-----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, PgiXn4Mn7SiKdeYqElEvM9EIO9wvlu/4iGZ3Ho+cMTHGM0NYSmNSPBFypUH5lOUY oY5WXBOjpVcBWiWVCtpSkA== /in/edgar/work/20000811/0001095811-00-002594/0001095811-00-002594.txt : 20000921 0001095811-00-002594.hdr.sgml : 20000921 ACCESSION NUMBER: 0001095811-00-002594 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARV ASSISTED LIVING INC CENTRAL INDEX KEY: 0000949322 STANDARD INDUSTRIAL CLASSIFICATION: [8050 ] IRS NUMBER: 330160968 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26980 FILM NUMBER: 692233 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE STREET 2: SUITE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 1: 245 FISCHER AVENUE STREET 2: SUITE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 10-Q 1 e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30, 2000. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q --------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER: 0-26980 ARV ASSISTED LIVING, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0160968 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400 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 [ ] The number of outstanding shares of the Registrant's Common Stock, no par value, as of August 10, 2000 was 17,459,689. ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) ASSETS
JUNE 30, DECEMBER 31, 2000 1999 --------- ------------ Current assets: Cash and cash equivalents .......................... $ 14,392 $ 14,570 Accounts receivable and amounts due from affiliates 1,652 2,165 Prepaids and other current assets .................. 3,304 2,772 Properties held for sale, net ...................... 5,311 4,301 --------- --------- Total current assets ....................... 24,659 23,808 Property, furniture and equipment, net ............... 101,234 102,185 Goodwill, net ........................................ 19,138 19,430 Operating lease security deposits .................... 9,242 12,164 Other non-current assets ............................. 16,998 16,704 --------- --------- $ 171,271 $ 174,291 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................... $ 1,560 $ 1,503 Accrued liabilities ................................ 8,917 10,270 Notes payable, current portion ..................... 42,161 1,363 Accrued interest payable ........................... 736 1,292 Net current liabilities from discontinued operations 2,842 2,510 --------- --------- Total current liabilities .................. 56,216 16,938 Notes payable, less current portion .................. 54,767 114,369 Lease liabilities .................................... 1,945 1,922 Other non-current liabilities ........................ 861 934 --------- --------- 113,789 134,163 --------- --------- Minority interest in majority owned entities ......... 1,109 1,004 Shareholders' equity: Preferred stock, no par value. Authorized 8,000 shares, none issued and outstanding ........ -- -- Common stock, no par value. Authorized 100,000 shares; issued and outstanding 17,460 and 16,679 shares at June 30, 2000 and December 31, 1999, respectively ............. 145,512 144,280 Accumulated deficit ................................ (89,139) (105,156) --------- --------- Total shareholders' equity ................. 56,373 39,124 --------- --------- Commitments and contingent liabilities $ 171,271 $ 174,291 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 2 3 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenue: Assisted living community revenue: Rental revenue $ 28,007 $ 27,271 $ 56,296 $ 55,894 Assisted living and other services 6,200 6,759 12,589 13,635 Management fees from others -- 101 -- 244 Management fees from affiliates 178 213 393 450 -------- -------- -------- -------- Total revenue 34,385 34,344 69,278 70,223 -------- -------- -------- -------- Operating expenses: Assisted living community operating expense 21,912 21,242 44,598 43,064 Assisted living community lease Expense 7,893 7,917 16,281 15,992 General and administrative 2,874 3,407 5,737 7,626 Impairment of long lived assets -- 7,722 -- 7,722 Depreciation and amortization 2,145 2,097 4,254 4,354 -------- -------- -------- -------- Total operating expenses 34,824 42,385 70,870 78,758 -------- -------- -------- -------- Loss from operations (439) (8,041) (1,592) (8,535) -------- -------- -------- -------- Other income(expense): Interest income 444 190 758 335 Other income(expense), net (320) 152 (316) 207 Interest expense (1,668) (2,078) (3,880) (4,086) Litigation judgment -- (5,600) -- (5,600) -------- -------- -------- -------- Total other expense (1,544) (7,336) (3,438) (9,144) -------- -------- -------- -------- Loss from operations before income tax expense, minority interest in income of majority owned entities, extraordinary item and change in accounting principle (1,983) (15,377) (5,030) (17,679) Income tax expense 17 -- 25 -- -------- -------- -------- -------- Loss from operations before minority interest in income of majority owned entities, extraordinary item and change in accounting principle (2,000) (15,377) (5,055) (17,679) Minority interest in income of majority owned entities (154) (316) (88) (731) -------- -------- -------- -------- Loss from operations before extraordinary item and change in accounting principle (2,154) (15,693) (5,143) (18,410) Extraordinary gain from early extinguishment of debt, net of income tax 15,546 -- 21,159 -- -------- -------- -------- -------- Income (loss) before change in accounting principle 13,392 (15,693) 16,016 (18,410) Cumulative effect of change in accounting principle, net of tax -- -- -- (1,259) -------- -------- -------- -------- Net income (loss) $ 13,392 $(15,693) $ 16,016 $(19,669) ======== ======== ======== ======== Basic and diluted income(loss) per common share: Loss from operations before extraordinary item and change in accounting principle $ (.12) $ (.99) $ (.30) $ (1.16) Extraordinary gain from early extinguishment of debt, net of income tax .89 1.23 Cumulative effect of change in accounting principle, net of tax -- -- -- (.08) -------- -------- -------- -------- Net income (loss) $ .77 $ (.99) $ .93 $ (1.24) ======== ======== ======== ======== Weighted average common shares Outstanding 17,460 15,873 17,254 15,873 ======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 3 4 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ----------------------- 2000 1999 -------- -------- Net cash used in operating activities of continuing operations . $ (2,462) $ (1,639) Net cash provided by operating activities of discontinued operations .................................................... 332 1,050 -------- -------- Net cash used in operating activities ................. (2,130) (589) -------- -------- Cash flows used in investing activities: Proceeds from the sale of communities, net of cost ........... 713 22,809 Purchase of previously leased communities .................... -- (14,636) Additions to property, furniture and equipment ............... (2,825) (6,056) (Increase) decrease in leased property security deposits ..... 1,298 (6,204) Cash contributed to joint venture ............................ -- (1,248) Other ........................................................ -- 159 -------- -------- Net cash used in investing activities ................. (814) (5,176) -------- -------- Cash flows provided by financing activities: Borrowings under notes payable for purchase of previously leased communities .......................................... -- 14,678 Borrowing under refinancing for owned communities ............ -- 41,817 Borrowing under non-secured credit line ...................... 7,000 -- Proceeds from note payable ................................... 11,209 -- Repayments of notes payable .................................. (5,577) (35,716) Repayments of subordinated debt .............................. (9,013) -- Distributions from majority owned entities ................... (152) (533) Loan fees .................................................... (701) -- Other ........................................................ -- (76) -------- -------- Net cash provided by financing activities ............. 2,766 20,170 -------- -------- Net (decrease) increase in cash and cash equivalents .. (178) 14,405 Cash and cash equivalents at beginning of period ............... 14,570 11,884 -------- -------- Cash and cash equivalents at end of period ..................... $ 14,392 $ 26,289 ======== ======== Supplemental schedule of cash flow information: Cash paid during the period for: Interest ..................................................... $ 4,436 $ 4,657 ======== ======== Income taxes ................................................. $ -- $ -- ======== ======== Supplemental schedule of non-cash investing activities: Conversion of subordinated notes to common stock ............. $ 1,232 Financing of leased property security deposits ............... $ 2,033
See accompanying notes to unaudited condensed consolidated financial statements. 4 5 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION We prepared the accompanying condensed consolidated financial statements of ARV Assisted Living, Inc. and subsidiaries ("the Company" or "ARV") following the requirements of the Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles ("GAAP") can be condensed or omitted. We have reclassified certain prior year data to conform to the 2000 presentation. The financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. These are condensed financial statements. To obtain a more detailed understanding of our results, you should also read the financial statements and notes in our Form 10-K for 1999, which is on file with the SEC. The results of operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of the Company and our subsidiaries. Subsidiaries, which include limited partnerships in which we have controlling interests, have been consolidated into the financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES In preparing the financial statements conforming with GAAP, we have made estimates and assumptions that affect the following: o reported amounts of assets and liabilities at the date of the financial statements; o disclosure of contingent assets and liabilities at the date of the financial statements; and o reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS We have reclassified certain prior period amounts to conform to the June 30, 2000 presentation. RECENT ACCOUNTING DEVELOPMENTS In April 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities," which was effective for fiscal years beginning after December 15, 1998. The SOP provides guidance on the financial reporting of start-up activities and organizational costs. It requires costs of start-up activities and organizational costs to be expensed when incurred and, upon adoption, the write-off as a cumulative effect of a change in accounting principle of any previously capitalized start-up or organizational costs. We adopted the provisions of SOP 98-5 on January 1, 1999 and reported a charge of approximately $1.3 million for the cumulative effect of this change in accounting principle. There was no effect on income taxes related to the write-off. 5 6 GAIN (LOSS) PER SHARE Basic earnings (loss) per share ("EPS") excludes all dilution and is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised, or converted into common stock. The effect of potentially dilutive securities was not included for any of the periods presented as the effect was antidilutive. Potentially dilutive securities include convertible notes and stock options, which convert to 17,710,000 and 12,778,000 shares of common stock for the six-month period ended June 30, 2000 and 1999, respectively. (2) COMMITMENTS AND CONTINGENT LIABILITIES COMMITMENTS The Company has guaranteed indebtedness of certain affiliated partnerships as follows: (IN THOUSANDS) Notes secured by real estate $75,262 Construction loans associated with the Development and construction of Affordable housing apartments $14,651 The Company has guaranteed $89.9 million of loans in the event of fraud, material misrepresentations, environmental impairment and certain loan covenants. The Company has guaranteed tax credits for certain partnerships in the aggregate amount of $65.3 million, excluding interest, penalties or other charges which might be assessed against the partners. We have provided development and operating deficit guarantees for certain affiliated partnerships. In our opinion, no claims may be currently asserted under any of the aforementioned guarantees based on the terms of the respective agreements other than those accrued nor are any additional accruals anticipated. LITIGATION On June 15, 1999 six California limited partnerships of which the Company is the managing general partner and a majority limited partner - American Retirement Villas Properties II, American Retirement Villas Properties III, Bradford Square, LP, Casa Bonita Fullerton, Ltd., Collwood Knolls, L.P., and San Gabriel Retirement Villa, L.P. (the "ARV Partnerships")-filed an action in the Superior Court for the State of California, County of Orange, seeking a declaratory judgment and damages for breach of contract, promissory estoppel, fraud and negligent misrepresentation against PRN Mortgage Capital, L.L.C. and Red Mountain Funding, L.L. C. (the "Defendants"). Defendants filed a counter-claim seeking payment by the ARV Partnerships of certain loan commitment fees allegedly owed to Defendants. On June 29, 2000 all parties submitted the matter to arbitration and hereafter agreed to dismiss all actions in consideration of Defendants payment to the ARV Partnerships of the settlement sum of $400,000. The settlement agreement has been executed and the payment was received on August 3, 2000. We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity. 6 7 (3) SALES OF ASSISTED LIVING COMMUNITIES On May 26, 2000, we entered into a leasehold interest purchase and sale agreement for the sale of three ALCs located outside of California for $10.00. In addition we received a non-interest bearing note for $500,000 in exchange for security deposits on one of those properties. The note is due on April 1, 2010 and has been discounted at a 7% rate to a value of $245,000. On June 1, 2000, we completed the sale of these three ALCs. As of December 31, 1999, these ALCs were included in assets held for sale at their sales price. The resulting gain or loss was insignificant during 2000. (4) RELATED PARTY TRANSACTIONS On April 24, 2000, the Company entered into a Term Loan Agreement with LFSRI II Assisted Living LLC ("LFSRI"), an affiliate of Prometheus. As of April 27, 2000, Prometheus beneficially owned approximately 43.5% of the Company's outstanding Common Stock. Pursuant to the Term Loan Agreement, the Company may borrow up to $10,000,000 from LFSRI with a maturity date of April 24, 2002, which, subject to certain conditions, may be extended by one year if no default has occurred. The outstanding amount under the loan will bear interest at the annual rate equal to the LIBOR rate for each interest period plus a 10% margin. At June 30, 2000, there was $7,000,000 outstanding. In connection with the Term Loan Agreement, the Company issued to LFSRI a warrant to purchase up to 750,000 shares of the company's Common Stock at a price of $3.00 per share, subject to various adjustments exercisable until April 24, 2005. The Company also amended its stockholder rights agreement to prevent shares that Prometheus may be deemed to beneficially own by reason of LFSRI's rights under the warrant from causing Prometheus to become an "Acquiring Person" and thus causing a triggering event under the rights agreement. As a part of the Term Loan Agreement the company had until August 24, 2000 to exercise the remaining $3,000,000. On August 4, 2000, the Company extended this option to November 22, 2000 for a 0.5% fee on the unutilized portion. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS This 10-Q report contains forward-looking statements, including statements regarding, among other items: o our business strategy; o our liquidity requirements and ability to obtain financing; o the impact of future acquisitions and developments; o the anticipated sale of 15 ALCs and other properties during the third and fourth quarters of 2000; o the level of future capital expenditures; o the impact of inflation and changing prices; and o the outcome of certain litigation matters. These forward-looking statements are based on our expectations and are subject to a number of risks and uncertainties, some of which are beyond our control. These risks and uncertainties include, but are not limited to: o access to capital necessary for acquisitions and development; o our ability to manage growth; o the successful integration of ALCs into our portfolio; o governmental regulations; o competition; and o other risks associated with the assisted living industry. Although we believe we have the resources required to achieve our objectives, actual results could differ materially from those anticipated by these forward-looking statements. There can be no assurances that events anticipated by these forward-looking statements will in fact transpire as expected. 7 8 OVERVIEW As of June 30, 2000, we operated 55 assisted living communities ("ALCs") containing 6,623 units, including 33 ALCs that are leased pursuant to long-term operating leases ("Leased ALCs"); 15 communities that we own for our own account ("Owned ALCs"); and 7 communities that are managed for related parties ("Managed ALCs"). In April 2000 we opened Lynnbrooke, a 140- unit ALC in Irvine, CA, under a joint venture agreement. Lynnbrooke is ARV's first community in Southern California to offer a distinct unit for the treatment of Alzheimer's disease and other memory disorders. In June 2000 we opened Bay Spring Village, a 127-unit facility in Barrington, RI. This facility was started before the decision was made to focus our growth efforts in the western United States. As of June 30, 2000, we were in construction on a remaining 137 unit ALC in Colorado. Since commencing operation of ALCs for our own account in April 1994, we have focused our growth efforts on the acquisition and development of additional ALCs and expansion of services to our residents as they "age in place." As of June 30, 2000, a substantial portion of our business and operations was conducted in California, where 38 of the 55 ALCs we operate are located. We intend to continue to make California the primary focus of our geographic clustering strategy. However, we intend to reduce our prior growth rate in order to focus greater attention on enhancing the profitability of our existing core operations and on leasing up new developments at an increased rate. In addition, we plan to divest ALCs that do not expand or enhance one of our geographic clusters or do not meet our financial objectives. In June 1999 we booked a $7.7 million impairment for ALC's located outside the western United States. In December 1999 we decided to sell twelve ALCs outside of the western United States; to date we have sold three of these. This decision was in keeping with our strategy to focus our efforts on occupancy gains and to lease up ALCs faster. Newly opened ALCs are expected to incur operating losses until sufficient occupancy levels and operating efficiencies are achieved. Based upon historical experience, we believe that a typical community will achieve its targeted occupancy levels 18 - 24 months from the commencement of operations. Accordingly, we will require substantial amounts of liquidity to maintain the operations of newly opened ALCs. If sufficient occupancy levels are not achieved within reasonable periods, our results of operations, financial position and liquidity could be materially and adversely impacted. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999 The following table sets forth a comparison of the three months ended June 30, 2000 and the three months ended June 30, 1999. Operating Results before Impairment For the Three Months Ended June 30, 2000 and 1999 (Unaudited) (In millions)
FOR THE THREE MONTHS (DOLLARS IN MILLIONS) ENDED JUNE 30, INCREASE/ 2000 1999 (DECREASE) ----- ----- ---------- Revenue: Assisted living community revenue ......... $34.2 $34.0 0.5% Management fees from affiliates and others 0.2 0.3 (43.3)% ----- ----- ----- Total revenue ..................... 34.4 34.3 0.1% ----- ----- ----- Operating expenses: Assisted living community operating expense 21.9 21.2 3.2% Assisted living community lease expense ... 7.9 7.9 (0.3)% General and administrative ................ 2.9 3.4 (15.6)% Depreciation and amortization ............. 2.1 2.1 2.3% ----- ----- ----- Total operating expenses .......... 34.8 34.6 (17.8)% ----- ----- ----- Loss from operations before impairment ...... $(0.4) $(0.3) (37.8)% ===== ===== =====
8 9 Total revenue for the three months ended June 30, 2000 increased $0.1 million to $34.4 million from $34.3 million for the three months ended June 30, 1999. This increase was primarily due to an increase in assisted living community revenue as described below. Assisted living community revenue increased $0.2 million to $34.2 million for the three months ended June 30, 2000 from $34.0 million for the three months ended June 30, 1999. The increase in assisted living community revenue is attributable to the following: o An increase in average rate per occupied unit for ALCs, which we owned and leased in both periods to $2,139 for the 2000 quarter as compared to $2,059 for the 1999 quarter; offset by o The sales of ALCs which were determined to be non-strategic. As of June 30, 2000, we owned and leased 48 ALCs for our own account consisting of 33 Leased ALCs and 15 Owned ALCs. As of June 30, 1999, we owned and leased a total of 51 ALCs for our own account consisting of 35 leased ALCs and 16 Owned ALCs. Management fees from affiliates and others for the 2000 quarter decreased by $0.1 million due to the loss of management contracts. Assisted living community operating expenses increased $0.7 million to $21.2 million for the three months ended June 30, 2000 from $21.2 million for the three months ended June 30, 1999. These increases were due to the following: o Increase in overtime due to labor shortages and additional personnel needed to support the assisted living operations; o Increase in worker's compensation insurance expense; and o Increases in marketing expense to update collateral advertising materials and support. Assisted living community lease expenses remained relatively constant at $7.9 million, as the decrease due to the reduction in the number of facilities lease for the three months ended June 30, 2000 was offset by contracted rate increases. General and administrative expenses decreased $0.5 million to $2.9 million for the three months ended June 30, 2000 from $3.4 million for the three months ended June 30, 1999, as a result of: o Decrease in legal fees for lawsuits and proxy fight expenses in 1999; and o Management's continued efforts to reduce staff at our corporate offices. Depreciation and amortization expenses remained relatively constant at $2.1 million when compared to June 30, 1999. The anticipated decrease in depreciation and amortization as a result of the sale of communities was offset by a new community and capital expenditures. Interest income increased $0.2 million due to the higher average cash balances carried during the three months ended June 30, 2000. Interest expense decreased $0.5 million to $1.6 million for the three months ended June 30, 2000 compared with $2.1 million for the three months ended June 30, 1999 due to our debt retirement program and settlement from arbitration in June 2000 of the loan fees paid in 1998 to a potential lender. This was offset by increases due to the refinancing in 1999. Interest expense consisted primarily of interest incurred on our remaining $16.8 million of 6-3/4%, convertible subordinated notes due 2006 and mortgage interest on owned ALCs. Other income and expense increased $0.5 million primarily due to an operating loss generated by a skilled nursing facility. We do not consider the skilled nursing facility part of our operations, hence its loss is recorded in other income and expense. The litigation judgement in June 1999 was for the award on the Emeritus lawsuit of $5.4 million and an accrual of $0.2 million in legal costs. SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999 9 10 The following information concerning the operating results of the Company for the six-month period ended June 30, 2000 is presented in order to provide the reader with additional information concerning the Company's operations. Operating Results before Impairment For the Six Months Ended June 30, 2000 and 1999 (Unaudited) (In millions)
JUNE 30, ----------------- INCREASE/ 2000 1999 (DECREASE) ----- ----- ---------- Revenue: Assisted living community revenue ......... $68.9 $69.5 (0.9)% Management fees from affiliates and others 0.4 0.7 (43.4)% ----- ----- ----- Total revenue ..................... 69.3 70.2 (1.4)% ----- ----- ----- Operating expenses: Assisted living community operating expense 44.6 43.0 3.6% Assisted living community lease expense ... 16.3 16.0 1.8% General and administrative ................ 5.7 7.6 (24.8)% Depreciation and amortization ............. 4.3 4.4 (2.3)% ----- ----- ----- Total operating expenses .......... 70.9 71.0 (0.2)% ----- ----- ----- Loss from operations before impairment ...... $(1.6) $(0.8) 95.8% ===== ===== =====
Total revenue for the six months ended June 30, 2000 decreased $0.9 million to $69.3 million from $70.2 million for the six months ended June 30, 1999. This decrease was primarily due to: o a decrease in management fees from affiliates and others of $0.3 million from 1999 levels due to a decrease in management contracts; and o the sales of ALCs which were determined to be non-strategic; and o a decrease in assisted living penetration rate from 46.3% in 1999 to 46.1% for 2000; offset by o increases in the average rate per occupied unit which went from $2,036 for the six-months ended June 30, 1999 to $2,131 for the six-months ended June 30, 2000; and o Higher occupancy rates of 85.3% for 2000 compared to 83.0% for 1999. Assisted living expenses increased $1.9 million to $60.9 million for the six months ended June 30, 2000, from $59.0 million for the six months ended June 30, 1999. Of these increases, $1.6 million of ALC operating expense and $0.3 million lease expense can be explained as follows: o Increase in payroll and food costs due to tighter labor markets and higher food prices; and o the increase in assisted living community lease expense is primarily due to the opening of one leased ALC; offset by, o the sale of four communities in 1999. General and administrative expenses decreased $1.9 million due to: o Continuing efforts to reduce staff at our corporate office; and o Reduction in legal expenses, recruiting, severance and consulting costs; and o Recovery from insurance of cost of proxy fight in the amount of $0.5 million. Depreciation and amortization expenses remained relatively constant when compared to the six months ended June 30, 1999. Interest income increased $0.5 million to $0.8 million for the six months ended June 30, 2000 from $0.3 million for the six months ended June 30, 1999 due to larger average invested cash balances. Interest expense decreased $0.2 million to $3.9 million for the six months ended June 30, 2000 compared with $4.1 million for the six months ended June 30, 1999 due to the bond retirement offset by the refinancing that was completed in June 1999. Interest expense 10 11 consisted primarily of interest incurred on our remaining $16.8 million of 6-3/4%, convertible subordinated notes due 2006 as well as mortgage interest on Owned ALCs. LIQUIDITY AND CAPITAL RESOURCES Our unrestricted cash balances were $14.4 million and $14.6 million at June 30, 2000 and December 31, 1999, respectively. The small decrease was due primarily to cash used in operations. Working capital at June 30, 2000 was a negative $31.6 million due to the reclassification to current liabilities of the loan on the properties refinanced in June 1999. The loans are due June 2001 but are in the process of being refinanced with 30-year loans. However, the company has not received final approvals, therefore the $40.8 million of loans has been reclassified to current liabilities. Without this reclassification the working capital would be $8.8 million compared to $6.9 million at December 31, 1999. Cash used by operating activities was $2.1 million for the six months ended June 30, 2000, compared to $0.6 million used for the six month period ended June 30, 1999. The primary components of cash used by operating activities for the quarter ended June 30, 2000 were: o Net loss before extraordinary items for the six months ended June 30, 2000 of $5.1 million; and o Net decrease of $1.6 million in liabilities; offset by o Discontinued operations generating $0.3 million in cash; and o Non-cash charges of $4.3 million for depreciation and amortization. Cash used in investing activities was $0.8 million for the six months ended June 30, 2000, compared to net cash used in investing activities of $5.2 million for the six months ended June 30, 1999. The primary components of cash used in investing activities for the six months ended June 30, 2000 were: o $2.8 million used for purchases of property, furniture and equipment; offset by o $1.3 million for decreases in Leased ALCs security deposits due to sale; and o $0.7 million of proceeds from the sale of our interest in a partnership. Net cash provided by financing activities was $2.8 million for the six months ended June 30, 2000, compared to net cash provided by financing activities of $20.2 million for the six months ended June 30, 1999. The primary components of cash provided by financing activities for the period ended June 30, 2000 were: o Debt proceeds of $11.2 million for the June 28, 2000 refinancing of an owned ALC; and o Debt proceeds of $7.0 million on the line of credit; offset by: o $5.6 million for repayments of notes payable; and o $9.0 million for repayment of subordinated debt; and o $0.7 million for payment of loan fees on refinancings and new debt. The various debt and lease agreements contain restrictive covenants requiring us to maintain certain financial ratios, including current ratio, working capital, minimum net worth, and debt service coverage, among others. At June 30, 2000, we were not in compliance with the current ratio and debt service coverage ratio under certain debt and lease agreements. We have obtained waivers for those covenants with which we were not in compliance. Had we not obtained waivers we would have been in default on certain debt and lease agreements. We believe that our existing liquidity, our ability to sell ALCs and land sites which do not meet our financial objectives or geographic clustering strategy and our ability to refinance certain owned ALCs and investments will provide us with adequate resources to meet our current operating and investing needs. We do not currently generate sufficient cash from operations to fund recurring working capital requirements. And, we will be required from time to time to incur additional indebtedness or issue additional debt or equity securities to finance our strategy, including the development and rehabilitation of ALCs as well as other capital expenditures. We anticipate that we will be able to obtain the additional financing; however, we cannot assure you that we will be able to obtain financing on favorable terms. 11 12 Pursuant to the terms of our development and property management agreements for certain tax credit partnerships, we have provided certain guarantees for the benefit of these partnerships. Among these guarantees are operating deficit, tax credit and financing guarantees. To the extent that the operations of certain tax credit partnerships do not improve prior to the maturity of the existing construction financing, we may be required to fund additional amounts under the terms of our financing guarantees. Management has established a provision for the estimated funding of obligations under our financing guarantees. Actual funding could differ from those estimates. IMPACT OF INFLATION AND CHANGING PRICES Operating revenue from ALCs we operate is the primary source of our revenue. These ALCs are affected by rental rates which are highly dependent upon market conditions and the competitive environments where the communities are located. Employee compensation is the principal cost element of property operations. Although we cannot assure you that we will be able to continue to do so, we have been able historically to offset the effects of inflation on salaries and other operating expenses by increasing rental and assisted living rates. However, the labor markets in which we operate communities are generally tight and we expect continued pressure on wage rates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk related to fluctuations in interest rates on our notes payable. Currently, we do not utilize interest rate swaps. The purpose of the following analysis is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of June 30, 2000. You should be aware that many of the statements contained in this section are forward looking and should be read in conjunction with our disclosures under the heading "Forward-Looking Statements." For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact fair market value of the debt instrument, but do affect our future earnings and cash flows. We do not have an obligation to prepay fixed-rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on the fixed-rate debt until we would be required to refinance such debt. Holding the variable rate debt balance constant, each one percentage point increase in interest rates would result in an increase in variable rate interest incurred for the coming year of approximately $273,000. The table below details the principal amount and the average interest rates of notes payable in each category based upon the maturity dates. The fair value estimates for notes payable are based upon future discounted cash flows of similar type notes or quoted market prices for similar loans. The carrying value of our variable rate debt approximates fair value due to the frequency of re-pricing of this debt. Our fixed-rate debt consists of convertible subordinated notes payable and mortgage payables. The fixed rate-debt bears interest at rates that approximate current market rates.
MATURITY DATE - JUNE 30, -------------------------------------------------------- FAIR 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE ------- ------ ------- ---- ---- ---------- ------- ------- (DOLLARS IN THOUSANDS) Fixed rate debt $41,777 146 $ 160 $174 $189 $27,157 $69,605 $69,605 Average interest rate 7.5% 7.5% 7.5% 7.4% 7.4% 7.4% Variable rate debt $ 384 $1,620 $25,319 $ -- $ -- $ -- $27,323 $27,323 Average interest rate 11.4% 11.4% 9.5%
We do not believe that the future market rate risks related to the above securities will have a material adverse impact on our financial position, results of operations or liquidity. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On June 15, 1999 six California limited partnerships of which the Company is the managing general partner and a majority limited partner - American Retirement Villas Properties II, American Retirement Villas Properties III, Bradford Square, LP, Casa Bonita Fullerton, Ltd., Collwood Knolls, L.P., and San Gabriel Retirement Villa, L.P. (the "ARV Partnerships")-filed an action in the Superior Court for the State of California, County of Orange, seeking a declaratory judgment and damages for breach of contract, 12 13 promissory estoppel, fraud and negligent misrepresentation against PRN Mortgage Capital, L.L.C. and Red Mountain Funding, L.L. C. (the "Defendants"). Defendants filed a counter-claim seeking payment by the ARV Partnerships of certain loan commitment fees allegedly owed to Defendants. On June 29, 2000 all parties submitted the matter to arbitration and thereafter agreed to dismiss all actions in consideration of Defendants' payment to the ARV Partnerships of the settlement sum of $400,000. The settlement agreement has been executed and the payment was received on August 3, 2000. We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on June 9, 2000. The following is a brief description of each matter voted upon at the meeting and the number of votes cast for or against, or withheld with respect to, each matter. (a) The stockholders reelected the Class C Director, Maurice J. DeWald to serve until 2003. 15,032,841 votes were received for Mr. DeWald's election, and 891,444 votes were withheld. The term of office as director continued after the meeting for the following Class A and Class B directors: Douglas M. Pasquale (A), David P. Collins (B), John A. Moore (B), and Jeffrey D. Koblentz (A). (b) Votes were received for the appointment of KPMG, LLP as the Company's independent auditor as follows: For: 15,764,920 Against: 126,613 Abstain: 36,752 ITEM 5. OTHER INFORMATION None 13 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS 10.1 LLC Articles of Incorporation 10.2 Multifamily Note 10.3 Term Loan Agreement between ARV Assisted Living, Inc and LFSRI II Assisted Living LLC 10.4 Term Note between ARV Assisted Living, Inc and LFSRI II Assisted Living LLC 10.5 Warrant To Purchase Common Stock of ARV Assisted Living, Inc. 27 Financial Data Schedule (b) REPORTS ON FORM 8-K None 14 15 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARV ASSISTED LIVING, INC. By: /s/ Douglas M. Pasquale ---------------------------------- Douglas M. Pasquale President and Chief Executive Officer (Duly authorized officer) Date: August 10, 2000 By: /s/ Abdo H. Khoury ---------------------------------- Abdo H. Khoury Senior Vice President and Chief Financial Officer (Duly authorized officer) Date: August 10, 2000 15 16 EXHIBIT INDEX Exhibit Number Description - -------------- ----------- 10.1 LLC Articles of Incorporation 10.2 Multifamily Note 10.3 Term Loan Agreement between ARV Assisted Living, Inc and LFSRI II Assisted Living LLC 10.4 Term Note between ARV Assisted Living, Inc and LFSRI II Assisted Living LLC 10.5 Warrant To Purchase Common Stock of ARV Assisted Living, Inc. 27 Financial Data Schedule EX-10.1 2 ex10-1.txt EXHIBIT 10.1 1 File #200015210047 FILED in the Office of the Secretary of State of the State of California MAY 26, 2000 /s/ BILL JONES ------------------------------ BILL JONES, Secretary of State This Space For Filing Use Only - -------------------------------------------------------------------------------- [SEAL OF THE STATE OF CALIFORNIA] State of California Bill Jones Secretary of State LIMITED LIABILITY COMPANY ARTICLES OF ORGANIZATION A $70.00 FILING FEE MUST ACCOMPANY THIS FORM. IMPORTANT - READ INSTRUCTIONS BEFORE COMPLETING THIS FORM. - -------------------------------------------------------------------------------- 1. Name of the limited liability company (end the name with the words "Limited Liability Company," "Ltd. Liability Co.," or the abbreviations "LLC" or "L.L.C.") ARV COVELL, LLC - -------------------------------------------------------------------------------- 2. The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the Beverly-Killea limited liability company act. - -------------------------------------------------------------------------------- 3. Name the agent for service of process and check the appropriate provision below: DOUGLAS ARMSTRONG which is ------------------------------------------------------------------ [X] an individual residing in California. Proceed to item 4. [ ] a corporation which has filed a certificate pursuant to section 1505. Proceed to item 5. - -------------------------------------------------------------------------------- 4. If an individual, California address of the agent for service of process: Address: 245 FISCHER AVENUE, D-1 City: COSTA MESA State: CA Zip Code: 92626 - -------------------------------------------------------------------------------- 5. The limited liability company will be managed by: (check one) [ ] one manager [X] more than one manager [ ] limited liability company members - -------------------------------------------------------------------------------- 6. Other matters to be included in this certificate may be set forth on separate attached pages and are made a part of this certificate. Other matters may include the latest date on which the limited liability company is to dissolve. - -------------------------------------------------------------------------------- 7. Number of pages attached, if any: NONE - -------------------------------------------------------------------------------- Type of business of the limited liability company. OWNERSHIP, OPERATION AND MANAGEMENT OF REAL PROPERTY. - -------------------------------------------------------------------------------- DECLARATION: It is hereby declared that I am the person who executed this instrument, which execution is my act and deed. /s/ DOUGLAS ARMSTRONG DOUGLAS ARMSTRONG ----------------------------- ----------------------------- Signature of Organizer Type or Print Name of Organizer 5/23/00 ----------------------------- Date [SEAL OF THE SECRETARY OF STATE] - -------------------------------------------------------------------------------- SEC/STATE (REV. 1/99) FORM LLC-1 - FILING FEE $70.00 Approved by Secretary of State - -------------------------------------------------------------------------------- EX-10.2 3 ex10-2.txt EXHIBIT 10.2 1 EXHIBIT 10.2 MULTIFAMILY NOTE US $11,209,000.00 June 30, 2000 FOR VALUE RECEIVED, the undersigned ("BORROWER") jointly and severally (if more than one) promises to pay to the order of BANC ONE CAPITAL FUNDING CORPORATION, an Ohio corporation, the principal sum of Eleven Million Two Hundred Nine Thousand and 00/100 Dollars (US $11,209,000.00), with interest on the unpaid principal balance at the annual rate of Eight and fifty-three hundredths percent (8.53%). 1. DEFINED TERMS. As used in this Note, (i) the term "LENDER" means the holder of this Note, and (ii) the term "INDEBTEDNESS" means the principal of, interest on, or any other amounts due at any time under, this Note, the Security Instrument or any other Loan Document, including prepayment premiums, late charges, default interest, and advances to protect the security of the Security Instrument under Section 12 of the Security Instrument. Event of Default, Key Principal and other capitalized terms used but not defined in this Note shall have the meanings given to such terms in the Security Instrument (as defined in Paragraph 5). 2. ADDRESS FOR PAYMENT. All payments due under this Note shall be payable at 150 E. Gay Street, 22nd Floor, Columbus, Ohio 43215, or such other place as may be designated by written notice to Borrower from or on behalf of Lender. 3. PAYMENT OF PRINCIPAL AND INTEREST. Principal and interest shall be paid as follows: (a) Unless disbursement of principal is made by Lender to Borrower on the first day of the month, interest for the period beginning on the date of disbursement and ending on and including the last day of the month in which such disbursement is made shall be payable simultaneously with the execution of this Note. Interest under this Note shall be computed on the basis of a 360-day year consisting of twelve 30-day months. (b) Consecutive monthly installments of principal and interest, each in the amount of Ninety Thousand Four Hundred Eighty Four and 63/100 Dollars (US $90,484.63), shall be payable on the first day of each month beginning on August 1, 2000, until the entire unpaid principal balance evidenced by this Note is fully paid. Any accrued interest remaining past due for 30 days or more shall be added to and become part of the unpaid principal balance and shall bear interest at the rate or rates specified in this Note, and any reference below to "accrued interest" shall refer to accrued interest which has not become part of the unpaid principal balance. Any remaining principal and interest shall be due and payable on July 1, 2010 or on any earlier date on which the unpaid principal balance of this Note becomes due and payable, by acceleration or otherwise (the "MATURITY DATE"). The unpaid principal balance shall continue to bear interest after the Maturity Date at the Default Rate set forth in this Note until and including the date on which it is paid in full. (c) Any regularly scheduled monthly installment of principal and interest that is received by Lender before the date it is due shall be deemed to have been received on the due date solely for the purpose of calculating interest due. 4. APPLICATION OF PAYMENTS. If at any time Lender receives, from Borrower or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, Lender may apply that payment to amounts then due and payable in any manner and in any order determined by Lender, in Lender's discretion. Borrower agrees that neither Lender's acceptance of a payment from Borrower in an amount that is less than all amounts then due and payable nor Lender's application of such payment shall constitute or be deemed to constitute either a waiver of the unpaid 2 amounts or an accord and satisfaction. If Lender accepts a guaranty of only a portion of the Indebtedness, Borrower hereby waives its right under California Civil Code Section 2822(a) to designate the portion of the Indebtedness which shall be satisfied by any guarantor's partial payment. 5. SECURITY. The Indebtedness is secured, among other things, by a Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (California) dated as of the date of this Note (the "SECURITY INSTRUMENT"), and reference is made to the Security Instrument for other rights of Lender concerning the collateral for the Indebtedness. 6. ACCELERATION. If an Event of Default has occurred and is continuing, the entire unpaid principal balance, any accrued interest, the prepayment premium payable under Paragraph 10, if any, and all other amounts payable under this Note and any other Loan Document shall at once become due and payable, at the option of Lender, without any prior notice to Borrower. Lender may exercise this option to accelerate regardless of any prior forbearance. 7. LATE CHARGE. If any monthly amount payable under this Note or under the Security Instrument or any other Loan Document is not received by Lender within 10 days after the amount is due, Borrower shall pay to Lender, immediately and without demand by Lender, a late charge equal to 5 percent of such amount. Borrower acknowledges that its failure to make timely payments will cause Lender to incur additional expenses in servicing and processing the loan evidenced by this Note (the "LOAN"), and that it is extremely difficult and impractical to determine those additional expenses. Borrower agrees that the late charge payable pursuant to this Paragraph represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Note, of the additional expenses Lender will incur by reason of such late payment. The late charge is payable in addition to, and not in lieu of, any interest payable at the Default Rate pursuant to Paragraph 8. 8. DEFAULT RATE. So long as any monthly installment or any other payment due under this Note remains past due for 30 days or more, interest under this Note shall accrue on the unpaid principal balance from the earlier of the due date of the first unpaid monthly installment or other payment due, as applicable, at a rate (the "DEFAULT RATE") equal to the lesser of 4 percentage points above the rate stated in the first paragraph of this Note or the maximum interest rate which may be collected from Borrower under applicable law. If the unpaid principal balance and all accrued interest are not paid in full on the Maturity Date, the unpaid principal balance and all accrued interest shall bear interest from the Maturity Date at the Default Rate. Borrower also acknowledges that its failure to make timely payments will cause Lender to incur additional expenses in servicing and processing the Loan, that, during the time that any monthly installment or other payment under this Note is delinquent for more than 30 days, Lender will incur additional costs and expenses arising from its loss of the use of the money due and from the adverse impact on Lender's ability to meet its other obligations and to take advantage of other investment opportunities, and that it is extremely difficult and impractical to determine those additional costs and expenses. Borrower also acknowledges that, during the time that any monthly installment or other payment due under this Note is delinquent for more than 30 days, Lender's risk of nonpayment of this Note will be materially increased and Lender is entitled to be compensated for such increased risk. Borrower agrees that the increase in the rate of interest payable under this Note to the Default Rate represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Note, of the additional costs and expenses Lender will incur by reason of the Borrower's delinquent payment and the additional compensation Lender is entitled to receive for the increased risks of nonpayment associated with a delinquent loan. 9. LIMITS ON PERSONAL LIABILITY. (a) Except as otherwise provided in this Paragraph 9, Borrower shall have no personal liability under this Note, the Security Instrument or any other Loan Document for the repayment of the Page 2 3 Indebtedness or for the performance of any other obligations of Borrower under the Loan Documents, and Lender's only recourse for the satisfaction of the Indebtedness and the performance of such obligations shall be Lender's exercise of its rights and remedies with respect to the Mortgaged Property and any other collateral held by Lender as security for the Indebtedness. This limitation on Borrower's liability shall not limit or impair Lender's enforcement of its rights against any guarantor of the Indebtedness or any guarantor of any obligations of Borrower. (b) Borrower shall be personally liable to Lender for the repayment of a portion of the Indebtedness equal to any loss or damage suffered by Lender as a result of (1) failure of Borrower to pay to Lender upon demand after an Event of Default, all Rents to which Lender is entitled under Section 3(a) of the Security Instrument and the amount of all security deposits collected by Borrower from tenants then in residence; (2) failure of Borrower to apply all insurance proceeds and condemnation proceeds as required by the Security Instrument; (3) failure of Borrower to comply with Section 14(d) or (e) of the Security Instrument relating to the delivery of books and records, statements, schedules and reports; (4) fraud or written material misrepresentation by Borrower, Key Principal or any officer, director, partner, member or employee of Borrower in connection with the application for or creation of the Indebtedness or any request for any action or consent by Lender; or (5) failure to apply Rents, first, to the payment of reasonable operating expenses (other than Property management fees that are not currently payable pursuant to the terms of an Assignment of Management Agreement or any other agreement with Lender executed in connection with the Loan) and then to amounts ("DEBT SERVICE AMOUNTS") payable under this Note, the Security Instrument or any other Loan Document (except that Borrower will not be personally liable (i) to the extent that Borrower lacks the legal right to direct the disbursement of such sums because of a bankruptcy, receivership or similar judicial proceeding, or (ii) with respect to Rents that are distributed in any calendar year if Borrower has paid all operating expenses and Debt Service Amounts for that calendar year). (c) Borrower shall become personally liable to Lender for the repayment of all of the Indebtedness upon the occurrence of any of the following Events of Default: (1) Borrower's acquisition of any property or operation of any business not permitted by Section 33 of the Security Instrument; or (2) a Transfer that is an Event of Default under Section 21 of the Security Instrument. (d) To the extent that Borrower has personal liability under this Paragraph 9, Lender may exercise its rights against Borrower personally without regard to whether Lender has exercised any rights against the Mortgaged Property or any other security, or pursued any rights against any guarantor, or pursued any other rights available to Lender under this Note, the Security Instrument, any other Loan Document or applicable law. If Borrower is a married person, then Borrower agrees that Lender may look to all of Borrower's community property and separate property to satisfy Borrower's recourse obligations under this Paragraph 9. For purposes of this Paragraph 9, the term "MORTGAGED PROPERTY" shall not include any funds that (1) have been applied by Borrower as required or permitted by the Security Instrument prior to the occurrence of an Event of Default, or (2) Borrower was unable to apply as required or permitted by the Security Instrument because of a bankruptcy, receivership, or similar judicial proceeding. 10. VOLUNTARY AND INVOLUNTARY PREPAYMENTS. (a) A prepayment premium shall be payable in connection with any prepayment made under this Note as provided below: (1) Borrower may voluntarily prepay all (but not less than all) of the unpaid principal balance of this Note on the last Business Day of a calendar month if Borrower has given Lender at least 30 days prior notice of its intention to make such prepayment. Such prepayment shall be made by paying (A) the amount of principal being prepaid, (B) all accrued Page 3 4 interest, (C) all other sums due Lender at the time of such prepayment, and (D) the prepayment premium calculated pursuant to Schedule A. For all purposes, including the accrual of interest, any prepayment received by Lender on any day other than the last calendar day of the month shall be deemed to have been received on the last calendar day of such month. For purposes of this Note, a "BUSINESS DAY" means any day other than a Saturday, Sunday or any other day on which Lender is not open for business. (2) Upon Lender's exercise of any right of acceleration under this Note, Borrower shall pay to Lender, in addition to the entire unpaid principal balance of this Note outstanding at the time of the acceleration, (A) all accrued interest and all other sums due Lender under this Note and the other Loan Documents, and (B) the prepayment premium calculated pursuant to Schedule A. (3) Any application by Lender of any collateral or other security to the repayment of any portion of the unpaid principal balance of this Note prior to the Maturity Date and in the absence of acceleration shall be deemed to be a partial prepayment by Borrower, requiring the payment to Lender by Borrower of a prepayment premium. The amount of any such partial prepayment shall be computed so as to provide to Lender a prepayment premium computed pursuant to Schedule A without Borrower having to pay out-of-pocket any additional amounts. (b) Notwithstanding the provisions of Paragraph 10(a), no prepayment premium shall be payable with respect to (A) any prepayment made no more than 90 days before the Maturity Date, or (B) any prepayment occurring as a result of the application of any insurance proceeds or condemnation award under the Security Instrument. (c) Schedule A is hereby incorporated by reference into this Note. (d) Any required prepayment of less than the unpaid principal balance of this Note shall not extend or postpone the due date of any subsequent monthly installments or change the amount of such installments, unless Lender agrees otherwise in writing. (e) Borrower recognizes that any prepayment of the unpaid principal balance of this Note, whether voluntary or involuntary or resulting from a default by Borrower, will result in Lender's incurring loss, including reinvestment loss, additional expense and frustration or impairment of Lender's ability to meet its commitments to third parties. Borrower agrees to pay to Lender upon demand damages for the detriment caused by any prepayment, and agrees that it is extremely difficult and impractical to ascertain the extent of such damages. Borrower therefore acknowledges and agrees that the formula for calculating prepayment premiums set forth on Schedule A represents a reasonable estimate of the damages Lender will incur because of a prepayment. (f) Borrower further acknowledges that the prepayment premium provisions of this Note are a material part of the consideration for the Loan, and acknowledges that the terms of this Note are in other respects more favorable to Borrower as a result of the Borrower's voluntary agreement to the prepayment premium provisions. 11. COSTS AND EXPENSES. Borrower shall pay on demand all expenses and costs, including fees and out-of-pocket expenses of attorneys and expert witnesses and costs of investigation, incurred by Lender as a result of any default under this Note or in connection with efforts to collect any amount due under this Note, or to enforce the provisions of any of the other Loan Documents, including those incurred in post-judgment collection efforts and in any bankruptcy proceeding (including any action for relief from the automatic stay of any bankruptcy proceeding) or judicial or non-judicial foreclosure proceeding. Page 4 5 12. FORBEARANCE. Any forbearance by Lender in exercising any right or remedy under this Note, the Security Instrument, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of that or any other right or remedy. The acceptance by Lender of any payment after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of Lender's right to require prompt payment when due of all other payments or to exercise any right or remedy with respect to any failure to make prompt payment. Enforcement by Lender of any security for Borrower's obligations under this Note shall not constitute an election by Lender of remedies so as to preclude the exercise of any other right or remedy available to Lender. 13. WAIVERS. Presentment, demand, notice of dishonor, protest, notice of acceleration, notice of intent to demand or accelerate payment or maturity, presentment for payment, notice of nonpayment, grace, and diligence in collecting the Indebtedness are waived by Borrower, Key Principal, and all endorsers and guarantors of this Note and all other third party obligors. 14. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower in connection with the Loan is interpreted so that any interest or other charge provided for in any Loan Document, whether considered separately or together with other charges provided for in any other Loan Document, violates that law, and Borrower is entitled to the benefit of that law, that interest or charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Lender in excess of the permitted amounts shall be applied by Lender to reduce the unpaid principal balance of this Note. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower has been violated, all Indebtedness that constitutes interest, as well as all other charges made in connection with the Indebtedness that constitute interest, shall be deemed to be allocated and spread ratably over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note. 15. COMMERCIAL PURPOSE. Borrower represents that the Indebtedness is being incurred by Borrower solely for the purpose of carrying on a business or commercial enterprise, and not for personal, family or household purposes. 16. COUNTING OF DAYS. Except where otherwise specifically provided, any reference in this Note to a period of "days" means calendar days, not Business Days. 17. GOVERNING LAW. This Note shall be governed by the law of the jurisdiction in which the Land is located. 18. CAPTIONS. The captions of the paragraphs of this Note are for convenience only and shall be disregarded in construing this Note. 19. NOTICES. All notices, demands and other communications required or permitted to be given by Lender to Borrower pursuant to this Note shall be given in accordance with Section 31 of the Security Instrument. 20. CONSENT TO JURISDICTION AND VENUE. Borrower and Key Principal each agrees that any controversy arising under or in relation to this Note shall be litigated exclusively in the jurisdiction in which the Land is located (the "PROPERTY JURISDICTION"). The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to this Note. Borrower and Key Principal each irrevocably consents Page 5 6 to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise. 21. WAIVER OF TRIAL BY JURY. BORROWER, KEY PRINCIPAL AND LENDER EACH (A) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS NOTE OR THE RELATIONSHIP BETWEEN THE PARTIES, AS LENDER, KEY PRINCIPAL AND BORROWER, THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. Page 6 7 ATTACHED SCHEDULES. THE FOLLOWING SCHEDULES ARE ATTACHED TO THIS NOTE: [X] SCHEDULE A PREPAYMENT PREMIUM (REQUIRED) [X] SCHEDULE B MODIFICATIONS TO MULTIFAMILY NOTE IN WITNESS WHEREOF, Borrower has signed and delivered this Note or has caused this Note to be signed and delivered by its duly authorized representative. BORROWER: ARV COVELL, LLC a California limited liability company By:___________________________________ Name: Abdo H. Khoury, Title: Authorized Manager Borrower's Employer ID Number: 33-0911962 Fannie Mae MBS/DUS [Pool] [Commitment] No.: Page 7 8 Pay to the order of FANNIE MAE, without recourse. LENDER: BANC ONE CAPITAL FUNDING CORPORATION, AN OHIO CORPORATION By:__________________________________ Name: Jennifer B. Henson Title: Director SCHEDULE A PREPAYMENT PREMIUM Any prepayment premium payable under Paragraph 10 of this Note shall be computed as follows: (a) If the prepayment is made during the first 9.5 years beginning on the date of the Note (the "YIELD MAINTENANCE PERIOD"), the prepayment premium shall be the greater of: (i) 1% of the unpaid principal balance of this Note; or (ii) The product obtained by multiplying: (A) the amount of principal being prepaid, by (B) the difference obtained by subtracting from the interest rate on this Note the yield rate (the "YIELD RATE") on the 6.5% U.S. Treasury Security due February 1, 2010 (the "SPECIFIED U.S. TREASURY SECURITY"), as the Yield Rate is reported in The Wall Street Journal on the fifth Business Day preceding (x) the date notice of prepayment is given to Lender where prepayment is voluntary, or (y) the date Lender accelerates the Loan, by Page 8 9 (C) the present value factor calculated using the following formula: 1 - (1 + r)(-n) --------------- r [r = Yield Rate n = the number of 365-day years (or 366-day years, if applicable), and any fraction thereof, remaining between the Prepayment Date and the expiration of the Yield Maintenance Period] 9 10 In the event that no Yield Rate is published for the Specified U.S. Treasury Security, then the nearest equivalent U.S. Treasury Security shall be selected at Lender's discretion. If the publication of such Yield Rates in The Wall Street Journal is discontinued, Lender shall determine such Yield Rates from another source selected by Lender. For purposes of subparagraph (ii)(C), the "PREPAYMENT DATE" shall be (x) in the case of a voluntary prepayment, the date on which the prepayment is made, and (y) in any other case, the date on which Lender accelerates the unpaid principal balance of this Note. (b) If the prepayment is made after the expiration of the Yield Maintenance Period but more than 90 days before the Maturity Date, the prepayment premium shall be 1% of the unpaid principal balance of this Note. _____________________ INITIAL(S) 10 11 SCHEDULE B MODIFICATIONS TO NOTE (SENIOR HOUSING) The following modifications are made to the text of the Note that precedes this Exhibit: 1. Section 9(b)(3) of the Note is hereby amended to read as follows: 2. Failure of Borrower to comply with Sections 14(d), 14 (e), or 14 (f) of the Security Instrument relating to the delivery of books and records, statements, schedules and reports;" 3. Section 9(b) of the Note is hereby amended to add the following paragraph (6) at the end thereof: "Borrower's failure to renew, continue, extend, or maintain all permits, licenses or other certificates or other approvals required to legally operate the Mortgaged Property as a seniors housing facility, as defined in the Security Instrument;" 4. All capitalized terms used in this Schedule not specifically defined herein shall have the meanings set forth in the text of the Note that precedes this Schedule. BORROWER'S INITIALS: _____________ 11 12 RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Ballard Spahr Andrews & Ingersoll, LLP 300 East Lombard Street, Suite 1900 Baltimore, Maryland 21202 Attn: Thomas A. Hauser, Esquire ================================================================================ MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING (CALIFORNIA) ATTENTION COUNTY RECORDER: THIS INSTRUMENT IS INTENDED TO BE EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING 12 13 PURSUANT TO SECTION 9402 OF THE CALIFORNIA COMMERCIAL CODE. PORTIONS OF THE GOODS COMPRISING A PART OF THE MORTGAGED PROPERTY ARE OR ARE TO BECOME FIXTURES RELATED TO THE LAND DESCRIBED IN EXHIBIT A HERETO. THIS INSTRUMENT IS TO BE FILED FOR RECORD IN THE RECORDS OF THE COUNTY WHERE DEEDS OF TRUST ON REAL PROPERTY ARE RECORDED AND SHOULD BE INDEXED AS BOTH A DEED OF TRUST AND AS A FINANCING STATEMENT COVERING FIXTURES. THE ADDRESSES OF BORROWER (DEBTOR) AND LENDER (SECURED PARTY) ARE SPECIFIED IN THE FIRST PARAGRAPH ON PAGE 1 OF THIS INSTRUMENT. 13 14 TABLE OF CONTENTS
1. DEFINITIONS 2 2. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT 6 3. ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION 7 4. ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY 9 5. PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN DOCUMENTS; PREPAYMENT PREMIUM 11 6. EXCULPATION 11 7. DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES 11 8. COLLATERAL AGREEMENTS 12 9. APPLICATION OF PAYMENTS 12 10. COMPLIANCE WITH LAWS 13 11. USE OF PROPERTY 13 12. PROTECTION OF LENDER'S SECURITY 13 13. INSPECTION 14 14. BOOKS AND RECORDS; FINANCIAL REPORTING 14 15. TAXES; OPERATING EXPENSES 16 16. LIENS; ENCUMBRANCES 16 17. PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY 17 18. ENVIRONMENTAL HAZARDS 17
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19. PROPERTY AND LIABILITY INSURANCE 23 20. CONDEMNATION 24 21. TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER 25 22. EVENTS OF DEFAULT 29 23. REMEDIES CUMULATIVE 30 24. FORBEARANCE 30 25. LOAN CHARGES 30 26. WAIVER OF STATUTE OF LIMITATIONS 31 27. WAIVER OF MARSHALING 31 28. FURTHER ASSURANCES 31 29. ESTOPPEL CERTIFICATE 31 30. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE 31 31. NOTICE 32 32. SALE OF NOTE; CHANGE IN SERVICER 32 33. SINGLE ASSET BORROWER 32 34. SUCCESSORS AND ASSIGNS BOUND 32 35. JOINT AND SEVERAL LIABILITY 33 36. RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY 33 37. SEVERABILITY; AMENDMENTS 33 38. CONSTRUCTION 33 39. LOAN SERVICING 33
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40. DISCLOSURE OF INFORMATION 34 41. NO CHANGE IN FACTS OR CIRCUMSTANCES 34 42. SUBROGATION 34 43. ACCELERATION; REMEDIES 34 44. RECONVEYANCE 35 45. SUBSTITUTE TRUSTEE 35 46. STATEMENT OF OBLIGATION 35 47. SPOUSE'S SEPARATE PROPERTY 35 48. FIXTURE FILING 35 49. ADDITIONAL PROVISION REGARDING APPLICATION OF PAYMENTS 35 50. WAIVER OF MARSHALING; OTHER WAIVERS 36 51. ADDITIONAL PROVISIONS CONCERNING ENVIRONMENTAL HAZARDS 36 52. ADDITIONAL PROVISION REGARDING INSURANCE 37 53. WAIVER OF TRIAL BY JURY 38
Page iii iii 17 MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING THIS MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE FILING (the "INSTRUMENT") is dated as of the 30th day of June, 2000, by ARV COVELL, LLC, a limited liability company, organized and existing under the laws of California, whose address is 245 Fischer Avenue, D-1, Costa Mesa, California 92626, as trustor ("BORROWER"), to FIDELITY NATIONAL TITLE INSURANCE COMPANY, as trustee ("TRUSTEE"), for the benefit of BANC ONE CAPITAL FUNDING CORPORATION, an Ohio corporation, organized and existing under the laws of Ohio, whose address is 150 E. Gay Street, 22nd Floor, Columbus, Ohio 43215, as beneficiary ("LENDER"). Borrower, in consideration of the Indebtedness and the trust created by this Instrument, irrevocably grants, conveys and assigns to Trustee, in trust, with power of sale, the Mortgaged Property, including the Land located in Yolo County, State of California and described in Exhibit A attached to this Instrument. TO SECURE TO LENDER the repayment of the Indebtedness evidenced by Borrower's Multifamily Note payable to Lender, dated as of the date of this Instrument, and maturing on July 1, 2010, in the principal amount of $11,209,000.00, and all renewals, extensions and modifications of the Indebtedness, the payment of all sums advanced by or on behalf of Lender to protect the security of this Instrument under Section 12, and the performance of the covenants and agreements of Borrower contained in the Loan Documents. Borrower represents and warrants that Borrower is lawfully seized of the Mortgaged Property and has the right, power and authority to grant, convey and assign the Mortgaged Property, and that the Mortgaged Property is unencumbered. Borrower covenants that Borrower will warrant and defend generally the title to the Mortgaged Property against all claims and demands, subject to any easements and restrictions listed in a schedule of exceptions to coverage in any title insurance policy issued to Lender contemporaneously with the execution and recordation of this Instrument and insuring Lender's interest in the Mortgaged Property. COVENANTS. Borrower and Lender covenant and agree as follows: 1. DEFINITIONS. The following terms, when used in this Instrument (including when used in the above recitals), shall have the following meanings: Page 1 18 (a) "BORROWER" means all persons or entities identified as "Borrower" in the first paragraph of this Instrument, together with their successors and assigns. (b) "COLLATERAL AGREEMENT" means any separate agreement between Borrower and Lender for the purpose of establishing replacement reserves for the Mortgaged Property, establishing a fund to assure completion of repairs or improvements specified in that agreement, or assuring reduction of the outstanding principal balance of the Indebtedness if the occupancy of or income from the Mortgaged Property does not increase to a level specified in that agreement, or any other agreement or agreements between Borrower and Lender which provide for the establishment of any other fund, reserve or account. (c) "ENVIRONMENTAL PERMIT" means any permit, license, or other authorization issued under any Hazardous Materials Law with respect to any activities or businesses conducted on or in relation to the Mortgaged Property. (d) "EVENT OF DEFAULT" means the occurrence of any event listed in Section 22. (e) "FIXTURES" means all property which is so attached to the Land or the Improvements as to constitute a fixture under applicable law, including: machinery, equipment, engines, boilers, incinerators, installed building materials; systems and equipment for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air, or light; antennas, cable, wiring and conduits used in connection with radio, television, security, fire prevention, or fire detection or otherwise used to carry electronic signals; telephone systems and equipment; elevators and related machinery and equipment; fire detection, prevention and extinguishing systems and apparatus; security and access control systems and apparatus; plumbing systems; water heaters, ranges, stoves, microwave ovens, refrigerators, dishwashers, garbage disposers, washers, dryers and other appliances; light fixtures, awnings, storm windows and storm doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors; cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants; swimming pools; and exercise equipment. (f) "GOVERNMENTAL AUTHORITY" means any board, commission, department or body of any municipal, county, state or federal governmental unit, or any subdivision of any of them, that has or acquires jurisdiction over the Mortgaged Property or the use, operation or improvement of the Mortgaged Property. Page 2 2 19 (g) "HAZARDOUS MATERIALS" means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become friable; underground or above-ground storage tanks, whether empty or containing any substance; any substance the presence of which on the Mortgaged Property is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material or substance now or in the future defined as a "hazardous substance," "hazardous material," "hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "pollutant" within the meaning of any Hazardous Materials Law. (h) "HAZARDOUS MATERIALS LAWS" means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Borrower or to the Mortgaged Property. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 5101, et seq., and their state analogs. (i) "IMPOSITIONS" and "IMPOSITION DEPOSITS" are defined in Section 7(a). (j) "IMPROVEMENTS" means the buildings, structures, improvements, and alterations now constructed or at any time in the future constructed or placed upon the Land, including any future replacements and additions. (k) "INDEBTEDNESS" means the principal of, interest on, and all other amounts due at any time under, the Note, this Instrument or any other Loan Document, including prepayment premiums, late charges, default interest, and advances as provided in Section 12 to protect the security of this Instrument. (l) [Intentionally omitted.] (m) "KEY PRINCIPAL" means the natural person(s) or entity identified as such at the foot of this Instrument, and any person or entity who becomes a Key Principal after the date of this Instrument and is identified as such in an amendment or supplement to this Instrument. (n) "LAND" means the land described in Exhibit A. (o) "LEASES" means all present and future leases, subleases, licenses, concessions or grants or other possessory interests now or hereafter in force, whether oral or written, covering or affecting Page 3 20 the Mortgaged Property, or any portion of the Mortgaged Property (including proprietary leases or occupancy agreements if Borrower is a cooperative housing corporation), and all modifications, extensions or renewals. (p) "LENDER" means the entity identified as "Lender" in the first paragraph of this Instrument and its successors and assigns, or any subsequent holder of the Note. (q) "LOAN DOCUMENTS" means the Note, this Instrument, all guaranties, all indemnity agreements, all Collateral Agreements, O&M Programs, and any other documents now or in the future executed by Borrower, Key Principal, any guarantor or any other person in connection with the loan evidenced by the Note, as such documents may be amended from time to time. (r) "LOAN SERVICER" means the entity that from time to time is designated by Lender to collect payments and deposits and receive notices under the Note, this Instrument and any other Loan Document, and otherwise to service the loan evidenced by the Note for the benefit of Lender. Unless Borrower receives notice to the contrary, the Loan Servicer is the entity identified as "Lender" in the first paragraph of this Instrument. (s) "MORTGAGED PROPERTY" means all of Borrower's present and future right, title and interest in and to all of the following: (1) the Land; (2) the Improvements; (3) the Fixtures; (4) the Personalty; (5) all current and future rights, including air rights, development rights, zoning rights and other similar rights or interests, easements, tenements, rights-of-way, strips and gores of land, streets, alleys, roads, sewer rights, waters, watercourses, and appurtenances related to or benefitting the Land or the Improvements, or both, and all rights-of-way, streets, alleys and roads which may have been or may in the future be vacated; (6) all proceeds paid or to be paid by any insurer of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property, whether or not Borrower obtained the insurance pursuant to Lender's requirement; (7) all awards, payments and other compensation made or to be made by any municipal, state or federal authority with respect to the Land, the Improvements, the Fixtures, the Personalty or any other part of the Page 4 21 Mortgaged Property, including any awards or settlements resulting from condemnation proceedings or the total or partial taking of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property under the power of eminent domain or otherwise and including any conveyance in lieu thereof; (8) all contracts, options and other agreements for the sale of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property entered into by Borrower now or in the future, including cash or securities deposited to secure performance by parties of their obligations; (9) all proceeds from the conversion, voluntary or involuntary, of any of the above into cash or liquidated claims, and the right to collect such proceeds; (10) all Rents and Leases; (11) all earnings, royalties, accounts receivable, issues and profits from the Land, the Improvements or any other part of the Mortgaged Property, and all undisbursed proceeds of the loan secured by this Instrument and, if Borrower is a cooperative housing corporation, maintenance charges or assessments payable by shareholders or residents; (12) all Imposition Deposits; (13) all refunds or rebates of Impositions by any municipal, state or federal authority or insurance company (other than refunds applicable to periods before the real property tax year in which this Instrument is dated); (14) all tenant security deposits which have not been forfeited by any tenant under any Lease; and (15) all names under or by which any of the above Mortgaged Property may be operated or known, and all trademarks, trade names, and goodwill relating to any of the Mortgaged Property. (t) "NOTE" means the Multifamily Note described on page 1 of this Instrument, including the Acknowledgment and Agreement of Key Principal to Personal Liability for Exceptions to Non-Recourse Liability (if any), and all schedules, riders, allonges and addenda, as such Multifamily Note may be amended from time to time. (u) "O&M PROGRAM" is defined in Section 18(a). Page 5 22 (v) "PERSONALTY" means all furniture, furnishings, equipment, machinery, building materials, appliances, goods, supplies, tools, books, records (whether in written or electronic form), computer equipment (hardware and software) and other tangible personal property (other than Fixtures) which are used now or in the future in connection with the ownership, management or operation of the Land or the Improvements or are located on the Land or in the Improvements, and any operating agreements relating to the Land or the Improvements, and any surveys, plans and specifications and contracts for architectural, engineering and construction services relating to the Land or the Improvements and all other intangible property and rights relating to the operation of, or used in connection with, the Land or the Improvements, including all governmental permits relating to any activities on the Land. (w) "PROPERTY JURISDICTION" is defined in Section 30(a). (x) "RENTS" means all rents (whether from residential or non-residential space), revenues and other income of the Land or the Improvements, including parking fees, laundry and vending machine income and fees and charges for food, health care and other services provided at the Mortgaged Property, whether now due, past due, or to become due, and deposits forfeited by tenants. (y) "TAXES" means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, which are levied, assessed or imposed by any public authority or quasi-public authority, and which, if not paid, will become a lien, on the Land or the Improvements. (z) "TRANSFER" means (A) a sale, assignment, transfer or other disposition (whether voluntary, involuntary or by operation of law); (B) the granting, creating or attachment of a lien, encumbrance or security interest (whether voluntary, involuntary or by operation of law); (C) the issuance or other creation of an ownership interest in a legal entity, including a partnership interest, interest in a limited liability company or corporate stock; (D) the withdrawal, retirement, removal or involuntary resignation of a partner in a partnership or a member or manager in a limited liability company; or (E) the merger, dissolution, liquidation, or consolidation of a legal entity. "Transfer" does not include (i) a conveyance of the Mortgaged Property at a judicial or non-judicial foreclosure sale under this Instrument or (ii) the Mortgaged Property becoming part of a bankruptcy estate by operation of law under the United States Bankruptcy Code. For purposes of defining the term "Transfer," the term "partnership" shall mean a general partnership, a limited partnership, a joint venture and a limited liability partnership, and the term "partner" shall mean a general partner, a limited partner and a joint venturer. 2. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is also a security agreement under the Uniform Commercial Code for any of the Mortgaged Property which, under applicable law, may be subject to a security interest under the Uniform Commercial Code, whether acquired now or in the future, and all products and cash and non-cash Page 6 23 proceeds thereof (collectively, "UCC COLLATERAL"), and Borrower hereby grants to Lender a security interest in the UCC Collateral. Borrower shall execute and deliver to Lender, upon Lender's request, financing statements, continuation statements and amendments, in such form as Lender may require to perfect or continue the perfection of this security interest. Borrower shall pay all filing costs and all costs and expenses of any record searches for financing statements that Lender may require. Without the prior written consent of Lender, Borrower shall not create or permit to exist any other lien or security interest in any of the UCC Collateral. If an Event of Default has occurred and is continuing, Lender shall have the remedies of a secured party under the Uniform Commercial Code, in addition to all remedies provided by this Instrument or existing under applicable law. In exercising any remedies, Lender may exercise its remedies against the UCC Collateral separately or together, and in any order, without in any way affecting the availability of Lender's other remedies. This Instrument constitutes a financing statement with respect to any part of the Mortgaged Property which is or may become a Fixture. 3. ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION. (a) As part of the consideration for the Indebtedness, Borrower absolutely and unconditionally assigns and transfers to Lender all Rents. It is the intention of Borrower to establish a present, absolute and irrevocable transfer and assignment to Lender of all Rents and to authorize and empower Lender to collect and receive all Rents without the necessity of further action on the part of Borrower. Promptly upon request by Lender, Borrower agrees to execute and deliver such further assignments as Lender may from time to time require. Borrower and Lender intend this assignment of Rents to be immediately effective and to constitute an absolute present assignment and not an assignment for additional security only. For purposes of giving effect to this absolute assignment of Rents, and for no other purpose, Rents shall not be deemed to be a part of the "Mortgaged Property," as that term is defined in Section 1(s). However, if this present, absolute and unconditional assignment of Rents is not enforceable by its terms under the laws of the Property Jurisdiction, then the Rents shall be included as a part of the Mortgaged Property and it is the intention of the Borrower that in this circumstance this Instrument create and perfect a lien on Rents in favor of Lender, which lien shall be effective as of the date of this Instrument. (b) After the occurrence of an Event of Default, Borrower authorizes Lender to collect, sue for and compromise Rents and directs each tenant of the Mortgaged Property to pay all Rents to, or as directed by, Lender. However, until the occurrence of an Event of Default, Lender hereby grants to Borrower a revocable license to collect and receive all Rents, to hold all Rents in trust for the benefit of Lender and to apply all Rents to pay the installments of interest and principal then due and payable under the Note and the other amounts then due and payable under the other Loan Documents, including Imposition Deposits, and to pay the current costs and expenses of managing, operating and maintaining the Mortgaged Property, including utilities, Taxes and insurance premiums (to the extent not included in Imposition Deposits), tenant improvements and other capital expenditures. So long as no Event of Default has occurred and is continuing, Page 7 24 the Rents remaining after application pursuant to the preceding sentence may be retained by Borrower free and clear of, and released from, Lender's rights with respect to Rents under this Instrument. From and after the occurrence of an Event of Default, and without the necessity of Lender entering upon and taking and maintaining control of the Mortgaged Property directly, or by a receiver, Borrower*s license to collect Rents shall automatically terminate and Lender shall without notice be entitled to all Rents as they become due and payable, including Rents then due and unpaid. Borrower shall pay to Lender upon demand all Rents to which Lender is entitled. At any time after the occurrence of an Event of Default, Lender may give, and Borrower hereby irrevocably authorizes Lender to give, notice to all tenants of the Mortgaged Property instructing them to pay all Rents to Lender; provided, however, that the giving of any such notice by Lender shall not affect, in any way, Lender's entitlement to the Rents as of the date on which the Event of Default occurs. No tenant shall be obligated to inquire further as to the occurrence or continuance of an Event of Default, and no tenant shall be obligated to pay to Borrower any amounts which are actually paid to Lender in response to such a notice. Any such notice by Lender shall be delivered to each tenant personally, by mail or by delivering such demand to each rental unit. Borrower shall not interfere with and shall cooperate with Lender's collection of such Rents. (c) Borrower represents and warrants to Lender that Borrower has not executed any prior assignment of Rents (other than an assignment of Rents securing indebtedness that will be paid off and discharged with the proceeds of the loan evidenced by the Note), that Borrower has not performed, and Borrower covenants and agrees that it will not perform, any acts and has not executed, and shall not execute, any instrument which would prevent Lender from exercising its rights under this Section 3, and that at the time of execution of this Instrument there has been no anticipation or prepayment of any Rents for more than two months prior to the due dates of such Rents. Borrower shall not collect or accept payment of any Rents more than two months prior to the due dates of such Rents. (d) If an Event of Default has occurred and is continuing, Lender may, regardless of the adequacy of Lender's security or the solvency of Borrower and even in the absence of waste, enter upon and take and maintain full control of the Mortgaged Property in order to perform all acts that Lender in its discretion determines to be necessary or desirable for the operation and maintenance of the Mortgaged Property, including the execution, cancellation or modification of Leases, the collection of all Rents, the making of repairs to the Mortgaged Property and the execution or termination of contracts providing for the management, operation or maintenance of the Mortgaged Property, for the purposes of enforcing the assignment of Rents pursuant to Section 3(a), protecting the Mortgaged Property or the security of this Instrument, or for such other purposes as Lender in its discretion may deem necessary or desirable. Alternatively, if an Event of Default has occurred and is continuing, regardless of the adequacy of Lender's security, without regard to Borrower*s solvency and without the necessity of giving prior notice (oral or written) to Borrower, Lender may apply to any court having jurisdiction for the appointment of a receiver for the Mortgaged Property to take any or all of the actions set forth in the preceding sentence. If Lender elects to seek the appointment of a receiver for the Mortgaged Property at Page 8 25 any time after an Event of Default has occurred and is continuing, Borrower, by its execution of this Instrument, expressly consents to the appointment of such receiver, including the appointment of a receiver ex parte if permitted by applicable law. Lender or the receiver, as the case may be, shall be entitled to receive a reasonable fee for managing the Mortgaged Property. Immediately upon appointment of a receiver or immediately upon the Lender's entering upon and taking possession and control of the Mortgaged Property, Borrower shall surrender possession of the Mortgaged Property to Lender or the receiver, as the case may be, and shall deliver to Lender or the receiver, as the case may be, all documents, records (including records on electronic or magnetic media), accounts, surveys, plans, and specifications relating to the Mortgaged Property and all security deposits and prepaid Rents. In the event Lender takes possession and control of the Mortgaged Property, Lender may exclude Borrower and its representatives from the Mortgaged Property. Borrower acknowledges and agrees that the exercise by Lender of any of the rights conferred under this Section 3 shall not be construed to make Lender a mortgagee-in-possession of the Mortgaged Property so long as Lender has not itself entered into actual possession of the Land and Improvements. (e) If Lender enters the Mortgaged Property, Lender shall be liable to account only to Borrower and only for those Rents actually received. Lender shall not be liable to Borrower, anyone claiming under or through Borrower or anyone having an interest in the Mortgaged Property, by reason of any act or omission of Lender under this Section 3, and Borrower hereby releases and discharges Lender from any such liability to the fullest extent permitted by law. (f) If the Rents are not sufficient to meet the costs of taking control of and managing the Mortgaged Property and collecting the Rents, any funds expended by Lender for such purposes shall become an additional part of the Indebtedness as provided in Section 12. (g) Any entering upon and taking of control of the Mortgaged Property by Lender or the receiver, as the case may be, and any application of Rents as provided in this Instrument shall not cure or waive any Event of Default or invalidate any other right or remedy of Lender under applicable law or provided for in this Instrument. 4. ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY. (a) As part of the consideration for the Indebtedness, Borrower absolutely and unconditionally assigns and transfers to Lender all of Borrower's right, title and interest in, to and under the Leases, including Borrower's right, power and authority to modify the terms of any such Lease, or extend or terminate any such Lease. It is the intention of Borrower to establish a present, absolute and irrevocable transfer and assignment to Lender of all of Borrower's right, title and interest in, to and under the Leases. Borrower and Lender intend this assignment of the Leases to be immediately effective and to constitute an absolute present assignment and not an assignment for additional security only. For purposes of giving effect to this absolute assignment of the Leases, and for no other purpose, the Leases shall not be deemed to be a part of the "Mortgaged Property," as that term is defined in Section 1(s). However, if this Page 9 26 present, absolute and unconditional assignment of the Leases is not enforceable by its terms under the laws of the Property Jurisdiction, then the Leases shall be included as a part of the Mortgaged Property and it is the intention of the Borrower that in this circumstance this Instrument create and perfect a lien on the Leases in favor of Lender, which lien shall be effective as of the date of this Instrument. (b) Until the occurrence of an Event of Default, Borrower shall have all rights, power and authority granted to Borrower under any Lease (except as otherwise limited by this Section or any other provision of this Instrument), including the right, power and authority to modify the terms of any Lease or extend or terminate any Lease. Upon the occurrence of an Event of Default, the permission given to Borrower pursuant to the preceding sentence to exercise all rights, power and authority under Leases shall automatically terminate. Borrower shall comply with and observe Borrower's obligations under all Leases, including Borrower's obligations pertaining to the maintenance and disposition of tenant security deposits. (c) Borrower acknowledges and agrees that the exercise by Lender, either directly or by a receiver, of any of the rights conferred under this Section 4 shall not be construed to make Lender a mortgagee-in-possession of the Mortgaged Property so long as Lender has not itself entered into actual possession of the Land and the Improvements. The acceptance by Lender of the assignment of the Leases pursuant to Section 4(a) shall not at any time or in any event obligate Lender to take any action under this Instrument or to expend any money or to incur any expenses. Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm or corporation in or about the Mortgaged Property. Prior to Lender's actual entry into and taking possession of the Mortgaged Property, Lender shall not (i) be obligated to perform any of the terms, covenants and conditions contained in any Lease (or otherwise have any obligation with respect to any Lease); (ii) be obligated to appear in or defend any action or proceeding relating to the Lease or the Mortgaged Property; or (iii) be responsible for the operation, control, care, management or repair of the Mortgaged Property or any portion of the Mortgaged Property. The execution of this Instrument by Borrower shall constitute conclusive evidence that all responsibility for the operation, control, care, management and repair of the Mortgaged Property is and shall be that of Borrower, prior to such actual entry and taking of possession. (d) From and after the occurrence of an Event of Default, and without the necessity of Lender entering upon and taking and maintaining control of the Mortgaged Property directly, by a receiver, or by any other manner or proceeding permitted by the laws of the Property Jurisdiction, Lender immediately shall have all rights, powers and authority granted to Borrower under any Lease, including the right, power and authority to modify the terms of any such Lease, or extend or terminate any such Lease. (e) Borrower shall, promptly upon Lender's request, deliver to Lender an executed copy of each residential Lease then in effect. All Leases for residential dwelling units shall be on forms approved by Lender, shall be for initial terms of at least six months and not more than two years, Page 10 27 and shall not include options to purchase. If customary in the applicable market, residential Leases with terms of less than six months may be permitted with Lender's prior written consent. (f) Borrower shall not lease any portion of the Mortgaged Property for non-residential use except with the prior written consent of Lender and Lender's prior written approval of the Lease agreement. Borrower shall not modify the terms of, or extend or terminate, any Lease for non-residential use (including any Lease in existence on the date of this Instrument) without the prior written consent of Lender. Borrower shall, without request by Lender, deliver an executed copy of each non-residential Lease to Lender promptly after such Lease is signed. All non-residential Leases, including renewals or extensions of existing Leases, shall specifically provide that (1) such Leases are subordinate to the lien of this Instrument (unless waived in writing by Lender); (2) the tenant shall attorn to Lender and any purchaser at a foreclosure sale, such attornment to be self-executing and effective upon acquisition of title to the Mortgaged Property by any purchaser at a foreclosure sale or by Lender in any manner; (3) the tenant agrees to execute such further evidences of attornment as Lender or any purchaser at a foreclosure sale may from time to time request; (4) the Lease shall not be terminated by foreclosure or any other transfer of the Mortgaged Property; (5) after a foreclosure sale of the Mortgaged Property, Lender or any other purchaser at such foreclosure sale may, at Lender's or such purchaser's option, accept or terminate such Lease; and (6) the tenant shall, upon receipt after the occurrence of an Event of Default of a written request from Lender, pay all Rents payable under the Lease to Lender. (g) Borrower shall not receive or accept Rent under any Lease (whether residential or non-residential) for more than two months in advance. 5. PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER LOAN DOCUMENTS; PREPAYMENT PREMIUM. Borrower shall pay the Indebtedness when due in accordance with the terms of the Note and the other Loan Documents and shall perform, observe and comply with all other provisions of the Note and the other Loan Documents. Borrower shall pay a prepayment premium in connection with certain prepayments of the Indebtedness, including a payment made after Lender's exercise of any right of acceleration of the Indebtedness, as provided in the Note. 6. EXCULPATION. Borrower's personal liability for payment of the Indebtedness and for performance of the other obligations to be performed by it under this Instrument is limited in the manner, and to the extent, provided in the Note. 7. DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES. (a) Borrower shall deposit with Lender on the day monthly installments of principal or interest, or both, are due under the Note (or on another day designated in writing by Lender), until the Indebtedness is paid in full, an additional amount sufficient to accumulate with Lender the entire sum required to pay, when due (1) any water and sewer charges which, if not paid, may Page 11 28 result in a lien on all or any part of the Mortgaged Property, (2) the premiums for fire and other hazard insurance, rent loss insurance and such other insurance as Lender may require under Section 19, (3) Taxes, and (4) amounts for other charges and expenses which Lender at any time reasonably deems necessary to protect the Mortgaged Property, to prevent the imposition of liens on the Mortgaged Property, or otherwise to protect Lender's interests, all as reasonably estimated from time to time by Lender. The amounts deposited under the preceding sentence are collectively referred to in this Instrument as the "IMPOSITION DEPOSITS". The obligations of Borrower for which the Imposition Deposits are required are collectively referred to in this Instrument as "IMPOSITIONS". The amount of the Imposition Deposits shall be sufficient to enable Lender to pay each Imposition before the last date upon which such payment may be made without any penalty or interest charge being added. Lender shall maintain records indicating how much of the monthly Imposition Deposits and how much of the aggregate Imposition Deposits held by Lender are held for the purpose of paying Taxes, insurance premiums and each other obligation of Borrower for which Imposition Deposits are required. Any waiver by Lender of the requirement that Borrower remit Imposition Deposits to Lender may be revoked by Lender, in Lender's discretion, at any time upon notice to Borrower. (b) Imposition Deposits shall be held in an institution (which may be Lender, if Lender is such an institution) whose deposits or accounts are insured or guaranteed by a federal agency. Lender shall not be obligated to open additional accounts or deposit Imposition Deposits in additional institutions when the amount of the Imposition Deposits exceeds the maximum amount of the federal deposit insurance or guaranty. Lender shall apply the Imposition Deposits to pay Impositions so long as no Event of Default has occurred and is continuing. Unless applicable law requires, Lender shall not be required to pay Borrower any interest, earnings or profits on the Imposition Deposits. Borrower hereby pledges and grants to Lender a security interest in the Imposition Deposits as additional security for all of Borrower's obligations under this Instrument and the other Loan Documents. Any amounts deposited with Lender under this Section 7 shall not be trust funds, nor shall they operate to reduce the Indebtedness, unless applied by Lender for that purpose under Section 7(e). (c) If Lender receives a bill or invoice for an Imposition, Lender shall pay the Imposition from the Imposition Deposits held by Lender. Lender shall have no obligation to pay any Imposition to the extent it exceeds Imposition Deposits then held by Lender. Lender may pay an Imposition according to any bill, statement or estimate from the appropriate public office or insurance company without inquiring into the accuracy of the bill, statement or estimate or into the validity of the Imposition. (d) If at any time the amount of the Imposition Deposits held by Lender for payment of a specific Imposition exceeds the amount reasonably deemed necessary by Lender, the excess shall be credited against future installments of Imposition Deposits. If at any time the amount of the Imposition Deposits held by Lender for payment of a specific Imposition is less than the amount reasonably estimated by Lender to be necessary, Borrower shall pay to Lender the amount of the deficiency within 15 days after notice from Lender. Page 12 29 (e) If an Event of Default has occurred and is continuing, Lender may apply any Imposition Deposits, in any amounts and in any order as Lender determines, in Lender's discretion, to pay any Impositions or as a credit against the Indebtedness. Upon payment in full of the Indebtedness, Lender shall refund to Borrower any Imposition Deposits held by Lender. 8. COLLATERAL AGREEMENTS. Borrower shall deposit with Lender such amounts as may be required by any Collateral Agreement and shall perform all other obligations of Borrower under each Collateral Agreement. 9. APPLICATION OF PAYMENTS. If at any time Lender receives, from Borrower or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, then Lender may apply that payment to amounts then due and payable in any manner and in any order determined by Lender, in Lender's discretion. Neither Lender's acceptance of an amount which is less than all amounts then due and payable nor Lender's application of such payment in the manner authorized shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Borrower's obligations under this Instrument and the Note shall remain unchanged. 10. COMPLIANCE WITH LAWS. Borrower shall comply with all laws, ordinances, regulations and requirements of any Governmental Authority and all recorded lawful covenants and agreements relating to or affecting the Mortgaged Property, including all laws, ordinances, regulations, requirements and covenants pertaining to health and safety, construction of improvements on the Mortgaged Property, fair housing, zoning and land use, and Leases. Borrower also shall comply with all applicable laws that pertain to the maintenance and disposition of tenant security deposits. Borrower shall at all times maintain records sufficient to demonstrate compliance with the provisions of this Section 10. Borrower shall take appropriate measures to prevent, and shall not engage in or knowingly permit, any illegal activities at the Mortgaged Property that could endanger tenants or visitors, result in damage to the Mortgaged Property, result in forfeiture of the Mortgaged Property, or otherwise materially impair the lien created by this Instrument or Lender's interest in the Mortgaged Property. Borrower represents and warrants to Lender that no portion of the Mortgaged Property has been or will be purchased with the proceeds of any illegal activity. 11. USE OF PROPERTY. Unless required by applicable law, Borrower shall not (a) except for any change in use approved by Lender, allow changes in the use for which all or any part of the Mortgaged Property is being used at the time this Instrument was executed, (b) convert any individual dwelling units or common areas to commercial use, (c) initiate or acquiesce in a change in the zoning classification of the Mortgaged Property, or (d) establish any condominium or cooperative regime with respect to the Mortgaged Property. 12. PROTECTION OF LENDER'S SECURITY. Page 13 30 (a) If Borrower fails to perform any of its obligations under this Instrument or any other Loan Document, or if any action or proceeding is commenced which purports to affect the Mortgaged Property, Lender's security or Lender's rights under this Instrument, including eminent domain, insolvency, code enforcement, civil or criminal forfeiture, enforcement of Hazardous Materials Laws, fraudulent conveyance or reorganizations or proceedings involving a bankrupt or decedent, then Lender at Lender's option may make such appearances, disburse such sums and take such actions as Lender reasonably deems necessary to perform such obligations of Borrower and to protect Lender's interest, including (1) payment of fees and out-of-pocket expenses of attorneys, accountants, inspectors and consultants, (2) entry upon the Mortgaged Property to make repairs or secure the Mortgaged Property, (3) procurement of the insurance required by Section 19, and (4) payment of amounts which Borrower has failed to pay under Sections 15 and 17. (b) Any amounts disbursed by Lender under this Section 12, or under any other provision of this Instrument that treats such disbursement as being made under this Section 12, shall be added to, and become part of, the principal component of the Indebtedness, shall be immediately due and payable and shall bear interest from the date of disbursement until paid at the "DEFAULT RATE", as defined in the Note. (c) Nothing in this Section 12 shall require Lender to incur any expense or take any action. 13. INSPECTION. Lender, its agents, representatives, and designees may make or cause to be made entries upon and inspections of the Mortgaged Property (including environmental inspections and tests) during normal business hours, or at any other reasonable time. 14. BOOKS AND RECORDS; FINANCIAL REPORTING. (a) Borrower shall keep and maintain at all times at the Mortgaged Property or the management agent's offices, and upon Lender's request shall make available at the Mortgaged Property, complete and accurate books of account and records (including copies of supporting bills and invoices) adequate to reflect correctly the operation of the Mortgaged Property, and copies of all written contracts, Leases, and other instruments which affect the Mortgaged Property. The books, records, contracts, Leases and other instruments shall be subject to examination and inspection at any reasonable time by Lender. (b) Borrower shall furnish to Lender all of the following: (1) within 120 days after the end of each fiscal year of Borrower, a statement of income and expenses for Borrower's operation of the Mortgaged Property for that fiscal year, a statement of changes in financial position of Borrower relating to the Mortgaged Property for that fiscal year and, when requested by Lender, a balance sheet showing all assets and liabilities of Page 14 31 Borrower relating to the Mortgaged Property as of the end of that fiscal year; (2) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, a rent schedule for the Mortgaged Property showing the name of each tenant, and for each tenant, the space occupied, the lease expiration date, the rent payable for the current month, the date through which rent has been paid, and any related information requested by Lender; (3) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, an accounting of all security deposits held pursuant to all Leases, including the name of the institution (if any) and the names and identification numbers of the accounts (if any) in which such security deposits are held and the name of the person to contact at such financial institution, along with any authority or release necessary for Lender to access information regarding such accounts; (4) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, a statement that identifies all owners of any interest in Borrower and the interest held by each, if Borrower is a corporation, all officers and directors of Borrower, and if Borrower is a limited liability company, all managers who are not members; (5) upon Lender's request, a monthly property management report for the Mortgaged Property, showing the number of inquiries made and rental applications received from tenants or prospective tenants and deposits received from tenants and any other information requested by Lender; and (6) upon Lender's request, a balance sheet, a statement of income and expenses for Borrower and a statement of changes in financial position of Borrower for Borrower's most recent fiscal year; and (7) if required by Lender, a statement of income and expense for the Mortgaged Property for the prior month or quarter. (c) Each of the statements, schedules and reports required by Section 14(b) shall be certified to be complete and accurate by an individual having authority to bind Borrower, and shall be in such form and contain such detail as Lender may reasonably require. Lender also may require that any statements, schedules or reports be audited at Borrower's expense by independent certified public accountants acceptable to Lender. Page 15 32 (d) If Borrower fails to provide in a timely manner the statements, schedules and reports required by Section 14(b), Lender shall have the right to have Borrower's books and records audited, at Borrower's expense, by independent certified public accountants selected by Lender in order to obtain such statements, schedules and reports, and all related costs and expenses of Lender shall become immediately due and payable and shall become an additional part of the Indebtedness as provided in Section 12. (e) If an Event of Default has occurred and is continuing, Borrower shall deliver to Lender upon written demand all books and records relating to the Mortgaged Property or its operation. (f) Borrower authorizes Lender to obtain a credit report on Borrower at any time. (g) If an Event of Default has occurred and Lender has not previously required Borrower to furnish a quarterly statement of income and expense for the Mortgaged Property, Lender may require Borrower to furnish such a statement within 45 days after the end of each fiscal quarter of Borrower following such Event of Default. Page 16 33 15. TAXES; OPERATING EXPENSES. (a) Subject to the provisions of Section 15(c) and Section 15(d), Borrower shall pay, or cause to be paid, all Taxes when due and before the addition of any interest, fine, penalty or cost for nonpayment. (b) Subject to the provisions of Section 15(c), Borrower shall pay the expenses of operating, managing, maintaining and repairing the Mortgaged Property (including insurance premiums, utilities, repairs and replacements) before the last date upon which each such payment may be made without any penalty or interest charge being added. (c) As long as no Event of Default exists and Borrower has timely delivered to Lender any bills or premium notices that it has received, Borrower shall not be obligated to pay Taxes, insurance premiums or any other individual Imposition to the extent that sufficient Imposition Deposits are held by Lender for the purpose of paying that specific Imposition. If an Event of Default exists, Lender may exercise any rights Lender may have with respect to Imposition Deposits without regard to whether Impositions are then due and payable. Lender shall have no liability to Borrower for failing to pay any Impositions to the extent that any Event of Default has occurred and is continuing, insufficient Imposition Deposits are held by Lender at the time an Imposition becomes due and payable or Borrower has failed to provide Lender with bills and premium notices as provided above. (d) Borrower, at its own expense, may contest by appropriate legal proceedings, conducted diligently and in good faith, the amount or validity of any Imposition other than insurance premiums, if (1) Borrower notifies Lender of the commencement or expected commencement of such proceedings, (2) the Mortgaged Property is not in danger of being sold or forfeited, (3) Borrower deposits with Lender reserves sufficient to pay the contested Imposition, if requested by Lender, and (4) Borrower furnishes whatever additional security is required in the proceedings or is reasonably requested by Lender, which may include the delivery to Lender of the reserves established by Borrower to pay the contested Imposition. (e) Borrower shall promptly deliver to Lender a copy of all notices of, and invoices for, Impositions, and if Borrower pays any Imposition directly, Borrower shall promptly furnish to Lender receipts evidencing such payments. 16. LIENS; ENCUMBRANCES. Borrower acknowledges that, to the extent provided in Section 21, the grant, creation or existence of any mortgage, deed of trust, deed to secure debt, security interest or other lien or encumbrance (a "LIEN") on the Mortgaged Property (other than the lien of this Instrument) or on certain ownership interests in Borrower, whether voluntary, involuntary or by operation of law, and whether or not such Lien has priority over the lien of this Instrument, is a "TRANSFER" which constitutes an Event of Default. Page 17 34 17. PRESERVATION, MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY. (a) Borrower (1) shall not commit waste or permit impairment or deterioration of the Mortgaged Property, (2) shall not abandon the Mortgaged Property, (3) shall restore or repair promptly, in a good and workmanlike manner, any damaged part of the Mortgaged Property to the equivalent of its original condition, or such other condition as Lender may approve in writing, whether or not insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair, (4) shall keep the Mortgaged Property in good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality, (5) shall provide for professional management of the Mortgaged Property by a residential rental property manager satisfactory to Lender under a contract approved by Lender in writing, and (6) shall give notice to Lender of and, unless otherwise directed in writing by Lender, shall appear in and defend any action or proceeding purporting to affect the Mortgaged Property, Lender's security or Lender's rights under this Instrument. Borrower shall not (and shall not permit any tenant or other person to) remove, demolish or alter the Mortgaged Property or any part of the Mortgaged Property except in connection with the replacement of tangible Personalty. (b) If, in connection with the making of the loan evidenced by the Note or at any later date, Lender waives in writing the requirement of Section 17(a)(5) above that Borrower enter into a written contract for management of the Mortgaged Property and if, after the date of this Instrument, Borrower intends to change the management of the Mortgaged Property, Lender shall have the right to approve such new property manager and the written contract for the management of the Mortgaged Property and require that Borrower and such new property manager enter into an Assignment of Management Agreement on a form approved by Lender. If required by Lender (whether before or after an Event of Default), Borrower will cause any Affiliate of Borrower to whom fees are payable for the management of the Mortgaged Property to enter into an agreement with Lender, in a form approved by Lender, providing for subordination of those fees and such other provisions as Lender may require. "Affiliate of Borrower" means any corporation, partnership, joint venture, limited liability company, limited liability partnership, trust or individual controlled by, under common control with, or which controls Borrower (the term "control" for these purposes shall mean the ability, whether by the ownership of shares or other equity interests, by contract or otherwise, to elect a majority of the directors of a corporation, to make management decisions on behalf of, or independently to select the managing partner of, a partnership, or otherwise to have the power independently to remove and then select a majority of those individuals exercising managerial authority over an entity, and control shall be conclusively presumed in the case of the ownership of 50% or more of the equity interests). 18. ENVIRONMENTAL HAZARDS. Page 18 35 (a) Except for matters covered by a written program of operations and maintenance approved in writing by Lender (an "O&M PROGRAM") or matters described in Section 18(b), Borrower shall not cause or permit any of the following: (1) the presence, use, generation, release, treatment, processing, storage (including storage in above ground and underground storage tanks), handling, or disposal of any Hazardous Materials on or under the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property; (2) the transportation of any Hazardous Materials to, from, or across the Mortgaged Property; (3) any occurrence or condition on the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property, which occurrence or condition is or may be in violation of Hazardous Materials Laws; or (4) any violation of or noncompliance with the terms of any Environmental Permit with respect to the Mortgaged Property or any property of Borrower that is adjacent to the Mortgaged Property. The matters described in clauses (1) through (4) above are referred to collectively in this Section 18 as "PROHIBITED ACTIVITIES OR CONDITIONS". (b) Prohibited Activities and Conditions shall not include the safe and lawful use and storage of quantities of (1) pre-packaged supplies, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable multifamily properties, (2) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by tenants and occupants of residential dwelling units in the Mortgaged Property; and (3) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Mortgaged Property's parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws. (c) Borrower shall take all commercially reasonable actions (including the inclusion of appropriate provisions in any Leases executed after the date of this Instrument) to prevent its employees, agents, and contractors, and all tenants and other occupants from causing or permitting any Prohibited Activities or Conditions. Borrower shall not lease or allow the sublease or use of all or any portion of the Mortgaged Property to any tenant or subtenant for nonresidential use by any user that, in the ordinary course of its business, would cause or permit any Prohibited Activity or Condition. Page 19 36 (d) If an O&M Program has been established with respect to Hazardous Materials, Borrower shall comply in a timely manner with, and cause all employees, agents, and contractors of Borrower and any other persons present on the Mortgaged Property to comply with the O&M Program. All costs of performance of Borrower's obligations under any O&M Program shall be paid by Borrower, and Lender's out-of-pocket costs incurred in connection with the monitoring and review of the O&M Program and Borrower's performance shall be paid by Borrower upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower fails to pay promptly shall become an additional part of the Indebtedness as provided in Section 12. (e) Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing: (1) Borrower has not at any time engaged in, caused or permitted any Prohibited Activities or Conditions; (2) to the best of Borrower's knowledge after reasonable and diligent inquiry, no Prohibited Activities or Conditions exist or have existed; (3) except to the extent previously disclosed by Borrower to Lender in writing, the Mortgaged Property does not now contain any underground storage tanks, and, to the best of Borrower's knowledge after reasonable and diligent inquiry, the Mortgaged Property has not contained any underground storage tanks in the past. If there is an underground storage tank located on the Property which has been previously disclosed by Borrower to Lender in writing, that tank complies with all requirements of Hazardous Materials Laws; (4) Borrower has complied with all Hazardous Materials Laws, including all requirements for notification regarding releases of Hazardous Materials. Without limiting the generality of the foregoing, Borrower has obtained all Environmental Permits required for the operation of the Mortgaged Property in accordance with Hazardous Materials Laws now in effect and all such Environmental Permits are in full force and effect; (5) no event has occurred with respect to the Mortgaged Property that constitutes, or with the passing of time or the giving of notice would constitute, noncompliance with the terms of any Environmental Permit; (6) there are no actions, suits, claims or proceedings pending or, to the best of Borrower's knowledge after reasonable and diligent inquiry, threatened that involve the Mortgaged Property and allege, arise out of, or relate to any Prohibited Activity or Condition; and Page 20 37 (7) Borrower has not received any complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Materials, or any other environmental, health or safety matters affecting the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property. The representations and warranties in this Section 18 shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the loan evidenced by the Note, until the Indebtedness has been paid in full. (f) Borrower shall promptly notify Lender in writing upon the occurrence of any of the following events: (1) Borrower's discovery of any Prohibited Activity or Condition; (2) Borrower's receipt of or knowledge of any complaint, order, notice of violation or other communication from any Governmental Authority or other person with regard to present or future alleged Prohibited Activities or Conditions or any other environmental, health or safety matters affecting the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property; and (3) any representation or warranty in this Section 18 becomes untrue after the date of this Instrument. Any such notice given by Borrower shall not relieve Borrower of, or result in a waiver of, any obligation under this Instrument, the Note, or any other Loan Document. (g) Borrower shall pay promptly the costs of any environmental inspections, tests or audits ("ENVIRONMENTAL INSPECTIONS") required by Lender in connection with any foreclosure or deed in lieu of foreclosure, or as a condition of Lender's consent to any Transfer under Section 21, or required by Lender following a reasonable determination by Lender that Prohibited Activities or Conditions may exist. Any such costs incurred by Lender (including the fees and out-of-pocket costs of attorneys and technical consultants whether incurred in connection with any judicial or administrative process or otherwise) which Borrower fails to pay promptly shall become an additional part of the Indebtedness as provided in Section 12. The results of all Environmental Inspections made by Lender shall at all times remain the property of Lender and Lender shall have no obligation to disclose or otherwise make available to Borrower or any other party such results or any other information obtained by Lender in connection with its Environmental Inspections. Lender hereby reserves the right, and Borrower hereby expressly authorizes Lender, to make available to any party, including any prospective bidder at a foreclosure sale of the Mortgaged Property, the results of any Environmental Inspections made by Lender with respect Page 21 38 to the Mortgaged Property. Borrower consents to Lender notifying any party (either as part of a notice of sale or otherwise) of the results of any of Lender's Environmental Inspections. Borrower acknowledges that Lender cannot control or otherwise assure the truthfulness or accuracy of the results of any of its Environmental Inspections and that the release of such results to prospective bidders at a foreclosure sale of the Mortgaged Property may have a material and adverse effect upon the amount which a party may bid at such sale. Borrower agrees that Lender shall have no liability whatsoever as a result of delivering the results of any of its Environmental Inspections to any third party, and Borrower hereby releases and forever discharges Lender from any and all claims, damages, or causes of action, arising out of, connected with or incidental to the results of, the delivery of any of Lender's Environmental Inspections. (h) If any investigation, site monitoring, containment, clean-up, restoration or other remedial work ("REMEDIAL WORK") is necessary to comply with any Hazardous Materials Law or order of any Governmental Authority that has or acquires jurisdiction over the Mortgaged Property or the use, operation or improvement of the Mortgaged Property under any Hazardous Materials Law, Borrower shall, by the earlier of (1) the applicable deadline required by Hazardous Materials Law or (2) 30 days after notice from Lender demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it to completion, and shall in any event complete the work by the time required by applicable Hazardous Materials Law. If Borrower fails to begin on a timely basis or diligently prosecute any required Remedial Work, Lender may, at its option, cause the Remedial Work to be completed, in which case Borrower shall reimburse Lender on demand for the cost of doing so. Any reimbursement due from Borrower to Lender shall become part of the Indebtedness as provided in Section 12. (i) Borrower shall cooperate with any inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activity or Condition. (j) Borrower shall indemnify, hold harmless and defend (i) Lender, (ii) any prior owner or holder of the Note, (iii) the Loan Servicer, (iv) any prior Loan Servicer, (v) the officers, directors, shareholders, partners, employees and trustees of any of the foregoing, and (vi) the heirs, legal representatives, successors and assigns of each of the foregoing (collectively, the "INDEMNITEES") from and against all proceedings, claims, damages, penalties and costs (whether initiated or sought by Governmental Authorities or private parties), including fees and out-of-pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial or administrative process or otherwise, arising directly or indirectly from any of the following: (1) any breach of any representation or warranty of Borrower in this Section 18; (2) any failure by Borrower to perform any of its obligations under this Section 18; (3) the existence or alleged existence of any Prohibited Activity or Condition; Page 22 39 (4) the presence or alleged presence of Hazardous Materials on or under the Mortgaged Property or any property of Borrower that is adjacent to the Mortgaged Property; and (5) the actual or alleged violation of any Hazardous Materials Law. (k) Counsel selected by Borrower to defend Indemnitees shall be subject to the approval of those Indemnitees. However, any Indemnitee may elect to defend any claim or legal or administrative proceeding at the Borrower's expense. (l) Borrower shall not, without the prior written consent of those Indemnitees who are named as parties to a claim or legal or administrative proceeding (a "CLAIM"), settle or compromise the Claim if the settlement (1) results in the entry of any judgment that does not include as an unconditional term the delivery by the claimant or plaintiff to Lender of a written release of those Indemnitees, satisfactory in form and substance to Lender; or (2) may materially and adversely affect Lender, as determined by Lender in its discretion. (m) Lender agrees that the indemnity under this Section 18 shall be limited to the assets of Borrower and Lender shall not seek to recover any deficiency from any natural persons who are general partners of Borrower. (n) Borrower shall, at its own cost and expense, do all of the following: (1) pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Section 18; (2) reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Section 18; and (3) reimburse Indemnitees for any and all expenses, including fees and out-of-pocket expenses of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Section 18, or in monitoring and participating in any legal or administrative proceeding. (o) In any circumstances in which the indemnity under this Section 18 applies, Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lender, with the prior written consent of Borrower (which shall not be unreasonably withheld, delayed or conditioned), may settle or compromise any action or Page 23 40 legal or administrative proceeding. Borrower shall reimburse Lender upon demand for all costs and expenses incurred by Lender, including all costs of settlements entered into in good faith, and the fees and out-of-pocket expenses of such attorneys and consultants. (p) The provisions of this Section 18 shall be in addition to any and all other obligations and liabilities that Borrower may have under applicable law or under other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Section 18 without regard to whether Lender or that Indemnitee has exercised any rights against the Mortgaged Property or any other security, pursued any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. If Borrower consists of more than one person or entity, the obligation of those persons or entities to indemnify the Indemnitees under this Section 18 shall be joint and several. The obligation of Borrower to indemnify the Indemnitees under this Section 18 shall survive any repayment or discharge of the Indebtedness, any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the lien of this Instrument. 19. PROPERTY AND LIABILITY INSURANCE. (a) Borrower shall keep the Improvements insured at all times against such hazards as Lender may from time to time require, which insurance shall include but not be limited to coverage against loss by fire and allied perils, general boiler and machinery coverage, and business income coverage. Lender's insurance requirements may change from time to time throughout the term of the Indebtedness. If Lender so requires, such insurance shall also include sinkhole insurance, mine subsidence insurance, earthquake insurance, and, if the Mortgaged Property does not conform to applicable zoning or land use laws, building ordinance or law coverage. If any of the Improvements is located in an area identified by the Federal Emergency Management Agency (or any successor to that agency) as an area having special flood hazards, and if flood insurance is available in that area, Borrower shall insure such Improvements against loss by flood. (b) All premiums on insurance policies required under Section 19(a) shall be paid in the manner provided in Section 7, unless Lender has designated in writing another method of payment. All such policies shall also be in a form approved by Lender. All policies of property damage insurance shall include a non-contributing, non-reporting mortgage clause in favor of, and in a form approved by, Lender. Lender shall have the right to hold the original policies or duplicate original policies of all insurance required by Section 19(a). Borrower shall promptly deliver to Lender a copy of all renewal and other notices received by Borrower with respect to the policies and all receipts for paid premiums. At least 30 days prior to the expiration date of a policy, Borrower shall deliver to Lender the original (or a duplicate original) of a renewal policy in form satisfactory to Lender. Page 24 41 (c) Borrower shall maintain at all times commercial general liability insurance, workers' compensation insurance and such other liability, errors and omissions and fidelity insurance coverages as Lender may from time to time require. (d) All insurance policies and renewals of insurance policies required by this Section 19 shall be in such amounts and for such periods as Lender may from time to time require, and shall be issued by insurance companies satisfactory to Lender. (e) Borrower shall comply with all insurance requirements and shall not permit any condition to exist on the Mortgaged Property that would invalidate any part of any insurance coverage that this Instrument requires Borrower to maintain. (f) In the event of loss, Borrower shall give immediate written notice to the insurance carrier and to Lender. Borrower hereby authorizes and appoints Lender as attorney-in-fact for Borrower to make proof of loss, to adjust and compromise any claims under policies of property damage insurance, to appear in and prosecute any action arising from such property damage insurance policies, to collect and receive the proceeds of property damage insurance, and to deduct from such proceeds Lender's expenses incurred in the collection of such proceeds. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 19 shall require Lender to incur any expense or take any action. Lender may, at Lender's option, (1) hold the balance of such proceeds to be used to reimburse Borrower for the cost of restoring and repairing the Mortgaged Property to the equivalent of its original condition or to a condition approved by Lender (the "RESTORATION"), or (2) apply the balance of such proceeds to the payment of the Indebtedness, whether or not then due. To the extent Lender determines to apply insurance proceeds to Restoration, Lender shall do so in accordance with Lender's then-current policies relating to the restoration of casualty damage on similar multifamily properties. (g) Lender shall not exercise its option to apply insurance proceeds to the payment of the Indebtedness if all of the following conditions are met: (1) no Event of Default (or any event which, with the giving of notice or the passage of time, or both, would constitute an Event of Default) has occurred and is continuing; (2) Lender determines, in its discretion, that there will be sufficient funds to complete the Restoration; (3) Lender determines, in its discretion, that the rental income from the Mortgaged Property after completion of the Restoration will be sufficient to meet all operating costs and other expenses, Imposition Deposits, deposits to reserves and loan repayment obligations relating to the Mortgaged Property; (4) Lender determines, in its discretion, that the Restoration will be completed before the earlier of (A) one year before the maturity date of the Note or (B) one year after the date of the loss or casualty; and (5) upon Lender's request, Borrower provides Lender evidence of the availability during and after the Restoration of the insurance required to be maintained by Borrower pursuant to this Section 19. (h) If the Mortgaged Property is sold at a foreclosure sale or Lender acquires title to the Mortgaged Property, Lender shall automatically succeed to all rights of Borrower in and to any Page 25 42 insurance policies and unearned insurance premiums and in and to the proceeds resulting from any damage to the Mortgaged Property prior to such sale or acquisition. 20. CONDEMNATION. (a) Borrower shall promptly notify Lender of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all or any part of the Mortgaged Property, whether direct or indirect (a "CONDEMNATION"). Borrower shall appear in and prosecute or defend any action or proceeding relating to any Condemnation unless otherwise directed by Lender in writing. Borrower authorizes and appoints Lender as attorney-in-fact for Borrower to commence, appear in and prosecute, in Lender's or Borrower's name, any action or proceeding relating to any Condemnation and to settle or compromise any claim in connection with any Condemnation. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 20 shall require Lender to incur any expense or take any action. Borrower hereby transfers and assigns to Lender all right, title and interest of Borrower in and to any award or payment with respect to (i) any Condemnation, or any conveyance in lieu of Condemnation, and (ii) any damage to the Mortgaged Property caused by governmental action that does not result in a Condemnation. (b) Lender may apply such awards or proceeds, after the deduction of Lender's expenses incurred in the collection of such amounts, at Lender's option, to the restoration or repair of the Mortgaged Property or to the payment of the Indebtedness, with the balance, if any, to Borrower. Unless Lender otherwise agrees in writing, any application of any awards or proceeds to the Indebtedness shall not extend or postpone the due date of any monthly installments referred to in the Note, Section 7 of this Instrument or any Collateral Agreement, or change the amount of such installments. Borrower agrees to execute such further evidence of assignment of any awards or proceeds as Lender may require. 21. TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER. (a) The occurrence of any of the following events shall constitute an Event of Default under this Instrument: (1) a Transfer of all or any part of the Mortgaged Property or any interest in the Mortgaged Property; (2) a Transfer of a Controlling Interest in Borrower; (3) a Transfer of a Controlling Interest in any entity which owns, directly or indirectly through one or more intermediate entities, a Controlling Interest in Borrower; Page 26 43 (4) a Transfer of all or any part of Key Principal's ownership interests (other than limited partnership interests) in Borrower, or in any other entity which owns, directly or indirectly through one or more intermediate entities, an ownership interest in Borrower; (5) if Key Principal is an entity, (A) a Transfer of a Controlling Interest in Key Principal, or (B) a Transfer of a Controlling Interest in any entity which owns, directly or indirectly through one or more intermediate entities, a Controlling Interest in Key Principal; (6) if Borrower or Key Principal is a trust, the termination or revocation of such trust; and (7) a conversion of Borrower from one type of legal entity into another type of legal entity, whether or not there is a Transfer. Lender shall not be required to demonstrate any actual impairment of its security or any increased risk of default in order to exercise any of its remedies with respect to an Event of Default under this Section 21. (b) The occurrence of any of the following events shall not constitute an Event of Default under this Instrument, notwithstanding any provision of Section 21(a) to the contrary: (1) a Transfer to which Lender has consented; (2) a Transfer that occurs by devise, descent, or by operation of law upon the death of a natural person; (3) the grant of a leasehold interest in an individual dwelling unit for a term of two years or less not containing an option to purchase; (4) a Transfer of obsolete or worn out Personalty or Fixtures that are contemporaneously replaced by items of equal or better function and quality, which are free of liens, encumbrances and security interests other than those created by the Loan Documents or consented to by Lender; (5) the grant of an easement, if before the grant Lender determines that the easement will not materially affect the operation or value of the Mortgaged Property or Lender's interest in the Mortgaged Property, and Borrower pays to Lender, upon demand, all costs and expenses incurred by Lender in connection with reviewing Borrower's request; and Page 27 44 (6) the creation of a tax lien or a mechanic's, materialman's or judgment lien against the Mortgaged Property which is bonded off, released of record or otherwise remedied to Lender's satisfaction within 30 days of the date of creation. (c) Lender shall consent, without any adjustment to the rate at which the Indebtedness secured by this Instrument bears interest or to any other economic terms of the Indebtedness, to a Transfer that would otherwise violate this Section 21 if, prior to the Transfer, Borrower has satisfied each of the following requirements: (1) the submission to Lender of all information required by Lender to make the determination required by this Section 21(c); (2) the absence of any Event of Default; (3) the transferee meets all of the eligibility, credit, management and other standards (including any standards with respect to previous relationships between Lender and the transferee and the organization of the transferee) customarily applied by Lender at the time of the proposed Transfer to the approval of borrowers in connection with the origination or purchase of similar mortgages, deeds of trust or deeds to secure debt on multifamily properties; (4) the Mortgaged Property, at the time of the proposed Transfer, meets all standards as to its physical condition that are customarily applied by Lender at the time of the proposed Transfer to the approval of properties in connection with the origination or purchase of similar mortgages on multifamily properties; (5) in the case of a Transfer of all or any part of the Mortgaged Property, or direct or indirect ownership interests in Borrower or Key Principal (if an entity), if transferor or any other person has obligations under any Loan Document, the execution by the transferee or one or more individuals or entities acceptable to Lender of an assumption agreement (including, if applicable, an Acknowledgment and Agreement of Key Principal to Personal Liability for Exceptions to Non-Recourse Liability) that is acceptable to Lender and that, among other things, requires the transferee to perform all obligations of transferor or such person set forth in such Loan Document, and may require that the transferee comply with any provisions of this Instrument or any other Loan Document which previously may have been waived by Lender; Page 28 45 (6) if a guaranty has been executed and delivered in connection with the Note, this Instrument or any of the other Loan Documents, the Borrower causes one or more individuals or entities acceptable to Lender to execute and deliver to Lender a guaranty in a form acceptable to Lender; and (7) Lender's receipt of all of the following: (A) a non-refundable review fee in the amount of $3,000 and a transfer fee equal to 1 percent of the outstanding Indebtedness immediately prior to the Transfer. (B) In addition, Borrower shall be required to reimburse Lender for all of Lender's out-of-pocket costs (including reasonable attorneys' fees) incurred in reviewing the Transfer request, to the extent such expenses exceed $3,000. (d) For purposes of this Section, the following terms shall have the meanings set forth below: (1) "INITIAL OWNERS" means, with respect to Borrower or any other entity, the persons or entities who on the date of the Note own the aggregate 100% of the ownership interests in Borrower or that entity. (2) A Transfer of a "CONTROLLING INTEREST" shall mean, with respect to any entity, the following: (i) if such entity is a general partnership or a joint venture, a Transfer of any general partnership interest or joint venture interest which would cause the Initial Owners to own less than 51% of all general partnership or joint venture interests in such entity; (ii) if such entity is a limited partnership, a Transfer of any general partnership interest; (iii) if such entity is a limited liability company or a limited liability partnership, a Transfer of any membership or other ownership interest which would cause the Initial Owners to own less than 51% of all membership or other ownership interests in such entity; (iv) if such entity is a corporation (other than a Publicly-Held Corporation) with only one class of voting stock, a Transfer of any voting stock which would cause the Initial Owners to own less than 51% of voting stock in such corporation; Page 29 46 (v) if such entity is a corporation (other than a Publicly-Held Corporation) with more than one class of voting stock, a Transfer of any voting stock which would cause the Initial Owners to own less than a sufficient number of shares of voting stock having the power to elect the majority of directors of such corporation; and (vi) if such entity is a trust, the removal, appointment or substitution of a trustee of such trust other than (A) in the case of a land trust, or (B) if the trustee of such trust after such removal, appointment or substitution is a trustee identified in the trust agreement approved by Lender. (3) "PUBLICLY-HELD CORPORATION" shall mean a corporation the outstanding voting stock of which is registered under Section 12(b) or 12(g) of the Securities and Exchange Act of 1934, as amended. 22. EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute an Event of Default under this Instrument: (a) any failure by Borrower to pay or deposit when due any amount required by the Note, this Instrument or any other Loan Document; (b) any failure by Borrower to maintain the insurance coverage required by Section 19; (c) any failure by Borrower to comply with the provisions of Section 33; (d) fraud or material misrepresentation or material omission by Borrower, or any of its officers, directors, trustees, general partners or managers, Key Principal or any guarantor in connection with (A) the application for or creation of the Indebtedness, (B) any financial statement, rent roll, or other report or information provided to Lender during the term of the Indebtedness, or (C) any request for Lender's consent to any proposed action, including a request for disbursement of funds under any Collateral Agreement; (e) any Event of Default under Section 21; (f) the commencement of a forfeiture action or proceeding, whether civil or criminal, which, in Lender's reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair the lien created by this Instrument or Lender's interest in the Mortgaged Property; Page 30 47 (g) any failure by Borrower to perform any of its obligations under this Instrument (other than those specified in Sections 22(a) through (f)), as and when required, which continues for a period of 30 days after notice of such failure by Lender to Borrower, but no such notice or grace period shall apply in the case of any such failure which could, in Lender's judgment, absent immediate exercise by Lender of a right or remedy under this Instrument, result in harm to Lender, impairment of the Note or this Instrument or any other security given under any other Loan Document; (h) any failure by Borrower to perform any of its obligations as and when required under any Loan Document other than this Instrument which continues beyond the applicable cure period, if any, specified in that Loan Document; and (i) any exercise by the holder of any other debt instrument secured by a mortgage, deed of trust or deed to secure debt on the Mortgaged Property of a right to declare all amounts due under that debt instrument immediately due and payable. 23. REMEDIES CUMULATIVE. Each right and remedy provided in this Instrument is distinct from all other rights or remedies under this Instrument or any other Loan Document or afforded by applicable law, and each shall be cumulative and may be exercised concurrently, independently, or successively, in any order. 24. FORBEARANCE. (a) Lender may (but shall not be obligated to) agree with Borrower, from time to time, and without giving notice to, or obtaining the consent of, or having any effect upon the obligations of, any guarantor or other third party obligor, to take any of the following actions: extend the time for payment of all or any part of the Indebtedness; reduce the payments due under this Instrument, the Note, or any other Loan Document; release anyone liable for the payment of any amounts under this Instrument, the Note, or any other Loan Document; accept a renewal of the Note; modify the terms and time of payment of the Indebtedness; join in any extension or subordination agreement; release any Mortgaged Property; take or release other or additional security; modify the rate of interest or period of amortization of the Note or change the amount of the monthly installments payable under the Note; and otherwise modify this Instrument, the Note, or any other Loan Document. (b) Any forbearance by Lender in exercising any right or remedy under the Note, this Instrument, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any other right or remedy. The acceptance by Lender of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount which is less than the required payment, shall not be a waiver of Lender's right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any remedies for any failure to make prompt payment. Enforcement by Lender of any security for the Indebtedness shall not constitute an election by Lender of remedies so as to preclude the Page 31 48 exercise of any other right available to Lender. Lender's receipt of any awards or proceeds under Sections 19 and 20 shall not operate to cure or waive any Event of Default. 25. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower is interpreted so that any charge provided for in any Loan Document, whether considered separately or together with other charges levied in connection with any other Loan Document, violates that law, and Borrower is entitled to the benefit of that law, that charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Lender in excess of the permitted amounts shall be applied by Lender to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower has been violated, all Indebtedness which constitutes interest, as well as all other charges levied in connection with the Indebtedness which constitute interest, shall be deemed to be allocated and spread over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note. 26. WAIVER OF STATUTE OF LIMITATIONS. Borrower hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien of this Instrument or to any action brought to enforce any Loan Document. 27. WAIVER OF MARSHALING. Notwithstanding the existence of any other security interests in the Mortgaged Property held by Lender or by any other party, Lender shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided in this Instrument, the Note, any other Loan Document or applicable law. Lender shall have the right to determine the order in which any or all portions of the Indebtedness are satisfied from the proceeds realized upon the exercise of such remedies. Borrower and any party who now or in the future acquires a security interest in the Mortgaged Property and who has actual or constructive notice of this Instrument waives any and all right to require the marshaling of assets or to require that any of the Mortgaged Property be sold in the inverse order of alienation or that any of the Mortgaged Property be sold in parcels or as an entirety in connection with the exercise of any of the remedies permitted by applicable law or provided in this Instrument. 28. FURTHER ASSURANCES. Borrower shall execute, acknowledge, and deliver, at its sole cost and expense, all further acts, deeds, conveyances, assignments, estoppel certificates, financing statements, transfers and assurances as Lender may require from time to time in order to better assure, grant, and convey to Lender the rights intended to be granted, now or in the future, to Lender under this Instrument and the Loan Documents. 29. ESTOPPEL CERTIFICATE. Within 10 days after a request from Lender, Borrower shall deliver to Lender a written statement, signed and acknowledged by Borrower, certifying to Lender or any person designated by Lender, as of the date of such statement, (i) that the Loan Page 32 49 Documents are unmodified and in full force and effect (or, if there have been modifications, that the Loan Documents are in full force and effect as modified and setting forth such modifications); (ii) the unpaid principal balance of the Note; (iii) the date to which interest under the Note has been paid; (iv) that Borrower is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Instrument or any of the other Loan Documents (or, if the Borrower is in default, describing such default in reasonable detail); (v) whether or not there are then existing any setoffs or defenses known to Borrower against the enforcement of any right or remedy of Lender under the Loan Documents; and (vi) any additional facts requested by Lender. 30. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. (a) This Instrument, and any Loan Document which does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the jurisdiction in which the Land is located (the "PROPERTY JURISDICTION"). (b) Borrower agrees that any controversy arising under or in relation to the Note, this Instrument, or any other Loan Document shall be litigated exclusively in the Property Jurisdiction. The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to the Note, any security for the Indebtedness, or any other Loan Document. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise. 31. NOTICE. (a) All notices, demands and other communications ("NOTICE") under or concerning this Instrument shall be in writing. Each notice shall be addressed to the intended recipient at its address set forth in this Instrument, and shall be deemed given on the earliest to occur of (1) the date when the notice is received by the addressee; (2) the first Business Day after the notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next Business Day delivery; or (3) the third Business Day after the notice is deposited in the United States mail with postage prepaid, certified mail, return receipt requested. As used in this Section 31, the term "Business Day" means any day other than a Saturday, a Sunday or any other day on which Lender is not open for business. (b) Any party to this Instrument may change the address to which notices intended for it are to be directed by means of notice given to the other party in accordance with this Section 31. Each party agrees that it will not refuse or reject delivery of any notice given in accordance with this Section 31, that it will acknowledge, in writing, the receipt of any notice upon request by the other party and that any notice rejected or refused by it shall be deemed for purposes of this Page 33 50 Section 31 to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service. (c) Any notice under the Note and any other Loan Document which does not specify how notices are to be given shall be given in accordance with this Section 31. 32. SALE OF NOTE; CHANGE IN SERVICER. The Note or a partial interest in the Note (together with this Instrument and the other Loan Documents) may be sold one or more times without prior notice to Borrower. A sale may result in a change of the Loan Servicer. There also may be one or more changes of the Loan Servicer unrelated to a sale of the Note. If there is a change of the Loan Servicer, Borrower will be given notice of the change. 33. SINGLE ASSET BORROWER. Until the Indebtedness is paid in full, Borrower (a) shall not acquire any real or personal property other than the Mortgaged Property and personal property related to the operation and maintenance of the Mortgaged Property; (b) shall not operate any business other than the management and operation of the Mortgaged Property; and (c) shall not maintain its assets in a way difficult to segregate and identify. 34. SUCCESSORS AND ASSIGNS BOUND. This Instrument shall bind, and the rights granted by this Instrument shall inure to, the respective successors and assigns of Lender and Borrower. However, a Transfer not permitted by Section 21 shall be an Event of Default. 35. JOINT AND SEVERAL LIABILITY. If more than one person or entity signs this Instrument as Borrower, the obligations of such persons and entities shall be joint and several. 36. RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY. (a) The relationship between Lender and Borrower shall be solely that of creditor and debtor, respectively, and nothing contained in this Instrument shall create any other relationship between Lender and Borrower. (b) No creditor of any party to this Instrument and no other person shall be a third party beneficiary of this Instrument or any other Loan Document. Without limiting the generality of the preceding sentence, (1) any arrangement (a "SERVICING ARRANGEMENT") between the Lender and any Loan Servicer for loss sharing or interim advancement of funds shall constitute a contractual obligation of such Loan Servicer that is independent of the obligation of Borrower for the payment of the Indebtedness, (2) Borrower shall not be a third party beneficiary of any Servicing Arrangement, and (3) no payment by the Loan Servicer under any Servicing Arrangement will reduce the amount of the Indebtedness. 37. SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of any provision of this Instrument shall not affect the validity or enforceability of any other provision, and all other provisions shall remain in full force and effect. This Instrument contains the entire Page 34 51 agreement among the parties as to the rights granted and the obligations assumed in this Instrument. This Instrument may not be amended or modified except by a writing signed by the party against whom enforcement is sought. 38. CONSTRUCTION. The captions and headings of the sections of this Instrument are for convenience only and shall be disregarded in construing this Instrument. Any reference in this Instrument to an "Exhibit" or a "Section" shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Instrument or to a Section of this Instrument. All Exhibits attached to or referred to in this Instrument are incorporated by reference into this Instrument. Any reference in this Instrument to a statute or regulation shall be construed as referring to that statute or regulation as amended from time to time. Use of the singular in this Agreement includes the plural and use of the plural includes the singular. As used in this Instrument, the term "including" means "including, but not limited to." 39. LOAN SERVICING. All actions regarding the servicing of the loan evidenced by the Note, including the collection of payments, the giving and receipt of notice, inspections of the Property, inspections of books and records, and the granting of consents and approvals, may be taken by the Loan Servicer unless Borrower receives notice to the contrary. If Borrower receives conflicting notices regarding the identity of the Loan Servicer or any other subject, any such notice from Lender shall govern. 40. DISCLOSURE OF INFORMATION. Lender may furnish information regarding Borrower or the Mortgaged Property to third parties with an existing or prospective interest in the servicing, enforcement, evaluation, performance, purchase or securitization of the Indebtedness, including trustees, master servicers, special servicers, rating agencies, and organizations maintaining databases on the underwriting and performance of multifamily mortgage loans. Borrower irrevocably waives any and all rights it may have under applicable law to prohibit such disclosure, including any right of privacy. 41. NO CHANGE IN FACTS OR CIRCUMSTANCES. All information in the application for the loan submitted to Lender (the "LOAN APPLICATION") and in all financial statements, rent rolls, reports, certificates and other documents submitted in connection with the Loan Application are complete and accurate in all material respects. There has been no material adverse change in any fact or circumstance that would make any such information incomplete or inaccurate. 42. SUBROGATION. If, and to the extent that, the proceeds of the loan evidenced by the Note are used to pay, satisfy or discharge any obligation of Borrower for the payment of money that is secured by a pre-existing mortgage, deed of trust or other lien encumbering the Mortgaged Property (a "PRIOR LIEN"), such loan proceeds shall be deemed to have been advanced by Lender at Borrower's request, and Lender shall automatically, and without further action on its part, be subrogated to the rights, including lien priority, of the owner or holder of the obligation secured by the Prior Lien, whether or not the Prior Lien is released. Page 35 52 43. ACCELERATION; REMEDIES. If an Event of Default has occurred and is continuing, Lender, at Lender's option, may declare the Indebtedness to be immediately due and payable without further demand, and may invoke the power of sale and any other remedies permitted by California law or provided in this Instrument or in any other Loan Document. Borrower acknowledges that the power of sale granted in this Instrument may be exercised by Lender without prior judicial hearing. Lender shall be entitled to collect all costs and expenses incurred in pursuing such remedies, including attorneys' fees, costs of documentary evidence, abstracts and title reports. If the power of sale is invoked, Lender shall execute a written notice of the occurrence of an Event of Default and of Lender's election to cause the Mortgaged Property to be sold and shall cause the notice to be recorded in each county in which the Mortgaged Property or some part of the Mortgaged Property is located. Trustee shall give notice of default and notice of sale and shall sell the Mortgaged Property according to California law. Trustee may sell the Mortgaged Property at the time and place and under the terms designated in the notice of sale in one or more parcels and in such order as Trustee may determine. Trustee may postpone the sale of all or any part of the Mortgaged Property by public announcement at the time and place of any previously scheduled sale. Lender or Lender's designee may purchase the Mortgaged Property at any sale. At the sale, Lender shall be entitled to credit bid, or to instruct Trustee, on behalf of Lender to credit bid, up to and including the entire amount of the Indebtedness plus Trustee's fees and expenses. Trustee shall deliver to the purchaser at the sale, within a reasonable time, but in any event within 10 calendar days, after the sale, a deed conveying the Mortgaged Property so sold without any express or implied covenant or warranty. The recitals in Trustee's deed shall be prima facie evidence of the truth of the statements made in those recitals. Trustee shall apply the proceeds of the sale in the following order: (a) to all costs and expenses of exercising the power of sale, including the payment of Trustee's fees and attorneys' fees and costs of title evidence; (b) to the Indebtedness in such order as Lender, in Lender's discretion, directs; and (c) the excess, if any, to the person or persons legally entitled to the excess. 44. RECONVEYANCE. Upon payment of the Indebtedness, Lender shall request Trustee to reconvey the Mortgaged Property and shall surrender this Instrument and the Note to Trustee. Trustee shall reconvey the Mortgaged Property without warranty to the person or persons legally entitled to the Mortgaged Property. Such person or persons shall pay Trustee's reasonable costs incurred in so reconveying the Mortgaged Property. 45. SUBSTITUTE TRUSTEE. Lender, at Lender's option, may from time to time, by a written instrument, appoint a successor trustee, which instrument, when executed and acknowledged by Lender and recorded in the office of the Recorder of the county or counties where the Mortgaged Property is situated, shall be conclusive proof of proper substitution of the successor trustee. The successor trustee shall, without conveyance of the Mortgaged Property, succeed to all the title, power and duties conferred upon the Trustee in this Instrument and by California law. The instrument of substitution shall contain the name of the original Lender, Page 36 53 Trustee and Borrower under this Instrument, the book and page where this Instrument is recorded, and the name and address of the successor trustee. If notice of default has been recorded, this power of substitution cannot be exercised until after the costs, fees and expenses of the then acting Trustee have been paid to such Trustee, who shall endorse receipt of those costs, fees and expenses upon the instrument of substitution. The procedure provided for substitution of trustee in this Instrument shall govern to the exclusion of all other provisions for substitution, statutory or otherwise. 46. STATEMENT OF OBLIGATION. Lender may collect a fee not to exceed the maximum allowed by applicable law for furnishing the statement of obligation as provided in Section 2943 of the Civil Code of California. 47. SPOUSE'S SEPARATE PROPERTY. Each Borrower who is a married person expressly agrees that recourse may be had against his or her community property and separate property. 48. FIXTURE FILING. This Instrument is also a fixture filing under the Uniform Commercial Code of California. 49. ADDITIONAL PROVISION REGARDING APPLICATION OF PAYMENTS. In addition to the provisions of Section 9, Borrower further agrees that, if Lender accepts a guaranty of only a portion of the Indebtedness, Borrower waives its right under California Civil Code Section 2822(a), to designate the portion of the Indebtedness which shall be satisfied by a guarantor's partial payment. 50. WAIVER OF MARSHALING; OTHER WAIVERS. To the extent permitted by law, Borrower waives (i) the benefit of all present or future laws providing for any appraisement before sale of any portion of the Mortgaged Property, (ii) all rights of redemption, valuation, appraisement, stay of execution, notice of election to mature or declare due the whole of the Indebtedness and marshalling in the event of foreclosure of the lien created by this Instrument, (iii) all rights and remedies which Borrower may have or be able to assert by reason of the laws of the State of California pertaining to the rights and remedies of sureties, (iv) the right to assert any statute of limitations as a bar to the enforcement of the lien of this Instrument or to any action brought to enforce the Note or any other obligation secured by this Instrument, and (v) any rights, legal or equitable, to require marshaling of assets or to require upon foreclosure sales in a particular order, including any rights under California Civil Code Sections 2899 and 3433. Lender shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided by this Instrument. Lender shall have the right to determine the order in which any or all portions of the Indebtedness are satisfied from the proceeds realized upon the exercise of the remedies provided by this Instrument. By signing this Instrument, Borrower does not waive its rights under Section 2924c of the California Civil Code. Page 37 54 51. ADDITIONAL PROVISIONS CONCERNING ENVIRONMENTAL HAZARDS. In addition to the provisions of Section 18: (a) Except for matters covered by an O&M Program or matters described in Section 18(b), Borrower shall not cause or permit any lien (whether or not such lien has priority over the lien created by this Instrument) upon the Mortgaged Property imposed pursuant to any Hazardous Materials Laws. Any such lien shall be considered a Prohibited Activity or Condition. (b) Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing: (1) at the time of acquiring the Mortgaged Property, Borrower undertook all appropriate inquiry into the previous ownership and uses of the Mortgaged Property consistent with good commercial or customary practice and no evidence or indication came to light which would suggest that the Mortgaged Property has been or is now being used for any Prohibited Activities or Conditions; and (2) the Mortgaged Property has not been designated as "hazardous waste property" or "border zone property" pursuant to Section 25220, et seq., of the California Health and Safety Code. The representations and warranties in this Section 51(b) shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the loan evidenced by the Note, until the Indebtedness has been paid in full. (c) Without limiting any of the remedies provided in this Instrument, Borrower acknowledges and agrees that each of the provisions in Section 18 and in this Section 51 is an environmental provision (as defined in Section 736(f)(2) of the California Code of Civil Procedure) made by Borrower relating to the real property security (the "ENVIRONMENTAL PROVISIONS"), and that Borrower's failure to comply with any of the Environmental Provisions will be a breach of contract that will entitle Lender to pursue the remedies provided by Section 736 of the California Code of Civil Procedure ("SECTION 736") for the recovery of damages and for the enforcement of the Environmental Provisions. Pursuant to Section 736, Lender's action for recovery of damages or enforcement of the Environmental Provisions shall not constitute an action within the meaning of Section 726(a) of the California Code of Civil Procedure or constitute a money judgment for a deficiency or a deficiency judgment within the meaning of Sections 580a, 580b, 580d, or 726(b) of the California Code of Civil Procedure. (d) Any reference in this Instrument or in any other Loan Document to Section 18 of this Instrument shall be construed as referring together to Section 18 and this Section 51. Page 38 55 52. ADDITIONAL PROVISION REGARDING INSURANCE. In addition to the provisions of Section 19, Borrower further agrees that to the extent that Borrower obtains any form of property damage insurance for the Mortgaged Property or any portion thereof that insures perils not required to be insured against by Lender, such policy of property damage insurance shall include a standard mortgagee clause and shall name Lender as loss payee and, within 10 days following Borrower's purchase of such additional insurance, Borrower shall cause to be delivered to Lender a duplicate original policy of insurance with respect to such policy. Any insurance proceeds payable to Borrower under such policy shall be additional security for the Indebtedness and Lender shall have the same rights to such policy and proceeds as it has with respect to insurance policies required by Lender pursuant to Section 19 (except that Lender shall not require that the premium for such additional insurance be included among the Imposition Deposits). 53. WAIVER OF TRIAL BY JURY. BORROWER AND LENDER EACH (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS INSTRUMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS BORROWER AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. Page 39 56 ATTACHED EXHIBITS. The following Exhibits are attached to this Instrument: [ ] Exhibit A Description of the Land (required). [ ] Exhibits B-1, B-2, B-3 Modifications to Instrument IN WITNESS WHEREOF, Borrower has signed and delivered this Instrument or has caused this Instrument to be signed and delivered by its duly authorized representative. BORROWER: ARV COVELL, LLC a California limited liability company By:___________________________________ Name: Abdo H. Khoury, Title: Authorized Manager Borrower's Employer ID Number: 33-0911962 Fannie Mae MBS\DUS Commitment No.: Page 40 57 ACKNOWLEDGMENT STATE OF CALIFORNIA COUNTY OF ORANGE On _____________, 2000, before me, _________________ a Notary Public in and for said state, personally appeared ABDO H. KHOURY, personally known to me or proved to me on the basis of satisfactory evidence to be the person(s) whose names(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her their signature(s) on the instrument, the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ______________________________________ Notary Public [SEAL] Page 41 58 KEY PRINCIPAL KEY PRINCIPAL NAME: ARV Assisted Living Inc. ADDRESS: 245 Fischer Avenue, D-1 Costa Mesa, California 92626 Page 42 59 EXHIBIT A [DESCRIPTION OF THE LAND] Page 1 60 EXHIBIT B MODIFICATIONS TO INSTRUMENT The following modifications are made to the text of the Instrument that precedes this Exhibit: Page A-1 1 61 EXCEPTIONS TO NON-RECOURSE GUARANTY This Exceptions to Non-Recourse Guaranty ("GUARANTY") is entered into as of June 30, 2000, by the undersigned (the "KEY PRINCIPAL" whether one or more), for the benefit of BANC ONE CAPITAL FUNDING CORPORATION, and/or any subsequent holder of the Note (the "LENDER"). RECITALS A. ARV COVELL, LLC (the "BORROWER") has requested that Lender make a loan to Borrower in the amount of $11,209,000.00 (the "LOAN"). The Loan will be evidenced by a Multifamily Note from Borrower to Lender dated as of the date of this Guaranty (the "NOTE"). The Note will be secured by a Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (California) dated the same date as the Note (the "SECURITY INSTRUMENT"), encumbering the real property described in the Security Instrument (the "PROPERTY"). B. Key Principal has an economic interest in Borrower or will otherwise obtain a material financial benefit from the Loan. C. As a condition to making the Loan to Borrower, Lender requires that the Key Principal execute this Guaranty. NOW, THEREFORE, in order to induce Lender to make the Loan to Borrower, and in consideration thereof, Key Principal agrees as follows: 1. "Indebtedness" and other capitalized terms used but not defined in this Guaranty shall have the meanings assigned to them in the Security Instrument. 2. Key Principal hereby absolutely, unconditionally and irrevocably guarantees to Lender the full and prompt payment when due, whether at maturity or earlier, by reason of acceleration or otherwise, and at all times thereafter, of all amounts for which Borrower is personally liable under Paragraph 9 of the Note. 3. The obligations of Key Principal under this Guaranty shall survive any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the Security Instrument. 4. Key Principal's obligations under this Guaranty constitute an unconditional guaranty of payment and not merely a guaranty of collection. If Key Principal (or any Key Principal, if more than one) is a married person, Key Principal (or each such married Key Principal, if more than one) agrees that Lender may look to all of Key Principal's community property and separate property to satisfy Key Principal's obligations under this Guaranty. 5. The obligations of Key Principal under this Guaranty shall be performed without demand by Lender and shall be unconditional irrespective of the genuineness, validity, regularity or enforceability of the Note, the Security Instrument, or any other Loan Document, and without regard to Page A-2 2 62 any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or a guarantor. Key Principal hereby waives any and all benefits and defenses under California Civil Code SECTION 2810 and agrees that by doing so Key Principal shall be liable even if Borrower had no liability at the time of execution of the Note, the Security Instrument or any other Loan Document, or thereafter ceases to be liable. Key Principal hereby waives any and all benefits and defenses under California Civil Code SECTION 2809 and agrees that by doing so Key Principal's liability may be larger in amount and more burdensome than that of Borrower. Key Principal hereby waives the benefit of all principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty and agrees that Key Principal's obligations shall not be affected by any circumstances, whether or not referred to in this Guaranty, which might otherwise constitute a legal or equitable discharge of a surety or a guarantor. Key Principal hereby waives the benefits of any right of discharge under any and all statutes or other laws relating to guarantors or sureties and any other rights of sureties and guarantors thereunder. Without limiting the generality of the foregoing, Key Principal hereby waives, to the fullest extent permitted by law, diligence in collecting the Indebtedness, presentment, demand for payment, protest, all notices with respect to the Note and this Guaranty which may be required by statute, rule of law or otherwise to preserve Lender's rights against Key Principal under this Guaranty, including notice of acceptance, notice of any amendment of the Loan Documents, notice of the occurrence of any default or Event of Default, notice of intent to accelerate, notice of acceleration, notice of dishonor, notice of foreclosure, notice of protest, and notice of the incurring by Borrower of any obligation or indebtedness. Key Principal also waives, to the fullest extent permitted by law, all rights to require Lender to (a) proceed against Borrower or any other guarantor of Borrower's payment or performance with respect to the Indebtedness (an "OTHER GUARANTOR"), (b) if Borrower or any guarantor is a partnership, proceed against any general partner of Borrower or the guarantor, (c) proceed against or exhaust any collateral held by Lender to secure the repayment of the Indebtedness, or (d) pursue any other remedy it may now or hereafter have against Borrower, or, if Borrower is a partnership, any general partner of Borrower, including any and all benefits under California Civil Code Sections 2845, 2849 and 2850. 6. Key Principal understands that the exercise by Lender of certain rights and remedies contained in the Security Instrument (such as a nonjudicial foreclosure sale) may affect or eliminate Key Principal's right of subrogation against Borrower and that Key Principal may therefore incur a partially or totally nonreimbursable liability under this Guaranty. Nevertheless, Key Principal hereby authorizes and empowers Lender to exercise, in its sole and absolute discretion, any right or remedy, or any combination thereof, which may then be available, since it is the intent and purpose of Key Principal that the obligations under this Guaranty shall be absolute, independent and unconditional under any and all circumstances. Key Principal expressly waives any defense (which defense, if Key Principal had not given this waiver, Key Principal might otherwise have) to a judgment against Key Principal by reason of a nonjudicial foreclosure. Without limiting the generality of the foregoing, Key Principal hereby expressly waives any and all benefits under (i) California Code of Civil Procedure SECTION 580a (which Section, if Key Principal had not given this waiver, would otherwise limit Key Principal's liability after a nonjudicial foreclosure sale to the difference between the obligations of Key Principal under this Guaranty and the fair market value of the property or interests sold at such nonjudicial foreclosure sale), (ii) California Code of Civil Procedure SECTIONS 580b and 580d (which Sections, if Key Principal had not given this waiver, would otherwise limit Lender's right to recover a deficiency judgment with respect to purchase money obligations and after a nonjudicial foreclosure sale, respectively), and (iii) California Code of Civil Procedure SECTION 726 (which Section, if Key Principal had not given this waiver, among other things, would otherwise require Lender to exhaust all of its security before a personal judgment could be obtained for a deficiency). Notwithstanding any Page A-3 3 63 foreclosure of the lien of the Security Instrument, whether by the exercise of the power of sale contained in the Security Instrument, by an action for judicial foreclosure or by Lender's acceptance of a deed in lieu of foreclosure, Key Principal shall remain bound under this Guaranty. 7. In accordance with SECTION 2856 of the California Civil Code, Key Principal also waives any right or defense based upon an election of remedies by Lender, even though such election (e.g., nonjudicial foreclosure with respect to any collateral held by Lender to secure repayment of the Indebtedness) destroys or otherwise impairs the subrogation rights of Key Principal or the right of Key Principal (after payment of the obligations guaranteed by Key Principal under this Guaranty) to proceed against Borrower for reimbursement, or both, by operation of SECTION 580d of the Code of Civil Procedure or otherwise. 8. In accordance with SECTION 2856 of the California Civil Code, Key Principal waives any and all other rights and defenses available to Key Principal by reason of SECTIONS 2787 through 2855, inclusive, of the California Civil Code, including any and all rights or defenses Key Principal may have by reason of protection afforded to Borrower with respect to any of the obligations of Key Principal under this Guaranty pursuant to the antideficiency or other laws of the State of California limiting or discharging Borrower's Indebtedness, including SECTIONS 580a, 580b, 580d, and 726 of the California Code of Civil Procedure. 9. In accordance with SECTION 2856 of the California Civil Code, Key Principal agrees to withhold the exercise of any and all subrogation and reimbursement rights against Borrower, against any other person, and against any collateral or security for the Indebtedness, including any such rights pursuant to SECTIONS 2847 and 2848 of the California Civil Code, until the Indebtedness has been indefeasibly paid and satisfied in full, all obligations owed to Lender under the Loan Documents have been fully performed, and Lender has released, transferred or disposed of all of its right, title and interest in such collateral or security. 10. At any time or from time to time and any number of times, without notice to Key Principal and without affecting the liability of Key Principal, (a) the time for payment of the principal of or interest on the Indebtedness may be extended or the Indebtedness may be renewed in whole or in part; (b) the time for Borrower's performance of or compliance with any covenant or agreement contained in the Note, the Security Instrument or any other Loan Document, whether presently existing or hereinafter entered into, may be extended or such performance or compliance may be waived; (c) the maturity of the Indebtedness may be accelerated as provided in the Note, the Security Instrument, or any other Loan Document; (d) the Note, the Security Instrument, or any other Loan Document may be modified or amended by Lender and Borrower in any respect, including an increase in the principal amount; and (e) any security for the Indebtedness may be modified, exchanged, surrendered or otherwise dealt with or additional security may be pledged or mortgaged for the Indebtedness. 11. If more than one person executes this Guaranty, the obligations of those persons under this Guaranty shall be joint and several. Lender, in its discretion, may (a) bring suit against Key Principal, or any one or more of the persons constituting Key Principal, and any Other Guarantor, jointly and severally, or against any one or more of them; (b) compromise or settle with any one or more of the persons constituting Key Principal, or any Other Guarantor, for such consideration as Lender may deem proper; (c) release one or more of the persons constituting Key Principal, or any Other Guarantor, from liability; and (d) otherwise deal with Key Principal and any Other Guarantor, or any one or more of them, in any manner, and no such action shall impair the rights of Lender to collect Page A-4 4 64 from Key Principal any amount guaranteed by Key Principal under this Guaranty. Nothing contained in this paragraph shall in any way affect or impair the rights or obligations of Key Principal with respect to any Other Guarantor. 12. Any indebtedness of Borrower held by Key Principal now or in the future is and shall be subordinated to the Indebtedness and any such indebtedness of Borrower shall be collected, enforced and received by Key Principal, as trustee for Lender, but without reducing or affecting in any manner the liability of Key Principal under the other provisions of this Guaranty. 13. Key Principal shall have no right of, and hereby waives any claim for, subrogation or reimbursement against Borrower or any general partner of Borrower by reason of any payment by Key Principal under this Guaranty, whether such right or claim arises at law or in equity or under any contract or statute, until the Indebtedness has been paid in full and there has expired the maximum possible period thereafter during which any payment made by Borrower to Lender with respect to the Indebtedness could be deemed a preference under the United States Bankruptcy Code. 14. If any payment by Borrower is held to constitute a preference under any applicable bankruptcy, insolvency, or similar laws, or if for any other reason Lender is required to refund any sums to Borrower, such refund shall not constitute a release of any liability of Key Principal under this Guaranty. It is the intention of Lender and Key Principal that Key Principal's obligations under this Guaranty shall not be discharged except by Key Principal's performance of such obligations and then only to the extent of such performance. 15. Key Principal shall from time to time, upon request by Lender, deliver to Lender such financial statements as Lender may reasonably require. 16. Lender may assign its rights under this Guaranty in whole or in part and, upon any such assignment, all the terms and provisions of this Guaranty shall inure to the benefit of such assignee to the extent so assigned. The terms used to designate any of the parties herein shall be deemed to include the heirs, legal representatives, successors and assigns of such parties. 17. This Guaranty and the other Loan Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements. There are no unwritten oral agreements between the parties. All prior or contemporaneous agreements, understandings, representations, and statements, oral or written, are merged into this Guaranty and the other Loan Documents. Key Principal acknowledges that it has received a copy of the Note and all other Loan Documents. Neither this Guaranty nor any of its provisions may be waived, modified, amended, discharged, or terminated except by an agreement in writing signed by the party against which the enforcement of the waiver, modification, amendment, discharge, or termination is sought, and then only to the extent set forth in that agreement. 18. Key Principal agrees that any controversy arising under or in relation to this Guaranty shall be litigated exclusively in the jurisdiction where the Land is located (the "PROPERTY JURISDICTION"). The state and federal courts and authorities with jurisdiction in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to this Guaranty, the Note, the Security Instrument or any other Loan Document. Key Principal irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and Page A-5 5 65 waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise. 19. Key Principal (or each Key Principal, if more than one) agrees to notify Lender (in the manner for giving notices provided in Section 31 of the Security Instrument) of any change in Key Principal's address within 10 Business Days after such change of address occurs. 20. KEY PRINCIPAL AND LENDER EACH (A) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS GUARANTY OR THE RELATIONSHIP BETWEEN THE PARTIES AS GUARANTOR AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL. IN WITNESS WHEREOF, Key Principal has signed and delivered this Guaranty or has caused this Guaranty to be signed and delivered by its duly authorized representative. KEY PRINCIPAL ARV ASSISTED LIVING, INC., a Delaware corporation ______________________________________ Name: Abdo H. Khoury Title: Senior Vice President Address: 245 Fischer Avenue, D-1 Costa Mesa, California 92626 Social Security/Employer ID No.: 33-0160968 Page A-6 6 EX-10.3 4 ex10-3.txt EXHIBIT 10.3 1 EXHIBIT 10.3 $10,000,000 TERM LOAN AGREEMENT DATED AS OF APRIL 24, 2000 AMONG ARV ASSISTED LIVING, INC. AS BORROWER AND LFSRI II ASSISTED LIVING LLC AS LENDER WEIL, GOTSHAL & MANGES LLP 767 FIFTH AVENUE NEW YORK, NEW YORK 10153-0119 2 TABLE OF CONTENTS
PAGE ---- Article I Definitions, Interpretation And Accounting Terms..................................1 Section 1.1. Defined Terms..................................................................1 Section 1.2. Computation of Time Periods...................................................13 Section 1.3. Accounting Terms and Principles...............................................13 Section 1.4. Certain Terms.................................................................13 Article II The Term Loan Facility...........................................................14 Section 2.1. The Term Loan Commitment......................................................14 Section 2.2. Borrowing Procedures..........................................................14 Section 2.3. Repayment of Term Loan, Extension of Maturity Date............................14 Section 2.4. Evidence of Debt..............................................................14 Section 2.5. Optional Prepayments..........................................................15 Section 2.6. Mandatory Prepayments.........................................................15 Section 2.7. Reduction of Commitment; Extension of Commitment Termination Date..........................................................16 Section 2.8. Interest......................................................................16 Section 2.10. Payments and Computations.....................................................17 Section 2.11. Special Provisions Governing Term Loans.......................................17 Section 2.12. Taxes.........................................................................18 Article III Conditions To Term Loans.........................................................18 Section 3.1. Conditions Precedent to Initial Loans.........................................18 Section 3.2. Conditions Precedent to Each Term Loan........................................20 Article IV Representations and Warranties...................................................20 Section 4.1. Corporate Existence; Compliance with Law......................................20 Section 4.2. Corporate Power; Authorization; Enforceable Obligations.......................21 Section 4.3. Ownership of Borrower; Subsidiaries...........................................21 Section 4.4. Financial Statements..........................................................22 Section 4.5. Material Adverse Change.......................................................22 Section 4.6. Solvency......................................................................22 Section 4.7. Litigation....................................................................22 Section 4.8. Taxes.........................................................................22 Section 4.9. Full Disclosure...............................................................23 Section 4.10. Margin Regulations............................................................23 Section 4.11. No Burdensome Restrictions; No Defaults.......................................23
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PAGE ---- Section 4.12. Investment Company Act; Public Utility Holding Company Act....................24 Section 4.13. Use of Proceeds...............................................................24 Section 4.14. Insurance.....................................................................24 Section 4.15. Labor Matters.................................................................24 Section 4.16. ERISA.........................................................................25 Section 4.17. Environmental Matters.........................................................25 Section 4.18. Intellectual Property.........................................................26 Section 4.19. Properties....................................................................26 Section 4.20. Ranking.......................................................................27 Article V Reporting Covenants..............................................................27 Section 5.1. Financial Statements..........................................................27 Section 5.2. Default Notices...............................................................28 Section 5.3. Litigation....................................................................28 Section 5.4. SEC Filings; Press Releases...................................................28 Section 5.5. Labor Relations...............................................................29 Section 5.6. Tax Returns...................................................................29 Section 5.7. ERISA Matters.................................................................29 Section 5.8. Environmental Matters.........................................................29 Section 5.9. Other Information.............................................................30 Article VI Affirmative Covenants............................................................30 Section 6.1. Preservation of Corporate Existence, Etc......................................30 Section 6.2. Compliance with Laws, Etc.....................................................30 Section 6.3. Conduct of Business...........................................................31 Section 6.4. Payment of Taxes, Etc.........................................................31 Section 6.5. Maintenance of Insurance......................................................31 Section 6.6. Access........................................................................31 Section 6.7. Keeping of Books..............................................................31 Section 6.8. Maintenance of Properties, Etc................................................31 Section 6.9. Application of Proceeds.......................................................32 Section 6.10. Environmental.................................................................32 Article VII Negative Covenants...............................................................32 Section 7.1. Indebtedness..................................................................32
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PAGE ---- Section 7.2. Limitation on Liens...........................................................33 Section 7.3. Limitation on Restricted Payments.............................................34 Section 7.4. Limitation on Transactions with Affiliates....................................34 Section 7.5. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries.34 Section 7.6. Limitation on Issuance of Preferred Stock by Subsidiaries.....................35 Section 7.7. Waiver of Stay, Extension or Usury Laws.......................................35 Section 7.8. Limitation on Investments, Loans and Advances.................................35 Section 7.9. Certain Changes...............................................................35 Section 7.10. Compliance with ERISA.........................................................35 Section 7.11. Environmental.................................................................35 Article VIII Events of Default................................................................36 Section 8.1. Events of Default.............................................................36 Section 8.2. Remedies......................................................................37 Section 8.3. Rescission....................................................................38 Article IX Miscellaneous....................................................................38 Section 9.1. Amendments, Waivers, Etc......................................................38 Section 9.2. Assignments and Participations................................................38 Section 9.3. Costs and Expenses............................................................38 Section 9.4. Indemnities...................................................................39 Section 9.5. Right of Set-off..............................................................39 Section 9.6. Notices, Etc..................................................................40 Section 9.7. Binding Effect................................................................41 Section 9.8. Governing Law.................................................................41 Section 9.9. Submission to Jurisdiction; Service of Process................................41 Section 9.10. Waiver of Jury Trial..........................................................42 Section 9.11. Marshaling; Payments Set Aside................................................42 Section 9.12. Section Titles................................................................42 Section 9.13. Execution in Counterparts.....................................................42 Section 9.14. Entire Agreement..............................................................42 Section 9.15. Confidentiality...............................................................42
iii 5 Schedules Schedule 4.2 - Consents Schedule 4.3 - Options, Warrants; Ownership of Subsidiaries Schedule 4.11 - Defaults Schedule 4.15 - Labor Matters Schedule 4.16 - List of Plans Schedule 4.17 - Environmental Matters Schedule 7.1 - Existing Indebtedness Schedule 7.2 - Liens Schedule 7.8 - Existing Obligations and Investments Exhibits Exhibit A - Form of Term Note Exhibit B - Form of Legal Opinion Exhibit C - Form of Warrant Exhibit D Form of Payment Direction Letter iv 6 TERM LOAN AGREEMENT, dated as of April 24, 2000, among ARV Assisted Living, Inc., a Delaware corporation (the "Borrower"), and LFSRI II Assisted Living, LLC, a Delaware limited liability company (the "Lender"). W I T N E S S E T H: WHEREAS, the Borrower has requested that the Lender make available term loans for the purposes specified in this Agreement; and WHEREAS, the Lender is willing to make available to the Borrower such term loans upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS, INTERPRETATION AND ACCOUNTING TERMS SECTION 1.1. DEFINED TERMS. As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" means, with respect to any Person, any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person, each officer, director, general partner or joint-venturer of such Person, and each Person who is the beneficial owner of 10% or more of any class of Voting Stock of such Person. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Term Loan Agreement as amended, supplemented or otherwise modified from time to time. "Applicable Margin" means 10% per annum. "Asset Sale" has the meaning specified in clause (a) of the definition of "Net Cash Proceeds." "Borrowing" means Term Loans made on the same day by the Lender. "Borrowing Extension Fee" means an amount equal to 0.5% of the aggregate unutilized Commitment extended by the Borrower in accordance with Section 2.7(a). "Business Day" means any day other than (i) a Saturday or Sunday or (ii) a day on which federally insured depository institutions in New York City or California are authorized or obligated by law, regulation, governmental decree or executive order to be closed. 7 "Capital Lease" means, with respect to any Person, any lease of property by such Person as lessee which would be accounted for as a capital lease on a balance sheet of such Person prepared in conformity with GAAP. "Capital Lease Obligations" means, with respect to any Person, the capitalized amount of all obligations of such Person or any of its Subsidiaries under Capital Leases, as determined on a consolidated basis in conformity with GAAP. "Cash Equivalents" means (a) securities issued or fully guaranteed or insured by the United States government or any agency thereof, (b) certificates of deposit, eurodollar time deposits, overnight bank deposits and bankers' acceptances of any commercial bank organized under the laws of the United States, any state thereof, the District of Columbia, any foreign bank, or its branches or agencies (fully protected against currency fluctuations) which, at the time of acquisition, are rated at least "A-1" by Standard & Poor's Rating Services ("S&P") or "P-1" by Moody's Investors Services, Inc. ("Moody's"), (c) commercial paper of an issuer rated at least "A-1" by S&P or "P-1" by Moody's, and (d) shares of any money market fund that (i) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (a) through (c) above, (ii) has net assets of not less than $500,000,000 and (iii) is rated at least "A-1" by S&P or "P-1" by Moody's; provided, however, that the maturities of all obligations of the type specified in clauses (a) through (c) above shall not exceed 180 days. "Change of Control" means any of the following: (a) any person or group of persons (within the meaning of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of 50% or more of the issued and outstanding Voting Stock of the Borrower, excluding however any such Change of Control where the Lender's open market purchases of the outstanding Voting Stock of the Borrower are the immediate cause of the Change of Control; or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the board of directors of the Borrower (together with any new directors whose election by the board of directors of the Borrower or whose nomination for election by the stockholders of the Borrower was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose elections or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office; or (c) any person or two or more persons acting in concert shall have acquired by contract or otherwise, or shall have entered into a contract or arrangement that, upon consummation, will result in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Borrower; or (d) the sale, transfer, conveyance or disposal of all or substantially all the assets, property or business of the Borrower; or (e) the Borrower shall enter into any merger, consolidation or amalgamation other than any such merger, consolidation or amalgamation permitted pursuant to Section 7.9. "Closing Date" means April 24, 2000. "Code" means the Internal Revenue Code of 1986 (or any successor legislation thereto), as amended from time to time. 2 8 "Commitment" means the Commitment of the Lender to make Term Loans to the Borrower in the aggregate principal amount not to exceed $10,000,000, subject to reduction as provided in Section 2.7(b). "Commitment Fee" has the meaning specified in Section 2.9(a). "Commitment Termination Date" means the Initial Commitment Termination Date unless the Commitment Termination Date is extended in accordance with Section 2.7(a), in which event "Commitment Termination Date" means the 90th day following the Initial Commitment Termination Date. "Compliance Certificate" has the meaning specified in Section 5.1(h). "Constituent Documents" means, with respect to any Person, (i) the articles/certificate of incorporation (or the equivalent organizational documents) of such Person, (ii) the by-laws (or the equivalent governing documents) of such Person and (iii) any document setting forth the manner of election and duties of the directors or managing members of such Person (if any) and the designation, amount and/or relative rights, limitations and preferences of any class or series of such Person's Stock. "Contaminant" means any material, substance or waste that is classified, regulated or otherwise characterized under any Environmental Law as hazardous, toxic, a contaminant or a pollutant or by other words of similar meaning or regulatory effect, including any petroleum or petroleum-derived substance or waste, asbestos and polychlorinated biphenyls, but excludes any medical products or devices customarily used in the operation of senior housing facilities to the extent such products or devices are used in compliance with all Requirements of Law. "Contractual Obligation" of any Person means any obligation, agreement, undertaking or similar provision of any Security issued by such Person or of any agreement, undertaking, contract, lease, indenture, mortgage, deed of trust or other instrument (excluding a Loan Document) to which such Person is a party or by which it or any of its property is bound or to which any of its properties is subject. "Debt Issuance" means the incurrence of Indebtedness of the type specified in clause (a) and (b) of the definition of "Indebtedness" by the Borrower or any of its Subsidiaries. "Default" means any event which with the passing of time or the giving of notice or both would become an Event of Default. "Determination Date" means with respect to any Interest Period, the date which is two (2) Eurodollar Business Days before the commencement of such Interest Period. "Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event (other than upon the occurrence of a Change of Control), matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof on or prior to the Maturity Date. 3 9 "Dollars" and the sign "$" each mean the lawful money of the United States of America. "Environmental Laws" means all applicable Requirements of Law now or hereafter in effect, as amended or supplemented from time to time, relating to pollution or the regulation and protection of human health, safety, the environment or natural resources, including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601 et seq.); the Hazardous Material Transportation Act, as amended (49 U.S.C. Section 180 et seq.); the Federal Insecticide, Fungicide, and Rodenticide Act, as amended (7 U.S.C. Section 136 et seq.); the Resource Conservation and Recovery Act, as amended (42 U.S.C. Section 6901 et seq.); the Toxic Substance Control Act, as amended (42 U.S.C. Section 7401 et seq.); the Clean Air Act, as amended (42 U.S.C. Section 740 et seq.); the Federal Water Pollution Control Act, as amended (33 U.S.C. Section 1251 et seq.); the Occupational Safety and Health Act, as amended (29 U.S.C. Section 651 et seq.); the Safe Drinking Water Act, as amended (42 U.S.C. Section 300f et seq.); and their state and local counterparts or equivalents and any transfer of ownership notification or approval statute. "Environmental Liabilities and Costs" means, with respect to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand by any other Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including any thereof arising under any Environmental Law, Permit, order or agreement with any Governmental Authority or other Person, which relate to any environmental, health or safety condition or a Release or threatened Release, and result from the past, present or future operations of, or ownership of property by, such Person or any of its Subsidiaries. "Environmental Lien" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "ERISA" means the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control or treated as a single employer with the Borrower or any of its Subsidiaries within the meaning of Section 414 (b), (c), (m) or (o) of the Code. "ERISA Event" means (i) a reportable event described in Section 4043(b) or 4043(c)(1), (2), (3), (5), (6), (8) or (9) of ERISA with respect to a Title IV Plan or a Multiemployer Plan; (ii) the withdrawal of the Borrower, any of its Subsidiaries or any ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (iii) the complete or partial withdrawal of the Borrower, any of its Subsidiaries or any ERISA Affiliate from any Multiemployer Plan; (iv) notice of reorganization or insolvency of a Multiemployer Plan; (v) the filing of a notice of intent to terminate a Title IV Plan or the treatment of a plan amendment as a termination under Section 4041 of ERISA; (vi) the institution of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC; (vii) the failure to make any required contribution to a Title IV Plan or Multiemployer Plan; (viii) the imposition of a lien under Section 412 of the Code or Section 302 of ERISA on the Borrower or any of its Subsidiaries or any ERISA Affiliate; 4 10 or (ix) any other event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Title IV Plan or Multiemployer Plan or the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA. "Eurodollar Business Day" means a Business Day on which banks in the City of London, England are open for interbank or foreign exchange transactions. "Event of Default" has the meaning specified in Section 8.1. "Existing Indebtedness" has the meaning specified in Section 7.1(d). "Federal Reserve Board" means the Board of Governors of the Federal Reserve System, or any successor thereto. "Financial Statements" means the financial statements of the Borrower and its Subsidiaries delivered in accordance with Sections 4.4 and 5.1. "Fiscal Quarter" means each of the three-month periods ending on March 31, June 30, September 30 and December 31. "Fiscal Year" means the twelve-month period ending on December 31. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranty Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any Indebtedness of another Person, including (a) the direct or indirect guaranty, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of Indebtedness of another Person and (b) any liability of such Person for Indebtedness of another Person through any agreement (contingent or otherwise) (i) to purchase, repurchase or otherwise acquire such Indebtedness or any security therefor, or to provide funds for the payment or discharge of such Indebtedness (whether in the form of a loan, advance, stock purchase, capital contribution or otherwise), (ii) to maintain the solvency or any balance sheet item, level of income or financial condition of another Person, (iii) to make take-or-pay or similar payments, if required, regardless of non-performance by any other party or parties to an agreement, (iv) to purchase, sell or lease (as lessor or lessee) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, or (v) to supply funds to or in any other manner invest in such other Person (including to pay for property or services irrespective of 5 11 whether such property is received or such services are rendered). The amount of any Guaranty Obligation shall be equal to the amount of the Indebtedness so guaranteed or otherwise supported. "Hedging Contracts" means all Interest Rate Contracts, foreign exchange contracts, currency swap or option agreements, forward contracts, commodity swap, purchase or option agreements, other commodity price hedging arrangements, and all other similar agreements or arrangements designed to alter the risks of any Person arising from fluctuations in interest rates, currency values or commodity prices. "Indebtedness" of any Person means without duplication (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments or which bear interest, (c) all reimbursement and all obligations with respect to letters of credit, bankers' acceptances, surety bonds and performance bonds, whether or not matured, (d) all indebtedness for the deferred purchase price of property or services, other than trade payables and accruals for expenses incurred in the ordinary course of business and obligations for post-retirement benefits, (e) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property but excluding consignments to the extent that such Person's only obligation with respect to unused consigned property is the return of such property to the consignor), (f) all Capital Lease Obligations of such Person and the present value of future rental payments under all synthetic leases, (g) all Guaranty Obligations of such Person, (h) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any Stock or Stock Equivalents of such Person, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (i) all payments that such Person would have to make in the event of an early termination on the date Indebtedness of such Person is being determined in respect of Hedging Contracts of such Person and (j) all Indebtedness of the type referred to above of another Person secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and general intangibles) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "Indemnified Party" has the meaning specified in Section 9.4. "Indenture" means the Indenture dated as of April 3, 1996 between the Borrower and The Chase Manhattan Bank N.A., as Trustee providing for the issuance of 6 3/4% Convertible Subordinated Notes Due 2006. "Initial Commitment Termination Date" means August 24, 2000. "Initial Maturity Date" means April 24, 2002. "Interest Period" means, in connection with the calculation of interest payable on any Payment Date, the period from and including the immediately preceding Payment Date to but excluding such Payment Date; provided, however, that the first Interest Period shall be the period from and including the Closing Date to but excluding May 15, 2000. "Interest Rate Contracts" means all interest rate swap agreements, interest rate cap agreements, interest rate collar agreements and interest rate insurance. 6 12 "Investment" means, with respect to any Person, (a) any purchase or other acquisition by that Person of (i) any Security issued by, (ii) a beneficial interest in any Security issued by, or (iii) any other equity ownership interest in, any other Person, (b) any purchase by that Person of all or a significant part of the assets of a business conducted by another Person, and (c) any loan, advance (other than deposits with financial institutions available for withdrawal on demand, prepaid expenses, accounts receivable, advances to employees and similar items made or incurred in the ordinary course of business as presently conducted), or capital contribution by that Person to any other Person, including all Indebtedness to such Person arising from a sale of property by such Person other than in the ordinary course of its business. "IRS" means the Internal Revenue Service of the United States or any successor thereto. "Leases" means, with respect to any Person, all of those leasehold estates in real property of such Person, as lessee, as such may be amended, supplemented or otherwise modified from time to time. "Lender" has the meaning specified in the preamble to this Agreement. "LIBOR Rate" means with respect to each Interest Period, the rate (expressed as a percentage per annum, rounded to the nearest 100th) for deposits in U.S. dollars for a one-month period that appears on Telerate Page 3750 (or the successor thereto) as of 11:00 a.m., London, England time, on the related Determination Date. If such rate does not appear on Telerate Page 3750 as of 11:00 a.m., London, England time, on such Determination Date, LIBOR shall be the arithmetic mean of the offered rates expressed as a percentage per annum) for deposits in U.S. dollars for a one-month period that appear on the Reuters Screen LIBOR Page as of 11:00 a.m., London, England time, on such Determination Date, if at least two such offered rates so appear. If fewer than two such offered rates appear on the Reuters Screen LIBOR Page as of 11:00 a.m., London, England time, on such Determination Date, the Lender shall request the principal London, England office of any four major reference banks in the London interbank market selected by the Lender to provide such bank's offered quotation (expressed as a percentage per annum) to prime banks in the London interbank market for deposits in U.S. Dollars for a one-month period as of 11:00 a.m., London, England time, on such Determination Date for amounts of not less than One Million U.S. Dollars (U.S. $1,000,000.00). If at least two such offered quotations are so provided, LIBOR shall be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, the Lender shall request any three major banks in New York City selected by the Lender to provide such bank's rate (expressed as a percentage per annum) for loans in U.S. Dollars to leading European banks for a one month period as of approximately 11:00 a.m., New York City time on the applicable Determination Date for amounts of not less than One Million U.S. Dollars (U.S. $1,000,000.00). If at least two such rates are so provided, LIBOR shall be the arithmetic mean of such rates. If fewer than two rates are so provided, then LIBOR for the applicable Interest Period shall be LIBOR that was in effect for the next preceding Interest Period. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, charge, deposit arrangement, encumbrance, lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever intended to assure payment of any Indebtedness or other obligation, including any conditional sale or other title retention agreement, the interest of a lessor under a Capital Lease, any financing lease having substantially the same economic effect as any of the foregoing, and 7 13 the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction naming the owner of the asset to which such Lien relates as debtor. "Loan Documents" means, collectively, this Agreement, the Note, the Warrant Documents, the Second Amendment to Rights Agreement and each certificate, agreement or document executed by the Borrower and delivered to the Lender in connection with or pursuant to any of the foregoing. "Material Adverse Change" means a material adverse change in any of (a) the condition (financial or otherwise), business, performance, prospects, operations, assets, liabilities (contingent or otherwise) or properties of the Borrower or the Borrower and its Subsidiaries taken as a whole, (b) the legality, validity or enforceability of any Loan Document, (c) the ability of the Borrower to repay the Obligations or perform its obligations under the Loan Documents, or (d) the rights and remedies of the Lender under the Loan Documents. "Material Adverse Effect" means an effect that results in or causes, or could reasonably be expected to result in or cause, a Material Adverse Change. "Maturity Date" means the Initial Maturity Date, unless the Maturity Date is extended in accordance with Section 2.3(b), in which event the Maturity Date means the third anniversary of the Closing Date. "Maturity Date Extension Fee" means an amount equal to 2.50% of the aggregate principal amount of the Term Loans outstanding on the Initial Maturity Date. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Borrower, any of its Subsidiaries or any ERISA Affiliate has any obligation or liability, contingent or otherwise. "Net Cash Proceeds" means (a) proceeds received by the Borrower after the Closing Date in cash or Cash Equivalents from any sale, lease, transfer or other disposition of any of its assets (an "Asset Sale"), net of (x) the reasonable cash costs of sale, assignment or other disposition, (y) taxes paid or payable as a result thereof and (z) any amount required to be paid or prepaid on Indebtedness (other than the Obligations) secured by the assets subject to such Asset Sale; provided, however, that the evidence of each of (x), (y) and (z) are provided to the Lender in form and substance satisfactory to it; (b) proceeds of property insurance on account of the loss of or damage to any such assets or property, and payments of compensation for any such assets or property taken by condemnation or eminent domain, to the extent that within 360 days after the receipt thereof, replacement or repair of such asset or property has not commenced or, in the event that at any time such replacement or repair is abandoned or otherwise discontinued or is not diligently pursued, the remaining award or proceeds, as the case may be, net of taxes paid or payable as a result thereof evidence of which is provided to the Lender, shall constitute Net Cash Proceeds at such time; and (c) proceeds received after the Closing Date by the Borrower in cash or Cash Equivalents from any Debt Issuance under Section 7.1, in each case net of brokers' and advisors' fees and other costs incurred in connection with such transaction; provided, however, that evidence of such costs is provided to the Lender. "Non-Recourse Indebtedness" means Indebtedness as to which (a) neither the Borrower nor any of its Subsidiaries (i) provides credit support (including any undertaking, agreement or instrument which would constitute Indebtedness) or (ii) is directly or indirectly 8 14 liable (except for any such liability if and to the extent customarily included in non-recourse real estate loan documentation entered into by the Borrower and its Subsidiaries in the ordinary course of business) and (b) no default with respect to such Indebtedness (including any rights which the holders thereof may have to take enforcement action against the relevant Non-Recourse Subsidiary or its assets) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Borrower to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Non-Recourse Subsidiary" means a Subsidiary of the Borrower (a) whose properties and assets, to the extent they secure Indebtedness, secure only Non-Recourse Indebtedness and (b) which has no Indebtedness other than Non-Recourse Indebtedness and (c) the Investment in such Subsidiary is permitted hereunder. "Note" means the promissory note of the Borrower payable to the order of the Lender in a principal amount equal to $10,000,000. "Obligations" means the Term Loans and all other advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Lender, any Affiliate of the Lender or any Indemnitee, of every type and description, present or future, arising under this Agreement or under any other Loan Document, by reason of an extension of credit, loan, guaranty, indemnification or otherwise, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired and whether or not evidenced by any note, guaranty or other instrument or for the payment of money. The term "Obligations" includes all fees and all interest, charges, expenses, fees, attorneys' fees and disbursements and other sums chargeable to the Borrower under this Agreement or any other Loan Document, but excludes any obligations under the promissory note of the Borrower to the Lender dated October 1, 1999 in the principal amount of $1,500,000 and delivered pursuant to the terms of the Settlement Agreement. "Payment Date" means the 15th day of each calendar month or if in any calendar month the 15th day is not a Business Day, the Payment Date for such month shall be the first Business Day immediately preceding such day. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "Permit" means any permit, approval, authorization, license, variance or permission required from a Governmental Authority under an applicable Requirement of Law. "Permitted Encumbrances" means the following types of Liens (excluding any such Lien imposed pursuant to Section 401(a)(29) or Section 412(n) of the Code or by ERISA, any Environmental Lien, and any such Lien expressly prohibited by any applicable terms of any of the Loan Documents): (i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by Section 6.4; (ii) statutory Liens of landlords, statutory Liens and rights of set-off of banks, statutory Liens of carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law, in each case incurred in the ordinary course of 9 15 business (a) for amounts not yet overdue or (b) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of 5 days) are being contested in good faith by appropriate proceedings, so long as such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv) any attachment or judgment Lien not constituting an Event of Default under Section 8.1; (v) leases or subleases granted to third parties in accordance with any applicable terms of the Loan Documents and not interfering in any material respect with the ordinary conduct of the business of the Borrower or any of its Subsidiaries or resulting in a material diminution in the value of the assets of the Borrower and its Subsidiaries taken as a whole; (vi) easements, rights-of-way, restrictions, encroachments, and other minor defects or irregularities in title, in each case which do not and will not interfere in any material respect with the ordinary conduct of the business of the Borrower or any of its Subsidiaries or result in a material diminution in value of the assets of the Borrower and its Subsidiaries taken as a whole; (vii) any (a) interest or title of a lessor or sublessor under any lease not prohibited by this Agreement, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b), so long as the holder of such restriction or encumbrance agrees to recognize the rights of such lessee or sublessee under such lease; (viii) Liens arising from filing Uniform Commercial Code financing statements relating solely to leases not prohibited by this Agreement; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property; (xi) Liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of the Borrower and its Subsidiaries; and (xii) licenses of intellectual property (including, but not limited to, permits, patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, copyright applications, franchises and authorizations) granted by the Borrower or any 10 16 of its Subsidiaries in the ordinary course of business and not interfering in any material respect with the ordinary conduct of the business of the Borrower or such Subsidiary. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, estate, trust, limited liability company, unincorporated association, joint venture or other entity, or a Governmental Authority. "Preferred Stock" means, with respect to any Person, capital stock that has preferential rights to any other capital stock of such Person with respect to dividends, redemptions or upon liquidations. "Release" means, with respect to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration, in each case, of any Contaminant into the indoor or outdoor environment or into or out of any property owned by such Person, including the movement of Contaminants through or in the air, soil, surface water, ground water or property. "Remedial Action" means all actions required to (a) clean up, remove, treat or in any other way address any Contaminant in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release so that a Contaminant does not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment or (c) perform pre-remedial studies and investigations and post-remedial monitoring and care. "Requirement of Law" means, with respect to any Person, all federal, state, local and foreign laws, rules and regulations, orders, judgments, decrees and other determinations of any Governmental Authority or arbitrator, applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject, including ERISA, labor and benefit laws and Environmental Laws. "Responsible Officer" means, with respect to any Person, any of the principal executive officers, including chief financial officer, treasurer and controller of such Person, but in any event, with respect to financial matters generally or Section 5.1, the chief financial officer of such Person. "Restricted Payment" means (a) any dividend or other distribution, direct or indirect, on account of any Stock or Stock Equivalents of the Borrower or any Subsidiary now or hereafter outstanding, except a dividend payable solely in Stock or Stock Equivalents (other than Disqualified Capital Stock) or a dividend or distribution payable solely to the Borrower, (b) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any Stock or Stock Equivalents of the Borrower or any Subsidiary now or hereafter outstanding other than one payable solely in other Stock or Stock Equivalents of such Person (other than Disqualified Capital Stock) or solely to the Borrower, or (c) any payment or prepayment of principal or premium (if any), fees on, or redemption, purchase, retirement, defeasance, sinking fund or similar payment with respect to, any Indebtedness of the Borrower or any Subsidiary which is subordinate or junior in right of payment to the Term Loans, other than one payable solely in Stock or Stock Equivalents of such Person (other than Disqualified Capital Stock). 11 17 "Rights Agreement" means the Rights Agreement dated as of May 14, 1998 between the Borrower and ChaseMellon Shareholder Services, LLC, as amended. "Second Amendment to Rights Agreement" means the Second Amendment to Rights Agreement dated as of April 24, 2000. "Security" means any Stock, Stock Equivalent, voting trust certificate, bond, debenture, note or other evidence of Indebtedness, whether secured, unsecured, convertible or subordinated, or any certificate of interest, share or participation in, or any temporary or interim certificate for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing, but shall not include any evidence of the Obligations. "Settlement Agreement" means the Settlement Agreement dated as of September 29, 1999 among the Borrower, the Lender and the other parties named therein. "Solvent" means, with respect to any Person, that the value of the assets of such Person (both at fair value and present fair saleable value) is, on the date of determination, greater than the total amount of liabilities (including contingent and unliquidated liabilities) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature and does not have unreasonably small capital. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Stock" means shares of capital stock (whether denominated as common stock or preferred stock), beneficial, partnership or membership interests, participations or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity, whether voting or non-voting. "Stock Equivalent" means any security convertible into or exchangeable for Stock and any warrant, option or other right to purchase or subscribe for any Stock, whether or not presently convertible, exchangeable or exercisable. "Subsidiary" means, with respect to any Person, any corporation, partnership, limited liability company or other business entity of which (i) an aggregate of 50% or more of the outstanding Voting Stock or interest in participation rights in profits or capital contribution is, at the time, directly or indirectly, owned or controlled by such Person and/or one or more Subsidiaries of such Person or (ii) any such Person is a general partner or manager or may exercise the powers of a general partner or manager. "Tax Affiliate" means, with respect to any Person, (a) any Subsidiary of such Person, and (b) any Affiliate of such Person with which such Person files or is eligible to file consolidated, combined or unitary tax returns. "Taxes" has the meaning specified in Section 2.12(a). "Tax Returns" has the meaning specified in Section 4.8 "Telerate Page 3750" means the display designated as "Page 3750 on the Dow Jones Telerate Service (or such other page as may replace Page 3750 on that service or such other 12 18 service as may be nominated by the British Banker's Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for the U.S. Dollar deposits). "Term Loans" has the meaning specified in Section 2.1 "Title IV Plan" means a pension plan, other than a Multiemployer Plan, which is covered by Title IV of ERISA to which the Borrower any of its Subsidiaries or any ERISA Affiliate has any obligation or liability (contingent or otherwise). "Voting Stock" means Stock of any Person having ordinary power to vote in the election of members of the board of directors, managers, trustees or other controlling Persons, of such Person (irrespective of whether, at the time, Stock of any other class or classes of such entity shall have or might have voting power by reason of the happening of any contingency) and, in the case of any partnership, any interest of a general partner. "Warrants" shall mean the warrant to purchase from the Borrower 750,000 shares of common stock of ARV Assisted Living, Inc. in the form set forth on Exhibit C and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of common stock of the Borrower for which they may be exercised. "Warrant Documents" means, collectively, the Warrants, and each certificate, agreement or document executed by the Borrower in connection with or pursuant to any of the foregoing. "Withdrawal Liability" means, with respect to the Borrower at any time, the aggregate liability incurred (whether or not assessed) with respect to all Multiemployer Plans pursuant to Section 4201 of ERISA or for increases in contributions required to be made pursuant to Section 4243 of ERISA. SECTION 1.2. COMPUTATION OF TIME PERIODS. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including." SECTION 1.3. ACCOUNTING TERMS AND PRINCIPLES. All accounting terms not specifically defined herein shall be construed in conformity with GAAP and all accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in conformity with GAAP. SECTION 1.4. CERTAIN TERMS. (a) The words "herein," "hereof" and "hereunder" and similar words refer to this Agreement as a whole, and not to any particular Article, Section, subsection or clause in, this Agreement. (b) References in this Agreement to an Exhibit, Schedule, Article, Section, subsection or clause refer to the appropriate Exhibit or Schedule to, or Article, Section, subsection or clause in this Agreement. 13 19 (c) Each agreement defined in this Article I shall include all appendices, exhibits and schedules thereto. Unless the prior written consent of the Lender is required hereunder for an amendment, restatement, supplement or other modification to any such agreement and such consent is not obtained, references in this Agreement to such agreement shall be to such agreement as so amended, restated, supplemented or modified. (d) References in this Agreement to any statute shall be to such statute as amended or modified and in effect at the time any such reference is operative. (e) The term "including" when used in any Loan Document means "including without limitation" except when used in the computation of time periods. (f) The term "Lender" includes its successors, assigns and transferees. ARTICLE II THE TERM LOAN FACILITY SECTION 2.1. THE TERM LOAN COMMITMENT. On the terms and subject to the conditions contained in this Agreement, the Lender agrees to make available to the Borrower from time to time during the period from the Closing Date to the Commitment Termination Date each term loan (each, a "Term Loan" and collectively, the "Term Loans"), requested by the Borrower in accordance with Section 2.2. All Term Loans made hereunder shall not exceed at any time outstanding the Lender's Commitment. Amounts repaid or prepaid may not be reborrowed under this Agreement. SECTION 2.2. BORROWING PROCEDURES. (a) Except for the Borrowing made on the Closing Date, each Borrowing shall be made on notice given by the Borrower to the Lender not later than 11:00 A.M. (New York City time) three Business Days prior to the proposed date of such Borrowing. Each such notice shall be in writing identified as a borrowing notice hereunder and specifying (A) the proposed date of such Borrowing and (B) the aggregate amount of such Borrowing. Each Borrowing shall be made in an aggregate amount of not less than $1,000,000 and in increments of $1,000,000 with a minimum initial aggregate amount of not less than $5,000,000 on the Closing Date. No Borrowing may be made after the Commitment Termination Date. (b) On the date of any proposed Borrowing, subject to the fulfillment of the applicable conditions set forth in Sections 3.1 and 3.2, the Lender will make available, in immediately available funds, the Term Loans for such Borrowing to the Borrower. SECTION 2.3. REPAYMENT OF TERM LOAN, EXTENSION OF MATURITY DATE. (a) The Borrower shall repay the entire outstanding principal amount of the Term Loans, together with any accrued and unpaid interest thereon, on the Maturity Date. (b) So long as no Default shall have occurred, the Borrower may, by prior written notice to the Lender not later than 10 Business Days prior to the Initial Maturity Date extend the Maturity Date to the third anniversary of the Closing Date, provided that the Borrower 14 20 shall, if it makes such election, pay the Maturity Date Extension Fee on the Initial Maturity Date to the Lender. SECTION 2.4. EVIDENCE OF DEBT. The Term Loans shall be evidenced by a promissory note of the Borrower substantially in the form of Exhibit A, with appropriate insertions as to payee, date and principal amount and payable to the order of the Lender. The Lender is authorized to record the date and amount of each Term Loan made by the Lender on the schedule annexed thereto and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded, absent manifest error; provided that neither the failure to so record nor any error in such recordation shall affect the Borrower's obligations under the Note. SECTION 2.5. OPTIONAL PREPAYMENTS. (a) At any time to but excluding the Initial Maturity Date, the Borrower may, upon at least ten Business Days' prior notice to the Lender stating the proposed date and aggregate principal amount of the prepayment, prepay the outstanding principal amount of the Term Loans, in whole or in part, together with accrued and unpaid interest to the date of such prepayment on the principal amount prepaid; provided, however, that on the date of such prepayment the Borrower shall pay to the Lender an amount calculated to compensate the Lender on the same basis as if the prepaid amount of the Term Loan was outstanding through the Initial Maturity Date and bearing interest from the date of prepayment to the Initial Maturity Date at a rate of 10% per annum. If the Borrower has exercised its right to extend the Maturity Date to the third anniversary of the Closing Date under Section 2.3(b), it may at any time after the Initial Maturity Date, upon at least 10 Business Days' prior notice to the Lender, prepay in full or in part, without any premium or penalty (other than amounts owing pursuant to Section 2.11(b)), the Term Loans. Any prepayment shall be made ratably in respect of the Term Loans. The Borrower shall also pay any amounts owing pursuant to Section 2.11(b) as a result of exercising any of its rights under this Section 2.5. Upon the giving of such notice of prepayment, the principal amount of the Term Loans specified to be prepaid shall become due and payable on the date specified for such prepayment. (b) The Borrower shall have no right to optionally prepay the principal amount of any Term Loan other than as provided in this Section 2.5. Amounts of any Term Loan prepaid, may not be reborrowed. SECTION 2.6. MANDATORY PREPAYMENTS. (a) Upon any Change of Control, the Borrower shall make a mandatory prepayment in an amount equal to the aggregate principal amount of all Term Loans then outstanding, together with, all accrued but unpaid interest thereon and all applicable breakage costs owing under Section 2.11(b). In the event the Borrower is required to make such mandatory prepayment prior to the Initial Maturity Date, there shall also be due and owing to the Lender on the date of any such mandatory prepayment an amount calculated to compensate the Lender on the same basis as if the prepaid amount of the Term Loan was outstanding through the Initial Maturity Date and bearing interest from the date of prepayment until the Initial Maturity Date at a rate of 10% per annum; provided, however, that no such amount shall be required to be paid if the Change of Control is caused solely by the Lender selling the issued and outstanding Voting Stock of the Borrower owned by the Lender in a transaction where Lender is the only seller of Voting Stock of the Borrower to the purchaser of such Voting Stock of Borrower. 15 21 (b) Any prepayments made by the Borrower required to be applied in accordance with this Section 2.6 shall be applied to the outstanding principal balance of the Term Loans ratably. Amounts of any Term Loan prepaid may not be reborrowed. SECTION 2.7. REDUCTION OF COMMITMENT; EXTENSION OF COMMITMENT TERMINATION DATE. (a) The Borrower may, upon notice to the Lender at least 10 Business Days prior to the Initial Commitment Termination Date, extend the Commitment Termination Date for all or any portion of the Commitment which has not been borrowed as of the Initial Commitment Termination Date to a date that is 90 days following the Initial Commitment Termination Date, provided that the Borrower shall pay to the Lender the Borrowing Extension Fee on the Initial Commitment Termination Date and provided further that the portion of the Commitment so extended equals or exceeds $1,000,000 and is in increments of $1,000,000. Such notice shall set forth (i) the date of such extension and (ii) the amount of the unutilized Commitment that shall be extended. Any unutilized Commitment not extended shall terminate on the Initial Commitment Termination Date. (b) The Borrower may without penalty cancel the unutilized Commitment, in whole or in part upon not less than 10 Business Days' prior notice to the Lender or upon the extension of the Commitment Termination Date provided that the unutilized Commitment not subject to such cancellation, if any, shall be in increments of $1,000,000. Any unutilized Commitment shall terminate on the Commitment Termination Date. SECTION 2.8. INTEREST. (a) Rate of Interest. All Term Loans and the outstanding amount of all other Obligations shall bear interest, in the case of Term Loans, on the unpaid principal amount thereof from and including the date such Term Loans are made and, in the case of such other Obligations, from and including the date such other Obligations are due and payable until, in all cases, paid in full, except as otherwise provided in Section 2.8(c), at a rate per annum equal to the sum of (I) the LIBOR Rate determined for the applicable Interest Period, plus (II) the Applicable Margin. (b) Interest Payments. Interest accrued on each Term Loan during any Interest Period shall be payable on the Payment Date relating to such Interest Period and if not previously paid in full, on the Maturity Date. Interest accrued on the amount of all other Obligations shall be payable on demand from and after the time such Obligation becomes due and payable (whether by acceleration or otherwise). (c) Default Interest. Notwithstanding the rates of interest specified in Section 2.8(a) or elsewhere herein, effective immediately upon the occurrence of an Event of Default, and for as long thereafter as such Event of Default shall be continuing, the principal balance of all Term Loans and the amount of all other Obligations shall bear interest at a rate which is five percent per annum in excess of the rate of interest applicable to such Obligations from time to time. SECTION 2.9. COMMITMENT FEES. The Borrower agrees to pay to the Lender a commitment fee in an amount equal to $200,000 on the Closing Date. Such fee shall be fully earned when paid and not refundable. 16 22 SECTION 2.10. PAYMENTS AND COMPUTATIONS. (a) The Borrower shall make each payment hereunder (including fees and expenses) not later than 11:00 A.M. (New York City time) on the day when due, in Dollars, to the Lender in immediately available funds without set-off or counterclaim. Payments received by the Lender after 11:00 A.M. (New York City time) shall be deemed to be received on the next Business Day. (b) All computations of interest and of fees shall be made by the Lender on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest and fees are payable. Each determination by the Lender of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (c) Whenever any payment hereunder shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be, unless otherwise provided in the definition of Payment Date. (d) All payments and any other amounts received by the Lender from or for the benefit of the Borrower shall be applied first, to pay all Obligations then due and payable; and second, as the Borrower so designates. SECTION 2.11. SPECIAL PROVISIONS GOVERNING TERM LOANS. (a) Determination of Interest Rate. The LIBOR Rate for each Interest Period for Term Loans shall be determined by the Lender pursuant to the procedures set forth in the definition of "LIBOR Rate." The Lender's determination shall be presumed to be correct, absent manifest error, and shall be binding on the Borrower. (b) Breakage Costs. In addition to all amounts required to be paid by the Borrower pursuant to Section 2.5 and Section 2.6, the Borrower shall compensate the Lender, upon demand, for all losses, expenses and liabilities (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund or maintain the Lender's Term Loans to the Borrower but excluding any loss of the Applicable Margin on the relevant Term Loans) which the Lender may sustain (i) if for any reason (other than a default by the Lender) a proposed Borrowing does not occur on a date specified therefor in a notice of borrowing given by the Borrower or in a request by it transmitted by it by facsimile for borrowing does not commence after notice therefor is given, (ii) if for any reason any Term Loan is prepaid (including mandatorily pursuant to Section 2.6) on a date which is not the last day of the applicable Interest Period, or (iii) as a consequence of any failure by the Borrower to repay Term Loans when required by the terms hereof. The Lender shall deliver to the Borrower concurrently with such demand a written statement as to such losses, expenses and liabilities, and this statement shall be conclusive as to the amount of compensation due to the Lender, absent manifest error. SECTION 2.12. TAXES. (a) Any and all payments by the Borrower under each Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, levies, 17 23 imposts, deductions, charges or withholdings, and all liabilities with respect thereto (all such taxes (other than those taxes on or measured by the income of the Lender), levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If any Taxes shall be required by law to be deducted from or in respect of any sum payable under any Loan Document to the Lender (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.12) the Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law, and (iv) the Borrower shall deliver to the Lender evidence of such payment. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies of the United States or any political subdivision thereof or any applicable foreign jurisdiction, and all liabilities with respect thereto, which arise from any payment made under any Loan Document or from the execution, delivery or registration of, or otherwise with respect to, any Loan Document (collectively, "Other Taxes"). (c) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.12 shall survive the payment in full of the Obligations. ARTICLE III CONDITIONS TO TERM LOANS SECTION 3.1. CONDITIONS PRECEDENT TO INITIAL LOANS. The obligation of the Lender to make the Term Loans requested to be made by it on the Closing Date is subject to the satisfaction of all of the following conditions precedent: (a) Certain Documents. The Lender shall have received on the Closing Date each of the following, each dated the Closing Date unless otherwise indicated or agreed to by the Lender, in form and substance satisfactory to the Lender and its counsel: (i) this Agreement, duly executed and delivered by the Borrower and a Note of the Borrower conforming to the requirements set forth herein; (ii) the Warrant, duly executed and delivered by the Borrower; (iii) favorable opinion of O'Melveny & Myers LLP, counsel to the Borrower, which shall be to the effect set forth in Exhibit B addressed to the Lender and addressing such other matters as the Lender may reasonably request, including without limitation, the enforceability of the Loan Documents; (iv) evidence of the waiver of compliance with the requirements set forth in Section 3.01 of the Settlement Agreement; (v) the Second Amendment to Rights Agreement executed by the parties thereto and delivered by the Borrower to the Lender; 18 24 (vi) a copy of the articles or certificate of incorporation (or equivalent organizational documents) of the Borrower, certified as of a recent date by the Secretary of State of the state of incorporation of the Borrower, together with certificates of such official attesting to the good standing of the Borrower; (vii) a certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) the names and true signatures of each officer of the Borrower who has been authorized to execute and deliver any Loan Document or other document required hereunder to be executed and delivered by or on behalf of the Borrower, (B) the by-laws (or equivalent Constituent Document) of the Borrower as in effect on the date of such certification, (C) the resolutions of the Borrower's Board of Directors (or equivalent governing body) approving and authorizing the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party and (D) that there have been no changes in the certificate of incorporation (or equivalent Constituent Document) of the Borrower from the certificate of incorporation (or equivalent Constituent Document) delivered pursuant to the immediately preceding clause; (viii) a letter from the Borrower to the Lender reaffirming as of the Closing Date those matters set forth in the letter of the Borrower to its accountants dated as of March 2, 2000; (ix) a certificate of a Responsible Officer to the effect that the conditions set forth in Sections 3.1(b), (c), (d) and 3.2(b) have been satisfied; (x) a payment direction letter in the form of Exhibit D executed by the Lender and duly acknowledged by the Borrower; and (xi) such other certificates, documents, agreements and information respecting the Borrower as the Lender may reasonably request. (b) Issuance of Warrants. The Borrower shall have issued to the Lender Warrants in accordance with the terms of the Warrant. (c) Fees and Expenses Paid. There shall have been paid to the Lender all fees due and payable on or before the Closing Date (including all such fees described in Sections 2.9 and 9.3), and all expenses due and payable on or before the Closing Date (including all such expenses described in Section 9.3). (d) Consents, Etc. All consents and authorizations required pursuant to any material Contractual Obligation with any other Person and all consents and authorizations of, and effected all notices to and filings with, any Governmental Authority, in each case, as may be necessary to allow the Borrower to execute, deliver and perform, in all material respects, its obligations hereunder, the Loan Documents and each other agreement or instrument to be executed and delivered by it, pursuant thereto or in connection therewith. SECTION 3.2. CONDITIONS PRECEDENT TO EACH TERM LOAN. The obligation of the Lender on any date (including the Closing Date) to make any Term Loan is subject to the satisfaction of all of the following conditions precedent: 19 25 (a) Request for Borrowing. With respect to any Term Loan, the Lender shall have received a duly executed notice of borrowing. (b) Representations and Warranties; No Defaults. The following statements shall be true on the date of such Term Loan, both before and after giving effect thereto and to the application of the proceeds from any such Term Loan: (i) The representations and warranties set forth in Article IV and in the other Loan Documents shall be true and correct in all material respects on and as of any such date with the same effect as though made on and as of such date. (ii) No Default or Event of Default has occurred and is continuing. (c) No Legal Impediments. The making of the Term Loans on such date does not violate any Requirement of Law with respect to the Borrower, its Subsidiaries or the Lender on the date of or immediately following such Term Loan and is not enjoined, temporarily, preliminarily or permanently. (d) No Material Adverse Change. Since December 31, 1999, there has been no Material Adverse Change and there have been no events or developments that in the aggregate has had a Material Adverse Effect. (e) Additional Matters. The Lender shall have received such additional documents, information and materials as the Lender may reasonably request. Each submission by the Borrower to the Lender of a notice of borrowing and the acceptance by the Borrower of the proceeds of each Term Loan requested therein, shall be deemed to constitute a representation and warranty by the Borrower as to the matters specified in Section 3.2(b) on the date of the making of such Term Loan. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement, the Borrower represents and warrants to the Lender that, on and as of the Closing Date, after giving effect to the making of the Term Loans on the Closing Date and on and as of each date as required by Section 3.2(b)(i): SECTION 4.1. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of the Borrower and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization; (b) is duly qualified as a foreign corporation or organization and in good standing under the laws of each jurisdiction where such qualification is necessary, except where the failure to be so qualified or in good standing would not have a Material Adverse Effect; (c) has all requisite power and authority and the legal right to own, and operate its properties, to lease the property it operates under lease and to conduct its business as now or currently proposed to be conducted; (d) is in compliance with its Constituent Documents; (e) except as disclosed in Schedule 4.11, is in compliance with all applicable Contractual Obligations and Requirements of Law except where the failure to be in compliance would not in the aggregate have a Material Adverse Effect; and (f) has all necessary licenses, permits, consents or approvals from or by, has made all necessary filings with, and has given all 20 26 necessary notices to, each Governmental Authority having jurisdiction, to the extent required for such ownership, operation and conduct, except for licenses, permits, consents, approvals or filings which can be obtained or made by the taking of ministerial action to secure the grant or transfer thereof or the failure to obtain or make would not in the aggregate have a Material Adverse Effect. SECTION 4.2. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. (a) The execution, delivery and performance by the Borrower of the Loan Documents and the consummation of the transactions contemplated thereby: (i) are within the Borrower's corporate powers; (ii) have been duly authorized by all necessary corporate action, including the consent of shareholders where required; (iii) do not and will not (A) contravene the Borrower's Constituent Documents, (B) violate any other applicable Requirement of Law applicable to the Borrower or any of its Subsidiaries (including Regulations T, U and X of the Federal Reserve Board), or any order or decree of any Governmental Authority or arbitrator applicable to the Borrower or any of its Subsidiaries, (C) conflict with or result in the breach of, or constitute a default under, or result in or permit the termination or acceleration of, any Contractual Obligation of the Borrower or any of its Subsidiaries, or (D) result in the creation or imposition of any Lien upon any of the property of the Borrower or any of its Subsidiaries; and (iv) do not require the consent of, authorization by, approval of, notice to, or filing or registration with, any Governmental Authority or any other Person, other than those listed on Schedule 4.2 and which have been or will be, prior to the Closing Date, obtained or made, copies of which have been or will be delivered to the Lender pursuant to Section 3.1, and each of which on the Closing Date will be in full force and effect. (b) This Agreement has been, and each of the other Loan Documents will have been upon delivery thereof pursuant to the terms of this Agreement, duly executed and delivered by the Borrower. This Agreement is, and the other Loan Documents will be, when delivered hereunder, the legal, valid and binding obligation of the Borrower party thereto, enforceable against the Borrower in accordance with its terms. SECTION 4.3. OWNERSHIP OF BORROWER; SUBSIDIARIES. (a) All of the outstanding capital stock of the Borrower has been validly issued, is fully paid and non assessable. No Stock of the Borrower is subject to any option, warrant, right of conversion or purchase or any similar right other than as set forth on Schedule 4.3, as such Schedule may be amended from time to time by the Borrower during the period from the Closing Date to the Commitment Termination Date. (b) Set forth on Schedule 4.3 hereto is a complete and accurate list showing, as of the Closing Date, all Subsidiaries of the Borrower and, as to each such Subsidiary, the jurisdiction of its incorporation, the number of shares of each class of Stock authorized (if applicable), the number outstanding on the Closing Date and the number and percentage of the outstanding shares of each such class owned (directly or indirectly) by the Borrower. 21 27 SECTION 4.4. FINANCIAL STATEMENTS. (a) The consolidated balance sheets of the Borrower and its Subsidiaries as at December 31, 1999 and the related consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, and the balance sheets of the Borrower and its Subsidiaries as at February 29, 2000, and the related consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for the two months then ended, copies of which have been furnished to each Lender, fairly present, subject, in the case of said balance sheets as at February 29, 2000, and said statements of income, retained earnings and cash flows for the two months then ended, to the absence of footnote disclosure and normal recurring year-end audit adjustments, the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the period ended on such dates, all in conformity with GAAP. (b) Neither the Borrower nor any of its Subsidiaries has any material obligation, contingent liability or liability for taxes, long-term leases or unusual forward or long-term commitment which is not reflected in the Financial Statements referred to in clause (a) above or in the notes thereto or permitted by this Agreement. SECTION 4.5. MATERIAL ADVERSE CHANGE. Since December 31, 1999, there has been no Material Adverse Change and there have been no events or developments that in the aggregate have had a Material Adverse Effect. SECTION 4.6. SOLVENCY. After giving effect to the Term Loans to be made on the Closing Date and before and after each other date as Term Loans requested hereunder are made, the disbursement of the proceeds of such Term Loans pursuant to the instructions of the Borrower, the consummation of the other financing transactions contemplated hereby and the payment and accrual of all transaction costs in connection with the foregoing, the Borrower is Solvent. SECTION 4.7. LITIGATION. There are no pending or, to the knowledge of the Borrower, threatened actions, investigations, litigation or proceedings affecting the Borrower, or any of its Subsidiaries before any court, Governmental Authority or arbitrator other than those that in the aggregate could not have a Material Adverse Effect. The performance of any action by the Borrower required or contemplated by any of the Loan Documents is not restrained or enjoined (either temporarily, preliminarily or permanently). SECTION 4.8. TAXES. (a) All federal, state, local and foreign income and franchise and other material tax returns, reports and statements (collectively, the "Tax Returns") required to be filed by the Borrower or any of its Tax Affiliates have been filed with the appropriate Governmental Authorities in all jurisdictions in which such Tax Returns are required to be filed, all such Tax Returns are true and correct in all material respects, and all taxes, charges and other impositions reflected therein or otherwise due and payable have been paid prior to the date on which any fine, penalty, interest, late charge or loss may be added thereto for non-payment thereof except where contested in good faith and by appropriate proceedings if adequate reserves therefor have been established on the books of the Borrower or such Tax Affiliate in conformity with GAAP. Proper 22 28 and accurate amounts have been withheld by the Borrower and each of its Tax Affiliates from their respective employees for all periods in full and complete compliance with the tax, social security and unemployment withholding provisions of applicable Requirements of Law and such withholdings have been timely paid to the respective Governmental Authorities. (b) None of the Borrower or any of its Tax Affiliates has (i) any obligation under any tax sharing agreement or arrangement other than that to which the Lender has a copy prior to the date hereof or (ii) been a member of an affiliated, combined or unitary group other than the group of which the Borrower is the common parent. SECTION 4.9. FULL DISCLOSURE. The information prepared or furnished by or on behalf of the Borrower in connection with this Agreement or any Loan Document, or the consummation of the financing taken as a whole does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein or herein not misleading. All facts known to the Borrower which are material to an understanding of the financial condition, business, properties or prospects of the Borrower and the Borrower and the Subsidiaries taken as one enterprise have been disclosed to the Lender. SECTION 4.10. MARGIN REGULATIONS. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Federal Reserve Board), and no proceeds of any Borrowing will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock in contravention of Regulation T, U or X of the Federal Reserve Board. SECTION 4.11. NO BURDENSOME RESTRICTIONS; NO DEFAULTS. (a) Neither the Borrower nor any of its Subsidiaries (i) is a party to any Contractual Obligation the compliance with which would have a Material Adverse Effect or the performance of which by any thereof, either unconditionally or upon the happening of an event, will result in the creation of a Lien on the property or assets of any thereof or (ii) is subject to any charter or corporate restriction which could reasonably be expected to have a Material Adverse Effect. (b) Except as disclosed in Schedule 4.11, neither the Borrower nor any of its Subsidiaries is in default under or with respect to any Requirement of Law or Contractual Obligation owed by it and, to the knowledge of the Borrower, no other party is in default under or with respect to any Contractual Obligation owed to the Borrower or to any Subsidiary, other than, in either case, those defaults which in the aggregate could not have a Material Adverse Effect. (c) No Default or Event of Default has occurred and is continuing. (d) To the best knowledge of the Borrower, there is no Requirement of Law applicable to the Borrower the compliance with which by such Borrower could reasonably be expected to have a Material Adverse Effect. (e) Except as disclosed in Schedule 4.11, the Borrower is not delinquent in the payment of any Indebtedness owed by the Borrower to the federal government of the United States. 23 29 SECTION 4.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor any of its Subsidiaries is (a) an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended or (b) a "holding company," or an "affiliate" or a "holding company" or a "subsidiary company" of a "holding company," as each such term is defined and used in the Public Utility Holding Act of 1935, as amended. SECTION 4.13. USE OF PROCEEDS. The proceeds of the Term Loans are being used by the Borrower solely as follows: (a) to refinance existing Indebtedness of the Borrower and its Subsidiaries, and for the payment of related transaction costs, fees and expenses and (b) for working capital and general corporate purposes. SECTION 4.14. INSURANCE. All policies of insurance of any kind or nature of the Borrower or any of its Subsidiaries, including policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers' compensation and employee health and welfare insurance, are in full force and effect and are of a nature and provide such coverage as is sufficient and as is customarily carried by businesses of the size and character of such Person. None of the Borrower or any of its Subsidiaries has been refused insurance for any material coverage which it had applied or had any policy of insurance terminated in the past year (other than at its request). SECTION 4.15. LABOR MATTERS. (a) There are no strikes, work stoppages, slowdowns or lockouts pending or threatened against or involving the Borrower or any of its Subsidiaries, other than those which in the aggregate could not reasonably be expected to have a Material Adverse Effect. (b) Except as disclosed in Schedule 4.15, there are no unfair labor practices, grievances or complaints pending, or, to the Borrower's knowledge, threatened against or involving the Borrower or any of its Subsidiaries, nor are there any arbitrations or grievances threatened involving the Borrower or any of its Subsidiaries, other than those which, in the aggregate, if resolved adversely to the Borrower or such Subsidiary, could not reasonably be expected to have a Material Adverse Effect. (c) Except as set forth on Schedule 4.15, as of the Closing Date, there is no collective bargaining agreement covering any of the employees of the Borrower or the Subsidiaries. (d) Schedule 4.15 sets forth as of the date hereof, all material consulting agreements, executive employment agreements, executive compensation plans, deferred compensation agreements, employee stock purchase and stock option plans and severance plans of the Borrower and any of its Subsidiaries. 24 30 SECTION 4.16. ERISA. (a) Schedule 4.16 separately identifies as of the date hereof all Title IV Plans, all Multiemployer Plans and all of the employee benefit plans within the meaning of Section 3(3) of ERISA (except those already listed on Schedule 4.15) to which the Borrower or any of its Subsidiaries has any obligation or liability, contingent or otherwise. (b) Each employee benefit plan of the Borrower or any of its Subsidiaries which is intended to qualify under Section 401 of the Code does so qualify, and any trust created thereunder is exempt from tax under the provisions of Section 501 of the Code, except where all such failures have no Material Adverse Effect. (c) Each Title IV Plan is in compliance in all material respects with applicable provisions of ERISA, the Code and other Requirements of Law except for any non-compliance that in the aggregate with all other non-compliance would not have a Material Adverse Effect. (d) There has been no, nor is there reasonably expected to occur, any ERISA Event which could reasonably be expected to have a Material Adverse Effect. (e) Except to the extent set forth on Schedule 4.16, none of the Borrower, any Subsidiary or any ERISA Affiliate would have any Withdrawal Liability as a result of a complete withdrawal as of the date hereof from any Multiemployer Plan. SECTION 4.17. ENVIRONMENTAL MATTERS. (a) The operations of the Borrower and each of its Subsidiaries have been and are in compliance with all Environmental Laws, including obtaining and complying with all required environmental, health and safety Permits, other than non-compliances that in the aggregate with all matters covered by this Section 4.17 have (i) no reasonable likelihood of causing total Environmental Liabilities and Costs to exceed $500,000 in cash in any twelve-month period and (ii) no Material Adverse Effect. (b) The Borrower and its Subsidiaries have obtained and currently possess all environmental, health and safety Permits necessary for their operations, all such Permits are in full force and effect and the Borrower and each of its Subsidiaries is in compliance with the terms and conditions of such Permits except for failures that in the aggregate with all matters covered by this Section 4.17 have (i) no reasonable likelihood of causing total Environmental Liabilities and Costs to exceed $500,000 in cash in any twelve-month period and (ii) no Material Adverse Effect. (c) None of the currently (or, to the knowledge of the Borrower, previously at the time it was owned) owned or leased property or operations of the Borrower or any of its Subsidiaries is subject to any threatened or outstanding claim, order, agreement, notice of violation or potential liability or is subject to any pending or, to its knowledge, threatened judicial or docketed administrative proceeding or governmental investigation (each an "Environmental Contingency") with respect to (i) Environmental Law, (ii) a Remedial Action or (iii) Environmental Liabilities and Costs arising from a Release or threatened Release, other than those that in the aggregate with all matters covered by this Section 4.17 have (A) no reasonable likelihood of causing total Environmental Liabilities and Costs to exceed $500,000 in cash in any twelve-month period and (B) no Material Adverse Effect. Schedule 4.17 lists all Environmental Contingencies as of the date hereof that, if adversely determined, would in the aggregate with all 25 31 matters covered by this Section 4.17 cause (x) total Environmental Liabilities and Costs to exceed $500,000 in cash in any twelve-month period or (y) a Material Adverse Effect. (d) Except as disclosed on Schedule 4.17 none of the Borrower or any of its Subsidiaries is a treatment, storage or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., the regulations thereunder or any state analog. (e) There are no facts, circumstances or conditions arising out of or relating to the operations or ownership of real property owned or operated by the Borrower or any of its Subsidiaries which are not specifically included in the financial information furnished to the Lender other than those that in the aggregate have (i) no reasonable likelihood of causing the Borrower and its Subsidiaries to incur Environmental Liabilities and Costs in excess of $500,000 in cash in any twelve-month period and (ii) no Material Adverse Affect. SECTION 4.18. INTELLECTUAL PROPERTY. The Borrower and its Subsidiaries own or license or otherwise have the right to use all licenses, permits, patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, copyright applications, franchises, authorizations and other intellectual property rights that are necessary for the operations of their respective businesses, without infringement upon or conflict with the rights of any other Person with respect thereto, including all trade names associated with any private label brands of the Borrower or any of the Subsidiaries. To the Borrower's knowledge, no slogan or other advertising device, product, process, method, substance, part or component, or other material now employed, or now contemplated to be employed, by the Borrower or any of its Subsidiaries infringes upon or conflicts with any rights owned by any other Person, and no claim or litigation regarding any of the foregoing is pending or threatened. SECTION 4.19. PROPERTIES. (a) Each of the Borrower and its Subsidiaries has good and marketable title to, or valid leasehold interests in, all real property and good title to all personal property purported to be owned by it, including those reflected on the most recent Financial Statements delivered by the Borrower, and none of such properties and assets is subject to any Lien, except Liens permitted under Section 7.2. The Borrower and its Subsidiaries have received all deeds, assignments, waivers, consents, non-disturbance and recognition or similar agreements, bills of sale and other documents, and have duly effected all recordings, filings and other actions necessary to establish, protect and perfect the Borrower's and its Subsidiaries' right, title and interest in and to all such property. (b) All Permits required to have been issued or appropriate to enable all real property owned or leased by the Borrower or any of its Subsidiaries to be lawfully occupied and used for all of the purposes for which they are currently occupied and used have been lawfully issued and are in full force and effect, other than those which in the aggregate would not have a Material Adverse Effect. (c) None of the Borrower or any of its Subsidiaries has received any notice, or has any knowledge, of any pending, threatened or contemplated condemnation proceeding affecting any real property owned or leased by the Borrower or any of its Subsidiaries or any part thereof, except those which, in the aggregate, would not have a Material Adverse Effect. 26 32 SECTION 4.20. RANKING. The Obligations do and will rank pari passu in priority of payment with the Borrower's obligations under the Indenture. No Indebtedness of the Borrower issued directly or indirectly by the Borrower or any of its Subsidiaries will at any time rank senior in priority to the Term Loans or the Obligations. ARTICLE V REPORTING COVENANTS As long as any of the Obligations or the Commitment remains outstanding, the Borrower agrees with the Lender that: SECTION 5.1. FINANCIAL STATEMENTS. The Borrower shall furnish to the Lender the following: (a) Monthly Reports. Within 30 days after the end of each month commencing with the month ending April 30, 2000 (i) a consolidated income statement and balance sheet of the Borrower and its Subsidiaries, and (ii) income statements for each of the Borrower's properties, in each case for such month and for the portion of the year ending on the last day of such month and in the case of each income statement with a comparison of each item to the budget delivered pursuant to Section 5.1(e). (b) Quarterly Reports. Within 45 days after the end of each fiscal quarter of the Borrower, (i) quarterly consolidated financial statements, including balance sheet, income statement and cash flow statement, for the Borrower and its Subsidiaries, (ii) quarterly balance sheets, income statements and cash flow statements for each of the Borrower's Subsidiaries and (iii) quarterly balance sheets for each of the Borrower's properties. (c) Annual Reports. Within 90 days after the end of each Fiscal Year, the Borrower's 10-K filed with the Securities and Exchange Commission, or if the Borrower is no longer subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the annual audited consolidated financial statements of the Borrower and its Subsidiaries, certified with respect to such consolidated statements by independent certified public accountants acceptable to the Lender. (d) Occupancy Reports. Within 5 Business Days after each Sunday (or if the Borrower changes the end of its week to another day of the week, such day of the week), occupancy reports for each of the Borrower's properties for the preceding week, detailing the number of residents and units occupied. (e) Budgets. No later than November 30 of the year immediately preceding the year that is the subject of the budget, annual budgets, including separate capital expenditure budgets, for the Borrower and each of its properties (f) Other. Within 30 days after the end of each month, monthly updates of the capital expenditure budgets delivered to the Lender for each property of the Borrower with a comparison to the respective original budget previously delivered to the Lender. 27 33 (g) Management Letters etc. Within five Business Days after receipt thereof by the Borrower, copies of each management letter, exception report or similar letter or report received by the Borrower from its independent certified public accountants. (h) Compliance Certificate. Together with each delivery of any financial statement pursuant to clauses (a) and (b) of this Section 5.1, a certificate of a Responsible Officer of the Borrower (each, a "Compliance Certificate") stating that no Default or Event of Default has occurred and is continuing or, if a Default or an Event of Default has occurred or is continuing, stating the nature thereof and the action which the Borrower proposes to take with respect thereto. (i) Additional Information. Promptly, from time to time, such other information regarding the operations, including information regarding specific product categories and lines of business of the Borrower and it Subsidiaries, business affairs and financial condition of the Borrower or any of its Subsidiaries, or compliance with the terms of any Loan Document, as the Lender may reasonably request. SECTION 5.2. DEFAULT NOTICES. As soon as practicable, and in any event within five Business Days after a Responsible Officer of the Borrower has knowledge of the existence of any Default, Event of Default or other event which has had a Material Adverse Effect or which has any reasonable likelihood of causing or resulting in a Material Adverse Change, the Borrower shall give the Lender notice specifying the nature of such Default or Event of Default or other event, including the anticipated effect thereof, which notice, if given by telephone, shall be promptly confirmed in writing on the next Business Day. SECTION 5.3. LITIGATION. Promptly after the commencement thereof, the Borrower shall give the Lender written notice of the commencement of any action, suit and proceedings before any domestic or foreign Governmental Authority or arbitrator, affecting the Borrower or any of its Subsidiaries, which in the reasonable judgment of the Borrower or such Subsidiary, expose the Borrower or such Subsidiary to liability ("Potential Liability") in an amount of $500,000 or more (or any similar or related action, suits or proceedings that involve Potential Liability aggregating $500,000 or more in cash in any twelve month period) and which, if adversely determined, would have a Material Adverse Effect; provided, however, that claims for which an insurer of the Borrower or such Subsidiary, as the case may be, has acknowledged coverage shall not be included in such aggregate amounts to the extent of such coverage. SECTION 5.4. SEC FILINGS; PRESS RELEASES. Promptly after the sending or filing thereof, the Borrower shall send the Lender copies of (a) all reports which the Borrower sends to its security holders generally, (b) all reports and registration statements which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange or the National Association of Securities Dealers, Inc., (c) all press releases and (d) all other statements concerning material changes or developments in the business of the Borrower made available by the Borrower to the public. SECTION 5.5. LABOR RELATIONS. Promptly after becoming aware of the same, the Borrower shall give the Lender written notice of (a) any material labor dispute to which the Borrower or any of its Subsidiaries is or may become a party, including any strikes, lockouts or other disputes relating to any of such Person's facilities, and (b) any Worker Adjustment and Retraining Notification Act or related liability incurred with respect to the closing of any facility of any of such Person. 28 34 SECTION 5.6. TAX RETURNS. Upon the request of the Lender, the Borrower will provide copies of all federal, state, local tax returns and reports filed by the Borrower or any of its Subsidiaries in respect of taxes measured by income (excluding sales, use and like taxes). SECTION 5.7. ERISA MATTERS. The Borrower shall notify the Lender: (a) promptly and in any event within 30 days after the Borrower, any of its Subsidiaries or any ERISA Affiliate knows or has reason to know that any ERISA Event has occurred; (b) promptly and in any event within 10 days after the Borrower, any of its Subsidiaries or any ERISA Affiliate knows or has reason to know that a request for a minimum funding waiver under Section 412 of the Code has been filed with respect to any Title IV Plan or Multiemployer Plan, a written statement of a Responsible Officer of the Borrower describing such ERISA Event or waiver request and the action, if any, which the Borrower, its Subsidiaries and ERISA Affiliates propose to take with respect thereto and a copy of any notice filed with the PBGC or the IRS pertaining thereto; (c) simultaneously with the date that the Borrower, any of its Subsidiaries or any ERISA Affiliate files a notice of intent to terminate any Title IV Plan, if such termination would require material additional contributions in order to be considered a standard termination within the meaning of Section 4041(b) of ERISA, a copy of each notice. SECTION 5.8. ENVIRONMENTAL MATTERS. The Borrower shall provide the Lender promptly and in any event within 10 days of the Borrower or any Subsidiary learning of any of the following, written notice of any of the following: (a) that the Borrower or any Subsidiary is or may be liable to any Person as a result of a Release or threatened Release which could reasonably be expected to subject the Borrower and any Subsidiary in the aggregate for all matters covered by this Section 5.8 to total Environmental Liabilities and Costs of $500,000 or more in cash in any twelve-month period; (b) the receipt by the Borrower or any Subsidiary of notification that any real or personal property of such Person is subject to any Environmental Lien; (c) the receipt by the Borrower or any Subsidiary of any notice of violation of or potential liability under, or knowledge by a Responsible Officer of the Borrower or such Subsidiary that there exists a condition which could reasonably be expected to result in a violation of or liability under any Environmental Law, except for violations and liabilities the consequence of which in the aggregate would have no reasonable likelihood of subjecting the Borrower and the Subsidiaries in the aggregate for all matters covered by this Section 5.8 to total Environmental Liabilities and Costs of $500,000 or more in cash in any twelve-month period; (d) the commencement of any judicial or administrative proceeding or investigation alleging a violation of or liability under any Environmental Law, which in the aggregate, if adversely determined, would have a reasonable likelihood of subjecting the Borrower and its Subsidiaries collectively in the aggregate for all matters covered by this Section 5.8 to total Environmental Liabilities and Costs of $500,000 or more in cash in any twelve-month period; 29 35 (e) any proposed acquisition of stock, assets or real estate, or any proposed leasing of property, or any other action by the Borrower or any Subsidiary other than those the consequences of which in the aggregate have reasonable likelihood of subjecting the Borrower and its Subsidiaries in the aggregate for all matters covered by this Section 5.8 to total Environmental Liabilities and Costs of $500,000 or less in cash in any twelve-month period; (f) any proposed action by the Borrower or any Subsidiary in response to any proposed change in Environmental Laws, either of which, in the aggregate, have a reasonable likelihood of requiring the Borrower or any Subsidiary to obtain additional environmental, health or safety Permits or make additional capital improvements to obtain compliance with Environmental Laws that in the aggregate would cost $500,000 or more in cash in any twelve-month period or subject the Borrower and the Subsidiaries in the aggregate for all matters covered by this Section 5.8 to additional total Environmental Liabilities and Costs of $500,000 or more in cash in any twelve-month period; and (g) upon written request by the Lender, a report providing an update of the status of any environmental, health or safety compliance, hazard or liability issue identified in any notice or report delivered pursuant to this Agreement. SECTION 5.9. OTHER INFORMATION. The Borrower will provide the Lender with such other information respecting the business, properties, condition, financial or otherwise, or operations of the Borrower or any of its Subsidiaries as the Lender may from time to time reasonably request. ARTICLE VI AFFIRMATIVE COVENANTS As long as any of the Obligations or the Commitment remains outstanding, the Borrower agrees with the Lender that: SECTION 6.1. PRESERVATION OF CORPORATE EXISTENCE, ETC. The Borrower shall, and shall cause each Subsidiary to, preserve and maintain its corporate existence, rights (charter and statutory) and franchises, unless the Borrower in good faith determines only with respect to any Subsidiary, that such preservation of such Subsidiary is no longer desirable in the conduct of its business. SECTION 6.2. COMPLIANCE WITH LAWS, ETC. The Borrower shall, and shall cause each of its Subsidiaries to, comply with all applicable Requirements of Law, Contractual Obligations and Permits, except where the failure so to comply would not in the aggregate have a Material Adverse Effect. SECTION 6.3. CONDUCT OF BUSINESS. The Borrower shall, and shall cause each of its Subsidiaries to, (a) conduct its business in the ordinary course and (b) use its reasonable efforts, in the ordinary course and consistent with past practice, to preserve its business and the goodwill and business of the customers, advertisers, suppliers and others having business relations with the Borrower or any of its Subsidiaries, except in each case where the failure to comply with the covenants in each of clauses (a) and (b) above would not in the aggregate have a Material Adverse Effect. 30 36 SECTION 6.4. PAYMENT OF TAXES, ETC. The Borrower shall, and shall cause each of its Subsidiaries to, pay and discharge before the same shall become delinquent, all lawful governmental claims, taxes, assessments, charges, levies and judgments, except where contested in good faith, by proper proceedings and adequate reserves therefor have been established on the books of the Borrower or the appropriate Subsidiary in conformity with GAAP. SECTION 6.5. MAINTENANCE OF INSURANCE. The Borrower shall (i) maintain, and cause to be maintained for each of its Subsidiaries insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates (provided that the Borrower shall be entitled to implement a self-insurance program consistent with industry standards for similarly situated companies), and such other insurance as may be reasonably requested by the Lender. SECTION 6.6. ACCESS. The Borrower shall from time to time, permit the Lender, or any agents or representatives thereof, within five Business Days after written notification of the same (except that during the continuance of an Event of Default, no such notice shall be required) to (a) examine and make copies of and abstracts from the records and books of account of the Borrower and each of its Subsidiaries, (b) visit the properties of the Borrower and each of its Subsidiaries, (c) discuss the affairs, finances and accounts of the Borrower and each of its Subsidiaries with any of their respective officers or directors, and (d) communicate directly with the Borrower's independent certified public accountants, except where any such communication as contemplated by this Section 6.6 would cause the Borrower to waive any accountant-client privilege under Section 7527 of the Code. The Borrower shall authorize its independent certified public accountants to disclose to the Lender any and all financial statements and other information of any kind, as the Lender reasonably requests from the Borrower and which such accountants may have with respect to the business, financial condition, results of operations or other affairs of the Borrower or any of its Subsidiaries, except where any such disclosure as contemplated by this Section 6.6 would cause the Borrower to waive any accountant-client privilege under Section 7527 of the Code. SECTION 6.7. KEEPING OF BOOKS. The Borrower shall, and shall cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made in conformity with GAAP of all financial transactions and the assets and business of the Borrower and each such Subsidiary. SECTION 6.8. MAINTENANCE OF PROPERTIES, ETC. The Borrower shall, and shall cause each of its Subsidiaries to, maintain and preserve, (a) all of its properties which are necessary in the conduct of its business in good working order and condition, (b) all rights, permits, licenses, approvals and privileges (including all Permits) which are used or useful or necessary in the conduct of its business, and (c) all registered patents, trademarks, trade names, copyrights and service marks with respect to its business; except where the failure to so maintain and preserve in the aggregate would have no Material Adverse Effect. SECTION 6.9. APPLICATION OF PROCEEDS. The Borrower shall use the entire amount of the proceeds of the Term Loans as provided in Section 4.13. SECTION 6.10. ENVIRONMENTAL. The Borrower shall, and shall cause each of its Subsidiaries to, comply in all material respects with Environmental Laws and, without limiting 31 37 the foregoing, the Borrower shall, at its sole cost and expense, upon receipt of any notification or otherwise obtaining knowledge of any Release or other event that has any reasonable likelihood of causing the Borrower and its Subsidiaries to incur Environmental Liabilities and Costs in excess of $500,000 in cash in any twelve-month period, (i) conduct or pay for consultants to conduct, tests or assessments of environmental conditions at such operations or properties, including the investigation and testing of subsurface conditions and (ii) take such Remedial Action, investigational or other action as required by Environmental Laws or as any Governmental Authority requires or as is appropriate and consistent with good business practice to address the Release or event. ARTICLE VII NEGATIVE COVENANTS As long as any of the Obligations or the Commitment remains outstanding, the Borrower agrees with the Lender that: SECTION 7.1. INDEBTEDNESS. The Borrower shall not, and shall not permit any Subsidiary to, create, incur, assume or issue, directly or indirectly, guarantee or in any manner become, directly or indirectly, liable for or with respect to the payment of any Indebtedness except for (each of which shall be given independent effect): (a) Indebtedness under this Agreement; (b) Indebtedness of the Borrower in respect of the Indenture; (c) Non-Recourse Indebtedness; (d) Unsecured Indebtedness existing on the date hereof as set forth on Schedule 7.1 (the "Existing Indebtedness"); (e) Indebtedness secured directly or indirectly by the assets or properties of the Borrower or any of its Subsidiaries; (f) Indebtedness of a Subsidiary to the Borrower or a wholly-owned Subsidiary of the Borrower so long as such Indebtedness is held by the Borrower or a wholly-owned Subsidiary of the Borrower and is subject to no Lien (other than any Lien permitted by Section 7.2) held by any Person other than the Borrower or a wholly-owned Subsidiary of the Borrower; provided that if as of any date any Person other than the Borrower or a wholly-owned Subsidiary of the Borrower owns or holds any such Indebtedness or holds a Lien (other than any Lien permitted by Section 7.2) in respect of such Indebtedness such date shall be deemed an incurrence of Indebtedness not permitted under this Agreement unless such Indebtedness is otherwise permitted under Section 7.1(c) or (h); (g) Indebtedness of the Borrower to a wholly-owned Subsidiary of the Borrower for so long as such Indebtedness is held by a wholly-owned Subsidiary of the Borrower, provided that (a) such Indebtedness is unsecured and subordinated, pursuant to a written agreement, to Borrower's obligations under this Agreement and the Note and (b) if as of any date any Person other than a wholly-owned Subsidiary of the Borrower owns or holds any such Indebtedness or any Person holds a Lien (other than Liens permitted under Section 7.2) in 32 38 respect of such Indebtedness, such debt shall be deemed an incurrence of Indebtedness not permitted under this Agreement unless such Indebtedness is otherwise permitted under Section 7.1(c) or (h); (h) Indebtedness in respect of performance, completion, surety or appeal bonds provided in the ordinary course of business of the Borrower or any Subsidiary; (i) Refinancing of Indebtedness permitted by clause (d) or (e) of this Section 7.1; provided, however, that any such refinancing of Existing Indebtedness is in an aggregate principal amount not greater than the principal amount of, and is on terms no less favorable to the Borrower or such Subsidiary than, the Existing Indebtedness being refinanced; and (j) All Capital Lease Obligations. SECTION 7.2. LIMITATION ON LIENS. Neither the Borrower or any Subsidiary shall create, incur, assume or suffer to exist any Lien of any kind upon any of its property or assets now owned or hereafter acquired by it, except for: (a) Liens existing on the Closing Date and disclosed on Schedule 7.2; (b) Liens securing Indebtedness to the extent such Indebtedness is permitted under Section 7.1 other than (i) Existing Indebtedness or (ii) Indebtedness permitted under Section 7.1(f) or (g); (c) Liens to secure the payment of all or a part of the purchase price of assets or property acquired after the Closing Date, provided that (i) the aggregate principal amount of Indebtedness secured by such Liens shall not exceed the fair market value (or, if less, the cost) of the assets or property so acquired; (ii) the incurrence of Indebtedness secured by such Liens shall be permitted by this Agreement; and (iii) such Liens do not encumber any other assets or property of the Borrower (other than additions thereof) or any Subsidiary and shall attach to such assets or property within 60 days of the acquisition of such assets or property; (d) Liens securing Indebtedness which is incurred to refinance Indebtedness which has been secured by a Lien permitted under this Agreement and is permitted to be refinanced under this Agreement, provided that such Liens do not extend to or cover any property or assets of the Borrower or any of its Subsidiaries not securing the Indebtedness so refinanced; (e) Liens securing Indebtedness of a Subsidiary to the Borrower or a wholly-owned Subsidiary of the Borrower provided such Lien is held by the Borrower or a wholly-owned Subsidiary of the Borrower; and (f) Permitted Encumbrances. SECTION 7.3. LIMITATION ON RESTRICTED PAYMENTS. (a) Subject to Section 7.3(b), the Borrower shall not make, and shall not permit any Subsidiary to directly or indirectly, make, any Restricted Payment. (b) The provisions of Section 7.3(a) shall not prohibit: 33 39 (i) the retirement of any shares of Stock of the Borrower or subordinated Indebtedness by conversion into, or by an exchange for, shares of Stock of the Borrower that are not Disqualified Capital Stock or out of the Net Cash Proceeds of the substantially concurrent sale (other than to a Subsidiary of the Borrower) of Stock (other than Disqualified Capital Stock) of the Borrower; and (ii) the redemption or retirement of subordinated Indebtedness of the Borrower in exchange for, by conversion into, or out of the Net Cash Proceeds of, a substantially concurrent sale of subordinated Indebtedness of the Borrower (other than to a Subsidiary) that is contractually subordinated in right of payment to the Term Loans and that is permitted to be incurred under Section 7.1. SECTION 7.4. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Borrower shall not, and shall not permit, cause or suffer any Subsidiary to, conduct any business or enter into any transaction or series of transactions with or for the benefit of any of their respective Affiliates (each an "Affiliate Transaction"), except in good faith and on terms that are no less favorable to the Borrower or such Subsidiary, as the case may be, than those that could have been obtained in a comparable transaction on an arms' length basis from a Person not an Affiliate of the Borrower of such Subsidiary. Notwithstanding the foregoing, the restrictions set forth in this Section 7.4 shall not apply (a) to any customary directors' fees and consulting fees, collective bargaining agreements and compensation paid to the Borrower's employees, (b) to the transactions contemplated by the Warrant Documents or (c) to any transaction between the Borrower and any Subsidiary or between Subsidiaries, in the ordinary course of business. SECTION 7.5. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES. The Borrower shall not, and shall not permit any Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective or enter into any agreement with any Person that would cause, any consensual encumbrance or restriction of any kind on the ability of any Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on its Stock or any other interest or participation in, or measured by, its profits owed by, or pay any Indebtedness owed to, the Borrower or a Subsidiary, (b) make any loans or advances to the Borrower or any Subsidiary or (c) transfer any of its properties or assets to the Borrower or to any Subsidiary, except, in each case, for such encumbrances or restrictions existing under or contemplated by or by reason of (i) this Agreement, (ii) any restrictions existing under or contemplated by agreements in effect on the Closing Date, (iii) any restrictions, with respect to a Subsidiary that is not a Subsidiary of the Borrower on the Closing Date, in existence at the time such Person becomes a Subsidiary of the Borrower (but not created in contemplation of such Person becoming a Subsidiary), or (iv) any restrictions existing under any agreement that refinances or replaces an agreement containing a restriction permitted by clause (i), (ii) or (iii) above, provided, however, that the terms and conditions of any such restrictions under this clause (iv) are not materially less favorable to the Lender than those under or pursuant to the agreement being replaced or the agreement evidencing the Indebtedness refinanced. SECTION 7.6. LIMITATION ON ISSUANCE OF PREFERRED STOCK BY SUBSIDIARIES. The Borrower shall not cause or permit any Subsidiary, directly or indirectly, to issue shares of such Subsidiary's Preferred Stock or warrants, rights or options to acquire shares of such Subsidiary's Preferred Stock, except to the Borrower or a Subsidiary. 34 40 SECTION 7.7. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Borrower covenants (to the extent permitted by law) 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 or extension law or any usury law or other law that would prohibit or forgive the Borrower from paying all or any portion of the principal of or interest on the Term Loans as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Agreement, and (to the extent permitted by law) the Borrower hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Lender, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 7.8. LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. The Borrower shall not, and shall not permit any Subsidiary to, make any Investments in any Person, except: (i) Investments by the Borrower in any Subsidiary and Investments in the Borrower or any Subsidiary by a Subsidiary; (ii) Investments by the Borrower or any Subsidiary in any joint venture or partnership, the sole purpose of which is to own or hold real property located in the United States; (iii) Cash Equivalents; and (iv) in accordance with obligations and agreements in existence on the Closing Date and set forth on Schedule 7.8. SECTION 7.9. CERTAIN CHANGES. The Borrower will not, and will not permit any Subsidiary to, (i) materially change its accounting treatment and reporting practices or tax reporting treatment, except as required by GAAP or any Requirement of Law and disclosed to the Lender, (ii) enter into or engage in any business except as conducted on the Closing Date, (iii) enter into any disposition of any substantial amount of unearned revenues or any substantial forward sale or (iv) merge or consolidate with any Persons other than a Subsidiary, except that (A) any Subsidiary may merge or consolidate with or into any other Subsidiary and (B) any wholly owned Subsidiary may merge or consolidate with the Borrower, provided however that the Borrower is the surviving corporation of such merger or consolidation. SECTION 7.10. COMPLIANCE WITH ERISA. The Borrower will not, and will not permit any of its Subsidiaries to, or cause or permit any ERISA Affiliate to, cause or permit to occur (a) an event which could result in the imposition of a Lien under Section 412 of the Code or Section 302 or 4068 of ERISA or (b) an ERISA Event that would have a Material Adverse Effect. SECTION 7.11. ENVIRONMENTAL. The Borrower will not, and will not permit any of its Subsidiaries to, dispose of any Contaminant in violation of any Environmental Law; provided, however, that the Borrower shall not be deemed in violation of this Section 7.11 if, as the consequence of all such Releases, the Borrower and the Subsidiaries would not incur Environmental Liabilities and Costs in excess of $500,000 in cash in any twelve-month period. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1. EVENTS OF DEFAULT. Each of the following events shall be an Event of Default: (a) the Borrower shall fail to pay any principal of any Term Loan when the same becomes due and payable; or 35 41 (b) the Borrower shall fail to pay any interest on any Term Loan, any fee under any of the Loan Documents or any other Obligation (other than one referred to in clause (a) above) and such non-payment continues for a period of three Business Days after the due date therefor; or (c) any representation or warranty contained herein or in any Loan Document shall have been inaccurate or untrue in any material respect when made; or (d) the Borrower shall fail to perform or observe (i) any term, covenant or agreement contained in Section 5.2, 6.1, 6.6, 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8 or 7.9 of this Agreement or any material term, covenant or agreement in the Warrant; or (ii) any other term, covenant or agreement contained in this Agreement or in any other Loan Document if such failure under this clause (ii) shall remain unremedied for 30 days after the earlier of the date on which (A) a Responsible Officer of the Borrower becomes aware of such failure or (B) written notice thereof shall have been given to the Borrower by the Lender; or (e) (i) the Borrower or any of its Subsidiaries shall fail to make any payment or payments on any Indebtedness (other than the Obligations) of the Borrower or any such Subsidiary (or any Guaranty Obligation in respect of Indebtedness of any other Person) having an aggregate principal amount for all such Indebtedness of $5,000,000 or more, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) or (ii) any such Indebtedness shall become or be declared to be due and payable, or required to be prepaid or repurchased (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (f) the Borrower or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against the Borrower or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a custodian, receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against the Borrower or any of its Subsidiaries (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of 30 days or any of the actions sought in such proceedings shall occur; or the Borrower or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or (g) one or more judgments or orders (or other similar process) involving, in any single case or in the aggregate, an amount in excess of $500,000 in the case of a money judgment, to the extent not covered by insurance shall be rendered against one or more of the Borrower or any of its Subsidiaries unless enforcement of such judgment shall have been stayed by reason of a pending appeal or otherwise; or (h) an ERISA Event shall occur and the amount of all liabilities and deficiencies resulting therefrom, whether or not assessed, exceeds $500,000 in the aggregate; or (i) one or more of the Borrower and the Subsidiaries shall have entered into one or more consent or settlement decrees or agreements or similar arrangements with a 36 42 Governmental Authority or one or more judgments, orders, decrees or similar actions shall have been entered against one or more of the Borrower and its Subsidiaries based on or arising from the violation of or pursuant to any Environmental Law, or the generation, storage, transportation, treatment, disposal or Release of any Contaminant and, in connection with all the foregoing, the Borrower and the Subsidiaries are likely to incur Environmental Liabilities and Costs in excess of $500,000 in the aggregate in cash in any twelve-month period that were not reflected in the Financial Statements delivered pursuant to Section 4.4; or (j) an event that results in a Material Adverse Change shall occur. SECTION 8.2. REMEDIES. (a) Upon the occurrence of any Event of Default, all or any one or more of the rights, powers and other remedies available to the Lender against the Borrower under this Agreement or any other Loan Document, or at law or in equity may be exercised by the Lender at any time, including without limitation, the Lender may (i) by notice to the Borrower declare that all or any portion of the Commitment be terminated, whereupon the obligation of the Lender to make any Term Loan shall immediately terminate, and/or (ii) by notice to the Borrower, declare the Term Loans, all interest thereon and all other amounts and Obligations payable under this Agreement to be forthwith due and payable, whereupon the Term Loans, all such interest and all such amounts and Obligations shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that upon the occurrence of the Event of Default specified in Section 8.1(f), (A) the Commitment of the Lender to make Term Loans shall automatically be terminated and (B) the Term Loans, all such interest and all such amounts and Obligations shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. (b) The rights, powers and remedies of the Lender under this Agreement shall be cumulative and not exclusive of any other right, power or a remedy which the Lender may have against the Borrower or any other Person pursuant to this Agreement or the other Loan Documents or existing at law or in equity or otherwise. The Lender's rights, powers and remedies may be pursued singly, concurrently or otherwise, at such time and in such order as the Lender may determine in the Lender's discretion. No delay or omission to exercise any remedy, right or power accruing upon an Event of Default shall impair any such remedy, right or power or shall be construed as a waiver thereof, but any such remedy, right or power may be exercised from time to time and as often as may be deemed expedient. A waiver of any Default or Event of Default shall not be construed to be a waiver of any subsequent Default or Event of Default or to impair any remedy, right or power consequent thereon. SECTION 8.3. RESCISSION. If at any time after acceleration of the maturity of the Loans, the Borrower shall pay all arrears of interest and all payments on account of principal of the Term Loans which shall have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified herein) and all Events of Default and Defaults (other than non-payment of principal of and accrued interest on the Term Loans due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to Section 9.1, then upon the written consent of the Lender and written notice to the Borrower, the termination of the Commitment and/or the acceleration and its consequences may be rescinded and annulled; but such action shall not affect any subsequent Event of Default or Default or impair any right or remedy consequent thereon. The provisions of the preceding 37 43 sentence are intended merely to bind the Lender to a decision which may be made at the election of the Lender; they are not intended to benefit the Borrower and do not give the Borrower the right to require the Lender to rescind or annul any acceleration hereunder, even if the conditions set forth herein are met. ARTICLE IX MISCELLANEOUS SECTION 9.1. AMENDMENTS, WAIVERS, ETC. No amendment or waiver of any provision of this Agreement or any other Loan Document nor consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the parties hereto, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 9.2. ASSIGNMENTS AND PARTICIPATIONS. The Lender may sell, transfer, negotiate or assign all or any portion of its rights and obligations hereunder (including all of its rights and obligations with respect to the Term Loans). In addition to the foregoing, the Lender may assign, as collateral or otherwise, any of its rights under this Agreement (including rights to payments of principal or interest on the Term Loans) to any Person. SECTION 9.3. COSTS AND EXPENSES. The Borrower agrees upon demand to pay, or reimburse the Lender for, all of the Lender's reasonable internal and external audit, legal, filing, document duplication and reproduction and investigation expenses and for all other reasonable out-of-pocket costs and expenses of every type and nature (including, without limitation, the reasonable fees, expenses and disbursements of the Lender's counsel, Weil, Gotshal & Manges LLP, local legal counsel, auditors, accountants, appraisers, printers, insurance and environmental advisers, and other consultants and agents) incurred by the Lender in connection with (i) the preparation, negotiation, execution and interpretation of this Agreement (including, without limitation, the satisfaction or attempted satisfaction of any of the conditions set forth in Article III), the Loan Documents, and any proposal letter or commitment letter issued in connection therewith and the making of the Term Loans hereunder; (ii) the ongoing administration of this Agreement and the Term Loans and with respect to the Lender's rights and responsibilities hereunder and under the other Loan Documents; (iii) the protection, collection or enforcement of any of the Obligations or the enforcement of any of the Loan Documents; (iv) the commencement, defense or intervention in any court proceeding relating in any way to the Obligations, this Agreement or any of the other Loan Documents; (v) the response to, and preparation for, any subpoena or request for document production with which the Lender is served or deposition or other proceeding in which the Lender is called to testify, in each case, relating in any way to the Obligations, this Agreement or any of the other Loan Documents; (vi) any amendments, consents, waivers, assignments, restatements, or supplements to any of the Loan Documents and the preparation, negotiation, and execution of the same; (vii) in connection with any refinancing or restructuring of the credit arrangements provided hereunder in the nature of a "work-out" or in any insolvency or bankruptcy proceeding; and (viii) in taking any other action in or with respect to any suit or proceeding (bankruptcy or otherwise) described above. 38 44 SECTION 9.4. INDEMNITIES. (a) The Borrower shall indemnify and hold harmless the Lender and its affiliates and each of the respective officers, directors, employees, agents, advisors, attorneys and representatives of each (each, an "Indemnified Party") from and against any and all claims, damages, losses liabilities and expenses (including, without limitation, reasonable fees and disbursements of counsel), joint or several, that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or relating to any investigation, litigation or proceeding or the preparation of any defense with respect thereto, arising out of or in connection with or relating to the Term Loans, the Loan Documents (excluding the Warrants) or the transactions contemplated thereby, or any use made or proposed to be made with the proceeds of the Term Loans, whether or not such investigation, litigation or proceeding is brought by the Borrower, any of its shareholders or creditors, an Indemnified Party or any other person, or an Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated, except to the extent such claim, damage loss, liability or expense is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. No Indemnified Party shall have any liability (whether direct or indirect, in contract, tort or otherwise) to the Borrower or any of its shareholders or creditors for or in connection with the transactions contemplated hereby, except to the extent such liability is found in a final non-appealable judgement by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In no event, however, shall any Indemnified Party be liable on any theory of liability for any special, indirect, consequential or punitive damages and the Borrower hereby waives, releases and agrees (for itself and on behalf of its Subsidiaries) not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. (b) The Borrower agrees that any indemnification or other protection provided to any Indemnitee pursuant to this Agreement (including pursuant to this Section 9.4) or any other Loan Document shall (i) survive payment in full of the Obligations and (ii) inure to the benefit of any Person who was at any time an Indemnitee under this Agreement or any other Loan Document. SECTION 9.5. RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default each of the Lender, Prometheus Assisted Living L.L.C., LF Strategic Realty Investors II L.P., LFSRI II Alternative Partnership L.P., LFSRI II-CADIM Alternative Partnership L.P. and Lazard Freres Real Estate Investors L.L.C. is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender or its Affiliates to or for the credit or the account of the Borrower against any and all of the Obligations now or hereafter existing whether or not the Lender shall have made any demand under this Agreement or any other Loan Document and although such Obligations may be unmatured. The Lender agrees promptly to notify the Borrower after any such set-off and application made by the Lender or its Affiliates; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section 9.5 are in addition to the other rights and remedies (including other rights of set-off) which such Lender may have. SECTION 9.6. NOTICES, ETC. All notices, demands, requests and other communications provided for in this Agreement shall be given in writing, or by any 39 45 telecommunication device capable of creating a written record, and addressed to the party to be notified as follows: (a) if to the Borrower: ARV Assisted Living, Inc. 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: Senior Vice President and Secretary Telecopy no: (714) 708-3537 with a copy to: O'Melveny & Myers LLP 610 Newport Center Drive, 17th Floor Newport Beach, CA 92660 Attention: Gary Singer, Esq. Telecopy no: (949) 823-6994 40 46 (b) if to the Lender: LFSRI II Assisted Living LLC c/o Lazard Freres Real Estate Investors L.L.C. 30 Rockefeller Plaza New York, NY 10020 Attention: Chief Financial Officer and General Counsel Telecopy no: (212) 332-5641 and (212) 332-1793 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153-0119 Attention: Vanessa Spiro, Esq. Telecopy no: (212) 310-8007 or at such other address as shall be notified in writing (i) in the case of the Borrower, to the other parties and (ii) in the case of all other parties, to the Borrower and the Lender. All such notices and communications shall be effective upon personal delivery (if delivered by hand, including any overnight courier service), when deposited in the mails (if sent by mail), or when properly transmitted (if sent by a telecommunications device). SECTION 9.7. BINDING EFFECT. This Agreement shall become effective when it shall have been executed by the Borrower and the Lender, and thereafter shall be binding upon and inure to the benefit of the Borrower, the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lender. SECTION 9.8. GOVERNING LAW. This Agreement and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the law of the State of New York without regard to the principles of conflict of laws thereof. SECTION 9.9. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. (a) Any legal action or proceeding with respect to this Agreement or any other Loan Document may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including any objection to the laying of venue or based on the grounds of forum non conveniens, which of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (b) The Borrower hereby irrevocably consents to the service of any and all legal process, summons, notices and documents in any suit, action or proceeding brought in the United States of America arising out of or in connection with this Agreement or any of the other 41 47 Loan Documents by mail (by registered or certified mail, postage prepaid) or delivery of a copy of such process to the Borrower at its address specified in Section 9.6. The Borrower agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. (c) Nothing contained in this Section 9.9 shall affect the right of the Lender to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. SECTION 9.10. WAIVER OF JURY TRIAL. Each of the Lender and the Borrower irrevocably waives trial by jury in any action or proceeding with respect to this Agreement or any other Loan Document. SECTION 9.11. MARSHALING; PAYMENTS SET ASIDE. The Lender shall not be under any obligation to marshal any assets in favor of the Borrower or any other party or against or in payment of any or all of the Obligations. To the extent that the Borrower makes a payment or payments to the Lender or the Lender exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all right and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. SECTION 9.12. SECTION TITLES. The Section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. SECTION 9.13. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties 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. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are attached to the same document. Delivery of an executed signature page of this Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. A set of copies of this Agreement signed by all parties shall be lodged with the Borrower and the Lender. SECTION 9.14. ENTIRE AGREEMENT. This Agreement, together with all of the other Loan Documents and all certificates and documents delivered hereunder or thereunder, embodies the entire agreement of the parties and supersedes all prior agreements and understandings relating to the subject matter hereof. SECTION 9.15. CONFIDENTIALITY. The Lender agrees to keep information obtained by it pursuant hereto and the other Loan Documents confidential in accordance with the Lender's customary practices and agrees that it will only use such information in connection with the transactions contemplated by this Agreement and not disclose any of such information other than (a) to the Lender's employees, representatives and agents who are or are expected to be involved in the evaluation of such information in connection with the transactions contemplated by this Agreement and who are advised of the confidential nature of such information, (b) to the extent such information presently is or hereafter becomes available to the Lender on a non-confidential basis from a source other than the Borrower, (c) to the extent disclosure is required by law, regulation or judicial order or requested or required by bank regulators or auditors, or (d) to assignees or pledgees or potential pledgees who agree to be bound by the provisions of this Section 9.15. 42 48 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. ARV Assisted Living, Inc. By: ----------------------------------------- Name: ----------------------------------- Title: ---------------------------------- LFSRI II Assisted Living LLC By LF Strategic Realty Investors II L.P. Its Managing Member By Lazard Freres Real Estate Investors L.L.C. Its General Partner By: ----------------------------------------- Name: ----------------------------------- Title: ---------------------------------- 43 EX-10.4 5 ex10-4.txt EXHIBIT 10.4 1 EXHIBIT 10.4 TERM NOTE Lender: LFSRI II Assisted Living LLC New York, New York Principal Amount: $10,000,000.00 April 24, 2000 FOR VALUE RECEIVED, the undersigned ARV Assisted Living Inc., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of the Lender set forth above or its assigns or transferees (the "Holder") the Principal Amount set forth above, or, if less, the aggregate unpaid principal amount of the Term Loans (as defined in the Loan Agreement referred to below) owing to the Holder, payable at such times, and in such amounts, as are specified in the Loan Agreement. The Borrower promises to pay interest on the unpaid principal amount of the Term Loans from the date made until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Loan Agreement. Both principal and interest are payable in Dollars to the Holder, at LFSRI II Assisted Living, L.L.C., c/o Lazard Freres Real Estate Investors, L.L.C., 30 Rockefeller Plaza, New York, NY 10020, Attention: Chief Financial Officer and General Counsel, or any other address indicated in writing by the Holder to the Borrower, in immediately available funds. This Note is entitled to the benefits of the Term Loan Agreement, dated as of April 24, 2000 (as the same may be amended, restated, supplemented or otherwise modified from time to time, the "Loan Agreement"), among the Borrower and the Lender. Capitalized terms used herein and not defined herein are used herein as defined in the Loan Agreement. The Loan Agreement, among other things, (i) provides for the making of Term Loans by the Lender to the Borrower in an aggregate principal amount not to exceed $10,000,000, the indebtedness of the Borrower resulting from such Term Loans being evidenced by this Note and (ii) contains provisions for acceleration of the maturity of the unpaid principal amount of this Note upon the happening of certain stated events and also for prepayments on account of the principal hereof prior to the maturity hereof, upon the terms and conditions therein specified. Demand, diligence, presentment, protest and notice of non-payment and protest are hereby waived by the Borrower. This Note shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. 2 IN WITNESS WHEREOF, the Borrower has caused this Note to be executed and delivered by its duly authorized officer as of the day and year and at the place set forth above. ARV Assisted Living, Inc., a Delaware corporation By: ------------------------------------- Name: Title: For value received, [ ] (" ") hereby assigns, sells and conveys to ______________ all of its right, title and interest in and to the Term Note of ______ dated as of ______, 2000, payable to the order of ________ or its assigns and transferees ______, ____ ________________________ By: --------------------------------- Title: 2 3 Schedule A to Term Note LOANS AND REPAYMENTS OF TERM LOANS
Amount of Term Amount of Principal of Unpaid Principal Balance Date Loans Term Loans Repaid of Term Loans Notation Made By - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
EX-10.5 6 ex10-5.txt EXHIBIT 10.5 1 EXHIBIT 10.5 WARRANT TO PURCHASE COMMON STOCK OF ARV ASSISTED LIVING, INC. No. of Shares of Common Stock: 750,000 2 TABLE OF CONTENTS SECTION PAGE 1. DEFINITIONS...........................................................2 2. EXERCISE OF WARRANT...................................................5 2.1. Manner of Exercise...........................................5 2.2. Payment of Taxes.............................................7 2.3. Fractional Shares............................................7 2.4. Continued Validity...........................................7 2.5. Payment in Lieu of Shares....................................7 3. TRANSFER, DIVISION AND COMBINATION....................................9 3.1. Transfer.....................................................9 3.2. Division and Combination.....................................9 3.3. Expenses.....................................................9 3.4. Maintenance of Books.........................................9 4. ADJUSTMENTS...........................................................9 4.1. Stock Dividends, Subdivisions and Combinations...............9 4.2. Certain Other Distributions.................................10 4.3. Issuance of Additional Shares of Common Stock...............11 4.4. Issuance of Warrants or Other Rights........................12 4.5. Issuance of Convertible Securities..........................13 4.6. Superseding Adjustment......................................13 4.7. Other Provisions Applicable to Adjustments under this Section................................................14 4.8. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets....................................16 4.9. Other Action Affecting Common Stock.........................17 4.10. Certain Limitations.........................................17 5. NOTICES TO WARRANT HOLDERS...........................................17 5.1. Notice of Adjustments.......................................17 5.2. Notice of Corporate Action..................................18 6. NO IMPAIRMENT........................................................18 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY............................19 i 3 TABLE OF CONTENTS (CONTINUED) SECTION PAGE 8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS...................19 9. RESTRICTIONS ON TRANSFERABILITY......................................19 9.1. Restrictive Legend..........................................20 9.2. Notice of Proposed Transfers; Requests for Registration.....20 9.3. Required Registration.......................................21 9.4. Incidental Registration.....................................21 9.5. Registration Procedures.....................................22 9.6. Expenses....................................................24 9.7. Indemnification and Contribution............................24 9.8. 25 9.9. Termination of Restrictions.................................25 9.10. Listing on Securities Exchange..............................26 9.11. Certain Limitations on Registration Rights..................26 9.12. Selection of Managing Underwriters..........................26 10. SUPPLYING INFORMATION................................................26 11. LOSS OR MUTILATION...................................................26 12. OFFICE OF COMPANY....................................................27 13. Filings..............................................................27 14. limitation of liability..............................................27 15. MISCELLANEOUS........................................................27 15.1. Nonwaiver and Expenses......................................27 15.2. Notice Generally............................................27 15.3. No Stockholder Rights.......................................28 15.4. Indemnification.............................................28 15.5. Remedies....................................................29 15.6. Successors and Assigns......................................29 15.7. Amendment...................................................29 15.8. Severability................................................29 15.9. Headings....................................................29 15.10. Governing Law...............................................29 ii 4 TABLE OF CONTENTS (CONTINUED) SECTION PAGE EXHIBIT A SUBSCRIPTION FORM...................................................31 EXHIBIT B ASSIGNMENT FORM.....................................................32 iii 5 THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT. No. of Shares of Common Stock: 750,000 WARRANT To Purchase Common Stock of ARV ASSISTED LIVING, INC. THIS IS TO CERTIFY THAT LFSRI II Assisted Living LLC, or registered assigns, is entitled, at any time prior to the Expiration Date (as hereinafter defined), to purchase from ARV ASSISTED LIVING, INC., a Delaware corporation ("Company"), 750,000 shares (or such lesser number of shares as determined pursuant to Section 2.1) of Common Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, including fractional parts, at a purchase price of $3.00 per share, all on the terms and conditions and pursuant to the provisions hereinafter set forth. 1. DEFINITIONS As used in this Warrant, the following terms have the respective meanings set forth below: "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by Company after the Closing Date, other than Warrant Stock. "Affiliate" has the meaning ascribed thereto in Rule 12b-2 promulgated under the Exchange Act, and as in effect on the date hereof. "Business Day" shall mean any day that is not a Saturday or Sunday or a day on which banks are required or permitted to be closed in the State of New York or in the State of California. "Closing Date" shall have the meaning set forth in the Loan Agreement. "Commission" shall mean the Securities and Exchange Commission or any other federal agency then administering the Securities Act and other federal securities laws. "Common Stock" shall mean (except where the context otherwise indicates) the common stock, $.01 par value, of Company as constituted on the Closing Date, and any capital stock into which such common stock may thereafter be changed, 6 and shall also include (i) capital stock of Company of any other class (regardless of how denominated) issued to the holders of shares of common stock upon any reclassification thereof which is also not preferred as to dividends or assets over any other class of stock of Company and which is not subject to redemption and (ii) shares of common stock of any successor or acquiring corporation (as defined in Section 4.8) received by or distributed to the holders of common stock of Company in the circumstances contemplated by Section 4.8. "Convertible Securities" shall mean evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for Additional Shares of Common Stock, either immediately or upon the occurrence of a specified date or a specified event. "Current Market Price" shall mean, in respect of any share of Common Stock on any date herein specified, the average of the daily market prices for 30 consecutive Business Days commencing 45 days before such date. The daily market price for each such Business Day shall be (i) the last sale price on such day on the principal stock exchange or NASDAQ Stock Market ("NASDAQ") on which such Common Stock is then listed or admitted to trading, (ii) if no sale takes place on such day on any such exchange or NASDAQ, the average of the last reported closing bid and asked prices on such day as officially quoted on any such exchange or NASDAQ, (iii) if the Common Stock is not then listed or admitted to trading on any stock exchange or NASDAQ, the average of the last reported closing bid and asked prices on such day in the over-the-counter market, as furnished by the National Association of Securities Dealers Automatic Quotation System or the National Quotation Bureau, Inc., (iv) if neither such corporation at the time is engaged in the business of reporting such prices, as furnished by any similar firm then engaged in such business, or (v) if there is no such firm, as furnished by any member of the NASD selected mutually by the Majority Holders and Company or, if they cannot agree upon such selection, as selected by two such members of the NASD, one of which shall be selected by the Majority Holders and one of which shall be selected by Company. "Current Warrant Price" shall mean, in respect of a share of Common Stock at any date herein specified, the price at which a share of Common Stock may be purchased pursuant to this Warrant on such date. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Exercise Period" shall mean the period during which this Warrant is exercisable pursuant to Section 2.1. "Expiration Date" shall mean April 24, 2005. 3 7 "Fully Diluted Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all shares of Common Stock Outstanding at such date and all shares of Common Stock issuable in respect of this Warrant, and other options or warrants to purchase, or securities convertible into, shares of Common Stock outstanding on such date which would be deemed outstanding in accordance with GAAP for purposes of determining book value or net income per share. "GAAP" shall mean generally accepted accounting principles in the United States of America as from time to time in effect. "Holder" shall mean the Person in whose name the Warrant set forth herein is registered on the books of Company maintained for such purpose. "Loan Agreement" shall mean the Term Loan Agreement dated as of April 24, 2000 by and between Company and LFSRI II Assisted Living LLC, or any successor agreement between such parties. "Majority Holders" shall mean the holders of Warrants exercisable for in excess of 50% of the aggregate number of shares of Common Stock then purchasable upon exercise of all Warrants, whether or not then exercisable. "NASD" shall mean the National Association of Securities Dealers, Inc., or any successor corporation thereto. "Notes" shall have the meaning set forth in Section 2.1. "Other Property" shall have the meaning set forth in Section 4.8. "Outstanding" shall mean, when used with reference to Common Stock, at any date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of Company or any subsidiary thereof, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock. "Permitted Issuances" shall mean (i) the issuance of stock options or other securities or rights pursuant to a stock option, stock purchase, equity incentive, or similar plan or related agreement approved by Company's Board of Directors or a committee thereof, (ii) the issuance of stock options or other securities or rights to a director, officer, employee or consultant of Company as approved by Company's Board of Directors or a committee thereof, (iii) the issuance of securities upon the exercise of any stock options or other securities or rights referred to in clause (i) or clause (ii), (iv) the issuance of Common Stock in exchange for all or part of the principal amount of any of Company's 6 3/4% Convertible Subordinated Notes Due 2006 (the "Convertible Notes"), and (v) the issuance of securities upon the conversion of all or part of the Convertible Notes. "Person" shall mean any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, 4 8 corporation, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Restricted Common Stock" shall mean shares of Common Stock which are, or which upon their issuance on the exercise of this Warrant would be, evidenced by a certificate bearing the restrictive legend set forth in Section 9.1(a). "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Settlement Agreement" shall mean that certain Settlement Agreement, dated as of September 29, 1999, among the Company, Prometheus Assisted Living LLC, Lazard Freres Real Estate Investors L.L.C., LF Strategic Realty Investors II L.P., LFSRI II Alternative Partnership L.P., LFSRI II-CADIM Alternative Partnership L.P., Atria Communities, Inc., and Kapson Senior Quarters Corp. "Transfer" shall mean any disposition of any Warrant or Warrant Stock or of any interest in either thereof, which would constitute a sale thereof within the meaning of the Securities Act. "Transfer Notice" shall have the meaning set forth in Section 9.2. "Warrants" shall mean this Warrant and all warrants issued upon transfer, division or combination of, or in substitution for, any thereof. All Warrants shall at all times be identical as to terms and conditions and date, except as to the number of shares of Common Stock for which they may be exercised. "Warrant Price" shall mean an amount equal to (i) the number of shares of Common Stock being purchased upon exercise of this Warrant pursuant to Section 2.1, multiplied by (ii) the Current Warrant Price as of the date of such exercise. "Warrant Stock" shall mean the shares of Common Stock issuable to the Holder upon the exercise of the Warrant. 2. EXERCISE OF WARRANT 2.1. Manner of Exercise. From and after the Closing Date and until 5:00 P.M., New York time, on the Expiration Date, Holder may exercise this Warrant, on any Business Day, for all or any part of the number of shares of Common Stock purchasable hereunder at the time of such exercise. In the event that Company does not borrow an aggregate of $10,000,000 under the Loan Agreement, the number of shares of Common Stock for which this Warrant shall be exercisable will, at any time, be equal to (x) 75,000 shares of Common Stock, as such number may be adjusted pursuant to Section 4 (such adjustment in Section 4 to be calculated assuming that the number of shares of Common Stock for which this Warrant is exercisable on the Closing Date is 75,000 shares) 5 9 multiplied by (y) the aggregate amount of borrowings made under the Loan Agreement at such time divided by $1,000,000. In order to exercise this Warrant, in whole or in part, Holder shall deliver to Company at its principal office at 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626 or at the office or agency designated by Company pursuant to Section 12, (i) a written notice of Holder's election to exercise this Warrant, which notice shall specify the number of shares of Common Stock to be purchased, (ii) payment of the Warrant Price and (iii) this Warrant. Such notice shall be substantially in the form of the subscription form appearing at the end of this Warrant as Exhibit A, duly executed by Holder or its agent or attorney. Upon receipt thereof, Company shall, as promptly as practicable, and in any event within five (5) Business Days thereafter, execute or cause to be executed and deliver or cause to be delivered to Holder a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise, together with cash in lieu of any fraction of a share, as hereinafter provided. The stock certificate or certificates so delivered shall be, to the extent possible, in such denomination or denominations as such Holder shall request in the notice and shall be registered in the name of Holder or, subject to Section 9, such other name as shall be designated in the notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or, subject to Section 9, any other Person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the notice, together with the cash or check or checks and this Warrant, is received by Company as described above and all taxes required to be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of such shares have been paid. If this Warrant shall have been exercised in part, Company shall, at the time of delivery of the certificate or certificates representing Warrant Stock, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of Holder, appropriate notation may be made on this Warrant and the same returned to Holder. Notwithstanding any provision herein to the contrary, Company shall not be required to register shares in the name of any Person who acquired this Warrant (or part hereof) or any Warrant Stock otherwise than in accordance with this Warrant. Payment of the Warrant Price shall be made at the option of the Holder by (i) certified or official bank check, (ii) by the surrender of one or more of the notes (collectively, the "Notes") issued by Company and evidencing the loans made pursuant to the Loan Agreement, (iii) by the Holder's surrender to Company of that number of shares of Common Stock having an aggregate Current Market Price equal to the Current Warrant Price for Shares of Common Stock then being purchased, (iv) a written notice to Company that Holder is exercising the Warrant (or a portion thereof) by authorizing Company to withhold from issuance a number of shares of Common Stock issuable upon such exercise of the Warrant which when multiplied by the Current Market Price of the Common Stock is equal to the Warrant Price (and such withheld shares of Common Stock shall no longer be issuable under this Warrant), or (v) any combination thereof, duly endorsed by or accompanied by appropriate instruments of transfer duly executed by Holder or by Holder's attorney duly authorized in writing. For the purposes of making 6 10 payment of the Warrant Price, the Notes shall have a value equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of surrender in respect of payment of the Warrant Price. If a Holder surrenders Notes having an aggregate value which exceeds the aggregate Warrant Price, Company shall, at its option, pay the Holder an amount in cash equal to all or part of such excess (if any) over the Warrant Price and/or issue a new Note in the principal amount equal to that portion of such surrendered principal amount not applied to the Warrant Price or paid in cash to the Holder. If the Holder surrenders the Notes, the Holder shall specify the portion of the value of each such Note surrendered to be applied toward the Warrant Price. Notwithstanding any provision of the Loan Agreement, no payment or issuance of a Note pursuant to this Section 2.1 or any other provision of this Warrant shall constitute a prepayment requiring Company to pay a prepayment premium. 2.2. Payment of Taxes. All shares of Common Stock issued upon the exercise of this Warrant against payment of the Warrant Price pursuant to the terms hereof shall be validly issued, fully paid and nonassessable and without any preemptive rights. Company shall pay all expenses in connection with, and all taxes and other governmental charges (other than those on or measured by the income of Holder) that may be imposed with respect to, the issue or delivery thereof. Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for shares of Common Stock issuable upon exercise of this Warrant in any name other than that of Holder, and in such case Company shall not be required to issue or deliver any stock certificate until such tax or other charge has been paid or it has been established to the satisfaction of Company that no such tax or other charge is due. 2.3. Fractional Shares. Company shall not be required to issue a fractional share of Common Stock upon exercise of any Warrant. As to any fraction of a share which the Holder of one or more Warrants would otherwise be entitled to purchase upon such exercise, Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of (x) the Current Market Price per share of Common Stock on the date of exercise, if there is a public market for the Common Stock, or (y) the fair market value per share of Common Stock on the date of exercise as determined by the Board of Directors of Company, if there is no public market for the Common Stock. 2.4. Continued Validity. A holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part (other than a holder who acquires such shares after the same have been publicly sold pursuant to a registration statement under the Securities Act or sold pursuant to Rule 144 thereunder), shall continue to be entitled with respect to such shares to all rights to which it would have been entitled as Holder under Sections 9, 10 and 14 of this Warrant. 2.5. Payment in Lieu of Shares. (a) As used in this Section 2.5: (i) "Triggering Percentage" means, at any time, the lowest percentage of Aggregate Beneficial Ownership that would result in (A) a "Trigger Event" as defined in the Rights Agreement dated as of May 14, 1998 between Company and ChaseMellon Shareholder Services, L.L.C. as amended and in effect on the 7 11 date hereof (the "Rights Agreement") or (B) any "Change of Control" (or similar term) as defined in the Loan Agreement, the indenture for the Convertible Notes, or any lease, credit, employment or other agreement to which Company or a subsidiary of Company is a party as of the date of this Agreement, the occurrence of which would require Company or a subsidiary of Company to make any payment to any other Person or otherwise materially and adversely affect Company or a subsidiary of Company, (ii) "Adjustment Number" means, at any time, a number of shares of Common Stock which, if subtracted from the number of shares of Common Stock for which this Warrant, but for the provisions of this Section 2.5, otherwise would be exercisable at such time, would cause the Aggregate Beneficial Ownership to be an amount equal to the Triggering Percentage at such time, minus one-tenth of one percent (.10%), and (iii) "Aggregate Beneficial Ownership" means the aggregate beneficial ownership of shares of Common Stock by Holder and all Affiliates and Associates (as such terms are defined in the Rights Agreement). (b) Notwithstanding any other provision of this Agreement, if at any time the Aggregate Beneficial Ownership, but for the provisions of this Section 2.5, would otherwise equal or exceed the Triggering Percentage, then (i) the number of shares of Common Stock for which this Warrant is exercisable shall be a number equal to (A) the number of shares of Common Stock for which this Warrant, but for the provisions of this Section 2.5, would otherwise then be exercisable minus (B) the Adjustment Number at such time and (ii) in addition, Holder shall have a right (the "Cash Right"), which may be exercised in whole or in part, to receive immediately available funds from Company in an amount equal to the Adjustment Number at such time (or such portion of such number exercised by Holder) multiplied by the closing price of Common Stock on the date of such exercise, which right may otherwise be exercised upon the same terms and conditions, and shall be subject to the same Section 4 adjustments, as the right to exercise this Warrant to purchase shares of Common Stock. (c) If, at any time after an adjustment pursuant to this Section 2.5 in the number of shares of Common Stock for which this Warrant is exercisable, the Aggregate Beneficial Ownership becomes less than the Triggering Percentage minus one-tenth of one percent (.10%), then the adjustment and the Cash Right pursuant to this Section 2.5 shall be recalculated based on the Adjustment Number at such time effective immediately after such time. Any adjustment made pursuant to this Section 2.5 to the number of shares of Common Stock or Cash Right for which this Warrant may be exercised shall be effective immediately prior to the occurrence that would have caused the Holder's Aggregate Beneficial Ownership to equal or exceed the Triggering Percentage. 8 12 3. TRANSFER, DIVISION AND COMBINATION 3.1. Transfer. Subject to compliance with Section 9, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of Company referred to in Section 2.1 or the office or agency designated by Company pursuant to Section 12, together with a written assignment of this Warrant substantially in the form of Exhibit B hereto duly executed by Holder or its agent or attorney together with funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, Company shall, subject to Section 9, execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned in compliance with Section 9, may be exercised by a new Holder for the purchase of shares of Common Stock without having a new Warrant issued. 3.2. Division and Combination. Subject to Section 9, this Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office or agency of Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney. Subject to compliance with Section 3.1 and with Section 9, as to any transfer which may be involved in such division or combination, Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. 3.3. Expenses. Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 3. 3.4. Maintenance of Books. Company agrees to maintain, at its aforesaid office or agency, books for the registration and the registration of transfer of the Warrants. 4. ADJUSTMENTS The number of shares of Common Stock for which this Warrant is exercisable, or the price at which such shares may be purchased upon exercise of this Warrant, shall be subject to adjustment from time to time as set forth in this Section 4. Company shall promptly, but in any event within 3 Business Days, after the happening of any event described below which requires an adjustment pursuant to this Section 4 give each Holder notice of such event. 4.1. Stock Dividends, Subdivisions and Combinations. If at any time Company shall: (a) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock, 9 13 (b) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then (i) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (ii) the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. 4.2. Certain Other Distributions. If at any time Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: (a) cash, (b) any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), or (c) any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever (other than cash, Convertible Securities or Additional Shares of Common Stock), then (i) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such adjustment multiplied by a fraction (A) the numerator of which shall be the Current Market Price per share of Common Stock at the date of taking such record and (B) the denominator of which shall be such Current Market Price per share of Common Stock minus the amount allocable to one share of Common Stock of any such cash so distributable and of the fair value (as determined in good faith by the Board of Directors of Company and supported by an opinion from an investment banking firm of recognized national standing acceptable to the Majority Holders) of any and all such evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights so distributable, and (ii) the Current Warrant Price shall be adjusted to equal (A) the Current Warrant Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value 10 14 or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 4.2 and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, such change shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 4.1. 4.3. Issuance of Additional Shares of Common Stock. (a) If at any time Company shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock, other than Permitted Issuances, in exchange for consideration in an amount per Additional Share of Common Stock less than the Current Warrant Price at the time the Additional Shares of Common Stock are issued, then (i) the Current Warrant Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be reduced to a price determined by dividing (A) an amount equal to the sum of (x) the number of shares of Common Stock Outstanding immediately prior to such issue or sale multiplied by the then existing Current Warrant Price, plus (y) the consideration, if any, received by Company upon such issue or sale, by (B) the total number of shares of Common Stock Outstanding immediately after such issue or sale; and (ii) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the Current Warrant Price in effect immediately prior to such issue or sale by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale and dividing the product thereof by the Current Warrant Price resulting from the adjustment made pursuant to clause (i) above. (b) If at any time Company shall (except as hereinafter provided) at any time issue or sell any Additional Shares of Common Stock, other than Permitted Issuances, for consideration in an amount per Additional Share of Common Stock less than the Current Market Price, then (i) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such issue or sale by a fraction (A) the numerator of which shall be the number of shares of Common Stock Outstanding immediately after such issue or sale, and (B) the denominator of which shall be the number of shares of Common Stock Outstanding immediately prior to such issue or sale plus the number of shares which the aggregate offering price of the total number of such Additional Shares of Common Stock would purchase at the then Current Market Price; and (ii) the Current Warrant Price as to the number of shares for which this Warrant is exercisable prior to such adjustment shall be adjusted by multiplying such Current Warrant Price by a fraction (X) the numerator of which shall be the number of shares for which this Warrant is exercisable immediately prior to such issue or sale; and (Y) the denominator of which shall be the number of shares of Common Stock purchasable immediately after such issue or sale. (c) If at any time Company (except as hereinafter provided) shall issue or sell any Additional Shares of Common Stock, other than Permitted Issuances, in exchange for consideration in an amount per Additional Share of Common Stock which 11 15 is less than the Current Warrant Price and Current Market Price (as defined above) at the time the Additional Shares of Common Stock are issued, the adjustment required under Section 4.3 shall be made in accordance with the formula in paragraph (a) or (b) above which results in the lower Current Warrant Price following such adjustment. The provisions of paragraphs (a) and (b) of Section 4.3 shall not apply to any issuance of Additional Shares of Common Stock for which an adjustment is provided under Section 4.1 or 4.2. No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under paragraph (a) or (b) of Section 4.3 upon the issuance of any Additional Shares of Common Stock which are issued pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 4.4 or Section 4.5. (d) If any Additional Shares of Common Stock, other than Permitted Issuances, are issued or sold in exchange for consideration in an amount per Additional Share of Common Stock equal to or greater than the Current Warrant Price and the Current Market Price at the time the Additional Shares are issued, then (i) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the product obtained by multiplying the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such adjustment by a fraction (A) the numerator of which shall be the number of shares of Common Stock Outstanding immediately after the issuance of such Additional Shares of Common Stock, and (B) the denominator of which shall be the number of shares of Common Stock Outstanding immediately prior to the issuance of such Additional Shares of Common Stock; and (ii) the Current Warrant Price as to the number of shares of Common Stock for which this Warrant is exercisable prior to such adjustment shall not change but the Current Warrant Price for each of the incremental number of shares of Common Stock for which this Warrant becomes exercisable after such adjustment shall be equal to the fair value of such consideration per Additional Share of Common Stock. 4.4. Issuance of Warrants or Other Rights. If at any time Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving corporation) issue or sell, any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such warrants or other rights or upon conversion or exchange of such Convertible Securities shall be less than the Current Warrant Price or the Current Market Price in effect immediately prior to the time of such issue or sale, then the number of shares for which this Warrant is exercisable and the Current Warrant Price shall be adjusted as provided in Section 4.3 on the basis that the maximum number of Additional Shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and Company shall be deemed to have 12 16 received all of the consideration payable therefor, if any, as of the date of the issuance of such warrants or other rights. No further adjustments of the number of shares of Common Stock for which this Warrant is exercisable or the Current Warrant Price shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such warrants or other rights or upon the actual issue of such Common Stock upon such conversion or exchange of such Convertible Securities. 4.5. Issuance of Convertible Securities. If at any time Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which Company is the surviving corporation) issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Current Warrant Price or Current Market Price in effect immediately prior to the time of such issue or sale, then the number of Shares for which this Warrant is exercisable and the Current Warrant Price shall be adjusted as provided in Section 4.3 on the basis that the maximum number of Additional Shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and Company shall have received all of the consideration payable therefor, if any, as of the date of issuance of such Convertible Securities. No adjustment of the number of Shares for which this Warrant is exercisable and the Current Warrant Price shall be made under this Section 4.5 upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 4.4. No further adjustments of the number of shares of Common Stock for which this Warrant is exercisable or the Current Warrant Price shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities and, if any issue or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase any such Convertible Securities for which adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price have been or are to be made pursuant to other provisions of this Section 4, no further adjustments of the number of shares of Common Stock for which this Warrant is exercisable or the Current Warrant Price shall be made by reason of such issue or sale. 4.6. Superseding Adjustment. If, at any time after any adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall have been made pursuant to Section 4.4 or Section 4.5 as the result of any issuance of warrants, rights or Convertible Securities, (a) such warrants or rights, or the right of conversion or exchange in such other Convertible Securities, shall expire, and all or a portion of such warrants or rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised, or 13 17 (b) the consideration per share for which shares of Common Stock are issuable pursuant to such warrants or rights, or the terms of such other Convertible Securities, shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event, then for each outstanding Warrant such previous adjustment shall be rescinded and annulled and the Additional Shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of (i) treating the number of Additional Shares of Common Stock or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise of any such warrants or rights or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (ii) treating any such warrants or rights or any such other Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such warrants or rights or other Convertible Securities; whereupon a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. 4.7. Other Provisions Applicable to Adjustments under this Section. The following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable and the Current Warrant Price provided for in this Section 4: (a) Computation of Consideration. To the extent that any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the consideration received by Company therefor shall be the amount of the cash received by Company therefor, or, if such Additional Shares of Common Stock or Convertible Securities are offered by Company for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible Securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting any amounts paid or receivable for accrued interest or accrued dividends and any compensation, discounts or expenses paid or incurred by Company for and in the 14 18 underwriting of, or otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be the fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of Company. In case any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase such Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of Company, of such portion of the assets and business of the nonsurviving corporation as such Board in good faith shall determine to be attributable to such Additional Shares of Common Stock, Convertible Securities, warrants or other rights, as the case may be. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by Company for issuing such warrants or other rights plus the additional consideration payable to Company upon exercise of such warrants or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any Additional Shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends upon any class of stock other than Common Stock, Company shall be deemed to have received for such Additional Shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (b) When Adjustments to Be Made. The adjustments required by this Section 4 shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of Common Stock, as provided for in Section 4.1) up to, but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than 1% of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 4 and not previously made, would result in a minimum adjustment of at least 1% or in any event, on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (c) Fractional Interests. In computing adjustments under this Section 4, fractional interests in Common Stock shall be taken into account to the nearest 1/10th of a share. 15 19 (d) When Adjustment Not Required. If Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then thereafter no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (e) Escrow of Warrant Stock. If Holder exercises this Warrant after any property becomes distributable pursuant to this Section 4 by reason of the taking of any record of the holders of Common Stock but prior to the occurrence of the event for which such record is taken, any Additional Shares of Common Stock issuable upon exercise of this Warrant shall be held in escrow, upon payment of the Current Warrant Price, for Holder by Company to be issued to Holder upon and to the extent that the event actually takes place. Notwithstanding any other provision to the contrary herein, if the event for which such record was taken fails to occur or is rescinded, then such escrowed shares shall be cancelled by Company. (f) Challenge to Good Faith Determination. Whenever the Board of Directors of Company shall be required to make a determination in good faith of the fair value of any item under this Section 4, such determination may be challenged in good faith by the Majority Holders, and any dispute shall be resolved by an investment banking firm of recognized national standing selected by Company and acceptable to the Majority Holders. 4.8. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, any cash, shares of stock or other securities or property of any nature whatsoever including warrants or other subscription or purchase rights or any shares of common stock of the successor or acquiring corporation (collectively, "Other Property"), are to be received by or distributed to the holders of Common Stock of Company, then each Holder shall have the right thereafter to receive, upon exercise of such Warrant, the number of shares of common stock of the successor or acquiring corporation or of Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined by resolution of the 16 20 Board of Directors of Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 4. For purposes of this Section 4.8, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 4.8 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 4.9. Other Action Affecting Common Stock. In case at any time or from time to time Company shall take any action in respect of its Common Stock, other than any action described in this Section 4, then, unless such action will not have a materially adverse effect upon the rights of the Holders, the number of shares of Common Stock or other stock for which this Warrant is exercisable and/or the purchase price thereof shall be adjusted in such manner as may be equitable in the circumstances. 4.10. Certain Limitations. Notwithstanding anything herein to the contrary, Company agrees not to enter into any transaction which, by reason of any adjustment hereunder, would cause the Current Warrant Price to be less than the par value per share of Common Stock. 5. NOTICES TO WARRANT HOLDERS 5.1. Notice of Adjustments. Whenever the number of shares of Common Stock for which this Warrant is exercisable, or whenever the price at which a share of such Common Stock may be purchased upon exercise of the Warrants, shall be adjusted pursuant to Section 4, Company shall forthwith prepare a certificate to be executed by the chief financial officer of Company setting forth, in reasonable detail, the event requiring the adjustment and the method by which such adjustment was calculated (including a description of the basis on which the Board of Directors of Company determined the fair value of any evidences of indebtedness, shares of stock, other securities or property or warrants or other subscription or purchase rights referred to in Section 4.2 or 4.7(a)), specifying the number of shares of Common Stock for which this Warrant is exercisable and (if such adjustment was made pursuant to Section 4.8 or 4.9) describing the number and kind of any other shares of stock or Other Property for which this Warrant is exercisable, and any change in the purchase price or prices thereof, after giving effect to such adjustment or change. Company shall promptly cause a signed copy of such certificate to be delivered to each Holder in accordance with Section 15.2. Company shall keep at its office or agency designated pursuant to Section 12 copies of all such certificates and cause the same to be available for inspection at said office during normal business hours by any Holder or any prospective purchaser of a Warrant designated by a Holder thereof. 17 21 5.2. Notice of Corporate Action. If at any time (a) Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of Company, any reclassification or recapitalization of the capital stock of Company or any consolidation or merger of Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of Company to, another corporation, or (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of Company; then, in any one or more of such cases, Company shall give to Holder (i) at least 30 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 30 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of Company and delivered in accordance with Section 15.2. 6. NO IMPAIRMENT Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be 18 22 necessary or appropriate in order that Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant, and (c) use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable Company to perform its obligations under this Warrant. 7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY From and after the Closing Date, Company shall at all times reserve and keep available for issuance upon the exercise of Warrants such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of all outstanding Warrants. Company represents and warrants that, as of the Closing Date, the Company has 17,459,689 shares of Common Stock issued and outstanding and 100,000,000 shares of Common Stock authorized and available for issuance. Before taking any action which would cause an adjustment reducing the Current Warrant Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of the Warrants, Company shall take any corporate action which may be necessary in order that Company may validly and legally issue fully paid and non-assessable shares of such Common Stock at such adjusted Current Warrant Price. Before taking any action which would result in an adjustment in the number of shares of Common Stock for which this Warrant is exercisable or in the Current Warrant Price, Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. If any shares of Common Stock required to be reserved for issuance upon exercise of Warrants require registration or qualification with any governmental authority or other governmental approval or filing under any federal or state law (otherwise than as provided in Section 9) before such shares may be so issued, Company will in good faith and as expeditiously as possible and at its expense endeavor to cause such shares to be duly registered. 8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS In the case of all dividends or other distributions by Company to the holders of its Common Stock with respect to which any provision of Section 4 refers to the taking of a record of such holders, Company will in each such case take such a record and will take such record as of the close of business on a Business Day. Company will not at any time, except upon dissolution, liquidation or winding up of Company, close its stock transfer books or Warrant transfer books so as to result in preventing or delaying the exercise or transfer of any Warrant. 19 23 9. RESTRICTIONS ON TRANSFERABILITY The Warrants and the Warrant Stock may be transferred, hypothecated or assigned, as collateral or otherwise, upon satisfaction of the conditions specified in this Section 9, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Warrant or any Warrant Stock. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. 9.1. Restrictive Legend. (a) Except as otherwise provided in this Section 9, each certificate for Warrant Stock initially issued upon the exercise of this Warrant, and each certificate for Warrant Stock issued to any subsequent transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and are subject to the conditions specified in a certain Warrant dated April 24, 2000, originally issued by ARV Assisted Living, Inc. No transfer of the shares represented by this certificate shall be valid or effective until such conditions have been fulfilled. A copy of the form of said Warrant is on file with the Secretary of ARV Assisted Living, Inc. The holder of this certificate, by acceptance of this certificate, agrees to be bound by the provisions of such Warrant." (a) Except as otherwise provided in this Section 9, each Warrant shall be stamped or otherwise imprinted with a legend in substantially the following form: "This Warrant and the securities represented hereby have not been registered under the Securities Act of 1933, as amended, and may not be transferred in violation of such Act, the rules and regulations thereunder or the provisions of this Warrant." 9.2. Notice of Proposed Transfers; Requests for Registration. Prior to or promptly following any Transfer of any Warrants or any shares of Restricted Common Stock, the holder of such Warrants or Restricted Common Stock shall give written notice (a "Transfer Notice") to Company of such Transfer. Each certificate, if any, evidencing such shares of Restricted Common Stock issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(a), and each Warrant issued upon such Transfer shall bear the restrictive legend set forth in Section 9.1(b), unless in the opinion of counsel to such holder which is reasonably acceptable to Company such legend is not required in order to ensure compliance with the Securities Act. The holders of Warrants and Warrant Stock shall have the right to request registration of such Warrant Stock pursuant to Sections 9.3 and 9.4. 20 24 9.3. Required Registration. After receipt of a written notice from one or more holders of Warrants and/or Warrant Stock requesting that Company effect the registration under the Securities Act of either (i) 350,000 or more shares of Warrant Stock or (ii) Warrant Stock with an anticipated aggregate offering price of at least $1,000,000 and specifying the intended method or methods of disposition thereof, Company shall promptly notify all holders of Warrants and Warrant Stock in writing of the receipt of such request. Thereupon, each such holder, in lieu of exercising its rights under Section 9.4, may elect (by written notice sent to Company within ten Business Days from the date of such holder's receipt of the aforementioned Company's notice) to have its shares of Warrant Stock included in such registration thereof pursuant to this Section 9.3. Thereupon, Company shall then, as expeditiously as is possible, use its best efforts to effect the registration under the Securities Act of all shares of Warrant Stock which Company has been so requested to register by such holders for sale, all to the extent required to permit the disposition (in accordance with the intended method or methods thereof, as aforesaid) of the Warrant Stock so registered; provided, however, that Company shall not be required to effect more than one registration of any Warrant Stock pursuant to this Section 9.3 in any 12-month period. 9.4. Incidental Registration. If Company at any time proposes to file on its behalf and/or on behalf of any of its security holders (the "demanding security holders") a Registration Statement under the Securities Act on any form (other than a Registration Statement on Form S-4 or S-8 or any successor form for securities to be offered in a transaction of the type referred to in Rule 145 under the Securities Act or to employees of Company pursuant to any employee benefit plan, respectively) for the general registration of securities to be sold for cash with respect to its Common Stock or any other class of equity security (as defined in Section 3(a)(11) of the Exchange Act) of Company, it will give written notice to all holders of Warrants or Warrant Stock at least 60 days before the initial filing with the Commission of such Registration Statement, which notice shall set forth the intended method of disposition of the securities proposed to be registered by Company. The notice shall offer to include in such filing the aggregate number of shares of Warrant Stock, and the number of shares of Common Stock for which this Warrant is exercisable, as such holders may request. Each holder of any such Warrants or any such Warrant Stock desiring to have Warrant Stock registered under this Section 9.4 shall advise Company in writing within 30 days after the date of receipt of such offer from Company, setting forth the amount of such Warrant Stock for which registration is requested. Company shall thereupon include in such filing the number of shares of Warrant Stock for which registration is so requested, subject to the next sentence, and shall use its best efforts to effect registration under the Securities Act of such shares. If the managing underwriter of a proposed public offering shall advise Company in writing that, in its opinion, the distribution of the Warrant Stock requested to be included in the registration concurrently with the securities being registered by Company or such demanding security holder would materially and adversely affect the distribution of such securities by Company or such demanding security holder, then all selling security holders (other than any demanding security holder who initially requested such registration) shall reduce the amount of securities each intended to distribute through such offering on a pro rata basis. 21 25 Except as otherwise provided in Section 9.6, all expenses of such registration shall be borne by Company. 9.5. Registration Procedures. If Company is required by the provisions of this Section 9 to use its best efforts to effect the registration of any of its securities under the Securities Act, Company will, as expeditiously as possible: (a) prepare and file with the Commission a Registration Statement with respect to such securities and use its best efforts to cause such Registration Statement to become and remain effective for a period of time required for the disposition of such securities by the holders thereof; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all securities covered by such Registration Statement until the earlier of such time as all of such securities have been disposed of in a public offering; (c) furnish to such selling security holders such number of copies of a summary prospectus or other prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents, as such selling security holders may reasonably request; (d) notify such selling security holders at any time when a summary prospectus or other prospectus including a preliminary prospectus, is required to be delivered under the Securities Act, of the happening of any event as a result of which such prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of such selling security holders, Company shall prepare a supplement or amendment to such prospectus so that, such prospectus shall not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (e) use its best efforts to register or qualify the securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions within the United States and Puerto Rico as each holder of such securities shall request (provided, however, that Company shall not be obligated to qualify as a foreign corporation to do business under the laws of any jurisdiction in which it is not then qualified or to file any general consent to service or process), and do such other reasonable acts and things as may be required of it to enable such holder to consummate the disposition in such jurisdiction of the securities covered by such Registration Statement; (f) furnish, at the request of any holder requesting registration of Warrant Stock pursuant to Section 9.3, on the date that such shares of Warrant Stock are delivered to the underwriters for sale pursuant to such registration or, if such Warrant Stock is not 22 26 being sold through underwriters, on the date that the Registration Statement with respect to such shares of Warrant Stock becomes effective, (1) an opinion, dated such date, of the independent counsel representing Company for the purposes of such registration, addressed to the underwriters, if any, and if such Warrant Stock is not being sold through underwriters, then to the holders making such request, in customary form and covering matters of the type customarily covered in such legal opinions; and (2) a comfort letter dated such date, from the independent certified public accountants of Company, addressed to the underwriters, if any, and if such Warrant Stock is not being sold through underwriters, then to the holder making such request and, if such accountants refuse to deliver such letter to such holder, then to Company in a customary form and covering matters of the type customarily covered by such comfort letters as the underwriters or such holders shall reasonably request. Such opinion of counsel shall additionally cover such other legal matters with respect to the registration in respect of which such opinion is being given as such holders holding a majority of the Warrant Stock being so registered may reasonably request. Such letter from the independent certified public accountants shall additionally cover such other financial matters (including information as to the period ending not more than five Business Days prior to the date of such letter) with respect to the registration in respect of which such letter is being given as the holders holding a majority of the Warrant Stock being so registered may reasonably request; (g) enter into customary agreements (including an underwriting agreement in customary form) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such securities; and (h) make available for inspection by such selling security holders, any underwriter participating in any disposition pursuant to such Registration Statement and any attorney, accountant or other agent retained by any such selling security holder or underwriter, all financial and other records, pertinent corporate documents and properties of Company, and cause Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such Selling Security holder, underwriter, attorney, accountant or agent in connection with such Registration Statement; (i) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, but not later than 18 months after the effective date of the Registration Statement, an earnings statement covering the period of at least 12 months beginning with the first full month after the effective date of such Registration Statement, which earnings statements shall satisfy the provisions of Section 11(a) of the Securities Act. It shall be a condition precedent to the obligation of Company to take any action pursuant to this Section 9 in respect of the securities which are to be registered at the request of any holder of Warrants or Warrant Stock that such holder shall furnish to Company such information regarding the securities held by such holder and the intended 23 27 method of disposition thereof as Company shall reasonably request and as shall be required in connection with the action taken by Company. 9.6. Expenses. All expenses incurred in complying with Section 9, including, without limitation, all registration and filing fees (including all expenses incident to filing with the NASD), printing expenses, fees and disbursements of counsel for Company, the reasonable fees and expenses of one counsel for the selling security holders (selected by those holding a majority of the shares being registered), expenses of any special audits incident to or required by any such registration and expenses of complying with the securities or blue sky laws of any jurisdictions pursuant to Section 9.5(d), shall be paid by Company, except that Company shall not be liable for any fees, discounts or commissions to any underwriter or any fees or disbursements of counsel for any underwriter in respect of the securities sold by such holder of Warrant Stock. 9.7. Indemnification and Contribution. (a) In the event of any registration of any of the Warrant Stock under the Securities Act pursuant to this Section 9, Company shall indemnify and hold harmless the holder of such Warrant Stock, such holder's directors and officers, and each other Person (including each underwriter) who participated in the offering of such Warrant Stock and each other Person, if any, who controls such holder or such participating Person within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such holder or any such director or officer or participating Person or controlling Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any alleged untrue statement of any material fact contained, on the effective date thereof, in any Registration Statement under which such securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or (ii) any alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse such holder or such director, officer or participating Person or controlling Person for any legal or any other expenses reasonably incurred by such holder or such director, officer or participating Person or controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any alleged untrue statement or alleged omission made in such Registration Statement, preliminary prospectus, prospectus or amendment or supplement in reliance upon and in conformity with written information furnished to Company by such holder specifically for use therein or (in the case of any registration pursuant to Section 9.3) so furnished for such purposes by any underwriter. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or such director, officer or participating Person or controlling Person, and shall survive the transfer of such securities by such holder. (b) Each holder of any Warrant Stock, by acceptance thereof, agrees to indemnify and hold harmless Company, its directors and officers and each other Person, if any, who controls Company within the meaning of the Securities Act against any 24 28 losses, claims, damages or liabilities, joint or several, to which Company or any such director or officer or any such Person may become subject under the Securities Act or any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon information in writing provided to Company by such holder of such Warrant Stock specifically for use in the following documents and contained, on the effective date thereof, in any Registration Statement under which securities were registered under the Securities Act at the request of such holder, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, but in no event, in an amount exceeding the net proceeds received by such holder in the offering. (c) If the indemnification provided for in this Section 9 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The liability of any holder of Warrant Stock hereunder shall not exceed the net proceeds received by it in the offering. 9.8. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9.7(c) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 9.9. Termination of Restrictions. Notwithstanding the foregoing provisions of Section 9, the restrictions imposed by this Section upon the transferability of the Warrants, the Warrant Stock and the Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) and the legend requirements of Section 9.1 shall terminate as to any particular Warrant or share of Warrant Stock or Restricted Common Stock (or Common Stock issuable upon the exercise of the Warrants) (i) when and so long as such security shall have been effectively registered under the Securities Act and disposed of pursuant thereto, (ii) when such security is disposed of pursuant to 25 29 Rule 144 under the Securities Act, or (iii) when Company shall have received an opinion of counsel reasonably satisfactory to it that such shares may be transferred without registration thereof under the Securities Act. Whenever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the holder thereof shall be entitled to receive from Company, at Company's expense, a new certificate representing such Common Stock not bearing the restrictive legend set forth in Section 9.1(a). 9.10. Listing on Securities Exchange. So long as any shares of Common Stock are listed on any securities exchanges, Company shall increase the number of shares listed on such securities exchanges to cover all shares of Common Stock issued or, to the extent permissible under the applicable securities exchange rules, issuable upon the exercise of this Warrant. 9.11. Certain Limitations on Registration Rights. Notwithstanding the other provisions of Section 9, Company shall not be obligated to register the Warrant Stock of any holder if, in the written opinion of counsel to Company reasonably satisfactory to the holder and its counsel (or, if the holder has engaged an investment banking firm, to such investment banking firm and its counsel), the sale or other disposition of such holder's Warrant Stock, in the manner proposed by such holder (or by such investment banking firm), may be effected without registering such Warrant Stock under the Securities Act. 9.12. Selection of Managing Underwriters. The managing underwriter or underwriters for any offering of Warrant Stock to be registered pursuant to Section 9.3 shall be selected by the holders of a majority of the shares being so registered (other than any shares being registered pursuant to Section 9.4) and shall be reasonably acceptable to Company. 10. SUPPLYING INFORMATION Company shall cooperate with each Holder of a Warrant and each holder of Restricted Common Stock in supplying such information as may be reasonably necessary for such holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Warrant or Restricted Common Stock. 11. LOSS OR MUTILATION Upon receipt by Company from any Holder of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and indemnity reasonably satisfactory to it (it being understood that the written agreement of such Holder shall be sufficient indemnity), and in case of mutilation upon surrender and cancellation hereof, Company will execute and deliver in lieu hereof a new Warrant of like tenor to such Holder; provided, in the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to Company for cancellation. 26 30 12. OFFICE OF COMPANY As long as any of the Warrants remain outstanding, Company shall maintain an office or agency (which may be the principal executive offices of Company) where the Warrants may be presented for exercise, registration of transfer, division or combination as provided in this Warrant. 13. FILINGS Company will file on or before the required date all regular or periodic reports (pursuant to the Exchange Act) with the Commission and will deliver to Holder promptly upon their becoming available one copy of each report, notice or proxy statement sent by Company to its stockholders generally, and of each regular or periodic report (pursuant to the Exchange Act) and any Registration Statement, prospectus or written communication (other than transmittal letters) (pursuant to the Securities Act), filed by Company with (i) the Commission or (ii) any securities exchange on which shares of Common Stock are listed. 14. LIMITATION OF LIABILITY No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of such Holder for the purchase price of any Common Stock or as a stockholder of Company, whether such liability is asserted by Company or by creditors of Company. 15. MISCELLANEOUS 15.1. Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of a party hereto shall operate as a waiver of such right or otherwise prejudice that party's rights, powers or remedies. If a party hereto fails to make, when due, any payments provided for hereunder, or fails to comply with any other provision of this Warrant, that party shall pay to the other party such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by such other party in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. 15.2. Notice Generally. Any notice, demand, request, consent, approval, declaration, delivery or other communication hereunder to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if in writing and either delivered in person with receipt acknowledged or sent by registered or certified mail, return receipt requested, postage prepaid, or by telecopy and confirmed by telecopy answerback, addressed as follows: (a) If to any Holder or holder of Warrant Stock, at its last known address appearing on the books of Company maintained for such purpose. 27 31 (b) If to Company at ARV Assisted Living, Inc. 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 Attention: President Telecopy Number: (714) 708-3537 With a copy to: O'Melveny & Myers LLP 610 Newport Center Drive, 17th Floor Newport Beach, CA 92660 Attention Gary J. Singer, Esq. Telecopy Number: (949) 823-6994 or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration, delivery or other communication hereunder shall be deemed to have been duly given or served on the date on which personally delivered, with receipt acknowledged, telecopied and confirmed by telecopy answerback, or three (3) Business Days after the same shall have been deposited in the United States mail. Failure or delay in delivering copies of any notice, demand, request, approval, declaration, delivery or other communication to the person designated above to receive a copy shall in no way adversely affect the effectiveness of such notice, demand, request, approval, declaration, delivery or other communication. 15.3. No Stockholder Rights. Prior to the effective exercise of this Warrant in accordance with the provisions hereof, Holder shall not be entitled to any rights of a stockholder with respect to any shares of Warrant Stock, including (without limitation) the right to vote such shares or to receive dividends or other distributions thereon. 15.4. Indemnification. Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of the issuance of this Warrant to Holder (but not relating to or arising out of any exercise of any Warrant); provided, however, that Company will not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys' fees, expenses or disbursements (i) arise solely out of Holder's violation of any state or federal securities laws, (ii) arise out of any matter for which Company has expressly retained the right to pursue such matter against the Holder pursuant to Section 5.01(c) of the Settlement Agreement or (iii) are found in a final non-appealable judgment by a court to have resulted from Holder's gross negligence, bad faith or willful misconduct in its capacity as a stockholder or warrantholder of Company. 28 32 15.5. Remedies. Each party hereto, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under Section 9 of this Warrant. Each party agrees that monetary damages would not be adequate compensation for any loss incurred by the other party by reason of a breach by it of the provisions of Section 9 of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 15.6. Successors and Assigns. Subject to the provisions of Sections 3.1 and 9, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of Company and the successors and assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and, with respect to Section 9 hereof, holders of Warrant Stock, and shall be enforceable by any such Holder or holder of Warrant Stock. 15.7. Amendment. This Warrant and all other Warrants may be modified or amended or the provisions hereof waived with the written consent of Company and the Majority Holders, provided that no such Warrant may be modified or amended to reduce the number of shares of Common Stock for which such Warrant is exercisable or to increase the price at which such shares may be purchased upon exercise of such Warrant (before giving effect to any adjustment as provided therein) without the prior written consent of the Holder thereof. 15.8. Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant. 15.9. Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 15.10. Governing Law. This Warrant shall be governed by the laws of the State of New York, without regard to the provisions thereof relating to conflict of laws. 29 33 IN WITNESS WHEREOF, Company has caused this Warrant to be duly executed and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. Dated: April 24, 2000 ARV Assisted Living, Inc. By: /s/ Abdo Khoury ----------------------------------- Name: Abdo Khoury Title: Senior Vice President and Secretary Attest: By: /s/ Bernard Wheeler-Medley ------------------------------ Name: Bernard Wheeler-Medley Title: Assistant Secretary 30 34 EXHIBIT A SUBSCRIPTION FORM [To be executed only upon exercise of Warrant] The undersigned registered owner of this Warrant irrevocably exercises this Warrant for the purchase of ______ Shares of Common Stock of ARV Assisted Living, Inc. and herewith makes payment therefor, all at the price and on the terms and conditions specified in this Warrant and requests that certificates for the shares of Common Stock hereby purchased (and any securities or other property issuable upon such exercise) be issued in the name of and delivered to _____________ whose address is _________________ and, if such shares of Common Stock shall not include all of the shares of Common Stock issuable as provided in this Warrant, that a new Warrant of like tenor and date for the balance of the shares of Common Stock issuable hereunder be delivered to the undersigned. ------------------------------- (Name of Registered Owner) ------------------------------- (Signature of Registered Owner) ------------------------------- (Street Address) ------------------------------- (City) (State) (Zip Code) NOTICE: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. 35 EXHIBIT B ASSIGNMENT FORM FOR VALUE RECEIVED the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under this Warrant, with respect to the number of shares of Common Stock set forth below: Name and Address of Assignee No. of Shares of Common Stock and does hereby irrevocably constitute and appoint __________________________ attorney-in-fact to register such transfer on the books of ARV Assisted Living, Inc. maintained for the purpose, with full power of substitution in the premises. Dated:__________________ Print Name: -------------------------- Signature: -------------------------- Witness: ----------------------------- NOTICE: The signature on this subscription must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-27 7 ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 14,392 0 0 0 0 24,659 110,934 9,700 171,271 56,216 54,767 0 0 145,512 (89,139) 171,271 0 34,385 0 34,824 (1,544) 0 1,668 (2,137) 17 (2,154) 0 15,546 0 13,392 .77 .77
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