SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1996 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 0-27108
REGENT ASSISTED LIVING, INC.
(Name of small business issuer in its charter)
Oregon 93-1171049
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
121 SW Morrison Street
Suite 1000
Portland, Oregon 97204
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (503) 227-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. _____
State issuer's revenues for its most recent fiscal year: $13,260,249
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 19, 1997: $6,954,625
State the number of shares of Common Stock outstanding at March 19, 1997:
4,633,000
Documents Incorporated by Reference
-----------------------------------
Part of Form 10-KSB into
Document which incorporated
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Proxy Statement for 1997 Annual Part III
Meeting of Shareholders
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
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Item of Form 10-KSB Page
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PART I
Item 1 - Description of Business 1
Item 2 - Description of Property 12
Item 3 - Legal Proceedings 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 4(a) - Executive Officers of the Registrant 15
PART II
Item 5 - Market for Common Stock
and Related Stockholder Matters 17
Item 6 - Management's Discussion and Analysis
or Plan of Operation 18
Item 7 - Financial Statements 26
Item 8 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
PART III
Item 9 - Directors, Executive Officers and Control Persons;
Compliance with Section 16(a) of the Exchange Act 26
Item 10 - Executive Compensation 27
Item 11 - Security Ownership of Certain Beneficial
Owners and Management 27
Item 12 - Certain Relationships and Related Transactions 27
Item 13 - Exhibits and Reports on Form 8-K 27
SIGNATURES 31
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PART I
Item 1. Description of Business
Overview and Background
The Company is an owner, operator, and developer of private-pay assisted
living communities. Assisted living is part of a spectrum of long-term care
services that provide a combination of housing, personal services, and health
care designed to respond to elderly individuals who require assistance with
activities of daily living in a manner that promotes maximum independence. The
Company's founder, Walter C. Bowen, helped pioneer the development of assisted
living communities in the late 1980s, and the Company's management collectively
has more than 40 years of experience in the acquisition, development, and
management of assisted living communities.
The Company believes it is a significant operator of stand-alone assisted
living communities in the western United States. In 1996 the Company owned or
leased and operated 458 beds in three assisted living communities and managed a
fourth community with 112 beds.
The Company believes that high-quality assisted living services can be
more efficiently and profitably provided in its prototypical communities than in
existing facilities that could be converted to use as an assisted living
community. Thus, in 1996 the Company embarked upon an aggressive expansion
program of acquiring sites in select markets in the western United States and
beginning the development and construction of new communities. As of March 26,
1997, the Company had eleven new communities under construction which, when
completed, will increase the number of beds owned or leased and operated by the
Company to approximately 1,850. Additionally, the Company has entered into an
agreement to manage one additional 70-bed community and has entered into an
agreement pursuant to which the Company has the right to purchase a 48-bed
community.
Assisted Living
The assisted living industry has evolved over the past 10 to 15 years in
response to pressure from the public to contain spiraling medical and other
health care related costs, and the choice assisted living provides to allow
senior citizens to age in place in a residential environment. Assisted living
offers a combination of housing and personalized health and support services for
senior citizens who cannot live completely independently but who do not require
the 24-hour medical care provided by a skilled nursing facility, which skilled
care typically also costs much more than that provided at an assisted living
community. In addition to housing and meals, the services commonly provided in a
congregate care facility, assisted living communities provide a range of
personal care and support services designed to meet the individual needs of
residents, including instrumental activities of daily living ("IADLs") such as
laundry and transportation services. Generally, assisted living residents
require higher levels of care than residents in
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congregate care but lower levels of care than patients in skilled nursing
facilities. For instance, assisted living residents often require assistance
with activities of daily living ("ADLs") such as bathing, dressing, incontinence
care, and taking medications but generally are not bed-ridden and can often
provide various degrees of self-care. Assisted living seeks to encourage
residents to live as independently as possible, emphasizing quality care while
treating residents with dignity and respect.
Business Strategy
The principal elements of the Company's business strategy are described
below.
Personalized Quality Care. The Company's primary focus is on providing
high quality personalized care for each resident. The Company seeks to provide a
wide range of high-quality services and care tailored to the needs of its
residents in an attractive, home-like environment. The Company has established
quality assurance programs to insure that high-quality services are being
provided to every resident in its communities. These programs include periodic
surveys of the residents and staff and the formation at each community of a
resident council, consisting of residents and their families, to assist in
evaluating the services provided to residents. The Company provides a toll-free
number that families of residents can use to make recommendations or register
complaints and frequently includes comment cards with resident billings. The
Company also attempts to achieve high-quality care through the establishment of
operational standards and performance goals. These standards and goals apply to
each of the Company's communities and relate to such matters as health services,
food service, housekeeping, maintenance, and administration.
Special Needs. A significant component of the Company's business is
providing services and activities required by residents afflicted with
Alzheimer's disease and other age-related dementias. Each of the Company's
larger assisted living communities is expected to have a special "Kingswood"
unit located in a separate wing or area of the community that will have its own
dining facilities, resident lounge areas, and specially-trained staff. The
physical separation of the special needs unit from the rest of the community
enables special needs residents to receive the unique care they require with a
minimum of disruption to other residents. The Company is also developing a
stand-alone special needs assisted living community it calls "Regent Court" that
is designed to serve solely residents with special needs.
Multiple Levels of Care. By providing graduated levels of care to
residents based on individual need, the Company permits its residents to "age in
place" and retains residents who might otherwise move to other facilities, which
assists the Company in maintaining its occupancy levels at its larger
communities. The Company believes that this high level of personalized quality
care also creates satisfied residents who, along with their families, are key
sources of referrals for the Company.
High Quality and Private Payor Focus. The Company seeks private pay
residents to the greatest extent possible. Approximately 95.3 percent of the
Company's units were occupied by
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private pay residents during 1996. The Company believes that caring for private
pay residents is more profitable because the Company is able to charge market
rates for its extensive, high-quality services without regard to
government-imposed cost containment pressures. The Company had revenue per
occupied unit in 1996 of $34,416. According to data compiled for the American
Seniors Housing Association, the Company's revenue per occupied unit exceeded
150 percent of the median revenue per occupied unit of $21,565 for the U.S.
assisted living industry for that year. The Company will continue to focus its
development efforts primarily in larger, more affluent communities with median
incomes sufficient to support the Company's full service approach to assisted
living.
Professional Management. The Company has developed and uses quality
assurance programs and operating standards to maintain quality and control
costs. This approach is coupled with a decentralized management structure under
which local managers and care coordinators responsively address residents'
individual needs. The relatively larger size of the Company's communities also
permits the Company to recruit and retain more highly-paid, experienced managers
and professional staff.
Education and Training. The Company believes that education, training, and
development enhance the effectiveness of its employees which in turn generates
enhanced employee and resident satisfaction and decreases employee and resident
turnover. Managers, on-site marketing directors, and other administrative
personnel receive periodic training both at the community and at the Company's
corporate office. The Company, through ongoing in-service training, maintains a
highly trained staff that is responsive to the changing needs of the Company's
resident.
Marketing. The Company's marketing strategy focuses on enhancing the
reputation of the Company's communities and creating awareness of the Company
and its services among potential referral sources. The Company also markets its
services through doctors and other professionals by direct mail and other
methods. The Company's experience is that satisfied residents, resident
families, and professional health care providers are the most important sources
of referrals for the Company. In addition, the Company emphasizes community
outreach through such programs as adult day care and respite care. These
programs permit individuals to use the Company's services on a temporary basis,
which provides the Company with an additional source of revenue and increases
awareness of the Company's communities among potential full-time residents.
Rapid Growth and Development. The Company intends to increase the number
of communities it operates primarily through the development of new communities
based upon the Company's two prototypes. See "Principal Product Lines." The
Company may undertake acquisitions if it locates suitable properties, however
the Company believes that because there are few acceptable stand-alone assisted
living communities such acquisitions will be limited. Nonetheless, the Company
may pursue opportunistic acquisitions of congregate care or other facilities
that are suitable for conversion to its operating model. The Company may also in
the future acquire or enter businesses ancillary to the operation of assisted
living communities, such as a retail pharmacy or rehabilitation therapy
business.
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Principal Services
Services provided to residents of the Company's communities are designed
to respond to their individual needs; promote independence, dignity and choice;
and improve their quality of life. Services are available 24 hours a day to meet
both anticipated and unanticipated needs. General services in the Company's
communities include the provision of three meals per day, laundry, housekeeping,
transportation, activities, and medication maintenance. Available support
services include personal care and routine nursing care, social and recreational
services, transportation, and other special services needed by the resident.
Personal care includes services such as bathing, dressing and grooming, as well
as assistance with personal hygiene, ambulation, and eating. Other services
include assistance with banking, grocery shopping, and pet care.
Each of the Company's communities offers residents services on a packaged
basis. These packages of services are based on three progressively more
comprehensive levels of care and two additional levels of care for special needs
residents. This approach permits the Company to charge residents for graduated
levels of care. Each level of care is priced to reflect all services provided at
that level. In addition, this approach simplifies the billing process, which
permits residents to plan their personal budgets with confidence. As the
required level of care increases, the Company's revenues per resident also
increase.
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The following table summarizes the services associated with each level of
care provided by the Company:
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Graduated Levels of Care
Assisted Living
Level One o Minimal assistance with ADLs and IADLs
o Services include
- Meals
- Housekeeping and laundry
- Personal care
- Scheduled transportation
Level Two o All Level One services plus moderate assistance with
ADLs and IADLs
- Direct hands-on assistance as needed for
- Medical treatments (e.g., injections)
- Dressing
- Other daily activities
Level Three o All Level Two services plus routine hands-on assistance
with ADLs and IADLs
o Personal care services include
- Incontinence care
- Bathing and dressing
- Mobility and/or ambulation assistance
o Close supervision as required for residents with special
behavioral conditions
Special Needs (Alzheimer's Disease and Age-Related Dementias)
Level One o Required assisted living services
o Direct hands-on assistance, behavioral intervention and
redirection as needed
Level Two o All Special Needs Level One services, plus routine
hands-on assistance with ADLs and personal care, including
- Incontinence care
- Bathing and dressing
- Mobility and/or ambulation assistance
o Increased frequency of certain services and increased
supervision
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The Company estimates that, of the current residents in its communities,
39 percent require assisted living level one care, 25 percent require assisted
living level two care, 10 percent require assisted living level three care, 17
percent require special needs level one care and 9 percent require special needs
level two care. The Company charges rates ranging from $1,865 to $2,585 per
month for assisted living level one care, $2,285 to $3,005 per month for
assisted living level
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two care, $2,705 to $3,455 per month for assisted living level three care,
$2,990 to $4,195 per month for special needs level one care, and $3,265 to
$4,675 per month for special needs level two care. The Company leases units to
residents on a month-to-month basis. Residents are also required to pay the
Company a nominal, nonrefundable administrative fee prior to admission.
Principal Product Lines
The Company currently provides its services in stand-alone assisted living
communities. The existing communities offer many services and activities
designed to meet the varying needs of the residents, including the unique
services required by residents afflicted with Alzheimer's disease or other
age-related dementias ("special needs"). This community concept is generally
identified by the Company as a "Regent" community and is the genesis of the
Company's prototypical community currently under construction in eleven new
markets. The Company is also developing a new type of community, called "Regent
Court," that is a smaller facility dedicated to providing services solely to
residents with special needs.
(i) Regent
The Company's eleven "Regent" communities currently under
construction, and the primary model to be built in the future by the
Company, are based upon the Company's stand-alone assisted living
community prototype. This prototype design has been developed and refined
through the Company's experience as an operator of its existing assisted
living communities, which also contain a significant portion of the
important attributes of the Regent prototype. Use of this prototype will
allow the Company to control development costs and maintain efficiency in
development and operations.
The prototypical Regent community is a stand-alone assisted living
community containing from 90 to 135 assisted living beds, with between 10
and 20 percent of the total generally comprising the special needs unit. A
"stand-alone" assisted living community is a facility devoted entirely to
assisted living, as distinct from other facilities that may offer assisted
living units in a separate wing or floor as well as other forms of
long-term care such as congregate care or skilled nursing. The buildings
generally range in size from 60,000 to 86,000 square feet and are
generally built on parcels ranging in size from 3 to 6 acres. The
buildings are two or three stories, depending upon site restrictions, and
of wood frame construction. The exterior features are designed to be
compatible with the predominant architectural designs of the area and with
an emphasis on a residential versus institutional appearance. Individual
units range in size from 320 square feet for a studio to 450 square feet
for a one-bedroom apartment. Two-bedroom units are approximately 755
square feet in size. In some locations the Company is developing a small
number of 900 square foot two-bedroom cottages next to the community for
occupancy by a spouse of a community's resident or for those who do not
require the more intensive services offered within the community.
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The Regent's interior layout is designed to promote efficient
delivery of services and resident independence. Circulation is organized
around a core area on the ground level which contains the kitchen and
common dining area, administrative offices, a commercial laundry, a
private dining room, lounge, day room and public restrooms. Elevators are
conveniently located for easy access to all common areas and resident
units. Each Regent community is expected to contain a special needs unit
called "Kingswood" that is designed to house and address the needs of
residents afflicted with Alzheimer's disease and other age-related
dementias. The special needs units are located in a separate wing or area
of the community and have their own dining facilities, resident lounge
areas, and specially-trained staff. The physical separation of the special
needs unit from the rest of the community enables special needs residents
to receive the unique care they require with a minimum of disruption to
other residents.
(ii) Regent Court
The "Regent Court" is a specially designed facility solely for
residents afflicted with Alzheimer's disease or other age-related
dementias. The typical Regent Court resident will have cognitive
difficulties, impaired motor functions, may be wander prone, and may have
incontinence. Accordingly, as with the Kingswood special needs unit of the
Regent community, these communities will be much smaller than the Regent,
typically 24,000 to 29,000 square feet in a one-story configuration, and
typically will service up to 48 residents within its 24 units. The Regent
Court's 24 units are divided into four "neighborhoods" of equal size and
both the overall layout and that of each neighborhood are designed to
promote the efficient delivery of services. Generally, two neighborhoods
will be reserved for those residents with a high level of function and two
for those with low levels of functioning. Each such group of two
neighborhoods will share a separate dining area. The community is designed
in this manner with the primary goal of providing high-quality care to
special needs residents who require unique care while providing for
maximum efficiencies of operation. Because the residents generally are
easily agitated and confused, organizing care within separate
neighborhoods permits the Company to assign staff to a specific
neighborhood in caregiver clusters. This permits the Company to minimize
each resident's exposure to multiple persons and allows staff to more
thoroughly learn about and provide for a resident's special needs.
Each neighborhood is connected to the others and to the main
administrative area by a series of hallways, walkways, and a courtyard.
Furthermore, due to the propensity of the Regent Court's residents to
wander, exterior pathways will be secured with fences to provide maximum
independence to the residents while also insuring their safety. Some
Regent Courts will also feature covered walkways to permit residents
opportunities for exercise on inclimate days.
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Development of Additional Communities
The Company is continuing its plan of aggressive growth that it commenced
in 1996. The Company's growth will be achieved primarily through construction of
new Regent and Regent Court prototype communities in selected markets in the
western United States. The Company currently plans to complete a total of at
least 15 new Regent communities (containing an aggregate of approximately 1,880
beds) and five new Regent Court communities (containing an aggregate of
approximately 240 beds) by the end of 1998. The Company currently has eleven new
Regent communities under construction, expects at least nine of these to open in
1997, and expects to begin construction of an additional four Regent communities
and five Regent Court communities in 1997.
In addition to the land for the eleven communities under construction, as
of March 26, 1997, the Company had acquired two additional sites for the
development of one new Regent community in Kenmore, Washington and one Regent
Court community in Scottsdale, Arizona. The Regent community will be developed
and owned by a limited liability company in which the Company owns a 50 percent
interest and the Company will manage the community. In addition, as of March 26,
1997, the Company had obtained options to acquire an additional three sites for
the development of Regent communities and an additional five sites for the
development of Regent Court communities. The Company is currently conducting
preliminary development activities on the two acquired sites and on each of the
sites under option.
The Company is actively engaged in discussions regarding the acquisition
of additional sites for development of the Company's prototype communities. The
Company is targeting areas in eleven western states with favorable demographics
in which to accomplish its growth plan. The Company believes that each site
acquired or under consideration would accommodate one of the Company's prototype
assisted living communities and fit well with the Company's growth strategy.
The Company expects that the development time for a prototype community
will range from approximately six months to one year and may be longer in some
cases. The Company expects that the average construction time will be
approximately ten to twelve months for a Regent community and six to seven
months for a Regent Court community. Furthermore, the Company estimates that
each of the Company's new communities will be approximately 25 percent
pre-leased and that it will take approximately 15 months from occupancy for each
Regent community to achieve an occupancy level of 95 percent or higher, at which
point, in the Company's experience, occupancy remains relatively stable. The
Company expects that it will take approximately five to six months for a Regent
Court community to achieve an occupancy level of 93 percent or higher. The cost
to construct a Regent community varies from site to site and is expected to
range from approximately $65,000 to $81,000 per residential unit. The estimated
cost to construct a Regent Court is approximately $75,000 per bed, but this
amount will also vary from site to site.
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While the Company is currently on schedule to achieve its goal of opening
at least 15 new assisted living communities by the end of 1998, the Company's
ability to achieve its development plans will depend upon a variety of factors,
many of which are beyond the Company's control. Furthermore, there is also no
assurance that the Company will elect to acquire any of the sites it has under
option or that the Company will be able to develop successfully any of the sites
its has acquired or will in the future acquire. See "Forward Looking
Statements."
The Company's Markets. In evaluating a prospective development project,
the Company will consider primarily the size of the population, income and age
demographics, strength of the market demand, and the ability to maximize the
efficiency of its management resources in a specific market or "cluster." The
Company intends to locate its Regent communities in metropolitan areas of 50,000
or more people with a high percentage of affluent elderly persons and to select
sites so that it can strategically place multiple communities within a several
hundred mile radius, creating a cluster of communities. Smaller communities may
be selected for development of Regent Courts because a Regent Court will
typically draw residents from a much larger area than does a Regent community.
Other factors that will be considered in the site selection process include the
level of competition, the local labor market, the state and local tax structure,
and the state and local legislative and regulatory environment.
Competition
Providers of assisted living housing and services compete for residents
primarily on the basis of quality of care, price, reputation, physical
appearance of the communities, services offered, family and physician
preferences, and location. The Company's current and potential competitors
include national, regional, and local operators of long-term care residences,
rehabilitation hospitals, extended care centers and skilled nursing facilities,
assisted and independent living centers, retirement communities, home health
agencies and similar institutions. The Company believes that assisted living is
a distinct and rapidly growing segment within the long-term care industry and
that it is distinguishable from other long-term care alternatives on the basis
of price, physical appearance, and range of services offered. Moreover, the
Company believes its communities are distinguishable from assisted living
facilities that do not cater primarily to private pay residents. Therefore,
although some of the Company's competitors have significantly greater resources
than those of the Company, the Company believes that it competes favorably in
all of the markets in which it operates due to the quality of its care and
services, operating systems, community designs, and community locations in the
market.
Government Regulation
The Company's assisted living communities are subject to regulation and
licensing by local and state health and social service agencies and other
regulatory authorities. Although regulatory requirements differ from state to
state, these requirements generally address, among other things: personnel
education, training and records; staffing levels; community services, including
administration and assistance with self-administration of medication; community
design and
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specifications; resident characteristics; food and housekeeping services;
emergency evacuation plans; and resident rights and responsibilities. In order
to qualify as a state licensed facility eligible to receive Medicaid funding,
the Company's communities must comply with additional regulations in these
areas. The Company's communities are also subject to various zoning
restrictions, local building codes and other ordinances, including fire safety
codes. These requirements vary from state to state and are monitored in varying
degrees by state agencies. Licenses have been obtained for the Company's current
communities in Oregon, Washington and California, and the Company expects that
it will be able to obtain licenses in other states as required. One of the
Company's communities, Sunshine Villa, is subject to restrictions that require
the Company to make 15 percent of the units at the community available to low
income residents.
Assisted living facilities are subject to less regulation than other
licensed health care providers, but more regulation than standard congregate
care or independent living facilities. However, the Company anticipates that
additional regulations and licensing requirements will likely be imposed by
states and the federal government. Currently, certain states require licenses to
provide the assisted living services offered by the Company. Certain states also
require Certificates of Need for assisted living facilities, but this is not a
requirement in states where the Company currently conducts business. There can
be no assurance that administrative or judicial interpretation of existing laws
or regulations or enactments of new laws or regulations will not have a material
adverse effect on the Company's results of operations or financial condition.
The Company believes that its current communities are in substantial compliance
with all applicable regulatory requirements. To the Company's knowledge, no
material regulatory actions are currently pending or have been threatened with
respect to any of its current communities.
Although only a small portion of the Company's revenues are derived from
the Medicaid program, the Company is subject to Medicaid fraud and abuse laws
which prohibit any bribe, kickback, rebate or remuneration of any kind in return
for the referral of Medicaid patients, or to induce the purchasing, leasing,
ordering, or arranging of any goods or services to be paid for by Medicaid.
Violations of these laws may result in civil and criminal penalties and
exclusions from participation in the Medicaid program. The Company believes it
is in substantial compliance with all applicable Medicaid laws.
Employees
As of December 31, 1996, the Company employed approximately 304 full-time
and 103 part-time employees, and the corporate offices employed 22 individuals
full-time. None of these employees is represented by any labor union. Management
believes that its employee relations are good.
Trademarks
The Company has filed for trademark protection of its "Regent," "Regent
Court," and "Kingswood" tradenames. Approval of these marks is pending.
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Forward Looking Statements
The information set forth in this report regarding the Company's
acquisition of sites for development, the Company's development, construction
and opening of new assisted living communities, the operation and performance of
the Company's new assisted living communities, the Company's plans to develop,
construct and operate new Regent Court communities, and the ability of the
Company's newly developed communities to compete for residents constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and are subject to the safe harbor created by that section. From
time to time, information provided by the Company, or statements made by its
employees, may contain other forward-looking statements. The following important
factors, among others, could cause the Company's actual results to differ
materially from those expressed in the Company's forward-looking statements
contained in this report and presented elsewhere by management. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to release publicly the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date of
this report.
There is no assurance that the Company will be able to achieve its plan to
develop, construct, and open 15 new Regent communities and five new Regent Court
communities by the end of 1998, or that any newly opened community will be
profitable.
The Company's development, construction and opening of new assisted living
communities are subject to the risk that the Company will be unable to obtain,
or will experience delays in obtaining, necessary zoning, land use, building,
occupancy and other required governmental permits and authorizations. The
Company's opening of new assisted living communities on schedule is also subject
to the risk that the Company or its contractor will experience delays in the
construction of one or more communities.
The achievement by the Company of its planned growth is subject to a
number of financing risks. The Company expects to incur significant debt and
lease obligations in connection with financing its growth plan. The Company
currently does not have commitments for all of the financing necessary to
finance its growth plan. If the Company were unable to obtain additional
required financing, or if such financing were not available on acceptable terms,
the Company believes that its plan to open 15 new Regent communities and five
new Regent Court communities by the end of 1998 would likely be delayed or
curtailed. Furthermore, if the Company is unable to generate sufficient cash
flow from operations to satisfy required debt and lease payments, the Company
will be required to obtain additional financing to satisfy those obligations.
The Company's growth strategy is subject to the risk that lease-up and
occupancy rates at newly-developed communities may not be achieved or sustained
at expected levels. This could result at a particular community for a number of
reasons, including competition from other nearby providers of long-term senior
care, the failure of management to assess accurately the demand for long-term
care in a particular market, and the failure of the Company's prototypical
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communities to be accepted in a particular market. If expected occupancy levels
are not achieved within the expected time frame, the Company may not be able to
repay or refinance a short-term construction loan obtained to construct the
relevant community. If occupancy rates at newly-developed communities are not
achieved and sustained at expected levels, the Company will experience greater
than anticipated operating losses in connection with the opening of new
communities and the Company's need for additional financing to meet its growth
plans will increase.
The Company's growth strategy is also subject to the risk that
construction costs for new communities may exceed original estimates. The
Company's agreements with its contractors generally provide for the contractor
to construct a community on a cost-plus basis. In addition, the Company's
sale/leaseback financing arrangements with REITs generally provide for the
Company to develop and construct the new community for a fixed amount.
Accordingly, the risk of construction cost over-runs on its new communities is
generally borne by the Company. Moreover, construction cost over-runs would
increase the Company's capital requirements and compel the Company to raise
additional financing, beyond what is currently anticipated, in order to achieve
its growth plans.
The Company's planned growth will place increasing pressure on the
Company's management controls and require the Company to locate, train,
assimilate, and retain additional community managers and support staff. There is
no assurance that the Company will be able to manage this growth successfully.
The failure of the Company to manage its planned growth successfully could have
a material adverse effect on the financial performance of the Company and
increase the Company's need for additional financing.
Item 2. Description of Property
Current Communities. The table below sets forth certain information
regarding the Company's Communities.
<TABLE>
<CAPTION>
Average Occupancy Rate
Year Ended December 31
Number Date -----------------------
Community Name of Beds(1) Opened 1994 1995 1996
-------------- ---------- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Regency Park......... Portland, OR 140 1987 96.5% 98.6% 98.0%
Sterling Park........ Redmond, WA 192 1990 93.1 94.7 97.2
Sunshine Villa....... Santa Cruz, CA 126 1990 92.5 92.8 97.4
--- ---- ---- ----
Total/Average... 458 94.0% 95.4% 97.5%
(1) In 1994 and 1995 Sterling Park operated 187 beds. The percentages for
those periods are based on 187 beds while the 1996 percentages are based
on 192 beds.
</TABLE>
12
<PAGE>
Effective December 1, 1995, the Company acquired Sunshine Villa from an
unrelated party for a purchase price of approximately $7.7 million. Prior to its
acquisition, Sunshine Villa had been managed by the Company or its predecessor
since August 1993. The Company sold Sunshine Villa to a real estate investment
trust ("REIT") that specializes in health care properties effective October 24,
1996, for $8.3 million, and simultaneously entered into an agreement to lease
the community for a period of at least 15 years. The Company also financed the
development of its Boise, San Antonio, and Clovis communities with the same
REIT. The lease on each community, including Sunshine Villa, provides that it
may be extended for up to two, ten-year periods but only if each of the four
leases is also extended for an identical period.
The Company leases Regency Park (the "Regency Lease") from an Oregon
limited partnership owned by Mr. Bowen and his minor children, and leases
Sterling Park (the "Sterling Lease") from a Washington limited liability company
owned by Mr. Bowen and his minor children. The Regency Lease expires in 2005,
and has annual base rent payments of approximately $1,271,000, in addition to
percentage rent payments equal to ten percent of the Company's annual gross
revenues from Regency Park in excess of the gross revenues for that property in
calendar year 1995. The Sterling Lease expires in 2005, and has annual base rent
payments of approximately $1,486,250, in addition to percentage rent payments
equal to ten percent of the Company's annual gross revenues from Sterling Park
in excess of the gross revenues for that property in calendar year 1995. Under
the Regency Lease and the Sterling Lease (collectively, the "Leases"), the
Company is responsible for, among other costs, maintenance, property taxes,
capital expenditures and direct operating costs related to the communities. Each
Lease also contains three 10-year renewal options and a right of first refusal
if the lessor proposes to sell the property. The payment terms of the Leases
were based on the fair market values of the underlying properties, as determined
by independent appraisals. The aggregate annual base rent payments under each
Lease, when expressed as a percentage of the appraised value of that property,
reflects a lease rate of approximately 10.25 percent, which the Company believes
was typical for leases in the health care industry upon the inception of each
lease. In obtaining the consent of the Regency partnership's lender to the
Regency Lease, the Company agreed that not less than 25 percent of its
outstanding stock will be owned by Mr. Bowen and that Mr. Bowen will continue to
control the management of the Company.
The Company manages Park Place in Portland, Oregon, a 112-bed assisted
living community owned by a limited partnership in which Mr. Bowen is a general
partner and beneficially owns a 1.85 percent interest. The Company receives a
management fee equal to five percent of the gross revenues of Park Place. In
1996, the fee paid to the Company for managing Park Place was $147,843.
13
<PAGE>
Communities Under Construction. As of March 26, 1997, the following
Regent communities are under construction:
<TABLE>
<CAPTION>
Expected
Projected Quarter Leased Or
Location No. of Beds Opening Owned
-------- ----------- ------- -----
<S> <C> <C> <C>
Boise, Idaho 136 2nd-97 Leased
Folsom, California 123 3rd-97 Owned
San Antonio, Texas 133 3rd-97 Leased
Roseville, California 108 4th-97 Owned
Clovis, California 129 4th-97 Leased
Rio Rancho, New Mexico 114 4th-97 Owned*
Bakersfield, California 131 4th-97 Owned
Eugene, Oregon 125 4th-97 Owned
Vacaville, California 127 4th-97 Owned
Tucson, Arizona 136 1st-98 Owned
Henderson, Nevada 134 1st-98 Owned
* The Company's community in Rio Rancho will be owned by a limited
liability company in which the Company has a 90 percent interest. The
Company will manage the community.
</TABLE>
The Company currently plans to begin construction of at least four additional
Regent communities and five Regent Court communities in 1997.
Development Sites. The Company is actively engaged in discussions to
acquire additional sites in several western states. In considering a prospective
site for development of a Regent community, the Company generally seeks a 3 to 6
acre parcel of undeveloped land located within a metropolitan area of 50,000
persons or more. A site of 1.5 to 3 acres is generally acquired for a Regent
Court community. The Company generally also seeks relatively flat parcels of
land zoned for multi-family residences with reasonable access to utilities and
streets. In the course of its evaluation, the Company generally will conduct a
geotechnical study of a site to determine if the soils have proper compaction
for the Company's development. The Company conducts "level one" environmental
assessments of each new property prior to acquisition.
In addition to the land for eight of the communities under construction,
as of March 26, 1997, the Company had acquired two additional sites for the
development of one new Regent community in Kenmore, Washington and one Regent
Court community in Scottsdale, Arizona. The Regent community is being developed
and will be owned by a limited liability company in which the Company owns a 50
percent interest and the Company will manage the community. In addition, as of
March 26, 1997, the Company had obtained options to acquire an additional three
sites for the development of Regent communities and an additional five sites for
the development of Regent Court communities. The Company has commenced
preliminary development activities on the two recently acquired sites and on
each of the sites under option. Preliminary development
14
<PAGE>
activities include due diligence activities (including the evaluation of
environmental and geotechnical matters), the preparation of architectural and
engineering plans and the negotiation of definitive arrangements regarding the
acquisition of the site and the financing of the development.
The Company is actively engaged in discussions regarding the acquisition
of sites for additional development. The Company is targeting areas in eleven
western states with favorable demographics and regulatory structures that it
believes will allow it to enhance its growth. The Company believes that each
site acquired or under consideration would accommodate one of the Company's
prototype assisted living communities and fit well with the Company's growth
strategy. There is no assurance that the Company will elect to acquire any of
the sites it has under option or that the Company will be able to develop
successfully any of the sites its has acquired or will in the future acquire.
Office Facilities. The Company currently shares space with other companies
and entities owned or controlled by Mr. Bowen (the "Bowen Companies"), and
leases approximately 10,500 square feet of office space in one location in
Portland, Oregon. A proportionate share of the total rent is allocated to the
Bowen Companies based on the space they occupy.
Item 3. Legal Proceedings
As of March 26, 1997, there were no material pending legal actions to
which the Company is a party or to which any of its property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4(a). Executive Officers of the Registrant
As of March 26, 1997, the executive officers of the Company were as set
forth below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Walter C. Bowen 54 Chairman of the Board, Chief Executive
Officer and President
Eric W. Jacobsen 36 Chief Operating Officer
James W. Ekberg 44 Executive Vice President of Acquisitions
and Development
15
<PAGE>
Steven L. Gish 38 Chief Financial Officer, Treasurer,
Secretary and Director
David R. Gibson 35 Vice President for Corporate Affairs,
General Counsel and Assistant Secretary
</TABLE>
Walter C. Bowen. Mr. Bowen is the founder of the Company and became the
Chief Executive Officer, President and a director of the Company upon its
formation. Mr. Bowen has been involved in the development, ownership and
management of assisted living facilities since 1986, and has devoted a majority
of his time to the ownership and operation of those facilities over the past
five years. Mr. Bowen has also been the Chief Executive Officer of several
related companies, Bowen Property Management Company, Bowen Financial Services
Corp., a company formed to obtain financing for real estate development
projects, and Bowen Development Company, a real estate construction company
(collectively, the "Bowen Companies"), since their formation. Mr. Bowen attended
the University of Oregon and is a graduate of Portland State University. Mr.
Bowen serves on the Board of Directors of the Assisted Living Facilities
Association of America and on the advisory board for the National Investment
Conference for the Senior Living and Long Term Care Industries.
Eric W. Jacobsen. Mr. Jacobsen became Chief Operating Officer of the
Company in August 1995 and has served as the chief operating officer of the
assisted living business of the Bowen Companies since September 1994. Mr.
Jacobsen joined the Bowen Companies in February 1994 as Vice President of
Development and Acquisitions. In his current capacity Mr. Jacobsen oversees the
management of the Company's communities and is responsible for strategic
planning for new communities. From July 1988 to February 1994, Mr. Jacobsen
served as Director of Development and Acquisitions of Holiday Retirement Corp.,
the largest owner and operator of senior living facilities in the United States.
Mr. Jacobsen holds a degree in business administration from the University of
Oregon and is a licensed real estate broker.
James W. Ekberg. Mr. Ekberg became Executive Vice President of
Acquisitions and Development of the Company in August 1995. Mr. Ekberg joined
the Bowen Companies in 1985 as Controller and has served as Executive Vice
President since 1991, in which capacity he was responsible for the development
of numerous projects for the Bowen Real Estate Group and oversaw the operations
of Bowen Development Company. He is an active member of The Oregon Society of
Certified Public Accountants and the Multi Family Housing Council, and serves on
the Board of the Housing Development Center. Mr. Ekberg holds a bachelor's
degree in accounting from the Honors College of Michigan State University.
Steven L. Gish. Mr. Gish became Chief Financial Officer and Treasurer
of the Company in August 1995. Mr. Gish joined the Bowen Companies in 1991
as Controller. Prior to that time, Mr. Gish served as Treasurer and
Controller of McCormick and Baxter Creosoting Company, an
16
<PAGE>
industrial wood preservation company. He is an active member of The Oregon
Society of Certified Public Accountants. Mr. Gish received a Bachelor of Science
degree in accounting from the University of Oregon in 1980.
David R. Gibson. Mr. Gibson became Vice President for Corporate Affairs,
General Counsel and Assistant Secretary of the Company in March 1996. Mr.
Gibson's primary responsibility with the Company is to oversee its legal
affairs. Prior to joining the Company, Mr. Gibson practiced law for over eight
years, the last seven with the law firm of Bogle & Gates. Mr. Gibson is an
active member of the Oregon State Bar and American Bar Association. Mr. Gibson
received his law degree from Northwestern School of Law of Lewis and Clark
College in 1987 and his Bachelor of Science degree in accounting from the
University of Oregon in 1984.
PART II
Item 5. Market for Common Stock and Related Stockholder Matters
The Company's Common Stock is quoted on the Nasdaq National Market System
under the symbol "RGNT." The following table sets forth the high and low closing
sale prices as reported on the Nasdaq National Market System for the periods
indicated.
Trading Period High Low
- -------------- ------ ------
Fourth Quarter, 1995 (12-20 to 12-31) $8 $7 1/2
First Quarter, 1996 (1-1 to 3-31) 8 4 3/4
Second Quarter, 1996 (4-1 to 6-30) 8 1/4 5 3/8
Third Quarter, 1996 (7-1 to 9-30) 7 1/2 4 1/2
Fourth Quarter, 1996 (10-1 to 12-31) 6 1/2 3 1/8
As of March 19, 1997, the number of record holders of the Company's Common
Stock was 27.
Since its initial public offering in December 1995, the Company has not
paid cash dividends on its Common Stock and presently intends to continue this
policy in order to retain its earnings for the development of the Company's
business. The Company's ability to pay dividends may be limited by the terms of
future debt and equity financings and other arrangements. Furthermore, the
Company's ability to declare and pay cash dividends on its Common Stock is
restricted by the terms of its Preferred Stock.
In December 1996, the Company completed a private placement of 1,666,667
shares of its Preferred Stock to an institutional investor in reliance upon the
exemption from registration under the Securities Act of 1933, as amended,
provided for in Section 4(2) thereof. See "Management's Discussion and Analysis
or Plan of Operation -- Liquidity and Capital Resources."
17
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation.
Overview
The Company is an owner, operator and developer of private-pay assisted
living communities. Assisted living is part of a spectrum of long-term care
services that provide a combination of housing, personal services, and health
care designed to respond to elderly individuals who require assistance with
activities of daily living in a manner that promotes maximum independence. The
Company's revenues are derived primarily from resident fees for basic housing,
personalized health care services, and other support services.
This report covers the first full year of operations since the Company's
initial public offering on December 26, 1995. The Company has aggressively
pursued its growth strategy and the following significant transactions and
events have occurred since its initial public offering:
The Company completed the sale of $10 million of Preferred Stock to
Prudential Private Equity Investors III, L.P., thereby providing the
Company with the equity capital necessary to complete development of the
Company's 15 planned Regent communities.
The Company has commenced construction on eleven new Regent communities,
engaged in development activities relative to five additional Regent
communities, and engaged in preliminary development on six sites where it
intends to construct its newly designed Regent Court community.
The Company has closed four construction loans and received non-binding
letters of intent or other expressions of intent to make four additional
construction loans, all in the aggregate amount of approximately $54.6
million.
The Company has completed four transactions with a REIT pursuant to which
the Company sold its Sunshine Villa community and obtained approximately
$23.4 million of lease financing for its Boise, San Antonio, and Clovis
communities.
Development of Additional Communities
The Company's current growth plan calls for completion of a total of at
least 15 new Regent communities and five new Regent Court communities by the end
of 1998. The future success and profitability of the Company are dependent upon
the expansion of its operations. During this expansion period, the expenses
associated with development, construction, and leasing of these communities are
expected to be significant.
Newly developed Regent communities are expected to incur operating losses
during the first nine months of operations for a typical 110-unit community,
resulting primarily from additional marketing costs expected to be incurred
during the lease-up period and operating losses expected to be incurred prior to
a new Regent community achieving break-even cash flow.
18
<PAGE>
Management expects that newly developed Regent communities will achieve
break-even cash flow within eight to ten months after commencing operations, at
which time the communities are expected to have achieved approximately 65-70
percent occupancy. Stabilized occupancy of 95 percent or higher is expected by
the fifteenth month of operation. Based upon its experience operating assisted
living communities, management expects occupancies will remain fairly stable
after 95 percent occupancy is achieved.
Newly developed Regent Court communities are expected to incur operating
losses during the first four to five months of operations, resulting primarily
from additional marketing costs expected to be incurred during the lease-up
period and operating losses expected to be incurred prior to achieving
break-even cash flow. Management anticipates that newly developed Regent Court
communities will achieve break-even cash flow within five to six months after
commencing operations, at which time the communities are expected to have
achieved approximately 60-70 percent occupancy. Stabilized occupancy of 93
percent or higher is expected by the ninth month of operation. Based upon its
experience operating the Kingswood units at its existing communities, management
expects occupancies will remain fairly stable in its Regent Court communities
after 93 percent occupancy is achieved.
Although the Company expects that its income from existing communities
will continue to increase as a result of management's continuing focus on
increasing rates, maintaining occupancy and controlling expenses, the expenses
associated with new development are expected to result in operating losses in
1997, and through at least 1998. Furthermore, if the Company expands its growth
plan through the development of additional new communities or if a significant
number of newly developed communities fail to reach break-even cash flow within
the expected time period, the Company will likely continue to incur operating
losses beyond 1998.
Operations of Existing Communities
The following table sets forth, for the periods presented, the number of
communities and beds owned or leased and average occupancy percentages of the
Predecessor (as discussed below) and the Company:
1995 1996
---- ----
Pro Forma(1)
Communities owned or leased 3 3
Number of beds 453 458
Average occupancy 95.4% 97.5%
(1) 1995 figures are presented on a pro forma basis as if Sunshine Villa
had been acquired as of January 1, 1995.
19
<PAGE>
Results of Operations
The following discussion and analysis should be read in conjunction with
the Financial Statements under Item 7. The Company's revenues are derived
primarily from resident fees for basic housing, personalized health care
services, and other support services. Operating expenses are comprised generally
of resident operating expenses, which include payroll and employee benefits,
food, property taxes, utilities, insurance and other direct residence operating
expenses; general and administrative expenses consisting of corporate and
support functions such as legal, accounting, and other administrative expenses;
lease expense; and depreciation and amortization expense.
The 1995 Predecessor financial statements represent the combined
historical results of operations of the Predecessor, which consists of a
combination of the business of the Company and the two affiliated entities that
own Regency Park and Sterling Park. The discussion of the results of operations
which follows is based upon the 1995 combined results of operations of the
Predecessor and the 1996 results of operations of the Company. For the purpose
of preparing the historical financial statements of the Predecessor, expenses
have been allocated among the affiliated companies in a manner consistent with
the Administrative Services Agreement (see Note 9 to the consolidated financial
statements).
Certain pro forma data discussed below has been derived from Note 11 to
the consolidated financial statements of the Company, which presents unaudited
pro forma results of operations for the year ended December 31, 1995, as if the
acquisition of Sunshine Villa, the initial public offering, and the lease of
Regency Park and Sterling Park had occurred as of January 1, 1995.
20
<PAGE>
The following table sets forth, for the periods indicated, the percentage of
revenues represented by certain items included in the Predecessor's 1995
financial statements and in the Company's 1995 pro forma financial statements
and 1996 consolidated financial statements.
<TABLE>
<CAPTION>
Predecessor Company
----------- ---------------------
1995 1995 1996
---- ---- ----
Pro Forma
(Unaudited)
<S> <C> <C> <C>
Revenues:
Rental and service 96.9% 98.6% 98.7%
Management fee 3.1 1.4 1.3
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Residence operating expenses 57.9 61.8 61.1
General and administrative expenses 8.0 12.5 13.8
Lease expense 21.8 20.8
Depreciation and amortization 6.3 2.3 1.9
----- ----- -----
Total operating expenses 72.2 98.4 97.6
----- ----- -----
Operating income 27.8 1.6 2.4
Interest income 0.5 0.4 2.7
Interest expense (17.6) (4.2) (4.2)
Other 1.6 1.2 0.1
----- ----- -----
Income (loss) before taxes
and extraordinary loss 12.3 (1.0) 1.0
Provision for income taxes (1) (4.7) (0.4)
----- ----- -----
Income (loss) before taxes and
extraordinary loss(1) 7.6 (1.0) 0.6
Extraordinary loss (0.4)
----- ----- -----
Net income (loss) (1) 7.6% (1.0)% 0.2%
----- ----- -----
(1) Unaudited pro forma for 1995
</TABLE>
21
<PAGE>
Comparison of Years Ended December 31, 1996 (Company) and 1995 (Predecessor)
Revenues. Revenues for 1996 totaled $13,260,249 compared to $10,138,809 in
1995. During 1996, the Company operated three communities and managed a fourth
community. The Company operated two communities and managed two additional
communities through December 1, 1995, when it acquired Sunshine Villa, one of
the two properties it was managing. The increase in revenue of $3,121,440 or
30.8 percent, is due primarily to the addition of Sunshine Villa (pro forma
revenues would have been $12,648,000 for 1995 if Sunshine Villa had been
acquired as of January 1, 1995) and to management's continuing focus on more
accurately assessing resident's needs (the effect of which resulted in increased
per bed revenues). Revenue from the operation of Sunshine Villa was $2,653,340
for the eleven months ended November 30, 1995. In addition, overall occupancy at
the Company's communities increased to an average of 97.5 percent for 1996,
whereas on a pro forma basis the average occupancy for 1995 was 95.4 percent.
Residence Operating Expenses. Residence operating expenses were $8,108,045
for 1996, and $5,871,676 for 1995. The increase of $2,236,369 or 38.1 percent is
due primarily to the addition of Sunshine Villa for 1996 (pro forma residence
operating expenses would have been $7,815,000 for 1995, if Sunshine Villa had
been acquired as of January 1, 1995). Residence operating expenses totaled 61.9
percent and 59.8 percent of rental and service revenues for 1996 and 1995,
respectively, whereas on a pro forma basis for the same period in 1995 expenses
totaled 62.7 percent of revenues.
General and Administrative Expenses. General and administrative expenses
were $1,834,960 for 1996, compared to $813,139 for 1995. The increase of
$1,021,821 is due primarily to increased payroll and ancillary costs primarily
resulting from staffing increases related to the implementation of the Company's
plan for growth, and to additional costs associated with being a public company.
General and administrative expenses, on a pro forma basis, would have been
$1,578,000 for 1995. General and administrative expenses were 13.8 percent of
total revenues for 1996, whereas on a pro forma basis expenses were 12.5 percent
of revenues for 1995.
Lease Expense. Lease expense for the Company's two leased communities was
$2,757,250 for 1996; there was no similar lease expense for 1995 since Regency
Park and Sterling Park were owned by entities included in the Predecessor. The
Company entered into long-term operating leases for the Sterling Park and
Regency Park communities effective January 1, 1996.
Depreciation and Amortization. Depreciation and amortization expense was
$245,656 for 1996, compared to $642,025 for 1995. Depreciation for 1996 relates
primarily to Sunshine Villa while depreciation for 1995 relates primarily to
Regency Park and Sterling Park, which are now being leased by the Company.
Depreciation and amortization would have been $296,000 on a pro forma basis for
1995.
22
<PAGE>
Interest Income. Interest income increased in 1996 to $361,565 from
$48,304 for 1995. The increase in interest income is due to the Company's
investment of the net proceeds from its initial public offering in high-quality,
short-term securities.
Extraordinary Loss. The extraordinary loss in 1996 of $53,097, net of an
income tax benefit of $33,900, resulted from the write-off of previously
capitalized loan fees. The write-off occurred in connection with the
sale/leaseback of Sunshine Villa, which has been accounted for as a financing
transaction.
Liquidity and Capital Resources
At December 31, 1996, the Company had approximately $10.1 million of
working capital compared to approximately $8.6 million at December 31, 1995, an
increase of $1.5 million.
Net cash provided by operating activities totaled approximately $760,000
for 1996, which resulted primarily from net income of approximately $24,000 and
the net change in other operating assets and liabilities of $709,000.
Net cash used in investing activities totaled approximately $10,093,000
for 1996, consists of approximately $8.8 million for land acquisition,
development and construction costs, net of approximately $885,000 of related
construction payables, $987,000 for the purchase of investments, and an
investment, in the approximate amount of $264,000, in a joint venture for the
development of the Kenmore community. The land acquisition, development, and
construction costs are related to the development of assisted living
communities. At December 31, 1996, the aggregate purchase price for nine parcels
of land for which the Company had purchase options was approximately $7,062,000.
The Company has paid initial deposits relating to these sites and has also
completed the demographic analysis and other preliminary due diligence for
purposes of developing assisted living communities at these sites.
The Company entered into an agreement pursuant to which it owns a fifty
percent equity interest in an assisted living community which is currently under
development in Kenmore, Washington. As reported above, net cash used in
development activities includes amounts advanced for this project. The Company
will manage this community upon its completion.
Net cash provided by financing activities totaled approximately
$10,397,000 during 1996, consisting primarily of $9,350,000 of net proceeds from
the issuance of Preferred Stock as discussed below and $3,712,000 of net
proceeds from issuances of long-term debt (including $2.6 million net proceeds
from the sale/leaseback of Sunshine Villa) less $1.6 million of deposits for
letters of credit.
On December 16, 1996, the Company completed the sale of $10 million of its
Preferred Stock to Prudential Private Equity Investors III, L.P. ("PPEI"). The
Preferred Stock is convertible, on a one-to-one basis, into 1,666,667 shares of
Common Stock, subject to adjustment as described below, at an effective price of
$6 per share. In connection with the sale of the
23
<PAGE>
Preferred Stock, the Company issued to PPEI a Stock Purchase Warrant to purchase
200,000 shares of Company Common Stock, exercisable upon the occurrence of
certain events described below at $5.50 per share. If the Company does not
obtain certificates of occupancy for 1,000 new units and open at least ten new
communities during 1997, then (a) the conversion ratio of the Preferred Stock
will be adjusted so that the Preferred Stock will be convertible into an
aggregate of 1,818,182 shares of Common Stock, and (b) PPEI will be entitled to
exercise the Stock Purchase Warrant for 200,000 shares of Common Stock. The
Company is required to pay a quarterly cumulative dividend on the Preferred
Stock at the rate of six percent per annum beginning March 31, 1997. In
connection with the sale of the Preferred Stock, the Company also entered into a
Stockholders Agreement with PPEI and Mr. Bowen.
The Company entered into lease financing arrangements with a REIT
regarding the acquisition and development of assisted living communities in
Boise, Idaho; San Antonio, Texas; and Clovis, California. Each arrangement
provides that the Company will develop for the REIT a community for a maximum
amount and the Company will lease the completed community on a long-term basis.
The total aggregate lease financing provided by the arrangements is
approximately $23.4 million.
The Company sold its Sunshine Villa community to a REIT for $8.3 million
in October 1996. The Company purchased the community for $7.7 million in
December 1995. The Company realized net proceeds of $2.62 million from the sale.
Due to continuing involvement by the Company, accounting principles require this
transaction to be accounted for as a financing. Coincident with the sale of
Sunshine Villa, the Company entered into a long-term lease of the community
which is coterminous with the Boise, San Antonio, and Clovis leases referred to
above. Each lease is for an initial term of approximately 15 to 16 years and
contains two, ten-year extension options, each of which can be exercised only if
exercised with respect to each of the four leases. The Sunshine Villa lease
provides for annual base rent of approximately $829,000, plus additional rent
based upon the increase in the community's revenues. The annual base rent for
each of the Boise, San Antonio, and Clovis leases will be determined based upon
the final construction cost of each community.
As of March 26, 1997, the Company has entered into four construction loans
in the aggregate amount of $27,685,000 for the construction of its Folsom,
Kenmore, Bakersfield, and Austin communities. The Company has also obtained from
commercial banks non-binding letters of intent or other indications of intent to
make construction loans for the construction of the Company's Roseville, Eugene,
Tucson, and Henderson communities in the approximate aggregate amount of $26.9
million. These loans are generally for a term of three years and are secured by
the related property.
The Company's current growth plan anticipates the development,
construction, and opening of 15 new Regent communities and five new Regent Court
communities by the end of 1998. The Company has obtained $23.4 million of REIT
lease financing to fund the development and construction of three Regent
communities. The total cost to develop and construct twelve Regent communities
and to fund the estimated initial operating deficits for 15 Regent communities
24
<PAGE>
will likely be between $100-110 million. A substantial portion of this cost will
be incurred in 1997. The Company has obtained $27.7 million in debt financing
for the construction of four communities and has received non-binding letters of
intent and other expressions of intent to provide an additional $26.9 million in
construction financing, all as described above. Provided that the Company
completes these loan transactions and can obtain approximately $31 million in
additional debt or REIT financing, the Company estimates that it has the
necessary equity capital to complete construction of the 15 communities and to
fund the initial operating deficits. The Company believes that such financing
will be available on acceptable terms.
The Company estimates that it will cost between $17-20 million to develop
and construct five Regent Court communities and to fund the related initial
operation deficits. The Company expects to finance these costs through the sale
or issuance of debt or equity. The Company currently has no commitments for such
financing.
The Company may enter into additional arrangements with one or more
unrelated parties regarding the joint development and ownership of one or more
of the Company's communities currently under construction or development in
order to further leverage the Company's growth.
If the Company were unable to obtain additional required financing, or if
such financing is not available on acceptable terms, the Company expects that
its plan to develop 15 Regent communities and five Regent Court communities by
the end of 1998 would likely be delayed or curtailed. Furthermore, if the
Company expands its growth plan, development activities do not result in the
construction of a community on the site, the Company experiences a decline in
the operations of its current communities or the Company does not achieve and
sustain anticipated occupancy levels at its new communities, then the Company
may require additional financing to complete its growth plan.
The Company does not presently intend to pay dividends to holders of its
Common Stock and intends to retain future earnings to finance the development of
assisted living communities and expansion of its business.
25
<PAGE>
Inflation
Management believes that the Company's and the Predecessor's operations
have not been materially adversely affected by inflation. The Company expects
salary and wage increases for its skilled staff will continue to be higher than
average salary and wage increases, as is common in the health care industry. To
date, the Company has been able to offset the effects of inflation on salaries
and other operating expenses by increases in rental and service rates. The
Company expects to be able to continue to do so in the future, subject to
applicable statutory, regulatory and zoning restrictions.
Recent Accounting Pronouncements
New accounting pronouncements are discussed in Note 1 of the Notes to
Consolidated Financial Statements.
Item 7. Financial Statements
The financial statements required by this item are included on pages F-1
to F-22 of this Report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, and Control Persons; Compliance with
Section 16(a) of the Exchange Act
Information with respect to directors of the Company will be included
under "Election of Directors" in the Company's definitive proxy statement for
its 1997 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this report and is incorporated
herein by reference. Information with respect to executive officers of the
Company is included under Item 4(a) of Part I of this report. Information
required by Item 405 of Regulation S-B is included under "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's
definitive proxy statement for its 1997 annual meeting of shareholders to be
filed not later than 120 days after the end of the fiscal year covered by this
report and is incorporated herein by reference.
26
<PAGE>
Item 10. Executive Compensation
Information with respect to executive compensation will be included under
"Executive Compensation" in the Company's definitive proxy statement for its
1997 annual meeting of shareholders to be filed not later than 120 days after
the end of the fiscal year covered by this report and is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial
owners and management will be included under "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1997 annual meeting of shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this report and is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions
with management will be included under "Certain Transactions" in the Company's
definitive proxy statement for its 1997 annual meeting of shareholders to be
filed not later than 120 days after the end of the fiscal year covered by this
report and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements are listed in the Index to Financial
Statements on page F-1 of this Report.
(a)(2) Exhibits
Exhibit
Number
------
(1)3.1 Restated Articles of Incorporation, as amended effective December
13, 1996.
(2)3.2 Restated Bylaws, as amended effective December 12, 1996.
4.1 See Article II of Exhibit 3.1 and Articles I and VI of Exhibit
3.2.
(1)10.1 Lease Agreement between the Company and Regency Park Apartments
Limited Partnership.
27
<PAGE>
(1)10.2 Lease Agreement between the Company and the Bowen-Gionet Joint
Venture.
(1)10.3 Employment Agreement between the Company and Walter C. Bowen.
(1)10.4 Employment Agreement between the Company and James W. Ekberg.
(1)10.5 Employment Agreement between the Company and Eric W. Jacobsen.
(1)10.6 Employment Agreement between the Company and Steven L. Gish.
(1)10.7 Employment Agreement between the Company and Gregory Roderick.
(1)10.8 Restrictive Covenant Agreement between the Company and Walter C.
Bowen.
(1)10.9 Restrictive Covenant Agreement between the Company and James W.
Ekberg.
(1)10.10 Restrictive Covenant Agreement between the Company and Eric W.
Jacobsen.
(1)10.11 Restrictive Covenant Agreement between the Company and Steven L.
Gish.
(1)10.12 Restrictive Covenant Agreement between the Company and Gregory
Roderick.
(1)10.13 1995 Stock Incentive Plan.
(1)10.14 Form of Incentive Stock Option Agreement.
(1)10.15 Form of Nonqualified Stock Option Agreement.
(1)10.16 Administrative Services Agreement among the Company and certain
of the Bowen companies.
(1)10.17 Indemnity Agreement between the Company and Walter C. Bowen.
(1)10.18 Indemnity Agreement between the Company and James W. Ekberg.
(1)10.19 Indemnity Agreement between the Company and Eric W. Jacobsen.
(1)10.20 Indemnity Agreement between the Company and Steven L. Gish.
(1)10.21 Regulatory Agreement by and between the Company (as assignee) and
the Oregon Housing and Community Services Department ("OHCS").
28
<PAGE>
(1)10.22 Form of First Amendment to Regulatory Agreement between the
Company and OHCS.
(1)10.23 Management Agreement regarding Park Place.
(1)10.24 Subordination and Attornment Agreement with The Canada Life
Assurance Company regarding Regency Park.
(1)10.25 Promissory Note from the Company to Sunshine Villa, Inc.
(1)10.26 Note from the Company to United States National Bank of Oregon.
(1)10.27 Line of Credit Instrument between the Company and United States
National Bank of Oregon.
(2)10.28 Letter of Understanding, effective as of March 8, 1996, between
the Company, Dr. Marvin S. Hausman, and Northwest Medical
Research Partners.
(2)10.29 Employment Agreement, effective as of March 20, 1996, between
David R. Gibson and the Company
(2)10.30 Restrictive Covenant Agreement, effective as of March 20, 1996,
between David R. Gibson and the Company
(3)10.32 Preferred Stock and Warrant Agreement between Prudential Private
Equity Investors III, L.P. ("PPEI") and the Company dated as of
December 16, 1996.
(3)10.33 Stockholders Agreement among the Company, PPEI, and Walter C.
Bowen dated as of December 16, 1996.
(3)10.34 Registration Agreement between the Company and PPEI dated as of
December 16, 1996.
(3)10.35 Stock Purchase Warrant in favor of PPEI for 200,000 Shares of
Common Stock.
(3)10.36 First Amendment to Lease between the Company and Regency Park
Apartments Limited Partnership dated December 16, 1996.
(3)10.37 Second Amendment to Lease between the Company and Sterling Park,
L.L.C. dated December 16, 1996.
(3)10.38 Form of Indemnity Agreement between the Company and directors.
29
<PAGE>
(3)21 List of Subsidiaries
(3)23.1 Consent of Coopers & Lybrand LLP
(3)24.1 Power of Attorney of Dana J. O'Brien.
(3)24.2 Power of Attorney of Martha L. Robinson.
- -------------------
(1) Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1, effective December 20, 1995 (Registration No.
33-96912).
(2) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
(3) Filed herewith.
All other schedules and exhibits are omitted because the required
information is not applicable or is not present in amounts sufficient to require
submission of the schedule or because the information required is included in
the financial statements and notes thereto.
30
<PAGE>
Index to Financial Statements
(Item 7)
Page
Financial Statements:
Regent Assisted Living, Inc. (The Company)
and Regent Assisted Living Group (Predecessor)
Reports of Independent Accountants F-2 - F-3
Consolidated Balance Sheets of Regent Assisted Living, Inc.
as of December 31, 1995 and 1996 F-4
Consolidated Statements of Operations of Regent Assisted
Living, Inc. for the years ended December 31, 1995 and 1996
and Regent Assisted Living Group for the year ended
December 31, 1995 F-5
Consolidated Statements of Changes in Shareholders' Equity
of Regent Assisted Living, Inc. for the years ended
December 31, 1995 and 1996 F-6
Consolidated Statements of Cash Flows of Regent Assisted
Living, Inc. for the years ended December 31, 1995 and
1996 and Regent Assisted Living Group for the year ended
December 31, 1995 F-7
Notes to Consolidated Financial Statements F-8 - F-22
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
Regent Assisted Living, Inc.
Portland, Oregon
We have audited the accompanying consolidated balance sheets of Regent Assisted
Living, Inc. and subsidiary (the Company) as of December 31, 1996 and 1995 and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Regent Assisted
Living, Inc. and subsidiary as of December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
March 21, 1997
F-2
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
Regent Assisted Living, Inc.
Portland, Oregon
We have audited the accompanying combined statements of operations and cash
flows of Regent Assisted Living Group (Predecessor), which is comprised of
Bowen-Gionet Joint Venture (dba Sterling Park Living Center), a general
partnership, Regency Park Apartments Limited Partnership and Regent Assisted
Living, Inc. for the year ended December 31, 1995. These financial statements
are the responsibility of the Predecessor's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statements of operations and cash flows are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statements of operations and cash flows. We believe that our audit of the
statements of operations and cash flows provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined results of operations and cash flows of
Regent Assisted Living Group for the year ended December 31, 1995 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
March 8, 1996
F-3
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. (The Company)
Consolidated Balance Sheets
December 31, 1995 and 1996
1995 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,585,952 $ 8,650,817
Investments 1,952,542 2,939,448
Accounts receivable 115,736 173,976
Prepaid expenses 77,928 101,148
Construction advances receivable 1,125,315
--------------- --------------
Total current assets 9,732,158 12,990,704
Property and equipment, net 7,908,746 17,383,668
Investment in joint venture 263,579
Restricted cash 76,364 1,646,485
Deferred income tax benefit 304,300
Other assets 469,342 588,948
--------------- --------------
Total assets $ 18,186,610 $ 33,177,684
=============== ==============
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 76,284 $ 144,291
Accounts payable and other accrued expenses 892,599 2,348,369
Accrued payroll 82,865 335,155
Accrued interest 33,939 57,530
--------------- --------------
Total current liabilities 1,085,687 2,885,345
Long-term debt 6,023,716 9,760,505
Other liabilities 417,005 474,423
--------------- --------------
Total liabilities 7,526,408 13,120,273
--------------- --------------
Commitments
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized;
1,666,667 shares issued and outstanding as of
December 31, 1996
Common stock, no par value, 25,000,000 shares authorized; 9,349,841
4,633,000 shares issued and outstanding 10,758,703 10,808,703
Accumulated deficit (98,501) (101,133)
--------------- --------------
Total shareholders' equity 10,660,202 20,057,411
--------------- --------------
Total liabilities and shareholders' equity $ 18,186,610 $ 33,177,684
=============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Consolidated Statements of Operations
for the years ended December 31, 1995 and 1996
1995 1996
-------------------------------------- --------------
The The
Predecessor Company Company
---------------- ---------------- --------------
<S> <C> <C> <C>
Revenues:
Rental and service $ 9,819,535 $ 237,501 $ 13,088,131
Management fee 319,274 789,118 172,118
---------------- ---------------- --------------
Total revenues 10,138,809 1,026,619 13,260,249
---------------- ---------------- --------------
Operating expenses:
Residence operating expenses 5,871,676 202,513 8,108,045
General and administrative 813,139 818,740 1,834,960
Lease expense 2,757,250
Depreciation and amortization 642,025 15,893 245,656
---------------- ---------------- --------------
Total operating expenses 7,326,840 1,037,146 12,945,911
---------------- ---------------- --------------
Operating income (loss) 2,811,969 (10,527) 314,338
Interest income 48,304 9,642 361,565
Interest expense (1,780,909) (67,616) (561,466)
Other income, net 162,517 20,658
---------------- ---------------- --------------
Income (loss) before income taxes and
extraordinary loss 1,241,881 (68,501) 135,095
Provision for income taxes 58,400
---------------- ---------------- --------------
Income before extraordinary loss 1,241,881 (68,501) 76,695
Extraordinary loss, net of income tax benefit 53,097
---------------- ---------------- --------------
Net income (loss) $ 1,241,881 $ (68,501) $ 23,598
================ ================ ==============
Earnings (loss) per common share:
Before extraordinary loss $ 0.01
Extraordinary loss (0.01)
--------------
Net earnings $ -
==============
Weighted average common and common share equivalents outstanding 3,026,844 3,026,844 4,666,800
================ ================ ==============
Unaudited pro forma data:
Income (loss) before benefit (provision) for
income taxes $ 1,241,881 $ (68,501)
Benefit (provision) for income taxes (472,000) 26,000
---------------- ----------------
Net income (loss) $ 769,881 $ (42,501)
================ ================
Earnings (loss) per share $ 0.25 $ (0.01)
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. (The Company)
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995 and 1996
Page 1 of 2
Preferred Stock
------------------------------------------------------
Series A Series B Common Stock
--------------------------- ------------------------- ----------------------------
Shares Amount Shares Amount Shares Amount
----------- ------------ --------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares to
founder 3,000,000 $ 2,000
Proceeds from public
offering, net of
issuance costs of
$1,490,937 1,633,000 10,756,563
Proceeds from issuance
of common stock
warrant 140
Net loss
Dividends
---------- --------------
Balances, December 31,
1995 4,633,000 10,758,703
Issuance of preferred
stock, net of
issuance costs
of $600,159 1,283,785 $ 7,201,910 382,882 $ 2,147,931
Proceeds from issuance
of common stock
warrant 50,000
Net income
Declaration of preferred
stock dividends
----------- ------------ --------- ------------ ---------- --------------
Balances, December 31,
1996 1,283,785 $ 7,201,910 382,882 $ 2,147,931 4,633,000 $ 10,808,703
=========== ============ ========= ============ ========== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-6a
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. (The Company)
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995 and 1996 (continued)
Page 2 of 2
Total
Accumulated Shareholders'
Deficit Equity
-------------- ---------------
<S> <C> <C>
Issuance of shares to
founder $ 2,000
Proceeds from public
offering, net of
issuance costs of
$1,490,937 10,756,563
Proceeds from issuance
of common stock
warrant 140
Net loss $ (68,501) (68,501)
Dividends (30,000) (30,000)
-------------- ---------------
Balances, December 31,
1995 (98,501) 10,660,202
Issuance of preferred
stock, net of
issuance costs
of $600,159 9,349,841
Proceeds from issuance
of common stock
warrant 50,000
Net income 23,598 23,598
Declaration of preferred
stock dividends (26,230) (26,230)
-------------- ---------------
Balances, December 31,
1996 $ (101,133) $ 20,057,411
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
F-6b
<PAGE>
<TABLE>
<CAPTION>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Consolidated Statements of Cash Flows
for the years ended December 31, 1995 and 1996
1995 1996
------------------------------- ------------
The The
Predecessor Company Company
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,241,881 $ (68,501) $ 23,598
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 642,025 15,893 245,656
Extraordinary loss 86,997
Deferred income tax provision (304,300)
Changes in other assets and liabilities:
Accounts receivable (213,713) (115,736) (58,240)
Prepaid expenses (70,006) (77,928) (23,220)
Restricted cash (76,364) (76,364) 76,364
Other assets 43,076 19,828 (149,187)
Accounts payable and other accrued expenses 337,552 306,604 529,890
Accrued payroll 125,727 82,865 252,290
Accrued interest (77,494) 33,939 23,591
Other liabilities 106,060 77,505 57,418
------------- ------------- ------------
Net cash provided by operating activities 2,058,744 198,105 760,857
------------- ------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (7,926,016) (7,443,224) (9,685,259)
Increase in construction related accounts payable 885,486
Purchase of investments, net (1,952,542) (1,952,542) (986,906)
Investment in joint venture (263,579)
Deposits to replacement reserve account (43,200)
------------- ------------- ------------
Net cash used in investing activities (9,878,558) (9,395,766) (10,093,458)
------------- ------------- ------------
Cash flows from financing activities:
Construction advances (1,125,315)
Proceeds from sale of common stock 10,758,703 10,758,703
Proceeds from issuance of preferred stock 9,349,841
Increase in accounts payable due to offering costs 585,995 585,995 14,164
Proceeds from issuance of common stock warrant 50,000
Payment of loan and lease fees (373,315) (131,085) (92,735)
Proceeds from issuance of long-term debt 24,050,000 5,600,000 9,487,752
Payments on long-term debt (15,432,925) (5,682,956)
Deposits for letters of credit (1,603,285)
Repayment of notes payable to an owner (1,956,588)
Partner distributions/S corporation dividends (1,958,593) (30,000)
------------- ------------- ------------
Net cash provided by financing activities 15,673,277 16,783,613 10,397,466
------------- ------------- ------------
Net increase in cash and cash equivalents 7,853,463 7,585,952 1,064,865
Cash and cash equivalents, beginning of period 566,028 - 7,585,952
------------- ------------- ------------
Cash and cash equivalents, end of period $ 8,419,491 $ 7,585,952 $ 8,650,817
============= ============= ============
Supplemental disclosure of non-cash investing and
financing activities:
Long-term debt incurred to acquire property $ 500,000 $ 500,000 $ -
============= ============= ============
Declaration of preferred stock dividend $ - $ - $ 26,230
============= ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-7
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
1. Operations and Summary of Significant Accounting Policies:
Regent Assisting Living, Inc. (the Company) is an owner, operator and
developer of private-pay assisted living communities. Assisted living is
part of a spectrum of long-term care services that provide a combination of
housing, personal services and health care designed to respond to elderly
individuals who require assistance with activities of daily living in a
manner that promotes maximum independence.
The Company: During 1995 the Company provided property management services
to four assisted living facilities including Sterling Park (Sterling),
Regency Park Assisted Living (Regency), Park Place Assisted Living (Park
Place) and Sunshine Villa (Sunshine). Sterling, Regency and Park Place are
owned by entities controlled by the majority shareholder of the Company.
Effective December 1, 1995 the Company acquired Sunshine from Sunshine
Villa, Inc., an unrelated party. The results of operations of the Company
for the years ended December 31, 1995 and 1996 include the assisted living
operations of Sunshine effective December 1, 1995. Unaudited pro forma 1995
results of operations (as if the acquisition occurred at January 1, 1995)
are included in Note 11.
Effective January 1, 1996, the Company entered into agreements to lease
Regency and Sterling and, accordingly, the results of operations of the
Company for the year ended December 31, 1996 also include the assisted
living operations of these communities (see also Predecessor below and
Notes 7 and 11).
As of December 31, 1996, an additional 16 assisted living communities are
in various stages of development. Substantially all of the construction
activities are being performed by Bowen Development Company, a related
party (see Note 9). Of these, thirteen will be owned by the Company and
three will be leased from an unrelated party. Additionally, the Company is
engaged in negotiations to develop several new communities.
The Predecessor: The Predecessor financial statements for the year ended
December 31, 1995 represent the combined results of operations of the
Predecessor. The Predecessor represents a combination of the business of
the Company, Bowen-Gionet Joint Venture (BGJV) (a general partnership) and
Regency Park Apartments Limited Partnership (Regency Partnership) (a
limited partnership) having 100% ownership in the Sterling and Regency
assisted living communities, respectively, and common management and
controlling interests. BGJV and Regency Partnership are 100% owned by
Walter C. Bowen and his family. Prior to the Offering, the Company was also
100% owned by Walter C. Bowen. Since the communities have common ownership
and management interests the assets and liabilities are reflected at
historical cost. All significant intercompany accounts and transactions
have been eliminated in combination.
F-8
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
1. Operations and Summary of Significant Accounting Policies, Continued:
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its majority owned subsidiary Regent/Rio
Rancho, L.L.C. All significant intercompany transactions and balances have
been eliminated in consolidation.
Affiliated Party Transactions: Certain executive officers of the Company
fulfill similar executive functions for other companies which are owned or
controlled by Mr. Walter C. Bowen, the Company's majority shareholder, and
spend significant amounts of time on the business of such companies.
Revenues: Revenues are recorded when services are rendered and consist of
resident fees for basic housing, personalized health care and other support
services. Management fees related to property management services for other
assisted living communities, substantially all of which are owned by
affiliated entities, are recorded when the services are rendered.
Classification of Expenses: All expenses incurred by the Company and by the
Predecessor (except interest, depreciation, amortization, and general and
administrative costs) are classified as residence operating expenses.
Expenses associated with corporate or support functions are classified as
general and administrative expense.
Cash and Cash Equivalents: The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits. Cash
equivalents consist of highly liquid debt instruments purchased with an
original maturity of three months or less. The Company's cash equivalents
are in high quality securities placed with institutions with high credit
ratings. This investment policy limits the Company's exposure to
concentrations of credit risk, and the Company has not experienced any
credit related losses.
Investments: The Company classifies its investments as available-for-sale
securities. Realized gains and losses on sales of securities are reflected
in operations; unrealized gains and losses are reflected in the statement
of changes in shareholders' equity. The Company had no unrealized gains or
losses on its investments as of December 31, 1995 and 1996.
F-9
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
1. Operations and Summary of Significant Accounting Policies, Continued:
Property and Equipment: Property and equipment are stated at cost with
depreciation being provided over the assets' estimated useful lives using
straight-line and accelerated methods as follows:
Predecessor The Company
Buildings 27.5 years 40 years
Land improvements 15 years 10 years
Furniture and equipment 5-7 years 5-7 years
Interest incurred during construction periods is capitalized as part of
the building costs. Maintenance and repairs are expensed as incurred;
renewals and improvements are capitalized. Upon disposal of property and
equipment subject to depreciation, the related costs and accumulated
depreciation are removed and resulting gains and losses are reflected in
operations.
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". This Statement requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of this Statement did not affect the Company's results of
operations.
Investment in Joint Venture: The Company has a 50% investment in Regent
Northshore House, L.L.C., a joint venture organized to develop an assisted
living facility in Kenmore, Washington. As of December 31, 1996, the
facility was under construction and has not commenced operations. The
Company accounts for its investment under the equity method, whereby its
proportionate share of earnings or losses are recorded as incurred.
Restricted Cash: The Company is required to provide letters of credit to
lenders in connection with certain financing transactions. Financial
institutions providing the letters of credit have required cash collateral
for the letters of credit, totaling $1,603,285 as of December 31, 1996.
Other items classified as restricted cash as of December 31, 1996 include
a replacement reserve required to be maintained for one of the operating
facilities.
Income Taxes - The Company: From its inception to the Termination Date
(see below), the Company was treated for income tax purposes as an S
corporation. As a result, the Company's earnings through the day preceding
the date of termination of the Company's S corporation status (the
Termination Date) have been taxed directly to the Company's shareholder.
The Termination Date occurred prior to the closing of the Company's
initial public offering (the Offering) in 1995. Subsequent to the
Termination Date, the Company is no longer treated as an S corporation
and, accordingly, is subject to federal and state income taxes on its
earnings.
F-10
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
1. Operations and Summary of Significant Accounting Policies, Continued:
Income Taxes - Predecessor: The businesses comprising the Predecessor have
elected to be taxed as either an S corporation or are Partnerships
pursuant to the provisions of the Internal Revenue Code and, as such, are
not subject to federal or state income taxes because their taxable income
or loss accrues to individual shareholders or partners, respectively.
Deferred Financing Costs: Financing costs, included in other assets, are
deferred and amortized to interest expense over the term of the related
debt using the straight-line amortization method.
Stock Options: The Company has adopted Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation". This Statement, which is effective for all companies in
1996, encourages, but does not require the recording of compensation cost
for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation under the
provisions of Accounting Principles Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. Accordingly, the
adoption of this Standard did not affect the Company's results of
operations, financial position or liquidity (see Note 6).
Disclosure of Fair Value of Financial Instruments: The carrying amounts of
cash and cash equivalents and investments approximate fair value because
of the short-term nature of these accounts and because amounts are
invested in accounts earning market rates of interest. The carrying amount
of debt approximates fair value inasmuch as the interest rates approximate
the current rates available to the Company.
Earnings Per Common Share - The Company: Earnings (loss) per common share
is based on the net income attributable to common shares (after deducting
preferred dividends), divided by the weighted average number of common and
common share equivalents outstanding.
Pro Forma Earnings Per Share - Predecessor: The pro forma earnings per
share is based on the unaudited pro forma net income, divided by the
weighted average number of common and common share equivalents of Regent
Assisted Living, Inc. outstanding during 1995.
Recent Accounting Pronouncements: In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standard No. 128 - "Earnings per Share", which is required to be adopted
in 1997. The unaudited pro forma "basic" and "diluted" earnings per share
under the new standard do not differ from the earnings per share
calculated under the existing standard.
F-11
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
1. Operations and Summary of Significant Accounting Policies, Continued:
Reclassification: Certain 1995 amounts have been reclassified to conform
to the 1996 presentation. These reclassifications have no effect on the
total shareholders' equity as of December 31, 1995 or 1995 net income
(loss).
2. Property and Equipment:
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Land $ 1,100,000 $ 1,100,000
Buildings and improvements 6,308,586 6,520,556
Furniture and equipment 308,594 530,540
Construction in progress 204,663 9,456,006
--------------- ----------------
7,921,843 17,607,102
Less accumulated depreciation 13,097 223,434
--------------- ----------------
Property and equipment, net $ 7,908,746 $ 17,383,668
=============== ================
</TABLE>
Land, buildings and certain furniture and equipment serve as collateral
for long-term debt. As further discussed in Note 7, land and buildings
relate primarily to Sunshine, the sale and leaseback of which has been
accounted for as a financing transaction. Construction in progress as of
December 31, 1996 includes the cost of land under development, development
and construction costs.
3. Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Resident security deposits $ 330,000 $ 461,108
Resident trust deposits 9,500 12,329
Deferred financing costs, net 119,542 89,961
Other 10,300 25,550
--------------- ----------------
Total other assets $ 469,342 $ 588,948
=============== ================
</TABLE>
F-12
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
3. Other Assets, Continued:
Pursuant to lease agreements, residents are required to provide security
deposits, and in certain cases, the last month's rent. A liability for
these deposits is recorded in other liabilities in the consolidated
financial statements.
4. Long-Term Debt:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Financing lease obligation, due in monthly installments
of $69,100, including interest at 8.4%, due in
November 2012 (see Note 7) $ 8,217,044
Mortgage payable to a bank, due in monthly
installments of $45,093, including interest
at the U.S. Treasury rate plus 3.0% $ 5,600,000
Note payable to a corporation, quarterly
payments of interest only at 7%, due in
December 1998 500,000 500,000
Amounts drawn on $6,850,000 construction loan for community
under construction, interest at prime plus .5% (8.75% at
December 31, 1996), due in October 1998 (see Note 7) 1,135,332
Other 52,420
-------------- --------------
6,100,000 9,904,796
Less amounts due within one year 76,284 144,291
-------------- --------------
Amounts due after one year $ 6,023,716 $ 9,760,505
============== ==============
</TABLE>
Principal payments on long-term debt for the years ending December 31 are
as follows:
1997 $ 144,291
1998 1,844,643
1999 170,592
2000 185,490
2001 201,688
Thereafter 7,358,092
----------------
$ 9,904,796
================
F-13
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
4. Long-Term Debt, Continued:
The Company incurred total interest costs of $574,520 in 1996, of which
$13,054 has been capitalized as part of construction in progress. Interest
costs paid by the Company in 1996 totaled $550,929. All interest costs
incurred by the Predecessor and the Company during 1995 have been charged
to expense. Interest costs paid by the Predecessor and by the Company in
1995 totaled $1,858,403 and $33,677, respectively.
5. Shareholder's Equity:
Common Stock : The Company is authorized to issue up to 25,000,000 shares
of common stock. The Company issued 1,400,000 shares of common stock at
$7.50 in a public offering (the Offering) in December 1995. The Company
also sold 233,000 shares to its founder at $7.50 per share concurrent with
the Offering.
Preferred Stock: The Company is authorized to issue 5,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue
Preferred Stock in one or more series and to fix the number of shares
constituting any such series, and the preferences, limitations and
relative rights, including the dividend rights, dividend rate, voting
rights, terms of redemption, redemption price or prices, conversion rights
and liquidation preferences of the shares constituting any series, without
any further vote or action by the shareholders of the Company.
On December 16, 1996, the Company issued 1,283,785 shares of Series A
Preferred Stock and 382,882 shares of Series B Preferred Stock
(collectively, the "Preferred Stock") for a total of $9,950,000. In
connection with this transaction, a warrant was issued to the holders of
the preferred stock, allowing the warrant holder to purchase 200,000
shares of common stock at an exercise price of $5.50 per share.
The Series A Preferred shares are convertible to an equivalent number of
common shares at any time at the option of the holder. The Series B
Preferred shares are convertible to common shares upon the occurrence of
certain "Conversion Events" as defined in the Company's amended articles
of incorporation.
Dividends on the Preferred Stock accrue at an annual rate of 6% of the
liquidation value of $6 per share.
If the Company does not obtain certificates of occupancy for 1,000 new
units and open at least ten new communities during 1997, then (a) the
conversion ratio of the Preferred Stock will be adjusted so that the
Preferred Stock will be convertible into an aggregate of 1,818,182 shares
of common stock, and (b) the preferred shareholder will be entitled to
exercise the Stock Purchase Warrant for 200,000 shares of common stock.
F-14
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
5. Shareholder's Equity, Continued:
In connection with the sale of the Preferred Stock, the Company also
entered into a Stockholders' Agreement with the preferred shareholder and
the founding shareholder regarding the voting and disposition of shares
held by the preferred shareholder and the founding shareholder, and a
Registration Agreement providing the preferred shareholder with rights to
require the Company to register shares of common stock upon conversion of
the Preferred Stock.
6. Stock Options:
1995 Stock Incentive Plan: The Company adopted a stock incentive plan (the
"1995 Stock Incentive Plan"), which provides for the award of incentive
stock options to key employees and the award of nonqualified stock
options, stock appreciation rights, bonus rights and other incentive
grants to employees, independent contractors and consultants. A total of
400,000 shares of common stock may be issued under the 1995 Stock
Incentive Plan. As of December 31, 1996 options to purchase 368,500 shares
had been granted pursuant to the Plan.
The 1995 Stock Incentive Plan is administered by the Board of Directors,
which has the authority, subject to the terms of the Plan, to determine
the persons to whom options or rights may be granted, the exercise price
and number of shares subject to each option or right, the character of the
grant, the time or times at which all or a portion of each option or right
may be exercised and certain other provisions of each option or right.
Options are exercisable over a period of time in accordance with the terms
of option agreements entered into at the time of grant. Generally, options
expire 10 years from date of grant and are expected to become exercisable
over a five-year period. Options granted under the 1995 Stock Incentive
Plan are generally nontransferable by the optionee and, unless otherwise
determined by the Board of Directors, must be exercised by the optionee
during the period of the optionee's employment or service with the Company
or within a specified period following termination of employment or
service.
Non-employee members of the board of directors of the Company are
automatically granted an option to purchase 2,000 shares of common stock
when they become a director. Each non-employee director is automatically
granted an option to purchase 2,000 additional shares of common stock in
each subsequent calendar year that the director continues to serve in that
capacity. The exercise price for these options will generally be the fair
market value of the common stock at the date of grant.
F-15
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
6. Stock Options, Continued:
Options Granted by Shareholder: In August 1995, the Company's founding
shareholder granted options to purchase an aggregate of 170,000 shares of
common stock, of which 165,000 were to certain officers of the Company.
These options vest and become immediately exercisable, and are subject to
the terms of option agreements which contain terms similar to those
governing the options granted under the 1995 Stock Incentive Plan.
A summary of option activity is as follows:
<TABLE>
<CAPTION>
Weighted-
Number Average
of Exercise
Shares Price
------------- --------------
<S> <C> <C>
Balance, January 1, 1995
Options granted 354,000 $ 6.83
Options exercised -
Options surrendered -
-------------
Balance, December 31, 1995 354,000 6.83
Options granted 184,500 4.85
Options exercised -
Options surrendered -
-------------
Balance, December 31, 1996 538,500 6.15
=============
</TABLE>
The table summarizes information about stock options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
Options Exercisable
Weighted- --------------------------------
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
--------------- ------------- --------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.00 - $8.00 170,000 8.70 years $ 6.12 170,000 $ 6.12
$ 4.25 - $7.50 41,000 9.40 years 5.69 41,000 5.69
$ 4.00 - $7.50 327,500 9.28 years 6.23 36,000 7.50
------------- ------------
538,500 6.15 247,000 6.25
============= ============
</TABLE>
F-16
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
6. Stock Options, Continued:
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized for the options
issued under the Company's stock option plan. The following table presents
the Company's net income (loss) and earnings per share, assuming
compensation cost had been determined based on the fair value at the date
of grant, and recognized as expense on a straight-line basis over the
vesting period of the options, consistent with the provisions of SFAS No.
123.
<TABLE>
<CAPTION>
1995
-----------------------------------
The
Predecessor Company 1996
----------------- -------------- -------------
<S> <C> <C> <C>
Net income (loss) - as reported (pro
forma for 1995) $ 769,881 $ (42,501) $ 23,598
Net income (loss) - pro forma for effect
of new standard $ 385,785 $ (426,597) $ (157,138)
Earnings (loss) per share - as reported
(pro forma for 1995) $ 0.25 $ (0.01) $ -
Earnings (loss) per share - pro forma
for effect of new standard $ 0.12 $ (0.14) $ (0.03)
</TABLE>
For purposes of the above pro forma information, the fair value of each
option grant was estimated as the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions.
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Risk-free interest rate 7.00% 6.75%
Expected life 9.6 years 9.1 years
Expected volatility 36.6% 36.6%
Expected dividend yield - -
</TABLE>
F-17
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
7. Commitments:
Operating Leases: The Company entered into agreements effective January 1,
1996 to lease from affiliated entities (see Note 1) the Sterling and
Regency assisted living communities for terms of 10 years at annual base
rentals of $1,486,250 and $1,271,000, respectively. The leases contain no
purchase options and are subject to additional rent payments based on a
percentage of the increase in annual revenue of the respective community.
The Company is responsible for all costs including repairs to the
facilities, property taxes and other direct operating costs of the
facilities.
The Company leases its corporate offices under a noncancelable operating
lease expiring February 2003. The corporate offices are shared with
certain other related entities and a portion of the total lease expense is
paid by those entities (see Note 9).
Future minimum lease payments (including the portion to be paid by related
entities) required under these leases for the years ending December 31 are
as follows:
<TABLE>
<CAPTION>
Office
Sterling Regency Lease Total
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
1997 $ 1,486,250 $ 1,271,000 $ 110,082 $ 2,867,332
1998 1,486,250 1,271,000 125,808 2,883,058
1999 1,486,250 1,271,000 125,808 2,883,058
2000 1,486,250 1,271,000 125,808 2,883,058
2001 1,486,250 1,271,000 125,808 2,883,058
Thereafter 5,945,000 5,084,000 141,534 11,170,534
--------------- --------------- -------------- ---------------
$ 13,376,250 $ 11,439,000 $ 754,848 $ 25,570,098
=============== =============== ============== ===============
</TABLE>
Net rent expense for the Company totaled $12,550 and $2,845,267 in 1995
and 1996, respectively. Net rent expense for the Predecessor totaled
$42,194 in 1995.
Financing Lease: During 1996, the Company sold the Sunshine Villa
community and leased it back. Due to continuing involvement by the
Company, as defined in SFAS No. 98, Accounting for Leases, this
transaction has been accounted for as a financing. The total consideration
for the sale was $8,300,000 which has been recorded as a finance lease
obligation by the Company (see Note 4). As a result of the transaction,
the Company realized net cash proceeds of approximately $2,660,000 (after
related costs of approximately $99,000) and retired long-term debt
totaling $5,541,000. In connection the retirement of the existing debt,
the Company wrote off the unamortized balance of the loan costs related to
that debt resulting in an extraordinary charge of $86,997 before income
tax benefit of $33,900. The Company recognized a gain on this transaction
of approximately $733,000 for income tax purposes.
F-18
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
7. Commitments, Continued:
The Company will continue to operate the property pursuant to a 16-year
lease agreement which stipulates an annual base rental of approximately
$829,000 and additional rent payments based on a percentage of the
increase in annual revenues. Under the terms of the lease, the Company is
responsible for all costs including property taxes, maintenance and other
direct operating costs.
Employment Agreements: Each officer of the Company has entered into an
employment agreement with the Company which expires in October 2000. The
agreements generally entitle the officer to benefits customarily provided
by the Company and provide a base salary and eligibility for a bonus. The
Company may terminate any officer without cause by making to such officer
a cash payment equal to one year's base salary at the rate in effect at
the time of termination. Any officer may terminate his employment upon 60
days' prior written notice. In addition, each officer has entered into a
restrictive covenant agreement containing certain noncompetition and
nondisclosure provisions.
Site Acquisitions: The Company is actively engaged in discussions to
acquire additional sites. The Company believes that each site under
consideration would accommodate its prototype assisted living community.
The Company has options to acquire certain properties and is currently
conducting due diligence to determine whether these sites are suitable for
assisted living developments.
Other Lease Financing: During 1996 the Company entered into arrangements
pursuant to which a real estate investment trust (REIT) specializing in
health care properties agreed to provide lease financing for the
development of the Company's Boise, Idaho; San Antonio, Texas and Clovis,
California communities. The three communities are under construction as of
December 31, 1996, and as of that date the Company has advanced $1,125,315
of construction costs which will be reimbursed by the lessor. The leases
will be accounted for as operating leases, payments for which will begin
after the commencement of operations at the facilities.
Construction Financing: The Company has entered into construction loans in
the aggregate amount of $21.7 million for the construction of its Folsom,
Bakersfield, and Austin communities. The Company has also obtained
non-binding letters of intent or other indications of intent from
commercial banks to make construction loans for the construction of the
Company's Roseville, Eugene, Tucson, and Henderson communities in the
approximate aggregate amount of $26.9 million. The Company, along with its
joint venture partner, has guaranteed a construction loan of $5.9 million
for the construction of the Kenmore community. These loans are generally
for a term of 3 years, collateralized by the related property, and are
guaranteed by a shareholder.
F-19
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
8. Income Taxes:
As discussed in Note 1, the Company was treated as an S corporation for
income tax purposes through the Termination Date, and the businesses
comprising the Predecessor are generally not subject to federal or state
income taxes because their taxable income or loss accrues to the
individual shareholders or partners. Accordingly, there is no provision
for income taxes in the 1995 historical financial statements of the
Predecessor or the Company.
The unaudited pro forma provision (benefit) for income taxes for the year
ended December 31, 1995 for the Predecessor and for the Company as if they
had operated as a C corporation is as follows:
<TABLE>
<CAPTION>
1995
------------------------------------
Predecessor The Company
-------------- ----------------
<S> <C> <C>
Federal $ 390,000 $ (22,000)
State 82,000 (4,000)
-------------- ----------------
$ 472,000 $ (26,000)
============== ================
</TABLE>
The components of the income tax provision, net of the benefit of $33,900
from the extraordinary loss, for the year ended December 31, 1996 are as
follows:
Current:
Federal $ 276,800
State 52,000
---------------
328,800
Deferred:
Federal (256,200)
State (48,100)
---------------
$ 24,500
===============
The tax effects of temporary differences that give rise to the deferred
tax asset as of December 31, 1996 are as follows:
Gain on sale of assisted living facility, not recorded
for financial reporting purposes (see Note 7) $ 285,800
Other, net 18,500
---------------
$ 304,300
===============
F-20
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
8. Income Taxes, Continued:
Income tax expense for the year ended December 31, 1996 differs from the
amounts computed by applying the U.S. federal income tax rate of 35% to
pretax income as follows:
Computed "expected" tax expense $ 16,834
Increase in income taxes resulting from:
State and local taxes, net of federal benefit 1,924
Nondeductible meal and entertainment expenses 3,905
Other, net 1,837
---------------
Actual income tax expense $ 24,500
===============
9. Related-Party Transactions:
Administrative Services Agreement
The Company has entered into an agreement with Bowen Property Management
Company, Bowen Financial Services, Bowen Development Company and Bowen
Condominium Management Company (the Affiliates), all of which are Oregon
corporations controlled by the President and major shareholder of the
Company, whereby the Company will provide each of the Affiliates executive
assistance, accounting and financial management services, legal and
administrative assistance, insurance, management information services and
other management services as required by the Affiliates. Under the terms
of the agreement, the Company is reimbursed at its cost on a monthly basis
for all services provided. Such reimbursements totaled approximately
$398,000 in 1996.
Prior to the Offering, the Predecessor also provided accounting, financial
management services, executive, legal and administrative assistance,
insurance, management information services and other management services
to affiliates. The Predecessor was reimbursed at its cost for all services
provided. Such reimbursements totaled approximately $216,000 in 1995.
Construction Contracts
Through 1996, the Company's construction has been performed pursuant to
construction contracts with Bowen Development Company, a related party.
The terms of these contracts provide for, among other things, contractor's
profit and overhead of up to 5% of the construction costs. Such fees
totaled $181,327 during the year ended December 31, 1996.
F-21
<PAGE>
Regent Assisted Living, Inc. (The Company)
Regent Assisted Living Group (Predecessor)
Notes to Consolidated Financial Statements
10. Retirement Plans:
Employees of the Company participate in a salary deferral plan under the
provisions of Section 401(k) of the Internal Revenue Code whereby they may
defer a portion of their gross wages. The employer may make additional
contributions to the Plan. Employer contributions made by the Company and
Predecessor totaled approximately $38,000 and $53,000 in 1995 and 1996,
respectively.
11. Pro Forma Financial Information (Unaudited):
The following table sets forth the unaudited pro forma statements of
operations of the Company for the year ended December 31, 1995 as if the
acquisition of Sunshine and the Offering (including approximately $750,000
of additional general and administrative expenses that are anticipated to
be incurred as a result of being a public entity) had occurred as of
January 1, 1995 and the agreements to lease Regency Park and Sterling Park
had been consummated at that date:
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Rental and service $ 12,473,000
Management fee 175,000
--------------
Total revenues 12,648,000
--------------
Operating expenses:
Residence operating expenses 7,815,000
General and administrative 1,578,000
Lease 2,757,000
Depreciation and amortization 296,000
--------------
Total operating expenses 12,446,000
--------------
Operating income 202,000
Interest income 49,000
Interest expense (536,000)
Other income, net 162,000
--------------
Net loss $ (123,000)
==============
Net loss per share $ (0.03)
==============
Weighted average common shares outstanding 4,633,000
==============
</TABLE>
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Portland, State of Oregon, on the 28th day of March, 1997.
REGENT ASSISTED LIVING, INC.
By: WALTER C.BOWEN
----------------------------------
Walter C. Bowen
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below on the 28th day of March, 1997, by
the following persons in the capacities indicated.
Signature Title
--------- -----
WALTER C. BOWEN President, Chief Executive Officer,
- ------------------------------ Chairman of the Board and Director
Walter C. Bowen (Principal Executive Officer)
STEVEN L. GISH Chief Financial Officer, Treasurer,
- ------------------------------ Secretary and Director
Steven L. Gish (Principal Financial and Accounting Officer)
PETER J. BRIX Director
- ------------------------------
Peter J. Brix
MARVIN S. HAUSMAN, M.D. Director
- ------------------------------
Marvin S. Hausman, M.D.
STEPHEN A. GREGG Director
- ------------------------------
Stephen A. Gregg
GARY R. MAFFEI Director
- ------------------------------
Gary R. Maffei
DANA J. O'BRIEN* Director
- ------------------------------
Dana J. O'Brien
*By: STEVEN L. GISH
MARTHA L. ROBINSON* ----------------------------
- ------------------------------ Director Steven L. Gish
Marsha L. Robinson Attorney-In-Fact
31
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
(1)3.1 Restated Articles of Incorporation, as amended effective December
13, 1996.
(2)3.2 Restated Bylaws, as amended effective December 12, 1996.
4.1 See Article II of Exhibit 3.1 and Articles I and VI of Exhibit
3.2.
(1)10.1 Lease Agreement between the Company and Regency Park Apartments
Limited Partnership.
(1)10.2 Lease Agreement between the Company and the Bowen-Gionet Joint
Venture.
(1)10.3 Employment Agreement between the Company and Walter C. Bowen.
(1)10.4 Employment Agreement between the Company and James W. Ekberg.
(1)10.5 Employment Agreement between the Company and Eric W. Jacobsen.
(1)10.6 Employment Agreement between the Company and Steven L. Gish.
(1)10.7 Employment Agreement between the Company and Gregory Roderick.
(1)10.8 Restrictive Covenant Agreement between the Company and Walter C.
Bowen.
(1)10.9 Restrictive Covenant Agreement between the Company and James W.
Ekberg.
(1)10.10 Restrictive Covenant Agreement between the Company and Eric W.
Jacobsen.
(1)10.11 Restrictive Covenant Agreement between the Company and Steven L.
Gish.
(1)10.12 Restrictive Covenant Agreement between the Company and Gregory
Roderick.
<PAGE>
(1)10.13 1995 Stock Incentive Plan.
(1)10.14 Form of Incentive Stock Option Agreement.
(1)10.15 Form of Nonqualified Stock Option Agreement.
(1)10.16 Administrative Services Agreement among the Company and certain of
the Bowen companies.
(1)10.17 Indemnity Agreement between the Company and Walter C. Bowen.
(1)10.18 Indemnity Agreement between the Company and James W. Ekberg.
(1)10.19 Indemnity Agreement between the Company and Eric W. Jacobsen.
(1)10.20 Indemnity Agreement between the Company and Steven L. Gish.
(1)10.21 Regulatory Agreement by and between the Company (as assignee) and
the Oregon Housing and Community Services Department ("OHCS").
(1)10.22 Form of First Amendment to Regulatory Agreement between the
Company and OHCS.
(1)10.23 Management Agreement regarding Park Place.
(1)10.24 Subordination and Attornment Agreement with The Canada Life
Assurance Company regarding Regency Park.
(1)10.25 Promissory Note from the Company to Sunshine Villa, Inc.
(1)10.26 Note from the Company to United States National Bank of Oregon.
(1)10.27 Line of Credit Instrument between the Company and United States
National Bank of Oregon.
(2)10.28 Letter of Understanding, effective as of March 8, 1996, between
the Company, Dr. Marvin S. Hausman, and Northwest Medical Research
Partners.
(2)10.29 Employment Agreement, effective as of March 20, 1996, between
David R. Gibson and the Company
<PAGE>
(2)10.30 Restrictive Covenant Agreement, effective as of March 20, 1996,
between David R. Gibson and the Company
(3)10.32 Preferred Stock and Warrant Agreement between Prudential Private
Equity Investors III, L.P. ("PPEI") and the Company dated as of
December 16, 1996.
(3)10.33 Stockholders Agreement among the Company, PPEI, and Walter C.
Bowen dated as of December 16, 1996.
(3)10.34 Registration Agreement between the Company and PPEI dated as of
December 16, 1996.
(3)10.35 Stock Purchase Warrant in favor of PPEI for 200,000 Shares of
Common Stock.
(3)10.36 First Amendment to Lease between the Company and Regency Park
Apartments Limited Partnership dated December 16, 1996.
(3)10.37 Second Amendment to Lease between the Company and Sterling Park,
L.L.C. dated December 16, 1996.
(3)10.38 Form of Indemnity Agreement between the Company and directors.
(3)21 List of Subsidiaries
(3)23.1 Consent of Coopers & Lybrand LLP
(3)24.1 Power of Attorney of Dana J. O'Brien.
(3)24.2 Power of Attorney of Martha L. Robinson.
(1) Incorporated by reference to Exhibits to the Company's Registration
Statement on Form S-1, effective December 20, 1995 (Registration No.
33-96912).
(2) Incorporated by reference to Exhibits to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995.
(3) Filed herewith.
447419-81 FILED
Sep 12 1995
Secretary of State
CERTIFICATE ACCOMPANYING
RESTATED ARTICLES OF INCORPORATED OF
BOWEN SENIOR LIVING MANAGEMENT, INC.
1. The name of the corporation is Bowen Senior Living Management, Inc.
(the "Corporation").
2. A copy of the Restated Articles of Incorporation ("Restated Articles")
is attached. Shareholder action was required to adopt the Restated Articles.
3. The Restated Articles were adopted by the shareholders of the
Corporation on August 28, 1995.
4. The shareholder vote for the adoption of the Restated Articles was
as follows:
Class Number of Number of Number of Number of
or Series Shares Votes Entitled Votes Cast Votes Cast
of Shares Outstanding To Be Cast For Against
- --------- ----------- -------------- ---------- ----------
Common
Stock 1,000 1,000 1,000 0
DATED: August 28, 1995.
BOWEN SENIOR LIVING MANAGEMENT, INC.
By: WALTER C. BOWEN
--------------------------------
Walter C. Bowen, President
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
BOWEN SENIOR LIVING MANAGEMENT, INC.
ARTICLE I
The name of the Corporation is Regent Assisted Living, Inc.
ARTICLE II
A. The Corporation is authorized to issue shares of two classes of stock:
25,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock.
When these Restated Articles of Incorporation become effective, each
of the shares of Common Stock issued and outstanding immediately before the time
these Restated Articles of Incorporation become effective shall be reclassified
and changed into and constitute 3,000 shares of fully paid Common Stock of the
Corporation without further action of any kind. No fractional shares shall be
issued on reclassification of the Common Stock and the number of shares for
which the Common Stock is reclassified shall be rounded up to the nearest whole
share.
B. Holders of Common Stock are entitled to one vote per share on any matter
submitted to the shareholders. On dissolution of the Corporation, after any
preferential amount with respect to the Preferred Stock has been paid or set
aside, the holders of Common Stock and the holders of any series of Preferred
Stock entitled to participate in the distribution of assets are entitled to
receive the net assets of the Corporation.
C. The Board of Directors is authorized, subject to limitations prescribed
by the Oregon Business Corporation Act, as amended from time to time (the
"Act"), and by the provisions of this Article, to provide for the issuance of
shares of Preferred Stock in series, to establish from time to time the number
of shares to be included in each series and to determine the designations,
relative rights, preferences and limitations of the shares of each series. The
authority of the Board of Directors with respect to each series includes
determination of the following:
(1) The number of shares in and the distinguishing designation of that
series;
<PAGE>
(2) Whether shares of that series shall have full, special,
conditional, limited or no voting rights, except to the extent otherwise
provided by the Act;
(3) Whether shares of that series shall be convertible and the terms
and conditions of the conversion, including provision for adjustment of the
conversion rate in circumstances determined by the Board of Directors;
(4) Whether shares of that series shall be redeemable and the terms
and conditions of redemption, including the date or dates upon or after which
they shall be redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions or at different redemption
dates;
(5) The dividend rate, if any, on shares of that series, the manner of
calculating any dividends and the preferences of any dividends;
(6) The rights of shares of that series in the event of voluntary or
involuntary dissolution of the Corporation and the rights of priority of that
series relative to the Common Stock and any other series of Preferred Stock on
the distribution of assets on dissolution; and
(7) Any other rights, preferences and limitations of that series that
are permitted by law to vary.
ARTICLE III
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for conduct as a director,
provided that this Article shall not eliminate the liability of a director for
any act or omission for which such elimination of liability is not permitted
under the Act. No amendment to the Act that further limits the acts or omissions
for which elimination of liability is permitted shall affect a director's
liability for any act or omission that occurs before the effective date of the
amendment.
ARTICLE IV
The Corporation shall indemnify to the fullest extent not prohibited
by law any current or former director of the Corporation who is made, or
threatened to be made, a party to an action, suit or proceeding, whether civil,
criminal, administrative, investigative or other (including an action, suit or
proceeding by or in the right of the Corporation), by reason of the fact that
such person is or was a director, officer, employee or agent of the Corporation
or a fiduciary within the meaning of the Employee Retirement Income Security Act
of 1974, as amended, with respect to any employee benefit plan of the
Corporation, or serves or served at the Corporation's request as a director,
officer, employee or agent, or as a fiduciary of an employee benefit plan, of
another corporation,
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<PAGE>
partnership, joint venture, trust or other enterprise. The Corporation shall pay
for or reimburse the reasonable expenses incurred by any such current or former
director in any such proceeding in advance of the final disposition of the
proceeding if the person sets forth in writing (i) the person's good faith
belief that the person is entitled to indemnification under this Article and
(ii) the person's agreement to repay all advances if it is ultimately determined
that the person is not entitled to indemnification under this Article. No
amendment to this Article that limits the Corporation's obligation to indemnify
any person shall have any effect on such obligation for any act or omission that
occurs before the later of the effective date of the amendment or the date that
notice of the amendment is given to the person. This Article shall not be deemed
exclusive of any other provisions for indemnification or advancement of expenses
of directors, officers, employees, agents and fiduciaries that may be included
in any statute, bylaw, agreement, general or specific action of the Board of
Directors, vote of shareholders or other document or arrangement.
ARTICLE V
The mailing address for the Corporation for notices is 2260 US Bancorp
Tower, 111 SW Fifth Avenue, Portland, Oregon 97204.
Executed: August 28, 1995.
BOWEN SENIOR LIVING MANAGEMENT, INC.
WALTER C. BOWEN
------------------------------------
Walter C. Bowen, President
3
<PAGE>
447419-81 FILED
Dec 13 1996
Secretary of State
ARTICLES OF AMENDMENT
OF
REGENT ASSISTED LIVING, INC.
(Establishing Series A and Series B Preferred Stock)
1. The name of the Corporation is Regent Assisted Living, Inc.
2. The Restated Articles of Incorporation of the Corporation are amended to
add a new Article II.D to the end of Article II to read in its entirety as
follows:
"D. Series A and Series B Preferred Stock. This Article II.D sets for the
designation, preferences, limitations and relative rights of two series of
Preferred Stock of the Corporation as determined by the Board of Directors of
the Corporation pursuant to its authority under ORS 60.134 and Article II.C
above. The shares of the first of such series shall be designated Series A
Preferred Stock ("Series A Preferred") and the number of shares constituting
such series shall be 1,666,667, and the shares of the second of such series
shall be designated Series B Preferred Stock ("Series B Preferred") and the
number of shares constituting such series shall be 382,882. The Series A
Preferred and the Series B Preferred shall be referred to collectively herein as
the "Preferred Stock." Except as otherwise provided herein or as otherwise
required by applicable law, all shares of Series A Preferred and Series B
Preferred shall be identical in all respects and shall entitle the holders
thereof to the same rights, preferences and privileges, subject to the same
qualifications, limitations and restrictions, as set forth below.
Section 1. Dividends.
(i) When and as declared by the Corporation's Board of Directors
and to the extent permitted under the Oregon Business Corporation Act, the
Corporation will pay preferential cumulative dividends to the holders of the
Preferred Stock as provided in this Section 1. Except as otherwise provided
herein, dividends on each share of Preferred Stock will accrue on a daily basis
at the rate of six percent per annum of the Liquidation Value thereof plus,
during any period in which accrued dividends have remained unpaid for more than
12 months, accrued and unpaid dividends thereon, determined on a quarterly
basis, from and including the date of issuance of such share of Preferred Stock
to and including the earlier of (a) the date on which the Liquidation Value of
such share of Preferred Stock plus any accrued and unpaid dividends thereon is
paid to the holder thereof upon any liquidation, dissolution or winding up of
the Corporation or upon any redemption by the Corporation, (b) the date on which
such share of Preferred Stock is converted into Common Stock or (c) the date as
of which the Weighted Average Market Price of the Common Stock for a period of
90 consecutive calendar days commencing after November 30, 1999, is at least
$12.00 per share (as appropriately adjusted for any combination or subdivision
of shares, stock dividend, stock split or other recapitalization). Such
dividends will accrue whether or not they have been declared and whether or not
there
<PAGE>
are profits, surplus or other funds of the Corporation legally available for the
payment of dividends. The date on which the Corporation initially issues any
share of Preferred Stock will be deemed to be its "date of issuance" regardless
of the number of times transfer of such share of Preferred Stock is made on the
stock records maintained by or for the Corporation and regardless of the number
of certificates which may be issued to evidence such share of Preferred Stock.
To the extent not paid on March 31, June 30, September 30, and December 31 of
each year beginning on March 31, 1997 (the "Dividend Payment Date"), all
dividends which have accrued on each share of Preferred Stock outstanding during
the three-month period (or other period in the case of the initial Dividend
Payment Date) shall be accumulated and shall remain accumulated dividends with
respect to each such share of Preferred Stock until paid. If at any time the
Corporation pays less than the total amount of dividends then accrued with
respect to the Preferred Stock, such payment will be distributed ratably among
the holders of the Preferred Stock on the basis of the amount of accrued and
unpaid dividends with respect to the shares of Preferred Stock owned by each
such holder.
(ii) In the event that at any time after dividends cease to
accrue on the Preferred Stock in accordance with Section 1(i)(c) above, and the
Corporation declares or pays any dividends upon the Common Stock (whether
payable in cash, securities or other property) other than dividends payable in
shares of Common Stock, the Corporation shall also declare and pay to the
holders of the Preferred Stock at the same time that it declares and pays such
dividends to the holders of the Common Stock the dividends which would have been
declared and paid with respect to the Common Stock issuable upon conversion of
the Preferred Stock had all of the outstanding Preferred Stock been converted
immediately prior to the record date for such dividend, or, if no record date is
fixed, the date as of which the record holders of Common Stock entitled to such
dividends are to be determined; provided that if any dividends consist of voting
securities, the Corporation shall make available to each holder of Preferred
Stock, at such holder's request, dividends consisting of non-voting securities
which are otherwise identical to the dividends consisting of voting securities
and which non-voting securities are entitled to vote under the same
circumstances as the Series B Preferred and are convertible into such voting
securities on the same terms as Series B Preferred is convertible into Series A
Preferred.
Section 2. Liquidation.
(i) Upon any liquidation, dissolution or winding up of the
Corporation, each holder of Preferred Stock shall be entitled to be paid, before
any distribution or payment is made upon any Junior Securities, an amount in
cash equal to the aggregate Liquidation Value of all Preferred Stock held by
such holder (plus all accrued or declared dividends unpaid thereon), and the
holders of Preferred Stock shall not be entitled to any further payment. If,
upon any such liquidation, dissolution or winding up of the Corporation, the
Corporation's assets to be distributed among the holders of the Preferred Stock
are insufficient to permit payment to such holders of the aggregate amount which
they are entitled to be paid hereunder, then the entire assets to be distributed
to the Corporation's
2
<PAGE>
stockholders shall be distributed pro rata among such holders based upon the
aggregate Liquidation Value of all Preferred Stock held by each such holder
(plus all accrued or declared dividends unpaid thereon). At least 30 days prior
to any liquidation, dissolution or winding up of the Corporation, the
Corporation shall give written notice of such event to each record holder of
Preferred Stock, specifying the amount of liquidation proceeds per share to be
distributed to the holders of the Preferred Stock and to the holders of the
Common Stock.
(ii) At least 30 days prior to the consummation of any
Fundamental Change, the Corporation shall give written notice of such event to
each record holder of the Preferred Stock, describing in reasonable detail the
terms and conditions of the Fundamental Change, and the Corporation shall give
each record holder of the Preferred Stock prompt written notice of any material
change in such terms and conditions. Upon the election of the holders of a
majority of the outstanding Preferred Stock delivered to the Corporation within
ten days after receipt of the written notice referred to in the preceding
sentence, such Fundamental Change shall be deemed to be a liquidation,
dissolution and winding up of the Corporation for purposes of this Section 2,
and the holders of the Preferred Stock shall be entitled to receive payment from
the Corporation equal to the amounts payable with respect to the Preferred Stock
upon a liquidation, dissolution or winding up of the Corporation in cancellation
of their shares of Preferred Stock upon the consummation of the Fundamental
Change. If the Fundamental Change is not consummated, the holders' election
shall be rescinded automatically or if there have been material changes in the
terms and conditions of the Fundamental Change, the holders of a majority of the
outstanding Preferred Stock may rescind the election by written notice to the
Corporation, subject in each case to exercise in the future upon another
Fundamental Change.
Section 3. Voting Rights.
(i) The holders of Preferred Stock shall have no right to vote on
matters to be voted on by the stockholders of the Corporation except as provided
in this Section 3 and as otherwise expressly required by applicable law;
provided that in any event, each holder of Preferred Stock shall be entitled to
notice of all stockholder meetings at the same time and in the same manner as
notice is given to the stockholders entitled to vote at any such meeting.
(ii) The holders of Series A Preferred shall be entitled to vote,
together as a single class with the holders of the Common Stock and the other
classes of the Corporation's capital stock voting with the Common Stock, on all
matters submitted to the stockholders for a vote with each share of Series A
Preferred having a number of votes equal to the number of shares of Common Stock
issuable upon the conversion of such share on the record date for the
determination of stockholders entitled to vote and shall be entitled to notice
of each stockholders meeting in accordance with the Bylaws of the Corporation.
3
<PAGE>
(iii) In addition to and not in derogation of any voting rights
expressly provided under applicable law, the holders of Series B Preferred shall
be entitled to vote, together as a single class with the holders of Common Stock
and Series A Preferred and all other classes of the Corporation's capital stock
voting with the Common Stock, with respect to each Voting Event (as defined
below) with each share of Series B Preferred having a number of votes equal to
the number of shares of Common Stock issuable upon conversion of such share on
the record date for the determination of stockholders entitled to vote, and the
holders of Series B Preferred shall be entitled to notice in accordance with the
Bylaws of the Corporation of each stockholders meeting held in connection with
any Voting Event. Each of the following corporate actions, to the extent
presented for the approval of stockholders, shall constitute a "Voting Event":
(a) any change in the authorized number of shares of the
Series A Preferred, the Series B Preferred or the Common Stock or any other
amendment to the Articles of Incorporation or Bylaws of the Corporation;
(b) the liquidation, dissolution or winding-up of the
Corporation, the filing of a bankruptcy, insolvency or receivership
petition by the Corporation or the reclassification or recapitalization of
the capital stock of the Corporation;
(c) any merger, consolidation or other business combination
or reorganization of the Corporation or (except as otherwise permitted by
subparagraph (g) below) any of its Subsidiaries with another entity or
entities;
(d) the sale, lease, exchange or other disposition of all or
substantially all of the property and assets of the Corporation or more
than 50% of the property and assets of the Corporation and its Subsidiaries
(excluding cash and cash equivalents and determined on a consolidated basis
in accordance with generally accepted accounting principles) in any
transaction or series of related transactions (other than sales of
inventory in the ordinary course of business);
(e) any issuance of shares of capital stock of the
Corporation other than upon exercise of options and warrants outstanding on
the date of issuance of the Preferred Stock and up to an aggregate of
600,000 shares of Common Stock issued upon exercise of options issued or
granted to officers, directors, employees, agents, consultants, advisors
and independent contractors of the Corporation and its Subsidiaries
pursuant to any stock option plan adopted by the Corporation's board of
directors (as such number of shares is equitably adjusted for subsequent
stock splits, stock combinations, stock dividends and recapitalizations,
the "Reserved Stock");
(f) any issuance of any options, warrants or other rights to
acquire any shares of capital stock of the Corporation other than the
Reserved Stock;
4
<PAGE>
(g) any acquisition (whether by purchase of stock or assets,
merger or otherwise) by the Corporation or any of its Subsidiaries of any
other entity or business or any interest therein in connection with which
the aggregate consideration to be paid by the Corporation and its
Subsidiaries exceeds $250,000 (including the direct and indirect assumption
of liabilities) in any transaction or series of related transactions;
(h) any material change in the nature of the business of the
Corporation and its Subsidiaries from that of owning, operating and/or
managing assisted living facilities and all related activities contributing
to or facilitating such business; and
(i) the election or removal of the chief executive officer
of the Corporation.
Section 4. Conversion.
4A. Right to Convert.
(i) Subject to the terms and conditions of this Section 4, each
holder of Preferred Stock shall have the right, at its option, to convert all or
any portion of the Preferred Stock (including any fraction of a share) held by
such holder as follows:
(a) at any time in the case of Series A Preferred, into such
number of fully paid and nonassessable shares of Common Stock, and at any
time in the case of Series B Preferred upon the occurrence of a Conversion
Event (as defined below), into such number of fully paid and nonassessable
shares of Common Stock, as is obtained by multiplying the number of shares
of Preferred Stock so to be converted by $6.00 and dividing the result by
the conversion price of $6.00 per share, or by the conversion price as last
adjusted and in effect at the date any Preferred Stock is surrendered for
conversion (such price, or such price as last adjusted, being referred to
herein as the "Conversion Price"); and
(b) in the case of Series B Preferred, into an equal number
of fully paid and nonassessable shares of Series A Preferred upon the
occurrence of a Conversion Event.
(ii) In the case of the Conversion Events described in clauses
(a) and (b) below, the right of conversion shall apply only to the shares of
Series B Preferred that are subject to the transfers or conversions described
therein, and in the case of the Conversion Events described in clauses (c)
through (j) below, the right of conversion shall apply to all shares of Series B
Preferred (except as otherwise provided in clause (g)). In addition, a
conversion in connection with a Conversion Event described in clauses (c)
through (j) below shall be exercisable only for a period of 60 days following
written notice
5
<PAGE>
of such Conversion Event from the Corporation and shall lapse thereafter until
the occur rence of a subsequent Conversion Event. Each of the following shall
constitute a "Conversion Event" with respect to the shares of Series B
Preferred:
(a) the sale or other transfer of such shares by Prudential
Private Equity Investors III, L.P. ("PPEI") or an affiliate of PPEI, or by
The Prudential Insurance Company of America ("Prudential") or an affiliate
of Prudential, to a party not affiliated with PPEI or Prudential;
(b) the distribution of such shares to any limited partner
of PPEI, other than Prudential Equity Investors, Inc. or Prudential or any
other affiliate of PPEI or Prudential;
(c) a sale of all or substantially all the assets of the
Corporation or of the Corporation and its Subsidiaries on a consolidated
basis (in any transaction or series of related transactions other than in
the ordinary course of business) or any other acquisition of the
Corporation by means of a merger, a negotiated stock purchase or a purchase
pursuant to a tender offer for substantially all of the outstanding shares
of Common Stock of the Corporation;
(d) if for any period of two consecutive fiscal quarters of
the Corporation, the quarterly financial statements of the Corporation
reflect an aggregate decline of 20% or more in the Corporation's
consolidated net income from the fiscal quarter immediately preceding such
consecutive fiscal quarters, determined in accordance with generally
accepted accounting principles;
(e) if the quarterly financial statements of the Corporation
for any fiscal quarter reflect a decline of 50% or more in the
Corporation's consolidated net income from the immediately preceding fiscal
quarter, determined in accordance with generally accepted accounting
principles;
(f) if for any period of two consecutive fiscal quarters of
the Corporation, the quarterly financial statements of the Corporation
reflect an earnings before interest, taxes, depreciation and amortization
("EBITDA") that is more than 20% less than the EBITDA contained in the then
current annual budget showing projected EBITDA for such quarter as approved
by the Corporation's board of directors from time to time;
(g) any default or event of default under any agreement
pursuant to which the Corporation or any of its Subsidiaries has incurred
indebtedness for borrowed money in excess of $500,000, unless and until
such default or event of default is cured or waived (provided that the
holder of the shares proposed to be converted is not a lender, or in the
case of PPEI, Prudential or their affiliates, neither PPEI, Prudential or
any of their affiliates is a lender, under such agreement);
6
<PAGE>
(h) if the total number of shares of Common Stock held by,
or obtainable upon the exercise of rights held by, PPEI and its affiliates
as a percentage of the total number of shares of Common Stock outstanding
on a fully-diluted basis is less than 50% of such percentage on the date of
original issuance of the Preferred Stock;
(i) if, during any twelve-month period, more than 30% of the
Corporation's directors have resigned or have been replaced; or
(j) upon the sale or transfer of more than 50% of the Common
Stock owned by the executive employees of the Corporation and its Subsid
iaries as a group immediately following the original issuance of the
Preferred Stock, or the sale or transfer of more than 50% of the Common
Stock owned by the Original Stockholder immediately following the original
issuance of the Preferred Stock.
4B. Conversion Procedure.
(i) Except as otherwise provided herein, each conversion of
Preferred Stock shall be deemed to have been effected as of the close of
business on the date on which the certificate or certificates representing the
Preferred Stock to be converted have been surrendered at the principal office of
the Corporation (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Preferred
Stock). At such time as such conversion has been effected, the rights of the
holder of such Preferred Stock as such holder shall cease and the Person or
Persons in whose name or names any certificate or certificates for shares of
Conversion Stock or Series A Preferred, as the case may be, are to be issued
upon such conversion shall be deemed to have become the holder or holders of
record of the shares represented thereby.
(ii) The conversion rights of each share of Preferred Stock shall
terminate on the date the Corporation has paid to the holder of such share the
Liquidation Value thereof (plus all accrued or declared dividends unpaid
thereon).
(iii) Notwithstanding any other provision hereof, if a conversion
of any Preferred Stock is to be made in connection with a Public Offering or the
sale of the Corporation or other transaction involving the Corporation, the
conversion of any shares of Preferred Stock may, at the election of the holder
thereof, be conditioned upon the consummation of the Public Offering or sale or
other transaction in which case such conversion shall not be deemed to be
effective until the consummation of the Public Offering or sale or other
transaction.
(iv) As soon as possible after a conversion has been effected
(but in any event within three business days in the case of subparagraph (a)
below), the Corporation shall deliver to the converting holder:
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<PAGE>
(a) a certificate or certificates representing the number of
shares of Conversion Stock or Series A Preferred, as the case may be,
issuable by reason of such conversion in such name or names and such
denomination or denominations as the converting holder has specified;
(b) payment in an amount equal to all accrued dividends
unpaid with respect to each share of Preferred Stock converted into
Conversion Stock, which have not been paid prior thereto, plus the amount
payable under subparagraph (viii) below with respect to such conversion;
and
(c) a certificate representing any shares of Preferred Stock
which were represented by the certificate or certificates delivered to the
Corporation in connection with such conversion but which were not
converted.
(v) If the Corporation is not permitted under applicable law to
pay any portion of the accrued dividends on the shares of Preferred Stock being
converted into Conversion Stock, the Corporation shall pay such dividends to the
converting holder as soon thereafter as funds of the Corporation are legally
available for such payment. At the request of any such converting holder, the
Corporation shall provide such holder with written evidence of its obligation to
such holder.
(vi) The issuance of certificates for shares of Conversion Stock
or Series A Preferred, as the case may be, upon any conversion of Preferred
Stock shall be made without charge to the holders thereof for any issuance tax
in respect thereof or other cost incurred by the Corporation in connection with
such conversion and the related issuance of shares; provided that the
Corporation shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than that of the holder of the shares which are being converted. Upon
conver sion of each share of Preferred Stock, the Corporation shall take all
such actions as are necessary in order to insure that the Conversion Stock or
Series A Preferred, as the case may be, issuable with respect to such conversion
shall be validly issued, fully paid and nonassessable.
(vii) The Corporation shall not close its transfer books against
the transfer of Conversion Stock or Series A Preferred issued or issuable upon
conversion of Preferred Stock in any manner which interferes with the timely
conversion of the Preferred Stock. The Corporation shall assist and cooperate
with any holder of Preferred Stock required to make any governmental filings or
obtain any governmental approval prior to or in connection with any conversion
of Preferred Stock hereunder (including, without limitation, making any filings
required to be made by the Corporation).
(viii) If any fractional interest in a share of Conversion Stock
would, except for the provisions of this subparagraph, be deliverable upon any
conversion of Preferred Stock, the Corporation, in lieu of delivering the
fractional share therefor, shall pay
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<PAGE>
an amount to the holder thereof equal to the Market Price of such fractional
interest as of the date of conversion.
(ix) The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Series A Preferred and
Common Stock, solely for the purpose of issuance upon the conversion of the
Series B Preferred, such number of shares of Series A Preferred and Common Stock
issuable upon the conversion of all outstanding Series B Preferred, and the
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of issuance upon the
conversion of the Series A Preferred, such number of shares of Common Stock
issuable upon conversion of all outstanding Series A Preferred. All shares of
stock which are so issuable shall, when issued, be duly and validly issued,
fully paid and nonassessable and free from all taxes, liens and charges. The
Corporation shall take all such actions as may be necessary to ensure that all
such shares may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of such stock may be listed (except for official notice of
issuance which shall be immediately delivered by the Corporation upon each such
issuance). The Corporation shall not take any action which would cause the
number of authorized but unissued shares of Series A Preferred or Common Stock
to be less than the required number of such shares to be reserved hereunder.
4C. Conversion Price.
(i) The initial Conversion Price of the Series A Preferred and
the Series B Preferred shall be $6.00. In order to prevent dilution of the
conversion rights granted hereunder, the Conversion Price shall be subject to
adjustment from time to time pursuant to this Section 4.
(ii) If and whenever the Corporation issues or sells, or in
accordance with paragraph 4D is deemed to have issued or sold, any shares of its
Common Stock for a consideration per share less than the Conversion Price in
effect immediately prior to the time of such issue or sale, then forthwith upon
such issue or sale the Conversion Price shall be reduced to the Conversion Price
determined by dividing (a) the sum of (1) the product derived by multiplying the
Conversion Price in effect immediately prior to such issue or sale times the
number of shares of Common Stock Deemed Outstanding immediately prior to such
issue or sale, plus (2) the consideration, if any, received by the Corporation
upon such issue or sale, by (b) the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale.
(iii) Notwithstanding the foregoing, there shall be no adjustment
in the Conversion Price under this paragraph 4C as a result of issuances or
deemed issuances of Common Stock (a) upon the grant or exercise of any options
with respect to any shares of the Reserved Stock (a "Permitted Option"), or (b)
upon the conversion of the Preferred Stock.
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<PAGE>
4D. Effect on Conversion Price of Certain Events. For purposes of
determining the adjusted Conversion Price hereunder, the following shall be
applicable:
(i) Issuance of Rights or Options. If the Corporation in any
manner grants or sells any Options and the price per share for which Common
Stock is issuable upon the exercise of such Options, or upon conversion or
exchange of the Convertible Securities issuable upon exercise of such Options,
is less than the Conversion Price in effect immediately prior to the time of the
granting or sale of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Corporation at the time of the granting or sale of
such Options for such price per share. For purposes of this paragraph, the
"price per share for which Common Stock is issuable" shall be determined by
dividing (A) the total amount, if any, received or receivable by the Corporation
as consideration for the granting or sale of such Options, plus the minimum
aggregate amount of additional consideration payable to the Corporation upon
exercise of all such Options, plus in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the issuance or sale of
such Convertible Securities and the conversion or exchange thereof, by (B) the
total maximum number of shares of Common Stock issuable upon the exercise of
such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No further adjustment of
the Conversion Price shall be made when Convertible Securities are actually
issued upon the exercise of such Options or when Common Stock is actually issued
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in
any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this paragraph, the "price per share for which Common Stock is issuable"
shall be determined by dividing (A) the total amount received or receivable by
the Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (B)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities. No further adjustment of the
Conversion Price shall be made when Common Stock is actually issued upon the
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustments of the Conversion Price had been or are to be made pursuant to
other
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provisions of this Section 4, no further adjustment of the Conversion Price
shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
price provided for in any Options, the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exchangeable for Common
Stock changes at any time, the Conversion Price in effect at the time of such
change shall be adjusted to the Conversion Price which would have been in effect
at such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or changed
conversion rate, as the case may be, at the time initially granted, issued or
sold.
(iv) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Security without the exercise of any such
Option or right, the Conversion Price then in effect hereunder shall be adjusted
to the Conversion Price which would have been in effect at the time of such
expiration or termination had such Option or Convertible Security, to the extent
outstanding immediately prior to such expiration or termination, never been
issued.
(v) Calculation of Consideration Received. If any Common Stock,
Option or Convertible Security is issued or sold or deemed to have been issued
or sold for cash, the consideration received therefor shall be deemed to be the
gross purchase price therefor. In case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Corporation shall be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Corporation shall be the Market Price thereof as of the date of receipt. If any
Common Stock, Option or Convertible Security is issued to the owners of the
non-surviving entity in connection with any merger in which the Corporation is
the surviving corporation, the amount of consideration therefor shall be deemed
to be the fair value of such portion of the net assets and business of the
non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any consideration
other than cash and securities shall be determined jointly by the Corporation
and the holders of a majority of the outstanding Preferred Stock. If such
parties are unable to reach agreement within a reasonable period of time, the
fair value of such consideration shall be determined by an independent appraiser
experienced in valuing such type of consideration jointly selected by the
Corporation and the holders of a majority of the outstanding Preferred Stock.
The determination of such appraiser shall be final and binding upon the parties,
and the fees and expenses of such appraiser shall be borne equally by the
Corporation on the one hand and the holders of the outstanding Preferred Stock
on the other hand, and the portion of the cost to be borne by the holders of
Preferred Stock will be apportioned among such holders pro rata on the basis of
the number of shares of Preferred Stock owned by each such holder.
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(vi) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the Option
shall be deemed to have been issued for no consideration.
(vii) Record Date. If the Corporation takes a record of the
holders of Common Stock for the purpose of entitling them (a) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (b) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date shall be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or upon the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
4E. Subdivision or Combination of Common Stock. If the Corporation at
any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced, and if the Corporation at any
time combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
4F. Subdivision or Combination of Preferred Stock. If the Corporation
at any time subdivides by any stock split, stock dividend, recapitalization or
otherwise the outstanding shares of either the Series A Preferred or the Series
B Preferred into a greater number of shares, then the shares of the other series
shall be similarly subdivided, and if the Corporation at any time combines (by
reverse stock split or otherwise) the outstanding shares of the Series A
Preferred or the Series B Preferred into a smaller number of shares, then the
shares of the other series shall be similarly combined.
4G. Reorganization, Reclassification, Consolidation, Merger or Sale.
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Corporation's assets or other
transaction in each case which is effected in such a manner that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as an "Organic Change". Prior to the
consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and sub stance reasonably satisfactory to the holders of a
majority of the Preferred Stock then outstanding) to insure that each of the
holders of Preferred Stock shall thereafter have the right to acquire and
receive, in lieu of or in addition to (as the case may be), the shares of
Conversion Stock immediately theretofore acquirable and receivable upon the
conversion of such holder's Preferred Stock, such shares of stock, securities or
assets as such holder would have received in connection with such Organic Change
if such holder had converted its
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Preferred Stock into Conversion Stock immediately prior to such Organic Change.
In each such case, the Corporation shall also make appropriate provisions (in
form and substance reasonably satisfactory to the holders of a majority of the
Preferred Stock then outstanding) to insure that the provisions of this Section
4 and Section 5 and 6 hereof shall thereafter be applicable to the Preferred
Stock (including, in the case of any such consolidation, merger or sale in which
the successor entity or purchasing entity is other than the Corporation, an
immediate adjustment of the Conversion Price to the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, and a
corresponding immediate adjustment in the number of shares of Conversion Stock
acquirable and receivable upon conversion of Preferred Stock, if the value so
reflected is less than the Conversion Price in effect immediately prior to such
consolidation, merger or sale). The Corporation shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Corporation) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument (in
form and substance reasonably satisfactory to the holders of a majority of the
Preferred Stock then outstanding), the obligation to deliver to each such holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.
4H. Certain Events. If any event occurs of the type contemplated by
the provisions of this Section 4 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Corporation's board of directors shall make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of Preferred Stock;
provided that no such adjustment shall increase the Conversion Price as
otherwise determined pursuant to this Section 4 or decrease the number of shares
of Conversion Stock issuable upon conversion of each share of Preferred Stock.
4I. Notices.
(i) Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Preferred Stock,
setting forth in reasonable detail and certifying the calculation of such
adjustment.
(ii) The Corporation shall give written notice to all holders of
Preferred Stock at least 20 days prior to the date on which the Corporation
closes its books or takes a record (a) with respect to any dividend or
distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the
holders of Preferred Stock at least 20 days prior to the date on which any
Organic Change shall take place.
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4J. Automatic Conversion. All of the outstanding Preferred Stock shall
be automatically converted into Conversion Stock upon the closing of the sale of
shares pursuant to a Qualified Public Offering. Any such automatic conversion
shall only be effected at the time of and subject to the closing of the sale of
such shares pursuant to such Qualified Public Offering.
4K. Additional Adjustments. If a "Special Adjustment Event" occurs
then the Conversion Price of the Preferred Stock shall be readjusted to the
Conversion Price which would have been in effect if the Conversion Price at the
original issuance of the Preferred Stock had been $5.50 per share. A "Special
Adjustment Event" shall be deemed to have occurred if the Corporation's
independent outside auditors have not certified in writing to the holders of the
Preferred Stock within 30 days after December 31, 1997, that the Corporation
has, during the calendar year ending December 31, 1997, opened and secured all
necessary permits and approvals for the operation of (i) at least ten new
assisted living facilities (not operated or managed by the Company as of the
date of issuance) and (ii) at least 1,000 units within all such new assisted
living facilities. For purposes of calculating the number of new facilities and
units opened by the Corporation, facilities and units in facilities in which the
Corporation has an ownership interest of at least 50% or a lease of at least 15
years (including any available options or extensions of such lease) shall be
counted in their entirety, whereas facilities and units in facilities for which
the Corporation obtains a management contract but in which the Corporation does
not have an ownership interest of at least 50% or a lease of at least 15 years
(including any available options or extensions of such lease) ("Managed
Facilities" and "Managed Units," respectively) shall be counted as one-third of
a facility and one-third of a unit, respectively; provided that no more than
three Managed Facilities and 300 Managed Units (counting as one new assisted
living facility and 100 new units, respectively) shall be counted for purposes
of determining whether a Special Adjustment Event has occurred. Notwithstanding
anything to the contrary set forth in this paragraph 4K, no adjustment to the
Conversion Price shall be made pursuant to this paragraph 4K if the effect of
such adjustment would be to increase the Conversion Price then in effect.
Section 5. Liquidating Dividends.
Prior to the time that the Corporation ceases to accrue dividends on
the Preferred Stock as a result of Section 1(i)(c) hereof, if the Corporation
declares or pays a dividend upon the Common Stock payable otherwise than in cash
out of earnings or earned surplus (determined in accordance with generally
accepted accounting principles, consistently applied) except for a stock
dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the
Corporation shall pay to the holders of Preferred Stock at the time of payment
thereof the Liquidating Dividends which would have been paid on the shares of
Conversion Stock had such Preferred Stock been converted immediately prior to
the date on which a record is taken for such Liquidating Dividend, or, if no
record is taken, the date as of which the record holders of Common Stock
entitled to such dividends are to be determined; provided that if the
Liquidating Dividends consist of voting securities, the
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Corporation shall make available to each holder of Series B Preferred, at such
holder's request, Liquidating Dividends consisting of securities which are
non-voting (except as otherwise required by law), which are otherwise identical
to the Liquidating Dividends consisting of voting securities and which are
convertible into such voting securities on the same terms as Series B Preferred
is convertible into Series A Preferred or Common Stock.
Section 6. Purchase Rights.
If at any time the Corporation grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
"Purchase Rights"), then each holder of Preferred Stock shall be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if such holder had held
the number of shares of Conversion Stock acquirable upon conversion of such
holder's Preferred Stock immediately before the date on which a record is taken
for the grant, issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights; provided that
if the Purchase Rights involve voting securities, the Corporation shall make
available to each holder of Preferred Stock, at such holder's request, Purchase
Rights involving non-voting securities which are otherwise identical to the
Purchase Rights involving voting securities and which non-voting securities are
entitled to vote under the same circumstances as the Series B Preferred and are
convertible into such voting securities on the same terms as Series B Preferred
is convertible into Series A Preferred or Common Stock.
Section 7. Events of Noncompliance.
(i) Definition. An Event of Noncompliance shall have occurred if:
(a) the Corporation fails to pay on any Dividend Payment
Date the full amount of dividends then accrued on the Preferred Stock,
whether or not such payment is legally permissible or is prohibited by any
agreement to which the Corporation is subject;
(b) the Corporation breaches or otherwise fails to perform
or observe any other material covenant or agreement set forth herein, in
the Purchase Agreement or in the Stockholders Agreement and such breach or
failure continues uncured for a period of 30 days;
(c) the Corporation or any material Subsidiary makes an
assignment for the benefit of creditors or admits in writing its inability
to pay its debts generally as they become due; or an order, judgment or
decree is entered adjudicating the Corporation or any material Subsidiary
bankrupt or insolvent; or any order for relief with respect to the
Corporation or any material Subsidiary is entered
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under the Federal Bankruptcy Code; or the Corporation or any material
Subsidiary petitions or applies to any tribunal for the appointment of a
custodian, trustee, receiver or liquidator of the Corporation or any
material Subsidiary or of any substantial part of the assets of the
Corporation or any material Subsidiary, or com mences any proceeding (other
than a proceeding for the voluntary liquidation and dissolution of a
Material Subsidiary) relating to the Corporation or any material Subsidiary
under any bankruptcy, reorganization, arrangement, insolvency, readjustment
of debt, dissolution or liquidation law of any jurisdiction; or any such
petition or application is filed, or any such proceeding is commenced,
against the Corporation or any material Subsidiary and either (a) the
Corporation or any such material Subsidiary by any act indicates its
approval thereof, consent thereto or acquiescence therein or (b) such
petition, application or proceeding is not dismissed within 60 days;
(d) the Corporation or any material Subsidiary defaults in
the performance of any obligation or agreement if the effect of such
default is to cause an amount exceeding $500,000 to become due prior to its
stated maturity or to permit the holder or holders of any obligation to
cause an amount exceeding $500,000 to become due prior to its stated
maturity and such default continues uncured and is not waived for a period
of 30 days.
(ii) Consequences of Events of Noncompliance.
(a) If an Event of Noncompliance has occurred, the dividend
rate on the Preferred Stock shall increase immediately by an increment of
one percentage point. Thereafter, until such time as no Event of
Noncompliance exists, the dividend rate shall increase automatically at the
end of each succeeding 90-day period by an additional increment of one
percentage point (but in no event shall the dividend rate exceed the
greater of (i) 12% or (ii) the prime rate announced from time to time by
the U.S. Bank of Oregon plus 300 basis points). Any increase of the
dividend rate resulting from the operation of this subparagraph shall
terminate as of the close of business on the date on which no Event of
Noncompliance exists, subject to subsequent increases pursuant to this
paragraph.
(b) If any Event or Events of Noncompliance has occurred and
has continued for 730 days, the number of directors constituting the
Corporation's Board of Directors shall, at the request of the holders of a
majority of the Preferred Stock then outstanding, be increased by such
number which shall constitute a minimum majority of the Board of Directors
(including the directors designated by the holder(s) of the Preferred Stock
pursuant to the Stockholders Agreement), and the holders of Preferred Stock
shall have the special right, voting separately as a single class (with
each share being entitled to one vote) and to the exclusion of all other
classes of the Corporation's stock, to elect individuals to fill such newly
created directorships, to remove any individuals elected to such
directorships and to fill any
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vacancies in such directorships. The special right of the holders of
Preferred Stock to elect members of the Board of Directors may be exercised
at the special meeting called pursuant to this subparagraph (b), at any
annual or other special meeting of stockholders and, to the extent and in
the manner permitted by applicable law, pursuant to a written consent in
lieu of a stockholders meeting. Such special right shall continue until
such time as there is no longer any Event of Noncompliance in existence, at
which time such special right shall terminate subject to revesting upon the
occurrence and continuation of any Event of Noncompliance which gives rise
to such special right hereunder.
At any time when such special right has vested in the holders of
Preferred Stock, a proper officer of the Corporation shall, upon the written
request of the holder of at least 10% of the Preferred Stock then outstanding,
addressed to the secretary of the Corporation, call a special meeting of the
holders of Preferred Stock for the purpose of electing directors pursuant to
this subparagraph. Such meeting shall be held at the earliest legally
permissible date at the principal office of the Corporation, or at such other
place as first designated by the holders of at least 10% of the Preferred Stock
then outstanding. If such meeting has not been called by a proper officer of the
Corporation within 10 days after personal service of such written request upon
the secretary of the Corporation or within 20 days after mailing the same to the
secretary of the Corporation at its principal office, then the holders of at
least 10% of the Preferred Stock then outstanding may designate in writing one
of their number to call such meeting at the expense of the Corporation, and such
meeting may be called by such Person so designated upon the notice required for
annual meetings of stockholders and shall be held at the Corporation's principal
office, or at such other place designated by the holders of at least 10% of the
Preferred Stock then outstanding. Any holder of Preferred Stock so designated
shall be given access to the stock record books of the Corporation for the
purpose of causing a meeting of stockholders to be called pursuant to this
subparagraph.
At any meeting or at any adjournment thereof at which the holders
of Preferred Stock have the special right to elect directors, the presence, in
person or by proxy, of the holders of a majority of the Preferred Stock then
outstanding shall be required to constitute a quorum for the election or removal
of any director by the holders of the Preferred Stock exercising such special
right. The vote of a majority of such quorum shall be required to elect or
remove any such director.
Any director so elected by the holders of Preferred Stock shall
continue to serve as a director until the expiration of the lesser of (a) a
period of six months following the date on which there is no longer any Event of
Noncompliance in existence or (b) the remaining period of the full term for
which such director has been elected. After the expiration of such six-month
period or when the full term for which such director has been elected ceases
(provided that the special right to elect directors has terminated), as the case
may be, the number of directors constituting the Board of Directors of the
Corporation shall decrease to such number as constituted the whole Board of
Directors of the Corporation
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immediately prior to the occurrence of the Event or Events of Noncompliance
giving rise to the special right to elect directors.
(c) If any Event of Noncompliance exists, each holder of
Preferred Stock shall also have any other rights which such holder is
entitled to under any contract or agreement at any time and any other
rights which such holder may have pursuant to applicable law.
Section 8. Registration of Transfer.
The Corporation shall keep at its principal office a register for the
registration of Preferred Stock. Upon the surrender of any certificate
representing shares of Preferred Stock at such place, the Corporation shall, at
the request of the record holder of such certificate, execute and deliver (at
the Corporation's expense) a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of Preferred Stock
represented by the surrendered certificate. Each such new certificate shall be
registered in such name and shall represent such number of shares of Preferred
Stock as is requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate. The issuance of
new certificates shall be made without charge to the holders of the surrendered
certificates for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such issuance (but not including any transfer
taxes).
Section 9. Replacement.
Upon receipt of evidence reasonably satisfactory to the Corporation
(an affidavit of the registered holder shall be satisfactory) of the ownership
and the loss, theft, destruction or mutilation of any certificate evidencing
shares of Preferred Stock, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor its own agreement shall be satisfactory), or, in the case
of any such mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of shares of Preferred Stock
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate.
Section 10. Definitions.
"Common Stock" means the Common Stock, no par value, of the
Corporation, and any capital stock of any class of the Corporation hereafter
authorized which is not limited to a fixed sum or percentage of any stated value
in respect to the rights of the holders thereof to participate in dividends or
in the distribution of assets upon any liquidation, dissolution or winding up of
the Corporation.
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"Common Stock Deemed Outstanding" means, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock issuable upon exercise of any Option or conversion of any
Convertible Securities granted or issued by the Corporation prior to the
effective date hereof, plus the number of shares of Common Stock deemed to be
outstanding pursuant to paragraphs 4D(i) and (ii) hereof whether or not the
Options or Convertible Securities are actually exercisable at such time.
"Conversion Stock" means shares of Common Stock; provided that if
there is a change such that the securities issuable upon conversion of either
series of Preferred Stock are issued by an entity other than the Corporation or
there is a change in the class of securities so issuable, then the term
"Conversion Stock" shall mean one share of the security issuable upon conversion
of the such series of Preferred Stock if such security is issuable in shares, or
shall mean the smallest unit in which such security is issuable if such security
is not issuable in shares.
"Convertible Securities" means any stock or securities convertible
into or exchangeable for Common Stock.
"Fundamental Change" shall mean any of the following transactions: (a)
the consolidation or merger of the Corporation with or into another entity or
entities (other than any merger in which the Corporation is the surviving entity
and immediately after the merger the holder(s) of the Preferred Stock, the
Original Stockholder and his Permitted Transferees and affiliates collectively
are both (i) the record owners of capital stock of the Corporation possessing
the voting power (under ordinary circumstances) to elect a majority of the
Corporation's Board of Directors and (ii) the record and beneficial owners of at
least 50% of the Corporation's issued and outstanding Common Stock, including
the Preferred Stock on an as-if-converted basis); (b) the sale or transfer by
the Corporation of all or substantially all of its assets (determined for the
Corporation either alone or on a consolidated basis); and (c) the sale, transfer
or issuance or series of sales, transfers and/or issuances of shares of the
Corporation's capital stock by the Corporation or any holder thereof which
results in the holder(s) of the Preferred Stock, the Original Stockholder and
his Permitted Transferees and affiliates ceasing to be collectively either (i)
the record owners of capital stock of the Corporation possessing the voting
power (under ordinary circumstances) to elect a majority of the Corporation's
Board of Directors or (ii) the record and beneficial owners of at least 50% of
the Corporation's issued and outstanding Common Stock, including the Preferred
Stock on an as-if-converted basis.
"Junior Securities" means any of the Corporation's capital stock or
other equity securities other than the Preferred Stock.
"Liquidation Value" of any share of Preferred Stock as of any
particular date shall be equal to $6.00 (as such amount is equitably adjusted
for subsequent stock splits, stock combinations, stock dividends and
recapitalizations affecting the Preferred Stock).
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"Market Price" of any security means the average of the closing prices
of such security's sales on all securities exchanges on which such security may
at the time be listed, or, if there has been no sales on any such exchange on
any day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted in the
NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is
not quoted in the NASDAQ System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which "Market Price" is being determined and the 20 consecutive business days
prior to such day. If at any time such security is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
"Market Price" shall be the fair value thereof determined jointly by the
Corporation and the holders of a majority of the Preferred Stock. If such
parties are unable to reach agreement within a reasonable period of time, such
fair value shall be determined by an independent appraiser experienced in
valuing securities jointly selected by the Corporation and the holders of a
majority of the Preferred Stock. The determination of such appraiser shall be
final and binding upon the parties, and the Corporation shall pay the fees and
expenses of such appraiser.
"Options" means any rights or options to subscribe for or purchase
Common Stock or Convertible Securities.
"Original Stockholder" has the meaning set forth in the Stockholders
Agreement.
"Permitted Transferee" has the meaning set forth in the Stockholders
Agreement.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"PPEI" means Prudential Private Equity Investors III, L.P., a Delaware
limited partnership.
"Public Offering" means any offering by the Corporation of its equity
securities to the public pursuant to an effective registration statement under
the Securities Act of 1933, as then in effect, or any comparable statement under
any similar federal statute then in force; provided that for purposes of
paragraph 4J hereof, a Public Offering shall not include an offering made in
connection with a business acquisition or combination or an employee benefit
plan.
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"Purchase Agreement" means the Preferred Stock and Warrant Purchase
Agreement dated as of December 12, 1996, between the Corporation and PPEI.
"Qualified Public Offering" means a Public Offering of the
Corporation's Common Stock which is underwritten by a nationally recognized
investment banking firm having an aggregate offering value of at least $30
million in which the price per share to be paid by the public shall be at least
equal to $15.00 per share (as such price per share is appropriately adjusted for
any combination or subdivision of shares, stock dividend, stock split or other
recapitalizations).
"Stockholders Agreement" means the Stockholders Agreement dated as of
December 12, 1996, among the Corporation, PPEI and the Original Stockholder.
"Subsidiary" means, with respect to any Person, any corporation,
partnership, limited liability company, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a partnership,
limited liability company, association or other business entity, a majority of
the partnership or other similar ownership interest thereof is at the time owned
or controlled, directly or indirectly, by any Person or one or more Subsidiaries
of that person or a combination thereof. For purposes hereof, a Person or
Persons shall be deemed to have a majority ownership interest in a partnership,
limited liability company, association or other business entity if such Person
or Persons shall be allocated a majority of partnership, limited liability
company, association or other business entity gains or losses or shall be or
control the managing general partner of such partnership, limited liability
company, association or other business entity.
"Weighted Average Market Price" of the Common Stock means (i) the sum
of the product of the Share Price multiplied by the Daily Volume for each day of
any period of 90 consecutive calendar days (the "Trading Period"), divided by
(ii) the Aggregate Daily Volume for the Trading Period, where
"Share Price" means the closing price on each day of the
Trading Period of sales of the Common Stock on the securities exchange on
which the Common Stock may be listed, or if on any day the Common Stock is
not listed on any securities exchange, the last bid price quoted in the
NASDAQ System as of 4:00 P.M., New York time on such day, or if on any day
the Common Stock is not quoted in the NASDAQ System, the last bid price on
such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor
organization, or if there has been no sales on such day, the Share Price
shall equal zero, and
21
<PAGE>
"Daily Volume" means the total number of shares of Common
Stock traded on any securities exchange on any day during the Trading
Period, or if on any day the Common Stock is not listed on any securities
exchange, the total number of shares of Common Stock traded on the NASDAQ
System on any day during the Trading Period, or if on any day the Common
Stock is not quoted in the NASDAQ System, the total number of shares of
Common Stock traded on any day during the Trading Period in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, and
"Aggregate Daily Volume" means the sum of the Daily Volume
for each day of the Trading Period.
Section 11. Notices.
Except as otherwise expressly provided hereunder, all notices referred
to herein shall be in writing and shall be delivered by reputable overnight
courier service, charges prepaid, and shall be deemed to have been given when so
mailed or sent (i) to the Corporation, at its principal executive offices and
(ii) to any stockholder, at such holder's address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
Section 12. Amendment and Waiver.
No amendment, modification or waiver hereof shall be binding or
effective with respect to any provision hereof without the prior written consent
of the holders of at least 66-2/3% of the Preferred Stock, in each case
outstanding at the time such action is taken; provided that no change in the
terms hereof may be accomplished by merger or consolidation of the Corporation
with another corporation or entity unless the Corporation has obtained the prior
written consent of the holders of the applicable percentage of the Preferred
Stock then outstanding."
3. These articles of amendment were adopted on December 10, 1996.
4. Shareholder action was not required to adopt these articles of
amendment. The articles of amendment were adopted by the Corporation's Board of
Directors without shareholder action.
5. The person to contact about this filing is:
Peter Bragdon
(503) 294-9517
22
<PAGE>
Dated: December 12, 1996
REGENT ASSISTED LIVING, INC.
By: WALTER C. BOWNE
-------------------------------------
Walter C. Bowen, President and
Chief Executive Officer
23
RESTATED BYLAWS
OF
REGENT ASSISTED LIVING, INC.
(as amended effective December 12, 1996)
ARTICLE I
SHAREHOLDERS MEETINGS AND VOTING
1.1 Annual Meeting. The annual meeting of the shareholders shall be held at
10:00 a.m. on the second Tuesday in May of each year, unless a different time
and date or time is fixed by the Board of Directors and stated in the notice of
the meeting. Failure to hold an annual meeting on the stated date shall not
affect the validity of any corporate action.
1.2 Special Meetings. Special meetings of the shareholders, for any
purposes, unless otherwise prescribed by statute, may be called by the President
or the Board of Directors and shall be called by the President upon the written
demand of the holders of not less than one-tenth of all the votes entitled to be
cast on any issue proposed to be considered at the meeting. The demand shall
describe the purposes for which the meeting is to be held and shall be signed,
dated and delivered to the Secretary.
1.3 Place of Meetings. Meetings of the shareholders shall be held at any
place in or out of Oregon designated by the Board of Directors. If a meeting
place is not designated by the Board of Directors, the meeting shall be held at
the Corporation's principal office.
1.4 Notice of Meetings. Written or printed notice stating the date, time
and place of the shareholders meeting and, in the case of a special meeting or a
meeting for which special notice is required by law, the purposes for which the
meeting is called, shall be delivered by the Corporation to each shareholder
entitled to vote at the meeting and, if required by law, to any other
shareholders entitled to receive notice, not earlier than 60 days nor less than
10 days before the meeting date. If mailed, the notice shall be deemed delivered
when it is mailed to the shareholder with postage prepaid at the shareholder's
address shown in the Corporation's record of shareholders.
1.5 Waiver of Notice. A shareholder may at any time waive any notice
required by law, these Bylaws or the Articles of Incorporation. The waiver shall
be in writing, signed by the shareholder entitled to the notice and delivered to
the Corporation for inclusion in the minutes or for filing with the corporate
records. A shareholder's attendance at a meeting waives objection to (i) lack of
notice or defective notice of the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting or to transacting
business at the meeting, and (ii) consideration of a particular matter at the
meeting that is not within the purposes described in the meeting notice, unless
the shareholder objects to considering the matter when it is presented.
<PAGE>
1.6 Fixing of Record Date. The Board of Directors may fix a future date as
the record date to determine the shareholders entitled to notice of a
shareholders meeting or to demand a special meeting, vote, take any other action
or receive payment of any share or cash dividend or other distribution. This
date shall not be earlier than 70 days or, in the case of a meeting, later than
10 days before the meeting or action requiring a determination of shareholders.
The record date for any meeting, vote or other action of the shareholders shall
be the same for all voting groups. If not otherwise fixed by the Board of
Directors, the record date to determine shareholders entitled to notice of and
to vote at an annual or special shareholders meeting is the close of business on
the day before the notice is first mailed or otherwise transmitted to
shareholders. If not otherwise fixed by the Board of Directors, the record date
to determine shareholders entitled to receive payment of any share or cash
dividend or other distribution is the close of business on the day the Board of
Directors authorizes the share or cash dividend or other distribution.
1.7 Shareholders List for Meeting. After a record date for a meeting is
fixed, the Corporation shall prepare an alphabetical list of all shareholders
entitled to notice of the shareholders meeting. The list shall be arranged by
voting group and, within each voting group, by class or series of shares, and it
shall show the address of and number of shares held by each shareholder. The
shareholders list shall be available for inspection by any shareholder, upon
proper demand as may be required by law, beginning two business days after
notice of the meeting is given and continuing through the meeting, at the
Corporation's principal office or at a place identified in the meeting notice in
the city where the meeting will be held. The Corporation shall make the
shareholders list available at the meeting, and any shareholder or the
shareholder's agent or attorney shall be entitled to inspect the list at any
time during the meeting or any adjournment thereof. Refusal or failure to
prepare or make available the shareholders list does not affect the validity of
action taken at the meeting.
1.8 Quorum; Adjournment.
(1) Shares entitled to vote as a separate voting group may take action
on a matter at a meeting only if a quorum of those shares exists with respect to
that matter. A majority of the votes entitled to be cast on the matter by the
voting group constitutes a quorum of that voting group for action on that
matter.
(2) A majority of votes represented at the meeting, although less than
a quorum, may adjourn the meeting from time to time to a different time and
place without further notice to any shareholder of any adjournment, except that
notice is required if a new record date is or must be set for the adjourned
meeting. At an adjourned meeting at which a quorum is present, any business may
be transacted that might have been transacted at the meeting originally held.
(3) Once a share is represented for any purpose at a meeting, it shall
be present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting, unless a new record date is or must be set for the
adjourned meeting. A new record date must be set if the meeting is adjourned to
a date more than 120 days after the date fixed for the original meeting.
<PAGE>
1.9 Voting Requirements; Action Without Meeting.
(1) If a quorum exists, action on a matter, other than the election of
directors, by a voting group is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless a
greater number of affirmative votes is required by law or the Articles of
Incorporation. Directors are elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present.
(2) Action required or permitted by law to be taken at a shareholders
meeting may be taken without a meeting if the action is taken by all the
shareholders entitled to vote on the action. The action must be evidenced by one
or more written consents describing the action taken, signed by all the
shareholders entitled to vote on the action and delivered to the Secretary for
inclusion in the minutes or for filing with the corporate records. Shareholder
action taken by written consent is effective when the last shareholder signs the
consent, unless the consent specifies an earlier or later effective date.
1.10 Proxies. A shareholder may vote shares in person or by proxy. A
shareholder may appoint a proxy by signing an appointment form either personally
or by the shareholder's attorney-in-fact. An appointment of a proxy is effective
when received by the Secretary or other officer of the Corporation authorized to
tabulate votes. An appointment is valid for 11 months unless a different period
is provided in the appointment form. An appointment is revocable by the
shareholder unless the appointment form conspicuously states that it is
irrevocable and the appointment is coupled with an interest that has not been
extinguished.
1.11 Meeting by Telephone Conference. Shareholders may participate in an
annual or special meeting by, or conduct the meeting through, use of any means
of communication by which all shareholders participating may simultaneously hear
each other during the meeting, except that no meeting for which a written notice
is sent to shareholders may be conducted by this means unless the notice states
that participation in this manner is permitted and describes how any shareholder
desiring to participate in this manner may notify the Corporation. Participation
in a meeting by this means shall constitute presence in person at the meeting.
ARTICLE II
BOARD OF DIRECTORS
2.1 Duties of Board of Directors. All corporate powers of the Corporation
shall be exercised by or under the authority of its Board of Directors; the
business and affairs of the Corporation shall be managed under the direction of
its Board of Directors.
2.2 Number, Term and Qualification. The number of directors of the
Corporation shall be eight. At the 1996 annual meeting of shareholders, the
directors shall be divided into three classes, as nearly equal in number as
possible, with the term of office of the first class ("Class I") to expire at
the 1997 annual meeting of shareholders, the term of office of the second class
("Class II") to expire at the 1998 annual meeting of shareholders and the term
of office of the third class
<PAGE>
("Class III") to expire at the 1999 annual meeting of shareholders. At each
annual meeting of shareholders following such initial classification and
election, directors elected to succeed those directors whose terms expire shall
be elected to serve three-year terms and until their successors are elected and
qualified, so that the term of one class of directors will expire each year. The
number of directors may be increased or decreased from time to time by amendment
of this Section 2.2, provided that no decrease in the number of directors shall
shorten the term of any incumbent director. If the number of directors is
changed pursuant to this Section 2.2, any newly created directorships, or any
decrease in directorships, shall be so apportioned among the classes so as to
make all classes as nearly equal as possible. Despite the expiration of a
director's term, the director shall continue to serve until the director's
successor is elected and qualified or the number of directors is decreased.
Directors need not be residents of Oregon or shareholders of the Corporation.
2.3 Regular Meetings. A regular meeting of the Board of Directors shall be
held without notice other than this Bylaw immediately after, and at the same
place as, the annual meeting of shareholders. The Board of Directors may provide
by resolution the time and place for the holding of additional regular meetings
in or out of Oregon without notice other than the resolution.
2.4 Special Meetings. Special meetings of the Board of Directors may be
called by or at the request of the President or any two directors. The person or
persons authorized to call special meetings of the Board of Directors may fix
any place in or out of Oregon as the place for holding any special meeting of
the Board of Directors called by them.
2.5 Notice. Notice of the date, time and place of any special meeting of
the Board of Directors shall be given at least 24 hours before the meeting by
notice communicated in person or by telephone, telegraph, teletype, other form
of wire or wireless communication, mail or private carrier. If written, notice
shall be effective at the earliest of (a) when received, (b) three days after
its deposit in the United States mail, as evidenced by the postmark, if mailed
postpaid and correctly addressed, or (c) on the date shown on the return
receipt, if sent by registered or certified mail, return receipt requested and
the receipt is signed by or on behalf of the addressee. Notice by all other
means shall be deemed effective when received by or on behalf of the director.
Notice of any regular or special meeting need not describe the purposes of the
meeting unless required by law or the Articles of Incorporation.
2.6 Waiver of Notice. A director may at any time waive any notice required
by law, these Bylaws or the Articles of Incorporation. Except as set forth
below, the waiver must be in writing, be signed by the director entitled to the
notice, specify the meeting for which notice is waived and be filed with the
minutes or corporate records. A director's attendance at or participation in a
meeting waives any required notice to the director of the meeting unless the
director at the beginning of the meeting, or promptly upon the director's
arrival, objects to holding the meeting or to transacting business at the
meeting and does not thereafter vote for or assent to action taken at the
meeting.
2.7 Quorum. A majority of the number of directors set forth in Section 2.2
of these Bylaws shall constitute a quorum for the transaction of business at any
meeting of the Board of
<PAGE>
Directors. If less than a quorum is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice.
2.8 Manner of Acting. The act of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors,
unless a different number is provided by law, the Articles of Incorporation or
these Bylaws.
2.9 Meeting by Telephone Conference; Action Without Meeting.
(1) Directors may participate in a regular or special meeting by, or
conduct the meeting through, use of any means of communication by which all
directors participating may simultaneously hear each other during the meeting.
Participation in a meeting by this means shall constitute presence in person at
the meeting.
(2) Any action that is required or permitted to be taken at a meeting
of the Board of Directors may be taken without a meeting if one or more written
consents describing the action taken are signed by all of the directors entitled
to vote on the matter and included in the minutes or filed with the corporate
records reflecting the action taken. The action shall be effective when the last
director signs the consent, unless the consent specifies an earlier or later
effective date.
2.10 Vacancies. Any vacancy on the Board of Directors, including a vacancy
resulting from an increase in the number of directors, may be filled by the
shareholders, the Board of Directors, the remaining directors if less than a
quorum (by the vote of a majority thereof) or by a sole remaining director. Any
vacancy not filled by the directors shall be filled by election at an annual
meeting or at a special meeting of shareholders called for that purpose. A
vacancy that will occur at a specified later date, by reason of a resignation or
otherwise, may be filled before the vacancy occurs, but the new director may not
take office until the vacancy occurs.
2.11 Compensation. By resolution of the Board of Directors, the directors
may be paid reasonable compensation for services as directors and their expenses
of attending meetings of the Board of Directors.
2.12 Presumption of Assent. A director who is present at a meeting of the
Board of Directors or a committee of the Board of Directors shall be deemed to
have assented to the action taken at the meeting unless (a) the director's
dissent or abstention from the action is entered in the minutes of the meeting,
(b) the director delivers a written notice of dissent or abstention to the
action to the presiding officer of the meeting before any adjournment or to the
Corporation immediately after the adjournment of the meeting or (c) the director
objects at the beginning of the meeting, or promptly upon the director's
arrival, to the holding of the meeting or to transacting business at the
meeting. The right to dissent or abstain is not available to a director who
voted in favor of the action.
2.13 Removal. The shareholders may remove one or more directors only for
cause, and only at a meeting called expressly for that purpose, by a vote of the
holders of 75 percent of the shares then entitled to vote at an election of
directors.
<PAGE>
2.14 Resignation. Any director may resign by delivering written notice to
the Board of Directors, its chairperson or the Corporation. Unless the notice
specifies a later effective date, a resignation notice shall be effective upon
the earlier of (a) receipt, (b) five days after its deposit in the United States
mails, if mailed postpaid and correctly addressed, or (c) on the date shown on
the return receipt, if sent by registered or certified mail, return receipt
requested, and the receipt is signed by addressee. Once delivered, a resignation
notice is irrevocable unless revocation is permitted by the Board of Directors.
ARTICLE III
COMMITTEES OF THE BOARD
3.1 Committees. The Board of Directors may create one or more committees
and appoint members of the Board of Directors to serve on them. Each committee
shall have two or more members. The creation of a committee and appointment of
members to it must be approved by a majority of all directors in office when the
action is taken. Subject to any limitation imposed by the Board of Directors or
by law, each committee may exercise all the authority of the Board of Directors
in the management of the Corporation. A committee may not take any action that a
committee is prohibited from taking by the Oregon Business Corporation Act, as
amended (the "Act").
3.2 Changes of Size and Function. Subject to the provisions of law, the
Board of Directors shall have the power at any time to change the number of
committee members, fill committee vacancies, change any committee members and
change the functions and terminate the existence of a committee.
3.3 Conduct of Meetings. Each committee shall conduct its meetings in
accordance with the applicable provisions of these Bylaws relating to meetings
and action without meetings of the Board of Directors. Each committee shall
adopt any further rules regarding its conduct, keep minutes and other records
and appoint subcommittees and assistants as it deems appropriate.
3.4 Compensation. By resolution of the Board of Directors, committee
members may be paid reasonable compensation for services on committees and their
expenses of attending committee meetings.
ARTICLE IV
OFFICERS
4.1 Appointment. The Board of Directors at its first meeting following its
election each year shall appoint a President and a Secretary. At this meeting,
or at any other time, the Board of Directors may appoint one of its members as
Chairman of the Board. The Board of Directors or the President may appoint any
other officers, assistant officers and agents. Any two or more offices may be
held by the same person.
<PAGE>
4.2 Compensation. The Corporation may pay its officers reasonable
compensation for their services as fixed from time to time by the Board of
Directors or by the President with respect to officers appointed by the
President.
4.3 Term. The term of office of all officers commences upon their
appointment and continues until their successors are appointed or until their
resignation or removal.
4.4 Removal. Any officer or agent appointed by the Board of Directors or
the President may be removed by the Board of Directors at any time with or
without cause. Any officer or agent appointed by the President may be removed by
the President at any time with or without cause.
4.5 Chairman of the Board. The Chairman of the Board, if that office is
filled, shall preside at all meetings of the Board of Directors and shall
perform any duties and responsibilities prescribed from time to time by the
Board of Directors.
4.6 President. Unless otherwise determined by the Board of Directors, the
President shall be the chief executive officer of the Corporation and, subject
to the control of the Board of Directors, shall be responsible for the general
operation of the Corporation. The President shall have any other duties and
responsibilities prescribed by the Board of Directors. Unless otherwise
determined by the Board of Directors, the President shall have authority to vote
any shares of stock owned by the Corporation and to delegate this authority to
any other officer.
4.7 Vice Presidents. Each Vice President shall perform those duties and
responsibilities prescribed by the Board of Directors or the President. The
Board of Directors or the President may confer a special title upon a Vice
President.
4.8 Secretary.
(1) The Secretary shall record and keep the minutes of all meetings of
the directors and shareholders in one or more books provided for that purpose
and shall perform all other duties prescribed by the Board of Directors or the
President.
(2) Any assistant secretary shall have the duties prescribed from time
to time by the Board of Directors, the President or the Secretary. In the
absence or disability of the Secretary, the Secretary's duties shall be
performed by an assistant secretary.
4.9 Treasurer. The Treasurer shall have charge and custody of and be
responsible for all funds and securities of the Corporation and shall have all
other duties prescribed from time to time by the Board of Directors or the
President.
<PAGE>
ARTICLE V
INDEMNIFICATION
The Corporation may indemnify to the fullest extent not prohibited by
law any person who is made, or threatened to be made, a party to an action, suit
or proceeding, whether civil, criminal, administrative, investigative or other
(including an action, suit or proceeding by or in the right of the Corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the Corporation or a fiduciary within the meaning of the Employee
Retirement Income Security Act of 1974, as amended, with respect to any employee
benefit plan of the Corporation, or serves or served at the Corporation's
request as a director, officer, employee or agent, or as a fiduciary of an
employee benefit plan, of another corporation, partnership, joint venture, trust
or other enterprise. The Corporation may pay for or reimburse the reasonable
expenses incurred by any such person in any such proceeding in advance of the
final disposition of the proceeding if the person sets forth in writing (i) the
person's good faith belief that the person is entitled to indemnification under
this Article and (ii) the person's agreement to repay all advances if it is
ultimately determined that the person is not entitled to indemnification under
this Article. No amendment to these Bylaws that limits the Corporation's
obligation to indemnify any person shall have any effect on such obligation for
any act or omission that occurs before the later to occur of the effective date
of the amendment or the date that notice of the amendment is given to the
person. This Article shall not be deemed exclusive of any other provisions for
indemnification or advancement of expenses of directors, officers, employees,
agents and fiduciaries that may be included in the Articles of Incorporation or
any statute, bylaw, agreement, general or specific action of the Board of
Directors, vote of shareholders or other document or arrangement.
ARTICLE VI
ISSUANCE OF SHARES
6.1 Adequacy of Consideration. Before the Corporation issues shares, the
Board of Directors shall determine that the consideration received or to be
received for the shares to be issued is adequate. The authorization by the Board
of Directors of the issuance of shares for stated consideration shall evidence a
determination by the Board that such consideration is adequate.
6.2 Certificates for Shares.
(1) Certificates representing shares of the Corporation shall be in
any form determined by the Board of Directors consistent with the requirements
of the Act and these Bylaws. The certificates shall be signed, either manually
or in facsimile, by two officers of the Corporation, at least one of whom shall
be the President or a Vice President, and may be sealed with the seal of the
Corporation, if any, or a facsimile thereof. All certificates for shares shall
be consecutively numbered or otherwise identified. The signatures of officers
upon a certificate may be facsimiles if the certificate is countersigned by a
transfer agent or any assistant transfer agent or registered by a registrar,
other than the Corporation itself or an employee of the Corporation.
<PAGE>
(2) Every certificate for shares of stock that are subject to any
restriction on transfer or registration of transfer pursuant to the Articles of
Incorporation, the Bylaws, securities laws, a shareholders agreement or any
agreement to which the Corporation is a party shall have conspicuously noted on
the face or back of the certificate either the full text of the restriction or a
statement of the existence of the restriction and that the Corporation retains a
copy of the full text. Every certificate issued when the Corporation is
authorized to issue more than one class or series within a class of shares shall
set forth on its face or back either (a) a summary of the designations, relative
rights, preferences and limitations of the shares of each class and the
variations in rights, preferences and limitations for each series authorized to
be issued and the authority of the Board of Directors to determine variations
for future series or (b) a statement of the existence of those designations,
relative rights, preferences and limitations and a statement that the
Corporation will furnish a copy thereof to the holder of the certificate upon
written request and without charge.
(3) All certificates surrendered to the Corporation for transfer shall
be canceled. The Corporation shall not issue a new certificate for previously
issued shares until the former certificate or certificates for those shares are
surrendered and canceled; except that in case of a lost, destroyed or mutilated
certificate, a new certificate may be issued on terms prescribed by the Board of
Directors.
6.3 Transfer Agent and Registrar. The Board of Directors may from time to
time appoint one or more transfer agents and one or more registrars for the
shares of the Corporation, with those powers and duties determined by the Board
of Directors.
6.4 Officer Ceasing to Act. If the person who signed a share certificate,
either manually or in facsimile, no longer holds office when the certificate is
issued, the certificate is nevertheless valid.
ARTICLE VII
CONTRACTS, LOANS, CHECKS AND OTHER INSTRUMENTS
7.1 Contracts. Except as otherwise provided by law, the Board of Directors
may authorize any officers or agents to execute and deliver any contract or
other instrument in the name and on behalf of the Corporation, and this
authority may be general or confined to specific instances.
7.2 Loans. The Corporation shall not borrow money and no evidence of
indebtedness shall be issued in its name unless authorized by the Board of
Directors. This authority may be general or confined to specific instances.
7.3 Checks, Drafts, Etc. All checks, drafts or other orders for the payment
of money and notes or other evidences of indebtedness issued in the name of the
Corporation shall be signed in the manner and by the officers or agents of the
Corporation designated by the Board of Directors.
<PAGE>
7.4 Deposits. All funds of the Corporation not otherwise employed shall be
deposited to the credit of the Corporation in those banks, trust companies or
other depositories as the Board of Directors or officers of the Corporation
designated by the Board of Directors shall select, or be invested as authorized
by the Board of Directors.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Severability. A determination that any provision of these Bylaws is for
any reason inapplicable, invalid, illegal or otherwise ineffective shall not
affect or invalidate any other provision of these Bylaws.
8.2 Amendments. These Bylaws may be amended or repealed and new Bylaws may
be adopted by the Board of Directors or the shareholders of the Corporation;
provided, however, that Sections 2.2 and 2.13 and this Section 8.2 may be
amended or repealed only by a majority of the Board of Directors or a vote of
the holders of 75 percent of the shares entitled to vote thereon.
8.3 Oregon Control Share Act. ORS 60.801 to ORS 60.816, known as the
"Oregon Control Share Act," do not apply to acquisitions of the Corporation's
voting shares (as defined in the Oregon Control Share Act).
As Amended Effective December 12, 1996
PREFERRED STOCK AND WARRANT
PURCHASE AGREEMENT
DATED DECEMBER 16, 1996
BETWEEN REGENT ASSISTED LIVING, INC.
AND PRUDENTIAL PRIVATE EQUITY INVESTORS III, L.P.
<PAGE>
TABLE OF CONTENTS
1. Authorization and Closing..................................................1
1A. Authorization of the Preferred Stock and the
Warrant...............................................................1
1B. Purchase and Sale of the Preferred Stock and the
Warrant...............................................................1
1C. The Closing...........................................................1
2. Conditions of Purchaser's Obligation at the Closing........................2
2A. Representations and Warranties; Covenants.............................2
2B. Articles of Amendment.................................................2
2C. Registration Agreement................................................2
2D. Stockholders Agreement................................................3
2E. Securities Law Compliance.............................................3
2F. Lease Modification Agreements.........................................3
2G. Opinion of the Company's Counsel......................................3
2H. Closing Documents.....................................................3
2I. Proceedings...........................................................4
2J. Waiver................................................................4
2K. Expenses..............................................................4
3. Covenants..................................................................4
3A. Financial Statements and Other Information............................4
3B. Inspection of Property................................................8
3C. Designation of Directors..............................................8
3D. Restrictions..........................................................9
3E. Affirmative Covenants................................................14
3F. Compliance with Agreements...........................................16
3G. Current Public Information...........................................16
3H. Amendment of Agreements..............................................16
3I. First Refusal Rights.................................................17
4. Transfer of Restricted Securities.........................................18
4A. General Provisions...................................................18
4B. Opinion Delivery.....................................................18
4C. Rule 144A............................................................19
4D. Legend Removal.......................................................19
4E. Restriction on Transfer..............................................19
5. Representations and Warranties of the Company.............................20
5A. Organization, Corporate Power and Licenses...........................20
5B. Capital Stock and Related Matters....................................20
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5C. Subsidiaries; Investments............................................21
5D. Authorization; No Breach.............................................22
5E. Financial Statements.................................................23
5F. Absence of Undisclosed Liabilities...................................23
5G. No Material Adverse Change...........................................24
5H. Absence of Certain Developments......................................24
5I. Assets...............................................................25
5J. Tax Matters..........................................................29
5K. Contracts and Commitments............................................31
5L. Intellectual Property Rights.........................................33
5M. Litigation, etc......................................................34
5N. Brokerage............................................................35
5O. Governmental Consent, etc............................................35
5P. Insurance............................................................35
5Q. Employees............................................................36
5R. ERISA................................................................36
5S. Compliance with Laws.................................................37
5T. Environmental and Safety Matters.....................................39
5U. Affiliated Transactions..............................................42
5V. Medicare and Medicaid Matters........................................42
5W. Reports with the Securities and Exchange
Commission...........................................................44
5X. Disclosure...........................................................44
5Y. Real Property Holding Corporation....................................45
5Z. Closing Date.........................................................45
5AA. Forward-Looking Information..........................................45
6. Definitions...............................................................46
6A. Definitions..........................................................46
7. Miscellaneous.............................................................53
7A. Expenses.............................................................53
7B. Remedies.............................................................54
7C. Purchaser's Representations..........................................54
7D. Treatment of the Preferred Stock.....................................56
7E. Consent to Amendments................................................56
7F. Survival of Representations and Warranties...........................57
7G. Successors and Assigns...............................................57
7H. Severability.........................................................57
7I. Counterparts.........................................................58
7J. Descriptive Headings; Interpretation.................................58
7K. Governing Law........................................................58
7L. Notices..............................................................58
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7M. Consideration for Warrants...........................................59
7N. No Strict Construction...............................................60
7O. Indemnification......................................................60
iii
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REGENT ASSISTED LIVING, INC.
PURCHASE AGREEMENT
THIS AGREEMENT is made as of December 16, 1996, between Regent
Assisted Living, Inc., an Oregon corporation (the "Company"), and Prudential
Private Equity Investors III, L.P., a Delaware limited partnership
("Purchaser"). Except as otherwise indicated herein, capitalized terms used
herein are defined in Section 6 hereof.
The parties hereto agree as follows:
Section 1. Authorization and Closing.
1A. Authorization of the Preferred Stock and the Warrant. The Company
shall authorize the issuance and sale to Purchaser of (i) 1,283,785 shares of
its Series A Preferred Stock, no par value (the "Series A Preferred"), and
382,882 shares of its Series B Preferred Stock, no par value (the "Series B
Preferred"), each having the rights and preferences set forth in Exhibit A
attached hereto, and (ii) the warrant in the form attached hereto as Exhibit B
(the "Warrant"). The Series A Preferred and the Series B Preferred are
convertible into shares of the Company's Common Stock, no par value (the "Common
Stock"). The Series A Preferred and the Series B Preferred are collectively
referred to herein as the "Preferred Stock."
1B. Purchase and Sale of the Preferred Stock and the Warrant. At the
Closing, the Company shall sell to Purchaser and, subject to the terms and
conditions set forth herein, Purchaser shall purchase from the Company (i)
1,283,785 shares of Series A Preferred and 382,882 shares of Series B Preferred
at an aggregate price of $9,950,000 and (ii) the Warrant at a price of $50,000.
1C. The Closing. The closing of the purchase and sale of the Preferred
Stock and the Warrant (the "Closing") shall take place at the offices of
Kirkland & Ellis, at 10:00 a.m. on December 16, 1996, or at such other place or
on such other date as may be mutually agreeable to the Company and Purchaser. At
the Closing,
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the Company shall deliver to Purchaser stock certificates evidencing the
Preferred Stock to be purchased by Purchaser and the Warrant to be purchased by
Purchaser, registered in Purchaser's or its nominee's name, upon payment of the
purchase price thereof by a cashier's or certified check, or by wire transfer of
immediately available funds pursuant to written instructions provided by the
Company to Purchaser prior to the Closing, in the total amount of $10,000,000.
Section 2. Conditions of Purchaser's Obligation at the Closing. The
obligation of Purchaser to purchase and pay for the Preferred Stock and the
Warrant at the Closing is subject to the satisfaction as of the Closing of the
following conditions:
2A. Representations and Warranties; Covenants. The representations and
warranties contained in Section 5 hereof shall be true and correct in all
material respects at and as of the Closing as though then made, except to the
extent of changes caused by the transactions expressly contemplated herein, and
the Company shall have performed in all material respects all of the covenants
required to be performed by it hereunder prior to the Closing.
2B. Articles of Amendment. The Company shall have duly adopted,
executed and filed with the Secretary of State of Oregon a Articles of Amendment
of Rights and Preferences establishing the terms and the relative rights and
preferences of the Series A Preferred and the Series B Preferred in the form set
forth in Exhibit A hereto (the "Articles of Amendment"), and the Company shall
not have adopted or filed any other document designating terms, relative rights
or preferences of its preferred stock. The Articles of Amendment shall be in
full force and effect as of the Closing under the laws of Oregon and shall not
have been amended or modified.
2C. Registration Agreement. The Company and Purchaser shall have
entered into a registration agreement in form and substance as set forth in
Exhibit C attached hereto (the "Registration Agreement"), and the Registration
Agreement shall be in full force and effect as of the Closing.
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<PAGE>
2D. Stockholders Agreement. The Company, Purchaser and Walter C. Bowen
("Bowen") shall have entered into a stockholders agreement in form and substance
set forth in Exhibit D attached hereto (the "Stockholders Agreement"), and the
Stockholders Agreement shall be in full force and effect as of the Closing.
2E. Securities Law Compliance. The Company shall have made all filings
under all applicable federal and state securities laws necessary to consummate
the issuance of the Preferred Stock and the Warrant pursuant to this Agreement
in compliance with such laws.
2F. Lease Modification Agreements. The Company and each of the
landlords of the Company's Regency Park and Sterling Park facilities (the
"Landlords") shall have entered into a modification agreement with respect to
the underlying leases (the "Lease Modification Agreements") in form and
substance reasonably satisfactory to Purchaser, and each of the Lease
Modification Agreements shall not have been amended or modified and shall be in
full force and effect at the Closing.
2G. Opinion of the Company's Counsel. Purchaser shall have received
from Stoel Rives LLP, counsel for the Company, an opinion with respect to the
matters set forth in Exhibit E attached hereto, which shall be addressed to
Purchaser, dated the date of the Closing and in form and substance satisfactory
to Purchaser.
2H. Closing Documents. The Company shall have delivered to Purchaser
all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing,
stating that the conditions specified in Section 1 and paragraphs 2A
through 2F, inclusive, have been fully satisfied;
(ii) certified copies of the resolutions duly adopted by the
Company's board of directors authorizing the execution, delivery and
performance of this Agreement, the Registration Agreement and each of the
other agreements contemplated hereby, the filing of the Articles of
Amendment, the issuance and sale of the Preferred Stock, the issuance and
3
<PAGE>
sale of the Warrant, the reservation for issuance upon conversion of the
Preferred Stock and exercise of the Warrant an aggregate of 2,018,182
shares of Common Stock and the consummation of all other transactions
contemplated by this Agreement;
(iii) certified copies of the Restated Articles of Incorporation,
as amended, the Articles of Amendment and the Company's bylaws, each as in
effect at the Closing; and
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder (including, without limitation, all blue sky law
filings and waivers of all preemptive rights and rights of first refusal).
2I. Proceedings. All corporate and other proceedings taken or required
to be taken by the Company in connection with the transactions contemplated
hereby to be consummated at or prior to the Closing and all documents incident
thereto shall be reasonably satisfactory in form and substance to Purchaser and
its special counsel.
2J. Waiver. Any condition specified in this Section 2 may be waived if
consented to by Purchaser; provided that no such waiver shall be effective
against Purchaser unless it is set forth in a writing executed by Purchaser.
2K. Expenses. At the Closing, the Company shall have reimbursed
Purchaser for the reasonable fees and expenses of its special counsel as
provided in paragraph 7A hereof.
Section 3. Covenants.
3A. Financial Statements and Other Information. The Company shall
deliver to Purchaser (so long as Purchaser holds any Underlying Common Stock)
and to each holder of at least 25% of the Underlying Common Stock who is not a
Competitor:
(i) as soon as available but in any event within 30 days after
the end of each monthly accounting period in each
4
<PAGE>
fiscal year, beginning with the calendar month of January, 1997, unaudited
consolidating and consolidated statements of operations and cash flows of
the Company and its Subsidiaries for such monthly period and for the period
from the beginning of the fiscal year to the end of such month, and
unaudited consolidating and consolidated balance sheets of the Company and
its Subsidiaries as of the end of such monthly period, setting forth in
each case comparisons to the Company's annual budget and to the
corresponding period in the preceding fiscal year, and all such statements
shall be prepared in accordance with generally accepted accounting
principles, consistently applied, subject to the absence of footnote
disclosures and to normal year-end adjustments for recurring accruals, and
shall be certified by the Company's chief financial officer;
(ii) accompanying the financial statements referred to in
subparagraph (i), an Officer's Certificate stating that there is no Event
of Noncompliance in existence or, if any Event of Noncompliance exists,
specifying the nature and period of existence thereof and what actions the
Company and its Subsidiaries have taken and propose to take with respect
thereto;
(iii) within 90 days after the end of each fiscal year,
consolidating and consolidated statements of operations and cash flows of
the Company and its Subsidiaries for such fiscal year, and consolidating
and consolidated balance sheets of the Company and its Subsidiaries as of
the end of such fiscal year, setting forth in each case comparisons to the
Company's annual budget and, beginning with the year ending December 31,
1997, to the preceding fiscal year, all prepared in accordance with
generally accepted accounting principles, consistently applied, and
accompanied by, with respect to the consolidated portions of such
statements, an opinion containing no exceptions or qualifications (except
for qualifications regarding specified contingent liabilities) of an
independent accounting firm of recognized national standing;
(iv) within five business days of its receipt by the Company, a
copy of such independent accounting firm's annual management letter to the
board of directors;
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<PAGE>
(v) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant
aspects of the Company's operations or financial affairs given to the
Company by its independent accountants (and not otherwise contained in
other materials provided hereunder);
(vi) promptly when available but in any event within 30 days
after the beginning of each fiscal year, an annual budget prepared on a
monthly basis for the Company and its Subsidiaries for such fiscal year
(displaying anticipated statements of income and cash flows and balance
sheets), and promptly upon preparation thereof any other significant
budgets prepared by the Company and any revisions of such annual
or other budgets, and within 30 days after any monthly period in which
there is a material adverse deviation from the annual budget, an Officer's
Certificate explaining the deviation and what actions the Company has taken
and proposes to take with respect thereto;
(vii) promptly (but in any event within five business days) after
the discovery or receipt of notice of any Event of Noncompliance or any
condition or event which is reasonably likely to result in any material
liability under any federal, state or local statute or regulation relating
to public health and safety, worker health and safety or pollution or
protection of the environment, an Officer's Certificate specifying the
nature and period of existence thereof and what actions the Company and its
Subsidiaries have taken and propose to take with respect thereto;
(viii) within ten days after transmission thereof, copies of all
financial statements, proxy statements, reports and any other general
written communications which the Company sends to its stockholders and
copies of all registration statements and all regular, special or periodic
reports which it files, or (to its knowledge) any of its officers or
directors file with respect to the Company, with the Securities and
Exchange Commission or with any securities exchange on which any of its
securities are then listed, and copies of all press releases and other
statements made available generally by the
6
<PAGE>
Company to the public concerning material developments in the Company's and
its Subsidiaries' businesses; and
(ix) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any Person
entitled to receive information under this paragraph 3A may reasonably
request.
Each of the financial statements referred to in subparagraph (i) and (iii) shall
be true and correct in all material respects as of the dates and for the periods
stated therein, subject in the case of the unaudited financial statements to
changes resulting from normal year-end adjustments for recurring accruals. Upon
the written request of Purchaser or any holder of Underlying Common Stock
entitled to receive information under this paragraph, the Company shall cease to
send any information otherwise required by this paragraph to Purchaser or such
holder of Underlying Common Stock; provided that Purchaser or such holder of
Underlying Common Stock may at any time thereafter, upon written request, again
receive such information as provided in this paragraph.
Pursuant to this paragraph, the Company may furnish Purchaser or other holders
of Underlying Common Stock with certain information that is non-public,
confidential or proprietary in nature. As used herein, "Confidential
Information" means (i) any material, nonpublic information about the Company and
its Subsidiaries and (ii) any technical, nonfinancial information, data or
know-how which is identified in writing as confidential by the Company, in
either case as furnished by the Company to Purchaser or any other holder
of Underlying Common Stock pursuant to this paragraph but does not include
information (x) which was publicly known, or otherwise known to Purchaser or
such other holder of Underlying Common Stock, at the time of disclosure, (y)
which subsequently becomes publicly known through no act or omission by
Purchaser or such other holder of Underlying Common Stock or (z) which otherwise
becomes known to Purchaser or such other holder of Underlying Common Stock,
other than through disclosure by the Company. Purchaser and other holders of
Underlying Common Stock shall use their reasonable best efforts to hold in
confidence and not to disclose the Confidential Information, except (a) as may
be required by law, (b) to the officers, directors, employees, agents
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<PAGE>
and professional consultants of Purchaser or any subsidiary of Purchaser or (c)
to any prospective transferee of the Preferred Stock or Underlying Common Stock
provided that such prospective transferee agrees to be bound by the provisions
of this paragraph; and provided that Purchaser or such other holder of
Underlying Common Stock be free, after notice to the Company, to correct any
false or misleading information which may become public concerning the Company
or Purchaser's relationship to the Company or this Agreement. If Purchaser
ceases to hold any Preferred Stock or Underlying Common Stock, Purchaser will,
if requested by the Company, return to the Company all documents furnished by
the Company containing Confidential Information which have not theretofore been
destroyed or returned to the Company.
3B. Inspection of Property. The Company shall permit any
representatives designated by Purchaser (so long as Purchaser holds any
Underlying Common Stock) or any holder of at least 25% of the Underlying Common
Stock who is not a Competitor, upon reasonable notice and during normal business
hours and at such other times as any such holder may reasonably request, to (i)
visit and inspect any of the properties of the Company and its Subsidiaries,
(ii) examine the corporate and financial records of the Company and its
Subsidiaries and make copies thereof or extracts therefrom and (iii) discuss the
affairs, finances and accounts of any such corporations with the directors,
executive officers and inde pendent accountants of the Company and its
Subsidiaries. The presentation of an executed copy of this Agreement by
Purchaser or any such holder of Preferred Stock or Underlying Common Stock to
the Company's independent accountants shall constitute the Company's permission
to its independent accountants to participate in discussions with such Persons.
3C. Designation of Directors. So long as the Preferred Stock remains
outstanding, the holders of the Preferred Stock shall have the right to select
two representatives to be elected to the Company's board of directors, and the
Company shall use its best efforts to cause such representatives to be nominated
for election to the board of directors and solicit proxies from the Company's
stockholders in favor of the election of such representatives. Such
representatives shall initially be Dana O'Brien and Martha Robinson. Purchasers
may in the future select an industry
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<PAGE>
executive reasonably acceptable to the remaining members of the Company's board
of directors or any employee, partner, adviser or manager of Purchaser or its
general partner as representatives to be elected to the Company's board of
directors. The Company shall use its best efforts to cause such representatives
to be elected to the board of directors (including voting all unrestricted
proxies in favor of such representatives) and shall not take any action which
would diminish the prospects of such representatives being elected to the board
of directors. The Company shall enter into indemnity agreements with any
directors selected by Purchaser that are similar in form and substance to those
that the Company has entered into with its other directors. The Company shall
use its best efforts to cause the appointment of at least one such
representative to be a member of the Compensation Committee and the Audit
Committee of the Company's board of directors. All reasonable out-of-pocket
expenses of each board member incurred in connection with attending regular and
special board meetings and any meeting of any board committee shall be paid by
the Company. The board representatives designated hereunder or elected by the
holders of the Preferred Stock shall be entitled to fees and other compensation
paid to board members who are not employees of the Company or its Subsidiaries.
3D. Restrictions. So long as any Preferred Stock remains outstanding,
the Company shall not, without the prior written consent of the holders of at
least 662/3% of the outstanding Preferred Stock:
(i) directly or indirectly declare or pay any dividends or make
any distributions upon any of its capital stock or other equity securities
other than the Preferred Stock pursuant to the terms of the Articles of
Amendment, except for dividends payable in shares of Common Stock issued
upon the outstanding shares of Common Stock;
(ii) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire,
any of the Company's or any Subsidiary's capital stock or other equity
securities (including, without limitation, warrants, options and other
rights to acquire such capital stock or other equity securities) other
9
<PAGE>
than the Preferred Stock pursuant to the terms of the Articles of
Amendment, or directly or indirectly redeem, purchase or make any payments
with respect to any stock appreciation rights, phantom stock plans or
similar rights or plans;
(iii) except as expressly contemplated by this Agreement,
authorize, issue or enter into any agreement providing for the issuance
(contingent or otherwise) of, (a) any notes or debt securities containing
equity features (including, without limitation, any notes or debt
securities convertible into or exchangeable for capital stock or other
equity securities, issued in connection with the issuance of capital stock
or other equity securities or containing profit participation features),
other than Permitted Debt Securities, or (b) any capital stock or other
equity securities (or any securities convertible into or exchangeable for
any capital stock or other equity securities) which are senior to or on a
parity with the Series A Preferred or the Series B Preferred with respect
to the payment of dividends, redemptions or distributions upon liquidation
or otherwise;
(iv) make, or permit any Subsidiary to make, any loans or
advances to, guarantees for the benefit of, or Investments in, any Person
(other than a Wholly-Owned Subsidiary established under the laws of a
jurisdiction of the United States or any of its territorial possessions),
except for (a) reasonable advances to employees in the ordinary course of
business, (b) acquisitions permitted pursuant to subparagraph (viii) below
and (c) Investments conforming to the Investment Policy adopted from time
to time by the Company's Board of Directors (collectively, the "Permitted
Investments");
(v) merge or consolidate with any Person, unless such merger or
consolidation is approved by the stockholders of the Company as required by
the laws of the State of Oregon (including, without limitation, any
provisions requiring a separate class or series vote), the Restated
Articles of Incorporation, as amended, the Company's bylaws or any other
statute, rule or regulation to which the Company is subject or, except as
permitted by subparagraph (viii) below, permit
10
<PAGE>
any Subsidiary to merge or consolidate with any Person (other than a
Wholly-Owned Subsidiary);
(vi) sell, lease or otherwise dispose of, or permit any
Subsidiary to sell, lease or otherwise dispose of, any assets of the
Company or its Subsidiaries having a fair market value equal to or in
excess of $250,000 (determined by the Company's board of directors in its
reasonable good faith judgment) in any transaction or series of related
transactions (other than sales in the ordinary course of business and the
sale and leaseback of assisted living facilities) unless such transaction
(or series of transactions) has been approved by a majority of the
directors of the Company who are not officers or employees of the Company);
(vii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation,
any reorganization into a limited liability company, a partnership or any
other non-corporate entity which is treated as a partnership for federal
income tax purposes), unless approved by the stockholders of the Company as
required by the laws of the State of Oregon (including, without limitation,
any provisions requiring a separate class or series vote), the Restated
Articles of Incorporation, as amended, the Company's bylaws or any other
statute, rule or regulation to which the Company is subject;
(viii) acquire, or permit any Subsidiary to acquire, any interest
in any company or business (whether by a purchase of assets, purchase of
stock, merger or otherwise), or enter into any joint venture, involving an
aggregate consideration (including, without limitation, the assumption of
liabilities whether direct or indirect) exceeding $10,000,000 in any
transaction or series of related transactions unless such transaction (or
series of transactions) has been approved by a majority of the directors of
the Company who are not officers or employees of the Company;
(ix) enter into, or permit any Subsidiary to enter into, the
ownership, management or operation of any business other than owning,
managing or operating of assisted living
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facilities; as used herein, assisted living facilities includes congregate
care, skilled nursing, stand alone special care facilities, adult day care,
home health care, hospice care and the provision of products and services
ancillary to such businesses;
(x) become subject to, or permit any of its Subsidiaries to
become subject to, (including, without limitation, by way of amendment to
or modification of) any agreement or instrument which by its terms would
(under any circumstances) directly restrict (a) the right of any Subsidiary
to make loans or advances or pay dividends to, transfer property to, or
repay any Indebtedness owed to, the Company or another Subsidiary or (b)
the Company's right to perform the provisions of this Agreement, the
Registration Agreement, the Articles of Amendment, the Restated Articles of
Incorporation, as amended or the Company's bylaws (including, without
limitation, provisions relating to the declaration and payment of dividends
on and the making of redemptions and conversions of the Preferred Stock);
(xi) except as expressly contemplated by this Agreement, make any
amendment to the Articles of Incorporation, the Articles of Amendment or
the Company's bylaws, or file any resolution of the board of directors with
the Oregon Secretary of State containing any provisions, which would
increase the number of authorized shares of the Preferred Stock or
adversely affect or otherwise impair the rights or the relative preferences
and priorities of the holders of the Preferred Stock or the Underlying
Common Stock under this Agreement, the Restated Articles of Incorporation,
as amended, the Articles of Amendment, the Company's bylaws or the
Registration Agreement, unless approved by the stockholders of the Company
as required by the laws of the State of Oregon (including, without
limitation, any provisions requiring a separate class or series vote), the
Restated Articles of Incorporation, as amended, the Company's bylaws or any
other statute, rule or regulation to which the Company is subject;
(xii) enter into, amend, modify or supplement, or permit any
Subsidiary to enter into, amend, modify or supplement,
12
<PAGE>
any agreement, transaction, commitment or arrangement with any of its or
any Subsidiary's officers, directors, employees, stockholders holding more
than 1% of the outstanding Common Stock or Affiliates or with any
individual related by blood, marriage or adoption to any such individual or
with any entity in which any such Person or individual owns a material
beneficial interest, except for customary employment arrangements and
benefit programs on reasonable terms as approved by a disinterested
majority of the members of the compensation committee of the Company's
board of directors, except for other agreements, transactions, commitments
and arrangements entered into by the Company on an arm's-length basis as
determined by a disinterested majority (including at least one director
designated by the holders of the Preferred Stock) of the members of the
conflicts committee of the Company's board of directors, and except as
otherwise expressly contemplated by this Agreement;
(xiii) increase any compensation (including salary, bonuses and
other forms of current and deferred compensation) payable to any officer or
director of the Company or any Subsidiary, except as approved by a
disinterested majority of the members of the compensation committee of the
Company's board of directors;
(xiv) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, any Indebtedness
other than Permitted Indebtedness; and
(xv) amend or modify any stock option plan or employee stock
ownership plan as in existence as of the Closing, other than to increase to
600,000 the number of options for shares of the Company's common stock that
may be issued under the Company's 1995 Stock Incentive Plan, adopt any new
stock option plan or employee stock ownership plan or issue any shares of
Common Stock to its or its Subsidiaries' employees other than pursuant to
the Company's existing stock option and employee stock ownership plans ,
unless approved by the stockholders of the Company as required by the laws
of the State of Oregon (including, without limitation, any provisions
requiring a separate class or series vote), the Restated
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<PAGE>
Articles of Incorporation, as amended, the Company's bylaws or any other
statute, rule or regulation to which the Company is subject.
Notwithstanding the foregoing, this Agreement shall not require the consent of
the holders of 662/3% of the outstanding Preferred Stock for actions otherwise
approved by the stockholders of the Company as required by the laws of the State
of Oregon (including, without limitation, any provisions requiring a separate
class or series vote), the Restated Articles of Incorporation, as amended, the
Company's bylaws or any other statute, rule or regulation to which the Company
is subject.
3E. Affirmative Covenants. So long as any Preferred Stock remains
outstanding, the Company shall, and shall cause each Subsidiary to, unless it
has received the prior written consent of the holders of at least 662/3% of the
outstanding Preferred Stock:
(i) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material
licenses, authorizations and permits necessary to the conduct of its
businesses;
(ii) maintain and keep its material properties in good repair,
working order and condition, and from time to time make all necessary or
desirable repairs, renewals and replacements, so that its businesses may be
properly conducted at all times in all material respects;
(iii) pay and discharge when payable all material taxes,
assessments and governmental charges imposed upon its properties or upon
the income or profits therefrom (in each case before the same becomes
delinquent and before penalties accrue thereon) and all material claims for
labor, materials or supplies which if unpaid would by law become a Lien
upon any of its property, unless and to the extent that the same are being
contested in good faith and by appropriate proceedings and ade quate
reserves (as determined in accordance with generally accepted accounting
principles, consistently
14
<PAGE>
applied) have been established on its books with respect thereto;
(iv) comply with all other material obligations which it incurs
pursuant to any contract or agreement, whether oral or written, express or
implied, as such obligations become due, unless and to the extent that the
same are being contested in good faith and by appropriate proceedings and
adequate reserves (as determined in accordance with generally accepted
accounting principles, consistently applied) have been established on its
books with respect thereto;
(v) comply with all applicable laws, rules and regulations of all
governmental authorities, the violation of which would reasonably be
expected to have a material adverse effect upon the financial condition,
operating results, assets, operations or business prospects of the Company
and its Subsidiaries taken as a whole;
(vi) apply for and continue in force with financially sound and
reputable insurance companies insurance covering risks of such types and in
such amounts as are customary for corporations of similar size engaged in
similar lines of business;
(vii) make a good faith effort to secure and maintain officers
and directors liability insurance coverage: (A) as of the Closing, in the
amount of $2,000,000, (B) as of January 1, 1997, in the amount of
$3,000,000 and (C) thereafter, in such amounts as are customary for
publicly traded corporations of similar size engaged in similar lines of
business as reasonably determined by the Company's board of directors;
provided, however, that the Company shall not be required to secure and
maintain any such insurance if such insurance is not available on
commercially reasonable terms; and
(viii) maintain proper books of record and account which present
fairly in all material respects its financial condition and results of
operations and make provisions on its financial statements for all such
proper reserves as in each
15
<PAGE>
case are required in accordance with generally accepted accounting
principles, consistently applied;
3F. Compliance with Agreements. The Company shall perform and observe
in all material respects (i) all of its obligations to each holder of the
Preferred Stock and all of its obligations to each holder of the Underlying
Common Stock set forth in the Restated Articles of Incorporation, as amended,
the Articles of Amendment and the Company's bylaws, (ii) all of its obligations
to each holder of the Warrant set forth therein and (iii) all of its obligations
to each holder of Registrable Securities set forth in the Registration
Agreement.
3G. Current Public Information. The Company shall file all reports
required to be filed by it under the Securities Act and the Securities Exchange
Act and the rules and regulations adopted by the Securities and Exchange
Commission thereunder and shall take such further action as any holder or
holders of Restricted Securities may reasonably request, all to the extent
required to enable such holders to sell Restricted Securities pursuant to (i)
Rule 144 adopted by the Securities and Exchange Commission under the Securities
Act (as such rule may be amended from time to time) or any similar rule or
regulation hereafter adopted by the Securities and Exchange Commission or (ii) a
registration statement on Form S-2 or S-3 or any similar registration form
hereafter adopted by the Securities and Exchange Commission. Upon request, the
Company shall deliver to any holder of Restricted Securities a written statement
as to whether it has complied with such requirements.
3H. Amendment of Agreements. The Company shall not amend, modify or
waive any provision of any Lease Modification Agreement, without the prior
written consent of the holders of at least 662/3% the Preferred Stock, and the
Company shall enforce the provisions of the Lease Modification Agreements and
shall exercise all of its rights and remedies thereunder unless it is otherwise
directed by the holders of at least 662/3% of the Preferred Stock.
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3I. First Refusal Rights.
(i) Except for issuances of Common Stock (a) upon the conversion of
the Preferred Stock or upon the exercise of the Warrant, (b) in connection with
the acquisition of another company or business as contemplated by paragraph
3D(viii), (c) pursuant to a public offering registered under the Securities Act,
or (d) upon the exercise of options granted to any of the Company's or its
Subsidiaries' employees, directors, agents, consultants, advisors or independent
consultants pursuant to any stock option plan adopted by the Company's board of
directors, (e) upon the exercise of any of the warrants sold to the
representatives of the underwriters of the Company's initial public offering,
(f) upon the conversion of any Permitted Debt Securities or (g) as a dividend on
the outstanding Common Stock, if the Company authorizes the issuance or sale of
any shares of Common Stock or any securities containing options or rights to
acquire any shares of Common Stock, the Company shall first offer to sell to
each holder of Underlying Common Stock a portion of such stock or securities
equal to the quotient determined by dividing (1) the number of shares of Under
lying Common Stock held by such holder by (2) the sum of the total number of
shares of Underlying Common Stock and the number of shares of Common Stock
outstanding which are not shares of Underlying Common Stock. Each holder of
Underlying Common Stock shall be entitled to purchase such stock or securities
at the most favorable price and on the most favorable terms as such stock or
securities are to be offered to any other Persons; provided that if all Persons
entitled to purchase or receive such stock or securities are required to also
purchase other securities of the Company, the holders of Underlying Common Stock
exercising their rights pursuant to this paragraph shall also be required to
purchase the same strip of securities (on the same terms and conditions) that
such other Persons are required to purchase and provided that, at the request of
any holder of Underlying Common Stock, the Company shall offer to such holder
stock or securities which have no voting rights (other than required by
applicable law) and which are convertible into voting securities on the same
terms as the Series A Preferred is convertible into Common Stock but which are
otherwise identical to the stock or securities being offered. The purchase price
for all stock and securities offered to the holders of the Underlying Common
Stock shall be
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payable in cash or, to the extent otherwise required hereunder, notes issued by
such holders.
(ii) In order to exercise its purchase rights hereunder, a holder of
Underlying Common Stock must within 15 days after receipt of written notice from
the Company describing in reasonable detail the stock or securities being
offered, the purchase price thereof, the payment terms and such holder's
percentage allotment deliver a written notice to the Company describing its
election hereunder. If all of the stock and securities offered to the holders of
Underlying Common Stock is not fully subscribed by such holders, the remaining
stock and securities shall be reoffered by the Company to the holders purchasing
their full allotment upon the terms set forth in this paragraph, except that
such holders must exercise their purchase rights within five days after receipt
of such reoffer.
(iii) Upon the expiration of the offering periods described above, the
Company shall be entitled to sell such stock or securities which the holders of
Underlying Common Stock have not elected to purchase during the 180 days
following such expiration on terms and conditions no more favorable to the
purchasers thereof than those offered to such holders. Any stock or securities
offered or sold by the Company after such 180-day period must be reoffered to
the holders of Underlying Common Stock pursuant to the terms of this paragraph.
Section 4. Transfer of Restricted Securities.
4A. General Provisions. Restricted Securities are transferable only
pursuant to (i) public offerings registered under the Securities Act, (ii) Rule
144 or Rule 144A of the Securities and Exchange Commission (or any similar rule
or rules then in force) if such rule is available and (iii) subject to the
conditions specified in paragraph 4B below, any other legally available means of
transfer.
4B. Opinion Delivery. In connection with the transfer of any
Restricted Securities (other than a transfer described in paragraph 4A(i) or
(ii) above), the holder thereof shall deliver written notice to the Company
describing in reasonable detail the
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transfer or proposed transfer, together with an opinion in form and substance
reasonably satisfactory to the Company's counsel of Kirkland & Ellis or other
counsel which (to the Company's reason able satisfaction) is knowledgeable in
securities law matters to the effect that such transfer of Restricted Securities
may be effected without registration of such Restricted Securities under the
Securities Act. In addition, if the holder of the Restricted Securities delivers
to the Company an opinion of Kirkland & Ellis or such other counsel in form and
substance reasonably satisfactory to the Company's counsel that no subsequent
transfer of such Restricted Securities shall require registration under the
Securities Act, the Company shall promptly upon such contemplated transfer
deliver new certificates for such Restricted Securities which do not bear the
Securities Act legend set forth in paragraph 7C. If the Company is not required
to deliver new certificates for such Restricted Securities not bearing such
legend, the holder thereof shall not transfer the same until the prospective
transferee has confirmed to the Company in writing its agreement to be bound by
the conditions contained in this paragraph and paragraph 7C. The cost of
obtaining any opinion contemplated by this paragraph 4B shall be borne by the
holder of the Restricted Securities being transferred.
4C. Rule 144A. Upon the request of any Purchaser, the Company shall
promptly supply to such Purchaser or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
4D. Legend Removal. If any Restricted Securities become eligible for
sale pursuant to Rule 144(k), the Company shall, upon the request of the holder
of such Restricted Securities, remove the legend set forth in paragraph 7C from
the certificates for such Restricted Securities.
4E. Restriction on Transfer. The Preferred Stock may not be
transferred to a Competitor without the prior written consent of the Company;
provided that the Common Stock issuable upon the conversion of the Preferred
Stock and the Warrant shall not be subject to such restriction on transfer.
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Section 5. Representations and Warranties of the Company. As a
material inducement to the Purchasers to enter into this Agreement and purchase
the Preferred Stock and the Warrant hereunder, the Company hereby represents and
warrants that:
5A. Organization, Corporate Power and Licenses. The Company is a
corporation duly organized and validly existing under the laws of Oregon and is
qualified to do business in every jurisdiction in which its ownership of
property or conduct of business requires it to qualify. The Company possesses
all requisite corporate power and authority and all material licenses, permits
and authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and to carry out the transactions contemplated by
this Agreement. The copies of the Company's and each Subsidiary's charter
documents and bylaws which have been furnished to the Purchasers' special
counsel reflect all amendments made thereto at any time prior to the date of
this Agreement and are correct and complete.
5B. Capital Stock and Related Matters.
(i) As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of (a) 5,000,000 shares of preferred
stock, of which 1,666,667 shares shall be designated as Series A Preferred
(1,283,785 of which shall be issued and outstanding, and 382,882 of which shall
be reserved for issuance upon the conversion of the Series B Preferred) and
382,882 shares shall be designated as Series B Preferred (all of which shall be
issued and outstanding), and (b) 25,000,000 shares of Common Stock, of which
4,633,000 shares shall be issued and outstanding and 2,018,182 shares shall be
reserved for issuance upon conversion of the Preferred Stock or exercise of the
Warrant. As of the Closing, neither the Company nor any Subsidiary shall have
outstanding any stock or securities convertible or exchangeable for any shares
of its capital stock or containing any profit participation features, nor shall
it have outstanding any rights or options to subscribe for or to purchase its
capital stock or any stock or securities convertible into or exchangeable for
its capital stock or any stock appreciation rights or phantom stock plans,
except for the Preferred Stock and except as set forth on the attached
"Capitalization Schedule." The Capitalization
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Schedule accurately sets forth the following information with respect to all
outstanding options and rights to acquire the Company's capital stock: the
holder, the number of shares covered, the exercise price and the expiration
date. As of the Closing, neither the Company nor any Subsidiary shall be subject
to any obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire any shares of its capital stock or any warrants, options or other
rights to acquire its capital stock, except as set forth on the Capitalization
Schedule and except pursuant to the Articles of Amendment and the Restated
Articles of Incorporation, as amended. As of the Closing, all of the outstanding
shares of the Company's capital stock shall be validly issued, fully paid and
nonassessable.
(ii) There are no statutory or, to the best of the Company's
knowledge, contractual stockholders' preemptive rights or rights of refusal with
respect to the issuance of the Preferred Stock or the Warrant hereunder or the
issuance of the Common Stock upon conversion of the Preferred Stock or upon
exercise of the Warrant. The Company has not violated any applicable federal or
state securities laws in connection with the offer, sale or issuance of any of
its capital stock, and the offer, sale and issuance of the Preferred Stock or
the Warrant hereunder do not require registration under the Securities Act or
any applicable state securities laws. To the best of the Company's knowledge,
there are no agreements between the Company's stockholders with respect to the
voting or transfer of the Company's capital stock or with respect to any other
aspect of the Company's affairs.
5C. Subsidiaries; Investments. The attached "Subsidiary Schedule"
correctly sets forth the name of each Subsidiary, the jurisdiction of its
organization and the Persons owning the membership interests of such Subsidiary.
Each Subsidiary is duly organized and validly existing under the laws of the
jurisdiction of its organization, possesses all requisite limited liability
company power and authority and all material licenses, permits and
authorizations necessary to own its properties and to carry on its businesses as
now being conducted and is qualified to do business in every jurisdiction in
which its ownership of property or the conduct of business requires it to
qualify. The Company has made all contributions required to date pursuant to the
operating
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agreement for each Subsidiary, and all membership interests are owned by the
Company free and clear of any Lien and, except as described on the Subsidiary
Schedule, are not subject to any option or right to purchase any such membership
interests. Except as set forth on the Subsidiary Schedule, neither the Company
nor any Subsidiary owns or holds the right to acquire any shares of stock or any
other security or interest in any other Person.
5D. Authorization; No Breach. The execution, delivery and performance
of this Agreement, the Warrant, the Registration Agreement and all other
agreements contemplated hereby to which the Company is a party and the filing of
the Articles of Amendment have been duly authorized by the Company. This
Agreement, the Warrant, the Registration Agreement, the Restated Articles of
Incorporation, as amended, the Articles of Amendment and all other agreements
contemplated hereby to which the Company is a party each constitutes a valid and
binding obligation of the Company, enforceable in accordance with its terms. The
execution and delivery by the Company of this Agreement, the Registration
Agreement and all other agreements contemplated hereby to which the Company is a
party, the offering, sale and issuance of the Preferred Stock and the Warrants
hereunder, the issuance of the Common Stock upon conversion of the Preferred
Stock, the issuance of the Series A Preferred upon conversion of the Series B
Preferred, the issuance of Warrants hereunder, the issuance of Common Stock upon
exercise of Warrants, the filing of the Articles of Amendment and the
fulfillment of and compliance with the respective terms hereof and thereof by
the Company, do not and shall not (i) conflict with or result in a breach of the
terms, conditions or provisions of, (ii) constitute a default under, (iii)
result in the creation of any lien, security interest, charge or encumbrance
upon the Company's or any Subsidiary's capital stock or assets pursuant to, (iv)
give any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or other action by or notice or declaration to, or filing
with, any court or administrative or governmental body or agency pursuant to,
the Articles of Amendment or the charter or bylaws of the Company or any
Subsidiary, or any law, statute, rule or regulation to which the Company or any
Subsidiary is subject, or
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any material agreement, instrument, order, judgment or decree to which the
Company or any Subsidiary is subject.
5E. Financial Statements. Attached hereto as the "Financial Statements
Schedule" are the following financial statements:
(i) the audited balance sheet of the Company as of December 31,
1995 and the related statement of operations and cash flows (or the
equivalent) for the twelve-month period then ended; and
(ii) the unaudited balance sheet of the Company as of September
30, 1996 (the "Latest Balance Sheet"), and the related statement of
operations and cash flows (or the equivalent) for the nine-month period
then ended.
Each of the foregoing financial statements (including in all cases the notes
thereto, if any) is accurate and complete in all material respects, is
consistent with the books and records of the Company (which, in turn, are
accurate and complete in all material respects) and has been prepared in
accordance with generally accepted accounting principles, consistently applied.
5F. Absence of Undisclosed Liabilities. Except as set forth on the
attached "Liabilities Schedule," the Company and its Subsidiaries do not have
any material obligation or liability (whether accrued, absolute, contingent,
unliquidated or otherwise, whether or not known to the Company or any
Subsidiary, whether due or to become due and regardless of when asserted)
arising out of transactions entered into at or prior to the Closing, or any
action or inaction at or prior to the Closing, or any state of facts existing at
or prior to the Closing other than: (i) liabilities set forth on the Latest
Balance Sheet (including any notes thereto), (ii) liabilities and obligations
which have arisen after the date of the Latest Balance Sheet in the ordinary
course of business (none of which is a liability resulting from breach of
contract, breach of warranty, tort, infringement, claim or lawsuit) and (iii)
other liabilities and obligations expressly disclosed in the other Schedules to
this Agreement.
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5G. No Material Adverse Change. Since the date of the Latest Balance
Sheet, there has been no material adverse change in the financial condition,
operating results, assets, operations, business prospects, employee relations or
customer or supplier relations of the Company and its Subsidiaries taken as a
whole.
5H. Absence of Certain Developments.
(i) Except as expressly contemplated by this Agreement or as set forth
on the attached "Developments Schedule," since the date of the Latest Balance
Sheet, neither the Company nor any Subsidiary have
(a) issued any notes, bonds or other debt securities or any
capital stock or other equity securities or any securities convertible,
exchangeable or exercisable into any capital stock or other equity
securities;
(b) borrowed any amount or incurred or become subject to any
liabilities, except current liabilities incurred in the ordinary course of
business and liabilities under contracts entered into in the ordinary
course of business;
(c) discharged or satisfied any Lien or paid any obligation or
liability, other than current liabilities paid in the ordinary course of
business;
(d) declared or made any payment or distribution of cash or other
property to its stockholders with respect to its capital stock or other
equity securities or purchased or redeemed any shares of its capital stock
or other equity securities (including, without limitation, any warrants,
options or other rights to acquire its capital stock or other equity
securities);
(e) mortgaged or pledged any of its properties or assets or
subjected them to any Lien, except Liens for current property taxes not yet
due and payable;
(f) sold, assigned or transferred any of its tangible assets,
including any sale-leaseback transactions,
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except in the ordinary course of business, or canceled any debts or
claims;
(g) sold, assigned or transferred any patents or patent
applications, trademarks, service marks, trade names, corporate names,
copyrights or copyright registrations, trade secrets or other intangible
assets;
(h) suffered any extraordinary losses or waived any rights of
value, whether or not in the ordinary course of business or consistent with
past practice;
(i) made capital expenditures or commitments therefor in excess
of $150,000;
(j) made any loans or advances to, guarantees for the benefit of,
or any Investments (other than Permitted Investments) in, any Persons in
excess of $200,000 in the aggregate;
(k) made any charitable contributions or pledges in excess of
$10,000 in the aggregate;
(l) suffered any damage, destruction or casualty loss exceeding
in the aggregate $10,000, whether or not covered by insurance;
(m) made any Investment in or taken steps to incorporate any
Subsidiary; or
(n) entered into any other transaction other than in the ordinary
course of business or entered into any other material transaction, whether
or not in the ordinary course of business.
(ii) Neither the Company nor any Subsidiary has at any time made any
payments for political contributions or made any bribes, kickback payments or
other illegal payments.
5I. Assets. Except as set forth on the attached "Assets Schedule," the
Company and each Subsidiary have good and marketable
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title to, or a valid leasehold interest in, all of the material properties and
assets used by them, located on their premises or shown on the Latest Balance
Sheet or acquired thereafter. Except as described on the Assets Schedule, the
Company's and each Subsidiary's material equipment and other tangible assets are
in good operating condition in all material respects and are fit for use in the
ordinary course of business. The Company and each Subsidiary own, or have a
valid leasehold interest in, all assets necessary for the conduct of their
respective businesses as presently conducted.
(i) Owned Properties. The Assets Schedule sets forth a list of all
owned real property (the "Owned Real Property") used by the Company or any
Subsidiary in the operation of the Company's business. Except as set forth on
the Assets Schedule, with respect to each such parcel of Owned Real Property:
(a) such parcel is free and clear of all encumbrances, except Permitted
Encumbrances; (b) there are no leases, subleases, licenses, concessions, or
other agreements, written or oral, granting to any person the right of use or
occupancy of any portion of such parcel; and (c) there are no outstanding
actions or rights of first refusal to purchase such parcel, or any portion
thereof or interest therein.
(ii) Leased Properties. The Assets Schedule sets forth a list of all
of the leases and subleases ("Leases") of real property in which the Company or
any subsidiary has a leasehold and subleasehold interest (the "Leased Real
Property") (the Owned Real Property and the Leased Real Property are
collectively referred to herein as the "Real Property"). Each of the Leases are
in full force and effect and the Company holds a valid and existing leasehold or
subleasehold interest under each of the Leases. The Company has delivered to
Purchaser true, correct, complete and accurate copies of each of the Leases
described in the Assets Schedule. Except as described on the Assets Schedule,
with respect to each Lease listed on the Assets Schedule: (a) the Lease is
legal, valid, binding, enforceable and in full force and effect; (b) the Lease
will continue to be legal, valid, binding, enforceable and in full force and
effect on identical terms following the Closing; (c) neither the Company nor any
other party to the Lease is in breach or default, and no event has occurred
which, with notice or lapse of time, would constitute such a breach
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or default or permit termination, modification or acceleration under the Lease;
(d) no party to the Lease has repudiated any provision thereof; (e) there are no
disputes, oral agreements, or forbearance programs in effect as to the Lease;
(f) the Lease has not been modified in any respect, except to the extent that
such modifications are disclosed by the documents delivered to Purchaser; (g)
the Company has not assigned, transferred, conveyed, mortgaged, deeded in trust
or encumbered any interest in the Lease; and (h) the purchase and transfer of
stock and warrants of the Company, as contemplated by this Agreement, will not
require the consent of the landlords or any other party under the Leases or
Seller shall obtain all necessary consents prior to the Closing. Purchaser
acknowledges that the Company subleases the operation of the beauty salon at
each property to a third party.
(iii) Real Property Disclosure. Except as disclosed on the Assets
Schedule, there is no real property leased or owned by the Company or any
subsidiary and used in the Company's business.
(iv) No Proceedings. There are no pending or, to the best of the
Company's knowledge, threatened proceedings in eminent domain or other similar
proceedings affecting any portion of the Real Property. There exists no writ,
injunction, decree, order or judgment outstanding, nor any litigation, pending
or, to the best of the Company's knowledge, threatened, relating to the
ownership, lease, use, occupancy or operation by any person of the Real
Property.
(v) Current Use. The current use or occupancy of the Real Property
does not violate in any material respect any instrument of record or agreement
affecting such Real Property or any covenant, condition, restriction, easement,
agreement or order of any governmental authority having jurisdiction over any of
the Real Property. No damage or destruction has occurred with respect to any of
the Real Property that, individually or in the aggregate, has had or resulted
in, or will have or result in, a material adverse effect on the operation of the
Company's business.
(vi) Condition and Operation of Improvements. All buildings and all
components of all buildings, structures and other
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improvements included within the Owned Real Property (the "Improvements"), are
in good condition and repair and are adequate to operate such facilities as
currently used. To the best of the Company's knowledge and belief, there are no
facts or conditions affecting any of the Improvements and the Leased Real
Property which would, individually or in the aggregate, interfere in any
significant respect with the use, occupancy or operation thereof as currently
used, occupied or operated or intended to be used, occupied or operated. To the
best of the Company's knowledge and belief, there are no material structural
deficiencies or latent defects affecting any Improvements. All water, gas,
electrical, steam, compressed air, telecommunication, sanitary and storm sewage
lines and systems and other similar systems serving the Real Property are
installed and operating and are sufficient to enable the Real Property to
continue to be used and operated in the manner currently being used and
operated. Each such utility or other service is provided by a public or private
utility or service company and enters the Owned Real Property from an adjacent
public street or valid private easement owned by the supplier of such utility or
other service. Each Improvement has direct access to a public street adjoining
the Real Property on which such Improvement is situated over the driveways and
accessways currently being used in connection with the use and operation of such
Improvement and no existing accessway crosses or encroaches upon any property or
property interest not owned by the Company. No Improvement or portion thereof is
dependent for its access, operation or utility on any land, building or other
improvement not included in the Owned Real Property.
(vii) Permits. All certificates of occupancy, permits, licenses,
franchises, approvals and authorizations (collectively, the "Real Property
Permits") of all governmental authorities having jurisdiction over the Real
Property, required or appropriate to have been issued to the Company to enable
the Real Property in all material respects to be lawfully occupied and used for
all of the purposes for which it is currently occupied and used, have been
obtained by the Company and, to the Company's best knowledge, have been lawfully
issued and are, as of the date hereof, in full force and effect, with no
suspension, revocation or modification of any Real Property Permit pending or
threatened.
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(viii) Compliance with Laws. The Real Property is in full compliance
with all applicable building, zoning, subdivision, health and safety and other
land use and similar laws affecting the Real Property (collectively, the "Real
Property Laws"), and the Company has not received any notice of violation or
claimed violation of any Real Property Law. To the best of the Company's
knowledge, there is no pending or anticipated change in any Real Property Law
that will have or result in a material adverse effect upon the ownership,
alteration, use, occupancy or operation of the Real Properties or any portion
thereof. No current use by the Company of the Real Properties is dependent on a
nonconforming use or other approval from a governmental authority, the absence
of which would significantly limit the use of any of the properties or assets in
the operation of the Company's business.
5J. Tax Matters.
(i) Except as set forth on the attached "Taxes Schedule": the Company
and each Subsidiary have filed all Tax Returns which they are required to file
under applicable laws and regulations; all such Tax Returns are complete and
correct in all material respects and have been prepared in compliance with all
applicable laws and regulations in all material respects; the Company, each
Subsidiary have paid in all material respects all Taxes due and owing by them
(whether or not such Taxes are required to be shown on a Tax Return) and have
withheld and paid over to the appropriate taxing authority all Taxes which they
are required to withhold from amounts paid or owing to any employee,
stockholder, creditor or other third party; neither the Company nor any
Subsidiary has waived any statute of limitations with respect to any Taxes or
agreed to any extension of time with respect to any Tax assessment or
deficiency; the accrual for Taxes on the Latest Balance Sheet would be adequate
to pay all Tax liabilities of the Company and its Subsidiaries if their current
tax year were treated as ending on the date of the Latest Balance Sheet
(excluding any amount recorded which is attributable solely to timing
differences between book and Tax income); since the date of the Latest Balance
Sheet, the Company and its Subsidiaries have not incurred any liability for
Taxes other than in the ordinary course of business; the assessment of any
additional Taxes for periods for which Tax Returns have been filed by the
Company and each Subsidiary shall
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not exceed the recorded liability therefor on the Latest Balance Sheet
(excluding any amount recorded which is attributable solely to timing
differences between book and Tax income); no foreign, federal, state or local
tax audits or administrative or judicial proceedings are pending or being
conducted with respect to the Company or any Subsidiary, no information related
to Tax matters has been requested by any foreign, federal, state or local taxing
authority and no written notice indicating an intent to open an audit or other
review has been received by the Company from any foreign, federal, state or
local taxing authority; and there are no material unresolved questions or claims
raised or made by any taxing authority concerning the Company's or any
Subsidiary's Tax liability.
(ii) Neither the Company nor any of its Subsidiaries has made an
election under ss.341(f) of the Internal Revenue Code of 1986, as amended.
Neither the Company nor any Subsidiary is liable for the Taxes of another Person
that is not a Subsidiary in a material amount under (a) Treasury Regulation ss.
1.1502-6 (or comparable provisions of state, local or foreign law), (b) as a
transferee or successor, (c) by contract or indemnity or (d) otherwise. Neither
the Company nor any Subsidiary is a party to any tax sharing agree ment. The
Company, each Subsidiary have disclosed on their federal income Tax Returns any
position taken for which substantial authority (within the meaning of IRC
ss.6662(d)(2)(B)(i)) did not exist at the time the return was filed. Neither the
Company nor any Subsidiary has made any payments, is obligated to make payments
or is a party to an agreement that could obligate it to make any payments that
would not be deductible under IRC ss.280G.
(iii) "Tax" or "Taxes" means federal, state, county, local, foreign or
other income, gross receipts, ad valorem, franchise, profits, sales or use,
transfer, registration, excise, utility, environmental, communications, real or
personal property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including, without
limitation, deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not. "Tax Return" means any return, information
report or filing with
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respect to Taxes, including any schedules attached thereto and including any
amendment thereof.
5K. Contracts and Commitments.
(i) Except as expressly contemplated by this Agreement or as set forth
on the attached "Contracts Schedule" or the attached "Employee Benefits
Schedule," neither the Company nor any Subsidiary is a party to or bound by any
written or oral:
(a) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other employee benefit plan or
arrangement, or any collective bargaining agreement or any other contract
with any labor union, or severance agreements, programs, policies or
arrangements;
(b) contract for the employment of any officer, individual
employee or other Person on a full-time, part-time, consulting or other
basis providing annual compensation in excess of $50,000 or contract
relating to loans to officers, directors or Affiliates;
(c) contract under which the Company or Subsidiary has advanced
or loaned any other Person amounts in the aggregate exceeding $50,000;
(d) agreement or indenture relating to borrowed money or other
Indebtedness or the mortgaging, pledging or otherwise placing a Lien on any
material asset or material group of assets of the Company and its
Subsidiaries;
(e) guarantee of any obligation;
(f) lease or agreement under which the Company or any Subsidiary
is lessee of or holds or operates any property, real or personal, owned by
any other party, except for any lease of real or personal property under
which the aggregate annual rental payments do not exceed $50,000;
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(g) lease or agreement under which the Company or any Subsidiary
is lessor of or permits any third party to hold or operate any property,
real or personal, owned or controlled by the Company or any Subsidiary;
(h) contract or group of related contracts with the same party or
group of affiliated parties the performance of which involves consideration
in excess of $100,000;
(i) assignment, license, indemnification or agreement with
respect to any intangible property (including, without limitation, any
Intellectual Property);
(j) warranty agreement with respect to its services rendered or
its products sold or leased;
(k) agreement under which it has granted any Person any
registration rights (including, without limitation, demand and piggyback
registration rights);
(l) sales, distribution or franchise agreement;
(m) material agreement with a term of more than six months which
is not terminable by the Company or any Subsidiary upon less than 30 days
notice without penalty;
(n) contract or agreement prohibiting it from freely engaging in
any business or competing anywhere in the world; or
(o) any other agreement which is material to its operations or
relating to the acquisition of additional properties.
(ii) All of the contracts, agreements and instruments set forth on the
Contracts Schedule are valid, binding and enforceable in accordance with their
respective terms. The Company and each Subsidiary have performed all material
obligations required to be performed by them on or prior to the date of this
Agreement and are not in default under or in breach of nor in receipt of any
claim of default or breach under any material contract, agreement or instrument
to which the Company or any Subsidiary is subject; no event has occurred which
with the passage of time or the giving of notice or both would result in a
default, breach or event of noncompliance by the Company or any Subsidiary under
any material contract, agreement or
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instrument to which the Company or any Subsidiary is subject; neither the
Company nor any Subsidiary has any present expectation or intention of not fully
performing all such material obligations; and neither the Company nor any
Subsidiary has knowledge of any breach or anticipated breach by the other
parties to any material contract, agreement, instrument or commitment to which
it is a party.
(iii) The Company has delivered or made available to the Purchasers'
special counsel a true and correct copy of each of the written instruments,
plans, contracts and agreements and an accurate description of each of the oral
arrangements, contracts and agreements which are referred to on the Contracts
Schedule, together with all amendments, waivers or other changes thereto.
5L. Intellectual Property Rights.
(i) The attached "Intellectual Property Schedule" contains a complete
and accurate list of all (a) material patented or registered Intellectual
Property Rights owned or used by the Company or any Subsidiary, (b) material
pending patent applications and applications for registrations of other
Intellectual Property Rights filed by the Company or any Subsidiary, (c)
material unregistered trade names and corporate names owned or used by the
Company or any Subsidiary and (d) material unregistered trademarks, service
marks, copyrights, mask works and computer software owned or used by the Company
or any Subsidiary. The Intellectual Property Schedule also contains a complete
and accurate list of all licenses and other rights granted by the Company or any
Subsidiary to any third party with respect to any material Intellectual Property
Rights and all licenses and other rights granted by any third party to the
Company or any Subsidiary with respect to any material Intellectual Property
Rights, in each case identifying the subject Intellectual Property Rights.
Except as set forth on the Intellectual Property Schedule, the Company or one of
its Subsidiaries owns all right, title and interest to, or has the right to use
pursuant to a valid license, all Intellectual Property
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Rights necessary for the operation of the businesses of the Company and its
Subsidiaries as presently conducted free and clear of all Liens.
(ii) Except as set forth on the Intellectual Property Schedule, (a)
the Company and its Subsidiaries own all right, title and interest in and to all
of the Intellectual Property Rights listed on such schedule, free and clear of
all Liens, (b) there have been no claims made against the Company or any
Subsidiary asserting the invalidity, misuse or unenforceability of any of such
Intellectual Property Rights, and, to the best of the Company's knowledge, there
are no valid grounds for the same, (c) neither the Company nor any Subsidiary
has received any notices of, and is not aware of any facts which indicate a
likelihood of, any infringement or misappropriation by, or conflict with, any
third party with respect to such Intellectual Property Rights (including,
without limitation, any demand or request that the Company or any Subsidiary
license any rights from a third party) and (d) to the best of the Company's
knowledge, the conduct of the Company's and each Subsidiary's business has not
infringed, misappropriated or conflicted with and does not infringe, misappro
priate or conflict with any Intellectual Property Rights of other Persons, nor
would any future conduct as presently contemplated infringe, misappropriate or
conflict with any Intellectual Property Rights of other Persons.
5M. Litigation, etc. Except as set forth on the attached "Litigation
Schedule," there are no actions, suits, proceedings, orders, investigations or
claims pending or, to the best of the Company's knowledge, threatened against or
affecting the Company or any Subsidiary (or to the best of the Company's
knowledge, pending or threatened against or affecting any of the officers,
directors or employees of the Company and its Subsidiaries with respect to their
businesses or proposed business activities), at law or in equity, or before or
by any governmental department, commission, board, bureau, agency or
instrumentality (including, without limitation, any actions, suit, proceedings
or investigations with respect to the transactions contemplated by this
Agreement); neither the Company nor any Subsidiary is subject to any arbitration
proceedings under collective bargaining agreements or otherwise or, to the best
of the Company's knowledge,
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any governmental investigations or inquiries (including, without limitation,
inquiries as to the qualification to hold or receive any license or permit);
and, to the best of the Company's knowledge, there is no basis for any of the
foregoing. Neither the Company nor any Subsidiary is subject to any judgment,
order or decree of any court or other governmental agency.
5N. Brokerage. Except for the fees that will be payable by the Company
to each of Needham & Company, Inc. and Coopers & Lybrand L.L.P. in connection
with the transactions contemplated by this Agreement, there are no claims for
brokerage commissions, finders' fees or similar compensation in connection with
the transactions contemplated by this Agreement based on any arrangement or
agreement binding upon the Company or any Subsidiary. The Company shall pay, and
hold Purchaser harmless against, any liability, loss or expense (including,
without limitation, reasonable attorneys' fees and out-of-pocket expenses)
arising in connection with any such claim.
5O. Governmental Consent, etc. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental authority
is required in connection with the execution, delivery and performance by the
Company of this Agreement or the other agreements contemplated hereby, or the
consummation by the Company of any other transactions contemplated hereby or
thereby, except as expressly contemplated herein or in the exhibits hereto.
5P. Insurance. The attached "Insurance Schedule" contains a
description of each insurance policy maintained by the Company and its
Subsidiaries with respect to its properties, assets and businesses, and each
such policy is in full force and effect as of the Closing. Neither the Company
nor any Subsidiary is in default with respect to its material obligations under
any insurance policy maintained by it, and neither the Company nor any
Subsidiary has been denied insurance coverage. The insurance coverage of the
Company and its Subsidiaries is customary for corporations of similar size
engaged in similar lines of business. Except as set forth on the Insurance
Schedule, the Company and its Subsidiaries do not have any self-insurance or
co-insurance programs, and the reserves set forth on the Latest Balance Sheet
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are adequate to cover all anticipated liabilities with respect to any such
self-insurance or co-insurance programs.
5Q. Employees. The Company is not aware that any executive or key
employee of the Company or any Subsidiary or any group of employees of the
Company or any Subsidiary has any plans to terminate employment with the Company
or any Subsidiary. The Company and each Subsidiary have complied in all material
respects with all laws relating to the employment of labor (including, without
limitation, provisions thereof relating to wages, hours, equal opportunity,
collective bargaining and the payment of social security and other taxes), and
the Company is not aware that it or any Subsidiary has any material labor
relations problems (including, without limitation, any union organization
activities, threatened or actual strikes or work stoppages or material
grievances). Except as set forth on the attached "Employees Schedule," neither
the Company, its Subsidiaries nor, to the best of the Company's knowledge, any
of their employees is subject to any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreements relating to, affecting or in
conflict with the present or proposed business activities of the Company and its
Subsidiaries, except for agreements between the Company and its present and
former employees.
5R. ERISA. Except as set forth on the attached "Employee Benefits
Schedule":
(i) Multiemployer Plans. The Company does not have any obligation to
contribute to (or any other liability, including current or potential withdrawal
liability, with respect to) any "multiemployer plan" (as defined in Section
3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")).
(ii) Retiree Welfare Plans. The Company does not maintain or have any
obligation to contribute to (or any other liability with respect to) any plan or
arrangement whether or not terminated, which provides medical, health, life
insurance or other welfare-type benefits for current or future retired or
terminated employees (except for limited continued medical benefit coverage
required to be provided under Section 4980B of the IRC or as required under
applicable state law).
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(iii) Defined Benefit Plans. The Company does not maintain, contribute
to or have any liability under (or with respect to) any employee plan which is a
tax-qualified "defined benefit plan" (as defined in Section 3(35) of ERISA),
whether or not terminated.
(iv) Defined Contribution Plans. The Company does not maintain,
contribute to or have any liability under (or with respect to) any employee plan
which is a tax-qualified "defined contribution plan" (as defined in Section
3(34) of ERISA), whether or not terminated.
(v) Other Plans. The Company does not maintain, contribute to or have
any liability under (or with respect to) any plan or arrangement providing
benefits to current or former employees, including any bonus plan, plan for
deferred compensation, employee health or other welfare benefit plan or other
arrangement, whether or not terminated.
(vi) The Company. For purposes of this paragraph 5R, the term
"Company" includes all organizations under common control with the Company
pursuant to Section 414(b) or (c) of the IRC.
5S. Compliance with Laws.
(i) Neither the Company nor any Subsidiary has violated any law or any
governmental regulation or requirement which violation has had or would
reasonably be expected to have a material adverse effect upon the financial
condition, operating results, assets, operations or business prospects of the
Company and its Subsidiaries taken as a whole, and neither the Company nor any
Subsidiary has received notice of any such violation.
(ii) Neither the Company or any Subsidiary nor their officers and
employees, nor any persons who provide professional services under agreements
with the Company or its Subsidiaries have engaged in any activities which are
prohibited under any laws related to the operation of the business of the
Company or any Subsidiary, or the regulations promulgated pursuant to such laws,
including, without limitation, the following activities:
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(a) making or causing to be made a false statement or
representation of a material fact in any application for any benefit or
payment;
(b) making or causing to be made any false statement or
representation of a material fact for use in determining rights to any
benefit or payment;
(c) presenting or causing to be presented a claim for
reimbursement for services under Medicare, Medicaid, or other state health
care programs that is for an item or service that is (i) not provided as
claimed, or (ii) false or fraudulent;
(d) failing to disclose knowledge by a claimant of the occurrence
of any event affecting the initial or continued right to any benefit or
payment on its own behalf or on behalf of another, regardless of whether
there was intent to fraudulently secure such benefit or payment;
(e) offering, paying, soliciting or receiving any remuneration
(including any kickback, bribe, or rebate), directly or indirectly, overtly
or covertly, in cash or in kind (i) in return for referring an individual
to a person for the furnishing or arranging for the furnishing of any item
or service for which payment may be made in whole or in part by Medicare or
Medicaid, or other state health care program, or (ii) in return for
purchasing, leasing, or ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service, or item for
which payment may be made in whole or in part by Medicare or Medicaid or
other state health care program;
(f) making a payment, directly or indirectly, to a physician as
an inducement to reduce or limit services to individuals who are under the
direct care of the physician and who are entitled to benefits under
Medicare, Medicaid, or other state health care programs;
(g) providing to any person information that is false or
misleading that could reasonably be expected to
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influence the decision when to discharge a patient from a facility;
(h) making or causing to be made or inducing or seeking to induce
the making of any false statement or representation (or omitting to state a
fact required to be stated therein or necessary to make the statements
contained therein not misleading) of a material fact with respect to (i)
the conditions or operations of a facility in order that the facility may
qualify for Medicare, Medicaid or other state health care program
certification, (ii) information required to be provided under ss. 1124A of
the Social Security Act (42 U.S.C. ss. 1320a-3), or (iii) information
otherwise required by Medicare Regulations, Medicaid Regulations, or Other
Healthcare Regulations; and
(i) charging money or other consideration for any Medicaid
service at a rate in excess of the rates established by the state, or
charging, soliciting, accepting or receiving, in addition to amounts paid
by Medicaid, any gift money, donation or other consideration as a
precondition of admitting a patient or as a requirement for the patient's
continued stay in a facility.
5T. Environmental and Safety Matters.
(i) For purposes of this Agreement, the term "Environmental and Safety
Requirements" shall mean all federal, state and local statutes, regulations,
ordinances and other provisions having the force or effect of law, all judicial
and administrative orders and determinations and all common law, in each case
concerning public health and safety, worker health and safety and pollution or
protection of the environment (including, without limitation, all those relating
to the presence, use, production, generation, handling, transport, treatment,
storage, disposal, distribution, labeling, testing, processing, discharge,
Release, threatened Release, control or cleanup of any hazardous materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning
set forth in CERCLA (as defined below); and
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"Environmental Lien" shall mean any Lien, whether recorded or unrecorded, in
favor of any governmental entity, relating to any liability of the Company or
any Subsidiary arising under any Environmental and Safety Requirements.
(ii) Except as set forth on the attached "Environmental Schedule":
(a) The Company and its Subsidiaries have complied with and are
currently in compliance with all Environmental and Safety Requirements, and
neither the Company nor its Subsidiaries have received any written notice,
report or information regarding any liabilities (whether accrued, absolute,
contingent, unliqui dated or otherwise) or any corrective, investigatory or
remedial obligations arising under Environmental and Safety Requirements
which relate to the Company or its Subsidiaries or any of their properties
or facilities, except for any such noncompliance, liability or obligation
which has not had or would not reasonably be expected to have a material
adverse effect on the financial condition, operating results, assets,
operations or business prospects of the Company and its Subsidiaries taken
as a whole.
(b) Without limiting the generality of the foregoing, the Company
and its Subsidiaries have obtained and complied with, and are currently in
compliance with, all permits, licenses and other authorizations that may be
required pursuant to any Environmental and Safety Requirements for the
occupancy of their properties or facilities or the operation of their
businesses, except for any such failure to obtain or comply which has not
had or would not reasonably be expected to have a material adverse effect
on the financial condition, operating results, assets, operations or
business prospects of the Company and its Subsidiaries taken as a whole. A
list of all such permits, licenses and other authorizations which are
material to the Company and its Subsidiaries is set forth on the attached
Environmental Schedule.
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(c) Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations on
the Company and its Subsidiaries or otherwise for site investigation or
cleanup, or notification to or consent of any government agencies or third
parties under any Environmental and Safety Requirements (including, without
limitation, any so called "transaction-triggered" or "responsible property
transfer" laws and regulations).
(d) None of the following exists at any property or facility
owned, occupied or operated by the Company or any of its Subsidiaries:
(1) underground storage tanks or surface impoundments;
(2) asbestos-containing materials in any form or condition; or
(3) materials or equipment containing polychlorinated biphenyls.
(e) Neither the Company nor any of its Subsidiaries has treated,
stored, disposed of, arranged for or permitted the disposal of,
transported, handled or Released any substance (including, without
limitation, any hazardous substance) or owned, occupied or operated any
facility or property, so as to give rise to liabilities of the Company or
its Subsidiaries for response costs, natural resource damages or attorneys
fees pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), as amended, or any other Environmental
and Safety Requirements except for any liabilities which would not
reasonably be expected to have a material adverse effect.
(f) Without limiting the generality of the foregoing, no facts,
events or conditions relating to the past or present properties, facilities
or operations of the Company or its Subsidiaries shall prevent, hinder or
limit continued compliance with Environmental and Safety Requirements, give
rise to any corrective, investigatory or remedial obligations
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pursuant to Environmental and Safety Requirements or give rise to any other
liabilities (whether accrued, absolute, contingent, unliquidated or
otherwise) pursuant to Environmental and Safety Requirements (including,
without limitation, those liabilities relating to onsite or offsite
Releases or threatened Releases of hazardous materials, substances or
wastes, personal injury, property damage or natural resources damage,
except for any such noncompliance, obligation or liability which has not
had or would not reasonably be expected to have a material adverse effect
on the financial condition, operating results, assets, operations or
business prospects of the Company and its Subsidiaries taken as a whole.
(g) Neither the Company nor any of its Subsidiaries has, either
expressly or by operation of law, assumed or undertaken any material
liability or corrective, investigatory or remedial obligation of any other
Person relating to any Environmental and Safety Requirements.
(h) No Environmental Lien has attached to any property owned,
leased or operated by the Company or any of its Subsidiaries.
5U. Affiliated Transactions. Except as set forth on the attached
"Affiliated Transactions Schedule," no officer, director, employee, stockholder
or Affiliate of the Company or any Subsidiary or any individual related by
blood, marriage or adoption to any such individual or any entity in which any
such Person or individual owns any beneficial interest, is a party to any
agreement, contract, commitment or transaction with the Company or any
Subsidiary or has any material interest in any material property used by the
Company or any Subsidiary.
5V. Medicare and Medicaid Matters. Except as set forth on the
"Healthcare Schedule":
(i) neither the Company nor any of its Subsidiaries (nor, as
applicable, each facility owned, managed or leased by the Company and its
Subsidiaries) currently receives or has in the past (while under the control or
management of the Company) received any
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reimbursements under the Medicare program ("Medicare") or is or has in the past
been required to have a Medicare Provider Agreement or is or has in the past
been required to obtain or maintain a Medicare Certification;
(ii) the Company and each of its Subsidiaries (and, as applicable,
each facility of the Company and its Subsidiaries) is certified for
participation in the Medical Assistance ("Medicaid") program for the state in
which it is located, has a current and valid Medicaid Provider Agreement, and
the Company (and, as applicable, each facility of the Company and its
Subsidiaries has obtained and maintains the Medicaid Certification necessary for
capital reimbursement of the Company's assets;
(iii) neither the Company nor any Subsidiary nor the respective
officers and directors of the Company and its Subsidiaries (acting in their
individual and non-representative capacities), nor Persons who provide
professional services under agreements with the Company or its Subsidiaries,
have engaged in any activities which (i) could subject such Person to sanctions
under 42 U.S.C. ss. 1320a-7 or (ii) at the time such activities were engaged in
were prohibited under Federal Medicare and Medicaid statutes, 42 U.S.C. ss.ss.
1320a-7 and 1320a-7b, or the regulations promulgated pursuant to such statutes
or related state or local statutes or regulations or which are prohibited by
rules of professional conduct;
(iv) neither the Company nor any Subsidiary has received notice from
any Authority of any pending or threatened investigations or surveys, and
neither the Company nor any Subsidiary has any reason to believe that any such
investigations or surveys are pending, threatened or imminent; and
(v) the Company and its Subsidiaries have complied with all applicable
Medicare Regulations, Medicaid Regulations, and Other Healthcare Regulations and
have filed all returns, cost reports and other filings in any manner prescribed.
All returns, cost reports and other filings made by the Company and its
Subsidiaries to Medicare, Medicaid or any other Authority are true and complete.
No deficiency in any such returns, cost reports and other filings, including
deficiencies for late filings, has been
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asserted or threatened by any Authority, and to the best of the company's
knowledge, after reasonable investigation, there is no basis for any claims or
requests for reimbursement from any Authority. Neither the Company nor any of
its Subsidiaries has been subject to any audit relating to fraudulent Medicare
or Medicaid procedure or practices.
5W. Reports with the Securities and Exchange Commission. The Company
has furnished the Purchasers with complete and accurate copies of its annual
report on Form 10-K for its most recent fiscal year, all other reports or
documents required to be filed by the Company pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act since the filing of the most recent annual report
on Form 10-K and its most recent annual report to its shareholders. At their
respective times of filing with the Securities and Exchange Commission, such
reports and filings did not contain any material false statements or any
misstatement of any material fact and did not omit to state any fact necessary
to make the statements set forth therein not misleading. The Company has made
all filings with the Securities and Exchange Commission which it is required to
make, and the Company has not received any request from the Securities and
Exchange Commission to file any amendment or supplement to any of the reports
described in this paragraph.
5X. Disclosure. Neither this Agreement nor any of the exhibits,
schedules, attachments, written statements, documents, certificates or other
items prepared or supplied to Purchaser by or on behalf of the Company with
respect to the transactions contemplated hereby (the "Disclosed Information")
contain any untrue statement of a material fact or omit a material fact
necessary to make each statement contained herein or therein not misleading;
provided that with respect to the financial projections furnished to Purchaser
by the Company, the Company represents and warrants only that such projections
were based upon assumptions reasonably believed by the Company to be reasonable
and fair as of the date of the projections. There is no fact which the Company
has not disclosed to Purchaser in writing and of which any of its officers or
directors is aware and which has had or would reasonably be expected to have a
material adverse effect upon the existing or expected financial condition,
operating results, assets, customer or supplier relations, employee relations or
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business prospects of the Company and its Subsidiaries taken as a whole.
5Y. Real Property Holding Corporation. Since its date of
incorporation, the Company has not been, and as of the date of the Closing shall
not be, a "United States real property holding corporation", as defined in
Section 897(c)(2) of the IRC and in Section 1.897-2(b) of the Treasury
Regulations. The Company has filed with the IRS all statements, if any, with its
United States income tax returns which are required under Section 1.897-2(h) of
the Treasury Regulations.
5Z. Closing Date. The representations and warranties of the Company
contained in this Section 5 and elsewhere in this Agreement and all information
contained in any exhibit, schedule or attachment hereto or in any certificate or
other writing delivered by, or on behalf of, the Company to Purchaser shall be
true and correct in all material respects on the date of the Closing as though
then made, except as affected by the transactions expressly contemplated by this
Agreement.
5AA. Forward-Looking Information. The Company believes that the
Disclosed Information contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended. Certain factors that
could cause results to differ materially from those projected in the
forward-looking statements are set forth in the "Risk Factors" section of the
Company's Prospectus related to its initial public offering and in the reports
filed by the Company pursuant to the Securities Exchange Act of 1934. Many of
these factors are beyond the Company's control, and they include the risk that
the Company will be unable to locate suitable sites for the development of new
assisted living facilities, risks relating to the inability to obtain, or delays
in obtaining, necessary zoning, land use, building, occupancy and other required
governmental permits and authorizations, risks that financing may not be
available to the Company on satisfactory terms, environmental risks, risks that
construction costs may exceed original estimates, risks that construction and
lease-up may not be completed on schedule, risks that occupancy rates at a newly
completed community may not be
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achieved or be sustained at expected levels and risks relating to the
competitive environment for development.
Section 6. Definitions.
6A. Definitions. For the purposes of this Agreement, the following
terms have the meanings set forth below:
"Affiliate" of any particular Person means any other Person
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Authority" means any Governmental Agency, JCAHO, Medicare, Medicaid,
any member of the Blue Cross and Blue Shield Association, private insurance
company, health maintenance organization, preferred provider organization,
exclusive provider organization, alternative delivery system, managed care
system, the Civilian Health and Medical Program of the Uniformed Services, other
third-party payor, other industry group or any other agency, group,
instrumentality or authority having contractual or mandatory authority in
respect of the business of the Company or any Subsidiary.
"Competitor" means any Person that directly or indirectly derives a
substantial portion of its revenue or income from the provision of
accommodations or health care to the elderly.
"Event of Noncompliance" has the meaning set forth in the Articles of
Amendment.
"Governmental Agency" means any federal, state, local, foreign or
other governmental agency, instrumentality, commission, authority, board or
body.
"HCFA" means the Healthcare Financing Administration of HHS and any
Person succeeding to the functions thereof.
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"HHS" means the Department of Health and Human Services and any Person
succeeding to the functions thereof.
"Indebtedness" means at a particular time, without duplication, (i)
any indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, (ii) any indebtedness evidenced by any note,
bond, debenture or other debt security, (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (other than trade payables
and other current liabilities incurred in the ordinary course of business which
are not more than six months past due), (iv) any commitment by which a Person
assures a creditor against loss (including, without limitation, contingent
reimbursement obligations with respect to letters of credit), (v) any
indebtedness guaranteed in any manner by a Person (including, without
limitation, guarantees in the form of an agreement to repurchase or reimburse),
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person assures a creditor against loss, (vii) any
indebtedness secured by a Lien on a Person's assets and (viii) any unsatisfied
obligation for "withdrawal liability" to a "multiemployer plan" as such terms
are defined under ERISA.
"Intellectual Property Rights" means all (i) patents, patent
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documentation thereof, (vi) trade
secrets and other confidential information (including, without limitation,
ideas, formulas, compositions, inventions (whether patentable or unpatent able
and whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable
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works, financial and marketing plans and customer and supplier lists and
information), (vii) other intellectual property rights and (viii) copies and
tangible embodiments thereof (in whatever form or medium).
"Investment" as applied to any Person means (i) any direct or indirect
purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and any
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"IRS" means the United States Internal Revenue Service.
"JCAHO" means the Joint Commission for Accreditation of Healthcare
Organizations or any Governmental Authority succeeding to the functions thereof.
"Liens" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof), any sale of
receivables with recourse against the Company, any Subsidiary or any Affiliate,
any filing or agreement to file a financing statement as debtor under the
Uniform Commercial Code or any similar statute other than to reflect ownership
by a third party of property leased to the Company or any Subsidiaries under a
lease which is not in the nature of a conditional sale or title retention
agreement, or any subordination arrangement in favor of another Person (other
than any subordination arising in the ordinary course of business).
"Medicaid Certification" means certifications by HCFA or a state
agency or entity under contract with HCFA that the facility fully complies with
all the conditions of participation set forth in Medicaid Regulations.
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"Medicaid Regulations" means, collectively, (i) all federal statutes
(whether set forth in Title XIX of the Social Security Act or elsewhere)
affecting the medical assistance program established by Title XIX of the Social
Security Act (42 U.S.C. ss.ss. 1396, et seq.) and any statutes succeeding
thereto; (ii) all orders and administrative, reimbursement and other guidelines
of all Governmental Authorities (whether or not having the force of law)
promulgated pursuant to or in connection with the statutes described in clause
(i) above; (iii) all state statutes and plans for medical assistance enacted in
connection with the statutes and provisions described in clauses (i) and (ii)
above; and (i) all applicable provisions of all rules, regulations, manuals,
orders and administrative, reimbursement and other guidelines of all
Governmental Authorities (whether or not having the force of law) promulgated
pursuant to or in connection with any of the foregoing, in each case as may be
amended, supplemented or otherwise modified from time to time.
"Medicare Certification" means certifications by HCFA or a state
agency or entity under contract with HCFA that the facility fully complies with
all the conditions of participation set forth in Medicare Regulations.
"Medicare Regulations" means, collectively, all federal statutes
(whether set forth in Title XVIII of the Social Security Act or elsewhere)
affecting the health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 U.S.C. ss.ss. 1395, et seq.) and any
statutes succeeding thereto, together with all applicable provisions of all
rules, regulations, manuals, orders and administrative, reimbursement and other
guidelines of all Governmental Authorities (whether or not having the force of
law) promulgated pursuant to or in connection with any of the foregoing, in each
case as may be amended, supplemented or otherwise modified from time to time.
"Officer's Certificate" means a certificate signed by the Company's
president or its chief financial officer on behalf of the Company, stating that
(i) the officer signing such certificate has made or has caused to be made such
investigations as are necessary in order to permit him to verify the accuracy of
the information set forth in such certificate and (ii) to the best of such
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<PAGE>
officer's knowledge, such certificate does not misstate any material fact and
does not omit to state any fact necessary to make the certificate not
misleading.
"Other Healthcare Regulations" means, collectively, all statutes,
rules (including, without limitation, rules of professional conduct),
regulations, manuals, orders and guidelines of all Authorities, other than
Medicare Regulations and Medicaid Regulations, relating to the operation of
hospitals, healthcare or insurance.
"Permitted Debt Securities" means any convertible debt securities, the
proceeds from the sale of which are used for the purchase, lease, development or
construction of additional assisted living facilities and assets used in
connection therewith.
"Permitted Encumbrances" shall mean: (a) statutory liens for current
taxes or other governmental charges with respect to the Real Property not yet
due and payable or the amount or validity of which is being contested in good
faith by appropriate proceedings by the Company and for which appropriate
reserves have been established in accordance with GAAP; (b) mechanics, carriers
workers, repairers and similar statutory liens arising or incurred in the
ordinary course of business for amounts which are not delinquent and which are
not, individually or in the aggregate, material to the Company's business; (c)
zoning, entitlement, building and other land use regulations imposed by
governmental agencies having jurisdiction over the Real Property which are not
violated by the current use and operation of the Real Property; (d) covenants,
conditions, restrictions, easements and other similar matters of record
affecting title to the Real Property which do not materially impair the
occupancy or use of the Real Property for the purposes for which it is currently
used in connection with the Company's business; and (e) the Lease with respect
to any Leased Real Property.
"Permitted Indebtedness" means any indebtedness for borrowed money
incurred or assumed in connection with (i) the purchase, lease, development or
construction of additional assisted living facilities, (ii) the refinancing of
any indebtedness set forth on the attached "Contracts Schedule" or described in
clause
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(i) above, or (iii) a line of credit with a financial institution for up
to $5,000,000 for working capital purposes.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Restricted Securities" means (i) the Preferred Stock issued
hereunder, (ii) the Warrant issued hereunder, (iii) the Common Stock issued upon
conversion of Preferred Stock or upon exercise of the Warrant and (iv) any
securities issued with respect to the securities referred to in clauses (i),
(ii) or (iii) above by way of a stock dividend or stock split or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular Restricted Securities, such securities
shall cease to be Restricted Securities when they have (a) been effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them, (b) been distrib uted to the public
through a broker, dealer or market maker pursuant to Rule 144 (or any similar
provision then in force) under the Securities Act or become eligible for sale
pursuant to Rule 144(k) (or any similar provision then in force) under the
Securities Act or (c) been otherwise transferred and new certificates for them
not bearing the Securities Act legend set forth in paragraph 7C have been
delivered by the Company in accordance with paragraph 4B. Whenever any
particular securities cease to be Restricted Securities, the holder thereof
shall be entitled to receive from the Company, without expense, new securities
of like tenor not bearing a Securities Act legend of the character set forth in
paragraph 7C.
"Securities Act" means the Securities Act of 1933, as amended, or any
similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body or
agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar federal law then in force.
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"Subsidiary" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
"Treasury Regulations" means the United States Treasury Regulations
promulgated under the IRC, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.
"Underlying Common Stock" means (i) the Common Stock issued or
issuable upon conversion of the Preferred Stock or upon exercise of the Warrant
and (ii) any Common Stock issued or issuable with respect to the securities
referred to in clause (i) above by way of stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. For purposes of this Agreement, any Person who holds
Preferred Stock or Warrants shall be deemed to be the holder of the Underlying
Common Stock obtainable upon conversion of the Preferred Stock or exercise of
the Warrants in connection with the transfer thereof or otherwise regardless of
any restriction or limitation on the conversion of the Preferred Stock or
exercise of the Warrants, such Underlying Common Stock shall be deemed to be in
52
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existence, and such Person shall be entitled to exercise the rights of a holder
of Underlying Common Stock hereunder. As to any particular shares of Underlying
Common Stock, such shares shall cease to be Underlying Common Stock when they
have been (a) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering them, (b) distributed to the
public through a broker, dealer or market maker pursuant to Rule 144 under the
Securities Act (or any similar provision then in force) or (c) repurchased by
the Company or any Subsidiary.
"Wholly-Owned Subsidiary" means, with respect to any Person, a
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
Section 7. Miscellaneous.
7A. Expenses. The Company shall pay, and hold Purchaser and all
holders of Preferred Stock, Warrants and Underlying Common Stock harmless
against liability for the payment of, (i) the reasonable fees and expenses of
its special counsel arising in connection with the negotiation and execution of
this Agreement and the consummation of the transactions contemplated by this
Agreement and the reasonable expenses incurred by Purchaser in connection with
its due diligence review of the Company, in each case which shall be payable at
the Closing, (ii) the reasonable fees and expenses incurred with respect to any
amendments or waivers (whether or not the same become effective) under or in
respect of this Agreement, the agreements contemplated hereby, the Restated
Articles of Incorporation, as amended or the Articles of Amendment, (including,
without limitation, in connection with any proposed merger, sale or
recapitalization of the Company), (iii) stamp and other taxes which may be
payable in respect of the execution and delivery of this Agreement or the
issuance, delivery or acquisition of any shares of Preferred Stock or any shares
of Common Stock issuable upon conversion of Series A Preferred or exercise of
the Warrant, (iv) the reasonable fees and expenses incurred with respect to the
enforcement of the rights granted under this Agreement, the agreements
contemplated hereby, the Restated Articles of Incorporation, as amended, the
Warrants and the
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Articles of Amendment, and (v) the reasonable fees and expenses incurred by each
such Person in any filing with any governmental agency with respect to its
investment in the Company or in any other filing with any governmental agency
with respect to the Company which mentions such Person.
7B. Remedies. Each holder of Preferred Stock and Underlying Common
Stock shall have all rights and remedies set forth in this Agreement, the
Restated Articles of Incorporation, as amended and the Articles of Amendment and
all rights and remedies which such holders have been granted at any time under
any other agreement or contract and all of the rights which such holders have
under any law. Any Person having any rights under any provision of this
Agreement shall be entitled to enforce such rights specifically (without posting
a bond or other security), to recover damages by reason of any breach of any
provision of this Agreement and to exercise all other rights granted by law.
7C. Purchaser's Representations.
(i) Authorization. Purchaser has full power and authority to enter
into this Agreement and to consummate the transactions contemplated by this
Agreement, and this Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms.
(ii) Purchase Entirely for Own Account. This Agreement is made with
Purchaser in reliance upon its representation to the Company that the Restricted
Securities to be received by Purchaser will be acquired for investment for
Purchaser's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that Purchaser has no present
intention of selling, granting any participation in, or otherwise distributing
the same. Purchaser further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Restricted Securities.
(iii) Disclosure of Information. Purchaser believes it has received
all the information it considers necessary or
54
<PAGE>
appropriate for deciding whether to purchase the Restricted Securities.
Purchaser further represents that it has had an opportunity to ask questions and
receive answers from the Company regarding the terms and conditions of the
offering of the Restricted Securities and the business, properties, prospects
and financial condition of the Company. The foregoing, however, does not limit
or modify the representations and warranties of the Company in Section 5 of this
Agreement or the right of Purchaser to rely thereon.
(iv) Investment Experience. Purchaser is an investor in securities of
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment, and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Restricted Securities. Purchaser also
represents it has not been organized for the purpose of acquiring the Restricted
Securities.
(v) Accredited Investor. Purchaser is an "accredited investor" within
the meaning of Securities and Exchange Commission Rule 501 of Regulation D, as
presently in effect.
(vi) Brokerage. Assuming the Company's representations in paragraph 5N
are accurate, there are no claims for brokerage commissions, finders' fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement binding upon Purchaser.
(vii) Restricted Securities. Purchaser understands that the Restricted
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933 only in certain limited circumstances. In this
connection, Purchaser represents that it is familiar with Securities and
Exchange Commission Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Act.
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(viii) Legend. Each certificate or instrument representing Restricted
Securities shall be imprinted with a legend in substantially the following form:
"The securities represented by this certificate were
originally issued on December 16, 1996, and have not been
registered under the Securities Act of 1933, as amended. The
transfer of the securities represented by this certificate
is subject to the conditions specified in the Preferred
Stock and Warrant Purchase Agreement, dated as of December
16, 1996, and as amended and modified from time to time,
between the issuer (the "Company") and certain investors,
and the Company reserves the right to refuse the transfer of
such securities until such conditions have been fulfilled
with respect to such transfer. A copy of such conditions
shall be furnished by the Company to the holder hereof upon
written request and without charge."
7D. Treatment of the Preferred Stock. The Company covenants and agrees
that (i) so long as federal income tax laws prohibit a deduction for
distributions made by the Company with respect to preferred stock, it shall
treat all distributions paid by it on the Preferred Stock as non-deductible
dividends on all of its tax returns and (ii) it shall treat the Preferred Stock
as preferred stock in all of its financial statements and other reports and
shall treat all distributions paid by it on the Preferred Stock as dividends on
preferred stock in such statements and reports. The Company acknowledges and
agrees that the increased dividend rate on the Preferred Stock provided for in
the Articles of Amendment upon the occurrence of certain Events of Noncompliance
has been negotiated by (and is intended by) the Company and the Purchasers as a
reasonable increase in yield necessitated by the increased risk to the holders
of the Preferred Stock which would arise upon any such occurrence.
7E. Consent to Amendments. Except as otherwise expressly provided
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of
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at least 662/3% of the outstanding Preferred Stock; provided that if there is no
Preferred Stock outstanding, the provisions of this Agreement may be amended and
the Company may take any action herein prohibited, only if the Company has
obtained the written consent of the holders of at least 662/3% of the Underlying
Common Stock. No other course of dealing between the Company and the holder of
any Preferred Stock, Warrant or Underlying Common Stock or any delay in
exercising any rights hereunder or under the Restated Articles of Incorporation,
as amended or Articles of Amendment shall operate as a waiver of any rights of
any such holders. For purposes of this Agreement, shares of Preferred Stock or
Underlying Common Stock held by the Company or any Subsidiaries shall not be
deemed to be outstanding. If the Company pays any consideration to any holder of
Preferred Stock or Underlying Common Stock for such holder's consent to any
amendment, modification or waiver hereunder, the Company shall also pay each
other holder granting its consent hereunder equivalent consideration computed on
a pro rata basis.
7F. Survival of Representations and Warranties. All representations
and warranties contained herein or made in writing by any party in connection
herewith shall survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, regardless of any
investigation made by any Purchaser or on its behalf.
7G. Successors and Assigns. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not. In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for any Purchaser's benefit as a
purchaser or holder of Preferred Stock , the Warrant or Underlying Common Stock
are also for the benefit of, and enforceable by, any subsequent holder of such
Preferred Stock, such Warrant or such Underlying Common Stock.
7H. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable
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law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
this Agreement.
7I. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together shall constitute one
and the same Agreement.
7J. Descriptive Headings; Interpretation. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
7K. Governing Law. The corporate law of the State of Oregon shall
govern all issues and questions concerning the relative rights and obligations
of the Company and its stockholders. All other issues and questions concerning
the construction, validity, enforcement and interpretation of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to any
choice of law or conflict of law rules or provisions (whether of the State of
New York or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of New York.
7L. Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to Purchaser and to the Company at the addresses
indicated below:
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To Purchaser:
Prudential Equity Investors, Inc.
Attn: Dana J. O'Brien
717 Fifth Avenue, 11th Floor
New York, NY 10022
To the Company:
Before December 27, 1996:
Regent Assisted Living, Inc.
Attn: Chief Financial Officer
2260 U.S. Bancorp Tower
111 S.W. Fifth Avenue
Portland, OR 97204
After December 27, 1996:
Regent Assisted Living, Inc.
Attn: Chief Financial Officer
121 S.W. Morrison, Suite 1000
Portland, OR 97204
At any time with a copy to:
Stoel Rives LLP
Attn: Mr. Todd A. Bauman
900 S.W. Fifth Avenue, Suite 2300
Portland, OR 97204-1268
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
7M. Consideration for Warrants. Purchaser and the Company acknowledge
and agree that the fair market value of the Preferred Stock issued hereunder is
$9,950,000 and the fair market value of the Warrant issued hereunder is $50,000
and that, for all purposes (including tax and accounting), the consideration for
the issuance of the Warrant shall be allocated as set forth in
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paragraph 1B. Purchaser and the Company shall file their respective federal,
state and local tax returns in a manner which is consistent with such valuation
and allocation and shall not take any contrary position with any taxing
authority.
7N. No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
7O. Indemnification.
(i) General. In consideration of the Purchaser's execution and
delivery of this Agreement and acquiring the Preferred Stock and Warrant
hereunder and in addition to all of the Company's other obligations under this
Agreement, the Company shall defend, protect, indemnify and hold harmless
Purchaser and each other holder of Preferred Stock or Warrant and all of their
officers, directors, employees and agents (including, without limita tion, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the "Indemnitees") from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and reasonable expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(except for fees of counsel in connection with the preparation for or attendance
at a deposition) (the "Indemnified Liabilities"), incurred by the Indemnitees or
any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in this Agreement, the Warrant, the Registration Agreement or the
Stockholders Agreement or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement, the Warrant, the
Registration Agreement or the Stockholders Agreement or any other certificate,
instrument or document contemplated hereby or thereby, or (c) any
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cause of action, suit or claim brought or made against such Indemnitee and
arising out of or resulting from the execution, delivery, performance or
enforcement of this Agreement or any other instrument, document or agreement
executed pursuant hereto by any of the Indemnitees, other than a cause of
action, suit or claim brought or made by a Person affiliated with the Indemnitee
or by or on behalf of the Company, except for any such Indemnified Liabilities
arising on account of the particular Indemnitee's gross negligence or willful
misconduct. To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.
(ii) Environmental Liabilities. Without limiting the generality of the
indemnity set out in paragraph 7O(i) above, the Company shall defend, protect,
indemnify and hold harmless Purchaser and all other Indemnitees from and against
any and all actions, causes of action, suits, liabilities, penalties, fees,
expenses and claims of any and every kind whatsoever paid, incurred or suffered
by, or asserted against, each Purchaser or any other Indemnitee for, with
respect to, or as a direct or indirect result of, the past, present or future
environmental condition of any property owned, operated or used by the Company,
any Subsidiary, their predecessors or successors or of any offsite treatment,
storage or disposal location associated therewith, including, without
limitation, the presence on or under, or the escape, seepage, leakage, spillage,
discharge, emission, release, or threatened release into, onto or from, any such
property or location of any toxic, chemical or hazardous substance, material or
waste (including, without limitation, any liabilities, penalties, fees, expenses
or claims asserted or arising under the Comprehensive Environmental Response,
Compensation and Liability Act, any so-called "Superfund" or "Superlien" law, or
any other federal, state, local or foreign statute, law, ordinance, code, rule,
regulation, order or decree regulating, relating to or imposing liability or
standards on conduct concerning, any toxic, chemical or hazardous substance,
material or waste), regardless of whether caused by, or within the control of,
the Company or any Subsidiary.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REGENT ASSISTED LIVING, INC.
By WALTER C. BOWEN
--------------------------------------
Its PRESIDENT
-------------------------------------
PRUDENTIAL PRIVATE EQUITY
INVESTORS III, L.P.
By Prudential Equity Investors, Inc.
Its General Partner
By Cornerstone Equity
Investors, L.L.C.
Its Investment Adviser
By DANA J. O'BRIEN
---------------------------------
Its SENIOR MANAGING DIRECTOR
--------------------------------
<PAGE>
LIST OF DISCLOSURE SCHEDULES
----------------------------
Capitalization Schedule
Subsidiary Schedule Financial
Statements Schedule
Liabilities Schedule
Developments Schedule
Assets Schedule
Taxes Schedule
Contracts Schedule
Intellectual Property Schedule
Litigation Schedule
Insurance Schedule
Employees Schedule
Employee Benefits Schedule
Environmental Schedule
Affiliated Transactions Schedule
Healthcare Schedule
REGENT ASSISTED LIVING, INC.
STOCKHOLDERS AGREEMENT
THIS AGREEMENT is made as of December 16, 1996, between Regent
Assisted Living, Inc., an Oregon corporation (the "Company"), Prudential Private
Equity Investors, III, L.P., a Delaware limited partnership (the "Investor"),
and Walter C. Bowen (the "Original Stockholder"). The Investor and the Original
Stockholder are collectively referred to as the "Stockholders" and individually
as a "Stockholder." Capitalized terms used herein are defined in paragraph 8
hereof.
The Investor shall purchase shares of the Company's preferred stock
and a warrant to purchase common stock pursuant to a purchase agreement between
the Investor and the Company dated as of the date hereof (the "Purchase
Agreement").
The Company and the Stockholders desire to enter into this Agreement
for the purposes, among others, of (i) establishing the composition of the
Company's Board of Directors (the "Board"), (ii) assuring continuity in the
management and ownership of the Company and (iii) limiting the manner and terms
by which the Original Stockholder's Stockholder Shares may be transferred. The
execution and delivery of this Agreement is a condition to the Investor's
purchase of the Company's stock and the contingent warrant pursuant to the
Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
1. Board of Directors.
(a) From and after the Closing (as defined in the Purchase Agreement)
and until the provisions of this paragraph 1 cease to be effective, each holder
of Stockholder Shares shall vote all of his Stockholder Shares which are voting
shares and any other voting securities of the Company over which such holder has
voting
<PAGE>
control and shall take all other reasonably necessary or desirable actions
within his control (whether in his capacity as a stockholder, director, member
of a board committee or officer of the Company or otherwise, and including,
without limitation, attendance at meetings in person or by proxy for purposes of
obtaining a quorum and execution of written consents in lieu of meetings), and
the Company shall take all reasonably necessary or desirable actions within its
control (including, without limitation, calling special board and stockholder
meetings), so that:
(i) the authorized number of directors on the Board shall be
established at eight directors;
(ii) the following individuals shall be elected to the Board:
(A) two representatives designated by the Investor (the
"Investor Directors"), provided that the Investor Directors shall
initially be employees of the general partner of the Investor or
employees of the investment advisor of the Investor or its general
partner, and provided further that the Investor may subsequently
designate an industry executive as an Investor Director provided that
such industry executive is reasonably acceptable to a majority of the
other Directors;
(B) two members of the Company's management designated by
the Original Stockholder (the "Management Directors"), provided that
until the second annual meeting of the Company's stockholders, Walter
C. Bowen and Steven L. Gish shall serve as the Management Directors;
and
(C) four representatives designated by the Stockholders
(determined on the basis of a vote of a majority of the Stockholder
Shares held by the Stockholders), provided that such representatives
are not members of the Company's management or employees or officers
of the Company or its subsidiaries (the "Outside Directors");
- 2 -
<PAGE>
(iii) there shall be an executive committee, a compensation
committee and an audit committee of the Board, each with at least one
Investor Director as a member thereof;
(iv) there shall be a conflicts committee of the Board (the
"Conflicts Committee") to consider and resolve all conflicts of interest
matters presented to the Board, and the Conflicts Committee shall be
composed of two Outside Directors and the two Investor Directors;
(v) any other committees of the Board shall be created only upon
the approval of a majority of the members of the Board and each such
committee (if any) shall have at least one Investor Director as a member;
(vi) the removal from the Board (with or without cause) of any
representative designated hereunder by the Investor or by the Original
Stockholder shall be at the Investor's or the Original Stockholder's
written request, respectively, but only upon such written request and under
no other circumstances, provided that if any director elected pursuant to
subparagraph (ii)(B) above ceases to be an employee of the Company and its
Subsidiaries, he shall be removed as a director promptly after his
employment ceases; and
(vii) in the event that any representative designated hereunder
by the Investor or by the Original Stockholder ceases to serve as a member
of the Board during his term of office, the resulting vacancy on the Board
shall be filled by a representative designated by the Investor or the
Original Stockholder, respectively, as provided hereunder.
(b) The Company shall pay the reasonable out-of-pocket expenses
incurred by each director in connection with attending the meetings of the
Board, and any committee thereof. So long as any Investor Director serves on the
Board and for three years thereafter, the Company shall make a good faith effort
to secure and maintain directors and officers liability insurance coverage: (A)
as of the Closing, in the amount of $2,000,000, (B) as of January 1, 1997, in
the amount of $3,000,000 and (C) thereafter, in such amounts as are customary
for publicly traded corporations of similar size engaged in similar lines of
business as reasonably
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<PAGE>
determined by the Board; and the Company's certificate of incorporation and
bylaws shall provide for indemnification and exculpation of directors to the
fullest extent permitted under applicable law. In addition, the Company shall
enter into indemnity agreements with the Investor Directors in form and
substance similar to the indemnity agreements the Company currently has with the
Management Directors.
(c) The rights of the Investor under this paragraph 1 shall terminate
at such time as the Investor and its Affiliates hold in the aggregate less than
25% of the Stockholder Shares held by the Investor on the date hereof; provided
that the Investor may assign its right to designate directors hereunder to any
Person or group of affiliated Persons who acquire more than 50% of the
Stockholder Shares held by the Investor as of the date hereof.
(d) The rights of the Original Stockholder under this paragraph 1
shall terminate at such time as the Original Stockholder and his Permitted
Transferees hold in the aggregate less than 25% of the Stockholder Shares held
by such Persons on the date hereof.
(e) The provisions of this paragraph 1 shall terminate automatically
and be of no further force and effect upon the tenth anniversary of the date
hereof unless extended by the parties hereto.
(f) If any party fails to designate a representative to fill a
directorship pursuant to the terms of this paragraph 1, the election of an
individual to such directorship shall be accomplished in accordance with the
Company's bylaws and applicable law.
2. Contract Proceedings. The Company, the Original Stockholder and the
Investor hereby agree that:
(a) The Company shall have a right of first refusal on all sites to be
purchased, leased or otherwise secured for real estate development by any
Affiliate of the Original Stockholder (including, without limitation, Bowen
Development Company ("BDC")) except for the sites identified on the attached
Exhibit A and the Conflicts Committee shall determine whether or not the Company
shall exercise such right;
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<PAGE>
(b) BDC or any other Affiliate of the Original Stockholder may
continue as contractor for the current Company projects in Boise, San Antonio,
Folsom, Roseville and Clovis, provided that the terms of such projects shall be
equal to hard costs, including general conditions (which consist of on-site
costs), plus 5% or less (for overhead and profit) as determined by the Conflicts
Committee;
(c) All of the other projects on which construction shall begin prior
to June 30, 1997, may be awarded to BDC upon BDC providing proof to the
Conflicts Committee that such contract is on terms no less favorable than the
Company would otherwise be able to obtain from a completely independent general
contractor, including a discounted contractors fee for awarding multiple
projects to one contractor, if applicable. In such cases, competitive bidding
shall not be required provided the Conflicts Committee determines that the
Company's construction schedule dictates that the time required to obtain such
bids would unduly delay construction and place the Company behind its current
projected schedule of openings; and
(d) All contracts pursuant to which construction will begin subsequent
to June 30, 1997, or any contract for the construction of a facility beyond the
initial twelve projects as set forth on the attached Exhibit B, shall require
competitive bidding on comparable terms and the approval of the Conflicts
Committee for a contract to be awarded to BDC.
3. Certain Voting Covenants. From and after the Closing (as defined in
the Purchase Agreement), the Original Stockholder and his Permitted Transferees
shall not vote any of his or their Stockholder Shares which are voting shares
and any other voting securities of the Company over which such holder has voting
control, in favor of the Company taking the following actions unless such
Original Stockholder or his Permitted Transferees first obtains the prior
written consent of the holders of at least 662/3% of the outstanding Preferred
Stock:
(a) merge or consolidate with any Person or permit any Subsidiary to
merge or consolidate with any Person (other than a wholly-owned Subsidiary);
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<PAGE>
(b) liquidate, dissolve or effect a recapitalization or reorganization
in any form of transaction (including, without limitation, any reorganization
into a limited liability company, a partnership or any other non-corporate
entity which is treated as a partnership for federal income tax purposes);
(c) except as expressly contemplated by the Purchase Agreement, make
any amendment to the Articles of Incorporation, the Articles of Amendment or the
Company's bylaws, or file any resolution of the Board with the Oregon Secretary
of State containing any provisions, which would increase the number of
authorized shares of the Preferred Stock or adversely affect or otherwise impair
the rights or the relative preferences and priorities of the holders of the
Preferred Stock or the Underlying Common Stock under the Purchase Agreement, the
Restated Articles of Incorporation, as amended, the Company's bylaws or the
Registration Agreement;
(d) amend or modify any stock option plan or employee stock ownership
plan as in existence as of the Closing, other than to increase to 600,000 the
number of options for shares of the Company's common stock that may be issued
under the Company's 1995 Stock Incentive Plan, adopt any new stock option plan
or employee stock ownership plan or issue any shares of Common Stock to its or
its Subsidiaries' employees other than pursuant to the Company's existing stock
option and employee stock ownership plans; or
(e) any other corporate action of the type described in Section 3D of
the Purchase Agreement which requires the approval of the stockholders of the
Company under the laws of the State of Oregon (including, without limitation,
any provisions requiring a separate class or series vote), the Restated Articles
of Incorporation, as amended, the Company's bylaws or any other statute, rule or
regulation to which the Company is subject.
4. Representations and Warranties. Each Stockholder represents and
warrants that (i) such Stockholder is the record owner of the number of
Stockholder Shares set forth opposite its name on the Stockholder Schedule
attached hereto, (ii) this Agreement has been duly authorized, executed and
delivered by such Stockholder and constitutes the valid and binding obligation
of such Stockholder, enforceable in accordance with its terms, and (iii) such
Stockholder has not granted and is not a party to any
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<PAGE>
proxy, voting trust or other agreement which is inconsistent with, conflicts
with or violates any provision of this Agreement. No holder of Stockholder
Shares shall grant any proxy or become party to any voting trust or other
agreement which is inconsistent with, conflicts with or violates any provision
of this Agreement.
5. Restrictions on Transfer of Stockholder Shares.
(a) Transfer of Stockholder Shares. The Original Stockholder shall not
sell, transfer, assign, pledge or otherwise dispose of (whether with or without
consideration and whether voluntarily or involuntarily or by operation of law)
any interest in his Stockholder Shares (a "Transfer"), except pursuant to the
provisions of this paragraph 4 or pursuant to a Public Sale and except for
Transfers of up to 1,233,000 of his Stockholder Shares (as appropriately
adjusted for any combination or subdivision of shares, stock dividend, stock
split or other recapitalization) (an "Exempt Sale"). The Original Stockholder
shall not consummate any Transfer (other than a Public Sale or an Exempt Sale)
until 30 days after the later of the delivery to the Company and the Investor of
the Original Stockholder's Sale Notice, unless the parties to the Transfer have
been finally determined pursuant to this paragraph 4 prior to the expiration of
such 30-day period (the "Election Period").
(b) Participation Rights. At least 30 days prior to any Transfer of
Stockholder Shares by the Original Stockholder (other than a Public Sale or an
Exempt Sale), the Original Stockholder shall deliver a written notice (the "Sale
Notice") to the Company and the Investor, specifying in reasonable detail the
identity of the prospective transferee(s), the number of shares to be
transferred and the terms and conditions of the Transfer. The Investor may elect
to participate in the contemplated Transfer at the same price per share (whether
voting or non-voting stock) and on the same terms by delivering written notice
to the Original Stockholder within 30 days after delivery of the Sale Notice. If
the Investor has elected to participate in such Transfer, the Original
Stockholder and the
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<PAGE>
Investor shall be entitled to sell in the contemplated Transfer, at the same
price and on the same terms, a number of Stockholder Shares equal to the product
of (i) the quotient determined by dividing the percentage of Stockholder Shares
owned by such Person by the aggregate percentage of Stockholder Shares owned by
the Original Stockholder and the Investor and (ii) the number of Stockholder
Shares to be sold in the contemplated Transfer.
For example, if the Sale Notice contemplated a sale of 100
Stockholder Shares by the Original Stockholder, and if the
Original Stockholder at such time owns 30% of all
Stockholder Shares and if the Investor elects to participate
and owns 20% of all Stockholder Shares, the Original
Stockholder would be entitled to sell 60 shares (30% / 50% x
100 shares) and the Investor would be entitled to sell 40
shares (20% / 50% x 100 shares).
The Original Stockholder shall use best efforts to obtain the agreement of the
prospective transferee(s) to the participation of the Investor in any
contemplated Transfer and to the inclusion of the Warrant and the Preferred
Stock in the contemplated Transfer, and the Original Stockholder shall not
transfer any of its Stockholder Shares to any prospective transferee if such
prospective transferee(s) declines to allow the participation of the Investor or
the inclusion of the Warrant and/or the Preferred Stock. If any portion of the
Warrant is included in any Transfer of Stockholder Shares under this
subparagraph 4(b), the purchase price for the Warrant shall be equal to the full
purchase price determined hereunder for the Stockholder Shares covered by the
portion of the Warrant to be transferred.
(c) Permitted Transfers. The restrictions set forth in this paragraph
4 shall not apply with respect to any Transfer of Stockholder Shares by the
Original Stockholder pursuant to (i) the stock option agreements dated as of
September 1, 1995 among the Company, the Original Stockholder and each of
Messrs. Ekberg, Gish, Jacobsen, Parfitt and Roderick as originally executed, or
(ii) applicable laws of descent and distribution or among the Original
Stockholder's Family Group (referred to herein as "Permitted Transferees");
provided that, with respect to a Transfer permitted pursuant to clause (ii), the
restrictions contained in this paragraph 4 shall continue to be applicable to
the Stockholder Shares after any such Transfer and provided further that the
transferees of such Stockholder Shares shall have agreed in writing to be bound
by the provisions of this Agreement affecting the Stockholder Shares so
transferred. For purposes of this Agreement, "Family Group" means the Original
Stockholder's spouse and descendants (whether natural or adopted) and any trust
solely for
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<PAGE>
the benefit of the Original Stockholders and/or the Original Stockholder's
spouse and/or descendants.
(d) Termination of Restrictions. The restrictions set forth in this
paragraph 4 shall continue with respect to the applicable Stockholder Share held
by the Original Stockholder until the date on which such Stockholder Share has
been transferred pursuant to this paragraph 4.
6. Holdback Agreement. The Original Stockholder shall not effect any
public sale or distribution of any Stockholder Shares or of any other capital
stock or equity securities of the Company, or any securities convertible into or
exchangeable or exercisable for such stock or securities, during the seven days
prior to and the 90-day period beginning on the effective date of any
underwritten Demand Registration or any underwritten Piggyback Registration (as
such terms are defined in the Registration Agreement dated as of the date hereof
between the Investor and the Company) unless the underwriters managing the
registration otherwise agree. The restrictions on the transfer of Stockholder
Shares set forth in this paragraph 5 shall continue with respect to each
Stockholder Share until such share is no longer held by the Original Stockholder
or his Permitted Transferees.
7. Legend. Each certificate evidencing Stockholder Shares and each
certificate issued in exchange for or upon the transfer of any Stockholder
Shares (if such shares remain Stockholder Shares after such transfer) shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
"The securities represented by this certificate are subject
to a Stockholders Agreement dated as of December 16, 1996,
among the issuer of such securities (the "Company") and
certain of the Company's stockholders, as amended and
modified from time to time. A copy of such Stockholders
Agreement shall be furnished without charge by the Company
to the holder hereof upon written request."
The Company shall imprint such legend on certificates evidencing Stockholder
Shares outstanding as of the date hereof. The legend set forth above shall be
removed from the certificates evidencing
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<PAGE>
any shares which cease to be Stockholder Shares in accordance with paragraph 8
hereof.
8. Transfer. Prior to transferring any Stockholder Shares to any
Person other than a Public Sale, the holders of Stockholder Shares shall cause
the prospective transferee to be bound by this Agreement and to execute and
deliver to the Company and the other holders of Stockholder Shares a counterpart
of this Agreement.
9. Definitions.
"Board" has the meaning set forth in the preamble.
"Common Stock" means the Company's Common Stock, no par value.
"Company" has the meaning set forth in the preamble.
"Investors" has the meaning set forth in the preamble.
"Investor Directors" has the meaning set forth in paragraph 1(a).
"Management Directors" has the meaning set forth in paragraph 1(a).
"Original Stockholder" has the meaning set forth in the preamble.
"Outside Directors" has the meaning set forth in paragraph 1(a).
"Permitted Transferee" has the meaning set forth in paragraph 4(c)
hereof.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
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<PAGE>
"Preferred Stock" means the Company's Series A Preferred Stock, no par
value, and Series B Preferred Stock, no par value.
"Public Sale" means any sale of Stockholder Shares to the public
pursuant to an offering registered under the Securities Act or to the public
through a broker, dealer or market maker pursuant to the provisions of Rule 144
adopted under the Securities Act.
"Purchase Agreement" has the meaning set forth in the preamble.
"Securities Act" means the Securities Act of 1933, as amended from
time to time.
"Stockholder Shares" means (i) any Common Stock purchased or otherwise
acquired by any Stockholder, (ii) any Common Stock issued or issuable directly
or indirectly upon conversion of the Preferred Stock or exercise of the Warrant
and (iii) any Common Stock issued or issuable with respect to the securities
referred to in clauses (i) and (ii) above by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. For purposes of this Agreement, any
Person who holds Preferred Stock or the Warrant shall be deemed to be the holder
of the Stockholder Shares issuable directly or indirectly upon conversion of the
Preferred Stock or exercise of the Warrant in connection with the transfer
thereof or otherwise and regardless of any restriction or limitation on the
conversion or exercise thereof. As to any particular Stockholder Shares, such
shares shall cease to be Stockholder Shares when they have been (a) effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them or (b) distributed to the public through a
broker, dealer or market maker pursuant to Rule 144 under the Securities Act (or
any similar provision then in force).
"Stockholders" has the meaning set forth in the preamble.
"Subsidiary" means, with respect to any Person, any corporation,
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of
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<PAGE>
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the other Subsidiaries
of that Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the limited
liability company, partnership or other similar ownership interest thereof is at
the time owned or controlled, directly or indirectly, by any Person or one or
more Subsidiaries of that Person or a combination thereof. For purposes hereof,
a Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control the managing director or general partner of such limited
liability company, partnership, association or other business entity.
"Transfer" has the meaning set forth in paragraph 4(a).
"Warrant" means the stock purchase warrant issued to the Investor
under the Purchase Agreement exercisable into shares of Common Stock.
10. Transfers in Violation of Agreement. Any Transfer or attempted
Transfer of any Stockholder Shares in violation of any provision of this
Agreement shall be void, and the Company shall not record such Transfer on its
books or treat any purported transferee of such Stockholder Shares as the owner
of such shares for any purpose.
11. Amendment and Waiver. Except as otherwise provided herein, no
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or the Stockholders unless such modification,
amendment or waiver is approved in writing by the Company or the holders of a
majority of the Stockholder Shares, the holders of a majority of the Stockholder
Shares held by the Original Investor and his Permitted Transferees and the
Investor. The failure of any party to enforce any of the provisions of this
Agreement shall in no way be construed as a waiver of such provisions and shall
not affect the right of such party thereafter to enforce each and every
provision of this Agreement in accordance with its terms.
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<PAGE>
12. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this
Agreement in such jurisdiction or affect the validity, legality or
enforceability of any provision in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.
13. Entire Agreement. Except as otherwise expressly set forth herein,
this Agreement embodies the complete agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
14. Successors and Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and the Stockholders and any subsequent
holders of Stockholder Shares and the respective successors and assigns of each
of them, so long as they hold Stockholder Shares.
15. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
16. Remedies. The Company and the Stockholders shall be entitled to
enforce their rights under this Agreement specifically, to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in their favor. The parties hereto agree and acknowledge
that money damages would not be an adequate remedy for any breach of the
provisions of this Agreement and that the Company and any Stockholder shall be
entitled to specific performance and/or injunctive relief from any court of law
or equity of competent jurisdiction (without posting
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<PAGE>
a bond or other security) in order to enforce or prevent any violation of the
provisions of this Agreement.
17. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed first class mail
(postage prepaid) or sent by reputable overnight courier service (charges
prepaid) to the Company at the address set forth below and to any other
recipient at the address indicated on the schedules hereto and to any subsequent
holder of Stockholder Shares subject to this Agreement at such address as
indicated by the Company's records, or at such address or to the attention of
such other person as the recipient party has specified by prior written notice
to the sending party. Notices shall be deemed to have been given hereunder when
delivered personally, three days after deposit in the U.S. mail and one day
after deposit with a reputable overnight courier service. The Company's address
is:
Before December 27, 1996:
Regent Assisted Living, Inc.
2260 U.S. Bancorp Tower
111 S.W. Fifth Avenue
Portland, Oregon 97204
Attn: Chief Financial Officer
After December 27, 1996:
Regent Assisted Living, Inc.
121 S.W. Morrison, Suite 1000
Portland, OR 97204
Attn: Chief Financial Officer
At any time with a copy to:
Stoel Rives LLP
Attn: Mr. Todd A. Bauman
900 S.W. Fifth Avenue, Suite 2300
Portland, OR 97204-1268
18. Governing Law. The corporate law of the State of Oregon shall
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All other
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<PAGE>
issues and questions concerning the construction, validity, interpretation and
enforceability of this Agreement and the exhibits and schedules hereto shall be
governed by, and construed in accordance with, the laws of the State of New York
without giving effect to any choice of law or conflict of law rules or
provisions (whether of the State of New York or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than the State
of New York.
19. Business Days. If any time period for giving notice or taking
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the state in which the Company's chief executive office is located, the time
period shall automatically be extended to the business day immediately following
such Saturday, Sunday or legal holiday.
20. Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
REGENT ASSISTED LIVING, INC.
By WALTER C. BOWEN
-------------------------------------
Its PRESIDENT
------------------------------------
PRUDENTIAL PRIVATE EQUITY
INVESTORS III, L.P.
By Prudential Equity Investors, Inc.
Its General Partner
By Cornerstone Equity Investors,
L.L.C.
Its Investment Advisor
By DANA J. O'BRIEN
-------------------------------------
Its SENIOR MANAGING DIRECTOR
------------------------------------
WALTER C. BOWEN
----------------------------------------
WALTER C. BOWEN
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<PAGE>
SCHEDULE OF STOCKHOLDERS
- --------------------------------------------------------------------------------
Name and Address Number of Stockholder Shares
- ---------------- ----------------------------
Prudential Private Equity 1,866,667<F1>
Investors III, L.P.
717 Fifth Avenue
New York, New York 10022
Attn: Dana O'Brien
Walter C. Bowen 3,233,000
c/o Regent Assisted Living, Inc.
121 S.W. Morrison, Suite 1000
Portland, OR 97204
- --------------------------------------------------------------------------------
- --------------
<F1> Subject to increases as provided for in the Restated Articles of
Incorporation, as amended.
<PAGE>
EXHIBIT A
---------
To Stockholders Agreement
Any property to be purchased pursuant to an agreement, right, option, or other
instrument in effect as of the date hereof, including, without limitation,
those rights described as follows:
1. Right to purchase excess land owned by the Company adjacent to its
Eugene site, as identified in the Affiliated Transactions Schedule.
2. Earnest Money Agreement fort the purchase of a single family home
in Aloha, Oregon which will provide access to a land-locked parcel
owned by Bowen Financial Services Corp. The property is adjacent
to a low income multi-family housing project and in a lower class
neighborhood.
3. Right to acquire approximately 20 acres of primarily forested land
adjacent to the land upon which Mr. Bowen is currently constructing
his family's primary residence. The parcel is zoned for development
of one single family residence.
4. Right to acquire all or a portion of the approximately 40 acres owned
by Hoyt Street Partners, an Oregon limited liability company. Mr. Bowen
has a 5 percent ownership interest. Members in the LLC have the right
to purchase the LLC's property but must comply with an elaborate
process by which the proposed development is identified to members and
members have the right to participate in such development. The 40 acres
is in an urban reneweal area north of downtown Portland.
<PAGE>
EXHIBIT B
---------
To Stockholders Agreement
The following twelve projects:
1. Boise, Idaho;
2. San Antonio, Texas;
3. Folsom, California;
4. Roseville, California;
5. Clovis, California;
6. Bakersfield, California;
7. Vacaville, California;
8. Rio Rancho, New Mexico;
9. Tucson, Arizona;
10. Henderson, Nevada;
11. Eugene, Oregon; and
12. Austin, Texas
REGENT ASSISTED LIVING, INC.
REGISTRATION AGREEMENT
THIS AGREEMENT is made as of December 16, 1996, between Regent
Assisted Living, Inc., an Oregon corporation (the "Com pany"), and Prudential
Private Equity Investors III, L.P., a Delaware limited partnership (the
"Purchaser").
The parties to this Agreement are parties to a Purchase Agreement of
even date herewith (the "Purchase Agreement"). In order to induce the Purchaser
to enter into the Purchase Agreement, the Company has agreed to provide the
registration rights set forth in this Agreement. The execution and delivery of
this Agreement is a condition to the Closing under the Purchase Agreement.
Unless otherwise provided in this Agreement, capitalized terms used herein shall
have the meanings set forth in paragraph 8 hereof.
The parties hereto agree as follows:
1. Demand Registrations.
(a) Requests for Registration. At any time the holders of at least
662/3% of the Registrable Securities may request registration under the
Securities Act of all or any portion of their Registrable Securities on Form S-1
or any similar long-form registration ("Long-Form Registrations") or on Form S-2
or S-3 or any similar short-form registration ("Short-Form Registrations") if
available. All registrations requested pursuant to this paragraph 1(a) are
referred to herein as "Demand Registrations". Each request for a Demand
Registration shall specify the approximate number of Registrable Securities
requested to be registered and the anticipated per share price range for such
offering. Within ten days after receipt of any such request, the Company shall
give written notice of such requested registration to all other holders of
Registrable Securities and shall include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within 15 days after the receipt of the Company's notice. The
holders of Registrable Securities shall be entitled to request two Demand
Registrations in which the Company shall pay all Registration Expenses. A
registration shall not count as one of the permitted
<PAGE>
Demand Registrations until it has become effective, and no Demand Registration
shall count as one of the permitted Demand Registra tions unless the holders of
Registrable Securities are able to register and sell at least 90% of the
Registrable Securities requested to be included in such registration; provided
that in any event the Company shall pay all Registration Expenses in connection
with any registration initiated as a Demand Registration whether or not it has
become effective and whether or not such registration has counted as one of the
permitted Demand Registrations. All Long-Form Registrations shall be
underwritten registrations, and at the election of the holders of a majority of
the Registrable Securities included in any Demand Registration, such Demand
Registration shall be a Short-Form Registration if the Company is permitted to
use the applicable short form. The Company shall use its best efforts to make
Short-Form Registrations on Form S-3 available for the sale of Registrable
Securities.
(b) Priority on Demand Registrations. The Company shall not include in
any Demand Registration any securities which are not Registrable Securities
without the prior written consent of the holders of at least 662/3% of the
Registrable Securities included in such registration. If a Demand Registration
is an underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold in an orderly manner in such offering within a price range
acceptable to the holders of a majority of the Registrable Securities initially
requesting registration, the Company shall include in such registration prior to
the inclusion of any securities which are not Registrable Securities the number
of Registrable Securities requested to be included which in the opinion of such
underwriters can be sold in an orderly manner within the price range of such
offering, pro rata among the respective holders thereof on the basis of the
amount of Registrable Securities owned by each such holder.
(c) Restrictions on Demand Registrations.
(i) The Company shall not be obligated to effect any Demand
Registration within 90 days after the effective date of a previous Demand
Registration.
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<PAGE>
(ii) The Company shall be entitled to postpone for a reasonable period
of time (but not exceeding 120 days) the filing or effectiveness of any
registration statement otherwise required to be prepared and filed by it
pursuant to paragraph 1(a) if the Company determines, in its reasonable
judgment, that (a) the Company is in possession of material information that has
not been disclosed to the public and the Company reasonably deems it to be
advisable not to disclose such information at such time in a registration
statement or (b) such registration and offering would materially and adversely
affect any financing, acquisition, corporate reorganization or other material
transaction involving the Company or any of its Affiliates (as defined in the
rules and regulations adopted under the Exchange Act) and, in any such case, the
Company promptly gives the requesting Holders of Registrable Securities written
notice of such determination, containing a general statement of the reasons for
such postponement and an approximation of the anticipated delay or (c) such
other cause as the Company shall have been advised by its investment banker make
it undesirable or unpracticable to proceed with the offering. If the Company
shall so postpone the filing of a registration statement, the requesting Holders
of Registrable Securities shall have the right to withdraw the request for
registration by giving written notice to the Company within 30 days after
receipt of the notice of postponement and, in the event of such withdrawal, such
request shall not be counted for purposes of the requests for registration to
which Holders are entitled pursuant to paragraph 1(a) and the Company shall pay
all Registration Expenses in connection with such registration. The Company may
delay a Demand Registration hereunder only once in any twelve-month period.
(iii) Holders of Registrable Securities shall use all reasonable
efforts to effect as wide a distribution of the Registrable Securities as
reasonably practicable, including, if such distribution is pursuant to any
underwritten offering, using reasonable efforts to secure the agreement of the
underwriters to the same effect.
(d) Selection of Underwriters. The holders of a majori ty of the
Registrable Securities included in any Demand Registra tion shall have the right
to select the investment banker(s) and manager(s) to administer the offering,
which must be reasonably acceptable to the Company.
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<PAGE>
(e) Other Registration Rights. Except as provided in this Agreement,
the Company shall not grant to any Persons the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, without the prior written
consent of the holders of at least 662/3% of the Registrable Securities;
provided that the Company may grant rights to other Persons to participate in
Piggyback Registrations so long as such rights are subordinate to the rights of
the holders of Registrable Securities with respect to such Piggyback
Registrations as provided in paragraph 2 hereof.
2. Piggyback Registrations.
(a) Right to Piggyback. Whenever the Company proposes to register any
of its securities under the Securities Act (other than pursuant to a Demand
Registration) and the registration form to be used may be used for the
registration of Registrable Securi ties (a "Piggyback Registration"), the
Company shall give prompt written notice to all holders of Registrable
Securities of its intention to effect such a registration and shall include in
such registration (other than registrations only of shares issued (i) for the
purpose of acquiring another company or companies or (ii) pursuant to an
employee benefit plan) all Registrable Securities with respect to which the
Company has received written requests for inclusion therein within 20 days after
the receipt of the Company's notice.
(b) Piggyback Expenses. The Registration Expenses of the holders of
Registrable Securities shall be paid by the Company in all Piggyback
Registrations.
(c) Priority on Primary Registrations. If a Piggyback Registration is
an underwritten primary registration on behalf of the Company, and the managing
underwriters advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the number
which can be sold in an orderly manner in such offering within a price range
acceptable to the Company, the Company shall include in such registration (i)
first, the securities the Company proposes to sell, (ii) second, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Registrable Securities on the basis of the number of shares
owned
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<PAGE>
by each such holder, and (iii) third, other securities requested to be
included in such registration.
(d) Priority on Secondary Registrations. If a Piggyback Registration
is an underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in an orderly manner in such
offering within a price range acceptable to the holders initially requesting
such registration, the Company shall include in such registration (i) first, the
securities requested to be included therein by the holders requesting such
registration and the Registrable Securities requested to be included in such
registration, pro rata among the holders of such securities on the basis of the
number of securities owned by each such holder, and (ii) second, other
securities requested to be included in such registration.
(e) Other Registrations. If the Company has previously filed a
registration statement with respect to Registrable Securi ties pursuant to
paragraph 1 or pursuant to this paragraph 2, and if such previous registration
has not been withdrawn or abandoned, the Company shall not file or cause to be
effected any other registration of any of its equity securities or securities
convert ible or exchangeable into or exercisable for its equity securities under
the Securities Act (except on Form S-8 or any successor form), whether on its
own behalf or at the request of any holder or holders of such securities, until
a period of at least 90 days has elapsed from the effective date of such
previous registration.
3. Holdback Agreements.
(a) Each holder of Registrable Securities shall not effect any public
sale or distribution (including sales pursuant to Rule 144) of equity securities
of the Company, or any securities convertible into or exchangeable or
exercisable for such securi ties, during the seven days prior to and the 180-day
period begin ning on the effective date of any underwritten Demand Registration,
any underwritten Piggyback Registration in which Registrable Securities are
included (except as part of such underwritten registration) or any other
underwritten public offering of common stock of the Company, unless the
underwriters managing the registered public offering otherwise agree; provided
that the
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<PAGE>
holders of Registrable Securities shall not be required to agree to a
holdback period longer than that agreed to by the officers or directors of the
Company.
(b) The Company (i) shall not effect any public sale or distribution
of its equity securities, or any securities convert ible into or exchangeable or
exercisable for such securities, during the seven days prior to and during the
180-day period beginning on the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration (except as part of such
underwritten registration or pursuant to registrations on Form S-8 or any
successor form), unless the underwriters managing the registered public offering
otherwise agree, and (ii) shall cause each holder of its Common Stock, or any
securities convertible into or exchangeable or exercisable for Common Stock,
purchased from the Company at any time after the date of this Agreement (other
than in a registered public offering, including pursuant to an acquisition or
merger or pursuant to an employee benefit plan) to agree not to effect any
public sale or distribu tion (including sales pursuant to Rule 144) of any such
securities during such period (except as part of such underwritten registra
tion, if otherwise permitted), unless the underwriters managing the registered
public offering otherwise agree.
4. Registration Procedures. Whenever the holders of Registrable
Securities have requested that any Registrable Securi ties be registered
pursuant to this Agreement, the Company shall use reasonable efforts to effect
the registration and the sale of such Registrable Securities in accordance with
the intended method of disposition thereof (including the registration of the
Series A Preferred, the Series B Preferred and the Warrants held by a holder of
Registrable Securities requesting registration as to which the Company has
received reasonable assurances that only Registrable Securities shall be
distributed to the public), and pursuant thereto the Company shall as
expeditiously as possible:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registra ble Securities and use
reasonable efforts to cause such registra tion statement to become effective
(provided that before filing a registration statement or prospectus or any
amendments or supple ments thereto, the Company shall furnish to the counsel
selected by the holders of a majority of the Registrable Securities covered by
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<PAGE>
such registration statement copies of all such documents proposed to be filed,
which documents shall be subject to the review and comment of such counsel);
(b) notify each holder of Registrable Securities of the effectiveness
of each registration statement filed hereunder and prepare and file with the
Securities and Exchange 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 for a period of not less
than 90 days and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amend ment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use reasonable efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company shall not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subparagraph, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process in any such
jurisdiction);
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
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 any such seller, the Company shall
prepare
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<PAGE>
a supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, 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;
(f) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the NASD automated quotation
system and, if listed on the NASD automated quotation system, use its best
efforts to secure designa tion of all such Registrable Securities covered by
such registra tion statement as a NASDAQ "national market system security"
within the meaning of Rule 11Aa2-1 of the Securities and Exchange Commis sion
or, failing that, to secure NASDAQ authorization for such Registrable Securities
and, without limiting the generality of the foregoing, to arrange for at least
two market makers to register as such with respect to such Registrable
Securities with the NASD;
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including effecting a stock split or a combination of
shares);
(i) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attor ney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to supply all
information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
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<PAGE>
(j) otherwise use reasonable efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and make
available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months beginning with
the first day of the Company's first full calendar quarter after the effective
date of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to partici pate in the preparation of such
registration or comparable state ment and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included; and
(l) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company shall use reasonable efforts promptly to obtain the
withdrawal of such order.
Each Holder of Registrable Securities as to which any registration is being
effected shall furnish to the Company in writing such information regarding such
Holder and the distribution of such Registrable Securities as the Company may
from time to time reasonably request in writing in order to comply with the
Securi ties Act, which writing shall state that such information is being
provided specifically for use in the preparation of the related registration
statement. Each Holder of Registrable Securities as to which any registration is
being effected agrees to notify the Company as promptly as practicable of any
inaccuracy or change in information previously furnished by such Holder to the
Company or of the happening of any event in either case as a result of which any
prospectus relating to such registration contains an untrue statement of a
material face regarding such Holder or the distribu tion of such Registrable
Securities or omits to state any material fact regarding such Holder or the
distribution of such Registrable Securities required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing, and to promptly furnish to the Company any addi
tional information required to correct and update any previously furnished
information or required such that such prospectus shall not contain, with
respect to such Holder or the distribution of such Registrable Securities, an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the
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<PAGE>
statements therein not misleading in light of the circumstances then
existing.
Each Holder of Registrable Securities agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in
paragraph 4(e), such Holder will forthwith discontinue disposition of such
Registrable Securities covered by such registration statement or prospectus
until such Holder's receipt of the copies of the supplemented or amended
prospectus relating to such registration statement or prospectus, or until it is
advised in writing by the Company that the use of the applicable prospectus may
be resumed, and has received copies of any addi tional or supplemental filings
which are incorporated by reference in such Prospectus, and, if so directed by
the Company, such Holder will deliver to the Company (at the Company's expense)
all copies, other than permanent file copies then in such Holder's possession,
of the prospectus covering the Registrable Securities current at the time of
receipt of such notice.
5. Registration Expenses.
(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all registration
and filing fees, fees and expenses of compliance with securities or blue sky
laws, printing expenses, messenger and delivery expenses, fees and disbursements
of custodians, and fees and disbursements of counsel for the Company and all
independent certified public accountants, underwriters (excluding discounts and
commissions) and other Persons retained by the Company (all such expenses being
herein called "Registration Expenses"), shall be borne as provided in this
Agreement, except that the Company shall, in any event, pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit or quarterly review, the expense of any liability insurance and
the expenses and fees for listing the securities to be regis-
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<PAGE>
tered on each securities exchange on which similar securities issued by the
Company are then listed or on the NASD automated quotation system.
(b) In connection with each Demand Registration and each Piggyback
Registration, the Company shall reimburse the holders of Registrable Securities
included in such registration for the reasonable fees and disbursements of one
counsel chosen by the holders of a majority of the Registrable Securities
included in such registration.
(c) To the extent Registration Expenses are not required to be paid by
the Company, each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
shall be borne by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
6. Indemnification.
(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities, its officers and directors and each
Person who controls such holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue or alleged untrue statement of material fact contained in any regis
tration statement, prospectus or preliminary prospectus or any amendment thereof
or supplement thereto or any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as the same are caused by or contained in any
information furnished in writing to the Company by such holder expressly for use
therein or by such holder's failure to deliver a copy of the registration
statement or prospectus or any amendments or supple ments thereto after the
Company has furnished such holder with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company shall indemnify
such underwrit ers, their officers and directors and each Person who controls
such underwriters (within the meaning of the Securities Act) to the same extent
as provided above with respect to the indemnification of the holders of
Registrable Securities.
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<PAGE>
(b) In connection with any registration statement in which a holder of
Registrable Securities is participating, each such holder shall furnish to the
Company in writing such informa tion and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, shall indemnify the Company, its
directors and officers and each Person who controls the Company (within the
meaning of the Securities Act) against any losses, claims, damages, liabilities
and expenses resulting from any untrue or alleged untrue statement of material
fact contained in the registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or affidavit so
furnished in writing by such holder; provided that the obligation to indemnify
shall be indi vidual, not joint and several, for each holder and shall be
limited to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.
(c) Any Person entitled to indemnification hereunder shall (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification (provided that the failure to give prompt notice
shall not impair any Per son's right to indemnification hereunder to the extent
such failure has not prejudiced the indemnifying party) and (ii) unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim,
permit such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is assumed,
the indemnifying party shall not be subject to any liability for any settlement
made by the indemnified party without its consent (but such consent shall not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim shall not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.
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<PAGE>
(d) The indemnification provided for under this Agree ment shall
remain in full force and effect regardless of any investigation made by or on
behalf of the indemnified party or any officer, director or controlling Person
of such indemnified party and shall survive the transfer of securities. The
Company also agrees to make such provisions, as are reasonably requested by any
indemnified party, for contribution to such party in the event the Company's
indemnification is unavailable for any reason.
7. Participation in Underwritten Registrations. No Person may
participate in any registration hereunder which is underwritten unless such
Person (i) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (ii) completes and executes all question
naires, powers of attorney, indemnities, underwriting agreements and other
documents required under the terms of such underwriting arrangements; provided
that no holder of Registrable Securities included in any underwritten
registration shall be required to make any representations or warranties to the
Company or the underwrit ers (other than representations and warranties
regarding such holder, such holder's ownership of and right to transfer the
Registrable Securities, and such holder's intended method of distribution) or to
undertake any indemnification obligations to the Company or the underwriters
with respect thereto, except as otherwise provided in paragraph 6 hereof.
8. Definitions.
(a) "Registrable Securities" means (i) any Common Stock issued upon
the conversion of any Series A Preferred issued pursuant to the Purchase
Agreement or issued upon conversion of the Series B Preferred issued pursuant to
the Purchase Agreement, (ii) any Common Stock issued upon conversion of any
Series B Preferred issued pursuant to the Purchase Agreement, (iii) any Common
Stock issued upon exercise of the Warrant issued pursuant to the Purchase
Agreement and (iv) any Common Stock issued or issuable with respect to the
securities referred to in clauses (i), (ii) and (iii) above by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular Registrable Securities, such securities shall cease to be Registrable
Securities when they have been distributed to the public pursuant to an offering
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<PAGE>
registered under the Securities Act or sold to the public through a broker,
dealer or market maker in compliance with Rule 144 under the Securities Act (or
any similar rule then in force) or repurchased by the Company or any
Subsidiary. For purposes of this Agreement, a Person shall be deemed to be a
holder of Registrable Securities, and the Registrable Securities shall be deemed
to be in existence, whenever such Person has the right to acquire directly or
indirectly such Registrable Securities (upon conversion or exercise in
connection with a transfer of securities or otherwise, but disregarding any
restrictions or limitations upon the exercise of such right), whether or not
such acquisition has actually been effected, and such Person shall be entitled
to exercise the rights of a holder of Registrable Securities hereunder.
(b) Unless otherwise stated, other capitalized terms contained herein
have the meanings set forth in the Purchase Agreement.
9. Miscellaneous.
(a) No Inconsistent Agreements. The Company shall not hereafter enter
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the holders of Registrable Securities in this
Agreement.
(b) Adjustments Affecting Registrable Securities. The Company shall
not take any action, or permit any change to occur, with respect to its
securities which would materially and adversely affect the ability of the
holders of Registrable Securities to include such Registrable Securities in a
registration undertaken pursuant to this Agreement or which would materially and
adversely affect the marketability of such Registrable Securities in any such
registration (including, without limitation, effecting a stock split or a
combination of shares).
(c) Remedies. Any Person having rights under any provi sion of this
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party shall be entitled to
specific performance and other injunctive relief from any court
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<PAGE>
of law or equity of competent jurisdiction (without posting any bond or other
security) in order to enforce or prevent violation of the provisions of this
Agreement.
(d) Amendments and Waivers. Except as otherwise provid ed herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of at least 662/3% of the Registrable
Securities.
(e) Successors and Assigns. All covenants and agree ments in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(f) Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effec tive and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(g) Counterparts. This Agreement may be executed simul taneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
(h) Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not consti tute a part of this
Agreement.
(i) Governing Law. The corporate law of the State of Oregon shall
govern all issues and questions concerning the relative rights of the Company
and its stockholders. All other issues and questions concerning the
construction, validity, interpretation and enforcement of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in
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<PAGE>
accordance with, the laws of the State of New York, without giving effect to any
choice of law or conflict of law rules or provisions (whether of the State of
New York or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of New York.
(j) Notices. All notices, demands or other communica tions to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to each Purchaser at the address indicated on the
Schedule of Purchasers and to the Company at the address indicated below:
Before December 27, 1996:
Regent Assisted Living, Inc.
Attn: Chief Financial Officer
2260 U.S. Bancorp Tower
111 S.W. Fifth Avenue
Portland, OR 97204
After December 27, 1996:
Regent Assisted Living, Inc.
Attn: Chief Financial Officer
121 S.W. Morrison, Suite 1000
Portland, OR 97204
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
* * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
REGENT ASSISTED LIVING, INC.
By WALTER C. BOWEN
--------------------------------------
Its PRESIDENT
-------------------------------------
PRUDENTIAL PRIVATE
EQUITY INVESTORS III, L.P.
By Prudential Equity
Investors, Inc.
Its General Partner
By Cornerstone Equity
Investors, L.L.C.
Its Investment Adviser
By DANA J. O'BRIEN
---------------------------------
Its SENIOR MANAGING DIRECTOR
--------------------------------
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The security represented by this certificate was originally
issued on December 16, 1996, and has not been registered
under the Securities Act of 1933, as amended. The transfer
of such secur ty is subject to the conditions specified in
the Preferred Stock and Warrant Purchase Agreement, dated as
of December 16, 1996 (as amended and modified from time to
time), between the issuer hereof (the "Company") and the
initial holder hereof, and the Company reserves the right to
refuse the transfer of such security until such conditions
have been fulfilled with respect to such transfer. Upon
written request, a copy of such conditions shall be
furnished by the Company to the holder hereof without
charge.
REGENT ASSISTED LIVING, INC.
STOCK PURCHASE WARRANT
----------------------
Date of Issuance: December 16, 1996 Certificate No. W-1
For value received, the Company hereby grants to Prudential Private
Equity Investors III, L.P. or its registered assigns (the "Registered Holder")
the right to purchase from the Company upon the occurrence of an Exercise Event
200,000 shares of Warrant Stock at a price per share equal to $5.50 (such price
as adjusted and readjusted from time to time in accordance with Section 2
hereof, the "Exercise Price").
This Warrant is being issued simultaneously with the issuance of
1,283,785 shares of the Company's Series A Preferred Stock (the "Series A
Preferred") and 382,882 shares of the Company's Series B Preferred Stock (the
"Series B Preferred") to Prudential Private Equity Investors III, L.P. ("PPEI")
pursuant to the Preferred Stock and Warrant Purchase Agreement dated as of
December 12, 1996 (the "Purchase Agreement"), between Regent Assisted Living,
Inc., an Oregon corporation (the "Company"), and PPEI.
<PAGE>
Certain capitalized terms used herein are defined in Section 5 hereof.
The amount and kind of securities obtainable pursuant to the rights granted
hereunder and the purchase price for such securities are subject to adjustment
pursuant to the provisions contained in this Warrant.
For income tax purposes, the value of this Warrant as of the date
hereof is $50,000.
This Warrant is subject to the following provisions:
Section 1. Exercise of Warrant.
1A. Exercise Period. Subject to the provisions of paragraph 1E hereof,
the Registered Holder may exercise, in whole or in part, the purchase rights
represented by this Warrant at any time and from time to time on and after the
occurrence of a Trigger Event, until the fifth anniversary of the date of such
Trigger Event (the "Exercise Period"). The Company shall give the Registered
Holder written notice of the expiration of the Exercise Period at least 30 days
but not more than 90 days prior to the end of the Exercise Period. A "Trigger
Event" shall occur if the Company's independent outside auditors have not
certified in writing to the Registered Holder of this Warrant within 30 days
after December 31, 1997, that the Company has, during the calendar year ending
December 31, 1997, opened and secured all necessary permits and approvals for
the operation of at least (i) at least ten new assisted living facilities (not
operated or managed by the Company as of the date hereof) and (ii) at least
1,000 units within all such new assisted living facilities. For purposes of
calculating the number of new facilities and units opened by the Company,
facilities and units in facilities in which the Company has an ownership
interest of at least 50% or a lease of at least 15 years (including any
available options or extensions of such lease) shall be counted in their
entirety, whereas facilities and units in facilities for which the Company
obtains a management contract but in which the Company does not have an
ownership interest of at least 50% or a lease of at least 15 years (including
any available options or extensions of such lease) ("Managed Facilities" and
"Managed Units," respectively) shall be counted as one-third of a facility and
one-third of a unit, respectively; provided that no more than three Managed
Facilities and 300 Managed Units (counting as one new assisted living facility
and 100 new units,
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respectively) shall be counted for purposes of determining a Trigger Event.
1B. Exercise Procedure.
(i) This warrant shall be deemed to have been exercised when the
Company has received all of the following items (the "Exercise Time"):
(a) a completed Exercise Agreement, as described in paragraph 1C
below, executed by the Person exercising all or part of the purchase rights
represented by this Warrant (the "Purchaser");
(b) this Warrant;
(c) if this Warrant is not registered in the name of the Purchaser, an
Assignment or Assignments in the form set forth in Exhibit II hereto
evidencing the assignment of this Warrant to the Purchaser, in which case
the Registered Holder shall have complied with the provisions set forth in
Section 7 hereof; and
(d) either (1) a certified or bank cashier's check payable to the
Company or a wire transfer to an account designated in writing by the
Company in an amount equal to the product of the Exercise Price multiplied
by the number of shares of Warrant Stock being purchased upon such exercise
(the "Aggregate Exercise Price"), (2) the surrender to the Company of debt
or equity securities of the Company having a Market Price equal to the
Aggregate Exercise Price of the Warrant Stock being purchased upon such
exercise (provided that for purposes of this subparagraph, the Market Price
of any note or other debt security or any preferred stock shall be deemed
to be equal to the aggregate outstanding principal amount or liquidation
value thereof plus all accrued and unpaid interest thereon or accrued or
declared and unpaid dividends thereon) or (3) a written notice to the
Company that the Purchaser is exercising the Warrant (or a portion thereof)
by authorizing the Company to withhold from issuance a number of shares of
Warrant Stock issuable upon such exercise of the Warrant which when
multiplied by the Market Price of the Common Stock is equal to the
Aggregate Exercise Price (and
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such withheld shares shall no longer be issuable under this Warrant).
(ii) Certificates for shares of Warrant Stock purchased upon exercise
of this Warrant shall be delivered by the Company to the Purchaser within five
business days after the date of the Exercise Time. Unless this warrant has
expired or all of the purchase rights represented hereby have been exercised,
the Company shall prepare a new Warrant, substantially identical hereto,
representing the rights formerly represented by this Warrant which have not
expired or been exercised and shall, within such five-day period, deliver such
new Warrant to the Person designated for delivery in the Exercise Agreement.
(iii) The Warrant Stock issuable upon the exercise of this Warrant
shall be deemed to have been issued to the Purchaser at the Exercise Time, and
the Purchaser shall be deemed for all purposes to have become the record holder
of such Warrant Stock at the Exercise Time.
(iv) The issuance of certificates for shares of warrant Stock upon
exercise of this Warrant shall be made without charge to the Registered Holder
or the Purchaser for any issuance tax in respect thereof or other cost incurred
by the Company in connection with such exercise and the related issuance of
shares of Warrant Stock. Each share of Warrant Stock issuable upon exercise of
this Warrant shall, upon payment of the Exercise Price therefor, be fully paid
and nonassessable and free from all liens and charges with respect to the
issuance thereof.
(v) The Company shall not close its books against the transfer of this
Warrant or of any share of Warrant Stock issued or issuable upon the exercise of
this Warrant in any manner which interferes with the timely exercise of this
Warrant. The Company shall from time to time take all such action as may be
necessary to assure that the par value per share of the unissued Warrant Stock
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.
(vi) The Company shall assist and cooperate with any Registered Holder
or Purchaser required to make any governmental filings or obtain any
governmental approvals prior to or in connection with any exercise of this
Warrant (including, without limitation, making any filings required to be made
by the Company);
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provided, however, that all such filings made or approvals obtained by or on
behalf of any Registered Holder or Purchaser shall be at its sole cost (except
as otherwise provided by paragraph 1B(iv).
(vii) Notwithstanding any other provision hereof, if an exercise of
any portion of this Warrant is to be made in connection with a registered public
offering or the sale of the Company, the exercise of any portion of this warrant
may, at the election of the holder hereof, be conditioned upon the consummation
of the public offering or sale of the Company in which case such exercise shall
not be deemed to be effective until the consummation of such transaction.
(viii) The Company shall at all times reserve and keep available out
of its authorized but unissued shares of Warrant Stock solely for the purpose of
issuance upon the exercise of the Warrant, such number of shares of Warrant
Stock issuable upon the exercise of the Warrant. The Company shall take all such
actions as may be necessary to assure that all such shares of Warrant Stock may
be so issued without violation of any applicable law or governmental regulation
or any requirements of any domestic securities exchange upon which shares of
Common Stock may be listed (except for official notice of issuance which shall
be immediately delivered by the Company upon each such issuance). The Company
shall from time to time take all such action as may be necessary to assure that
the par value of the unissued Warrant Stock acquirable upon exercise of this
Warrant is at all times equal to or less than the Exercise Price. The Company
shall not take any action which would cause the number of authorized but
unissued shares of Warrant Stock to be less than the number of such shares
required to be reserved hereunder for issuance upon exercise of the Warrant.
1C. Exercise Agreement. Upon any exercise of this Warrant, the
Exercise Agreement shall be substantially in the form set forth in Exhibit I
hereto, except that if the shares of Warrant Stock are not to be issued in the
name of the Person in whose name this Warrant is registered, the Exercise
Agreement shall also state the name of the Person to whom the certificates for
the shares of Warrant Stock are to be issued, and if the number of shares of
Warrant Stock to be issued does not include all the shares of Warrant Stock
purchasable hereunder, it shall also state the name of the Person to whom a new
Warrant for the unexercised portion of the rights hereunder is to be delivered.
Such Exercise Agreement shall be dated the actual date of execution thereof.
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1D. Fractional Shares. If a fractional share of Warrant Stock would,
but for the provisions of paragraph 1A, be issuable upon exercise of the rights
represented by this Warrant, the Company shall, within five business days after
the date of the Exercise Time, deliver to the Purchaser a check payable to the
Purchaser in lieu of such fractional share in an amount equal to the difference
between the Market Price of such fractional share as of the date of the Exercise
Time and the Exercise Price of such fractional share.
1E. Exercise Events. Subject to the terms and conditions of this
Section 1, each holder of the Warrant shall have the right, at its option, to
exercise the Warrant upon the occurrence of an Exercise Event. Each of the
following shall constitute an "Exercise Event" with respect to the Warrant:
(i) the sale or other transfer of the Warrant by PPEI or an affiliate
of PPEI, or by The Prudential Insurance Company of America ("Prudential") or an
affiliate of Prudential, to a party not affiliated with PPEI or Prudential;
(ii) the distribution of the Warrant to any limited partner of PPEI,
other than Prudential Equity Investors Inc. or Prudential or any other affiliate
of PPEI or Prudential;
(iii) a sale of all or substantially all the assets of the Company or
of the Company and its Subsidiaries on a consolidated basis (in any transaction
or series of related transactions other than in the ordinary course of business)
or any other acquisition of the Company by means of a merger, a negotiated stock
purchase or a purchase pursuant to a tender offer for substantially all of the
outstanding shares of Common Stock of the Company;
(iv) if for any period of two consecutive fiscal quarters of the
Company, the quarterly financial statements of the Company reflect an aggregate
decline of 20% or more in the Company's consolidated net income from the fiscal
quarter immediately preceding such consecutive fiscal quarters, determined in
accordance with generally accepted accounting principles;
(v) if the quarterly financial statements of the Company for any
fiscal quarter reflect a decline of 50% or more in the Company's consolidated
net income from the immediately
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preceding fiscal quarter, determined in accordance with generally accepted
accounting principles;
(vi) if for any period of two consecutive fiscal quarters of the
Company, the quarterly financial statements of the Company reflect an earnings
before interest, taxes, depreciation and amortization ("EBITDA") that is more
than 20% less than the EBITDA contained in the then current annual budget
showing projected EBITDA for such quarter as approved by the Corporation's board
of directors from time to time;
(vii) any default or event of default under any agreement pursuant to
which the Company or any of its Subsidiaries has incurred indebtedness for
borrowed money in excess of $500,000, unless and until such default or event of
default is cured or waived (provided that the holder of the shares proposed to
be converted is not a lender, or in the case of PPEI, Prudential or their
affiliates, neither PPEI, Prudential or any of their affiliates is a lender,
under such agreement);
(viii) if the total number of shares of Common Stock held by, or
obtainable upon the exercise of rights held by, PPEI and its affiliates as a
percentage of the total number of shares of Common Stock outstanding on a
fully-diluted basis is less than 50% of such percentage on the date of original
issuance of the Preferred Stock;
(ix) if, during any twelve-month period, more than 30% of the
Company's directors have resigned or have been replaced; or
(x) upon the sale or transfer of more than 50% of the Common Stock
owned by the executive employees of the Company and its Subsidiaries as a group
immediately following the original issuance of the warrant, or the sale or
transfer of more than 50% of the Common Stock owned by Walter C. Bowen
immediately following the original issuance of the Warrant.
Section 2. Adjustment of Exercise Price and Number of Shares. In order
to prevent dilution of the rights granted under this Warrant, the Exercise Price
shall be subject to adjustment from time to time as provided in this Section 2,
and the number of shares of Warrant Stock obtainable upon exercise of this
Warrant shall be subject to adjustment from time to time as provided in this
Section 2.
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<PAGE>
2A. Adjustment of Exercise Price and Number of Shares upon Issuance of
Common Stock.
(i) If and whenever on or after the Date of Issuance of this Warrant
the Company issues or sells, or in accordance with paragraph 2B is deemed to
have issued or sold, any shares of Common Stock for a consideration per share
less than the Exercise Price in effect immediately prior to the time of such
issue or sale, then immediately upon such issue or sale the Exercise Price shall
be reduced to the Exercise Price determined by dividing:
(A) the sum of (x) the product derived by multiplying the Exercise Price
in effect immediately prior to such issue or sale times the number of
shares of Common Stock Deemed Outstanding immediately prior to such
issue or sale, plus (y) the consideration, if any, received by the
Company upon such issue or sale, by
(B) the number of shares of Common Stock Deemed Outstanding immediately
after such issue or sale.
Upon each such adjustment of the Exercise Price hereunder, the number of shares
of Warrant Stock acquirable upon exercise of this Warrant shall be adjusted to
the number of shares determined by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares of Warrant Stock
acquirable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Exercise Price resulting from such
adjustment.
(ii) Notwithstanding the foregoing, there shall be no adjustment to
the Exercise Price or the number of shares of Warrant Stock obtainable upon
exercise of this warrant under this paragraph 2B as a result of issuances or
deemed issuances of Common Stock (A) with respect to the granting of stock
options to officers, directors, employees and consultants of the Company and its
Subsidiaries or the exercise thereof for an aggregate of 600,000 shares of
Common Stock (as such number of shares is equitably adjusted for subsequent
stock splits, stock combinations, stock dividends and recapitalizations and such
number shall include all stock options outstanding as of the date of the
Purchase Agreement) or (B) upon the conversion of the Preferred Stock.
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<PAGE>
2B. Effect on Exercise Price of Certain Events. For purposes of
determining the adjusted Exercise Price under paragraph 2A, the following shall
be applicable:
(i) Issuance of Rights or Options. If the Company in any manner grants
or sells any options and the price per share for which Common Stock is issuable
upon the exercise of such Options, or upon conversion or exchange of any
Convertible Securities issuable upon exercise of such Options, is less than the
Exercise Price in effect immediately prior to the time of the granting or sale
of such Options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options, or upon conversion or exchange of
the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options, shall be deemed to be outstanding and to have been
issued and sold by the Company at such time for such price per share. For
purposes of this paragraph, the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or exchange of such
Convertible Securities" is determined by dividing (A) the total amount, if any,
received or receivable by the Company as consideration for the granting or sale
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the case
of such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable to the Company upon the
issuance or sale of such Convertible Securities and the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock issuable upon
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No further
adjustment of the Exercise Price shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the price per share for which
Common Stock is issuable upon conversion or exchange thereof is less than the
Exercise Price in effect immediately prior to the time of such issue or sale,
then the maximum number of shares of Common Stock issuable upon conversion or
exchange of such Convertible Securities shall be deemed to be outstanding and to
have been issued and sold by the Company at such
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<PAGE>
time for such price per share. For the purposes of this paragraph, the "price
per share for which Common Stock is issuable upon conversion or exchange
thereof" is determined by dividing (A) the total amount received or receivable
by the Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the conversion or exchange thereof, by (B) the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities. No further adjustment of the
Exercise Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustments of the Exercise Price had been or are to be made pursuant to
other provisions of this paragraph 2B, no further adjustment of the Exercise
Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exchangeable for Common
Stock changes at any time, the Exercise Price in effect at the time of such
change shall be adjusted immediately to the Exercise Price which would have been
in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold and the number of shares of Warrant Stock issuable hereunder
shall be correspondingly adjusted.
(iv) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Securities without the exercise of such
Option or right, the Exercise Price then in effect and the number of shares of
Warrant Stock acquirable hereunder shall be adjusted immediately to the Exercise
Price and the number of shares which would have been in effect at the time of
such expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination, never
been issued.
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<PAGE>
(v) Calculation of Consideration Received. If any Common Stock,
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the gross purchase price therefor. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than cash,
the amount of the consideration other than cash received by the Company shall be
the fair value of such consideration, except where such consideration consists
of securities, in which case the amount of consideration received by the Company
shall be the Market Price thereof as of the date of receipt. In case any Common
Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving entity the amount of consideration therefor shall be deemed to be the
fair value of such portion of the net assets and business of the non-surviving
entity as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other than
cash or securities shall be determined jointly by the Company and the Registered
Holders of Warrants representing a majority of the shares of Warrant Stock
obtainable upon exercise of such Warrants. If such parties are unable to reach
agreement within a reasonable period of time, such fair value shall be
determined by an appraiser jointly selected by the Company and the Registered
Holders of Warrants representing a majority of the shares of Warrant Stock
obtainable upon exercise of such Warrants. The determination of such appraiser
shall be final and binding on the Company and the Registered Holders of the
Warrants, and the fees and expenses of such appraiser shall be borne equally by
the Company on the one hand and the Registered Holders of the Warrants on the
other hand, pro rata on the basis of the number of shares of Warrant Stock held
by each such holder.
(vi) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options shall be deemed to
have been issued without consideration.
(vii) Treasury Shares. The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and
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the disposition of any shares so owned or held shall be considered an issue or
sale of Common Stock.
(viii) Record Date. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
2C. Subdivision or Combination of Common Stock. If the Company at any
time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced and the number of shares of Warrant
Stock obtainable upon exercise of this Warrant shall be proportionately
increased. If the Company at any time combines (by reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Exercise Price in effect immediately prior to such
combination shall be proportionately increased and the number of shares of
Warrant Stock obtainable upon exercise of this Warrant shall be proportionately
decreased.
2D. Reorganization, Reclassification, Consolidation, Merger or Sale.
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets or other transaction,
which in each case is effected in such a way that the holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as "Organic Change." Prior to the consummation of any Organic Change,
the Company shall make appropriate provision (in form and substance satisfactory
to the Registered Holders of the Warrants representing a majority of the Warrant
Stock obtainable upon exercise of all Warrants then outstanding) to insure that
each of the Registered Holders of the Warrants shall thereafter have the right
to acquire and receive, in lieu of or addition to (as the case may be) the
shares of Warrant
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<PAGE>
Stock immediately theretofore acquirable and receivable upon the exercise of
such holder's Warrant, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for the number of shares of
Warrant Stock immediately theretofore acquirable and receivable upon exercise of
such holder's Warrant had such Organic Change not taken place. In any such case,
the Company shall make appropriate provision (in form and substance satisfactory
to the Registered Holders of the Warrants representing a majority of the Warrant
Stock obtainable upon exercise of all Warrants then outstanding) with respect to
such holders' rights and interests to insure that the provisions of this Section
2 and Sections 3 and 4 hereof shall thereafter be applicable to the Warrants
(including, in the case of any such consolidation, merger or sale in which the
successor entity or purchasing entity is other than the Company, an immediate
adjustment of the Exercise Price to the value for the Common Stock reflected by
the terms of such consolidation, merger or sale, and a corresponding immediate
adjustment in the number of shares of Warrant Stock acquirable and receivable
upon exercise of the Warrants, if the value so reflected is less than the
Exercise Price in effect immediately prior to such consolidation, merger or
sale). The Company shall not effect any such consolidation, merger or sale,
unless prior to the consummation thereof, the successor entity (if other than
the Company) resulting from consolidation or merger or the entity purchasing
such assets assumes by written instrument (in form and substance satisfactory to
the Registered Holders of Warrants representing a majority of the Warrant Stock
obtainable upon exercise of all of the Warrants then outstanding), the
obligation to deliver to each such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to acquire.
2E. Certain Events. If any event occurs of the type contemplated by
the provisions of this Section 2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's board of directors shall make an appropriate adjustment in the
Exercise Price and the number of shares of Warrant Stock obtainable upon
exercise of this Warrant so as to protect the rights of the holders of the
Warrants; provided that no such adjustment shall increase the Exercise Price or
decrease the number of shares of Warrant Stock obtainable as otherwise
determined pursuant to this Section 2.
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2F. Notices.
(i) Immediately upon any adjustment of the Exercise Price, the Company
shall give written notice thereof to the Registered Holder, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(ii) The Company shall give written notice to the Registered Holder at
least 20 days prior to the date on which the Company closes its books or takes a
record (A) with respect to any dividend or distribution upon the Common Stock,
(B) with respect to any pro rata subscription offer to holders of Common Stock
or (C) for determining rights to vote with respect to any Organic Change,
dissolution or liquidation.
(iii) The Company shall also give written notice to the Registered
Holders at least 20 days prior to the date on which any Organic Change,
dissolution or liquidation shall take place.
Section 3. Liquidating Dividends. If at any time on or after the date
this Warrant becomes exercisable the Company declares or pays a dividend upon
the Common Stock payable otherwise than in cash out of earnings or earned
surplus (determined in accordance with generally accepted accounting principles,
consistently applied) except for a stock dividend payable in shares of Common
Stock (a "Liquidating Dividend"), then the Company shall pay to the Registered
Holder of this warrant at the time of payment thereof the Liquidating Dividend
which would have been paid to such Registered Holder on the Warrant Stock had
this Warrant been fully exercised immediately prior to the date on which a
record is taken for such Liquidating Dividend, or, if no record is taken, the
date as of which the record holders of Common Stock entitled to such dividends
are to be determined; provided that if the Liquidating Dividends consist of
voting securities, the Company shall make available to the Registered Holder of
this Warrant, at such holder's request, Liquidating Dividends consisting of
non-voting securities (except as otherwise required by law) which are otherwise
identical to the Liquidating Dividends consisting of voting securities and which
non-voting securities are convertible into such voting securities on the same
terms as Series B Preferred is convertible into Series A Preferred.
Section 4. Purchase Rights. If at any time on or after the date this
Warrant becomes exercisable the Company grants,
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issues or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of Common Stock (the "Purchase Rights"), then the Registered Holder of
this Warrant shall be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of warrant Stock
acquirable upon complete exercise of this Warrant immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights; provided that if the Purchase Rights involve voting securities, the
Company shall make available to the Registered Holder of this Warrant, at such
holder's request, Purchase Rights involving non-voting securities (except as
otherwise required by law) which are otherwise identical to the Purchase Rights
involving voting securities and which non-voting securities are convertible or
exchangeable into such voting securities on the same term as the Company's
Series B Preferred is convertible into the Company's Series A Preferred.
Section 5. Definitions. The following terms have meanings set forth
below:
"Common Stock" means, collectively, the Company's Common Stock and any
capital stock of any class of the Company hereafter authorized which is not
limited to a fixed sum or percentage of par or stated value in respect to the
rights of the holders thereof to participate in dividends or in the distribution
of assets upon any liquidation, dissolution or winding up of the Company.
"Common Stock Deemed Outstanding" means, at any given time, the number
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to paragraphs 2B(i) and
2B(ii) hereof regardless of whether the Options or Convertible Securities are
actually exercisable at such time, but excluding any shares of Common Stock
issuable upon exercise of the Warrants.
"Convertible Securities" means any stock or securities (directly or
indirectly) convertible into or exchangeable for Common Stock.
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"Market Price" means as to any security the average of the closing
prices of such security's sales on all domestic securities exchanges on which
such security may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted in
the NASDAQ System as of 4:00 P.M., New York time, on such day, or, if on any day
such security is not quoted in the NASDAQ System, the average of the highest bid
and lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which "Market Price" is being determined and the 20
consecutive business days prior to such day; provided that if such security is
listed on any domestic securities exchange the term "business days" as used in
this sentence means business days on which such exchange is open for trading. If
at any time such security is not listed on any domestic securities exchange or
quoted in the NASDAQ System or the domestic over-the-counter market, the "Market
Price" shall be the fair value thereof determined jointly by the Company and the
Registered Holders of Warrants representing a majority of the Warrant Stock
purchasable upon exercise of all the Warrants then outstanding; provided that if
such parties are unable to reach agreement within a reasonable period of time,
such fair value shall be determined by an appraiser jointly selected by the
Company and the Registered Holders of Warrants representing a majority of the
Warrant Stock purchasable upon exercise of all the warrants then outstanding.
The determination of such appraiser shall be final and binding on the Company
and the Registered Holders of the Warrants, and the fees and expenses of such
appraiser shall be paid by the Company.
"Options" means any rights or options to subscribe for or purchase
Common Stock or Convertible Securities.
"Person" means an individual, a partnership, a joint venture, a
corporation, a limited liability company, a trust, an unincorporated
organization and a government or any department or agency thereof.
"Warrant Stock" means shares of the Company's Common Stock; provided
that if there is a change such that the securities
- 16 -
<PAGE>
issuable upon exercise of the Warrants or conversion of the Subject Shares are
issued by an entity other than the Company or there is a change in the type or
class of securities so issuable, then the term "Warrant Stock" shall mean one
share of the security issuable upon exercise of the Warrants or conversion of
the Subject Shares if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.
Other capitalized terms used in this Warrant but not defined herein
shall have the meanings set forth in the Purchase Agreement.
Section 6. No Voting Rights; Limitations of Liability. This Warrant
shall not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Registered Holder to purchase Warrant Stock, and no enumeration
herein of the rights or privileges of the Registered Holder shall give rise to
any liability of such holder for the Exercise Price of Warrant Stock acquirable
by exercise hereof or as a stockholder of the Company.
Section 7. Warrant Transferable. Subject to the transfer conditions
referred to in the legend endorsed hereon, this Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the Registered Holder,
upon surrender of this Warrant with a properly executed Assignment (in the form
of Exhibit II hereto) at the principal office of the Company.
Section 8. Warrant Exchangeable for Different Denominations. This
Warrant is exchangeable, upon the surrender hereof by the Registered Holder at
the principal office of the Company, for new Warrants of like tenor representing
in the aggregate the purchase rights hereunder, and each of such new Warrants
shall represent such portion of such rights as is designated by the Registered
Holder at the time of such surrender. The date the Company initially issues this
Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the
number of times new certificates representing the unexpired and unexercised
rights formerly represented by this Warrant shall be issued. All Warrants
representing portions of the rights hereunder are referred to herein as the
"Warrants."
- 17 -
<PAGE>
Section 9. Replacement. Upon receipt of evidence reasonably
satisfactory to the Company (an affidavit of the Registered Holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing this Warrant, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the Company
(provided that if the holder is a financial institution or other institutional
investor its own agreement shall be satisfactory), or, in the case of any such
mutilation upon surrender of such certificate, the Company shall (at its
expense) execute and deliver in lieu of such certificate a new certificate of
like kind representing the same rights represented by such lost, stolen,
destroyed or mutilated certificate and dated the date of such lost, stolen,
destroyed or mutilated certificate.
Section 10. Notices. Except as otherwise expressly provided herein,
all notices referred to in this Warrant shall be in writing and shall be
delivered personally, sent by reputable overnight courier service (charges
prepaid) or sent by registered or certified mail, return receipt requested,
postage prepaid and shall be deemed to have been given when so delivered or
deposited in the U.S. Mail (i) to the Company, at its principal executive
offices and (ii) to the Registered Holder of this Warrant, at such holder's
address as it appears in the records of the Company (unless otherwise indicated
by any such holder).
Section 11. Amendment and Waiver. Except as otherwise provided herein,
the provisions of the Warrants may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
Registered Holders of Warrants representing a majority of the shares of Warrant
Stock obtainable upon exercise of the warrants; provided that no such action may
change the Exercise Price of the Warrants or the number of shares or class of
stock obtainable upon exercise of each Warrant without the written consent of
the Registered Holders of Warrants representing at least 66 2/3% of the shares
of Warrant Stock obtainable upon exercise of the Warrants.
Section 12. Descriptive Headings; Governing Law. The descriptive
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporation
laws of the State of Oregon shall govern all issues concerning the relative
rights of the
- 18 -
<PAGE>
Company and its stockholders. All other questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be governed by
the internal law of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.
* * * *
- 19 -
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by its duly authorized officers under its corporate seal and to be
dated the Date of Issuance hereof.
REGENT ASSISTED LIVING, INC.
By WALTER C. BOWEN
--------------------------------------
Its PRESIDENT
-------------------------------------
[Corporate Seal]
Attest:
DAVID R. GIBSON
- -----------------------------
Assistant Secretary
<PAGE>
EXHIBIT I
EXERCISE AGREEMENT
------------------
To: Dated:
The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. W-_____), hereby agrees to subscribe for the purchase
of _____ shares of the Warrant Stock covered by such Warrant and makes payment
herewith in full therefor at the price per share provided by such Warrant.
Signature _______________________
Address _________________________
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED, ________________________________________ hereby
sells, assigns and transfers all of the rights of the undersigned under the
attached Warrant (Certificate No. W-_____) with respect to the number of shares
of the Warrant Stock covered thereby set forth below, unto:
Names of Assignee Address No. of Shares
- ----------------- ------- -------------
Dated: Signature _______________________
_______________________
Witness _________________________
FIRST AMENDMENT
TO LEASE
Regency Park Assisted Living
This First Amendment (this "First Amendment") to the Lease Agreement (the
"Lease") between Regent Assisted Living, Inc. ("Tenant") and Regency Park
Apartments Limited Partnership ("Landlord"), dated December 31, 1995, is
effective as of December 12, 1996.
Recitals
A. Tenant proposes to obtain financing for its business through a sale of
preferred stock ("Preferred Stock") to Prudential Equity Investors III, L.P., a
Delaware corporation ("Prudential") pursuant to the Preferred Stock and Warrant
Purchase Agreement dated December 12, 1996 between Tenant and Prudential (the
"Purchase Agreement").
B. To facilitate the sale of Preferred Stock, Tenant and Landlord wish to
modify the terms of the Lease to defer a portion of lease payments in the event
Tenant is in default on certain of its monetary obligations, and to subordinate
such deferred payments to the Preferred Stock in certain circumstances, in
accordance with the provisions set forth in this First Amendment.
Agreement
---------
Tenant and Landlord hereby agree as follows:
1. Deferral of Lease Payments. If Tenant is (a) in monetary default with
respect to (i) any of its leases of assisted living facilities, or (ii) any
Indebtedness of Tenant having a principal amount in excess of $500,000, or (b)
fails to pay on any Dividend Payment Date (as defined in Tenant's Restated
Articles of Incorporation, as amended) the full amount of dividends then accrued
on the Preferred Stock (a "Subordination Event"), then the monthly lease
payments under the Lease will, thereafter and until all Subordination Events
have been cured, be reduced to equal the monthly principal and interest payments
on the loans held by Landlord to finance the facility subject to the Lease plus
reserves for taxes, insurance and replacement and repairs as then in existence
or as required from time-to-time by the lender. The difference between lease
payments due pursuant to the Lease and any reduced lease payments made pursuant
to the preceding sentence will accrue as "Deferred Rent" until all such
Subordination Events have been cured, with interest accruing on such Deferred
Rent at a per annum rate of the greater of (i) twelve percent, or (ii) the prime
rate announced from time to time by U.S. Bank of Oregon plus 300 basis points.
<PAGE>
2. Subordination of Deferred Rent. In connection with any liquidation,
winding up, dissolution or reorganization of Tenant (whether or not in any
bankruptcy, insolvency, reorganization, receivership or other proceeding) or any
other transaction determined to be treated as a liquidation by the holders of
the Preferred Stock pursuant to the provisions of Article II.D, Section 2 of
Tenant's of Tenant's Restated Articles of Incorporation, as amended (a
"Liquidation"), the rights of Landlord to receive the Deferred Rent (including
accrued interest thereon) shall be subordinated to the rights of the holders of
the Preferred Stock to receive the Liquidation Value (as defined in Tenant's
Restated Articles of Amendment, as amended) of the Preferred Stock plus all
accrued and unpaid dividends thereon upon such Liquidation. If in connection
with any Liquidation Landlord receives any portion of the Deferred Rent
(including any accrued interest thereon) prior to the holders of the Preferred
Stock receiving the aggregate Liquidation Value and accrued dividends with
respect to the Preferred Stock, Landlord shall receive such payments in trust
for the benefit of the holders of the Preferred Stock and shall promptly pay
over such amounts to the holders of the Preferred Stock (pro rata among such
holders based upon the number of shares held) until the holders of the Preferred
Stock have received an amount equal to the aggregate Liquidation Value plus all
accrued dividends thereon.
3. Expiration. This First Amendment shall terminate upon the first to occur
of (a) there shall be no shares of Preferred Stock outstanding (except to the
extent the provisions of paragraph 2 above are in effect with respect to any
sale, merger or liquidation of Tenant), or (b) there shall be no Subordination
Event that is continuing and Tenant's financial statements delivered pursuant to
the Purchase Agreement show positive EBITDA for two consecutive fiscal quarters
after Tenant has opened 1,000 additional units after the date of this First
Amendment as determined in accordance with Article II.D, Section 4K of Tenant's
Restated Articles of Incorporation, as amended.
4. Third Party Beneficiary. Tenant and Landlord acknowledge and agree that
Prudential and the holders of the Preferred Stock are third party beneficiaries
of this First Amendment and that no term of this First Amendment may be amended
or waived without the prior written consent of the holders of a majority of the
outstanding shares of Preferred Stock and that the holders of outstanding shares
of Preferred Stock shall be entitled to enforce the provisions of this First
Amendment at law or in equity.
5. Definitions. For the Purposes of this First Amendment:
"EBITDA" means Tenant's net income for any period, plus the amount of
interest expense, income taxes, depreciation and amortization deducted in
determining such net income, all determined on a consolidated basis in
accordance with generally accepted accounting principles.
"Indebtedness" means indebtedness for borrowed money, indebtedness
evidenced by a note or other instrument, indebtedness for the deferred purchase
price of
<PAGE>
property or services (other than trade payables in the ordinary course of
business), obligations under capitalized leases and indebtedness secured by a
lien on property.
IN WITNESS WHEREOF, the undersigned have executed this First Amendment
as of the date written above.
LANDLORD: REGENCY PARK APARTMENTS, LIMITED PARTNERSHIP
By: WALTER C. BOWEN
-------------------------------------
Name: Walter C. Bowen
-------------------------------------
Title: General Partner
-------------------------------------
TENANT: REGENT ASSISTED LIVING, INC.
By: WALTER C. BOWEN
-------------------------------------
Name: Walter C. Bowen
-------------------------------------
Title: President
-------------------------------------
SECOND AMENDMENT
TO LEASE
Sterling Park Assisted Living
This Second Amendment (this "Second Amendment") to the Lease Agreement (the
"Lease") between Regent Assisted Living, Inc. ("Tenant") and Sterling Park, LLC,
a Washington limited liability company ("Landlord"), dated December 31, 1995, is
effective as of December 16 1996.
Recitals
--------
A. Tenant proposes to obtain financing for its business through a sale of
preferred stock ("Preferred Stock") to Prudential Equity Investors III, L.P., a
Delaware corporation ("Prudential") pursuant to the Preferred Stock and Warrant
Purchase Agreement dated December 16, 1996 between Tenant and Prudential (the
"Purchase Agreement").
B. To facilitate the sale of Preferred Stock, Tenant and Landlord wish to
modify the terms of the Lease to defer a portion of lease payments in the event
Tenant is in default on certain of its monetary obligations, and to subordinate
such deferred payments to the Preferred Stock in certain circumstances, in
accordance with the provisions set forth in this Second Amendment.
Agreement
---------
Tenant and Landlord hereby agree as follows:
1. Deferral of Lease Payments. If Tenant is (a) in monetary default with
respect to (i) any of its leases of assisted living facilities, or (ii) any
Indebtedness of Tenant having a principal amount in excess of $500,000, or (b)
fails to pay on any Dividend Payment Date (as defined in Tenant's Restated
Articles of Incorporation, as amended) the full amount of dividends then accrued
on the Preferred Stock (a "Subordination Event"), then the monthly lease
payments under the Lease will, thereafter and until all Subordination Events
have been cured, be reduced to equal the monthly principal and interest payments
on the loans held by Landlord to finance the facility subject to the Lease plus
reserves for taxes, insurance and replacement and repairs as then in existence
or as required from time-to-time by the lender. The difference between lease
payments due pursuant to the Lease and any reduced lease payments made pursuant
to the preceding sentence will accrue as "Deferred Rent" until all such
Subordination Events have been cured, with interest accruing on such Deferred
Rent at a per annum rate of the greater of (i) twelve percent, or (ii) the prime
rate announced from time to time by U.S. Bank of Oregon plus 300 basis points.
<PAGE>
2. Subordination of Deferred Rent. In connection with any liquidation,
winding up, dissolution or reorganization of Tenant (whether or not in any
bankruptcy, insolvency, reorganization, receivership or other proceeding) or any
other transaction determined to be treated as a liquidation by the holders of
the Preferred Stock pursuant to the provisions of Article II.D, Section 2 of
Tenant's of Tenant's Restated Articles of Incorporation, as amended (a
"Liquidation"), the rights of Landlord to receive the Deferred Rent (including
accrued interest thereon) shall be subordinated to the rights of the holders of
the Preferred Stock to receive the Liquidation Value (as defined in Tenant's
Restated Articles of Amendment, as amended) of the Preferred Stock plus all
accrued and unpaid dividends thereon upon such Liquidation. If in connection
with any Liquidation Landlord receives any portion of the Deferred Rent
(including any accrued interest thereon) prior to the holders of the Preferred
Stock receiving the aggregate Liquidation Value and accrued dividends with
respect to the Preferred Stock, Landlord shall receive such payments in trust
for the benefit of the holders of the Preferred Stock and shall promptly pay
over such amounts to the holders of the Preferred Stock (pro rata among such
holders based upon the number of shares held) until the holders of the Preferred
Stock have received an amount equal to the aggregate Liquidation Value plus all
accrued dividends thereon.
3. Expiration. This Second Amendment shall terminate upon the Second to
occur of (a) there shall be no shares of Preferred Stock outstanding (except to
the extent the provisions of paragraph 2 above are in effect with respect to any
sale, merger or liquidation of Tenant), or (b) there shall be no Subordination
Event that is continuing and Tenant's financial statements delivered pursuant to
the Purchase Agreement show positive EBITDA for two consecutive fiscal quarters
after Tenant has opened 1,000 additional units after the date of this Second
Amendment as determined in accordance with Article II.D, Section 4K of Tenant's
Restated Articles of Incorporation, as amended.
4. Third Party Beneficiary. Tenant and Landlord acknowledge and agree that
Prudential and the holders of the Preferred Stock are third party beneficiaries
of this Second Amendment and that no term of this Second Amendment may be
amended or waived without the prior written consent of the holders of a majority
of the outstanding shares of Preferred Stock and that the holders of outstanding
shares of Preferred Stock shall be entitled to enforce the provisions of this
Second Amendment at law or in equity.
5. Definitions. For the Purposes of this Second Amendment:
"EBITDA" means Tenant's net income for any period, plus the amount of
interest expense, income taxes, depreciation and amortization deducted in
determining such net income, all determined on a consolidated basis in
accordance with generally accepted accounting principles.
"Indebtedness" means indebtedness for borrowed money, indebtedness
evidenced by a note or other instrument, indebtedness for the deferred purchase
price of
<PAGE>
property or services (other than trade payables in the ordinary course of
business), obligations under capitalized leases and indebtedness secured by a
lien on property.
IN WITNESS WHEREOF, the undersigned have executed this Second Amendment as
of the date written above.
LANDLORD: STERLING PARK, LLC
By: WALTER C. BOWEN
-----------------------------------------------
Name: Walter C. Bowen
-----------------------------------------------
Title: Authorized Member
-----------------------------------------------
TENANT: REGENT ASSISTED LIVING, INC.
By: WALTER C. BOWEN
-----------------------------------------------
Name: Walter C. Bowen
-----------------------------------------------
Title: President
-----------------------------------------------
REGENT ASSISTED LIVING, INC.
INDEMNITY AGREEMENT
This Indemnity Agreement is made as of _________________, 199__ by and
between Regent Assisted Living, Inc., an Oregon corporation (the "Company"), and
___________________ ("Indemnitee"), a director of the Company.
RECITALS
A. It is essential to the Company to retain and attract as directors the
most capable persons available.
B. Corporate litigation subjects directors to expensive litigation risks at
the same time that adequate coverage of directors' and officers' liability
insurance may be unavailable.
C. The Restated Articles of Incorporation of the Company (the "Articles")
require indemnification of the directors of the Company to the fullest extent
not prohibited by law. The Articles and the Oregon Business Corporation Act, as
amended (the "Act"), expressly provide that the indemnification provisions set
forth in the Act are not exclusive, and thereby contemplate that contracts may
be entered into between the Company and members of the Board of Directors with
respect to indemnification of directors.
D. Indemnitee does not regard the protection available under the Company's
Articles and insurance adequate in the present circumstances, and may not be
willing to serve as a director without adequate protection, and the Company
desires Indemnitee to serve in such capacity.
AGREEMENT
NOW, THEREFORE, in consideration of the covenants and mutual
agreements set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. Agreement to Serve. Indemnitee agrees to serve or continue to serve as a
director of the Company for so long as Indemnitee is duly elected or appointed
or until such time as Indemnitee tenders a resignation in writing.
2. Definitions. As used in this Agreement:
(a) The term "Proceeding" includes any threatened, pending or
completed action, suit or proceeding, whether brought in the right of the
Company or
<PAGE>
otherwise, whether of a civil, criminal, administrative or investigative nature,
and whether formal or informal, in which Indemnitee may be or may have been
involved as a party or otherwise, by reason of the fact that Indemnitee is or
was a director, officer, employee or agent of the Company, or is or was serving
at the Company's request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, whether or
not serving in that capacity at the time any liability or expense is incurred
for which indemnification or reimbursement can be provided under this Agreement.
(b) The term "Expenses" includes, without limitation, expenses of
investigations, judicial or administrative proceedings or appeals, amounts paid
in settlement by Indemnitee, attorneys' fees and disbursements and any expenses
of establishing a right to indemnification under Section 7 of this Agreement,
but shall not include the amount of judgments or fines against Indemnitee.
(c) References to "other enterprises" include employee benefit plans;
references to "fines" include any excise tax assessed with respect to any
employee benefit plan; references to "serving at the Company's request" include
any service as a director, officer, employee or agent of the Company which
imposes duties on, or involves services by, that director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner reasonably
believed to be in the interest of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Company" as
referred to in this Agreement.
3. Indemnity in Third-Party Proceedings. The Company shall indemnify
Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is
a party to or threatened to be made a party to any Proceeding (other than a
Proceeding by or in the right of the Company to procure a judgment in its favor)
against all Expenses, judgments and fines actually and reasonably incurred by
Indemnitee in connection with the Proceeding, but only if Indemnitee acted in
good faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company and, in the case of a criminal
proceeding, in addition, had no reasonable cause to believe that Indemnitee's
conduct was unlawful. The termination of any such Proceeding by judgment, order
of court, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not, of itself, create a presumption that Indemnitee did not
act in good faith and in a manner which Indemnitee reasonably believed to be in
the best interests of the Company, and with respect to any criminal proceeding,
that Indemnitee had reasonable cause to believe that Indemnitee's conduct was
unlawful.
Pursuant to this Agreement, the Company specifically will, and hereby
does, indemnify, to the fullest extent permitted by law, Indemnitee against any
and all losses, claims, damages, liabilities and expenses, joint or several (or
actions or proceedings, whether commenced or threatened, in respect thereof), to
which Indemnitee
2
<PAGE>
may become subject, as a result of serving as a director of the Company, under
the Securities Act of 1933, as amended, or any other statute or common law,
including any amount paid in settlement of any litigation, commenced or
threatened, and to reimburse Indemnitee for any legal or other expenses incurred
by Indemnitee in connection with investigating any claims and defending any
actions, insofar as any such losses, claims, damages, liabilities, expenses or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact regarding the Company, or the omission or alleged
omission to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
4. Indemnity in Proceedings By or In the Right of the Company. The Company
shall indemnify Indemnitee in accordance with the provisions of this Section 4
if Indemnitee is a party to or threatened to be made a party to any Proceeding
by or in the right of the Company to procure a judgment in its favor against all
Expenses actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of the Proceeding, but only if Indemnitee acted in good
faith and in a manner which Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification for
Expenses shall be made under this Section 4 in respect of any claim, issue or
matter as to which Indemnitee shall have been finally adjudged by a court to be
liable for negligence or misconduct in the performance of Indemnitee's duty to
the Company, unless and only to the extent that any court in which the
Proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
Indemnitee is fairly and reasonably entitled to indemnity.
5. Indemnification of Expenses of Successful Party. Notwithstanding any
other provisions of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise, in defense of any Proceeding or in
defense of any claim, issue or matter therein, including the dismissal of an
action without prejudice, Indemnitee shall be indemnified against all Expenses
incurred in connection therewith.
6. Advances of Expenses. The Expenses incurred by Indemnitee pursuant to
Sections 3, 4 and 8 in any Proceeding shall be paid by the Company in advance
upon Indemnitee's written request, if Indemnitee (i) shall undertake to repay
such amount to the extent it is ultimately determined by a court that Indemnitee
is not entitled to be indemnified by the Company and (ii) shall furnish the
Company a written affirmation of the Indemnitee's good faith belief that
Indemnitee is entitled to be indemnified by the Company under this Agreement.
Such advances shall be made without regard to Indemnitee's ability to repay such
expenses.
7. Right of Indemnitee to Indemnification Upon Application; Procedure Upon
Application. Any indemnification or advances of expenses under Section 3, 4, 6
or 8 shall be made no later than 45 days after receipt of Indemnitee's written
request, unless
3
<PAGE>
a determination is made within that 45-day period by (a) the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties to
such proceeding, or (b) independent legal counsel in a written opinion (which
counsel shall be appointed if a quorum is not obtainable), that the Indemnitee
has not met the relevant standards for indemnification set forth in Section 3, 4
or 8 or an exclusion set forth in Section 9 is applicable.
The right to indemnification or advances of expenses as provided by
this Agreement shall be enforceable by Indemnitee in any court of competent
jurisdiction. The burden of proving that indemnification or advances are not
appropriate shall be on the Company. Neither the failure of the Company
(including its Board of Directors or independent legal counsel) to have made a
determination, before the commencement of such action, that indemnification or
advances are proper in the circumstances because Indemnitee has met the
applicable standard of conduct, nor an actual determination by the Company
(including its Board of Directors or independent legal counsel) that Indemnitee
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that Indemnitee has not met the applicable
standard of conduct. Indemnitee's expenses incurred in connection with
successfully establishing Indemnitee's right to indemnification or advances of
expenses, in whole or in part, in any such Proceeding shall also be indemnified
by the Company.
8. Additional Indemnification.
(a) Notwithstanding any limitation in Section 3 or 4, the Company
shall indemnify Indemnitee in accordance with the provisions of this Section
8(a) to the fullest extent permitted by law if Indemnitee is a party to or
threatened to be made a party to any Proceeding (including a Proceeding by or in
the right of the Company to procure a judgment in its favor) involving a claim
against Indemnitee for breach of fiduciary duty by Indemnitee against all
Expenses, judgments and fines actually and reasonably incurred by Indemnitee in
connection with the Proceeding, provided that no indemnity shall be made under
this Section 8(a) on account of Indemnitee's conduct which constitutes a breach
of Indemnitee's duty of loyalty to the Company or its shareholders, is an act or
omission not in good faith or which involves intentional misconduct or a knowing
violation of the law, or with respect to an unlawful distribution under ORS
60.367.
(b) Notwithstanding any limitation in Section 3, 4 or 8(a), the
Company shall indemnify Indemnitee if Indemnitee is a party to or threatened to
be made a party to any Proceeding (including a Proceeding by or in the right of
the Company to procure a judgment in its favor) against all Expenses, judgments
and fines actually and reasonably incurred by Indemnitee in connection with the
Proceeding to the fullest extent permitted by the Act, including the
nonexclusivity provision of ORS 60.414(1) and any successor provision and
including any amendments to the Act adopted after the date hereof that may
increase the extent to which a corporation may indemnify its directors.
4
<PAGE>
(c) The indemnification provided by this Agreement shall not be deemed
exclusive of any other rights to which Indemnitee may be entitled under the
Articles, Bylaws, any other agreement, any vote of shareholders or directors,
the Act or otherwise, both as to action in Indemnitee's official capacity or as
to action in another capacity while holding that office. The indemnification
under this Agreement shall continue as to Indemnitee even though Indemnitee may
have ceased to be a director and shall inure to the benefit of Indemnitee's
heirs and personal representatives.
9. Exclusions. Notwithstanding any provision in this Agreement, the Company
shall not be obligated to make any indemnification or advances of expenses in
connection with any claim made against Indemnitee:
(a) For which payment is required to be made to or on behalf of
Indemnitee under any insurance policy, except with respect to any excess beyond
the amount of required payment under such policy, unless payment under such
insurance policy is not made after reasonable effort by Indemnitee to obtain
payment. The Company shall be subrogated with respect to any other rights of
Indemnitee with respect to any payment made by the Company or on behalf of the
Company under this Agreement;
(b) For any transaction from which Indemnitee derived an improper
personal benefit; or
(c) For an accounting of profits made from the purchase and sale by
Indemnitee of securities of the Company within the meaning of Section 16(b) of
the Securities Exchange Act of 1934, as amended, or similar provisions of any
state statutory law or common law.
10. Partial Indemnification. If Indemnitee is entitled under any provisions
of this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments and fines actually and reasonably incurred by Indemnitee in
the investigation, defense, appeal or settlement of any Proceeding but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of those Expenses, judgments or fines to which
Indemnitee is entitled.
11. Severability. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee as to Expenses, judgments and
fines with respect to any Proceeding to the full extent permitted by any
applicable portion of this Agreement that shall not have been invalidated or by
any other applicable law.
12. Notices. Indemnitee shall, as a condition precedent to Indemnitee's
right to be indemnified under this Agreement, give the Company written notice as
soon as practicable of any claim made against Indemnitee for which indemnity
will or could be
5
<PAGE>
sought under this Agreement. Notice to the Company shall be directed to Regent
Assisted Living, Inc., 121 S.W. Morrison, Suite 1000, Portland, Oregon 97204,
Attention: Secretary (or such other address as the Company shall designate in
writing to Indemnitee). Notice shall be deemed received three days after the
date postmarked if sent by prepaid mail, properly addressed. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
13. Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns.
14. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute the original.
15. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Oregon.
IN WITNESS WHEREOF, the parties hereby have caused this Agreement to
be duly executed and signed as of the date set forth above.
REGENT ASSISTED LIVING, INC.
By:
---------------------------------------
INDEMNITEE
--------------------------------------------
6
EXHIBIT 21
SUBSIDIARIES
------------
The Regent Northshore House, LLC Oregon
Regent/Rio Rancho, LLC Oregon
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Regent Assisted Living, Inc. on Form S-8 (File No. 333-12157 and File No.
333-12159) of our report, dated March 21, 1997, on our audits of the
consolidated financial statements of Regent Assisted Living, Inc. and subsidiary
as of December 31, 1996 and 1995 and for the years then ended and our report
dated March 8, 1996 on our audit of the combined statements of operations and
cash flows of Regent Assisted Living Group for the year ended December 31, 1995,
which reports are included in this Annual Report on Form 10-KSB for the year
ended December 31, 1996.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
March 28, 1997
POWER OF ATTORNEY
(Annual Report on Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
REGENT ASSISTED LIVING, INC. (the "Company"), does hereby constitute and appoint
Walter C. Bowen, David R. Gibson and Steven L. Gish, and each of them, his true
and lawful attorney and agent to execute in his name the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996 and any amendment thereto
and to file the same with the Securities and Exchange Commission; and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
DATED: March 24, 1997
DANA J. O'BRIEN
---------------------------------
Signature
Dana J. O'Brien
---------------------------------
Type or Print Name
POWER OF ATTORNEY
(Annual Report on Form 10-K)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director of
REGENT ASSISTED LIVING, INC. (the "Company"), does hereby constitute and appoint
Walter C. Bowen, David R. Gibson and Steven L. Gish, and each of them, his true
and lawful attorney and agent to execute in his name the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1996 and any amendment thereto
and to file the same with the Securities and Exchange Commission; and the
undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
DATED: March 24, 1997
MARTHA L. ROBINSON
---------------------------------
Signature
Martha L. Robinson
---------------------------------
Type or Print Name
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEET OF REGENT ASSISTED LIVING, INC., AS OF DECEMBER 31,
1996, AND THE RELATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS IN THE
PERIOD ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,650,817
<SECURITIES> 2,939,448
<RECEIVABLES> 1,326,291
<ALLOWANCES> 27,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,990,704
<PP&E> 17,607,102
<DEPRECIATION> 223,434
<TOTAL-ASSETS> 33,177,684
<CURRENT-LIABILITIES> 2,885,345
<BONDS> 9,760,505
0
9,349,841
<COMMON> 10,808,703
<OTHER-SE> (101,133)
<TOTAL-LIABILITY-AND-EQUITY> 33,177,684
<SALES> 13,088,131
<TOTAL-REVENUES> 13,260,249
<CGS> 8,108,045
<TOTAL-COSTS> 12,945,911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 561,466
<INCOME-PRETAX> 135,095
<INCOME-TAX> 58,400
<INCOME-CONTINUING> 76,695
<DISCONTINUED> 0
<EXTRAORDINARY> 53,097
<CHANGES> 0
<NET-INCOME> 23,598
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
