ALTERNATIVE LIVING SERVICES INC, S-1, 1996-05-28

ALTERNATIVE LIVING SERVICES INC
S-1, 1996-05-28

Previous: AMRESCO RES SC CORP AMR RS SE CP MT LN TR 1996-2, 8-K, 1996-05-28

Next: XIONICS DOCUMENT TECHNOLOGIES INC, S-1, 1996-05-28

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ALTERNATIVE LIVING SERVICES, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 8361 39-1771281
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
450 N. SUNNYSLOPE ROAD WILLIAM F. LASKY
SUITE 300 ALTERNATIVE LIVING SERVICES, INC.
BROOKFIELD, WISCONSIN 53005 450 N. SUNNYSLOPE ROAD, SUITE 300
(414) 789-9565 BROOKFIELD, WISCONSIN 53005
(Address, including zip code, and telephone (414) 789-9565
number, including area code, of (Name, address, including zip code, and
registrant's principal executive offices) telephone number, including area code, of agent
for service)
Copies to:
ALAN C. LEET, ESQ. CHRISTOPHER M. KELLY, ESQ.
ROGERS & HARDIN JONES, DAY, REAVIS & POGUE
2700 CAIN TOWER NORTH POINT
229 PEACHTREE STREET, N.E. 901 LAKESIDE AVENUE
ATLANTA, GEORGIA 30303 CLEVELAND, OHIO 44114
(404) 522-4700 (216) 586-1238
</TABLE>

---------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
---------------------

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement. /
/
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.01 Par Value........... 5,750,000 Shares $17.00 $97,750,000 $33,707
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes 750,000 shares to cover over-allotments, if any.

(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933, as amended.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

ALTERNATIVE LIVING SERVICES, INC.

CROSS REFERENCE SHEET FURNISHED PURSUANT
TO ITEM 501(B) OF REGULATION S-K

<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING PROSPECTUS CAPTION OR PAGE
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Prospectus Summary, Risk Factors
>4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Risk Factors, Underwriting
6. Dilution................................... Dilution
7. Selling Security Holders................... Principal and Selling Stockholders
8. Plan of Distribution....................... Outside Front Cover Page of Prospectus,
Underwriting
9. Description of Securities to be
Registered............................... Description of Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters
11. Information with Respect to the
Registrant............................... Prospectus Summary, Risk Factors, Use of
Proceeds, Dividend Policy,
Capitalization, Pro Forma Financial
Information, Selected Consolidated
Financial Data, Management's Discussion
and Analysis of Financial Condition and
Results of Operations, Business,
Management, History and Organization,
Principal and Selling Stockholders,
Certain Relationships and Related
Transactions, Description of Capital
Stock, Shares Eligible for Future Sale,
Additional Information, Consolidated
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. *
</TABLE>

- ---------------

* Not applicable or answer thereto is negative.
<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 24, 1996
PROSPECTUS

5,000,000 SHARES

[ALTERNATIVE LIVING SERVICES LOGO]

COMMON STOCK
------------------
Of the 5,000,000 shares of Common Stock, no par value (the "Common Stock"),
offered hereby (the "Offering"), 2,187,500 shares of Common Stock are being sold
by Alternative Living Services, Inc. ("ALS" or the "Company"), and 2,812,500
shares of Common Stock are being sold by certain existing stockholders of the
Company (the "Selling Stockholders"). The Company will not receive any proceeds
from the sale of shares by the Selling Stockholders. See "Principal and Selling
Stockholders." Prior to this Offering, there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
will be between $15.00 and $17.00 per share. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price. It
is anticipated that approximately 500,000 shares of Common Stock will be offered
outside of the United States. The Company intends to apply to list the shares of
Common Stock on the American Stock Exchange under the proposed symbol "ALI".
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THE OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- ----------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) Certain Selling Stockholders have granted the Underwriters a 30-day option
to purchase up to an additional 750,000 shares of Common Stock on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Selling Stockholders will be $ , $ , and $ ,
respectively.
------------------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by the Underwriters, and subject to various prior
conditions, including the right to withdraw, cancel or modify the Offering and
to reject orders in whole or in part. It is expected that delivery of stock
certificates will be made in New York, New York on or about , 1996.
------------------
NATWEST SECURITIES LIMITED

MCDONALD & COMPANY
SECURITIES, INC.
THE CHICAGO CORPORATION
The date of this Prospectus is , 1996
<PAGE> 4

[GRAPHIC/MAP SHOWING ALS RESIDENCES;
PHOTOGRAPHS ILLUSTRATING CLARE BRIDGE(SM),
WYNWOOD(SM), WOVENHEARTS(R) AND CROSSINGS(R) RESIDENCES MODELS]

---------------------

Crossings(R) and WovenHearts(R) are registered service marks of the Company
and the Company claims service mark protection in the marks Wynwood (SM) and
Clare Bridge (SM).

---------------------

FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby
may not be offered or sold in the United Kingdom other than to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments, whether as principal or agent (except in circumstances that do not
constitute an offer to the public within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986), and this
Prospectus may only be issued or passed on to any person in the United Kingdom
if that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or a person to whom
this Prospectus may otherwise lawfully be passed on.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, financial statements, including the notes thereto, and pro forma
financial information appearing elsewhere in this Prospectus. Unless the context
otherwise requires, references made to the "Company" or "ALS" shall mean
Alternative Living Services, Inc., its "Predecessor," as described in the Notes
to Summary Consolidated Financial and Operating Data, and its subsidiaries.
Unless otherwise indicated, all share and per share data (i) assumes the
Underwriters' over-allotment option will not be exercised and (ii) gives effect
to the 1,812.55 for one stock split with respect to the Common Stock effected on
May 17, 1996 (the "Stock Split").

THE COMPANY

Alternative Living Services, Inc. is a leading national assisted living
company operating 57 residences with an aggregate capacity of approximately
2,500 residents. Of these total residences, the Company owns 18, leases 23,
holds equity interests in and operates seven and manages an additional nine. The
Company provides a full range of assisted living services in its residences for
the frail elderly and free-standing specialty care residences for individuals
with Alzheimer's disease and other dementias. ALS and its predecessor have
operated assisted living residences since 1981 including specialty dementia care
residences since 1985. The Company believes it is one of the leading operators
of free-standing dementia care residences, a growing niche within the larger
assisted living industry.

The Company provides a broad continuum of personal care (such as assistance
with bathing, toileting, dressing, eating and ambulation), support services
(such as housekeeping, laundry and transportation) and health care (such as
medication administration and health monitoring) to its residents. In addition,
the Company offers a wide range of specialized services, including behavior
management and environmental adaptation programs, to residents who suffer from
Alzheimer's disease and other dementias. All of these services are provided on a
24-hour basis in "home-like" settings which emphasize privacy, individual choice
and independence. The Company operates four distinct assisted living product
lines, each serving a particular segment of the private pay elderly population.
Each assisted living product line is designed to permit residents to age in
place by meeting their personal and health care needs across a range of pricing
options.

- Clare Bridge -- These specially designed free-standing residences serve
the programmatic needs of individuals with Alzheimer's disease and other
dementias. This upper-income model accommodates 24 to 52 residents and is
primarily located in metropolitan and suburban markets. The average amount
paid by residents for the month of March 1996 was approximately $3,090 (or
$103 per day).

- Wynwood -- Designed to serve primarily upper-income frail elderly
individuals, these larger, multi-story residences are typically located in
metropolitan and suburban markets. The capacity of this model ranges from
50 to 90 residents. The average amount paid by residents for the month of
March 1996 was approximately $2,530 (or $84 per day).

- Crossings -- These residences provide supportive services and personal
care to elderly individuals in apartment-style settings. This model
typically accommodates 50 to 100 residents and is generally located in
metropolitan areas. The average monthly amount paid by residents for the
month of March 1996 was approximately $1,600 (or $53 per day).

- WovenHearts -- These smaller residences serve primarily moderate-income
frail elderly individuals. This model has a capacity of 20 to 30 residents
and is primarily located in smaller communities and rural markets. The
average monthly amount paid by residents for the month of March 1996 was
approximately $1,560 (or $52 per day).

3
<PAGE> 6

the Company acquired Heartland Retirement Services, Inc. ("Heartland"), an
assisted living company which operated 20 WovenHearts residences throughout
Wisconsin. As a result of this transaction, the Company has broadened its range
of assisted living product lines to serve frail elderly individuals in moderate
income markets and rural communities. In further support of its growth strategy,
the Company is currently negotiating for financing commitments aggregating up to
approximately $300 million to develop, construct and permanently finance
assisted living residences.

The Company's management team has extensive operational and strategic
experience in the health care industry. The Company's President and Chief
Executive Officer, William F. Lasky, founded the Company's predecessor and has
been actively involved in the assisted living industry for over 15 years. Mr.
Lasky currently serves as Chairman of the Assisted Living Facilities Association
of America ("ALFAA"), the nation's largest dedicated assisted living trade
organization. The Company's Chairman, William G. Petty, Jr., has held senior
management positions and has managed strategic investments in companies in the
long-term care, assisted living and senior living industries. Mr. Petty served
as the Chairman, Chief Executive Officer and President of Evergreen Healthcare,
Inc. ("Evergreen"), a NYSE-listed operator of long-term care facilities, from
June 1993 until July 1995, when Evergreen merged with GranCare, Inc.
("GranCare"), for which he now serves as Vice Chairman. See "Management."

The assisted living industry is a rapidly growing segment within the long
term care industry. The Company's target market, which consists of seniors age
75 and older, is one of the fastest growing segments of the United States
population. According to the United States Census Bureau, this age group is
expected to grow by 33.5% between 1990 and 2000. The Company believes that the
market for assisted living services, including dementia care services, will
continue to grow due to (i) the aging of the U.S. population, (ii) rising public
and private cost containment pressures, (iii) declining availability of
traditional nursing home beds given nursing home operators' increasing focus on
higher acuity patients, (iv) quality of life advantages of assisted living
residences over traditional skilled nursing homes and (v) the decreasing
availability of family care as an option for elderly family members. The Company
believes that it is well positioned to capitalize on these trends given its
growth and operating strategies and its extensive experience in the assisted
living industry.

THE OFFERING

Common Stock offered by:

The Company............................... 2,187,500 shares

The Selling Stockholders.................. 2,812,500 shares(1)

Total Common Stock offered.............. 5,000,000 shares

Common Stock to be outstanding after the
Offering.................................. 11,710,849 shares(2)

Use of proceeds to the Company............ For repayment of $18.9 million of
indebtedness and accrued
interest, including $8.7 million
in bridge financing provided by
an affiliate in connection with
the Heartland acquisition, for
the development, construction and
possible acquisition of assisted
living residences and for general
corporate purposes, including
working capital. See "Use of
Proceeds."

Proposed American Stock Exchange Symbol
("AMEX")................................ ALI
- ---------------

(1) In the event the overallotment option is exercised in full, an additional
750,000 shares will be sold by the Selling Stockholders.
(2) Excludes 789,149 shares of Common Stock issuable upon the exercise of
currently outstanding options to purchase Common Stock, including options
granted under the Company's 1995 Incentive Compensation Plan (the "1995
Plan"). See "Capitalization" and "Management."

4
<PAGE> 7

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

The following summary consolidated financial and operating data of the
Company is qualified in its entirety by the more detailed information in the
financial statements (including the related notes), and the pro forma financial
information appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ------------------------------------------
PRO FORMA PRO FORMA
PRO FORMA AS ADJUSTED PRO FORMA AS ADJUSTED
1993(1) 1994 1995 1995(2) 1995(2)(3) 1995 1996(4) 1996(5) 1996(3)
------- ------ ------- --------- ----------- ------ ------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:

Operating revenue.............. $2,788 $4,957 $10,464 $38,153 $38,153 $2,081 $ 4,325 $11,609 $11,609
Operating loss................. (124) (390) (1,046) (3,476) (3,476) (420) (1,352) (1,343) (1,343)
Interest expense, net.......... (56) (301) (812) (2,537) (801) (180) (391) (692) (155)
Equity in income (losses) of
unconsolidated affiliates.... -- (1) (438) (47) (47) 39 (85) (28) (28)
Minority interest in losses of
consolidated subsidiaries.... -- 49 112 125 125 23 45 45 45
Net loss before extraordinary
items........................ $ (180) $ (643) $(1,746) $(5,463) $(3,728) $ (538) $(1,804) $(2,030) $(1,493)
====== ====== ======= ======= ======= ====== ======= ====== =======
Net loss....................... $ (180) $ (643) $(1,746) $ (538) $(1,804)
====== ====== ======= ====== =======
Net loss before extraordinary
items per share.............. $ -- $(0.25) $ (0.32) $ (0.69) $ (0.37) $(0.21) $ (0.24) (0.21) $ (0.12)
====== ====== ======= ======= ======= ====== ======= ====== =======
Net loss per share............. $(0.25) $ (0.32) $(0.21) $ (0.24)
====== ======= ====== =======
Weighted average shares
outstanding.................. 2,549 5,453 7,894 10,081 2,549 7,650 9,830 12,017
====== ======= ======= ======= ====== ======= ====== =======
OTHER OPERATING DATA (END OF PERIOD):
Number of residences(6)........ 12 13 19 52 15 42 57
Total resident capacity(6)..... 160 340 616 2,368 474 1,081 2,502
</TABLE>

<TABLE>
<CAPTION>
AT MARCH 31, 1996
---------------------------------------
PRO FORMA AS
BALANCE SHEET DATA: ACTUAL PRO FORMA(5) ADJUSTED(3)(5)
------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents...................................................... $ 6,816 $ 10,449 $ 22,749
Working capital (deficit)...................................................... 5,672 (4,537) 17,291
Total assets................................................................... 53,824 92,227 104,527
Long term debt, less current installments...................................... 30,632 30,747 22,075
Stockholders' equity........................................................... 19,350 32,131 62,631
</TABLE>

- ---------------

(1) The Company was organized December 14, 1993. In connection with the initial
capitalization of the Company, substantially all of the assets of two
operating companies were contributed to the Company (collectively referred
to herein as the "Predecessor"). For purposes of this summary financial
data, amounts for the year ended December 31, 1993 represent the sum of: (i)
the results of operations of the Predecessor for the period from January 1,
1993 through December 13, 1993; and (ii) the results of operations of the
Company for the period from December 14, 1993 through December 31, 1993. See
"History and Organization -- The Company and its Predecessor."
(2) Gives effect to the following transactions (collectively, the "1996
Transactions") as if such transactions had occurred on January 1, 1995 with
respect to statement of operations and operating data for the year ended
December 31, 1995: (a) the January 1996 acquisition by the Company
(effective as of January 1, 1996) of all outstanding shares of common stock
of Heartland for cash and shares of Common Stock; (b) the January 1996 sale
and leaseback of two of the Company's residences; (c) the May 1996 private
placement of shares of Common Stock; (d) the May 1996 acquisition of the
remaining general and limited partnership interests not owned by the Company
in various partnerships comprising the operations of ALS-Midwest (as defined
herein) for a combination of cash, notes and shares of Common Stock; and (e)
the May 1996 merger with Crossings pursuant to which all outstanding capital
stock of Crossings was exchanged for shares of Common Stock. See "Pro Forma
Financial Information."
(3) Gives effect to the sale by the Company of 2,187,500 shares of Common Stock
(assuming an initial public offering price of $16.00 and the application of
the net proceeds therefrom), as if such transaction had occurred on January
1, 1995 and 1996 with respect to statement of operations for the year ended
December 31, 1995 and for the quarter ended March 31, 1996, respectively,
and as of March 31, 1996 with respect to the balance sheet data. See "Pro
Forma Financial Information" and "Use of Proceeds."
(4) The results of the Company for the three months ended March 31, 1996 include
the operations of Heartland, which was acquired effective as of January 1,
1996. See "History and Organization -- Acquisition of Heartland Retirement
Services, Inc."

5
<PAGE> 8

(5) Gives effect to (a) the May 1996 private placement of shares of Common
Stock; (b) the May 1996 acquisition of the remaining general and limited
partnership interests not owned by the Company in various partnerships
comprising the operations of ALS-Midwest for a combination of cash, notes
and shares of Common Stock; and (c) the May 1996 merger with Crossings
pursuant to which all outstanding capital stock of Crossings was exchanged
for shares of Common Stock, as if such transactions had occurred on January
1, 1996 with respect to statement of operations for the quarter ended March
31, 1996, and as of March 31, 1996 with respect to the balance sheet data.
(6) Includes residences which the Company owns, leases, holds equity interests
in and manages.

6
<PAGE> 9

RISK FACTORS

Potential investors should consider carefully the following factors, as
well as the more detailed information contained elsewhere in this Prospectus,
before making a decision to invest in the Common Stock offered hereby.

HISTORY OF, AND ANTICIPATED, OPERATING LOSSES

The Company has experienced significant operating losses and net losses in
each year since inception, primarily as a result of the Company's development,
construction and residence lease-up activities as well as the incurrence of
certain expenses to establish its corporate infrastructure to support future
planned growth. For the years ended December 31, 1993, 1994 and 1995, the
Company incurred operating losses of $124,000, $390,000 and $1.0 million,
respectively, and net losses of $180,000, $643,000 and $1.7 million,
respectively. For the three months ended March 31, 1996, the Company incurred an
operating loss and net loss of $1.4 million and $1.8 million, respectively.
After giving effect to the 1996 Transactions, for the year ended December 31,
1995 and the three months ended March 31, 1996, the Company incurred operating
losses of $3.5 million and $1.3 million, respectively, and losses before
extraordinary items of $5.4 million and $2.0 million, respectively. See "History
and Organization" and "Pro Forma Financial Information."

Newly opened assisted living residences typically operate at a loss during
the first six to 12 months of operation, primarily due to the incurrence of
certain fixed and variable expenses in advance of the achievement of targeted
rent and service fee revenues from the lease-up of such residences. In addition,
the development and construction of assisted living residences involve the
commitment of substantial capital over a typical six to 12 month construction
period, the consequence of which may be an adverse impact on the Company's
liquidity. In the case of acquired residences, resident turnover and increased
marketing expenditures which may be required to reposition such residences,
together with the possible disruption of operations resulting from the
implementation of renovations, may adversely impact the financial performance of
such residences for a period of time after their acquisition.

The Company plans to use approximately $11.6 million of the estimated net
proceeds of the Offering to develop, construct and, to the extent opportunities
are available, acquire additional assisted living residences. See "Use of
Proceeds." Principally as a result of the Company's development and construction
activities, the Company anticipates that it will incur additional operating
losses for at least the next 12 to 18 months as the operating expenses
associated with developing and operating new residences and supporting its
corporate infrastructure necessary to manage the Company's growth strategy will
be only partially offset by operating profits generated by stabilized
residences. There can be no assurance, however, that the Company will achieve
profitability or that the Company will not experience unforeseen expenses,
difficulties, complications and delays which could result in greater than
anticipated operating losses or otherwise materially adversely affect the
Company's financial condition and results of operations. See "-- Development and
Construction Risks," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," and "Business -- Business Strategy."

ABILITY TO CONTINUE GROWTH; ABILITY TO MANAGE RAPID EXPANSION

The Company has and expects to continue to pursue an aggressive expansion
strategy focused on developing, constructing and acquiring assisted living
residences. The Company's prospects are directly affected by its ability to
develop, construct and, to a lesser extent, acquire additional residences. The
Company's ability to continue to grow will depend in large part on its ability
to identify suitable and affordable development and acquisition opportunities
and successfully pursue such opportunities, identify and obtain necessary
financing commitments and effectively operate its assisted living residences.
There can be no assurance, however, that the Company will be successful in
developing, constructing or acquiring any additional residences or that it will
be able to continue to achieve or exceed its historical growth rate.

The Company's rapid expansion places significant demands on the Company's
management and operating personnel. The Company's ability to manage its recent
and future growth effectively will require it to continue to improve its
operational, financial and management information systems and to continue to
attract,

7
<PAGE> 10

retain, train, motivate and manage key employees. If the Company is unable to
manage its growth effectively, its business, operating results and financial
condition will be adversely affected. See "Business -- Business Strategy" and
"Management -- Executive Officers and Directors."

DEVELOPMENT AND CONSTRUCTION RISKS

The Company's growth strategy is dependent, in part, on its ability to
develop and construct a significant number of additional residences. Currently,
the Company has 18 residences under construction and 25 residences under
development. The Company expects to open 21 of these residences during 1996.
Development projects generally are subject to various risks, including zoning,
permitting, health care licensing and construction delays, that may result in
construction cost overruns and longer development periods and, accordingly,
higher than anticipated start-up losses. Although the Company has extensive
development experience, closely manages each development project and regularly
monitors the general contractors constructing the Company's residences, project
management is subject to a number of contingencies over which the Company will
have little or no control and which might adversely affect project costs and
completion time. Such contingencies include shortages of, or the inability to
obtain, labor or materials, the inability of the general contractor or
subcontractors to perform under their contracts, strikes, adverse weather
conditions and changes in applicable laws or regulations or in the method of
applying such laws and regulations. As a result of these various factors, there
can be no assurance that the Company will not experience construction delays,
that it will be successful in developing and constructing currently planned or
additional residences or that any developed residence will be economically
successful. If the Company's planned development is delayed, the Company's
business, operating results and financial condition could be adversely affected.
See "Business -- Business Strategy" and "-- Properties."

RISKS ASSOCIATED WITH ACQUISITIONS

The Company has acquired a total of 37 residences, both on an individual
basis and as part of multi-residence acquisitions. Although the Company intends
to continue to seek acquisition opportunities, no assurances can be made that
the Company will be successful in identifying any future acquisition
opportunities or completing any identified acquisitions. The acquisition of
residences involves a number of risks. Existing residences available for
acquisition frequently serve or target different market segments than those
presently served by the Company. It may be necessary in such cases to reposition
and renovate acquired residences or turn over the existing resident population
to achieve a resident acuity and income profile which is consistent with the
Company's current operations. In addition, the Company may also determine that
staff and operating management personnel changes are necessary to successfully
integrate such residences into the Company's existing operations. No assurances
can be made that management will be successful in repositioning any acquired
residences or in effecting any necessary operational or structural changes and
improvements on a timely basis. Any failure by the Company to make necessary
operational or structural changes or to successfully reposition acquired
residences may adversely impact the Company's business, operating results and
financial condition. In undertaking acquisitions of residences, the Company also
may be adversely impacted by unforeseen liabilities attributable to the prior
operators of such residences, against whom the Company may have little or no
recourse. See "Business -- Business Strategy."

DIFFICULTIES ASSOCIATED WITH INTEGRATING THE OPERATIONS OF CROSSINGS AND
HEARTLAND

Since January 1996, the Company has completed two significant transactions
pursuant to which the Company added a total of 35 additional residences. In May
1996, the Company merged with Crossings, which operated 15 residences with an
aggregate capacity of approximately 1,420 residents. In addition, in January
1996 the Company completed the acquisition of Heartland, which operated 20
assisted living residences. On a pro forma basis, after giving effect to the
1996 Transactions, the Company would have reported operating revenue of $38.2
million and a loss before extraordinary items of $5.4 million in 1995 as
compared to operating revenue of $10.5 million and a net loss before
extraordinary items of $1.7 million on a historical basis.

The Company believes that it can successfully integrate and manage the
operations of Crossings and Heartland, as well as achieve certain economies of
scale. However, because of the inherent uncertainties

8
<PAGE> 11

associated with efforts to integrate and manage the operations of the three
companies, there can be no assurance that the Company will be successful in such
integration and management, that any cost savings or operating synergies will be
realized, or that there will not be offsetting increases in other expenses or
other charges to earnings resulting from the combined operations. The Company
expects to establish a reserve for severance and other non-recurring charges
expected to be incurred in connection with the merger and integration of
Crossings' operations. While the Company has no current plans, it may also elect
to dispose of certain of its residences and may as a result incur further
non-recurring expenses.

DISCRETIONARY USE OF PROCEEDS

The Company will have broad discretion in using the net proceeds received
by the Company from the Offering. While $18.9 million of the net proceeds
received by the Company will be used for debt retirement, the Company expects to
use a substantial portion of the $11.6 million of remaining net proceeds to
develop and construct additional residences. While the Company currently has 18
residences under construction and 25 residences under development, the Company
will have broad discretion in modifying its current construction and development
plan, selecting and developing future sites, acquiring additional residences and
otherwise using the net proceeds of the Offering. See "Use of Proceeds" and
"Business -- Properties."

NEED FOR ADDITIONAL FINANCING; RISK OF RISING INTEREST RATES

The Company expects that cash on hand, the net proceeds of the Offering and
additional construction and sale/leaseback financing will be sufficient to fund
its current development and construction program, as well as the anticipated
operating losses, for at least the next 18 months, including the 43 residences
currently under construction or under development, 21 of which are scheduled to
open during 1996. There can be no assurance, however, that the Company will not
be required to seek additional debt or equity capital earlier or that
sale/leaseback financing will be available on terms acceptable to the Company.
In addition, the Company may require additional financing to enable it to
acquire additional residences, to respond to changing economic conditions, to
effect further expansion of the Company's development program or to account for
changes in assumptions related to its development program. See
"Business Properties." Increases in prevailing interest rates could increase
the cost of sale/leaseback financings or other borrowings.

Even if the net proceeds of the Offering are sufficient to fund the
Company's activities during such 18-month period, the Company will require
sufficient financial resources in the future to meet its operating and working
capital needs and to fund future development and construction activities and, to
the extent opportunities arise, acquisition activities. The Company expects
negative cash flow to continue for at least the next 12 to 18 months as it
continues to develop and construct assisted living residences. There can be no
assurance that any newly constructed residences will achieve a stabilized
occupancy rate and attain a resident mix that meet the Company's expectations or
generate sufficient positive cash flow to cover operating and financing costs
associated with such residences. The Company will, from time to time, seek
additional funding through public or private financing, including equity or debt
financing. If additional funds are raised through equity offerings, stockholders
may experience further dilution. See "Dilution." There can be no assurance,
however, that adequate equity, debt or sale/leaseback financing will be
available as needed or on terms acceptable to the Company. A lack of available
funds may require the Company to delay, reduce or eliminate all or some if its
future development, construction or acquisition activities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS

As of March 31, 1996, on a pro forma basis to give effect to the 1996
Transactions and as adjusted to give effect to the application of the net
proceeds of the Offering, the Company's long-term debt would have been $22.1
million. On a pro forma basis to give effect to the 1996 Transactions, the
Company would have had lease expense for the year ended December 31, 1995 of
$8.9 million. Long-term debt and annual operating lease payment obligations will
increase significantly as the Company pursues its growth strategy. In addition,
the Company anticipates that future development of residences may be financed
with construction loans and, therefore, there is a risk that, upon completion of
construction, permanent financing for newly developed

9
<PAGE> 12

residences may not be available or may be available only on terms that are
unfavorable or unacceptable to the Company. There can be no assurance that the
Company will generate sufficient cash flow to meet its obligations. Failure to
meet these obligations may result in the Company being in default under its
financing agreements or leases and, as a consequence, the Company may lose its
ability to operate any individual residence or any group of residences which is
cross-defaulted or cross-collateralized. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Business
Strategy."

DEPENDENCE ON SENIOR MANAGEMENT

The Company depends, and will continue to depend, upon the services of
William F. Lasky, the Company's President and Chief Executive Officer, William
G. Petty, Jr., the Company's Chairman of the Board, and the Company's other
executive officers. Mr. Lasky is subject to the terms of an employment agreement
with the Company which terminates in 1997 and prohibits Mr. Lasky from competing
with the Company within specified geographic areas for a period of 18 months
following the termination of his employment. The Company intends to purchase
"keyman" life insurance on Mr. Lasky in the amount of $2.0 million. Mr. Petty is
a party to a services agreement pursuant to which he has agreed to provide
management, financial and strategic planning services to the Company through
April 1998. However, Mr. Petty is not bound by any noncompetition agreement. Mr.
Petty is a principal of Beecken, Petty & Company, L.L.C., a company formed to
serve as general partner of a health care investment fund to be formed in 1996
to make privately negotiated equity or equity-related investments in growth
companies in the health care service industry (the "Fund"). Upon formation of
the Fund (expected in the summer of 1996), it is expected that Mr. Petty will
devote a substantial portion of his business time and energy to the business and
affairs of the Fund. Certain, but not all, of the Company's other executive
officers are parties to employment agreements with the Company containing
noncompete provisions. However, none of such employment agreements (and none of
the noncompete provisions contained therein) provide the Company with assurances
that such executive officers will remain with the Company. The loss of the
services of any such executive officers could have a material adverse effect on
the Company's financial condition or results of operations. See "Management."

POTENTIAL CONFLICTS OF INTEREST OF CERTAIN EXECUTIVE OFFICERS AND DIRECTORS

Mr. Lasky, Douglas A. Hennig, the Company's Senior Vice President, and
Richard W. Boehlke, the Company's Vice Chairman, each owns interests in assisted
living residences operated by the Company pursuant to management agreements or,
in the case of Mr. Boehlke, pursuant to a long-term lease. On a pro forma basis
giving effect to the 1996 Transactions, revenues attributable to these
residences represented less than 5.0% of operating revenue for the year ended
December 31, 1995. These agreements are on terms which the Company believes are
fair and, in the case of the management agreements, the Company has the right to
terminate such agreements, in its sole discretion, at least on an annual basis.
However, such ownership interests of Messrs. Lasky, Hennig and Boehlke may
create actual or potential conflicts of interest on the part of these officers.
See "Management -- Executive Officers and Directors" and "Certain Relationships
and Related Transactions."

In addition, Mr. Petty also serves as the Vice Chairman of GranCare, a
publicly-owned operator of skilled nursing facilities and institutional
pharmacies, which also operates four assisted living residences. The Company
understands that GranCare may develop or acquire additional assisted living
facilities in the future which may compete directly with the Company's
residences. GranCare currently owns 19.9% of the outstanding shares of Common
Stock, all of which shares are expected to be sold in the Offering. Gene E.
Burleson, a director of the Company, is Chairman of the Board and Chief
Executive Officer of GranCare. Ronald G. Kenny, a director of the Company, is
also a director of GranCare. In addition, Messrs. Burleson, Petty and Kenny and
their affiliates are shareholders of GranCare. These relationships with, and
ownership interests in, GranCare may create actual or potential conflicts of
interests. See "Management -- Executive Officers and Directors," "Principal and
Selling Stockholders" and "Certain Relationships and Related Transactions."

10
<PAGE> 13

SUBSTANTIAL PORTION OF THE OFFERING TO BENEFIT AFFILIATES OF THE COMPANY

The Selling Stockholders, which include GranCare, Capital Consultants, Inc.
("CCI") and Heartland Development Corporation ("HDC") will receive approximately
$41.9 million (assuming an initial public offering price of $16.00 per share,
after deducting underwriting discounts and commissions) for the shares of Common
Stock to be sold by them in the Offering. If the over-allotment option is fully
exercised, the members of Alternative Living Investors, L.L.C. ("ALI"), CCI and
Care Living Centers, Inc. ("CLC") will receive an aggregate amount of $11.2
million. The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Stockholders. In addition, approximately
$8.7 million of the net proceeds to the Company of the Offering will be used to
retire a bridge loan provided to the Company by RDV Capital Management L.P. in
connection with the Heartland acquisition. Jerry Tubergen, a director of the
Company, serves as President of RDV Corporation, the general partner of RDV
Capital Management L.P. See "Use of Proceeds," "Principal and Selling
Stockholders" and "Certain Relationships and Related Transactions."

GEOGRAPHIC CONCENTRATION

On a pro forma basis, giving effect to the 1996 Transactions, operations in
Wisconsin, Oregon and Colorado would have accounted for approximately 58.5% of
total operating revenue for the three months ended March 31, 1996. Although the
Company believes that this concentration provides operational advantages and
efficiencies, the Company's business prospects are significantly affected by
general economic factors affecting such areas and the laws and regulatory
environment of such states. In addition, the Company's growth strategy involves
the development and acquisition of residences within a concentrated area in each
geographic region into which it expands. Therefore, even if the Company is able
to expand into other geographic regions, its prospects may become significantly
affected by general economic factors affecting such local areas and by
applicable local laws and regulatory environments in such regions. See
"Business -- Properties."

RESIDENCE MANAGEMENT, STAFFING AND LABOR COSTS

The Company competes with other providers of long-term care with respect to
attracting and retaining qualified and skilled personnel. The Company is
dependent upon its ability to attract and retain management personnel
responsible for the day-to-day operations of each of the Company's residences.
Any inability of the Company to attract or retain qualified residence management
personnel could have a material adverse effect on the Company's financial
condition or results of operations. In addition, a possible shortage of nurses
or trained personnel may require the Company to enhance its wage and benefits
package in order to compete in the hiring and retention of such personnel. The
Company will also be dependent upon the available labor pool of semi-skilled and
unskilled employees in each of the markets in which it operates. No assurance
can be given that the Company's labor costs will not increase, or that, if they
do increase, they can be matched by corresponding increases in rates charged to
residents. Any significant failure by the Company to attract and retain
qualified management and staff personnel, to control its labor costs or to pass
on any increased labor costs to residents through rate increases would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Competition."

COMPETITION

11
<PAGE> 14

increased competition will not adversely affect the Company's ability to attract
or retain residents or maintain its existing rate structures. Moreover, in
implementing its growth strategy, the Company expects to face competition for
development and acquisition opportunities from local developers and regional and
national assisted living companies. Some of the Company's present and potential
competitors have, or may have access to, greater financial resources than those
of the Company. Consequently, there can be no assurance that the Company will
not encounter increased competition in the future which could limit its ability
to attract and retain residents, to maintain or increase resident service fees
or to expand its business and could have a material adverse effect on the
Company's financial condition, results of operations and prospects. See
"Business -- Competition."

JOINT VENTURES

The Company has entered into several joint ventures with regional real
estate development partners for the construction, development and ownership of
assisted living residences in targeted geographic areas. There can be no
assurance that the Company's joint venture partners will be successful in
identifying sites for future residences, securing necessary permits and licenses
for the construction of new residences and supervising the construction of new
residences on time and within budget. In addition, the Company has agreed not to
own or operate competing assisted living residences within specified geographic
areas adjacent to residences developed through joint ventures. While the Company
typically receives a fee for managing residences developed through joint
ventures, the Company shares with the other joint venture partners certain
decision-making authority as well as any profits or losses realized from the
operation or sale of such residences. The Company is obligated under certain of
its joint venture arrangements to purchase the equity interests of its joint
venture partners upon the election of such joint venture partners at a price
based on the appraised value of the residence owned by the applicable joint
venture. Pursuant to those provisions, the Company might become obligated to
acquire additional interests in residences developed through joint ventures on
terms or at times that would otherwise not be acceptable to the Company,
including times during which the Company may not have adequate liquidity to fund
such acquisitions. See "Business -- Joint Ventures and Strategic Alliances."

GOVERNMENT REGULATION

Health care is an area of extensive and frequent regulatory change. The
assisted living industry is relatively new, and, accordingly, the manner and
extent to which it is regulated at the Federal and state levels is evolving.
Changes in the laws or new interpretations of existing laws may have a
significant impact on the Company's methods and costs of doing business. The
Company is, and will be, subject to varying degrees of regulation and licensing
by health or social service agencies and other regulatory authorities in the
various states and localities where it operates or intends to operate.

The Company's success will depend in part upon its ability to satisfy
applicable regulations and requirements and to procure and maintain required
licenses in rapidly changing regulatory environments. Any failure to satisfy
applicable regulations or to procure or maintain a required license could have a
material adverse effect on the Company's financial condition, results of
operations and prospects. The Company's operations could also be adversely
affected by, among other things, regulatory developments such as revisions in
building code requirements for assisted living residences, mandatory increases
in the scope and quality of care to be offered to residents and revisions in
licensing and certification standards. There can be no assurance that Federal,
state or local laws or regulations will not be imposed or expanded which
adversely impact the Company's business, financial condition, results of
operations or prospects. The Company's residence operations are also subject to
health and other state and local government regulations.

Pursuant to recently adopted Wisconsin legislation, effective on July 1,
1996 only certain independent apartment model assisted living facilities may be
designated as an "assisted living facility" in the State of Wisconsin. Most of
the Company's residences located in Wisconsin would not meet the definitional
requirements of this statute. As this legislation is not yet effective, its
scope and application are still uncertain. If the Company is ultimately
compelled to discontinue any reference to the generic term "assisted living" in
its sales and marketing materials for its Wisconsin residences, such compliance
could have a material adverse

12
<PAGE> 15

effect on the Company's business, results of operation or financial condition.
See "Business -- Government Regulation."

LIABILITY AND INSURANCE

The provision of personal and health care services entails an inherent risk
of liability. In recent years, participants in the long-term care industry have
become subject to an increasing number of lawsuits alleging malpractice or
related legal theories, many of which involve large claims and result in the
incurrence of significant defense costs. In addition, compared to more
institutional long-term care facilities, assisted living residences (especially
dementia care residences) of the type operated by the Company offer residents a
greater degree of independence in their daily lives. This increased level of
independence, however, may subject the resident and the Company to certain risks
that would be reduced in more institutionalized settings. The Company currently
maintains liability insurance intended to cover such claims which it believes is
adequate based on the nature of the risks, its historical experience and
industry standards. There can be no assurance, however, that claims in excess of
the Company's insurance or claims not covered by the Company's insurance, such
as claims for punitive damages, will not arise. A successful claim against the
Company not covered by, or in excess of, the Company's insurance could have a
material adverse effect upon the Company's financial condition and results of
operations. Claims against the Company, regardless of their merit or eventual
outcome, may also have a material adverse effect upon the Company's ability to
attract or retain residents or expand its business and may require management to
devote substantial time to matters unrelated to the Company's operations. In
addition, the Company's insurance policies must be renewed annually. There can
be no assurance that the Company will be able to obtain liability insurance in
the future or that, if such insurance is available, it will be available on
acceptable economic terms. See "Business -- Insurance."

DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY

The Company currently relies, and for the foreseeable future expects to
rely, primarily on the ability of its residents to pay for the Company's
services from their own and their families' financial resources. Generally, only
elderly adults with income or assets meeting or exceeding the comparable median
in the region where the Company's assisted living residences are located can
afford the Company's fees for its residences. Inflation or other circumstances
which adversely affect the ability of residents and potential residents to pay
for assisted living services could have an adverse effect on the Company. In the
event that the Company encounters difficulty in attracting seniors with adequate
resources to pay for the Company's services, the Company would be adversely
affected.

ENVIRONMENTAL LIABILITY RISKS ASSOCIATED WITH REAL PROPERTY

Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs incurred by such parties in connection with the contamination. Such
laws typically impose clean up responsibility and liability without regard to
whether the owner knew of or caused the presence of the contaminants, and
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate such property, may adversely affect the owner's
ability to sell or lease such property or to borrow using such property as
collateral. In addition, some environmental laws create a lien on the
contaminated site in favor of the government for damages and costs it incurs in
connection with the contamination. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at the disposal or treatment facility,
whether or not such facility is owned or operated by such person. Finally, the
owner of a site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from a
site.

13
<PAGE> 16

The Company has conducted environmental assessments of all of its operating
residences and has conducted, or is in the process of conducting, environmental
assessments of all of its undeveloped sites and sites currently under
construction. These assessments have not revealed, and the Company is not
otherwise aware of, any environmental liability that it believes would have a
material adverse effect on the Company's business, assets or results of
operations. There can be no assurance, however, that environmental assessments
would detect all environmental contamination which may give rise to material
environmental liabilities. The Company believes that its residences are in
compliance in all material respects with all Federal, state and local laws,
ordinances and regulations regarding hazardous or toxic substances or petroleum
products. The Company has not been notified by any governmental authority, and
is not otherwise aware, of any material non-compliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the residences it currently operates.

CONTROL BY OFFICERS AND DIRECTORS

Upon completion of the Offering, the Company's officers and directors and
entities with which they are affiliated will continue to beneficially own
approximately 27.0% of the outstanding shares of Common Stock. Accordingly,
following the Offering, such individuals will have the ability, by voting their
shares in concert, to significantly influence (i) the election of the Company's
Board of Directors and, thus, the direction and future operations of the
Company, and (ii) the outcome of all other matters submitted to the Company's
stockholders, including mergers, consolidations, and the sale of all or
substantially all of the Company's assets. In addition, the 1995 Plan authorizes
the issuance of options to purchase up to 1,425,000 shares of Common Stock to
employees and directors of the Company. The Company's officers and directors
currently hold options to acquire 751,810 shares of Common Stock, which options
are subject to certain vesting requirements. The issuance of additional shares
of Common Stock pursuant to the exercise of stock options granted to management
under the 1995 Plan would increase the number of shares held by the Company's
executive officers and directors in the future. See "Management -- Executive
Compensation" and "Principal and Selling Stockholders."

ANTI-TAKEOVER PROVISIONS

The Company's Restated Certificate of Incorporation authorizes the issuance
of 5 million shares of preferred stock and 30 million shares of Common Stock.
After giving effect to the Offering, the Company will have 18.3 million shares
of authorized but unissued shares of Common Stock. The Company's Board of
Directors has the power to issue any or all of these additional shares without
stockholder approval, and the preferred shares can be issued with such rights,
preferences and limitations as may be determined by the Board. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of any holders of preferred stock that may be issued in the future.
The Company presently has no commitments or contracts to issue any additional
shares of Common Stock or any shares of preferred stock. The issuance of
preferred stock or the further issuance of Common Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could delay, discourage, hinder or preclude an unsolicited
acquisition of the Company, could make it less likely that stockholders receive
a premium for their shares as a result of any such attempt and could adversely
affect the market price of and the voting and other rights of the holders of
outstanding shares of Common Stock. As a Delaware corporation, the Company is
subject to Section 203 of the Delaware General Corporation Law which, in
general, prevents an "interested stockholder" (defined generally as a person
owning 15% or more of the corporation's outstanding voting stock) from engaging
in a "business combination" (as defined in Section 203) for three years
following the date such person became an interested stockholder unless certain
conditions are satisfied. See "Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE

No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of Common Stock for future sale will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock in the public market following the
Offering,

14
<PAGE> 17

or the perception that such sales could occur, could adversely affect the
prevailing market price of the Common Stock. The shares of Common Stock
outstanding prior to the Offering will be eligible for sale in the public market
at various times in the future. Upon completion of the Offering, the Company
will have 11,710,849 shares of Common Stock outstanding. Of these shares, the
5,000,000 shares sold in the Offering will be freely tradeable without
restriction or limitation under the Securities Act of 1933, as amended (the
"Securities Act"), except for shares purchased by "affiliates" of the Company,
as such term is defined in Rule 144 promulgated under the Securities Act. The
remaining 6,710,849 shares are "restricted securities" within the meaning of
Rule 144. The Company, all of its directors and officers and all holders of
% or more of the shares of Common Stock have agreed with the Underwriters
not to sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
NatWest Securities Limited, other than grants of stock options under the 1995
Plan. NatWest Securities Limited may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. Beginning 90 days after the date of this Prospectus, 456,763
restricted shares will first become eligible for sale in the public market
pursuant to Rule 144 promulgated under the Securities Act, subject to the volume
and resale restrictions of such rule. All of these shares will be subject to
lock-up agreements with the Underwriters. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale."

NO PRIOR PUBLIC TRADING MARKET

Prior to the Offering, there has been no public trading market for the
Common Stock. The public offering price for the Common Stock will be determined
by negotiations among the Company and the Underwriters based upon several
factors and will not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth, or any other generally accepted
criteria of value, and should not be considered as indicative of the actual
value of the Company. Therefore, the market price of the Common Stock may fall
below the public offering price of the Common Stock at any time following the
Offering. See "Underwriting."

While the Company intends to apply to list the Common Stock on the American
Stock Exchange, there can be no assurance that such listing will be approved or
that an active trading market will develop. Further, if a market does develop,
it may be limited, and there can be no assurance that it will be sustained. To
the extent that an active trading market does develop, factors such as quarterly
variations in the Company's financial results, announcements by the Company or
others, general market conditions or certain regulatory pronouncements may cause
the market price of the Common Stock to fluctuate substantially. There can be no
assurance that the Common Stock can be resold at or above the initial public
offering price.

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the Common Stock offered hereby will incur immediate dilution
of $11.35 per share in the net tangible book value of their investment, assuming
an initial public offering price of $16.00 per share. See "Dilution."

USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be
approximately $30.5 million, assuming an initial public offering price of $16.00
per share and after deducting the estimated underwriting discounts and
commissions and the estimated expenses of the Offering payable by the Company.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders. See "Principal and Selling Stockholders." The
Company intends to use the net proceeds to it from the Offering (i) to repay
bridge financing incurred in connection with the Heartland acquisition, which
represented aggregate principal obligations and accrued interest through March
31, 1996 of $8.7 million and $163,000, respectively (the "Heartland Bridge
Financing"); (ii) to repay promissory notes issued in connection with the recent
acquisition by the Company of the remaining equity interests not owned by the
Company in its Michigan residences ("ALS-Midwest"), which notes represent
aggregate principal obligations of $4.3 million (the "ALS-Midwest Notes"); (iii)
to repay an aggregate of $5.7 million of construction loans

15
<PAGE> 18

on certain ALS-Midwest residences (the "ALS-Midwest Construction Loans"); (iv)
to finance the development and construction of currently planned residences; (v)
to finance the development, construction or acquisition of additional
residences; and (vi) for general corporate purposes, including working capital.

The Heartland Bridge Financing is comprised of a "Tranche A Loan" and a
"Tranche B Loan," both of which were made in January 1996 and both of which are
due in January 1998. The Tranche A Loan, representing a principal obligation of
$2.9 million, bears interest at the rate of 9% per annum for the first six
months of the loan, 10.5% per annum for the second six months of the loan and at
an annual interest rate thereafter which escalates on a quarterly basis by 2%
per annum per quarter. The Tranche B Loan, representing a $5.8 million principal
obligation, bears interest at the rate of 9% for the first year of the loan with
an annual interest rate for the last year of the loan term which escalates on a
quarterly basis by 2% per annum quarter. The proceeds from the Heartland Bridge
Financing were used to acquire all of the common stock of Heartland and to
retire certain indebtedness of Heartland. See "History and Organization --
Acquisition of Heartland Retirement Services, Inc." and "Certain Relationships
and Related Transactions."

The ALS-Midwest Notes are comprised of promissory notes in the principal
amount of $1.4 million bearing interest at the rate of 9% and maturing in
January 1997 and promissory notes in the principal amount of $2.9 million
bearing interest at the rate of 8% and maturing in September 1996. See "History
and Organization -- Acquisition of Remaining Equity Interest in ALS-Midwest."

The ALS-Midwest Construction Loans at March 31, 1996 were comprised of
promissory notes in the principal amount of $5.7 million bearing interest at
rates between 10.95% and prime plus 0.50% and maturing at various dates between
January 1997 and December 2014.

The Company expects to use the balance of the net proceeds, approximately
$11.6 million, primarily to finance the development and construction of assisted
living residences, including completion of the 18 residences currently under
construction and the 25 residences under development.

The Company may also use the net proceeds to finance further development
and construction or, if appropriate opportunities arise, the acquisition of
existing assisted living operations. While the Company intends to seek, consider
and review possible acquisitions of assisted living residences and assisted
living operators from time to time, the Company is not currently in negotiations
with respect to any such acquisitions other than the possible acquisition of its
joint venture partners' equity interest in certain of the residences operated by
the Company.

The Company may also use the net proceeds for general corporate purposes,
including working capital. To the extent that the net proceeds from the Offering
are not immediately used for the foregoing purposes, the Company intends to
invest such net proceeds in investment grade, short-term, interest-bearing
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Business -- Business
Strategy", "Business -- Properties Under Construction and Development",
"Business -- Joint Ventures and Strategic Alliances" and "Risk
Factors -- History of, and Anticipated, Operating Losses."

DIVIDEND POLICY

The Company has never paid or declared cash dividends and currently intends
to retain any future earnings for the operation and expansion of its business.
Any determination to pay cash dividends in the future will be at the discretion
of the Board of Directors and will be dependent on the Company's financial
condition, results of operations, contractual restrictions, capital
requirements, business prospects and such other factors as the Board of
Directors deems relevant.

16
<PAGE> 19

DILUTION

At March 31, 1996, the pro forma net tangible book value of the Company
after giving effect to the (a) the May 1996 private placement of shares of
Common Stock (the "Recent Equity Transactions"); (b) the May 1996 acquisition of
the remaining general and limited partnership interests not owned by the Company
in various partnerships comprising the operations of ALS-Midwest for a
combination of cash, notes and shares of Common Stock (the "ALS-Midwest
Restructuring"); and (c) the May 1996 merger with Crossings pursuant to which
all outstanding capital stock of Crossings was exchanged for shares of Common
Stock as if they had been effective on March 31, 1996 (the "Crossings Merger"),
but prior to the Offering, would have been approximately $24.0 million, or $2.52
per share. Pro forma net tangible book value per share of Common Stock is
determined by dividing the number of shares of Common Stock outstanding after
giving effect to the above transactions into the pro forma net tangible book
value of the Company (total tangible assets less total liabilities) but without
giving effect to the possible exercise of stock options which have been or will
be granted by the Company prior to the consummation of the Offering under its
stock option plans. After giving effect to the Offering at an assumed initial
public offering price of $16.00 per share (the midpoint of the range set forth
on the cover page of this Prospectus), the pro forma net tangible book value at
such date would have been $54.5 million or $4.65 per share, representing an
immediate increase in pro forma net tangible book value of $2.13 per share to
existing stockholders. Accordingly, purchasers of the Common Stock in the
Offering would sustain an immediate dilution of $11.35 per share.

The following table illustrates such per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price................................. $16.00
Pro forma net tangible book value as of March 31, 1996.............. $2.52
Increase in pro forma net tangible book value attributable to the
Offering(1)...................................................... 2.13
Pro forma net tangible book value after the Offering.................. 4.65
------
Dilution to new investors in the Offering............................. $11.35
======
</TABLE>

- ---------------

(1) After deducting underwriting discounts and commissions and estimated
expenses of the Offering payable by the Company.

The following table summarizes, on a pro forma basis as of March 31, 1996,
after giving effect to the Recent Equity Transactions, the ALS-Midwest
Restructuring and the Crossings Merger and the Offering, the differences between
the holders of Common Stock prior to the Offering, as a group, and the new
investors in the Common Stock offered hereby, with respect to the number of
shares purchased, the total consideration paid and the average price paid per
share, based upon an assumed initial public offering price of $16.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)........ 9,523,349 81.3% $37,524,000 51.7% $ 3.94
New investors................... 2,187,500 18.7 35,000,000 48.3 16.00
---------- ------- ----------- -------
Total................. 11,710,849 100.0% $72,524,000 100.0%
========= ===== ========== =====
</TABLE>

- ---------------

(1) Sales of shares of Common Stock by the Selling Shareholders in the Offering
will reduce the number of shares held by existing shareholders to 6,710,849
or 57.3% of the total number of shares outstanding after the Offering, and
will increase the number of shares to be purchased by new investors to
5,000,000 or 42.7% of the total number of shares outstanding after the
Offering. If the Underwriter's over-allotment option is exercised in full,
the number of shares of Common Stock held by existing Stockholders would be
further reduced to 50.9% of the total number of shares to be outstanding
after the Offering and the number of shares of Common Stock held by new
investors would be increased to 49.1% of the total number of shares to be
outstanding after the Offering.
(2) Excludes 789,149 shares of Common Stock issuable upon the exercise of
currently outstanding options to purchase Common Stock, including options
granted under the 1995 Plan. See "Capitalization" and "Management -- Stock
Option Plans."

17
<PAGE> 20

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at March 31, 1996 (i) on an actual basis; (ii) as adjusted to give pro
forma effect to (a) the May 1996 private placement of shares of Common Stock;
(b) the May 1996 acquisition of the remaining general and limited partnership
interests not owned by the Company in various partnerships comprising the
operations of ALS-Midwest for a combination of cash, notes and shares of Common
Stock; and (c) the May 1996 merger with Crossings pursuant to which all
outstanding capital stock of Crossings was exchanged for shares of Common Stock
as if such transactions had occurred on March 31, 1996; and (iii) as adjusted to
give pro forma effect to such transactions as if they had been effective on
March 31, 1996 and to the Offering (assuming an initial public offering price of
$16.00 per share) and the application of the net proceeds therefrom. This table
should be read in conjunction with "Pro Forma Financial Information," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes thereto appearing elsewhere in this Prospectus. See "Index to Consolidated
Financial Statements."

<TABLE>
<CAPTION>
AT MARCH 31, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term indebtedness:
Current installments of long-term debt..................... $ 105 $ 157 $ 157
Notes payable.............................................. -- 9,365 --
------- ------- -------
Total short-term indebtedness.............................. 105 9,522 157
======= ======= =======
Long-term debt, less current portion......................... $30,632 $30,747 $22,075
Other long-term liabilities.................................. 268 10,583(1) 10,583(1)
Minority interest............................................ 637 637 637
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, none outstanding............................ -- -- --
Common stock, $0.01 par value; 30,000,000 shares
authorized; 6,913,483, 9,523,349 and 11,710,849 shares
outstanding actual, pro forma and pro forma as adjusted,
respectively(2)......................................... 69 95 117
Additional paid-in capital................................. 23,674 36,429 66,907
Accumulated deficit........................................ (4,393) (4,393) (4,393)
------- ------- -------
Total stockholders' equity......................... 19,350 32,131 62,631
------- ------- -------
Total capitalization............................... $50,887 $74,098 $95,926
======= ======= =======
</TABLE>

- ---------------

(1) Includes $10,224,000 of sale/leaseback obligation relating to two residences
operated by Crossings. Crossings entered into sale/ leaseback transactions
for these two residences pursuant to which the buyer acquired the building
and personal property subject to the mortgage indebtedness, but Crossings
remains obligated under such mortgage indebtedness.
(2) Excludes 789,149 shares of Common Stock issuable upon the exercise of
currently outstanding options to purchase Common Stock, including options
granted under the 1995 Plan. See "Management -- Executive Compensation."

18
<PAGE> 21

PRO FORMA FINANCIAL INFORMATION

The accompanying unaudited pro forma condensed combined financial
statements set forth the pro forma effects of recently completed acquisitions
and transactions of the Company, including: (i) the January 1996 acquisition by
the Company (effective as of January 1, 1996) of all outstanding shares of
common stock of Heartland for cash and shares of Common Stock (the "Heartland
Acquisition"); (ii) the January 1996 sale/ leaseback of the Company's Bradenton
and Sarasota residences (the "Florida Sale/leaseback"); (iii) the Recent Equity
Transactions; (iv) the ALS-Midwest Restructuring; and (v) the Crossings Merger.
The column captioned "The Company Pro Forma As Adjusted" reflects each of the
aforementioned transactions, as applicable, as well as the Offering and the
application of the estimated net proceeds to the Company therefrom. See "History
and Organization" and "Use of Proceeds."

The following unaudited pro forma condensed combined balance sheet of the
Company as of March 31, 1996 reflects the pro forma effects of: (i) the Recent
Equity Transactions (ii) the ALS-Midwest Restructuring; and (iii) the Crossings
Merger, as if such transactions had occurred as of March 31, 1996.

The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1995 reflects the pro forma effects of: (i) the
Heartland Acquisition; (ii) the Florida Sale/leaseback; (iii) the Recent Equity
Transactions; (iv) the ALS-Midwest Restructuring; and (v) the Crossings Merger
as if such transactions had occurred on January 1, 1995. The unaudited pro forma
condensed combined statement of operations for the three months ended March 31,
1996 reflects the pro forma effects of: (i) the Recent Equity Transactions; (ii)
the ALS-Midwest Restructuring; and (iii) the Crossings Merger, as if such
transactions had occurred on January 1, 1996. Extraordinary charges or credits
that result directly from the Offering are not included in the pro forma
condensed combined statements of operations.

The following unaudited pro forma condensed combined financial information
has been prepared by the Company based on the audited financial statements and
the related notes thereto of the Company, Heartland, Crossings and ALS-Midwest
for the year ended December 31, 1995 and the unaudited financial statements of
the Company, Crossings and ALS-Midwest for the three months ended March 31, 1996
included elsewhere in this Prospectus, giving effect to these transactions and
the assumptions and adjustments described in the accompanying notes. The
following unaudited pro forma condensed combined financial information is not
necessarily indicative of the actual results that would have been achieved if
these transactions had actually been completed as of the dates indicated, or
which may be realized in the future. The unaudited pro forma condensed combined
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of the Company, Heartland, Crossings and ALS-Midwest
and the related notes thereto included elsewhere in this Prospectus. See "Index
to Consolidated Financial Statements."

19
<PAGE> 22

ALTERNATIVE LIVING SERVICES, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECENT ALS-MIDWEST CROSSINGS
THE EQUITY PRO FORMA PRO FORMA
COMPANY TRANSACTIONS ALS-MIDWEST ADJUSTMENTS CROSSINGS(C) ADJUSTMENTS
------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................ $ 6,816 $2,000(A) $ 845 $(1,000)(B) $ 1,788 $
Short-term investments................... 50 -- --
Resident receivables, net................ 236 309 257
Other current assets..................... 424 93 691
------- ------ ------- ------- -------- ---------
Total current assets.................. 7,526 2,000 1,247 (1,000) 2,736
Property, plant and equipment, net....... 35,030 15,189 2,954(B) 807
Long term investments.................... 1,168 -- --
Investments in and advances to
unconsolidated affiliates.............. 6,754 -- (5,121)(B) --
Other assets............................. 1,091 408 12,586
Goodwill................................. 2,255 -- 6,597(D)
------- ------ ------- ------- -------- ---------
Total assets.......................... $53,824 $2,000 $16,844 $(3,167) $ 16,129 $ 6,597
======= ====== ======= ======= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt................................. $ 105 $ $ $ $ 52 $
Accounts payable....................... 389 2,215 805
Accrued expenses and other............. 1,360 597 1,478 680(D)
Notes payable.......................... -- 5,660 $ 2,900(B) --
805(B)
Advances from and notes payable to
related entities..................... -- 3,959 (3,959)(B) --
------- ------ ------- ------- -------- ---------
Total current liabilities............. 1,854 12,431 (254) 2,335 680
Long-term debt........................... 30,632 -- 115
Deferred gain on sale.................... 1,083 -- 13,172 (13,172)(D)
Other long-term liabilities.............. 268 -- 10,315
Minority interest........................ 637 2,623 (2,623)(B) --
Common stock and additional paid-in
capital................................ 23,743 2,000(A) 2,679 (2,679)(B) 12,541 (12,541)(D)
1,500(B) 9,281(D)
Accumulated deficit...................... (4,393) (889) 889(B) (22,349) 22,349(D)
------- ------ ------- ------- -------- ---------
Total liabilities and stockholders'
equity (deficit)..................... $53,824 $2,000 $16,844 $(3,167) $ 16,129 $ 6,597
======= ====== ======= ======= ======== =========

<CAPTION>
THE THE COMPANY
COMPANY OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................ $10,449 $12,300(E) $ 22,749
Short-term investments................... 50 50
Resident receivables, net................ 802 802
Other current assets..................... 1,208 1,208
------- ------- ---------
Total current assets.................. 12,509 12,300 24,809
Property, plant and equipment, net....... 53,980 53,980
Long term investments.................... 1,168 1,168
Investments in and advances to
unconsolidated affiliates.............. 1,633 1,633
Other assets............................. 14,085 14,085
Goodwill................................. 8,852 8,852
------- ------- ---------
Total assets.......................... $92,227 $12,300 $ 104,527
======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt................................. $ 157 $ $ 157
Accounts payable....................... 3,409 3,409
Accrued expenses and other............. 4,115 (163)(E) 3,952
Notes payable.......................... 9,365 (5,660)(E) --
(2,900)(E)
(805)(E)
Advances from and notes payable to
related entities..................... -- --
------- ------- ---------
Total current liabilities............. 17,046 (9,528) 7,518
Long-term debt........................... 30,747 (8,672)(E) 22,075
Deferred gain on sale.................... 1,083 1,083
Other long-term liabilities.............. 10,583 10,583
Minority interest........................ 637 637
Common stock and additional paid-in
capital................................ 36,524 30,500(E) 67,024

Accumulated deficit...................... (4,393) (4,393)
------- ------- ---------
Total liabilities and stockholders'
equity (deficit)..................... $92,227 $12,300 $ 104,527
======= ======= =========
</TABLE>

20
<PAGE> 23

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996

- ---------------

A) To record cash proceeds of $2,000,000 from the issuance of 430,281
shares of Common Stock in two private equity transactions in May 1996.
See "Business -- Joint Ventures and Strategic Alliances -- Proposed
Joint Venture with Pioneer Development Company, Inc." and
"Management -- Executive Compensation -- Employment and Services
Agreements -- Services Agreement with Petty, Kneen & Company."

B) To record the acquisition of the remaining general and limited partner
interests in ALS-Midwest not owned by the Company (the "Former
ALS-Midwest Owners") for $1,000,000 in cash, the ALS-Midwest Notes and
172,537 shares of Common Stock valued at $1,500,000. Purchase accounting
adjustments include: (i) an increase in property, plant and equipment of
$2,954,000; (ii) the elimination of previous equity investments in
affiliates and advances to affiliates of $5,121,000; (iii) recording
ALS-Midwest Notes payable to the Former ALS-Midwest Owners of $2,900,000
and $805,000 (such balances exclude advances made by the Former
ALS-Midwest Owners subsequent to March 31, 1996 of $600,000); (iv) the
elimination of advances from affiliates of $3,959,000; (v) the
elimination of minority interest of $2,623,000; and (vi) the elimination
of ALS-Midwest's equity prior to the acquisition including common stock
of $2,679,000 and accumulated deficit of $889,000. As a result of these
transactions, ALS-Midwest became a wholly-owned subsidiary of the
Company. See "Use of Proceeds."

C) Reflects the unaudited pro forma condensed combined balance sheet of
Crossings as of March 31, 1996 after giving effect to the May 1996
conversion of Crossings' mandatorily redeemable preferred stock of
$6,000,000 into shares of common stock of Crossings as if such
transaction had occurred on March 31, 1996.

D) To record the Crossings Merger pursuant to which all capital stock of
Crossings was converted into 2,007,049 shares of Common Stock valued at
$9,281,000. Purchase accounting adjustments include: (i) the recognition
of goodwill of $6,597,000; (ii) the recognition of accrued transaction
fee of $680,000; (iii) the elimination of deferred gain relating to
various Crossings sale/leaseback transactions of $13,172,000; and (iv)
the elimination of Crossings' equity prior to the merger including
common stock of $12,541,000 and accumulated deficit of $22,349,000.

E) To record the effects of the sale of 2,187,500 shares of Common Stock by
the Company and the receipt of the estimated net proceeds of
$30,500,000, assuming an initial public offering price of $16.00 per
share and after deducting estimated underwriting discounts and
commissions and offering expenses of $4,500,000. Of the total net
proceeds, $18,200,000 will be used to repay debt and accrued interest as
of March 31, 1996, including: (i) the Heartland Bridge Financing of an
aggregate principal obligation of $8,672,000 and accrued interest of
$163,000 incurred in conjunction with the Heartland Acquisition; (ii)
notes payable of $5,660,000 relating to the ALS-Midwest residences; and
(iii) the ALS-Midwest Notes of $2,900,000 and $805,000. The remainder of
the net proceeds will be used to finance the development and
construction of residences, to finance the development, construction or
acquisition of additional residences, and for general corporate
purposes, including working capital. See "Use of Proceeds."

21
<PAGE> 24

ALTERNATIVE LIVING SERVICES, INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEARTLAND FLORIDA ALS-MIDWEST CROSSINGS
THE PRO FORMA SALE/ ALS- PRO FORMA CROSSINGS PRO FORMA
COMPANY HEARTLAND ADJUSTMENTS LEASEBACK MIDWEST ADJUSTMENTS PRO FORMA(O) ADJUSTMENTS
------- --------- ----------- --------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Resident service fees..... $ 9,684 $ 1,141 $ $ $2,505 $ $ 23,463 $
Other..................... 780 282 298 --
------- --------- ----------- --------- ------- ----------- ------------ -----------
Operating revenue....... 10,464 1,423 2,803 23,463 --
Operating expenses:
Residence operations...... 7,206 1,675 2,765 13,353
Lease expense............. 890 -- 120(K) 7,378 548(P)
(18)(K)
General and
administrative.......... 2,600 861 320 2,188
Depreciation and
amortization............ 814 109 103(H) (36)(K) 380 76(L) 93 165(P)
39(H)
------- --------- ----------- --------- ------- ----------- ------------ -----------
Total operating
expenses............... 11,510 2,645 142 66 3,465 76 23,012 713
------- --------- ----------- --------- ------- ----------- ------------ -----------
Operating income
(loss)................ (1,046) (1,222) (142) (66) (662 ) (76) 451 (713)
Interest expense............ (1,047) (227) (867)(I) (543 ) (261)(M) (22)
91(I) (64)(M)
Interest income............. 234 8 57 (50)(M) 154
Gain on sale of land........ 439 -- 290
Equity in income (losses) of
unconsolidated
affiliates................ (438) (47) 438(N) --
Other expenses.............. -- -- (257)
Minority interest........... 112 13 424 (424)(N) --
Income tax benefit.......... -- 586 (586)(J)
------- --------- ----------- --------- ------- ----------- ------------ -----------
Total other income
(expense), net........ (699) 333 (1,362) (62 ) (361) 165 --
------- --------- ----------- --------- ------- ----------- ------------ -----------
Income (loss) before
extraordinary items....... $(1,746) $ (889) $(1,504) $ (66) $ (724 ) $(437) $ 616 $(713)
======== ======== ========== ======== ======= =========== =========== ==========
Loss before extraordinary
items per share........... $ (0.32)
-------
Weighted average shares
outstanding............... 5,453(F)(G)
-------

<CAPTION>
THE THE COMPANY
COMPANY OFFERING PRO FORMA
PRO FORMA ADJUSTMENTS AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Resident service fees..... $36,793 $ $36,793
Other..................... 1,360 1,360
----------- ----------- -----------
Operating revenue....... 38,153 -- 38,153
Operating expenses:
Residence operations...... 24,999 24,999
Lease expense............. 8,918 8,918

General and
administrative.......... 5,969 5,969
Depreciation and
amortization............ 1,743 1,743

----------- ----------- -----------
Total operating
expenses............... 41,629 -- 41,629
----------- ----------- -----------
Operating income
(loss)................ (3,476) -- (3,476)
Interest expense............ (2,940) 867(Q) (1,205)
543(Q)
261(Q)
64(Q)
Interest income............. 403 403
Gain on sale of land........ 729 729
Equity in income (losses) of
unconsolidated
affiliates................ (47) (47)
Other expenses.............. (257) (257)
Minority interest........... 125 125
Income tax benefit.......... -- --
----------- ----------- -----------
Total other income
(expense), net........ (1,987) 1,735 (252)
----------- ----------- -----------
Income (loss) before
extraordinary items....... $(5,463) 1,735 $(3,728)
=========== ========== ===========
Loss before extraordinary
items per share........... $ (0.69) $ (0.37)
----------- -----------
Weighted average shares
outstanding............... 7,894 10,081
----------- -----------
</TABLE>

22
<PAGE> 25

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

F)The weighted average shares outstanding includes the effect of the Recent
Equity Transactions which resulted in the issuance of 430,281 shares of
Common Stock.

G)For purposes of calculating net loss per share, Common Stock issued and
Common Stock options granted subsequent to May 1995 at per share amounts
less than the assumed initial public offering price of $16.00 per share
have been reflected as outstanding for the period presented. Accordingly,
weighted average shares outstanding was increased by 736,903 shares for
the effect of such Common Stock and Common Stock options.

H)To record additional depreciation and amortization relating to the
Heartland Acquisition of $103,000 attributable to the increase in the
carrying value of property, plant and equipment and the amortization of
goodwill of $39,000.

I)To record interest expense for the Heartland Bridge Financing of $867,000
relating to the Heartland Acquisition (average interest rate of 10%) and
the elimination of interest expense of $91,000 related to the repayment
of debt at the time of acquisition.

J)To eliminate the income tax benefit of $586,000 which had been previously
recognized pursuant to a tax sharing arrangement between Heartland and
its former parent.

K)To record the effects of the Florida Sale/leaseback transactions,
including: (i) lease expense of $120,000; (ii) accretion of deferred gain
of $18,000; and (iii) the elimination of depreciation of $36,000. The
annual lease expense for the two residences, which commenced operations
in October and December 1995, respectively, is $720,000.

L)To record additional depreciation and amortization relating to the
ALS-Midwest Restructuring of $76,000 attributable to the increase in the
carrying value of property, plant and equipment.

M)To record interest expense for ALS-Midwest of $261,000 (interest rate of
9%) and $64,000 (interest rate of 8%), respectively, relating to the
ALS-Midwest Notes and elimination of interest income of $50,000 resulting
from reduced cash balances (assumed interest rate of 5%).

N)To eliminate the Company's equity in losses of unconsolidated affiliates
of $438,000 relating to ALS-Midwest and minority interest in earnings of
$424,000 related to ALS-Midwest. Pursuant to the ALS-Midwest
Restructuring, ALS-Midwest became a wholly-owned subsidiary of the
Company.

23
<PAGE> 26

O)The following unaudited pro forma condensed combined statement of
operations for Crossings for the year ended December 31, 1995 gives
effect to: (i) Crossings' December 1995 sale/leaseback transactions with
a real estate investment trust ("REIT") with respect to 12 residences
(the "REIT Sale/leaseback"); (ii) Crossings January 1996 sale/leaseback
transaction involving The Palms residence (the "Palms Sale/leaseback");
and (iii) an 19 year operating lease entered into with a related party
with respect to the Union Park residence, assuming all such transactions
had occurred as of January 1, 1995. The unaudited pro forma condensed
combined statements of operations of Crossings are not necessarily
indicative of results that would have occurred had the above transactions
been consummated as of January 1, 1995 or that might be attained in the
future. See "History and Organization -- The Crossings
Merger -- Organization and Recent Restructuring of Crossings."

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
---------------------------------------
PRO FORMA CROSSINGS
CROSSINGS ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
Net revenues.......................................................... $21,726 $ 1,737(aa) $23,463
--------- ----------- ---------
Expenses:
Residence operations................................................ 12,444 909(aa) 13,353
Lease expense....................................................... 1,148 652(aa) 7,378
640(ab)
(15)(ab)
5,437(ac)
(484)(ac)
General and administrative.......................................... 2,188 -- 2,188
Depreciation and amortization....................................... 1,814 (192)(ab) 93
(1,529)(ac)
--------- ----------- ---------
Total operating expenses...................................... 17,594 5,418 23,012
--------- ----------- ---------
Income from operations................................................ 4,132 (3,681) 451
Interest expense.................................................... (5,962) 679(ab) (22)
5,261(ac)
Interest income..................................................... 154 -- 154
Gain on sale of development project................................. 290 -- 290
Other expense....................................................... (257) -- (257)
--------- ----------- ---------
Other income (expense), net................................... (5,775) 5,940 165
--------- ----------- ---------
Income (loss) before extraordinary items and minority
interest.................................................... $(1,643) $ 2,259 $ 616
======= ========== ========
</TABLE>

-----------------------

(aa) To record the historical operations of the Union Park residence
prior to Crossings' acquisition of a leasehold interest in such
residence including (i) revenues of $1,737,000; (ii) residence
operating expenses of $909,000; and (iii) lease expense of
$652,000 resulting therefrom.
(ab) To record the effects of the Palms Sale/leaseback transaction
including: (i) lease expense of $640,000; (ii) the accretion of
a deferred gain of $15,000; (iii) the elimination of
depreciation of $192,000; and (iv) and the elimination of
interest expense of $679,000 relating to the debt repaid at the
time of the transaction.
(ac) To record the effects of the REIT Sale/leaseback transaction
including: (i) lease expense of $5,437,000; (ii) the accretion
of deferred gain of $484,000; (iii) the elimination of
depreciation of $1,529,000; and (iv) the elimination of
interest of $5,261,000 relating to the debt repaid at the time
of the transaction.

P) To record the effects of the Crossings Merger, including the elimination of
deferred gain accretion of $548,000 and the recognition of goodwill
amortization of $165,000.

Q) To record the reduction in interest expense resulting from the application
by the Company of the estimated net proceeds from the Offering to repay
indebtedness therefrom. The related reduction in interest includes: (i)
$867,000 relating to the Heartland Bridge Financing; (ii) $543,000 relating
to the ALS-Midwest Construction Loans; and (iii) $261,000 and $64,000,
respectively, relating to the ALS-Midwest Notes. See "Use of Proceeds."

24
<PAGE> 27

ALTERNATIVE LIVING SERVICES,INC.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ALS-MIDWEST CROSSINGS THE
THE PRO FORMA PRO FORMA COMPANY
COMPANY ALS-MIDWEST ADJUSTMENTS CROSSINGS ADJUSTMENTS PRO FORMA
------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Resident service fees...................... $ 4,033 $ 1,142 $ $ 5,942 $ $11,117
Other...................................... 292 200 -- 492
------- ----------- ----- --------- ----------- ---------
Operating revenue........................ 4,325 1,342 5,942 11,609
Operating expenses:
Residences operations...................... 3,241 869 3,477 7,587
Lease expense.............................. 488 51 1,715 137(W) 2,391
General and administrative................. 1,583 114 704 2,401
Depreciation and amortization.............. 365 120 24(T) 23 41(W) 573
------- ----------- ----- --------- ----------- ---------
Total operating expenses................. 5,677 1,154 24 5,919 178 12,952
------- ----------- ----- --------- ----------- ---------
Operating income (loss).................. (1,352) 188 (24) 23 (178) (1,343)
Interest expense............................. (530) (239) (65)(U) (13) (863)
(16)(U)
Interest income.............................. 139 3 (13)(U) 42 171
Loss on sale of land......................... (21) -- -- (21)
Equity in losses (income) of unconsolidated
affiliates................................. (85) -- 57(V) -- (28)
Other income................................. -- -- 9 9
Minority interest............................ 45 11 (11)(V) -- 45
------- ----------- ----- --------- ----------- ---------
Total other income (expense), net........ (452) (225) (48) 38 -- (687)
------- ----------- ----- --------- ----------- ---------
Income (loss) before extraordinary items..... $(1,804) $ (37) $ (72) $ 61 $(178) $(2,030)
======== =========== =========== ======= ========== ========
Loss before extraordinary item per share..... $ (0.24) $ (0.21)
======== ========
Weighted average shares outstanding.......... 7,650(R)(S) 9,830
======== ========

<CAPTION>
THE COMPANY
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
Revenue:
Resident service fees...................... $ $11,117
Other...................................... 492
----- -----------
Operating revenue........................ -- 11,609
Operating expenses:
Residences operations...................... 7,587
Lease expense.............................. 2,391
General and administrative................. 2,401
Depreciation and amortization.............. 573
----- -----------
Total operating expenses................. -- 12,952
----- -----------
Operating income (loss).................. -- (1,343)
Interest expense............................. 217(X) (326)
239(X)
65(X)
16(X)
Interest income.............................. 171
Loss on sale of land......................... (21)
Equity in losses (income) of unconsolidated
affiliates................................. (28)
Other income................................. 9
Minority interest............................ 45
----- -----------
Total other income (expense), net........ 537 (150)
----- -----------
Income (loss) before extraordinary items..... $ 537 $(1,493)
========== =========
Loss before extraordinary item per share..... $ (0.12)
=========
Weighted average shares outstanding.......... 12,017
=========
</TABLE>

25
<PAGE> 28

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996

R) The weighted average shares outstanding includes the effect of the Recent
Equity Transactions which resulted in the issuance of 430,281 shares of
Common Stock.

S) For purposes of calculating net loss per share, Common Stock issued and
Common Stock options granted subsequent to May 1995 at per share amounts
less than the assumed initial public offering price of $16.00 per share
have been reflected as outstanding for the period presented. Accordingly,
weighted average shares outstanding was increased by 736,903 shares for the
effect of such Common Stock and Common Stock options.

T) To record additional depreciation and amortization of $24,000 attributable
to the increase in the carrying value of property, plant and equipment as a
result of the ALS-Midwest Restructuring.

U) To record interest expense for ALS-Midwest of $65,000 (interest rate of 9%)
and $16,000 (interest rate of 8%), respectively, relating to the
ALS-Midwest Notes and elimination of interest income of $13,000 resulting
from reduced cash balances (assumed interest rate of 5%).

V) To eliminate the Company's equity in losses of unconsolidated affiliates of
$57,000 related to ALS-Midwest and minority interest of $11,000 related to
ALS-Midwest. Pursuant to the ALS-Midwest Restructuring, ALS-Midwest became
a wholly-owned subsidiary of the Company.

W) To record the effects of the Crossings Merger, including the elimination of
deferred gain accretion of $137,000 and the recognition of goodwill
amortization of $41,000.

X) To record the reduction in interest expense resulting from the application
by the Company of the estimated net proceeds from the Offering to repay
indebtedness. The related reduction in interest includes: (i) $217,000
relating to the Heartland Bridge Financing; (ii) $239,000 relating to the
ALS-Midwest Construction Loans; payable in conjunction with the ALS-Midwest
residences; and (iii) $65,000 and $16,000, respectively. See "Use of
Proceeds."

26
<PAGE> 29

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated historical financial data presented below as of
and for the three years ended December 31, 1993, 1994 and 1995 are derived from
the Company's audited consolidated financial statements appearing elsewhere in
this Prospectus and should be read in conjunction with those financial
statements and related notes appearing elsewhere in this Prospectus. The
selected consolidated historical financial data presented below for the years
ended December 31, 1991 and 1992 are derived from the unaudited consolidated
financial statements of the Company's Predecessor for those years. The selected
consolidated historical financial data for the three months ended March 31, 1995
and 1996 are derived from the unaudited consolidated financial statements of the
Company. The pro forma data are unaudited. The selected consolidated financial
data presented below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and pro forma financial information and related notes included
elsewhere in this Prospectus. See "Pro Forma Financial Information" and "Index
to Consolidated Financial Statements."

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
------------------------------------------------------------------- ---------------------------
PREDECESSOR THE COMPANY THE COMPANY
--------------------------- -------------------------- PRO FORMA ---------------- PRO FORMA
1991(1) 1992(1) 1993(1) 1993(1) 1994 1995 1995(2) 1995 1996(3) 1996(4)
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Resident service fees........ $ 602 $2,537 $2,636 $ 130 $4,506 $ 9,684 $36,793 $1,983 $ 4,033 $11,117
Other revenue................ -- 7 5 17 451 780 1,360 98 292 492
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Operating revenue...... 602 2,544 2,641 147 4,957 10,464 38,153 2,081 4,325 11,609
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Operating expenses:
Residence operations......... 556 1,596 1,672 87 2,934 7,207 24,999 1,348 3,241 7,587
Lease expense................ 165 547 563 19 697 890 8,918 426 488 2,391
General and administrative... 262 421 423 41 1,458 2,599 5,969 582 1,583 2,401
Depreciation and
amortization............... 30 83 101 6 258 814 1,743 145 365 573
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Total operating
expenses............. 1,013 2,647 2,759 153 5,347 11,510 41,629 2,501 5,677 12,952
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Operating income
(loss)............... (411 ) (103 ) (118 ) (6 ) (390) (1,046) (3,476) (420) (1,352) (1,343)
Other income (expense):
Interest expense, net........ (1 ) (27 ) (48 ) (8 ) (301) (812) (2,537) (180) (391) (692)
Equity in income (losses) of
unconsolidated
affiliates................. -- -- -- -- (1) (438) (47) 39 (85) (28)
Minority interest in losses
of consolidated
subsidiaries............... -- -- -- -- 49 112 125 23 45 45
Other, net................... -- -- -- -- -- 438 472 -- (21) (12)
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Total other expenses,
net.................. (1 ) (27 ) (48 ) (8 ) (253) (700) (1,987) (118) (452) (687)
------- ------- ------- ------- ------ ------- --------- ------ ------- ---------
Net loss before extraordinary
items...................... $ (412 ) $ (130 ) $ (166 ) $ (14 ) $ (643) $(1,746) $(5,463) $ (538) $(1,804) $(2,030)
====== ====== ====== ====== ====== ======= ======== ====== ======= ========
Net loss before extraordinary
items per share............ $(0.01 ) $(0.25) $ (0.32) $ (0.69) $(0.21) $ (0.24) $(0.21)
====== ====== ======= ======== ====== ======= ========
Net loss..................... $ (412 ) $ (130 ) $ (166 ) $ (14 ) $ (643) $(1,746) $ (538) $(1,804)
====== ====== ====== ====== ====== ======= ====== =======
Net loss per share........... $(0.01 ) $(0.25) $ (0.32) $(0.21) $ (0.24)
====== ====== ======= ====== =======
Weighted average shares
outstanding................ 2,549 2,549 5,453 7,894 2,549 7,650 9,830
====== ====== ======= ======== ====== ======= ========
OTHER OPERATING DATA (END OF PERIOD):
Number of residences(5)........ 12 13 19 52 15 42 57
Total resident capacity(5)..... 160 340 616 2,368 474 1,081 2,502
</TABLE>

27
<PAGE> 30

<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
AT MARCH 31, 1996
PREDECESSOR COMPANY -------------------------
------------- --------------------------
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(3)(4)
----- ----- ------ ------- ------- ------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 2 $ -- $ 196 $ 311 $ 2,948 $ 6,816 $ 10,449
Working capital (deficit)........................... (152) (369) (338) (1,212) 1,207 5,672 (4,537)
Total assets........................................ 525 759 2,543 14,424 39,357 53,824 92,227
Long term debt, less current installments........... -- 134 57 6,356 17,101 30,632 30,747
Stockholders' equity................................ 300 349 325 4,559 19,343 19,350 32,131
</TABLE>

- ---------------

(1) The Company was organized in December 1993. Statement of operations data for
periods prior to December 14, 1993 reflect the results of operations of the
Predecessor. Statement of operations data for the Company for 1993 are for
the period from December 14, 1993 (inception) through December 31, 1993. See
"History and Organization -- The Company and its Predecessor."
(2) Gives effect to the 1996 Transactions as if such transactions had occurred
on January 1, 1995 with respect to statement of operations and operating
data for the year ended December 31, 1995.
(3) The results of the Company for the three months ended March 31, 1996 include
the operations of Heartland, which was acquired effective as of January 1,
1996. See "History and Organization -- Acquisition of Heartland Retirement
Services, Inc."
(4) Gives effect to the Recent Equity Transactions, the ALS-Midwest
Restructuring and the Crossings Merger as if such transactions had occurred
on January 1, 1996 with respect to statement of operations and other
operating data for the quarter ended March 31, 1996 and as of March 31, 1996
with respect to balance sheet data. See "Pro Forma Financial Information"
and "Use of Proceeds."
(5) Includes residences which the Company owns, leases, holds equity interests
in and manages.

28
<PAGE> 31

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company currently operates 57 assisted living residences with an
aggregate capacity of approximately 2,500 residents. Of these total residences,
the Company owns 18, leases 23, holds interests in seven and manages an
additional nine on behalf of third parties. In addition, the Company is
currently constructing or developing 43 residences, 21 of which are scheduled to
open during 1996. The Company's rapid growth since 1993 has had a significant
impact on the Company's results of operations and accounts for most of the
changes in results between the first three months of 1995 and 1996 and the years
ended 1993, 1994 and 1995. As of December 31, 1993, 1994 and 1995, and March 31,
1996, the Company operated 12, 13, 19 and 42 residences, respectively.

Since its organization in December 1993, the Company has achieved
significant growth in operating revenue resulting from its aggressive
development program and several strategic acquisitions, but to date has not
realized operating income or net income. For the year ended December 31, 1995,
the Company generated operating revenue of $10.5 million and incurred an
operating loss of $1.0 million and a net loss of $1.7 million. For the three
months ended March 31, 1996, the Company generated operating revenue of $4.3
million and incurred an operating loss of $1.4 million and a net loss of $1.8
million. On a pro forma basis, after giving effect to the 1996 Transactions as
if such transactions had occurred on January 1, 1995, the Company would have
generated operating revenue of $38.2 million and incurred an operating loss of
$3.5 million and a loss before extraordinary items of $5.4 million for 1995. On
a pro forma basis, after giving effect to the 1996 Transactions as if such
transactions had occurred on January 1, 1996, the Company would have generated
operating revenue of $11.6 million and incurred an operating loss of $1.3
million and a loss before extraordinary items of $2.0 million for the first
quarter of 1996.

The Company intends to continue to pursue its growth strategy by developing
and constructing additional assisted living residences and, as appropriate
opportunities arise, acquiring assisted living operations. Newly opened assisted
living residences typically operate at a loss during the first six to 12 months
of operation, primarily due to the incurrence of certain fixed and variable
expenses in advance of the achievement of targeted rent and service fees from
the lease-up of such residences (referred to as lease-up expenses). In addition,
the development and construction of residences involve the commitment of
substantial capital over a typical six to 12 month construction period, the
consequence of which may be an adverse impact on the Company's liquidity. In the
case of acquired residences, resident turnover and increased marketing
expenditures which may be required to reposition such residences, together with
the possible disruption of operations resulting from the implementation of
renovations, may adversely impact the financial performance of such residences
for a period of time after acquisition. As a result, the Company anticipates
that it will incur additional operating and net losses for at least the next 12
to 18 months of operations as the operating expenses associated with developing,
renovating and operating residences and supporting the corporate infrastructure
necessary to manage the Company's growth strategy will be only partially offset
by operating profits generated by stabilized residences. See "-- Liquidity and
Capital Resources," "Risk Factors -- Development and Construction Risks" and
"Risk Factors -- Need for Additional Financing."

For purposes of this discussion, amounts for the year ended December 31,
1993 represent the sum of the results of operations of the Predecessor for the
period from January 1, 1993 through December 13, 1993 and the results of
operations of the Company for the period from December 14, 1993 through December
31, 1993. The following discussion and analysis should be read in conjunction
with the information under "Pro Forma Financial Information," "Selected
Consolidated Financial Data" and the consolidated financial statements and
related notes thereto, which appear elsewhere in this Prospectus.

Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995.

Operating Revenue. Resident service fees for the three months ended March
31, 1996 were $4.0 million, representing an increase of $2.0 million, or 103%,
from $2.0 million for the comparable 1995 period, due to the

29
<PAGE> 32

increased number of residences operated during the 1996 period. Of this
increase, $900,000 resulted from the addition of the Heartland residences
acquired in January 1996, $390,000 resulted from the acquisition of one
residence in April 1995 and $310,000 resulted from the opening of two residences
during the last quarter of 1995 and one residence during the first quarter of
1996. Other revenue, which consists of management and development fees from
unconsolidated joint venture entities, increased to $292,000 in 1996 from
$98,000 for the comparable 1995 period primarily as a result of fees received
from the five ALS-Midwest residences. As a result of the ALS-Midwest
Restructuring, the Company acquired all of the remaining interests not already
held by the Company in these five residences. Consequently, in subsequent
periods, the operations of ALS-Midwest will be consolidated with those of the
Company.

Residence Operations. Residence operating expenses for the three months
ended March 31, 1996 were $3.2 million, representing a $1.9 million, or 140%,
increase from $1.3 million for the comparable 1995 period, due to the increased
number of residences operated during the 1996 period. Of this increase, $880,000
resulted from the addition of the Heartland residences, $380,000 from the
acquisition of one residence in April 1995 and $445,000 resulted from the
opening of two residences during the last quarter of 1995 and one residence
during the first quarter of 1996.

Lease Expense. Lease expense for the three months ended March 31, 1996 was
$488,000, representing an increase of $62,000, or 14.5%, from $426,000 for the
comparable period in 1995. Such increase is primarily attributable to two leases
related to the Heartland residences and the Florida Sale/leaseback in January
1996.

General and Administrative. General and administrative expenses for the
three months ended March 31, 1996 were $1.6 million, representing an increase of
$1.0 million, or 172%, from $583,000 for the comparable period in 1995. The
increase in expenses was partially attributable to salaries, related payroll
taxes and employee benefits relating to additional corporate personnel retained
to support the Company's actual and anticipated growth strategy, increased
accounting costs, corporate office space rental and other expenses related to
the Company's growth strategy and increased marketing expenses associated with
new residences. The Company expects that its general and administrative expenses
will decrease as a percentage of operating revenue as the Company grows and
achieves certain economies of scale.

Depreciation and Amortization. Depreciation and amortization for the three
months ended March 31, 1996 was $365,000, representing an increase of $220,000,
or 152%, from $145,000 for the comparable period in 1995. This increase resulted
primarily from the addition of the Heartland residences, the acquisition of one
residence in April 1995 and a new residence opened during 1996.

Interest Expense. Interest expense for the three months ended March 31,
1996 was $530,000, representing an increase of $349,000, or 193%, from $181,000
for the comparable period in 1995. This increase in interest expense was
primarily due to the incurrence of indebtedness in the amount of $4.2 million
related to the acquisition of one residence in April 1995.

Equity in Losses (Income) of Unconsolidated Affiliates. Equity in losses
of unconsolidated affiliates was $85,000 for the three months ended March 31,
1996, representing an increase of $124,000, or 318%, from equity in income of
unconsolidated affiliates of $39,000 for the comparable period in 1995. These
losses were primarily attributable to the Company's investment in ALS-Midwest.
As a result of the ALS-Midwest Restructuring, the Company will cease to record
an equity in net losses with regard to ALS-Midwest but will continue to record
an equity in losses (income) from other unconsolidated affiliates.

Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the three months ended March
31, 1996 was $45,000, representing an increase of $23,000, or 105%, from $22,000
for the comparable period in 1995. The increase was attributable to the share of
start-up losses allocated to the minority interest in one residence, which
opened in January 1996.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Operating Revenue. Resident service fees for the year ended December 31,
1995 were $9.7 million, representing an increase of $5.2 million, or 115%, from
$4.5 million for 1994, due to the increased number of residences operated during
1995. Of this increase, $3.5 million resulted from the full year of operation of
two

30
<PAGE> 33

residences, including one which was opened in March 1994 and one which was
acquired in November 1994, and $1.2 million from the acquisition of one
residence in April 1995. In addition, the expansion of one residence and the
opening in the fourth quarter of 1995 of two residences contributed to the
increase. The remaining increase of $330,000, or 73%, in operating revenue
resulted from an increase in other revenue.

Residence Operations. Residence operating expenses for the year ended
December 31, 1995 were $7.2 million representing an increase of $4.3 million, or
148%, from $2.9 million for 1994, due to the incurrence of lease-up expenses
related to residences acquired and opened in 1995. Specifically, $2.7 million of
such increase resulted from a full year of operations of two residences, one of
which was acquired in September 1994 and the other of which was opened in March
1994 and $1.0 million resulted from the residence acquired in April 1995.

Lease Expense. Lease expense for the year ended December 31, 1995 was
$890,000, representing an increase of $193,000, or 28%, from $697,000 for 1994.
Such increase is primarily attributable to the full year of lease expense in
1995 for the residence that opened in March 1994 and the increase in lease
expense associated with the residence expansion discussed above.

General and Administrative. General and administrative expenses for year
ended December 31, 1995 were $2.6 million, representing an increase of $1.1
million, or 78%, from $1.5 million for the comparable 1994 period. The increase
in expenses was partially attributable to salaries, related payroll taxes and
employee benefits relating to additional corporate personnel retained to support
the Company's actual and anticipated growth strategy, increased accounting
costs, increased marketing expenses associated with new residences, increased
rent due to the expansion of existing corporate office space and other expenses
related to the Company's growth strategy, and increased marketing expenses
associated with new residences. The Company expects that its general and
administrative expenses will decrease as a percentage of operating revenue as
the Company grows and achieves certain economies of scale.

Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1995 was $815,000, representing an increase of $557,000, or
215%, from $258,000 for 1994. This increase resulted primarily from the full
year of operations of the residence that opened in September 1994 and the
residence acquired in April 1995.

Interest Expense. Interest expense for 1995 was $1,047,000, representing
an increase of $725,000, or 225%, from $322,000 for 1994. The increased interest
expense was primarily the result of a full year of interest expense associated
with indebtedness on the residence that opened in March 1994 and the assumption
of debt associated with the residence acquired in April 1995 aggregating $5.3
million.

Gain on Sale of Land. Two parcels of land adjacent to one of the Company's
residences were sold in November and December 1995 resulting in a gain of
$439,000. Since the Company has not engaged in other land sales, a similar gain
does not appear in other periods in the financial statements.

Equity in Losses of Unconsolidated Affiliates. Equity in net losses from
investments in unconsolidated affiliates was $438,000 for 1995. The Company did
not have any significant investments in unconsolidated affiliates in 1994. These
losses were attributable to the start-up losses incurred by several of the
ALS-Midwest residences during the year.

Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the year ended December 31,
1995 was $112,000, representing an increase of $63,000, or 131%, from $49,000
for the comparable 1994 period. The increase was attributable to the losses
allocated to the minority interest in two residences and the costs associated
with identifying development opportunities in the Eastern United States.

Year Ended December 31, 1994 Compared to Year Ended December 31, 1993

Operating Revenue. Resident service fees for the year ended December 31,
1994 were $4.5 million, representing an increase of $1.7, or 63% from $2.7
million for the comparable 1993 period due to the opening of one residence and
the acquisition of another. Other revenues, which consist of management fees,
increased

31
<PAGE> 34

to $451,000 in 1994 from $22,000 for the comparable 1993 period primarily as a
result of management contracts entered into in December 1993 for the operation
of the seven residences previously operated by the Predecessor.

Residence Operations. Residence operating expenses for the year ended
December 31, 1994 were $2.9 million, representing an increase of $1.1 million,
or 61%, from $1.8 million for 1993 due to the acquisition of one residence and
the opening of another residence.

Lease Expense. Lease expense for 1994 was $697,000, representing an
increase of $115,000, or 20%, from $582,000, for 1993. This increase is
primarily attributable to the opening of one residence in March 1994.

General and Administrative. General and administrative expenses for 1994
were $1.5 million, representing an increase of $1.0 million, or 214%, from
$464,000 for 1993. The increase is related to the expansion of the Company's
corporate staff and related office expenses to accommodate the Company's growth
strategy.

Depreciation and Amortization. Depreciation and amortization for 1994 was
$258,000, representing an increase of $151,000, or 142%, compared to $107,000
for 1993. Such increase was attributable to the acquisition of one residence in
September 1994 and the furniture, fixtures and equipment associated with the
opening of one residence in March 1994.

Interest Expense. Interest expense for the year ended 1994 was $322,000,
representing an increase of $266,000 from $56,000 for 1993. This increase is
attributable to the incurrence of $6.3 million of additional indebtedness in
connection with the acquisition of one residence in September 1994.

Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries was $49,000 for 1994. These
losses were attributable to the losses allocated to the minority partners'
interest in one residence. The Company did not have minority partners in 1993.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations, its aggressive
development program and acquisitions through a combination of various forms of
real estate financing, capital contributions from joint venture partners, loans
from Evergreen and net proceeds from private placements of shares of Common
Stock.

The Company has operated from time to time with significant working capital
deficits primarily as a consequence of the financing of its residence
development and acquisitions and, to a lesser extent, the operating losses its
assisted living residences have sustained. At December 31, 1995, the Company's
working capital was $1.2 million, as compared to a working capital deficit of
$1.2 million at December 31, 1994, an increase of $2.4 million. Working capital
at March 31, 1996 was $5.7 million, an increase of $4.5 million from December
31, 1995, primarily attributable to the Florida Sale/leaseback. On a pro forma
basis to give effect to the 1996 Transactions, the Company would have had a
working capital deficit of $3.9 million, primarily attributable to the
additional short-term debt incurred in connection with the ALS-Midwest
Restructuring, which debt will be repaid with a portion of the net proceeds from
the Offering. See "Use of Proceeds." Net cash used by operating activities
totaled $357,000, $1.1 million and $1.2 million for the years ended 1994 and
1995 and the three months ended March 31, 1996, respectively. Net cash used in
investing activities totaled $3.4 million, $17.1 million and $3.0 million for
the years ended 1994 and 1995 and the three months ended March 31, 1996,
respectively. Substantially all these expenditures were used for development and
acquisition of residences. Net cash provided by financing activities totaled
$3.9 million, $20.9 million and $2.1 million for the years ended 1994 and 1995
and the three months ended March 31, 1996, respectively.

As of March 31, 1996, on a pro forma basis to give effect to the 1996
Transactions and as adjusted to give effect to the application of the net
proceeds of the Offering to the Company, the Company's long-term debt would have
been $22.1 million. On a pro forma basis to give effect to the 1996
Transactions, the Company had lease expense for the year ended December 31, 1995
of $8.9 million. Long-term debt and annual lease expense will increase
significantly as the Company pursues its growth strategy.

The Company expects that cash on hand the net proceeds of the Offering and
additional construction and sale/leaseback financing will be sufficient to fund
its development and construction program, as well as the

32
<PAGE> 35

anticipated operating losses therefrom, for at least the next 18 months,
including the 43 residences under construction or under development, 21 of which
are scheduled to open during 1996. There can be no assurance, however, that the
Company will not be required to seek additional capital earlier or that
sale/leaseback financing will be on terms acceptable to the Company. In
addition, the Company may require additional financing to enable it to acquire
additional residences, to respond to changing economic conditions, to effect
further expansion of the Company's development program or to account for changes
in assumptions related to its development program. See "Business -- Properties".
The Company expects negative cash flow to continue for at least the next 12 to
18 months as it continues to develop and construct assisted living residences.
The Company's future success will depend on its ability to fund its growth
strategy. The Company will seek, from time to time, additional funding through
public or private financing, including equity or debt financing. There can be no
assurances that such financing will be available to the Company as needed or on
terms acceptable to the Company.

In May 1995, the Company completed the private placement of 4,302,994
shares of the Company's Common Stock for $20 million. The net proceeds of
approximately $19.0 million from this financing were used to (i) repurchase
380,636 shares of Common Stock and prepay a promissory note held by a co-founder
of the Predecessor for $2.5 million and $40,640, respectively; (ii) repay
advances to the Company made by Evergreen together with interest due thereon in
the amount of approximately $4.1 million; (iii) develop, construct and acquire
assisted living residences; and (iv) fund general corporate purposes, including
the corporate infrastructure necessary to manage the Company's future
operations.

On January 26, 1996 the Company acquired all of the outstanding capital
stock of Heartland for a total consideration of approximately $5.5 million and
the issuance of 261,424 shares of Common Stock. In connection with the Heartland
acquisition, the Company borrowed approximately $8.7 million pursuant to the
Heartland Bridge Financing provided by RDV Capital Management L.P., a Delaware
limited partnership affiliated with one of the Company's directors. See "Certain
Relationships and Related Transactions." Under the terms to the Heartland Bridge
Financing, the Company borrowed (i) $2.9 million pursuant to a two year note,
which accrues interest at the annual rate of 9.0% for the first six months,
10.5% for the second six months and thereafter the annual interest rate
increases by an additional 2.0% for each three month period until the final
maturity on January 25, 1998; and (ii) $5.8 million pursuant to a two year note,
which accrues interest at an annual rate of 9.0% per annum for the first twelve
months, increasing thereafter by an additional 2.0% for each three month period
until final maturity on January 25, 1998. The loan is secured by the pledge by
the Company of the outstanding shares of the common stock of Heartland. The
Company expects to use a portion of the net proceeds received by it from the
Offering to repay this loan.

In May 1996, the Company guaranteed two loans to two of the ALS-Midwest
Partnerships in the aggregate amount of $9.4 million, the proceeds of which are
being used to fund the construction of the Company's residences currently under
construction in Northville and Utica, Michigan. The loans bear interest at a
rate equal to the prime rate plus 1.0% and are payable with respect to interest
only until the maturity date, April 1, 1999.

On May 23, 1996, the Company raised approximately $2.0 million of cash
through the sale of (i) 322,706 shares of Common Stock to a company affiliated
with Pioneer Development Company, the Company's proposed joint venture partner
in New York, Massachusetts, Connecticut and Rhode Island; and (ii) 107,575
shares of Common Stock to Petty, Kneen & Company, a company controlled by
William G. Petty, Jr., the Company's Chairman of the Board, and John W. Kneen,
the Company's Chief Financial Officer. See "Business -- Joint Ventures and
Strategic Alliances -- Proposed Joint Venture with Pioneer Development Company,
Inc." and "Management -- Executive Compensation -- Consulting, Employment and
Services Agreements -- Consulting Agreement with Petty, Kneen & Company."

On May 23, 1996, the Company and Crossings consummated the Crossings merger
pursuant to which Crossings was merged with and into ALS and all of the shares
of Crossings capital stock outstanding prior to the Crossings merger were
converted into 2,007,049 shares of Common Stock. See "History and
Organization -- Crossing Merger."

33
<PAGE> 36

On May 23, 1996, the Company acquired the limited partnership interests not
already owned by it in ALS-Midwest for aggregate consideration of 115,024 shares
of Common Stock and promissory notes in the aggregate principal amount of $2.9
million. These promissory notes are due and payable on January 31, 1997 and bear
interest at the rate of 8% per annum. See "Use of Proceeds." The Company
acquired 100% of the outstanding stock of the corporate general partner of
ALS-Midwest ("ALS-Midwest, Inc.") pursuant to a merger transaction whereby the
shareholders of ALS-Midwest Inc. other than the Company received, in exchange
for their shares of ALS-Midwest Inc., $300,000 in cash and 57,512 shares of the
Common Stock. Contemporaneously with the merger, the Company refunded advances
made to the ALS-Midwest Partnerships by affiliates of Damone by a cash payment
of $700,000 and delivery of a promissory note in the amount of $1.4 million. See
"Use of Proceeds and "History and Organization and Acquisition of Remaining
Interests in ALS-Midwest."

IMPACT OF INFLATION

To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and results of
operations due to the Company's dependence on its senior resident population,
most of whom rely on relatively fixed incomes to pay for the Company's services.
As a result, the Company may not be able to increase resident service fees to
account fully for increased operating expenses. In structuring its fees, the
Company attempts to anticipate inflation levels, but there can be no assurance
that the Company will be able to anticipate fully or otherwise respond to any
future inflationary pressures.

34
<PAGE> 37

BUSINESS

OVERVIEW

The Company is a leading national assisted living company operating 57
residences with an aggregate capacity of approximately 2,500 residents. Of these
total residences, the Company owns 18, leases 23, holds equity interests in and
operates seven and manages an additional nine. The Company provides a full range
of assisted living services in its residences for the frail elderly and
free-standing specialty care residences for individuals with Alzheimer's disease
and other dementias. The Company and its Predecessor have operated assisted
living residences since 1981 including specialty dementia care residences since
1985. The Company believes it is one of the leading operators of free-standing
dementia care residences, a growing niche within the larger assisted living
industry.

The Company provides a broad continuum of personal care (such as assistance
with bathing, toileting, dressing, eating and ambulation), support services
(such as housekeeping, laundry and transportation) and health care (such as
medication administration and health monitoring) to its residents. In addition,
the Company offers a wide range of specialized services, including behavior
management and environmental adaptation programs, to residents who suffer from
Alzheimer's disease and other dementias. All of these services are provided on a
24-hour basis in "home-like" settings which emphasize privacy, individual choice
and independence. The Company operates four distinct assisted living product
lines (Clare Bridge, Wynwood, Crossings and WovenHearts), each serving a
particular segment of the private pay elderly population. Each assisted living
product line is designed to permit residents to age in place by meeting their
personal and health care needs across a range of pricing options. See
"-- Assisted Living Product Lines."

Since 1993, the Company has experienced significant growth through its
aggressive development program and several strategic acquisitions. During this
period the Company has developed or acquired 48 residences with an aggregate
capacity of approximately 2,400 residents. The Company intends to continue its
development strategy and is currently developing or constructing an additional
43 residences, 21 of which are scheduled to open during 1996. The Company also
intends to continue to pursue strategic acquisitions of assisted living
operations. In keeping with its acquisition strategy, in May 1996, the Company
acquired Crossings, an assisted living company which operated 15 residences with
a capacity of approximately 1,420 residents throughout the Western United
States. This strategic merger has provided the Company with access to several
new geographic markets and complements its existing range of assisted living
product lines with the addition of apartment-style assisted living residences.
In January 1996, the Company acquired Heartland, an assisted living company
which operated 20 WovenHearts residences throughout Wisconsin. As a result of
this transaction, the Company has broadened its range of assisted living product
lines to serve frail elderly in moderate income markets and rural communities.
In further support of its growth strategy, the Company is currently negotiating
for financing commitments aggregating up to approximately $300 million to
develop, construct and permanently finance assisted living residences.

The Company's management team has extensive operational and strategic
experience in the health care industry. The Company's President and Chief
Executive Officer, William F. Lasky, founded the Company's predecessor and has
been actively involved in the assisted living industry for over 15 years. Mr.
Lasky currently serves as Chairman of ALFAA, the nation's largest dedicated
assisted living trade organization. The Company's Chairman, William G. Petty,
Jr., has held senior management positions and has managed strategic investments
in companies in the long-term care, assisted living and senior living
industries. Mr. Petty served as the Chairman, Chief Executive Officer and
President of Evergreen, a NYSE-listed operator of long-term care facilities,
from June 1993 until July 1995, when Evergreen merged with GranCare, for which
he now serves as Vice Chairman. See "Management."

35
<PAGE> 38

public and private cost containment pressures, (iii) declining availability of
traditional nursing home beds given nursing home operators' increasing focus on
higher acuity patients, (iv) quality of life advantages of assisted living
residences over traditional skilled nursing homes and (v) the decreasing
availability of family care as an option for elderly family members. The Company
believes that it is well positioned to capitalize on these trends given its
growth and operating strategies and its extensive experience in the assisted
living industry.

BUSINESS STRATEGY

The Company believes that significant growth opportunities exist to provide
personal and health care services to the rapidly growing elderly population. The
Company intends to aggressively expand its operations through the development
and construction, and the selective acquisition, of additional residences. The
Company also intends to seek to improve the operating performance of its
residences through the continued enhancement of its operations.

Growth Strategy. The Company's growth strategy emphasizes growth through
the development and construction of assisting living residences and through
strategic acquisitions of assisted living operations.

Development Strategy. The Company intends to continue to expand its
operations primarily through the development and construction of assisted
living residences in selected markets. The Company has an integrated
internal development approach pursuant to which the Company's management
and other personnel (including designers and architects, market analysts
and construction managers) locate sites for, develop and open its
residences. Personnel experienced in site selection conduct extensive
market and site-specific feasibility studies prior to the Company
committing significant financial resources to new projects. Utilizing its
four residence models, the Company believes it can rapidly expand its
operations into new markets and strengthen its presence within its existing
markets.

Since 1981, the Company has developed and constructed 30 residences
(including residences developed by Crossings and Heartland) and is in the
process of developing or constructing 43 additional residences, 21 of which
are expected to open during 1996. Construction time for new development
generally ranges from seven to 12 months for its Wynwood, Clare Bridge and
Crossings residences and ranges from four to six months for its WovenHearts
residences. Once opened, new residences generally achieve a stabilized
level of occupancy of 95% or higher over periods ranging from 10 to 14
months and six to nine months for these types of residences, respectively.

To facilitate its development strategy, the Company has formed
strategic alliances with established regional real estate development
partners which have enabled the Company to develop and construct additional
residences while reducing the investment of, and associated risk to, the
Company. The Company's development partners generally provide construction
management experience, existing relationships with local contractors,
suppliers and municipal authorities, knowledge of local and state building
codes and zoning laws and assistance with site location for new residences.
The Company contributes operational and industry expertise, has operational
management responsibility for residences owned by joint ventures and, in
most cases, has the right and obligation to acquire the equity interests of
the other joint venture partners at predetermined times. Through March 31,
1996, nine of the Company's residences had been developed pursuant to joint
ventures. The Company recently acquired its joint venture partners' equity
interests in five of these residences. The Company intends to continue to
evaluate opportunities to acquire similar interests in the future. See
"Business -- Joint Ventures and Strategic Alliances" and "History and
Organization."

Acquisition Strategy. The Company has acquired, and intends to
continue to selectively acquire, assisted living operations. The Company
may acquire one or more residences as a means to enter new markets and may
also seek to acquire residences within its existing regions to gain further
market share and leverage its existing operating infrastructure. In
reviewing acquisition opportunities, the Company considers, among other
things, the competitive climate, the current reputation of the residence(s)
or the operator, the quality of the management, the need to reposition the
residence(s) in the marketplace and costs associated therewith, the
construction quality and any need for renovations of the residence(s) and
the opportunity to improve or enhance operating results.

36
<PAGE> 39

In keeping with the Company's acquisition strategy, in May 1996 the
Company acquired Crossings, which operated 15 assisted living residences,
and in January 1996 the Company acquired Heartland, which operated 20
WovenHearts residences. The addition of Heartland and Crossings has
increased substantially the Company's operations and has provided ALS with
additional development and management expertise to further support its
growth strategy. See "History and Organization."

In support of its growth strategy, the Company maintains an in-house team
of researchers and analysts dedicated to performing market studies in connection
with identifying development and acquisition opportunities. In collaboration
with regional development partners, the Company selects target markets based on
a number of factors, including demographic profiles of both potential residents
and their adult children, existing competitors and known new entrants, estimated
market demand and zoning prospects. The Company's development department uses
demographic information and demand estimation models to identify optimal areas
within each target market. Potential sites are then evaluated by the Company's
site evaluation committee. Sites are approved or rejected based on established
criteria relating to land cost and conditions, visibility, accessibility,
immediate adjacencies, community perception and zoning prospects. Full market
feasibility studies, including site evaluations of all potential competitors and
extensive interviews of key community sources, are subsequently conducted on all
approved sites. A similar investigative process is employed when evaluating
potential acquisitions within an identified target market. The Company's
residences are currently located in Wisconsin, Oregon, Michigan, Colorado,
Florida, Washington, Pennsylvania, California and Idaho, and the Company is in
the process of constructing or developing residences in Arizona, Minnesota, New
Jersey, North Carolina, South Carolina and New York.

The Company seeks to cluster its full range of assisted living product
lines to further strengthen its presence within existing markets as well as to
effectively penetrate new markets. The Company generally enters larger
metropolitan markets with its Wynwood, Clare Bridge or Crossings product line.
Once established, the Company may supplement its market presence by developing
WovenHearts residences throughout smaller adjacent markets. The Company will
also use its WovenHearts product line to enter into smaller residential markets,
including rural communities, that would otherwise not support its larger upper
end residential models. This strategy enables the Company to penetrate its
principal markets, provides it access to smaller markets and enables it to
achieve certain regional economies of scale.

Operating Strategy. The Company's operating strategy is to achieve and
sustain a strong competitive position within its chosen markets as well as to
continue to enhance the performance of its operations. The Company believes that
its multiple product lines afford it a significant competitive advantage as they
enable the Company to offer an evolving continuum of care and services,
including specialty care services, and offer such care and services across a
range of pricing options, thereby serving both the upper and moderate income
segments of the elderly population. The Company will also seek to enhance its
current operations by (i) maintaining and improving occupancy rates at its
residences; (ii) opportunistically increasing resident service fees; and (iii)
improving operating efficiencies.

Offer Evolving Continuum of Care and Services. The Company seeks to
continually expand its range of personal and health care and support
services to meet the evolving needs of its residents. The Company's
Wynwood, Crossings and WovenHearts assisted living product lines are
designed to meet the needs of frail elderly individuals who require regular
assistance with activities of daily living and have other special care
needs. The Company's Clare Bridge product line is specifically designed to
serve the needs of individuals with Alzheimer's disease and other dementias
through the provision of a variety of specialty care services. The Company
intends to evaluate opportunities to provide additional services, such as
home health, pharmacy and restorative services, to its residents.

Offer Services Across a Range of Pricing Options. By offering a
variety of pricing options for its residential and care services, the
Company believes it is able to capture a larger segment of the elderly
population. The Company's Wynwood, Clare Bridge and Crossings product lines
are designed to serve frail elderly residents who can afford access to a
broad range of personal and health care and support services. The Company's
WovenHearts product line, on the other hand, is designed to cater to
moderate income elderly who need access to care but may have more limited
financial resources.

37
<PAGE> 40

Maintain and Improve Occupancy Rates. The Company will also seek to
maintain and improve occupancy rates by continuing to (i) attract new
residents through marketing programs directed towards family decision
makers, namely adult children, and potential residents and (ii) actively
seek referrals from hospitals, rehabilitation hospitals, physicians'
clinics, home health care agencies and other acute and sub-acute health
care providers in the markets served by the Company.

Selectively Increase Service Pricing Levels. The Company will
continue to review opportunities to increase resident service fees within
its existing markets, while maintaining competitive market positions. In
keeping with this strategy, the Company will continue to offer both premium
priced and moderately priced assisted living services and generally target
private pay residents. The Company's private pay residents are typically
seniors who can afford to pay for services from their own and their
families' financial resources. Such resources may include social security,
savings, proceeds from the sale of their residence, contributions from
family members and insurance proceeds from long-term insurance care
policies.

Improve Operating Efficiencies. The Company will seek to improve
operating results of its residences by continuing to actively monitor and
manage operating costs. In addition, the Company believes that
concentrating residences within selected geographic regions enables the
Company to achieve operating efficiencies through economies of scale and
reduced corporate overhead and provides for more effective management
supervision and financial controls.

ASSISTED LIVING PRODUCT LINES

The Company operates four distinct assisted living product lines (Clare
Bridge, Wynwood, Crossings, and WovenHearts) designed to meet the increasing
personal and health care needs of the private pay elderly population. Product
lines are defined as consisting of various housing models offering a
predetermined selection of services within a defined price range. Together,
these product lines encompass a full range of assisted living services ranging
from basic support services to specialized care for residents with Alzheimer's
disease and other dementias. Each of the Company's product lines targets a
distinct segment of the elderly population through site selection, building
design, staffing, service and care plans, as well as pricing structures based on
the needs and characteristics of each targeted segment. All of the Company's
residences incorporate its philosophy of preserving residents' privacy,
encouraging individual choice and fostering independence in a "home-like"
setting.

Clare Bridge. These specially designed, free-standing residences
serve the programmatic needs of individuals with Alzheimer's disease and
other dementias. Clare Bridge residents typically require higher levels of
care and services as a result of their progressive decline in cognitive
abilities including impaired memory, thinking and behavior. These residents
require increased supervision because they are typically highly confused,
wander prone and incontinent. Ranging in size from 16,000 to 28,000 square
feet, these single-story residences accommodate 24 to 52 residents and are
primarily located in metropolitan and suburban markets. The Company seeks
to create a "home-like" setting that addresses the resident's cognitive
limitations using internal neighborhoods consisting of rooms which are
scaled to the size typically found in an upper-income, single family home
with the same level of furniture, fixtures and carpeting. Key features
specific to the needs of Clare Bridge residents generally include indoor
wandering paths, a simulated "town-square" area, secure outdoor spaces with
raised gardening beds, directional aids to assist in "wayfinding" such as
signs, color-coded neighborhoods and memory boxes with the resident's
photograph outside of their unit, and specially designed furniture suitable
for incontinent residents. The required level of care in Clare Bridge
residences is typically higher than in the Company's other residences due
to the increased level of supervision and assistance required by residents
with dementias. As a result, these residences have a staffing pattern which
includes a full-time nurse and a care giver to resident ratio of 1 to 6.
Due to the generally high level of care required by residents, a
single-tier pricing structure is used. The Company generally charges
monthly rates per resident ranging from $2,800 for a shared room to $3,300
for a private room.

Wynwood. These multi-story residences are designed to serve primarily
upper-income frail elderly individuals in metropolitan and suburban
markets. Wynwood residents are generally 75 years of age or older, require
assistance with at least two of the five basic activities of daily living
(so-called ADLs (i.e.,

38
<PAGE> 41

bathing, toileting, dressing, eating and ambulation)) and need services due
primarily to physical limitations rather than cognitive impairment. The
Wynwood residences typically range in size from 35,000 to 45,000 square
feet and accommodate 50 to 72 residents. To achieve a more residential
environment in these larger buildings, each wing or "neighborhood" in the
residence contains design elements scaled to a single-family home and
includes a living room, dining room, patio or enclosed porch, laundry room
and personal care area, as well as a care giver work station. Residents are
offered a choice of private or shared, fully-furnished accommodations with
ongoing health assessments by a nurse, 24-hour assistance with ADLs, three
meals a day plus snacks, organized social activities, housekeeping and
personal laundry service. The Company maintains a minimum care giver to
resident ratio of 1 to 10 at each of these residences and increases
staffing levels to a ratio as high as 1 to 6 to accommodate the care needs
of the resident population. All residents are assessed at admission to
determine the level of care and service required and placed in one of four
levels ranging from basic care to three different levels of advanced care.
The Company customarily charges monthly rates per resident ranging from
$1,800 to $2,400 for a shared room and from $2,500 to $3,100 for a private
room.

Crossings. These apartment-style residences serve the needs of elderly
individuals who may require support services and personal care and are
generally located in metropolitan markets. Apartment-style residences are
favored in certain markets in the United States, particularly throughout
Western states and are required in certain states to meet licensing
requirements. The Company believes this product line enables it to capture
a broader segment of the assisted living market. These multi-story
residences range in size from 45,000 to 65,000 square feet and accommodate
60 to 80 residents, who choose among studio, one-bedroom and two-bedroom
apartments. These apartments typically include a bedroom, a kitchenette, a
full bathroom and a living/dining area and range in size from 280 to 700
square feet. Common space is dispersed throughout the buildings and
includes a central dining room, a library, various activity rooms, laundry
rooms and a beauty shop. The Company maintains care staff to resident
ratios ranging from 1 to 12 to 1 to 16, depending upon the care needs of
the residents. Crossings residences generally offer a three-tier pricing
structure ranging from a basic care package to more advanced care levels.
The Company customarily charges monthly rates per resident ranging from
$1,500 to $3,300. Additional fees ranging from $100 to $450 per month may
be charged for more advanced care levels, including its RISE and ESP
ancillary support programs. See "-- Assisted Living Care and Service
Programs".

WovenHearts. These residences are designed to meet the needs of
elderly individuals who have primarily physical limitations or who may be
experiencing the early stages of Alzheimer's disease. These smaller
residences serve moderate-income frail elderly individuals and are
typically located in small towns or rural markets. WovenHearts residences
range in size from 7,000 to 12,000 square feet and accommodate 15 to 26
residents. These single-story residences resemble, and can generally be
constructed on a site suitable for, a single family home. These residences
have multiple common areas that are easily accessible from any resident
room and include a living room, a den, an entertainment room, several
personal care areas as well as a large kitchen area which opens into an
adjoining dining room. This design allows residents to participate in
familiar daily activities (such as assisting with meals, laundry and
housekeeping) which promote maintenance of their functional abilities. Most
of the resident units are private and fully furnished, though shared
accommodations are also available. The Company generally maintains a
minimum care giver to resident ratio of 1 to 8 at its WovenHearts
residences. In addition, the Company is able to offer high quality and
cost-effective care and service in a smaller residential setting by using a
centralized professional staff (i.e., registered nurses and marketing
specialists) that performs functions for several WovenHeart residences. The
combination of lower construction and staffing costs enables the Company to
offer affordable care and services to the moderate income elderly
population. The WovenHeart residences currently have a single-tier pricing
structure consisting of a monthly rate ranging from $1,800 to $2,500. In
the future, the Company intends to adapt its WovenHearts model, services
and staffing levels to accommodate the needs of residents with later stages
of Alzheimer's disease.

39
<PAGE> 42

ASSISTED LIVING CARE AND SERVICE PROGRAMS

The Company offers a full range of assisted living care and services based
upon individual resident needs. Prior to admission, all residents are assessed
by the Company's professional staff to determine the appropriate residence model
and level of care and services required by such residents. Subsequently,
individual care plans are developed by residence staff in conjunction with the
residents, their families and their physicians. These plans are periodically
reviewed, typically at six month intervals, or when a change in medical or
cognitive status occurs. Each of the Company's assisted living product lines is
designed to accommodate residents as they age in place and require increasing
level of care. To oversee the delivery of care and services, the Company
maintains a licensed nurse on staff at each of its residences. The Company
believes that this level of attention to the health care needs of its residents
enables them to remain in the Company's residences, in many cases, for the rest
of their lives. In addition, the Company is also able to transfer residents to
and from its various residence models, where appropriate, depending upon the
evolving care needs of such residents. The Company has implemented different
care and service plans for each of its product lines. At its Wynwood and
Crossings models, for instance, residents are placed in one of several care
levels depending upon their individual needs. At its Clare Bridge and
WovenHearts residences, the Company uses a single care structure. However, the
Company is in the process of implementing at its WovenHearts residences a
multi-tier care plan similar to the plans offered at its Wynwood residences. The
Company's care levels include a basic care program, several advanced care
programs as well as additional ancillary service programs as further described
below.

Basic Care. At this level, residents are provided with a variety of
services, including 24 hour assistance with ADLs, ongoing health
assessments by a professional nurse, three meals per day and snacks,
coordination of special diets planned by a registered dietitian, assistance
with coordination of physician care, physical therapy and other medical
services, social and recreational activities, housekeeping and personal
laundry services.

Advanced Care. The Company also offers higher levels of personal and
health care services to residents who require more frequent or intensive
physical assistance or increased care and supervision due to cognitive
impairments. The Company offers three advanced care levels which provide
residents with increasing levels of care and services dependent on the
residents' changing needs. Rates charged for these services are added to
the rate charged for basic care. The Company generally charges an
additional $300 to $750 per month depending upon the level and frequency of
care required and staffing needs. Residents in the highest care level are
typically very physically frail or experiencing early stages of Alzheimer's
disease or other dementia. Physically frail residents may require complex
medication management, assistance with most or all ADLs, two-person
transfer from a wheelchair or incontinence care. Residents with cognitive
impairment may require frequent staff interaction and intervention due to
confusion.

Alzheimer's Care. The Company believes it is one of the leading
providers of care to residents with cognitive impairments including
Alzheimer's and other dementias, in its free-standing Clare Bridge
residences. The Company's programs provide the attention, care and services
needed to help cognitively impaired residents maintain a higher quality of
life. Specialized services include assistance with ADLs, behavior
management and a life-skills based activities program, the goal of which is
to provide a normalized environment that supports residents' remaining
functional abilities. Whenever possible, residents participate in all
facets of daily life at the residence, such as assisting with meals,
laundry and housekeeping.

RISE (Restoring Independence, Strength and Energy). Crossings
residences offer RISE, a one-on-one exercise program designed to help
residents regain their independence and become healthier, and stronger by
improving flexibility, balance, strength and endurance. The program is
targeted to residents with health concerns related to Parkinson's disease,
strokes, osteoarthritis, osteoporosis, congestive heart disease, hip
fractures and other limitations in ambulation and mobility. Monthly rates
for the program range from $90 to $400 depending on the frequency and
duration of sessions.

ESP (Extended Support Program). ESP, also offered at Crossings
residences, is a program designed to provide additional structure and
personal attention to residents with early stages of dementia.

40
<PAGE> 43

Regularly scheduled group recreational activities and social events help
residents build self-esteem and decrease anxiety related to confusion and
disorientation. The ESP program has been successful in retaining residents
who, due to their dementia, might otherwise need to relocate to a more
supportive environment. The monthly program rates range from $325 to $450.

Supportive Services. These services, which are currently offered at
Crossings residences, are designed for residents who typically do not need
routine assistance with ADLs and who are able to handle the administration
of their own medications. These services typically include three meals per
day, housekeeping, personal laundry service, transportation and social and
recreational programming.

Access to Specialized Medical Services. The Company assists its
residents with the coordination of access to medical services from third
parties including home health care, rehabilitation therapy, pharmacy
services and hospice care. These providers are often reimbursed directly by
the resident or a third party payor, such as Medicare. In the future, the
Company may elect to provide these services directly using its own skilled
employees or through a joint venture agreement with a skilled provider.

Residents requiring greater levels of supervision or more specialized
programming due to Alzheimer's disease or other dementias may be recommended for
transfer to one of the Company's Clare Bridge residences. In the event that a
resident's acuity level reaches a level such that the Company is unable to meet
the resident's needs, the Company maintains relationships with local hospitals
and skilled nursing facilities to facilitate resident transfers.

41
<PAGE> 44

PROPERTIES

Operating Properties. The table below sets forth certain information with
respect to the Company's properties which are operated by the Company. The
Company owns, leases, holds equity interest in or manages, on behalf of third
parties, these residences. The Company considers its properties to be in good
operating condition and suitable for the purposes for which they are being used.

SUMMARY OF RESIDENCES

<TABLE>
<CAPTION>
AS OF
MARCH 31, 1996
DATE --------------------
OWNERSHIP RESIDENT OPENED/ RATE PER OCCUPANCY
RESIDENCE TYPE LOCATION CARE LEVEL (% OWNED) CAPACITY ACQUIRED UNIT(1) RATE(2)
- --------------------------- ------------------ ----------------- --------------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OWNED/LEASED PROPERTIES
WISCONSIN
Clare Bridge............. Brookfield Dementia Care Leased 24 Nov-91 $3,307 100%
Clare Bridge............. Middleton Dementia Care Owned 24 Mar-91 3,305 98
Wynwood.................. Madison Frail Elderly Leased 50 Feb-92 2,492 100
Wynwood.................. Brookfield Frail Elderly Leased 60 Mar-94 2,752 99
WovenHearts.............. Clintonville Frail Elderly Owned 19 Jul-95 1,017 87
WovenHearts(3)........... Edgerton Frail Elderly Owned 16 Oct-95 1,519 71
WovenHearts.............. Janesville Frail Elderly Owned 16 Oct-95 2,581 91
WovenHearts.............. Jefferson Dementia Care Owned 16 Oct-95 2,084 71
WovenHearts.............. Kaukauna Frail Elderly Owned 16 Jul-95 1,619 91
WovenHearts.............. Manitowoc Frail Elderly Owned 20 Dec-95 1,803 31
WovenHearts.............. Neenah Frail Elderly Owned 20 Apr-96 2,100 --
WovenHearts.............. New London Frail Elderly Owned 20 Jul-95 1,406 67
WovenHearts.............. New Richmond Frail Elderly Owned 15 Mar-96 2,000 --
WovenHearts.............. Onalaska Frail Elderly Owned 20 Jun-95 1,760 68
WovenHearts.............. Rice Lake Frail Elderly Owned 20 Oct-95 1,800 50
WovenHearts.............. Shawano Frail Elderly Owned 15 Jul-95 1,228 100
WovenHearts.............. Platteville Frail Elderly Owned(72.7) 20 Nov-95 1,454 45
WovenHearts.............. Cambridge Frail Elderly Owned(50.0) 15 Jan-96 1,563 27
WovenHearts.............. Jefferson Dementia Care Leased 16 Jan-96 1,726 100
WovenHearts.............. Sun Prairie Frail Elderly Leased 20 Oct-95 1,660 93
WovenHearts.............. Menomonie Frail Elderly Owned(19.0) 20 Mar-95 1,736 64
WovenHearts.............. Plymouth Frail Elderly Owned(19.0) 15 Jun-94 2,155 89
WovenHearts.............. Wisc. Rapids Frail Elderly Owned(19.0) 20 May-95 2,004 92
OREGON
Crossings................ Albany Support Services Leased 74 Aug-90 1,132 89
Crossings................ Albany Support Services Leased 63 Jun-89 1,443 100
Crossings................ Forest Grove Support Services/
Frail Elderly Leased 88 Sep-90 1,354 94
Crossings................ McMinnville Support Services/
Frail Elderly Leased 87 May-91 1,512 97
Crossings................ Tualatin Frail Elderly Leased 112 Feb-89 2,163 88
Crossings................ Gresham Frail Elderly Leased 78 Jan-90 1,781 96
Crossings................ Medford Frail Elderly Leased 76 Jan-91 1,707 76
MICHIGAN
Clare Bridge............. Ann Arbor Dementia Care Owned 36 Jun-95 3,009 97
Clare Bridge............. Farmington Hills Dementia Care Owned 28 Jul-94 3,258 85
Clare Bridge............. Farmington Hills Dementia Care Owned 32 Oct-95 3,409 63
Clare Bridge............. Lansing Dementia Care Leased 36 Jan-96 2,972 55
Clare Bridge............. Utica Dementia Care Owned 36 Jan-95 3,086 94
COLORADO
Crossings................ Boulder Support Services Leased 82 Aug-88 1,600 97
Crossings................ Aurora Support Services Leased 159 Apr-91 1,132 90
Crossings................ Aurora Frail Elderly Leased 60 Apr-91 1,556 80
Crossings................ Boulder Frail Elderly Leased 76 Jun-94 2,290 99
</TABLE>

42
<PAGE> 45

- ---------------

(1) Average monthly rate per resident at each residence is calculated by
dividing the residence's total monthly resident service fee revenue by the
average number of occupied beds for the month.
(2) Average monthly occupancy rate for each ClareBridge, Wynwood and WovenHearts
residence and for each of the managed residences is calculated by dividing
the total number of resident occupied days by the total number of available
bed days of the residence. Average monthly occupancy rates for each
Crossings residence is calculated as the sum of occupied beds at the end of
each week for any one month period divided by the number of weeks in that
month.
(3) ALS shares management responsibility for this residence with its joint
venture partner, Memorial Community Hospital Association, Inc. of Edgerton,
Wisconsin.
(4) The Pennsylvania residences are owned by joint venture entities of which ALS
is the 60% equity owner. See "Business -- Joint Ventures and Strategic
Alliances -- Joint Venture with Continuing Care Concepts, Inc."
(5) ALS's 60% interest in this residence was acquired in September 1994. See
"Business -- Joint Ventures and Strategic Alliances -- Joint Venture with
Continuing Care Concepts, Inc."
(6) This residence is owned by a franchisee. The Company, however, receives a
management fee equal to 6.0% of the annual gross revenues of this residence.
(7) The Company holds a 2.5% equity interest in, and has a right of first
refusal to purchase, this residence.
(8) The Company holds a 0.5% equity interest in, and has a right of first
refusal to purchase, this residence.

The Company occupies executive offices located in Brookfield, Wisconsin
under a lease expiring in 2000. The Company also leases office space in Tacoma,
Washington; Madison, Wisconsin; and Denver, Colorado.

43
<PAGE> 46

Properties Under Construction and Development. The Company is in various
stages of constructing 18 residences and is developing 25 residences. Set forth
below is certain information with respect to residences in construction and
residence sites in development.

PROPERTIES UNDER CONSTRUCTION/DEVELOPMENT

<TABLE>
<CAPTION>
RESIDENT OPENING
RESIDENCE MODEL LOCATION(1) CARE LEVEL CAPACITY DATE STATUS(2)
- --------------------------------------------- ---------------------- ----------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Clare Bridge................................. Tampa, FL Dementia Care 38 3Q 1996 Construction
Clare Bridge................................. Montgomery, PA Dementia Care 48 3Q 1996 Construction
WovenHearts.................................. Whitewater, WI Frail Elderly 20 3Q 1996 Construction
WovenHearts.................................. Fond Du Lac, WI Frail Elderly 20 3Q 1996 Construction
WovenHearts.................................. Mankato, MN Frail Elderly 20 3Q 1996 Construction
WovenHearts.................................. Baraboo, WI Frail Elderly 20 3Q 1996 Construction
WovenHearts.................................. Oshkosh, WI Frail Elderly 20 3Q 1996 Construction
WovenHearts.................................. Janesville, WI Frail Elderly 20 3Q 1996 Construction
Wynwood...................................... Northville, MI Frail Elderly 72 4Q 1996 Construction
Wynwood...................................... Chapel Hill, NC Frail Elderly 70 4Q 1996 Construction
Clare Bridge................................. Ft. Meyers, FL Dementia Care 38 4Q 1996 Construction
Crossings.................................... Boise, ID Support Services 80 4Q 1996 Development
WovenHearts.................................. Owatonna, MN Frail Elderly 20 4Q 1996 Construction
WovenHearts.................................. Austin, MN Frail Elderly 20 4Q 1996 Construction
WovenHearts.................................. Winona, MN Frail Elderly 20 4Q 1996 Construction
WovenHearts.................................. River Falls, WI Frail Elderly 20 4Q 1996 Construction
WovenHearts.................................. St. Cloud, MN Frail Elderly 20 4Q 1996 Development
WovenHearts.................................. Eau Clair, WI Frail Elderly 20 4Q 1996 Development
WovenHearts.................................. Kenosha, WI Frail Elderly 20 4Q 1996 Development
WovenHearts.................................. Faribault, MN Frail Elderly 20 4Q 1996 Development
WovenHearts.................................. LaCrosse, WI Frail Elderly 20 4Q 1996 Development
Wynwood...................................... Utica, MI Frail Elderly 72 1Q 1997 Construction
Crossings.................................... Albany, OR Frail Elderly 70 1Q 1997 Development
Clare Bridge................................. Tempe, AZ Dementia Care 50 1Q 1997 Development
Crossings.................................... Colorado Springs, CO Frail Elderly 50 1Q 1997 Development
WovenHearts.................................. Middleton, WI Frail Elderly 20 1Q 1997 Development
WovenHearts.................................. Wilmar, MN Frail Elderly 20 1Q 1997 Development
Clare Bridge................................. Cary, NC Dementia Care 50 1Q 1997 Construction
Clare Bridge................................. Westhampton, NJ Dementia Care 50 1Q 1997 Construction
Crossings.................................... Tacoma, WA Frail Elderly 70 2Q 1997 Development
Clare Bridge................................. Charlotte, NC Dementia Care 50 2Q 1997 Development
Crossings.................................... Yakima, WA Frail Elderly 50 2Q 1997 Development
Clare Bridge................................. Williamsville, NY Dementia Care 52 2Q 1997 Development
Clare Bridge................................. Hamilton, NJ Dementia Care 50 2Q 1997 Development
Clare Bridge................................. Niskayuna, NY Dementia Care 52 2Q 1997 Development
Clare Bridge................................. Columbia, SC Dementia Care 50 2Q 1997 Development
Clare Bridge................................. East Hempfield, PA Dementia Care 38 2Q 1997 Development
Wynwood...................................... Charlotte, NC Dementia Care 72 2Q 1997 Development
Crossings.................................... Parker, CO Frail Elderly 70 3Q 1997 Development
Crossings.................................... Twin Falls, ID Frail Elderly 80 3Q 1997 Development
Clare Bridge................................. Pittsburgh, PA Dementia Care 52 3Q 1997 Development
Clare Bridge................................. York, PA Dementia Care 38 3Q 1997 Development
Clare Bridge................................. Winston-Salem, NC Dementia Care 38 4Q 1997 Development
---------
1,790
========
</TABLE>

- ---------------

(1) Each of the residences located in Michigan, North Carolina, New Jersey, New
York and Pennsylvania is being developed and will be owned directly by joint
venture entities in which the Company will own varying percentages of equity
interests. See "Business of the Company -- Joint Ventures and Strategic
Alliances."
(2) "Construction" means that construction activities have occurred (ground
breaking) and are ongoing. "Development" means that the site is under
"control" (pursuant to purchase agreements or options or otherwise) and
development activities with respect to the site have commenced and are
ongoing (such as site permitting, preparation of surveys and architectural
plans, and negotiation of construction contracts).

44
<PAGE> 47

The Company has also targeted the States of Delaware and Connecticut for
new development and is considering expanding its operations into Illinois. To
that end, the Company has undertaken market feasibility studies for selected
markets within each of those states.

OPERATIONS

The Company centralizes many of its administrative functions to enable its
residence employees to focus their efforts on resident care. The Company
maintains centralized accounting, finance and other operational functions at its
national corporate office in Brookfield, Wisconsin. Employees at the Company's
national corporate office are responsible for (i) establishing Company-wide
policies and procedures relating to, among other things, resident care and
operation, (ii) facilitating billing and collection, accounts payable, finance,
accounting and payroll, (iii) developing employee training materials and
programs and (iv) providing overall strategic direction to the Company. In
addition, all development, construction and acquisition activities, including
feasibility and market studies, residence design, and development and
construction management, are conducted from the Company's national office. The
Company seeks to control operating expenses for each of its residences through
monthly budgeting, standardized management reporting and centralized purchasing
through national purchase contracts. Residence expenditures are monitored and
approved by the Company's regional directors who are held accountable for
achieving budgeted results for each residence within their respective territory
and who report to the Company's Senior Vice-President of Operations. All of the
Company's residences are divided into geographic regions in order to efficiently
allocate the Company's professional managerial resources. This regional focus
permits the Company to realize certain financial and management economies of
scale while reducing much of the administrative burden typically placed on
residence staff. The Company currently has eight regions, each of which are
under the supervision of a regional director.

The Residence Director supervises the other members of the residence's
management team (consisting of a Health Care Coordinator, Community Service
Representative, Life Enrichment Coordinator, Resident Assistant Supervisor and
Kitchen Manager) and is responsible for monitoring day-to-day operations and
resident services. Company policy requires the Residence Director to be present
in the residence during normal business hours and the Health Care Coordinator to
be on-call 24 hours a day.

The Company has adopted the "care giver" model which differs significantly
from traditional long-term care models. In traditional long-term care settings,
the delivery of care and services is divided into numerous departments typically
consisting of nursing, housekeeping activities and food services all provided by
separate individuals. The Company's resident assistants are responsible for the
personal care, medication administration (when permitted by state law),
housekeeping, laundry, meal service and social activities of the residents. As a
result, the Company believes its staff can deliver comparable levels of care in
a more personalized, efficient and economic manner than that offered in most
long-term care settings. The Company believes that its care giver model enables
its staff to develop a personal approach and, in many instances, become a
significant part of residents' lives.

The Company has attracted, and continues to seek, highly dedicated,
experienced personnel. The Company has created formal training programs
accompanied by review and evaluation procedures to help ensure quality care for
its residents. The Company believes that education, training, and development
enhance the effectiveness of its employees. All employees are required to
complete the Company's training program, which includes a core curriculum
comprised of personal care basics, Alzheimer's disease processes, behavior
management, health care management, life skills programming, first aid, fire
safety, nutrition, infection control, hospitality, customer service, and death
and dying. In addition to classroom training, the Company's residences provide
new employees with on the job training, utilizing experienced staff as trainers
and mentors.

For staff who desire to advance into residence management, a program that
provides additional training in management techniques and budget management is
available. The Company has developed an "Associate in Training" program that
places a residence director trainee in an existing residence to attain "hands
on" experience under the direct supervision of a current Residence Director.
This program is intended to ensure

45
<PAGE> 48

that a sufficient number of Company-trained professionals will be available to
manage newly developed and acquired residences.

QUALITY ASSURANCE

The Company's quality assurance program is intended to further its goal of
achieving a high degree of resident and family satisfaction with the care and
services it provides. The Company coordinates the implementation of its quality
assurance program at each of its residences through its national and regional
offices. Periodic and annual surveys of residents and their family members are
used to appraise and monitor their level of satisfaction with the Company's
services. The Company also provides a toll-free number so that residents, their
families and professionals may conveniently convey their comments and
observations. In addition, residence inspections are conducted periodically by
regional staff. The scope of these inspections cover the appearance of the
exterior of the buildings and grounds, the appearance and cleanliness of the
interior, the professionalism and friendliness of staff, the quality of resident
care and care documentation, the quality of resident social events and planned
activities, the presentation of meals and appearance of dining areas, the
appearance of residents and overall compliance with government regulations. To
further evaluate customer service, the Company engages a third party service to
periodically "mystery shop" the Company's residences. This independent service
analyzes the Company's performance from the perspective of a customer without
the inherent biases of a Company employee. This service assists the Company in
continually monitoring and improving the level of services offered to its
residents to further ensure maximum customer satisfaction.

MARKETING

The Company's marketing and sales efforts are undertaken on the national,
regional and local levels. This effort is intended to create awareness of the
Company and its services among prospective residents, their families, other key
decision makers and professional referral sources. A national office marketing
staff develops overall strategies to promote the Company's product lines
throughout its markets and assesses continuously the success of its efforts by
monitoring the generation and tracking of leads carried out by the Company's
sales staff. Each regional office also has a marketing specialist, and most
residences have on staff a Community Services Representative, both of whom are
dedicated to sales and marketing activities.

Prior to opening new residences, the Company commences an aggressive
marketing campaign by opening a sales office in close proximity to residences
nearing completion. During this launch campaign, the Company's personnel
actively contact local referral sources, which generally account for a majority
of resident referrals. In addition, the Company typically engages in more
traditional types of marketing activities, such as direct mailings and print
advertising, signs and yellow pages advertising. These marketing activities and
media advertisements are directed to the adult children of prospective residents
because they comprise the primary decision makers for placing a frail elderly
relative in an assisted living setting. The Company's "clustering" strategy also
enables the Company to leverage its pre-opening and on-going marketing efforts
in a given area.

The Company's marketing personnel also provide insight into local and
regional demand for assisted living services. The regional and local marketing
staff may be more attuned to local demand for certain services not offered by
the Company. As a result, the Company regularly involves its marketing personnel
in evaluating its development activities and services.

46
<PAGE> 49

ADVISORY BOARD

The Company has formed an Advisory Board comprised of professionals with
specialized expertise in the delivery of assisted living services. The Advisory
Board meets regularly to review the Company's resident care policies and
procedures. The Advisory Board, however, has no authority to act on behalf of
the Company. The current members of the Advisory Board are:

<TABLE>
<CAPTION>
NAME POSITION
- ----------------------------------- ------------------------------------------------
<S> <C>
Kathleen Buckwater, Ph.D........... Professor and Associate Director, Office of
Nursing Research Development and Utilization,
University of Iowa
Donna Cohn, Ph.D................... Chairman, Department of Aging and Mental Health,
University of South Florida
Carly R. Hellen, OTR/L............. Director of Nursing Home Services of Rush
Alzheimer's Disease Center, Rush-Presbyterian-
St. Luke's Medical Center, Chicago, Illinois
Thomas Kirk........................ Vice President, Patient Family and Education
Services, National Alzheimer's Association,
Chicago, Illinois
Cynthia Leibrock, MA, ASID,
IFDA............................. Principal Easy Access Barrier Free Design,
Aurora, Colorado
Nancy Mace, MA..................... Consultant and author of "The 36-Hour Day,"
Walnut, California
Cynthia Schmeichel, Ph.D........... Vice President of Strategic Planning of the
Chartwell Foundation, Chicago, Illinois
</TABLE>

JOINT VENTURES AND STRATEGIC ALLIANCES

In further support of its development strategy, the Company has formed
strategic alliances and joint ventures with established real estate development
partners. These alliances and joint ventures have enabled the Company to develop
and construct additional residences while reducing the investment of, and
associated risk to, the Company.

Joint Venture with Continuing Care Concepts, Inc. In 1994, the Company
established a joint venture with Continuing Care Concepts, Inc. ("CCC") to
develop, own and operate assisted living in targeted market areas throughout
Pennsylvania and New Jersey (the "ALS-East Territory"). CCC is a corporation
owned and controlled by DeLuca Enterprises, Inc., an Eastern Pennsylvania-based
commercial real estate development and construction company. In September 1994,
the Company commenced its relationship with CCC through the acquisition of a 60%
interest in a partnership that owns the Wynwood residence located in Richboro,
Pennsylvania. CCC retained the remaining 40% of this partnership. Pursuant to
the acquisition agreement entered into by the Company and CCC in connection with
this transaction (the "ALS-East Agreement"), during the five-year period
commencing in September 1994, the Company and CCC have agreed to develop and
construct additional assisted living residences throughout the ALS-East
Territory, with the Company and CCC having a 60% and 40% equity interests and
capital obligations, respectively. Pursuant to this arrangement, the Company has
agreed to contribute a total of $5.2 million of equity to develop ALS-East
residences, $1.0 million of which had been funded as of March 31, 1996. The
Company is entitled to receive a priority distribution from the ALS-East
residences in the aggregate amount of $1,680,000, and thereafter the Company and
CCC are entitled to receive their respective share of any incremental
distribution. If construction is not commenced on at least eight new ALS-East
residences by September 1998, the above priority amount will be modified so as
to provide the Company with a 27% internal rate of return on capital contributed
to ALS-East residences.

47
<PAGE> 50

During the five year development term, the Company and CCC have agreed to
develop residences within the ALS-East Territory exclusively with each other,
and have agreed not to independently engage in other competitive activities in
such territory, subject to certain limited exceptions. CCC and its affiliates
have agreed to provide development and construction management services to
ALS-East development projects and the Company has agreed to serve as manager of
the ALS-East residences, all pursuant to agreed upon arrangements. Under the
ALS-East Agreement, the approval of both the Company and CCC is generally
required for matters relating to the development, construction, operation and
management of ALS-East residences. In addition to the Richboro residence, the
Company and CCC have constructed and are operating a Clare Bridge residence in
Lower Makefield, Pennsylvania, are constructing Clare Bridge residences in
Montgomery, Pennsylvania and Westhampton, New Jersey and are developing two
additional Clare Bridge residences.

Upon the first to occur of (i) September 20, 1998 or (ii) the issuance of
an occupancy permit for eight ALS-East residences, the Company shall have the
option to purchase CCC's interest in all ALS-East entities at an amount based on
a fair market value determination, subject to a minimum purchase price.

The Company and the principals of CCC are currently engaged in discussions
regarding the purchase by the Company of the equity interest held by CCC in
certain of the residences mentioned above as well as the restructuring of the
on-going joint venture relationship. These discussions are preliminary, however,
and neither party has any binding obligation with respect thereto. No assurance
can be given that the Company will arrive at a satisfactory understanding with
CCC with respect to the purchase of its interest in these residences or with
respect to modifying the ALS-East joint venture.

Joint Venture with Days Development Company. The Company has established a
joint venture (the "ALS-Carolina J.V.") with Days Development Company, L.C., a
Roanoke, Virginia based commercial real estate development and construction
company ("Days"), to develop, own and operate assisted living residences in
targeted market areas throughout North and South Carolina (the "ALS-Carolina
Territory").

Pursuant to the ALS-Carolina J.V., Days and the Company have agreed to
capitalize and form separate project entities during a five year development
term which commenced in November 1995 to develop, construct, open and operate
residences in the ALS-Carolina Territory, with the Company and Days owning and
funding a 51% and 49% equity interest, respectively, in such project entities.
During the development term, the Company and Days will develop residences
exclusively with each other within the ALS-Carolina Territory, and have agreed
not to independently engage in other competitive activities in such markets,
subject to certain limited exceptions. Days is providing development and
construction management services to the ALS-Carolina J.V. and the Company is to
serve as manager of the ALS-Carolina residences, all pursuant to agreed upon
arrangements. The Company and Days are currently constructing a Wynwood
residence in Chapel Hill, North Carolina and a Clare Bridge residence in Cary,
North Carolina and developing three Clare Bridge residences and a Wynwood
residence in the ALS-Carolina Territory.

Days and the Company will share decision making with respect to the
development of ALS-Carolina residences. Decision making with respect to the
operation of ALS-Carolina residences is generally determined by majority vote,
and, consequently, the Company may make such decisions without Days' consent by
virtue of its majority equity interest. However, certain major business
decisions require joint approval of the Company and Days, such as any merger,
dissolution or reorganization of any project entity owning an ALS-Carolina
residence, any sale of an equity interest in any such project entity to persons
other than to the Company and Days, any distributions to the Company and Days
other than as contemplated and the election and appointment of officers of such
project entities. The Company has agreed to be solely responsible for any
guarantees required to secure permanent loan financing on an ALS-Carolina
residence after such residence first achieves 75% occupancy.

With respect to each ALS-Carolina residence, upon the second anniversary of
the opening of the residence, Days shall have the right to require the Company
to purchase (put option), and the Company shall have the option to acquire (call
option), Days's ownership interest in such residence. The purchase price payable
upon exercise of the put or call option is based on the appraised fair market
value of the residence at the time such option is exercised and is payable in
cash and/or shares of Common Stock.

48
<PAGE> 51

The Company and Days are currently engaged in discussions regarding the
purchase by the Company of the equity interest held by Days in the Chapel Hill,
North Carolina residence as well as the restructuring of the ongoing joint
venture relationship. These discussions, however, are preliminary and neither
party has any binding obligation with respect thereto. No assurance can be given
that the Company will arrive at a satisfactory understanding with Days with
respect to the purchase of its interest in the Chapel Hill residence or with
respect to modifying the terms of the ALS-Carolina J.V.

Proposed Joint Venture with Pioneer Development Company, Inc. The Company
has entered into a non-binding Memorandum of Understanding (the "Memorandum")
with Pioneer Development Company, Inc., a Syracuse, New York based commercial
real estate development and construction company ("Pioneer"), which contemplates
that the Company and Pioneer will enter into a joint venture relationship to
develop, own and operate assisted living residences in targeted market areas
throughout New York, Massachusetts, Connecticut and Rhode Island (the
"ALS-Northeast Territory"). Although the Company and Pioneer are seeking to
finalize the terms of definitive agreements with respect to the joint venture
contemplated by the Memorandum (referred to herein as the "ALS-Northeast J.V."),
although no assurances can be given that the Company and Pioneer will
successfully complete these negotiations and enter into definitive joint venture
agreements.

The Memorandum contemplates that Pioneer and the Company will capitalize
and form separate project entities during a five-year development term to
develop, construct, open and operate residences in the ALS-Northeast Territory,
with the Company and Pioneer owning and funding a 51% and 49% equity interest,
respectively, in such project entities. During such development term, the
Company and Pioneer will develop residences exclusively with each other within
the ALS-Northeast Territory in the manner contemplated by the Memorandum, and
will agree not to independently engage in other competitive activities in such
markets, subject to certain limited exceptions. Pioneer will provide development
and construction management services to the ALS-Northeast J.V. and ALS will
serve as manager of the ALS-Northeast residences, all pursuant to agreed upon
arrangements.

With respect to each ALS-Northeast residence, upon the first to occur of
(i) such residence achieving a 75% occupancy or (ii) the second anniversary of
the opening of such residence, Pioneer shall have the right to require the
Company to purchase Pioneer's interest in the residence (put option). The
Company shall have an option to acquire (call option) Pioneer's interest in each
ALS-Northeast residence beginning two years after the opening date of such
residence. The purchase price payable upon exercise of the put and call options
shall be based on the appraised fair market value of the residence and shall be
payable in cash and/or shares of Common Stock. In addition, the Company has
agreed to be solely responsible for any guarantees required to secure financing
on an ALS-Northeast residence commencing at the time such residence first
achieves 75% occupancy. Pioneer and the Company will share decision making with
respect to the development and operation of each ALS-Northeast residence until
such time as the put option for such residence shall first become exercisable,
at which time the Company, by virtue of its majority equity interest, will have
the right to make most major decisions without Pioneer's consent.

In contemplation of the ALS-Northeast J.V. described in the Memorandum, ALS
has issued to Pioneer 322,706 shares of Common Stock at a price per share of
$4.65 (the "Pioneer Shares"). The Pioneer Shares may be redeemed by ALS, at
ALS's election, if definitive agreements for ALS-Northeast are not executed by
the parties on or before June 30, 1996, at a redemption price equal to the
purchase price for the Pioneer Shares. ALS also has the right to repurchase
certain of the Pioneer Shares at the price paid by Pioneer for such shares if
approved building sites for less than four new ALS-Northeast residences have
been acquired or applicable permits have not been obtained for the construction
of ALS-Northeast residences in 1996. The Pioneer Shares are, accordingly,
nontransferable so long as these repurchase options are in effect.

Fee Development Relationship with The Damone Group. In connection with the
Michigan Restructuring, the Company and The Damone Group, Inc. ("Damone"), a
Troy, Michigan based commercial real estate development and construction firm
that developed and constructed the Company's Michigan residences and certain of
the Company's Florida residences, have agreed to an exclusive fee development
and construction arrangement with respect to future residences to be developed
and constructed by the Company in Michigan

49
<PAGE> 52

and Florida during the 36 month period commencing in May 1996. Pursuant to this
arrangement, Damone will provide development and construction management
services to the Company pursuant to agreed upon terms; provided, however, the
Company has the right to retain other developers to provide construction
services if Damone's guaranteed maximum price bid for construction of a new
residence exceeds 105% of the guaranteed maximum price bid of such other
developer.

The Company has also granted to Damone a right to invest in the next two
Wynwood or Clare Bridge residences developed and constructed by the Company in
Michigan. Under this investment right, Damone is entitled to acquire an interest
in the limited partnerships to be formed to own such residences, which limited
partnership interest may represent up to a 49% equity interest in each of such
residences, subject, however, to the prior right of Margolick Financial Group
Limited Partnership described below. If Damone elects to invest in any such
residence, the Company will have the right to acquire the Damone interest (call
option) in such residence, and Damone shall have the right to require the
Company to acquire Damone's interest (put option) in such residence to the
Company, commencing six months following the opening of such residence. The
purchase price payable by the Company under such put and call options is a
formula price based on the fair market value of the residence, except that
during the first ten months that the call option is exercisable, the appraised
value upon exercise of the call option shall be based on the residence's
projected stabilized occupancy.

The Company granted a similar right to invest in the next three Wynwood or
Clare Bridge residences to be developed and constructed by the Company in
Michigan to Margolick Financial Group Limited Partnership of Farmington Hills,
Michigan ("MFG"), which served as placement agent for the private placement of
limited partnership interests in the ALS-Midwest Partnerships. Specifically, MFG
has the right to provide 49% of the equity capital for the next three Wynwood or
Clare Bridge residences constructed by the Company in Michigan prior to December
1998. If MFG or its designees elect to make any such investment, the limited
partnership interest acquired by MFG or its designees will be subject to put and
call options substantially identical to those described above with respect to
the investment right granted to Damone. The Company has also agreed to pay MFG
one (1%) percent of capital project costs of the next 15 WovenHearts residences
developed and constructed by the Company in Michigan prior to December 1998. The
Company estimates that it will construct in excess of 15 WovenHearts residences
in Michigan during this time period, which would result in amounts in excess of
$150,000 being payable to MFG.

Fee Development Relationship with Western Communities Corporation. The
Company has entered into a Pre-Construction Coordination Agreement (the "WCC
Agreement") with Western Communities Corporation, a Tempe, Arizona-based
construction and development firm ("WCC"), pursuant to which WCC is responsible
for (i) locating suitable sites in communities in Arizona designated by the
Company ("Project Areas") for development of the Company's assisted living and
dementia care residences; (ii) assisting the Company in its site selection
process; and (iii) obtaining all required governmental approvals within
specified time periods. WCC is entitled to a project development fee of $50,000
per project site and to reimbursement of 110% of costs and expenses. If WCC does
not obtain the required approvals within the specified time, it must refund the
development fee (but not costs and expenses) for that project site to the
Company; however, the obligation to refund such fee is limited to the first four
Project Areas designated by the Company in each of 1996 and 1997. Upon
acquisition of a project site, the parties intend to enter into a mutually
satisfactory construction management agreement pursuant to which WCC will manage
the construction of the facility. The WCC Agreement provides that the Company
and WCC will not enter into a similar agreement with any other person in Arizona
and that WCC will not locate or develop sites for assisted living or dementia
care residences in Arizona without first offering such sites to the Company.

A Clare Bridge residence in Tempe, Arizona is designated as the first
development project under the WCC Agreement. WCC has this site under contract
and the Company is obligated to reimburse WCC for certain costs incurred,
including substitution of earnest money. The Company is also obligated to
designate at least three additional Project Areas during the term of the WCC
Agreement, which is two years unless terminated earlier pursuant to the terms
thereof.

50
<PAGE> 53

INDUSTRY BACKGROUND

The long-term care industry encompasses a continuum of housing and personal
and health care options that are provided primarily to the elderly population.
Assisted living residences offer a viable alternative to nursing homes for
elderly individuals requiring less intensive medical services, especially
individuals who may require assistance due to physical or cognitive impairments.
As an elderly person's need for assistance increases, care in an assisted living
residence, where assistance with personal care, support services and health care
services are available, is often preferable to, and less costly than, home-based
or traditional nursing home care. Generally, assisted living residents have
higher acuity levels than those of residents of congregate and retirement living
centers but lower than those of residents in skilled nursing facilities.

The Company believes there will continue to be significant growth
opportunities in the long-term care market for providing health care and other
services to the elderly, especially the market for assisted living residences.
Factors contributing to this growth potential include the following:

Demographic and Social Trends. The target market for the Company's
services are persons generally 75 years and older, one of the fastest
growing segments of the U.S. population. According to a 1993 industry
report published by ALFAA and Coopers & Lybrand, the average age of male
and female residents of assisted living residences is 83 and 85 years of
age, respectively. According to the U.S. Census Bureau, the portion of the
U.S. population age 75 and older is expected to increase by 33.5%, from
approximately 13.0 million in 1990 to over 17.4 million, by the year 2000
and the number of persons age 85 and older, as a segment of the U.S.
population, is expected to increase 43%, from approximately 3.0 million to
over 4.3 million, by the year 2000.

The number of persons afflicted with Alzheimer's disease is also
expected to grow in the coming years. According to data published by the
Alzheimer's Association, this group will grow from the current 4 million to
14 million, or 35%, by the year 2040. As Alzheimer's disease and other
dementias are more likely to occur as a person ages, the increasing life
expectancy of Americans is expected to result in a greater number of
persons afflicted with Alzheimer's disease and other dementias in future
years.

In addition, as the number of two-income households has increased over
the last decade and as the geographical separation of elderly family
members from their adult children increases with the geographic mobility of
the U.S. population, many families that traditionally would have provided
the type of care and services offered by the Company to elderly family
members will increasingly not be in a position to do so. The Company
believes that these demographic and social trends will result in increased
demand for assisted living services, including dementia care residences.

Cost Containment Pressures. In response to rapidly rising health care
costs, government and private-pay sources have adopted cost-containment
measures that have encouraged reduced hospital lengths of stays. The
federal government has acted to curtail increases in health care costs
under Medicare by limiting acute care hospital reimbursement for specific
services to pre-establish fixed amounts. Private insurers have begun to
limit reimbursement for medical services in general to predetermined
"reasonable charges," while managed care organizations, such as health
maintenance organizations, are attempting to limit hospitalization costs by
negotiating discounted rates for hospital services and by monitoring and
reducing hospital use. In response, hospitals are discharging patients
earlier and referring elderly who may be too sick or frail to maintain
complete independence, to skilled nursing facilities where the cost of
providing care is lower than in a hospital. As a result, an increased
number of discharged hospital patients are seeking skilled nursing facility
care. At the same time, skilled nursing facility operators continue to
focus on improving occupancy and expanding services to subacute patients
requiring higher levels of skilled nursing care. Given these cost
containment pressures, the Company believes that the less institutional,
less costly assisted living residences will be well positioned to serve an
increasing segment of the long-term care market.

Limited Supply of Long-Term Care Beds. Most of the states in which
the Company currently operates have enacted certificate of need ("CON") or
similar legislation which restricts the supply of licensed nursing facility
beds. These laws generally limit the construction of nursing facilities,
and the

51
<PAGE> 54

addition of beds or services to existing nursing facilities, and hence tend
to limit the available supply of traditional nursing home beds. In
addition, some long-term care facilities have started to convert
traditional nursing home beds into sub-acute beds. The Company also
believes that high construction costs and limits on government
reimbursement for the full cost of construction and start-up expenses also
will constrain the growth and supply of traditional nursing home facilities
and beds. The Company expects that this tightening supply of nursing beds
will tend to shift to assisted living care residences certain elderly who
previously would have resided in a traditional nursing home facility.

Quality of Life Advantages of Assisted Living. The Company believes
that, as potential residents and their family members become increasingly
more aware of the assisted living alternative, they will be attracted to
the more residential setting of assisted living residences, which promote
residents' privacy, individual choice and independence and encourage the
involvement of the resident's family, neighbors and friends. The Company
believes that assisted living care, which is based on a residential model
for the care of the frail elderly and others, offers quality of life
advantages over the institutional, medically oriented nursing home model.

GOVERNMENT REGULATION

Health care is an area of extensive and frequent regulatory change. The
assisted living industry is relatively new and, accordingly, the manner and
extent to which it is regulated at the Federal and state levels is evolving. See
"Risk Factors -- Government Regulation."

The Company's assisted living residences are subject to regulation and
licensing by state and local health and social service agencies and other
regulatory authorities. Although regulatory requirements vary from state to
state, these requirements generally address, among other things: personnel
education, training and records; staffing levels; facility services, including
administration and assistance with self-administration of medication, and
limited nursing services; physical residence specifications; furnishing of
residence units; food and housekeeping services; emergency evacuation plans; and
resident rights and responsibilities. New Jersey also requires each assisted
living residence to obtain a CON prior to its opening. The Company's residences
are also subject to various state or local building codes and other ordinances,
including safety codes. Management anticipates that the states which are
establishing regulatory frameworks for assisted living residences will require
licensing of assisted living residences and will establish varying requirements
with respect to such licensing.

The Company has obtained all required licenses for each of its residences
and expects that it will obtain all required licenses for each new residence.
Each of the Company's licenses must be renewed annually. The Company has also
obtained a CON for each residence under construction or development in New
Jersey.

Like other health care facilities, assisted living residences are subject
to periodic survey or inspection by governmental authorities. From time to time
in the ordinary course of business, the Company receives deficiency reports. The
Company reviews such reports and seeks to take appropriate corrective action.
Although most inspection deficiencies are resolved through a plan of correction,
the reviewing agency typically is authorized to take action against a licensed
facility where deficiencies are noted in the inspection process. Such action may
include imposition of fines, imposition of a provisional or conditional license
or suspension or revocation of a license or other sanctions. Any failure by the
Company to comply with applicable requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that its residences are in substantial compliance with all
applicable regulatory requirements. No actions are currently pending against any
of the Company's residences nor have any of the Company's residences been cited
in the past for any significant non-compliance with regulatory requirements.

Pursuant to recently adopted Wisconsin legislation creating a new category
of residential care facilities for the elderly for state funding purposes,
effective on July 1, 1996 only those assisted living facilities which are
comprised of independent apartments having an individual lockable entrance, a
full kitchen, an individual full bath and separate sleeping and living areas,
among other requirements, may be designated as an "assisted living facility" in
the State of Wisconsin. The Company's residences located in Wisconsin as well
as, the Company believes, numerous other assisted living residences operating
within the state, would not meet the

52
<PAGE> 55

definitional requirements of this statute. As this legislation is not yet
effective, its scope and application are still uncertain. Pending the
effectiveness of this new legislation and further classification by the
applicable state agencies, the Company, as well as other assisted living
operators in Wisconsin, are reviewing their administrative, legislative and
judicial options in responding to this legislation. The Company believes that
many operators will not discontinue their use of the generic trade description
"assisted living facility" in doing business in the State of Wisconsin until
such time as the scope and enforceability of the legislation as well as the
consequences of noncompliance are clarified. If the Company is ultimately
compelled to discontinue any reference to the generic term "assisted living" in
its sales and marketing materials for its Wisconsin residences, such compliance
could have a material adverse effect on the Company's business, results of
operation or financial condition.

COMPETITION

The long-term care industry is highly competitive and, given the relatively
low barriers to entry and continuing health care cost containment pressures, the
Company expects that the assisted living segment of such industry will become
increasingly competitive in the future. The Company competes with other
providers of elderly residential care on the basis of the breadth and quality of
its services, the quality of its residences and, with respect to private pay
patients or residents, price. The Company also competes with other providers of
long-term care in the acquisition and development of additional residences. The
Company's current and potential competitors include national, regional and local
operators of long-term care residences, acute care hospitals and rehabilitation
hospitals, extended care centers, assisted/independent living centers,
retirement communities, home health agencies and similar institutions, many of
which have significantly greater financial and other resources than the Company.
In addition, the Company competes with a number of tax-exempt nonprofit
organizations which can finance capital expenditures on a tax-exempt basis or
receive charitable contributions unavailable to the Company and which are
generally exempt from income tax. While the Company's competitive position
varies from market to market, the Company believes that it competes favorably in
substantially all of the markets in which it operates based on key competitive
factors such as the breadth and quality of services offered, residence quality,
recruitment and retention of qualified health care personnel and reputation
among local referral sources. See "Risk Factors -- Competition."

The Company also competes with other providers of long-term care with
respect to attracting and retaining qualified and skilled personnel. In recent
years the health care industry has experienced a shortage of qualified health
care professionals. While the Company has been able to retain the services of an
adequate number of professionals to staff its residences appropriately and
maintain its standards of quality care, there can be no assurance that continued
shortages will not affect the ability of the Company to maintain the desired
staffing levels. See "Risk Factors -- Residence Management, Staffing and Labor
Costs."

INSURANCE

The provision of personal and health care services entails an inherent risk
of liability. Compared to more institutional long-term care facilities, assisted
living residences (especially its dementia care residences) of the type operated
by the Company offer residents a greater degree of independence in their daily
lives. This increased level of independence, however, may subject the resident
and the Company to certain risks that would be reduced in more institutionalized
settings. The Company currently maintains liability insurance intended to cover
such claims which it believes is adequate based on the nature of the risks, its
historical experience and industry standards. See "Risk Factors -- Liability and
Insurance."

TRADEMARKS

Crossings and WovenHearts are registered service marks of the Company and
the Company claims service mark protection in the marks Wynwood, Hamilton
House(SM) and Clare Bridge.

53
<PAGE> 56

EMPLOYEES

At March 31, 1996, the Company employed 808 full-time employees and 690
part-time employees. The Company believes it maintains good relationships with
its employees. None of the Company's employees are represented by a collective
bargaining group.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings other than ordinary
routine proceedings incidental to its business. The Company does not expect
these legal proceedings, either individually or in the aggregate, to have a
material adverse effect on the Company's business, results of operations or
liquidity.

HISTORY AND ORGANIZATION

THE COMPANY AND ITS PREDECESSORS

The Company was organized in December 1993, and was initially capitalized
by Evergreen and CLC. Evergreen, then a NYSE-listed operator of long-term care
facilities, became a wholly-owned subsidiary of GranCare in July 1995. At the
time of the Company's organization, CLC was owned 25% by William F. Lasky, the
Company's President and Chief Executive Officer, and 75% by two other
shareholders. Pursuant to the terms of an acquisition agreement between
Evergreen, CLC and Alternative Living Services, a Wisconsin general partnership
owned 50% by Mr. Lasky and 50% by two other individuals (the "ALS Partnership"),
the Company was initially capitalized with (i) $2.7 million in cash contributed
by Evergreen in exchange for a 51% interest in the Company and (ii) certain
assets and contractual rights owned by CLC which were contributed in exchange
for the remaining 49% interest in the Company. Immediately prior to the
consummation of the transaction (i) Assisted Care, Inc. ("Assisted Care"), a
corporation formed by the shareholders of CLC in 1989 to develop assisted living
facilities outside of the State of Wisconsin, was merged with and into CLC and
(ii) the ALS Partnership conveyed certain of its assets relating to its assisted
living business to CLC.

The Company's executive offices are located at 450 North Sunnyslope Road,
Suite 300, Brookfield, Wisconsin 53003, and its telephone number is (414)
789-9565.

1995 RECAPITALIZATION

In May 1995, the Company consummated a recapitalization transaction (the
"1995 Recapitalization") pursuant to which it sold 4,302,994 shares of Common
Stock to Alternative Living Investors, L.L.C. ("ALI"), a newly formed limited
liability investment company, for a total of $20 million and a portion of the
net proceeds from such sale were used (i) to repurchase shares of the Company
held by a former stockholder of CLC and (ii) to repay certain loans and advances
made to the Company by this former stockholder and Evergreen. See "Certain
Relationships and Related Transactions." ALI was formed as an investment vehicle
for several investors, the majority of whom were unaffiliated with the Company,
who participated in the 1995 Recapitalization, and ALI will be liquidated
following the Offering. See "Principal and Selling Stockholders."

54
<PAGE> 57

ACQUISITION OF HEARTLAND RETIREMENT SERVICES, INC.

Effective on January 1, 1996, the Company acquired all of the outstanding
capital stock of Heartland in consideration of the payment to Heartland's
shareholders of $5.5 million and the issuance of 261,424 shares of Common Stock.
In connection with the Heartland acquisition, the Company borrowed approximately
$8.7 million pursuant to the Heartland Bridge Financing. See "Use of Proceeds,"
"Management's Discussion and Analysis -- Liquidity and Capital Resources" and
"Certain Relationships and Related Transactions."

CROSSINGS MERGER

On May 24, 1996, the Company and Crossings consummated the Crossings Merger
pursuant to which the businesses and operations of ALS and Crossings were
combined. Pursuant to the Crossings Merger, on May 24, 1996 Crossings was merged
with and into ALS and all of the shares of Crossings capital stock outstanding
prior to the Crossings Merger were converted into an aggregate of 2,007,049
shares of ALS Common Stock. Following the Crossings Merger and the several
recent acquisition and equity transactions described below, there are 9,523,349
shares of Common Stock outstanding, of which approximately 21% are held by the
former stockholders of Crossings.

Upon consummation of the Crossings Merger, Crossings' three senior
executive officers were elected directors or executive officers of ALS.
Specifically, Richard W. Boehlke, formerly Crossings' President and Chief
Executive Officer, was elected to the Company's Board of Directors as its Vice
Chairman. D. Lee Field, formerly Crossings' Executive Vice President and Chief
Operating Officer, became a Senior Vice President of ALS, and David M. Boitano,
formerly Vice President and Chief Financial Officer of Crossings became a Vice
President of ALS. As a condition to the Crossings Merger, the Company entered
into employment or services agreements with each of Messrs. Boehlke, Field and
Boitano. Pursuant to the services agreement with Mr. Boehlke, the Company has
agreed to nominate Mr. Boehlke to serve as a member of the Board of Directors of
the Company during the three year term of the services agreement. See
"Management -- Executive Compensation -- Employment and Services Agreements."

Organization and Recent Restructuring of Crossings. Crossings was
organized in December 1995 in connection with a restructuring of the assisted
living business of Crossings International Corporation ("Old Crossings"), which
was organized in 1984. The Crossings restructuring, which was effected in
December 1995 and January 1996, involved (i) the roll-up into Old Crossings of
partnerships formerly controlled by Old Crossings and its affiliates, each of
which owned one residence operated by Old Crossings (collectively, "Crossings
Partnership Roll-Up"), (ii) the sale of twelve residences by Old Crossings to a
REIT and the simultaneous leaseback of such residences by Crossings and the
refinancing of an additional residence owned by an affiliated partnership of Old
Crossings and operated by Old Crossings (collectively, the "Crossings REIT
Transactions"), (iii) the issuance of Series A preferred stock of Old Crossings
to CCI, as agent for certain of its clients, in exchange for satisfaction of
indebtedness of Old Crossings, (iv) the exchange by the Old Crossings
shareholders of the common and Series A preferred stock of Old Crossings for
equal numbers of shares of common and Series A preferred stock of Crossings, (v)
the issuance of Crossings Series B preferred stock to CCI in exchange for cash
and (vi) the conveyance by Old Crossings to CCI of an owned residence and the
simultaneous lease of such residence by CCI to Crossings pursuant to a lease
expiring upon the first to occur of three years or the achievement of certain
minimum vacancy thresholds. Upon completion of the restructuring transactions,
Old Crossings became a wholly-owned subsidiary of Crossings, Crossings became
the lessee and operator of thirteen of the facilities formerly operated by Old
Crossings, and CCI became the holder of Crossings' Series A and Series B
preferred stock. Prior to the Crossings Merger, CCI, as the holder of the
Crossings Series A and Series B preferred stock, exchanged all of its shares of
Crossings preferred stock for shares of Crossings common stock at an exchange
ratio determined by CCI and Crossings.

Crossings Partnership Roll-up Transactions. On December 20, 1995, the
partners (including Messrs. Boehlke, Boitano and Field) of three partnerships
that owned Crossings' Courtyard, Atrium and Columbia Edgewater residences, all
of which were partially-owned by Old Crossings, conveyed their partnership
interests to Old Crossings and, as a result, in Old Crossings held all of the
partnership interests of such partnerships. As a result of these transactions,
Old Crossings assumed the contingent liabilities for the

55
<PAGE> 58

respective partnerships' indebtedness of each former partner, and made aggregate
cash payments of $1.2 million, $125,000 and $125,000 to Messrs. Boehlke, Field
and Boitano, respectively. CCI conveyed to Old Crossings an 80% partnership
interest in the partnership that owned Crossings' McMinnville, Oregon residence,
in return for the assumption by Old Crossings of CCI's contingent liability for
the partnership's indebtedness and 48,800 shares of Old Crossings Series A
preferred stock.

Crossings REIT Transactions. Old Crossings sold twelve of its assisted
living and senior living residences to Nationwide Health Properties, Inc.
("NHP") for aggregate cash consideration of $45,319,273, and assumption of
$9,303,727 of indebtedness to the Oregon Housing Authority with respect to the
Albany, Forest Grove and McMinnville, Oregon residences. Old Crossings paid
certain costs and expenses from the cash proceeds from NHP in connection with
the sale of its residences. The residences were sold free and clear of all liens
and material encumbrances, except those securing the assumed indebtedness.
Crossings has entered into individual operating leases with NHP with respect to
each of the residences sold to NHP by Old Crossings. In addition, NHP made a
mortgage loan to 2010 Union Limited Partnership, a Washington limited
partnership ("2010 Union L.P."), to refinance the secured indebtedness of 2010
Union L.P. Mr. Boehlke holds a 99% partnership interest in 2010 Union L.P. and
Old Crossings holds the remaining 1% partnership interest. The proceeds of the
NHP loan exceeded the existing secured indebtedness of 2010 Union L.P., and Mr.
Boehlke received a distribution from 2010 Union L.P. of $250,000 from such
proceeds. Crossings has entered into an operating lease with 2010 Union L.P. to
operate its Union Park at Allenmore residence, and that lease has been assigned
to NHP as security for its loan to 2010 Union L.P.

ACQUISITION OF REMAINING EQUITY INTERESTS IN ALS-MIDWEST

In May 1996, pursuant to the ALS-Midwest Restructuring, the Company
acquired the remaining equity interests not owned by the Company in the five
residences operated by the Company in Michigan. The ALS-Midwest residences are
each owned by a separate Michigan limited partnership, the general partner of
which is Alternative Living Services -- Midwest Inc. ("ALS-Midwest Inc."). Prior
to the ALS-Midwest Restructuring, (i) ALS and Damone each owned 50% of the
common stock of ALS-Midwest, and (ii) the limited partnership interests in the
ALS-Midwest limited partnerships were held by ALS and a small number of
unaffiliated investors (the "ALS-Midwest Investors"). See "Business--Joint
Ventures and Strategic Alliances."

The Company acquired the limited partnership interests in ALS-Midwest held
by the ALS-Midwest Investors for aggregate consideration of 115,024 shares of
Common Stock and promissory notes in the aggregate principal amount of $2.9
million. These promissory notes are due and payable on January 31, 1997 and bear
interest at the rate of 8% per annum. The Company acquired 100% of the
outstanding stock of ALS-Midwest Inc. pursuant to a merger transaction whereby
the shareholders of ALS-Midwest other than ALS received, in exchange for their
shares of ALS-Midwest Inc., $300,000 in cash and 57,512 shares of the Common
Stock. Contemporaneously with the merger transaction, the Company refunded
advances made to the ALS-Midwest Partnerships by affiliates of Damone by a cash
payment of $700,000 and delivery of a promissory note in the amount of $1.4
million. This promissory note bears interest at the rate of 9% and is due and
payable in September 1996. Pursuant to the ALS-Midwest Restructuring, ALS and
Damone established a fee development relationship relating to the development
and construction of future ALS residences in Michigan and Florida. See "Use of
Proceeds" and "Business -- Joint Ventures and Strategic Alliances -- Fee
Development Relationship with The Damone Group."

RECENT EQUITY TRANSACTIONS

In May 1996, the Company raised $2 million of equity capital through the
private placement of 430,281 shares of Common Stock. See
"Management -- Executive Compensation -- Employment and Services
Agreements -- Services Agreement with Petty, Kneen & Company" and
"Business -- Joint Ventures and Strategic Alliances -- Proposed Joint Venture
with Pioneer Development Company, Inc."

56
<PAGE> 59

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

Set forth below is certain information concerning the executive officers
and directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
William G. Petty, Jr....................... 50 Chairman of the Board
William F. Lasky........................... 41 President, Chief Executive Officer and
Director
Richard W. Boehlke......................... 48 Vice Chairman of the Board and Director
John W. Kneen.............................. 43 Vice President, Chief Financial Officer,
Treasurer and Secretary
D. Lee Field............................... 36 Senior Vice President
G. Faye Godwin............................. 54 Senior Vice President
Douglas A. Hennig.......................... 43 Senior Vice President
Mary Lou Austin............................ 40 Vice President and Controller
David M. Boitano........................... 35 Vice President
David J. Hoff.............................. 30 Vice President, Construction and
Development
Pamela Edwards Klein....................... 41 Vice President, Corporate Development
Gene E. Burleson........................... 54 Director
Robert Haveman............................. 48 Director
Ronald G. Kenny............................ 40 Director
Jerry L. Tubergen.......................... 42 Director
</TABLE>

William G. Petty, Jr. has served as Chairman of the Board since December
1993 and served as Chief Executive Officer of the Company from December 1993 to
April 1996. Mr. Petty has served as the Vice Chairman of GranCare since July
1995. Mr. Petty also served as the Chairman of the Board, Chief Executive
Officer and President of Evergreen from June 1993 to July 1995 and as Chairman
of the Board, Chief Executive Officer and President of National Heritage, Inc.,
predecessor to Evergreen, from October 1992 to June 1993. Mr. Petty has been a
Managing Director of Omega Capital, Ltd., a private health care investment fund
("Omega Capital"), since 1986. Mr. Petty also served as a member of the Board of
Directors of Forum Group, Inc. ("Forum") and as one of three members of Forum's
Executive Committee from June 1993 to November 1994.

William F. Lasky has served as Chief Executive Officer of the Company since
April 1996 and as President of the Company since December 1993. He served as the
Managing Partner of the ALS Partnership from 1981 to December 1993 and as the
President of CLC from 1989 to December 1993. The ALS Partnership and CLC
developed and operated assisted living residences currently operated by the
Company. Mr. Lasky served as a regional director of Unicare Health Residences, a
national operator of nursing homes, from 1981 to 1985. Mr. Lasky is a member of
the Board of Directors and the Chairman of ALFAA and is a licensed nursing home
administrator.

Richard W. Boehlke has served as the Vice Chairman of the Board of the
Company since May 1996. Mr. Boehlke served as President and Chief Executive
Officer of Crossings, which he founded in 1984, until Crossings merged with the
Company in May 1996. From 1980 to 1984, Mr. Boehlke was employed by National
Medical Enterprises, Inc. as Vice President -- Development responsible for all
new development within its long-term care group of companies.

John W. Kneen has served as the Chief Financial Officer and Treasurer of
the Company since April 1996 and as Vice President and Secretary of the Company
since December 1993. He served as Vice President of Corporate Development and
Assistant Secretary of Evergreen from December 1993 to July 1995, and as Vice
President and Chief Financial Officer of Evergreen Housing Partners, Inc. from
1991 to 1993. Mr. Kneen served as President of Premier Lifestyles, Inc., a
senior housing management company, from 1989 to 1991.

D. Lee Field has served as Senior Vice President of the Company since May
1996. Prior to joining the Company, he was employed from 1984 by Crossings,
where he held a succession of executive positions

57
<PAGE> 60

including Executive Vice President and Chief Operating Officer from 1993 until
the Crossings Merger, and Vice President of Operations from 1989 to 1993. Mr.
Field is a member of the Board of Directors for the American Senior Housing
Association and a member of the Task Force for Assisted Living of the American
Health Care Association.

G. Faye Godwin has served as Senior Vice President of the Company since
April 1996. From May 1995 to April 1996, Ms. Godwin served as the Vice President
of Operations of the Company. Previously, Ms. Godwin served as the Chief
Operating Officer of Standish Care, Inc., a publicly-held assisted living
company, from February 1994 to May 1995. From April 1989 to January 1994, Ms.
Godwin was Senior Vice President of Operations at Sunrise Assisted Living, an
assisted living company.

Douglas A. Hennig has served as Senior Vice President of the Company since
January 1996. From January 1993 to January 1996, Mr. Hennig served as the
President of Heartland. From 1991 to 1993, he was President of Hennig &
Associates, a consulting firm in Madison, Wisconsin involved in retirement
housing consulting and the development and management of assisted living
residences. From 1986 to 1991, he was Vice President of the Meridian Group in
Madison, Wisconsin, a market research company, with responsibility for market
research, marketing, operations management and development consulting for
retirement housing and assisted living.

Mary Lou Austin has served as Vice President of the Company since April
1996 and as Controller since September 1995. Prior to joining the Company, she
was employed as Controller of the Social Development Commission of Milwaukee
from 1993 to 1995. From 1990 to 1993, Ms. Austin was Assistant Controller at
Time Insurance Company, a health insurance company. Ms. Austin is a Certified
Public Accountant.

David M. Boitano has served as Vice President of the Company since May
1996. Prior to joining the Company, he was employed from 1994 as Vice President
and Chief Financial Officer of Crossings. From 1986 to 1994, Mr. Boitano served
as Vice President and Controller of Exvere, Inc., a merger and acquisition
consulting firm, and of Franklin Holdings, Ltd., a multi-state holding company.
From 1983 to 1985, Mr. Boitano was employed by Ernst & Young. Mr. Boitano is a
Certified Public Accountant.

David J. Hoff has served as Vice President, Construction and Development,
since April 1996. From February 1995 to April 1996, Mr. Hoff served as the
Director of Construction and Development of the Company. From 1990 to 1995, Mr.
Hoff owned and operated a subcontracting firm which provided building
inspection, zoning administration and land planning services to the Town of
Brookfield, Wisconsin. Prior to 1990, Mr. Hoff was employed as an architect by
an architectural firm located in Milwaukee, Wisconsin which specialized in
institutional and retirement health care design. Mr. Hoff is a Registered
Architect and Certified Building Inspector in the State of Wisconsin.

Pamela Edwards Klein has served as Vice President of Corporate Development
since August 1995. Previously, Ms. Klein served as the Director of Market
Development for the Company from December 1993 to August 1995 and for the ALS
Partnership from March 1992 to December 1993. Ms. Klein was principal of her own
marketing consulting business from January 1991 to March 1992. From December
1987 to August 1989, Ms. Klein was a grants administrator with the Medical
College of Wisconsin.

Gene E. Burleson has served as a director of the Company since July 1995.
He became Chairman of the Board of GranCare in January 1994 and has served as
Chief Executive Officer of GranCare since December 1990. Previously, Mr.
Burleson served as President of American Medical International, Inc., a provider
of health care services, where from early 1988 to March 1989 he served as
President while continuing his role as Chief Operating Officer, a position he
assumed in 1986. Prior to serving as President of the parent company, Mr.
Burleson served for nine years as President and Chief Executive Officer of
American Medical International -- European Operations. Mr. Burleson currently
serves on the board of directors of Deckers Outdoor Corporation and Integrated
Voice Solutions, Inc.

Robert Haveman has served as a director of the Company since May 1995. He
has served as the Secretary/Treasurer of the Prince Corporation, an automotive
interior trim manufacturer, since 1987 and served as a director of Evergreen
from June 1993 to July 1995.

58
<PAGE> 61

Ronald G. Kenny has served as a director of the Company since May 1995. He
has served as Vice President-Finance of Huizenga Capital Management, Inc., a
privately held investment management company, since 1990. Mr. Kenny has served
as a director of GranCare since July 1995. Mr. Kenny also served as a director
of Evergreen from June 1993 to July 1995 and as director of National Heritage,
Inc. from October 1992 to June 1993.

Jerry L. Tubergen has served as a director of the Company since May 1995.
He has served as President and Chief Operating Officer of RDV Corporation, a
private financial management firm, since its formation in 1991. Mr. Tubergen
served as Managing Partner of Deloitte & Touche in Grand Rapids, Michigan from
1987 to 1991. Mr. Tubergen also serves as a director of the Orlando Magic, Ltd.,
a NBA franchise, and Genmar Holdings, Inc., a manufacturer and marketer of
motorized pleasure boats.

There are no family relationships among any of the executive officers or
directors of the Company. Each director of the Company other than Mr. Boehlke
was elected to the Board of Directors of the Company pursuant to the terms of
the Company's Amended and Restated Stockholders' Agreement dated as of January
15, 1996, which agreement will terminate and be of no further force and effect
upon the consummation of the Offering. Pursuant to the merger agreement entered
into by the Company and Crossings in connection with the Crossings Merger, Mr.
Boehlke was elected to the Board of Directors as its Vice Chairman and Messrs.
Field and Boitano were elected as executive officers of the Company. Pursuant to
a services agreement between Mr. Boehlke and the Company, the Company has agreed
to nominate Mr. Boehlke as a director of the Company during the three year term
of the services agreement. See "History and Organization -- Crossings Merger"
and "Management -- Executive Compensation -- Employment and Services Agreement."
No other arrangement or understanding exists between any executive officer or
any other person pursuant to which any executive officer was selected as an
executive officer of the Company. Subject to the terms of employment agreements,
executive officers of the Company are elected or appointed by the Board of
Directors and hold office until their successors are elected or until their
death, resignation or removal.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has established an audit committee (the "Audit
Committee") and a compensation committee (the "Compensation Committee"). The
Company does not have a nominating committee.

The Audit Committee is comprised of Gene E. Burleson, Robert Haveman and
Jerry L. Tubergen with Mr. Tubergen serving as Chairman. The Audit Committee
convenes when deemed appropriate or necessary by its members. The primary
functions of the Audit Committee are to: (i) recommend an accounting firm to be
appointed by the Company as its independent auditors; (ii) consult with the
Company's independent auditors regarding the audit plan; and (iii) determine
that management places no restrictions on the scope or implementation of the
independent auditors' examination.

The Compensation Committee is comprised of Richard W. Boehlke, Ronald G.
Kenny, William G. Petty, Jr. and Jerry L. Tubergen, with Mr. Kenny serving as
Chairman. The Compensation Committee: (i) sets and approves the compensation
(including salary, deferred compensation, bonuses, incentive compensation and
all other types of compensation or remuneration) of the Company's executive
officers; and (ii) administers the Company's 1995 Plan.

EXECUTIVE COMPENSATION

Compensation of Directors. Directors of the Company who are not parties to
services agreements with the Company and are not employees of the Company are
entitled to an annual retainer of $12,000, payable in quarterly installments. In
lieu of their retainer for the twelve month period commencing June 1, 1995, each
of Messrs. Burleson, Haveman, Kenny and Tubergen were granted a non-qualified
stock option pursuant to the 1995 Plan to purchase up to 7,745 shares of the
Common Stock at an exercise price of $4.65 per share, such options becoming
exercisable on June 1, 1996 and expiring on June 1, 2005. In lieu of their
annual retainer for the 36 month period commencing June 1, 1996, each of Messrs.
Burleson, Haveman, Kenny and Tubergen were granted a non-qualified stock option
pursuant to the 1995 Plan to purchase up to 12,422 shares of the

59
<PAGE> 62

Common Stock at an exercise price of $8.69 per share, such options vesting
one-third on June 1, 1997, one-third on June 1, 1998 and one-third on June 1,
1999, and expiring on May 8, 2006. Directors are also entitled to reimbursement
of reasonable out-of-pocket expenses incurred by them in attending meetings of
the Board of Directors. See also "-- Employment and Services Agreement."

Summary of Cash and Certain Other Compensation of Executive Officers. The
following table sets forth information as to all compensation paid or accrued
during the last fiscal year to the Company's chief executive officer and to each
other executive officer of the Company whose total salary and bonus exceeded
$100,000 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
---------------------------------- UNDERLYING
OTHER ANNUAL OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS
- ------------------------------------------- ---- -------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William G. Petty, Jr....................... 1995 $ -- -- $48,650 90,628
Chairman of the Board and
Chief Executive Officer(1)
William F. Lasky........................... 1995 $166,600 $30,000 -- 128,691
President and Director(2)
</TABLE>

- ---------------

(1) Mr. Petty is not an employee and was not an employee of the Company during
1995. Mr. Petty served as the Company's Chief Executive Officer until May
1996. The Company paid Mr. Petty fees aggregating $48,650 for his services
during the year ended December 31, 1995.
(2) Mr. Lasky became the Company's Chief Executive Officer in May 1996.

Stock Options Granted During Fiscal Year Ended December 31, 1995. The
following table sets forth information regarding the grant of stock options to
each of the Named Executive Officers. Neither of the Named Executive Officers
received SARs.

STOCK OPTION GRANTS

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL 1995 ($/SHARE) DATE 5% 10%
- -------------------------- ------------ ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William G. Petty,
Jr.(1).................. 90,628(1) 26.2% $4.65 6/27/2005 $264,922 $671,364
William F. Lasky.......... 128,691 37.2% $4.65 6/27/2005 $376,189 $953,337
</TABLE>

- ---------------

(1) These options were granted subsequent to December 31, 1995 but were
committed to be granted by the Company in 1995 in connection with services
performed by Mr. Petty during 1995. These options vest at a rate of 25% per
year and first become exercisable on June 28, 1996.

60
<PAGE> 63

STOCK OPTION YEAR-END VALUES

The following table sets forth information with respect to the number and
value of unexercised options held as of the end of the last fiscal year for each
of the Named Executive Officers. Neither of the Named Executive Officers
exercised stock options during 1995 or holds SARs.

FISCAL YEAR-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END (#) AT FY-END ($)(2)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William G. Petty, Jr. ................... -- 90,628(1) $ -- $ 0
William F. Lasky......................... 54,377 128,691 0 0
</TABLE>

- ---------------

(1) Includes options granted subsequent to December 31, 1995 but which were
committed to be granted by the Company in 1995 in connection with service
performed during 1995.
(2) There was no public trading market for the Common Stock at December 31,
1995. These values have been calculated based on the value of the Common
Stock determined by the Company's Board of Directors as of December 31,
1995. Based on assumed initial public offering price of $16.00 per share,
the value of Mr. Petty's options, all of which were unexercisable, was
$1,028,628 and the value of Mr. Lasky's options, 54,377 and 128,691 of which
were exercisable and unexercisable, respectively, was $617,179 and
$1,460,643, respectively.

EMPLOYMENT AND SERVICES AGREEMENTS

Services Agreement with Petty, Kneen & Company. The Company has entered
into a services agreement with Petty, Kneen & Company ("PK & Co."), a limited
liability company controlled by Messrs. Petty and Kneen. Pursuant to the
services agreement, PK & Co. has agreed to provide management, financial and
strategic planning services to the Company on a fee basis, including without
limitation, the services of Mr. Petty as Chairman and the services of Mr. Kneen
as Chief Financial Officer of the Company. The Company has agreed to pay an
annual fee of $320,000 to PK & Co. for such services; provided, however, such
fee shall be reduced to $200,000 if Mr. Kneen is not called upon to serve as
Chief Financial Officer of the Company. Pursuant to the services agreement, the
Company also has agreed to reimburse PK & Co. for certain out of pocket
expenses. In consideration of this service agreement, each of Messrs. Petty and
Kneen have agreed to provide the Company with a right of first refusal with
respect to certain acquisition opportunities relating to assisted living
residences or operations which come to their attention during the term of the
services agreement. This services agreement expires on April 30, 1998 and may be
extended on a quarter to quarter basis thereafter, subject to earlier
termination at the election of the Company upon 30 days notice. In consideration
of this services agreement, PK & Co. purchased 107,575 shares of Common Stock in
May 1996 at a price per share of $4.65.

Services Agreement with Richard W. Boehlke. As a condition of and
effective upon the Crossings Merger, the Company entered into a services
agreement with Mr. Boehlke, formerly Crossings' President and Chief Executive
Officer, pursuant to which he has agreed to provide general, policy-making
services to the Company and to undertake special projects designated from time
to time by the Board of Directors for the three year period ending May 1999. In
consideration of these services, the Company has agreed to pay Mr. Boehlke
$200,000 per year and has agreed to provide Mr. Boehlke certain other benefits,
including use of a company car and life and medical insurance coverage similar
to that provided to the Company's executive officers. During the term of the
agreement, the Company has agreed to nominate Mr. Boehlke to serve as a director
of the Company.

Employment Agreement with William F. Lasky. The Company has entered into
an employment agreement with Mr. Lasky with a term that expires on May 31, 1997,
unless earlier terminated pursuant to the terms thereof. The agreement is
automatically renewed for additional consecutive one-year terms unless timely
notice of nonrenewal is given by either the Company or Mr. Lasky. The employment
agreement provides that Mr. Lasky shall receive a base salary in an amount
determined by the Company's Board of Directors; provided, however, that in no
event may such base salary be less than $150,000. In addition, the

61
<PAGE> 64

employment agreement provides that Mr. Lasky is entitled to receive incentive
bonuses of up to 35% of his base salary if the Company's earnings before
interest, taxes and depreciation are within ten percent of the earnings targeted
in the Company's annual business plan approved by the Board of Directors.
Pursuant to the employment agreement, the Company loaned $150,000 to Mr. Lasky
in June 1995, which loan is repayable in three annual installments of $50,000
beginning on June 30, 1996 plus interest at 6% per annum; provided, however,
that if Mr. Lasky is employed by the Company on any such repayment date, the
principal and interest then due shall be forgiven by the Company. The employment
agreement also provides for the granting of certain stock options described
above and certain other benefits typical in employment agreements with a senior
executive officer. Finally, the employment agreement provides that Mr. Lasky
will not disclose certain proprietary information belonging to the Company or
otherwise compete with the Company for a period of eighteen months following his
termination of employment except where such termination is by the Company
without "cause."

Employment Agreements with G. Faye Godwin and Douglas A. Hennig. The
Company has entered into employment agreements with each of Ms. Godwin and Mr.
Hennig. These employment agreements are annual agreements that automatically
renew for consecutive one year terms unless timely notice of nonrenewal is given
either by the Company or the applicable officer. These agreements provide that
these officer shall receive a base salary in an amount determined by the
Company's Board of Directors, provided, however, that in no event may such base
salary be less than $110,000 in the case of Ms. Godwin and $130,000 in the case
of Mr. Hennig. Pursuant to these agreements, Ms. Godwin and Mr. Hennig are
entitled to receive incentive bonuses payable, at the sole discretion of the
Board of Directors, if certain target earnings are achieved. These employment
agreements also provide for the granting of certain stock options and certain
other benefits typical in employment agreements with senior executive officers.
Pursuant to these employment agreements, each of Ms. Godwin and Mr. Hennig have
agreed not to disclose certain proprietary information belonging to the Company
or otherwise to compete with the Company for a period of 12 months in the case
of Ms. Godwin and 18 months in the case of Mr. Hennig following their respective
termination of employment, except where such termination is by the Company
without "cause."

The employment agreement with Mr. Hennig was entered in connection with the
acquisition of Heartland (of which Mr. Hennig was the founder and president) and
afforded Mr. Hennig the right to purchase 53,525 shares of Common Stock at a per
share price of $4.65 (the "Hennig Stock"). The Hennig Stock is nontransferable
and is subject to the Company's right to repurchase such shares at the price
paid by Mr. Hennig for the Hennig Stock until such time as such shares become
vested, with vesting occurring 50% on the first anniversary of Mr. Hennig's
employment by the Company, 30% on the second anniversary and 20% on the third
anniversary. Pursuant to the employment agreement with Mr. Hennig, Mr. Hennig
also has the right to purchase an additional 41,589 shares of Common Stock at a
per share price of $7.21 at any time during the 30 day period commencing
December 1, 1996.

In addition, pursuant to his employment agreement, Mr. Hennig is entitled
to borrow up to $100,000 from the Company during the initial annual term of the
agreement, which loan shall bear interest at the rate of 6% per annum and shall
be repayable on the third anniversary of the date of the loan. In addition, if
the employment agreement with Mr. Hennig is renewed for a second annual term,
Mr. Hennig is entitled to borrow an additional $100,000 from the Company on
similar terms. Pursuant to these provisions, Mr. Hennig borrowed $60,000 from
the Company in May 1996. This loan is secured by Mr. Hennig's pledge of certain
shares of Common Stock owned by Mr. Hennig.

Employment Agreements with D. Lee Field and David M. Boitano. As a
condition of and effective upon the Crossings Merger, the Company entered into
employment agreements with each of Messrs. Field and Boitano. These agreements
provide for a one year term, and are automatically renewed for an additional one
year term unless timely notice of nonrenewal is given by the Company or the
applicable officer. The employment agreements provide that Messrs. Field and
Boitano shall receive a base salary in an amount (not less than $140,000)
determined by the Company's Board of Directors or President. Pursuant to these
employment agreements, Messrs. Field and Boitano are entitled to receive
incentive bonuses of up to 25% and 20% of their base salary, respectively,
payable at the discretion of the Board of Directors if certain targeted earnings
are achieved. The employment agreements also provide for the granting of certain
stock options and

62
<PAGE> 65

certain other benefits typical in employment agreements with senior executive
officers. Finally, pursuant to these employment agreements, each of Messrs.
Field and Boitano have agreed not to disclose certain proprietary information
belonging to the Company or otherwise to compete with the Company for a period
of twelve months following their respective termination of employment, except
where such termination is by the Company without "cause."

1995 Incentive Compensation Plan. The 1995 Plan provides key employees
(who may also be directors) of the Company and its subsidiaries performance
incentives and also provides a means of encouraging stock ownership in the
Company by such persons. Under the 1995 Plan, key employees of the Company or
its affiliates are eligible to receive stock options to purchase shares of the
Company's Common Stock. The 1995 Plan allows a maximum number of shares to be
subject to options of 1,425,000. Options are granted under the 1995 Plan on the
basis of the optionee's contribution to the Company, and no option may exceed a
term of ten years. Options granted under the 1995 Plan may be either incentive
stock options or options that do not qualify as incentive stock options. The
Company's Compensation Committee is authorized to designate the recipients of
options, the dates of grants, the number of shares subject to options, the
option price, the terms of payment on exercise of the options, and the time
during which the options may be exercised. The price of incentive stock options
granted under the 1995 Plan cannot be less than the fair market value of the
shares at the time the options are granted.

At May 15, 1996, options to purchase an aggregate of 789,149 shares of
Common Stock were granted and outstanding at a weighted average exercise price
of $3.93 per share, of which options to purchase 103,843 shares were exercisable
at such date.

Compensation Committee Interlocks and Insider Participation. The Company
has appointed Messrs. Boehlke, Kenny, Petty and Tubergen as members of the
Compensation Committee. The Company has no compensation committee interlocks.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of May , 1996 by: (i)
each person or entity known to the Company to own more than 5% of the
outstanding shares of the Common Stock; (ii) each of the Company's directors;
(iii) each of the Named Executive Officers; (iv) other Selling Stockholders; and
(v) all of the Company's directors and executive officers as a group. Except as
otherwise noted, the person or entity named has sole voting and investment power
over the shares indicated.

<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THE NUMBER OF OWNED AFTER THE
OFFERING SHARES OFFERING
------------------- BEING -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT SOLD NUMBER PERCENT
- ---------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Alternative Living Investors, L.L.C.(1)....... 4,302,994 45.2%
184 Shuman Boulevard,
Suite 200
Naperville, Illinois 60563
GranCare, Inc.(2)............................. 1,892,302 19.9 1,892,302 -- --
One Ravinia Drive,
Suite 1500
Atlanta, Georgia 30346
</TABLE>

63
<PAGE> 66
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THE NUMBER OF OWNED AFTER THE
OFFERING SHARES OFFERING
------------------- BEING -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT SOLD NUMBER PERCENT
- ---------------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Gene E. Burleson*(2)(3)....................... 1,900,047 19.9 1,892,302 7,745 **
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Capital Consultants, Inc.(4).................. 1,003,524 10.5 721,651 281,873 2.4
2300 SW First Avenue
Portland, Oregon 97201
Richard W. Boehlke*........................... 781,346 8.2 -- 781,346 6.7
1201 Pacific Avenue
Suite 1800
Tacoma, Washington 98402
Peter H. Huizenga(5)(6)....................... 753,024 7.9 -- 753,024 6.4
2215 York Road, Suite 500
Oakbrook, Illinois 60521
Robert Haveman(1)(5)(7)*...................... 753,024 7.9 -- 753,024 6.4
One Prince Center
Holland, Michigan 49423
Jerry L. Tubergen(1)(5)(8)*................... 717,739 7.5 -- 717,739 6.1
126 Ottawa Ave., Suite 500
Grand Rapids, Michigan 49503
William F. Lasky(9)*.......................... 511,140 5.3 -- 511,140 4.3
450 North Sunnyslope Road, Suite 200
Brookfield, Wisconsin 53003
Heartland Development Corporation(10)......... 198,547 2.1 198,547 -- --
William G. Petty, Jr.(1)(11)*................. 130,232 1.4 -- 130,232 1.1
Ronald G. Kenny(1)(5)(12)*.................... 29,260 ** -- 29,260 **
All Officers and Directors(13) 5,088,428 52.6% 1,892,302 3,196,126 27.0
as a Group (15 Persons).....................
</TABLE>

- ---------------

* See "Management" for position with the Company.
** Less than 1%
(1) ALI is a limited liability company that was formed in May 1995 as an
investment vehicle for a $20 million investment in the Company. See
"History and Organization -- 1995 Recapitalization Transaction." Messrs.
Haveman, Kenny, Petty and Tubergen serve as managers of ALI, but disclaim
beneficial ownership of the shares held by ALI. ALI will sell up to 704,043
of its shares of Common Stock in the Offering if and to the extent that the
Underwriters' overallotment option is exercised. Following the Offering,
ALI intends to liquidate and distribute to its members their respective
pro-rata interest in the shares then held by ALI and, to the extent the
Underwriters' overallotment option is exercised in full or in part, the net
proceeds of the Offering received by ALI.
(2) Represents shares held by Evergreen Healthcare, Inc., which became a
wholly-owned subsidiary of GranCare in July 1995. Gene E. Burleson, a
director of the Company, is the Chairman of the Board, President and Chief
Executive Officer of GranCare and may be deemed to beneficially own the
shares of Common Stock held by it.
(3) Also includes options to acquire 7,745 shares exercisable within the next
60 days.
(4) Represents shares held by CCI as agent for clients for whom it holds
discretionary authority. Pursuant to the Agreement and Plan of Merger
entered into between the Company and Crossings in connection with the
Crossings Merger, the Company has granted certain registration rights to
CCI whereby CCI is entitled to include, as a Selling Stockholder, up to
740,000 shares of Common Stock in the Offering.
(5) Represents shares of Common Stock to which the beneficial owner is entitled
to receive upon the distribution of the Common Stock from ALI based upon
such person's ownership of the membership units thereof, assuming that the
Underwriters' overallotment option is not exercised. See note (1) above.

64
<PAGE> 67

(6) Includes 365,754 shares of Common Stock held by the Peter H. Huizenga
Testamentary Trust, 43,030 shares of Common Stock held by the Betsy
Huizenga Trust, 43,030 shares of Common Stock held by the Greta Huizenga
Trust, 43,030 shares of Common Stock held by the Peter H. Huizenga, Jr.
Trust and 43,030 shares of Common Stock held by the Timothy Dean Huizenga
Trust, all of which Mr. Huizenga may be deemed to beneficially own by
virtue of his role as a trustee.
(7) Of these shares, 645,449 shares represent membership interests in ALI held
by two nonprofit corporations that Mr. Haveman serves as an officer. Mr.
Haveman disclaims beneficial ownership of the shares held by these
corporations. Also includes options to acquire 7,745 shares exercisable
within the next 60 days.
(8) Includes (i) 258,180 shares attributable to member interests in ALI held by
Mr. Tubergen or trusts for which he serves as trustee (the "Trusts") and
(ii) options to acquire 7,745 shares exercisable within the next 60 days.
The co-trustees of the Trusts also serve as trustees to a trust holding
member interests in ALI representing an additional 65,545 shares.
(9) Mr. Lasky's beneficial ownership includes shares held by CLC by virtue of
his position as an officer and majority shareholder of CLC and options to
acquire 54,377 shares within the next 60 days. CLC is a Wisconsin
corporation owned by Mr. Lasky and David Burr. CLC will sell up to 25,000
shares of its Common Stock in the Offering if and to the extent that the
Underwriters' overallotment option is exercised. Of the proceeds from the
sale of Common Stock held by CLC, only so much as is necessary to satisfy
the income tax liability resulting from such sale will be distributed by
CLC to Messrs. Lasky and Burr. The remainder of the proceeds of such sale
will be used by CLC to redeem a portion of the shares of capital stock of
CLC held by Mr. Burr. If the Underwriters' overallotment option is
exercised in full, Mr. Lasky will beneficially own 486,140 shares of Common
Stock.
(10) Pursuant to the Heartland Acquisition, HDC was granted certain registration
rights whereby it is entitled to include, as a Selling Stockholder, all of
its shares of Common Stock in the Offering.
(11) Represents 107,575 shares held by Petty, Kneen & Company, L.L.C., a company
owned and controlled by Mr. Petty and John W. Kneen and options to acquire
22,657 shares within the next 60 days. See "History and
Organization -- Recent Equity Transactions."
(12) Includes options to acquire 7,745 shares exercisable within the next 60
days. Mr. Kenny is a management employee of Huizenga Capital Management, a
sole proprietorship of Peter H. Huizenga. Mr. Kenny disclaims beneficial
ownership of any shares held by Mr. Huizenga and his affiliates.
(13) Also includes options to acquire 146,642 shares exercisable within the next
60 days.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Since the Company was organized and capitalized in December 1993, Evergreen
had from time to time advanced funds to the Company, either pursuant to
additional capital investments or in the form of interest bearing advances.
During 1994, Evergreen advanced $2.7 million to the Company pursuant to a
capital call and $216,658 in the form of an interest bearing advance. During
1995, Evergreen made $3.8 million of additional interest bearing advances to the
Company to fund its growth and operations. Interest bearing advances made by
Evergreen bore interest at a rate of 9% per annum. The aggregate outstanding
advances from Evergreen of $4.0 million and accrued and unpaid interest thereon
of $55,400 were repaid with a portion of the net proceeds from the 1995
Recapitalization. See "History and Organization -- 1995 Recapitalization
Transaction."

In connection with the purchase by the Company of the Wynwood residence in
Sarasota, Florida, the Company gave the seller a note in the amount of $4.2
million which was payable on or before May 31, 1995. Evergreen guaranteed the
payment of this note made by the Company. Subsequently in June 1995, the Company
refinanced this note with permanent financing and released Evergreen from its
guarantee.

Evergreen granted bank lenders to two ALS-Midwest partnerships a put option
entitling such bank lenders to sell to Evergreen loans made to such ALS-Midwest
partnerships aggregating $4.0 million in the event either of the respective
partnerships as borrower, is in default in repaying such loans. These borrowings
were used by these partnerships to construct two Clare Bridge residences in
Michigan. As part of the 1995 Recapitalization, the Company agreed to use its
best efforts to either (i) cause Evergreen to be released from all guaranties
and contractual commitments made by Evergreen as a financial accommodation on
behalf of or for the benefit of the Company or (ii) provide Evergreen with such
security or other assurances as Evergreen may reasonably request to secure
Evergreen in the event it is called upon under any such guaranty or contractual
commitment or other financial accommodation.

The Company manages six dementia care residences in Wisconsin for the ALS
Partnership, which is 50% owned and controlled by Mr. Lasky, pursuant to
management agreements providing for a management fee of between 12% to 15% of
gross operating revenues. The management agreements expire in December 1998, but
may be terminated by the Company upon 90 days notice to the ALS Partnership. The
ALS Partnership paid

65
<PAGE> 68

the Company management fees of $252,000, $290,000 and $14,400 for 1995, 1994 and
1993, respectively. The Company also manages a WovenHearts residence in
Wisconsin owned by a partnership of which Douglas A. Hennig, the Company's
Senior Vice President, is a 23% general partner. The Company expects to receive
management fees of approximately $25,000 from this agreement in 1996. The
Company leases a Crossings residence from the 2010 Union L.P. of which Richard
W. Boehlke, the Vice Chairman of the Board of the Company is the 99% general
partner. The Company expects to pay aggregate annual lease payments of
approximately $652,000 pursuant to this lease in May 1996. The lease payments
are equal to the periodic debt service and lease obligations of the partnership
with respect to the property. See "Risk Factors -- Potential Conflicts of
Interest of Certain Executive Officers and Directors" and "History and
Organization -- Crossings Merger -- Crossings REIT Transactions."

In connection with the Heartland acquisition, the Company borrowed an
aggregate of $8.7 million from RDV Capital Management L.P., a Delaware limited
partnership, the general partner of which is RDV Corporation. Jerry L. Tubergen,
a director of the Company, is the President and Chief Operating Officer of RDV
Corporation. See "Use of Proceeds," "History and Organization -- Acquisition of
Heartland Retirement Services, Inc." and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

The Company conducted site evaluations and market feasibility studies for
GranCare in 1995 and expected to continue to provide such services during 1996.
The Company has billed GranCare approximately $75,000 and $63,000 for fees
relating to these services in 1995 and 1996, respectively.

For certain additional background information regarding transactions
involving the Company and Crossings and their respective officers, directors and
stockholders, see "History and Organization."

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $0.01 par value, and 5,000,000 shares of $0.01 par value
preferred stock (the "Preferred Stock"). Upon completion of the Offering,
11,710,849 shares of Common Stock will be issued and outstanding, 789,149 shares
of Common Stock will be reserved for issuance upon the exercise of employee
stock options previously granted, 1,425,000 shares of Common Stock will be
reserved for issuance upon the exercise of stock options which may be granted
under the 1995 Plan and no Preferred Stock will be issued and outstanding. The
following summary does not purport to be complete and is subject to the detailed
provisions of, and qualified in its entirety by reference to, the Company's
Restated Certificate of Incorporation and Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part, and to the applicable provisions of the Delaware General Corporation Law
(the "DGCL").

COMMON STOCK

Voting Rights. Each share of Common Stock entitles the holder thereof to
one vote in all matters submitted to a vote of stockholders. The Common Stock
does not have cumulative voting rights, which means that holders of a majority
of the outstanding shares of Common Stock voting for the election of directors
can elect all directors then being elected.

Dividends. Each share of Common Stock has an equal and ratable right to
receive dividends to be paid from the Company's assets legally available
therefor when, as and if declared by the Board of Directors but subject to
rights of holders of any series of Preferred Stock. Delaware law generally
requires that dividends are payable only out of the Company's surplus or current
net profits in accordance with the DGCL. See "Dividend Policy".

Liquidation. In the event of the dissolution, liquidation or winding up of
the Company, the holders of Common Stock are entitled to share equally and
ratably in the assets available for distribution after payments are made to the
Company's creditors, but subject to the preferred liquidation rights of any
holders of any series of Preferred Stock of the Company.

66
<PAGE> 69

Other. The holders of shares of Common Stock have no preemptive,
subscription, redemption or conversion rights and are not liable for further
call or assessment. All of the outstanding shares of Common Stock are, and the
Common Stock offered hereby by the Company will be, fully paid and
nonassessable.

PREFERRED STOCK

The Board of Directors is authorized, without stockholder approval, to
issue from time to time up to 5,000,000 shares of Preferred Stock in one or more
series, and with respect to each series, to determine, subject to limitations
prescribed by law, any dividend rights and rates, any conversion or exchange
rights, any rights, terms and prices of redemption (including sinking fund
provisions), any liquidation preferences, any voting rights, and generally any
other rights, preferences, privileges, qualifications, limitations and
restrictions not in conflict with the Company's Restated Certificate of
Incorporation. To date, no series of Preferred Stock has been authorized or
issued. The Company has no present plans to issue any shares of Preferred Stock.

The issuance of shares of Preferred Stock by action of the Board of
Directors could adversely affect the voting power, dividend rights and other
rights of holders of the Common Stock. Issuance of shares of a series of
Preferred Stock also could, depending on the terms such series, either impede or
facilitate the completion of a merger, tender offer or other takeover attempt.
Although the Board of Directors is required to make a determination as to the
best interests of the Company's stockholders when issuing shares of Preferred
Stock, the Board of Directors could act in a manner that would discourage an
acquisition attempt or other transaction that some or a majority of the
stockholders might believe to be in the best interests of the Company or in
which stockholders might receive a premium for their Common Stock over the
then-prevailing market price. Although there are currently no plans to issue
shares of Preferred Stock or rights to purchase such shares, the Company
believes that the availability of the Preferred Stock will provide the Company
with increased flexibility in structuring future financings and acquisitions and
in meeting other corporate needs that might arise. The authorized shares of
Preferred Stock are available for issuance without further action by the
Company's stockholders, unless such action is required by applicable law or the
rules of any stock exchange on which the Common Stock may then be listed.

LIMITATIONS ON DIRECTORS' LIABILITY

The Company's Restated Certificate of Incorporation provides that no
director of the Company shall be personally liable to the Company or its
stockholders for monetary damages for any breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) in respect of certain unlawful dividend payments or stock purchases
or redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. The effect of these provisions is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of fiduciary duty as a director (including breaches resulting from
grossly negligent behavior), except in the situations described above. These
provisions do not limit the liability of directors under federal securities laws
and do not affect the availability of equitable remedies such as an injunction
or rescission based upon a director's breach of his duty of care.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW AND CERTAIN ANTI-TAKEOVER
MATTERS

Section 203 of the DGCL prohibits certain transactions between a publicly
held Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates and/or associates of such person,
beneficially owns, directly or indirectly, 15 percent or more of the outstanding
voting shares of a Delaware corporation. This provision prohibits certain
business combinations (defined broadly to include mergers, consolidations, sales
or other dispositions of assets having an aggregate value of 10 percent or more
of the consolidated assets of the corporation, and certain transactions that
would increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder acquired its stock, unless

67
<PAGE> 70
(i) the business combination or the transaction whereby the person became an
interested stockholder is approved by the corporation's board of directors prior
to the date of such transaction; (ii) the interested stockholder acquired at
least 85 percent of the voting stock of the corporation in the transaction in
which it became an interested stockholder; or (iii) the business combination is
approved by a majority of the board of directors and by the affirmative vote of
two-thirds of the outstanding voting stock owned by disinterested stockholders
at an annual or special meeting.

Upon completion of the Offering, the Corporation's Restated Certificate of
Incorporation will provide that any action required or permitted to be taken by
the stockholders must be effected at a duly called annual or special meeting of
such holders and may not be affected by any consent in writing by such holders,
unless such consent is unanimous.

TRANSFER AGENT AND REGISTRAR

will act as the transfer agent and registrar for the Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have outstanding
11,710,849 shares of Common Stock, without taking into account any outstanding
stock options. Of these shares, all of the shares of Common Stock offered hereby
will be freely tradeable without restriction or further registration under the
Securities Act, except for shares acquired by "affiliates" of the Company (as
defined in Rule 144 under the Securities Act).

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities,"
as defined in Rule 144, for at least two years, including "affiliates" of the
Company, would be entitled to sell within any three-month period that number of
shares that does not exceed the greater of (i) 1% of the number of shares of
Common Stock then outstanding or (ii) the average weekly trading volume of the
Common Stock during the four calendar weeks preceding such sale. Sales pursuant
to Rule 144 are subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. Affiliates may sell shares not constituting restricted securities only
in accordance with the foregoing volume limitations and other restrictions but
without regard to the two year holding period. A person (or persons whose shares
are aggregated) who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least three years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above. The Commission has proposed but has not yet adopted amendments to Rule
144 which would shorten the required holding period for "restricted securities"
to one year (two years in the case of Rule 144(k)). The Company is unable to
estimate the number of shares that will be sold under Rule 144 since this will
depend in part on the market price for the Common Stock, the personal
circumstances of the holders of such shares and other factors (including any
amendments to Rule 144).

The Company, the Selling Stockholders, all directors and officers of the
Company and all other holders of % or more of the shares of Common Stock and
options to purchase shares of Common Stock outstanding after the Offering have
agreed that, for a period of 180 days following the Offering, they will not
offer to sell, sell, contract to sell, grant any option to purchase or otherwise
dispose (or announce any offer, sale, grant of any option to purchase or other
disposition) of any shares of Common Stock held by them or any securities held
by them that are convertible into or exchangeable or exercisable for shares of
Common Stock, without the prior written consent of NatWest Securities Limited
(except that the Company may grant options to purchase shares of Common Stock
and issue shares upon the exercise thereof under the 1995 Plan.) Beginning 90
days after the date of this Prospectus, 456,763 restricted shares will first
become eligible for sale in the public market pursuant to Rule 144, subject to
the volume, resale and other limitations of such rule. All of these shares will
be subject to lock-up agreements with the Underwriters.

68
<PAGE> 71

69
<PAGE> 72

UNDERWRITING

The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company and the Selling Stockholders the number of shares of Common
Stock set forth opposite their names below.

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
NatWest Securities Limited...................................................
McDonald & Company Securities, Inc...........................................
The Chicago Corporation......................................................
----------------
Total..............................................................
=============
</TABLE>

The Underwriters are obligated to purchase all the shares of Common Stock
offered hereby, if any such shares are purchased.

The Underwriters propose to offer the shares directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers at such price less a concession
not in excess of $. per share of Common Stock. Such dealers may re-allow a
concession not in excess of $. per share of Common Stock to certain other
brokers and dealers. After the public offering, the per share price and such
concessions may be changed by the Underwriters. The Underwriters have informed
the Company and the Selling Stockholders that they do not intend to confirm
sales of shares of Common Stock to any accounts over which they exercise
discretionary authority.

The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including liabilities under the federal securities laws, or will
contribute to payments that the Underwriters may be required to make in respect
thereof.

Certain Selling Stockholders have granted an option to the Underwriters,
exercisable for 30 days from the date of this Prospectus, to purchase up to
750,000 additional shares of Common Stock at the initial public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriters may exercise such option only to cover over-allotments in the
sale of the shares of Common Stock offered hereby. See "Principal and Selling
Stockholders."

The Chicago Corporation owns membership units in ALI which represent
beneficial ownership of approximately 64,545 shares of Common Stock (less than
1.0% of the shares of Common Stock to be outstanding after the Offering). In
addition, officers of NatWest Securities Limited, McDonald & Company Securities,
Inc. and The Chicago Corporation own membership units in ALI which represent, in
the aggregate, approximately 193,635 shares of Common Stock (1.7% of the shares
of Common Stock to be outstanding after the Offering). Prior to the Offering,
all of such membership units will be repurchased by ALI in exchange for the
shares of Common Stock beneficially owned by such members. As a result of such
repurchase, none of The Chicago Corporation and such officers will be directly
or indirectly selling shares of Common Stock in the Offering or receiving any
net proceeds of such sale by ALI. The Chicago Corporation may transfer shares of
Common Stock it receives in such repurchase to its officers and employees as
compensation.

NatWest Securities Limited, a United Kingdom broker-dealer and a member of
the Securities and Futures Authority Limited, has agreed that, as part of the
distribution of the Common Stock offered hereby and subject to certain
exceptions, it will not offer or sell any Common Stock within the United States,
its territories or possessions, or to persons who are citizens thereof or
residents therein. The Underwriting Agreement does not limit sales of the Common
Stock offered hereby outside of the United States.

National Westminster Bank Plc, New York Branch, an affiliate of NatWest
Securities Limited, will receive from Crossings a $680,000 success fee for
financial advisory services rendered on behalf of Crossings in connection with
the Crossings Merger.

NatWest Securities Limited has further represented and agreed that (a) it
has not offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose

70
<PAGE> 73

ordinary activities involve them in acquiring, holding, managing or disposing of
investments (whether as principal or agent) for the purposes of their businesses
or otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the
"Act"); (b) it has complied and will comply with all applicable provisions of
the Act with respect to anything done by it in relation to the shares of Common
Stock in, from, or otherwise involving the United Kingdom; and (c) it has only
issued or passed on and will only issue or pass on, in the United Kingdom, any
document that consists of or any part of listing particulars, supplementary
listing particulars, or any other document required or permitted to be published
by listing rules under Part IV of the Act, to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.

Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock was determined by
negotiation between the Company and the Underwriters. Among the factors that
were considered in determining the initial public offering price, in addition to
prevailing market and general economic conditions, were the history of, and
prospects for, the industry in which the Company operates, the ability of the
Company's management, the Company's past and present operations, the Company's
historical results of operations, the Company's earnings prospects, the prices
of similar securities of comparable companies and other relative factors. There
can be no assurance, however, that the price at which the Common Stock will sell
in the public market after the Offering will not be lower than the price at
which it is sold by the Underwriters. See "Risk Factors -- No Prior Public
Trading Market."

The Company, the Selling Stockholders, all directors and officers of the
Company and all other holders of % or more of the shares of Common Stock and
options to purchase Common Stock outstanding after the Offering have agreed with
the Underwriters that, for a period of 180 days following the Offering, they
will not offer to sell, sell, contract to sell, grant an option to purchase or
otherwise dispose (or announce any offer, sale, grant of any option or other
distribution) of any shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock without the prior written consent of
NatWest Securities Limited (except that the Company may grant options to
purchase shares of Common Stock, and issue shares upon the exercise thereof,
under the 1995 Plan). See "Principal and Selling Stockholders" and
"Management -- Executive Compensation."

LEGAL MATTERS

Certain legal matters with respect to the shares offered hereby will be
passed upon for the Company by Rogers & Hardin, Atlanta, Georgia. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Jones, Day, Reavis & Pogue, Cleveland, Ohio.

EXPERTS

The consolidated financial statements of Alternative Living Services, Inc.
and subsidiaries as of December 31, 1994 and 1995 and for the period January 1,
1993 to December 13, 1993 for the Predecessor to the Company and for the period
December 14, 1993 to December 31, 1993 and the years ended December 31, 1994 and
1995 for the Company have been included herein and in the registration statement
of which this prospectus is a part in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein and in the registration statement upon the authority of said firm as
experts in accounting and auditing.

The consolidated financial statements of Heartland Retirement Services,
Inc. and subsidiaries as of December 31, 1994 and 1995 and for each of the years
in the period from January 11, 1993 (inception) through December 31, 1995 have
been included herein and in the registration statement of which this prospectus
is a part in reliance upon the report of Arthur Andersen LLP, independent
certified public accountants, appearing elsewhere herein and in the registration
statement upon the authority of said firm as experts in accounting and auditing.

71
<PAGE> 74

The combined financial statements of Alternative Living Services-Midwest
Inc. and affiliates as of and for the year ended December 31, 1995 have been
included herein and in the registration statement of which this prospectus is a
part in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein and in the registration statement
upon the authority of said firm as experts in accounting and auditing.

The combined financial statements of New Crossings International
Corporation and subsidiaries as of December 31, 1994 and 1995 and for each of
the years in the three-year period ended December 31, 1995, have been included
herein and in the registration statement of which this prospectus is a part in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and in the registration statement upon
the authority of said firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (herein, together with all
amendments thereto, called the "Registration Statement"), of which this
Prospectus constitutes a part, under the Securities Act and the rules and
regulations promulgated thereunder, with respect to the Common Stock offered
hereby. This Prospectus omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement, including the
exhibits thereto, for further information with respect to the Company and the
securities offered hereby. Statements contained herein concerning the provisions
of documents are necessarily summaries of such documents; when any such document
is an exhibit to the Registration Statement, each such statement is qualified in
its entirety by reference to the copy of such document filed with the
Commission. The Registration Statement and the exhibits and schedules thereto
may be reviewed without charge at the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at the New York Regional
Office located at Seven World Trade Center, New York, New York 10048 and at the
Chicago Regional Office located at 500 Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained, upon payment of the
fee prescribed by the Commission, at the Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549.

72
<PAGE> 75
EXHIBIT 10.10

AMENDED AND RESTATED ALTERNATIVE LIVING SERVICES, INC.

1995 INCENTIVE COMPENSATION PLAN

SECTION 1. Title and Purpose. The plan described herein shall be
known as the Amended and Restated 1995 Incentive Compensation Plan (the "Plan").
The purpose of this Plan is to advance the interests of ALTERNATIVE LIVING
SERVICES, INC. ("ALS"), any subsidiary corporation of ALS, and any partnership
which is owned entirely by ALS (referred to collectively as the "Company",
except that with respect to incentive stock options the "Company" shall not
include any such partnerships) by strengthening the Company's ability to attract
and retain individuals of training, experience and ability in the employ or
service of the Company and to furnish additional incentive to the Company's
valued employees, directors, officers, independent contractors and agents to
promote the Company's financial success. This Plan will be effected through the
granting of stock options, stock appreciation rights ("SARs") or restricted
stock ("Restricted Stock") awards as herein provided. Stock options granted
hereunder may, if so designated, constitute "incentive stock options" ("ISOs")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or, if so designated, may be options which do not
constitute ISOs or other qualified options ("NSOs") (ISOs and NSOs being
collectively referred to as "Stock Options"), as specified by a Committee
(hereafter defined) of the Board of Directors of the Company (the "Board").
Stock Options granted under this Plan may be accompanied by SARs as hereinafter
set forth. As used herein, "subsidiary corporation" shall have the meaning given
such terms in Code Section 424.

SECTION 2. Shares of Stock Subject to the Plan. Stock which may be
issued pursuant to Stock Options, SARs and Restricted Stock granted from time to
time under this Plan shall not exceed in the aggregate 1,425,000 shares of ALS
common stock (including fractional shares thereof), without par value (the
"Common Stock") (as adjusted for the 1,812.55-for-one stock split on May 17,
1996), subject to further adjustment as provided in Sections 16 and 17 hereof).
It is contemplated that the shares to be issued upon the exercise of Stock
Options or SARs or as Restricted Stock granted under this Plan will be approved
for listing by each securities exchange on which shares of Common Stock are then
listed.

In the event that the number of shares underlying any Stock Option or
SAR granted under the Plan is reduced for any reason, or any Stock Option or
SAR under the Plan can no longer be exercised in part or in whole (other than
due to the exercise of a related SAR or a related Stock Option, as the case may
be), or shares awarded as Restricted Stock are forfeited, the number of shares
no longer subject to such Stock Option or SAR or so forfeited are thereupon
deemed released and are thereafter available for subsequent awards under the
Plan (unless the Plan shall have been terminated).

SECTION 3. Eligibility. Stock Options, SARs and Restricted Stock may
be granted to directors, officers, employees, independent contractors and agents
of the Company by the Board;

<PAGE> 76

provided, however, that ISOs may only be granted to employees of the Company. In
determining the persons to whom Stock Options, SARs and Restricted Stock will be
granted and the number of shares to be covered by each, the Board shall take
into account the duties of the respective persons, their present and potential
contributions to the success of the Company, the anticipated number of years of
effective service remaining, and such other factors as they shall deem relevant
in connection with accomplishing the purposes of the Plan. Stock Options, SARs
and Restricted Stock may not be granted to an individual under this Plan at a
time when such individual is serving as a member of the Committee or during any
other period which would have the effect of disqualifying such individual from
being a "disinterested person" under Subsection (c)(2)(i) of Rule 16b-3 (or any
successor provision thereto) promulgated under the Securities Exchange Act of
1934, as amended ("Rule 16b-3"). An employee owning stock possessing more than
10 percent of the total combined voting power or value of all classes of stock
of ALS or any parent or subsidiary corporation ("Ten Percent Shareholder") is
not eligible to receive an ISO unless the option price is at least 110 percent
of the fair market value of the Common Stock at the time the ISO is granted and
the ISO by its terms is not exercisable more than five (5) years from the date
it is granted. Restricted Stock and any Common Stock which any employee may
receive under outstanding Stock Options or SARs shall be treated as stock owned
by such employee for purposes of this calculation.

SECTION 4. Administration of the Plan. This Plan shall be
administered by the Compensation Committee (the "Committee") consisting of two
or more directors, all of whom shall be "disinterested persons" as defined in
Rule 16b- 3(c)(2)(i) (or any successor provision thereto), appointed by and to
serve at the pleasure of the Board of ALS. No individual may be appointed to
the Committee who is not a director of ALS at the time of such appointment or
who shall within one year prior to such individual's service on the Committee
have been granted any award under this Plan or any other plan of the Company or
any of its affiliated entities unless permitted by Rule 16b-3(c)(2) (or any
successor provision thereto). An individual's membership on the Committee shall
terminate automatically at the time such individual ceases to be a director of
ALS. The Committee shall select one of its members as its chairman and shall
hold its meetings at such times and places as it shall deem advisable. A
majority of its members shall constitute a quorum. All action of the Committee
shall be taken by a majority of its members. Any action may be taken by a
written instrument signed by a majority of the members and any action so taken
shall be fully effective as if it had been taken by a vote of a majority of the
members at a meeting duly called and held. The Committee may appoint a
secretary, keep minutes of its meetings, and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.

SECTION 5. Powers of the Committee. The Committee shall have full
power and authority to determine those persons to whom Stock Options, SARs or
Restricted Stock shall be granted, the number of shares to be covered by such
awards, the term of each, the time or times at which Stock Options, SARs or
Restricted Stock shall be granted, provided, with respect to ISOs, the term and
the time are permitted by Section 422 of the Code. Except as otherwise
expressly provided in this Plan, the Committee shall also have the power to
determine, at the time of the grant of each Stock Option, SAR or Restricted
Stock award, all terms and conditions

2
<PAGE> 77

governing the rights and obligations of the participant with respect to such
award, including but not limited to: (a) the exercise price of any Stock Option
or SAR or the method by which the exercise price shall be determined; (b) the
length of the period during which the Stock Option or SAR may be exercised and
any limitations on the number of shares purchasable with the Stock Option or
with respect to which an SAR is exercisable at any given time during such
period; (c) the time at which the Stock Option or SAR may be exercised; (d) the
length of the restriction period for Restricted Stock awards (the "Restriction
Period"); (e) any conditions precedent to be satisfied before the Stock Option
or SAR may be exercised; (f) whether to accelerate any Restriction Period
expiration date or Stock Option or SAR vesting schedule, if any; (g) any
restrictions on resale of any shares received under the Plan; and (h) the terms
of any financing extended to a Stock Option grantee. Notwithstanding the
foregoing, the Committee shall not have the power (absent a revision to Rule
16b-3 permitting the same) to establish a Restriction Period shorter than six
months from the date of grant or permit the exercise of Stock Options or SARs
prior to the expiration of six months from the date of grant. The Committee
shall also have full and final authority: (i) to prescribe the form of each
Incentive Compensation Agreement evidencing Stock Options, SARs and Restricted
Stock awards, which agreements need not be identical for each participant or
grant, but shall each be consistent with this Plan; (ii) to adopt, amend and
rescind such rules and regulations as may be advisable in the opinion of the
Committee to administer this Plan; (iii) to correct any defect or supply any
omission or reconcile any inconsistency in this Plan, including any correction
or amendment which in the judgment of the Committee is necessary to ensure
compliance with the requirements of the Code or the requirements of Rule 16b-3
and any future rules promulgated in substitution therefor under the Securities
Exchange Act of 1934, as amended; and (iv) to construe and interpret this Plan
and any Incentive Compensation Agreements and any rules and regulations relating
thereto, and to make all other determinations deemed necessary or advisable for
the administration of this Plan. Except as provided in Section 22 hereof, the
Committee shall not have any authority, the possession or exercise of which
would cause an ISO granted hereunder to be disqualified as such under the Code.

SECTION 6. Indemnification of the Committee. In addition to such
other rights of indemnification as they may have as directors of ALS or as
members of the Committee, members of the Committee shall be indemnified by ALS
as and to the fullest extent permitted by law, including without limitation,
indemnification against the reasonable expenses, including attorneys' fees,
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal thereof, to which they or
any of them may be a party by reason of any action taken or failure to act
under or in connection with this Plan, or any Stock Options, SARs or Restricted
Stock awards granted hereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by ALS), or paid by them in satisfaction of a judgment in any
such action, suit or proceeding except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such Committee member
is liable for negligence, bad faith or misconduct in his duties.

3
<PAGE> 78

SECTION 7. Option Exercise Price. The option exercise price for
shares of Common Stock which shall be covered by each NSO shall be established
by the Board in its sole discretion at the time of granting the NSO. The
option exercise price for shares of Common Stock which shall be covered by each
ISO shall be no less than the fair market value of the Common Stock at the time
of granting the ISO. In the event that any ISO is granted to a Ten Percent
Shareholder the price at which shares of Common Stock shall be purchasable
under such ISO shall not be less than 110 percent of the fair market value of
such shares at the time of the grant. For the purposes of this Section 7 and
all other provisions of this Plan which require a determination of the fair
market value of the Common Stock as of a specified date, "fair market value"
shall mean: (i) if the primary market for the Common Stock is a national
securities exchange, the NASDAQ National Market System, or other market
quotation system in which last sale transactions are reported on a
contemporaneous basis, such fair market value shall be deemed to be the last
reported sale price of the Common Stock on such exchange or in such quotation
system on the day on which the option shall be granted (or other relevant
valuation date specified herein), or, if there shall not have been a sale on
such exchange or reported through such system on such trading day, the closing
or last bid quotation therefor on such exchange or quotation system on such
trading day; (ii) if the primary market for the Common Stock is not such an
exchange or quotation market in which transactions are contemporaneously
reported, such fair market value shall be deemed to be the closing or last bid
quotation in the over-the-counter market on such trading day as reported by
the National Association of Securities Dealers through NASDAQ, its automated
system for reporting quotations, or its successor (or such other generally
accepted source of publicly reported bid quotations as the Company may
reasonably designate) on the day on which the option shall be granted (or other
relevant valuation date specified herein); and (iii) in all other cases, such
fair market value shall be determined in good faith by the Committee at the
time the option is granted (or on any other relevant valuation date specified
herein). If the fair market value so determined shall include a fraction of a
cent, it shall be rounded up to the next full cent.

SECTION 8. Medium and Time of Payment. The option exercise price
shall be payable upon the exercise of the Stock Option and shall be paid in
cash, by check, with shares of Common Stock, or in any combination thereof as
specified by the Committee. For purposes of making such payment in shares of
Common Stock, such stock shall be valued at its fair market value as provided
in Section 7 hereof on the day of exercise of the Stock Option and shall have
been held by the grantee for a period of six (6) months.

SECTION 9. Limitation on Grant of ISOs. The aggregate fair market
value (determined as of the time the ISO is granted) of the shares with respect
to which ISOs are exercisable for the first time by a employee during any
calendar year (under all such plans of the Company) shall not exceed $100,000.

SECTION 10. Term of Stock Options and SARs.

(a) The period during which each Stock Option or SAR granted
hereunder may be exercised will be determined by the Committee in each case;
provided, however, that no

4
<PAGE> 79

Stock Option or SAR shall by its terms be exercisable after the expiration of
ten (10) years from the date the Stock Option or SAR is granted or before six
(6) months from the date the Stock Option or SAR is granted. In the event that
any ISO is granted to a Ten Percent Shareholder, the maximum period described
above shall be reduced to five (5) years from the date the ISO is granted.

(b) With the prior written consent of any affected grantee of
Stock Options hereunder, the Committee may grant to one or more such grantees,
in exchange for their surrender and the cancellation of such Stock Options and
their corresponding SARS, if any, new Stock Options and related SARs which may
have different exercise prices than the exercise prices provided in the Stock
Options and related SARs so surrendered and canceled and containing such other
terms and conditions consistent with the Plan as the Committee may deem
appropriate.

SECTION 11. Award of Stock Appreciation Rights. (a) SARs may be
granted under this Plan to such employees as the Committee may from time to
time select and upon such terms and conditions as the Committee may from time
to time prescribe. SARs may be granted in tandem with Stock Options designated
as being related to such SARs or may be granted on a stand alone basis. Each
SAR which relates to a specific Stock Option granted may be granted
concurrently with the Stock Option to which it relates or at any time prior to
the exercise, expiration or termination of such Stock Option (except as
otherwise provided in Sections 20 and 22 hereof), but no later than six months
and one day prior to the end of the term of such Stock Option. An SAR shall
entitle the participant, subject to the provisions of this Plan and the related
Incentive Compensation Agreement, to receive from ALS an amount equal to the
excess of the fair market value on the exercise date of the number of shares
for which the SAR is exercised over the exercise price for such shares under
the related Stock Option or as stated in the separate SAR award, as the case
may be. For this purpose, such fair market value shall be determined as
provided in Section 7 hereof on the close of business on the date of exercise.

(b) An SAR shall be exercisable on such dates or during such
periods as may be determined by the Committee from time to time, except that in
no event shall any SAR granted in tandem with a related Stock Option be
exercisable when the related Stock Option is not eligible to be exercised.

(c) An SAR granted in tandem with a related Stock Option may be
exercised only upon surrender of the related Stock Option by the employee,
which related Stock Option shall be terminated to the extent of the number of
shares for which the SAR is exercised. Similarly, a Stock Option granted in
tandem with an SAR may be exercised only upon surrender of the related SAR by
the employee, which related SAR shall be terminated to the extent of the number
of shares for which the Stock Option is exercised. Shares covered by such a
terminated Stock Option or SAR (or portion thereof) granted under this Plan
shall not be available for subsequent awards under this Plan.

5
<PAGE> 80
(d) The amount payable by ALS upon exercise of an SAR may be
paid in cash, in shares of Common Stock (valued at their fair market value on
the exercise date determined as provided in Section 7 hereof) or in any
combination thereof as the Committee shall determine from time to time. No
fractional shares shall be issued and the employee shall receive cash in lieu
thereof.

(e) The Committee may impose any other conditions upon the
exercise of an SAR, which conditions may include a condition that the SAR may
be exercised only in accordance with rules and regulations adopted by the
Committee from time to time. Such rules and regulations may govern the right
to exercise SARs granted prior to the adoption or amendment of such rules and
regulations as well as SARs granted thereafter.

(f) The Committee may at any time amend, terminate or suspend
any SAR theretofore granted under this Plan, provided that the terms of any SAR
after any amendment shall conform to the provisions of this Plan. An SAR
awarded in tandem with a related Stock Option shall terminate upon the
termination or expiration of any related Stock Option.

(g) Notwithstanding the provisions of this Section 11, an SAR
may not be exercised until the expiration of six (6) months from the date of
grant of such SAR.

SECTION 12. Limitations on Right to Exercise.

(a) No Stock Option or SAR may be exercised when the fair
market value of the shares subject to such Stock Option or SAR is less than the
exercise price of the Stock Option or SAR.

(b) No Stock Option or SAR may be exercised after (i) the
expiration of ninety (90) days after the earlier of the date the employment of
the employee terminates with the Company or the date the employee is given
written notice of his discharge from such employment or (ii) with respect to
participants who are not employees, the expiration of ninety (90) days after
the date such participant's service to the Company (in all capacities) as a
director, officer, independent contractor and agent shall terminate. The
expiration period described in the preceding sentence shall be waived in the
event such termination occurs because of death or in the event termination of
employment occurs because of disability within the meaning of Code Section
22(e)(3) ("Disability"); provided, however, that no ISO or related in tandem
SAR may be exercised after the expiration of 365 days after the earlier of the
date the employment of the employee terminates with the Company or the date the
employee is given written notice of his discharge from such employment because
of Disability. Absence or leave approved by the Company, to the extent
permitted by the applicable provisions of the Code, shall not be considered an
interruption of employment for any purpose under this Plan.

(c) The transfer or issuance of Common Stock upon the exercise
of any Stock Option or SAR granted under the Plan will be contingent upon the
advice of counsel to the Company that the shares to be issued pursuant thereto
have been duly registered or are exempt

6
<PAGE> 81

from registration under the applicable securities laws, and upon receipt by the
Committee of cash, check, Common Stock, or a combination thereof, in payment of
the full purchase price of such shares.

SECTION 13. Award of Restricted Stock. (a) The Committee shall have
the authority (i) to grant Restricted Stock awards, (ii) to issue or transfer
Restricted Stock to grantees, and (iii) to establish terms, conditions and
restrictions in connection with the issuance or transfer of Restricted Stock,
including the Restriction Period, which may differ with respect to each grantee
or award.

(b) The grantee of a Restricted Stock award shall execute and
deliver to a plan administrator designated by the Committee (who may be an
officer of ALS) an executed Incentive Compensation Agreement, an escrow
agreement satisfactory to the Committee and appropriate blank stock powers with
respect to the Restricted Stock covered by such agreements, as the Committee
deems necessary. The Committee shall then cause stock certificates registered
in the name of the grantee to be issued and deposited together with the stock
powers with an escrow agent to be designated by the Committee, who may be an
officer of ALS. The Committee shall cause the escrow agent to issue to the
grantee a receipt evidencing any stock certificate held by it registered in the
name of the grantee.

(c) Restricted Stock awards granted to a grantee shall be
subject to the following restrictions until the expiration of the Restriction
Period: (i) a grantee shall be issued, but shall not be entitled to delivery of,
the stock certificate for the Restricted Stock; (ii) the Restricted Stock shall
be subject to the restrictions on transferability set forth herein and in the
grantee's related Incentive Compensation Agreement; (iii) the Restricted Stock
shall be forfeited and the stock certificates shall be returned to ALS and all
rights of the grantee to such shares and as a shareholder shall terminate
without further obligation on the part of ALS when such grantee leaves or is
terminated from the employ of the Company (or its subsidiary, as the case may
be) for any reason, except in the case of Disability or death (in which event
the Restriction Period shall lapse and the shares shall be delivered to the
grantee's beneficiaries or legal representative) and except in the case of
normal retirement after reaching the age of 65 (in which event the Restriction
Period shall lapse and the shares shall be delivered to the grantee); and (iv)
any other restrictions which the Committee may determine in advance are
necessary or appropriate.

(d) The Committee shall have the authority to remove any or all
of the restrictions on the Restricted Stock whenever it may determine that, by
reason of changes in applicable laws or other changes in circumstances arising
after the date of the Restricted Stock award, such action is appropriate. Unless
permitted by Rule 16b-3, no Restricted Stock award shall have a Restriction
Period shorther than six (6) months from the date of grant of such award.

(e) Subject to Section 23 hereof, at the expiration of the
Restriction Period, a stock certificate evidencing the Restricted Stock with
respect to which the Restriction Period has expired (to the nearest full share)
shall be delivered without charge to the grantee, or his personal
representative, free of all restrictions under the Plan.

7
<PAGE> 82
SECTION 14. Limitations on Transfer and Issuance. No Stock Option,
SAR or Restricted Stock granted under this Plan shall be transferable otherwise
than by will or the laws of descent and distribution, and no Stock Option or SAR
granted under this Plan may be exercised or other rights or benefits claimed
under the Plan by any person other than the participant to whom the Stock Option
or SAR shall initially have been granted during the lifetime of such participant
(other than the person's guardian or legal representative). After the death of
such original grantee, the "holder" of any Stock Option, SAR or Restricted Stock
granted under this Plan shall be deemed to be the person to whom the original
grantee's rights shall pass under the original grantee's will or under the laws
of descent and distribution. Notwithstanding the foregoing, no transfer by will
or the laws of descent or distribution will be binding on the Company unless the
Committee is furnished with sufficient proof establishing the validity of such
transfer.

SECTION 15. No Right to Employment Conferred. Nothing in this Plan
or in any Incentive Compensation Agreement prescribed by the Committee shall
confer upon any employee or other participant any right to continue in the
employ or service of the Company or interfere in any way with the right of the
Company to terminate such person's employment or service to the Company at any
time.

SECTION 16. Recapitalization. In the event of changes in the
outstanding shares of Common Stock by reason of stock dividends, stock splits,
subdivisions or combinations of shares, the number and class of shares
available under the Plan in the aggregate and the maximum number of shares as
to which Stock Options, SARs and Restricted Stock may be granted to any
employee under the Plan shall be correspondingly and fairly adjusted by the
Committee. A corresponding adjustment in outstanding Stock Options and SARs
shall be made without change in the total exercise price applicable to the
unexercised portion of any Stock Option or SAR, with a corresponding adjustment
in the exercise price per share. The number of SARs awarded to a employee
shall be adjusted in such event so that the same ratio of SARs to the number of
shares granted under any related Stock Option is maintained.

SECTION 17. Reorganization. If ALS is merged, consolidated or effects
a share exchange with another corporation (whether or not ALS is the surviving
corporation), or if substantially all of the assets or all of the Common Stock
is acquired by another corporation, or in the event of a separation,
reorganization or liquidation of ALS, the Board or the board of directors of any
corporation assuming the obligations of ALS hereunder, shall make appropriate
provision for the protection of any outstanding Stock Options and SARs by the
substitution on an equitable basis of appropriate stock of ALS, or of the
merged, consolidated or otherwise reorganized corporation which will be issuable
in respect to the shares of Common Stock, provided only that the excess of the
aggregate fair market value of the shares subject to the Stock Options and SARs
immediately after such substitution over the exercise price thereof is not more
than the excess of the aggregate fair market value of the shares subject to such
Stock Options and SARs immediately before such substitution over the exercise
price thereof. Notwithstanding the preceding sentence, if ALS is merged,
consolidated or effects a share exchange with another corporation or if
substantially all of the assets or all of the Common

<PAGE> 83

Stock is acquired by another corporation, or in the event of a separation,
reorganization or liquidation of ALS, the Board or the board of directors of
any corporation assuming the obligations of ALS hereunder may, upon written
notice to the holder of any outstanding Stock Option or SAR, provide that such
Stock Option or SAR must be exercised within sixty (60) days of the date of
such notice or it will be terminated.

SECTION 18. Stockholder Approval. This Plan is expressly made subject
to the approval by the holders of a majority of the issued and outstanding
shares of ALS Common Stock entitled to vote and represented at a meeting of
stockholders duly called in accordance with applicable law, where a quorum is
present. If the Plan is not so approved within one year after its adoption by
the Board, then the Plan shall not come into effect, and any Stock Option, SAR
or Restricted Stock award granted pursuant hereto shall terminate and end. No
Stock Option or SAR granted hereunder shall be exercisable and no Restricted
Stock transferable or deliverable to a grantee unless and until such stockholder
approval is obtained.

SECTION 19. Registration of Shares of Common Stock. The Committee, in
its discretion, may postpone the issuance and/or delivery of shares of Common
Stock issuable upon any exercise of a Stock Option or an SAR or upon the grant
of a Restricted Stock award until completion of any stock exchange listing,
registration, or other qualification or exemption of such shares under any state
and/or federal law, rule or regulation as the Committee may consider
appropriate, and may require any grantee to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of the shares in compliance with applicable laws, rules and
regulations.

SECTION 20. Termination and Amendment of the Plan. The Plan shall
terminate on the earlier of (i) ten years from the date this Plan is adopted by
the Board or by the stockholders of ALS, whichever is earlier, or (ii) such time
as a new stock incentive compensation plan is adopted by the Board expressly in
replacement of this Plan. No Stock Option, SAR or Restricted Stock shall be
granted under this Plan after its termination date, but the termination of this
Plan shall not adversely affect any Stock Option, SAR or Restricted Stock
theretofore granted hereunder. Subject to the foregoing, this Plan may at any
time or from time to time be terminated, modified or amended by (1) the Board
and (2) by the stockholders of ALS, if and to the extent that stockholder
approval thereof is required under Section 422 of the Code, under Rule 16b-3 or
by any securities exchange on which the shares of Common Stock are then listed,
or if directed by the Board.

SECTION 21. Plan Provisions Control Terms of Awards. The terms of this
Plan shall govern all Stock Options, SARs or Restricted Stock awards granted
under this Plan and in no event shall the Committee have the power to grant any
Stock Option, SAR or Restricted Stock under this Plan which is contrary to any
of the provisions of the Plan.

SECTION 22. Modification of Terms. Any provision contained in this
Plan to the contrary notwithstanding, on and after the date that any Stock
Option, SAR or Restricted Stock award is granted hereunder, the Committee shall
have the authority to modify the terms and

9
<PAGE> 84

provisions of any such Stock Option, SAR or Restricted Stock award including,
but not limited to, modifications that cause a previously granted Stock Option
to cease, upon the modification date, to qualify as an ISO; provided, however,
that no such modification shall (i) materially increase the benefits to
participants as provided for under this Plan (as such interpretation is
interpreted under Rule 16b-3, other applicable law or stock exchange
regulations), or (ii) materially decrease the benefits to a specific participant
in this Plan without the prior written consent of such participant. For
purposes of clause (ii) of the preceding sentence, any modification that would
convert a previously granted ISO into a NSO will be treated as causing a
material decrease in the benefits available to the holder of such Stock Option.

SECTION 23. Withholding Taxes. (a) Whenever shares are to be issued
or delivered pursuant to the Plan, the Company shall have the right, in its
sole discretion, to either (i) require the grantee to remit to the Company or
(ii) withhold from any salary, wages or other compensation payable by the
Company to the grantee, an amount sufficient to satisfy federal, state and
local withholding tax requirements prior to the delivery of any certificate or
certificates for such shares. Whenever payments are to be made, such payments
shall be net of an amount sufficient to satisfy federal, state and local
withholding tax requirements and authorized deductions.

(b) With respect to shares received by a grantee pursuant to
the exercise of an ISO, if such grantee disposes of any such shares within two
years from the date of grant of such option or within one year after the
transfer of such shares to the grantee, the Company shall have the right to
withhold from any salary, wages or other compensation payable by the Company to
the grantee an amount sufficient to satisfy federal, state and local withholding
tax requirements attributable to such disposition.

SECTION 24. Rights as a Stockholder. (a) A grantee of a Stock Option or
an SAR or a transferee of such grantee pursuant to Section 14 hereof shall have
no rights as a stockholder with respect to any shares of Common Stock related
thereto until the issuance of a stock certificate for such shares following the
exercise of such Stock Option or SAR. Except as otherwise provided for in
Sections 16 and 17 hereof, no adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities, or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued.

(b) A grantee of Restricted Stock or a transferee of such
grantee pursuant to Section 14 hereof shall, upon the date certificates for the
Restricted Stock are issued, have all of the rights of a stockholder including
the right to vote such shares and to receive dividends, subject however to the
restrictions established pursuant to Section 13 hereof.

SECTION 25. Compliance with Rule 16b-3. The Company intends that this
Plan shall comply with the requirements of Rule 16b-3 during the term of this
Plan. Should any provision of this Plan not be necessary to comply with the
requirements of the Rule or should any

10
<PAGE> 85

additional provisions be necessary for this Plan to comply with the requirements
of Rule 16b-3, the Board may amend the Plan to add or to modify the provisions
of this Plan accordingly.

SECTION 26. Plan Financing. ALS may extend and maintain, or arrange for
the extension and maintenance of, financing to any grantee (including a grantee
who is a director of ALS) to purchase shares pursuant to exercise of a Stock
Option granted hereunder on such terms as may be approved by the Committee in
its sole discretion. In considering the terms for extension or maintenance of
credit by ALS, the Committee shall, among other factors, consider the cost to
ALS of any financing extended by ALS.

SECTION 27. Funding. Except as provided under Section 13(b) hereof, no
provision of the Plan shall require or permit the Company, for the purpose of
satisfying any obligations under the Plan, to purchase assets or place any
assets in a trust or other entity to which contributions are made or otherwise
to segregate any assets, nor shall the Company maintain separate bank accounts,
books, records or other evidence of the existence of a segregated or separately
maintained or administered fund for such purposes.

SECTION 28. ERISA. The Plan is not an employee benefit plan which is
subject to the provisions of the Employee Retirement Income Security Act of
1974, and the provisions of Code Section 401(a) are not applicable to the Plan.

SECTION 29. Effective Date of Plan. The Plan shall be effective June
28, 1995, subject to approval by the stockholders of ALS pursuant to the
provisions of Section 18 hereof.

11
<PAGE> 86
EXHIBIT 10.6

AGREEMENT AND PLAN OF MERGER

dated as of

May 22, 1996

between

ALTERNATIVE LIVING SERVICES, INC.

NEW CROSSINGS INTERNATIONAL CORPORATION

and

CAPITAL CONSULTANTS, INC.

<PAGE> 87

AGREEMENT AND PLAN OF MERGER

This AGREEMENT AND PLAN OF MERGER is entered into as of May
22, 1996, between ALTERNATIVE LIVING SERVICES, INC., a Delaware corporation
("ALS"), whose address is 450 N. Sunnyslope Road, Suite 300, Brookfield,
Wisconsin 53005, NEW CROSSINGS INTERNATIONAL CORPORATION, a Nevada corporation
("Crossings"), whose address is 1201 Pacific Avenue, Suite 1800, Tacoma,
Washington 98402, and CAPITAL CONSULTANTS, INC., an Oregon corporation
("CCI"), whose address is 2300 Southwest Yamhill Street, Suite 8000, Portland,
Oregon 97204-1383, with respect to the following facts:

A. ALS and the ALS Subsidiary Companies (as defined
below) are in the business of owning and operating assisted
living or dementia care facilities (the "ALS Facilities")
serving the frail and elderly (the "ALS Business").

B. Crossings and the Crossings Subsidiary Companies (as
defined below) are also in the business of owning and
operating assisted living facilities (the "Crossings
Facilities") serving the frail and elderly (the "Crossings
Business").

C. Crossings and ALS wish to merge Crossings with and
into ALS in a transaction intended to qualify as a
reorganization within Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").

D. CCI is the agent and investment manager for certain
of Crossings' shareholders.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants contained herein, the parties hereto agree as follows:

ARTICLE I

THE MERGER

SECTION 1.01. The Merger.

(a) ALS and Crossings agree that at the Effective Time, Crossings
shall be merged (the "Merger") with and into ALS in accordance with the General
Corporation Law of the State of Delaware ("Delaware Law") and the General
Corporation Law of

-1-

<PAGE> 88

Nevada ("Nevada Law"), whereupon the separate existence of Crossings shall
cease, and ALS shall be the surviving corporation (the "Surviving Corporation")
and shall continue to exist under Delaware Law.

(b) Following the approval of the Merger by the shareholders
of ALS (the "ALS Shareholders") and by the shareholders of Crossings (the
"Crossings Shareholders"), and following the satisfaction or waiver in
accordance herewith of all the conditions to the Merger set forth in Article
IX, and provided that this Agreement shall not have been terminated as provided
in Article X, the parties hereto shall cause a Certificate of Merger meeting
the requirements of Delaware Law (the "Certificate of Merger") and Articles of
Merger meeting the requirements of Nevada Law (the "Articles of Merger") to be
properly executed and filed in accordance with such requirements on the Closing
Date. The Merger shall become effective at such time as the Certificate of
Merger is duly filed with the Secretary of State of the State of Delaware (the
"Effective Time").

(c) From and after the Effective Time, the Surviving
Corporation shall possess all the rights, privileges, powers and franchises and
be subject to all of the restrictions, disabilities and duties of Crossings and
ALS, all as provided under Delaware Law and Nevada Law.

SECTION 1.02. Conversion of Shares. At the Effective Time:

(a) each issued and outstanding share of common stock, no par
value, of ALS (the "ALS Common Stock") shall continue to be an
identical issued and outstanding share of ALS Common Stock;

(b) each share of common stock, $.001 par value, of Crossings
(the "Crossings Common Stock"), shall be converted into the right to
receive 5.21140873 (the "Common Share Factor") shares of ALS Common
Stock (the "Merger Consideration"); provided, that, if any fractional
share results when multiplying the number of shares of Crossings
Common Stock held by any shareholder of Crossings prior to the Merger
by the Common Share Factor, the total number of shares of ALS Common
Stock delivered to such Crossings shareholder at the Closing will be
rounded up or down to the nearest whole number. Pursuant to the
foregoing, the Crossings Shareholders shall be entitled to receive in
the aggregate 2,007,049 shares of ALS Common Stock.

-2-

<PAGE> 89

SECTION 1.03. Surrender of Crossings Common Stock and
Issuance of ALS Common Stock. (a) At the Closing each of the Crossings
Shareholders, individually or, in the case of Crossings Shareholders for which
CCI acts as agent, through CCI, shall tender the certificates representing its
respective shares of Crossings Common Stock, together with assignments separate
from certificate or a properly completed letter of transmittal covering such
shares, and ALS shall tender to each of the Crossings Shareholders certificates
representing the number of shares of ALS Common Stock calculated in accordance
with Section 1.02.

(b) Each holder of shares of Crossings Common Stock that have
been converted into a right to receive the Merger Consideration, upon surrender
to ALS of a certificate or certificates representing such shares, will be
entitled to receive its Merger Consideration issuable in respect of such
shares. Until so surrendered, each such certificate shall, after the Effective
Time, represent for all purposes, only the right to receive such Merger
Consideration.

SECTION 1.04. Dissenter's Rights. It shall be a condition
precedent to the obligations of ALS and Crossings to consummate the Merger that
all of the Crossings Shareholders and the ALS Shareholders shall have waived
their right to exercise dissenter's rights with respect to the Merger.

ARTICLE II

THE SURVIVING CORPORATION

SECTION 2.01. Certificate of Incorporation. The certificate
of incorporation of ALS in effect at the Effective Time shall be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with applicable law.

SECTION 2.02. Bylaws. The bylaws of ALS in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended
in accordance with applicable law.

SECTION 2.03. Directors and Officers. From and after the
Effective Time, until successors are duly elected or appointed and qualified in
accordance with applicable law, (i) the directors of ALS at the Effective Time
and Richard W. Boehlke shall be the directors of the Surviving Corporation, and
(ii) the officers of ALS at the Effective Time shall be the officers of the
Surviving Corporation and, immediately prior to the Effective Time, the Board
of Directors of ALS shall take all action necessary to elect D. Lee Field as
Senior Vice President and David M. Boitano as Vice President of the Surviving
Corporation effective as of the Effective Time.

-3-

<PAGE> 90

ARTICLE III

THE CLOSING

SECTION 3.01. Closing. Upon the terms and subject to the
satisfaction of the conditions contained herein, the closing of the
transactions contemplated by this Agreement (the "Closing"), will take place at
the offices of Rogers & Hardin, at 10:00 a.m., Atlanta, Georgia time, on May
23, 1996 or at such other place or time as the parties hereto may agree. The
date on which the Closing occurs is hereinafter referred to as the "Closing
Date."

SECTION 3.02. Deliveries by Crossings. At the Closing,
Crossings shall deliver to ALS the following:

(a) The certificates and other documents required to be
delivered by the Crossings Shareholders at Closing pursuant to Section
1.03 hereof;

(b) The officers certificate contemplated by Section
9.02(i);

(d) The Woodburn & Wedge opinion as contemplated by
Section 9.02(v);

(e) The Bogle & Gates P.L.L.C. opinion as to certain tax
matters as contemplated by Section 9.02(vi);

(f) The Restricted Stock Agreements duly executed by each
of the Crossings Shareholders or their agent as contemplated by
Section 9.02(vii);

(g) Purchaser representation letters and questionnaires
as contemplate by Section 9.02(viii); and

(h) All other documents, instruments and writings
required to be delivered by Crossings or the Crossings Shareholders at
or prior to the Closing Date pursuant to this Agreement or otherwise
required in connection herewith.

SECTION 3.03. Deliveries by ALS. At the Closing ALS shall
deliver (unless previously delivered) the following:

-4-

<PAGE> 91

(a) To the Crossings Shareholders (in care of Bogle &
Gates, P.L.L.C.), the shares of ALS Common Stock representing the
Merger Consideration.

(b) The officers certificate contemplated by Section
9.03(i) hereto;

(d) The Rogers & Hardin opinion as to certain tax matters
as contemplated by Section 9.03(v);

(e) The Amendment to Stockholders' Agreement dated as of May
22, 1996, executed by ALS Shareholders holding not fewer than 87% of
the shares of ALS Common Stock prior to giving effect to the Merger
and the ALS Restructuring Transactions; and

(f) All other documents, instruments and writings required to
be delivered by ALS at or prior to the Closing pursuant to this
Agreement or otherwise required in connection herewith.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF CROSSINGS

All representations and warranties set forth below are subject to and
qualified by those matters set forth in the disclosure schedule of Crossings
delivered to ALS in connection with the execution of this Agreement (the
"Crossings Disclosure Schedule"). Each of the following representations are
correct and complete as of the date of this Agreement. Where any
representation or warranty is made to "Crossings' actual knowledge", to "the
knowledge of Crossings", to "Crossings' knowledge" or subject to a similar
knowledge limitation, such representation or warranty is made only to the
knowledge and belief of Richard W. Boehlke, D. Lee Field and David M. Boitano,
or any of them, without any obligation to conduct any inquiry or investigation
other than such inquiry as the principal executive officer of Crossings most
likely to have knowledge of such matter may conclude is reasonable in the
circumstances, and the actual or imputed knowledge of CCI, the CCI Holders, the
other officers, agents or employees of Crossings who are not among the
above-listed executive officers of Crossings shall not be imputed to Crossings.
For purposes of this Agreement, the term material adverse effect on Crossings
or the Crossings Business shall mean any change in, or effect on, Crossings, a
Crossings Subsidiary Company (as defined below), or the Crossings Business
which

-5-

<PAGE> 92

results in, or could reasonably be expected to result in, Crossings or a
Crossings Subsidiary Company suffering a diminution of value or incurring costs
or expenses or becoming liable for any amount in excess of $50,000. All
references to "Crossings" in Section 4.04 and Sections 4.06 through 4.27 shall
mean, except where the context otherwise requires, each of Crossings and the
Crossings Subsidiary Companies. An item contained in the Crossings Disclosure
Schedule is deemed disclosed with respect to all representations and
warranties. Disclosure of items that are not strictly called for by this
Agreement shall not imply that such information is material or that the
inclusion establishes or implies a standard of materiality.

SECTION 4.01. Corporate.

(a) Crossings is a corporation duly organized and validly existing
under the laws of the State of Nevada, and has the corporate power and
authority to carry on its business as and where it is presently conducted, to
enter into this Agreement and the other documents and instruments to be
executed and delivered by Crossings pursuant hereto (such other documents and
instruments are sometimes referred to herein as the "Crossings Ancillary
Instruments") and to carry out the transactions contemplated hereby and
thereby. Each Crossings Subsidiary Company (as defined below) is duly
organized and validly existing as a corporation, partnership, limited
partnership or limited liability company, as applicable, under the laws of the
jurisdiction identified on the Crossings Disclosure Schedule, and has the power
and authority to carry on its business as and where it is presently conducted.
For purposes of this Agreement, "Crossings Subsidiary Company" shall mean each
corporation, limited liability company, partnership or limited partnership in
which Crossings has a direct or indirect ownership interest and which directly
or indirectly owns, leases or operates or intends to own, lease or operate all
or any percentage interest in one or more Crossings Facilities or is otherwise
material to the Crossings Business.

(b) Crossings is duly licensed or qualified to do business as a
foreign corporation and is in good standing in each jurisdiction wherein the
character of the properties owned or leased by it or the nature of the
Crossings Business makes such licensing or qualification necessary, except
where the failure to be so qualified would not have a material adverse effect
on the Crossings Business or the operations of Crossings as a whole. Each
Crossings Subsidiary Company is duly licensed or qualified to do business and
is in good standing in each jurisdiction wherein the character of the
properties owned or leased by it or the nature of the business conducted by it
makes such licensing or qualification necessary, except where the failure to be
so

-6-

<PAGE> 93

licensed or qualified would not have a material adverse effect on the Crossings
Business or the operations of such entity.

(c) Crossings does not own any interest in any corporation,
partnership or other entity, except as set forth in the Crossings Disclosure
Schedule. The identity and ownership interest of each equity owner of each
Crossings Subsidiary Company are as set forth on the Crossings Disclosure
Schedule.

(d) The authorized capital stock of Crossings (the "Crossings Stock")
consists entirely of (x) 40,000,000 shares of Crossings Common Stock, of which
385,126 shares will be issued and outstanding as of the Effective Time, and (y)
5,000,000 shares of preferred stock, par value of 1/10 of $.01 per share, none
of which will be issued and outstanding as of the Effective Time. The record
owners of the Crossings Stock as of the Effective Time are set forth on the
Crossings Disclosure Schedule. All such shares of Crossings Stock at the
Effective Time will be validly issued, fully paid and nonassessable. Other
than under this Agreement or as set forth in the Crossings Disclosure Schedule,
there are no options, warrants, conversions, subscription or other rights,
agreements, contracts or commitments of any kind obligating Crossings,
contingently or otherwise, to issue or sell any shares of capital stock or
other securities of Crossings or any securities convertible into or
exchangeable for capital stock or other securities of Crossings, or to
repurchase or redeem any capital stock or other securities of Crossings. At
the Closing, the Crossings Stock will not be subject to any contractual
restrictions relating to its disposition or conversion pursuant to Section 1.02
hereof.

SECTION 4.02. Shareholders. Each of the Crossings
Shareholders has, and will have at the Closing, good and marketable title to
the Crossings Stock held by such Crossings Shareholder and identified on the
Crossings Disclosure Schedule, free and clear of all Liens, claims and
encumbrances and free and clear of any restrictions on transfer (other than
restrictions under the Securities Act of 1933 and applicable state securities
laws). Other than the agreements to be terminated at or immediately prior to
Closing, none of the Crossings Shareholders are parties to any option, warrant,
purchase right or other contract or commitment that could require them to sell,
transfer or otherwise dispose of any Crossings Stock nor are they parties to
any voting trust, proxy or other agreement or understanding with respect to the
voting of the Crossings Stock. The state of residence of each of the Crossings
Shareholders is set forth on the Crossings Disclosure Schedule.

SECTION 4.03. Authority. The execution and delivery of this
Agreement and the Crossings Ancillary Instruments and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by the
Board of

-7-

<PAGE> 94

Directors of Crossings. Other than the approval of the Crossings Shareholders,
no other corporate act or proceeding on the part of Crossings is necessary to
authorize this Agreement, the Crossings Ancillary Instruments or the
transactions contemplated hereby or thereby. This Agreement constitutes, and
when executed and delivered, the Crossings Ancillary Instruments will
constitute, legal, valid and binding agreements of Crossings enforceable in
accordance with their respective terms (except insofar as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally and except as to the
availability of equitable remedies).

SECTION 4.04. No Violation or Conflict.

(a) No Violation. Neither the execution or delivery of this
Agreement or the Crossings Ancillary Instruments, nor the consummation by
Crossings of the transactions contemplated hereby or thereby will violate any
statute, law, rule, regulation, order, writ, injunction or decree of any court
or governmental authority applicable to Crossings, which violation would have a
material adverse effect on the Crossings Business. To Crossings' knowledge,
except as disclosed in the Crossings Disclosure Schedule no consent, approval,
authorization or action by any governmental agency, instrumentality,
commission, authority, board or body (collectively, a "Governmental Agency") is
required in connection with the execution and delivery by Crossings of this
Agreement, the Crossings Ancillary Instruments or the consummation by Crossings
of the transactions contemplated herein or therein. Except as set forth in the
Crossings Disclosure Schedule, Crossings is not required, to its knowledge, to
submit any notice, report or other filing to any Governmental Agency in
connection with the execution or delivery of this Agreement and the
consummation of the transactions contemplated hereby.

(b) No Conflict. Subject to obtaining the consents identified on
the Crossings Disclosure Schedule (the "Required Crossings Consents"), neither
the execution and delivery of this Agreement, nor the consummation of the
transactions contemplated hereby will, to Crossings' actual knowledge, conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate or
modify, cancel, or require any notice under any agreement, contract, lease or
other arrangement (including, without limitation, any agreement, contract,
lease, or other arrangement relating to indebtedness) to which Crossings is a
party or by which Crossings is bound which would have a material adverse effect
on Crossings or the Crossings Business.

SECTION 4.05. Financial Statements. Included in the
Crossings Disclosure Schedule are true and complete copies of financial
statements of Crossings consisting of (i) balance

-8-

<PAGE> 95

sheets of Crossings as of December 31, 1995, and December 31, 1994, and the
related statements of income, stockholders' equity and cash flows for the years
then ended (including the notes contained therein), which financial statements
(the "Crossings Audited Financial Statements") have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis and
have been audited and reported on, and are accompanied by, the signed,
unqualified opinions of KPMG Peat Marwick LLP, independent public accountants
for Crossings and (ii) an unaudited consolidated balance sheet of Crossings
as of March 31, 1996 (the "Crossings Recent Balance Sheet"), and the related
unaudited consolidated statement of operations for the three months then
ended. All of such financial statements (including all notes and schedules
contained therein or annexed thereto) have been derived from the financial
books and records of Crossings and accurately present, in all material
respects, the assets, liabilities and financial position and the results of
operations of Crossings as of the dates and for the years and periods indicated.

SECTION 4.06. No Undisclosed Liabilities. To Crossings'
actual knowledge, Crossings has no liabilities or obligations except (i) to the
extent reflected or reserved for on the Crossings Recent Balance Sheet; (ii)
liabilities or obligations arising or incurred in the ordinary course of
business since the date of the Crossings Recent Balance Sheet; (iii)
liabilities and obligations which, under generally accepted accounting
principles, would not be required to be disclosed on the Crossings Recent
Balance Sheet or in the accompanying footnotes thereto; or (iv) liabilities or
obligations disclosed in the Crossings Disclosure Schedule or pursuant to or in
any section of this Agreement.

SECTION 4.07. Absence of Certain Material Changes. Except as
disclosed in the Crossings Disclosure Schedule, since the date of the Crossings
Recent Balance Sheet, Crossings has conducted the Crossings Business in the
ordinary and usual course of business, consistent with past practice, except as
contemplated by this Agreement, and Crossings has not:

(a) suffered any damage, destruction or loss to its property
or assets, whether covered by insurance or not, having, or reasonably
expected to have, a material adverse effect upon Crossings or the
Crossings Business;

(b) experienced any strike or labor disturbance, other than
routine individual grievances which have not had, and are not
reasonably expected to have, a material adverse effect upon Crossings;

-9-

<PAGE> 96

(c) entered into any commitment or transaction (including,
without limitation, any borrowing or capital expenditure) other than
in the ordinary course of business consistent with past practice and
its current business plan, as disclosed to ALS;

(d) entered into any employment agreement, bonus, stock
option or arrangement respecting employee benefits or granted any
increase in the compensation of employees of Crossings (including,
without limitation, any increase or change pursuant to any bonus,
pension, profit-sharing, retirement or other plan or commitment), or
any increase in any such compensation payable or to become payable to
any officer or employee thereof;

(e) made, declared, paid or become obligated to make, declare
or pay any dividend or distribution to its equity owners;

(f) terminated, modified or cancelled any material agreement,
contract, lease or license (or series of related agreements,
contracts, leases and licenses) to which Crossings is a party or
bound;

(g) made any capital investment in, any loan to or any
acquisition of the securities or assets of any other entity;

(h) incurred any indebtedness or increased or accelerated its
obligations under any indebtedness; or

(i) taken any other action or become subject to any liability
outside of the ordinary course of business.

SECTION 4.08. Real Property. The Crossings Disclosure
Schedule sets forth all of the material real property (the "Crossings
Properties") owned, leased, used or occupied by Crossings to operate the
Crossings Business as currently operated, including all land, easements or
rights of way of record granted to it, and all buildings or warehouses located
thereon. To the knowledge of Crossings, no fact or condition exists which
would prohibit or materially adversely affect the ordinary rights of access to
and from any of the Crossings Properties from and to the existing highways and
roads and Crossings has not received notice of any pending or threatened
restriction or denial, governmental or otherwise, upon such ingress and egress.
All improvements and structures located on the Crossings Properties are located
within the applicable boundaries of the Crossings Properties and within all
applicable setback requirements and do not encroach upon any adjacent

-10-

<PAGE> 97

properties and there are no encroachments on the Crossings Properties from any
adjacent properties, except for such matters as would not materially adversely
affect Crossings or the Crossings Business.

SECTION 4.09. Leases. The Crossings Disclosure Schedule
contains a complete list of all leases (including all amendments thereof and
modifications thereto) (the "Crossings Leases") material to the Crossings
Business pursuant to which Crossings leases real or personal property as lessor
or lessee (whether capital, operating or otherwise), true copies of which
Crossings Leases have been delivered to ALS. To Crossings' knowledge, no party
is in default, or with notice or lapse of time would be in default, with
respect to any of the Crossings Leases.

SECTION 4.10. Title to Properties. Crossings has, to its
knowledge, good, valid and marketable title to all of its assets and properties
reflected in the books and records of Crossings as being owned, free and clear
of all Liens, except Crossings Permitted Liens.

"Liens" shall mean any mortgages, pledges, title defects or
objections, liens, claims, security interests, conditional and installment sale
agreements, encumbrances or charges of any kind. "Crossings Permitted Liens"
shall mean (i) the liens disclosed in the title report(s) provided prior to the
date of this Agreement to ALS, if any, none of which individually or in the
aggregate materially impair (or are expected to impair in the future) the use,
occupancy or value of the assets and properties of Crossings or otherwise
materially impair (or are expected to impair in the future) its business
operations, (ii) statutory liens for real or personal property taxes not yet
delinquent or payable subsequent to the Closing Date, and statutory or common
law liens securing the payment or performance of any obligation of Crossings,
the payment or performance of which is not delinquent, or which are payable or
performable subsequent to such date; (iii) the statutory rights of customers of
Crossings with respect to inventory under orders or contracts entered into by
Crossings in the ordinary course of business; (iv) such imperfections or
irregularities of title, liens, easements, charges or encumbrances as do not
materially impair the use, occupancy or value of the assets and properties of
Crossings, or otherwise materially impair business operations; (v) building,
zoning and other laws applicable to Crossings' assets and properties, none of
which individually or in the aggregate materially impair (or are expected to
impair in the future) the use, occupancy or value of the assets and properties
of Crossings or otherwise materially impair (or are expected to impair in the
future) its business operations; and (vi) any liens disclosed in the Crossings
Disclosure Schedule.

-11-

<PAGE> 98

SECTION 4.11. Condition of Crossings Properties. To
Crossings' knowledge, except in each case for normal wear and tear and except
as reflected on the Crossings Disclosure Schedule, all structures owned or
utilized by Crossings are structurally sound with no material defects which
impair the use of such structures in the manner in which they are currently
being used, and all machinery and equipment owned or utilized by Crossings are
in good and normal operating condition and repair.

SECTION 4.12. Patents, Trademarks, Trade Names, Etc. The
Crossings Disclosure Schedule contains an accurate and complete description of
all material trademark and service mark registrations, trademark and service
mark applications, trade names, copyright applications and registrations,
software programs (exclusive of common commercially available software),
patents and patent applications owned or held by Crossings, or under which
Crossings owns or holds any license or other interest, all registered or
assumed names under which Crossings is carrying on the Crossings Business and
all licenses, agreements or other arrangements under which Crossings has the
right to use any of the foregoing (collectively, the "Crossings Rights").
Except as indicated in the Crossings Disclosure Schedule, all such patents,
trademarks and copyrights have been duly registered in, filed in or issued by
the United States Patent and Trademark Office or the United States Registrar of
Copyrights, and have been properly maintained and renewed in accordance with
all applicable laws and regulations. Crossings owns (or possesses adequate
licenses or other rights to use) all Crossings Rights and all inventions,
processes and other technical know-how or other proprietary rights used in and
necessary to the conduct of the Crossings Business. Except as set forth in the
Crossings Disclosure Schedule, no notice of conflict with the asserted rights
of others with respect to the foregoing has been received, and such Crossings
Rights are adequate, in Crossings' judgment, for the conduct of the Crossings
Business. Crossings has not granted any licenses or sublicenses thereunder to
others except as set forth in the Crossings Disclosure Schedule. To the
knowledge of Crossings, except as disclosed in the Crossings Disclosure
Schedule, none of the Crossings Rights are subject to any claim that (i) any of
the Crossings Rights are invalid or subject to a claim of patent misuse, (ii)
Crossings is infringing any patents, trademarks, trade names or copyrights of
others, (iii) Crossings is violating any secrecy rights of any person, or (iv)
any Crossings Rights are being used contrary in any respect to the provisions
of any license or other agreement relating to the use of the Crossings Rights.
Crossings does not know of any claims of third parties to the use or title of
any Crossings Rights inconsistent with the rights of ownership or use set forth
in the Crossings Disclosure Schedule. Except as disclosed in the Crossings
Disclosure Schedule, to the knowledge of Crossings, none of the Crossings
Rights is being infringed by a third party. To Crossings'

-12-

<PAGE> 99

knowledge, Crossings has not interfered with, infringed upon or misappropriated
any trademark, trade name, copyright or patent of any third party.

SECTION 4.13. Litigation. Except as set forth in the
Crossings Disclosure Schedule, there are no claims, actions, suits, proceedings
or investigations pending or, to Crossings' knowledge, threatened by or against
Crossings or the Crossings Business or the transactions contemplated hereby,
which might individually or in the aggregate materially adversely affect
Crossings' financial condition or the conduct of the Crossings Business as
presently conducted, nor is there any judgment, decree, injunction or order
outstanding against Crossings which individually or in the aggregate has or is
likely to have such an effect.

SECTION 4.14. Insurance. The Crossings Disclosure Schedule
sets forth a complete and accurate list and description, including but not
limited to deductibles thereunder, of all material policies of fire, liability,
product liability, workmen's compensation, health and other forms of insurance
presently in effect with respect to the Crossings Business. To Crossings'
knowledge, all such policies are in full force and effect, are sufficient for
all applicable requirements of law and will not be effected by or terminated or
lapsed by reason of the consummation of the transactions contemplated by this
Agreement.

SECTION 4.15. Employees. The Crossings Disclosure Schedule
contains a summary representative list of all employees of Crossings as of May
14, 1996. Except as indicated on the Crossings Disclosure Schedule, all
Crossings' employees are terminable at will.

SECTION 4.16. Employee Benefit Plans; ERISA.

(a) Except for the employee plans, benefits and materials described
in the Crossings Disclosure Schedule (the "Crossings Plans"), Crossings does
not have bonus, deferred compensation, incentive compensation, severance or
termination pay, hospitalization or other medical, stock purchase, stock
option, pension, life or other insurance, profit-sharing or retirement plan,
agreement or arrangement, or other employee benefit plan or arrangement,
whether formal or informal, and whether legally binding or not, maintained or
contributed to by Crossings with respect to its employees.

(b) Crossings has never been a party to a "multiemployer plan" as
that term is defined in Section 3(37) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").

-13-

<PAGE> 100

(c) With respect to each Crossings Plan, to Crossings' knowledge, (i)
all payments due from Crossings to date with respect to any such Crossings Plan
have been made and all amounts properly accrued to date as liabilities of
Crossings Plan which have not been paid have been properly recorded on the
books of Crossings and are reflected in the Crossings Recent Balance Sheet;
(ii) all reports and information relating to such Crossings Plan required to be
filed with any governmental entity have been timely filed except where the
failure to do so would not result in material liability to Crossings; (iii)
there are no actions, suits or claims pending (other than routine claims for
benefits) with respect to such Plan or against the assets of such Crossings
Plan; (iv) no Crossings Plan is a plan which is established and maintained
outside the United States primarily for the benefit of individuals
substantially all of whom are nonresident aliens.

SECTION 4.17. Compliance with Laws. To the knowledge of
Crossings, Crossings is in compliance with all laws, regulations, ordinances,
permits and licenses relating to the ownership or use of Crossings' properties
and assets or related to the conduct of the Crossings Business the enforcement
of which would materially adversely affect Crossings or the Crossings Business
as currently conducted by Crossings.

SECTION 4.18. No Condemnation or Expropriation. Crossings
has not received a notice that either the whole or any portion of the Crossings
Properties or any other of its assets is subject to any governmental decree or
order to be sold or is being condemned, expropriated or otherwise taken by any
public authority with or without payment of compensation therefor, or that any
such condemnation, expropriation or taking has been proposed.

SECTION 4.19. Tax Matters.

(a) The provision made for taxes on the Crossings Recent Balance
Sheet is, in Crossings' judgment, sufficient for payment of all federal, state,
foreign, local and other income, excise, profits, franchise, occupation,
property, payroll, sales, use, gross receipts and other taxes and assessments,
whether or not disputed at the date of the Crossings Recent Balance Sheet, and
for all years and periods prior thereto, except in each case where a failure to
make such a provision would not have a material adverse effect on the Crossings
Business or the operations of Crossings as a whole. Since the date of the
Crossings Recent Balance Sheet, Crossings has not incurred any taxes material
to the Crossings Business or operations of Crossings as a whole, other than
taxes incurred in the ordinary course of business.

-14-

<PAGE> 101

(b) Except as disclosed in the Crossings Disclosure Schedule, to
Crossings' knowledge, (i) Crossings has filed when due all federal, state,
local and foreign tax returns required by applicable law to be filed by it and
has paid all taxes (including all deficiency assessments, additions to taxes,
penalties and interest, of which notice has been received) to the extent that
such amounts have become due or are claimed to be due from any federal, state,
local or foreign taxing authorities; (ii) there is no agreement, waiver or
consent providing for an extension of time with respect to the assessment of
any tax or deficiency against Crossings and no power of attorney granted by
Crossings with respect to any tax matter is currently in force; (iii) there is
no action, suit, proceeding, investigation, audit or claim pending against or
with respect to Crossings in respect of any tax or assessment, nor has any
claim for additional tax or assessment being asserted by any such authority;
and (iv) Crossings has not filed any agreement or consent under Section 341(f)
of the Internal Revenue Code of 1986, as amended (the "Code"). None of the
Crossings Shareholders nor Crossings is a "foreign person," as that term is
defined in Section 1445(f) of the Code.

(c) Except for the possibility of the sale of the CCI Shares (as
defined below) as contemplated or permitted in Sections 7.08 and 7.09 below and
other than in a transaction registered or otherwise exempt from registration
under the Securities Act (as defined below) and all applicable state securities
laws, to the knowledge of Crossings, there is no plan or intention on the part
of the Crossings Shareholders to sell, exchange or otherwise dispose of any ALS
Common Stock received in connection with the Merger.

(d) Crossings is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.

(e) There is no intercorporate indebtedness existing between
Crossings and ALS that was issued, acquired or will be settled at a discount.

(f) The fair market value of the ALS Common Stock and any
additional consideration provided hereunder to the Crossings Shareholders will
be approximately equal to the fair market value of the Crossings Common Stock
of the Crossings Shareholders.

(g) Crossings is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.

SECTION 4.20. Contracts and Commitments. Except for (i)
liabilities or obligations disclosed in the Crossings Disclosure Schedule or
(ii) liabilities or obligations disclosed

-15-

<PAGE> 102

pursuant to or in any section of this Agreement, to Crossings' knowledge:

(a) Crossings does not have any (i) collective bargaining
agreements in effect or being negotiated, (ii) agreements to which it
is a party that contain any severance or termination pay liabilities
or obligations, (iii) employment or consulting agreements for
employees in effect or being negotiated;

(b) Crossings has not given any power of attorney (revocable
or irrevocable) to any person, firm or corporation for any purpose
whatsoever that is currently in force;

(c) Crossings is not a party to any agreement which
contains covenants limiting the freedom of Crossings (or ALS after
Closing) to compete in any line of business or market or with any
person;

(d) Crossings is not a party to any agreement that provides
for payments to or by Crossings in an aggregate amount of $50,000 or
more and requires performance by Crossings for a term of more than six
(6) months from the date hereof and that is not terminable within six
(6) months by Crossings without material cost, liability or penalty;

(e) Crossings is not a party to any agreement establishing or
providing for any joint venture, partnership or similar arrangement
with any other person or entity related to the Crossings Business; and

(f) Crossings has no reason to believe that any material
contract or commitment to which Crossings is a party is not in full
force and effect in accordance with the terms thereof (except in each
case insofar as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and except as to the
availability of equitable remedies). To Crossings' actual knowledge,
no party is in default with respect to any such contracts, except
where the aggregate effect of such defaults would not have a material
adverse effect on the Crossings Business or the operations of
Crossings as a whole.

SECTION 4.21. Labor Disagreements. Crossings has not
experienced any material labor disputes, union organization attempts or any
work stoppage due to labor disagreements. Except as set forth on the Crossings
Disclosure Statement, Crossings has not received a notice that there is any
unfair labor practice,

-16-

<PAGE> 103

charge or complaint pending or threatened against it before the National Labor
Relations Board or any comparable state agency or authority. To Crossings'
knowledge, there is no labor strike, dispute, request for representation,
slowdown or stoppage actually pending or threatened against or affecting
Crossings. To Crossings' knowledge, no question concerning representation has
been raised or is threatened respecting Crossings' employees. No grievance
which might have a material adverse effect on the Crossings Business and the
operations of Crossings as a whole is pending.

SECTION 4.22. Environmental Matters.

(a) To Crossings' actual knowledge, except as set forth in the
Crossings Disclosure Schedule, (i) each facility and property owned, operated
or leased by Crossings has been and is now owned, operated or leased in
compliance with all applicable Environmental Laws (as hereinafter defined) the
noncompliance with which could materially adversely affect the Crossings
Business as currently conducted by Crossings and (ii) there are no
circumstances that may prevent or interfere with such compliance in the future.

(b) There are no pending or, to Crossings' actual knowledge,
threatened suits, actions, claims, complaints, notices or requests for
information received by Crossings with respect to any alleged violation of any
Environmental Law except for: (i) matters set forth in the Crossings Disclosure
Schedule and (ii) matters which, if adversely decided or resolved, individually
or in the aggregate would not have a material adverse effect on the Crossings
Business as currently conducted by Crossings.

(c) Crossings holds such permits, certificates, approvals, licenses,
exemptions, variances, waivers, permits- by-rule, or other authorizations
("Crossings Environmental Permits") issued by any governmental authority, or
otherwise granted or conferred by operation of any Environmental Law, for the
operation of its facilities or the Crossings Business as are sufficient, in
Crossings' knowledge, to avoid a breach of the representation in Section
4.22(a) hereof. All such Crossings Environmental Permits held by Crossings are
identified in the Crossings Disclosure Schedule.

(d) To Crossings' knowledge, no property currently or previously
owned, operated or leased by Crossings is listed or is proposed for listing on
the National Priorities List pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act, as amended ("CERCLA"), or the
Comprehensive Environmental Response, Compensation and Liability Information
System List ("CERCLIS") or on any similar state or foreign list of sites
requiring investigation or cleanup; and Crossings has

-17-

<PAGE> 104

not received notice, nor is aware, of any lien filed against either the
personal or real property of Crossings under any Environmental Law.

(e) To Crossings' knowledge, Crossings has not been required by any
Environmental Law to place any notice or restriction relating to the presence
of any hazardous materials in any deed to any facility or property owned,
operated or leased by Crossings where the failure to so place any such notice
has, or may reasonably be expected to have, a material adverse effect on the
Crossings Business.

(f) For purposes of this Agreement, "Environmental Law" shall mean
any law, regulation, rule, ordinance, order or decree now existing relating to
(i) pollution or protection of the environment, including natural resources,
(ii) exposure of persons to hazardous materials, (iii) protection of the public
health or welfare from the effects of products, by-products, wastes, emissions,
discharges or releases of hazardous materials, or (iv) regulation of the
manufacture, use or introduction into commerce of hazardous materials,
including their manufacture, formulation, packaging, labeling, distribution,
transportation, handling, storage or disposal.

SECTION 4.23. Affiliates' Relationships.

(a) All leases, contracts or other arrangements between Crossings and
any Crossings Affiliate (as hereinafter defined) are set forth in the Crossings
Disclosure Schedule.

(b) Other than as set forth in the Crossings Disclosure Schedule, no
Crossings Affiliate has any material direct or indirect interest in (i) any
entity which does business with Crossings or is competitive with the Crossings
Business or (ii) any property, asset or right which is used by Crossings in the
conduct of the Crossings Business.

(c) For purposes of this Agreement, "Crossings Affiliate" shall mean
and include all Crossings Shareholders, directors and officers of Crossings;
the spouse, parent or child of any such director or officer; and any entity in
which any of the foregoing has a direct or indirect interest, except through
ownership of less than 5% of the outstanding shares of any such entity.

SECTION 4.24. No Brokers or Finders. Neither Crossings nor
any of its directors, officers, employees, Crossings Shareholders or agents
have retained, employed or used any broker or finder in connection with the
transaction provided for herein or in connection with the negotiation thereof
other than Crossings' retention of National Westminster Bank Plc, New York
Branch ("NatWest") pursuant to that certain engagement

-18-

<PAGE> 105

letter dated March 5, 1996, between Crossings and NatWest, a copy of which has
been provided to ALS.

SECTION 4.25. Management Agreements. The Crossings
Disclosure Schedule contains a complete list of all management, consulting or
development agreements (the "Crossings Management Agreements") to which
Crossings is a party and which relate to the management, consulting or
development of one or more Crossings Facilities. To Crossings' knowledge, no
party is in default, or with notice of lapse of time would be in default, with
respect to any of the Crossings Management Agreements.

SECTION 4.26. Licenses and Permits.

(a) The Crossings Disclosure Statement contains a true and
complete list of licenses, permits, certificates, approvals, resolutions,
consents and other authorizations necessary to own, lease or operate each of
the Crossings Facilities or to conduct the Crossings Business in compliance
with applicable law ("Crossings Permits") and, with respect to each Crossings
Permit, the name of the licensor or grantor, a description of the subject
matter, the termination date, and the terms of any renewal option.

(b) Crossings lawfully obtained and currently possesses the
respective Crossings Permits and has fulfilled and performed its obligations
under each of the Crossings Permits. No event has occurred and no condition or
state of facts exists which constitutes or, after notice or lapse of time or
both, would constitute a breach or default under any of the Crossings Permits
or would allow revocation or termination of any of the Crossings Permits, or
which might adversely affect the rights of Crossings under any of the Crossings
Permits. No notice of cancellation, of default of any dispute concerning any
of the Crossings Permits, or of any event, condition or state of facts
described in the preceding sentence, has been received by, or is known to,
Crossings or its officers, directors or employees. Except as set forth in the
Crossings Disclosure Statement, each of the Crossings Permits is valid,
subsisting and in full force and effect, and will continue in full force and
effect after the Merger, in each case without (i) the occurrence of any breach,
default or forfeiture of rights thereunder, or (ii) the consent, approval or
act of, or the making of any filing with, any governmental body, regulatory
commission or other person.

(c) The Crossings Permits include all applicable environmental,
land use and growth management obligations required by any federal, state,
local, foreign or other governmental body, regulatory commission or other
person.

SECTION 4.27. Other Information. None of the representations
or warranties to ALS contained herein and no

-19-

<PAGE> 106

statements contained in the Crossings Disclosure Schedule hereto contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not misleading.

ARTICLE IV(A)

REPRESENTATIONS AND WARRANTIES OF CCI

Each of the following representations are correct and complete as of
the date of this Agreement.

SECTION 4A.01. Corporate. CCI is a corporation duly organized
and validly existing under the laws of the State of Oregon, and has the
corporate power and authority to carry on its business as and where it is
presently conducted, and has a limited power of attorney that authorizes it as
agent for the CCI Holders to enter into this Agreement and the other documents
and instruments to be executed and delivered by CCI pursuant hereto (such other
documents and instruments are sometimes referred to herein as the "CCI
Ancillary Instruments") and has the power and authority to carry out the
transactions contemplated hereby and thereby. This Agreement constitutes, and
when executed and delivered, the CCI Ancillary Instruments will constitute,
legal, valid and binding agreements of CCI, as agent for the CCI Holders,
enforceable in accordance with their respective terms (except insofar as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and except as to the availability of equitable remedies).

SECTION 4A.02. Control Issues. With respect to the shares of
Crossings Common Stock held by CCI, as agent for each of the Crossings
Shareholders identified on Schedule 4A.02 attached hereto (the "CCI Holders"),
CCI represents and warrants to ALS and Crossings that:

(a) CCI does not hold the shares of Crossings Stock of the CCI
Holders through a trust, partnership or other entity;

(b) under the terms of the account agreements between CCI and the
CCI Holders, as amended, CCI has the discretionary authority to vote and
dispose of the shares of Crossings Stock held by the CCI Holders;

(c) CCI does not have the right to share in the appreciation of
the value of the shares of Crossings Stock of the CCI Holders, except that CCI
receives a management fee based on the overall value of the account;

-20-

<PAGE> 107

(d) CCI does not have the right to share in any dividends declared
on the shares of Crossings Stock of the CCI Holders; and

(e) the CCI Holders have the authority to terminate the agency of
CCI with respect to the shares of Crossings Stock of the CCI Holders on
thirty-days notice.

SECTION 4A.03. Authority. CCI represents and warrants to ALS
and Crossings that CCI:

(a) has all necessary power and authority as agent on behalf of
the CCI Holders to vote the shares of Crossings Stock of the CCI Holders in
favor of the Merger and to waive the rights of the CCI Holders to assert
dissenters' rights with respect to the Merger;

(b) has all necessary power and authority as agent on behalf of
the CCI Holders to take all actions necessary to tender the shares of Crossings
Stock held by the CCI Holders in connection with the Merger;

(c) has sufficient knowledge to make the representations and
warranties and has all necessary power and authority as agent on behalf of the
CCI Holders to make the undertakings and agreements on behalf of the CCI
Holders pursuant to the terms of the Restricted Stock Agreement.

SECTION 4A.04. Holder Status. Each of the CCI Holders (as
defined below) is either (i) an "accredited investor," as such term is defined
in Rule 501(a) of Regulation D ("Regulation D") promulgated under the
Securities Act (as defined below), or (ii) has designated CCI as such CCI
Holder's "purchaser representative," as such term is defined in Rule 501(h) of
Regulation D (such CCI Holders are referred to as "Nonaccredited Investors").
Of the CCI Holders, only three are Nonaccredited Investors. The CCI Holders'
states of residence are as set forth on Schedule 4A.02.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF ALS

All representations and warranties set forth below are subject to and
qualified by those matters set forth in the disclosure schedule of ALS
delivered to Crossings in connection with the execution of this Agreement,
including without limitation the confidential private placement memorandum, as
amended and supplemented as of the date hereof (the "Confidential Memorandum")
of ALS provided to Crossings and the Crossings

-21-

<PAGE> 108

Shareholders (collectively, the "ALS Disclosure Schedule"). Each of the
following representations are correct and complete as of the date of this
Agreement. Where any representation or warranty is made to "ALS's actual
knowledge", to "the knowledge of ALS", to "ALS's knowledge" or subject to a
similar knowledge limitation, such representation or warranty is made only to
the knowledge and belief of William G. Petty, Jr., William F. Lasky, Mary Lou
Austin or John W. Kneen, or any of them, without any obligation to conduct any
inquiry or investigation other than such inquiry as the principal executive
officer of ALS most likely to have knowledge of such matter may conclude is
reasonable in the circumstances, and the actual or imputed knowledge of the
other officers, agents or employees of ALS who are not among the above-listed
executive officers of ALS shall not be imputed to ALS. For purposes of this
Agreement, the term material adverse effect on ALS or the ALS Business shall
mean any change in, or effect on, ALS, a ALS Subsidiary Company (as defined
below), or the ALS Business which results in, or could reasonably be expected
to result in, ALS or a ALS Subsidiary Company suffering a diminution of value
or incurring costs or expenses or becoming liable for any amount in excess of
$100,000. All references to "ALS" in Section 5.04 and Sections 5.06 through
5.27 shall mean, except where the context otherwise requires, each of ALS and
the ALS Subsidiary Companies. An item contained in the ALS Disclosure Schedule
is deemed disclosed with respect to all representations and warranties.
Disclosure of items that are not strictly called for by this Agreement shall
not imply that such information is material or that the inclusion establishes
or implies a standard of materiality.

SECTION 5.01. Corporate.

(a) ALS is a corporation duly organized and validly existing under
the laws of the State of Delaware, and has the corporate power and authority to
carry on its business as and where it is presently conducted, to enter into
this Agreement and the other documents and instruments to be executed and
delivered by ALS pursuant hereto (such other documents and instruments are
sometimes referred to herein as the "ALS Ancillary Instruments"; the Crossings
Ancillary Instruments and the ALS Ancillary Instruments are sometimes referred
to herein collectively as the "Ancillary Instruments") and to carry out the
transactions contemplated hereby and thereby. Each ALS Subsidiary Company (as
defined below) is duly organized and validly existing as a corporation,
partnership, limited partnership or limited liability company, as applicable,
under the laws of the jurisdiction identified on the ALS Disclosure Schedule,
and has the power and authority to carry on its business as and where it is
presently conducted. For purposes of this Agreement, "ALS Subsidiary Company"
shall mean each corporation, limited liability company, partnership or limited
partnership in which ALS has a direct or indirect ownership interest and which

-22-

<PAGE> 109

directly or indirectly owns, leases or operates or intends to own, lease or
operate all or any percentage interest in one or more ALS Facilities or is
otherwise material to the ALS Business.

(b) ALS is duly licensed or qualified to do business as a foreign
corporation and is in good standing in each jurisdiction wherein the character
of the properties owned or leased by it or the nature of the ALS Business makes
such licensing or qualification necessary, except where the failure to be so
qualified would not have a material adverse effect on the ALS Business or the
operations of ALS as a whole. Each ALS Subsidiary Company is duly licensed or
qualified to do business and is in good standing in each jurisdiction wherein
the character of the properties owned or leased by it or the nature of the
business conducted by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have a
material adverse effect on the ALS Business or the operations of such entity.

(c) ALS does not own any interest as of the Effective Time in any
corporation, partnership or other entity, except as set forth in the ALS
Disclosure Schedule. The identity and ownership interest of each equity owner
of each ALS Subsidiary Company as of the Effective Time are as set forth on the
ALS Disclosure Schedule.

(d) The authorized capital stock of ALS consists entirely of (A)
30,000,000 shares of common stock ("ALS Common Stock"), $.01 par value per
share, of which (i) 6,913,484 shares are issued and outstanding as of the date
hereof and (ii) 9,523,350 shares will be issued and outstanding after giving
effect to the Merger and upon completion of the ALS Restructuring Transactions
(as defined below) and (B) 5,000,000 shares of preferred stock, none of which
is issued and outstanding. The owners of the ALS Common Stock are set forth on
the ALS Disclosure Schedule. All such shares of ALS Common Stock are, and at
Closing will be, validly issued, fully paid and nonassessable. Other than
under this Agreement or as set forth in the ALS Disclosure Schedule, there are
no options, warrants, conversions, subscription or other rights, agreements,
contracts or commitments of any kind obligating ALS, contingently or otherwise,
to issue or sell any shares of capital stock or other securities of ALS or any
securities convertible into or exchangeable for capital stock or other
securities of ALS, or to repurchase or redeem any capital stock or other
securities of ALS. At the Closing, except as indicated on the ALS Disclosure
Statement, the ALS Common Stock will not be subject to any contractual
restrictions relating to its disposition.

SECTION 5.02. Confidential Memorandum. The Confidential
Memorandum does not contain any untrue statement of material fact with respect
to ALS or the ALS Business or omit to

-23-

<PAGE> 110

state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.

SECTION 5.03. Authority. The execution and delivery of this
Agreement and the ALS Ancillary Instruments and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by the
Board of Directors of ALS. Other than the approval of the shareholders of ALS,
no other corporate act or proceeding on the part of ALS is necessary to
authorize this Agreement, the ALS Ancillary Instruments or the transactions
contemplated hereby or thereby. This Agreement constitutes, and when executed
and delivered, the ALS Ancillary Instruments will constitute, legal, valid and
binding agreements of ALS enforceable in accordance with their respective terms
(except insofar as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and except as to the availability of equitable remedies).

SECTION 5.04. No Violation or Conflict.

(a) No Violation. Neither the execution or delivery of this
Agreement or the ALS Ancillary Instruments, nor the consummation by ALS of the
transactions contemplated hereby or thereby will violate any statute, law,
rule, regulation, order, writ, injunction or decree of any court or
governmental authority applicable to ALS, which violation would have a material
adverse effect on the ALS Business. To ALS's knowledge, except as disclosed in
the ALS Disclosure Schedule, no consent, approval, authorization or action by
any Governmental Agency is required in connection with the execution and
delivery by ALS of this Agreement, the ALS Ancillary Instruments or the
consummation by ALS of the transactions contemplated herein or therein. Except
as set forth in the ALS Disclosure Schedule, ALS is not required, to its
knowledge, to submit any notice, report or other filing to any Governmental
Agency in connection with the execution or delivery of this Agreement and the
consummation of the transactions contemplated hereby.

(b) No Conflict. Subject to obtaining the consents identified on
the ALS Disclosure Schedule, neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby will,
to ALS's actual knowledge, conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate or modify, cancel, or require any notice under any
agreement, contract, lease or other arrangement (including, without limitation,
any agreement, contract, lease, or other arrangement relating to indebtedness)
to which ALS is a party or by which ALS is bound which would have a material
adverse effect on ALS or the ALS Business.

-24-

<PAGE> 111

SECTION 5.05. Financial Statements. Included in the ALS
Disclosure Schedule are true and complete copies of the financial statements of
ALS consisting of (i) balance sheets of ALS as of December 31, 1995 and
December 31, 1994, and the related statements of income, stockholders' equity
and cash flows for the years then ended (including the notes contained
therein), which financial statements (the "ALS Audited Financial Statements")
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis and have been audited and reported on, and are
accompanied by, the signed, unqualified opinions of KPMG Peat Marwick LLP,
independent public accountants for ALS, and (ii) an unaudited consolidated
balance sheet of ALS as of March 31, 1996 (the "ALS Recent Balance Sheet"), and
the related unaudited consolidated statement of operations for the three months
then ended. All of such financial statements (including all notes and
schedules contained therein or annexed thereto) have been derived from the
financial books and records of ALS and accurately present, in all material
respects, the assets, liabilities and financial position and results of
operations of ALS as of the dates and for the years and periods indicated.

SECTION 5.06. No Undisclosed Liabilities. To ALS's actual
knowledge, ALS has no liabilities or obligations except (i) to the extent
reflected or reserved for on the ALS Recent Balance Sheet; (ii) liabilities or
obligations arising or incurred in the ordinary course of business since the
date of the ALS Recent Balance Sheet; (iii) liabilities and obligations which,
under generally accepted accounting principles, would not be required to be
disclosed on the ALS Recent Balance Sheet or in the accompanying footnotes
thereto; or (iv) liabilities or obligations disclosed in the ALS Disclosure
Schedule or pursuant to or in any section of this Agreement.

SECTION 5.07. Absence of Certain Material Changes. Except as
disclosed in the ALS Disclosure Schedule, since the date of the ALS Recent
Balance Sheet, ALS has conducted the ALS Business in the ordinary and usual
course of business, consistent with past practice, except as contemplated by
this Agreement, and ALS has not:

(b) experienced any strike or labor disturbance, other than
routine individual grievances which have not had, and are not
reasonably expected to have, a material adverse effect upon ALS;

-25-

<PAGE> 112

(d) entered into any employment agreement, bonus, stock
option or arrangement respecting employee benefits or granted any
increase in the compensation of employees of ALS (including, without
limitation, any increase or change pursuant to any bonus, pension,
profit-sharing, retirement or other plan or commitment), or any
increase in any such compensation payable or to become payable to any
officer or employee thereof;

(e) made, declared, paid or become obligated to make, declare
or pay any dividend or distribution to its equity owners;

(f) terminated, modified or cancelled any material agreement,
contract, lease or license (or series of related agreements,
contracts, leases and licenses) to which ALS is a party or bound;

(g) made any capital investment in, any loan to, or any
acquisition of the securities or assets of, any other entity (other
than such matters as are described in (c) above);

(h) incurred any indebtedness or increased or accelerated its
obligations under any indebtedness (other than such matters as are
described in (c) above); or

(i) taken any other action or become subject to any liability
outside of the ordinary course of business.

SECTION 5.08. Real Property. The ALS Disclosure Schedule
sets forth a list by either city and state or legal description of all of the
material real property (the "ALS Properties") owned, leased, used or occupied
by ALS or any ALS Subsidiary Company to operate the ALS Business as currently
operated, together with the name of ALS or the ALS Subsidiary Company owing,
leasing, using or operating each respective property. To the knowledge of ALS,
no fact or condition exists which would prohibit or materially adversely affect
the ordinary rights of access to and from any of the ALS Properties from and to
the existing highways and roads and ALS has not received notice of any pending
or threatened restriction or denial, governmental or otherwise, upon such
ingress and egress. To the

-26-

<PAGE> 113

knowledge of ALS, all improvements and structures located on the ALS Properties
are located within the applicable boundaries of the ALS Properties and within
all applicable setback requirements and do not encroach upon any adjacent
properties and there are no encroachments on the ALS Properties from any
adjacent properties, except for such matters as would not materially adversely
affect ALS or the ALS Business.

SECTION 5.09. Leases. The ALS Disclosure Schedule contains a
complete list of all leases (including all amendments thereof and modifications
thereto) (the "ALS Leases") material to the ALS Business and requiring payments
in excess of $30,000 per year pursuant to which ALS leases real or personal
property as lessor or lessee (whether capital, operating or otherwise), true
copies of which ALS Leases have been made available to Crossings. To ALS's
actual knowledge, no party is in default, or with notice or lapse of time would
be in default, with respect to any of the ALS Leases.

SECTION 5.10. Title to Properties. ALS has, to its
knowledge, good, valid and marketable title to all of its assets and properties
reflected in the books and records of ALS as being owned, free and clear of all
Liens, except ALS Permitted Liens.

"Liens" shall mean any mortgages, pledges, title defects or
objections, liens, claims, security interests, conditional and installment sale
agreements, encumbrances or charges of any kind. "ALS Permitted Liens" shall
mean (i) the liens disclosed in the title report(s) provided prior to the date
of this Agreement to Crossings, if any, none of which individually or in the
aggregate materially impair (or are expected to impair in the future) the use,
occupancy or value of the assets and properties of ALS or otherwise materially
impair (or are expected to impair in the future) its business operations, (ii)
statutory liens for real or personal property taxes not yet delinquent or
payable subsequent to the Closing Date, and statutory or common law liens
securing the payment or performance of any obligation of ALS, the payment or
performance of which is not delinquent, or which are payable or performable
subsequent to such date; (iii) the statutory rights of customers of ALS with
respect to inventory under orders or contracts entered into by ALS in the
ordinary course of business; (iv) such imperfections or irregularities of
title, liens, easements, charges or encumbrances as do not materially impair
the use, occupancy or value of the assets and properties of ALS, or otherwise
materially impair business operations; (v) building, zoning and other laws
applicable to ALS's assets and properties, none of which individually or in the
aggregate materially impair (or are expected to impair in the future) the use,
occupancy or value of the assets and properties of ALS or otherwise materially
impair (or are expected to impair in the future) its business

-27-

<PAGE> 114

operations; and (vi) any liens disclosed in the ALS Disclosure Schedule.

SECTION 5.11. Condition of ALS Properties. To ALS's
knowledge, except in each case for normal wear and tear and except as reflected
on the ALS Disclosure Schedule, all structures owned or utilized by ALS are
structurally sound with no material defects which impair the use of such
structures in the manner in which they are currently being used, and all
machinery and equipment owned or utilized by ALS are in good and normal
operating condition and repair.

SECTION 5.12. Patents, Trademarks, Trade Names, Etc. The ALS
Disclosure Schedule contains an accurate and complete description of all
material trademark and service mark registrations, trademark and service mark
applications, trade names, copyright applications and registrations, software
programs (exclusive of common commercially available software), patents and
patent applications owned or held by ALS, or under which ALS owns or holds any
license or other interest, all registered or assumed names under which ALS is
carrying on the ALS Business and all licenses, agreements or other arrangements
under which ALS has the right to use any of the foregoing (collectively, the
"ALS Rights"). Except as indicated in the ALS Disclosure Schedule, all such
patents, trademarks and copyrights have been duly registered in, filed in or
issued by the United States Patent and Trademark Office or the United States
Registrar of Copyrights, and have been properly maintained and renewed in
accordance with all applicable laws and regulations. ALS owns (or possesses
adequate licenses or other rights to use) all ALS Rights and all inventions,
processes and other technical know-how or other proprietary rights used in and
necessary to the conduct of the ALS Business. Except as set forth in the ALS
Disclosure Schedule, no notice of conflict with the asserted rights of others
with respect to the foregoing has been received, and such ALS Rights are
adequate, in ALS's judgment, for the conduct of the ALS Business. ALS has not
granted any licenses or sublicenses thereunder to others except as set forth in
the ALS Disclosure Schedule. To the knowledge of ALS, except as disclosed in
the ALS Disclosure Schedule, none of the ALS Rights are subject to any claim
that (i) any of the ALS Rights are invalid are subject to a claim of patent
misuse, (ii) ALS is infringing any patents, trademarks, trade names or
copyrights of others, (iii) ALS is violating any secrecy rights of any person,
or (iv) any ALS Rights are being used contrary in any respect to the provisions
of any license or other agreement relating to the use of the ALS Rights. ALS
does not know of any claims of third parties to the use or title of any ALS
Rights inconsistent with the rights of ownership or use set forth in the ALS
Disclosure Schedule. Except as disclosed in the ALS Disclosure Schedule, to
the knowledge of ALS, none of the ALS Rights is being infringed by a third
party. To ALS's knowledge, ALS has not interfered

-28-

<PAGE> 115

with, infringed upon or misappropriated any trademark, trade name, copyright or
patent of any third party.

SECTION 5.13. Litigation. Except as set forth in the ALS
Disclosure Schedule, there are no claims, actions, suits, proceedings or
investigations pending or, to ALS's knowledge, threatened by or against ALS or
the ALS Business or the transactions contemplated hereby, which might
individually or in the aggregate materially adversely affect ALS's financial
condition or the conduct of the ALS Business as presently conducted, nor is
there any judgment, decree, injunction or order outstanding against ALS which
individually or in the aggregate has or is likely to have such an effect.

SECTION 5.14. Reserved.

SECTION 5.15. Reserved.

SECTION 5.16. Employee Benefit Plans; ERISA.

(a) Except for the employee plans, benefits and materials described
in the ALS Disclosure Schedule (the "ALS Plans"), ALS does not have bonus,
deferred compensation, incentive compensation, severance or termination pay,
hospitalization or other medical, stock purchase, stock option, pension, life
or other insurance, profit-sharing or retirement plan, agreement or
arrangement, or other employee benefit plan or arrangement, whether formal or
informal, and whether legally binding or not, maintained or contributed to by
ALS with respect to its employees.

(b) ALS has never been a party to a "multiemployer plan" as that term
is defined in Section 3(37) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA").

(c) With respect to each ALS Plan, to ALS's knowledge, (i) all
payments due from ALS to date with respect to any such ALS Plan have been made
and all amounts properly accrued to date as liabilities of ALS Plan which have
not been paid have been properly recorded on the books of ALS and are reflected
in the ALS Recent Balance Sheet; (ii) all reports and information relating to
such ALS Plan required to be filed with any governmental entity have been
timely filed except where the failure to do so would not result in material
liability to ALS; (iii) there are no actions, suits or claims pending (other
than routine claims for benefits) with respect to such Plan or against the
assets of such ALS Plan; (iv) no ALS Plan is a plan which is established and
maintained outside the United States primarily for the benefit of individuals
substantially all of whom are nonresident aliens.

-29-

<PAGE> 116

SECTION 5.17. Compliance with Laws. To the knowledge of ALS,
ALS is in compliance with all laws, regulations, ordinances, permits and
licenses relating to the ownership or use of ALS's properties and assets or
related to the conduct of the ALS Business the enforcement of which would
materially adversely affect ALS or the ALS Business as currently conducted by
ALS.

SECTION 5.18. No Condemnation or Expropriation. ALS has not
received a notice that either the whole or any portion of the ALS Properties or
any other of its assets is subject to any governmental decree or order to be
sold or is being condemned, expropriated or otherwise taken by any public
authority with or without payment of compensation therefor, or that any such
condemnation, expropriation or taking has been proposed.

SECTION 5.19. Tax Matters.

(a) The provision made for taxes on the ALS Recent Balance Sheet is,
in ALS's judgment, sufficient for payment of all federal, state, foreign, local
and other income, excise, profits, franchise, occupation, property, payroll,
sales, use, gross receipts and other taxes and assessments, whether or not
disputed at the date of the ALS Recent Balance Sheet, and for all years and
periods prior thereto, except in each case where a failure to make such a
provision would not have a material adverse effect on the ALS Business or the
operations of ALS as a whole. Since the date of the ALS Recent Balance Sheet,
ALS has not incurred any taxes material to the ALS Business or operations of
ALS as a whole, other than taxes incurred in the ordinary course of business.

(b) Except as disclosed in the ALS Disclosure Schedule, to ALS's
knowledge, (i) ALS has filed when due all federal, state, local and foreign tax
returns required by applicable law to be filed by it and has paid all taxes
(including all deficiency assessments, additions to taxes, penalties and
interest, of which notice has been received) to the extent that such amounts
have become due or are claimed to be due from any federal, state, local or
foreign taxing authorities; (ii) there is no agreement, waiver or consent
providing for an extension of time with respect to the assessment of any tax or
deficiency against ALS and no power of attorney granted by ALS with respect to
any tax matter is currently in force; (iii) there is no action, suit,
proceeding, investigation, audit or claim pending against or with respect to
ALS in respect of any tax or assessment, nor has any claim for additional tax
or assessment being asserted by any such authority; and (iv) ALS has not filed
any agreement or consent under Section 341(f) of the Internal Revenue Code of
1986, as amended (the "Code").

-30-

<PAGE> 117

(d) ALS has no plan or intention to sell or otherwise dispose of
any of the assets of Crossings acquired in the Merger, except for dispositions
made in the ordinary course of business or transfers described in Section
368(a)(2)(C) of the Code.

(e) ALS has no plan or intention to discontinue the historic
business of Crossings as such term is defined in Treasury Regulations Section
1.368-1(d).

(f) There is no intercorporate indebtedness existing between
Crossings and ALS that was issued, acquired or will be settled at a discount.

(g) The fair market value of the ALS Common Stock and any
additional consideration provided hereunder to the Crossings Shareholders will
be approximately equal to the fair market value of the Crossings Common Stock
of the Crossings Shareholders.

(h) ALS is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.

SECTION 5.20. Contracts and Commitments. Except for (i)
liabilities or obligations disclosed in the ALS Disclosure Schedule or (ii)
liabilities or obligations disclosed pursuant to or in any section of this
Agreement, to ALS's knowledge:

(a) ALS does not have any (i) collective bargaining
agreements in effect or being negotiated, (ii) agreements to which it
is a party that contain any severance or termination pay liabilities
or obligations, (iii) employment or consulting agreements for
employees in effect or being negotiated;

(b) ALS is not a party to any agreement which contains
covenants limiting the freedom of ALS to compete in any line of
business or market or with any person;

(c) ALS is not a party to any agreement that provides for
payments to or by ALS in an aggregate amount of $100,000 or more and
requires performance by ALS for a term of more than six (6) months
from the date hereof and that is not terminable within six (6) months
by ALS without material cost, liability or penalty;

(d) ALS is not a party to any agreement establishing or
providing for any material joint

-31-

<PAGE> 118

venture, partnership or similar arrangement with any other person or
entity related to the ALS Business; and

(e) ALS has no reason to believe that any material contract
or commitment to which ALS is a party is not in full force and effect
in accordance with the terms thereof (except in each case insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and except as to the availability of equitable remedies).
To ALS's actual knowledge, no party is in default with respect to any
such contracts, except where the aggregate effect of such defaults
would not have a material adverse effect on the ALS Business or the
operations of ALS as a whole.

SECTION 5.21. Labor Disagreements. ALS has not experienced
any material labor disputes, union organization attempts or any work stoppage
due to labor disagreements. Except as set forth on the ALS Disclosure
Statement, ALS has not received a notice that there is any unfair labor
practice, charge or complaint pending or threatened against it before the
National Labor Relations Board or any comparable state agency or authority. To
ALS's knowledge, there is no labor strike, dispute, request for representation,
slowdown or stoppage actually pending or threatened against or affecting ALS.
To ALS's knowledge, no question concerning representation has been raised or is
threatened respecting ALS's employees. No grievance which might have a
material adverse effect on the ALS Business and the operations of ALS as a
whole is pending.

SECTION 5.22. Environmental Matters.

(a) To ALS's actual knowledge, except as set forth in the ALS
Disclosure Schedule, (i) each facility and property owned, operated or leased
by ALS has been and is now owned, operated or leased in compliance with all
applicable Environmental Laws the noncompliance with which could materially
adversely affect the ALS Business as currently conducted by ALS and (ii) there
are no circumstances that may prevent or interfere with such compliance in the
future.

(b) There are no pending or, to ALS's actual knowledge, threatened
suits, actions, claims, complaints, notices or requests for information
received by ALS with respect to any alleged violation of any Environmental Law
except for: (i) matters set forth in the ALS Disclosure Schedule and (ii)
matters which, if adversely decided or resolved, individually or in the
aggregate would not have a material adverse effect on the ALS Business as
currently conducted by ALS.

-32-

<PAGE> 119

(c) ALS holds such permits, certificates, approvals, licenses,
exemptions, variances, waivers, permits-by- rule, or other authorizations ("ALS
Environmental Permits") issued by any governmental authority, or otherwise
granted or conferred by operation of any Environmental Law, for the operation
of its facilities or the ALS Business as are sufficient, in ALS's knowledge, to
avoid a breach of the representation in Section 5.22(a) hereof. All such ALS
Environmental Permits held by ALS are identified in the ALS Disclosure
Schedule.

(d) To ALS's knowledge, no property currently or previously owned,
operated or leased by ALS is listed or is proposed for listing on the National
Priorities List pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act, as amended ("CERCLA"), or the Comprehensive
Environmental Response, Compensation and Liability Information System List
("CERCLIS") or on any similar state or foreign list of sites requiring
investigation or cleanup; and ALS has not received notice, nor is aware, of any
lien filed against either the personal or real property of ALS under any
Environmental Law.

(e) To ALS's knowledge, ALS has not been required by any
Environmental Law to place any notice or restriction relating to the presence
of any hazardous materials in any deed to any facility or property owned,
operated or leased by ALS where the failure to so place any such notice has, or
may reasonably be expected to have, a material adverse effect on the ALS
Business.

SECTION 5.23. Affiliates' Relationships.

(a) All leases, contracts or other arrangements between ALS and any
Affiliate (as hereinafter defined) are set forth in the ALS Disclosure
Schedule.

(b) Other than as set forth in the ALS Disclosure Schedule, no ALS
Affiliate has any material direct or indirect interest in (i) any entity which
does business with ALS or is competitive with the ALS Business or (ii) any
property, asset or right which is used by ALS in the conduct of the ALS
Business.

(c) For purposes of this Agreement, "ALS Affiliate" shall mean and
include all ALS Shareholders, directors and officers of ALS; the spouse, parent
or child of any such director or officer; and any entity in which any of the
foregoing has a direct or indirect interest, except through ownership of less
than 5% of the outstanding shares of any such entity.

SECTION 5.24. No Brokers or Finders. Neither ALS nor any of
its directors, officers, employees, ALS Shareholders or agents have retained,
employed or used any broker or finder in connection with the transaction
provided for herein or in connection with the negotiation thereof.

-33-

<PAGE> 120

SECTION 5.25. Management Agreements. The ALS Disclosure
Schedule contains a description of all material management, consulting or
development agreements (the "ALS Management Agreements") to which ALS is a
party and which relate to the management, consulting or development of one or
more ALS Facilities. To ALS's knowledge, no party is in default, or with
notice of lapse of time would be in default, with respect to any of the ALS
Management Agreements.

SECTION 5.26. Licenses and Permits.

(a) The ALS Disclosure Statement contains summary description of
all licenses, permits, certificates, approvals, resolutions, consents and other
authorizations necessary to own, lease or operate each of the ALS Facilities or
to conduct the ALS Business in compliance with applicable law ("ALS Permits").

(b) ALS lawfully obtained and currently possesses the respective
ALS Permits and has fulfilled and performed its obligations under each of the
ALS Permits. No event has occurred and no condition or state of facts exists
which constitutes or, after notice or lapse of time or both, would constitute a
breach or default under any of the ALS Permits or would allow revocation or
termination of any of the ALS Permits, or which might adversely affect the
rights of ALS under any of the ALS Permits. No notice of cancellation, of
default of any dispute concerning any of the ALS Permits, or of any event,
condition or state of facts described in the preceding sentence, has been
received by, or is known to, ALS or its officers, directors or employees.
Except as set forth in the ALS Disclosure Statement, each of the ALS Permits is
valid, subsisting and in full force and effect, and will continue in full force
and effect after the Merger, in each case without (i) the occurrence of any
breach, default or forfeiture of rights thereunder, or (ii) the consent,
approval or act of, or the making of any filing with, any governmental body,
regulatory commission or other person.

(c) The ALS Permits include all applicable environmental, land use
and growth management obligations required by any federal, state, local,
foreign or other governmental body, regulatory commission or other person.

SECTION 5.27. Other Information. None of the representations
or warranties to Crossings contained herein and no statements contained in the
ALS Disclosure Schedule hereto contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained therein not misleading.

-34-

<PAGE> 121

ARTICLE VI

COVENANTS OF Crossings

Crossings agrees that:

SECTION 6.01. Conduct of Crossings. From the date hereof
until the Effective Time, Crossings and the Crossings Subsidiary Companies
shall conduct their business in the ordinary course consistent with past
practice and shall use their best efforts to preserve intact their business
organizations and relationships with third parties and to keep available the
services of their present officers and employees. Except for actions otherwise
contemplated herein, without limiting the generality of the foregoing, from the
date hereof until the Effective Time:

(a) Crossings will not adopt or propose any change in its
articles of incorporation or bylaws;

(b) Crossings will not, and will not permit any Crossings
Subsidiary Company to, merge or consolidate with any other Person (as
defined below) or acquire a material amount of assets of any other
Person;

(c) Crossings will not, and will not permit any Crossings
Subsidiary Company to, sell, lease, license or otherwise dispose of
any material assets or property except (i) pursuant to existing
contracts or commitments described in the Crossings Disclosure
Schedule and (ii) in the ordinary course consistent with past
practice;

(d) Neither Crossings nor any Crossings Subsidiary
Company shall (i) declare, set aside or pay any dividend or other
distribution or payment in cash, securities or property in respect of
shares of the Crossings Common Stock, (ii) make any direct or indirect
redemption, retirement, purchase or other acquisition of any of its
capital stock, or (iii) reclassify, combine, split, subdivide or
redeem, purchase or otherwise acquire, directly or indirectly any of
its outstanding shares of capital stock (provided, that, nothing
contained herein shall restrict Crossings' ability to convert or
exchange preferred stock of Crossings into Crossings Common Stock);

(e) Neither Crossings nor any Crossings Subsidiary
Company shall, directly or indirectly, (i) issue, grant, sell or
pledge or agree or propose to issue, grant, sell or pledge any shares
of, or rights

-35-

<PAGE> 122

or securities of any kind to acquire any shares of, the capital stock
of Crossings (provided, that, nothing contained herein shall restrict
Crossings' ability to convert or exchange preferred stock of Crossings
into Crossings Common Stock), (ii) incur any material indebtedness for
borrowed money, (iii) waive, release, grant or transfer any rights of
material value (iv) adopt a plan of liquidation or dissolution or (v)
change any accounting principles or methods except insofar as may be
required by changes in generally accepted accounting principles;

(f) Neither Crossings nor any Crossings Subsidiary
Company will, directly or indirectly, (i) increase the cash
compensation payable or to become payable by it to any of its
employees (other than with respect to raises in the ordinary course of
business for hourly employees), officers, consultants or directors,
(ii) enter into, adopt or amend any stock option, stock purchase,
profit sharing, pension, retirement, deferred compensation, restricted
stock or severance plan, agreement or arrangement for the benefit of
employees, officers, directors or consultants of Crossings or any
Crossings Subsidiary Company, (iii) enter into or amend any employment
or consulting agreement, except in the ordinary course of business, or
(iv) make any loan or advance to, or enter into any written contract,
lease or commitment with, any officer, employee, consultant or
director of Crossings or any Crossings Subsidiary Company, except for
travel advances in the ordinary course of business;

(g) Neither Crossings nor any Crossings Subsidiary
Company shall, directly or indirectly, assume, guarantee, endorse or
otherwise become responsible for the obligations of any other
individual, corporation or other entity, or make any loans or advances
to any individual, corporation or other entity except in the ordinary
course of business and consistent with past practices;

(h) Crossings will not, and will not permit any Crossings
Subsidiary Company to (i) take or agree or commit to take any action
that would make any representation and warranty of Crossings hereunder
inaccurate in any respect at, or as of any time prior to, the
Effective Time or (ii) omit or agree or commit to omit to take any
action necessary to prevent any such representation or warranty from
being inaccurate in any respect at any such time; and

-36-

<PAGE> 123

(i) Crossings will not, and will not permit any Crossings
Subsidiary Company to, agree or commit to do any of the foregoing.

For purposes of this Agreement, "Person" means an individual, a
corporation, a partnership, a limited liability company, an association, a
trust or any other entity or organization, including a government or political
subdivision or any agency or instrumentality thereof.

SECTION 6.02. Crossings Shareholder Meeting. Crossings shall
cause a meeting of the Crossings Shareholders (the "Crossings Shareholders
Meeting") to be duly called and held as soon as reasonably practicable for the
purpose of voting on the approval and adoption of this Agreement and the
Merger. In lieu of a live meeting of shareholders, approval and adoption of
this Agreement and the Merger may be accomplished by the unanimous written
consent of the Crossings Shareholders in accordance with Nevada Law and
Crossings' articles of incorporation and bylaws. The Directors of Crossings
shall, subject to their fiduciary duties as advised by counsel, recommend
approval and adoption of this Agreement and the Merger by the Crossings
Shareholders. In connection with such meeting, Crossings (i) will use its best
efforts to obtain the necessary approvals by the Crossings Shareholders of this
Agreement and the transactions contemplated hereby and (ii) will otherwise
comply with all legal requirements applicable to such meeting.

SECTION 6.03. Access to Information. From the date hereof
until the Effective Time, Crossings will give ALS, its counsel, financial
advisors, auditors and other authorized representatives full access to the
offices, properties, books and records of Crossings and the Crossings
Subsidiary Companies, will furnish to ALS, its counsel, financial advisors,
auditors and other authorized representatives such financial and operating data
and other information as such Persons may reasonably request and will instruct
Crossings' employees, counsel and financial advisors to cooperate with ALS in
its investigation of the business of Crossings and the Crossings Subsidiary
Companies; provided that no investigation pursuant to this Section shall affect
any representation or warranty given by Crossings to ALS hereunder.

SECTION 6.04. Notices of Certain Events. Crossings shall
promptly notify ALS of:

(i) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement;

-37-

<PAGE> 124

(ii) any notice or other communication from any governmental
or regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and

(iii) any actions, suits, claims, investigations or
proceedings commenced or, to the best of its knowledge threatened
against, relating to or involving or otherwise affecting Crossings or
any Crossings Subsidiary Company which, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to
Section 4.13 or which relate to the consummation of the transactions
contemplated by this Agreement.

SECTION 6.05. Confidentiality. Prior to the Effective Time
and after any termination of this Agreement Crossings will hold, and will use
its best efforts to cause its officers, directors, employees, accountants,
counsel, consultants, advisors and agents to hold, in confidence, unless
compelled to disclose by judicial or administrative process or by other
requirements of law, all confidential documents and information concerning ALS
and the ALS Subsidiary Companies furnished to Crossings in connection with the
transactions contemplated by this Agreement, except to the extent that such
information can be shown to have been (i) previously known on a nonconfidential
basis by Crossings, (ii) in the public domain through no fault of Crossings or
(iii) later lawfully acquired by Crossings from sources other than ALS;
provided that Crossings may disclose such information to its officers,
directors, employees, accountants, counsel, consultants, advisors and agents in
connection with the transactions contemplated by this Agreement, on a
need-to-know basis, so long as such Persons are informed by Crossings of the
confidential nature of such information and are directed by Crossings to treat
such information confidentially; and provided, further, that in accordance with
the Confidentiality Agreement entered into between ALS and CCI, Crossings may
disclose such information to CCI and its officers, directors, employees,
accountants, counsel, consultants, advisors and agents in connection with the
transactions contemplated by this Agreement. Crossings' obligation to hold any
such information in confidence shall be satisfied if it exercises the same care
with respect to such information as it would take to preserve the
confidentiality of its own similar information. If this Agreement is
terminated, Crossings will, and will use its best efforts to cause its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents to, destroy or deliver to ALS, upon request, all documents and other
materials, and all copies thereof, obtained by Crossings or on its behalf from
ALS in connection with this Agreement that are subject to such confidence.

-38-

<PAGE> 125

ARTICLE VII

COVENANTS OF ALS

ALS agrees that:

SECTION 7.01. Conduct of ALS. From the date hereof until the
Effective Time, ALS and the ALS Subsidiary Companies shall conduct their
business in the ordinary course consistent with past practice and shall use
their best efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
present officers and employees. Except for actions otherwise contemplated
herein or described in the ALS Disclosure Statement, without limiting the
generality of the foregoing, from the date hereof until the Effective Time:

(a) ALS will not adopt or propose any change in its
certificate of incorporation or bylaws;

(b) ALS will not, and will not permit any ALS Subsidiary
Company to, merge or consolidate with any other Person or acquire a
material amount of assets of any other Person;

(c) ALS will not, and will not permit any ALS Subsidiary
Company to, sell, lease, license or otherwise dispose of any material
assets or property except (i) pursuant to existing contracts or
commitments described in the ALS Disclosure Schedule and (ii) in the
ordinary course consistent with past practice;

(d) Except in connection with any of the ALS
Restructuring Transactions, neither ALS nor any ALS Subsidiary Company
shall (i) declare, set aside or pay any dividend or other distribution
or payment in cash, securities or property in respect of shares of the
ALS Common Stock, (ii) make any direct or indirect redemption,
retirement, purchase or other acquisition of any of its capital stock,
or (iii) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly any of its outstanding
shares of capital stock;

(e) Except in connection with any of the ALS
Restructuring Transactions, neither ALS nor any ALS Subsidiary Company
shall, directly or indirectly, (i) issue, grant, sell or pledge or
agree or propose to issue, grant, sell or pledge any shares of, or
rights or securities of any kind to acquire any shares of, the

-39-

<PAGE> 126

capital stock of ALS, (ii) incur any material indebtedness for
borrowed money, (iii) waive, release, grant or transfer any rights of
material value (iv) adopt a plan of liquidation or dissolution or (v)
change any accounting principles or methods except insofar as may be
required by changes in generally accepted accounting principles;

(f) Except in connection with any of the ALS
Restructuring Transactions, neither ALS nor any ALS Subsidiary Company
will, directly or indirectly, (i) increase the cash compensation
payable or to become payable by it to any of its officers, consultants
or directors, (ii) enter into, adopt or amend any stock option, stock
purchase, profit sharing, pension, retirement, deferred compensation,
restricted stock or severance plan, agreement or arrangement for the
benefit of employees, officers, directors or consultants of ALS or any
ALS Subsidiary Company, (iii) enter into or amend any employment or
consulting agreement, except in the ordinary course of business, or
(iv) make any loan or advance to, or enter into any written contract,
lease or commitment with, any officer, employee, consultant or
director of ALS or any ALS Subsidiary Company, except for travel
advances in the ordinary course of business;

(g) Except in connection with any of the ALS
Restructuring Transactions, neither ALS nor any ALS Subsidiary Company
shall, directly or indirectly, assume, guarantee, endorse or otherwise
become responsible for the obligations of any other individual,
corporation or other entity, or make any loans or advances to any
individual, corporation or other entity except in the ordinary course
of business and consistent with past practices;

(h) ALS will not, and will not permit any ALS Subsidiary
Company to (i) take or agree or commit to take any action that would
make any representation and warranty of ALS hereunder inaccurate in
any respect at, or as of any time prior to, the Effective Time or (ii)
omit or agree or commit to omit to take any action necessary to
prevent any such representation or warranty from being inaccurate in
any respect at any such time; or

(i) ALS will not, and will not permit any ALS Subsidiary
Company to, agree or commit to do any of the foregoing.

-40-

<PAGE> 127

SECTION 7.02. ALS Shareholder Meeting. ALS shall cause a
meeting of the ALS Shareholders (the "ALS Shareholders Meeting") to be duly
called and held as soon as reasonably practicable for the purpose of voting on
the approval and adoption of this Agreement and the Merger. In lieu of a live
meeting of shareholders, approval and adoption of this Agreement and the Merger
may be accomplished by the unanimous written consent of the ALS Shareholders in
accordance with Delaware Law and ALS's certificate of incorporation and bylaws.
The Directors of ALS shall, subject to their fiduciary duties as advised by
counsel, recommend approval and adoption of this Agreement and the Merger by
the ALS Shareholders. In connection with such meeting, ALS (i) will use its
best efforts to obtain the necessary approvals by the ALS Shareholders of this
Agreement and the transactions contemplated hereby and (ii) will otherwise
comply with all legal requirements applicable to such meeting.

SECTION 7.03. Access to Information. From the date hereof
until the Effective Time, ALS will give Crossings, CCI, the CCI Holders and
their respective counsel, financial advisors, auditors and other authorized
representatives full access to the offices, properties, books and records of
ALS and the ALS Subsidiary Companies, will furnish to Crossings, CCI, the CCI
Holders and their respective counsel, financial advisors, auditors and other
authorized representatives such financial and operating data and other
information as such Persons may reasonably request and will instruct ALS's
employees, counsel and financial advisors to cooperate with Crossings in its
investigation of the business of ALS and the ALS Subsidiary Companies; provided
that no investigation pursuant to this Section shall affect any representation
or warranty given by ALS to Crossings hereunder.

SECTION 7.04. Notices of Certain Events. ALS shall promptly
notify Crossings of:

(i) any notice or other communication from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement;

(ii) any notice or other communication from any governmental
or regulatory agency or authority in connection with the transactions
contemplated by this Agreement; and

-41-

<PAGE> 128

disclosed pursuant to Section 5.13 or which relate to the consummation
of the transactions contemplated by this Agreement.

SECTION 7.05. Confidentiality. Prior to the Effective Time
and after any termination of this Agreement ALS will hold, and will use its
best efforts to cause its officers, directors, employees, accountants, counsel,
consultants, advisors and agents to hold, in confidence, unless compelled to
disclose by judicial or administrative process or by other requirements of law,
all confidential documents and information concerning Crossings, the Crossings
Shareholders and the Crossings Subsidiary Companies furnished to ALS in
connection with the transactions contemplated by this Agreement, except to the
extent that such information can be shown to have been (i) previously known on
a nonconfidential basis by ALS, (ii) in the public domain through no fault of
ALS or (iii) later lawfully acquired by ALS from sources other than Crossings;
provided that ALS may disclose such information to its officers, directors,
employees, accountants, counsel, consultants, advisors and agents in connection
with the transactions contemplated by this Agreement on a need-to-know basis so
long as such Persons are informed by ALS of the confidential nature of such
information and are directed by ALS to treat such information confidentially.
ALS' obligation to hold any such information in confidence shall be satisfied
if it exercises the same care with respect to such information as it would take
to preserve the confidentiality of its own similar information. If this
Agreement is terminated, ALS will, and will use its best efforts to cause its
officers, directors, employees, accountants, counsel, consultants, advisors and
agents to, destroy or deliver to Crossings, upon request, all documents and
other materials, and all copies thereof, obtained by ALS or on its behalf from
Crossings in connection with this Agreement that are subject to such
confidence.

SECTION 7.06. Director and Officer Liability. For three
years after the Effective Time, ALS will cause the Surviving Corporation to
indemnify and hold harmless the present and former officers and directors of
Crossings and Crossings International Corporation, a Washington corporation
("Old Crossings"), in respect of acts or omissions occurring prior to the
Effective Time to the extent provided under Crossings' and Old Crossings'
articles of incorporation and bylaws in effect on the date hereof with respect
to present officers and directors and in effect as of the time of such act or
omission with respect to former officer and directors; provided that such
indemnification shall be subject to any limitation imposed from time to time
under applicable law.

SECTION 7.07. ALS Restructuring Transactions. ALS shall use
its best efforts to consummate on or prior to the Closing Date the
restructuring transactions specifically

-42-

<PAGE> 129

described on Schedule 7.07 attached hereto (collectively, the "ALS
Restructuring Transactions").

SECTION 7.08. IPO Registration Rights.

(a) Certain Other Definitions. As used in this
Agreement, the following terms shall have the following respective meanings:

"CCI Holders" shall have the meaning set forth in Section 4A.02 above.

"CCI Shares" shall mean the shares of ALS Common Stock issued to the
CCI Holders pursuant to Section 1.02 hereof.

"Commission" shall mean the United States Securities and Exchange
Commission and any successor federal agency having similar powers.

"IPO Right" shall mean the right of the CCI Holders to include the CCI
Shares, as selling shareholders, in the Public Offering in accordance with this
Section 7.08.

"Public Offering" shall mean the first offer and sale by ALS of shares
of ALS Common Stock in a public offering registered pursuant to the Securities
Act.

The terms "register", "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.

"Registrable Securities" shall mean the CCI Shares identified as
"Registrable Securities" on Schedule 4A.02 for so long as they are held by the
CCI Holders, or any transferee for which CCI acts as agent.

"Registration Expenses" shall mean all expenses incurred by ALS in
connection with the Public Offering and in complying with Section 7.08 hereof,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for ALS, blue sky fees and
expenses, and accountants' expenses including without limitation any special
audits or "comfort" letters incident to or required by any such registration,
and any fees and disbursements of underwriters customarily paid by issuers, but
excluding underwriting discounts and commissions.

"Securities Act" shall mean the Securities Act of 1933, as amended.

-43-

<PAGE> 130

(b) IPO Right. In the event ALS effects a Public
Offering after the Effective Time, the CCI Holders, and each of them, shall be
entitled to include in such registration all of the Registrable Securities held
by them and to sell such Registrable Securities in the Public Offering (such
shares referred to herein as the "Included Shares"), as selling shareholders,
subject to the terms, conditions and limitations hereof. By electing to
include Included Shares in the Public Offering, a CCI Holder shall agree to
sell such Included Shares at the price and on the terms agreed to by ALS with
respect to the primary shares of ALS Common Stock to be sold in the Public
Offering. The IPO Right shall not be assignable by the CCI Holders except to
transferees for which CCI acts as agent.

(1) Notice of Exercise. If ALS shall determine
to effect a Public Offering, ALS will:

(i) promptly give written notice thereof
to each CCI Holder, which notice briefly describes the CCI
Holders' rights under this Section 7.08 (including notice
deadlines); and

(ii) include in such registration (and
any related filing or qualification under applicable blue sky
laws), and in any underwriting involved therein, all the
Registrable Securities specified in a written request or
requests, made by any CCI Holder and received by ALS within
ten (10) business days after the written notice from ALS
described in clause (i) above is delivered by ALS. Such
written request may specify all or a part of a Holder's
Registrable Securities.

(2) Registration Statement Form. The Public
Offering shall be effected by the filing of a registration statement
on any form which ALS is eligible to use, such form to be selected by
ALS.

(3) Expenses. Except as otherwise provided
herein or prohibited by applicable law, ALS will pay all Registration
Expenses in connection with the registration of Included Shares
pursuant to this Section 7.08. Any underwriter's discount or
commission payable with respect to Included Shares and the fees and
expenses of legal counsel to the CCI Holders participating in such
registration shall be paid by the CCI Holder selling such Included
Shares.

(4) Information from CCI Holder. Each CCI Holder
electing to sell Registrable Securities pursuant

-44-

<PAGE> 131

to the IPO Right shall furnish to ALS such information regarding such
CCI Holder as ALS may reasonably request in writing and as shall be
reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 7.08. Any
such information shall be subject to the confidentiality provisions
contained in Section 7.05.

(5) IPO Right Nonexclusive. ALS may register
securities for sale for the account of any person in the Public
Offering (including shares to be registered by or on behalf of ALS).

(d) Underwritten Public Offering. If the Public Offering
is an underwritten offering of Registrable Securities, ALS will enter into an
underwriting agreement reasonably acceptable to ALS with such underwriters for
such offering, such agreement to contain such representations and warranties by
ALS and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities similar in scope to those provided in Section
7.08(h). The holders of Included Shares shall be parties to any such
underwriting agreement and ancillary selling shareholder agreements (which as
to the selling shareholders shall be in such form as is reasonable and
customary in the circumstances) and shall be responsible for bearing the
underwriter's discount and commission applicable to such Included Shares. The
representations and warranties by, and the other arrangements on the part of,
ALS to and for the benefit of such underwriters, shall also be made to and for
the benefit of such holders of Included Shares. Such holders of Included
Shares shall not be required by ALS to make any representations or warranties
to or agreements with ALS or the underwriters other than customary and
reasonable representations, warranties or agreements (including indemnity
agreements customary in secondary offerings which, assuming the underwriter is
Natwest Securities Limited, would be similar in scope to indemnities contained
in Section 7.08(h) below) regarding such holder and such holder's Registrable
Securities.

(e) Preparation; Reasonable Investigation. In connection
with the preparation and filing of a registration statement registering
Included Shares under the Securities Act, ALS will give the holders of Included
Shares and their respective counsel and accountants, the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the Commission and each amendment thereof or
supplement thereto, and will give each of them such reasonable access to its
books and records and such opportunities to discuss the business of ALS with
its officers and the independent public accountants who have certified its
financial statements as shall be necessary in the opinion of such holders

-45-

<PAGE> 132

to conduct a reasonable investigation within the meaning of the Securities Act.

(f) Blue Sky Registration. In the event of any registration
of any Registrable Securities under the Securities Act, ALS agrees to use its
best efforts to register and qualify the securities covered by such
registration statement under such other securities or blue sky laws of such
jurisdiction as shall be reasonably requested by the holders of Included
Shares; provided, however, that ALS shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states of jurisdictions.

(g) Reports under the Act. With a view to making
available to the CCI Holders the benefits of Rule 144 under the Securities Act
during the two year period following a Public Offering (but only so long as ALS
shall be subject to the periodic reporting obligations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), ALS agrees to use its
best efforts to:

(i) make and keep public information regarding ALS
available as those terms are understood and defined in Rule
144 under the Securities Act, at all times from and after
ninety (90) days following the effective date of the first
registration under the Securities Act filed by ALS for an
offering of its securities to the general public;

(ii) file with the Commission in a timely manner all
reports and other documents required of ALS under the
Securities Act and the Exchange Act at any time after it has
become subject to such reporting requirements;

(iii) so long as a CCI Holder owns any restricted securities,
furnish to the holder forthwith upon written request a written
statement by ALS as to its compliance with the reporting
requirements of Rule 144 (at any time from and after ninety
(90) days following the effective date of the first
registration statement filed by ALS for an offering of its
securities to the general public), and of the Securities Act
and the Exchange Act (at any time after it has become subject
to such reporting requirements), a copy of the most recent
annual or quarterly report of ALS, and such other reports and
documents so filed as a CCI Holder may reasonably request in
availing itself of any rule

-46-

<PAGE> 133

or regulation of the Commission allowing a holder to sell any such
securities without registration.

(h) Indemnification.

(1) Indemnification by ALS. In the event of any
registration of any Registrable Securities under the Securities Act
pursuant to the IPO Right, ALS will, and hereby does, indemnify and
hold harmless, in the case of any registration statement filed in
connection therewith, the seller of any Included Shares covered by
such registration statement (the "CCI Seller(s)"), its directors,
trustees and officers, and each other person, if any, who controls
such CCI Seller or any such underwriter within the meaning of the
Securities Act, and in each case, against any losses, claims, damages,
liabilities or expenses (including attorneys' fees), joint or several,
to which such seller or any such director or officer or participating
or controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions or proceedings in respect thereof) arise out of
or are based upon (x) any untrue statement or alleged untrue statement
of any material fact contained in any registration statement under
which such securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or any
document incorporated by reference therein, or (y) any omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and ALS will reimburse such seller, and each such
director, trustee, officer, participating person and controlling
person for any legal or any other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim,
liability, action or proceeding, provided that ALS shall not be liable
in any such case to the extent that any such loss, claim, damage,
liability or expense (or action or proceeding in respect thereof)
arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration
statement, any such preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to ALS through an instrument duly
executed by such seller or any such director, trustee, officer,
participating person or controlling person specifically stating that
it is for use in the preparation thereof. Such

-47-

<PAGE> 134

indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such seller or any such
director, officer, participating person or controlling person and
shall survive the transfer of such securities by such CCI Seller. ALS
shall agree to provide provision for contribution relating to such
indemnity as shall be reasonably requested by any CCI Seller or the
underwriters.

(2) Indemnification by CCI Seller. ALS may
require, as a condition to including any Registrable Securities in any
registration statement filed to effect the Public Offering, that ALS
shall have received an undertaking satisfactory to it from each CCI
Seller, to indemnify and hold harmless (in the same manner and to the
same extent as set forth in subdivision (1) of this Section 7.08(h))
ALS, each director of ALS, each officer of ALS who shall sign such
registration statement and each other person, if any, who controls ALS
within the meaning of the Securities Act, with respect to (x) any
untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such securities
were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, or any document incorporated by
reference therein, or (y) any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, if such statement or
omission was made in reliance upon and in conformity with written
information furnished to ALS through an instrument duly executed by
such CCI Seller specifically stating that it is for use in the
preparation of such registration statement, preliminary prospectus,
final prospectus, summary prospectus, amendment or supplement;
maximum liability of any CCI Seller to ALS under this Section
7.08(h)(2) shall be limited to the net proceeds received by such CCI
Seller in the Public Offering. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf
of ALS or any such director, officer or controlling person and shall
survive the transfer of such Registrable Securities by such CCI
Seller. The CCI Sellers shall also agree to provide provision for
contribution relating to such indemnity as shall be reasonably
requested by ALS or the underwriters.

-48-

<PAGE> 135

(3) Notice of Claims, etc. Promptly after
receipt by an indemnified party of notice of the commencement of any
action or proceeding involving a claim referred to in the preceding
subdivisions of this Section 7.08(h), such indemnified party will, if
a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such
action, provided that the failure of any indemnified party to give
notice as provided herein shall not relieve the indemnifying party of
its obligations under the preceding subdivisions of this Section
7.08(h). In case any such action is brought against an indemnified
party, unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties
may exist in respect of such claim, the indemnifying party shall be
entitled to participate in and to assume the defense thereof, jointly
with any other indemnified party similarly notified, to the extent
that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall,
without the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by claimant or plaintiff to such
indemnified party of a release from all liability in respect to such
claim or litigation.

SECTION 7.09. Other Exit Rights of CCI Holders. Until the
first to occur of (i) the date upon which the CCI Holders shall no longer own
in the aggregate more than 26% of the CCI Shares or (ii) the date upon which
the CCI Holders are entitled to sell Registrable Securities pursuant to Section
7.08 hereof (such earlier date, the "Ending Date"), ALS shall use its best
efforts to afford the CCI Holders, with respect to the CCI Shares, the right to
participate on a pro rata basis in any Liquidity Transaction (hereinafter
defined) that ALS facilitates or approves. For purposes hereof, "Liquidity
Transaction" shall mean any transaction that allows any holders of ALS Common
Stock to sell their ALS Common Stock other than (a) any "Transfer" made by any
such other holder of ALS Common Stock in accordance with the ALS Amended and
Restated Stockholders' Agreement dated as of January 15, 1996, as amended, or
(b) any sale of ALS Common Stock which, together with all related sales of ALS
Common Stock, does not exceed 1% of the then outstanding ALS Common Stock or
(c) any

-49-

<PAGE> 136

sale of ALS Common Stock in the Public Offering or (d) any purchase by ALS of
ALS Common Stock pursuant to the exercise of put options by other holders of
ALS Common Stock pursuant to any of (x) the Stock Purchase Agreement among
Heartland Retirement Services, Inc., the shareholders of Heartland Retirement
Services, Inc. and ALS dated as of January 25, 1996; (y) the Limited Partner
Interest Purchase Agreement between ALS, Alternative Living Services-Midwest
Inc., Lionel S. Margolick and the limited partners referenced therein dated as
of May 20, 1996; and (z) the Agreement and Plan of Merger among ALS, ALS
Acquisition Corp., Alternative Living Services-Midwest Inc. and the
shareholders of Alternative Living Services-Midwest, Inc. dated as of May 20,
1996, or (e) any purchase by ALS of ALS Common Stock pursuant to the exercise
by ALS of a right to repurchase (m) the "Hennig Stock" as defined and described
under the caption "Management -- Employment and Services Agreements
- --Employment Agreements with G. Faye Godwin and Douglas A. Hennig" in the draft
Preliminary Prospectus included in the Confidential Memorandum; (n) the
"Pioneer Shares" as defined and described in "Business -- Joint Ventures and
Strategic Alliances -- Proposed Joint Venture with Pioneer Development Company,
Inc." in the draft Preliminary Prospectus included in the Confidential
Memorandum or (n) shares received upon the exercise of options granted under
the 1995 Incentive Compensation Plan of ALS pursuant to the repurchase rights
set forth in Section 15 of such plan.

SECTION 7.10. CCI Right to Attend Board Meetings. At all
times subsequent to July 31, 1996 and prior to the Ending Date, CCI, as
investment advisor to the CCI Holders, shall have the right to receive timely
notice of, and have an opportunity to attend, all regular and special meetings
of the Board of Directors of ALS and shall be entitled to receive copies of all
correspondence from ALS to its Board of Directors and from the Board of
Directors to ALS. Timely notice for purposes of this Section 7.09 shall mean
such notice as is provided to the Board of Directors via the same delivery
means used to deliver such notice to the Board of Directors.

SECTION 7.11. Stockholder Approval of Certain Transactions.
At all such times as CCI is entitled to attend meetings of the Board of
Directors of ALS pursuant to Section 7.10 hereof, ALS will not take any of the
following actions without approval of the holders of a majority of the
outstanding shares of ALS Common Stock, following notice of such proposed
action to the ALS Shareholders as required by Delaware Law and the Restated
Bylaws of ALS:

(i) effect a corporate combination (excluding any merger,
consolidation or combination not requiring stockholder
approval under Delaware Law) or otherwise sell,

-50-

<PAGE> 137

convey, lease or dispose of all or substantially all of its property
or business;

(ii) alter or change the rights, preferences or privileges of the
shares of ALS Common Stock so as to effect adversely the ALS
Common Stock;

(iii) increase the authorized number of shares of ALS Common
Stock;

(iv) create any new class or series of capital stock or any other
securities convertible into capital stock of ALS; or

(v) declare or pay any dividends on the ALS Common Stock other
than dividends payable solely in cash or shares of common
stock.

SECTION 7.12. Intended Beneficiary. The provisions of
Sections 7.08, 7.09, 7.10 and 7.11 hereof are intended to be for the benefit of
the CCI Holders, and each of CCI and each of the CCI Holders shall be entitled
to enforce the provisions of these sections for the CCI Holders.

SECTION 7.13. Certain Tax Matters.

(a) Following the Closing, ALS will continue the historic
business of Crossings or use a significant portion of Crossings historic
business assets in a business within the meaning of Treasury Regulations
Section 1.368- 1(d).

(b) ALS shall not, for a period of two years following the
Effective Date, reacquire any of the ALS Common Stock issued in connection with
the Merger.

SECTION 7.14. Certain Severance Benefits. Subject to
completion of the Merger, ALS shall provide the severance benefits described on
Schedule 7.14 attached hereto to the employees of Crossings designated on
Schedule 7.14. This covenant is intended to be for the benefit of such
Crossings' employees, and each of such Crossings' employees shall be entitled
to enforce these covenants as if they were parties hereto.

ARTICLE VIII

COVENANTS OF ALS AND CROSSINGS

The parties hereto agree that:

SECTION 8.01. Best Efforts. Subject to the terms and
conditions of this Agreement, each party will use its best

-51-

<PAGE> 138

efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate the transactions contemplated by this Agreement.

SECTION 8.02. Certain Filings. Crossings and ALS shall
cooperate with one another (a) in determining whether any action by or in
respect of, or filing with, any governmental body, agency or official, or
authority is required, or any actions, consents, approvals or waivers are
required to be obtained from parties to any material contracts, in connection
with the consummation of the transactions contemplated by this Agreement and
(b) in seeking any such actions, consents, approvals or waivers or making any
such filings, furnishing information required in connection therewith and
seeking timely to obtain any such actions, consents, approvals or waivers.

SECTION 8.03. Public Announcements. ALS and Crossings will
consult with each other before issuing any press release or making any public
statement with respect to this Agreement and the transactions contemplated
hereby and, except as may be required by applicable law, will not issue any
such press release or make any such public statement prior to such
consultation.

SECTION 8.04. Further Assurances. At and after the
Effective Time, the officers and directors of the Surviving Corporation will be
authorized to execute and deliver, in the name and on behalf of Crossings, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of Crossings, any other actions and things to vest, perfect or
confirm of record or otherwise in the Surviving Corporation any and all right,
title and interest in, to and under any of the rights, properties or assets of
Crossings acquired or to be acquired by the Surviving Corporation as a result
of, or in connection with, the Merger.

SECTION 8.05. Exclusive Dealing.

(a) During the period commencing April 6, 1996 and ending on the
date upon which this Agreement is terminated pursuant to Section 10.1 below,
each party hereto shall not, nor shall it permit any of its subsidiaries to,
nor shall it authorize or permit any officer, director or employee of, or any
investment banker, attorney or other advisor or representative of, such party
or any of its subsidiaries to (i) solicit or initiate, or encourage the
submission of, any Acquisition Proposal (as hereinafter defined) or (ii)
participate in any substantive discussions or negotiations regarding, or
knowingly furnish to any person any information with respect to, or take any
other action to knowingly facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead

-52-

<PAGE> 139

to, any Acquisition Proposal. For purposes of this Agreement "Acquisition
Proposal" means an inquiry about or proposal for the acquisition or purchase of
25% or more of the assets of such party and its subsidiaries, taken as a whole,
or any acquisition or purchase, or any tender offer or exchange offer that if
consummated would result in any person beneficially owning, any equity
securities of such party representing in excess of 25% of the voting capital
stock of such party or any equity securities of any material subsidiary of such
party, or any merger, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving such party or any of
its material subsidiaries (or the equity securities thereof) other than (i) the
Merger, (ii) in the case of ALS, the ALS Restructuring Transactions, or (iii)
in the case of Crossings, any exchange or conversion of currently outstanding
equity securities of Crossings into Crossings Common Stock.

(b) During the Exclusive Period, neither party, its
subsidiaries nor the respective Boards of Directors of such party and its
subsidiaries or any committee thereof, shall (i) approve or recommend, propose
to approve or recommend, consider or evaluate, or cause to be considered or
evaluated, any Acquisition Proposal or (ii) enter into any agreement or
understanding with respect to any Acquisition Proposal.

(c) (i) If either party hereto shall breach this Section
8.05 and the Merger shall not be consummated, such party shall be obligated to
immediately pay the other party, in same day funds, all of the costs and
expenses incurred by the other party in connection with proposed Merger and the
negotiation and documentation of this Agreement, including without limitation
the fees and expenses of its financial consultants, accountants and counsel and
the time (on a reasonable per diem rate basis) and expenses incurred by
personnel of the other party in connection therewith (the "Expenses"), plus the
sum of $1,500,000 (the "Termination Fee"), or (ii) if an Acquisition Proposal
shall have been made to a party during the Exclusive Period and within six
months following the termination of such Exclusive Period such party or its
shareholders enter into an agreement with respect to, or approves or recommends
or takes any action to knowingly facilitate such Acquisition Proposal, such
party shall be obligated to immediately pay the other party, in same day funds
upon demand, the Expenses and the Termination Fee; provided, that, if a party
instructs its advisors and representatives to abide by the terms of this
Section 8.05 and any of its advisors or representatives (other than any of such
party's officers, directors or employees) violates the terms of this Section
8.05 without the approval or participation of such party, such party shall not
be liable for the Termination Fee, but shall remain liable for the other
party's Expenses. The parties hereto agree that damages in the event of a
breach by either party of this Section 8.05 would be difficult to determine and
that the

-53-

<PAGE> 140

liquidated damages provided for by this Section 8.05 represent the parties'
reasonable and good faith estimate thereof and are not intended as a penalty.

SECTION 8.06. Tax Matters.

(a) ALS and Crossings shall report for all purposes that the Merger
is a tax-free reorganization under Section 368(a) of the Code. ALS and
Crossings shall not take any position to the contrary, and shall not take any
action to disqualify the Merger as a reorganization under Section 368(a) of the
Code.

(b) Except for the payment of up to $40,000.00 of the expenses
of CCI in connection with the transactions contemplated by this Agreement by
the Surviving Company if the Merger is consummated (or by Crossings if the
Merger is not consummated), ALS, Crossings and CCI shall pay their respective
expenses incurred in connection with such transactions and neither ALS nor
Crossings shall pay the expenses of any of the Crossings Shareholders. Except
as specifically addressed in this Section 8.06, responsibility for the expenses
of ALS and Crossings shall be governed by Section 11.04 below.

ARTICLE IX

CONDITIONS TO THE MERGER

SECTION 9.01. Conditions to the Obligations of Each Party.
The obligations of Crossings and ALS to consummate the Merger are subject to
the satisfaction of the following conditions:

(i) this Agreement and the consummation of the Merger shall
have been adopted and approved by the Crossings Shareholders in
accordance with Nevada Law;

(ii) this Agreement and the consummation of the Merger
shall have been adopted and approved by the shareholders of ALS in
accordance with Delaware Law;

(iii) all of the ALS Shareholders and the Crossings
Shareholders shall have waived their right to exercise dissenter's
rights in connection with the Merger;

(iv) any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, relating to the
Merger shall have expired;

(v) no provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation
of the Merger;

-54-

<PAGE> 141

(vi) ALS and each of Richard W. Boehlke, D. Lee Field and
David M. Boitano shall have entered into and delivered to each other
Services or Employment Agreements in form and substance satisfactory
to ALS and each such person, respectively;

(vii) Crossings shall have obtained all Required Crossings
Consents;

(viii) all actions by or in respect of or filings with any
governmental body, agency, official, or authority required to permit
the consummation of the Merger shall have been obtained.

SECTION 9.02. Conditions to the Obligations of ALS. The
obligation of ALS to consummate the Merger is subject to the satisfaction of
the following further conditions:

(i) Crossings shall have performed in all material respects
all of its obligations hereunder required to be performed by it at or
prior to the Effective Time, the representations and warranties of
Crossings contained in this Agreement and in any certificate or other
writing delivered by Crossings pursuant hereto shall be true in all
material respects at and as of the Effective Time as if made at and as
of such time (except with respect to the actions taken by Crossings
and the Crossings Shareholders contemplated herein) and ALS shall have
received a certificate signed by the Vice President and Chief
Financial Officer of Crossings to the foregoing effect;

(ii) no court, arbitrator or governmental body, agency or
official shall have issued any order, and there shall not be any
statute, rule or regulation, restraining or prohibiting the
consummation of the Merger or the effective operation of the business
of Crossings and the Crossings Subsidiary Companies after the
Effective Time, and no proceeding challenging this Agreement or the
transactions contemplated hereby or seeking to prohibit, alter,
prevent or materially delay the Merger shall have been instituted by
any Person before any court, arbitrator or governmental body, agency
or official and be pending;

(iii) ALS shall have received all documents it may
reasonably request relating to the existence of Crossings and the
Crossings Subsidiary Companies and the authority of Crossings to enter
into and perform this Agreement, all in form and substance
satisfactory to ALS;

(iv) ALS shall have received an opinion of Bogle & Gates
P.L.L.C., counsel to Crossings, in the form of Exhibit 9.02(iv)
attached hereto, dated as of the Closing;

-55-

<PAGE> 142

(v) ALS shall have received an opinion of Woodburn &
Wedge, special Nevada counsel to Crossings, in the form of Exhibit
9.02(v) attached hereto, dated as of the Closing;

(vi) ALS shall have received an opinion of Bogle & Gates
P.L.L.C., counsel to Crossings, as to certain tax matters, in the form
of Exhibit 9.02(vi) attached hereto, dated as of the Closing;

(vii) ALS shall have received from each of the Crossings
Shareholders a fully signed Restricted Stock Agreement, in the form of
Exhibit 9.02(vii) attached hereto, dated as of the Closing;

(viii) ALS shall have received purchaser representative
letters and questionnaires in form and substance satisfactory to ALS
from each of the Crossings Shareholders (other than CCI Holders) that
is not an "accredited investor" as defined by Rule 501 of Regulation
D;

(ix) All state securities laws or "blue sky" permits and
authorizations (or shall otherwise have available an exemption from
the requirements of such laws) necessary to issue the Merger
Consideration pursuant to the Merger and the transactions contemplated
hereby shall have been received; and

(x) From the date hereof through the Effective Time,
there shall have been no material adverse change (or development
involving a prospective change) in the financial condition, results of
operations, properties, business, or prospects of Crossings and the
Crossings Subsidiary Companies taken as a whole.

SECTION 9.03. Conditions to the Obligations of Crossings.
The obligation of Crossings to consummate the Merger is subject to the
satisfaction of the following further conditions:

(i) ALS shall have performed in all material respects all
of its obligations hereunder required to be performed by it at or
prior to the Effective Time, the representations and warranties of ALS
contained in this Agreement and in any certificate or other writing
delivered by ALS pursuant hereto shall be true in all material
respects at and as of the Effective Time as if made at and as of such
time (except with respect to the actions taken by ALS and the ALS
Shareholders contemplated herein) and Crossings shall have received a
certificate signed by the President of ALS to the foregoing effect;

-56-

<PAGE> 143

(ii) no court, arbitrator or governmental body, agency or
official shall have issued any order, and there shall not be any
statute, rule or regulation, restraining or prohibiting the
consummation of the Merger or the effective operation of the business
of ALS and the ALS Subsidiary Companies after the Effective Time, and
no proceeding challenging this Agreement or the transactions
contemplated hereby or seeking to prohibit, alter, prevent or
materially delay the Merger shall have been instituted by any Person
before any court, arbitrator or governmental body, agency or official
and be pending;

(iii) Crossings shall have received all documents it may
reasonably request relating to the existence of ALS and the ALS
Subsidiary Companies and the authority of ALS to enter into and
perform this Agreement, all in form and substance satisfactory to
Crossings;

(iv) Crossings shall have received an opinion of Rogers &
Hardin, counsel to ALS, in the form of Exhibit 9.03(iv) attached
hereto, dated as of the Closing;

(v) Crossings shall have received an opinion of Rogers &
Hardin, counsel to ALS, as to certain tax matters, in the form of
Exhibit 9.03(v) attached hereto, dated as of the Closing;

(vi) CCI shall have received the Amendment to Stockholders'
Agreement dated as of May 22, 1996, executed by ALS Shareholders
holding not fewer than 87% of the shares of ALS Common Stock prior to
giving effect to the Merger and the ALS Restructuring Transactions;
and

(vii) From the date hereof through the Effective Time,
there shall have been no material adverse change (or development
involving a prospective change) in the financial condition, results of
operations, properties, business, or prospects of ALS and the ALS
Subsidiary Companies taken as a whole.

ARTICLE X

TERMINATION

SECTION 10.01. Termination. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time (notwithstanding any approval of this Agreement by the stockholders of
Crossings):

(i) by mutual written consent of Crossings and ALS;

-57-

<PAGE> 144

(ii) by either Crossings or ALS, if the Merger has not been
consummated by May 31, 1996; or

(iii) by either Crossings or ALS, if there shall be any law
or regulation that makes consummation of the Merger illegal or
otherwise prohibited or if any judgment, injunction, order or decree
enjoining ALS or Crossings from consummating the Merger is entered and
such judgment, injunction, order or decree shall become final and
nonappealable.

SECTION 10.02. Effect of Termination. If this Agreement is
terminated pursuant to Section 10.01, this Agreement shall become void and of
no effect with no liability on the part of any party hereto, except that the
agreements contained in Sections 6.05, 7.05, 8.03, 8.05, 8.06, 10.02 and 11.04
shall survive the termination hereof.

ARTICLE XI

MISCELLANEOUS

SECTION 11.01. Notices. Except as otherwise required by
applicable law, all notices, approvals, consents and other communications to
ALS or Crossings under or in connection with this Agreement shall be in writing
and shall be sent via telephone facsimile transmission, via personal delivery
or via express courier or delivery service, addressed to such party at such
party's address or telephone facsimile number set forth below or at such other
address or telephone facsimile number as shall be designated by such party in a
written notice given to the other party complying as to delivery with the terms
of this Section:

if to ALS, to:

Alternative Living Services, Inc.
184 Shuman Boulevard
Naperville, Illinois 60563
Attn: William G. Petty, Jr.
Facsimile No. (708) 357-4020

and to:

Alternative Living Services, Inc.
450 Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attn: William F. Lasky
Facsimile No. (414) 789-9592

-58-

<PAGE> 145

with a copy to:

Roger & Hardin
2700 Cain Tower
229 Peachtree Street
Atlanta, Georgia 30303
Attn: Alan C. Leet
Facsimile No. (404) 525-2224

if to Crossings, to:

Crossings International Corporation
1201 Pacific Avenue
Suite 1800
Tacoma, Washington 98402
Attn: Richard W. Boehlke
Facsimile No. (206) 383-9979

with a copy to:

Bogle & Gates P.L.L.C.
4700 Two Union Square
601 Union Street
Seattle, Washington 98101-2322
Attn: Kyle B. Lukins
Facsimile No. (206) 621-2660

if to CCI, to:

Capital Consultants, Inc.
2300 Southwest Yamhill Street
Suite 8000
Portland, Oregon 97204-1383
Attn: Carol Hardie
Facsimile No. (503) 241-0448

with a copy to:

O'Melveny & Myers
400 South Hope Street
Los Angeles, California 90071-2899
Attn: Kathryn A. Sanders
Facsimile No. (213) 669-6407

All such notices, approvals, consents and other communications shall
be deemed given (i) when given and receipted for (or upon the date of attempted
delivery when delivery is refused), if sent via personal delivery or via
express courier or delivery service or (ii) when received, if sent via
telephone facsimile (confirmation of such receipt via confirmed telephone
facsimile being deemed receipt).

-59-

<PAGE> 146

SECTION 11.02. Survival of Representations, Warranties and
Certain Agreements. The representations and warranties and agreements
contained herein and in any certificate or other writing delivered pursuant
hereto shall not survive the Effective Time or the termination of this
Agreement except for the agreements set forth in Sections 6.05, 7.05, 7.06,
7.08, 7.09, 7.10, 7.11, 7.12, 7.13, 7.14, 8.03, 8.05, 8.06, 10.02, 11.02, 11.03
and 11.04. Nothing contained in this Section 11.02 shall relieve any Person
from liability for actual fraud in connection with any representations or
warranties contained in this Agreement or the Ancillary Instruments.

SECTION 11.03. Amendments; No Waivers. (a) Except as set
forth in the first proviso below, any provision of this Agreement may be
amended or waived if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by Crossings and ALS or in the case of a
waiver, by the party against whom the waiver is to be effective; provided that
with respect to Sections 7.08, 7.09, 7.10, 7.11 and 7.12, and Articles IV(A)
and XI of this Agreement, any provision may be amended or waived only if such
amendment or waiver is in writing and signed, in the case of an amendment, by
Crossings, ALS and CCI or in the case of a waiver, by the party against who the
waiver is to be effective; and, provided, further, that after the adoption of
this Agreement by the Crossings Shareholders, no such amendment or waiver
shall, without the further approval of the Crossings Shareholders, alter or
change (i) the amount or kind of consideration to be received in exchange for
any shares of Crossings Stock, (ii) any term of the certificate of
incorporation of the Surviving Corporation or (iii) any of the terms or
conditions of this Agreement if such alteration or change would adversely
affect the Crossings Shareholders.

(b) No failure or delay by any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.

SECTION 11.04. Expenses. Except for the payment of up to
$40,000.00 of the expenses of CCI in accordance with Section 8.06, all costs
and expenses incurred in connection with this Agreement and the Merger shall be
paid by the party incurring such cost or expense; provided that if the Merger
is consummated the Surviving Corporation shall bear all such costs and expenses
of Crossings.

SECTION 11.05. Successors and Assigns. The provisions of
this Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors

-60-

<PAGE> 147

and assigns, provided that no party may assign, delegate or otherwise transfer
any of its rights or obligations under this Agreement without the consent of
the other parties hereto.

SECTION 11.06. Governing Law. This Agreement shall be
construed in accordance with and governed by the law of the State of Delaware.

SECTION 11.07. Counterparts; Effectiveness; Facsimile
Signatures. This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement shall become
effective when each party hereto shall have received counterparts hereof signed
by all of the other parties hereto. Delivery of an executed counterpart of a
signature page to this Agreement or of the signature page of any of the ALS
Ancillary Instruments, Crossings Ancillary Instruments or CCI Ancillary
Instruments via telephone facsimile transmission shall be effective as delivery
of a manually executed counterpart of this Agreement or of any such document.

SECTION 11.08. Entire Agreement. Except for the
Confidentiality Agreement entered into between ALS and CCI in April, 1996,
which shall remain in full force and effect in accordance with its terms, this
Agreement, the Exhibits and Schedules hereto, and each of the Crossings
Ancillary Instruments, the ALS Ancillary Instruments and the CCI Ancillary
Instruments constitute the entire agreement between the parties with respect to
the subject matter hereof and thereof and supersede all prior agreements,
understandings and negotiations, both written and oral, between the parties
with respect to the subject matter of this Agreement, the Crossings Ancillary
Instruments, ALS Ancillary Instruments and the CCI Ancillary Instruments.
Except as specifically set forth herein, neither this Agreement nor any
provision hereof is intended to confer upon any person other than the parties
hereto any rights or remedies hereunder. The terms of this Agreement have been
the subject of careful consideration and negotiation by the parties hereto, and
in construing any particular provision of this Agreement, no consideration
shall be given to which party

-61-

<PAGE> 148

prepared or suggested the particular words employed in such provision.

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.

ALTERNATIVE LIVING SERVICES, INC.

By /s/ William F. Lasky
-------------------------------------
Title: President
--------------------------------

NEW CROSSINGS INTERNATIONAL CORPORATION

By /s/ Richard W. Boehlke
-------------------------------------
Title: President
--------------------------------

CAPITAL CONSULTANTS, INC.

By /s/ Jeffrey L. Grayson
-------------------------------------
Title: Chief Executive Officer
--------------------------------
<PAGE> 149
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES:
Independent Auditors' Report....................................................... F-3
Consolidated Balance Sheets, as of December 31, 1994 and 1995...................... F-4
Consolidated Statements of Operations, periods January 1, 1993 to December 13, 1993
and December 14, 1993 to December 31, 1993, and the years ended December 31,
1994 and 1995................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity, periods January 1, 1993
to December 13, 1993 and December 14, 1993 to December 31, 1993, and the years
ended December 31, 1994 and 1995................................................ F-6
Consolidated Statements of Cash Flows, periods January 1, 1993 to December 13, 1993
and December 14, 1993 to December 31, 1993, and the years ended December 31,
1994 and 1995................................................................... F-7
Notes to Consolidated Financial Statements......................................... F-8
Condensed Consolidated Balance Sheet, as of March 31, 1996 (unaudited)............. F-17
Condensed Consolidated Statements of Operations, three months ended March 31, 1995
and 1996 (unaudited)............................................................ F-18
Condensed Consolidated Statements of Cash Flows, three months ended March 31, 1995
and 1996 (unaudited)............................................................ F-19
Notes to Condensed Consolidated Financial Statements (unaudited)................... F-20
HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants........................................... F-21
Consolidated Balance Sheets, as of December 31, 1994 and 1995...................... F-22
Consolidated Statements of Income, period from January 11, 1993 (inception) to
December 31, 1993 and the years ended December 31, 1994 and 1995................ F-23
Consolidated Statements of Changes in Shareholders' Equity, period from January 11,
1993 (inception) to December 31, 1993 and the years ended December 31, 1994 and
1995............................................................................ F-24
Consolidated Statements of Cash Flows, period from January 11, 1993 (inception) to
December 31, 1993 and the years ended December 31, 1994 and 1995................ F-25
Notes to Consolidated Financial Statements......................................... F-26
NEW CROSSINGS INTERNATIONAL CORPORATION:
Independent Auditors' Report....................................................... F-33
Combined Balance Sheets, as of December 31, 1994 and 1995.......................... F-34
Combined Statements of Operations, years ended December 31, 1993, 1994 and 1995.... F-35
Combined Statements of Shareholders' Deficit, years ended December 31, 1993, 1994
and 1995........................................................................ F-36
Combined Statements of Cash Flows, years ended December 31, 1993, 1994 and 1995.... F-37
Notes to Combined Financial Statements............................................. F-38
Condensed Consolidated Balance Sheet, as of March 31, 1996 (unaudited)............. F-47
Condensed Combined and Consolidated Statements of Operations, three months ended
March 31, 1995 and 1996 (unaudited)............................................. F-48
Condensed Combined and Consolidated Statements of Cash Flows, three months ended
March 31, 1995 and 1996 (unaudited)............................................. F-49
</TABLE>

F-1
<PAGE> 150

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES:
Independent Auditors' Report....................................................... F-51
Combined Balance Sheet, December 31, 1995.......................................... F-52
Combined Statement of Operations, year ended December 31, 1995..................... F-53
Combined Statement of Changes in Stockholders' Equity, year ended December 31,
1995............................................................................ F-54
Combined Statement of Cash Flows, year ended December 31, 1995..................... F-55
Notes to Combined Financial Statements............................................. F-56
Condensed Combined Balance Sheet, as of March 31, 1996 (unaudited)................. F-60
Condensed Combined Statements of Operations, three months ended March 31, 1995 and
1996 (unaudited)................................................................ F-61
Condensed Combined Statements of Cash Flows, three months ended March 31, 1995 and
1996 (unaudited)................................................................ F-62
Notes to Condensed Combined Financial Statements (unaudited)....................... F-63
</TABLE>

F-2
<PAGE> 151

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Alternative Living Services, Inc.:

We have audited the accompanying consolidated balance sheets of Alternative
Living Services, Inc. and subsidiaries (the Company) as of December 31, 1994 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the Predecessor for the period January
1, 1993 to December 13, 1993 and for the Company for the period December 14,
1993 (date of inception) to December 31, 1993 and the years ended December 31,
1994 and 1995. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 1994 and 1995, and the results of operations and cash flows for
the Predecessor for the period January 1, 1993 to December 13, 1993 and for the
Company for the period December 14, 1993 (date of inception) to December 31,
1993 and the years ended December 31, 1994 and 1995 in conformity with generally
accepted accounting principles.

KPMG PEAT MARWICK LLP

Milwaukee, Wisconsin
February 12, 1996

F-3
<PAGE> 152

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 310,814 $ 2,947,964
Short-term investments.......................................... 50,000 50,000
Resident receivables, net....................................... 70,409 55,276
Other current assets............................................ 188,449 282,505
----------- -----------
Total current assets.................................... 619,672 3,335,745
----------- -----------
Property, plant and equipment, net................................ 9,167,085 27,289,291
Minority interest................................................. 553,368 --
Long-term investments............................................. -- 1,183,105
Investments in and advances to unconsolidated affiliates.......... 1,601,536 4,788,148
Other assets...................................................... 2,482,293 2,760,323
----------- -----------
Total assets............................................ $14,423,954 $39,356,612
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.......................... $ 191,814 $ 162,419
Accounts payable................................................ 443,476 786,169
Accrued expenses................................................ 911,949 1,180,129
Advances from and notes payable to unconsolidated affiliates.... 284,356 --
----------- -----------
Total current liabilities............................... 1,831,595 2,128,717
----------- -----------
Long-term debt, less current installments......................... 6,356,260 17,100,996
Advances from and notes payable to unconsolidated affiliates...... 1,550,000 --
Other long-term liabilities....................................... 126,859 174,419
Minority interest................................................. -- 609,745
Stockholders' equity:
Common stock and additional paid-in capital..................... 5,216,527 21,745,607
Accumulated deficit............................................. (657,287) (2,402,872)
----------- -----------
Total stockholders' equity.............................. 4,559,240 19,342,735
----------- -----------
Total liabilities and stockholders' equity.............. $14,423,954 $39,356,612
========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 153

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS JANUARY 1, 1993 TO DECEMBER 13, 1993 AND DECEMBER 14, 1993 TO DECEMBER
31, 1993,
AND YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
PREDECESSOR
TO THE
COMPANY THE COMPANY
---------- ------------------------------------
1993 1993 1994 1995
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Resident service fees......................... $2,636,329 $ 129,659 $4,505,884 $ 9,683,756
Other......................................... 4,500 17,420 450,556 780,378
---------- --------- ---------- -----------
Operating revenue............................... 2,640,829 147,079 4,956,440 10,464,134
---------- --------- ---------- -----------
Operating expenses:
Residence operations.......................... 1,671,957 86,697 2,933,549 7,206,988
Lease expense................................. 563,211 18,870 697,126 889,514
General and administrative.................... 423,262 40,823 1,457,719 2,599,170
Depreciation and amortization................. 100,438 6,330 258,247 814,571
---------- --------- ---------- -----------
Total operating expenses.............. 2,758,868 152,720 5,346,641 11,510,243
---------- --------- ---------- -----------
Operating loss.................................. (118,039) (5,641) (390,201) (1,046,109)
Other income (expense):
Interest expense.............................. (47,841) (8,571) (322,393) (1,047,031)
Interest income............................... -- -- 21,483 234,495
Gain on sale of land.......................... -- -- -- 438,659
Equity in losses of unconsolidated
affiliates................................. -- -- (500) (437,736)
Minority interest in losses of consolidated
subsidiaries............................... -- -- 48,536 112,137
---------- --------- ---------- -----------
Total other expense, net.............. (47,841) (8,571) (252,874) (699,476)
---------- --------- ---------- -----------
Net loss.............................. $ (165,880) $ (14,212) $ (643,075) $(1,745,585)
========= ======== ========= ==========
Net loss per share.............................. $ (0.01) $ (0.25) $ (0.32)
======== ========= ==========
Weighted average shares outstanding............. 2,549,453 2,549,453 5,453,158
======== ========= ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 154

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PERIODS JANUARY 1, 1993 TO DECEMBER 13, 1993 AND DECEMBER 14, 1993 TO DECEMBER
31, 1993,
AND YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL STOCK
-------------------- ACCUMULATED SUBSCRIPTION
PREDECESSOR TO THE COMPANY SHARES AMOUNTS DEFICIT RECEIVABLE TOTAL
- ----------------------------------------------- ------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992.................. 6,155 $ 980,266 $ (616,059) $ (200,000) $ 164,207
Asset contribution in exchange for stock..... 199 50,000 -- -- 50,000
Adjustment to contributed capital............ -- (152,427) -- -- (152,427)
Receipt of stock subscription................ -- -- -- 200,000 200,000
Net loss..................................... -- -- (165,880) -- (165,880)
------ ----------- ----------- ------------ -----------
Balances at December 13, 1993.................. 6,354 $ 877,839 $ (781,939) $ -- $ 95,900
====== ============ ============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL STOCK
----------------------- ACCUMULATED SUBSCRIPTION
THE COMPANY SHARES AMOUNTS DEFICIT RECEIVABLE TOTAL
- -------------------------------------------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Initial capitalization at December 14, 1993:
Common stock issued for cash.............. 112,378 $ 330,000 $ -- $ -- $ 330,000
Satisfaction of payment of short-term
advance................................. 58,002 170,000 -- -- 170,000
Common stock subscribed................... 754,021 2,200,000 -- (2,200,000) --
Liabilities assumed in excess of assets
transferred to the Company from the
Predecessor............................. 888,150 (160,815) -- -- (160,815)
Net loss.................................. -- -- (14,212) -- (14,212)
--------- ----------- ----------- ------------ -----------
Balances at December 31, 1993............... 1,812,551 2,539,185 (14,212) (2,200,000) 324,973
--------- ----------- ----------- ------------ -----------
Receipt of stock subscription............. -- -- -- 2,200,000 2,200,000
Contributed capital from majority
stockholder............................. -- 2,677,342 -- -- 2,677,342
Net loss.................................. -- -- (643,075) -- (643,075)
--------- ----------- ----------- ------------ -----------
Balances at December 31, 1994............... 1,812,551 5,216,527 (657,287) -- 4,559,240
--------- ----------- ----------- ------------ -----------
Net proceeds from private offering........ 4,302,994 19,029,080 -- -- 19,029,080
Retirement of stock held by minority
stockholder............................. (380,636) (2,500,000) -- -- (2,500,000)
Common stock issued for contributed
capital................................. 917,150 -- -- -- --
Net loss.................................. -- -- (1,745,585) -- (1,745,585)
--------- ----------- ----------- ------------ -----------
Balances at December 31, 1995............... 6,652,059 $21,745,607 $(2,402,872) $ -- $19,342,735
========= ============ ============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 155

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS JANUARY 1, 1993 TO DECEMBER 13, 1993 AND DECEMBER 14, 1993 TO DECEMBER
31, 1993,
AND YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
PREDECESSOR
TO THE
COMPANY THE COMPANY
----------- --------------------------------------
1993 1993 1994 1995
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (165,880) $ (14,212) $ (643,075) $ (1,745,585)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization..................... 100,438 6,330 258,247 814,571
Gain on sale of land.............................. -- -- -- (438,659)
Minority interest in losses of consolidated
subsidiaries.................................... -- -- (48,536) (112,137)
(Increase) decrease in net resident receivables... (23,150) 12,350 (93,491) 15,133
(Increase) decrease in other current assets....... 21,878 -- (172,300) (92,618)
Increase (decrease) in accounts payable........... 5,792 (4,673) 57,741 342,693
Increase in accrued expenses...................... 299,038 42,646 168,170 223,093
Changes in other assets and liabilities and other
adjustments..................................... -- -- 116,338 (102,440)
----------- --------- ----------- ------------
Net cash provided by (used in) operating activities... 238,116 42,441 (356,906) (1,095,949)
----------- --------- ----------- ------------
Cash flows from investing activities:
Purchase of short-term investments.................. -- -- (50,000) --
Net proceeds from sale of land...................... -- -- -- 972,249
Acquisitions of affiliate and facility.............. -- -- (66,930) (850,000)
Payments for property, plant and equipment and
project development costs......................... (1,692,502) (10,184) (1,772,173) (12,667,187)
Investments in and advances to unconsolidated
affiliates........................................ (291,084) 74,641 (1,485,574) (3,186,612)
Increase in long-term investments................... -- -- -- (1,183,105)
Due from minority stockholder....................... -- (100,521) -- --
Payments for deferred costs......................... (18,470) (1,201) (30,274) (208,291)
----------- --------- ----------- ------------
Net cash used in investing activities................. (2,002,056) (37,265) (3,404,951) (17,122,946)
----------- --------- ----------- ------------
Cash flows from financing activities:
Contributions by minority partner and minority
stockholder....................................... -- -- 745,000 1,275,250
Purchase of remaining limited partners.............. -- -- (605,000) --
Payments for financing costs........................ -- (7,179) (36,579) (221,104)
Repayment of line of credit and short-term note
payable........................................... -- (25,000) -- (4,208,166)
Repayments of long-term debt........................ (136,041) (107,244) (1,320,503) (6,575,095)
Proceeds from issuance of long-term debt............ 1,650,000 -- -- 15,890,436
Changes in advances from and notes payable to
unconsolidated affiliates......................... 170,000 330,000 216,658 (1,834,356)
Issuance of common stock and other capital
contributions..................................... (102,427) -- 2,677,342 19,029,080
Retirement of stock held by minority stockholder.... -- -- -- (2,500,000)
Stock subscription received......................... 200,000 -- 2,200,000 --
----------- --------- ----------- ------------
Net cash provided by financing activities............. 1,781,532 190,577 3,876,918 20,856,045
----------- --------- ----------- ------------
Net increase in cash and cash equivalents............. 17,592 195,753 115,061 2,637,150
Cash and cash equivalents:
Beginning of period................................. -- -- 195,753 310,814
----------- --------- ----------- ------------
End of period....................................... $ 17,592 $ 195,753 $ 310,814 $ 2,947,964
============ ========== ============ =============
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE> 156

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995

(1) BUSINESS

Alternative Living Services, Inc. (the Company) was organized on December
14, 1993 to develop, own and operate assisted living residences. As of December
31, 1995, the Company operated and consolidated in its financial statements
eight residences totaling 428 living units located in Wisconsin, Pennsylvania
and Florida. As of the same date, the Company had two residences in construction
and two in different stages of pre-construction development. In addition, the
Company is a 50% owner of the corporation which is the general partner of
limited partnerships formed to develop and operate seven residences in Michigan.

In connection with the initial capitalization of the Company on December
14, 1993, substantially all of the assets and liabilities of two corporations
under common control with the Company were transferred to the Company at
historical book values in exchange for 49% of the common stock in the Company.
Accordingly, for financial reporting purposes, the combined financial statements
of these two affiliated companies for all periods prior to December 14, 1993 are
referred to as the "Predecessor." The net assets of the Predecessor which were
not transferred to the Company at the initial capitalization were primarily
intercompany receivables and payables and intangible assets, totaling $256,715.

The Company became a majority-owned subsidiary of Evergreen Healthcare,
Inc. (Evergreen) on the date of initial capitalization in exchange for $330,000
in cash, satisfaction of a $170,000 short-term advance and a $2,200,000 stock
subscription. Subsequent to the issuance of stock in May 1995, the Company was
no longer a majority-owned subsidiary of Evergreen. (See note 11.)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of the Company are as follows:

(a) Principles of Consolidation

The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Results of operations of the
majority-owned subsidiaries are included from the date of acquisition. All
significant intercompany accounts and transactions with such subsidiaries
have been eliminated in the consolidation.

(b) Cash Equivalents

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of
the consolidated statements of cash flows.

Property, plant and equipment is carried at cost, net of accumulated
depreciation. Depreciation is computed over the estimated lives of the
assets using the straight-line method. Buildings and improvements are
depreciated over 20 to 40 years, and furniture, fixtures and equipment are
depreciated over seven years. Maintenance and repairs are expensed as
incurred.

(d) Intangible Assets and Project Development Costs

Intangible Assets and Project Development Costs, which are included in
Other Assets, are composed of organization costs, pre-opening costs,
deferred financing costs, and project development costs. Organization costs
are amortized on a straight-line basis over five years. Pre-opening costs
are amortized on a straight-line basis over three years. Deferred financing
costs are amortized on a straight-line basis over the term of the debt.

F-8
<PAGE> 157

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(e) Goodwill

Goodwill represents the cost of acquired net assets in excess of their
fair market values. Amortization of goodwill is computed using the
straight-line method over a period of forty years. The Company's management
periodically evaluates goodwill for impairment based upon expectations of
nondiscounted operating cash flows in relation to the net capital
investment in the subsidiary.

(f) Revenue

Revenue consists primarily of resident service fees which are reported
at net realizable amounts.

(g) Income Taxes

Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.

(h) Fair Value of Financial Instruments

The carrying amounts of cash, cash equivalents and short-term
investments approximate fair value due to the short-term nature of the
accounts and due to the accounts earning interest at current market rates.
The carrying amount of the Company's debt approximates fair value due to
the interest rates approximating the current rates available to the Company
for similar borrowing arrangements.

(i) Use of Estimates

The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The preparation
of the 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.

(j) Net Loss Per Share

Net loss per share is based upon the weighted average number of common
and common equivalent shares outstanding during each period. Common
equivalent shares include stock options, which have been included using the
treasury stock method only when their effect is dilutive (see Note 15).

F-9
<PAGE> 158

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment at December 31, follows:

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Land........................................................ $ 1,439,854 $ 4,591,898
Land improvements........................................... -- 529,440
Buildings................................................... 7,253,844 16,562,595
Furniture, fixtures and equipment........................... 1,578,776 3,274,576
Construction in progress.................................... -- 4,088,424
----------- -----------
Total property, plant and equipment......................... 10,272,474 29,046,933
Less accumulated depreciation............................... 1,105,389 1,757,642
----------- -----------
Property, plant and equipment, net.......................... $ 9,167,085 $27,289,291
========== ==========
</TABLE>

Interest is capitalized in connection with the construction of residences
and is amortized over the estimated useful lives of the residences. Interest
capitalized in 1995 was approximately $62,000.

Construction in process at December 31, 1995 consisted principally of costs
related to the development of assisted living residences, with outstanding
construction commitments totaling approximately $10,702,000.

(4) ACQUISITIONS

The Company acquired a 60% partnership interest in CCCI/Northampton Limited
Partnership (the Northampton Partnership) on September 19, 1994, which operates
Northampton Manor, an assisted living residence located in Pennsylvania. The
total purchase cost of $1,266,930, including acquisition costs of $66,930, was
paid in cash.

The total purchase cost of the Northampton Partnership was allocated to the
acquired assets and assumed or incurred liabilities as follows:

<TABLE>
<S> <C>
Current assets.......................................................... $ 1,318,425
Property, plant and equipment........................................... 6,854,997
Minority interest in accumulated deficit................................ 504,832
Goodwill................................................................ 969,347
Other assets............................................................ 17,372
Current liabilities..................................................... (215,196)
Long-term debt.......................................................... (8,182,847)
-----------
$ 1,266,930
==========
</TABLE>

As of December 31, 1995, the Company had a 60% ownership interest in three
development projects and a 51% ownership interest in another development
project. The 40% and 49% interests in these consolidated affiliates not held by
the Company and the losses therefrom have been reflected as minority interest in
the consolidated balance sheets and as minority interest in losses of
consolidated subsidiaries in the consolidated statements of operations.

The Company acquired the Palmer Ranch, an 86-unit assisted living residence
in Sarasota, Florida on March 31, 1995. The total purchase cost of $850,000,
including acquisition costs of $51,815, was paid in cash.

F-10
<PAGE> 159

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The total purchase cost of the Palmer Ranch was allocated to the acquired
assets and assumed or incurred liabilities as follows:

<TABLE>
<S> <C>
Current assets........................................................... $ 1,438
Property, plant and equipment............................................ 6,550,000
Goodwill................................................................. 50,000
Other assets............................................................. 51,815
Short-term note payable.................................................. (4,208,166)
Other current liabilities................................................ (45,087)
Long-term debt........................................................... (1,400,000)
Other liabilities........................................................ (150,000)
----------
$ 850,000
=========
</TABLE>

Consolidated pro forma operating revenue, net loss and net loss per share
of the Company for 1994 and 1995 as if the Northampton Partnership and the
Palmer Ranch had been acquired as of January 1, 1994, are as follows:

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Operating revenue........................................... $ 8,813,000 $10,946,000
========== ==========
Net loss.................................................... (1,012,000) (1,727,000)
========== ==========
Net loss per weighted average outstanding share............. $ (0.45) $ (0.33)
========== ==========
</TABLE>

(5) LONG-TERM INVESTMENTS

Long-term investments are comprised of the following at December 31:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Collateral reserve fund, $1,000,000 certificate of deposit and
accrued interest required to be maintained until July 10,
2000........................................................ $ -- $1,015,677
Debt reserve fund, $112,000 certificate of deposit and accrued
interest required to be maintained until July 10, 2000...... -- 113,756
Debt reserve fund, $53,000 certificate of deposit and accrued
interest required to be maintained until August 15, 2002.... -- 53,672
---------- ----------
Total long-term investments................................... $ -- $1,183,105
========= =========
</TABLE>

F-11
<PAGE> 160

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Investments in and advances to unconsolidated affiliates consist of the
following at December 31:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Investments in unconsolidated affiliates:
ALS-Midwest Inc. ........................................... $ -- $ 514,349
North Schoenherr Limited Partnership........................ 515,233 434,864
Marsh/Tihart Limited Partnership............................ 100,000 200,000
Eisenhower/State Limited Partnership........................ 425,000 432,070
---------- ----------
Total investments in unconsolidated affiliates................ 1,040,233 1,581,283
---------- ----------
Advances to unconsolidated affiliates:
Partnerships................................................ 454,582 2,539,860
Notes receivable............................................ 75,000 382,761
Other....................................................... 31,721 284,244
---------- ----------
Total advances to unconsolidated affiliates................... 561,303 3,206,865
---------- ----------
Total investments in and advances to unconsolidated
affiliates.................................................. $1,601,536 $4,788,148
========= =========
</TABLE>

The investment in ALS-Midwest Inc. (ALS-Midwest) represents a 50% ownership
in a corporation formed in 1991 to develop assisted living residences. Projects
developed to fund these residences have been organized as separate limited
partnerships, with ALS-Midwest as the sole general partner, and the Company as a
limited partner. Other limited partners are unrelated investors. The investment
in ALS-Midwest is recorded using the equity method.

Advances to unconsolidated affiliates also includes management fees
pursuant to an agreement with ALS Partnership (Partnership), which is 50% owned
and controlled by an officer and a shareholder. Under the terms of the
agreement, the Partnership is obligated to pay a monthly management fee of up to
12% to 15% of gross operating revenue. During 1994 and 1995, the management fees
were $290,000 and $252,000, respectively.

Notes receivable at December 31, 1995 includes $150,000 due from an officer
and a shareholder of the Company, which is repayable in three annual
installments of $50,000 plus interest at 6%, beginning June 30, 1996.

(7) OTHER ASSETS

Other assets are comprised of the following at December 31:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Project development costs..................................... $1,365,325 $1,170,914
Goodwill, net................................................. 957,990 954,522
Organizational and other costs, net........................... 110,099 88,692
Deferred financing costs, net................................. 36,579 273,079
Deposits and other............................................ 12,300 273,116
---------- ----------
Total other assets............................................ $2,482,293 $2,760,323
========= =========
</TABLE>

F-12
<PAGE> 161

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) LONG-TERM DEBT

Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Note payable, due April 20, 1995, interest at 9.5%........... $ 56,572 $ --
Mortgage payable, interest at 8.8%, refinanced in 1995....... 5,451,937 --
Mortgage payable, interest at 8.1%, refinanced in 1995....... 1,039,565 --
Mortgage payable, due in 20 quarterly installments, the first
four quarterly installments represent interest only,
interest at 8% through June 30, 1996, thereafter interest
at the prime rate plus 1% not to exceed 10% (9.5% at
December 31, 1995), outstanding principal balance of
approximately $954,000 due on March 31, 2000............... -- 1,000,000
Mortgage payable, due in 20 quarterly installments, the first
four quarterly installments represent interest only,
interest at the prime rate plus 1% not to exceed 10% (9.5%
at December 31, 1995), outstanding principal balance of
approximately $380,000 due on April 2, 2000................ -- 400,000
Mortgage payable, due in 60 monthly installments including
interest at 9.21%, outstanding principal balance of
approximately $4,027,000 due on July 10, 2000.............. -- 4,279,064
Mortgage payable, due in 72 monthly installments including
interest at 9.985%, outstanding principal balance of
approximately $1,751,000 due on August 15, 2002............ -- 1,913,915
Mortgage payable, due in 120 monthly installments including
interest at 8.46% through June 30, 2000, thereafter at the
five-year U.S. Treasury rate plus 2.5% (7.88% at December
31, 1995), outstanding principal balance of approximately
$5,046,000 due on June 1, 2005............................. -- 6,567,357
Note payable, due November 20, 2020, first twelve monthly
payments represent interest only, interest at the prime
rate plus 1% (9.5% at December 31, 1995), secured by the
Clare Bridge project of Lower Makefield and all rents,
income and furniture and equipment......................... -- 3,103,079
---------- -----------
Total long-term debt......................................... 6,548,074 17,263,415
Less current installments.................................... 191,814 162,419
---------- -----------
Total long-term debt, less current installments.............. $6,356,260 $17,100,996
========= ==========
</TABLE>

The Company is required to maintain letters of credit aggregating
$1,000,000 under terms of the mortgage payable due June 1, 2005, until such time
as Northampton Manor can maintain a certain minimum debt service coverage ratio
for twelve consecutive months or until certain performance criteria are met.

The mortgages payable are secured by security agreements and guarantees by
the Company. In addition, certain security agreements require the Company to
maintain collateral and debt reserve funds (see Notes 5 and 14).

Interest paid for the years ended December 31, 1994 and 1995 was $142,270
and $1,044,863, respectively.

F-13
<PAGE> 162

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Principal payments on long-term debt for the next five years and thereafter
are as follows:

<TABLE>
<S> <C>
1996.................................................................... $ 162,419
1997.................................................................... 217,732
1998.................................................................... 235,332
1999.................................................................... 257,716
2000.................................................................... 282,228
Thereafter.............................................................. 16,107,988
-----------
Total long-term debt.................................................... $17,263,415
==========
</TABLE>

(9) ACCRUED EXPENSES

Accrued expenses are comprised of the following at December 31:

<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Accrued salaries and wages................................... $255,935 $ 332,097
Advance rents and deposits................................... 520,133 545,584
Other........................................................ 135,881 302,448
-------- ----------
Total accrued expenses....................................... $911,949 $1,180,129
======== =========
</TABLE>

(10) ADVANCES FROM AND NOTES PAYABLE TO UNCONSOLIDATED AFFILIATES

Advances from and notes payable to unconsolidated affiliates consist of the
following at December 31:

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Advances -- Evergreen....................................... $ 216,658 --
Note payable -- Evergreen................................... 1,550,000 --
Note payable -- minority stockholder........................ 67,698 --
---------- ----------
Total advances from and notes payable to unconsolidated
affiliates................................................ 1,834,356 --
Less current installments................................... 284,356 --
---------- ----------
Total advances from and notes payable to unconsolidated
affiliates, less current installments..................... $1,550,000 --
========= =========
</TABLE>

The advances and notes payable to Evergreen, interest at 9%, were paid in
full in May 1995. See Note 11.

(11) STOCKHOLDERS' EQUITY

The Company completed a private placement equity offering on May 26, 1995,
resulting in net proceeds of $19,029,080, for 4,302,994 shares of its common
stock. Simultaneously, the Company issued 917,150 shares of its stock to
Evergreen as consideration for $2,677,342 cash received during 1994, which is
reflected as common stock and additional paid-in capital in the accompanying
balance sheet.

The Company has 30,000,000 shares of common stock authorized, and 1,812,551
shares and 6,652,059 shares of no par, common shares issued and outstanding at
December 31, 1994 and 1995, respectively.

(12) STOCK OPTION PLAN

The Company adopted an incentive compensation plan (the 1995 Plan) during
1995, which provides key employees of the Company performance incentives, and
also provides a means of encouraging stock ownership in the Company by officers,
directors, and key employees through the issuance of stock options.

F-14
<PAGE> 163

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Compensation Committee is authorized to designate recipients of the
options, date of grants, the number of shares subject to options, and the time
during which the options may be exercised. The price of stock options granted
under the plan cannot be less than the fair market value of the shares at the
time the options are granted.

Options to purchase an aggregate of 470,308 shares of common stock were
issued and outstanding at December 31, 1995, at a weighted average exercise
price of $3.44 per share, of which options to purchase 103,483 shares were
exercisable at such date.

(13) INCOME TAXES

Deferred tax assets and liabilities consist of the following at December
31:

<TABLE>
<CAPTION>
1994 1995
-------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $228,600 $ 800,200
Investment in unconsolidated affiliates.................... 1,400 105,100
Other...................................................... 56,000 104,100
-------- ----------
Total deferred tax assets.................................... 286,000 1,009,400
Less valuation allowance..................................... 259,500 917,500
-------- ----------
Deferred tax assets, net of valuation allowance.............. $ 26,500 $ 91,900
-------- ----------
Deferred tax liability -- tax versus book depreciation....... $ 26,500 $ 91,900
======== =========
</TABLE>

The Company has approximately $2,030,000 of net operating loss
carryforwards for income tax purposes at December 31, 1995, which will begin to
expire, if unused, beginning in the year 2008. The loss may be further limited
as to future use due to the change in control provisions in the Internal Revenue
Code which apply because of the issuance of stock in the private placement in
May 1995.

(14) COMMITMENTS AND CONTINGENCIES

The Company leases certain properties under non-cancelable operating leases
that expire at various dates through the year 2014.

Future annual minimum operating lease payments at December 31, 1995 are as
follows:

<TABLE>
<S> <C>
1996.................................................................... $ 1,088,249
1997.................................................................... 1,109,970
1998.................................................................... 1,137,957
1999.................................................................... 1,167,482
2000.................................................................... 1,077,870
Thereafter.............................................................. 15,514,590
-----------
$21,096,118
==========
</TABLE>

The Company has guaranteed specific obligations of several unconsolidated
affiliates, totaling $5,680,000 at December 31, 1995. These obligations consist
primarily of construction financing and lease agreements entered into by
partially-owned limited partnerships. The Company anticipates that its
unconsolidated affiliates will be able to perform under their respective
financings and other obligations, and that no payments will be required and no
losses will be incurred under such guarantees.

F-15
<PAGE> 164

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) SUBSEQUENT EVENTS

The Company sold two assisted living residences for approximately
$7,022,000 on January 22, 1996 and leased them back under a ten-year sale and
lease-back agreement. The transaction produced a gain of approximately
$1,083,000, which will be deferred and amortized over the lease period.

The Company acquired Heartland Retirement Services, Inc. (Heartland) on
January 29, 1996 for $5,500,000 cash plus 261,424 shares of the Company's common
stock with an estimated market value of $1,749,000. The acquisition was
effective as of January 1, 1996. This acquisition was financed by a bridge loan
of approximately $8,700,000. As of January 1, 1996, Heartland operated 20
assisted living residences with 15 to 20 units each.

On May 24, 1996, the Company acquired New Crossings International
Corporation, a company which operates 15 assisted living residences as of May,
1996. The total purchase consideration was 2,007,049 shares of the Company's
common stock with an estimated market value of $9,281,000. (unaudited)

On May 24, 1996, the Company acquired the limited partnership interest in
five Michigan limited partnerships owned by unrelated investors for aggregate
consideration of 115,025 shares of common stock and promissory notes in the
aggregate principal amount of $2,900,000. These promissory notes are due and
payable on January 31, 1997 and bear interest at the rate of 8% per annum. The
Company also acquired 100% of the outstanding stock of ALS-Midwest pursuant to a
merger transaction whereby the shareholders of ALS-Midwest, other than the
Company, received, in exchange for their shares of ALS-Midwest, $300,000 in cash
and 57,512 shares of the Company's common stock. (unaudited)

On May 24, 1996, the Company raised approximately $2 million of equity
capital through the private placement of 430,281 shares of the Company's common
stock. (unaudited)

On May 17, 1996, the Board of Directors authorized and the stockholders
approved the filing of a Restated Certificate of Incorporation that provides for
(a) the authorization of 5 million shares of preferred stock, $0.01 par value,
the terms of which may be determined by the Board of Directors from time to
time, (b) the authorization of 30 million shares of common stock, $0.01 par
value, and (c) a 1,812.55 for 1 stock split of its common stock. Accordingly,
the stock split and the changes in preferred and common stock have been given
retroactive effect in the accompanying consolidated financial statements.

In connection with an anticipated initial public offering (IPO), the
Company intends to file a registration statement with the Securities and
Exchange Commission (SEC). Pursuant to the requirements of the SEC, for purposes
of net loss per share, common stock issued and common stock options granted at
per share amounts less than the anticipated IPO price per share subsequent to
May 1995 have been reflected as outstanding for all periods presented.
Accordingly, weighted average shares outstanding was increased by 736,903 shares
for the effect of such common stock and stock options. (unaudited)

F-16
<PAGE> 165

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 6,816,266
Short-term investments....................................................... 50,000
Resident receivables, net.................................................... 235,647
Other current assets......................................................... 424,323
------------
Total current assets................................................. 7,526,236
------------
Property, plant and equipment, net............................................. 35,029,600
Long-term investments.......................................................... 1,167,658
Investments in and advances to unconsolidated affiliates....................... 6,754,273
Other assets................................................................... 3,346,086
------------
Total assets......................................................... $ 53,823,853
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt....................................... $ 104,991
Accounts payable............................................................. 388,917
Accrued expenses............................................................. 1,360,067
------------
Total current liabilities............................................ 1,853,975
------------
Long-term debt, less current installments...................................... 30,631,646
Other long-term liabilities.................................................... 1,350,504
Minority interest.............................................................. 637,088
Stockholders' equity:
Common stock and additional paid-in capital.................................. 23,743,238
Accumulated deficit.......................................................... (4,392,598)
------------
Total stockholders' equity........................................... 19,350,640
------------
Total liabilities and stockholders' equity........................... $ 53,823,853
===========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-17
<PAGE> 166

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1995 1996
---------- -----------
<S> <C> <C>
Revenue:
Resident service fees.......................................... $1,982,928 $4,033,003
Other.......................................................... 98,352 292,115
---------- -----------
Operating revenue................................................ 2,081,280 4,325,118
---------- -----------
Operating expenses:
Residence operations........................................... 1,347,562 3,241,020
Lease expense.................................................. 426,158 487,532
General and administrative..................................... 582,620 1,583,452
Depreciation and amortization.................................. 145,257 365,237
---------- -----------
Total operating expenses............................... 2,501,597 5,677,241
---------- -----------
Operating loss................................................... (420,317) (1,352,123)
---------- -----------
Other income (expense):
Interest expense............................................... (180,858) (530,051)
Interest income................................................ 1,352 139,223
Gain on sale of land........................................... -- (20,766)
Equity in losses (income) of unconsolidated affiliates......... 38,913 (84,809)
Minority interest in losses of consolidated subsidiaries....... 22,413 44,699
---------- -----------
Total other expense, net............................... (118,180) (451,704)
---------- -----------
Net loss......................................................... $(538,497) $(1,803,827)
========= ==========
Net loss per share............................................... $(0.21) $(0.24)
========= ==========
Weighted average shares outstanding.............................. 2,549,453 7,650,385
========= ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-18
<PAGE> 167

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (538,497) $(1,803,827)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................ 145,257 365,237
(Increase) decrease in net resident receivables.............. 14,678 (439,480)
(Increase) decrease in other current assets.................. (32,079) 85,750
Decrease in accounts payable................................. (76,365) (515,886)
Increase in accrued expenses................................. 890,265 56,258
Changes in other assets and liabilities and other
adjustments................................................. (1,494,090) 1,048,059
----------- -----------
Net cash used in operating activities............................. (1,090,831) (1,203,887)
----------- -----------
Cash flows from investing activities:
Sale of property under lease.................................... -- 5,975,101
Payments for property, plant and equipment and project
development costs............................................ (6,831,962) (2,406,859)
Changes in investments in and advances to unconsolidated
affiliates................................................... 658,016 (1,683,548)
Increase in long-term investments............................... -- 15,447
Cash from acquisition........................................... -- 1,100,100
----------- -----------
Net cash provided by (used in) investing activities............... (6,173,946) 3,000,241
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt.................................... (1,491,323) (8,203,331)
Proceeds from issuance of long-term debt........................ 11,050,000 10,026,464
Changes in advances from and notes payable to unconsolidated
affiliates................................................... (1,834,356) --
Issuance of common stock and other capital contribution......... -- 248,815
----------- -----------
Net cash provided by financing activities......................... 7,724,321 2,071,948
----------- -----------
Net increase in cash and cash equivalents......................... 459,544 3,868,302
Cash and cash equivalents:
Beginning of period............................................. 310,814 2,947,964
----------- -----------
End of period................................................... $ 770,358 $ 6,816,266
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-19
<PAGE> 168

ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1) BASIS OF PRESENTATION

The condensed consolidated balance sheet as of March 31, 1996 and condensed
consolidated statements of operations and cash flows for the three months ended
March 31, 1995 and 1996 contained herein, which are unaudited, include the
accounts of the Company and its affiliates which are under the common financial
control of the Company. All significant intercompany accounts have been
eliminated in consolidation. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have been
included. Adjustments consist only of normal recurring items. The results of
operations for the three months ended March 31, 1995 and 1996, are not
necessarily indicative of the results to be expected for the full fiscal year.

The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Reference is made to the Company's audited
financial statements and the related notes as of December 31, 1994 and 1995 and
for each of the years then ended, which provide additional disclosures and a
further description of accounting policies.

(2) SUBSEQUENT EVENTS

On May 24, 1996, the Company acquired New Crossings International
Corporation a company which operates 15 assisted living facilities as of May,
1996. The total purchase consideration was 2,007,049 shares of the Company's
common stock with an estimated value of $9,281,000.

On May 24, 1996 the Company acquired the limited partnership interest in
five Michigan limited partnerships owned by unrelated investors for aggregate
consideration of 115,025 shares of common stock and promissory notes in the
aggregate principal amount of $2,900,000. These promissory notes are due and
payable on January 31, 1997 and bear interest at the rate of 8% per annum. The
Company also acquired 100% of the outstanding stock of ALS-Midwest pursuant to a
merger transaction whereby the shareholders of ALS-Midwest other than the
Company received, in exchange for their shares of ALS-Midwest, $300,000 in cash
and 57,512 shares of the Company's common stock.

On May 24, 1996, the Company raised approximately $2 million of equity
capital through the private placement of 430,281 shares of the Company's common
stock.

On May 17, 1996, the Board of Directors authorized and the stockholders
approved the filing of a Restated Certificate of Incorporation that provides for
(a) the authorization of 5 million shares of preferred stock, $0.01 par value,
the terms of which may be determined by the Board of Directors from time to
time, (b) the authorization of 30 million shares of common stock, $0.01 par
value, and (c) 1,812.55 for 1 stock split of its common stock. Accordingly, the
stock split and the changes in preferred and common stock have been given
retroactive effect in the accompanying condensed consolidated financial
statements.

F-20
<PAGE> 169

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Heartland Retirement Services, Inc.:

We have audited the accompanying consolidated balance sheets of Heartland
Retirement Services, Inc. (a majority owned subsidiary of Heartland Development
Corporation) and Subsidiaries as of December 31, 1994 and 1995, and the related
consolidated statements of income, cash flows and changes in shareholders'
equity for the period from inception, January 11, 1993, through December 31,
1993, and for each of the years ended December 31, 1994 and 1995. 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.

As discussed in Note 9 to the financial statements, on January 26, 1996,
the shareholders of Heartland Retirement Services, Inc. sold all of their stock
to Alternative Living Services, Inc.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heartland Retirement
Services, Inc. and Subsidiaries as of December 31, 1994 and 1995, and the
results of its operations and its cash flows for the period from inception,
January 11, 1993, through December 31, 1993, and for the years ended December
31, 1994 and 1995, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Milwaukee, Wisconsin,
January 26, 1996.

F-21
<PAGE> 170

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 122,209 $1,100,100
Resident receivables.............................................. 131,748 185,617
Due from related party............................................ 584,317 --
Food inventory.................................................... -- 18,606
Prepaids and other current assets................................. 2,423 71,641
---------- ----------
Total current assets...................................... 840,697 1,375,964
Property and equipment:
Land.............................................................. 76,045 743,519
Land improvements................................................. -- 27,355
Buildings......................................................... -- 6,307,150
Furniture and fixtures............................................ 38,779 555,167
Computers and equipment........................................... 20,290 108,230
Construction in progress.......................................... 24,698 180,042
---------- ----------
159,812 7,921,463
Less -- Accumulated depreciation.................................. (3,667) (77,592)
---------- ----------
156,145 7,843,871
---------- ----------
Investments and other assets:
Investments....................................................... 57,586 282,577
Goodwill.......................................................... -- 12,771
Other assets, net of amortization................................. 118,017 94,230
Deferred income taxes............................................. 48,466 137,323
---------- ----------
224,069 526,901
---------- ----------
Total assets.............................................. $1,220,911 $9,746,736
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 33,274 $ 161,680
Real estate taxes payable......................................... 1,040 80,453
Other accrued expenses............................................ 71,424 109,887
Deferred revenue.................................................. 144,761 120,820
Construction note payable......................................... 97,369 --
Income taxes payable.............................................. 1,782 --
Due to related party.............................................. -- 4,433,878
Current maturities of mortgage note payable....................... -- 41,454
---------- ----------
Total current liabilities................................. 349,650 4,948,172
Mortgage notes payable.............................................. -- 3,556,192
Minority interest................................................... -- 32,042
Shareholders' equity
Common stock, $1 par value; authorized 9,000 shares; issued and
outstanding 100 shares......................................... 100 100
Additional paid-in capital........................................ 1,404,758 2,632,625
Accumulated deficit............................................... (533,597) (1,422,395)
---------- ----------
Total shareholders' equity................................ 871,261 1,210,330
---------- ----------
Total liabilities and shareholders' equity................ $1,220,911 $9,746,736
========= =========
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

F-22
<PAGE> 171

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIOD FROM INCEPTION (JANUARY 11, 1993) TO DECEMBER 31, 1993
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- -----------
<S> <C> <C> <C>
Revenue:
Resident service fees.................................... $ -- $ -- $ 1,140,779
Other.................................................... 260,834 359,062 281,951
--------- --------- -----------
Operating revenue.......................................... 260,834 359,062 1,422,730
Operating expenses:
Operating and maintenance................................ -- -- 207,443
Salary and related costs................................. 146,817 308,665 1,413,796
General and administrative............................... 430,659 648,325 861,387
Real estate taxes and insurance.......................... -- 2,915 54,111
Depreciation and amortization............................ 16,307 9,188 108,486
--------- --------- -----------
Total operating expenses......................... 593,783 969,093 (2,645,223)
Operating loss........................................... (332,949) (610,031) (1,222,493)
Other income (expense):
Equity in losses of unconsolidated affiliates............ -- (1,617) (47,496)
Interest expense......................................... -- -- (226,807)
Interest income.......................................... 9,366 52,175 8,901
Minority interest in losses of consolidated subsidiary... -- -- 12,958
--------- --------- -----------
Net loss before income taxes..................... (323,583) (559,473) (1,474,937)
Income tax benefit......................................... 129,838 219,621 586,139
--------- --------- -----------
Net loss......................................... $(193,745) $(339,852) $ (888,798)
========= ========= ==========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-23
<PAGE> 172

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 11, 1993) TO DECEMBER 31, 1993
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balances at January 11, 1993...................... $100 $ 2,758 $ -- $ 2,858
Net loss........................................ -- -- (193,745) (193,745)
Capital contribution from Parent................ -- 1,402,000 -- 1,402,000
------ ---------- ----------- ----------
Balances at December 31, 1993..................... 100 1,404,758 (193,745) 1,211,113
Net loss........................................ -- -- (339,852) (339,852)
------ ---------- ----------- ----------
Balances at December 31, 1994..................... 100 1,404,758 (533,597) 871,261
Net loss........................................ -- -- (888,798) (888,798)
Capital contribution from Parent................ -- 1,227,867 -- 1,227,867
------ ---------- ----------- ----------
Balances at December 31, 1995..................... $100 $2,632,625 $(1,422,395) $1,210,330
====== ========= ========== =========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-24
<PAGE> 173

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 11, 1993) TO DECEMBER 31, 1993
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1993 1994 1995
----------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (193,745) $(339,852) $ (888,798)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization....................... 27,566 9,188 108,486
Deferred income taxes............................... (19,836) (28,630) (85,857)
Changes in operating assets and liabilities --
Increase in accounts receivable................... (113,854) (12,243) (53,869)
(Increase) decrease in due from related party..... 11,341 (273,401) 584,317
(Increase) decrease in prepaids and other current
assets......................................... (12,630) 5,958 (87,824)
Increase in other noncurrent assets............... -- (15,420) (23,545)
Increase in accounts payable and accrued
expenses....................................... 47,848 47,596 166,869
Increase (decrease) in deferred revenue........... 22,325 122,436 (23,941)
Increase (decrease) in taxes payable.............. 5,273 (3,491) 77,631
----------- --------- -----------
Cash used in operations........................ (225,712) (487,859) (229,531)
Cash flows from investing activities:
Loan to Parent......................................... (1,145,000) -- --
Parent loan repayment.................................. -- 698,000 447,000
Purchase of equity investments......................... (8,770) (46,842) (224,991)
Payments for property and equipment.................... -- (159,812) (6,874,642)
----------- --------- -----------
Cash provided by (used in) investing
activities................................... (1,153,770) 491,346 (6,652,633)
Cash flows from financing activities:
Net proceeds from mortgage notes payable............... -- 97,369 3,500,277
Capital contribution from Parent....................... 1,402,000 -- 340,858
Net contribution of minority interest in subsidiary.... -- -- 32,042
Loans from related parties............................. -- -- 3,986,878
Financing costs........................................ -- (2,050) --
----------- --------- -----------
Cash provided by financing activities.......... 1,402,000 95,319 7,860,055
Net increase in cash................................... 22,518 98,806 977,891
Cash at beginning of period............................ 885 23,403 122,209
----------- --------- -----------
Cash at end of period.................................. $ 23,403 $ 122,209 $ 1,100,100
========== ========= ==========
Cash paid during the year for interest................. -- -- $ 181,551
Cash received during the year for taxes................ -- -- $ 366,359
Direct purchase of property by Parent.................. -- -- $ 887,009
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-25
<PAGE> 174

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business

Heartland Retirement Services, Inc. ("Heartland"), a 95.5% owned subsidiary
of Heartland Development Corporation ("HDC" or "Parent") was incorporated on
January 11, 1993, to provide assisted-living products and services to older
adults. Heartland has developed an assisted-living trademark, known as
WovenHearts(R), which is marketed and franchised in Wisconsin and the
continental United States. Heartland develops, owns and operates a number of
community based residential facilities operating under the WovenHearts name.
Residents require assistance with the activities of daily living and, thus, are
no longer able to live independently. Each resident pays a monthly fee that
covers the use of an individual living unit and common areas, as well as
utilities, meals, housekeeping and assistance with the routine activities of
daily living such as bathing and dressing. Heartland also provides retirement
housing consulting services.

WovenCare Systems, Inc. ("WovenCare"), formerly Hennig & Associates, Inc.,
is a wholly owned subsidiary of Heartland which provides property management
services for various assisted living residences.

As of December 31, 1995, the Company owned, and consolidated in its
financial statements, 12 assisted living facilities with 15 to 20 units each, as
follows:

<TABLE>
<CAPTION>
PERCENT COMMENCED
LEGAL ENTITY LOCATION OWNED OPERATIONS
------------------------------------ ---------------------- -------- ----------------
<S> <C> <C> <C>
Heartland Retirement Services Clintonville,
Clintonville Associates, LLC Wisconsin 100% July, 1995
Heartland Retirement Services
Edgerton Associates, LLC Edgerton, Wisconsin 100 October, 1995
Heartland Retirement Services
Janesville Associates, LLC Janesville, Wisconsin 100 October, 1995
Heartland Retirement Services
Jefferson I Associates, LLC Jefferson, Wisconsin 100 October, 1995
Heartland Retirement Services
Kaukauna Associates, LLC Kaukauna, Wisconsin 100 July, 1995
Heartland Retirement Services
Manitowoc Associates, LLC Manitowoc, Wisconsin 100 December, 1995
Heartland Retirement Services
Neenah Associates, LLC Neenah, Wisconsin 100 Anticipated
February, 1996
Heartland Retirement Services
New London Associates, LLC New London, Wisconsin 100 April, 1995
Heartland Retirement Services
Onalaska Associates, LLC Onalaska, Wisconsin 100 June, 1995
Heartland Retirement Services
Platteville Associates, LLC Platteville, Wisconsin 72.7 November, 1995
Heartland Retirement Services
Rice Lake Associates, LLC Rice Lake, Wisconsin 100 October, 1995
Heartland Retirement Services
Shawano Associates, LLC Shawano, Wisconsin 100 July, 1995
</TABLE>

F-26
<PAGE> 175

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Consolidation policy

The consolidated financial statements include the accounts of Heartland and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts are eliminated in consolidation. The 1993 accounting period covered by
the accompanying financial statements is from January 11, 1993 (commencement of
operations) through December 31, 1993.

Investments

Heartland and its subsidiaries are general partners in three limited
partnerships and members in four limited liability companies that each own a
single community based retirement facility. The Company's investment in each of
these entities at December 31, 1995 is between .5% and 50%. These investments
are accounted for under the equity method in which Heartland records its
proportionate share of the partnership's or limited liability company's net
income or loss.

Cash and cash equivalents

Cash and cash equivalents include cash on deposit held at financial
institutions with original maturities of three months or less.

Property and equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the following estimated useful lives of the
assets:

<TABLE>
<CAPTION>
YEARS
----
<S> <C>
Buildings..................................................................... 40
Furniture and fixtures........................................................ 12
Computers and equipment....................................................... 3-5
</TABLE>

Interest incurred during construction periods is capitalized as part of the
building costs. Capitalized interest was $46,490 in the year ended December 31,
1995. There was no interest capitalized during the years ended December 31, 1993
and 1994. Capitalized interest costs are computed using the borrowing rate for
construction expenditures (9.75% for 1995).

Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements are added to property.

Construction in progress

Construction in progress at December 31, 1994 and 1995 relates to one
project and 14 projects, respectively. The 1995 projects are scheduled for
completion in 1996 and are at various stages of development. Construction in
progress on these projects include earnest money deposits on land purchases,
building permits, architecture plans, site analysis and other development costs
associated with the facilities. The 1994 project has been completed.

F-27
<PAGE> 176

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Other noncurrent assets

Other noncurrent assets consist of the following as of December 31:

<TABLE>
<CAPTION>
AMORTIZATION
1994 1995 LIFE
-------- ------- ---------------
<S> <C> <C> <C>
Trademark costs................................. $ 7,123 $ 6,013 7 years
Financing costs................................. 2,050 43,209 Term of debt
Franchise costs................................. 36,896 36,052 5 years
Brochures....................................... 71,948 -- As used
Other........................................... -- 8,956 1 year or less
-------- -------
$118,017 $94,230
======== =======
</TABLE>

Revenue recognition

Revenues are recorded when services are rendered and consist primarily of
residents' fees for basic housing and support services including routine
nursing, and optional personalized assistance on a fee for service basis. The
residency agreements are on a month to month basis. Heartland may adjust the
monthly charge with 30 days advance notice.

The Company charges its new residents an upfront, nonrefundable admission
fee which is charged to residents to cover estimated costs of processing and
evaluating new residents. Such admission fee revenues are included in residents'
fees and are recorded when the fees are received and totaled approximately $0,
$0 and $136,000 for the periods ended December 31, 1993, 1994, and 1995,
respectively. The costs of processing and evaluating prospective new residents
are expensed as incurred.

Heartland also derives revenue from retirement housing consulting services
and franchise sales. Consulting service revenue is recognized as services are
performed and initial franchise fee revenue is recognized when all related
franchise services have been performed. A monthly franchise fee based on a
percentage of gross receipts is charged to the Company's three franchisees and
is recognized as earned. Consulting service revenues were approximately
$227,000, $115,000, and $45,000 for the periods ended December 31, 1993, 1994
and 1995, respectively. Franchise fee revenues were approximately $0, $72,500,
and $47,500 for the periods ended December 31, 1993, 1994, and 1995,
respectively. Consulting service and franchise fee revenues are included in
other revenues in the financial statements.

Heartland receives a development fee for services related to facility
start-up costs. These services include, but are not limited to governmental
approvals, facility design, construction management, financing negotiation,
licensing, and initial resident lease-up. Revenues are recognized over the
construction period and totaled approximately $0, $139,500, and $80,500 for the
periods ended December 31, 1993, 1994 and 1995, respectively.

The deferred revenue represents that portion of franchise revenues and
development fee revenues that have been billed, but for which services have not
yet been provided.

Income taxes

Deferred income taxes are provided for differences in the financial
reporting and income tax basis of assets and liabilities.

F-28
<PAGE> 177

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Goodwill

Costs in excess of fair market value at date of acquisition have been
recorded as goodwill and amortized over fifteen years on a straight-line basis.
The Company's management periodically evaluates goodwill for impairment based
upon the future economic benefit of the recorded balance.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents approximate fair value
because of the short-term nature of these accounts and because they are invested
in accounts earning market rates of interest. The carrying amount of the
Company's debt approximates fair value because the interest rates approximate
the current rates available to the Company.

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.

(2) ACQUISITION OF ASSISTED LIVING FACILITIES

In 1995, the Company purchased nine assisted living facilities for
$5,295,739 (including closing costs of $12,489). The acquisitions have been
accounted for as a purchase and, accordingly, the purchase price was allocated
to the assets acquired based on the estimated fair value of such assets at date
of acquisition. Allocation of the cash purchase price is summarized as follows:

<TABLE>
<S> <C>
Land..................................................................... $ 310,600
Building................................................................. 4,755,807
Furniture and equipment.................................................. 287,000
Construction in progress................................................. 65,129
Goodwill................................................................. 15,871
Liabilities assumed...................................................... (138,668)
----------
Total cash purchase price................................................ $5,295,739
=========
</TABLE>

(3) RELATED PARTY TRANSACTIONS

The following is a summary of related party balances:

<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Due from related parties:
Parent..................................................... $ 805,674 $ 158,482
Other...................................................... 17,712 286,244
--------- -----------
823,386 444,726
--------- -----------
Due (to) related parties:
Parent..................................................... (232,437) (3,263,269)
Other...................................................... (6,632) (1,615,335)
--------- -----------
(239,069) (4,878,604)
--------- -----------
Net due (to) from related parties............................ $ 584,317 $(4,433,878)
========= ==========
</TABLE>

F-29
<PAGE> 178

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in the amount due from related parties at December 31, 1994 and
1995, is $447,000 and $277,744, respectively, for a related party loan. This
loan is due on demand and bears interest based on the prime interest rate. The
rate on this loan was 8.50% and 8.65% at December 31, 1994 and 1995,
respectively. In addition, the amount due from Parent at December 31, 1994 and
1995, includes $306,692 and $158,482, respectively, for income taxes receivable
(see Note 6).

During 1993, 1994 and 1995, Heartland incurred approximately $228,000,
$114,000 and $117,100, respectively, in allocated expenses from its sister
company, which included office rent and vehicle mileage.

Included in the amount due to Parent at December 31, 1994 and 1995 is $0
and $2,919,000, respectively, of 8.25% to 8.75% mortgage notes payable and $0
and $299,014, respectively of an 8.25% intercompany revolving credit agreement.
Included in due to other at December 31, 1995, is a $1,583,000 8.25% note
payable due to a sister company (see Note 9).

Management and partnership fees

WovenCare receives a 6% management fee and Heartland receives a 2%
partnership management fee based on the gross receipts for certain of the
entities in which they have investments. Heartland recognized management fees
and partnership management fee service revenues of approximately $34,000,
$32,000 and $109,000 in 1993, 1994, and 1995, respectively, from these related
entities.

(4) MORTGAGE NOTES PAYABLE

Mortgage notes payable consist of the following as of December 31, 1995:

<TABLE>
<S> <C>
Mortgage notes payable to a financial institution; with varying annual
payments including interest at 9.75% through 1997 and at 1% above prime
thereafter; due March through November, 2000; secured by specific
residence properties................................................... $3,597,646
----------
Total.................................................................... 3,597,646
Less -- Current maturities............................................... 41,454
----------
Mortgage notes payable................................................... $3,556,192
==========
</TABLE>

As of December 31, 1995, the following principal payments are scheduled:

(5) COMMON STOCK

In 1993, Heartland issued 4.5 shares of its common stock to the minority
shareholder in exchange for 100% of the minority shareholder's common stock in
WovenCare. As a result of this transaction, WovenCare became a wholly owned
subsidiary of Heartland.

As part of this transaction, Heartland entered into a shareholder agreement
with the minority shareholder. This agreement allows the minority shareholder to
put any or all of his Heartland common stock to the Company during a 30-day
period each year beginning in 1997 at the greater of 1.5 times book value or its
fair market value, as defined. In addition, the agreement allows Heartland to
purchase the stock from the minority

F-30
<PAGE> 179

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shareholder at 1.5 times book value or fair value upon the occurrence of certain
events. As discussed in Note 9, the minority shareholder sold these shares on
January 26, 1996.

(6) STOCK APPRECIATION RIGHTS

A 1993 stock appreciation rights agreement between Heartland and its 4.5%
minority shareholder was cancelled in January 1996, in connection with the sale
of Heartland stock by the shareholders as discussed in Note 9. As none of the
financial performance targets had been met, no provision has been recorded in
the financial statements for these rights.

(7) INCOME TAXES

Heartland has an agreement with its Parent for the apportionment of Federal
income tax liabilities and benefits. The Parent calculates Federal taxes on a
with and without Heartland basis and charges Heartland for its portion of any
incremental Federal income tax liability. Conversely, the Parent will reimburse
Heartland for any reduction of its Federal income tax liability related to the
operations of Heartland. The income tax benefit receivable is included in due
from related party.

The income tax (provision) benefit consists of the following:

<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $115,275 $192,773 $497,232
State................................................ (5,273) (1,782) 50
Deferred
19,836 28,630 88,857
-------- -------- --------
Total.................................................. $129,838 $219,621 $586,139
======== ======== ========
</TABLE>

The effective income tax rate exceeded the Federal statutory rate due
primarily to state income taxes.

The net deferred income tax asset in the accompanying balance sheets
include the following amounts of deferred income tax assets and liabilities:

<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Deferred income tax asset......................................... $52,446 $154,116
Deferred income tax liability..................................... (3,980) (16,793)
------- --------
Net deferred income tax asset..................................... $48,466 $137,323
======= ========
</TABLE>

The deferred income tax liability results primarily from differences in the
financial reporting and income tax basis of property and consulting and
franchise revenues.

At December 31, 1995, the Company has recorded a deferred income tax asset
related to the State of Wisconsin net operating loss carryforwards:

<TABLE>
<CAPTION>
NET OPERATING
EXPIRE AT CLOSE OF TAX YEARS YEAR LOSS
ENDED DECEMBER 31, GENERATED CARRYFORWARD
- ------------------------------ --------- --------------
<S> <C> <C>
2008 1993 $ 335,199
2009 1994 540,971
2010 1995 1,466,351
--------------
$2,342,521
===========
</TABLE>

F-31
<PAGE> 180

HEARTLAND RETIREMENT SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) COMMITMENTS

As the general partner for Hennig Lodi Limited Partnership, WovenCare has
guaranteed a mortgage note of $319,000 and a business note of $35,600. These
notes are secured by the property of the limited partnership.

Heartland has guaranteed its share of mortgage notes on behalf of several
unconsolidated limited partnerships and limited liability companies in which the
company has an ownership interest. The Heartland obligation is limited to its
investment percentage in each development multiplied times the mortgage note
balance due, or an aggregate of $3,864,642. These notes are secured by the
property of each limited partnership or limited liability company. The mortgage
note obligation of one of these entities is a $2.5 million Wisconsin Health and
Educational Facilities Authority (WHEFA) revenue bond issue that the Parent has
partially guaranteed with a letter of credit of $500,000. See Note 9.

Heartland has entered into certain contracts for the construction of
residential assisted-living residences in Minnesota and Wisconsin. Completion of
the residences is scheduled throughout 1996. At December 31, 1995, approximately
$17,000 is still to be incurred under the terms of these contracts.

Heartland has also entered into agreements to purchase certain land and
buildings during 1996, with the intention of constructing and operating
assisted-living residences. At December 31, 1995, Heartland has approximately
$1,292,000 net of earnest money deposits of outstanding commitments under these
agreements.

Heartland has also entered into development agreements to engage an outside
party to locate and develop assisted-living residences within Wisconsin and
Minnesota. Terms of these agreements specify that payments will be made upon
completion of certain services including, among other things, site control and
construction. At December 31, 1995, approximately $266,000 is still to be
incurred assuming all terms of these contracts have been met.

Heartland has entered into three franchise agreements which contain a
provision whereby the franchisee has the right to terminate the franchise
agreement upon a change in the controlling majority ownership of the Company. As
indicated in Note 9, a change in ownership occurred in January 1996. Assuming
these residences are leased up, if the franchisees terminate these agreements,
the Company will forfeit approximately $35,000 of annual ongoing revenues.

(9) SALE OF HEARTLAND

On January 26, 1996, the Heartland shareholders sold all of their stock to
Alternative Living Services, Inc., an unrelated party. Heartland, at that time,
became a wholly owned subsidiary of Alternative Living Services, Inc. Just prior
to closing, the Parent made a capital contribution to Heartland, effective
January 1, 1996, consisting of the $1,583,000 note payable to its sister
company. In connection with the sale, all amounts due to or from related parties
were repaid on January 26, 1996. Other than these amounts due to or from related
parties, all other mortgage notes payable of Heartland continue to be
obligations of Heartland after the sale. In addition, Alternative Living
Services, Inc. provided a $500,000 cash deposit replacing the Parent letter of
credit under the WHEFA bond facility.

F-32
<PAGE> 181

INDEPENDENT AUDITORS' REPORT

The Board of Directors
New Crossings International Corporation:

We have audited the accompanying combined balance sheets of New Crossings
International Corporation as of December 31, 1994 and 1995, and the related
combined statements of operations, shareholders' deficit, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of New
Crossings International Corporation as of December 31, 1994 and 1995, and the
combined results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.

KPMG PEAT MARWICK LLP

Seattle, Washington
February 5, 1996

F-33
<PAGE> 182

NEW CROSSINGS INTERNATIONAL CORPORATION

COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995

<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 838,565 $ 2,931,507
Accounts receivable............................................. 98,036 219,481
Notes receivable................................................ 30,000 --
Inventory....................................................... 52,690 56,225
Prepaid rent.................................................... 53,197 526,186
Prepaid expenses................................................ 158,848 150,930
------------ ------------
Total current assets.................................... 1,231,336 3,884,329
Property and equipment, net....................................... 53,519,190 6,769,823
Notes receivable from related party............................... 741,257 --
Loan fees, net of accumulated amortization of $611,918 and $30,696
in 1994 and 1995, respectively.................................. 1,063,796 36,278
Deferred lease charge............................................. 4,351,600 4,247,173
Lease deposits.................................................... 22,059 1,560,065
Other assets, net................................................. 654,682 375,437
------------ ------------
$ 61,583,920 $ 16,873,105
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt and capital leases............ $ 25,596,440 $ 69,418
Notes payable to related party.................................. 53,075 --
Accounts payable................................................ 438,911 602,626
Accrued payroll and payroll taxes............................... 303,778 426,315
Accrued interest payable........................................ 1,185,628 1,016,631
Other accrued expenses.......................................... 345,340 615,852
Property taxes.................................................. 614,888 310,203
Unearned revenue................................................ 228,760 157,578
------------ ------------
Total current liabilities............................... 28,766,820 3,198,623
Security deposits................................................. 116,724 96,628
Deferred gain on sale............................................. 2,054,463 11,649,712
Sale/leaseback obligation......................................... 4,351,600 4,247,173
Long-term debt and capital leases................................. 44,925,423 7,682,527
------------ ------------
Total liabilities....................................... 80,215,030 26,874,663
------------ ------------
Mandatorily redeemable preferred stock -- Series A preferred, par
value $.001, 240,000 shares issued and outstanding in 1995
(liquidation preference of $25.00 per share).................... -- 6,000,000
Commitments and contingencies
Minority interest................................................. 1,148,724 --
Shareholders' deficit:
Preferred stock, $.001 par value. Authorized 5,000,000
shares -- Series B preferred stock, 260,000 shares issued and
outstanding in 1995 (liquidation preference of $25.00 per
share)....................................................... -- 260
Common stock, $.001 par value. Authorized 40,000,000 shares;
issued and outstanding 150,000 and 192,563 shares in 1994 and
1995,
respectively................................................. 150 193
Additional paid-in capital...................................... 36,903 6,540,856
Accumulated deficit............................................. (19,816,887) (22,542,867)
------------ ------------
Total shareholders' deficit............................. (19,779,834) (16,001,558)
------------ ------------
$ 61,583,920 $ 16,873,105
=========== ===========
</TABLE>

See accompanying notes to combined financial statements.

F-34
<PAGE> 183

NEW CROSSINGS INTERNATIONAL CORPORATION

COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues.................................... $17,977,881 $19,760,802 $21,725,841
----------- ----------- -----------
Expenses:
Residence operations.......................... 10,432,107 11,183,617 12,444,171
Lease expense................................. 812,987 789,000 1,147,475
General and administrative.................... 1,963,801 1,536,630 2,188,158
Depreciation and amortization................. 1,721,595 1,973,608 1,814,446
----------- ----------- -----------
Total operating expenses.............. 14,930,490 15,482,855 17,594,250
----------- ----------- -----------
Income from operations................ 3,047,391 4,277,947 4,131,591
----------- ----------- -----------
Other income (expense):
Interest expense.............................. (6,268,690) (5,627,798) (5,961,595)
Interest income............................... 131,181 89,835 153,721
Provision for writedown of development
projects................................... -- (258,000) --
Provision for writedown of investment......... (500,836) -- --
Gain on sale of development project........... -- -- 290,289
Other expense................................. -- -- (256,686)
----------- ----------- -----------
Other expense, net.................... (6,638,345) (5,795,963) (5,774,271)
----------- ----------- -----------
Loss before extraordinary items and
minority interest................... (3,590,954) (1,518,016) (1,642,680)
Extraordinary items:
Gains from extinguishment of debt............. 699,176 -- 499,769
Losses from extinguishment of debt............ -- -- (879,045)
----------- ----------- -----------
Loss before minority interest......... (2,891,778) (1,518,016) (2,021,956)
Minority interest............................... 2,794 49,000 84,381
----------- ----------- -----------
Net loss.............................. $(2,894,572) $(1,567,016) $(2,106,337)
========== ========== ==========
</TABLE>

See accompanying notes to combined financial statements.

F-35
<PAGE> 184

NEW CROSSINGS INTERNATIONAL CORPORATION

COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
PREFERRED
STOCK -- SERIES
B COMMON STOCK ADDITIONAL
---------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1992............. -- $ -- 150,000 $150 $ 36,903 $(15,138,442) $(15,101,389)
Distributions.......... -- -- -- -- -- (80,342) (80,342)
Net loss............... -- -- -- -- -- (2,894,572) (2,894,572)
------- ------ ------- ------ ---------- ------------ ------------
Balances at December
31, 1993............. -- -- 150,000 150 36,903 (18,113,356) (18,076,303)
------- ------ ------- ------ ---------- ------------ ------------
Distributions.......... -- -- -- -- -- (136,515) (136,515)
Net loss............... -- -- -- -- -- (1,567,016) (1,567,016)
------- ------ ------- ------ ---------- ------------ ------------
Balances at December
31, 1994............. -- -- 150,000 150 36,903 (19,816,887) (19,779,834)
------- ------ ------- ------ ---------- ------------ ------------
Distributions.......... -- -- -- -- -- (619,643) (619,643)
Issuance of Series B
preferred stock...... 260,000 260 -- -- 6,499,740 -- 6,500,000
Stock bonus grants..... -- -- 42,563 43 4,213 -- 4,256
Net loss............... -- -- -- -- -- (2,106,337) (2,106,337)
------- ------ ------- ------ ---------- ------------ ------------
Balances at December
31, 1995............. 260,000 $260 192,563 $193 $6,540,856 $(22,542,867) $(16,001,558)
======= ====== ======= ====== ========= =========== ===========
</TABLE>

See accompanying notes to combined financial statements.

F-36
<PAGE> 185

NEW CROSSINGS INTERNATIONAL CORPORATION

COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $(2,894,572) $ (1,567,016) $ (2,106,337)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gains from extinguishment of debt........................... (699,176) -- (499,769)
Losses from extinguishment of debt.......................... -- -- 879,045
Provision for writedown of development projects............. -- 258,000 --
Provision for writedown of investment....................... 500,836 -- --
Depreciation and amortization............................... 1,721,595 1,973,608 1,814,446
Amortization of deferred gain............................... (41,792) (47,302) (46,186)
Amortization of discount on participation notes............. -- (21,000) (36,000)
Stock bonus grants.......................................... -- -- 43
Write-off of note receivable from related party............. -- -- 107,870
Loss (gain) on disposal of assets........................... -- 53,557 (264,582)
Minority interest........................................... 2,794 49,000 84,381
Reclassification from stockholder receivable to
compensation.............................................. 314,239 69,393 49,135
Note payable issued for legal settlement.................... 150,000 -- --
Changes in operating assets and liabilities:
Accounts receivable....................................... 95,018 9,406 (121,445)
Inventory................................................. (3,534) 226 (3,535)
Prepaid rent.............................................. (1,073) (7,476) (472,989)
Prepaid expenses.......................................... 4,571 (52,124) 7,918
Lease deposits............................................ (22,704) 16,592 (1,538,006)
Other assets.............................................. 354,768 13,956 279,245
Accounts payable.......................................... 190,178 (244,344) 163,715
Accrued payroll and payroll taxes......................... 95,733 (44,471) 122,537
Accrued interest payable.................................. (118,256) (630,921) (147,434)
Other accrued expenses.................................... (103,577) 146,790 270,512
Property taxes............................................ 590,746 24,142 (304,685)
Unearned revenues......................................... 7,111 104,786 (71,182)
Security deposits......................................... (50,062) (27,441) (20,096)
----------- ------------ ------------
Net cash provided by (used in) operating activities.... 92,843 77,361 (1,853,399)
----------- ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment........................... (1,324,392) (4,346,356) (700,162)
Sales of property and equipment............................... 7,312 90,430 44,770,804
Investment in partnership..................................... (501,836) -- --
Decrease in notes receivable.................................. 235,758 -- 30,000
Decrease in notes receivable from related parties............. -- -- 584,252
Purchase of minority interest................................. -- -- (1,233,105)
Issuance of note receivable to related party.................. (80,000) (472,941) --
----------- ------------ ------------
Net cash provided by (used in) investing activities.... (1,663,158) (4,728,867) 43,451,789
----------- ------------ ------------
Cash flows from financing activities:
Proceeds from debt............................................ 8,307,112 14,973,734 100,000
Principal payments on debt.................................... (6,513,043) (10,127,927) (51,483,730)
Increase in participation obligation.......................... -- (276,000) --
Discount on restructured notes payable........................ -- 599,142 --
Issuance of preferred stock................................... -- -- 12,500,000
Payment of loan fees.......................................... (102,138) -- (11,500)
Advances from related parties................................. 31,200 -- --
Payments to related parties................................... -- (43,833) (53,075)
Distribution to partners...................................... (80,342) (56,515) (557,143)
----------- ------------ ------------
Net cash provided by (used in) financing activities.... 1,642,789 5,068,601 (39,505,448)
----------- ------------ ------------
Net increase in cash................................... 72,474 417,095 2,092,942
Cash at beginning of year....................................... 348,996 421,470 838,565
----------- ------------ ------------
Cash at end of year............................................. $ 421,470 $ 838,565 $ 2,931,507
============ ============= =============
</TABLE>

See accompanying notes to combined financial statements.

F-37
<PAGE> 186

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995

(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of Operations

Crossings International Corporation (Old Crossings), based in Tacoma,
Washington, was organized in 1984 to own, operate, develop and acquire assisted
living and related senior living residences located primarily in the western
United States. In December 1995, New Crossings International Corporation
(Crossings) was formed and issued 192,563 shares of common stock for all of the
outstanding shares of Old Crossings, which became a wholly-owned subsidiary of
Crossings.

(b) Principles of Combination

The accompanying combined financial statements reflect the combined
operating results and financial position of the following assisted living and
senior living residences all of which have common ownership, management and
control through Old Crossings and, subsequent to December 21, 1995, Crossings
(collectively referred to as the "Company"):

<TABLE>
<CAPTION>
NUMBER OF
NAME UNITS LOCATION
---------------------------------------------- --------- --------------------------
<S> <C> <C>
Inn at Canterbury............................. 60 Aurora, Colorado
Canterbury Gardens............................ 159 Aurora, Colorado
The Palms at Loma Linda....................... 140 Loma Linda, California
Columbia Edgewater Properties................. 128 Richland, Washington
Heritage at Meridian Park..................... 112 Tualatin, Oregon
Forest Grove Residential Center............... 88 Forest Grove, Oregon
McMinnville Residential Center................ 87 McMinnville, Oregon
Atrium Associates............................. 82 Boulder, Colorado
RiverPlace.................................... 80 Boise, Idaho
Ridge Point................................... 76 Boulder, Colorado
Heritage at Rogue Valley...................... 76 Medford, Oregon
Heritage at Mount Hood........................ 78 Gresham, Oregon
Albany Residential Center..................... 74 Albany, Oregon
Valley Park Associates........................ 63 Albany, Oregon
---------
1,303
========
</TABLE>

The investors interest in all residences that are not wholly owned by the
Company are recorded as minority interests.

In addition, the Company owns a 1% interest in 2010 Union Limited
Partnership (2010) a partnership which operates a 119 unit senior living
residence. Effective December 21, 1995, the Company began leasing the residence.
The operating results subsequent to this date are included in the combined
financial statements. The investment in the 2010 partnership is accounted for on
the cost basis since the Company is a limited partner and does not maintain
control over partnership operations.

All significant intercompany accounts and transactions have been eliminated
in the accompanying combined financial statements.

Resident units are rented on a month-to-month basis and rent is recognized
in the month the units are occupied.

F-38
<PAGE> 187

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(d) Inventory

Inventory consists of food and supplies and is stated at the lower of cost
(first-in, first-out) or market.

(e) Property Acquisition and Development Costs

The Company capitalizes all costs incurred directly in acquiring and
developing real estate. Among those costs are feasibility studies, land
acquisition costs, construction and development period interest and real estate
taxes, construction costs, and other direct project costs. These costs are
capitalized only to the extent that they are incurred prior to the date of
substantial completion or when a certificate of occupancy is issued and to the
extent considered recoverable through future operating cash flows of the
facility.

(f) Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets
which range from five to seven years for fixtures and equipment and forty years
for buildings. Leasehold improvements are amortized over the lesser of the
useful life of the improvement or the lease term.

(g) Loan Fees

Deferred loan fees are amortized using the straight-line method over the
term of the related debt which ranges from four to forty years.

(h) Deferred Lease Charge

Deferred lease charge represents a deferred charge established in
connection with the sale/leaseback of Heritage at Meridian Park (Heritage) as
discussed in note 6. The Company's obligation under the first mortgage was not
released at the time of the transaction. The deferred charge is reduced as
principal payments on the first mortgage associated with the property are made
by the buyer of Heritage.

(i) Income Taxes

Deferred income taxes are provided based on the estimated future tax
effects of temporary differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are recorded for
deferred tax assets when it is more likely than not that such deferred tax
assets will not be realized.

The combined deferred income taxes reflect income taxes as if all combined
residences were C-corporations.

(j) Use of Estimates

The preparation of the combined 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.

F-39
<PAGE> 188

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(2) STATEMENTS OF CASH FLOWS

Supplemental disclosures of cash flow information are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid...................................... $6,386,946 $5,659,142 $5,961,595
Interest capitalized............................... 288,953 347,338 --
</TABLE>

The following is a summary of noncash investing and financing activities:

- Debt of $2,512,500 was relieved as a result of a statutory Warrant
Deed for the property in lieu of foreclosure in 1994.

- The Company purchased equipment under capital leases totaling $25,130,
$108,067 and $70,966 for the years ended December 31, 1993, 1994 and
1995, respectively.

- The decrease of $90,806, $105,099 and $104,427 in deferred lease
charge for the years ended December 31, 1993, 1994 and 1995,
respectively, represent noncash items relating to the decrease of the
sale/leaseback obligation and the corresponding asset.

- In 1994, a note receivable from a partner of an affiliate for $80,000
was charged against the capital interest in one of the partnership
accounts as a result of litigation.

- In 1995, notes payable of $62,500 were issued to former partners as
part of an equity distribution.

- In 1995, fixed assets, other assets, interest payable and debt of
approximately $2,775,000, $74,000, $21,000 and $3,100,000,
respectively, related to the Legends condominium project were
transferred to a corporation owned by the president of the Company
(note 4). The transaction resulted in a gain of approximately $290,000
to the Company.

- In 1995, mortgage notes payable of approximately $9,304,000 were
assumed by Nationwide Health Properties, Inc. (NHP), a real estate
investment trust, in conjunction with a sale/leaseback transaction.

(3) PROPERTY AND EQUIPMENT

Property and equipment consists of the following at December 31:

<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
Land..................................................... $ 4,922,407 $ 750,748
Buildings and improvements............................... 50,821,197 6,409,105
Fixtures and equipment................................... 2,716,765 973,995
Leasehold improvements................................... 45,601 47,720
----------- ----------
58,505,970 8,181,568
Less accumulated depreciation and amortization........... 7,002,125 1,433,445
Construction in progress................................. 2,015,345 21,700
----------- ----------
$53,519,190 $6,769,823
========== =========
</TABLE>

Depreciation and amortization expense related to property and equipment was
$1,530,973, $1,634,961 and $1,706,530 in 1993, 1994 and 1995, respectively.

At December 31, 1994 and 1995, property and equipment includes $308,610 and
$338,300, respectively, of fixtures and equipment held under capital leases.
Related accumulated amortization totaled $117,580 and $153,610, respectively.

F-40
<PAGE> 189

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Substantially all property and equipment serve as collateral for long-term
debt (note 5). On December 21, 1995, most of this property and equipment was
included in the sales/leaseback transaction more fully described in note 6.

The Legends condominium project was originally planned to be a senior
living co-op community. During 1994, the Company finalized the redefinition of
this project as a senior condominium project. In conjunction with that change,
the Company expensed $258,000 for costs associated with the original business
purpose which have no future benefit. In June 1995, the Company transferred all
assets and liabilities related to the Legends condominium, including the first
mortgage, to a corporation that is owned by the Company's president. The
transaction resulted in a gain of $290,289.

(4) RELATED-PARTY TRANSACTIONS

At December 31, 1994, the Company had an unsecured interest only
stockholder note receivable, due January 1, 2024 with a balance of $633,387. The
Company also had a note receivable of $107,870 with 2010, interest and principal
both due upon maturity. Both notes had interest rates of 8.50%. The stockholder
note was repaid to the Company during 1995 and the note receivable with 2010 was
written off.

At December 31, 1994, the Company also owed an officer and a former officer
of Crossings $32,475 and $20,600, respectively. Officers notes payable had
matured December 12, 1993. The officer and former officer agreed to extend the
payments on a month-to-month basis provided the Company paid an extension fee
totaling $1,250 each per month. The amounts were paid during 1995.

Crossings Aviation, Inc. is wholly owned by the president of the Company.
During 1993, 1994 and 1995, the Company paid approximately $121,859, $42,500 and
$31,000, respectively, to the aviation company for travel services.

On December 21, 1995, in conjunction with 2010's mortgage financing
transaction with a real estate investment trust, the Company entered into an
operating lease with 2010 in which the Company's president maintains a 99%
general partnership interest. The Company retains a 1% limited partnership
interest in 2010.

(5) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consist of the following at
December 31:

<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
Mortgage notes payable, fixed interest rates of 8% to
10.9%...................................................... $45,221,624 $ --
Mortgage notes payable, variable interest rates of 6.9% to
9.75%...................................................... 6,985,599 --
Project development notes payable, interest rates of 10% to
12%........................................................ 4,648,816 --
Project development notes, non interest bearing.............. 205,000 --
Equity participation notes, including contingent
participation
obligations................................................ 13,263,279 --
Capital lease obligations, interest at rates between 3.4% and
23% payable in monthly installments, due through 2000...... 197,545 178,870
----------- ----------
70,521,863 173,870
Debt refinanced long-term through a sale/leaseback
transaction
(see note 14):
Mortgage notes payable, fixed interest rates of 8% to
10.9%................................................... -- 6,085,900
Equity participation notes, including contingent
participation
obligations............................................. -- 1,487,175
----------- ----------
70,521,863 7,751,945
Less current portion......................................... 25,596,440 69,418
----------- ----------
Total long-term debt and capital lease obligations,
excluding current portion........................ $44,925,423 $7,682,527
========== =========
</TABLE>

F-41
<PAGE> 190

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Equity Participation Notes Payable

At December 31, 1994, the Company had ten equity participation notes
payable administered through Capital Consultants, Inc. (CCI), as agent for
pension funds with equity participation rights ranging from 30% to 90%. The
aggregate outstanding loan balances for each individual facility were
periodically compared to the estimated fair value of the underlying property.
Prior to fiscal year 1993, an obligation for a contingent equity participation
(participation obligation) of approximately $977,000 was recorded related to two
of the participation notes because the fair value of the properties exceeded the
aggregate outstanding loan balances at those facilities. The contingent
obligation is included in the outstanding balance of equity participation notes.

During 1994, the Company modified the loan terms whereby the equity
participation percentages payable to the lender upon sale or refinance of the
residences or maturity of the notes was increased by 5% to 40%. The new equity
participation percentages ranged from 76.5% to 95% of agreed-upon net sale
proceeds or residual fair market value. The Company also agreed to pay 17% of
future development fees to CCI until the notes were repaid. Past due interest of
approximately $599,000 was forgiven. The increased equity participation
percentages resulted in an addition to the participation obligation of
approximately $276,000.

The restructuring qualifies as a troubled debt restructuring in accordance
with generally accepted accounting principles and as such, the interest forgiven
and the increase in participation obligation was being recognized over the
remaining terms of the underlying participation notes until they were paid off
in December 1995 and January 1996 (see notes 6 and 14). The net reduction in
interest expense attributable to the deferred amortization items was $21,000 and
$36,000 in 1994 and 1995, respectively.

(6) SALES/LEASEBACKS OF FACILITIES AND DEFERRED GAIN

In January 1991, the Company entered into a sale/leaseback transaction for
Heritage at Meridian Park located in Tualatin, Oregon. The buyer received the
building and personal property, and assumed the first mortgage of $4.6 million
and the underlying land lease. However, the Company remains obligated under the
first mortgage on the property which matures on December 1, 1999.

The Company received $1.3 million in cash and entered into a ten-year lease
with two five-year renewal options. The Company realized a gain of approximately
$2.2 million which has been deferred because of the Company's continuing
involvement with the facility. The gain is being amortized into income as an
offset to lease expense over the initial lease term based on payments with
respect to the underlying mortgage for which the Company's obligation was not
released. The total deferred gain at December 31, 1994 and 1995 was $2,054,463
and $2,008,279, respectively. At December 31, 1994 and 1995, the mortgage
balance serviced by the purchaser, but for which the Company remains liable, was
$4,351,600 and $4,247,173, respectively.

In December 1995, the Company entered into a series of sale/leaseback
transactions with respect to eleven properties. In conjunction with these
transactions, the Company purchased the partnership interests related to three
properties prior to entering into the sale/leaseback transactions with NHP. The
only residence controlled by the Company that was not included in the above
transactions was The Palms at Loma Linda (The Palms). The Company completed a
sale/leaseback transaction with respect to The Palms in January 1996 (see note
14).

The Company received approximately $44.5 million in cash and entered into
various lease agreements with initial terms ranging between seventeen and
nineteen years with three ten-year renewal options. The Company realized a gain
of approximately $9.7 million which is recorded as a deferred gain because of
the Company's continuing involvement with the facilities. The deferred gain will
be amortized into income as an offset to lease expense over the initial lease
term using the straight-line method.

The extinguishment of approximately $23.5 million of debt, which included
$13.3 million of equity participation notes, was accomplished through the
issuance of 240,000 shares of Mandatorily Redeemable

F-42
<PAGE> 191

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Series A Preferred Stock and 260,000 shares of Series B Preferred Stock and the
application of proceeds from the sale/leaseback transaction with NHP.

(7) INCOME TAXES

The provision for income taxes differs from the amount of income taxes
determined by applying the applicable U.S. statutory Federal rate of 35% to
pretax income primarily as a result of limitations on the Company's ability to
utilize net operating losses.

The tax effect of temporary differences that give rise to significant
portions of Federal deferred tax assets (liabilities) are comprised of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $3,732,000 $4,477,000 $2,307,000
Deferred loan fees............................. 432,000 373,000 13,000
Deferred gain.................................. 736,000 719,000 4,107,000
---------- ---------- ----------
Total gross deferred tax asset......... 4,900,000 5,569,000 6,427,000
Less valuation allowance....................... 4,343,000 4,951,000 5,756,000
---------- ---------- ----------
Deferred tax asset, net................ 557,000 618,000 671,000
Deferred tax liability -- property and equipment
principally due to differences in depreciation
and amortization............................... 557,000 618,000 671,000
---------- ---------- ----------
Net deferred tax asset................. $ -- $ -- $ --
========= ========= =========
</TABLE>

The net increase in the total valuation allowance was $510,000, $608,000
and $805,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
The increases were primarily due to increases in the amount of net operating
loss carryforwards and deferred gain for which the Company is not assured of
utilization.

As of December 31, 1995, the Company has net operating loss carryforwards
of approximately $6,600,000. Unused net operating loss carryforwards will expire
commencing in the years 2002 through 2010. Suspended Passive Activity Losses of
approximately $1,041,000 do not have an expiration date. These carryforwards may
result in a tax benefit when the Company has future taxable income. If
substantial changes in the Company's ownership should occur, there could be an
annual limitation on the amount of the net operating loss carryforwards which
could be utilized.

(8) COMMITMENTS AND CONTINGENCIES

The Company leases land and buildings for residences and corporate
operations under various long-term rental agreements expiring in varying years
through approximately 2014. All of these leases represent operating leases and,
accordingly, rental payments are recorded as rent expense when incurred.

As of December 31, 1995, substantially all of the Company's operating
leases, except for 2010, are leased from NHP, an unrelated third party, as a
result of the sale/leaseback transactions that occurred in December 1995.

F-43
<PAGE> 192

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Minimum lease payments under noncancelable leases at December 31, 1995 are
as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ------------
<S> <C> <C>
1996......................................................... $ 85,664 $ 6,500,680
1997......................................................... 40,403 6,515,944
1998......................................................... 34,783 6,539,777
1999......................................................... 32,022 6,548,274
2000......................................................... 10,471 6,585,895
Thereafter................................................... -- 73,262,365
-------- ------------
Total minimum lease payments....................... 203,343 $105,952,935
===========
Less amount representing interest............................ 24,473
--------
Present value of net minimum lease payments........ 178,870
Less current portion......................................... 69,418
--------
Long-term capital lease obligations................ $109,452
========
</TABLE>

Lease expense is recorded net of the amortization of $43,000, $49,000 and
$49,000 of the deferred gain on the sale/leaseback for the years ended December
31, 1993, 1994 and 1995, respectively. In addition, the Company is responsible
for all operating and maintenance costs associated with the Heritage at Meridian
Park facility.

(9) EXTRAORDINARY GAINS AND LOSSES

During 1993 a note for approximately $354,000 and related accrued interest
of approximately $345,000 was extinguished which resulted in a gain of
approximately $699,000. As discussed in note 6, 1995 sales/ leaseback
transactions resulted in extraordinary gains of $499,769 related to debt
extinguished and extraordinary losses of $879,045 resulting from the write-off
of deferred loan fees associated with loans held on sold facilities.

(10) REDEEMABLE PREFERRED STOCK

In December 1995, the Company issued 240,000 shares of Series A Preferred
Stock (Series A) valued at $25 per share to CCI in conjunction with the payoff
of all outstanding debt to CCI, including the participating notes and all
respective obligations thereunder, and the buyout of CCI's interest in
McMinnville Residential Center. Holders of Series A preferred stock are entitled
to cumulative cash dividends beginning January 15, 1997 in the amount of
$2.08 1/3 per annum, per share, due and payable before January 15 of the
following year.

Series A is redeemable at the option of the Company under certain
circumstances at $25 plus accrued dividends whether declared or not.
Shareholders have the right to redeem shares if the Company fails to pay the
required dividends. Furthermore, the Series A holders may exercise their options
to redeem all (but not less than all) of the outstanding preferred shares, given
proper notice for such action, at an amount of $25.00 per share.

Any shares not redeemed prior to an initial public offering ("IPO") meeting
certain minimum requirements, are convertible into common stock based on a
conversion formula dependent on the IPO price but, in general, at the value of
the preferred shares divided by the IPO price. Upon liquidation, the Series A
holders would receive an amount equal to $25 per share up to $6,000,000 and
would not participate in any other equity.

F-44
<PAGE> 193

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(11) SHAREHOLDERS' DEFICIT

In December 1995, the Company changed the par value of common stock from
$.10 per share to $.001 per share and increased the number of authorized shares
of common stock and preferred stock to 40,000,000 and 5,000,000, respectively.
Common stock and additional paid-in capital have been adjusted for all years to
reflect the change in par value.

In December 1995, the Company issued 260,000 shares of Series B Preferred
Stock (Series B) to CCI in exchange for $6,500,0000 in cash which was primarily
used in conjunction with the payoff of all outstanding obligations to CCI. The
Series B Preferred Stock is redeemable in part at the option of the Company
under certain circumstances at the greater of $32.50 per share or a conversion
ratio pursuant to an IPO. Any shares not redeemed prior to an IPO meeting
certain minimum requirements are convertible into common stock based on a
conversion formula dependent on the IPO price. Holders of Series B are not
entitled to receive any dividends; however, the Series B holders, as a class,
have the right to elect one director. Subsequent to January 15, 1997, the
holders of the majority of Series B have the right to remove any and all
directors.

(12) STOCK BONUS AND OPTION PLAN

In June 1995, the Company established a Stock Bonus and Option Plan (Plan)
in which stock can be granted to employees as bonus shares or options. The
options may be granted as either incentive or nonqualified stock options. The
Plan is administered by the Board of Directors or an administrative committee if
the Board of Directors so desires. Incentive options may be granted only to
officers or other employees of the Company while nonqualified options may be
granted to employees and other persons as the plan administrator selects. The
Company has reserved 42,563 shares of common stock for issuance under this Plan.

In July 1995, the Company granted a stock bonus of 42,563 shares of common
stock to employees in recognition of past performance. Consequently, there are
no shares available for grant under the Plan. Compensation expense of $4,256 has
been recognized based upon an estimated value of $.10 at the time of the grant.

In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation. This pronouncement establishes
the accounting and reporting standards for stock-based employee compensation
plans, including stock purchase plans, stock options and stock appreciation
rights. This new standard defines a fair value-based method of accounting for
these equity instruments. This method measures compensation cost based on the
value of the award and recognizes that cost over the service period. Companies
may elect to adopt this standard or to continue accounting for these types of
equity instruments under current guidance, APB Opinion No. 25, Accounting for
Stock Issued to Employees. Companies which elect to continue using the guidance
of Opinion 25 must make pro forma disclosures of net earnings and earnings per
share as if this new statement had been applied. This new standard is applicable
to financial statements for fiscal years beginning after December 15, 1995.

The Company anticipates that it will continue to use the rules of APB
Opinion No. 25 and make the pro forma disclosures required under the new
standard.

(13) LIQUIDITY

The Company has incurred recurring losses and has a net capital deficiency.
In December 1995, the Company began restructuring its long-term obligations
through sale/leaseback transactions more fully described in note 6. The
restructuring was completed in January 1996 as described in note 14. Although
debt service reductions will be replaced in part by increased lease payments,
management believes that the restructured operations will allow the Company to
obtain additional borrowings and generate additional cash from operations. As
part of the restructuring, a $14,280,000 financing commitment for new
developments was obtained from NHP and the Company obtained approximately
$8,900,000 in construction loan financing.

F-45
<PAGE> 194

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(14) SUBSEQUENT EVENTS

(a) The Palms Sale/Leaseback

In January 1996, the Company completed a sale/leaseback arrangement related
to The Palms. Debt of approximately $7,513,000, which includes deferred gain on
restructuring (note 5) of approximately $87,000, was removed from the Company's
records and assumed by the buyer/lessor. The underlying property and equipment
was also conveyed to the buyer/lessor. The Company remains obligated for the
first mortgage on the property. Because of the Company's continuing involvement,
the mortgage obligation will continue as a liability of the Company, a
corresponding deferred charge will be established and amortized until maturity
or repayment of the related debt, and the related gain on sale of approximately
$1,660,000 will be deferred and amortized over the remaining term of the debt.

(b) Acquisition by Alternative Living Services, Inc. (Unaudited)

On May 24, 1996, the Company merged with Alternative Living Services, Inc.,
a company which operates assisted living residences primarily in the midwest and
eastern United States. Immediately prior to, and in connection with, the merger,
the Series A and Series B Preferred Stock was converted into Crossings common
stock. The total purchase consideration paid by Alternative Living Services,
Inc. was 2,007,049 shares of Alternative Living Services, Inc.'s common stock
with an estimated market value of $9,281,000.

F-46
<PAGE> 195

NEW CROSSINGS INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash......................................................................... $ 1,787,785
Accounts receivable.......................................................... 257,496
Inventory.................................................................... 46,193
Prepaid rent................................................................. 546,511
Prepaid expenses............................................................. 97,915
------------
Total current assets................................................. 2,735,900
Property and equipment, net.................................................... 807,001
Deferred lease charge.......................................................... 10,224,044
Lease deposits................................................................. 1,623,064
Other assets, net.............................................................. 739,048
------------
$ 16,129,055
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt and capital leases......................... $ 52,311
Accounts payable............................................................. 804,536
Accrued payroll and payroll taxes............................................ 441,169
Accrued interest payable..................................................... 67,500
Other accrued expenses....................................................... 480,787
Property taxes............................................................... 280,413
Unearned revenue............................................................. 208,337
------------
Total current liabilities............................................ 2,335,053
Security deposits.............................................................. 91,278
Deferred gain on sale.......................................................... 13,171,582
Sale/leaseback obligation...................................................... 10,224,044
Long-term debt and capital leases.............................................. 115,167
------------
Total liabilities.................................................... 25,937,124
------------
Mandatorily redeemable preferred stock -- Series A preferred, par value $.001;
240,000 shares issued and outstanding (liquidation preference of $25.00 per
share)....................................................................... 6,000,000
Commitments and contingencies
Shareholders' deficit:
Preferred stock, $.001 par value. Authorized 5,000,000 shares -- Series B
preferred stock, 260,000 shares issued and outstanding (liquidation
preference of $25.00 per share)........................................... 260
Common stock, $.001 par value. Authorized 40,000,000 shares; issued and
outstanding 192,563 shares................................................ 193
Additional paid-in capital................................................... 6,540,856
Accumulated deficit.......................................................... (22,349,378)
------------
Total shareholders' deficit.......................................... (15,808,069)
------------
$ 16,129,055
===========
</TABLE>

See accompanying notes to condensed combined and consolidated financial
statements.

F-47
<PAGE> 196

NEW CROSSINGS INTERNATIONAL CORPORATION

CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Net revenues......................................................... $ 5,374,200 $5,942,095
----------- ----------
Expenses:
Residence operations............................................... 2,921,460 3,476,951
Lease expense...................................................... 156,370 1,714,541
General and administrative......................................... 519,196 704,137
Depreciation and amortization...................................... 449,622 23,436
----------- ----------
Total operating expenses................................... 4,046,648 5,919,065
----------- ----------
Income from operations..................................... 1,327,552 23,030
----------- ----------
Other income (expense):
Interest expense................................................... (1,439,726) (12,998)
Interest income.................................................... 39,100 42,380
Other income....................................................... -- 8,453
----------- ----------
Other income (expense), net..................................... (1,400,626) 37,835
----------- ----------
Income (loss) before extraordinary item......................... (73,074) 60,865
Extraordinary item -- gain from extinguishment of debt............. -- 132,624
----------- ----------
Net income (loss).......................................... $ (73,074) $ 193,489
========== =========
</TABLE>

See accompanying notes to condensed combined and consolidated financial
statements.

F-48
<PAGE> 197

NEW CROSSINGS INTERNATIONAL CORPORATION

CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995, AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities (including
changes in all operating assets and liabilities)................... $ 50,871 $ (593,459)
--------- -----------
Cash used in investing activities -- purchases of property and
equipment.......................................................... (197,635) (532,159)
--------- -----------
Cash flows from financing activities:
Proceeds from debt................................................. 145,091 --
Principal payments on debt......................................... (149,916) (18,104)
Payments to related parties........................................ (22,094) --
Distribution to partners........................................... (134,661) --
--------- -----------
Net cash used in financing activities...................... (161,580) (18,104)
--------- -----------
Net decrease in cash....................................... (308,344) (1,143,722)
Cash at beginning of period.......................................... 838,565 2,931,507
--------- -----------
Cash at end of period................................................ $ 530,221 $ 1,787,785
========= ==========
</TABLE>

See accompanying notes to condensed combined and consolidated financial
statements.

F-49
<PAGE> 198

NEW CROSSINGS INTERNATIONAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)

(1) The accompanying condensed combined and consolidated financial statements
reflect the operating results and financial position of certain assisted
living and senior living residences under the common ownership, management
and control of Crossings International Corporation and subsequent to
December 21, 1995 New Crossings International Corporation (collectively
referred to as the "Company"). The unaudited interim condensed combined and
consolidated financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations.

The information furnished reflects, in the opinion of management, all
adjustments, consisting of only normal recurring items, necessary for a
fair presentation of the results for the interim periods presented. Interim
results are not necessarily indicative of results for a full year.

(2) In January 1996, the Company completed a sale/leaseback arrangement related
to a residence. Debt of approximately $7,513,000, which includes deferred
gain on restructuring of approximately $87,000 was removed from the
Company's records and assumed by the buyer/lessor. The underlying property
and equipment of approximately $6,481,000 was also conveyed to the
buyer/lessor. The Company will remain obligated for the first mortgage on
the property. Because of the Company's continuing involvement the mortgage
obligation will continue as a liability of the Company, a corresponding
deferred charge will be established and amortized until maturity or
repayment of the related debt, and the related gain on sale of
approximately $1,660,000 will be deferred and amortized over the remaining
maturity or repayment of the debt term.

(3) On May 24, 1996, the Company merged with Alternative Living Services, Inc.,
a company which operates assisted living residences primarily in the
midwest and eastern United States. Immediately prior to, and in connection
with, the merger, the Series A and Series B Preferred Stock was converted
into Crossings common stock. The total purchase consideration paid by
Alternative Living Services, Inc. was 2,007,049 shares of Alternative
Living Services, Inc.'s common stock with an estimated market value of
$9,281,000.

F-50
<PAGE> 199

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Alternative Living Services -- Midwest Inc.:

We have audited the accompanying combined balance sheet of Alternative
Living Services -- Midwest Inc. and Affiliates (the Company) as of December 31,
1995, and the related combined statements of operations, changes in
stockholders' equity, and cash flows for the year ended December 31, 1995. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
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 combined 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 audit provides a reasonable basis for our
opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Alternative Living
Services -- Midwest Inc. and Affiliates at December 31, 1995, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Milwaukee, Wisconsin
April 18, 1996

F-51
<PAGE> 200

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

COMBINED BALANCE SHEET
DECEMBER 31, 1995

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 577,205
Resident receivables, net........................................... 134,336
Other current assets................................................ 127,940
-----------
Total current assets........................................ 839,481
-----------
Property, plant and equipment, net.................................... 10,496,005
Other assets.......................................................... 3,440,110
-----------
Total assets................................................ $14,775,596
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 1,635,033
Accrued expenses.................................................... 455,436
Notes payable to banks.............................................. 5,679,865
Advances from and notes payable to related entities................. 3,204,946
-----------
Total current liabilities................................... 10,975,280
-----------
Minority interest..................................................... 2,634,367
Stockholders' equity:
Common stock and additional paid-in capital......................... 2,017,437
Accumulated deficit................................................. (851,488)
-----------
Total stockholders' equity.................................. 1,165,949
-----------
Total liabilities and stockholders' equity.................. $14,775,596
==========
</TABLE>

See accompanying notes to combined financial statements.

F-52
<PAGE> 201

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
Revenue:
Resident service fees................................................ $2,504,388
Other................................................................ 298,152
----------
Operating revenue...................................................... 2,802,540
----------
Operating expenses:
Residence operations................................................. 2,765,644
General and administrative........................................... 319,711
Depreciation and amortization........................................ 379,848
----------
Total operating expenses..................................... 3,465,203
----------
Operating loss......................................................... (622,663)
----------
Other income (expense):
Interest expense..................................................... (542,913)
Interest income...................................................... 57,067
Minority interest in losses of combined affiliates................... 423,946
----------
Total other expense, net..................................... (61,900)
----------
Net loss............................................................... $ (724,563)
=========
</TABLE>

See accompanying notes to combined financial statements.

F-53
<PAGE> 202

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL
------------------- ACCUMULATED
SHARES AMOUNTS DEFICIT TOTAL
------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1994...................... 20,000 $ 747,612 $ (62,725) $ 684,887
------ ---------- ----------- ----------
Contributed capital.............................. 1,269,825 -- 1,269,825
Distribution of dividends........................ -- (64,200) (64,200)
Net loss......................................... -- (724,563) (724,563)
------ ---------- ----------- ----------
Balances at December 31, 1995...................... 20,000 $2,017,437 $(851,488) $1,165,949
====== ========= ========= =========
</TABLE>

See accompanying notes to combined financial statements.

F-54
<PAGE> 203

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (724,563)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................. 379,848
Minority interest in losses of combined affiliates........................ (423,946)
Increase in other current assets.......................................... (101,393)
Increase in accounts payable.............................................. 1,529,068
Increase in accrued expenses.............................................. 329,208
Changes in other assets and liabilities and other adjustments............. (701,969)
------------
Net cash provided by operating activities...................................... 286,253
------------
Cash flows from investing activities --
payments for property, plant and equipment and project development costs..... (10,745,698)
------------
Cash flows from financing activities:
Proceeds from notes payable to bank.......................................... 5,651,717
Payments on notes payable to bank............................................ (148,356)
Changes in advances from and notes payable to related entities............... 1,126,478
Contributed capital.......................................................... 1,269,825
Contributions by minority partners........................................... 3,058,313
Distribution of dividends.................................................... (64,200)
------------
Net cash provided by financing activities...................................... 10,893,777
------------
Net increase in cash and cash equivalents...................................... 434,332
Cash and cash equivalents:
Beginning of period.......................................................... 142,873
------------
End of period................................................................ $ 577,205
===========
</TABLE>

See accompanying notes to combined financial statements.

F-55
<PAGE> 204

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995

(1) BUSINESS

Alternative Living Services -- Midwest Inc. (the Company) was incorporated
in 1991 to develop assisted living residences in Michigan and other midwest
states.

Limited partnerships are formed for each Michigan facility developed. The
Company serves as the sole general partner and holds approximately 45% to 73% of
each partnership formed. Limited partnerships formed to date and the Company's
respective ownership percentage are as follows:

Hamilton House (45% interest), formed to develop the Hamilton House-I
residence in Farmington Hills, Michigan, which opened July 18, 1994.

North Schoenherr (50% interest), formed to develop the Hamilton
House-I residence in Utica, Michigan, which opened January 16, 1995.

Eisenhower/State (50% interest), formed to develop the Hamilton
House-I residence in Ann Arbor, Michigan, which opened June 8, 1995.

Twelve Mile Drake (45% interest), formed to develop the Hamilton
House-II residence in Farmington Hills, Michigan, which opened October 1,
1995.

Marsh/Tihart (73% interest), formed to develop the Hamilton House-II
residence in Lansing, Michigan, which was under construction at December
31, 1995.

Six Mile Abbey (50% interest), formed to develop the Hamilton House-II
residence in Northville, Michigan, which was under construction at December
31, 1995.

Northpointe Utica (50% interest), formed to develop the Hamilton
House-II residence in Utica, Michigan, which was under construction at
December 31, 1995.

Residences owned by these limited partnerships are operated and managed by
Alternative Living Services, Inc., (ALS, Inc.) which develops, owns and operates
assisted living residences, including residences for the frail elderly and
specialty care residences for individuals with Alzheimer's disease and other
dementia. ALS, Inc. is paid management fees of approximately 8% of monthly
revenues by the limited partnerships in exchange for the management services
performed. Additionally, ALS, Inc. participates as a limited partner in several
of the limited partnerships.

The Company has authorized, issued and outstanding 20,000 shares of no par
common stock at December 31, 1995, of which ALS, Inc. holds 10,000 shares.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of the Company are as follows:

(a) Combined Financial Statements

The combined financial statements include the accounts of the Company
and its affiliates which are under the common financial control of the
Company. Results of operations of the affiliates are included from the date
of acquisition. All significant intercompany accounts and transactions with
its affiliates have been eliminated in the combined financial statements.

Minority interest represents the ownership percentage of accumulated
losses and capital contributions made by the limited partners other than
ALS, Inc. (see note 9). The ownership interests of the Company and its
affiliates and ALS, Inc. have been included in total stockholders' equity.

F-56
<PAGE> 205

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(b) Cash Equivalents

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for purposes of
the combined statement of cash flows.

Property, plant and equipment is carried at cost, net of accumulated
depreciation. Depreciation is computed over the estimated lives of the
assets using the straight-line method. Buildings are depreciated over 20 to
40 years, and furniture, fixtures and equipment are depreciated over five
to seven years. Maintenance and repairs are expensed as incurred.

(d) Other Assets

Other assets includes organizational and other costs which are
amortized on a straight-line basis over five years. Also included in other
assets are land acquisition and project development costs incurred in the
initial development of new residences, and capital contributions receivable
from unaffiliated limited partners. Land acquisition and project
development costs will become a component of the total cost of the new
residences, and will be amortized over their respective useful lives.

(e) Income Taxes

Deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.

(f) Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents approximate fair
value due to the short-term nature of the accounts and due to the accounts
earning interest at current market rates. The carrying amount of the
Company's note payable to bank and advances from and notes payable to
related entities approximates fair value due to the interest rates
approximating the current rates available to the Company for similar
borrowing arrangements.

(g) Use of Estimates

F-57
<PAGE> 206

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(3) PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment at December 31, 1995 follows:

<TABLE>
<S> <C>
Land and land improvements.............................................. $ 1,544,603
Buildings............................................................... 7,512,810
Furniture and fixtures.................................................. 1,392,588
Construction in progress................................................ 347,421
-----------
Total property, plant and equipment..................................... 10,797,422
Less accumulated depreciation........................................... 301,417
-----------
Property, plant and equipment, net...................................... $10,496,005
==========
</TABLE>

Interest is capitalized in connection with the construction of facilities
and is amortized over the estimated useful lives of the facilities. Interest
capitalized during 1995 was approximately $280,000.

(4) OTHER ASSETS

Other assets are comprised of the following at December 31, 1995:

<TABLE>
<S> <C>
Land acquisition and project development costs........................... $2,926,893
Organization, finance and other costs.................................... 377,946
Capital contribution receivable.......................................... 135,271
----------
Total other assets............................................. $3,440,110
=========
</TABLE>

(5) NOTES PAYABLE TO BANKS

Notes payable to banks consists of the following at December 31, 1995:

<TABLE>
<S> <C>
Mortgage notes payable, interest at the prime rate plus 1.25% to 2.5%
(10.25% at December 31, 1995), payable on demand....................... $4,209,761
Mortgage note payable, interest at 10.75%, payable on demand............. 1,470,104
----------
Total notes payable to banks................................... $5,679,865
=========
</TABLE>

(6) ADVANCES FROM AND NOTES PAYABLE TO RELATED ENTITIES

Advances from and notes payable to related entities consist of the
following at December 31, 1995:

<TABLE>
<S> <C>
Advances and notes payable -- The Damone Group, Inc...................... $1,029,700
Advances and notes payable -- ALS, Inc................................... 2,063,389
Advances and notes payable -- other related entities..................... 111,857
----------
Total advances from and notes payable to related entities...... $3,204,946
=========
</TABLE>

These advances from and notes payable to related entities are payable on
demand, with interest at 9%.

F-58
<PAGE> 207

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(7) INCOME TAXES

Deferred tax assets and liabilities consist of the following at December
31, 1995:

<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards........................................ $ 72,700
Investment in affiliates................................................ 184,700
--------
Total deferred tax assets................................................. 257,400
Less valuation allowance.................................................. 257,400
--------
Deferred tax assets, net of valuation allowance........................... $ --
========
</TABLE>

The Company has approximately $204,600 of net operating loss carryforwards
for income tax purposes at December 31, 1995, which will begin to expire, if
unused, beginning in the year 2005.

(8) COMMITMENTS AND CONTINGENCIES

At December 31, 1995, capital expenditure commitments for the construction
of two Michigan facilities developed by Six Mile Abbey and Northpointe Utica
limited partnerships were approximately $13,300,000. Costs incurred through
December 31, 1995 of approximately $2,908,000 are included in land acquisition
and project development costs. Both facilities are expected to become
operational in 1996.

F-59
<PAGE> 208

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31,
1996
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 845,200
Resident receivables, net..................................................... 308,801
Other current assets.......................................................... 92,859
-----------
Total current assets.................................................. 1,246,860
-----------
Property, plant and equipment, net.............................................. 15,189,408
Other assets.................................................................... 407,600
-----------
Total assets.......................................................... $16,843,868
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 2,214,848
Accrued expenses.............................................................. 596,537
Notes payable to banks........................................................ 5,660,259
Advances from and notes payable to related entities........................... 3,958,936
-----------
Total current liabilities............................................. 12,430,580
-----------
Minority interest............................................................... 2,623,236
Stockholders' equity:
Common stock and additional paid-in capital................................... 2,679,060
Accumulated deficit........................................................... (889,008)
-----------
Total stockholders' equity............................................ 1,790,052
-----------
Total liabilities and stockholders' equity............................ $16,843,868
==========
</TABLE>

See accompanying notes to condensed combined financial statements.

F-60
<PAGE> 209

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1995 1996
-------- ----------
<S> <C> <C>
Revenue:
Resident service fees................................................ $414,041 $1,141,481
Other................................................................ -- 200,324
-------- ----------
Operating revenue............................................ 414,041 1,341,805
-------- ----------
Operating expenses:
Residence operations................................................. 334,843 868,821
Lease expense........................................................ 3,342 50,678
General and administrative........................................... 18,947 114,414
Depreciation and amortization........................................ 51,878 119,776
-------- ----------
Total operating expenses..................................... 409,010 1,153,689
-------- ----------
Operating income....................................................... 5,031 188,116
-------- ----------
Other income (expense):
Interest expense..................................................... (82,160) (239,452)
Interest income...................................................... 2,717 2,675
Minority interest in losses of combined affiliates................... -- 11,131
-------- ----------
Total other expense, net..................................... (79,443) (225,646)
-------- ----------
Net loss............................................................... $(74,412) $ (37,530)
======== =========
</TABLE>

See accompanying notes to condensed combined financial statements.

F-61
<PAGE> 210

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (74,412) $ (37,530)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization................................... 51,878 119,776
Minority interest in losses of combined affiliates.............. -- (11,131)
Increase in resident receivables................................ (12,990) (174,465)
Decrease (increase) in other current assets..................... (76,519) 35,081
Increase in accounts payable.................................... 18,110 579,815
Increase in accrued expenses.................................... 69,864 141,101
Changes in other assets and liabilities and other adjustments... 320,901 124,209
--------- -----------
Net cash provided by operating activities............................ 296,832 776,856
--------- -----------
Cash flows from investing activities --
payments for property, plant and equipment and project development
costs........................................................... (26,432) (1,904,875)
--------- -----------
Cash flows from financing activities:
Proceeds from notes payable to bank................................ 21,000 --
Payments on notes payable to bank.................................. (209,564) (19,606)
Changes in advances from and notes payable to related entities..... 150,203 753,990
Contributed capital................................................ -- 661,630
--------- -----------
Net cash provided by (used in) financing activities.................. (38,361) 1,396,014
--------- -----------
Net increase in cash and cash equivalents............................ 232,039 267,995
Cash and cash equivalents:
Beginning of period................................................ 142,894 577,205
--------- -----------
End of period...................................................... $ 374,933 $ 845,200
========= ==========
</TABLE>

See accompanying notes to condensed combined financial statements.

F-62
<PAGE> 211

ALTERNATIVE LIVING SERVICES -- MIDWEST INC. AND AFFILIATES

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)

(1) BASIS OF PRESENTATION

The condensed combined balance sheet as of March 31, 1996 and related
condensed combined statements of operations and cash flows for the three months
ended March 31, 1995 and 1996 contained herein, which are unaudited, include the
accounts of Alternative Living Services -- Midwest Inc. (ALS-Midwest) and its
affiliates which are under the common financial control of ALS-Midwest. All
significant intercompany accounts have been eliminated in the combination. In
the opinion of management, all adjustments necessary for a fair presentation of
such financial statements have been included. Adjustments consist only of normal
recurring items. The results of operations for the three months ended March 31,
1995 and 1996, are not necessarily indicative of the results to be expected for
the full fiscal year.

The condensed combined financial statements do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. Reference is made to ALS-Midwest's audited financial
statements and the related notes as of December 31, 1995 and for the year then
ended, which provide additional disclosures and a further description of
accounting policies.

F-63
<PAGE> 212
------------------------------------------------------
------------------------------------------------------

NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE
DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 15
Dividend Policy....................... 16
Dilution.............................. 17
Capitalization........................ 18
Pro Forma Financial Information....... 19
Selected Consolidated Financial
Data................................ 27
Management's discussion and Analysis
of Financial Condition and Results
of Operation........................ 29
Business.............................. 35
History and Organization.............. 54
Management............................ 57
Principal and Selling Stockholders.... 63
Certain Relationships and Related
Transactions........................ 65
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 68
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 71
Additional Information................ 72
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------

5,000,000 SHARES

[ALTERNATIVE LIVING SERVICES, INC. LOGO]

COMMON STOCK
-------------------------
PROSPECTUS
-------------------------

NATWEST SECURITIES LIMITED

MCDONALD & COMPANY
SECURITIES, INC.

THE CHICAGO CORPORATION
, 1996

------------------------------------------------------
------------------------------------------------------
<PAGE> 213

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following tables sets forth the expenses to be paid in connection with
the issuance and distribution of the securities being registered, other than
underwriting discounts and commissions, and all such expenses will be borne by
the Registrant. All amounts are estimates except for the Securities and Exchange
Commission registration fee and the National Association of Securities Dealers,
Inc. ("NASD") filing fee.

<TABLE>
<S> <C>
SEC Registration Fee............................................................... $33,707
NASD Fee........................................................................... 10,275
AMEX Listing Fee................................................................... *
Printing and Mailing Expenses...................................................... *
Legal Fees and Expenses............................................................ *
Accounting Fees and Expenses....................................................... *
Transfer Agent's Fees and Expenses................................................. *
Blue Sky Fees and Expenses......................................................... *
Miscellaneous Expenses............................................................. *
-------
Total.................................................................... $ *
=======
</TABLE>

- ---------------

* To be supplied by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 102(b)(7) of the General Corporation Law of the State of Delaware
permits a Delaware corporation to limit the personal liability of its directors
in accordance with the provisions set forth therein. The Restated Certificate of
Incorporation of the Registrant provides that the personal liability of its
directors shall be limited to the fullest extent permitted by applicable law.

Section 145 of the General Corporation Law of the State of Delaware
contains provisions permitting Delaware corporations to indemnify directors,
officers, employees or agents against expenses, including attorneys' fees,
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person was or is a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, provided that (i) such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the corporation's best interest, and (ii) in the case of a criminal proceeding
such person had no reasonable cause to believe his or her conduct was unlawful.
In the case of actions or suits by or in the right of the corporation, no
indemnification shall be made in a case in which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
have determined upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses. Indemnification as described
above shall only be granted in a specific case upon a determination that
indemnification is proper in the circumstances because the indemnified person
has met the applicable standard of conduct. Such determination shall be made (a)
by a majority vote of the directors who are not parties to such proceeding, even
though less than a quorum, (b) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (c)
by the stockholders of the corporation. Notwithstanding the foregoing, to the
extent that a director, officer, employee or agent of the corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) or (b) of Section 145, or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in

II-1
<PAGE> 214

connection therewith. The Restated Certificate of Incorporation and the Restated
Bylaws of the Registrant provide for indemnification of its directors and
officers to the fullest extent permitted by applicable law.

The form of Underwriting Agreement attached hereto as Exhibit 1.1, which
provides for, among other things, the Registrant's sale to the Underwriters of
the securities being registered herein, will obligate the Underwriters to
indemnify the Registrant and Registrant's officers and directors against certain
liabilities under the Securities Act of 1933.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In connection with the Company's initial capitalization on December 14,
1993, the Company issued 975,151 shares of Common Stock to Evergreen Healthcare,
Inc., a Georgia corporation ("Evergreen"), 380,636 shares of Common Stock to
Care Living Centers, Inc., a Wisconsin corporation, and 456,763 shares of Common
Stock to Dr. Kraig E. Lorenzen. These securities were issued without
registration under the Securities Act in reliance upon the exemption in Section
4(2) of the Securities Act.

On May 24, 1995, the Company issued 4,302,994 shares of Common Stock to
Alternative Living Investors, L.L.C., a Delaware limited liability company,
pursuant to the Company's 1995 recapitalization transaction for $20,000,000 and
917,151 shares of Common Stock to Evergreen pursuant to a September 21, 1994
capital call for $2,677,342. These securities were issued without registration
under the Securities Act in reliance upon the exemption in Section 4(2) of the
Securities Act.

On January 25, 1996 in connection with the Company's acquisition of all of
the outstanding capital stock of Heartland Retirement Services, Inc., a
Wisconsin corporation ("Heartland"), the Company issued an aggregate of 207,899
shares of Common Stock to Heartland Development Corporation, a Wisconsin
corporation, and Douglas A. Hennig, the sole shareholders of Heartland (the
"Heartland Acquisition"). These securities were issued without registration
under the Securities Act in reliance upon the exemption in Section 4(2) of the
Securities Act. In addition, pursuant to the terms of the employment agreement
entered into by and between the Company and Mr. Hennig as part of the Heartland
Acquisition, the Company issued 53,525 shares of Common Stock to Mr. Hennig for
$248,748.12 and the Company granted Mr. Hennig an option to acquire an aggregate
of 41,589 shares of Common Stock. These securities were issued without
registration under the Securities Act in reliance upon the exemption in Section
4(2) of the Securities Act.

On May 23, 1996, the Company issued 322,706 shares of Common Stock for
$1,500,583.00 to Assisted Living Equity Investors, a New York general
partnership, ("ALE"), pursuant to the terms of a Stock Purchase Agreement dated
as of May 22, 1996 by and between the Company and Pioneer. These securities were
issued without registration under the Securities Act in reliance upon the
exemption in Rule 506 of Regulation D promulgated pursuant to Section 4(2) of
the Securities Act.

On May 23, 1996, the Company issued 107,575 shares of Common Stock for
$500,023.75 to Petty, Kneen & Company, L.L.C. ("PK & Co."), a Delaware limited
liability company organized by William G. Petty, Jr. and John W. Kneen, the
Chairman of the Board and the Chief Financial Officer of the Company,
respectively, pursuant to the terms of the Purchase Agreement dated as of May
22, 1996 by and between the Company and PK & Co. These securities were issued
without registration under the Securities Act in reliance upon the exemption in
Rule 506 of Regulation D promulgated pursuant to Section 4(2) of the Securities
Act.

On May 23, 1996 in connection with the merger of Alternative Living
Services -- Midwest Inc. ("ALS-Midwest") with and into ALS Acquisition Corp., a
wholly-owned subsidiary of the Company, the Company issued an aggregate of
57,512 shares of Common Stock to Water Cliff Limited Partnership, Michael J.
Damone and the Michael G. Damone Trust dated November 4, 1969, the sole
shareholders of ALS-Midwest other than the Company. These securities were issued
without registration under the Securities Act in reliance upon the exemption in
Rule 504 of Regulation D promulgated pursuant to Section 3(b) of the Securities
Act and in reliance upon the exemption in Rule 506 of Regulation D promulgated
pursuant to Section 4(2) of the Securities Act.

On May 23, 1996 in connection with the acquisition by the Company of all of
the limited partnership interests in five Michigan limited partnerships not
already held by the Company or by ALS-Midwest pursuant

II-2
<PAGE> 215

to the terms of the Limited Partner Interest Purchase Agreement by and among the
Company, ALS-Midwest, Lionel S. Margolick and the limited partners named therein
dated as of May 20, 1996, the Company issued an aggregate of 115,024 shares of
Common Stock. These securities were issued without registration under the
Securities Act in reliance upon the exemption in Rule 506 of Regulation D
promulgated pursuant to Section 4(2) of the Securities Act.

On May 23, 1996 in connection with the merger of New Crossing International
Corporation, a Nevada corporation ("Crossings"), with and into the Company
pursuant to the Agreement and Plan of Merger by and between the Company,
Crossings and Capital Consultants, Inc. dated as of May 22, 1996, the Company
issued and aggregate of 2,007,049 shares of Common Stock to the shareholders of
Crossings. These securities were issued without registration under the
Securities Act in reliance upon the exemption in Rule 506 of Regulation D
promulgated pursuant to Section 4(2) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

The following exhibits are filed pursuant to Item 601 of Regulation S-K.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Restated Certificate of Incorporation of Registrant.
3.2 -- Restated Bylaws of Registrant.
4.1 -- See Articles Four, Six, Seven, Eight, Nine, Ten and Eleven of the Company's
Restated Certificate of Incorporation filed as Exhibit 3.1 to this Registration
Statement and Articles 2, 3, 5, 7 and 8 of the Company's Restated Bylaws filed as
Exhibit 3.2 to this Registration Statement.
4.2 -- Form of Common Stock certificate.*
5.1 -- Opinion and Consent of Rogers & Hardin.
10.1 -- Stock Purchase Agreement dated as of May 22, 1996 by and between Assisted Living
Equity Investors and the Company.*
10.2 -- Services Agreement effective as of January 1, 1996 by and between Petty, Kneen &
Company, L.L.C. and the Company.
10.3 -- Purchase Agreement dated as of May 22, 1996 by and between Petty, Kneen & Company,
L.L.C. and the Company.
10.4 -- Agreement and Plan of Merger among the Company, ALS Acquisition Corp., Alternative
Living Services-Midwest Inc. and the shareholders of Alternative Living
Services-Midwest Inc. dated as of May 20, 1996.
10.5 -- Limited Partner Interest Purchase Agreement by and among the Company, Alternative
Living Services-Midwest Inc., Lionel S. Margolick and the Limited Partners
referenced herein dated as of May 20, 1996.
10.6 -- Agreement and Plan of Merger dated as of May 22, 1996 between the Company, New
Crossings International Corporation and Capital Consultants, Inc.*
10.7 -- Services Agreement by and between Richard W. Boelhke and the Company dated as of
May 23, 1996.
10.8 -- Employment Agreement by and between D. Lee Field and the Company dated as of May
23, 1996.
10.9 -- Employment Agreement by and between David M. Boitano and the Company dated as of
May 23, 1996.
10.10 -- Amended and Restated Alternative Living Services, Inc. 1995 Incentive Compensation
Plan.*
</TABLE>

II-3
<PAGE> 216

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------------------
<C> <C> <S>
10.11 -- Employment Agreement by and between G. Faye Godwin and the Company dated as of May
23, 1996.
10.12 -- Employment Agreement by and between Douglas A. Hennig and the Company dated as of
January 25, 1996, as amended.
10.13 -- Employment Agreement by and between William F. Lasky and the Company dated as of
December 14, 1993, as amended.
10.14 -- Recapitalization Agreement dated as of May 23, 1995 by and among the Company,
Evergreen Healthcare, Inc., Care Living Centers, Inc., William F. Lasky, David
Burr, Kraig E. Lorenzen and Alternative Living Investors, L.L.C.
10.15 -- Stock Purchase Agreement among Heartland Retirement Services, Inc., the
shareholders of Heartland Retirement Services, Inc. and the Company dated as of
January 25, 1996.*
10.16 -- Loan Agreement dated as of January 25, 1996 by and among RDV Capital Management
L.P. and the Company.*
10.17 -- Lease Agreement between Healthcare REIT, Inc. and the Company dated as of January
22, 1996 (Clare Bridge of Bradenton).
10.18 -- Lease Agreement between Healthcare REIT, Inc. and the Company dated as of January
22, 1996 (Clare Bridge of Sarasota).
10.19 -- Loan Agreement by and between ALS-Stonefield, Inc. and Healthcare Capital Finance,
Inc. dated as of August 10, 1995.
10.20 -- Loan Agreement by and between SouthTrust Bank of Alabama, National Association and
the Company dated as of June 19, 1995.
10.21 -- Reimbursement Agreement dated as of March 29, 1995 by and between Evergreen
Healthcare, Inc. and the Company.*
10.22 -- Joint Venture Agreement dated as of November 15, 1995 by and between Days
Development Company, LC and the Company.
10.23 -- Acquisition Agreement dated as of September 20, 1994 by and between
CCCI/Northampton Limited Partnership, Continuing Care Concepts, Inc. and the
Company, as amended.
10.24 -- Construction Loan and Security Agreement between Clare Bridge of Montgomery and
Maine Line Federal Savings Bank dated as of March 8, 1996.
10.25 -- Loan Agreement dated as of April 30, 1996 by and between North Pointe-Utica
Limited Partnership and GMAC Commercial Mortgage Corporation.
10.26 -- Loan Agreement dated as of April 30, 1996 by and between Six Mile/Abby Limited
Partnership and GMAC Commercial Mortgage Corporation.
10.27 -- Construction Loan and Security Agreement between Clare Bridge of Lower Makefield
and Main Line Federal Savings Bank dated as of November 20, 1995.
10.28 -- Lease Agreement by and between Badger II Limited Partnership and the Company dated
as of December 19, 1994, as amended.*
10.29 -- Mortgage and Security Agreement between CCCI/Northampton Limited Partnership and
Main Line Federal Savings Bank dated as of June 30, 1995.
10.30 -- Building Loan Agreement by and between Wynwood of Chapel Hill, LLC and Wachovia
Bank of North Carolina, N.A. dated as of February 29, 1996.
10.31 -- Lease dated as of February 27, 1996 by and between George Gialamas and the
Company.
10.32 -- Assisted Living Consultant and Management Services Agreement by and between
Alternative Living Services and the Company dated as of December 14, 1993.
</TABLE>

II-4
<PAGE> 217

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------------------
<C> <C> <S>
10.33 -- Purchase and Sale Agreement dated as of December 15, 1995 by and between
Nationwide Health Properties, Inc. and New Crossings International Corporation.*
10.34 -- Schedule of Purchase and Sale Agreements substantially similar to exhibit 10.32.*
10.35 -- Lease and Security Agreement by and between Nationwide Health Properties, Inc. and
New Crossings International Corporation dated as of December 15, 1995 (the
Atrium).
10.36 -- Schedule of Lease and Security Agreements by and between Nationwide Health
Properties, Inc. and New Crossings International Corporation substantially similar
to exhibit 10.35.
10.37 -- Loan Agreement dated as of October 31, 1988 by and between Forest Grove
Residential Center Limited Partnership and Oregon Housing Agency, State of Oregon,
together with Amendment to Loan Agreement for Forest Grove Residential Center
dated as of August 20, 1995 by and between Oregon Housing Agency, State of Oregon
and New Crossings International Corporation.*
10.38 -- Purchase and Sale Agreement dated as of December 15, 1995 by and among Crossing
International Corporation, New Crossings International Corporation, 2010 Union
Limited Partnership and Nationwide Health Properties, Inc.*
10.39 -- Assumption Agreement dated as of July 23, 1990 between Albany Residential Center,
Beaulieu-Draper Limited, the Oregon Housing Agency, State of Oregon and Crossings
International Corporation.*
10.40 -- Oregon Housing Agency, State of Oregon, Loan Agreement dated as of October 31,
1988, between Forest Grove Residential Center Limited Partnership and the State of
Oregon.*
10.41 -- Oregon Housing Agency, State of Oregon, Loan Agreement dated March 22, 1991,
between McMinnville Residential Estates Limited Partnership and the State of
Oregon, Oregon Housing Authority.*
10.42 -- Loan Agreement by and between Nationwide Health Properties, Inc. and 2010 Union
Limited Partnership dated as of December 15, 1995, as amended.
10.43 -- Sublease and Security Agreement by and between 2010 Union Limited Partnership and
New Crossings International Corporation dated as of December 15, 1995.
10.44 -- Operating Lease dated as of January 1, 1991 by and between Capital Consultants,
Inc. and Crossings International Corporation as amended.*
10.45 -- Lease dated as of January 10, 1996 between Capital Consultants, Inc. and Crossing
International Corporation.*
10.46 -- Loan Agreement dated as of June 13, 1991 as amended by and between Capital
Consultants, Inc. and Crossings International Corporation.*
10.47 -- Real Estate Purchase and Sale Agreement by and between C.J. Case and R.W. Case, II
and New Crossings International Corporation dated April 2, 1996.*
10.48 -- Lease and Security Agreement by and between National Health Properties, Inc. and
New Crossings International Corporation dated March 27, 1996.*
10.49 -- Lease Agreement by and between Wild West Post No. 91 Veterans of Foreign Wars and
2010 Union Limited Partnership dated December 2, 1985 and amended on April 15,
1993 and December , 1995.*
10.50 -- Sublease Agreement between Franciscan Health Services Northwest and Crossings
International Corporation dated October , 1994.*
10.51 -- Assumption Agreement dated August 8, 1990 by and between Forest Grove Residential
Center Limited Partnership, Robert Cook and Larry Draper, the Oregon Housing
Agency and Crossings International Corporation.*
</TABLE>

II-5
<PAGE> 218

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------------------
<C> <C> <S>
10.52 -- Assumption Agreement dated July 29, 1991 by and between McMinnville Residential
Estates Limited Partnership, the Oregon Housing Agency and McMinnville Residential
Center Limited Partnership.*
10.53 -- Assumption Agreement dated December 18, 1995 by and between Crossings
International Corporation, New Crossings International Corporation, Oregon Housing
Agency and National Health Properties, Inc. (Albany Residential).*
10.54 -- Schedule of Assumption Agreements substantially similar to exhibit 10.53.*
10.55 -- Lease Approval Agreement dated December 18, 1995 by and between National Health
Properties, Inc., New Crossings International Corporation and Oregon Housing
Agency (Albany Residential).*
10.56 -- Schedule of Lease Approval Agreements substantially similar to exhibit 10.55.*
10.57 -- Side Letter Agreement dated December 18, 1995 by Oregon Housing Agency accepted
and agreed to by National Health Properties, Inc. and New Crossings International
Corporation (Albany Residential).*
10.58 -- Schedule of Side Letter Agreements substantially similar to exhibit 10.57.*
10.59 -- Management Agreement dated August 30, 1990 by and between Housing Division, State
of Oregon and Crossings International Corporation (Albany Residential).*
10.60 -- Management Agreement dated July 29, 1991 by and between Housing Division, State of
Oregon, McMinnville Limited Partnership and Crossings International Corporation
(McMinnville).*
10.61 -- Consent Agreement dated December , 1995 by and among Legacy Health Systems,
Crossings International Corporation and National Health Properties, Inc.*
10.62 -- Sublease and Security Agreement by and between Nationwide Health Properties, Inc.
and New Crossings International Corporation dated as of December 15, 1995.
21.1 -- Subsidiaries of the Registrant.*
23.1 -- Consent of Rogers & Hardin (included in Exhibit 5.1).
23.2 -- Consents of KPMG Peat Marwick LLP.
23.3 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney.
27.1 -- Financial Data Schedule.
</TABLE>

- ---------------

* To be filed by amendment.

(b) Financial Statement Schedules.

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled

II-6
<PAGE> 219

by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required to permit prompt delivery
to each purchaser.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-7
<PAGE> 220
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Brookfield, State of
Wisconsin, on the 24th day of May, 1996.

ALTERNATIVE LIVING SERVICES, INC.

By: /s/ WILLIAM F. LASKY
------------------------------------
William F. Lasky
President and Chief Executive
Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------------- -------------
<S> <C> <C>
/s/ WILLIAM F. LASKY President, Chief Executive May 24, 1996
- --------------------------------------------- Officer and Director (Principal
William F. Lasky Executive Officer)

* Vice President, Treasurer, Chief May 24, 1996
- --------------------------------------------- Financial Officer and Secretary
John W. Kneen (Principal Financial Officer)

* Vice President and Controller May 24, 1995
- --------------------------------------------- (Principal Accounting Officer)
Mary Lou Austin

* Chairman of the Board and May 24, 1996
- --------------------------------------------- Director
William G. Petty, Jr.

* Vice Chairman and Director May 24, 1996
- ---------------------------------------------
Richard W. Boelhke

* Director May 24, 1996
- ---------------------------------------------
Gene E. Burleson

* Director May 24, 1996
- ---------------------------------------------
Robert Haveman

* Director May 24, 1996
- ---------------------------------------------
Ronald G. Kenny

* Director May 24, 1996
- ---------------------------------------------
Jerry L. Tubergen

By: /s/ WILLIAM F. LASKY
-----------------------------------------
William F. Lasky,
as Attorney-in-Fact
</TABLE>

II-8
<PAGE> 221

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY NUMBERED
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- -------------------------------------------------------------- ---------------------
<S> <C> <C>
1.1 Form of Underwriting Agreement.* .............................
3.1 Restated Certificate of Incorporation of Registrant. .........
3.2 Restated Bylaws of Registrant. ...............................
4.1 See Articles Four, Six, Seven, Eight, Nine, Ten and Eleven of
the Company's Restated Certificate of Incorporation filed as
Exhibit 3.1 to this Registration Statement and Articles 2, 3,
5, 7 and 8 of the Company's Restated Bylaws filed as Exhibit
3.2 to this Registration Statement. ..........................
4.2 Form of Common Stock certificate.* ...........................
5.1 Opinion and Consent of Rogers & Hardin. ......................
10.1 Stock Purchase Agreement dated as of May 22, 1996 by and
between Assisted Living Equity Investors and the Company.* ...
10.2 Services Agreement effective as of January 1, 1996 by and
between Petty, Kneen & Company, L.L.C. and the Company. ......
10.3 Purchase Agreement dated as of May 22, 1996 by and between
Petty, Kneen & Company, L.L.C. and the Company. ..............
10.4 Agreement and Plan of Merger among the Company, ALS
Acquisition Corp., Alternative Living Services-Midwest Inc.
and the shareholders of Alternative Living Services-Midwest
Inc. dated as of May 20, 1996. ...............................
10.5 Limited Partner Interest Purchase Agreement by and among the
Company, Alternative Living Services-Midwest Inc., Lionel S.
Margolick and the Limited Partners referenced herein dated as
of May 20, 1996. .............................................
10.6 Agreement and Plan of Merger dated as of May 22, 1996 between
the Company, New Crossings International Corporation and
Capital Consultants, Inc.* ...................................
10.7 Services Agreement by and between Richard W. Boelhke and the
Company dated as of May 23, 1996. ............................
10.8 Employment Agreement by and between D. Lee Field and the
Company dated as of May 23, 1996. ............................
10.9 Employment Agreement by and between David M. Boitano and the
Company dated as of May 23, 1996. ............................
10.10 Amended and Restated Alternative Living Services, Inc. 1995
Incentive Compensation Plan.*
10.11 Employment Agreement by and between G. Faye Godwin and the
Company dated as of May 23, 1996. ............................
10.12 Employment Agreement by and between Douglas A. Hennig and the
Company dated as of January 25, 1996, as amended. ............
10.13 Employment Agreement by and between William F. Lasky and the
Company dated as of December 14, 1993, as amended. ...........
10.14 Recapitalization Agreement dated as of May 23, 1995 by and
among the Company, Evergreen Healthcare, Inc., Care Living
Centers, Inc., William F. Lasky, David Burr, Kraig E. Lorenzen
and Alternative Living Investors, L.L.C. .....................
</TABLE>

II-9
<PAGE> 222

<TABLE>
<CAPTION>
SEQUENTIALLY NUMBERED
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- -------------------------------------------------------------- ---------------------
<S> <C> <C>
10.15 Stock Purchase Agreement among Heartland Retirement Services,
Inc., the shareholders of Heartland Retirement Services, Inc.
and the Company dated as of January 25, 1996.* ...............
10.16 Loan Agreement dated as of January 25, 1996 by and among RDV
Capital Management L.P. and the Company.* ....................
10.17 Lease Agreement between Healthcare REIT, Inc. and the Company
dated as of January 22, 1996 (Clare Bridge of Bradenton). ....
10.18 Lease Agreement between Healthcare REIT, Inc. and the Company
dated as of January 22, 1996 (Clare Bridge of Sarasota). .....
10.19 Loan Agreement by and between ALS-Stonefield, Inc. and
Healthcare Capital Finance, Inc. dated as of August 10,
1995. ........................................................
10.20 Loan Agreement by and between SouthTrust Bank of Alabama,
National Association and the Company dated as of June 19,
1995. ........................................................
10.21 Reimbursement Agreement dated as of March 29, 1995 by and
between Evergreen Healthcare, Inc. and the Company. *.........
10.22 Joint Venture Agreement dated as of November 15, 1995 by and
between Days Development Company, LC and the Company. ........
10.23 Acquisition Agreement dated as of September 20, 1994 by and
between CCCI/Northampton Limited Partnership, Continuing Care
Concepts, Inc. and the Company, as amended. ..................
10.24 Construction Loan and Security Agreement between Clare Bridge
of Montgomery and Maine Line Federal Savings Bank dated as of
March 8, 1996. ...............................................
10.25 Loan Agreement dated as of April 30, 1996 by and between North
Pointe-Utica Limited Partnership and GMAC Commercial Mortgage
Corporation. .................................................
10.26 Loan Agreement dated as of April 30, 1996 by and between Six
Mile/Abby Limited Partnership and GMAC Commercial Mortgage
Corporation. .................................................
10.27 Construction Loan and Security Agreement between Clare Bridge
of Lower Makefield and Main Line Federal Savings Bank dated as
of November 20, 1995. ........................................
10.28 Lease Agreement by and between Badger II Limited Partnership
and the Company dated as of December 19, 1994, as
amended.* ....................................................
10.29 Mortgage and Security Agreement between CCCI/Northampton
Limited Partnership and Main Line Federal Savings Bank dated
as of June 30, 1995. .........................................
10.30 Building Loan Agreement by and between Wynwood of Chapel Hill,
LLC and Wachovia Bank of North Carolina, N.A. dated as of
February 29, 1996. ...........................................
10.31 Lease dated as of February 27, 1996 by and between George
Gialamas and the Company. ....................................
10.32 Assisted Living Consultant and Management Services Agreement
by and between Alternative Living Services and the Company
dated as of December 14, 1993. ...............................
</TABLE>

II-10
<PAGE> 223

<TABLE>
<CAPTION>
SEQUENTIALLY NUMBERED
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- -------------------------------------------------------------- ---------------------
<S> <C> <C>
10.33 Purchase and Sale Agreement dated as of December 15, 1995 by
and between Nationwide Health Properties, Inc. and New
Crossings International Corporation*..........................
10.34 Schedule of Purchase and Sale Agreements substantially similar
to exhibit 10.32*.............................................
10.35 Lease and Security Agreement by and between Nationwide Health
Properties, Inc. and New Crossings International Corporation
dated as of December 15, 1995 (The Atrium)....................
10.36 Schedule of Lease and Security Agreements by and between
Nationwide Health Properties, Inc. and New Crossings
International Corporation substantially similar to exhibit
10.35.........................................................
10.37 Loan Agreement dated as of October 31, 1988 by and between
Forest Grove Residential Center Limited Partnership and Oregon
Housing Agency, State of Oregon, together with Amendment to
Loan Agreement for Forest Grove Residential Center dated as of
August 20, 1995 by and between Oregon Housing Agency, State of
Oregon and New Crossings International Corporation.* .........
10.38 Purchase and Sale Agreement dated as of December 15, 1995 by
and among Crossing International Corporation, New Crossings
International Corporation, 2010 Union Limited Partnership and
Nationwide Health Properties, Inc.* ..........................
10.39 Assumption Agreement dated as of July 23, 1990 between Albany
Residential Center, Beaulieu-Draper Limited, the Oregon
Housing Agency, State of Oregon and Crossings International
Corporation.* ................................................
10.40 Oregon Housing Agency, State of Oregon, Loan Agreement dated
as of October 31, 1988, between Forest Grove Residential
Center Limited Partnership and the State of Oregon.* .........
10.41 Oregon Housing Agency, State of Oregon, Loan Agreement dated
March 22, 1991, between McMinnville Residential Estates
Limited Partnership and the State of Oregon, Oregon Housing
Authority.* ..................................................
10.42 Loan Agreement by and between Nationwide Health Properties,
Inc. and 2010 Union Limited Partnership dated as of December
15, 1995, as amended. ........................................
10.43 Sublease and Security Agreement by and between 2010 Union
Limited Partnership and New Crossings International
Corporation dated as of December 15, 1995. ...................
10.44 Operating Lease dated as of January 1, 1991 by and between
Capital Consultants, Inc. and Crossings International
Corporation as amended.* .....................................
10.45 Lease dated as of January 10, 1996 between Capital
Consultants, Inc. and Crossing International Corporation.* ...
10.46 Loan Agreement dated as of June 13, 1991 as amended by and
between Capital Consultants, Inc. and Crossings International
Corporation.* ................................................
10.47 Real Estate Purchase and Sale Agreement by and between C.J.
Case and R.W. Case, II and New Crossings International
Corporation dated April 2, 1996*..............................
</TABLE>

II-11
<PAGE> 224

<TABLE>
<CAPTION>
SEQUENTIALLY NUMBERED
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- -------------------------------------------------------------- ---------------------
<S> <C> <C>
10.48 Lease and Security Agreement by and between National Health
Properties, Inc. and New Crossings International Corporation
dated March 27, 1996.* .......................................
10.49 Lease Agreement by and between Wild West Post No. 91 Veterans
of Foreign Wars and 2010 Union Limited Partnership dated
December 2, 1985 and amended on April 15, 1993 and December
, 1995.* ...................................................
10.50 Sublease Agreement between Franciscan Health Services
Northwest and Crossings International Corporation dated
October , 1994.* ...........................................
10.51 Assumption Agreement dated August 8, 1990 by and between
Forest Grove Residential Center Limited Partnership, Robert
Cook and Larry Draper, the Oregon Housing Agency and Crossings
International Corporation.* ..................................
10.52 Assumption Agreement dated July 29, 1991 by and between
McMinnville Residential Estates Limited Partnership, the
Oregon Housing Agency and McMinnville Residential Center
Limited Partnership.* ........................................
10.53 Assumption Agreement dated December 18, 1995 by and between
Crossings International Corporation, New Crossings
International Corporation, Oregon Housing Agency and National
Health Properties, Inc. (Albany Residential).* ...............
10.54 Schedule of Assumption Agreements substantially similar to
exhibit 10.53.* ..............................................
10.55 Lease Approval Agreement dated December 18, 1995 by and
between National Health Properties, Inc., New Crossings
International Corporation and Oregon Housing Agency (Albany
Residential).* ...............................................
10.56 Schedule of Lease Approval Agreements substantially similar to
exhibit 10.55.* ..............................................
10.57 Side Letter Agreement dated December 18, 1995 by Oregon
Housing Agency accepted and agreed to by National Health
Properties, Inc. and New Crossings International Corporation
(Albany Residential).* .......................................
10.58 Schedule of Side Letter Agreements substantially similar to
exhibit 10.57.* ..............................................
10.59 Management Agreement dated August 30, 1990 by and between
Housing Division, State of Oregon and Crossings International
Corporation (Albany Residential).* ...........................
10.60 Management Agreement dated July 29, 1991 by and between
Housing Division, State of Oregon, McMinnville Limited
Partnership and Crossings International Corporation
(McMinnville).* ..............................................
10.61 Consent Agreement dated December , 1995 by and among Legacy
Health Systems, Crossings International Corporation and
National Health Properties, Inc.* ............................
</TABLE>

II-12
<PAGE> 225

- ---------------

* To be filed by amendment.

II-13

<PAGE> 1
EXHIBIT 3.1

RESTATED CERTIFICATE OF INCORPORATION
OF
ALTERNATIVE LIVING SERVICES, INC.

Alternative Living Services, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"),

DOES HEREBY CERTIFY:

FIRST: That the present name of the Corporation is Alternative Living
Services, Inc. and its original certificate of incorporation was filed with the
Secretary of State of the State of Delaware on December 13, 1993.

SECOND: That the Corporation's original certificate of incorporation
was subsequently amended and restated in that certain Restated Certificate of
Incorporation of Alternative Living Services, Inc. dated May 26, 1995 (the
"Original Restated Certificate of Incorporation").

THIRD: That at a meeting of the Board of Directors of said
Corporation held on May 9, 1996, resolutions were duly adopted setting forth a
proposed restated certificate of incorporation of said Corporation (the
"Restated Certificate of Incorporation") and recommended that such Restated
Certificate of Incorporation be approved by the stockholders;

FOURTH: That thereafter, by written consent in lieu of a special
meeting of the stockholders of the Corporation pursuant to Section 228(a) of
the General Corporation Law of the State of Delaware (the "GCL"), stockholders
of the Corporation having not less than the minimum number of votes that would
be necessary to authorize such action at a meeting at which all shares entitled
to vote thereon were present and voted adopted a resolution approving the
Restated Certificate of Incorporation; prompt written notice of said corporate
action was given in accordance with Section 228(d) of the GCL.

FIFTH: That this Restated Certificate of Incorporation restates and
amends the Original Restated Certificate of Incorporation, and has been duly
adopted in accordance with Sections 242 and 245 of the GCL.

SIXTH: That the text of the Original Restated Certificate of
Incorporation is hereby restated and amended to read in its entirety as
follows:

ARTICLE ONE

The name of the corporation is ALTERNATIVE LIVING SERVICES, INC.
<PAGE> 2

ARTICLE TWO

The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.

ARTICLE THREE

The nature of the business or purpose to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.

ARTICLE FOUR

The total number of shares of all classes of stock which the
Corporation has authority to issue is thirty-five million (35,000,000), of
which 30,000,000 shares shall be common stock, with $0.01 par value (the
"Common Stock"), and 5,000,000 shall be preferred stock, with $0.01 par value
(the "Preferred Stock").

The Board of Directors is expressly authorized, at any time and from
time to time, to provide for the issuance of shares of the Preferred Stock in
one or more series with such designations, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions thereof, as shall be expressed in the resolution or
resolutions providing for the issuance thereof adopted by the Board of
Directors (a "Preferred Stock Designation") and as are not inconsistent with
this Restated Certificate of Incorporation or any amendment hereto, and as may
be permitted by the General Corporation Law of the State of Delaware. Except
as otherwise expressly required by law and except for such voting powers as may
be expressly fixed by a Preferred Stock Designation relating to any series of
Preferred Stock, shares of Preferred Stock shall have no voting power
whatsoever.

The designation and the powers, preference and rights of the Common
Stock are as follows:

1. Shares of Common Stock may be issued from time to time as the
Board of Directors shall determine and on such terms and for
such consideration as shall be fixed by the Board of
Directors. Each share of Common Stock shall be equal to every
other share of Common Stock in every respect.

2. Each holder of Common Stock shall be entitled at all meetings
of stockholders to one vote for each share of Common Stock
held by it of record on the books of the Corporation.

2
<PAGE> 3

3. As of the Effective Time (as hereinafter defined) each share
of Common Stock issued and outstanding immediately prior to
the Effective Time (the "Old Common Stock") shall be
reclassified as and converted into and shall thereafter
represent for all corporate purposes one thousand eight
hundred and twelve and fifty-five one hundredths (1,812.55)
validly issued, fully paid and nonassessable shares of Common
Stock without any action on the part of the holder thereof.
As used herein, "Effective Time" shall mean 11:59 p.m.
(Eastern Standard Time) on the date that the Restated
Certificate of Incorporation of the Corporation is filed with
the Secretary of State of the State of Delaware to effect the
inclusion of this ARTICLE. Each certificate that theretofore
represented a share or shares of Old Common Stock shall
thereafter represent that number of shares of Common Stock
into which the share or shares of Old Common Stock represented
by such certificate shall have been reclassified; provided,
however, that each record holder of a stock certificate or
certificates that represent a share or shares of Old Common
Stock shall receive, upon surrender of such certificate or
certificates, a new certificate evidencing and representing
the number of shares of Common Stock to which such record
holder is entitled pursuant to the foregoing reclassification.

ARTICLE FIVE

The Corporation is to have perpetual existence.

ARTICLE SIX

In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors shall have the power to make, adopt, amend and
repeal the bylaws of the Corporation, including, to the extent permitted by
law, any bylaw adopted by the stockholders of the Corporation unless such bylaw
specifically provides that it may not be amended or repealed by the Board of
Directors.

ARTICLE SEVEN

Meetings of stockholders may be held within or without the State of
Delaware, as the bylaws may provide. The books of the Corporation may be kept
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the bylaws of the Corporation.
Election of directors need not be by written ballot unless the bylaws of the
Corporation so provide.

3
<PAGE> 4

ARTICLE EIGHT

The Corporation reserves the right to amend, alter, change or repeal
any provisions contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.

ARTICLE NINE

The Corporation shall have the power and authority to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative and whether or not by or in
the right of the Corporation, by reason of the fact that he or she is or was a
director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, judgments, fines and amounts paid in settlement to the
maximum extent permitted by the Delaware General Corporation Law or other
applicable law.

ARTICLE TEN

No director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that the foregoing clause
shall not apply to any liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware or (iv) for any transaction from which the
director derived an improper personal benefit. This ARTICLE shall not
eliminate or limit the liability of a director for any act or omission
occurring prior to the time this ARTICLE became effective.

ARTICLE ELEVEN

Any action required to be taken at any annual or special meeting of
stockholders of the Corporation, or any action which may be taken at any annual
or special meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to
those stockholders who have not consented in writing. Any action taken
pursuant to such written consent of the stockholders shall have the same force
and effect as if taken by the stockholders at a meeting thereof.

4
<PAGE> 5

IN WITNESS WHEREOF, said Corporation has caused this Restated
Certificate of Incorporation to be executed and acknowledged this 17th day of
May, 1996.

ALTERNATIVE LIVING SERVICES, INC.

/s/ William F. Lasky
------------------------------------
William F. Lasky, President and
Chief Executive Officer

<PAGE> 1
EXHIBIT 3.2

RESTATED BYLAWS
OF
ALTERNATIVE LIVING SERVICES, INC.

A Delaware Corporation

(effective May 9, 1996)

ARTICLE 1
OFFICES

Section 1.1 Registered office. The registered office of the
Corporation in the State of Delaware shall be at 32 Loockerman Square, Suite
L-100, Dover, Delaware 19901. The name of the Corporation's registered agent
at such address shall be The Prentice-Hall Corporation System, Inc.

Section 1.2 Other offices. The Corporation may also have offices at
such other places, both within and without the State of Delaware, as the Board
of Directors (the "Board") may from time to time determine or the business of
the Corporation may require.

ARTICLE 2
MEETINGS OF STOCKHOLDERS

Section 2.1 Place and Time of Meetings. An annual meeting of the
stockholders shall be held for the purpose of electing directors and conducting
such other business as may properly come before the meeting. The date, time
and place of the annual meeting, either within or without the State of
Delaware, shall be determined by resolution of the Board of Directors. Special
meetings of stockholders for any other purpose may be held at such time and
place, within or without the State of Delaware, as shall be stated in the
notice of the meeting or in a duly executed waiver of notice thereof. Special
meetings of the stockholders may be called by the President for any purpose and
shall be called by the Secretary if directed by the Board of Directors.

Section 2.2 Notice of Meetings. Except as otherwise required by law,
notice of each meeting of the stockholders, whether annual or special, shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of record entitled to vote at such meeting by
delivering a written notice thereof to the stockholder personally, or by
depositing such notice in the United States mail, in a postage prepaid
envelope, directed to the stockholder at stockholder's post office address
furnished by stockholder to the Secretary of the Corporation for such purpose
or, if stockholder has not furnished to the Secretary stockholder's address for
such purpose, then at stockholder's post office address last known to the
Secretary, or by transmitting a notice thereof to stockholder at such address
by telegraph, cable or facsimile telecommunication. Notice shall be deemed
given upon delivery (if by hand)

<PAGE> 2

or upon deposit in the mail (if by mail) or upon stockholder's receipt (if by
telegraph, cable or facsimile).

Except as otherwise expressly required by law, no publication of any
notice of a meeting of the stockholders shall be required. Every notice of a
meeting of the stockholders shall state the place, date and hour of the
meeting, and, in the case of a special meeting, shall also state the purpose or
purposes for which the meeting is called. Notice of any meeting of
stockholders shall not be required to be given to any stockholder who waives
such notice, and such notice shall be deemed waived by any stockholder who
attends such meeting in person or by proxy, except by a stockholder who attends
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.

Section 2.3 Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken, unless such notice is otherwise expressly required by law or hereunder.
At the adjourned meeting, the Corporation may transact any business that might
have been transacted at the original meeting. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, the notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the adjourned meeting. At the
adjourned meeting, the Corporation may transact any business that might have
been transacted at the original meeting.

Section 2.4 List of Stockholders. The Secretary shall make, at least
ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at such meeting, arranged in alphabetical order
and specifying the address and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the place of the meeting during the whole time thereof and may be inspected by
any stockholder who is present. Upon the willful neglect or refusal of the
Directors to produce such a list at any meeting for the election of Directors,
they shall be ineligible for election to any office at such meeting. The stock
ledger shall be the only evidence of which stockholders are entitled to examine
the stock ledger, the list required by this section or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.

Section 2.5 Quorum. Except as otherwise provided by law or the
Certificate of Incorporation, at each meeting of stockholders the presence in
person or by proxy of the holders of shares of stock having a majority of the
votes that could be cast by the holders of all outstanding shares of stock
entitled to vote at the meeting shall be necessary and sufficient to constitute
a quorum. If a quorum is not present, the holders of the shares present in
person or

2
<PAGE> 3

represented by proxy at the meeting, and entitled to vote thereat, shall have
the power to adjourn the meeting to another time and/or place by the
affirmative vote of the holders of a majority of such shares.

Section 2.6 Voting; Proxies.

(a) At each meeting of the stockholders, each
stockholder shall be entitled to vote in person or by proxy
each share or fractional share of the stock of the Corporation
having voting rights on the matter in question and held by the
stockholder and registered in the stockholder's name on the
books of the Corporation:

(i) on the date fixed pursuant to Section
7.5 of these Bylaws as the record date for the
determination of stockholders entitled to notice of
and to vote at such meeting; or

(ii) if no such record date is so fixed,
then (a) at the close of business on the day next
preceding the day on which notice of the meeting is
given or (b) if notice of the meeting is waived, at
the close of business on the day next preceding the
day on which the meeting is held.

(b) Unless otherwise provided in a shareholders,
agreement, persons holding stock of the Corporation in a
fiduciary capacity shall be entitled to vote such stock.
Persons whose stock is pledged shall be entitled to vote such
shares, unless in the pledgor's transfer on the books of the
Corporation he expressly empowered the pledgee to vote such
shares, in which case only the pledgee or the pledgee's proxy
may represent and vote such stock. Stock having voting power
standing of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants
in common, tenants by entirety or otherwise, or with respect
to which two or more persons have the same fiduciary
relationship, shall be voted in accordance with the provisions
of the General Corporation Law of the State of Delaware.

(c) Unless otherwise provided in a shareholders
agreement, voting rights may be exercised by the stockholder
entitled thereto in person or by the stockholder's proxy
appointed by an instrument in writing, subscribed by such
stockholder or by his attorney thereunto authorized and
delivered to the secretary of the meeting; provided, however,
that no proxy shall be voted or acted upon after three years
from its date, unless that proxy shall provide for a longer
period. A duly executed proxy shall be irrevocable if it so
states and if, and only for so long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A
stockholder who may have given a proxy prior to any meeting
shall not, solely by attending such meeting, revoke the same
unless he notifies the secretary of the meeting of his intent
to revoke the proxy, in writing, prior to the

3
<PAGE> 4

voting of the proxy. At any meeting of the stockholders at
which a quorum is present, all matters (except as otherwise
provided in the Certificate of Incorporation, in these Bylaws
or by law) shall be decided by the vote of a majority in
voting interest of the stockholders present in person or by
proxy and entitled to vote thereat and thereon. Voting at any
meeting of the stockholders on any question need not be by
ballot, unless so directed by the chairman of the meeting. On
a vote by ballot each ballot shall be signed by the
stockholder voting, or by his proxy, if there be such proxy,
and it shall state the number of shares voted.

Section 2.7 Conduct of Meetings. Meetings of stockholders shall be
presided over by the Chairman of the Board, if any, or in his or her absence by
the President, or in his or her absence by a Vice President, or in the absence
of the foregoing persons by a Chairman designated by the Board of Directors, or
in the absence of such designation by a Chairman chosen at the meeting by the
stockholders attending. The Corporation's Secretary shall act as secretary of
the meeting, but in his or her absence the Chairman of the meeting may appoint
any person to act as secretary of the meeting.

ARTICLE 3
BOARD OF DIRECTORS

Section 3.1 General Powers. The property, business and affairs of
the Corporation shall be managed by the Board.

Section 3.2 Number and Term of Office. The number of directors shall
be a minimum of four (4) and a maximum of nine (9). Directors need not be
stockholders of the Corporation. The exact number of directors shall be as
established by resolution of the Board in conformity with applicable laws. The
directors of the Corporation shall hold office until their successors shall
have been duly elected or appointed and shall qualify or until their
resignation or removal in the manner hereinafter provided.

Section 3.3 Election of Directors. The Board of Directors shall
initially consist of the persons named as directors by the incorporator, and
each director so elected shall hold office until the first annual meeting of
the stockholders or until a successor is elected and qualified. At the first
annual meeting of the stockholders and at each annual meeting thereafter, the
stockholders shall elect directors, each of whom shall hold office for a term
of one year or until a successor is elected and qualified.

Section 3.4 Resignations; Removal. Any director of the Corporation
may resign at any time by giving written notice to the Board or to the
Secretary of the Corporation. Any such resignation shall take effect at the
time specified therein or, if the time is not specified, immediately upon its
receipt by the Board or Secretary. Unless otherwise specified in the notice,
the acceptance of such resignation shall not be necessary to make it effective.
Any

4
<PAGE> 5

director may be removed at any time, with or without cause, by the holders of a
majority of shares of stock of the Corporation then entitled to vote at an
election of directors, except as otherwise provided by statute.

Section 3.5 Vacancies. Any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors or
any other cause, may be filled by the remaining directors or by the
shareholders by a plurality of the votes cast at a meeting of stockholders.
Each director so chosen to fill a vacancy shall hold office until his successor
shall have been elected and shall qualify or until he shall resign or shall
have been removed in the manner provided herein.

Section 3.6 Place of Meeting, Etc. The Board may hold any of its
meetings at such place or places within or without the State of Delaware as the
Board may from time to time by resolution designate or as shall be designated
by the person or persons calling the meeting or in the notice or a waiver of
notice of any such meeting.

Directors may participate in any regular or special meeting of the
Board by means of conference telephone or similar communications equipment
pursuant to which all persons participating in the meeting of the Board can
hear each other, and such participation shall constitute presence in person at
such meeting.

Section 3.7 Annual Meeting. The Board shall meet as soon as
practicable after each annual election of directors, and notice of such annual
meeting shall not be required.

Section 3.8 Regular Meetings. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution
determine. If any day fixed for a regular meeting shall be a legal holiday at
the place where the meeting is to be held, then the meeting shall be held at
the same hour and place on the next succeeding business day not a legal
holiday. Except as required by law, notice of regular meetings need not be
given.

Section 3.9 Special Meetings. Special meetings of the Board shall be
held whenever called by the President or a majority of the authorized number of
directors. Except as otherwise provided by law or by these Bylaws, notice of
the time and place of each such special meeting shall be mailed to each
director, addressed to him at his residence or usual place of business, at
least three (3) days before the day on which the meeting is to be held, or
shall be sent to him at such place by facsimile telecommunication, telegraph or
cable or be delivered personally not less than forty-eight (48) hours before
the time at which the meeting is to be held. Except where otherwise required
by law or by these Bylaws, notice of the purpose of a special meeting need not
be given. Notice of any meeting of the Board shall not be required to be given
to any director who is present at such meeting other than a director who
attends such meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.

5
<PAGE> 6

Section 3.10 Quorum and Manner of Acting. Except as otherwise
provided in these Bylaws or by law, the presence of a majority of the authorized
number of directors shall be required to constitute a quorum for the transaction
of business at any meeting of the Board, and all matters shall be decided at any
such meeting, a quorum being present, by the affirmative votes of a majority of
the directors present. If no quorum exists, a majority of directors present at
any meeting may adjourn the same from time to time until a quorum is present.
Notice of any adjourned meeting need not be given.

Section 3.11 Action by Consent. Any action required or permitted to
be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of the proceedings of the Board or committee.

Section 3.12 Compensation. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also provide that the Corporation shall reimburse each
director for any expense incurred on account of attendance at any meetings of
the Board or committees of the Board. Neither the payment of such compensation
nor the reimbursement of such expenses shall be construed to preclude any
director from serving the Corporation or its subsidiaries in any other capacity
and receiving compensation therefor.

Section 3.13 Committees. By resolution passed by a majority of the
whole Board, the Board may designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. Any such committee,
to the extent provided in the Board's resolution and except as otherwise limited
by law, shall have and may exercise all the powers and authority of the Board in
the management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers requiring it. Any such
committee shall keep written minutes of its meetings and report the same to the
Board at the next regular meeting of the Board. In the absence or
disqualification of a member of a committee and that member's alternate, if the
Board appoints alternates, the member or members thereof present at any meeting
and not disqualified from voting (whether or not the member or members
constitute a quorum) may unanimously appoint another member of the Board to act
at the meeting in the place of any such absent or disqualified member.

Section 3.14 Committee Rules. Each committee of the Board of
Directors may fix its own rules of procedure and shall hold its meetings as
provided by such rules, except as may otherwise be provided by resolution of the
Board designating such committee, but in all cases the presence of at least a
majority of the members of such committee shall be necessary to constitute a
quorum.

Section 3.15 Presumption of Assent. A director of the Corporation who
is present at a meeting of the Board of Directors or any committee designated by
the Board at which action on any corporate matter is taken shall be deemed to
have assented to the action taken unless his

6
<PAGE> 7

dissent is entered in the minutes of the meeting or unless he files his written
dissent to such action with the person acting as the Secretary of the meeting
before the adjournment thereof or forwards such dissent by registered mail to
the Secretary of the Corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.

ARTICLE 4
OFFICERS

Section 4.1 Number. The officers of the Corporation shall be chosen
by the Board and shall consist of a Chairman of the Board, a President, a
Secretary, a Treasurer and such other officers and assistant officers as may be
deemed necessary or desirable by the Board of Directors. The Board may, if it
so determines, elect one or more Vice Presidents and may choose a Chairman of
the Board from among its members. Any number of offices may be held by the
same person. In its discretion, the Board of Directors may choose not to fill
any office for any period as it may deem advisable, except the offices of
President and Secretary.

Section 4.2 Election; Term of Office; Qualifications. The officers
of the Corporation, except such officers as may be appointed in accordance with
Section 4.3, shall be elected annually by the Board at the first meeting
thereof held after the election of the Board. Each officer shall hold office
until his successor has been duly chosen and qualifies or until his resignation
or removal in the manner hereinafter provided.

Section 4.3 Assistants, Agents and Employees, Etc. In addition to
the officers specified in Section 4.1, the Board may appoint such other
assistants, agents and employees as it may deem necessary or advisable,
including one or more Assistant Secretaries, and one or more Assistant
Treasurers, each of whom shall hold office for such period, have such authority
and perform such duties as the Board may from time to time determine. The
Board may delegate to any officer of the Corporation or any committee of the
Board the power to appoint, remove and prescribe the duties of any such
assistants, agents or employees.

Section 4.4 Resignation; Removal. Any officer or agent may resign at
any time upon written notice to the Board or the Secretary of the Corporation.
Any officer or agent elected or appointed by the Board of Directors may be
removed by the Board of Directors whenever in its judgment the best interests
of the Corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.

Section 4.5 Vacancies. A vacancy in any office caused by death,
resignation, removal, disqualification or otherwise, may be filled by the Board
for the unexpired portion of the term of that office by a majority vote of the
directors then in office.

Section 4.6 Chairman of the Board ("Chairman"). The Chairman, if one
is elected, shall preside at all meetings of the Board and stockholders; shall
have, with the assistance of the

7
<PAGE> 8

President, general responsibility for the active management of the business of
the Corporation; and shall perform such other duties and have such other powers
as the Board may from time to time prescribe. In addition to the President,
the Chairman shall have authority to execute bonds, mortgages and other
contracts (whether or not requiring a seal), except where required or permitted
by law to be otherwise signed and executed and except where the signing and
execution thereof are expressly delegated by the Board to some other officer or
agent of the Corporation.

Section 4.7 The President. The President, subject to guidance and
assistance of the Chairman of the Board, if one is elected, shall preside at
all meetings of the stockholders; shall have general and active management of
the business of the Corporation; shall, in the absence of the Chairman, preside
at meetings of the Board and stockholders; and shall see that all orders and
resolutions of the Board are carried into effect. The President shall execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof are expressly
delegated by the Board to some other officer or agent of the Corporation.

Section 4.8 Vice President. The Vice President, or if there shall be
more than one, the vice presidents in the order determined by the Board, shall,
in the absence or disability of the President, perform the duties and exercise
the powers of the President and shall perform such other duties and have such
other powers as the Board or the Chairman may, from time to time, determine or
these bylaws may prescribe.

Section 4.9 Secretary and Assistant Secretaries. The Secretary shall
attend all meetings of the Board and all meetings of the stockholders; shall
record all the proceedings of the meetings of the stockholders and of the Board
in a book to be kept for that purpose; and shall perform like duties for the
Board's standing committees when required. The Secretary shall give, or cause
to be given, notice of all meetings of the stockholders and special meetings of
the Board; shall perform such other duties as may be prescribed by the Board or
President, under whose supervision he or she shall act; shall have custody of
the corporate seal of the Corporation; and shall have authority to affix the
same to any instrument requiring it and, when it is so affixed, may attest it
by his or her signature. The Board may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
or her signature. The Assistant Secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board, shall, in the
absence or disability of the Secretary, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as the Board may from time to time prescribe.

Section 4.10 Treasurer and Assistant Treasurer. The Treasurer shall
have the custody of the corporate funds and securities; shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation; shall deposit all monies and other valuable effects in the name
and to the credit of the Corporation as may be ordered by the Board taking
proper vouchers for such disbursements; and shall render to the President and
to the Board, at

8
<PAGE> 9

its regular meetings or when the Board so requires, an account of the
Corporation. If required by the Board, the Treasurer shall give the
Corporation a bond (which shall be rendered every six (6) years) in such sums
and with such surety or sureties as shall be satisfactory to the Board for the
faithful performance of the duties of the office of Treasurer and for the
restoration to the Corporation, in case of death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property
of whatever kind in the possession or under the control of the Treasurer
belonging to the Corporation. The Assistant Treasurer, or if there shall be
more than one, the assistant treasurers in the order determined by the Board,
shall, in the absence or disability of the Treasurer, perform the duties and
exercise the powers of the Treasurer and shall perform such other duties and
have such other powers as the Board may from time to time prescribe.

Section 4.11 Compensation. The compensation of the officers of the
Corporation shall be fixed from time to time by the Board. None of such
officers shall be prevented from receiving such compensation by reason of the
fact that he or she is also a director of the Corporation. Nothing contained
herein shall preclude any officer from serving the Corporation, or any
subsidiary corporation, in any other capacity and receiving such compensation by
reason of the fact that he or she is also a director of the Corporation.

ARTICLE 5
INDEMNIFICATION

Section 5.1 Action, Etc. Other Than by or in the Right of the
Corporation. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contenders or its equivalent,
shall not of itself create a presumption that the person did not act in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal action or
proceeding, that he had reasonable cause to believe that his or her conduct was
unlawful.

Section 5.2 Actions, Etc., by or in the Right of the Corporation.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure

<PAGE> 10

a judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys, fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation; provided, however, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the Court of Chancery of the State of Delaware or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses as the Court of Chancery of the State of Delaware or such other court
shall deem proper.

Section 5.3 Determination of Right of Indemnification. Any
indemnification under Section 5.1 or 5.2 (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in Section 5.1 or 5.2. Such determination shall be made (i)
by the Board by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding, or (ii) if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or (iii) by the
stockholders.

Section 5.4 Indemnification Against Expenses of Successful Party.
Notwithstanding the other provisions of this Article, to the extent that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred
to in Section 5.1 or 5.2, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.

Section 5.5 Right to Advancement of Expenses. Expenses (including
attorneys' fees) incurred by a director in defending any civil, criminal,
administrative or investigative action, suit or proceeding by reason of the
fact that he or she is or was a director, shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding; provided,
however, that any such advancement of expenses shall be made only upon delivery
to the Corporation of an undertaking by or on behalf of such director to repay
such amount if it shall ultimately be determined that he or she is not entitled
to be indemnified for such expenses. Expenses (including attorneys' fees)
incurred by an officer in defending a civil, criminal, administrative, or
investigative action, suit or proceeding by reason of the fact that he or she
is or was an officer, employee or agent of the Corporation may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding if and as authorized by the Board in the specific case upon receipt
of an undertaking by or on behalf of the officer to repay

10
<PAGE> 11

such amount if it shall ultimately be determined that he or she is not entitled
to be indemnified by the Corporation as authorized in this Article. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid or advanced by the Corporation if and as authorized by the Board in
the specific case and upon such terms and conditions as the Board deems
appropriate.

Section 5.6 Other Rights and Remedies. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.

Section 5.7 Insurance. Upon resolution passed by the Board, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article.

Section 5.8 Constituent Corporations. For the purposes of this
Article, references to "the Corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation, so that any person who is or was a director, officer, employee or
agent of such a constituent corporation or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
shall stand in the same position under the provisions of this Article with
respect to the resulting or surviving corporation as he would if he had served
the resulting or surviving corporation in the same capacity.

Section 5.9 Other Enterprises, Fines, and Serving at Corporation's
Request. For the purposes of this Article, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan;
and references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation that
imposes duties on, or involves services by, such 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 he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as used in this Article.

Section 5.10 Right of Indemnitee to Bring Suit or Proceeding. The
rights to indemnification and to the advancement of expenses conferred in this
Article 5 shall be contract rights

11
<PAGE> 12

and such rights shall continue as to an indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators. Any repeal or modification
of the provisions of this Article 5 shall be prospective only and shall not
adversely affect any right or protection hereunder of any person with respect
to any action, suit or proceeding arising out of or relating to any act or
omission occurring prior to the time of such repeal or modification. If a
claim under this Article 5 is not paid in full by the Corporation within sixty
(60) days after a written claim has been received by the Corporation, except in
the case of a claim for an advancement of expenses by a director, in which case
the applicable period shall be twenty (20) days, the indemnitee may at any time
thereafter bring a suit or other proceeding against the Corporation to recover
the unpaid amount of the claim. If successful in whole or in part in any such
suit or proceeding, or in a suit or proceeding brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expenses (including attorneys'
fees) of prosecuting or defending such suit or proceeding. Neither the failure
of the Corporation (including its Board of Directors, independent legal counsel
or its stockholders) to have made a determination prior to the commencement of
such suit or proceeding that indemnification of the indemnitee is proper under
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the indemnitee has not met
such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit or proceeding brought by the indemnitee, be a defense to such suit
or proceeding. In any such suit or proceeding brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the Corporation to recover the advancement of expenses pursuant
to the terms of an undertaking, the burden of proving that the indemnitee is
not entitled to be indemnified, or to such advancement of expenses, under this
Article 5 or otherwise, shall be on the Corporation.

ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.

Section 6.1 Execution of Contracts. The Board, except as otherwise
provided in these Bylaws, may authorize any officer or officers, agent or
agents, to enter into any contract or execute any instrument in the name and on
behalf of the Corporation, and such authority may be general or confined to
specific instances. It may appoint, or authorize any officer or officers to
appoint, one or more transfer clerks or one or more transfer agents and one or
more registrars, and may require all certificates for stock to bear the
signature or signatures of any of them.

Section 6.2 Checks, Drafts, Etc. All checks, drafts or other orders
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from

12
<PAGE> 13

time to time, shall be determined by resolution of the Board. Each such
officer, assistant, agent or attorney shall give such bond, if any, as the
Board may require.

Section 6.3 Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select,
or as may be selected by any officer or officers, assistant or assistants,
agent or agents, or attorney or attorneys of the Corporation to whom such power
is delegated by the Board. For the purpose of deposit and for the purpose of
collection for the account of the Corporation, the President, any Vice
President or the Treasurer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money that are
payable to the order of the Corporation.

Section 6.4 General and Special Bank Accounts. The Board may from
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board
may select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to
whom such power is delegated by the Board. The Board may make such special
rules and regulations with respect to such bank accounts, not inconsistent with
the provisions of these Bylaws, as it may deem expedient.

ARTICLE 7
STOCK

Section 7.1 Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by him. The certificates
representing shares of such stock shall be numbered in the order in which they
are issued and shall be signed in the name of the Corporation by the President
or a Vice President, and by the Secretary or an Assistant Secretary or by the
Treasurer or an Assistant Treasurer. Any or all of the signatures on the
certificates may be a facsimile. If any officer, transfer agent or registrar
who has signed, or whose facsimile signature has been placed upon, any such
certificate, has ceased to be such officer, transfer agent or registrar before
such certificate is issued, such certificate may nevertheless be issued by the
Corporation with the same effect as though the person who signed such
certificate, or whose facsimile signature was placed thereupon, were such
officer, transfer agent or registrar at the date of issue. A record shall be
kept of the respective names of the persons, firms or corporations owning the
stock represented by such certificates, the number and class of shares
represented by such certificates, respectively, and the respective dates
thereof, and in case of cancellation, the respective dates of cancellation.
Every certificate surrendered to the Corporation for exchange or transfer shall
be

13
<PAGE> 14

cancelled, and no new certificate or certificates shall be issued in exchange
for any existing certificate until such existing certificate shall have been so
cancelled, except as provided in Section 7.4.

Section 7.2 Transfers of Stock. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk
or a transfer agent appointed as provided in Section 7.3, and upon surrender of
the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand
on the books of the Corporation shall be deemed by the Corporation to be the
owner thereof for all purposes. Whenever any transfer of shares is made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates are presented to the
Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.

Section 7.3 Regulations. The Board may make such rules and
regulations as it may deem expedient (if not inconsistent with these Bylaws)
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.

Section 7.4 Lost, Stolen, Destroyed and Mutilated Certificates. In
any case of loss, theft, destruction or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction
or mutilation and upon the giving of a bond of indemnity to the Corporation in
such form and in such sum as the Board may direct; provided, however, that a
new certificate may be issued without requiring any bond when, in the judgment
of the Board, it is proper to do so.

Section 7.5 Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders (or any adjournment thereof) or to
express consent to corporate action in writing without a meeting, or entitled
to receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any other change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than
sixty (60) nor less than ten (10) days before the date of such meeting, nor
more than sixty (60) days prior to any other action. If, in any case involving
the determination of stockholders for any purpose other than notice of or
voting at a meeting of stockholders or expressing consent to corporate action
without a meeting, the Board shall not fix such a record date, then the record
date for determining stockholders for such purpose shall be the close of
business on the day on which the Board adopts the resolution

14
<PAGE> 15

relating thereto. A determination of stockholders entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of such
meeting; provided, however, that the Board may fix a new record date for the
adjourned meeting.

ARTICLE 8
MISCELLANEOUS

Section 8.1 Fiscal Year. The fiscal year of the Corporation shall be
determined by resolution of the Board.

Section 8.2 Seal. The Board shall provide a corporate seal, which
shall be in the form of a circle and shall bear the name of the Corporation and
words and figures showing that the Corporation was incorporated in the State of
Delaware and the year of incorporation.

Section 8.3 Waiver of Notices. Whenever notice is required to be
given by these Bylaws, by the Certificate of Incorporation or by law, the
person entitled to said notice may waive such notice in writing, either before
or after the time stated therein, and such waiver shall be deemed equivalent to
notice.

Section 8.4 Amendments. These Bylaws, or any of them, may be
amended, modified, repealed or adopted and new Bylaws may be made (i) by the
Board, acting at any meeting of the Board, or (ii) by the stockholders, at any
annual meeting of stockholders, without previous notice, or at any special
meeting of stockholders, provided that notice of such proposed amendment,
modification, repeal or adoption is given in the notice of special meeting.
Any Bylaws made or altered by the stockholders may be altered or repealed by
either the Board or the stockholders.

<PAGE> 1
EXHIBIT 5.1

[The following text appears as letterhead:

Rogers & Hardin
Attorneys At Law
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
(404) 522-4700
TELEX: 54-2335
TELECOPIER: (404) 525-2224]

May 24, 1996

ALTERNATIVE LIVING SERVICES, INC.
450 North Sunnyslope Road, Suite 300
Brookfield, Wisconsin 53005

Gentlemen:

We have acted as counsel to Alternative Living Services, Inc. (the
"Company") in connection with the registration by the Company on Form S-1
(hereinafter referred to, together with any amendments thereto, as the
"Registration Statement") under the Securities Act of 1933, as amended, of an
aggregate of 5,750,000 shares of common stock, $.01 par value per share, of the
Company (the "Shares"), of which (a) 5,000,000 shares will be purchased by
certain underwriters (the "Underwriters") from the Company and certain selling
stockholders of the Company and (b) up to 750,000 additional shares will be
purchased by the Underwriters from certain selling stockholders of the Company
if the Underwriters exercise the option granted to them by such stockholders
solely to cover over-allotments, if any.

In connection with this opinion, we have examined such corporate
records and documents and have made such examinations of law as we have deemed
necessary. In rendering this opinion, we have relied, without investigation,
upon various certificates of public officials and of officers and
representatives of the Company. In our examination of documents, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity with the originals of all
documents submitted to us as copies.
<PAGE> 2
Alternative Living Services, Inc.
May 24, 1996
Page 2

Based upon the foregoing and subject to the assumptions,
qualifications, limitations and exceptions set forth herein, we are of the
opinion that the Shares have been duly authorized and, when sold as
contemplated in the Registration Statement and in the Underwriting Agreement to
be entered into among the Company, the selling stockholders and NatWest
Securities Limited, McDonald & Company Securities, Inc. and The Chicago
Corporation, as representatives of the several Underwriters, will be legally
issued, fully paid and non-assessable.

We consent to the filing of this opinion as an exhibit to the
Registration Statement and as an exhibit to applications to the securities
commissioners of the various states and other jurisdictions of the United
States for registration or qualification of the Shares in such states and other
jurisdictions. We further consent to the reference to our firm under the
caption "Legal Matters" in the Prospectus which is a part of the Registration
Statement.

Very truly yours,

/s/ Rogers & Hardin

ROGERS & HARDIN

<PAGE> 1

EXHIBIT 10.2

SERVICES AGREEMENT

This SERVICES AGREEMENT (the "Agreement"), effective as of January 1,
1996 is made by and between Petty, Kneen & Company, L.L.C. ("PK&Co."), a
Delaware limited liability company, Alternative Living Services, Inc. ("ALS"),
a Delaware corporation and, as to Paragraph 14 hereof, William G. Petty, Jr.
("Mr. Petty") and John W. Kneen ("Mr. Kneen").

W I T N E S S E T H:

WHEREAS, members and affiliates of PK&Co. perform substantial
management, financial and strategic planning functions for ALS without direct
compensation from ALS; and

WHEREAS, it is believed that the cost of maintaining the additional
personnel by ALS necessary to perform the functions provided for by this
Agreement would exceed the fee set forth in Section 3 of this Agreement and
that the terms of this Agreement are, in any event, no less favorable to ALS
than could otherwise be obtained from a third party for comparable services;
and

WHEREAS, ALS desires to receive the management, financial and
strategic planning services presently provided by PK&Co. and affiliates of
PK&Co. and PK&Co. is willing to provide such services under the terms of this
Agreement.

NOW, THEREFORE, for and in consideration of the mutual premises,
representations and covenants herein contained, the parties hereto mutually
agree as follows:

1. Services to be Provided: PK&Co. agrees to make available to ALS, upon
request, the following services (the "Services") to be rendered
primarily by Mr. Petty and Mr. Kneen:

(a) Consultation and assistance in the development and
implementation of ALS's corporate business strategies, plans
and objectives;

(b) Consultation and assistance in management and conduct of
corporate affairs and corporate governance consistent with the
Restated Certificate of Incorporation and Bylaws of ALS;

<PAGE> 2

(d) Consultation and assistance with respect to strategic
transactions, including the acquisition and disposition of
assets and operations;

(e) The services of Mr. Petty, in his capacity as Chairman of the
Board of ALS, and the services of Mr. Kneen, in his capacity
as a executive officer of ALS (including, without limitation,
the services of Mr. Kneen as Chief Financial Officer of ALS);
and

(f) Such other services as may be mutually agreed upon by the
parties hereto from time to time.

2. Scope of Services: It is the intent of the parties hereto that, with
the exception of the ongoing assistance and services of Messrs. Petty
and Kneen in their respective capacities as executive officers of ALS,
PK&Co. shall provide only the Services requested by ALS in connection
with regular and routine management, financial and strategic planning
functions related to the ongoing operations of ALS. The parties
hereto contemplate that the Services rendered in connection with the
conduct of ALS's business will be on a scale comparable to the
services provided by Messrs. Petty and Kneen in the second half of
1995, adjusted for the currently anticipated corporate growth;
provided, however, that during such periods that Mr. Kneen shall be
serving as Chief Financial Officer of ALS, Mr. Kneen shall devote
substantially all of his business time and energy to the business and
affairs of ALS. The parties hereto recognize that adjustments may be
required to the terms of this Agreement in the event of major
corporate acquisitions, divestitures or special projects. ALS will
continue to bear all costs required for outside services including,
but not limited to, the outside services of attorneys, auditors,
trustees, transfer agents and registrars, and it is expressly
understood that PK&Co. assumes no liability for any expenses or
services other than those stated in Section 1. In addition to the fee
paid to PK&Co. by ALS for the Services provided pursuant to this
Agreement, ALS will pay to PK&Co. the amount of out-of-pocket costs
incurred by PK&Co. in rendering such Services in accordance with the
reimbursement policies of ALS, however, PK&Co. shall be responsible
for paying any lease expense associated with office space maintained
by PK&Co. in the Chicago area and the salary and employee costs of
secretarial and administrative personnel of PK&Co. at such office (or,
to the extent that any such expenses are paid directly by ALS, the fee
provided for herein shall be reduced by the amount of such expenses).

3. Fee for Services: ALS agrees to pay to PK&Co. $80,000.00 quarterly,
commencing as of January 1, 1996, pursuant to this Agreement;
provided, however, that if Mr. Kneen shall be
<PAGE> 3

relieved of his responsibilities as Chief Financial Officer of ALS in
the future, the quarterly fee shall be $50,000.00 hereunder.

4. Original Term: Subject to the provisions of Section 5 hereof, the
original term of this Agreement shall be from January 1, 1996 to April
30, 1998.

5. Extensions; Terminations: This Agreement shall be extended on a
quarter-to-quarter basis after the expiration of its original term
unless written notification is given by PK&Co. or ALS to the other
thirty (30) days in advance of the first day of each successive
quarter or unless it is superseded by a subsequent written agreement
of the parties hereto. In addition, this Agreement may be terminated
by ALS by giving thirty (30) days advanced written notice to PK&Co.

6. Right to Purchase ALS Shares: In consideration of PK&Co. agreeing to
provide the Services hereunder, ALS shall afford PK&Co. the
opportunity to purchase, in a private placement transaction, 107,575
shares of ALS common stock pursuant to that certain Purchase
Agreement, a copy of which is attached hereto. Upon the purchase of
any shares of ALS common stock pursuant to such purchase agreement,
such shares shall be validly issued, fully paid and non-assessable,
and the rights of PK&Co. in those shares shall not be affected by any
breach, termination or amendment of this Agreement.

7. Limitation of Liability: In providing its Services hereunder, PK&Co.
shall have a duty to act, and to cause its agents to act, in a
reasonably prudent manner, but neither PK&Co. nor any member, officer,
employee or agent of PK&Co. or its affiliates shall be liable to ALS
for any error of judgment or mistake of law or for any loss incurred
by ALS in connection with the matter to which this Agreement relates,
except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of PK&Co..

8. Indemnification of PK&Co. by ALS: ALS shall indemnify and hold
harmless PK&Co., its affiliates and their respective officers,
directors and employees from and against any and all losses,
liabilities, claims, damages, costs and expenses (including attorneys'
fees and other expenses of litigation) to which such party may become
subject to arising out of the Services provided by PK&Co. to ALS
hereunder; provided that such indemnity shall not protect any such
party against any liability to which such person would otherwise be
subject to by reason of willful misfeasance, bad faith or gross
negligence.

9. Further Assurances: Each of the parties will make, execute,
acknowledge and deliver such other instruments and documents,

3
<PAGE> 4

and take all such other actions, as the other party may reasonably
request and as may reasonably be required in order to effectuate the
purposes of this Agreement and to carry out the terms hereof.

10. Notices. All communications hereunder shall be in writing and shall
be addressed, if intended for PK&Co., to 184 Shuman Boulevard, Suite
200, Naperville, Illinois 60563, Attention: William G. Petty, Jr., or
such other address as it shall have furnished to ALS in writing, and
if intended for ALS, to 450 N. Sunnyslope Road, Suite 300, Brookfield,
Wisconsin 53005, Attention: President, or such other address as it
shall have furnished to PK&Co. in writing.

11. Amendment and Modification: Neither this Agreement nor any term
hereof may be changed, waived, discharged or terminated other than by
agreement in writing signed by the parties hereto.

12. Successor and Assigns: This Agreement shall be binding upon and inure
to the benefit of PK&Co. and ALS and their respective successors and
assigns, except that neither party may assign its rights or delegate
its duties under this Agreement without the prior written consent of
the other party.

13. Governing Law: This Agreement shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Wisconsin.

14. Agreement of Messrs. Petty and Kneen: In consideration of this
Agreement and as a further inducement to ALS to enter into this
Agreement, during the term of this Agreement each of Mr. Petty and Mr.
Kneen hereby agree: (i) to serve ALS in their respective current
capacities as contemplated hereby until such time as ALS, acting by
its Board of Directors, shall elect to modify, amend or discontinue
such capacities or responsibilities; and (ii) to provide ALS with a
right of first offer with respect to any Assisted Living Opportunities
(hereinafter defined) that may be offered to them personally or in
their capacities as ALS representatives, which right of first offer
shall be deemed refused by ALS unless the President or the Board of
Directors of ALS shall notify Messrs. Petty and Kneen of its election
to pursue such Assisted Living Opportunity within five (5) days
following notice by Mr. Petty or Mr. Kneen to ALS of such Assisted
Living Opportunity. "Assisted Living Opportunity" for purposes hereof
shall mean opportunities to manage, lease, purchase or otherwise
operate residences or facilities engaged primarily in the business of
providing assisted living services to the elderly (including, without
limitation, specialty assisted living care for individuals suffering
from

<PAGE> 5

Alzheimer's disease or other dementias or congregate living
communities offering assisted living services), either directly or
through the purchase of ownership interests in one or more entities
primarily engaged in such activities.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first above written.

PETTY, KNEEN & CO. L.L.C.

By:___________________________
Title:________________________

ALTERNATIVE LIVING SERVICES, INC.

By:___________________________
Title:________________________

As to Paragraph 14 hereof:

______________________________
WILLIAM G. PETTY, JR.

______________________________
JOHN W. KNEEN

<PAGE> 1

EXHIBIT 10.3

PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT (the "Agreement"), dated as of May 22,
1996, by and between PETTY, KNEEN & COMPANY, L.L.C., a Delaware limited
liability company ("PK&Co."), and ALTERNATIVE LIVING SERVICES, INC., a Delaware
corporation ("ALS").

W I T N E S S E T H:

WHEREAS, PK&Co. desires to purchase from ALS, and ALS desires
to sell to PK&Co., such shares; and

WHEREAS, pursuant to the terms of that certain Service
Agreement dated as of January 1, 1996, ALS has agreed to permit PK&Co. to
purchase shares of the common stock, without par value, of ALS (the "Common
Stock"); and

WHEREAS, the parties hereto desire to set forth their mutual
agreement and understanding with respect to the purchase and sale of the Common
Stock as more particularly set forth herein.

NOW, THEREFORE, in consideration of the foregoing and the
respective representations, warranties, covenants, agreements and conditions
hereinafter set forth, the parties hereto, intending to be legally bound, do
hereby agree as follows:

SECTION 1. PURCHASE AND SALE OF COMMON STOCK; PAYMENT; CLOSING; ADMISSION
AMENDMENT.

1.1 Purchase and Sale of Common Stock. Subject to the terms
and conditions of this Agreement, at the Closing (as hereinafter defined), ALS
shall sell, transfer, assign, convey and deliver to PK&Co., and PK&Co. shall
purchase from ALS, 107,575 shares of Common Stock (hereinafter referred to as
the "Purchased Stock") at a per share purchase price of $4.65 ("Share Purchase
Price"), resulting in an aggregate purchase price of FIVE HUNDRED THOUSAND TWO
HUNDRED AND TWENTY-THREE DOLLARS AND SEVENTY-FIVE CENTS (500,223.75) (the
"Purchase Price").

1.2 Payment. The Purchase Price shall be paid by PK&Co. at
the Closing by delivery to ALS of one or more certified or bank cashier's
checks of immediately available federal funds payable to the order of ALS or by
wire transfer at the Closing of immediately available federal funds to an
account designated by ALS.

<PAGE> 2

1.3 Closing; Effective Time. The consummation of the
transactions contemplated by this Agreement (the "Closing") shall take place at
10:00 a.m., at the offices of Rogers & Hardin, on May 23, 1996, provided that
the conditions set forth in this Agreement shall have been fulfilled or waived
and, if not, as soon as practicable following the date on which the last of the
conditions set forth in this Agreement is fulfilled or waived, or at such other
time and/or place as the parties hereto shall agree upon in writing. The time
of Closing is sometimes referred to herein as the "Effective Time".

1.4 Admission Amendment. Pursuant to Section 7.7 of the
Amended and Restated Shareholders Agreement of ALS dated as of January 15,
1996, by and among ALS and all the stockholders of ALS, as amended, a copy of
which is attached as Exhibit A hereto (the "ALS Stockholders' Agreement"),
effective at the Effective Time, the ALS Stockholders' Agreement is hereby
amended to include PK&Co. as a party thereto and PK&Co. hereby agrees to be
bound by the terms of the ALS Stockholders' Agreement.

1.5 Consent to Merger. PK&Co. hereby acknowledges that
the Board of Directors and shareholders of ALS have approved that certain
Agreement and Plan of Merger dated as of May 22, 1996 between ALS and New
Crossings International Corporation (the "Merger Agreement"), a copy of which
is included in the Disclosure Memorandum (hereinafter defined), pursuant to
which New Crossings International Corporation shall be merged with and into
ALS, subject to the terms and conditions of the Merger Agreement (the
"Merger"). To facilitate the Merger in the event any of the following waivers,
acknowledgments, approvals or consents shall be necessary or required, at law
or otherwise, PK&Co. hereby (i) waives any and all notices required with
respect to the approval of the Merger and Merger Agreement by the shareholders
of ALS pursuant to the Restated Certificate of Incorporation or Restated Bylaws
of ALS (the "ALS Governing Documents") or the General Corporation Law of the
State of Delaware (the "GCL"), including without limitation, Sections 222, 251
and 252 of the GCL, (ii) acknowledges receipt of the information called for
with respect to the Merger pursuant to Sections 251 and 252 of the GCL; (iii)
waives any and all appraisal rights with respect to the Merger pursuant to
Section 262 of the GCL and (iv) approves and consents to the Merger and the
Merger Agreement. Nothing herein shall be (nor deemed to be) an acknowledgment
by the parties hereto that the approvals, consents, waivers and acknowledgments
set forth in this Section 1.5 are required for the approval, consummation and
effectiveness of the Merger or the Merger Agreement under the GCL or the ALS
Governing Documents.

SECTION 2. NOT USED.

SECTION 3. REPRESENTATIONS AND WARRANTIES OF PK&CO. PK&Co. represents and
warrants to ALS that the statements contained in this Section 3 are true,
correct and complete as of the date of this Agreement and will be correct and
complete as of the Effective Time (as though then made).

2
<PAGE> 3

3.1 Organization and Authorization of PK&Co.. PK&Co. is a
Delaware limited liability company, duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and has its principal
and only place of business, and qualified to do business, in the State of
Illinois. PK&Co. has full power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. This Agreement has been
duly executed by or on behalf of PK&Co. and constitutes the valid and legally
binding obligation of PK&Co., enforceable in accordance with its terms (except
insofar as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and except as to the availability of equitable remedies).

3.2 No Violation. Neither the execution and the delivery of
this Agreement, nor the consummation of the transactions contemplated hereby,
will violate any provision of its charter, bylaws or other governing documents,
or constitute a breach on the part of PK&Co. under any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which PK&Co. is
subject.

3.3 Brokers' Fees. PK&Co. has no liability or obligation to
pay any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which ALS could become liable
or obligated.

3.4 Representations Concerning PK&Co.'s Investment. PK&Co.
hereby represents, warrants and agrees as follows:

3.4.1 The Purchased Stock is being purchased by
PK&Co. and not by any other person or entity, with the funds of PK&Co.
and not with the funds of any other person or entity, and for the
account of PK&Co., not as a nominee or agent and not for the account
of any other person or entity. Upon the execution of this Agreement
and the purchase of the Purchased Stock, no other person or entity
will have any interest, beneficial or otherwise, in the Purchased
Stock that PK&Co. purchases hereby. PK&Co. is not obligated to
transfer shares of the Purchased Stock to any other person nor does
PK&Co. have any agreement or understanding to do so. PK&Co. is
purchasing the Purchased Stock for investment for an indefinite period
and not with a view to the sale or distribution of any part or all
thereof by public or private sale or other disposition. PK&Co. has no
intention of selling, granting any participation in or otherwise
distributing or disposing of any shares of the Purchased Stock.
PK&Co. does not intend to subdivide the purchase of the Purchased
Stock with any person or entity.

3.4.2 PK&Co. has been advised that the shares of
Purchased Stock have not been registered under the Act, or registered
or qualified under any state securities law, on the ground, among
others, that no distribution or public offering of the Purchased Stock
is to be effected and the Purchased Stock will be issued by ALS in

3
<PAGE> 4

connection with a transaction that does not involve any public
offering within the meaning of Section 4(2) of the Act or under the
rules and regulations of the Securities and Exchange Commission (the
"SEC") with respect to the Act, including Rule 506, and under all
applicable state securities laws. PK&Co. understands that ALS is
relying in part on the representations of PK&Co. as set forth herein
for purposes of claiming such exemptions and that the basis for such
exemptions may not be present if, notwithstanding the representations
of PK&Co., PK&Co. intends to acquire shares of the Purchased Stock for
resale on the occurrence or non-occurrence of some predetermined
event. PK&Co. has no such intention.

3.4.3 PK&Co. acknowledges receipt of a Confidential
Private Placement Memorandum from ALS (the "Disclosure Memorandum")
and acknowledges that PK&Co. has been furnished with such financial
and other information concerning ALS, the officers, directors and the
business of ALS, as PK&Co. considers necessary in connection with the
investment by PK&Co. in the Purchased Stock. PK&Co. has carefully
reviewed the Disclosure Memorandum, and is thoroughly familiar with
the business, operations, properties and financial condition of ALS
and has discussed with the officers or directors of ALS any questions
PK&Co. may have had with respect thereto. PK&Co. understands:

(a) the risks involved in this
offering, including the highly speculative nature of
the investment;

(b) the financial hazards involved in
this offering, including the risk of losing the
entire investment made by PK&Co.;

(d) the tax consequences of this
investment.

PK&Co. has consulted with legal, accounting, tax, investment and other
advisers to PK&Co. with respect to the tax treatment of an investment
by PK&Co. in shares of the Purchased Stock and the merits and risks of
an investment in the Purchased Stock.

3.4.4 PK&Co.: (i) is an "accredited investor" as
defined in Regulation D, promulgated by the SEC under the authority of
the Act ("Regulation D"); (ii) has adequate means of providing for the
current needs and possible contingencies of PK&Co., apart from any
income that PK&Co. might earn from an investment in ALS; (iii) has no
need for liquidity of the investment made by PK&Co. in ALS; and (iv)
can bear the economic risk of losing the entire investment of PK&Co.
therein.

4
<PAGE> 5

SECTION 4. REPRESENTATIONS AND WARRANTIES OF ALS. ALS represents and
warrants to PK&Co. that the statements contained in this Section 4 are correct
and complete as of the date of this Agreement and will be correct and complete
as of the Closing (as though then made).

4.1 Corporate. ALS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the requisite power and authority to carry on its business as it is now being
conducted, to enter into this Agreement and to carry out the transactions
contemplated hereby.

4.2 Authority. The execution and delivery of this Agreement
and any other documents, instruments or certificates to be executed and
delivered by ALS pursuant hereto and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of ALS. No other corporate act or proceeding on the part of ALS or
its stockholders is necessary to authorize this Agreement, the other documents,
instruments or certificates to be executed and delivered by ALS pursuant hereto
or the transactions contemplated hereby or thereby, including the transfer by
ALS of the Purchased Stock to PK&Co.. This Agreement constitutes, and when
executed and delivered any other documents, instruments and certificates to be
executed and delivered by ALS pursuant hereto will constitute, the legal, valid
and binding agreements of ALS, enforceable against ALS in accordance with their
respective terms (except insofar as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and except as to the availability of
equitable remedies).

4.3 No Violation. Neither the execution, delivery and
performance of this Agreement or any other documents, instruments or
certificates to be executed and delivered by ALS pursuant hereto, nor the
consummation by ALS of the transactions contemplated hereby or thereby, (a)
will, to the knowledge of ALS, violate any statute, law, rule, regulation,
order, writ, injunction or decree of any court or governmental authority by
which ALS is bound, or (b) will violate or conflict with or constitute a
default under any term or provision of the Certificate of Incorporation or
Bylaws of ALS.

4.4 Valid Issuance of Purchased Stock. The Purchased Stock,
when issued and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully
paid, and nonassessable shares of the Common Stock, shall have the rights and
privileges set forth in the Certificate of Incorporation of ALS and will be
free of any and all liens, claims, encumbrances and restrictions on transfer
other than restrictions on transfer contained in the ALS Stockholders'
Agreement (as hereinafter defined) and under the Securities Act and applicable
state securities laws.

5
<PAGE> 6

SECTION 5. COVENANTS OF PK&CO..

5.1 Agreement to Refrain from Resales. Without in any way
limiting the representations and warranties contained herein, PK&Co. covenants
and agrees that PK&Co. shall in no event pledge, hypothecate, sell, transfer,
assign or otherwise dispose of any shares of Purchased Stock, nor shall PK&Co.
receive any consideration for the shares of Purchased Stock from any person,
unless and until prior to any proposed pledge, hypothecation, sale, transfer,
assignment or other disposition:

(a) A registration statement on Form S-1 under the
Act (or any other form appropriate for the purpose under the Act or
any form replacing any such form) with respect to the shares of
Purchased Stock shall be then effective and such disposition shall
have been appropriately qualified in accordance with the Act,
applicable state security laws and any other applicable Federal or
state law; or

(b) PK&Co. shall have furnished ALS with (i) a
detailed explanation of the proposed disposition; and (ii) an opinion
of counsel to PK&Co. in form and substance satisfactory to ALS to the
effect that such disposition will not require registration of such
shares of Purchased Stock under the Act or qualification of such
shares of Purchased Stock under any other Federal or state securities
law, and counsel for ALS shall have concurred in such opinion and ALS
shall have advised PK&Co. of such concurrence.

5.2 Compliance with Provisions. PK&Co. hereby covenants and
agrees that each of the covenants, agreements, representations and warranties
made by PK&Co. contained in this Agreement and the statements contained in any
other document, instrument, certificate or writing delivered by PK&Co. to ALS
shall be true in all material respects when made and at and as of the Effective
Time as though such representations and warranties were made at and as of such
date, except as consented to by ALS in writing.

SECTION 6. COVENANTS OF ALS. ALS hereby covenants and agrees that each
of the covenants, agreements, representations and warranties made by ALS
contained in this Agreement and the statements contained in any other document,
instrument, certificate or writing delivered by ALS to PK&Co. shall be true in
all material respects when made and at and as of the Effective Time as though
such representations and warranties were made at and as of such date, except as
consented to by PK&Co. in writing.

SECTION 7. CERTIFICATES TO CONTAIN LEGENDS. PK&Co. understands and agrees
that any certificate or certificates representing the shares of Purchased Stock
shall bear such legends as ALS may consider necessary or advisable to
facilitate compliance with the Act, the applicable state securities laws and
any other securities law including without limitation, legends stating that the
shares of Purchased Stock have not been registered under the Act or qualified
under the state securities laws and setting forth the limitations on
dispositions imposed hereby.

6
<PAGE> 7

In addition, such certificate or certificates representing the shares of
Purchased shall bear a legend stating that the shares represented by such
certificate or certificates is subject to the terms of the ALS Stockholders'
Agreement as well as the covenants, terms and conditions of this Agreement.

SECTION 8. PURCHASED STOCK WILL BE RESTRICTED SECURITIES. PK&Co. understands
and agrees that the shares of Purchased Stock will be "restricted securities"
as that term is defined in Rule 144, promulgated by the SEC under the authority
of the Act, and, accordingly, that the Purchased Stock must be held
indefinitely unless the shares are subsequently registered under the Act and
qualified under applicable state securities law or exemptions from such
registration and qualification are available. PK&Co. understands that ALS is
under no obligation so to register the Purchased Stock under the Act, to
qualify the Purchased Stock under applicable state securities laws, or to
comply with Regulation A or any other exemption under the Act, applicable Law
or any other law. PK&Co. understands that Rule 144 is not currently available
for any sale of the Purchased Stock.

SECTION 9. INDEMNIFICATION. PK&Co. hereby agrees to indemnify and defend ALS,
and hold ALS harmless from and against any and all liability, damage, cost or
expense incurred on account of or arising out of:

9.1 Any breach of or inaccuracy in the representations, warranties or
agreements of PK&Co. herein, including, without limitation, the defense of any
claim based on any allegation of fact inconsistent with any of said
representations, warranties or agreements;

9.2 Any disposition of any of the shares of the Purchased Stock
contrary to any of said representations, warranties or agreements; and

9.3 Any action, suit or proceeding based on (a) a claim that any of
said representations, warranties or agreements were inaccurate or misleading,
or (b) any cause of action for damages or redress from ALS or any of them under
the Act, or (c) any disposition of any shares of the Purchased Stock.

SECTION 10. TERMINATION, AMENDMENT AND WAIVER.

10.1 Termination of Agreement. Time is of the essence
hereof. This Agreement may be terminated in its entirety at any time prior to
the Effective Time:

(a) without liability of any party, by mutual agreement of all the
parties hereto;

(b) by ALS, if there has been a material violation or breach by
PK&Co. of any of its covenants, agreements, representations or
warranties contained in this Agreement which has not been waived in
writing by ALS; and

7
<PAGE> 8

(c) by PK&Co., if there has been a material violation or breach by
ALS of any of its covenants, agreements, representations or warranties
contained in this Agreement which has not been waived in writing by
PK&Co..

10.2 Amendment, Extension and Waiver. At any time prior
to the Effective Time, ALS and PK&Co. may, by an instrument in writing signed
by both parties hereto, (a) amend this Agreement, (b) extend the time for the
performance of any of the obligations or other acts of the parties hereto, (c)
waive any inaccuracies in the representations and warranties contained herein
or in any document delivered pursuant hereto, and (d) waive compliance with any
of the agreements or conditions contained herein.

SECTION 11. MISCELLANEOUS.

11.1 Survival of Representations and Warranties. All of the
representations and warranties of the parties contained in this Agreement shall
survive the Closing hereunder (even if the damaged party knew or had reason to
know of any misrepresentation or breach of warranty at the time of Closing).

11.2 Expenses, Taxes, Etc. PK&Co. will pay all professional
fees and expenses incurred by PK&Co. in connection with this Agreement and the
transactions contemplated hereby. ALS will pay all professional fees and
expenses incurred by it in connection with this Agreement and the transactions
contemplated hereby.

11.3 Further Assurances. Each of the parties to this
Agreement hereby covenants and agrees that, from time to time, it will make,
execute and deliver any and all such other instruments and documents and will
do and perform any and all such further acts as shall be or become necessary,
proper or convenient to carry out or effectuate the respective covenants,
promises and undertakings contained in this Agreement.

11.4 Successors and Assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other parties.
This Agreement shall be binding upon and inure to the benefit of the respective
parties hereto and the successors and permitted assigns of such party.

11.5 Severability. If any provision, clause, or part of
this Agreement, or the application thereof under certain circumstances, is held
invalid, the remainder of this Agreement, or the application of such provision,
clause or part under other circumstances, shall not be affected thereby.

<PAGE> 9

11.6 Entire Agreement. This Agreement and other writings
referred to herein or delivered pursuant hereto which form a part hereof
contain the entire understanding of the parties with respect to the
transactions contemplated hereby and supersede all prior agreements and
understandings between the parties on such matters.

11.7 Headings. The Section headings contained in this
Agreement are for reference purposes only and will not affect in any way the
meaning or interpretation of this Agreement.

11.8 Notices. All notices, claims, certificates, requests,
demands and other communications hereunder will be in writing and will be
deemed to have been duly given if (i) personally delivered; (ii) sent by
telecopy, facsimile transmission or other electronic means of transmitting
written documents (if confirmation of such transmission is received); or (iii)
sent to the parties at their respective addresses indicated herein by
registered or certified mail, postage prepaid, return receipt requested, or by
private overnight mail courier service. The respective addresses to be used
for all such notices, demands or requests are as follows:

If to PK&Co., to:

Petty, Kneen & Company, L.L.C.
184 Shuman Boulevard, Suite 200
Naperville, Illinois 60563
Attention: William G. Petty, Jr.
Facsimile: (708) 357-4020

If to ALS, to:

Alternative Living Services, Inc.
450 North Sunnyslope Road, Suite 300
Brookfield, Wisconsin 53005
Attention: William F. Lasky
Facsimile: (414) 789-9592

with a copy to:

Rogers & Hardin
2700 Cain Tower
229 Peachtree Street, N.W.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: (404) 525-2224

<PAGE> 10

or to such other address as the person to whom notice is to be given may have
previously furnished to the other in writing in the manner set forth above.

11.9 Law Governing. This Agreement will be governed by, and
construed and enforced in accordance with, the internal laws of the State of
Wisconsin without regard to its conflicts of law rules.

11.10 Counterparts/Telecopies. This Agreement may be
executed simultaneously in counterparts, each of which will be deemed an
original, but all of which together will constitute one and the same
instrument. Facsimile and telecopy versions of signed documents shall be
deemed to be original documents for purposes of the Closing.

11.11 No Third Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any person other than the parties hereto and
their respective successors and permitted assigns.

11.12 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 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. Any reference to any
federal, state, local, or foreign statute or law shall be deemed also to refer
to all rules and regulations promulgated thereunder, unless the context
requires otherwise. The word "including" shall mean including without
limitation. The Parties intend that each representation, warranty, and
covenant contained herein shall have independent significance.

11.13 Number; Gender. Whenever the singular number is
used in this Agreement and when required by the context, the same shall include
the plural and vice versa, and the masculine gender shall include the feminine
and neuter genders and vice versa.

10
<PAGE> 11

IN WITNESS WHEREOF, the each of the parties hereto have caused
this Agreement to be executed and delivered to the other party hereto as of the
date and year first above written.

PETTY, KNEEN & COMPANY, L.L.C.

By: ________________________________

Its: _______________________________

ALTERNATIVE LIVING SERVICES, INC.

By: ________________________________

Its: _______________________________

11
<PAGE> 12

AMENDMENT TO EMPLOYMENT AGREEMENT

THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made and
entered into as of this 28th day of June, 1995, by and between WILLIAM F.
LASKY, a resident of the State of Wisconsin ("Employee"), and ALTERNATIVE
LIVING SERVICES, INC., a Delaware corporation (the "Company").

W I T N E S S E T H:

WHEREAS, Employee and the Company are parties to that certain
Employment Agreement dated December 14, 1993 (the "Agreement");

WHEREAS, Employee and the Company wish to modify and amend the
Agreement in the manner set forth herein.

NOW, THEREFORE, in consideration of the premises and the promises and
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, do hereby agree as follows:

1. Section 2.1 of the Agreement shall be amended and restated in
its entirety as follows:

2.1 Title. Employee shall serve as a senior
executive officer of the Company with the title of President
and, as such Employee shall report directly to the Chief
Executive Officer of the Company. Employee also consents to
serve, without additional compensation, if elected, as a
director of the Company.

2. The "Original Term", as defined in Section 3.1 of the
Agreement shall be changed from December 14, 1995 to May 31, 1997.

3. Section 3.2 of the Agreement shall be amended and restated in
its entirety as follows:

3.2 Payments Upon Termination. If Employee's
employment is terminated by the Company for cause or by
Employee for any reason other than "good reason", the Company
shall pay Employee the Base Salary (as hereinafter defined)
through the effective date of termination at the rate in
effect at the time notice of termination is given, and the
Company shall have no further obligations to Employee under
this Agreement subject to the rights and benefits the Employee
may have under employee benefits plans and programs of the
Company in existence as of the effective date of such
termination, if any, which shall be determined in accordance
therewith. If Employee's employment is

<PAGE> 13

terminated by the Company for any reason other than for cause
or by Employee for "good reason", the Company shall continue
to pay Employee the Base Salary at the rate in effect at the
time notice of termination is given, together with any
applicable bonuses and rights and benefits the Employee may
have under employee benefits plans and programs of the
Company in existence as of the date of such termination, all
for the twelve (12) month period following such termination
(the "Extended Period"); provided, however, such payments of
Base Salary and provision of bonuses, rights and benefits
hereunder during the Extended Period shall not be due and
payable by the Company to Employee if Employee (i)
shall violate the provisions of Section 5 hereof or (ii)
during the Extended Period shall engage in or render any
services to or be employed by any Competing Business
(hereinafter defined) in the Area (hereinafter defined) in the
capacity of officer, managerial or executive employee,
director, consultant or shareholder (other than as the owner
of less than one (1%) percent of the shares of a
publicly-owned corporation whose shares are traded on a
national securities exchange or in the over-the-counter
market).

4. The "Base Salary," as defined in Section 4.1 of the Agreement,
shall be not less than $150,000.

5. Section 4.2 of the Agreement shall be amended and restated in
its entirety as follows:

4.2 Incentive Bonuses. As additional
compensation hereunder, the Company may, in the discretion of
the Board of Directors, pay Employee an annual bonus (the
"Annual Bonus") for each fiscal year during the term of
Employee's employment hereunder. If Employee's employment
hereunder is terminated pursuant to the terms of this
Agreement prior to the end of a calendar year, his Annual
Bonus with respect to that year shall be prorated for such
portion of that year as he was employed by the Company. The
Employee shall be eligible to receive an Annual Bonus of up to
35% of the Base Salary payable if the Company's earnings
before interest, taxes and depreciation are within 10% of such
earnings targeted in the applicable annual business plan as
approved by the Board of Directors and such bonus shall be due
and payable upon the submission and verification of the
Company's annual financial statements.

6. Section 4.3 of the Agreement shall be amended and restated in
its entirety as follows:

<PAGE> 14

4.3 Stock Options. The Board of Directors of the
Company shall grant to Employee, as of June 28, 1995, options
to purchase 71 shares of common stock of the Company pursuant
to the terms of the 1995 Incentive Compensation Plan of the
Company, which options shall vest and first become exercisable
at the rate of 25% per year on the first, second, third and
fourth anniversary of the date of grant, such that all of
these options shall vest and become exercisable on the fourth
anniversary of the date of grant. The exercise price for
these options shall be $8,425 per share. Such options shall
no longer be exercisable as of and following the tenth (10th)
anniversary of the date of grant of such options.

7. Section 4.4(a) of the Agreement shall be amended and restated
in its entirety as follows:

(a) Life and Other Insurance. The
Company shall provide to Employee such term life and group
travel, accident, accidental death and dismemberment insurance
and long and short term disability insurance, or their
equivalents, as is provided from time to time for senior
executives of the Company. The Company shall be entitled, at
its sole option and expense, to arrange for and keep in
effect, during the term of Employee's employment hereunder, so
long as he is insurable, key man insurance on Employee in an
amount determined by the Board of Directors, such policy or
policies to name the Company or its designee as the
beneficiary. Employee shall reasonably cooperate with the
Company in procuring such key man insurance as the Company
shall elect to purchase.

8. Section 4.4(b) of the Agreement shall be amended and restated
in its entirety as follows:

(b) Medical Insurance. During the term
of Employee's employment hereunder, the Company shall, at its
expense, provided or arrange for and keep in effect,
hospitalization, major medical and similar medical and health
insurance for Employee and his family, to the same extent as
is provided from time to time for senior executives of the
Company.

9. Section 4.6 of the Agreement shall be amended and restated in
its entirety as follows:

4.6 Retirement Benefits. During the term of his
employment hereunder, Employee shall have the same rights as
senior executive officers of the Company to participate in all
profit-sharing, pension and

<PAGE> 15

other retirement plans as are now, or as may hereafter be,
established by the Company.

10. The following Section 4.9 shall be added to the Agreement:

4.9 Loan to Employee. Upon request by the
Employee, the Company shall loan to Employee up to $150,000,
such loan to be repayable in three annual installments of
$50,000 beginning on June 30, 1996 (each such date, a
"Repayment Date"), with interest accruing on such loan at the
rate of 6.0% per annum with accrued and unpaid interest due
and payable on each such annual Repayment Date.
Notwithstanding the foregoing, if the Employee is employed by
the Company on a Repayment Date, the principal and interest
payable to the Company on such Repayment Date shall be deemed
paid by the Employee and forgiven by the Company. In the
event the Employee's employment is terminated by the Company
for "cause" (as defined in Section 3.1 hereof) or by the
Employee otherwise than for "good reason" (as defined in
Section 3.1 hereof), all amounts remaining outstanding on such
loan shall be due and payable on the effective date of such
termination. The Company shall be entitled to set-off any
amounts due the Employee pursuant to Section 3.2 hereof
against any remaining amounts due to the Company under such
loan. The Employee agrees to execute a promissory note in
such form as the Company may reasonably request to evidence
such loan.

11. Section 6.5 of the Agreement shall be amended and restated in
its entirety as follows:

6.5 Notices. All communications provided for
hereunder shall be in writing and shall be deemed to be given
when delivered in person or deposited in the United States
mail, first class, registered mail, return receipt requested,
with proper postage prepaid, and

(a) If to Employee, addressed to:

William F. Lasky
450 N. Sunnyslope Road, Suite 300
Brookfield, Wisconsin 53005

(b) If to the Company, addressed to:

William G. Petty, Jr.
c/o Alternative Living Services, Inc.
184 Shuman Boulevard, Suite 200
Naperville, Illinois 60563

<PAGE> 16

cc: Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.

or at such other place or places or to such other person or
persons as shall be designated in writing by the parties
hereto in the manner provided above for notices.

12. The amendments to the Agreement set forth herein shall be
effective as of June 28, 1995. Except as modified by this Amendment, the
Agreement shall remain in full force and effect.

13. This Amendment may be executed by facsimile and in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

IN WITNESS WHEREOF, Employee has duly executed, and the Company has
caused this Amendment to be duly executed by its duly authorized officer, and
the parties have caused this Agreement to be delivered, all on the day and year
first written above.

/s/ William F. Lasky
---------------------------------------
WILLIAM F. LASKY

ALTERNATIVE LIVING SERVICES, INC.

By:/s/ William G. Petty, Jr.
------------------------------------
Its: Chairman, CEO
----------------------------------

<PAGE> 1
EXHIBIT 10.4

AGREEMENT AND PLAN OF MERGER

AMONG

ALTERNATIVE LIVING SERVICES, INC.,

ALS ACQUISITION CORP.,

ALTERNATIVE LIVING SERVICES - MIDWEST INC.

AND THE SHAREHOLDERS OF

ALTERNATIVE LIVING SERVICES - MIDWEST INC.

DATED AS OF MAY 20, 1996
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Name Change, Certificate of Incorporation and Bylaws . . . . . . . . . . . . . . . . . . . . 2
1.6 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Approval by Midwest Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES . . . . . . . . . . . . . . . . . . . . . 3
2.1 Share Consideration; Conversion or Cancellation of Shares in the Merger . . . . . . . . . . . 3
2.2 Payment for Shares in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.3 Transfer of Shares After the Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE III REPRESENTATIONS AND WARRANTIES OF ALS AND MERGER SUB . . . . . . . . . . . . . . . . . . . . 5
3.1 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.4 Acquisition of Surviving Corporation Common Stock for Investment . . . . . . . . . . . . . . 6
3.5 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6 Valid Issuance of Merger Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.7 Disclosure Memorandum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MIDWEST . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.1 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.3 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.5 Ownership of Midwest Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.6 Notice of Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE V REPRESENTATIONS AND WARRANTIES OF DAMONE HOLDERS . . . . . . . . . . . . . . . . . . . . . . 8
5.1 Organization of Certain Damone Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

</TABLE>
<PAGE> 3

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
5.2 Authorization of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.3 Noncontravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.4 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.5 Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.6 Ownership of Midwest Common Stock; No Interest in Partnerships . . . . . . . . . . . . . . . 9
5.7 Disclosure Memorandum 10
5.8 No Recommendation by Board of Directors; Conflicts of Interests . . . . . . . . . . . . . . . 10

ARTICLE VI REPRESENTATIONS AND WARRANTIES OF TDG . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.1 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.3 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.4 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.5 No Interest in Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ARTICLE VII COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.1 Conduct of the Business of Midwest Prior to the Effective Time . . . . . . . . . . . . . . . 11
7.2 Access to Properties and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.3 Conduct of Business of Merger Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.4 Conditional Put Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.5 Repayment of Certain Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.6 Release of Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.7 Right to Invest in Future Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.8 Development and Construction Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.9 Release of Claims by the Damone Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.10 Admission Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.11 Line of Credit Deposits; Farmington Hills II Water Main . . . . . . . . . . . . . . . . . . . 16

ARTICLE VIII CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.1 Conditions to Each Party's Obligation to Effect the Merger . . . . . . . . . . . . . . . . . 16
8.2 Conditions to the Obligation of Midwest to Effect the Merger . . . . . . . . . . . . . . . . 17
8.3 Conditions to the Obligations of ALS and Merger Sub to Effect the Merger . . . . . . . . . . 17

ARTICLE IX TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ARTICLE X MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.1 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.2 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.3 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
10.4 Expenses and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

</TABLE>
<PAGE> 4

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
10.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
10.6 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.8 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.9 Facsimile Signature; Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.10 Invalidity; Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Exhibit A ALS Stockholders' Agreement
Exhibit B Notice of Dissenters' Rights
Exhibit C Form of ALS Note
Schedule A List of Midwest Shareholders
Schedule B List of Notes to be Retired
Schedule C Description of Put/Call Option
Schedule D Development Fee Calculation Methodology

</TABLE>
<PAGE> 5

AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of May 20,
1996, among Alternative Living Services, Inc., a Delaware corporation ("ALS"),
ALS Acquisition Corp., a Michigan corporation and a wholly-owned subsidiary of
ALS ("Merger Sub"), The Damone Group, Inc., a Michigan corporation ("TDG"),
Alternative Living Services-Midwest Inc., a Michigan corporation ("Midwest")
and the shareholders of Midwest listed on Schedule A attached hereto (the
"Midwest Shareholders").

WHEREAS, Midwest is the sole general partner of seven Michigan
partnerships, namely: Hamilton House Limited Partnership, Eisenhower/State
Limited Partnership, North Schoenherr Limited Partnership, Twelve/Drake Limited
Partnership, Marsh/Tihart Limited Partnership, Six Mile/Abby Limited
Partnership and Northpointe - Utica Limited Partnership (each, a "Partnership,"
and collectively, the "Partnerships");

WHEREAS, ALS intends to acquire all of the limited partner
interests in the Partnerships from the holders thereof pursuant to the terms of
a Limited Partner Interest Purchase Agreement dated as of May 20, 1996, a copy
of which is attached hereto (the "LP Purchase Agreement");

WHEREAS, contemporaneously with or following the consummation
of the LP Purchase Agreement, the parties hereto intend for ALS to acquire all
of the outstanding shares of Midwest as a consequence of and pursuant to the
Merger (hereinafter defined) and the parties hereto wish to enter into certain
other agreements and arrangements described herein;

WHEREAS, the Boards of Directors of ALS, Merger Sub and
Midwest (with the concurrence of all of the Midwest Shareholders) deem
advisable and in the best interests of their respective shareholders the merger
of Midwest with and into Merger Sub (the "Merger") upon the terms and
conditions set forth herein and in accordance with the Michigan Business
Corporation Act (the "MBCA") (Merger Sub, following the effectiveness of the
Merger, being hereinafter sometimes referred to as the "Surviving
Corporation");

WHEREAS, the Boards of Directors of ALS, Merger Sub and
Midwest (and the Midwest Shareholders) have approved the Merger pursuant to
this Agreement, upon the terms and subject to the conditions set forth herein;

WHEREAS, for federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code").

NOW, THEREFORE, in consideration of the mutual
representations, warranties, covenants, agreements and conditions contained
herein, and in order to set forth the terms and conditions of the Merger and
the method of carrying the same into effect, the parties hereby agree as
follows:
<PAGE> 6

ARTICLE I

THE MERGER

1.1 The Merger. Upon the terms and conditions
hereinafter set forth and in accordance with the MBCA, at the Effective Time
(as defined in Section 1.3), Midwest shall be merged with and into Merger Sub
and thereupon the separate existence of Midwest shall cease, and Merger Sub, as
the Surviving Corporation, shall continue to exist under and be governed by the
MBCA.

1.2 Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at the
offices of Rogers & Hardin at 229 Peachtree Street, N.E., 2700 Cain Tower,
Atlanta, Georgia 30303 as promptly as practicable after satisfaction or waiver
of the conditions set forth in Article VII, or at such other location, time or
date as may be agreed to in writing by the parties hereto. The date on which
the Closing occurs is hereinafter referred to as the "Closing Date."

1.3 Effective Time. If all the conditions to the Merger
set forth in Article VIII shall have been satisfied or waived in accordance
herewith and this Agreement shall not have been terminated as provided in
Article IX, the parties hereto shall cause a Certificate of Merger meeting the
requirements of the MBCA ("Certificate of Merger") to be properly executed and
filed in accordance with such requirements on the Closing Date. The Merger
shall become effective at the time of filing of the Certificate of Merger with
the Secretary of State of the State of Michigan in accordance with the MBCA or
at such other time which the parties hereto shall have agreed upon and
designated in such filing as the effective time of the Merger (the "Effective
Time").

1.4 Effect of Merger. After the Effective Time, pursuant
to the MBCA, the separate existence of Midwest will cease and the Surviving
Corporation shall succeed, without other transfer, to all the rights and
property of Midwest and shall be subject to all the debts and liabilities of
Midwest in the same manner as if the Surviving Corporation had itself incurred
them. All outstanding capital stock of Midwest held by Midwest Shareholders
other than ALS (the "Damone Holders") shall be automatically converted into the
right to receive cash and shares of stock of ALS and all the shares of Merger
Sub shall be converted into shares of stock of the Surviving Corporation, as
set forth in Article II hereof.

1.5 Name Change, Certificate of Incorporation and Bylaws.
At the Effective Time, the Surviving Corporation shall change its name to
"Alternative Living Services - Midwest Inc." and the Articles of Incorporation
and the Bylaws of Midwest shall be the Articles of Incorporation and Bylaws of
the Surviving Corporation.

1.6 Directors and Officers. The persons who are
directors of Merger Sub immediately prior to the Effective Time shall, after
the Effective Time, serve as the directors of the Surviving Corporation, to
serve until their successors have been duly elected and qualified

2
<PAGE> 7

in accordance with the Articles of Incorporation and Bylaws of the Surviving
Corporation. The persons who are officers of Merger Sub immediately prior to
the Effective Time shall, after the Effective Time, serve as the officers of
the Surviving Corporation at the pleasure of the Board of Directors of the
Surviving Corporation.

1.7 Approval by Midwest Shareholders. This Agreement
constitutes action by unanimous written consent of all of the Midwest
Shareholders, in accordance with Section 450.1407(2) of the MBCA:

(i) approving and authorizing the Merger and the
plan of merger constituted by this Agreement
pursuant to Section 703a of the MBCA;

(ii) waiving all required notices of the Merger
pursuant to the Bylaws of Midwest or the MBCA
other than the Notices of Dissenters' Rights
(hereinafter defined);

(iii) waiving any right to dissent with respect to
the Merger pursuant to Sections 762 through
767 of the MBCA; and

(iv) authorizing the officers of Midwest to take
all such actions and do all such things as
any of them may deem necessary or appropriate
in order to consummate the Merger and
otherwise carry out the terms of this
Agreement.

ARTICLE II

CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES

2.1 Share Consideration; Conversion or Cancellation of
Shares in the Merger. Subject to the provisions of this Article II, at the
Effective Time, by virtue of the Merger and without any action on the part of
the holders thereof:

(a) Each issued and outstanding share of the common
stock, of Midwest (the "Midwest Common Stock"), other than shares of
Midwest Common Stock that are owned by Midwest as treasury stock (the
"Treasury Shares") or owned by ALS, shall be automatically converted
into the right to receive (i) $30.00 (the "Cash Portion") and (ii)
5.7512 shares (the "Exchange Ratio") of the common stock, $0.01 per
share par value, of ALS (the "ALS Common Stock"). Accordingly, the
Damone Holders will be entitled to receive, upon the conversion of
their shares of Midwest Common Stock, the Cash Portion and shares of
ALS Common Stock set forth on Schedule A hereto. No fractional shares
of ALS Common Stock will be issued in the Merger, and any fractional
shares resulting from the conversion contemplated by this Section
2.1(a) with respect to any of

3
<PAGE> 8

the three Damone Holders shall be rounded to the nearest whole share
of ALS Common Stock. If prior to the Effective Time, ALS or Midwest
should split or combine their respective Common Stock, or pay a stock
dividend or other stock distribution in their respective Common Stock,
or otherwise change their respective Common Stock into any other
securities, or make any other dividend or distribution on their
respective Common Stock, then the Exchange Ratio will be appropriately
adjusted to reflect such split, combination, dividend or other
distribution or change. The Exchange Ratio shall, in each case, be
rounded to the nearest one-thousandth (.0001) of a share.

(b) As a result of the Merger all of the shares of the
Midwest Common Stock to be converted into the right to receive the
Cash Portion and ALS Common Stock pursuant to Section 2.1(a) (the
"Midwest Shares") shall cease to be outstanding, shall be cancelled
and retired and shall cease to exist, and each holder of a certificate
representing any such shares shall thereafter cease to have any rights
with respect to such shares, except the right to receive for each of
the shares, upon the surrender of such certificate in accordance with
Section 2.2(b), consideration specified in Section 2.1(a) above (the
"Merger Consideration").

(c) The issued and outstanding shares of the common
stock, no par value, of Merger Sub (the "Merger Sub Common Stock")
shall be converted into one hundred (100) shares of fully paid and
nonassessable shares of common stock of the Surviving Corporation
("Surviving Corporation Common Stock").

(d) All shares of Midwest Common Stock which are owned as
Treasury Shares or are owned by ALS shall be cancelled and retired and
cease to exist, without any conversion thereof or payment with respect
thereto.

2.2 Payment for Shares in the Merger.

(a) At or following the Effective Time, upon the
surrender for exchange of the certificate or certificates representing Midwest
Shares to be exchanged pursuant to the Merger (the "Certificates") together
with such letter of transmittal duly completed and properly executed in
accordance with instructions thereto and such other documents as may be
reasonably required by ALS, the holder of such Certificate(s) shall be paid
promptly, without interest thereon and subject to any required withholding of
taxes, the Merger Consideration to which such holder is entitled hereunder, and
such Certificates shall forthwith be cancelled. Until so surrendered and
exchanged, the Certificates shall represent solely the right to receive the
Merger Consideration pursuant to Section 2.1.

(b) ALS, as the sole shareholder of Merger Sub, shall,
upon surrender to the Surviving Corporation of certificates representing the
Merger Sub Common Stock, receive a certificate representing the number of
shares of the Surviving Corporation Common Stock into which such Merger Sub
Common Stock shall have been converted pursuant to Section 2.1.

4
<PAGE> 9

2.3 Transfer of Shares After the Effective Time. No
transfers of Midwest Common Stock shall be made on the stock transfer books of
Midwest after the close of business on the day prior to the date of the
Effective Time.

2.4 Further Assurances. If at any time after the
Effective Time the Surviving Corporation shall consider or be advised that any
further deeds, assignments or assurances in law or any other acts are
necessary, desirable or proper (a) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation, the title to any property or right of
Midwest or Merger Sub acquired or to be acquired by reason of, or as a result
of, the Merger, or (b) otherwise to carry out the purposes of this Agreement,
Midwest and Merger Sub agree that the Surviving Corporation and its proper
officers and directors and the Midwest Shareholders shall and will execute and
deliver all such deeds, assignments and assurances in law and do all acts
necessary, desirable or proper to vest, perfect or confirm title to such
property or right in the Surviving Corporation and otherwise to carry out the
purposes of this Agreement, and that the proper officers and directors of the
Surviving Corporation are fully authorized in the name of Midwest and Merger
Sub or otherwise to take any and all such action.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF ALS AND MERGER SUB

ALS and Merger Sub represent and warrant to Midwest and to each Damone
Holder that the statements contained in this Article III are correct and
complete as of the date of this Agreement and will be correct and complete as
of the Effective Time (as though then made).

3.1 Corporate. Each of Merger Sub and ALS is a corporation
duly organized, validly existing and in good standing under the laws of the
States of Michigan and Delaware, respectively, and has the requisite power and
authority to own, lease and operate its assets and properties, to carry on its
business as it is now being conducted, to enter into this Agreement and to
carry out the transactions contemplated hereby.

3.2 Authority. The execution and delivery of this
Agreement and all other instrument to be executed and delivered by each of
Merger Sub and ALS pursuant hereto and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of each of Merger Sub and ALS. No other corporate act or proceeding
on the part of Merger Sub, ALS or their respective stockholders is necessary to
authorize this Agreement, the other instruments to be executed and delivered by
Merger Sub or ALS pursuant hereto or the transactions contemplated hereby or
thereby, including the payment by ALS of the Merger Consideration to the Damone
Holders. This Agreement constitutes, and when executed and delivered the other
instruments to be executed and delivered by Merger Sub or ALS pursuant hereto
will constitute, the legal, valid and binding agreements of Merger Sub and ALS,
enforceable against Merger Sub and ALS in accordance with their respective
terms (except insofar as such enforceability may be limited by applicable
bankruptcy, insolvency,

5
<PAGE> 10

reorganization, moratorium or similar laws affecting creditors' rights
generally and except as to the availability of equitable remedies).

3.3 No Violation. Neither the execution, delivery and
performance of this Agreement or the other instruments to be executed and
delivered by Merger Sub or ALS pursuant hereto, nor the consummation by Merger
Sub or ALS of the transactions contemplated hereby or thereby (a) will, to the
knowledge of Merger Sub or ALS, violate any statute, law, rule, regulation,
order, writ, injunction or decree of any court or governmental authority by
which Merger Sub or ALS is bound or (b) will violate or conflict with or
constitute a default under any term or provision of the Certificate of
Incorporation or Bylaws of Merger Sub or ALS.

3.4 Acquisition of Surviving Corporation Common Stock for
Investment. ALS is acquiring the Surviving Corporation Common Stock for
investment and not with a view toward, or for sale in connection with, any
distribution thereof, nor with any present intention of distributing or selling
the Surviving Corporation Common Stock. ALS acknowledges that such securities
have not been registered under the Securities Act of 1933, as amended (the
"Securities Act") or any applicable state securities laws and, therefore,
cannot be resold unless so registered or exempted from such registration. ALS,
individually or together with its representatives and agents, represents that
it has sufficient knowledge and experience in financial and business matters
that it is capable of evaluating the economic risks of investment in the
Surviving Corporation Common Stock.

3.5 No Brokers or Finders. Neither Merger Sub nor ALS
has any liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.

3.6 Valid Issuance of Merger Shares. The ALS Common
Stock to be issued as part of the Merger Consideration (the "Merger Shares"),
when issued and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully
paid, and nonassessable, shall have the rights and privileges set forth in the
Certificate of Incorporation of ALS and will be free of restrictions on
transfer other than restrictions on transfer contained in the ALS Amended and
Restated Stockholders' Agreement, as amended, a copy of which is attached
hereto as Exhibit A ("ALS Stockholders' Agreement") and under the Securities
Act and applicable state securities laws.

3.7 Disclosure Memorandum. The Confidential Disclosure
Memorandum of ALS delivered to Midwest and to each Midwest Shareholder (the
"Disclosure Memorandum") was prepared in good faith by ALS and does not, to the
knowledge of ALS after reasonable investigation, contain any untrue statement
of a material fact nor does it omit to state a material fact necessary to make
the statements therein not misleading.

3.8 Disclosure. ALS has provided to Midwest and the
Midwest Shareholders (i) all the information that they have requested for
deciding whether to consummate the

6
<PAGE> 11

transactions contemplated by this Agreement generally and, specifically,
whether to elect to receive any Merger Shares as part of the Merger
Consideration and (ii) all information that ALS believes is reasonably
necessary to enable such party to make such decisions. To the knowledge of ALS
after reasonable investigation, neither this Agreement, the Disclosure
Memorandum, nor any other written statements or certificates made or delivered
in connection herewith contains any untrue statement of a material fact or
omits to state a material fact necessary to make the statements herein or
therein not misleading.

3.9 Validity of Notes. The promissory notes of ALS to be
delivered pursuant to Section 7.5 hereof shall be, when issued at Closing, the
legal, valid and binding obligations of ALS enforceable in accordance with
their respective terms (except insofar as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and except as to the availability of
equitable remedies).

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF MIDWEST

Midwest represents and warrants to ALS, Merger Sub and the Midwest
Shareholders that the statements contained in this Article IV are correct and
complete as of the date of this Agreement and will be correct and complete as
of the Effective Date.

4.1 Corporate. Midwest is a corporation duly organized,
validly existing and in good standing under the laws of the State of Michigan
and has the requisite power and authority to own, lease and operate its assets
and properties, to carry on its business as it is now being conducted, to enter
into this Agreement and to carry out the transactions contemplated hereby.

4.2 Authority. The execution and delivery of this
Agreement and all other instrument to be executed and delivered by Midwest
pursuant hereto and the consummation of the transactions contemplated hereby
and thereby have been duly authorized by the Board of Directors of Midwest;
provided, however, the Board of Directors of Midwest has not made any
recommendation with respect to the Merger pursuant to Section 703a(2)(a) of the
MBCA. No other corporate act or proceeding on the part of Midwest or its
stockholders is necessary to authorize this Agreement, the other instruments to
be executed and delivered by Midwest pursuant hereto or the transactions
contemplated hereby or thereby. This Agreement constitutes, and when executed
and delivered the other instruments to be executed and delivered by Midwest
pursuant hereto will constitute, the legal, valid and binding agreements of
Midwest, enforceable against Midwest in accordance with their respective terms
(except insofar as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and except as to the availability of equitable remedies).

7
<PAGE> 12

4.3 No Violation. Neither the execution, delivery and
performance of this Agreement or the other instruments to be executed and
delivered by Midwest pursuant hereto, nor the consummation by Midwest of the
transactions contemplated hereby or thereby (a) will, to the knowledge of
Midwest, violate any statute, law, rule, regulation, order, writ, injunction or
decree of any court or governmental authority by which Midwest is bound or (b)
will violate or conflict with or constitute a default under any term or
provision of the Articles of Incorporation or Bylaws of Midwest.

4.4 No Brokers or Finders. Midwest has no liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement.

4.5 Ownership of Midwest Common Stock. The Midwest
Shareholders hold of record the shares of Midwest Common Stock set forth next
to their respective names on Schedule A attached hereto. The shares of Midwest
Common Stock set forth on Schedule A constitute all of the issued and
outstanding shares of Midwest Common Stock, and there are no other shares of
capital stock, treasury shares, options, warrants or other rights, agreement,
arrangements or commitments of any character to acquire shares of capital stock
of Midwest, or any interest therein.

4.6 Notice of Dissenters' Rights. Midwest has provided
to each Midwest Shareholder a Notice of Dissenters' Rights pursuant to Section
703a(2)(c)(ii) of the MBCA (the "Notice of Dissenters' Rights"), a copy of
which notice is attached hereto as Exhibit B hereto.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF DAMONE HOLDERS

Each of the Damone Holders represents and warrants to ALS, Merger Sub
and Midwest that the statements contained in this Article V are correct and
complete as of the date of this Agreement and will be correct and complete as
of the Effective Time (as though then made).

5.1 Organization of Certain Damone Holders; Residence.
If any Damone Holder is not a natural person, such Damone Holder is duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its organization. Each Damone Holder is a resident of the
State of Michigan.

5.2 Authorization of Transaction. Each Damone Holder has
full power and authority to execute and deliver this Agreement and to perform
his or its obligations hereunder. This Agreement has been duly executed by or
on behalf of each of the Damone Holders and constitutes the valid and legally
binding obligation of each of the Damone Holders, enforceable in accordance
with its terms (except insofar as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights

8
<PAGE> 13

generally and except as to the availability of equitable remedies). The Damone
Holders need not give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement.

5.3 Noncontravention. To the best knowledge of each
Damone Holder, neither the execution and the delivery of this Agreement, nor
the consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which any of the Damone Holders is subject or, if any Damone Holder is
other than a natural person, any provision of its charter, bylaws or other
governing documents.

5.4 No Brokers or Finders. No Damone Holder has any
liability or obligation to pay any fees or commissions to any broker, finder,
or agent with respect to the transactions contemplated by this Agreement.

5.5 Investment Intent. Each Damone Holder (i)
understands that any Merger Shares that he or it will have the right to receive
pursuant to this Agreement have not been, and will not be as of the Effective
Time, registered under the Securities Act, or under any state securities laws,
and are being offered and issued in reliance upon federal and state exemptions
for transactions not involving any public offering, (ii) is acquiring any
Merger Shares solely for his or its own account for investment purposes, and
not with a view to the distribution thereof, (iii) is a sophisticated investor
with knowledge and experience in business and financial matters, (iv) has
received the Disclosure Memorandum, Notice of Dissenters' Rights and certain
other information concerning ALS and has had the opportunity to obtain
additional information as desired in order to evaluate the merits and the risks
inherent in holding any Merger Shares, (v) is able to bear the economic risk
and lack of liquidity inherent in holding any Merger Shares, (vi) either (a) is
an "accredited investor" as defined by Rule 501 of Regulation D promulgated by
the Securities and Exchange Commission under the Securities Act ("Reg. D") or
(b) has such knowledge and experience in financial and business matters that he
is capable of evaluating the merits and risks inherent in an investment in the
Merger Shares, and (vii) understands and acknowledges that any Merger Shares
that he or it acquires pursuant to this Agreement will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act and
that the certificate representing any such Merger Shares will bear a legend
restricting transfer unless either (A) the transfer is exempt from the
registration requirements under the Securities Act and any applicable state
securities law and an opinion of counsel satisfactory to ALS that such transfer
is exempt therefrom is delivered to ALS or (B) the transfer is made pursuant to
an effective registration statement under the Securities Act and any applicable
state securities law. The number of "purchasers" acquiring Merger Shares
pursuant to the Merger, in accordance with Rule 501(e) of Reg D, is less than
5.

5.6 Ownership of Midwest Common Stock; No Interest in
Partnerships. Each Damone Holder holds of record and owns beneficially the
shares of Midwest Common Stock set forth next to his or its name on Schedule A
attached hereto, free and clear of any restrictions

9
<PAGE> 14

on transfer (other than any restrictions under the Securities Act and
applicable state securities laws), liens, encumbrances, options, warrants,
purchase rights, contracts, commitments, equities, demands, and all other
claims of any type. No Damone Holder is a party to any option, warrant,
purchase right, or other contract or commitment that could require the Damone
Holders to sell, transfer, or otherwise dispose of all or any part of such
shares of Midwest Common Stock. The shares of Midwest Common Stock set forth
on Schedule A constitute all of the issued and outstanding shares of Midwest
Common Stock, and there are no other shares of capital stock, treasury shares,
options, warrants or other rights, agreement, arrangements or commitments of
any character to acquire shares of capital stock of Midwest, or any interest
therein. Except for his ownership of Midwest Common Stock, no Damone Holder,
nor any affiliate (as defined in Rule 12b-2 under the Securities Exchange Act
of 1934) of any Damone Holder (other than Midwest), owns, directly or
indirectly, any general or limited partner interest in any of the Partnerships.

5.7 Disclosure Memorandum. The Damone Holders have
received a copy of the Disclosure Memorandum and all attachments and exhibits
thereto, including without limitation the annual financial statements of ALS
for the years ended December 31, 1995 and 1994. In reaching the decision to
approve the Merger, the Damone Holders have carefully evaluated their personal
financial situation and the information set forth in the Disclosure Memorandum,
including the risk factors set forth therein.

5.8 No Recommendation by Board of Directors; Conflicts of
Interests. Each Damone Holder recognizes and acknowledges that ALS currently
owns 50% of the outstanding capital stock of Midwest, and is in the process of
negotiating the acquisition by ALS of the remaining limited partner interests
in the Partnerships from the other holders thereof. Each Damone Holder also
recognizes that, in light of the foregoing and ALS's interest in the
transactions contemplated hereby, both ALS and its representatives on the
Midwest Board of Directors are subject to certain conflicts of interest with
respect to the transactions contemplated hereby. The Damone Holders further
recognize and acknowledge that, in light of such conflicts of interest, neither
the Board of Directors of Midwest nor ALS is making any recommendation to the
Damone Holders regarding the Merger or any of the transactions contemplated
hereby pursuant to (in the case of the Midwest Board of Directors) Section
703a(2)(a) of the MBCA. Accordingly, each Damone Holder has reached his or its
independent conclusion as to the merits and desirability of the transactions
contemplated hereby.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF TDG

TDG represents and warrants to ALS and the Merger Sub that the
statements contained in this Article VI are correct and complete as of the date
of this Agreement and will be correct and complete as of the Effective Date.

10
<PAGE> 15

6.1 Corporate. TDG is a corporation duly organized, validly
existing and in good standing under the laws of the State of Michigan and has
the requisite power and authority to own, lease and operate its assets and
properties, to carry on its business as it is now being conducted, to enter
into this Agreement and to carry out the transactions contemplated hereby.

6.2 Authority. The execution and delivery of this
Agreement and all other instrument to be executed and delivered by TDG pursuant
hereto and the consummation of the transactions contemplated hereby and thereby
have been duly authorized by the Board of Directors of TDG. No other corporate
act or proceeding on the part of TDG or its stockholders is necessary to
authorize this Agreement, the other instruments to be executed and delivered by
TDG pursuant hereto or the transactions contemplated hereby or thereby. This
Agreement constitutes, and when executed and delivered the other instruments to
be executed and delivered by TDG pursuant hereto will constitute, the legal,
valid and binding agreements of TDG, enforceable against TDG in accordance with
their respective terms (except insofar as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and except as to the availability of
equitable remedies).

6.3 No Violation. Neither the execution, delivery and
performance of this Agreement or the other instruments to be executed and
delivered by TDG pursuant hereto, nor the consummation by TDG of the
transactions contemplated hereby or thereby (a) will, to the knowledge of TDG,
violate any statute, law, rule, regulation, order, writ, injunction or decree
of any court or governmental authority by which TDG is bound or (b) will
violate or conflict with or constitute a default under any term or provision of
the Articles of Incorporation or Bylaws of TDG.

6.4 No Brokers or Finders. TDG has no liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement.

6.5 No Interest in Partnerships. Except for the
ownership of Midwest Common Stock by the Damone Holders, neither TDG nor any
affiliate (as defined in Rule 12b-2 under the Securities Exchange Act of 1934)
of TDG (other than Midwest), owns, directly or indirectly, any general or
limited partner interest in any of the Partnerships.

ARTICLE VII

COVENANTS AND AGREEMENTS

7.1 Conduct of the Business of Midwest Prior to the
Effective Time. Prior to the Effective Time, except for the consummation of
the LP Purchase Agreement or as

11
<PAGE> 16

otherwise consented to or approved in writing by ALS, or expressly permitted by
or required to consummate the transactions contemplated by this Agreement,
Midwest shall conduct its and the Partnerships' respective businesses in the
ordinary course and consistent in all material respects with past practice and
shall use all reasonable efforts to preserve substantially intact its and the
Partnerships' respective business organizations, to keep available the services
of their employees and consultants and to preserve their present relationships
with customers, suppliers, payors and other persons with whom they have a
significant business relationship; provided, however, that the loss of any
employee, consultant, customer, payor or supplier prior to the Effective Time
shall not constitute a breach of this covenant.

7.2 Access to Properties and Records. Each of ALS and
Midwest shall afford to the other parties hereto and their respective
accountants, counsel and representatives ("Respective Representatives"),
reasonable access during normal business hours throughout the period prior to
the Effective Time to all of their respective properties (including, without
limitation, books, contracts, commitments and written records) and shall make
reasonably available their respective officers and employees to answer fully
and promptly questions put to them thereby; provided, however, that no
investigation pursuant to this Section 7.2 shall alter any representation or
warranty of any party hereto or the conditions to the obligations of the
parties hereto.

7.3 Conduct of Business of Merger Sub. Merger Sub shall
not conduct any business from the date of this Agreement until the Effective
Time, other than to consummate the Merger and the transactions contemplated by
this Agreement.

7.4 Conditional Put Option. In the event that ALS has
not effected a sale of ALS Common Stock in a public offering registered under
the Securities Act on or before the eighteenth (18th) month anniversary of the
Effective Time (the "Put Date"), then each Damone Holder shall have the right
(the "Put Right") to require ALS to purchase 85% (but not less than 85%) of the
Merger Shares originally issued to such Damone Holder, to the extent such
shares are then owned by such Damone Holder, for a price per share, as adjusted
for stock dividends, splits, reclassifications, and other appropriate
adjustments to the outstanding shares of ALS Stock occurring subsequent to the
date of this Agreement, as applicable, equal to the sum of (i) $8.69384 plus
(ii) the product of $0.00214 times the number of days between the Effective
Time and the Put Closing Date (hereinafter defined) (the "Put Price"). Each
such Damone Holder may exercise the Put Right by notifying ALS in writing (the
"Put Notice"), within thirty (30) days after the Put Date, of his or its
election to exercise the Put Right and the number of Merger Shares then owned
by such Damone Holder (the "Put Shares"). If one or more Damone Holders
exercise the Put Right (the "Putting Holders"), then on the sixtieth (60th) day
following the Put Date (the "Put Closing Date"), the Putting Holders shall
sell, assign, transfer and deliver to ALS good title to the Put Shares, free
and clear of any and all liens, claims or encumbrances whatsoever and shall
deliver to ALS certificates representing the Put Shares accompanied by stock
powers duly executed in blank. Upon delivery of such Put Shares to ALS, ALS
shall pay to the Putting Holders, in immediately available funds, an amount
equal to the product of the Put Price times the number of Put Shares.

12
<PAGE> 17

7.5 Repayment of Certain Loans. At the Closing, ALS
shall cause the respective outstanding principal amounts and accrued and unpaid
interest due on the promissory notes, advances and other payables described on
Schedule B hereto (collectively, the "Notes") to be paid in full by the maker
thereof; provided, however, in lieu of the repayment of such Notes, ALS may
purchase the Notes from TDG, acting on behalf of the holder(s) thereof, for an
amount equal to the outstanding principal and accrued and unpaid interest due
under the Notes at the Closing, such amount to be payable at Closing by ALS by
delivery to TDG in exchange for the Notes (and evidence of the satisfaction of
the Notes reasonably acceptable to ALS) of cash in the amount of at least
$700,000.00 with the remaining amount payable by the delivery of ALS's
promissory note in the form of Exhibit C attached hereto.

7.6 Release of Guarantees. Effective on and after the
Closing, ALS shall indemnify Michael G. Damone, Michael J. Damone and TDG (the
"Damone Parties"), and any of them, to the extent that they have any liability
arising under guarantees given to secure indebtedness of Midwest or the
Partnerships. At the Closing, the parties will execute a form of
indemnification agreement to evidence this arrangement, such agreement to be in
form and substance mutually acceptable to the parties hereto. Within 180 days
after the Closing, ALS shall secure the release of the Damone Parties under any
such guarantees.

7.7 Right to Invest in Future Projects. Following the
Effective Time and through and until December 2, 1998, and subject to the
conditions and limitations set forth herein, TDG shall have the right to
purchase up to 49% of the aggregate equity interests (the "Available Interest")
in each limited partnership formed by ALS to own and develop the next two Large
Facilities (hereinafter defined) developed and constructed by ALS in Michigan
at any time after the Effective Time and prior to the Put Date ("Future
Facilities"); provided, however, TDG's right hereunder shall be limited by and
subordinate to the prior right of JLM Securities Company to purchase (or to
arrange for its clients to purchase; JLM Securities and such clients, the "JLM
Parties") all of such Available Interest in Future Facilities (the "JLM
Right"). Future Facilities shall not include Wynwood of Northville and Wynwood
of Utica (collectively, the "Pending Projects"). The definitive limited
partnership agreements for the Future Projects shall include the put and call
option provision with respect to the limited partnership interests in such
partnerships in accordance with the terms outlined on Schedule C attached
hereto. Prior to admitting any limited partners (other than the initial
limited partner) to such limited partnerships formed for the Future Facilities
and provided that the JLM Right is not exercised in full, ALS shall provide to
TDG a term sheet as well as a proposed partnership agreement outlining the
terms of the proposed investment and indicating the portion of the Available
Interest the JLM Parties elect not to purchase pursuant to the JLM Right. TDG
shall have 30 days to elect to make the investment contemplated thereby. If
the investment proposal is rejected, or if TDG fails to make any election
within 30 days of its receipt of such offer materials, the right of investment
with respect to such Future Facility shall be extinguished and TDG shall have
no further right hereunder with respect to such Future Facility. "Large
Facilities" shall mean each assisted living or specialty care facility for the
elderly that has projected total development costs (development and
construction costs, including development and construction management fees

13
<PAGE> 18

payable by the owner but excluding, however, any budgeted lease-up deficit) of
$3,000,000 or more.

7.8 Development and Construction Services. Commencing on
the Closing Date and for a period of 36 months thereafter, TDG (or The Damone
Group, L.L.C. or an affiliate of TDG approved by ALS, such approval not to be
unreasonably withheld) shall provide development and construction services to
ALS or any entity controlled by ALS (ALS or such entity, as applicable, the
"Project Entity"), on an exclusive basis in the manner contemplated hereby, in
connection with the construction and development by such Project Entity of new
assisted living or specialty care facilities for the elderly ("New Facilities")
in the States of Michigan and Florida in the manner contemplated hereby:

(a) TDG shall provide development services to the Project
Entity with respect to each New Facility in the manner and
pursuant to the terms set forth in a development agreement to be
entered into by TDG and the Project Entity, which development agreement
shall be in such form as is mutually and reasonably agreeable to TDG
and ALS (the "Development Agreement"). The development fees set forth
and payable in accordance with the Development Agreement (the
"Development Fee") shall be determined in the manner set forth on
Schedule D attached hereto and shall be the entire compensation due to
TDG for development services rendered with respect to a New Facility.

(b) Except as provided in Section 7.8(c) below, TDG shall
construct each New Facility pursuant to this Section 7.8 for a
guaranteed maximum price agreed upon by TDG and the Project Entity in
accordance with the terms of a construction agreement to be executed
by the Project Entity and TDG for such New Facility, such agreement to
be on AIA forms A121 CM/c and A201, such forms to be substantially in
the forms previously negotiated and agreed upon by ALS and TDG (the
"Construction Agreement"). The Project Entity shall pay TDG a
construction fee for its construction and construction management
services (the "Construction Fee"), which Construction Fee shall be
determined and payable in the manner set forth in the Construction
Agreement and which Construction Fee shall constitute the entire
compensation for all construction and construction management services
provided by TDG to the Project Entity (including all construction
profit and overhead). The Construction Fee shall be 8% of all direct
subcontractor and material costs, excluding the cost of any furniture,
fixtures and equipment purchased directly by the Project Entity
("Purchased FF&E"). The Project Entity will be responsible for cost
overruns as agreed upon by both parties only as they relate to changes
in costs based on unknown soil conditions encountered during
construction, approved change orders or changes to plans during
construction required by building inspectors or other governmental
agencies (provided such change orders or changes to plans during
construction are not due to the fault of TDG). TDG will be
responsible for all other cost overruns.

14
<PAGE> 19

(c) At the election of the applicable Project Entity, the
Project Entity may solicit from TDG and others competitive bids for
the construction of the New Facility prior to executing the
Construction Agreement with TDG. If (i) as a result of such
competitive bidding process, the guaranteed maximum price bid (project
hard costs, excluding Purchased FF&E and any commercially reasonable
construction management fees for overhead and profit, such as the
Construction Fee in the case of TDG) made by TDG shall be 105% or more
than the bid (the "Lower Bid") made by another bona fide bidder (the
"Lower Bidder") and (ii) within three (3) business days following
notice of such Lower Bid to TDG, TDG does not revise its bid to match
the Lower Bid, then the Project Entity shall be entitled to engage any
such Lower Bidder to construct the New Facility and the Project Entity
shall have no further obligation to engage TDG with respect to the
construction of such New Facility; provided, however, TDG shall be
entitled to any Development Fee earned by it in accordance with the
Development Agreement. If three New Facilities are constructed by one
or more Lower Bidders in accordance with this Section 7.8(c) during
any consecutive 12 month period, ALS may, at its election, cancel and
terminate the provisions of this Section 7.8 (excluding subsection
7.8(a) hereof, which shall continue) as to all future New Facilities
by notice given to TDG.

(d) The obligations of TDG and ALS pursuant to this
Section 7.8, provided they have not previously terminated in
accordance with the other terms hereof, shall expire upon the
construction of New Facilities by TDG pursuant to this Section 7.8
representing aggregate development and construction costs in excess of
$30 million.

7.9 Release of Claims by the Damone Holders.

(a) Effective at the Effective Time, each Damone Holder
and TDG, for himself or itself and on behalf of his or its agents,
attorneys, representatives, affiliates, successors, heirs and assigns,
hereby releases, waives, acquits, withdraws, retracts, and forever
discharges any and all claims, manner of actions, causes of action, in
law or in equity, suits, judgments, debts, liens, contracts,
agreements, promises, liabilities, demands, damages, losses, costs,
expenses or disputes, known or unknown, fixed or contingent
(collectively, "Claims"), which he or any of them now have or may have
hereafter, directly or indirectly, personally or in any capacity,
against ALS, Midwest, the Partnerships, the Subsidiary Companies (as
defined below) or, to the extent applicable, all and any of their
respective present or former subsidiaries, predecessors, successors
and assigns, as well as their respective present or former agents,
directors, officers, partners and employees, by reason of any act,
omission, matter, cause or thing whatsoever, from the beginning of
time to, and including, May 23, 1996, EXCEPT FOR any such Claims for
or arising under (i) this Agreement, (ii) the Merger Shares that such
Damone Holder has the right to receive pursuant to the Agreement (iii)
the promissory notes issued pursuant to Section 7.5 hereof and the
Indemnity Agreement executed pursuant to Section 7.6 hereof; (iv)
fraud; (v) contribution rights or rights in the nature of contribution
rights arising out of third party claims, (vi) defenses or affirmative

15
<PAGE> 20

defenses to claims of ALS or Midwest (but excluding counterclaims),
and (vii) agreements relating to the Pending Projects and any other
pending or active agreements relating to development, acquisition or
construction. For purposes of this Section 7.9, "Subsidiary
Companies" shall mean each corporation, limited liability company,
limited partnership or other entity in which ALS has a direct or
indirect ownership interest.

(b) The Partner hereby represents and warrants to ALS and
Midwest that he or it has not made any assignment or other transfer of
any interest in any Claim released by him or it under the terms of
this Section 7.9.

(c) TDG and each Damone Holder hereby acknowledges that
ALS, Midwest and the Partnerships are intended beneficiaries of this
release and that each of ALS, Midwest and the Partnerships have the
right to enforce the release as against each of them in accordance
with its terms under this Section 7.9.

7.10 Admission Amendment. Effective at the Effective
Time, pursuant to Section 8.7 of the ALS Stockholders' Agreement, the ALS
Stockholders' Agreement is hereby amended to include each Damone Holder as a
party thereto and each Damone Holder hereby agrees to be bound by the terms of
the ALS Stockholders' Agreement with respect to the shares of ALS Common Stock
held by them.

7.11 Line of Credit Deposits; Farmington Hills II Water
Main. On or prior to the Closing, ALS shall deposit an additional $50,000 with
the National Bank of Detroit ("NBD") in order to secure the release of the
$50,000 deposit maintained by TDG with NBD to secure the $200,000 line of
credit of Midwest with NBD. Furthermore, ALS acknowledges that the ongoing
water main extension for the Farmington Hills II facility, the estimated cost
of which is $35,000, will be the responsibility of ALS following the Effective
Time.

7.12 Consent to Merger. Each Damone Holder hereby
acknowledges that the Board of Directors and shareholders of ALS have approved
that certain Agreement and Plan of Merger between ALS and New Crossings
International Corporation (the "Crossings Merger Agreement"), substantially in
the form included in the Disclosure Memorandum, pursuant to which New Crossings
International Corporation shall be merged with and into ALS, subject to the
terms and conditions of the Crossings Merger Agreement (the "Crossings
Merger"). To facilitate the Crossings Merger in the event any of the following
waivers, acknowledgments, approvals or consents shall be necessary or required,
at law or otherwise, each Damone Holder hereby (i) waives any and all notices
required with respect to the approval of the Crossings Merger and Crossings
Merger Agreement by the shareholders of ALS pursuant to the Restated
Certificate of Incorporation or Restated Bylaws of ALS (the "ALS Governing
Documents") or the General Corporation Law of the State of Delaware (the
"GCL"), including without limitation, Sections 222, 251 and 252 of the GCL,
(ii) acknowledges receipt of the information called for with respect to the
Crossings Merger pursuant to Sections 251 and 252 of the GCL; (iii) waives any
and all appraisal rights with respect to the Crossings Merger pursuant to
Section 262 of the GCL and (iv) approves and consents to the Crossings Merger
and the Crossings

16
<PAGE> 21

Merger Agreement. Nothing herein shall be (nor deemed to be) an acknowledgment
by the parties hereto that the approvals, consents, waivers and acknowledgments
set forth in this Section 7.12 are required for the approval, consummation and
effectiveness of the Crossings Merger or the Crossings Merger Agreement under
the GCL or the ALS Governing Documents.

ARTICLE VIII

CONDITIONS PRECEDENT

8.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:

(a) All state securities laws or "blue sky" permits and
authorizations (or shall otherwise have available an exemption from
the requirements of such laws) necessary to issue the Merger
Consideration and the transactions contemplated hereby shall have been
received.

(b) No governmental authority or other agency, commission
or court of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation,
injunction or other order (whether temporary, preliminary or
permanent) which is in effect and has the effect of making the Merger
illegal or otherwise prohibiting consummation of the transactions
contemplated by this Agreement; provided, however, that, prior to
invoking this condition, each party hereto shall use all reasonable
efforts to have such statute, rule, regulation, injunction or order
vacated.

(c) All material federal, state, local and foreign
governmental consents, approvals and filings required to permit the
Merger and the consummation of the transactions contemplated by this
Agreement shall have been received or made and any applicable waiting
period shall have expired or been terminated without the imposition of
conditions that are or would become applicable to ALS, Midwest or the
Partnerships and which would reasonably be anticipated to have a
material adverse effect on the financial condition, results of
operations, properties, business or immediate prospects of ALS,
Midwest or the Partnerships.

8.2 Conditions to the Obligation of Midwest to Effect the
Merger. The obligation of Midwest to effect the Merger shall be subject to the
fulfillment or waiver by Midwest at or prior to the Effective Time of the
following additional conditions:

(a) Each of ALS and Merger Sub shall have performed in
all material respects its obligations under this Agreement required to
be performed by it on or prior to the Effective Time pursuant to the
terms hereof.

17
<PAGE> 22

(b) All representations or warranties of ALS and Merger
Sub in this Agreement shall be true and correct in all material
respects, in each case as if such representation or warranty was made
as of the Effective Time, except to the extent that any such
representation or warranty is made as of a specified date, in which
case such representation or warranty shall have been true and correct
as of such specified date.

(c) From the date hereof through the Effective Time,
there shall have been no material adverse change (or development
involving a prospective change) in the financial condition, results of
operations, properties, business, or prospects of ALS and its
subsidiaries taken as a whole.

8.3 Conditions to the Obligations of ALS and Merger Sub
to Effect the Merger. The obligations of ALS and Merger Sub to effect the
Merger shall be subject to the fulfillment or waiver by ALS at or prior to the
Effective Time of the following additional conditions:

(a) Midwest and the Midwest Shareholders shall have
performed in all material respects each of its obligations under this
Agreement required to be performed by it on or prior to the Effective
Time pursuant to the terms hereof.

(b) All representations or warranties of Midwest and the
Midwest Shareholders in this Agreement shall be true and correct in
all material respects, in each case as if such representation or
warranty were made as of the Effective Time except to the extent that
any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and
correct as of such specified date.

(c) From the date hereof through the Effective Time,
there shall have been no material adverse change (or development
involving a prospective change) in the financial condition, results of
operations, properties, business or prospects of Midwest or the
Partnerships taken as a whole.

(d) Merger Sub shall have received letters of resignation
addressed to Midwest from the members of Midwest's board of directors,
which resignations shall be effective as of the Effective Time.

(e) The LP Purchase Agreement shall have been closed and
consummated simultaneously with or prior to the Effective Time.

18
<PAGE> 23

ARTICLE IX

TERMINATION

9.1 Termination.

(a) Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the
Effective Time by the mutual consent of ALS and Midwest.

(b) Termination by Either Midwest or ALS. This Agreement
may be terminated and the Merger may be abandoned by action of the
Board of Directors of either Midwest or ALS or by the Damone Holders
if (i) the Merger shall not have been consummated by June 1, 1996, or
(ii) a United States federal or state court of competent jurisdiction
or Untied States federal or state governmental, regulatory or
administrative agency or commission shall have issued an order, decree
or ruling or taken any other action permanently restraining, enjoining
or otherwise prohibiting the transactions contemplated by this
Agreement and such order, decree, ruling or other action shall have
become final and non-appealable; provided, that the party seeking to
terminate this Agreement pursuant to this clause (ii) must have used
all reasonable efforts to remove such injunction, order or decree;
provided further, in the case of a termination pursuant to clause (i)
above, that the terminating party shall not have breached in any
material respect its obligations under this Agreement in any manner
that proximately caused the occurrence of the failure referred to in
said clause.

(c) Termination by ALS. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective
Time by action of the Board of Directors of ALS, if (i) there has been
a breach by Midwest or any of the Damone Holders of any representation
or warranty contained in this Agreement which would have or would be
reasonably likely to have a material adverse effect on Midwest or the
Partnerships, (ii) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of
Midwest or any of the Damone Holders, which breach is not curable or,
if curable is not cured within 15 days after written notice of such
breach is given by ALS to Midwest, or (iii) the conditions to ALS's
obligation to effect the Merger pursuant to Sections 8.1 and 8.3
hereof shall not have been satisfied or waived by ALS on or before
June 1, 1996.

(d) Termination by Midwest or any Damone Holder. This
Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time by action of the Board of Directors
of Midwest or any of the Damone Holders, if (i) there has been a
breach by ALS of any representation or warranty contained in this
Agreement which would have or would be reasonably likely to have a
material adverse effect on ALS, (ii) there has been a material breach
of any of the covenants or

19
<PAGE> 24

agreements set forth in this Agreement on the part of ALS, which
breach is not curable, or, if curable, is not cured within 15 days
after written notice of such breach is given by Midwest to ALS, or
(iii) the conditions to Midwest's and the Damone Holders obligation to
effect the Merger pursuant to Sections 8.1 and 8.2 hereof shall not
have been satisfied by ALS or waived by Midwest and the Damone Holders
on or before June 1, 1996.

9.2 Effects of Termination. In the event of the
termination of this Agreement pursuant to Section 9.1, this Agreement
shall be void, there shall be no liability on the part of the parties
or any of their respective officers or directors to the other and all
rights and obligations of any party hereto shall cease; provided,
however, that nothing herein shall relieve any party from liability
for the wilful breach of any of its representations, warranties,
covenants or agreements set forth in this Agreement.

ARTICLE X

MISCELLANEOUS

10.1 Amendment. Subject to the applicable provisions of
state law, this Agreement may be amended by the parties hereto at any time
prior to the Effective Time. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.

10.2 Waiver. At any time prior to the Effective Time, the
parties hereto, may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties of the other party contained
herein or in any documents delivered pursuant hereto, and (iii) waive
compliance by the other party with any of the agreements or conditions herein.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf
of such party. No waiver by any party of any default with respect to any
provision, condition or requirement hereof shall be deemed to be a waiver of
any other provision, condition or requirement hereof; nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereunder.

10.3 Survival. All representations, warranties and
agreements contained in this Agreement or in any instrument delivered pursuant
to this Agreement shall survive the Effective Time for a period of one year.

10.4 Expenses and Fees. Whether or not the Merger is
consummated, all costs and expenses incurred by the parties hereto in
connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses; provided, however, if the Merger
is consummated, ALS shall pay up to $15,000 in the aggregate of the

20
<PAGE> 25

out-of-pocket costs and expenses incurred by the Damone Holders and TDG in
connection herewith.

10.5 Notices. All notices and other communications given
or made pursuant hereto shall be in writing and shall be deemed to have been
given or made if in writing and delivered personally or sent by registered or
certified mail (postage prepaid, return receipt requested) or by telecopier to
the parties at the following addresses:

<TABLE>
<S> <C>
If to Merger Sub or ALS: Alternative Living Services, Inc.
450 North Sunnyslope Road, Suite 200
Brookfield, Wisconsin 53003
Attention: William F. Lasky
Telecopier: (414) 789-9592

With copies to: Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Telecopier: (404) 525-2224

If to Midwest: Alternative Living Services - Midwest, Inc.
850 Stephenson Highway
Suite 600
Troy, Michigan 48083
Attention:
Telecopier:

With copies to: Alternative Living Services, Inc.
450 North Sunnyslope Road, Suite 200
Brookfield, Wisconsin 53003
Attention: William F. Lasky
Telecopier: (414) 789-9592

If to TDG or any Damone
Holder: The Damone Group
850 Stephenson Highway
Suite 600
Troy, Michigan 48083
Attention:
Telecopier:
</TABLE>

21
<PAGE> 26

<TABLE>
<S> <C>
With copies to: Dykema Gossett, PLLC
Suite 300
1577 North Woodward Avenue
Bloomfield Hills, Michigan 48304
Attention: Dennis M. Gannan, Esq.
Telecopier: (810) 540-0763
</TABLE>

or at such other addresses as shall be furnished by the parties by like notice,
and such notice or communication shall be deemed to have been given or made as
of the date so delivered or mailed or sent by telecopier.

10.6 Headings. The headings contained in this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.

10.7 Entire Agreement. This Agreement and the other
agreements referred to herein constitute the entire agreement among the parties
and supersede all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the subject matter
hereof.

10.8 Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefits of the parties hereto
and their respective successors and permitted assigns. Neither this Agreement
nor any of the rights, interests or obligations shall be assigned by any of the
parties hereto without the prior written consent of the other parties. This
Agreement is not intended to confer upon any other person any rights or
remedies hereunder.

10.9 Facsimile Signature; Counterparts. This Agreement
may be executed by facsimile signature and in one or more counterparts, all of
which shall be considered one and the same agreement and each of which shall be
deemed an original.

10.10 Invalidity; Severability. In the event that any
provision of this Agreement shall be deemed contrary to law or invalid or
unenforceable in any respect by a court of competent jurisdiction, the
remaining provisions shall remain in full force and effect to the extent that
such provisions can still reasonably be given effect in accordance with the
intentions of the parties, and the invalid and unenforceable provisions shall
be deemed, without further action on the part of the parties, modified, amended
and limited solely to the extent necessary to render the same valid and
enforceable.

10.11 Governing Law. The validity and interpretation of
this Agreement shall be governed by the laws of the State of Michigan, without
reference to the conflict of laws principles thereof.

10.12 Incorporation of Exhibits and Schedules. The
Exhibits and Schedules identified in and attached to this Agreement are
incorporated herein by this reference.

22
<PAGE> 27

IN WITNESS WHEREOF, ALS, TDG, Merger Sub and Midwest have
caused this Agreement to be signed by their respective officers thereunto duly
authorized and each of the Midwest Shareholders have caused this Agreement to
be signed, all as of the date first written above.

ALTERNATIVE LIVING SERVICES, INC.

By:
------------------------------------
Name:
Title:

THE DAMONE GROUP, INC.

By:
------------------------------------
Name:
Title:

ALS ACQUISITION CORP.

By:
------------------------------------
Name:
Title:

ALTERNATIVE LIVING SERVICES -
MIDWEST INC.

By:
------------------------------------
Name:
Title:

23
<PAGE> 28

Midwest Shareholders:

WATER CLIFF VENTURES LIMITED PARTNERSHIP

BY: MICHAEL G. DAMONE TRUST

By:
-------------------------------------
Michael G. Damone, Trustee, Michael G.
Damone Trust dated November, 1969

------------------------------------------
MICHAEL J. DAMONE

------------------------------------------
Michael G. Damone, Trustee, Michael G.
Damone Trust dated November, 1969

ALTERNATIVE LIVING SERVICES, INC.

By:
---------------------------------------
Name:
Title:

<PAGE> 1
EXHIBIT 10.5

LIMITED PARTNER INTEREST
PURCHASE AGREEMENT

BY AND AMONG

ALTERNATIVE LIVING SERVICES, INC.,

ALTERNATIVE LIVING SERVICES-MIDWEST INC.,

LIONEL S. MARGOLICK,

AND THE LIMITED PARTNERS REFERENCED HEREIN

DATED AS OF

MAY 20, 1996
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Purchase and Sale of LP Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Basic Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Deliveries at the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

3. Representations and Warranties of the Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Organization of Certain Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2 Authorization of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Noncontravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Brokers' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.5 Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.6 LP Interests/Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.7 Disclosure Memorandum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8 No Recommendation by General Partner; Conflicts of Interests . . . . . . . . . . . . . . . . . . . . 6

4. Representations and Warranties of the Partner Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

5. Representations and Warranties of ALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.1 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.3 No Violation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.4 Acquisition of LP Interests for Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.5 No Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.6 Valid Issuance of Acquisition Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

6. Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1 Conditional Put Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.2 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.3 Appointment of the Partner Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.4 Right to Include Acquisition Shares in Registration . . . . . . . . . . . . . . . . . . . . . . . . 9
6.5 Indemnification and Release by ALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.6 Consent to Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

7. Conditions to ALS's Obligation to Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.3 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.4 No Material Adverse Event Regarding the Partnerships . . . . . . . . . . . . . . . . . . . . . . . . 12

8. Conditions to Partners' Obligations to Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

</TABLE>
<PAGE> 3

<TABLE>
<S> <C> <C>
8.3 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
8.4 No Material Adverse Event Regarding ALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

9. Termination, Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
9.1 Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
9.2 Amendment, Extension and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

10. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.2 Expenses, Taxes, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.4 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.8 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.9 Law Governing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.10 Counterparts/Telecopies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.11 No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.12 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10.13 Number; Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.14 Incorporation of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>

SCHEDULES

Schedule A Holders of LP Interests
Schedule B Form of ALS Note
Schedule C ALS Stockholders' Agreement
Schedule D Form of Partner Assignment and Release
<PAGE> 4

LIMITED PARTNER INTEREST
PURCHASE AGREEMENT

THIS LIMITED PARTNER INTEREST PURCHASE AGREEMENT, dated as of May 20,
1996 ("Agreement"), by and among Alternative Living Services, Inc., a Delaware
corporation ("ALS"), Alternative Living Services-Midwest, Inc., a Michigan
corporation ("ALS-Midwest"), Lionel S. Margolick (the "Partner Agent") and the
persons listed on Schedule A, attached hereto, (the "Partners") being the
holders (together with ALS) of all of the limited partner interests in the
Partnerships (hereinafter defined).

W I T N E S S E T H:

WHEREAS, the Partners and ALS hold all of the limited partner
interests in (i) Hamilton House Limited Partnership, a Michigan limited
partnership, (ii) Eisenhower/State Limited Partnership, a Michigan limited
partnership, (iii) North Schoenherr Limited Partnership, a Michigan limited
partnership, (iv) Marsh/Tihart Limited Partnership, a Michigan limited
partnership, and (v) Twelve/Drake Limited Partnership, a Michigan limited
partnership (each, a "Partnership", and collectively, the "Partnerships"), in
the respective amounts and percentages set forth on Schedule A, attached
hereto; and

WHEREAS, the Partners desire to sell, and ALS desires to purchase, all
of the limited partner interests held by the Partners in the Partnerships for
the consideration and in the manner set forth herein.

NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, and intending to be legally bound hereby, the parties hereto agree
as follows:

1. DEFINITIONS. In addition to the other definitions contained
elsewhere herein, the following definitions shall apply for purposes of this
Agreement:

"Accredited Investor" shall have the meaning ascribed to such
term in Regulation D of the Securities Act.

"Acquisition Shares" shall mean shares of ALS Common Stock to
be issued to one or more Partners pursuant to the provisions of Section 2.2
hereof.

"ALS" shall mean Alternative Living Services, Inc., a Delaware
corporation.

"ALS Common Stock" shall mean the $0.01 per share par value
common stock of ALS.

<PAGE> 5

"ALS-Midwest" shall mean Alternative Living Services-Midwest
Inc., a Michigan corporation, which serves as the sole general partner of each
of the Partnerships.

"ALS Notes" shall mean the promissory notes to be issued by
ALS to the Partners pursuant to the provisions of Section 2.2 hereof, in the
form, attached hereto as Schedule B.

"ALS Stockholders' Agreement" shall mean that certain Amended
and Restated Stockholders' Agreement (a copy of which is attached hereto as
Schedule C) dated as of January 15, 1996, by and among ALS and all the
shareholders of ALS, as amended, pursuant to which, among other things, the
transferability of shares of ALS Common Stock is restricted.

"Business Day" shall mean each day upon which state and
national banks are open for business in the City of Milwaukee, Wisconsin.

"Closing" shall have the meaning set forth in Section 2.3
hereof.

"Closing Date" shall have the meaning set forth in Section 2.3
hereof.

"Confidential Information" shall have the meaning set forth in
Section 6.3 hereof.

"Disclosure Memorandum" shall mean that certain Confidential
Disclosure Memorandum prepared by ALS for purposes of imparting information to
the Partners regarding ALS.

"LP Interest" shall mean the limited partner interest of each
Partner in the Partnerships, and "LP Interests" shall mean the limited partner
interests of all Partners in the Partnerships.

"Partner Assignment and Release" shall mean a Partner
Assignment and Release substantially in the form of Schedule D, attached
hereto, to be executed and delivered at Closing by each Partner.

"Partners" shall mean the persons other than ALS listed as
limited partners of the Partnerships on Schedule A, attached hereto, such
persons together with ALS being all of the limited partners of the
Partnerships.

"Partner Agent" shall mean Lionel S. Margolick, the agent
appointed by each of the Partners pursuant to Section 6.3 hereof.

"Partnership" and "Partnerships" shall have the meanings set
forth in the premises of this Agreement.

2
<PAGE> 6

"Partnership Agreements" shall mean the following limited
partnership agreements with respect to each of the Partnerships entered into
among ALS-Midwest, as general partner, and those persons listed on Exhibit A
thereto as the respective limited partners of each such Partnership: (i)
Limited Partnership Agreement of Hamilton House Limited Partnership dated as of
November 1, 1993; (ii) Limited Partnership Agreement of Eisenhower/State
Limited Partnership dated as of ____________, 1994; (iii) Limited Partnership
Agreement of North Schoenherr Limited Partnership dated as of May 1, 1994; (iv)
Limited Partnership Agreement of Marsh/Tihart Limited Partnership dated as of
_____________, 1994; and (v) Limited Partnership Agreement of Twelve/Drake
Limited Partnership dated as of _____________, 1995.

"Purchase Price" shall have the meaning set forth in Section
2.2 hereof.

"Put Date," "Put Notice", "Put Price", "Put Right", "Put
Shares", and "Putting Partners" shall each have the meaning set forth in
Section 6.1 hereof.

"Securities Act" shall mean the Securities Act of 1933, as
amended.

2. PURCHASE AND SALE OF LP INTERESTS.

2.1 BASIC TRANSACTION. On and subject to the terms and
conditions of this Agreement, ALS agrees to purchase from each of the Partners,
and each of the Partners agrees to sell to ALS, all of his or its LP Interest
for the consideration specified in Section 2.2 hereof. Each Partner and ALS
hereby consent, pursuant to Sections 10.2 and 10.4 of each of the Partnership
Agreements for the respective Partnerships, to the transfer by each other
Partner of his or its LP Interest, and further acknowledge that ALS will be
admitted, pursuant to Section 10.3 of each such Partnership Agreement, as the
limited partner of each Partnership, in substitution of the Partners.

2.2 PURCHASE PRICE. The Buyer agrees to pay at the
Closing (hereinafter defined) to the Partner Agent, on behalf of the Partners,
in the aggregate, the following consideration (the "Purchase Price"): (i)
115,024 shares of ALS Common Stock (the "Acquisition Shares"); and (ii)
$2,958,876.00 of principal amount of ALS Notes bearing interest at the rate of
8% per annum and payable in full on or before January 31, 1997, but in no event
prior to January 1, 1997, with each Partner entitled to receive such number of
shares of the Acquisition Shares as set forth on Schedule A attached hereto and
an ALS Note in the principal amount set forth on Schedule A attached hereto.

2.3 THE CLOSING. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Rogers & Hardin in Atlanta, Georgia, commencing at

3
<PAGE> 7

10:00, a.m. local time on the second business day following the satisfaction or
waiver of all conditions to the obligations of ALS and the Partners to
consummate the transactions contemplated hereby (other than conditions with
respect to actions the respective parties will take at the Closing itself) or
such other place, date and time as ALS and the Partner Agent may mutually
determine (the "Closing Date").

2.4 DELIVERIES AT THE CLOSING. At the Closing, (i) each
of the Partners shall deliver to ALS all certificates issued by any Partnership
representing all of his or its LP Interest therein, if any, endorsed in blank
or accompanied by duly executed assignment documents, (ii) each of the Partners
shall deliver to ALS and ALS-Midwest a Partner Assignment and Release duly
executed by such Partner, which instrument shall, among other things, (a)
release ALS and ALS-Midwest from any and all claims and liabilities of any type
except for such claims and liabilities as arise pursuant to this Agreement, the
ALS Notes or the Acquisition Shares (b) acknowledge that each of the Partners
who receives Acquisition Shares at the Closing shall become a party to, and
such shares and shall be bound by, the ALS Stockholders' Agreement, and (c)
certify that such Partner is not a "foreign person" within the meaning of
Section 1445 of the Internal Revenue Code of 1986, as amended; (iii) the
Partner Agent shall deliver to ALS and ALS-Midwest a certificate, duly executed
by the Partner Agent, certifying that (a) the representations and warranties of
the Partner Agent set forth in Section 4 hereof are true and correct as of the
Closing, (b) that the Partner Agent has the authority to act as the agent and
attorney-in-fact for each Partner in the manner set forth in Section 6.3
hereof, and that such agency has not been restricted, amended or revoked by any
Partner, and (c) that the Partner Assignment and Release delivered at Closing
by each Partner (directly or by Partner Agent on such Partner's behalf) has
been duly executed and delivered by such Partner; and (iv) ALS shall deliver to
the Partner Agent, on behalf of each of the Partners, the consideration payable
to such Partners pursuant to Section 2.2 hereof.

3. REPRESENTATIONS AND WARRANTIES OF THE PARTNERS. Each of the
Partners represents and warrants to ALS that the statements contained in this
Section 3 are correct and complete as of the date of this Agreement and will be
correct and complete as of the Closing Date (as though then made).

3.1 ORGANIZATION OF CERTAIN PARTNERS. If the Partner is
not a natural person, the Partner is duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its organization.

3.2 AUTHORIZATION OF TRANSACTION. The Partner has full
power and authority to execute and deliver this Agreement and to perform his or
its obligations hereunder. This Agreement has been duly executed by or on
behalf of the Partner and constitutes, and

4
<PAGE> 8

when executed and delivered the Partner Assignment and Release will constitute,
the valid and legally binding obligation of the Partner, enforceable in
accordance with its terms (except insofar as such enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting creditors' rights generally and except as to the availability of
equitable remedies). The Partner need not give any notice to, make any filing
with, or obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement.

3.3 NONCONTRAVENTION. Neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other restriction of
any government, governmental agency, or court to which the Partner is subject
or, if the Partner is other than a natural person, any provision of its
charter, bylaws or other governing documents.

3.4 BROKERS' FEES. The Partner has no liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which ALS could
become liable or obligated.

3.5 INVESTMENT INTENT. The Partner (i) understands that
any Acquisition Shares and the ALS Notes that he or it will acquire pursuant to
this Agreement have not been, and will not be as of the Closing Date,
registered under the Securities Act, or under any state securities laws, and
are being offered and issued in reliance upon federal and state exemptions for
transactions not involving any public offering, (ii) is acquiring any
Acquisition Shares and the ALS Notes solely for his or its own account for
investment purposes, and not with a view to the distribution thereof, (iii) has
such knowledge and experience in business and financial matters that he is
capable of evaluating the merits and risks of the investment in ALS
contemplated hereby, (iv) has received the Disclosure Memorandum, and has had
the opportunity to obtain additional information as requested in order to
evaluate the merits and the risks inherent in holding any Acquisition Shares
and the ALS Notes, (v) is able to bear the economic risk and lack of liquidity
inherent in holding any Acquisition Shares and the ALS Notes, (vi) is an
Accredited Investor, and (vii) understands and acknowledges that any
Acquisition Shares and the ALS Notes that he or it acquires pursuant to this
Agreement will be "restricted securities" as that term is defined in Rule 144
under the Securities Act and that the certificate representing any such
Acquisition Shares and the ALS Notes will bear a legend restricting transfer
unless either (A) the transfer is exempt from the registration requirements
under the Securities Act and any applicable state securities law and an opinion
of counsel satisfactory to ALS that such transfer is exempt therefrom is
delivered to ALS or (B) the transfer is made pursuant to an

5
<PAGE> 9

effective registration statement under the Securities Act and any applicable
state securities law.

3.6 LP INTERESTS/TITLE. Each Partner holds of record and
owns beneficially the LP Interest set forth next to his or its name on Schedule
A, attached hereto, free and clear of any restrictions on transfer (other than
any restrictions set forth in the Partnership Agreement for the respective
Partnership and any restrictions under the Securities Act and applicable state
securities laws), liens, encumbrances, options, warrants, purchase rights,
contracts, commitments, equities, demands, and all other claims of any type.
The Partner is not a party to any option, warrant, purchase right, or other
contract or commitment that could require the Partner to sell, transfer, or
otherwise dispose of all or any part of its LP Interest (other than this
Agreement). Upon execution of this Agreement, ALS will acquire good and
marketable title to the Partner's entire LP Interest, free of any claim of any
type.

3.7 DISCLOSURE MEMORANDUM. The Partner has received a
copy of the Disclosure Memorandum and all attachments and exhibits thereto,
including without limitation the annual financial statements of ALS for the
years ended December 31, 1995 and 1994. In reaching the decision to sell his or
its LP Interest hereunder, the Partner has carefully evaluated his personal
financial situation and the information set forth in the Disclosure Memorandum,
including the risk factors set forth therein.

3.8 NO RECOMMENDATION BY GENERAL PARTNER; CONFLICTS OF
INTERESTS. The Partner recognizes and acknowledges that ALS currently owns 50%
of the outstanding capital stock of ALS-Midwest, the sole general partner of
each of the Partnerships, and is in the process of negotiating the acquisition
by ALS of the remaining stock of ALS-Midwest from the other stockholders
thereof. The Partner further recognizes and acknowledges that neither
ALS-Midwest nor ALS is making any recommendation to the Partners regarding the
value of the Partnerships and the LP Interests, the fairness of the Purchase
Price or any of the transactions contemplated hereby. The Partner also
recognizes that, in light of the foregoing and ALS's interest in the
transactions contemplated hereby, both ALS and ALS-Midwest are subject to
certain conflicts of interest with respect to the transactions contemplated
hereby and, accordingly, the Partner has reached his or its independent
conclusion as to the merits and desirability of the transactions contemplated
hereby.

4. REPRESENTATIONS AND WARRANTIES OF THE PARTNER AGENT. The
Partner Agent represents and warrants to ALS that each of the Partners has duly
executed and delivered this Agreement. The Partner Agent further represents
and warrants that the Partners constitute all of the persons that acquired an
LP Interest in any of the Partnerships in private placement transactions for
which JLM Securities Company served as placement agent, and that pursuant to

6
<PAGE> 10

such private placement transactions each of the Partners acquired the LP
Interest set forth on Schedule A attached hereto.

5. REPRESENTATIONS AND WARRANTIES OF ALS. ALS represents and
warrants to each Partner that the statements contained in this Section 5 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though then made).

5.1 CORPORATE. ALS is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
the requisite power and authority to own, lease and operate its assets and
properties, to carry on its business as it is now being conducted, to enter
into this Agreement and to carry out the transactions contemplated hereby.

5.2 AUTHORITY. The execution and delivery of this
Agreement and all other instrument to be executed and delivered by ALS pursuant
hereto and the consummation of the transactions contemplated hereby and thereby
have been duly authorized by the Board of Directors of ALS. No other corporate
act or proceeding on the part of ALS or its stockholders is necessary to
authorize this Agreement, the other instruments to be executed and delivered by
ALS pursuant hereto or the transactions contemplated hereby or thereby,
including the payment by ALS of the Purchase Price to the Partners. This
Agreement constitutes, and when executed and delivered the other instruments to
be executed and delivered by ALS pursuant hereto will constitute, the legal,
valid and binding agreements of ALS, enforceable against ALS in accordance with
their respective terms (except insofar as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and except as to the availability of
equitable remedies).

5.3 NO VIOLATION. Neither the execution, delivery and
performance of this Agreement or the other instruments to be executed and
delivered by ALS pursuant hereto, nor the consummation by ALS of the
transactions contemplated hereby or thereby (a) will, to the knowledge of ALS,
violate any statute, law, rule, regulation, order, writ, injunction or decree
of any court or governmental authority by which ALS is bound or (b) will
violate or conflict with or constitute a default under any term or provision of
the Certificate of Incorporation or Bylaws of ALS.

5.4 ACQUISITION OF LP INTERESTS FOR INVESTMENT. ALS is
an Accredited Investor and is acquiring the LP Interests for investment and not
with a view toward, or for sale in connection with, any distribution thereof,
nor with any present intention of distributing or selling the LP Interests.
ALS acknowledges that such securities have not been registered under the
Securities Act or any applicable state securities laws and, therefore, cannot
be resold unless so registered or exempted from such registration. ALS,
individually or together with its representatives and agents,

7
<PAGE> 11

represents that it has sufficient knowledge and experience in financial and
business matters that it is capable of evaluating the economic risks of
investment in the LP Interests.

5.5 NO BROKERS OR FINDERS. ALS has no liability or
obligation to pay any fees or commissions to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which any
Partner could become liable or obligated.

5.6 VALID ISSUANCE OF ACQUISITION SHARES. The
Acquisition Shares, when issued and delivered in accordance with the terms of
this Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid, and nonassessable, shall have the rights and privileges set
forth in the Certificate of Incorporation of ALS and will be free of any and
all liens, claims, encumbrances and restrictions on transfer other than
restrictions on transfer contained in the ALS Stockholders' Agreement and under
the Securities Act and applicable state securities laws.

6. COVENANTS.

6.1 CONDITIONAL PUT OPTION. In the event that ALS has
not effected a sale of ALS Common Stock in a public offering registered under
the Securities Act (a "Public Offering") on or before the eighteenth (18th)
month anniversary of the Closing Date (the "Put Date"), then each Partner who
receives any Acquisition Shares pursuant hereto shall have the right (the "Put
Right") to require ALS to purchase all (but not less than all) of such
Acquisition Shares then owned by such Partner for a price per share, as
adjusted for stock dividends, splits, reclassifications, and other appropriate
adjustments to the outstanding shares of ALS stock occurring subsequent to the
date of this Agreement, as applicable, equal to the sum of (i) $8.69384 plus
(ii) the product of $0.0019 times the number of days between the Closing Date
and the Put Closing Date (hereinafter defined) (the "Put Price"). During the
thirty (30) days preceding the Put Date, ALS shall provide any inquiring
Partner or the Partner Agent complete and accurate information regarding ALS's
plans, if any, to effect a Public Offering at any time within the twelve (12)
months following the Put Date. Each such Partner may exercise the Put Right by
notifying ALS in writing (the "Put Notice"), within thirty (30) days after the
Put Date, of his or its election to exercise the Put Right and the number of
Acquisition Shares then owned by such Partner (the "Put Shares"). If one or
more Partners exercise the Put Right (the "Putting Partners"), then on the
sixtieth (60th) day following the Put Date (the "Put Closing Date"), the
Putting Partners shall sell, assign, transfer and deliver to ALS good title to
the Put Shares, free and clear of any and all liens, claims or encumbrances
whatsoever and shall deliver to ALS certificates representing the Put Shares
accompanied by stock powers duly executed in blank. Upon delivery of such Put
Shares to ALS, ALS shall pay to the Putting Partners, in immediately available
funds,

8
<PAGE> 12

an amount equal to the product of the Put Price times the number of Put Shares.

6.2 CONFIDENTIALITY. Each of the Partners will treat and
hold as confidential any and all information he or it may have received
concerning the businesses and affairs of ALS or any of the Partnerships that is
not already generally available to the public (collectively, the "Confidential
Information"), and shall refrain from using any of the Confidential Information
except in connection with evaluating the transactions contemplated by this
Agreement.

6.3 APPOINTMENT OF THE PARTNER AGENT. Each of the
Partners hereby authorizes and appoints the Partner Agent to serve as such
Partner's true and lawful attorney-in-fact and agent, to act in the name and on
behalf of such Partner with respect to any matters contemplated by this
Agreement and the Closing and consummation thereof, including without
limitation, those matters set forth below, through and until June 30, 1996, as
fully and effectively as such Partner might do were he or it present and
acting, third persons being relieved of the responsibility to determine, or to
require compliance by the Partner Agent with, such Partner's instructions: (i)
to deliver the Partner Assignment and Release of such Partner to ALS at the
Closing; (ii) to receive on behalf of such Partner at the Closing the
consideration payable to such Partner pursuant to Section 2.2 hereof; (iii) to
waive any conditions to such Partner's obligation to close pursuant to Section
8 hereof; and (iv) to terminate, extend the time for performance, or waive
inaccuracies or performance of this Agreement on behalf of the Partner pursuant
to Section 9 hereof. The agency and authority hereby created and granted by
each Partner may only be amended, restricted or revoked by such Partner by
written notice to ALS and Partner Agent given in accordance herewith at least
two (2) Business Days prior to the effective time of such amendment,
restriction or revocation.

6.4 RIGHT TO INCLUDE ACQUISITION SHARES IN REGISTRATION. In the
event that ALS effects a Public Offering on or prior to the Put Date, each of
the Partners shall be entitled to include in such registration all of the
Acquisition Shares held by them, and to sell such Acquisition Shares in such
Public Offering (such shares referred to herein as the "Included Shares") as
selling shareholders subject to the pricing, terms, conditions and limitations
as are applicable in such Public Offering and customary with respect to selling
shareholders. Notwithstanding anything herein to the contrary, if (a) the
Public Offering involves an underwritten offering of the ALS Common Stock to be
distributed by or through one or more underwriters, and (b) the managing
underwriter of such underwritten offering shall advise ALS in writing that, in
its opinion,

i) the distribution of all or a specified portion of
such Included Shares concurrently with the shares of
ALS

9
<PAGE> 13
Common Stock being sold by ALS in such Public
Offering will materially and adversely affect the
distribution of such securities by such underwriters,
then ALS will reduce the number of shares to be sold
by it in the Public Offering so as to permit the
inclusion of the Included Shares in the Public
Offering, or

ii) the distribution proposed to be made by ALS in the
Public Offering will be materially and adversely
affected by the inclusion of any shares of a selling
shareholder, including the Included Shares, or, in
spite of the reduction in the number of shares to be
offered by ALS pursuant to clause (i) above, certain
Included Shares are otherwise not permitted to be
included in the Public Offering by ALS's
underwriters, then the Partners shall not be entitled
to include such Included Shares in the public
offering.

ALS shall not be obligated to offer to include Acquisition Shares in a
registration on more than one occasion or to effect a registration of any
Acquisition Shares under this Section 6.4 incidental to the registration of any
of its securities in connection with mergers, acquisitions, exchange offers,
dividend reinvestment plans, or stock options or other employee benefit plans,
or incidental to the registration of any nonequity securities convertible into
equity securities.

6.5 INDEMNIFICATION AND RELEASE BY ALS. ALS hereby
agrees to indemnify, defend and hold harmless each Partner from and against all
demands, claims, actions or causes of action, assessments, losses, damages, or
liabilities, costs and expenses, including without limitation interest,
penalties, and attorney's fees and expenses (collectively, "Claims"), asserted
against, resulting to, imposed upon, or incurred by any such Partner, directly
or indirectly, by reason of or resulting from (a) the operation of any of the
Partnerships from and after the Closing Date; or (b) any Public Offering;
provided, however, this indemnification shall not include any Claims arising
out of, resulting from or related to (i) the conduct of, or actions taken by,
any such Partner, or (ii) with respect to any Partner electing to include
Acquisition Shares in any Public Offering, contractual, statutory or common law
obligations of such Partner as a selling shareholder of such Acquisition
Shares. Subject to and effective upon the Closing, ALS hereby releases,
waives, acquits and forever discharges all Claims which ALS now has or as of
the Closing may

10
<PAGE> 14

have against each Partner with respect to the operation of any of the
Partnerships as of and prior to the Closing Date.

6.6 CONSENT TO MERGER. Each Partner hereby acknowledges
that the Board of Directors and shareholders of ALS have approved that certain
Agreement and Plan of Merger between ALS and New Crossings International
Corporation (the "Merger Agreement"), substantially in the form included in the
Disclosure Memorandum pursuant to which New Crossings International Corporation
shall be merged with and into ALS, subject to the terms and conditions of the
Merger Agreement (the "Merger"). To facilitate the Merger in the event any of
the following waivers, acknowledgments, approvals or consents shall be
necessary or required, at law or otherwise, each Partner hereby (i) waives any
and all notices required with respect to the approval of the Merger and Merger
Agreement by the shareholders of ALS pursuant to the Restated Certificate of
Incorporation or Restated Bylaws of ALS (the "ALS Governing Documents") or the
General Corporation Law of the State of Delaware (the "GCL"), including without
limitation, Sections 222, 251 and 252 of the GCL, (ii) acknowledges receipt of
the information called for with respect to the Merger pursuant to Sections 251
and 252 of the GCL; (iii) waives any and all appraisal rights with respect to
the Merger pursuant to Section 262 of the GCL and (iv) approves and consents to
the Merger and the Merger Agreement. Nothing herein shall be (nor deemed to
be) an acknowledgment by the parties hereto that the approvals, consents,
waivers and acknowledgments set forth in this Section 6.6 are required for the
approval, consummation and effectiveness of the Merger or the Merger Agreement
under the GCL or the ALS Governing Documents.

7. CONDITIONS TO ALS'S OBLIGATION TO CLOSE. The
obligation of ALS to close the transactions contemplated by this Agreement are
subject to the fulfillment, prior to or at the Closing unless otherwise
required below, of each of the following conditions (all or any of which may be
waived in whole or in part by ALS):

7.1 REPRESENTATIONS AND WARRANTIES. The representations
and warranties made by the Partners and the Partner Agent in this Agreement and
the statements contained in any other instrument, list, certificate or writing
delivered by the Partners pursuant to this Agreement shall be true in all
material respects when made and at and as of the Closing Date as though such
representations and warranties were made at and as of such date, except as
consented to by ALS in writing.

7.2 PERFORMANCE. The Partners shall have performed and
complied with all agreements, obligations and conditions required by this
Agreement to be so performed or complied with by them prior to or at the
Closing.

7.3 LITIGATION. No suit, proceeding, investigation,
injunction, writ or preliminary restraining order shall have been

11
<PAGE> 15

commenced or threatened by any governmental agency on any grounds to restrain,
enjoin or hinder the transactions contemplated hereby.

7.4 NO MATERIAL ADVERSE EVENT REGARDING THE PARTNERSHIPS.
There shall not have occurred any damage to or destruction of the properties or
assets of any Partnership by fire or by other casualty, or any other business
development, which would have a material adverse effect on a Partnership or its
business as presently conducted, unless, in the case of damage or destruction,
such damage or destruction is insured in all material respects (including
business interruption coverage) and can be repaired or replaced in all material
respects.

8. CONDITIONS TO PARTNERS' OBLIGATIONS TO CLOSE. The obligation
of the Partners to close the transactions contemplated by this Agreement are
subject to the fulfillment, prior to or at the Closing unless otherwise
required below, of each of the following conditions (all or any of which may be
waived in whole or in part by the Partners or by the Partner Agent on their
behalf:

8.1 REPRESENTATIONS AND WARRANTIES. The representations
and warranties made by ALS in this Agreement and the statements contained in
any other instrument, list, certificate or writing delivered by ALS pursuant to
this Agreement shall be true in all material respects when made and at and as
of the Closing Date as though such representations and warranties were made at
and as of such date.

8.2 PERFORMANCE. ALS shall have performed and complied
with all agreements, obligations and conditions required by this Agreement to
be so performed or complied with by it prior to or at the Closing.

8.3 LITIGATION. No suit, proceeding, investigation,
injunction, writ or preliminary restraining order shall have been commenced or
threatened by any governmental agency on any grounds to restrain, enjoin or
hinder the transactions contemplated hereby.

8.4 NO MATERIAL ADVERSE EVENT REGARDING ALS. There shall
not have occurred any damage to or destruction of the properties or assets of
ALS by fire or by other casualty, or any other business development, which
would have a material adverse effect on ALS or its business as presently
conducted, unless, in the case of damage or destruction, such damage or
destruction is insured in all material respects (including business
interruption coverage) and can be repaired or replaced in all material
respects.

9. TERMINATION, AMENDMENT AND WAIVER.

9.1 TERMINATION OF AGREEMENT. Time is of the essence
hereof. This Agreement may be terminated in its entirety at any time prior to
the Closing:

12
<PAGE> 16

(a) without liability of any party, by mutual agreement
of all the parties hereto;

(b) by ALS, if there has been a material violation or
breach by any Partner or the Partner Agent of any of his or its covenants,
agreements, representations or warranties contained in this Agreement which has
not been waived in writing by ALS;

(c) by ALS, if any of the conditions precedent to Closing
set forth in Section 7 of this Agreement shall not be fulfilled prior to or by
June 30, 1996 and shall not have been waived in writing by ALS;

(d) by any Partner or by the Partner Agent, if there has
been a material violation or breach by ALS of any of its covenants, agreements,
representations or warranties contained in this Agreement which has not been
waived in writing by all the Partners or by the Partner Agent; and

(e) by any Partner or by the Partner Agent, if any of the
conditions precedent to Closing set forth in Section 8 of this Agreement shall
not be fulfilled prior to or by June 30, 1996 and shall not have been waived in
writing by all the Partners or by the Partner Agent.

9.2 AMENDMENT, EXTENSION AND WAIVER. At any time prior
to the Closing Date, ALS and all the Partners (or, with respect to items (b),
(c) and (d) below, by the Partner Agent on behalf of the Partners) may, by an
instrument in writing signed by such persons, (a) amend this Agreement, (b)
extend the time for the performance of any of the obligations or other acts of
the parties hereto, (c) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(d) waive compliance with any of the agreements or conditions contained herein.

10. MISCELLANEOUS.

10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of
the representations and warranties of the parties contained in this Agreement
shall survive the Closing hereunder (even if the damaged party knew or had
reason to know of any misrepresentation or breach of warranty at the time of
Closing) and continue in full force and effect for a period of one (1) year
thereafter.

10.2 EXPENSES, TAXES, ETC. The Partners will pay all
professional fees and expenses incurred by the Partners in connection with this
Agreement and the transactions contemplated hereby. ALS will pay all
professional fees and expenses incurred by it in connection with this Agreement
and the transactions contemplated hereby.

13
<PAGE> 17

10.3 FURTHER ASSURANCES. From time to time, at ALS's
request and without further consideration, the Partners will execute and
deliver to ALS such documents and take such other action as ALS may reasonably
request in order to consummate more effectively the transactions contemplated
hereby.

10.4 SUCCESSORS AND ASSIGNS. This Agreement shall not be
assigned by any party without the prior written consent of the other parties.
This Agreement shall be binding upon and inure to the benefit of the respective
parties hereto and the successors and permitted assigns of such party.

10.5 SEVERABILITY. If any provision, clause, or part of
this Agreement, or the application thereof under certain circumstances, is held
invalid, the remainder of this Agreement, or the application of such provision,
clause or part under other circumstances, shall not be affected thereby.

10.6 ENTIRE AGREEMENT. This Agreement and other writings
referred to herein or delivered pursuant hereto which form a part hereof
contain the entire understanding of the parties with respect to the
transactions contemplated hereby and supersede all prior agreements and
understandings between the parties on such matters.

10.7 HEADINGS. The Section headings contained in this
Agreement are for reference purposes only and will not affect in any way the
meaning or interpretation of this Agreement.

10.8 NOTICES. All notices, claims, certificates,
requests, demands and other communications hereunder will be in writing and
will be deemed to have been duly given if (i) personally delivered; (ii) sent
by telecopy, facsimile transmission or other electronic means of transmitting
written documents (if confirmation of such transmission is received); or (iii)
sent to the parties at their respective addresses indicated herein by
registered or certified mail, postage prepaid, return receipt requested, or by
private overnight mail courier service. The respective addresses to be used
for all such notices, demands or requests are as follows:

(a) If to ALS or ALS-Midwest, to:

Alternative Living Services, Inc.
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: William F. Lasky
Facsimile: (414) 789-9592

<PAGE> 18

with copies to:

The Damone Group, Inc.
850 Stephenson Highway
Suite 600
Troy, Michigan 48083
Attention:
Facsimile:

and

Rogers & Hardin
2700 Cain Tower
229 Peachtree Street, N.W.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: (404) 525-2224

(b) If to a Partner, at his or its address or fax number
as set forth on Schedule A, attached hereto, and

Lionel S. Margolick
c/o Margolick Financial Group
32255 Northwestern Highway, Suite 188
Farmington Hills, Michigan 48334
Facsimile: (810) 737-4719

or to such other address as the person to whom notice is to be given may have
previously furnished to the other in writing in the manner set forth above.

10.9 LAW GOVERNING. This Agreement will be governed by,
and construed and enforced in accordance with, the internal laws of the State
of Michigan without regard to its conflicts of law rules.

10.10 COUNTERPARTS/TELECOPIES. This Agreement may be
executed simultaneously in counterparts, each of which will be deemed an
original, but all of which together will constitute one and the same
instrument. Facsimile and telecopy versions of signed documents shall be
deemed to be original documents for purposes of Closing.

10.11 NO THIRD PARTY BENEFICIARIES. This Agreement shall not
confer any rights or remedies upon any person other than the parties hereto and
their respective successors and permitted assigns.

10.12 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

15
<PAGE> 19

drafted jointly by the parties 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. Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance.

10.13 NUMBER; GENDER. Whenever the singular number is used
in this Agreement and when required by the context, the same shall include the
plural and vice versa, and the masculine gender shall include the feminine and
neuter genders and vice versa.

10.14 INCORPORATION OF SCHEDULES. The Schedules identified in
this Agreement are incorporated herein by reference and made a part hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.

ALTERNATIVE LIVING SERVICES, INC.

By:
---------------------------------

Its:
--------------------------------

[SIGNATURES CONTINUED ON FOLLOWING PAGE]

16
<PAGE> 20

[SIGNATURES CONTINUED FROM PREVIOUS PAGE]

ALTERNATIVE LIVING SERVICES-MIDWEST INC.

By:
---------------------------------

Its:
---------------------------------

PARTNER AGENT

-------------------------------------
LIONEL S. MARGOLICK

PARTNERS:

-------------------------------------
MADELINE H. BERMAN

-------------------------------------
MANDELL BERMAN

-------------------------------------
DR. JONATHAN S. BERMAN

-------------------------------------
HAROLD BRODE, Trustee of the
Harold Brode Revocable Living
Trust dated 6/15/82, as amended

-------------------------------------
SEYMORE BRODE, Trustee

-------------------------------------
IRWIN L. ELSON

-------------------------------------
LARRY D. GIBSON, Trustee of
the Larry D. Gibson Trust UAD
5/9/84 by Larry D. Gibson

-------------------------------------
PAUL HARRIS

[SIGNATURES CONTINUED ON FOLLOWING PAGE]

17
<PAGE> 21

[SIGNATURES CONTINUED FROM PREVIOUS PAGE]

-------------------------------------
STUART HARRIS

-------------------------------------
MARK H. HUTTON

-------------------------------------
H. BARRY LEVINE

-------------------------------------
H. BARRY LEVINE, TRUSTEE

-------------------------------------
BEVERLY SEGAL

-------------------------------------
MERTON J. SEGAL

-------------------------------------
JOEL H. SHAPIRO

-------------------------------------
SPECTRUM ASSOCIATES

-------------------------------------
ROBERT E. VIDAL, Trustee of
the Robert E. Vidal Trust
UAD 11/2/92

[ADD SIGNATURE LINES FOR ADDITIONAL LPS]

18
<PAGE> 22

[SIGNATURES CONTINUED FROM PREVIOUS PAGE]

-------------------------------------
MORTON E. HARRIS

<PAGE> 1
EXHIBIT 10.7

SERVICES AGREEMENT

THIS AGREEMENT ("Agreement") is made and entered into this 23rd day of
May, 1996, by and between RICHARD W. BOEHLKE, an individual resident of the
City of Gig Harbor, Washington ("Mr. Boehlke"), and ALTERNATIVE LIVING
SERVICES, INC., a Delaware corporation (the "Company").

W I T N E S S E T H:

WHEREAS, as contemplated in that certain Agreement and Plan of Merger
("Merger Agreement") dated as of May 22, 1996 by and between the Company and
New Crossings International Corporation, a Nevada corporation ("Crossings"),
Crossings will be merged with and into the Company (hereinafter referred to as
the "Merger");

WHEREAS, Mr. Boehlke has been engaged as the President and Chief
Executive Officer of Crossings and, upon consummation of the Merger, will be
elected Vice Chairman of the Board of Directors of the Company;

WHEREAS, the Company and Mr. Boehlke each desire to enter into this
Agreement pursuant to which Mr. Boehlke will provide services to the Company
effective upon the consummation and closing of the Merger on the terms and
conditions hereinafter set forth, and to make certain other agreements; and

WHEREAS, the covenants and agreements of the Company and Mr. Boehlke
herein are made as an inducement to Mr. Boehlke and the Company respectively,
in connection with the Merger.

NOW THEREFORE, in consideration of the premises and of the promises
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, do hereby agree as follows:

SECTION 1. EFFECTIVE DATE.

Subject to the terms and conditions hereof, the Company hereby agrees
to engage Mr. Boehlke to provide the services herein described, and Mr. Boehlke
hereby accepts such engagement, commencing as of the "Effective Time" of the
Merger, as defined in the Merger Agreement (such time referred to herein as the
"Effective Time").

<PAGE> 2

SECTION 2. SERVICES TO BE PROVIDED.

2.1.
Services. Mr. Boehlke shall provide such general, policy-making
services and undertake such acquisition and investor relations projects as may
be requested from time to time by the Board of Directors of the Company (the
"Board") or the Chairman of the Board (the "Chairman"). In connection
therewith, Mr. Boehlke agrees to devote such time as is mutually agreed upon by
Mr. Boehlke and the Board to the business and affairs of the Company to
discharge such responsibilities to the Board and to use his best efforts to
promote the interests of the Company. This shall not preclude Mr. Boehlke from
participating in the ownership, development and management of other businesses,
subject to any fiduciary duties that Mr. Boehlke may have as a director of the
Company.

2.2 No Employment Status. Mr. Boehlke shall provide services to
the Company as an independent contractor, and shall not be an employee of the
Company.

SECTION 3. TERM.

3.1.
Term. The term of this Agreement (the "Term") shall commence on
the Effective Time and shall continue until the earlier of: (a) the third
anniversary date of the Effective Time (the "Original Term"), or (b) the
occurrence of any of the following events:

(i) the death or disability of Mr. Boehlke (disability meaning a
physical illness or incapacity that prevents Mr. Boehlke from
performing the substantial and material services contemplated hereby;
provided, however, that a disability shall be considered to exist
only if Mr. Boehlke is prevented for a period of three (3)
consecutive months following the date such condition commenced
and at the end of such three (3) month period he remained so
prevented, or if, prior to the expiration of such three (3) month
period, Mr. Boehlke's attending physician provides the Company with a
written prognosis that the illness, injury or other incapacity that
results in Mr. Boehlke's current disabled condition may be reasonably
expected to prevent Mr. Boehlke from performing all of the substantial
and material services contemplated hereby for a period of at least six
(6) consecutive months);

(ii) the mutual written agreement of the parties hereto to terminate
the Agreement;

(iii) the Company's termination of the Agreement for "cause." For
the purposes of this Agreement, "cause" for termination of the
Agreement shall exist (A) if Mr. Boehlke is convicted of, or pleads
guilty to, any act of fraud, misappropriation or embezzlement, or any
felony; or (B) if Mr. Boehlke has engaged in conduct or activities
materially damaging to the Company, monetarily or otherwise (it being
understood, however, that neither conduct nor activities pursuant to
Mr. Boehlke's exercise of his good faith business judgment nor
unintentional physical damage to any property of the Company by

2
<PAGE> 3

Mr. Boehlke shall be a ground for such a determination by the
Company). Termination for cause shall be made only upon vote of not
less than a majority of the directors then in office, after reasonable
notice to Mr. Boehlke and an opportunity for Mr. Boehlke, together
with counsel, to be heard before a duly called meeting of the Board;
or

(iv) Mr. Boehlke's termination of this Agreement for "good reason"
upon reasonable notice to the Company. For purposes of this
Agreement, "good reason" shall exist if the Company materially fails
to comply with any of the provisions of this Agreement, other than
isolated, insubstantial or inadvertent failures not occurring in bad
faith and which are remedied by the Company promptly after receipt of
notice thereof given by Mr. Boehlke.

The failure to set forth any fact or circumstance in a notice of termination
hereunder shall not constitute a waiver of the right to assert such fact or
circumstance by the party giving notice.

3.2. Payments Upon Termination. If the Agreement is terminated by
the Company for cause or by Mr. Boehlke for any reason other than "good
reason", the Company shall pay Mr. Boehlke the Compensation (as hereinafter
defined) through the effective date of such termination at the rate in effect
at the time a notice of termination is given. The Company shall have no
further obligations to Mr. Boehlke under this Agreement, subject to the rights
Mr. Boehlke may have under benefit plans and programs of the Company in which
Mr. Boehlke is participating as of the effective date of such termination, if
any, which shall be determined in accordance therewith. If the Agreement is
terminated by the Company for any reason other than for cause or by Mr. Boehlke
for "good reason", the Company shall continue to pay Mr. Boehlke the
Compensation at the rate in effect at the time a notice of termination is
given, together with any applicable rights Mr. Boehlke may have under benefit
plans and programs of the Company in which Mr. Boehlke is participating as of
the date of such termination, all for the balance of the Original Term (the
"Extended Period"); provided, however, such payments of Compensation and
provision of other benefits hereunder during the Extended Period shall not be
due and payable by the Company to Mr. Boehlke if Mr. Boehlke (i) shall violate
the provisions of Section 5 hereof; or (ii) during the Extended Period shall
engage in or render any services to or be employed by any Competing Business
(as hereinafter defined) in the Area (as hereinafter defined) in the capacity
of officer, managerial or executive employee, director, consultant or
shareholder (other than as the owner of less than one (1%) percent of the
shares of a publicly-owned corporation whose shares are traded on a national
securities exchange or in the NASDAQ National Market System).

SECTION 4. COMPENSATION.

4.1. Compensation. Mr. Boehlke shall be paid compensation for
services rendered hereunder (the "Compensation") at the annual rate of TWO
HUNDRED THOUSAND

3
<PAGE> 4

DOLLARS ($200,000), payable in monthly installments. The Compensation for Mr.
Boehlke shall be reviewed annually by the Board or a committee thereof, but
shall in no event be reduced to less than the initial Compensation as provided
above.

4.2. Insurance.

(a) Life and Other Insurance. The Company shall provide
to Mr. Boehlke such term life and group travel, accident,
accidental death and dismemberment insurance and long and
short term disability insurance, or their equivalents, as is
provided from time to time to executive officers of the
Company.

(b) Medical Insurance. During the Term of the Agreement,
the Company shall, at its expense, provide or arrange for and
keep in effect, hospitalization, major medical and similar
medical and health insurance for Mr. Boehlke and his family,
to the same extent as is provided from time to time to
executive officers of the Company.

4.3. Out-of-Pocket Expenses. The Company shall reimburse Mr.
Boehlke in accordance with the Company's reimbursement policies for all
reasonable out-of-pocket expenses incurred by Mr. Boehlke in connection with the
performance of services hereunder upon presentation to the Company of
appropriate vouchers therefor.

4.4 Use of Automobile. Mr. Boehlke may continue to use, and the
Company shall continue to make lease payments on, the 7 Series BMW automobile
leased by Crossings for the benefit of Mr. Boehlke, through the remainder of
the current term of such lease (but in no event beyond the Term of this
Agreement, unless the Agreement is terminated by Mr. Boehlke for "good reason,"
then not beyond the Original Term).

4.5 Facilities. During the Term of this Agreement, the Company
shall, at its expense, furnish Mr. Boehlke office space, equipment and supplies
and access to administrative assistance at the Company's offices in Tacoma,
Washington, as reasonably necessary or appropriate for the performance of his
duties hereunder.

4.6 Board Position. Pursuant to the Merger Agreement, Mr. Boehlke
shall be elected to the Board of Directors as the Vice Chairman of the Board of
the Company as of the Effective Time. During the Term, the Company shall use
its best efforts to cause Mr. Boehlke to be one of the director nominees
recommended by management of the Company at any stockholders' meeting convened
for the purpose of electing the Board of Directors of the Company. During all
periods during which the Compensation is payable to Mr. Boehlke hereunder, Mr.
Boehlke shall not receive any additional compensation for his service as
director or as Vice Chairman other than the Compensation and other benefits
provided for by this Agreement; provided, however, that if during the Term
additional stock options are granted to William G. Petty, Jr.,

4
<PAGE> 5

in his capacity as a director of the Company, a like amount of options will be
granted to Mr. Boehlke. For any periods thereafter during which Mr. Boehlke
shall serve as a director or as Vice Chairman, he shall receive the same cash
and other compensation (including without limitation participation in the
Company's 1995 Incentive Compensation Plan) that is paid from time to time to
the other non-employee directors of the Company. Nothing in this Agreement
shall affect the rights and duties of Mr. Boehlke as the Vice Chairman or as a
member of the Board.

SECTION 5. RESTRICTIVE COVENANTS.

(a) Mr. Boehlke acknowledges that (i) he is the owner of a
substantial portion of the outstanding common stock of Crossings to be
acquired by the Company pursuant to the Merger Agreement; (ii) the
covenants herein are necessary to protect the goodwill and other value
of Crossings for which the Company will pay substantial consideration;
(iii) at the Effective Time the Company will have separately bargained
and paid additional consideration for the restrictive covenants
herein; and (iv) the Company is acquiring Crossings in reliance on the
covenants of this Section 5 in view of the unique and essential nature
of the services Mr. Boehlke is to perform hereunder and the
irreparable injury that would befall the Company should Mr. Boehlke
breach such covenants.

(b) Mr. Boehlke further acknowledges that his services hereunder
are of a special, unique and extraordinary character and that his
activities on behalf of the Company will place him in a position of
confidence and trust with the customers and employees of the Company
and allow him access to Confidential Information (as hereinafter
defined).

(c) Mr. Boehlke further acknowledges that the type and periods of
restrictions imposed by the covenants in this Section 5 are fair and
reasonable and that such restrictions will not prevent Mr. Boehlke
from earning a livelihood.

(d) Mr. Boehlke further acknowledges that, as of the Effective
Time (i) the Company is engaged in the business of developing, owning,
acquiring and operating assisted living facilities, congregate living
communities and specialty care facilities for the treatment of
individuals suffering from Alzheimer's disease; (ii) the Company
conducts its business activity in and throughout the Area (as
hereinafter defined); and (iii) Competing Businesses (as hereinafter
defined) are engaged in businesses like and similar to the business of
the Company.

(e) Having acknowledged the foregoing, Mr. Boehlke covenants and
agrees with the Company that he will not, directly or indirectly:

(i) during the Term and after the termination of this
Agreement for any reason whatsoever (whether voluntarily or
involuntarily), disclose, use or

5
<PAGE> 6

otherwise exploit, except as may be necessary in the
performance of his duties hereunder, any Confidential
Information disclosed to Mr. Boehlke or of which Mr. Boehlke
became aware by reason of his services to the Company or
employment with Crossings or Crossings' predecessors;

(ii) during the Original Term unless this Agreement is earlier
terminated (a) by the Company without cause or (b) by Mr.
Boehlke for good reason, employ or attempt to employ or assist
anyone else in employing in any Competing Business in the Area
any managerial or executive employee of the Company or the
Division (whether or not such employment is full time or is
pursuant to a written contract with the Company); or

(iii) during the Original Term unless this Agreement is
earlier terminated (a) by the Company without cause or (b) by
Mr. Boehlke for good reason, engage in or render any services
to or be employed by any Competing Business in the Area in the
capacity of officer, managerial or executive employee,
director, management or strategic consultant or shareholder
(other than as the owner of less than one (1%) percent of the
shares of a publicly-owned corporation whose shares are traded
on a national securities exchange or on the NASDAQ National
Market System).

(f) Mr. Boehlke agrees that upon the termination of this Agreement
for any reason whatsoever (whether voluntarily or involuntarily) he
will not take with him or retain without written authorization, and he
will promptly deliver to the Company, originals and all copies of all
papers, files or other documents containing any Confidential
Information and all other property belonging to the Company and in his
possession or under his control.

6
<PAGE> 7

confidential information or has been reduced to writing and marked
clearly and conspicuously as confidential information. Confidential
Information shall not include any data or information that has been
voluntarily disclosed to the public by the Company (except where such
public disclosure has been made without authorization by the Company),
or that has been independently developed and disclosed by others, or
that otherwise enters the public domain through lawful means.
Confidential Information includes, but is not limited to, information
relating to the Company's or Crossings' financial affairs, processes,
services, customers, executive officers or employees, compensation,
research, development, purchasing, accounting or marketing.

(h) Mr. Boehlke acknowledges that irreparable loss and injury
would result to the Company upon the breach of any of the covenants
contained in this Section 5 and that damages arising out of such
breach would be difficult to ascertain. Mr. Boehlke hereby agrees
that, in addition to all other remedies provided at law or in equity,
the Company may petition and obtain from a court of law or equity both
temporary and permanent injunctive relief to prevent a breach by Mr.
Boehlke of any covenant contained in this Section 5. The parties
hereto agree that all references to the Company and Crossings in this
Section 5 shall include, unless the context otherwise requires, all
subsidiaries of the Company and Crossings, respectively.

SECTION 6. MISCELLANEOUS.

6.1. Binding Effect. This Agreement shall inure to the benefit of and
shall be binding upon Mr. Boehlke, his executor, administrator, heirs, personal
representatives, successors and assigns, and upon the Company and its
successors and assigns; provided, however, that the obligations and duties of
Mr. Boehlke may not be assigned or delegated,

6.2. Governing Law. This Agreement shall be deemed to be made in, and
in all respects shall be interpreted, construed, enforced and governed by and
in accordance with, the laws of the State of Wisconsin, without giving effect
to any principles of conflicts of laws.

6.3. Invalid Provisions. The parties hereto hereby agree that the
agreements, provisions and covenants contained in this Agreement (including,
without limitation, the agreements, provisions and covenants contained in
Section 5 hereof) are severable and divisible, that none of such agreements,
provisions or covenants depends upon any other provision, agreement or covenant
for its enforceability, and that each such agreement, provision and covenant
constitutes an enforceable obligation between the Company and Mr. Boehlke.
Consequently, the parties hereto agree that neither the invalidity nor the
unenforceability of any agreement, provision or covenant of this Agreement
shall affect the other agreements, provisions or covenants hereof, and this
Agreement shall remain in full force and effect and be construed in all
respects as if such invalid or unenforceable agreement, provision or covenant
were omitted.

7
<PAGE> 8

6.4. Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

6.5. Notices. All communications provided for hereunder shall be in
writing and shall be deemed to be given when delivered in person or deposited
in the United States mail, first class, registered mail, return receipt
requested, with proper postage prepaid, and

(a) If to Mr. Boehlke, addressed to:

Richard W. Boehlke
1201 Pacific Avenue
Suite 1800
Tacoma, Washington 98402
Facsimile: 206/383-9979

with a copy to:

Bogle & Gates, P.L.L.C.
Two Union Square
601 Union Street
Seattle, Washington 98101-2322
Attention: Edmund O. Belsheim, Jr., Esq.
Facsimile: 206/621-2660

(b) If to the Company, addressed to:

Alternative Living Services, Inc.
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: President
Facsimile: (414) 789-9592

8
<PAGE> 9
with a copy to:

Alternative Living Services, Inc.
184 Shuman Boulevard
Suite 200
Naperville, Illinois 60563
Attention: Chairman
Facsimile: (708) 347-4020

and a copy to:

Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: 404/525-2224

or at such other place or places or to such other person or persons as shall be
designated in writing by the parties hereto in the manner provided above for
notices.

6.6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

6.7. Waiver of Breach. The waiver by the Company or by Mr. Boehlke of
a breach of any provision, agreement or covenant of this Agreement by Mr.
Boehlke or by the Company, respectively, shall not operate or be construed as a
waiver of any prior or subsequent breach of the same or any other provision
agreement or covenant.

6.8. Entire Agreement. This Agreement is intended by the parties
hereto to be the final expression of their agreement and is the complete and
exclusive statement thereof notwithstanding any representation or statements to
the contrary heretofore made. This Agreement replaces in its respective
entirety any and all prior agreements, arrangements, understandings or
commitments between Crossings and/or any of its predecessors and affiliates and
Executive relating to Executive's employment or other services rendered to or
for the benefit of Crossings and/or any of its predecessors and affiliates.
This Agreement may be modified only by written instrument signed by each of the
parties hereto.

9
<PAGE> 10

IN WITNESS WHEREOF, Mr. Boehlke has duly executed, and the Company has
caused this Agreement to be duly executed by its duly authorized officers, and
the parties have caused this Agreement to be delivered, all as of the day and
year first written above.

ALTERNATIVE LIVING SERVICES, INC.

By:
-------------------------------

Its:
------------------------------

----------------------------------
RICHARD W. BOEHLKE

<PAGE> 1
EXHIBIT 10.8

EMPLOYMENT AGREEMENT

THIS AGREEMENT ("Agreement") is made and entered into this 23rd day of
May, 1996, by and between D. LEE FIELD, an individual resident of the City of
Gig Harbor, Washington (the "Executive"), and ALTERNATIVE LIVING SERVICES,
INC., a Delaware corporation (the "Company").

W I T N E S S E T H:

WHEREAS, the Executive has been engaged as the Executive Vice
President and Chief Operating Officer of Crossings;

WHEREAS, the Company and the Executive each desire to enter into this
Agreement pursuant to which the Executive will be employed by the Company
effective upon the consummation and closing of the Merger on the terms and
conditions hereinafter set forth, and to make certain other agreements; and

WHEREAS, the covenants and agreements of the Company and the Executive
herein are made as an inducement to the Executive and the Company respectively,
in connection with the Merger.

NOW THEREFORE, in consideration of the premises and of the promises
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, do hereby agree as follows:

SECTION 1. EMPLOYMENT; EFFECTIVE DATE.

Subject to the terms and conditions hereof, the Company hereby agrees
to employ the Executive, and the Executive hereby accepts such employment,
commencing as of the "Effective Time" of the Merger, as defined in the Merger
Agreement (such time referred to herein as the "Effective Time").

SECTION 2. POSITION.

2.1. Title. The Executive shall serve as an executive officer of the
Company with the title of Senior Vice President and, as such, the Executive
shall report directly to the President of the Company.

<PAGE> 2

2.2. Responsibilities. The Executive's responsibilities shall be as
directed by the President of the Company. The Executive agrees to devote his
full business time during normal business hours to the business and affairs of
the Company (except as otherwise provided herein) and to use his best efforts
to promote the interests of the Company and to perform faithfully and
efficiently the responsibilities assigned to him in accordance with the terms
of this Agreement, to the extent necessary to discharge such responsibilities.
This shall not preclude the Executive from (i) performing services on civic or
charitable boards or committees not significantly interfering with the
performance of his responsibilities under this Agreement, and (ii) taking
periods of vacation and sick leave to which the Executive is entitled.

2.3 Location. The Executive's location of employment shall be at
the Company's offices in Tacoma, Washington. The Company may not transfer the
Executive to any other location without the Executive's prior written consent.

SECTION 3. TERM.

3.1. Term. The term of employment of the Executive (the "Term")
hereunder shall commence on the Effective Time and shall continue until the
earlier of: (a) the second anniversary date of the Effective Time; (b) the
first anniversary of the date upon which the Company first sells shares of its
common stock in a public offering registered pursuant to the Securities Act of
1933, as amended; or (c) the occurrence of any of the following events:

(i) the death or disability of the Executive (disability meaning a
physical illness or incapacity that prevents the Executive from
performing the substantial and material duties of his then current
position of employment with the Company; provided, however, that a
disability shall be considered to exist only if the Executive is
prevented for a period of three (3) consecutive months following the
date such condition commenced and at the end of such three (3) month
period he remained so prevented, or if, prior to the expiration of
such three (3) month period, the Executive's attending physician
provides the Company with a written prognosis that the illness, injury
or other incapacity that results in the Executive's current disabled
condition may be reasonably expected to prevent the Executive from
performing all of the substantial and material duties of his then
current position of employment with the Company for a period of at
least six (6) consecutive months);

(ii) the mutual written agreement of the parties hereto to terminate
the Executive's employment hereunder;

2
<PAGE> 3

the Executive's exercise of his good faith business judgment nor
unintentional physical damage to any property of the Company by the
Executive shall be a ground for such a determination by the Company);
or (C) if the Executive has willfully and continuously failed to
substantially perform his duties hereunder (other than any such
failure resulting from incapacity due to physical or mental illness),
after a written demand for substantial performance is delivered to the
Executive that specifically identifies the manner in which the Company
believes that the Executive has not substantially performed those
duties, and the Executive has failed to resume substantial performance
of such duties on a continuous basis within fourteen (14) days after
receiving such demand. Termination for cause shall be made only upon
vote of not less than a majority of the directors then in office,
after reasonable notice to the Executive and an opportunity for the
Executive, together with counsel, to be heard before a duly called
meeting of the Board; or

(iv) the Executive's termination of his employment with the Company
for "good reason" upon reasonable notice to the Company. For purposes
of this Agreement, "good reason" shall exist if the Company materially
fails to comply with any of the provisions of this Agreement, other
than isolated, insubstantial or inadvertent failures not occurring in
bad faith and which are remedied by the Company promptly after receipt
of notice thereof given by the Executive.

The failure to set forth any fact or circumstance in a notice of termination
hereunder shall not constitute a waiver of the right to assert such fact or
circumstance by the party giving notice. The Term hereof, and any renewal
term, shall be automatically renewed for an additional one (1) year period
unless either the Executive or the Company gives notice to the other party that
it does not wish to renew this Agreement at least ninety (90) days prior to the
expiration of such Term or renewal term, as the case may be.

3.2. Payments Upon Termination. If the Executive's employment is
terminated by the Company for cause or by the Executive for any reason other
than "good reason", the Company shall pay the Executive the Base Salary (as
hereinafter defined) through the effective date of termination at the rate in
effect at the time a notice of termination is given. The Company shall have no
further obligations to the Executive under this Agreement, subject to the
rights and benefits the Executive may have under employee benefits plans and
programs of the Company in existence as of the effective date of such
termination, if any, which shall be determined in accordance therewith. If the
Executive's employment is terminated by the Company for any reason other than
for cause or by the Executive for "good reason", the Company shall continue to
pay the Executive the Base Salary at the rate in effect at the time a notice of
termination is given, together with any applicable bonuses and rights and
benefits the Executive may have under employee benefits plans and programs of
the Company in existence as of the date of such termination, all for the
balance of the Term or, if any renewal term shall then be in effect, for six
months after such termination (such period, as applicable, the "Extended
Period"); provided, however, such payments of Base Salary and provision of
bonuses, rights and benefits hereunder during the Extended Period shall not be
due and payable by the Company to the Executive if the Executive (i) shall
violate the provisions of Section 5 hereof;

3
<PAGE> 4

or (ii) during the Extended Period shall engage in or render any services to or
be employed by any Competing Business (as hereinafter defined) in the Area (as
hereinafter defined) in the capacity of officer, managerial or executive
employee, director, consultant or shareholder (other than as the owner of less
than one (1%) percent of the shares of a publicly-owned corporation whose
shares are traded on a national securities exchange or in the NASDAQ National
Market System).

SECTION 4. COMPENSATION.

4.1. Base Salary. For the Term of his employment hereunder, the
Executive shall be paid a salary (the "Base Salary") at the annual rate of One
Hundred Forty Thousand Dollars ($140,000), payable in equal installments in
accordance with the payroll payment practices from time to time adopted by the
Company, subject to required payroll withholding provisions. The Executive's
Base Salary shall be reviewed annually by the Board of Directors of the
Company, a committee thereof or the President, but shall in no event be reduced
to less than the Executive's initial Base Salary as provided above without the
consent of Employee.

4.2. Incentive Bonuses. As additional compensation hereunder, the
Company may, in the sole discretion of the Board of Directors, pay the
Executive an annual bonus (the "Annual Bonus") for each fiscal year during the
term of the Executive's employment hereunder. Subject to the terms and
conditions of subsection 3.2 of this Agreement, if the Executive's employment
hereunder is terminated pursuant to the terms of this Agreement prior to the
end of a calendar year, the Executive's Annual Bonus with respect to that year
shall be prorated for such portion of that year as he was employed by the
Company. The Executive shall be eligible to receive an Annual Bonus of up to
twenty-five percent (25%) of the Executive's Base Salary if the Division
achieves the financial plan for the Division targeted in the applicable annual
business plan as approved by the Board of Directors. Such bonus shall be due
and payable solely in the discretion of the Board of Directors based upon the
Division's annual financial statements for the applicable bonus period.

4.3. Stock Options. The Board of Directors of the Company shall grant
to the Executive, effective as of the Effective Time, options to purchase
36,233 shares of common stock, $0.01 par value per share, of the Company
pursuant to the terms of the Company's 1995 Incentive Compensation Plan, which
options shall vest and first become exercisable at the rate of 25% per year on
the first, second, third and fourth anniversary of the date of grant, such that
all of these options shall have vested and become exercisable by the fourth
anniversary of the date of grant. The exercise price for these options shall
be $8.69 per share. Such options that have not previously been exercised shall
no longer be exercisable as of and following the tenth (10th) anniversary of
the date of grant of such options.

4.4. Insurance.

(a) Life and Other Insurance. The Company shall provide
to the Executive such term life and group travel, accident,
accidental death and dismemberment

4
<PAGE> 5

insurance and long and short term disability insurance, or
their equivalents, as is provided from time to time for other
executive officers of the Company of comparable stature and
title. The Company shall be entitled, at its sole option and
expense, to arrange for and keep in effect, during the term of
the Executive's employment hereunder, so long as he is
insurable, key man insurance on the Executive in an amount
determined by the Board of Directors, such policy or policies
to name the Company or its designee as the beneficiary under
such policy or policies. The Executive shall reasonably
cooperate with the Company in procuring such key man insurance
as the Company shall elect to purchase.

(b) Medical Insurance. During the Term of the
Executive's employment hereunder, the Company shall, at its
expense, provide or arrange for and keep in effect,
hospitalization, major medical and similar medical and health
insurance for the Executive and his family, to the same extent
as is provided from time to time for other executive officers
of the Company.

4.5. Vacation. The Executive shall be entitled to four (4) weeks paid
vacation during each year of his employment hereunder.

4.6. Retirement Benefits. During the Term of his employment
hereunder, the Executive shall have the same rights as other executive officers
of the Company of comparable statute and title to participate in all
profit-sharing, pension and other retirement plans as are now, or as may
hereafter be, established by the Company.

4.7. Out-of-Pocket Expenses. The Company shall reimburse the
Executive for all reasonable out-of-pocket expenses incurred by the Executive
in connection with the performance of his duties hereunder upon presentation to
the Company of appropriate vouchers therefor.

4.8. Automobile Expense Allowance. During the term of the Executive's
employment hereunder, the Company shall pay to the Executive an automobile
allowance of $450.00 per month, plus mileage in accordance with the Company's
mileage reimbursement policy, as in effect from time to time. Notwithstanding
the foregoing, the Executive may continue to use, and the Company shall
continue to make lease payments on, the 5 Series BMW automobile leased by
Crossings for the benefit of Executive, through the remainder of the current
term of such lease. Thereafter, the automobile allowance provisions hereof
shall apply.

SECTION 5. RESTRICTIVE COVENANTS.

5
<PAGE> 6

Crossings in reliance on the covenants of this Section 5 in view of
the unique and essential nature of the services the Executive is to
perform hereunder and the irreparable injury that would befall the
Company should the Executive breach such covenants.

(b) The Executive further acknowledges that his services hereunder
are of a special, unique and extraordinary character and that his
position with the Company will place him in a position of confidence
and trust with the customers and employees of the Company and allow
him access to Confidential Information (as hereinafter defined).

(c) The Executive further acknowledges that the type and periods
of restrictions imposed by the covenants in this Section 5 are fair
and reasonable and that such restrictions will not prevent the
Executive from earning a livelihood.

(d) The Executive further acknowledges that, as of the Effective
Time (i) the Company is engaged in the business of developing, owning,
acquiring and operating assisted living facilities, congregate living
communities, and specialty care facilities for the treatment of
individuals suffering from Alzheimer's disease; (ii) the Company
conducts its business activity in and throughout the Area (as
hereinafter defined); and (iii) Competing Businesses (as hereinafter
defined) are engaged in businesses like and similar to the business of
the Company.

(e) Having acknowledged the foregoing, the Executive covenants and
agrees with the Company that he will not, directly or indirectly:

(i) while he is in the Company's employ and after the
termination of his employment for any reason whatsoever
(whether voluntarily or involuntarily), disclose, use or
otherwise exploit, except as may be necessary in the
performance of his duties hereunder, any Confidential
Information disclosed to the Executive or of which the
Executive became aware by reason of his employment with the
Company, Crossings or Crossings' predecessors;

(ii) while he is in the Company's employ and through the
period ending TWELVE (12) months after the termination of his
employment for any reason whatsoever (whether voluntarily or
involuntarily), employ or attempt to employ or assist anyone
else in employing in any Competing Business in the Area any
managerial or executive employee of the Company or the
Division (whether or not such employment is full time or is
pursuant to a written contract with the Company); and

6
<PAGE> 7

virtue of notice of nonrenewal given by the Company to the
Executive pursuant to Section 3.1 hereof, engage in or render
any services to or be employed by any Competing Business in
the Area in the capacity of officer, managerial or executive
employee, director, management or strategic consultant or
shareholder (other than as the owner of less than one (1%)
percent of the shares of a publicly-owned corporation whose
shares are traded on a national securities exchange or on the
NASDAQ National Market System).

(f) The Executive agrees that upon the termination of his
employment for any reason whatsoever (whether voluntarily or
involuntarily) he will not take with him or retain without written
authorization, and he will promptly deliver to the Company, originals
and all copies of all papers, files or other documents containing any
Confidential Information and all other property belonging to the
Company and in his possession or under his control.

(g) For purposes of this Section 5, the term (a) "Area" means a
twenty-five (25) mile radius of any congregate living community or
assisted living or specialty care facility owned, managed or operated
by the Company at the time the Executive's employment hereunder is
terminated; (b) "Competing Business" means the business of developing,
owning, acquiring or operating assisted living facilities, specialty
assisted care facilities for the treatment of individuals suffering
from Alzheimer's disease or congregate living communities; and (c)
"Confidential Information" means any and all data, knowledge and
information relating to the business of the Company or Crossings
(whether or not constituting a trade secret) that is, has been or will
be obtained by or disclosed to the Executive or of which the Executive
became or becomes aware as a consequence of or through his
relationship with the Company or Crossings and that has value to the
Company and is not generally known by its competitors, provided,
however, that no information will be deemed confidential unless it is
known to the Executive to be confidential information or has been
reduced to writing and marked clearly and conspicuously as
confidential information. Confidential Information shall not include
any data or information that has been voluntarily disclosed to the
public by the Company (except where such public disclosure has been
made without authorization by the Company), or that has been
independently developed and disclosed by others, or that otherwise
enters the public domain through lawful means. Confidential
Information includes, but is not limited to, information relating to
the Company's or Crossings' financial affairs, processes, services,
customers, executive officers or employees, compensation, research,
development, purchasing, accounting or marketing.

(h) The Executive acknowledges that irreparable loss and injury
would result to the Company upon the breach of any of the covenants
contained in this Section 5 and that damages arising out of such
breach would be difficult to ascertain. The Executive hereby agrees
that, in addition to all other remedies provided at law or in equity,
the Company may petition and obtain from a court of law or equity both
temporary and permanent injunctive relief to prevent a breach by the
Executive of any covenant contained in this

7
<PAGE> 8

Section 5. The parties hereto agree that all references to the
Company and Crossings in this Section 5 shall include, unless the
context otherwise requires, all subsidiaries of the Company and
Crossings, respectively.

SECTION 6. MISCELLANEOUS.

6.1. Binding Effect. This Agreement shall inure to the benefit of and
shall be binding upon the Executive, his executor, administrator, heirs,
personal representatives, successors and assigns, and upon the Company and its
successors and assigns; provided, however, that the obligations and duties of
the Executive may not be assigned or delegated,

6.3. Invalid Provisions. The parties herein hereto agree that the
agreements, provisions and covenants contained in this Agreement (including,
without limitation, the agreements, provisions and covenants contained in
Section 5 hereof) are severable and divisible, that none of such agreements,
provisions or covenants depends upon any other provision, agreement or covenant
for its enforceability, and that each such agreement, provision and covenant
constitutes an enforceable obligation between the Company and the Executive.
Consequently, the parties hereto agree that neither the invalidity nor the
unenforceability of any agreement, provision or covenant of this Agreement
shall affect the other agreements, provisions or covenants hereof, and this
Agreement shall remain in full force and effect and be construed in all
respects as if such invalid or unenforceable agreement, provision or covenant
were omitted.

6.4. Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

(a) If to the Executive, addressed to:

D. Lee Field
1201 Pacific Avenue
Suite 1800
Tacoma, Washington 98402
Facsimile: 206/383-9979

8
<PAGE> 9

with a copy to:

Bogle & Gates P.L.L.C.
Two Union Square
601 Union Street
Seattle, Washington 98101-2322
Attention: Edmund O. Belsheim, Jr.
Facsimile: (206) 621-2660

(b) If to the Company, addressed to:

Alternative Living Services, Inc.
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: President
Facsimile: (414) 789-9592

with a copy to:

Alternative Living Services, Inc.
184 Shuman Boulevard
Suite 200
Naperville, Illinois 60563
Attention: Chairman
Facsimile: (708) 347-4020

and a copy to:

Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: 404/525-2224

or at such other place or places or to such other person or persons as shall be
designated in writing by the parties hereto in the manner provided above for
notices.

6.6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

9
<PAGE> 10

6.7. Waiver of Breach. The waiver by the Company or by the Executive
of a breach of any provision, agreement or covenant of this Agreement by the
Executive or by the Company, respectively, shall not operate or be construed as
a waiver of any prior or subsequent breach of the same or any other provision
agreement or covenant.

IN WITNESS WHEREOF, the Executive has duly executed, and the Company
has caused this Agreement to be duly executed by its duly authorized officers,
and the parties have caused this Agreement to be delivered, all as of the day
and year first written above.

COMPANY: ALTERNATIVE LIVING SERVICES, INC.

By:_______________________________

Its:______________________________

EXECUTIVE: __________________________________
D. LEE FIELD

<PAGE> 1
EXHIBIT 10.9

EMPLOYMENT AGREEMENT

THIS AGREEMENT ("Agreement") is made and entered into this 23rd day of
May, 1996, by and between DAVID M. BOITANO, an individual resident of the City
of Tacoma, Washington (the "Executive"), and ALTERNATIVE LIVING SERVICES, INC.,
a Delaware corporation (the "Company").

W I T N E S S E T H:

WHEREAS, the Executive has been engaged as the Vice President and
Chief Financial Officer of Crossings;

WHEREAS, the covenants and agreements of the Company and the Executive
herein are made as an inducement to the Executive and the Company respectively,
in connection with the Merger.

NOW THEREFORE, in consideration of the premises and of the promises
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, do hereby agree as follows:

SECTION 1. EMPLOYMENT; EFFECTIVE DATE.

SECTION 2. POSITION.

2.1. Title. the Executive shall serve as an executive officer of the
Company with the title of Vice President and, as such, the Executive shall
report directly to the Chief Financial Officer of the Company (the "Supervising
Officer").

<PAGE> 2

2.2. Responsibilities. The Executive's responsibilities shall be as
directed by the Supervising Officer. The Executive agrees to devote his full
business time during normal business hours to the business and affairs of the
Company (except as otherwise provided herein) and to use his best efforts to
promote the interests of the Company and to perform faithfully and efficiently
the responsibilities assigned to him in accordance with the terms of this
Agreement, to the extent necessary to discharge such responsibilities. This
shall not preclude the Executive from (i) performing services on civic or
charitable boards or committees not significantly interfering with the
performance of his responsibilities under this Agreement, and (ii) taking
periods of vacation and sick leave to which the Executive is entitled.

SECTION 3. TERM.

3.1. Term. The term of employment of the Executive (the "Term")
hereunder shall commence on the Effective Time and shall continue until the
earlier of: (a) the second anniversary date of the Effective Time, (b) the
first anniversary of the date upon which the Company first sells shares of its
common stock in a public offering registered pursuant to the Securities Act of
1933, as amended; or (c) the occurrence of any of the following events:

(ii) the mutual written agreement of the parties hereto to terminate
the Executive's employment hereunder;

2
<PAGE> 3

Company, monetarily or otherwise (it being understood, however, that
neither conduct nor activities pursuant to the Executive's exercise of
his good faith business judgment nor unintentional physical damage to
any property of the Company by the Executive shall be a ground for
such a determination by the Company); or (C) if the Executive has
willfully and continuously failed to substantially perform his duties
hereunder (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive that specifically identifies
the manner in which the Company believes that the Executive has not
substantially performed those duties, and the Executive has failed to
resume substantial performance of such duties on a continuous basis
within fourteen (14) days after receiving such demand. Termination
for cause shall be made only upon vote of not less than a majority of
the directors then in office, after reasonable notice to the Executive
and an opportunity for the Executive, together with counsel, to be
heard before a duly called meeting of the Board; or

3
<PAGE> 4

however, such payments of Base Salary and provision of bonuses, rights and
benefits hereunder during the Extended Period shall not be due and payable by
the Company to the Executive if the Executive (i) shall violate the provisions
of Section 5 hereof; or (ii) during the Extended Period shall engage in or
render any services to or be employed by any Competing Business (as hereinafter
defined) in the Area (as hereinafter defined) in the capacity of officer,
managerial or executive employee, director, consultant or shareholder (other
than as the owner of less than one (1%) percent of the shares of a
publicly-owned corporation whose shares are traded on a national securities
exchange or in the NASDAQ National Market System).

SECTION 4. COMPENSATION.

4.2. Incentive Bonuses. As additional compensation hereunder, the
Company may, in the sole discretion of the Board of Directors, pay the
Executive an annual bonus (the "Annual Bonus") for each fiscal year during the
term of the Executive's employment hereunder. Subject to the terms and
conditions of subsection 3.2 of this Agreement, if the Executive's employment
hereunder is terminated pursuant to the terms of this Agreement prior to the
end of a calendar year, the Executive's Annual Bonus with respect to that year
shall be prorated for such portion of that year as he was employed by the
Company. The Executive shall be eligible to receive an Annual Bonus of up to
twenty percent (20%) of the Executive's Base Salary if the Division achieves
the financial plan for the Division targeted in the applicable annual business
plan as approved by the Board of Directors. Such bonus shall be due and
payable solely in the discretion of the Board of Directors based upon the
Division's annual financial statements for the applicable bonus period.

4.3. Stock Options. The Board of Directors of the Company shall grant
to the Executive, effective as of the Effective Time, options to purchase
36,233 shares of common stock, par value $0.01 per share, of the Company
pursuant to the terms of the Company's 1995 Incentive Compensation Plan (the
"Executive Options"), which Executive Options shall vest and first become
exercisable at the rate of 25% per year on the first, second, third and fourth
anniversary of the date of grant, such that all of these options shall have
vested and become exercisable by the fourth anniversary of the date of grant;
provided, however, 14,500 shares available for exercise pursuant to such
Executive Options shall become exercisable (even if vested in the manner
contemplated hereby) only if the Executive shall be elected to the position of
Senior Vice President of the Company on or before the fourth anniversary of the
date of grant (the "Further Condition"). Until such time as the Further
Condition is satisfied, the Executive may exercise his right to acquire only up
to ___% of the shares underlying vested Executive

4
<PAGE> 5

Options hereunder. The exercise price for these options shall be $8.69 per
share. Such options that have not previously been exercised shall no longer be
exercisable as of and following the tenth (10th) anniversary of the date of
grant of such options.

4.4. Insurance.

(a) Life and Other Insurance. The Company shall provide to the
Executive such term life and group travel, accident, accidental death
and dismemberment insurance and long and short term disability
insurance, or their equivalents, as is provided from time to time for
other executive officers of the Company of comparable stature and
title. The Company shall be entitled, at its sole option and expense,
to arrange for and keep in effect, during the term of the Executive's
employment hereunder, so long as he is insurable, key man insurance on
the Executive in an amount determined by the Board of Directors, such
policy or policies to name the Company or its designee as the
beneficiary under such policy or policies. The Executive shall
reasonably cooperate with the Company in procuring such key man
insurance as the Company shall elect to purchase.

(b) Medical Insurance. During the Term of the Executive's
employment hereunder, the Company shall, at its expense, provide or
arrange for and keep in effect, hospitalization, major medical and
similar medical and health insurance for the Executive and his family,
to the same extent as is provided from time to time for other
executive officers of the Company.

4.5. Vacation. The Executive shall be entitled to four (4) weeks paid
vacation during each year of his employment hereunder.

4.6. Retirement Benefits. During the Term of his employment
hereunder, the Executive shall have the same rights as other executive officers
of the Company of comparable stature and title to participate in all
profit-sharing, pension and other retirement plans as are now, or as may
hereafter be, established by the Company.

5
<PAGE> 6

SECTION 5. RESTRICTIVE COVENANTS.

(a) The Executive acknowledges that (i) he is the owner of a
portion of the outstanding common stock of Crossings to be acquired by
the Company pursuant to the Merger Agreement; (ii) the covenants
herein are necessary to protect the goodwill and other value of
Crossings for which the Company will pay substantial consideration;
(iii) at the Effective Time the Company will have separately bargained
and paid additional consideration for the restrictive covenants
herein; and (iv) the Company is acquiring Crossings in reliance on the
covenants of this Section 5 in view of the unique and essential nature
of the services the Executive is to perform hereunder and the
irreparable injury that would befall the Company should the Executive
breach such covenants.

(d) The Executive further acknowledges that, as of the Effective
Time (i) the Company is engaged in the business of developing, owning,
acquiring and operating assisted living facilities, congregate living
communities and specialty care facilities for the treatment of
individuals suffering from Alzheimer's disease; (ii) the Company
conducts its business activity in and throughout the Area (as
hereinafter defined); and (iii) Competing Businesses (as hereinafter
defined) are engaged in businesses like and similar to the business of
the Company.

(e) Having acknowledged the foregoing, the Executive covenants and
agrees with the Company that he will not, directly or indirectly:

6
<PAGE> 7

(iii) while he is in the Company's employ and through the
period ending TWELVE (12) months after the termination of his
employment (whether voluntarily or involuntarily), for any
reason whatsoever except for (a) termination by the Company
without cause or (b) termination by the Executive for good
reason or (c) expiration of the Term without renewal pursuant
to Section 3.1 hereof by virtue of notice of nonrenewal given
by the Company to the Executive pursuant to Section 3.1
hereof, engage in or render any services to or be employed by
any Competing Business in the Area in the capacity of officer,
managerial or executive employee, director, management or
strategic consultant or shareholder (other than as the owner
of less than one (1%) percent of the shares of a
publicly-owned corporation whose shares are traded on a
national securities exchange or on the NASDAQ National Market
System).

7
<PAGE> 8

information will be deemed confidential unless it is known to the
Executive to be confidential information or has been reduced to
writing and marked clearly and conspicuously as confidential
information. Confidential Information shall not include any data or
information that has been voluntarily disclosed to the public by the
Company (except where such public disclosure has been made without
authorization by the Company), or that has been independently
developed and disclosed by others, or that otherwise enters the public
domain through lawful means. Confidential Information includes, but
is not limited to, information relating to the Company's or Crossings'
financial affairs, processes, services, customers, executive officers
or employees, compensation, research, development, purchasing,
accounting or marketing.

SECTION 6. MISCELLANEOUS.

6.3. Invalid Provisions. The parties hereto hereby agree that the
agreements, provisions and covenants contained in this Agreement (including,
without limitation, the agreements, provisions and covenants contained in
Section 5 hereof) are severable and divisible, that none of such agreements,
provisions or covenants depends upon any other provision, agreement or covenant
for its enforceability, and that each such agreement, provision and covenant
constitutes an enforceable obligation between the Company and the Executive.
Consequently, the parties hereto agree that neither the invalidity nor the
unenforceability of any agreement, provision or covenant of this Agreement
shall affect the other agreements, provisions or covenants hereof, and this
Agreement shall remain in full force and effect and be construed in all
respects as if such invalid or unenforceable agreement, provision or covenant
were omitted.

8
<PAGE> 9

6.4. Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

(a) If to the Executive, addressed to:

David M. Boitano
1201 Pacific Avenue
Suite 1800
Tacoma, Washington 98402
Facsimile: 206/383-9979

with a copy to:

Bogle & Gates P.L.L.C.
Two Union Square
601 Union Street
Seattle, Washington 98101-2322
Attention: Edmund O. Belsheim, Jr.
Facsimile: 206/621-2660

(b) If to the Company, addressed to:

Alternative Living Services, Inc.
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: President
Facsimile: (414) 789-9592

with a copy to:

Alternative Living Services, Inc.
184 Shuman Boulevard
Suite 200
Naperville, Illinois 60563
Attention: Chairman
Facsimile: (708) 347-4020

9
<PAGE> 10

and a copy to:

Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: 404/525-2224

or at such other place or places or to such other person or persons as shall be
designated in writing by the parties hereto in the manner provided above for
notices.

6.6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

10
<PAGE> 11

COMPANY: ALTERNATIVE LIVING SERVICES, INC.

By:_______________________________

Its:______________________________

EXECUTIVE:
__________________________________
DAVID M. BOITANO

<PAGE> 1
EXHIBIT 10.11

EMPLOYMENT AGREEMENT

THIS AGREEMENT ("Agreement") is made and entered into this 23rd day of
May, 1996, by and between G. FAYE GODWIN, an individual resident of Wisconsin
(the "Executive"), and ALTERNATIVE LIVING SERVICES, INC., a Delaware
corporation (the "Company").

W I T N E S S E T H:

WHEREAS, the Executive has been engaged as the Senior Vice President
of the Company;

WHEREAS, the Company and the Executive each desire to enter into this
Agreement pursuant to which the Executive will be employed by the Company on
the terms and conditions hereinafter set forth, and to make certain other
agreements; and

WHEREAS, the covenants and agreements of the Company and the Executive
herein are made as an inducement to the Executive and the Company,
respectively.

NOW THEREFORE, in consideration of the premises and of the promises
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, do hereby agree as follows:

SECTION 1. EMPLOYMENT; EFFECTIVE DATE.

Subject to the terms and conditions hereof, the Company hereby agrees
to employ the Executive, and the Executive hereby accepts such employment,
commencing as of the date first written above (hereinafter referred to as the
"Effective Time").

SECTION 2. POSITION.

2.1. Title. The Executive shall serve as an executive officer of the
Company with the title of Senior Vice President and, as such, the Executive
shall report directly to the President of the Company.

2.2. Responsibilities. The Executive's responsibilities shall be as
directed by the President of the Company. The Executive agrees to devote her
full business time during normal business hours to the business and affairs of
the Company (except as otherwise provided herein) and to use her best efforts
to promote the interests of the Company and to perform faithfully and
efficiently the responsibilities assigned to her in accordance with the terms
of this Agreement, to the extent necessary to discharge such responsibilities.
This shall not preclude the Executive from (i) performing services on civic or
charitable boards or committees not significantly

<PAGE> 2

interfering with the performance of her responsibilities under this Agreement,
and (ii) taking periods of vacation and sick leave to which the Executive is
entitled.

SECTION 3. TERM.

3.1. Term. The term of employment of the Executive (the "Term")
hereunder shall commence on the Effective Time and shall continue until the
earlier of: (a) the first anniversary date of the Effective Time; or (c) the
occurrence of any of the following events:

(i) the death or disability of the Executive (disability meaning a
physical illness or incapacity that prevents the Executive from
performing the substantial and material duties of her then current
position of employment with the Company; provided, however, that a
disability shall be considered to exist only if the Executive is
prevented for a period of three (3) consecutive months following the
date such condition commenced and at the end of such three (3) month
period she remained so prevented, or if, prior to the expiration of
such three (3) month period, the Executive's attending physician
provides the Company with a written prognosis that the illness, injury
or other incapacity that results in the Executive's current disabled
condition may be reasonably expected to prevent the Executive from
performing all of the substantial and material duties of her then
current position of employment with the Company for a period of at
least six (6) consecutive months);

(ii) the mutual written agreement of the parties hereto to terminate
the Executive's employment hereunder;

(iii) the Company's termination of the Executive's employment
hereunder for "cause." For the purposes of this Agreement, "cause"
for termination of the Executive's employment shall exist (A) if the
Executive is convicted of, or pleads guilty to, any act of fraud,
misappropriation or embezzlement, or any felony; (B) if the Executive
has engaged in conduct or activities materially damaging to the
Company, monetarily or otherwise (it being understood, however, that
neither conduct nor activities pursuant to the Executive's exercise of
her good faith business judgment nor unintentional physical damage to
any property of the Company by the Executive shall be a ground for
such a determination by the Company); or (C) if the Executive has
willfully and continuously failed to substantially perform her duties
hereunder (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for substantial
performance is delivered to the Executive that specifically identifies
the manner in which the Company believes that the Executive has not
substantially performed those duties, and the Executive has failed to
resume substantial performance of such duties on a continuous basis
within fourteen (14) days after receiving such demand. Termination
for cause shall be made only upon vote of not less than a majority of
the directors then in office, after reasonable notice to the Executive
and an opportunity for the Executive, together with counsel, to be
heard before a duly called meeting of the Board; or

(iv) the Executive's termination of her employment with the Company
for "good reason" upon reasonable notice to the Company. For purposes
of this Agreement, "good reason"
<PAGE> 3

shall exist if the Company materially fails to comply with any
of the provisions of this Agreement, other than isolated,
insubstantial or inadvertent failures not occurring in bad
faith and which are remedied by the Company promptly after
receipt of notice thereof given by the Executive.

3.2. Payments Upon Termination. If the Executive's employment is
terminated by the Company for cause or by the Executive for any reason other
than "good reason", the Company shall pay the Executive the Base Salary (as
hereinafter defined) through the effective date of termination at the rate in
effect at the time a notice of termination is given. The Company shall have no
further obligations to the Executive under this Agreement, subject to the
rights and benefits the Executive may have under employee benefits plans and
programs of the Company in existence as of the effective date of such
termination, if any, which shall be determined in accordance therewith. If the
Executive's employment is terminated by the Company for any reason other than
for cause or by the Executive for "good reason", the Company shall continue to
pay the Executive the Base Salary at the rate in effect at the time a notice of
termination is given, together with any applicable bonuses and rights and
benefits the Executive may have under employee benefits plans and programs of
the Company in existence as of the date of such termination for six months
after such termination (such period, as applicable, the "Extended Period");
provided, however, such payments of Base Salary and provision of bonuses,
rights and benefits hereunder during the Extended Period shall not be due and
payable by the Company to the Executive if the Executive (i) shall violate the
provisions of Section 5 hereof; or (ii) during the Extended Period shall engage
in or render any services to or be employed by any Competing Business (as
hereinafter defined) in the Area (as hereinafter defined) in the capacity of
officer, managerial or executive employee, director, consultant or shareholder
(other than as the owner of less than one (1%) percent of the shares of a
publicly-owned corporation whose shares are traded on a national securities
exchange or in the NASDAQ National Market System).

SECTION 4. COMPENSATION.

4.1. Base Salary. For the Term of her employment hereunder, the
Executive shall be paid a salary (the "Base Salary") at the annual rate of One
Hundred Ten Thousand Dollars ($110,000), payable in equal installments in
accordance with the payroll payment practices from time to time adopted by the
Company, subject to required payroll withholding provisions. The Executive's
Base Salary shall be reviewed annually by the Board of Directors of the
Company, a committee thereof or the President, but shall in no event be reduced
to less than the Executive's initial Base Salary as provided above without the
consent of Employee.

3
<PAGE> 4

4.2. Incentive Bonuses. As additional compensation hereunder, the
Company may, in the sole discretion of the Board of Directors, pay the
Executive an annual bonus (the "Annual Bonus") for each fiscal year during the
term of the Executive's employment hereunder. Subject to the terms and
conditions of subsection 3.2 of this Agreement, if the Executive's employment
hereunder is terminated pursuant to the terms of this Agreement prior to the
end of a calendar year, the Executive's Annual Bonus with respect to that year
shall be prorated for such portion of that year as she was employed by the
Company. The Executive shall be eligible to receive an Annual Bonus of up to
twenty-five percent (25%) of the Executive's Base Salary if the Company
achieves the Company's budgeted operating income targeted in the applicable
annual business plan as approved by the Board of Directors. Such bonus shall
be due and payable solely in the discretion of the Board of Directors based
upon the Company's annual financial statements for the applicable bonus period.

4.3. Insurance.

(a) Life and Other Insurance. The Company shall provide
to the Executive such term life and group travel, accident,
accidental death and dismemberment insurance and long and
short term disability insurance, or their equivalents, as
is provided from time to time for other executive officers of
the Company of comparable stature and title. The Company shall
be entitled, at its sole option and expense, to arrange for and
keep in effect, during the term of the Executive's employment
hereunder, so long as she is insurable, key man insurance on
the Executive in an amount determined by the Board of
Directors, such policy or policies to name the Company or its
designee as the beneficiary under such policy or policies. The
Executive shall reasonably cooperate with the Company in
procuring such key man insurance as the Company shall elect to
purchase.

(b) Medical Insurance. During the Term of the
Executive's employment hereunder, the Company shall, at its
expense, provide or arrange for and keep in effect,
hospitalization, major medical and similar medical and health
insurance for the Executive and her family, to the same extent
as is provided from time to time for other executive officers
of the Company.

4.4. Vacation. The Executive shall be entitled to paid vacation
during each year of her employment hereunder in accordance with the Company's
vacation policy for executive employees.

4.5. Retirement Benefits. During the Term of her employment
hereunder, the Executive shall have the same rights as other executive officers
of the Company of comparable statute and title to participate in all
profit-sharing, pension and other retirement plans as are now, or as may
hereafter be, established by the Company.

4
<PAGE> 5

4.6. Out-of-Pocket Expenses. The Company shall reimburse the
Executive for all reasonable out-of-pocket expenses incurred by the Executive
in connection with the performance of her duties hereunder upon presentation to
the Company of appropriate vouchers therefor.

4.7. Automobile Expense Allowance. During the term of the Executive's
employment hereunder, the Company shall pay to the Executive an automobile
allowance of $600.00 per month, plus mileage in accordance with the Company's
mileage reimbursement policy, as in effect from time to time.

SECTION 5. RESTRICTIVE COVENANTS.

(a) The Executive acknowledges that (i) the covenants herein are
necessary to protect the goodwill and other value of the Company;
(iii) at the Effective Time the Company will have bargained and paid
adequate and sufficient consideration for the restrictive covenants
herein; and (iv) the Company is employing the Executive in reliance on
the covenants of this Section 5 in view of the unique and essential
nature of the services the Executive is to perform hereunder and the
irreparable injury that would befall the Company should the Executive
breach such covenants.

(b) The Executive further acknowledges that her services hereunder
are of a special, unique and extraordinary character and that her
position with the Company will place her in a position of confidence
and trust with the customers and employees of the Company and allow
her access to Confidential Information (as hereinafter defined).

(e) Having acknowledged the foregoing, the Executive covenants and
agrees with the Company that she will not, directly or indirectly:

(i) while she is in the Company's employ and after the
termination of her employment for any reason whatsoever
(whether voluntarily or involuntarily), disclose, use or
otherwise exploit, except as may be necessary in the
performance of her duties hereunder, any Confidential
Information disclosed to the Executive

5
<PAGE> 6

or of which the Executive became aware by reason of her
employment with the Company;

(ii) while she is in the Company's employ and through the
period ending eighteen (18) months after the termination of
her employment for any reason whatsoever (whether voluntarily
or involuntarily), employ or attempt to employ or assist
anyone else in employing in any Competing Business in the Area
any managerial or executive employee of the Company or the
Division (whether or not such employment is full time or is
pursuant to a written contract with the Company); and

(iii) while she is in the Company's employ and through the
period ending twelve (12) months after the termination of her
employment (whether voluntarily or involuntarily) for any
reason whatsoever, except for (a) termination by the Company
without cause or (b) termination by the Executive for "good
reason" or (c) expiration of the Term without renewal pursuant
to Section 3.1 hereof by virtue of notice of nonrenewal given
by the Company to the Executive pursuant to Section 3.1
hereof, engage in or render any services to or be employed by
any Competing Business in the Area in the capacity of officer,
managerial or executive employee, director, management or
strategic consultant or shareholder (other than as the owner
of less than one (1%) percent of the shares of a
publicly-owned corporation whose shares are traded on a
national securities exchange or on the NASDAQ National Market
System).

(f) The Executive agrees that upon the termination of her
employment for any reason whatsoever (whether voluntarily or
involuntarily), she will not take with her or retain without written
authorization, and she will promptly deliver to the Company, originals
and all copies of all papers, files or other documents containing any
Confidential Information and all other property belonging to the
Company and in her possession or under her control.

6
<PAGE> 7

and marked clearly and conspicuously as confidential information.
Confidential Information shall not include any data or information
that has been voluntarily disclosed to the public by the Company
(except where such public disclosure has been made without
authorization by the Company), or that has been independently
developed and disclosed by others, or that otherwise enters the public
domain through lawful means. Confidential Information includes, but
is not limited to, information relating to the Company's financial
affairs, processes, services, customers, executive officers or
employees, compensation, research, development, purchasing, accounting
or marketing.

SECTION 6. MISCELLANEOUS.

6.1. Binding Effect. This Agreement shall inure to the benefit of and
shall be binding upon the Executive, her executor, administrator, heirs,
personal representatives, successors and assigns, and upon the Company and its
successors and assigns; provided, however, that the obligations and duties of
the Executive may not be assigned or delegated,

6.4. Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

7
<PAGE> 8

(a) If to the Executive, addressed to:

G. Faye Godwin
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Facsimile: (414) 789-9592

(b) If to the Company, addressed to:

Alternative Living Services, Inc.
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: President
Facsimile: (414) 789-9592

with a copy to:

Alternative Living Services, Inc.
184 Shuman Boulevard
Suite 200
Naperville, Illinois 60563
Attention: Chairman
Facsimile: (708) 347-4020

and a copy to:

Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: 404/525-2224

or at such other place or places or to such other person or persons as shall be
designated in writing by the parties hereto in the manner provided above for
notices.

8
<PAGE> 9

6.6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

6.8. Entire Agreement. This Agreement is intended by the parties
hereto to be the final expression of their agreement and is the complete and
exclusive statement thereof notwithstanding any representation or statements to
the contrary heretofore made. This Agreement replaces in its respective
entirety any and all prior agreements, arrangements, understandings or
commitments between the Company and/or any of its predecessors and affiliates
and the Executive relating to the Executive's employment or other services
rendered to or for the benefit of the Company and/or any of its predecessors
and affiliates. This Agreement may be modified only by written instrument
signed by each of the parties hereto.

COMPANY: ALTERNATIVE LIVING SERVICES, INC.

By:
-------------------------------
Its:
------------------------------

EXECUTIVE:
----------------------------------
G. FAYE GODWIN

<PAGE> 1
EXHIBIT 10.12

EMPLOYMENT AGREEMENT
(as amended as of May 22, 1996)

THIS AGREEMENT ("Agreement") is made and entered into this 25th day of
January, 1996, by and between DOUGLAS A. HENNIG, a resident of the State of
Wisconsin ("Employee"), and ALTERNATIVE LIVING SERVICES, INC., a Delaware
corporation ("Company").

W I T N E S S E T H:

WHEREAS, the Company has agreed to acquire all of the outstanding
common stock of Heartland Retirement Services, Inc. ("HRS") from Heartland
Development Corporation ("HDC") and Employee pursuant to that certain Stock
Purchase Agreement (the "Purchase Agreement") dated as of January 25, 1996
between the Company, Employee, HDC and HRS (the "Acquisition");

WHEREAS, Employee has been an employee, officer, director and
shareholder of HRS;

WHEREAS, the Company and Employee each desire to enter into this
Agreement pursuant to which Employee will be employed by the Company effective
upon the consummation and closing of the Acquisition on the terms and
conditions hereinafter set forth, and to make certain other agreements; and

WHEREAS, the covenants and agreements of the Company and Employee
herein are made as an inducement to the Employee and the Company respectively,
in connection with the Acquisition,

NOW THEREFORE, in consideration of the premises and of the promises
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, do hereby agree as follows:

SECTION 1. Employment; Effective Date.

Subject to the terms and conditions hereof, the Company hereby agrees
to employ Employee, and Employee hereby accepts such employment, commencing
immediately following the "Closing" (as defined in the Purchase Agreement) of
the Acquisition pursuant to the terms of the Purchase Agreement (such time
referred to herein as the "Effective Time"); provided, however, this Agreement
shall terminate and the employment contemplated hereby shall not commence if
the Effective Time does not occur on or before January 31, 1996.

SECTION 2. Position.

2.1 Title. Employee shall serve as an executive officer of the
Company with the title of Senior Vice President and, as such, Employee shall
report directly to the President of the Company.

<PAGE> 2

Employee also consents to serve, without additional compensation, if elected,
as a director and officer of directly and indirectly owned subsidiaries
(wholly-owned and partially owned) of the Company.

2.2 Location. Employee's location of employment shall be at the
offices of HRS in Madison, Wisconsin or at the Company's principal executive
offices in Brookfield, Wisconsin, as specified from time to time by the
Company, and the Company may not transfer Employee to any other location
without the Employee's prior written consent unless such transfer results from
the permanent relocation of either the Division's (hereinafter defined) or the
Company's principal executive offices and the actual relocation thereto of
other employees of the Division or the Company, respectively. In the event of
a relocation of Employee, the Company will pay Employee's reasonable and
approved moving expenses up to $10,000.

2.3 Responsibilities. Employee's responsibilities shall be as
directed by the President and the Board of Directors of the Company, and shall
include, among other things, assigned general management responsibilities for
the WovenHearts Division of the Company (the "Division"). Employee shall
devote his full business time and best efforts to rendering services on behalf
of the Company.

SECTION 3. Term.

3.1 Term. The employment of Employee hereunder shall
commence on the Effective Time and shall continue until the earlier of (a) the
first anniversary date of the Effective Time (the "Original Term"), or (b) the
occurrence of any of the following events:

(i) the death or disability of Employee (disability meaning a physical
illness or incapacity that prevents Employee totally and permanently from
performing all of the substantial and material duties of his then current
position of employment with the Company; provided, however, that a disability
shall be considered to exist only if Employee is prevented for a period of
three (3) consecutive months following the date such condition commenced and at
the end of such three (3) month period he remained so prevented, or if, prior
to the expiration of such three (3) month period, Employee's attending
physician provides the Company with a written prognosis that the illness,
injury or other incapacity that results in Employee's current disabled
condition may be reasonably expected to prevent Employee from performing all of
the substantial and material duties of his then current position of employment
with the Company for a period of at least six (6) consecutive months);

2
<PAGE> 3

(ii) the mutual written agreement of the parties hereto to
terminate Employee's employment hereunder;

(iii) the Company's termination of Employee's employment
hereunder for "cause." For the purposes of this Agreement, "cause" for
termination of Employee's employment shall exist (x) if Employee is convicted
of, or pleads guilty to, any act of fraud, misappropriation or embezzlement, or
any felony, (y) if Employee has engaged in conduct or activities materially
damaging to the Company, monetarily or otherwise (it being understood, however,
that neither conduct nor activities pursuant to Employee's exercise of his good
faith business judgment nor unintentional physical damage to any property of
the Company by Employee shall be a ground for such a determination by the
Company) or (z) if Employee has willfully and continuously failed to
substantially perform his duties hereunder (other than any such failure
resulting from incapacity due to physical or mental illness), after a written
demand for substantial performance is delivered to Employee that specifically
identifies the manner in which the Company believes that Employee has not
substantially performed those duties, and Employee has failed to resume
substantial performance of such duties on a continuous basis within fourteen
(14) days after receiving such demand. Termination for cause shall be made
only upon vote of not less than a majority of the directors of the Company then
in office, after reasonable notice to Employee and an opportunity for Employee
to be heard before a meeting of the Board held upon reasonable notice to all
directors; or

(iv) the Employee's termination of his employment with the Company
for "good reason" upon reasonable notice to the Company. For purposes of this
Agreement, "good reason" shall exist if the Company materially fails to comply
with any of the provisions of this Agreement, other than isolated,
insubstantial or inadvertent failures not occurring in bad faith and which are
remedied by the Company promptly after receipt of notice thereof given by the
Employee.

The failure to set forth any fact or circumstance in a notice of
termination hereunder shall not constitute a waiver of the right to assert such
fact or circumstance by the party giving notice. The Original Term hereof, and
any renewal term, shall be automatically renewed for an additional one (1) year
period unless either Employee or the Company gives notice to the other party
that it does not wish to renew this Agreement at least thirty (30) days prior
to the expiration of such Original Term or renewal term, as the case may be.

3.2 Payments Upon Termination. If Employee's employment is
terminated by the Company for cause or by Employee for any reason other than
"good reason", the Company shall pay Employee the Base

3
<PAGE> 4

Salary (as hereinafter defined) through the effective date of termination at
the rate in effect at the time notice of termination is given, and the Company
shall have no further obligations to Employee under this Agreement subject to
the rights and benefits the Employee may have under employee benefits plans and
programs of the Company in existence as of the effective date of such
termination, if any, which shall be determined in accordance therewith. If
Employee's employment is terminated by the Company for any reason other than
for cause or by Employee for "good reason", the Company shall continue to pay
Employee the Base Salary at the rate in effect at the time notice of
termination is given, together with any applicable bonuses and rights and
benefits the Employee may have under employee benefits plans and programs of
the Company in existence as of the date of such termination, all for the six
(6) month period following such termination (the "Extended Period"); provided,
however, such payments of Base Salary and provision of bonuses, rights and
benefits hereunder during the Extended Period shall not be due and payable by
the Company to Employee if Employee (i) shall violate the provisions of Section
5 hereof or (ii) during the Extended Period shall engage in or render any
services to or be employed by any Competing Business (hereinafter defined) in
the Area (hereinafter defined) in the capacity of officer, managerial or
executive employee, director, consultant or shareholder (other than as the
owner of less than one (1%) percent of the shares of a publicly-owned
corporation whose shares are traded on a national securities exchange or in the
NASDAQ National Market System).

SECTION 4. Compensation.

4.1 Base Salary. For the Original Term of his employment
hereunder, Employee shall be paid a salary at the annual rate of ONE HUNDRED
THIRTY THOUSAND Dollars ($130,000.00), payable in equal installments in
accordance with the payroll payment practices from time to time adopted by the
Company, subject to required payroll withholding provisions. Thereafter, the
salary to be paid to the Employee shall be determined in the discretion of the
Board of Directors, but shall be no less than $130,000. The annual salary to
be paid to Employee under this Agreement is hereinafter referred to as the
"Base Salary."

4
<PAGE> 5

of the Base Salary if the Division achieves the financial plan for the Division
targeted in the applicable annual business plan as approved by the Board of
Directors. Such bonus shall be due and payable and deemed earned upon the
confirmation of its achievement by the Company based upon the Division's annual
financial statements for the applicable bonus period.

4.3 Stock Options. The Board of Directors of the Company shall grant
to Employee, effective as of the Effective Time, options to purchase 5.74
shares of common stock, without par value, of the Company (the "Common Stock")
pursuant to the terms of the 1995 Incentive Compensation Plan of the Company,
which options shall vest and first become exercisable at the rate of 25% per
year on the first, second, third and fourth anniversary of the date of grant,
such that all of these options shall have vested and become exercisable by the
fourth anniversary of the date of grant. The exercise price for these options
shall be $13,077.60 per share. Such options that have not previously been
exercised shall no longer be exercisable as of and following the tenth (10th)
anniversary of the date of grant of such options.

4.4 Insurance.

(a) Life and Other Insurance. The Company shall provide
to Employee such term life and group travel, accident, accidental death and
dismemberment insurance and long and short term disability insurance, or their
equivalents, as is provided from time to time for senior executives of the
Company. The Company shall be entitled, at its sole option and expense, to
arrange for and keep in effect, during the term of Employee's employment
hereunder, so long as he is insurable, key man insurance on Employee in an
amount determined by the Board of Directors, such policy or policies to name
the Company or its designee as the beneficiary. Employee shall reasonably
cooperate with the Company in procuring such key man insurance as the Company
shall elect to purchase.

4.5 Vacation. Employee shall be entitled to three (3) weeks paid
vacation during each year of his employment hereunder.

4.6 Retirement Benefits. During the term of his employment
hereunder, Employee shall have the same rights as senior executive

5
<PAGE> 6

officers of the Company to participate in all profit-sharing, pension and other
retirement plans as are now, or as may hereafter be, established by the
Company.

4.7 Out-of-Pocket Expenses. The Company shall reimburse Employee
for all reasonable out-of-pocket expenses incurred by Employee in connection
with the performance of his duties hereunder upon presentation of appropriate
vouchers therefor.

4.8 Automobile Expense Allowance. During the term of Employee's
employment hereunder, the Company shall pay to Employee an automobile allowance
of $450.00 per month, plus mileage in accordance with the Company's mileage
reimbursement policy, as in effect from time to time.

4.9 Loan to Employee. Upon request by the Employee at any time or
times during the Original Term, the Company shall loan to Employee up to
$100,000.00, such loan to be repayable in full on the third anniversary of the
date of the loan ("Repayment Date"), with interest accruing on such loan at the
rate of 6.0% per annum, with accrued and unpaid interest due and payable on
each anniversary of the date of the loan and all then accrued and unpaid
interest due and payable on the Repayment Date. Employee may repay the loan in
whole or in part prior to the Repayment Date without penalty. In the event the
Employee's employment is terminated by the Company for "cause" (as defined in
Section 3.1 hereof) or by the Employee otherwise than for "good reason" (as
defined in Section 3.1 hereof), all amounts remaining outstanding on such loan
shall be due and payable on the effective date of such termination. The
Company shall be entitled to set-off any amounts due the Employee (including,
without limitation, any amounts due pursuant to Section 3.2 hereof) against any
remaining amounts due to the Company under such loan. The repayment of such
loan shall be secured by a pledge by Employee of all Common Stock held by
Employee as of the date of such loan (excluding the Options Shares as
hereinafter defined. The Employee agrees to execute a promissory note and
stock pledge agreement in such form as the Company may reasonably request to
evidence such loan and pledge contemplated hereby. If this Agreement is
extended beyond the Original Term, the Company shall allow Employee to borrow
an additional $100,000 upon the same terms as are set forth in this Section 4.9
upon request of Employee during the twelve months following the end of the
Original Term provided that Employee is an employee of the Company at the time
of such request; provided, however, that such loan (and its terms) is subject
to the approval by such loan (and its terms) by the Company's Board of
Directors.

4.10 Legal Fees and Expenses. The Company shall reimburse the
Employee the amount of his legal fees and expenses incurred in connection with
the preparation of this Agreement up to $2,000.

6
<PAGE> 7

SECTION 5. Restrictive Covenants.

(a) Employee acknowledges that (i) he is the owner of 4.5% of the
outstanding common stock of HRS to be sold to the Company pursuant to the
Purchase Agreement; (ii) the covenants herein are necessary to protect the
goodwill and other value of HRS for which the Company will pay substantial
consideration; (iii) at the Effective Time the Company will have separately
bargained and paid additional consideration for the restrictive covenants
herein; and (iv) the Company is acquiring HRS in reliance on the covenants of
this Section 5 in view of the unique and essential nature of the services
Employee is to perform hereunder and the irreparable injury that would befall
the Company should Employee breach such covenants.

(b) Employee further acknowledges that his services hereunder are
of a special, unique and extraordinary character and that his position with the
Company will place him in a position of confidence and trust with the customers
and employees of the Company and allow him access to Confidential Information
(as hereinafter defined).

(c) Employee further acknowledges that the type and periods of
restrictions imposed by the covenants in this Section 5 are fair and reasonable
and that such restrictions will not prevent Employee from earning a livelihood.

(d) Employee further acknowledges that (i) the Company is engaged
in the business of developing, owning, acquiring and operating specialty care
facilities for the treatment of individuals suffering from Alzheimer's disease
and assisted living facilities; (ii) the Company conducts its business activity
in and throughout the Area (as hereinafter defined); and (iii) Competing
Businesses (as hereinafter defined) are engaged in businesses like and similar
to the business of the Company.

(e) Having acknowledged the foregoing, Employee covenants and
agrees with the Company that he will not, directly or indirectly:

(i) while he is in the Company"s employ and through the
period ending eighteen (18) months after the termination of his
employment for any reason whatsoever, disclose or use or otherwise
exploit for the benefit of any Competing Business within the Area,
except as may be necessary in the performance of his duties hereunder,
any Confidential Information disclosed to Employee or of which
Employee became aware by reason of his employment with or ownership in
the Company or HRS;

7
<PAGE> 8

(ii) while he is in the Company's employ and through the
period ending eighteen (18) months after the termination of his
employment for any reason whatsoever (whether voluntarily or
involuntarily), solicit or divert or appropriate to any Competing
Business, directly or indirectly, on his own behalf or in the service
of or on behalf of any Competing Business, or attempt to solicit or
divert or appropriate to any such Competing Business, within the Area,
any person or entity who was a customer of the Company at any time
during the last twelve (12) months of Employee's employment hereunder
and with whom Employee had contact during the term of his employment;

(iii) while he is in the Company's employ and through the
period ending eighteen (18) months after the termination of his
employment for any reason whatsoever (whether voluntarily or
involuntarily), employ or attempt to employ or assist anyone else in
employing in any Competing Business in the Area any managerial or key
employee of the Company (whether or not such employment is full time
or is pursuant to a written contract with the Company); and

(iv) while he is in the Company's employ and through the
period ending eighteen (18) months after the termination of his
employment for any reason whatsoever (whether voluntarily or
involuntarily) except for termination by the Company without cause,
engage in or render any services to or be employed by any Competing
Business in the Area in the capacity of officer, managerial or
executive employee, director, management or strategic consultant or
shareholder (other than as the owner of less than one (1%) percent of
the shares of a publicly-owned corporation whose shares are traded on
a national securities exchange or on the NASDAQ National Market
System).

(f) Employee agrees that upon the termination of his employment
for any reason whatsoever (whether voluntarily or involuntarily) he will not
take with him or retain without written authorization, and he will promptly
deliver to the Company, originals and all copies of all papers, files or other
documents containing any Confidential Information and all other property
belonging to the Company and in his possession or under his control.

(g) For purposes of this Section 5, the term (a) "Area" means a
twenty-five (25) mile radius of (i) the city halls of Milwaukee, Wisconsin and
Madison, Wisconsin, or (ii) any assisted living or specialty care facility
owned, managed or operated by the Company at the time Employee's employment
hereunder is terminated; (b) "Competing Business" means the business of
developing, owning, acquiring or operating specialty assisted care facilities
for the

8
<PAGE> 9

treatment of individuals suffering from Alzheimer's disease or assisted living
facilities; and (c) "Confidential Information" means any and all data and
information relating to the business of the Company or HRS (whether or not
constituting a trade secret) that is, has been or will be disclosed to Employee
or of which Employee became or becomes aware as a consequence of or through his
relationship with the Company or HRS and that has value to the Company and is
not generally known by its competitors; provided, however, that no information
will be deemed confidential unless it is known to Employee to be confidential
information or has been reduced to writing and marked clearly and conspicuously
as confidential information. Confidential Information shall not include any
data or information that has been voluntarily disclosed to the public by the
Company (except where such public disclosure has been made without
authorization by the Company), or that has been independently developed and
disclosed by others, or that otherwise enters the public domain through lawful
means. Confidential Information includes, but is not limited to, information
relating to the Company's financial affairs, processes, services, customers,
employees or employees, compensation, research, development, purchasing,
accounting or marketing.

(h) Employee acknowledges that irreparable loss and injury would
result to the Company upon the breach of any of the covenants contained in this
Section 5 and that damages arising out of such breach would be difficult to
ascertain. Employee hereby agrees that, in addition to all other remedies
provided at law or at equity, the Company may petition and obtain from a court
of law or equity both temporary and permanent injunctive relief to prevent a
breach by Employee of any covenant contained in this Section 5. The parties
hereto agree that all references to the Company and HRS in this Section 5 shall
include, unless the context otherwise requires, all subsidiaries of the Company
and HRS, respectively.

SECTION 6. Purchase of Common Stock.

6.1 Purchase at Effective Time. At the Effective Time, Employee
shall purchase from the Company, and the Company shall sell and issue to the
Employee, 23.62 shares of Common Stock (the "Employee Shares") at a per share
price of $10,531.25 (the "Share Price"), resulting in an aggregate purchase
price of $258,748.12 (the "Cash Amount"). The purchase and sale of the
Employee Shares shall be consummated on the date of the Effective Time at the
executive offices of the Company in Brookfield, Wisconsin, or at such other
time and place as the parties shall mutually determine (the "Share Closing").
At the Share Closing the Employee shall deliver to the Company the Cash Amount
in cash or same day funds in a manner acceptable to the Company and the Company
shall issue and deliver to Employee share certificates for the Employee Shares.
In the event the Company shall issue options to purchase Common Stock

9
<PAGE> 10

to William G. Petty, Jr. and John W. Kneen at any time within the first six
months of the Original Term and such options have a per share exercise price
(the "Petty/Kneen Price") that is less than the Share Price, the Company shall
issue additional shares of Common Stock (the "Extra Shares") to Employee for no
additional consideration so that the Employee will have a per share cost basis
in the Employee Shares and Extra Shares that is equal to the Petty/Kneen Price.

6.2 Repurchase Right of Company. Each of the Employee Shares
shall be non-transferable by Employee and shall be subject to the Company's
right to repurchase such shares in the manner described in this Section 6.2
(the "Repurchase Right") until such time as the first to occur of either (i)
such Employee Share becomes a "Vested Employee Share" as defined herein or (ii)
the Company shall have failed to exercise its Repurchase Right as to such
Employee Share within 180 days following the termination of employment of
Employee by the Company (the "Repurchase Period"). Pursuant to the Repurchase
Right, the Company shall be entitled to repurchase from Employee, and Employee
shall be obligated to sell to the Company, all Employee Shares that are not
then Vested Employee Shares at the price paid therefor to the Company by
Employee pursuant to Section 6.1 hereof, which Repurchase Right shall be
elected and exercised by the Company by giving notice thereof to Employee at
any time during the Repurchase Period (the "Repurchase Notice"). The Employee
Shares shall become "Vested Employee Shares" by virtue of the continuous
employment of Employee by the Company during the three year period following
the Effective Time, with 50% of the Employee Shares becoming Vested Employee
Shares on the first anniversary of the Employee's employment by the Company,
30% of the Employee Shares becoming Vested Employee Shares on the second
anniversary of the Employee's employment by the Company and 20% of the Employee
Shares becoming Vested Employee Shares on the third anniversary of the
Employee's employment by the Company, provided that as of such anniversary
dates Employee shall continue to be in the employ of the Company. The Company
shall specify a date for the closing of such repurchase in its Repurchase
Notice, which date shall not be less than five days nor more than ten days
after the date of such Repurchase Notice (the "Repurchase Closing"). The
Repurchase Closing shall occur at the executive offices of the Company in
Brookfield, Wisconsin, or at such other time and place as the parties shall
mutually determine. At the Repurchase Closing, the Employee shall deliver to
the Company share certificates for the Employee Shares to be repurchased
pursuant to the exercise Repurchase Right (the "Repurchased Shares") in
consideration of the payment by the Company contemplated hereby (the
"Repurchase Proceeds"). In the event the Employee shall fail to deliver such
share certificates at such Repurchase Closing, the Company shall be entitled to
deposit such Repurchase Proceeds in escrow with any state or national bank with
offices located in

10
<PAGE> 11

Milwaukee, Wisconsin, and upon giving Employee notice of such payment into
escrow the Repurchased Shares shall be deemed repurchased and may be
transferred on the books of the Company from Employee to the Company. The
share certificates for the Employee Shares shall contain a legend making
reference to the prohibitions on transfer contained in this Section 6.2 as well
as the Repurchase Right.

6.3 Option to Purchase Additional Shares. Employee shall be
entitled to purchase an additional 22.94 shares of Common Stock (the "Option
Shares") at a per share price of $13,077.60 (the "Option Price") at any time
during the thirty (30) day period commencing on December 1, 1996 and ending on
December 30, 1996 (the "Exercise Period"). Employee's purchase right pursuant
to this Section 6.3 shall be exercised by notice thereof from Employee to the
Company accompanied by payment of the aggregate Option Price prior to the
expiration of the Exercise Period. By exercising his right to purchase Option
Shares hereunder, Employee shall be deemed to be affirming that the
representations of Section 6.4 hereof with respect to the Employee Shares are
then true and accurate with respect to the Option Shares. The Option Shares
shall not be subject to the restrictions and provisions of Section 6.2 hereof,
but shall be subject to the provisions of Sections 6.4 and 6.5 hereof.

6.4 Qualification of Employee. Employee represents and warrants
that he (i) is acquiring the Employee Shares for investment and for his own
account and not with a view to, or for resale in connection with, any
distribution thereof; (ii) understands and acknowledges that the Employee
Shares have not been registered under the Securities Act of 1933, as amended
(the "Securities Act") or any state securities laws by reason of certain
exemptions from the registration provisions thereof which depend upon, among
other thing, the bona fide nature of Employee's investment intent as expressed
herein; (iii) is able to bear the economic risk of investment in the Employee
Shares and has such knowledge and experience in financial and business matters
that he or it is capable of evaluating the risks and merits of such Employee
Shares; and (iv) understands and acknowledges that the Employee Shares will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act and that the certificate representing such Employee Shares will
bear a legend restricting transfer unless (a) the transfer is exempt from
registration requirements under the Securities Act and any applicable state
securities law and an opinion of counsel reasonably satisfactory to the Company
that such transfer is exempt therefrom if delivered to the Company or (b) the
transfer is made pursuant to an effective registration statement under the
Securities Act and any applicable state securities law.

11
<PAGE> 12

6.5 Stockholders' Agreement. Employee hereby agrees to be bound
by, and a party to, the Company's Amended Stockholders' Agreement dated as of
January 15, 1996, effective upon his purchase of the Employee Shares in
accordance herewith.

SECTION 7. Miscellaneous.

7.1 Binding Effect. This Agreement shall inure to the benefit of
and shall be binding upon Employee, his executor, administrator, heirs,
personal representatives and assigns, and upon the Company and its successors
and assigns; provided, however, that the obligations and duties of Employee may
not be assigned or delegated,

7.2 Governing Law. This Agreement shall be deemed to be made in, and
in all respects shall be interpreted, construed and governed by and in
accordance with, the laws of the State of Wisconsin, without giving effect to
principles of conflicts of laws.

7.3 Invalid Provisions. The parties herein hereby agree that the
agreements, provisions and covenants contained in this Agreement (including,
without limitation, the agreements, provisions and covenants contained in
Section 5 hereof) are severable and divisible, that none of such agreements,
provisions or covenants depends upon any other provision, agreement or covenant
for its enforceability, and that each such agreement, provision and covenant
constitutes an enforceable obligation between the Company and Employee.
Consequently, the parties hereto agree that neither the invalidity nor the
unenforceability of any agreement, provision or covenant of this Agreement
shall affect the other agreements, provisions or covenants hereof, and this
Agreement shall remain in full force and effect and be construed in all
respects as if such invalid or unenforceable agreement, provision or covenant
were omitted.

7.4 Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

7.5 Notices. All communications provided for hereunder shall be
in writing and shall be deemed to be given when delivered in person or
deposited in the United States mail, first class, registered mail, return
receipt requested, with proper postage prepaid, and

12
<PAGE> 13

<TABLE>
<S> <C>
(a) If to Employee, addressed to:

Douglas A. Hennig
309 West Washington Avenue
Suite 345
Madison, Wisconsin 53703
Facsimile: (608) 283-6951

(b) If to the Company, addressed to:

Alternative Living Services, Inc.
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: President
Facsimile: (414) 789-9592

with a copy to:

Alternative Living Services, Inc.
184 Shuman Boulevard
Suite 200
Naperville, Illinois 60563
Attention: Chairman
Facsimile: (708) 347-4020

and a copy to:

Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
</TABLE>

or at such other place or places or to such other person or persons as shall be
designated in writing by the parties hereto in the manner provided above for
notices.

7.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

7.7 Waiver of-Breach. The waiver by the Company or by the
Employee of a breach of any provision, agreement or covenant of this Agreement
by Employee or by the Company, respectively, shall not operate or be construed
as a waiver of any prior or subsequent breach of the same or any other
provision agreement or covenant.

13
<PAGE> 14

7.8 Entire Agreement. This Agreement is intended by the parties
hereto to be the final expression of their agreement and is the complete and
exclusive statement thereof notwithstanding any representation or statements to
the contrary heretofore made. This Agreement may be modified only by written
instrument signed by each of the parties hereto.

IN WITNESS WHEREOF, Employee has duly executed, and the Company has
caused this Agreement to be duly executed by its duly authorized officers, and
the parties have caused this Agreement to be delivered, all on the day and year
first written above.

/s/ Douglas A. Hennig
-----------------------------------
DOUGLAS A. HENNIG

ALTERNATE LIVING SERVICES, INC.

By: /s/ John W. Kneen
-------------------------------

Its:
Vice President
--------------------------

<PAGE> 1
EXHIBIT 10.13

EMPLOYMENT AGREEMENT

THIS AGREEMENT ("Agreement") is made and entered into this 14th day of
December, 1993, by and between WILLIAM LASKY, a resident of the State of
Wisconsin ("Employee"), and ALTERNATIVE LIVING SERVICES, INC., a Delaware
corporation ("Company").

W I T N E S S E T H:

WHEREAS, execution of this Agreement is a condition of closing under
that certain Acquisition Agreement dated December 14, 1993 (the "Acquisition
Agreement"), whereby the Company will acquire certain assets and rights from
Care Living Centers, Inc. ("CLC");

WHEREAS, Assisted Care, Inc., a Wisconsin corporation ("ACI"), has been
merged with and into CLC;

WHEREAS, prior to the date hereof, Alternative Living Services, a
Wisconsin general partnership ("ALS"), has conveyed certain assets relating to
its long-term healthcare business to CLC;

WHEREAS, the Company intends to carry on certain aspects of the business
previously carried on by the CLC, ACI and ALS;

WHEREAS, the Employee has been an employee, officer, director,
shareholder of CLC and ACI and a general partner of ALS;

WHEREAS, the convenants and agreements of Employee herein are made as
an inducement to the acquisition by the Company of certain assets and rights
from CLC; and

WHEREAS, the Company and Employee each desire to enter into this
Agreement, pursuant to which Employee will be employed by the Company on the
terms and conditions hereinafter set forth, and to make certain other
agreements,

NOW, THEREFORE, in consideration of the premises and of the promises
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, do hereby agree as follows:

SECTION 1. Employment.

Subject to the terms hereof, the Company hereby employs Employee, and
Employee hereby accepts such employment. Employee shall devote his full
business time and best efforts to rendering services on behalf of the Company.

<PAGE> 2

SECTION 2. Position.

2.1 Title. Employee shall serve as the senior executive officer
of the Company with the title of President and, as such, Employee shall report
directly to the Board of Directors of the Company. Employee also consents to
serve, without additional compensation, if elected, as a director of the
Company.

2.2 Location. Employee's location of employment shall be at the
Company's principal executive offices in Brookfield, Wisconsin, and the Company
may not transfer Employee to any other location without the Employee's prior
written consent unless such transfer results from the relocation of the
Company's principal executive offices and the actual relocation thereto of
other executive officers of the Company holding positions and responsibilities
comparable to those of Employee.

SECTION 3. Term.

3.1 Term. The employment of Employee hereunder shall commence on
the date hereof and shall continue until the earlier of (a) December 14, 1995
(the "Original Term"), or (b) the occurrence of any of the following events:

(i) the death or disability of Employee (disability meaning a
physical illness or incapacity that prevents Employee totally and
permanently from performing all of the substantial and material
duties of his then current position of employment with the Company;
provided, however, that a disability shall be considered to exist
only if Employee is prevented for a period of three (3) consecutive
months following the date such condition commenced and at the end
of such three (3) month period he remained so prevented, or if,
prior to the expiration of such three (3) month period, Employee's
attending physician provides the Company with a written prognosis
that the illness, injury or other incapacity that results in
Employee's current disabled condition may be reasonably expected to
prevent Employee from performing all of the substantial and
material duties of his then current position of employment with the
Company for a period of at least six (6) consecutive months);

(ii) the mutual written agreement of the parties hereto to
terminate Employee's employment hereunder;

2
<PAGE> 3
materially damaging to the Company, monetarily or otherwise (it
being understood, however, that neither conduct nor activities
pursuant to Employee's exercise of his good faith business judgment
nor unintentional physical damage to any property of the Company by
Employee shall be a ground for such a determination by the Company) or
(z) if Employee has willfully and continuously failed to substantially
perform his duties hereunder (other than any such failure resulting
from incapacity due to physical or mental illness), after a written
demand for substantial performance is delivered to Employee that
specifically indentifies the manner in which the Company believes that
Employee has not substantially performed those duties, and Employee
has failed to resume substantial performance of such duties on a
continuous basis within fourteen (14) days after receiving such
demand. Termination for cause shall be made only upon vote of not
less than a majority of the directors then in office, after reasonable
notice to Employee and an opportunity for Employee, together with
counsel, to be heard before a meeting of the Board held upon
reasonable notice to all directors; or

(iv) the Employee's termination of his employment with the
Company for "good reason" upon reasonable notice to the Company. For
purposes of this Agreement, "good reason" shall exist if the Company
materially fails to comply with any of the provisions of this
Agreement, other than isolated, insubstantial or inadvertent failures
not occurring in bad faith and which are remedied by the Company
promptly after receipt of notice thereof given by the Employee

The Original Term hereof, and any renewal term, shall be automatically
renewed for an additional one (1) year period unless either Employee or the
Company gives notice to the other party that it does not wish to renew this
Agreement at least ninety (90) days prior to the expiration of such Original
Term or renewal term, as the case may be.

3.2 Payments Upon Termination. If Employee's employment is terminated
by the Company for cause or by Employee for any reason other than "good
reason", the Company shall pay Employee the Base Salary (as hereinafter
defined) through the effective date of termination at the rate in effect at the
time notice of termination is given, and the Company shall have no further
obligations to Employee under this Agreement subject to the rights and benefits
the Employee may have under employee benefits plans and programs of the
Company in existence as of the effective date of such termination, if any,
which shall be determined in accordance therewith. If Employee's employment is
terminated by the Company for any reason other than for cause or by Employee
for "good reason", the Company shall continue to pay Employee the Base Salary
at the rate in effect at the time notice of termination is given, together with
any applicable bonuses and rights and benefits the

3
<PAGE> 4
Employee may have under employee benefits plans and programs of the Company in
existence as of the date of such termination, all for the balance of the
Original Term or any renewal term then in effect.

SECTION 4. Compensation.

4.1 Base Salary. For the first twelve (12) months of the term of his
employment hereunder, Employee shall be paid a salary at the annual rate of One
Hundred Fifteen Thousand Dollars ($115,000.00), payable in equal installments
in accordance with the payroll payment practices from time to time adopted by
the Company, subject to required payroll withholding provisions. Thereafter,
the salary to be paid to the Employee shall be determined in the discretion of
the Board of Directors; provided, however, that in no event after the first
twelve (12) months of the term of his employment hereunder shall Employee's
annual rate of salary be less than One Hundred Twenty Five Thousand Dollars
($125,000.00). (The annual salary to be paid to Employee under this Agreement
is hereinafter referred to as the "Base Salary".)

4.2 Incentive Bonuses. As additional compensation hereunder, the
Company may, in the discretion of the Board of Directors, pay Employee an
annual bonus (the "Annual Bonus") for each fiscal year during the term of
Employee's employment hereunder. If Employee's employment hereunder is
terminated pursuant to the terms of this Agreement prior to the end of a
calendar year, his Annual Bonus with respect to that year shall be prorated for
such portion of that year as he was employed by the Company. The Employee
shall be eligible to receive an annual bonus of up to $35,000 payable if the
Company's earnings before interest, taxes and depreciation are within 10% of
such earnings targeted in the applicable annual business plan as approved by
the Board of Directors and such bonus shall be due and payable upon the
submission and verification of the Company's annual financial statements.

4.3 Stock Options. During his employment hereunder, Employee shall be
eligible to participate in any stock option plan (and in any other similar
plans) adopted by the Company in accordance with the terms of such plan on a
basis comparable to participation by other executive officers of the Company
holding positions and responsibilities comparable to those of Employee and on a
basis comparable to participation by the executive officers of Evergreen
Healthcare, Inc. ("Evergreen") in its stock option plan holding positions and
responsibilities comparable to those of Employee. A stock option plan shall be
included in the 1994 annual business plan to be submitted to the Board of
Directors for its approval.

4
<PAGE> 5
4.4. Insurance.

(a) Life and Other Insurance. The Company shall, at its sole option
and expense, provide or arrange for and keep in effect, during the term of
Employee's employment hereunder, so long as he is insurable, term life
insurance in an amount determined by the Board of Directors. The Company shall
provide such group travel accident, accidental death and dismemberment
insurance and long and short term disability insurance, or their equivalents,
as is provided from time to time for executives of the Company holding
positions and responsibilities comparable to those of Employee and comparable
to that provided to the executive officers of Evergreen holding positions and
responsibilities comparable to those of Evergreen.

(b) Medical Insurance. During the term of Employee's employment
hereunder, the Company shall, at its expense, provide or arrange for and keep
in effect, hospitalization, major medical and similar medical and health
insurance for Employee and his family, to the same extent as is provided from
time to time for executives of the Company holding positions and
responsibilities comparable to those of Employee and to the same extent as is
provided from time to time to the executive officers of Evergreen
holding positions and responsibilities comparable to those of Employee.

4.5 Vacation. Employee shall be entitled to three (3) weeks' paid
vacation during each year of his employment hereunder.

4.6 Retirement Benefits. During the term of his employment
hereunder, Employee shall have the same right as executive officers of the
Company holding positions and responsibilities comparable to those of Employee
to participate in all profit-sharing, pension and other retirement plans as are
now, or as may hereafter be, established by the Company and such right shall be
comparable to that of an executive officer of Evergreen holding positions and
responsibilities comparable to those of Employee.

4.7 Out-of-Pocket Expenses. The Company shall reimburse Employee for
all reasonable out-of-pocket expenses incurred by Employee in connection with
the performance of his duties hereunder upon presentation of appropriate
vouchers therefor.

4.8 Automobile Expense Allowance. During the term of Employee's
employment hereunder, the Company shall pay to Employee an automobile allowance
of $600.00 per month.

SECTION 5. Restrictive Covenants.

(a) Employee acknowledges that (i) he is the owner of 45.9127% of
the outstanding common stock of CLC and was the owner

<PAGE> 6
of 75.7062% of the outstanding common stock of ACI and is a general partner of
ALS; (ii) the covenants herein are necessary to protect the goodwill and other
value of CLC for which the Company paid substantial consideration; (iii) the
Company separately bargained and paid additional consideration for the
restrictive covenants herein; and (iv) the Company acquired certain assets of
CLC in reliance on such covenants in view of the unique and essential nature of
the services Employee is to perform hereunder and the irreparable injury that
would befall the Company should Employee breach such covenants.

(b) Employee further acknowledges that his services hereunder are of
a special, unique and extraordinary character and that his position with the
Company places him in a position of confidence and trust with the customers and
employees of the Company and allows him access to Confidential Information (as
hereinafter defined).

(d) Employee further acknowledges that (i) the Company is engaged
in the business of developing, owning, acquiring and operating assisted living
facilities and specialty care facilities for the treatment of individuals
suffering from Alzheimer's disease; (ii) the Company conducts its business
activity in and throughout the Area (as hereinafter defined); and (iii)
Competing Businesses (as hereinafter defined) are engaged in businesses like
and similar to the business of the Company.

(e) Having acknowledged the foregoing, Employee covenants and agrees
with the Company that he will not, directly or indirectly:

(i) while he is in the Company's employ and through the period
ending eighteen (18) months after the termination of his employment for any
reason whatsoever (whether voluntarily or involuntarily), disclose or use
or otherwise exploit for his own benefit, or the benefit of any other
person, except as may be necessary in the performance of his duties
hereunder, any Confidential Information disclosed to Employee or of which
Employee became aware by reason of his employment with or ownership in the
Company or CLC;

<PAGE> 7

appropriate to any such Competing Business, within the Area, any person
or entity who was a customer of the Company at any time during the last
twelve (12) months of Employee's employment hereunder and with whom
Employee had contact during the term of his employment;

(iii) while he is in the Company's employ and through the
period ending eighteen (18) months after the termination of his
employment for any reason whatsoever (whether voluntarily or
involuntarily), employ or attempt to employ or assist anyone else in
employing in any Competing Business in the Area any managerial or key
employee of the Company (whether or not such employment is full time or
is pursuant to a written contract with the Company); and

(iv) while he is in the Company's employ and through the
period ending eighteen (18) months after the termination of his
employment for any reason whatsoever (whether voluntarily or
involuntarily) except for termination by the Company without cause,
engage in or render any services to or be employed by any Competing
Business in the Area in the capacity of officer, managerial or
executive employee, director, consultant or shareholder (other than as
the owner of less than one (1%) percent of the shares of a
publicly-owned corporation whose shares are traded on a national
securities exchange or in the over-the-counter market).

(f) Employee agrees that upon the termination of his
employment for any reason whatsoever (whether voluntarily or involuntarily) he
will not take with him or retain without written authorization, and he will
promptly deliver to the Company, originals and all copies of all papers, files
or other documents containing any Confidential Information and all other
property belonging to the Company and in his possession or under his control.

(g) For purposes of this Section 5, the term (a) "Area" means
a one hundred (100) mile radius of (i) the city hall of Milwaukee, Wisconsin
and Madison, Wisconsin, or (ii) any assisted care facility owned, managed or
operated by the Company at the time Employee's employment hereunder is
terminated; (b) "Competing Business" means the business of developing, owning,
acquiring or operating living facilities or specialty assisted care facilities
for the treatment of individuals suffering from Alzheimer's disease; and (c)
"Confidential Information" means any and all data and information relating to
the business of the Company or CLC (whether or not constituting a trade secret)
that is, has been or will be disclosed to Employee or of which Employee became
or becomes aware as a consequence of or through his relationship with the
Company or CLC and that has value to the Company and is not generally known by
its competitors; provided, however, that no

<PAGE> 8

information will be deemed confidential unless it has been reduced to writing
and marked clearly and conspicuously as confidential information. Confidential
Information shall not include any data or information that has been voluntarily
disclosed to the public by the Company (except where such public disclosure has
been made without authorization by the Company), or that has been independently
developed and disclosed by others, or that otherwise enters the public domain
through lawful means. Confidential Information includes, but is not limited
to, information relating to the Company's financial affairs, processes,
services, customers, employees or employees' compensation, research,
development, purchasing, accounting or marketing.

SECTION 6. Miscellaneous.

6.1 Binding Effect. This Agreement shall inure to the benefit of
and shall be binding upon Employee, his executor, administrator, heirs,
personal representatives and assigns, and upon the Company and its successors
and assigns; provided, however, that the obligations and duties of Employee may
not be assigned or delegated.

6.2 Governing Law. This Agreement shall be deemed to be made in,
and in all respects shall be interpreted, construed and governed by and in
accordance with, the laws of the State of Wisconsin, without giving effect to
principles of conflicts of laws.

6.3 Invalid Provisions. The parties herein hereby agree that the
agreements, provisions and covenants contained in this Agreement (including,
without limitation, the agreements, provisions and covenants contained in
Section 5 hereof) are severable and divisible, that none of such agreements,
provisions or covenants depends upon any other provision, agreement or covenant
for its enforceability, and that each such agreement, provision and covenant
constitutes an enforceable obligation between the Company and Employee.
Consequently, the parties hereto agree that neither the invalidity nor the
unenforceability of any agreement, provision or covenant of this Agreement
shall affect the other agreements, provisions or covenants hereof, and this
Agreement shall remain in full force and effect and be construed in all
respects as if such

8
<PAGE> 9

invalid or unenforceable agreement, provision or covenant were omitted.

6.4 Headings. The section and paragraph headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

6.5 Notices. All communications provided for hereunder shall be in
writing and shall be deemed to be given when delivered in person or deposited
in the United States mail, first class, registered mail, return receipt
requested, with proper postage prepaid, and

(a) If to Employee, addressed to:

William Lasky
245 South Executive Drive, Suite 100
Brookfield, Wisconsin 53005

(b) If to the Company, addressed to:

William G. Petty, Jr.
c/o Evergreen Healthcare, Inc.
184 Shuman Blvd.
Naperville, IL 60563

cc: Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Steven E. Fox, Esq.

or at such other place or places or to such other person or persons as shall be
designated in writing by the parties hereto in the manner provided above for
notices.

6.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.

6.7 Waiver of Breach. The waiver by the Company of a breach of any
provision, agreement or covenant of this Agreement by Employee shall not
operate or be construed as a waiver of any prior or subsequent breach of the
same or any other provision, agreement or covenant by Employee.

6.8 Entire Agreement. This Agreement is intended by the parties
hereto to be the final expression of their agreement and is the complete and
exclusive statement thereof notwithstanding any

<PAGE> 10

representation or statements to the contrary heretofore made. This Agreement
may be modified only by written instrument signed by each of the parties
hereto.

IN WITNESS WHEREOF, Employee has set his hand and seal, and the Company
has caused this Agreement to be duly executed by its duly authorized officers
and has caused its proper corporate seal to be affixed hereto, and the parties
have caused this Agreement to be delivered, all on the day and year first
written above.

(SEAL)
--------------------------
WILLIAM LASKY

ALTERNATIVE LIVING SERVICES, INC.

By: /s/ William Lasky
-----------------------------

Its:
-------------------------

[CORPORATE SEAL]

Attest:
-------------------------

10
<PAGE> 11

representation or statements to the contrary heretofore made. This Agreement
may be modified only by written instrument signed by each of the parties
hereto.

/s/ William Lasky (SEAL)
--------------------------
WILLIAM LASKY

ALTERNATIVE LIVING SERVICES, INC.

By:
-----------------------------

Its:
-------------------------

[CORPORATE SEAL]

Attest:
-------------------------

10
<PAGE> 12

AMENDMENT TO EMPLOYMENT AGREEMENT

W I T N E S S E T H:

WHEREAS, Employee and the Company are parties to that certain
Employment Agreement dated December 14, 1993 (the "Agreement");

WHEREAS, Employee and the Company wish to modify and amend the
Agreement in the manner set forth herein.

NOW, THEREFORE, in consideration of the premises and the promises and
agreements hereinafter set forth, the parties hereto, intending to be legally
bound, do hereby agree as follows:

1. Section 2.1 of the Agreement shall be amended and restated in
its entirety as follows:

2. The "Original Term", as defined in Section 3.1 of the
Agreement shall be changed from December 14, 1995 to May 31, 1997.

3. Section 3.2 of the Agreement shall be amended and restated in
its entirety as follows:

<PAGE> 13

4. The "Base Salary," as defined in Section 4.1 of the Agreement,
shall be not less than $150,000.

5. Section 4.2 of the Agreement shall be amended and restated in
its entirety as follows:

6. Section 4.3 of the Agreement shall be amended and restated in
its entirety as follows:

<PAGE> 14

7. Section 4.4(a) of the Agreement shall be amended and restated
in its entirety as follows:

8. Section 4.4(b) of the Agreement shall be amended and restated
in its entirety as follows:

9. Section 4.6 of the Agreement shall be amended and restated in
its entirety as follows:

4.6 Retirement Benefits. During the term of his
employment hereunder, Employee shall have the same rights as
senior executive officers of the Company to participate in all
profit-sharing, pension and

<PAGE> 15

other retirement plans as are now, or as may hereafter be,
established by the Company.

10. The following Section 4.9 shall be added to the Agreement:

11. Section 6.5 of the Agreement shall be amended and restated in
its entirety as follows:

(a) If to Employee, addressed to:

William F. Lasky
450 N. Sunnyslope Road, Suite 300
Brookfield, Wisconsin 53005

(b) If to the Company, addressed to:

William G. Petty, Jr.
c/o Alternative Living Services, Inc.
184 Shuman Boulevard, Suite 200
Naperville, Illinois 60563

<PAGE> 16

cc: Rogers & Hardin
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.

or at such other place or places or to such other person or
persons as shall be designated in writing by the parties
hereto in the manner provided above for notices.

12. The amendments to the Agreement set forth herein shall be
effective as of June 28, 1995. Except as modified by this Amendment, the
Agreement shall remain in full force and effect.

13. This Amendment may be executed by facsimile and in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

/s/ William F. Lasky
---------------------------------------
WILLIAM F. LASKY

ALTERNATIVE LIVING SERVICES, INC.

By:/s/ William G. Petty, Jr.
------------------------------------
Its: Chairman, CEO
----------------------------------

<PAGE> 1

EXHIBIT 10.14

RECAPITALIZATION AGREEMENT

THIS RECAPITALIZATION AGREEMENT (the "Agreement") is made and entered
into as of this 23rd day of May, 1995, between and among ALTERNATIVE LIVING
SERVICES, INC., a Delaware corporation (the "Corporation"), EVERGREEN
HEALTHCARE, INC., a Georgia corporation ("Evergreen"), CARE LIVING CENTERS,
INC., a Wisconsin corporation ("CLC"), WILLIAM F. LASKY, an individual resident
of the State of Wisconsin ("Lasky"), DAVID BURR, an individual resident of the
State of Wisconsin ("Burr"), KRAIG E. LORENZEN, an individual resident of the
State of Wisconsin ("Lorenzen") and ALTERNATIVE LIVING INVESTORS, L.L.C., a
Delaware limited liability company ("Investor L.L.C.").

W I T N E S S E T H:

WHEREAS, Evergreen, CLC and Lorenzen are the owners of all of the
Corporation's outstanding shares of common stock, without par value (the
"Common Stock");

WHEREAS, the Investor L.L.C. desires to make an equity investment in
the Corporation in the amount of $20 million;

WHEREAS, CLC is a corporation wholly owned by Lasky and Burr, with
Lasky owning approximately 78 percent of the outstanding capital stock of CLC
and Burr owning approximately 22 percent of the outstanding capital stock of
CLC;

WHEREAS, on September 21, 1994, the Board of Directors of the
Corporation made a capital call pursuant to Section 9.1 of that certain
Alternative Living Services, Inc. Stockholders' Agreement between and among the
Corporation, Evergreen, CLC and Lasky dated as of December 14, 1993 (the "ALS
Stockholders' Agreement"), pursuant to which the shareholders of the
Corporation were given the option to acquire 940 shares of Common Stock at a
purchase price of $5,294.00 per share, such shares being offered to the
Corporation's shareholders in proportion to their stock ownership in the
Corporation (the "Capital Call");

WHEREAS, Evergreen has advanced to the Corporation $2,677,342 in
payment of its pro rata portion of the shares to be issued pursuant to the
Capital Call;

WHEREAS, Evergreen has advanced an additional $4,046,658 (the
"Evergreen Advances") to the Corporation to fund growth and working capital
requirements of the Corporation;

WHEREAS, the Corporation desires to purchase from Lorenzen, and
Lorenzen desires to sell to the Corporation, the 210 shares of

<PAGE> 2

Common Stock held by him pursuant to the terms and conditions hereof;

WHEREAS, the Corporation desires to prepay that certain Installment
Promissory Note dated December 14, 1993 in the original amount of $127,386.35
payable to the order of Lorenzen (the "Lorenzen Note");

WHEREAS, the parties hereto desire to set forth their understandings
and agreements in regard to the purchases and sales of shares of Common Stock
contemplated hereby and their respective rights and obligations regarding the
Corporation, to establish certain restrictions on the transferability of the
Common Stock, to set forth the terms and conditions of the sale and redemption
of such Common Stock and to provide for other related matters.

NOW, THEREFORE, for and in consideration of the premises and the
mutual promises, covenants and agreements herein contained, the parties hereto
agree as follows:

ARTICLE 1

RECAPITALIZATION

SECTION 1.1 RECAPITALIZATION TRANSACTIONS. Each of the several
transactions, actions, deliveries and matters that are to occur or transpire at
Closing (hereinafter defined) pursuant to this ARTICLE I (collectively,
"ARTICLE I Transactions") shall be subject to the satisfaction of the
conditions precedent set forth in Section 2.3 hereof (or waiver thereof by the
party or parties for whose benefit such conditions are set forth), shall not be
severable but shall be dependent upon the occurrence of the other ARTICLE I
Transactions at Closing and shall be deemed to have occurred and been
consummated simultaneously at Closing. By their execution of a counterpart
hereof, the parties hereto shall only be approving, consenting to, authorizing
and agreeing to the consummation of all of the ARTICLE I Transactions in a
simultaneous transaction, and shall not be approving, consenting to,
authorizing or agreeing to the consummation of any ARTICLE I Transaction
separately.

SECTION 1.2 RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS.
At or effective as of the Closing, the Corporation shall file with the
Secretary of State of the State of Delaware a Restated Certificate of
Incorporation in the form attached hereto as Appendix A and incorporated herein
by this reference (the "Restated Certificate"), and the Board of Directors of
the Corporation shall adopt the Restated Bylaws in form attached hereto as
Appendix B and incorporated herein by this reference ("Amended Bylaws").

2
<PAGE> 3

SECTION 1.3 PURCHASE OF COMMON STOCK BY INVESTOR L.L.C. At the
Closing, the Investor L.L.C. shall purchase from the Corporation 2,374 shares
of Common Stock (the "Investor Shares") for an aggregate purchase price of
$20,000,000.00 (or $8,424.60 per share) payable in the form of a wire transfer
to an account designated by the Corporation (the "Sale Proceeds").

SECTION 1.4 ISSUANCE OF COMMON STOCK TO EVERGREEN. The
Corporation shall at Closing issue 506 shares of fully paid non-assessable
shares of Common Stock (the "Capital Call Shares") to Evergreen representing
the shares of Common Stock purchased by Evergreen pursuant to the Capital Call,
for which payment has already been made by Evergreen to the Corporation.

SECTION 1.5 STOCKHOLDERS' AGREEMENT. At or effective as of the
Closing, the Corporation, Evergreen, CLC and the Investor L.L.C. shall execute
and mutually deliver the Stockholders' Agreement in the form attached hereto as
Appendix C and incorporated herein by reference (the "New Stockholders'
Agreement").

SECTION 1.6 REDEMPTION OF LORENZEN SHARES. At the Closing, the
Corporation shall purchase from Lorenzen, and Lorenzen shall sell to the
Corporation, the 210 shares of Common Stock held by Lorenzen (the "Lorenzen
Shares") at a redemption price of $2,500,000 (the "Redemption Price"), or
$11,904.76 per share, payable by wire transfer to the trust account of Godfrey
& Kahn, S.C. at M&I Marshall & Ilsley Bank, Milwaukee, Wisconsin (the "Lorenzen
Account").

SECTION 1.7 REPAYMENT OF EVERGREEN ADVANCES. At the Closing, the
Corporation shall repay the Evergreen Advances to Evergreen, together with
$45,017 of interest due thereon at May 15, 1995, plus a per diem interest
amount of $998 payable thereon for each day after May 15, 1995 through the
Closing Date (the "Advances Payment").

SECTION 1.8 REPAYMENT OF LORENZEN NOTE. At the Closing, the
Corporation shall pay in full the unpaid principal amount, together with
interest accrued and unpaid thereon, of the Lorenzen Note (the "Note Payment,"
which aggregates to $40,630.84 at May 1, 1995, plus a per diem interest amount
of $15.58 payable thereon for each day after May 1, 1995 through the Closing
Date), which payment shall be made by wire transfer to the Lorenzen Account.

<PAGE> 4

ARTICLE 2

CLOSING

SECTION 2.1 CLOSING. The transactions contemplated hereby shall
be consummated (the "Closing") on May 31, 1995 or on such earlier date mutually
agreed upon by the Corporation and the Investor L.L.C. (the "Closing Date"),
but in no event earlier than the date on which the last of the conditions
specified in Section 2.3 below is satisfied or waived by the party or parties
for whose benefit such condition is set forth. The Closing shall occur
pursuant to the terms of the Escrow Agreement (hereinafter defined).

SECTION 2.2 DELIVERIES. At Closing, the purchase and sale of the
Investor Shares, the Capital Call Shares and the Lorenzen Shares shall take
place as follows, subject to all the terms and conditions of this Agreement:

2.2.1 The Corporation shall caused to be issued and delivered to the
Investor L.L.C. certificates for the Investor Shares;

2.2.2 The Corporation shall caused to be issued and delivered to
Evergreen certificates for the Capital Call Shares;

2.2.3 As payment for the Investor Shares, the Investor L.L.C. shall
pay by wire transfer the Sale Proceeds to the Corporation;

2.2.4 The Corporation shall pay the Redemption Price to the Lorenzen
Account by wire transfer;

2.2.5 The Corporation shall pay the Note Payment to the Lorenzen
Account by wire transfer;

2.2.6 Lorenzen shall deliver the Lorenzen Shares and Lorenzen Note
to the Corporation for cancellation;

2.2.7 The Corporation shall cause the Restated Certificate and
Amended Bylaws to become effective in accordance with the Delaware General
Corporation Law;

2.2.8 Each of the Corporation, Evergreen, CLC and the Investor
L.L.C. shall execute and deliver the New Stockholders' Agreement; and

2.2.9 The Corporation shall pay the Advances Payment to Evergreen by
wire transfer.

4
<PAGE> 5

The deliveries contemplated by Sections 2.2.1, 2.2.2, 2.2.3, 2.2.4, 2.2.5,
2.2.6, 2.2.8 and 2.2.9 hereof shall be consummated under the terms of the
Escrow Agreement (hereinafter defined).

SECTION 2.3 CONDITIONS PRECEDENT TO CLOSING. (a) It shall be a
condition precedent to the obligations of each of the parties hereto that:

(i) each of the representations and warranties of the
other parties hereto set forth in this Agreement shall be true and
correct in all material respects on and as of the Closing Date as if
made on and as of such date, except to the extent otherwise
contemplated hereby;

(ii) no governmental authority or other agency, commission
or court of competent jurisdiction shall have enacted, issued,
promulgated or entered any statute, rule, regulation, injunction or
other order which is in effect and has the effect of making any of the
transactions contemplated hereby illegal or otherwise prohibited; and

(iii) the Escrow Agreement shall have been duly executed by
each of the parties thereto, and all deliveries contemplated by
Section 1 thereof shall have been received by the Escrow Agent.

(b) It shall be a condition precedent to the obligations of the
Investor L.L.C. hereunder that:

(i) from the date hereof to the Closing Date there shall
have been no material adverse change in the financial condition,
results of operations, properties, business or prospects of the
Corporation;

(ii) the Investor L.L.C. shall have received (A) a legal
opinion of counsel to the Corporation with respect to the matters set
forth in Sections 3.1.3 and 3.1.4 hereof (except that with respect to
the matters set forth in clause (ii)(B) of Section 3.1.3, such opinion
shall be limited to the knowledge of such counsel and shall identify
the agreements and instruments reviewed by such counsel), in such form
as is reasonably acceptable to the Investor L.L.C. and (B) the tax
opinion set forth as Exhibit H to the Offering Memorandum (hereinafter
defined); and

(iii) the Investor L.L.C. shall have received and accepted
subscriptions for the purchase of Membership Units therein having an
aggregate value of $20 million.

5
<PAGE> 6

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

SECTION 3.1 REPRESENTATIONS AND WARRANTIES BY THE CORPORATION.
The Corporation represents and warrants to, and agrees with, (i) the Investor
L.L.C. only as to the matters set forth in Sections 3.1.5 through 3.1.17; (ii)
the Investor L.L.C. and Evergreen with respect to the matters set forth in
Section 3.1.4 and (iii) each of the Investor L.L.C., Evergreen and the other
parties hereto with respect to the matters set forth in Sections 3.1.1 through
3.1.3 hereof:

3.1.1 ORGANIZATION AND QUALIFICATION. The Corporation is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. The Corporation has all requisite corporate
power and corporate authority to own or lease and operate its properties and
assets and to carry on its businesses as, and in the places where, such
properties and assets are now owned or leased and operated and such business is
now being conducted. The Corporation is duly qualified as a foreign
corporation and is in good standing in each jurisdiction in which the failure
to be so qualified would have a material adverse effect on the Corporation.

3.1.2 CAPITALIZATION OF THE CORPORATION; SHAREHOLDERS AND DIRECTORS.
The authorized capital stock of the Corporation consists of 100,000 shares of
Common Stock, of which 1,000 shares are validly issued and outstanding, all of
which are fully paid and nonassessable. There are no outstanding options,
warrants, convertible securities or other rights, agreements, arrangements or
commitments obligating the Corporation to issue or sell any shares of Common
Stock except as contemplated by this Agreement and as disclosed in the Offering
Memorandum (hereinafter defined). No dividends have been declared with respect
to the Common Stock which have not been paid. The shareholders of the
Corporation on the date hereof are as set forth in the Offering Memorandum.
The directors of the Corporation on the date hereof are William G. Petty, Jr.,
Lasky, Lorenzen, John W. Kneen and Keith J. Yoder.

3.1.3 AUTHORITY RELATIVE TO AGREEMENT; NON-CONTRAVENTION. The
Corporation has all requisite corporate power and corporate authority to enter
into this Agreement and to perform its obligations hereunder. This Agreement
has been duly authorized by the Corporation's Board of Directors, and, upon the
execution of this Agreement by all the shareholders of the Corporation who are
signatories hereto, no further corporate action is required in connection
herewith. This Agreement has been duly executed and delivered by the
Corporation and (i) constitutes the valid and binding obligation of the
Corporation, enforceable against it in

<PAGE> 7

accordance with its terms, except as the enforceability hereof may be limited
by bankruptcy, insolvency, reorganization, fraudulent conveyance or other laws
relating to or affecting the enforcement of creditors' rights or the collection
of debtors' obligations in general or by general equitable principles, and (ii)
does not (A) conflict with any provision of the Restated Certificate or Amended
Bylaws or (B) result in any violation of or default under, or permit the
acceleration of any obligation under, any mortgage, indenture, lease, agreement
or other instrument, permit, concession, grant, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to any of
the Corporation or its properties or any agreement or understanding between any
administrative or regulatory authority.

3.1.4 VALID ISSUANCE OF COMMON STOCK. The Investor Shares and
Capital Call Shares, when issued, sold, and delivered in accordance with the
terms of this Agreement for the consideration expressed herein, will be duly
and validly issued, fully paid, and nonassessable, shall have the rights,
preferences and privileges set forth in the Restated Certificate and will be
free of restrictions on transfer other than restrictions on transfer contained
in the New Stockholders' Agreement and under applicable state and federal
securities laws.

3.1.5 SUBSIDIARIES. The Corporation does not own or control,
directly or indirectly, any interest in any other corporation, association, or
other business entity and the Corporation is not a participant in any joint
venture, partnership, or similar arrangement, except as described in the
Confidential Private Placement Memorandum dated as of May 22, 1995 (together
with all attachments and exhibits thereto, the "Offering Memorandum").

3.1.6 REGISTRATION RIGHTS. The Corporation is not obligated to
register under the Securities Act of 1933, as amended (the "Securities Act"),
or under any state securities laws any of its presently outstanding securities
or any of its securities that may subsequently be issued.

3.1.7 DISCLOSURE. The Corporation has provided to the Investor
L.L.C. all the information that it has requested for deciding whether to
purchase the Common Stock and all information that the Corporation believes is
reasonably necessary to enable such party to make such decision. To the best
of the Corporation's knowledge after reasonable investigation, neither this
Agreement, the Offering Memorandum, nor any other written statements or
certificates made or delivered in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary to
make the statements herein or therein not misleading.

7
<PAGE> 8

3.1.8 OFFERING MEMORANDUM. The Offering Memorandum was prepared in
good faith by the Corporation and does not, to the best of the Corporation's
knowledge after reasonable investigation, contain any untrue statement of a
material fact nor does it omit to state a material fact necessary to make the
statements therein not misleading, except that with respect to financial
models, projections and expressions of opinion or predictions contained
therein, the Corporation (a) represents only that such financial models,
projections and expressions of opinion and predictions were prepared in good
faith and, at the time they were prepared, were based on assumptions the
Corporation believed to be reasonable, and (b) there have been no material
changes in the assumptions underlying such models, projections and expressions
of opinion other than the delay in completing the Offering and applying the
proceeds thereof and changes in the development schedule for certain of the
facilities of the Corporation that are in construction or development,
consistent with the information relative thereto in the Offering Memorandum.
Accordingly, such financial models, projections and expressions of opinion are
provided for illustrative purposes and do not represent a prediction or
forecast of future results of the Corporation.

3.1.9 FINANCIAL STATEMENTS. The Corporation has delivered to each
of the parties hereto the Offering Memorandum which contains the Corporation's
draft financial statements for the period ended December 31, 1994 (the
"Financial Statements"). The Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated and with each other. The
Financial Statements fairly present the financial condition and operating
results of the Corporation as of the dates, and for the periods, indicated
therein. Except as set forth in the Financial Statements, the Corporation has
no liabilities, contingent or otherwise, other than (i) liabilities incurred in
the ordinary course of business subsequent to December 31, 1994 (ii) expenses
incurred in connection with the Agreement and the sale of the Investor Shares,
which expenses are summarized in the Offering Memorandum; (iii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
the Financial Statements, which, in both cases, individually or in the
aggregate, are not material to the financial condition or operating results of
the Corporation; and (iv) matters described herein. Except as disclosed in the
Financial Statements, the Corporation is not a guarantor or indemnitor of any
indebtedness of any other person, firm, or corporation. The Corporation
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles. The Corporation shall deliver to the Investor L.L.C. the audited
financial statements of the Corporation for the year

8
<PAGE> 9

ended December 31, 1994 on or before June 15, 1995 (the "Audited Statements").
Except as set forth on Schedule 3.1.9 attached hereto, the Audited Statements
shall not vary materially from the Financial Statements.

3.1.10 CHANGES. To the best of the Corporation's knowledge and
except as described in the Offering Memorandum, since December 31, 1994 there
has not been:

(a) any material change in the assets, liabilities, financial
condition, or operating results of the Corporation from that reflected in the
Financial Statements, except changes described on Schedule 3.1.10(a) attached
hereto and changes in the ordinary course of business that have not been, in
the aggregate, materially adverse;

(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Corporation (as such business is
presently conducted and as it is proposed to be conducted);

(d) any dividend, declaration, setting aside, or payment or other
distribution in respect of any of the Corporation's capital stock, or any
direct or indirect redemption, purchase, or other acquisition of any of such
stock by the Corporation, except as contemplated hereby;

(e) to the best of the Corporation's knowledge, any other event or
condition of any character that might materially and adversely affect the
business, properties, prospects, or financial condition of the Corporation (as
such business is presently conducted and as it is proposed to be conducted).

3.1.11 INSURANCE. The Corporation has in full force and effect (i)
fire and casualty insurance policies, with extended coverage, sufficient in
amount (subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed; (ii) general liability insurance
providing coverage to the Corporation with respect to its operations; and (iii)
errors and omissions insurance in amounts customary for companies similarly
situated, all as described on Schedule 3.1.11 attached hereto and made a part
hereof.

3.1.12 ENVIRONMENTAL AND SAFETY LAWS. The Corporation is not in
violation of any applicable statute, law, or regulation relating to the
environment or occupational health and safety, the

<PAGE> 10

violation of which would have a material adverse effect upon the Corporation,
and no material expenditures are or will be required in order to comply with
any such existing statute, law, or regulation. To the extent that the
Corporation has obtained environmental reports and studies with respect to any
of its facilities or real property interests, such reports and studies have not
disclosed any environmental problem or state of affairs, the remediation of
which would require the Corporation to make a material expenditure.

3.1.13 COMPLIANCE WITH LAWS.

(a) The Corporation holds all licenses, permits and other
authorizations necessary to conduct its business (collectively, "Permits"), and
is in compliance with all Permits and all federal, state and other laws, rules,
regulations, ordinances and orders governing its business, except where the
failure to hold such licenses, permits and other authorizations or to so
comply, individually or in the aggregate, would not reasonably be foreseen to
have a material adverse effect upon the Corporation.

(b) No action or proceeding is pending or, to the
Corporation's knowledge, threatened that may result in suspension, revocation
or termination of any Permit, the issuance of any cease-and-desist order, or
the imposition of any administrative or judicial sanction, and the Corporation
has not received any notice from any governmental authority in respect of the
suspension, revocation or termination of any Permit, or any notice of any
intention to conduct any investigation or institute any proceeding, in any such
case where such suspension, revocation, termination, order, sanction,
investigation, or proceeding would result, individually or in the aggregate, in
a material adverse effect upon the Corporation.

3.1.14 LITIGATION. There are no suits, arbitrations, mediations,
actions, proceedings, unfair labor practice complaints or grievances pending
or, to the Corporation's knowledge, threatened or, to the Corporation's
knowledge, investigation pending or threatened, against the Corporation or with
respect to any property or asset of the Corporation before any court,
arbitrator, administrator or governmental or regulatory authority or body
which, individually or in the aggregate, could have a material adverse effect
upon the Corporation. Neither the Corporation nor any property or asset of the
Corporation is subject to any order, judgment, injunction or decree which,
individually or in thee aggregate, would have a material adverse effect upon
the Corporation.

10
<PAGE> 11

3.1.15 EMPLOYEE BENEFIT PLANS AND EMPLOYMENT MATTERS.

(a) The Corporation is in compliance in all material
respects with the requirement prescribed by all laws currently in effect
applicable to its employee benefit plans and to any employment agreement of
which it is a party, including, but not limited to, the Employment Retirement
Income Security Act of 1974 ("ERISA") and the Internal Revenue Code of 1986, as
amended (the "Code"). The Corporation has performed all of its obligations
under all such employee benefit plans and employment agreements in all material
respects. There is no pending or, to the knowledge of the Corporation,
threatened legal action, proceeding or investigation against or involving any
of its employee benefit plans which could result in a material amount of
liability to such employee benefit plan or to the Corporation.

(b) The Corporation does not sponsor or participate in,
and has not sponsored or participated in, any employee benefit pension plan to
which Section 4021 of ERISA applies that would create a material amount of
liability to the Corporation under Title IV of ERISA.

(c) The Corporation does not sponsor or participate in,
and has not sponsored or participated in, any employee benefit pension plan
that is a "multi-employer plan" (within the meaning of Section 3(37) of ERISA).

(d) All group health plans of the Corporation have been
operated in compliance with the group health plan continuation coverage
requirements of Section 4980B of the Code in all material respects, to the
extent such requirements are applicable.

(e) There have been no acts or omissions by the
Corporation or by any fiduciary, disqualified person or party in interest with
respect to an employee benefit plan of the Corporation that have given rise to
or may give rise to a material amount of fines, penalties, taxes, or related
charges under Section 502(c), 502(i) or 4071 of ERISA or under Chapter 43 of
the Code.

(f) No "reportable event," as defined in ERISA Section
4043, other than those events with respect to which the Pension Benefit
Guaranty Corporation has waived the notice requirement, has occurred with
respect to any of the employee benefit plans of the Corporation.

3.1.16 LABOR MATTERS. The Corporation is not a party to any
collective bargaining agreement with respect to any of its employees. To the
knowledge of the Corporation, there is no activity involving any of its
employees seeking to certify a collective bargaining unit or engaging in any
other activity.

11
<PAGE> 12

3.1.17 TAX MATTERS. The Corporation has paid, or made adequate
provision for on its December 31, 1994 balance sheet, all federal, state,
local, foreign or other governmental income, franchise, payroll, F.I.C.A.,
unemployment, withholding, real property, personal property, sales, payroll,
disability and all other taxes imposed on the Corporation or with respect to
any of its properties, or otherwise payable by it, including interest and
penalties, if any, in respect thereof (collectively "Taxes"), for the taxable
period ended December 31, 1994 and all fiscal periods of the Corporation prior
thereto, except such nonpayment, or failure to make adequate provision, which,
individually or in the aggregate would not have a material adverse effect upon
the Corporation. Taxes paid and/or incurred from December 31, 1994 until the
Closing Date shall include only Taxes incurred in the ordinary course of
business determined in the same manner as in the taxable period ending on
December 31, 1994. The Corporation has timely filed all income tax, excise
tax, sales tax, use tax, gross receipts tax, franchise tax, employment and
payroll related tax, property tax, and all other tax returns which the
Corporation is required to file, and has paid or provided for all the amounts
shown to be due thereon, except where such failure to make such timely filings,
individually or in the aggregate, would not have a material adverse effect upon
the Corporation, and except for the nonpayment of such amounts which,
individually or in the aggregate, would not have a material adverse effect on
the Corporation. No action or proceeding is pending or, to the Corporation's
knowledge, threatened by any governmental authority for any audit, examination,
deficiency, assessment or collection from the Corporation of any Taxes, no
unresolved claim for any deficiency, assessment or collection of any Taxes has
been asserted against the Corporation, and all resolved assessments of Taxes
have been paid or are reflected on the Corporation's balance sheet at December
31, 1994, except for any of the foregoing which, individually or in the
aggregate, would not have a material adverse effect upon the Corporation.

SECTION 3.2 REPRESENTATIONS AND WARRANTIES BY INVESTOR L.L.C.
Investor L.L.C. represents and warrants to, and agrees with, (i) the
Corporation only with respect to the matters set forth in Section 3.2.3 and
(ii) the Corporation and each of the other parties hereto with respect to the
matters set forth in Sections 3.2.1 and 3.2.2:

3.2.1 ORGANIZATION OF INVESTOR L.L.C. Investor L.L.C. is a
limited liability company duly incorporated and validly existing and in good
standing under the laws of the State of Delaware and has all requisite
corporate power and corporate authority to carry on its business as is now
being conducted.

12
<PAGE> 13

3.2.2 AUTHORITY RELATIVE TO AGREEMENT; NON-CONTRAVENTION.
Investor L.L.C. has all requisite corporate power and corporate authority to
enter into this Agreement and to perform its obligations hereunder. This
Agreement has been duly authorized under the Operating Agreement of the
Investor L.L.C., and no further action is required in connection herewith.
This Agreement has been duly executed and delivered by Investor L.L.C. and (i)
constitutes the valid and binding obligation of Investor L.L.C., enforceable
against Investor L.L.C. in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance or other laws relating to or affecting the enforcement of
creditors' rights or the collection of debtors' obligations in general or by
general equitable principles, and (ii) does not (A) conflict with any provision
of the Operating Agreement of the Investor L.L.C. or (B) result in any
violation of or default under, or permit the acceleration of any obligation
under, any material mortgage, indenture, lease, agreement or other instrument,
permit, concession, grant, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Investor L.L.C. or
its properties or any material agreement or understanding between any
administrative or regulatory authority.

3.2.3 INVESTMENT REPRESENTATIONS. The Investor L.L.C. (i)
is acquiring the Investor Shares for its own account and not with a view to, or
for resale in connection with, any distribution thereof; (ii) understands and
acknowledges that such Investor Shares have not been registered under the
Securities Act or any state securities laws by reason of certain exemptions
from the registration provisions thereof which depend upon, among other things,
the bona fide nature of such holder's investment intent as expressed herein;
(iii) is able to bear the economic risk of investment in the Investor Shares
and it is capable of evaluating the risks and merits of the Investor Shares;
and (iv) understands and acknowledges that the Investor Shares will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act and that the certificate representing such Investor Shares will
bear a legend restricting transfer unless (A) the transfer is exempt from the
registration requirements under the Securities Act and any applicable state
securities law and an opinion of counsel reasonably satisfactory to the
Corporation that such transfer is exempt therefrom is delivered to the
Corporation or (B) the transfer is made pursuant to an effective registration
statement under the Securities Act and any applicable state securities law.

SECTION 3.3 REPRESENTATIONS AND WARRANTIES OF EVERGREEN.
Evergreen represents and warrants to, and agrees with, (i) the Corporation only
with respect to the matters set forth in Section 3.3.3; (ii) the Investor
L.L.C. only with respect to the matters

<PAGE> 14

set forth in Section 3.3.4 and (iii) the Corporation, the Investor L.L.C. and
each of the other parties hereto with respect to Sections 3.3.1 and 3.3.2:

3.3.1 ORGANIZATION AND QUALIFICATION. Evergreen is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Georgia.

3.3.2 AUTHORITY RELATIVE TO AGREEMENT; NON-CONTRAVENTION. Evergreen
has all requisite corporate power and corporate authority to enter into this
Agreement and to perform its obligations hereunder. This Agreement has been
duly authorized by Evergreen's Board of Directors, and no further corporate
action is required in connection herewith. This Agreement has been duly
executed and delivered by Evergreen and (i) constitutes the valid and binding
obligation of Evergreen, enforceable against it in accordance with its terms,
except as the enforceability hereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance or other laws relating to or affecting
the enforcement of creditors' rights or the collection of debtors' obligations
in general or by general equitable principles, and (ii) does not (A) conflict
with any provision of Evergreen's Articles of Incorporation or Bylaws or (B)
result in any violation of or default under, or permit the acceleration of any
obligation under, any mortgage, indenture, lease, agreement or other
instrument, permit, concession, grant, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Evergreen or
its properties or any agreement or understanding between any administrative or
regulatory authority.

3.3.3 INVESTMENT REPRESENTATIONS. Evergreen (i) is
acquiring the Capital Call Shares for its own account and not with a view to,
or for resale in connection with, any distribution thereof; (ii) understands
and acknowledges that such Capital Call Shares have not been registered under
the Securities Act or any state securities laws by reason of certain exemptions
from the registration provisions thereof which depend upon, among other things,
the bona fide nature of such holder's investment intent as expressed herein;
(iii) is able to bear the economic risk of investment in the Capital Call
Shares and it is capable of evaluating the risks and merits of the Capital Call
Shares; and (iv) understands and acknowledges that the Capital Call Shares will
be "restricted securities" as that term is defined in Rule 144 under the
Securities Act and that the certificate representing such Capital Call Shares
will bear a legend restricting transfer unless (A) the transfer is exempt from
the registration requirements under the Securities Act and any applicable state
securities law and an opinion of counsel reasonably satisfactory to the
Corporation that such transfer is exempt therefrom is delivered to the
Corporation or (B) the transfer is made pursuant to an effective registration

14
<PAGE> 15

statement under the Securities Act and any applicable state securities law.

3.3.4 REPRESENTATIONS OF THE CORPORATION. Evergreen has no
knowledge that the Corporation, with respect to the matters set forth in the
Offering Memorandum and the matters set forth in Section 3.1 hereof, has made
any untrue statement of a material fact or has omitted to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading. For purposes of this Section
3.3.4, Evergreen's knowledge shall mean the knowledge of William G. Petty, Jr.,
John W. Kneen, Keith J. Yoder and Donald D. Finney only, as Evergreen's
executive officers.

SECTION 3.4 REPRESENTATION AND WARRANTIES OF LASKY AND BURR.
Each of Lasky and Burr, respectively, represents and warrants to, and agrees
with, (i) the Investor L.L.C. only with respect to the matters set forth in
Section 3.4.2 and (ii) the Investor L.L.C. and each of the other parties hereto
with respect to the matters set forth in Section 3.4.1:

3.4.1 AUTHORITY RELATIVE TO AGREEMENT; NON-CONTRAVENTION.
He has all requisite power and authority to enter into this Agreement and to
perform his obligations hereunder. This Agreement has been duly executed and
delivered by him and (i) constitutes the valid and binding obligation of him,
enforceable against him in accordance with its terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance or other laws relating to or affecting the enforcement of
creditors' rights or the collection of debtors' obligations in general or by
general equitable principles, and (ii) does not result in any violation of or
default under, or permit the acceleration of any obligation under, any
mortgage, indenture, lease, agreement or other instrument, permit, concession,
grant, franchise, license, judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to him or his properties or any agreement or
understanding between any administrative or regulatory authority.

3.4.2 REPRESENTATIONS OF CORPORATION. He has no knowledge
that the Corporation, with respect to the matters set forth in the Offering
Memorandum and the matters set forth in Section 3.1 hereof, has made any untrue
statement of a material fact or has omitted to state a material fact necessary
in order to make the statements made, in light of the circumstances under which
they were made, not misleading.

15
<PAGE> 16

SECTION 3.5 REPRESENTATIONS AND WARRANTIES OF CLC. CLC
represents and warrants to, and agrees with, each of the other parties hereto
as follows:

3.5.1 ORGANIZATION AND QUALIFICATION. CLC is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Wisconsin.

3.5.2 AUTHORITY RELATIVE TO AGREEMENT; NON-CONTRAVENTION.
CLC has all requisite corporate power and corporate authority to enter into
this Agreement and to perform its obligations hereunder. This Agreement has
been duly authorized by CLC's Board of Directors, and no further corporate
action is required in connection herewith. This Agreement has been duly
executed and delivered by CLC and (i) constitutes the valid and binding
obligation of CLC, enforceable against it in accordance with its terms, except
as the enforceability hereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance or other laws relating to or affecting
the enforcement of creditors' rights or the collection of debtors' obligations
in general or by general equitable principles, and (ii) does not (A) conflict
with any provision of CLC's Articles of Incorporation or Bylaws or (B) result
in any violation of or default under, or permit the acceleration of any
obligation under, any mortgage, indenture, lease, agreement or other
instrument, permit, concession, grant, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to CLC or its
properties or any agreement or understanding between any administrative or
regulatory authority.

SECTION 3.6 REPRESENTATIONS AND WARRANTIES OF LORENZEN. Lorenzen
represents and warrants to, and agrees with, (i) the Corporation only with
respect to the matters set forth in Sections 3.6.2 and 3.6.3 and (ii) the
Corporation and each of the other parties hereto with respect to the matters
set forth in Section 3.6.1:

3.6.1 AUTHORITY RELATIVE TO AGREEMENT; NON-CONTRAVENTION. He has
all requisite power and authority to enter into this Agreement and to perform
his obligations hereunder. This Agreement has been duly executed and delivered
by him and (i) constitutes the valid and binding obligation of him, enforceable
against him in accordance with its terms, except as the enforceability hereof
may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance
or other laws relating to or affecting the enforcement of creditors' rights or
the collection of debtors' obligations in general or by general equitable
principles, and (ii) does not result in any violation of or default under, or
permit the acceleration of any obligation under, any mortgage, indenture,
lease, agreement or other instrument, permit, concession, grant,

16
<PAGE> 17

franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to him or his properties or any agreement or
understanding between any administrative or regulatory authority.

3.6.2 TITLE. Except for the restrictions on transfer as set forth
in the ALS Stockholders' Agreement, Lorenzen holds good and marketable title to
the Lorenzen Shares free of all liens, claims and encumbrances. Upon delivery
to the Corporation of stock certificates representing the Lorenzen Shares and
upon termination of the ALS Stockholders' Agreement, each as contemplated
hereby, the Corporation will acquire good and marketable title to the Lorenzen
Shares, free of all liens, claims and encumbrances.

3.6.3 PRIVATE PLACEMENT MEMORANDUM. Lorenzen has received a copy of
the Offering Memorandum and all attachments and exhibits thereto, including
without limitation the draft annual financial statements of the Corporation for
the years ended December 31, 1994 and 1993 and the financial model prepared in
connection with the private placement contemplated by the Offering Memorandum
(collectively, the "Disclosure Material"). In reaching his decision to sell
the Lorenzen Shares hereunder, Lorenzen has carefully evaluated his personal
financial situation and the information set forth in the Disclosure Material.

ARTICLE 4

ADDITIONAL AGREEMENTS

SECTION 4.1 PAYMENT OF CERTAIN EXPENSES. Notwithstanding
anything herein to the contrary, the Corporation will pay the reasonable legal
fees and expenses incurred by Huizenga Capital Management in connection with
its review of all matters relating to the formation of the Investor L.L.C., the
offering of membership units by the Investor L.L.C. and the transactions
contemplated hereby, and the Corporation shall reimburse the Investor L.L.C.
for all other costs and expenses incurred by it in connection with its
organization and the transactions contemplated hereby in an amount not to
exceed $5,000.00.

SECTION 4.2 PAYMENT OF OPERATING EXPENSES OF INVESTOR
L.L.C. From and after the date hereof and for so long as the Investor L.L.C.
owns at least 40% of the outstanding Common Stock, the Corporation shall, on
behalf of the Investor L.L.C., pay all out-of-pocket costs and expenses of the
Investor L.L.C. reasonably related to its maintenance and operations in an
amount not to exceed $25,000.00 per year.

17
<PAGE> 18

SECTION 4.3 BOOKKEEPING, ACCOUNTING AND RELATED SERVICES.
From and after the date hereof and for so long as the Investor L.L.C. owns at
least 40% of the outstanding Common Stock, the Corporation shall provide to the
Investor L.L.C., without charge therefor, such bookkeeping, accounting and tax
preparation services as the Investor L.L.C. may reasonably request, and shall
maintain all books and records of the Investor L.L.C.

SECTION 4.4 RELEASE OF EVERGREEN GUARANTEES. Promptly
following the Closing Date, the Corporation shall use its best efforts to
either (i) cause Evergreen to be released from each and every guaranty or
contractual commitment made by Evergreen as a financial accommodation on behalf
of or for the benefit of the Corporation (collectively, the "Evergreen
Financial Accommodations") or (ii) provide Evergreen with such security or
other assurances as Evergreen may reasonably request to secure Evergreen with
respect to the Evergreen Financial Accommodations.

SECTION 4.5 LORENZEN SHARES TO BE CANCELLED. Upon the
redemption of the Lorenzen Shares by the Corporation in accordance herewith,
such shares shall be cancelled by the Corporation on the books of the
Corporation.

SECTION 4.6 ESCROW AGREEMENT. Upon the execution hereof,
Lorenzen, the Corporation, Evergreen, CLC, the Investor L.L.C. and Rogers &
Hardin (the "Escrow Agent") shall enter into an Escrow Agreement (the "Escrow
Agreement") in the form of Appendix D hereto, and shall make the deliveries
into escrow contemplated thereby.

SECTION 4.7 ELECTION OF NEW BOARD OF DIRECTORS. At
Closing, the Board of Directors of the Corporation shall be set at six members
and shall be comprised of the persons designated to so serve set forth in the
Offering Memorandum. Effective at Closing, this Agreement shall constitute the
action in lieu of special or annual meeting of the stockholders of the
Corporation taken by unanimous consent removing all prior directors of the
Corporation (to the extent they have not previously resigned) and electing the
persons designated as the directors of the Corporation in the Offering
Memorandum (the "New Board," consisting of Messrs. Petty, Lasky, Kneen,
Tubergen, Haveman and Kenny).

SECTION 4.8 PIONEER TRANSACTION AND OPTION GRANTS. The
Corporation will neither (i) consummate the proposed transaction with Pioneer
Group described in the Offering Memorandum, or any similar transaction with
Pioneer Group, or enter into any binding agreement with respect thereto, nor
(ii) grant or agree to grant any options or rights to acquire shares of Common
Stock prior to the Closing, unless approved by the New Board.

18
<PAGE> 19

SECTION 4.9 TERMINATION OF OTHER AGREEMENTS. Effective
immediately prior to the Closing, but subject to the consummation of the
Closing, the parties hereto terminate the ALS Stockholders Agreement, the Care
Living Centers, Inc. Shareholders' Agreement dated as of December 14, 1993 by
and among CLC, Lasky, Burr and Lorenzen, the letter agreement dated December
14, 1993 between Lorenzen and Lasky (and as to Section 6 and 7 thereof agreed
to by Burr), and the Stock Pledge Agreement dated December 14, 1993 executed by
Lasky as pledgor in favor of Lorenzen as pledgee (collectively, the "Terminated
Agreements"). As of such termination, the Terminated Agreements shall be of no
further force and effect, and the parties hereto and to all such agreements and
instruments shall have no further rights, claims, entitlements, duties or
obligations thereunder, whether now existing, accrued or vested or to arise or
to be accrued or vested in the future (including, without limitation, the right
to purchase shares in the Capital Call). Each of the parties hereto
acknowledges and represents that, to the best of its knowledge, no persons
other than the parties hereto have any right, claim, title or interest
whatsoever in any of the Terminated Agreements, whether as a party thereto, as
an assignee of any of the parties thereto or as a third party beneficiary or
otherwise.

SECTION 4.10 LORENZEN RELEASE. Effective at the Closing,
but subject to the consummation of the Closing, Lorenzen, for himself and on
behalf of his agents, representatives, successors, heirs and assigns, hereby
releases, waives, acquits, withdraws, retracts and forever discharges any and
all claims, manner of actions, causes of action, in law or in equity, suits,
judgments, debts, liens, contracts, agreements, promises, liabilities, demands,
damages, losses, costs, expenses and/or disputes, known or unknown, fixed or
contingent, which they now have or may have hereafter, directly or indirectly,
personally or in any capacity (collectively, for the purposes of this section,
"Claims"), against the Corporation, the Investor L.L.C., Evergreen, CLC, Burr
and/or Lasky, and/or, to the extent applicable, all and any of their respective
present or former affiliates, parents, subsidiaries, predecessors, successors
and assigns, as well as their respective present or former owners,
stockholders, investors, lenders, agents, independent contractors, directors,
officers, partners, employees, associates, representatives, consultants,
attorneys and insurers, by reason of any act, omission, matter, cause or thing
whatsoever, from the beginning of time to, and including the Closing Date,
except for any Claims arising hereunder and/or the several agreements and
instruments executed and delivered as contemplated hereby, including, without
limitation, the Escrow Agreement.

SECTION 4.11 CORPORATION, EVERGREEN, CLC, LASKY, BURR AND
INVESTOR L.L.C. RELEASE. Effective at the Closing, but subject

19
<PAGE> 20

to the consummation of the Closing, each of the Corporation, Evergreen, CLC,
Lasky, Burr and the Investor L.L.C., for itself and on behalf of its present
or former affiliates, parents, subsidiaries, predecessors, successors and
assigns as well as its present or former owners, stockholders, investors,
lenders, agents, independent contractors, directors, officers, partners,
employees, associates, representatives, consultants, attorneys and/or insurers,
hereby releases, waives, acquits, withdraws, retracts and forever discharges
any and all claims, manner of actions, causes of action, in law or in equity,
suits, judgments, debts, liens, contracts, agreements, promises, liabilities,
demands, damages, losses, costs, expenses and/or disputes, known or unknown,
fixed or contingent, which they now have or may have hereafter, directly or
indirectly, personally or in any capacity (collectively, for the purposes of
this section "Claims"), against Lorenzen, and/or, to the extent applicable, all
and any of his present or former agents, representatives, successors, heirs
and/or assigns, by reason of any act, omission, matter, cause or thing
whatsoever, from the beginning of time to, and including the Closing Date,
except for any Claims arising hereunder and/or the several agreements and
instruments executed and delivered as contemplated hereby, including, without
limitation, the Escrow Agreement.

SECTION 4.12 REPRESENTATION OF COUNSEL; NONASSIGNMENT.
Each of the parties hereto hereby acknowledges that such party has been advised
by counsel concerning the contents and effects of this Agreement, that such
party understands the provisions of this Agreement and that such party is
entering into this Agreement voluntarily. Each of the parties hereto
represents and warrants that such party has made no assignment or other
transfer of any interest in any Claim released by such party in Section 4.10 or
4.11, hereof. The representations and warranties made in this Section 4.12
shall survive indefinitely, Section 6.8 hereof, notwithstanding.

SECTION 4.13 ADDITIONAL INVESTOR SHARES. In the event
that (i) the Corporation shall have breached a representation or warranty set
forth in Section 3.1 hereof and (ii) either (a) such breach shall relate to an
overstatement of assets or understatement of liabilities of the Corporation in
the Financial Statements, or a combination of both, of at least $100,000 in the
aggregate (a "Misstatement Amount") or (b) such breach is a misrepresentation
of facts known to the Corporation or facts which, in the exercise of reasonable
diligence, should have been known to the Corporation and such facts underlying
such breach, were they known to the Investor L.L.C. prior to its purchase of
the Investor Shares hereunder, would reasonably have been expected to reduce
the valuation of the Corporation to an amount less than the valuation upon
which the Sale Proceeds were based by at least $100,000 (a "Revaluation
Amount"; any such Revaluation Amounts and/or Misstatement Amounts

20
<PAGE> 21

referred to herein in the aggregate as an "Adjustment Factor"), then the
Corporation, promptly upon demand by the Investor L.L.C., shall issue
additional shares of Common Stock to the Investor L.L.C., for no additional
consideration beyond the Sale Proceeds, such number of additional shares to be
calculated based on the following formula:

X = [ [ Z ] x 2374 ] - 2374
-------------
. 6079

Where X = the number of additional shares of Common Stock to be issued
to the Investor L.L.C. pursuant to this Section 4.9
("Additional Shares"), such number of shares to be rounded to
the nearest whole number;

Y = the Adjustment Factor, as defined above; and

Z = 20,000,000
--------------
32,898,000 - Y

provided; however, that (A) no Additional Shares shall be issuable hereunder
unless the Adjustment Factor is at least $100,000; (B) the maximum Adjustment
Factor hereunder for the issuance of Additional Shares pursuant to this Section
4.13 shall be $750,000 and (C) no issuance of Additional Shares hereunder shall
be required unless the Investor L.L.C. shall have given notice to the
Corporation of the breach of Section 3.1 hereof giving rise to an adjustment
pursuant to this Section 4.13 and shall have made demand for the Additional
Shares in accordance herewith on or before May 31, 1996; and (D) Additional
Shares shall be issued pursuant to this Section 4.13 on no more than one
occasion. The right to Additional Shares set forth in this Section 4.13 is not
an exclusive remedy of the Investor L.L.C. and is operative only if elected by
the Investor L.L.C.; provided, however, that if the Investor L.L.C. demands
Additional Shares pursuant to this Section 4.13, the Additional Shares so
issued shall constitute an election of remedies by the Investor L.L.C. and
shall constitute the complete remedy of the Investor L.L.C. for the breach
giving rise to the issuance of the Additional Shares to the extent of the
Adjustment Factor; provided, further, that the Investor L.L.C. shall not be
limited in its ability to collect damages or exercise any other available
remedies relating to any damages in excess of the Adjustment Factor.

21
<PAGE> 22

SECTION 4.14 INDEMNITIES.

(a) On the terms and subject to the conditions of
this Section 4.14, each of the parties hereto hereby agrees to indemnify,
defend and hold harmless each of the other parties hereto to whom or with whom
such party has made any representation, warranty or covenant from and against
any Indemnity Claims resulting from the breach of any representations,
warranties or covenants of such party set forth herein.

(b) The indemnification obligations with respect
to a breach of a representation or warranty set forth in this Section 4.14
shall be subject to the limitations set forth in Section 6.8.

(c) No indemnification shall be required under
this Section 4.14 for the breach of any representation or warranty until the
aggregate amount of such Indemnity Claims hereunder shall have exceeded
$100,000 and indemnification shall be made by the indemnifying party hereunder
only to the extent the aggregate amount of Indemnity Claims shall have exceeded
$100,000.

(d) Any party making a claim for indemnification
hereunder, which claim for indemnification results from a claim, demand, action
or proceeding by a third party against the party making the claim (the
"Indemnified Party"), will give the other party or parties (the "Indemnifying
Party") prompt notice of such third party Indemnity Claim giving rise to such
claim for indemnification of its right to indemnification hereunder, and the
Indemnifying Party will assume the defense thereof by representatives chosen by
it; provided, however, that the Indemnified Party shall be entitled to
participate in the defense of such third party Indemnity Claim and to employ
counsel at its own expense to assist in the handling of such Indemnity Claim.

(e) If the Indemnifying Party, within twenty (20)
days after notice of any such third party Indemnity Claim fails to assume the
defense thereof, the Indemnified Party shall (upon further notice to the
Indemnifying Party) have the right to undertake the defense, compromise or
settlement of such third party Indemnity Claim subject to the right of the
Indemnifying Party to assume the defense of such third party Indemnity Claim at
any time prior to the settlement, compromise or final determination thereof
(including reimbursement to the Indemnified Party of all expenses incurred by
it in defending against any such third party Indemnity Claim but only if and to
the extent that the indemnified party is entitled to indemnification on the
Indemnity Claim itself).

(f) Anything in this Section 4.14 to the contrary
notwithstanding, (i) the Indemnifying Party shall not, without the written
consent of the Indemnified Party (which consent shall not

22
<PAGE> 23

be unreasonably withheld), settle or compromise any third party Indemnity Claim
or consent to the entry of any judgment which imposes any future obligation on
the Indemnified Party or which does not include as an unconditional term
thereof the giving by the claimant or the plaintiff to the Indemnified Party a
release from all liability in respect to such Indemnity Claim.

(g) The Indemnified Party shall provide the
Indemnifying Party with such assistance (without charge) as may reasonably be
requested by the Indemnifying Party in connection with any indemnification or
defense provided for herein.

(h) For purposes of this Section 4.14, "Indemnity
Claim" shall mean any and all actions, suits, proceedings, claims, demands,
assessments, judgments, liabilities, losses, damages, costs and expenses,
including without limitation, any interest, fines, court costs and attorneys'
fees.

SECTION 4.15 INVESTIGATION. No investigation by the
Investor L.L.C. or its agents and representatives nor any statement or
disclosure in the Offering Memorandum shall have the effect of altering or
diminishing any representation or warranty of the Corporation set forth herein.
To the extent that disclosure made by the Corporation to the Investor L.L.C.
(including the Offering Memorandum) conflicts with any representations or
warranties of the Corporation set forth herein, the representations and
warranties set forth herein shall not be thereby modified or diminished unless
such representations and warranties make specific reference to such disclosure
(including the Offering Memorandum).

ARTICLE 5

TERMINATION

This Agreement and the transactions contemplated by this Agreement may
be terminated at any time prior to the Closing Date:

SECTION 5.1 MUTUAL CONSENT. By the mutual consent of the
parties hereto; or

SECTION 5.2 OTHER TERMINATION. By any party hereto in
the event that any condition set forth for the benefit of such party in Section
2.3 of this Agreement shall not have been satisfied on or before May 31, 1995
or the Closing shall not have occurred on or before May 31, 1995.

Notice of termination of this Agreement, as provided for in this Article 5,
shall be given by the party so terminating to the other parties hereto, in
accordance with the provisions of Section 6.2 of this Agreement.

23
<PAGE> 24

ARTICLE 6

MISCELLANEOUS

SECTION 6.1 EXPENSES. Except as provided in Section 4.1 above,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby (including legal, accounting, investment
advisory and other such costs) shall be paid by the party incurring such
expenses.

SECTION 6.2 NOTICES. Any notice, request, demand, waiver,
consent, approval or other communication required or permitted hereunder shall
be in writing and shall be deemed given only if sent by registered or certified
mail (postage prepaid), shipped and receipted by express courier service
(charges prepaid), or mailed first class (postage prepaid):

If to the Corporation:

450 N. Sunny Slope Road
Suite 300
Brookfield, Wisconsin 53005
ATTN: William F. Lasky

If to Investor L.L.C.:

184 Shuman Boulevard
Suite 200
Naperville, Illinois 60563
ATTN: William G. Petty, Jr.

with a copy to:

Huizenga Capital Management
2215 York Road
Suite 500
Oak Brook, Illinois 60521
ATTN: Ronald G. Kenny

If to Evergreen:

11350 N. Meridian Street
Suite 200
Carmel, Indiana 46032
ATTN: Keith J. Yoder

<PAGE> 25

If to CLC:

c/o Alternative Living Services, Inc.
450 N. Sunny Slope Road
Suite 300
Brookfield, Wisconsin 53005
ATTN: William F. Lasky

If to Lasky:

c/o Alternative Living Services, Inc.
450 N. Sunny Slope Road
Suite 300
Brookfield, Wisconsin 53005

If to Burr:

1030 East Circle Drive
Whitefish Bay, Wisconsin 53217
ATTN: David Burr

If to Lorenzen:

W278 N2645 Rocky Point Road
Pewaukee, Wisconsin 53072
ATTN: Dr. Kraig Lorenzen

with a copy to:

John F. Gaebler, Esq.
Godfrey & Kahn
780 North Water Street
Milwaukee, Wisconsin 53202

or such other address as shall be furnished in writing by any party to the
others prior to the giving of the applicable notice or communication. Such
notice, request, demand, waiver, consent, approval or other communication will
be deemed to have been given as of the date so delivered or, if mailed, three
(3) business days after the date so mailed.

SECTION 6.3 EXECUTION; COUNTERPARTS. This Agreement may be
executed by facsimile and in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.

SECTION 6.4 HEADINGS. The headings herein are for convenience of
reference only, do not constitute a part of this

<PAGE> 26

Agreement, and shall not be deemed to limit or affect the provisions hereof.

SECTION 6.5 ENTIRE AGREEMENT. This Agreement (together with the
exhibits incorporated by reference herein) and the Escrow Agreement constitute
the entire agreement between the parties with respect to the subject matter
hereof, and supersede all prior agreements and negotiations relating to the
subject matter hereof. There are no representations, warranties, covenants,
promises or agreements on the part of any party hereto to or with any other
party hereto with respect to the matters set forth herein which are not
explicitly set forth herein or in the Escrow Agreement.

SECTION 6.6 GOVERNING LAW. This Agreement shall be governed by,
and construed in accordance with, the substantive laws of the State of
Illinois, without regard to conflicts of laws principles, except that Sections
4.9, 4.10, 4.11 and 4.12 hereof shall be governed by, and construed in
accordance with, the substantive laws of the State of Wisconsin, without regard
to conflicts of laws principles.

SECTION 6.7 JURISDICTION. Any action, suit or proceeding seeking
to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated hereby may be
brought against any of the parties (other than Lorenzen) in the United States
District Court for the Northern District of Illinois, or any state court
sitting in the City of Chicago, Illinois, and each of the parties (other than
Lorenzen) hereby consents to the exclusive jurisdictions of such courts (and of
the appropriate appellate courts) in any such suit, action or proceeding and
waives any objection to venue laid therein. Process in any such suit, action
or proceeding may be served on any party (other than Lorenzen) anywhere in the
world, whether within or without the State of Illinois. Without limiting the
foregoing, each of the parties hereto (other than Lorenzen) agrees that service
of process upon such party at the address referred to in Section 6.2, together
with written notice of such service to such party, shall be deemed effective
service of process upon such party.

SECTION 6.8 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except
for Section 4.12 hereof, all representations and warranties contained herein or
made pursuant hereto, whether express or implied, shall survive the Closing
Date and shall continue in full force and effect for a period of two (2) years
after the Closing Date (except for the representations and warranties set forth
in Sections 3.1.12 and 3.1.17, which shall continue in full force for a period
of five (5) years after the Closing Date) and thereafter shall be of no force
or effect unless a representation or a warranty shall have been breached and
the party that made the

26
<PAGE> 27

representation or warranty shall have been given notice of such breach within
such two (2) year period (or five (5) year period, if applicable), in which
event the survival period for such representation shall be tolled. All
covenants and agreements contained in this Agreement shall survive the Closing
Date for so long as such covenants and agreements shall have applicability.

SECTION 6.9 SUCCESSORS AND ASSIGNS. The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, legal representatives, successors and assigns,
provided that no party may assign, delegate or otherwise transfer any of its
rights or obligations under this Agreement without the prior written consent of
the other parties hereto.

SECTION 6.10 ACTION BY THE CORPORATION'S SHAREHOLDERS. The
Corporation represents that its Board of Directors has approved this Agreement
and the transactions contemplated hereby, has declared its and their
advisability and has directed that, to the extent required by the General
Corporation Law of the State of Delaware, these matters be presented to the
shareholders of the Corporation for their approval thereof. Upon the execution
of a counterpart of this Agreement by each of the parties hereto and the
delivery of such counterparts to the Corporation or to the Secretary or
Assistant Secretary of the Corporation, such shall constitute action by the
shareholders of the Corporation taken by unanimous written consent in lieu of a
meeting pursuant to Section 228 of the General Corporation Law of the State of
Delaware approving this Agreement and the several matters contemplated hereby
pursuant to the terms and conditions set forth herein, including, without
limitation: (i) the sale and issuance of the Investor Shares and Capital Call
Shares; (ii) approval of the Restated Certificate and the Amended Bylaws; (iii)
the redemption of the Lorenzen Shares; (iv) the execution and delivery of the
New Stockholders' Agreement; (v) the repayment of the Evergreen Advances; and
(vi) the prepayment of the Lorenzen Note, all subject to the conditions of and
as contemplated by this Agreement.

27
<PAGE> 28

IN WITNESS WHEREOF, the Corporation, the Investor L.L.C., CLC and
Evergreen have each caused this Agreement to be duly executed and delivered by
their respective duly authorized officers, and each of Lasky, Lorenzen and Burr
has executed and delivered this Agreement, all as of the day and year first
above written.

ALTERNATIVE LIVING SERVICES, INC.

By:/s/ William F. Lasky
------------------------------------
Its: President
-------------------------------

ALTERNATIVE LIVING INVESTORS, L.L.C.

By: /s/ William G. Petty, Jr.
----------------------------------
Its: Manager

By: /s/ Robert Haveman
-----------------------------------
Its: Manager

By: /s/ Ronald G. Kenny
-----------------------------------
Its: Manager

By: /s/ Jerry L. Tubergen
-----------------------------------
Its: Manager

CARE LIVING CENTERS, INC.

By: /s/ William F. Lasky
-----------------------------------
Its: President
------------------------------

EVERGREEN HEALTHCARE, INC.

By: /s/ William G. Petty, Jr.
-----------------------------------
Its:
-------------------------------

/s/ William F. Lasky
----------------------------------------
William F. Lasky

/s/ David Burr
----------------------------------------
David Burr

/s/ Kraig E. Lorenzen
----------------------------------------
Kraig E. Lorenzen

<PAGE> 29

Schedule 3.1.9

FINANCIAL STATEMENT

The audited financial Statements may:

(i) reclassify $2,667,342 of "Current liabilities -- Advances from
and notes payable to affiliates" to "Stockholders equity" to
reflect these monies as the proceeds of the Capital Call;

(ii) include corresponding changes in the Notes to Consolidated
Financial Statements to reflect any such reclassification; and

(iii) include a "subsequent events" footnote addressing some or all
of the matters described on Schedule 3.1.10 hereto and the
consummation of the transactions contemplated by this
Agreement.

<PAGE> 30

Schedule 3.1.10(a)

SUMMARY OF MATERIAL EVENTS OCCURRING
SUBSEQUENT TO DECEMBER 31, 1994

PALMER CLUB ACQUISITION: On March 31, 1995, ALS purchased the Palmer Club, an
86 unit assisted living facility located in Sarasota, Florida for $6,000,000.

FLORIDA CONSTRUCTION: As of March 31, 1995, ALS has invested approximately
$1,500,000 in construction and development costs related to the construction of
a 36 bed Alzheimer facility in Bradenton, Florida and a 36 bed Alzheimer
facility in Sarasota, Florida.

OPENING OF HAMILTON HOUSE OF UTICA: On January 16, 1995, ALS opened Hamilton
House of Utica, a 36 resident facility located in Utica, Michigan. Currently,
the facility has 25 occupants - 70%.

FINANCING: ALS has entered into agreements to refinance the following
properties:

Stonefield Home $1,920,000
Palmer Club $4,300,000
Northampton Manor $6,600,000

<PAGE> 1
EXHIBIT 10.17

LEASE AGREEMENT

BETWEEN

HEALTH CARE REIT, INC.

AND

ALTERNATIVE LIVING SERVICES, INC.

JANUARY 22, 1996

CLARE BRIDGE OF BRADENTON
BRADENTON, FLORIDA
<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
ARTICLE 1: LEASED PROPERTY, TERM AND DEFINITIONS . . . . . . 1

1.1 Leased Property . . . . . . . . . . . . . . . . . 1
---------------
1.2 Term . . . . . . . . . . . . . . . . . . . . . . . 2
----
1.3 Definitions . . . . . . . . . . . . . . . . . . . 2
-----------

ARTICLE 2: RENT . . . . . . . . . . . . . . . . . . . . . . 8

2.1 Base Rent . . . . . . . . . . . . . . . . . . . . 8
---------
2.2 Increase of Lease Rate and Base Rent . . . . . . . 8
------------------------------------
2.3 Additional Rent . . . . . . . . . . . . . . . . . 8
---------------
2.4 Place of Payment of Rent . . . . . . . . . . . . . 8
------------------------
2.5 Net Lease . . . . . . . . . . . . . . . . . . . . 9
---------
2.6 No Termination, Abatement, Etc. . . . . . . . . . 9
-------------------------------
2.7 Computational Method . . . . . . . . . . . . . . . 10
--------------------
2.8 Commitment Fee . . . . . . . . . . . . . . . . . . 10
--------------

ARTICLE 3: IMPOSITIONS AND UTILITIES . . . . . . . . . . . . 10

3.1 Payment of Impositions . . . . . . . . . . . . . . 10
----------------------
3.2 Definition of Impositions . . . . . . . . . . . . 11
-------------------------
3.3 Escrow of Impositions . . . . . . . . . . . . . . 12
---------------------
3.4 Utilities . . . . . . . . . . . . . . . . . . . . 12
---------
3.5 Discontinuance of Utilities . . . . . . . . . . . 12
---------------------------
3.6 Business Expenses . . . . . . . . . . . . . . . . 13
-----------------
3.7 Permitted Contests . . . . . . . . . . . . . . . . 13
------------------

ARTICLE 4: INSURANCE . . . . . . . . . . . . . . . . . . . . 14

4.1 Property Insurance . . . . . . . . . . . . . . . . 14
------------------
4.2 Liability Insurance . . . . . . . . . . . . . . . 15
-------------------
4.3 Builder's Risk Insurance . . . . . . . . . . . . . 15
------------------------
4.4 Insurance Requirements . . . . . . . . . . . . . . 15
----------------------
4.5 Replacement Value . . . . . . . . . . . . . . . . 16
-----------------
4.6 Blanket Policy . . . . . . . . . . . . . . . . . . 16
--------------
4.7 No Separate Insurance . . . . . . . . . . . . . . 17
---------------------
4.8 Waiver of Subrogation . . . . . . . . . . . . . . 17
---------------------
4.9 Mortgages . . . . . . . . . . . . . . . . . . . . 17
---------
4.10 Escrows . . . . . . . . . . . . . . . . . . . . . 17
-------

ARTICLE 5: INDEMNITY . . . . . . . . . . . . . . . . . . . . 18

5.1 Tenant's Indemnification . . . . . . . . . . . . . 18
------------------------
5.2 Environmental Indemnity; Audits . . . . . . . . . 19
-------------------------------
5.3 Limitation of Landlord's Liability . . . . . . . . 20
----------------------------------
</TABLE>

(i)
<PAGE> 3

<TABLE>
<S> <C>
ARTICLE 6: USE AND ACCEPTANCE OF PREMISES . . . . . . . . . 20

6.1 Use of Leased Property . . . . . . . . . . . . . . 20
----------------------
6.2 Acceptance of Leased Property . . . . . . . . . . 20
-----------------------------
6.3 Conditions of Use and Occupancy . . . . . . . . . 21
-------------------------------

ARTICLE 7: REPAIRS AND MECHANICS' LIENS . . . . . . . . . . 21

7.1 Maintenance . . . . . . . . . . . . . . . . . . . 21
-----------
7.2 Required Alterations . . . . . . . . . . . . . . . 21
--------------------
7.3 Mechanic's Liens . . . . . . . . . . . . . . . . . 21
----------------
7.4 Replacements of Fixtures and Personal Property . . 22
----------------------------------------------

ARTICLE 8: DEFAULTS AND REMEDIES . . . . . . . . . . . . . . 22

8.1 Events of Default . . . . . . . . . . . . . . . . 22
-----------------
8.2 Remedies . . . . . . . . . . . . . . . . . . . . . 24
--------
8.3 Right of Set-Off . . . . . . . . . . . . . . . . . 26
----------------
8.4 Performance of Tenant's Covenants . . . . . . . . 27
---------------------------------
8.5 Late Payment Charge . . . . . . . . . . . . . . . 27
-------------------
8.6 Interest . . . . . . . . . . . . . . . . . . . . . 27
--------
8.7 Litigation; Attorneys' Fees . . . . . . . . . . . 27
---------------------------
8.8 Escrows and Application of Payments . . . . . . . 28
-----------------------------------
8.9 Remedies Cumulative . . . . . . . . . . . . . . . 28
-------------------

ARTICLE 9: DAMAGE AND DESTRUCTION . . . . . . . . . . . . . 28

9.1 Notice of Casualty . . . . . . . . . . . . . . . . 28
------------------
9.2 Substantial Destruction . . . . . . . . . . . . . 29
-----------------------
9.3 Partial Destruction . . . . . . . . . . . . . . . 30
-------------------
9.4 Restoration . . . . . . . . . . . . . . . . . . . 30
-----------
9.5 Insufficient Proceeds . . . . . . . . . . . . . . 31
---------------------
9.6 Not Trust Funds . . . . . . . . . . . . . . . . . 31
---------------
9.7 Landlord's Inspection . . . . . . . . . . . . . . 32
---------------------
9.8 Landlord's Costs . . . . . . . . . . . . . . . . . 32
----------------
9.9 No Rent Abatement . . . . . . . . . . . . . . . . 32
-----------------

ARTICLE 10: CONDEMNATION . . . . . . . . . . . . . . . . . . 32

10.1 Total Taking . . . . . . . . . . . . . . . . . . . 32
------------
10.2 Partial Taking . . . . . . . . . . . . . . . . . . 33
--------------
10.3 Condemnation Proceeds Not Trust Funds . . . . . . 33
-------------------------------------

ARTICLE 11: TENANT'S PROPERTY . . . . . . . . . . . . . . . 33

11.1 Tenant's Property . . . . . . . . . . . . . . . . 33
-----------------
11.2 Requirements for Tenant's Property . . . . . . . . 34
----------------------------------

ARTICLE 12: RENEWAL OPTIONS . . . . . . . . . . . . . . . . . 35

12.1 Renewal Options . . . . . . . . . . . . . . . . . 35
---------------
</TABLE>

(ii)
<PAGE> 4

<TABLE>
<S> <C>
12.2 Effect of Renewal . . . . . . . . . . . . . . . . 36
-----------------

ARTICLE 13: OPTION TO PURCHASE . . . . . . . . . . . . . . . 36

13.1 Option to Purchase . . . . . . . . . . . . . . . . 36
------------------
13.2 Option Price . . . . . . . . . . . . . . . . . . . 37
------------
13.3 Fair Market Value . . . . . . . . . . . . . . . . 37
-----------------
13.4 Closing . . . . . . . . . . . . . . . . . . . . . 39
-------
13.5 Failure to Close Option . . . . . . . . . . . . . 39
-----------------------
13.6 Failure to Exercise Option to Purchase and
-------------------------------------------------
Renewal Option . . . . . . . . . . . . . . . . . . 39
--------------

ARTICLE 14: NEGATIVE COVENANTS . . . . . . . . . . . . . . . 39

14.1 No Debt . . . . . . . . . . . . . . . . . . . . . 39
-------
14.2 No Liens . . . . . . . . . . . . . . . . . . . . . 39
--------
14.3 No Guaranties . . . . . . . . . . . . . . . . . . 40
-------------
14.4 No Transfer . . . . . . . . . . . . . . . . . . . 40
-----------
14.5 No Dissolution . . . . . . . . . . . . . . . . . . 40
--------------
14.6 No Change in Control . . . . . . . . . . . . . . . 40
--------------------
14.7 No Investments . . . . . . . . . . . . . . . . . . 40
--------------
14.8 Contracts . . . . . . . . . . . . . . . . . . . . 40
---------
14.9 Subordination of Payments to Affiliates . . . . . 40
---------------------------------------
14.10 Change of Location or Name . . . . . . . . . . . . 41
--------------------------

ARTICLE 15: AFFIRMATIVE COVENANTS . . . . . . . . . . . . . 41

15.1 Perform Obligations . . . . . . . . . . . . . . . 41
-------------------
15.2 Proceedings to Enjoin or Prevent Construction . . 41
---------------------------------------------
15.3 Documents and Information . . . . . . . . . . . . 41
-------------------------
15.4 Compliance With Laws . . . . . . . . . . . . . . . 43
--------------------
15.5 Broker's Commission . . . . . . . . . . . . . . . 43
-------------------
15.6 Existence and Change in Control . . . . . . . . . 43
-------------------------------
15.7 Financial Covenants . . . . . . . . . . . . . . . 43
-------------------

ARTICLE 16: ALTERATIONS, CAPITAL
IMPROVEMENTS, AND SIGNS . . . . . . . . . . 44

16.1 Prohibition on Alterations and Improvements . . . 44
-------------------------------------------
16.2 Approval of Alterations . . . . . . . . . . . . . 44
-----------------------
16.3 Permitted Alterations . . . . . . . . . . . . . . 45
---------------------
16.4 Requirements for Permitted Alterations . . . . . . 45
--------------------------------------
16.5 Ownership and Removal of Permitted Alterations . . 46
----------------------------------------------
16.6 Signs . . . . . . . . . . . . . . . . . . . . . . 46
-----

ARTICLE 17: [RESERVED] . . . . . . . . . . . . . . . . . . . 46

ARTICLE 18: ASSIGNMENT AND
SALE OF LEASED PROPERTY . . . . . . . . . . 46

18.1 Prohibition on Assignment and Subletting . . . . . 46
----------------------------------------
</TABLE>

(iii)
<PAGE> 5

<TABLE>
<S> <C>
18.2 Requests for Landlord's Consent to Assignment,
-------------------------------------------------
Sublease or Management Agreement . . . . . . . . . 47
--------------------------------
18.3 Agreements with Residents . . . . . . . . . . . . 48
-------------------------
18.4 Sale of Leased Property . . . . . . . . . . . . . 48
-----------------------
18.5 Assignment by Landlord . . . . . . . . . . . . . . 48
----------------------

ARTICLE 19: HOLDOVER AND SURRENDER . . . . . . . . . . . . . 48

19.1 Holding Over . . . . . . . . . . . . . . . . . . . 48
------------
19.2 Surrender . . . . . . . . . . . . . . . . . . . . 49
---------

ARTICLE 20: LETTER OF CREDIT . . . . . . . . . . . . . . . . 49

20.1 Terms of Letter of Credit . . . . . . . . . . . . 49
-------------------------
20.2 Replacement Letter of Credit . . . . . . . . . . . 49
----------------------------
20.3 Draws . . . . . . . . . . . . . . . . . . . . . . 50
-----
20.4 Partial Draws . . . . . . . . . . . . . . . . . . 50
-------------
20.5 Substitute Letter of Credit . . . . . . . . . . . 51
---------------------------
20.6 Reduction in Letter of Credit Amount . . . . . . . 51
------------------------------------

ARTICLE 21: QUIET ENJOYMENT, SUBORDINATION,
ATTORNMENT AND ESTOPPEL CERTIFICATES . . . . . 51

21.1 Quiet Enjoyment . . . . . . . . . . . . . . . . . 51
---------------
21.2 Subordination . . . . . . . . . . . . . . . . . . 51
-------------
21.3 Attornment . . . . . . . . . . . . . . . . . . . . 52
----------
21.4 Estoppel Certificates . . . . . . . . . . . . . . 52
---------------------

ARTICLE 22: REPRESENTATIONS AND WARRANTIES . . . . . . . . . 53

22.1 Organization and Good Standing . . . . . . . . . . 53
------------------------------
22.2 Power and Authority . . . . . . . . . . . . . . . 53
-------------------
22.3 Enforceability . . . . . . . . . . . . . . . . . . 54
--------------
22.4 Government Authorizations . . . . . . . . . . . . 54
-------------------------
22.5 Financial Statements . . . . . . . . . . . . . . . 54
--------------------
22.6 Condition of Facility . . . . . . . . . . . . . . 54
---------------------
22.7 Compliance with Laws . . . . . . . . . . . . . . . 54
--------------------
22.8 No Litigation . . . . . . . . . . . . . . . . . . 55
-------------
22.9 Consents . . . . . . . . . . . . . . . . . . . . . 55
--------
22.10 No Violation . . . . . . . . . . . . . . . . . . . 55
------------
22.11 Reports and Statements . . . . . . . . . . . . . . 55
----------------------
22.12 ERISA . . . . . . . . . . . . . . . . . . . . . . 56
-----
22.13 Chief Executive Office . . . . . . . . . . . . . . 56
----------------------
22.14 Other Name or Entities . . . . . . . . . . . . . . 56
----------------------
22.15 Parties in Possession . . . . . . . . . . . . . . 56
---------------------
22.16 Access . . . . . . . . . . . . . . . . . . . . . . 57
------
22.17 Utilities . . . . . . . . . . . . . . . . . . . . 57
---------
22.18 Condemnation and Assessments . . . . . . . . . . . 57
----------------------------
22.19 Zoning . . . . . . . . . . . . . . . . . . . . . . 57
------
22.20 Pro Forma Statement . . . . . . . . . . . . . . . 57
-------------------
22.21 Environmental Matters . . . . . . . . . . . . . . 57
---------------------
</TABLE>

(iv)
<PAGE> 6

<TABLE>
<S> <C>
22.22 Leases and Contracts . . . . . . . . . . . . . . . 58
--------------------
22.23 No Default . . . . . . . . . . . . . . . . . . . . 58
----------

ARTICLE 23: [RESERVED] . . . . . . . . . . . . . . . . . . . 58

ARTICLE 24: SECURITY INTEREST . . . . . . . . . . . . . . . 58

24.1 Collateral . . . . . . . . . . . . . . . . . . . . 58
----------
24.2 Additional Documents . . . . . . . . . . . . . . . 59
--------------------
24.3 Notice of Sale . . . . . . . . . . . . . . . . . . 59
--------------

ARTICLE 25: MISCELLANEOUS . . . . . . . . . . . . . . . . . 60

25.1 Notices . . . . . . . . . . . . . . . . . . . . . 60
-------
25.2 Advertisement of Leased Property . . . . . . . . . 60
--------------------------------
25.3 Entire Agreement . . . . . . . . . . . . . . . . . 60
----------------
25.4 Severability . . . . . . . . . . . . . . . . . . . 60
------------
25.5 Captions and Headings . . . . . . . . . . . . . . 60
---------------------
25.6 Governing Law . . . . . . . . . . . . . . . . . . 60
-------------
25.7 Memorandum of Lease . . . . . . . . . . . . . . . 61
-------------------
25.8 Waiver . . . . . . . . . . . . . . . . . . . . . . 61
------
25.9 Binding Effect . . . . . . . . . . . . . . . . . . 61
--------------
25.10 Power of Attorney . . . . . . . . . . . . . . . . 61
-----------------
25.11 No Offer . . . . . . . . . . . . . . . . . . . . . 61
--------
25.12 Modification . . . . . . . . . . . . . . . . . . . 62
------------
25.13 Lender's Modification . . . . . . . . . . . . . . 62
---------------------
25.14 No Merger . . . . . . . . . . . . . . . . . . . . 62
---------
25.15 Laches . . . . . . . . . . . . . . . . . . . . . . 62
------
25.16 Limitation on Tenant's Recourse . . . . . . . . . 62
-------------------------------
25.17 Construction of Lease . . . . . . . . . . . . . . 63
---------------------
25.18 Counterparts . . . . . . . . . . . . . . . . . . . 63
------------
25.19 Custody of Escrow Funds . . . . . . . . . . . . . 63
-----------------------
25.20 Landlord's Status as a REIT . . . . . . . . . . . 63
---------------------------
25.21 Exhibits . . . . . . . . . . . . . . . . . . . . . 63
--------
25.22 Waiver of Jury Trial . . . . . . . . . . . . . . . 63
--------------------
25.23 Attorney's Fees and Expenses . . . . . . . . . . . 64
----------------------------
25.24 Survival . . . . . . . . . . . . . . . . . . . . . 64
--------

EXHIBIT A: LEGAL DESCRIPTION . . . . . . . . . . . . . . . . 67

EXHIBIT B: PERMITTED EXCEPTIONS . . . . . . . . . . . . . . 68

EXHIBIT C: DOCUMENTS TO BE DELIVERED . . . . . . . . . . . . 69

EXHIBIT D: TENANT'S CERTIFICATE
AND FACILITY FINANCIAL REPORTS . . . . . . 1

EXHIBIT E: GOVERNMENT AUTHORIZATIONS . . . . . . . . . . . . 7

EXHIBIT F: PENDING LITIGATION . . . . . . . . . . . . . . . 8
</TABLE>

(v)
<PAGE> 7

<TABLE>
<S> <C> <C>
EXHIBIT G: LIST OF LEASES AND CONTRACTS . . . . . . . . . . 9
</TABLE>
<PAGE> 8

LEASE AGREEMENT

This Lease Agreement ("Lease" or "Agreement") is made
effective as of the 22nd day of January, 1996 (the "Effective Date") between
HEALTH CARE REIT, INC., a corporation organized under the laws of the State of
Delaware ("Landlord"), having its principal office located at One SeaGate,
Suite 1950, P.O. Box 1475, Toledo, Ohio 43603, and ALTERNATIVE LIVING SERVICES,
INC., a corporation organized under the laws of the State of Delaware
("Tenant"), having its chief executive office located at 450 N. Sunnyslope
Road, Suite 300, Brookfield, Wisconsin 53005.

R E C I T A L S

A. As of the date hereof, Landlord acquired the Leased
Property (defined below) from Tenant. Landlord paid the Acquisition Amount
(defined below).

B. Landlord desires to lease the Leased Property to
Tenant and Tenant desires to lease the Leased Property from Landlord upon the
terms set forth in this Lease.

NOW, THEREFORE, Landlord and Tenant agree as follows:

ARTICLE 1: LEASED PROPERTY, TERM AND DEFINITIONS

1.1 Leased Property. Landlord hereby leases to Tenant
and Tenant hereby leases from Landlord the following property:

(a) The land described in Exhibit A attached
hereto (the "Land").

(b) All buildings, structures, and other
improvements, including without limitation, sidewalks, alleys, utility pipes,
conduits, and lines, parking areas, and roadways, now or hereafter situated
upon the Land (the "Improvements").

(d) All permanently affixed equipment, machinery,
fixtures, and other items of real and personal property, including all
components thereof, located in, or used in connection with, and permanently
affixed to or incorporated into the Improvements, including without limitation,
all furnaces, boilers, heaters, electrical equipment, heating, plumbing,
lighting, ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems and
apparatus, sprinkler systems and fire and theft protection equipment, and
built-in oxygen and vacuum systems, all of which, to the greatest extent
permitted by law, are hereby deemed by the parties hereto to constitute real
estate, together with all replacements, modifications, alterations and
additions thereto but specifically

<PAGE> 9

excluding all items included within the category of Personal Property as
defined below (collectively the "Fixtures").

(e) All machinery, equipment, furniture,
furnishings, movable walls or partitions, computers, trade fixtures, consumable
inventory and supplies, and other personal property used or useful in Tenant's
business on the Leased Property, including without limitation, all items of
furniture, furnishings, equipment, supplies and inventory listed on Exhibit B
attached hereto and the replacements therefor, except items, if any, included
within the definition of Fixtures (collectively the "Personal Property").

SUBJECT, HOWEVER, to all easements, liens, encumbrances,
restrictions, agreements, and other title matters existing as of the date
hereof as listed on Exhibit B attached hereto (the "Permitted Exceptions").

1.2 Term. The initial term ("Initial Term") of this
Lease commences on the Effective Date and expires at 12:00 Midnight Eastern
Time on January 31, 2006 (the "Expiration Date"); provided, however, that
Tenant has one or more options to renew the Lease pursuant to Article 12.

1.3 Definitions. Except as otherwise expressly provided,
[i] the terms defined in this section have the meanings assigned to them in
this section and include the plural as well as the singular; [ii] all
accounting terms not otherwise defined herein have the meanings assigned to
them in accordance with generally accepted accounting principles as of the time
applicable; and [iii] the words "herein", "hereof", and "hereunder" and similar
words refer to this Lease as a whole and not to any particular section.

"Acquisition Amount" means $3,550,000.00.

"ADA" means the federal statute entitled Americans with
Disabilities Act, 42 U.S.C. Section 12101, et seq.

"Affiliate" means any person, corporation, partnership,
limited liability company, trust, or other legal entity that, directly or
indirectly, controls, or is controlled by, or is under common control with
Tenant. "Control" (and the correlative meanings of the terms "controlled by"
and "under common control with") means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such entity.

"Affiliate Facility" means the adult congregate living
facility known as Clare Bridge of Sarasota located in Sarasota, Florida.

-2-

<PAGE> 10

"Affiliate Lease" means the lease made between Landlord and
Tenant for the Affiliate Facility, as amended, modified, extended or renewed
from time to time.

"Annual Financial Statements" means the audited balance sheet
and statement of income for the most recent fiscal year and an unaudited
operating statement for the Facility for the most recent fiscal year certified
by the chief financial officer of Tenant to be accurate and to fairly present
the financial condition of the Facility.

"Base Rent" has the meaning set forth in Section 2.1, as
increased from time to time pursuant to Section 2.2.

"Business Day" means any day other than a Saturday, Sunday, or
national holiday.

"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended from time to time. The
terms "disposal" and "release" as used in this Agreement shall have the meaning
set forth in CERCLA.

"Closing" means the closing of the purchase of the Leased
Property by Landlord and the lease of the Leased Property to Tenant.

"Commencement Date" means the Effective Date if such date is
the first day of a month, and if it is not, the first day of the first month
following the Effective Date.

"Effective Date" means the date of this Lease.

"Environmental Laws" means all federal, state, and local
ecological, wetlands, and other environmental laws and regulations, as amended
from time to time, including but not limited to [i] CERCLA; [ii] the Resource
Conservation and Recovery Act; [iii] the Hazardous Materials Transportation
Act; [iv] the Clean Air Act; [v] Clean Water Act; [vi] the Toxic Substances
Control Act; and [vii] the Safe Water Drinking Act.

"Event of Default" has the meaning set forth in Section 8.1.

"Expiration Date" has the meaning set forth in Section 1.2.

"Facility" means the adult congregate living facility known as
Clare Bridge of Bradenton and located on the Leased Property.

"Fair Market Value" has the meaning set forth in Section 13.3.

-3-

<PAGE> 11

"Financial Statements" means [i] the audited annual balance
sheet and statement of income of Tenant for the years ended December 31, 1993
and December 31, 1994; and [ii] the unaudited quarterly balance sheet and
statement of income of Tenant for the period ended September 30, 1995.

"Government Authorizations" means all permits, licenses,
approvals, consents, and authorizations required to comply with all Legal
Requirements, including but not limited to, [i] zoning permits, variances,
exceptions, special use permits, conditional use permits, and consents; [ii]
the permits, licenses, provider agreements and approvals required for licensure
and operation of an adult congregate living facility certified as a provider
under the federal Medicare and state Medicaid programs; [iii] environmental,
ecological, coastal, wetlands, air, and water permits, licenses, and consents;
[iv] curb cut, subdivision, land use, and planning permits, licenses, approvals
and consents; [v] building, sign, fire, health, and safety permits, licenses,
approvals, and consents; and [vi] architectural reviews, approvals, and
consents required under restrictive covenants.

"Hazardous Materials" means any substance [i] the presence of
which poses a hazard to the health or safety of persons on or about the Land
including but not limited to asbestos containing materials; [ii] which requires
removal or remediation under any Environmental Law, including without
limitation any substance which is toxic, explosive, flammable, radioactive, or
otherwise hazardous; or [iii] which is regulated under or classified under any
Environmental Law as hazardous or toxic including but not limited to any
substance within the meaning of "hazardous substance", "hazardous material",
"hazardous waste", "toxic substance", "regulated substance", "solid waste", or
"pollutant" as defined in any Environmental Law.

"Impositions" has the meaning set forth in Section 3.2.

"Increaser Rate" means 20 basis points per year.

"Initial Term" has the meaning set forth in Section 1.2.

"Issuer" means a financial institution satisfactory to
Landlord issuing the Letter of Credit and such Issuer's successors and assigns.
Any "Issuer" shall have a Lace Financial Service Rating of "C+" or higher at
all times throughout the Term.

"Lease Advance" means [i] the first Lease Advance by Landlord
in the Acquisition Amount for the acquisition of the

-4-

<PAGE> 12

Leased Property or [ii] any other advance of funds by Landlord to Tenant
pursuant to the term of this Lease.

"Lease Advance Amount" means the amount of any Lease Advance.
The Acquisition Amount is the first Lease Advance Amount.

"Lease Advance Date" means the date on which Landlord makes a
Lease Advance.

"Lease Amount" is an aggregate concept and means the sum of
the Lease Advance Amounts outstanding at the applicable time.

"Lease Payments" means the sum of the Base Rent payments (as
increased from time to time) for the applicable period.

"Lease Rate" means the annual rate used to determine Base Rent
for each Lease Advance. The Lease Rate is the sum of the applicable Rate Index
plus the applicable Rate Spread, computed using the 365/360 method. The Lease
Rate includes any accrued Increaser Rate. On each Renewal Date, the Lease Rate
will be reset for the Lease Amount based upon the applicable Rate Index plus
the applicable Rate Spread in effect on the Rate Determination Date for such
Renewal Date.

"Lease Year" means each consecutive period of 365 or 366 days
throughout the Term. The first Lease Year commences on the Commencement Date
and expires on the day before the first anniversary of the Commencement Date.

"Leased Property" means, collectively, the Land, Improvements,
Appurtenances, Fixtures and Personal Property.

"Legal Requirements" means all laws, regulations, rules,
orders, writs, injunctions, decrees, certificates, requirements, agreements,
conditions of participation and standards of any federal, state, county,
municipal or other governmental entity, administrative agency, insurance
underwriting board, architectural control board, private third-party payor,
accreditation organization, or any restrictive covenants applicable to the
development, construction, condition and operation of the Facility by Tenant,
including but not limited to, [i] zoning, building, fire, health, safety, sign,
and subdivision regulations and codes; [ii] certificate of need laws; [iii]
licensure to operate as an adult congregate living facility; [iv] Medicare and
Medicaid certification requirements; [v] the ADA; [vi] any Environmental Laws;
and [vii] requirements, conditions and standards for participation in
third-party payer insurance programs.

"Letter of Credit" means an irrevocable and transferable
Letter of Credit in an amount initially equal to 5% of the Lease Amount (and
subject to increase as provided in Section 15.7 or reduction

-5-

<PAGE> 13

as provided in Section 20.6), issued by Issuer in favor of Landlord as security
for the Lease and in form acceptable to Lender, and any amendments thereto or
replacements or substitutions therefor.

"Material Obligation" means [i] any indebtedness secured by a
security interest in or a lien, deed of trust or mortgage on any of the Leased
Property (or any part thereof, including any Personal Property) and any
agreement relating thereto; [ii] any obligation or agreement that is material
to the construction or operation of the Facility or that is material to
Tenant's business or financial condition; [iii] any indebtedness or capital
lease of Tenant that has an outstanding principal balance of at least
$50,000.00 and any agreement relating thereto; [iv] any obligation to or
agreement with the Issuer relating to the Letter of Credit; and [v] any
sublease of the Leased Property.

"Option Price" has the meaning set forth in Section 13.2.

"Option to Purchase" has the meaning set forth in Section 13.1.

"Periodic Financial Statements" means [i] unaudited balance
sheet and statement of income of Tenant for the most recent quarter; and [ii]
unaudited operating statement for the Facility for the most recent month.

"Permitted Exceptions" means the exceptions to title set forth
on Exhibit B.

"Permitted Liens" means [i] liens granted to Landlord; [ii]
liens customarily incurred by Tenant in the ordinary course of business for
items not delinquent including mechanic's liens and deposits and charges under
worker's compensation laws; [iii] liens for taxes and assessments not yet due
and payable; [iv] any lien, charge, or encumbrance which is being contested in
good faith pursuant to this Agreement; [v] the Permitted Exceptions; and [vi]
purchase money financing and capitalized equipment leases for the acquisition
of personal property provided, however, that Landlord obtains a nondisturbance
agreement from the purchase money lender or equipment lessor in form and
substance as may be satisfactory to Landlord if the original cost of the
equipment exceeds $50,000.00.

"Pro Forma Statement" means a financial forecast for the
Facility for the next 5 year period prepared in accordance with the diligence
requirements for forecasts established by the American Institute of Certified
Public Accountants.

"Purchase Notice" has the meaning set forth in Section 13.1.

"Rate Determination Date" means the date on which the value
for the Rate Index is established for computing any Lease

-6-

<PAGE> 14

Rate. For any Lease Advances made during the Initial Term, the Rate
Determination Date is the Lease Advance Date. For any Renewal Date, the Rate
Determination Date is the last Business Day of the current Term.

"Rate Index" means the yield quoted in the Wall Street Journal
on the applicable Rate Determination Date for the most actively traded United
States Treasury Notes having the nearest equivalent maturity date to the
Expiration Date or the expiration date for the current Renewal Term, as
applicable. For any Lease Advance other than the first Lease Advance, the
yield shall be computed based upon the remainder of the Initial Term or Renewal
Term, as applicable.

"Rate Spread" means the rate spread from time to time used to
calculate the Lease Rate applicable to any Lease Advance. The Rate Spread is
[i] 4.00% for the Initial Term; [ii] for the first Renewal Term, the greater
of [a] the sum of the Lease Rate in effect at the end of the Initial Term plus
20 basis points, or [b] 6.00% ; [iii] for the second Renewal Term, the greater
of [a] the sum of the Lease Rate in effect at the end of the first Renewal Term
plus 20 basis points, or [b] 7.00%; and [iv] for the third Renewal Term, the
greater of [a] the sum of the Lease Rate in effect at the end of the Second
Renewal Term plus 20 basis points, or [b] 8.00%.

"Receivables" means [i] all of Tenant's rights to receive
payment for providing resident care and services at the Facility as set forth
in any accounts, contract rights, and instruments, and [ii] those documents,
chattel paper, inventory proceeds, provider agreements, participation
agreements, ledger sheets, files, records, computer programs, tapes, and
agreements relating to Tenant's rights to receive payment for providing
resident care services at the Facility.

"Renewal Date" means the first day of each Renewal Term.

"Renewal Option" has the meaning set forth in Section 12.1.

"Renewal Rate" means the Lease Rate established for any
Renewal Date and is the sum of the applicable Rate Index and applicable Rate
Spread.

"Renewal Term" has the meaning set forth in Section 12.1.

"Overdue Rate" has the meaning set forth in Section 8.6.

"State" means the State of Florida.

-7-

<PAGE> 15

"Tenant's Obligations" means all payment and performance
obligations of Tenant under this Lease and all documents executed by Tenant in
connection with this Lease.

"Tenant's Organizational Documents" means the Articles of
Incorporation of Tenant certified by the Secretary of State of the state of
organization, as amended to date and the Bylaws of Tenant certified by Tenant,
as amended to date.

"Term" means the Initial Term and each Renewal Term.

ARTICLE 2: RENT

2.1 Base Rent. Tenant shall pay Landlord base rent
("Base Rent") in advance in consecutive monthly installments payable on the
first day of each month during the Term commencing on the Commencement Date.
If the Effective Date is not the first day of a month, Tenant shall pay
Landlord Base Rent on the Effective Date for the partial month, i.e. for the
period commencing on the Effective Date and ending on the day before the
Commencement Date. The Base Rent for the Initial Term will be computed monthly
and will be equal to 1/12th of the sum of the products of each Lease Advance
times the Lease Rate for each Lease Advance. The Base Rent for each Renewal
Term will be computed in accordance with Section 12.2.

2.2 Increase of Lease Rate and Base Rent. Commencing on
the first anniversary of the Commencement Date and on each anniversary
thereafter throughout the Term (including any Renewal Term and Extended Term),
the Lease Rate will increase by the applicable Increaser Rate. On each date
that the Lease Rate is increased, the Base Rent will be increased accordingly
and will be equal to 1/12th of the sum of the products of each Lease Advance
times the Lease Rate (including the applicable Increaser Rate) for each Lease
Advance.

2.3 Additional Rent. In addition to Base Rent, Tenant
shall pay all other amounts, liabilities, obligations and Impositions which
Tenant assumes or agrees to pay under this Lease and any fine, penalty,
interest, charge and cost which may be added for nonpayment or late payment of
such items (collectively the "Additional Rent"). The Base Rent and Additional
Rent are hereinafter referred to as "Rent". Landlord shall have all legal,
equitable and contractual rights, powers and remedies provided either in this
Lease or by statute or otherwise in the case of nonpayment of the Rent.

2.4 Place of Payment of Rent. Tenant shall make all
payments of Base Rent and any Additional Rent required to be paid to Landlord
at the Landlord's address set forth in the first paragraph of this Lease or at
such other place as Landlord may

-8-

<PAGE> 16

designate from time to time. If delivery is by overnight mail, the address for
Landlord shall be One SeaGate, Suite 1950, Toledo, Ohio 43604.

2.5 Net Lease. This Lease shall be deemed and construed
to be an "absolute net lease", and Tenant shall pay all Rent and other charges
and expenses in connection with the Leased Property throughout the Term,
without abatement, deduction or set-off.

2.6 No Termination, Abatement, Etc. Except as otherwise
specifically provided in this Lease, Tenant shall remain bound by this Lease in
accordance with its terms. Tenant shall not, without the consent of Landlord,
modify, surrender or terminate the Lease, nor seek nor be entitled to any
abatement, deduction, deferment or reduction of Rent, or set-off against the
Rent. Except as expressly provided in this Lease, the obligations of Landlord
and Tenant shall not be affected by reason of [i] any damage to, or destruction
of, the Leased Property or any part thereof from whatever cause or any Taking
(as hereinafter defined) of the Leased Property or any part thereof; [ii] the
lawful or unlawful prohibition of, or restriction upon, Tenant's use of the
Leased Property, or any part thereof, the interference with such use by any
person, corporation, partnership or other entity, or by reason of eviction by
paramount title; [iii] any claim which Tenant has or might have against
Landlord or by reason of any default or breach of any warranty by Landlord
under this Lease or any other agreement between Landlord and Tenant, or to
which Landlord and Tenant are parties; [iv] any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding up
or other proceeding affecting Landlord or any assignee or transferee of
Landlord; or [v] any other cause, whether similar or dissimilar to any of the
foregoing, other than a discharge of Tenant from any such obligations as a
matter of law. If Landlord's mortgagee at any time notifies Tenant to pay Rent
directly to the mortgagee, Tenant shall be entitled to rely upon such notice.
Except as otherwise specifically provided in this Lease, Tenant hereby
specifically waives all rights, arising from any occurrence whatsoever, which
may now or hereafter be conferred upon it by law [a] to modify, surrender or
terminate this Lease or quit or surrender the Leased Property or any portion
thereof; or [b] entitling Tenant to any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Tenant hereunder. The
obligations of Landlord and Tenant hereunder shall be separate and independent
covenants and agreements and the Rent and all other sums payable by Tenant
hereunder shall continue to be payable in all events unless the obligations to
pay the same shall be terminated pursuant to the express provisions of this
Lease or by termination of this Lease other than by reason of an Event of
Default.

-9-

<PAGE> 17

2.7 Computational Method. Landlord and Tenant
acknowledge that all rates under this Lease will be computed based on the
actual number of days elapsed over a 360-day year (365/360 method).

2.8 Commitment Fee. On the Effective Date, Tenant shall
pay a commitment fee to Landlord in an amount equal to 1/2% of the Acquisition
Amount.

ARTICLE 3: IMPOSITIONS AND UTILITIES

3.1 Payment of Impositions. Tenant shall pay, as
Additional Rent, all Impositions that may be levied or become a lien on the
Leased Property or any part thereof at any time (whether prior to or during the
Term), without regard to prior ownership of said Leased Property, before any
fine, penalty, interest, or cost is incurred; provided, however, Tenant may
contest any Imposition in accordance with Section 3.7. Tenant shall deliver to
Landlord [i] not more than 5 days after the due date of each Imposition, copies
of the invoice for such Imposition and the check delivered for payment thereof;
and [ii] not more than 30 days after the due date of each Imposition, a copy of
the official receipt evidencing such payment or other proof of payment
satisfactory to Landlord. Tenant's obligation to pay such Impositions shall be
deemed absolutely fixed upon the date such Impositions become a lien upon the
Leased Property or any part thereof. Tenant, at its expense, shall prepare and
file all tax returns and reports in respect of any Imposition as may be
required by governmental authorities. Tenant shall be entitled to any refund
due from any taxing authority if no Event of Default shall have occurred
hereunder and be continuing. Landlord shall be entitled to any refund from any
taxing authority if an Event of Default has occurred and is continuing. Any
refunds retained by Landlord due to an Event of Default shall be applied as
provided in Section 8.8. Landlord and Tenant shall, upon request of the other,
provide such data as is maintained by the party to whom the request is made
with respect to the Leased Property as may be necessary to prepare any required
returns and reports. In the event governmental authorities classify any
property covered by this Lease as personal property, Tenant shall file all
personal property tax returns in such jurisdictions where it may legally so
file. Landlord, to the extent it possesses the same, and Tenant, to the extent
it possesses the same, will provide the other party, upon request, with cost
and depreciation records necessary for filing returns for any property so
classified as personal property. Where Landlord is legally required to file
personal property tax returns, Tenant will be provided with copies of
assessment notices indicating a value in excess of the reported value in
sufficient time for Tenant to file a protest. Tenant may, upon notice to
Landlord, at Tenant's option and at Tenant's sole cost and expense, protest,
appeal, or institute such other proceedings as Tenant may

-10-

<PAGE> 18

deem appropriate to effect a reduction of real estate or personal property
assessments and Landlord, at Tenant's expense as aforesaid, shall fully
cooperate with Tenant in such protest, appeal, or other action. Tenant shall
reimburse Landlord for all personal property taxes paid by Landlord within 30
days after receipt of billings accompanied by copies of a bill therefor and
payments thereof which identify the personal property with respect to which
such payments are made. Impositions imposed in respect to the tax-fiscal
period during which the Term terminates shall be adjusted and prorated between
Landlord and Tenant, whether or not such Imposition is imposed before or after
such termination, and Tenant's obligation to pay or Landlord's obligation to
refund its prorated share thereof shall survive such termination.

3.2 Definition of Impositions. "Impositions" means,
collectively, [i] taxes (including without limitation, all capital stock and
franchise taxes of Landlord imposed by the State or any governmental entity in
the State due to this lease transaction or Landlord's ownership of the Leased
Property and the income arising therefrom, or due to Landlord being considered
as doing business in the State because of Landlord's ownership of the Leased
Property or lease thereof to Tenant), all real estate and personal property ad
valorem, sales and use, business or occupation, single business, gross
receipts, transaction privilege, rent or similar taxes); [ii] assessments
(including without limitation, all assessments for public improvements or
benefits, whether or not commenced or completed prior to the date hereof and
whether or not to be completed with the Term); [iii] ground rents, water, sewer
or other rents and charges, excises, tax levies, and fees (including without
limitation, license, permit, inspection, authorization and similar fees); [iv]
all taxes imposed on Tenant's operations of the Leased Property, including
without limitation, employee withholding taxes, income taxes and intangible
taxes; [v] all taxes imposed by the State or any governmental entity in the
State with respect to the conveyance of the Leased Property by Landlord to
Tenant or Tenant's designee, including without limitation, conveyance taxes and
capital gains taxes; and [vi] all other governmental charges, in each case
whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character in respect of the Leased Property or any part
thereof and/or the Rent (including all interest and penalties thereon due to
any failure in payment by Tenant), which at any time prior to, during or in
respect of the Term hereof may be assessed or imposed on or in respect of or be
a lien upon [a] Landlord or Landlord's interest in the Leased Property or any
part thereof; [b] the Leased Property or any part thereof or any rent therefrom
or any estate, right, title or interest therein; or [c] any occupancy,
operation, use or possession of, or sales from, or activity conducted on, or in
connection with the Leased Property or the leasing or use of the Leased
Property or any part thereof. Tenant shall not, however, be required to pay
any tax based on net income (whether denominated as

-11-

<PAGE> 19

a franchise or capital stock or other tax) imposed on Landlord by any
governmental entity other than as described in clause [i] above.

3.3 Escrow of Impositions. If an Event of Default occurs
and while it remains uncured, Tenant shall, at Landlord's election, deposit
with Landlord on the first day of each month a sum equal to 1/12th of the
Impositions assessed against the Leased Property for the preceding tax year,
which sums shall be used by Landlord toward prompt payment of such Impositions.
Tenant, on demand, shall pay to Landlord any additional funds necessary to pay
and discharge the obligations of Tenant pursuant to the provisions of this
Section. The receipt by Landlord of the payment of such Impositions by and
from Tenant shall only be as an accommodation to Tenant, the mortgagees, and
the taxing authorities, and shall not be construed as rent or income to
Landlord, Landlord serving, if at all, only as a conduit for delivery purposes.

3.4 Utilities. Tenant shall pay, as Additional Rent, all
taxes, assessments, charges, deposits, and bills for utilities, including
without limitation charges for water, gas, oil, sanitary and storm sewer,
electricity, telephone service, and trash collection, which may be charged
against the occupant of the Improvements during the Term. If an Event of
Default occurs and while it remains uncured, Tenant shall, at Landlord's
election, deposit with Landlord on the first day of each month a sum equal to
1/12th of the amount of the annual utility expenses for the preceding Lease
Year, which sums shall be used by Landlord to promptly pay such utilities.
Tenant shall, on demand, pay to Landlord any additional amount needed to pay
such utilities. Landlord's receipt of such payments shall only be an
accommodation to Tenant and the utility companies and shall not constitute rent
or income to Landlord. Tenant shall at all times maintain that amount of heat
necessary to ensure against the freezing of water lines. Tenant hereby agrees
to indemnify and hold Landlord harmless from and against any liability or
damages to the utility systems and the Leased Property that may result from
Tenant's failure to maintain sufficient heat in the Improvements unless the
failure arises from Landlord's failure to make prompt payment of utility
expenses to the extent that funds for such expenses have been deposited with
Landlord under this section.

3.5 Discontinuance of Utilities. Landlord will not be
liable for damages to person or property or for injury to, or interruption of,
business for any discontinuance of utilities nor will such discontinuance in
any way be construed as an eviction of Tenant or cause an abatement of rent or
operate to release Tenant from any of Tenant's obligations under this Lease
unless Landlord has failed to make prompt payment of utility expenses to the
extent that funds for such expenses have been deposited with Landlord under
Section 3.4 above.

-12-

<PAGE> 20

3.6 Business Expenses. Tenant shall promptly pay all
expenses and costs incurred in connection with the operation of the Facility on
the Leased Property, including without limitation, employee benefits, employee
vacation and sick pay, consulting fees, and expenses for inventory and
supplies.

3.7 Permitted Contests. Tenant, on its own or on
Landlord's behalf (or in Landlord's name), but at Tenant's expense, may
contest, by appropriate legal proceedings conducted in good faith and with due
diligence, the amount or validity or application, in whole or in part, of any
Imposition or any Legal Requirement or insurance requirement or any lien,
attachment, levy, encumbrance, charge or claim provided that [i] in the case of
an unpaid Imposition, lien, attachment, levy, encumbrance, charge or claim, the
commencement and continuation of such proceedings shall suspend the collection
thereof from Landlord and from the Leased Property; [ii] neither the Leased
Property nor any Rent therefrom nor any part thereof or interest therein would
be in any immediate danger of being sold, forfeited, attached or lost; [iii] in
the case of a Legal Requirement, Landlord would not be in any immediate danger
of civil or criminal liability for failure to comply therewith pending the
outcome of such proceedings; [iv] in the event that any such contest shall
involve a sum of money or potential loss in excess of $50,000.00, Tenant shall
deliver to Landlord and its counsel an opinion of Tenant's counsel to the
effect set forth in clauses [i], [ii] and [iii], to the extent applicable; [v]
in the case of a Legal Requirement and/or an Imposition, lien, encumbrance or
charge, Tenant shall give such reasonable security as may be demanded by
Landlord to insure ultimate payment of the same and to prevent any sale or
forfeiture of the affected Leased Property or the Rent by reason of such
nonpayment or noncompliance; provided, however, the provisions of this Section
shall not be construed to permit Tenant to contest the payment of Rent (except
as to contests concerning the method of computation or the basis of levy of any
Imposition or the basis for the assertion of any other claim) or any other sums
payable by Tenant to Landlord hereunder; [vi] in the case of an insurance
requirement, the coverage required by Article 4 shall be maintained; and [vii]
if such contest be finally resolved against Landlord or Tenant, Tenant shall,
as Additional Rent due hereunder, promptly pay the amount required to be paid,
together with all interest and penalties accrued thereon, or comply with the
applicable Legal Requirement or insurance requirement. Landlord, at Tenant's
expense, shall execute and deliver to Tenant such authorizations and other
documents as may be reasonably required in any such contest, and, if reasonably
requested by Tenant or if Landlord so desires, Landlord shall join as a party
therein. Tenant hereby agrees to indemnify and save Landlord harmless from and
against any liability, cost or expense of any kind that may be imposed upon
Landlord in connection with any such contest and any loss resulting therefrom.

-13-

<PAGE> 21

ARTICLE 4: INSURANCE

4.1 Property Insurance. At Tenant's expense, Tenant
shall maintain in full force and effect a property insurance policy or policies
insuring the Leased Property against the following:

(a) Loss or damage commonly covered by a "Special
Form" policy insuring against physical loss or damage to the Improvements and
Personal Property, including but not limited to, risk of loss from fire and
other hazards, collapse, transit coverage, vandalism, malicious mischief,
theft, earthquake (if the Leased Property is in earthquake zone 1 or 2) and
sinkholes (if usually recommended in the area of the Leased Property). The
policy shall be in the amount of the full replacement value (as defined in
Section 4.5) of the Improvements and Personal Property and shall contain a
deductible amount acceptable to Landlord. Landlord shall be named as an
additional insured. The policy shall include a stipulated value endorsement or
agreed amount endorsement and endorsements for contingent liability for
operations of building laws, demolition costs, and increased cost of
construction.

(b) If applicable, loss or damage by explosion of
steam boilers, pressure vessels, or similar apparatus, now or hereafter
installed on the Leased Property, in commercially reasonable amounts acceptable
to Landlord.

(c) Consequential loss of rents and income
coverage insuring against all "Special Form" risk of physical loss or damage
with limits and deductible amounts acceptable to Landlord covering risk of loss
during the first 9 months of reconstruction, and containing an endorsement for
extended period of indemnity of at least 6 months, and shall be written with a
stipulated amount of coverage if available at a reasonable premium.

(d) If the Leased Property is located, in whole
or in part, in a federally designated 100- year flood plain area, flood
insurance for the Improvements in an amount equal to the lesser of [i] the full
replacement value of the Improvements; or [ii] the maximum amount of insurance
available for the Improvements under all federal and private flood insurance
programs.

(e) Loss or damage caused by the breakage of
plate glass in commercially reasonable amounts acceptable to Landlord.

(f) Loss or damage commonly covered by blanket
crime insurance including employee dishonesty, loss of money orders or paper
currency, depositor's forgery, and loss of property of patients accepted by
Tenant for safekeeping, in commercially reasonable amounts acceptable to the
Landlord.

-14-

<PAGE> 22

4.2 Liability Insurance. At Tenant's expense, Tenant
shall maintain liability insurance against the following:

(a) Claims for personal injury or property damage
commonly covered by comprehensive general liability insurance with endorsements
for incidental malpractice, contractual, personal injury, owner's protective
liability, voluntary medical payments, products and completed operations, broad
form property damage, and extended bodily injury, with commercially reasonable
amounts for bodily injury, property damage, and voluntary medical payments
acceptable to Landlord, but with a combined single limit of not less than
$5,000,000.00 per occurrence.

(b) Claims for personal injury and property
damage commonly covered by comprehensive automobile liability insurance,
covering all owned and non-owned automobiles, with commercially reasonable
amounts for bodily injury, property damage, and for automobile medical payments
acceptable to Landlord, but with a combined single limit of not less than
$5,000,000.00 per occurrence.

(c) Claims for personal injury commonly covered
by medical malpractice insurance in commercially reasonable amounts acceptable
to Landlord.

(d) Claims commonly covered by worker's
compensation insurance for all persons employed by Tenant on the Leased
Property. Such worker's compensation insurance shall be in accordance with the
requirements of all applicable local, state, and federal law.

4.3 Builder's Risk Insurance. In connection with any
construction, Tenant shall maintain in full force and effect a builder's
completed value risk policy ("Builder's Risk Policy") of insurance in a
nonreporting form insuring against all "Special Form" risk of physical loss or
damage to the Improvements, including but not limited to, risk of loss from
fire and other hazards, collapse, transit coverage, vandalism, malicious
mischief, theft, earthquake (if Leased Property is in earthquake zone 1 or 2)
and sinkholes (if usually recommended in the area of the Leased Property). The
Builder's Risk Policy shall include endorsements providing coverage for
building materials and supplies and temporary premises. The Builder's Risk
Policy shall be in the amount of the full replacement value of the Improvements
and shall contain a deductible amount acceptable to Landlord. Landlord shall
be named as an additional insured. The Builder's Risk Policy shall include an
endorsement permitting initial occupancy.

4.4 Insurance Requirements. The following provisions
shall apply to all insurance coverages required hereunder:

-15-

<PAGE> 23

(a) The form and substance of all policies shall
be subject to the approval of Landlord, which approval will not be unreasonably
withheld.

(b) The carriers of all policies shall have a
Best's Rating of "A" or better and a Best's Financial Category of X or higher
and shall be authorized to do insurance business in the State.

(c) Tenant shall be the "named insured" and
Landlord shall be an "additional insured" on each liability policy. On all
property and casualty policies, Landlord and Tenant shall be joint loss payees.

(d) Tenant shall deliver to Landlord certificates
or policies showing the required coverages and endorsements. The policies of
insurance shall provide that the policy may not be cancelled or not renewed,
and no material change or reduction in coverage may be made, without at least
30 days' prior written notice to Landlord.

(e) The policies shall contain a severability of
interest and/or cross-liability endorsement, provide that the acts or omissions
of Tenant or Landlord will not invalidate the coverage of the other party, and
provide that Landlord shall not be responsible for payment of premiums.

(f) All loss adjustment shall require the written
consent of Landlord and Tenant, as their interests may appear.

(g) At least 30 days prior to the expiration of
each policy, Tenant shall deliver to Landlord a certificate showing renewal of
such policy and payment of the annual premium therefor.

4.5 Replacement Value. The term "full replacement value"
means the actual replacement cost thereof from time to time including increased
cost of construction endorsement, with no reductions or deductions. Tenant
shall, in connection with each annual policy renewal, deliver to Landlord a
redetermination of the full replacement value by the insurer or an endorsement
indicating that the Leased Property is insured for its full replacement value.
If Tenant makes any Permitted Alterations (as hereinafter defined) to the
Leased Property, Landlord may have such full replacement value redetermined at
any time after such Permitted Alterations are made, regardless of when the full
replacement value was last determined.

4.6 Blanket Policy. Notwithstanding anything to the
contrary contained in this Section, Tenant may carry the insurance required by
this Article under a blanket policy of insurance, provided that the coverage
afforded Tenant will not be reduced or

-16-

<PAGE> 24

diminished or otherwise be different from that which would exist under a
separate policy meeting all of the requirements of this Lease.

4.7 No Separate Insurance. Tenant shall not take out
separate insurance concurrent in form or contributing in the event of loss with
that required in this Article, or increase the amounts of any then existing
insurance, by securing an additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including Landlord and any mortgagees, are included therein as additional
insureds or loss payees, the loss is payable under said insurance in the same
manner as losses are payable under this Lease, and such additional insurance is
not prohibited by the existing policies of insurance. Tenant shall immediately
notify Landlord of the taking out of such separate insurance or the increasing
of any of the amounts of the existing insurance by securing an additional
policy or additional policies.

4.8 Waiver of Subrogation. Each party hereto hereby
waives any and every claim which arises or may arise in its favor and against
the other party hereto during the Term for any and all loss of, or damage to,
any of its property located within or upon, or constituting a part of, the
Leased Property, which loss or damage is covered by valid and collectible
insurance policies, to the extent that such loss or damage is recoverable under
such policies. Said mutual waiver shall be in addition to, and not in
limitation or derogation of, any other waiver or release contained in this
Lease with respect to any loss or damage to property of the parties hereto.
Inasmuch as the said waivers will preclude the assignment of any aforesaid
claim by way of subrogation (or otherwise) to an insurance company (or any
other person), each party hereto agrees immediately to give each insurance
company which has issued to it policies of insurance, written notice of the
terms of said mutual waivers, and to have such insurance policies properly
endorsed, if necessary, to prevent the invalidation of said insurance coverage
by reason of said waivers, so long as such endorsement is available at a
reasonable cost.

4.9 Mortgages. The following provisions shall apply if
Landlord now or hereafter places a mortgage on the Leased Property or any part
thereof: [i] Tenant shall obtain a standard form of lender's loss payable
clause insuring the interest of the mortgagee; [ii] Tenant shall deliver
evidence of insurance to such mortgagee; [iii] loss adjustment shall require
the consent of the mortgagee which consent shall not be unreasonably withheld;
and [iv] Tenant shall provide such other information and documents as may be
reasonably required by the mortgagee.

4.10 Escrows. After an Event of Default occurs hereunder
and is continuing, Tenant shall make such periodic payments of

-17-

<PAGE> 25

insurance premiums in accordance with Landlord's requirements after receipt of
notice thereof from Landlord.

ARTICLE 5: INDEMNITY

5.1 Tenant's Indemnification. Tenant hereby indemnifies
and agrees to hold harmless Landlord, any successors or assigns of Landlord,
and Landlord's and such successor's and assign's directors, officers, employees
and agents from and against any and all demands, claims, causes of action,
fines, penalties, damages (including consequential damages), losses,
liabilities (including strict liability), judgments, and expenses (including,
without limitation, reasonable attorneys' fees, court costs, and the costs set
forth in Section 8.7) incurred in connection with or arising from: [i] the use
or occupancy of the Leased Property by Tenant or any persons claiming under
Tenant; [ii] any activity, work, or thing done, or permitted or suffered by
Tenant in or about the Leased Property; [iii] any acts, omissions, or
negligence of Tenant or any person claiming under Tenant, or the contractors,
agents, employees, invitees, or visitors of Tenant or any such person; [iv] any
breach, violation, or nonperformance by Tenant or any person claiming under
Tenant or the employees, agents, contractors, invitees, or visitors of Tenant
or of any such person, of any term, covenant, or provision of this Lease or any
law, ordinance, or governmental requirement of any kind including, without
limitation, any failure to comply with any applicable requirements under the
ADA; [v] any injury or damage to the person, property or business of Tenant,
its employees, agents, contractors, invitees, visitors, or any other person
entering upon the Leased Property; and [vi] any construction, alterations,
changes or demolition of the Facility performed by or contracted for Tenant or
its employees, agents or contractors. Provided, however, that Tenant shall
have no indemnity obligation with respect to matters, liabilities, obligations,
claims, damages, penalties, causes of actions, costs and expenses caused by
Landlord's gross negligence or willful misconduct. If any action or proceeding
is brought against Landlord, its employees, or agents by reason of any such
claim, Tenant, upon notice from Landlord, will defend the claim at Tenant's
expense with counsel reasonably satisfactory to Landlord. All amounts payable
to Landlord under this section shall be payable on written demand and any such
amounts which are not paid within 10 days after demand therefor by Landlord
shall bear interest at the Overdue Rate. In case any action, suit or
proceeding is brought against Tenant by reason of any such occurrence, Tenant
shall use its best efforts to defend such action, suit or proceeding.

5.1.1 Notice of Claim. Landlord shall notify Tenant in
writing of any claim or action brought against Landlord in which indemnity may
be sought against Tenant pursuant to this section. Such notice shall be given
in sufficient time to allow Tenant to defend or participate in such claim or
action, but the failure to

-18-

<PAGE> 26

give such notice in sufficient time shall not constitute a defense hereunder
nor in any way impair the obligations of Tenant under this section unless the
failure to give such notice precludes Tenant's defense of any such action.

5.1.2 Survival of Covenants. The covenants of Tenant
contained in this section shall remain in full force and effect after the
termination of this Agreement until the expiration of the period stated in the
applicable statute of limitations during which a claim or cause of action may
be brought and payment in full or the satisfaction of such claim or cause of
action and of all expenses and charges incurred by Landlord relating to the
enforcement of the provisions herein specified.

5.1.3 Reimbursement of Expenses. Unless prohibited by law,
Tenant hereby agrees to pay to Landlord all of the reasonable fees, charges and
reasonable out-of-pocket expenses related to the Facility and required hereby,
or incurred by Landlord in enforcing the provisions of this Agreement.

5.2 Environmental Indemnity; Audits.

5.2.1 Indemnification. Tenant hereby indemnifies and
agrees to hold harmless Landlord, any successors to Landlord's interest in this
Lease, and Landlord's and such successors' directors, officers, employees and
agents from and against any losses, claims, damages (including consequential
damages), penalties, fines, liabilities (including strict liability), costs
(including cleanup and recovery costs), and expenses (including expenses of
litigation and reasonable attorneys' fees) incurred by Landlord or any other
indemnitee or assessed against the Leased Property by virtue of any claim or
lien by any governmental or quasi-governmental unit, body, or agency, or any
third party, for cleanup costs or other costs pursuant to any Environmental
Law. Tenant's indemnity shall survive the termination of this Lease.
Provided, however, Tenant shall have no indemnity obligation with respect to
[i] Hazardous Materials first introduced to the Leased Property subsequent to
the date that Tenant's occupancy of the Leased Property shall have fully
terminated; or [ii] Hazardous Materials introduced to the Leased Property by
Landlord, its agent, employees, successors or assigns. If at any time during
the Term of this Lease any governmental authority notifies Landlord or Tenant
of a violation of any Environmental Law or Landlord reasonably believes that a
Facility may violate any Environmental Law, Landlord may require one or more
environmental audits of the Leased Premises, in such form, scope and substance
as specified by Landlord, at Tenant's expense. Tenant shall, within 30 days
after receipt of an invoice from Landlord, reimburse Landlord for all costs and
expenses incurred in reviewing any environmental audit, including without
limitation, reasonable attorneys' fees and costs.

-19-

<PAGE> 27

5.3 Limitation of Landlord's Liability. Landlord, its
agents, and employees, will not be liable for any loss, injury, death, or
damage (including consequential damages) to persons, property, or Tenant's
business occasioned by theft, act of God, public enemy, injunction, riot,
strike, insurrection, war, court order, requisition, order of governmental body
or authority, fire, explosion, falling objects, steam, water, rain or snow,
leak or flow of water (including water from the elevator system), rain or snow
from the Leased Property or into the Leased Property or from the roof, street,
subsurface or from any other place, or by dampness or from the breakage,
leakage, obstruction, or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, or lighting fixtures of the Leased
Property, or from construction, repair, or alteration of the Leased Property or
from any acts or omissions of any other occupant or visitor of the Leased
Property, or from any other cause beyond Landlord's control. The foregoing
limitation does not apply to loss, injury, death or damage caused by Landlord's
gross negligence or willful misconduct.

ARTICLE 6: USE AND ACCEPTANCE OF PREMISES

6.1 Use of Leased Property. Tenant shall use and occupy
the Leased Property exclusively as an adult congregate living facility and for
all lawful and licensed ancillary uses, and for no other purpose without the
prior written consent of the Landlord which consent shall not be unreasonably
withheld. Tenant shall obtain and maintain all approvals, licenses, and
consents needed to use and operate the Leased Property as herein permitted.
Tenant shall deliver to Landlord complete copies of surveys, examinations,
certification and licensure inspections, compliance certificates, and other
similar reports issued to Tenant by any governmental agency within 10 days
after Tenant's receipt of each item.

6.2 Acceptance of Leased Property. Tenant acknowledges
that [i] Tenant and its agents have had an opportunity to inspect the Leased
Property; [ii] Tenant has found the Leased Property fit for Tenant's use; [iii]
Landlord will deliver the Leased Property to Tenant in "as-is" condition; [iv]
Landlord is not obligated to make any improvements or repairs to the Leased
Property; and [v] the roof, walls, foundation, heating, ventilating, air
conditioning, telephone, sewer, electrical, mechanical, elevator, utility,
plumbing, and other portions of the Leased Property are in good working order.
Tenant waives any claim or action against Landlord with respect to the
condition of the Leased Property. LANDLORD MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY OR ANY
PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY
PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS TO QUALITY OF THE MATERIAL OR
WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE
TO BE BORNE BY TENANT.

-20-

<PAGE> 28

6.3 Conditions of Use and Occupancy. Tenant agrees that
during the Term it shall use and keep the Leased Property in a careful, safe
and proper manner; not commit or suffer waste thereon; not use or occupy the
Leased Property for any unlawful purposes; not use or occupy the Leased
Property or permit the same to be used or occupied, for any purpose or business
deemed extrahazardous on account of fire or otherwise; keep the Leased Property
in such repair and condition as may be required by the Board of Health, or
other city, state or federal authorities, free of all cost to Landlord; not
permit any acts to be done which will cause the cancellation, invalidation, or
suspension of any insurance policy; and permit Landlord and its agents to enter
upon the Leased Property at all reasonable times to examine the condition
thereof and accompanied by a representative of Tenant to the extent such a
representative is available.

ARTICLE 7: REPAIRS AND MECHANICS' LIENS

7.1 Maintenance. Tenant shall maintain, repair, and
replace the Leased Property, including without limitation, all structural and
nonstructural repairs and replacements to the roof, foundations, exterior
walls, parking areas, sidewalks, water, sewer, and gas connections, pipes, and
mains. Tenant shall pay, as Additional Rent, the full cost of maintenance,
repairs, and replacements. Tenant shall maintain all drives, sidewalks,
parking areas, and lawns on or about the Leased Property in a clean and orderly
condition, free of accumulations of dirt, rubbish, snow and ice. Tenant shall
permit Landlord to inspect the Leased Property at all reasonable times, and
shall implement all reasonable suggestions of the Landlord as to the
maintenance and replacement of the Leased Property.

7.2 Required Alterations. Tenant shall, at Tenant's sole
cost and expense, make any additions, changes, improvements or alterations to
the Leased Property, including structural alterations, which may be required by
any governmental authorities, including those required to maintain licensure or
certification under the Medicare and Medicaid programs (to the extent Tenant is
participating in such programs), whether such changes are required by Tenant's
use, changes in the law, ordinances, or governmental regulations, defects
existing as of the date of this Lease, or any other cause whatever. All such
additions, changes, improvements or alterations shall be deemed to be Permitted
Alterations and shall comply with all laws requiring such alterations and with
the provisions of Section 16.4.

7.3 Mechanic's Liens. Tenant shall have no authority to
permit or create a lien against Landlord's interest in the Leased Property, and
Tenant shall post notices or file such documents, to the extent permitted by
law, as may be required to protect Landlord's interest in the Leased Property
against liens. Tenant

-21-

<PAGE> 29

hereby agrees to defend, indemnify, and hold Landlord harmless from and against
any mechanic's liens against the Leased Property by reason of work, labor,
services or materials supplied or claimed to have been supplied on or to the
Leased Property. Tenant shall remove, bond-off, or otherwise obtain the
release of any mechanic's lien filed against the Leased Property within 10 days
after Tenant receives notice of the filing thereof. Tenant shall pay all
expenses in connection therewith, including without limitation, damages,
interest, court costs and reasonable attorneys' fees.

7.4 Replacements of Fixtures and Personal Property.
Tenant shall not remove Fixtures and Personal Property from the Leased Property
except to replace the Fixtures and Personal Property by other similar items of
equal quality and value. Items being replaced by Tenant may be removed and
shall become the property of Tenant and items replacing the same shall be and
remain the property of Landlord. Tenant shall execute, upon written request
from Landlord, any and all documents necessary to evidence Landlord's ownership
of the Personal Property and replacements therefor. Tenant may finance
replacements for the Fixtures and Personal Property by equipment lease or by a
security agreement and financing statement and if the original cost of the
equipment exceeds $50,000.00, Tenant must obtain the following: [i] Landlord's
consent to the terms and conditions of the equipment lease or security
agreement; and [ii] a nondisturbance agreement from the equipment lessor or
lender upon terms and conditions reasonably acceptable to Landlord for,
including without limitation, the following: [a] Landlord shall have the right
(but not the obligation) to assume such security agreement or equipment lease
upon the occurrence of an Event of Default under this Lease; [b] the equipment
lessor or lender shall notify Landlord of any default by Tenant under the
equipment lease or security agreement and give Landlord a reasonable
opportunity to cure such default; and [c] Landlord shall have the right to
assign its rights under the equipment lease, security agreement, or
nondisturbance agreement. Tenant shall, within 30 days after receipt of an
invoice from Landlord, reimburse Landlord for all costs and expenses incurred
in reviewing and approving the equipment lease, security agreement, and
nondisturbance agreement, including without limitation, reasonable attorneys'
fees and costs.

ARTICLE 8: DEFAULTS AND REMEDIES

8.1 Events of Default. The occurrence of any one or more
of the following shall be an event of default ("Event of Default") hereunder:

(a) Tenant fails to pay in full any installment
of Rent, or any other monetary obligation payable by Tenant under this Lease
(including the Option Price), within 10 days after such payment is due.

-22-

<PAGE> 30

(b) Landlord gives Tenant three or more notices
of non-payment of Rent (after expiration of the 10 day grace period) in any
Lease Year.

(c) Tenant fails to comply with any covenant set
forth in Article 14, Section 15.6, Section 15.7 or Article 20 of this Lease.

(d) Tenant fails to observe and perform any other
covenant, condition or agreement under this Lease to be performed by Tenant and
[i] such failure continues for a period of 30 days after written notice thereof
is given to Tenant by Landlord; or [ii] if, by reason of the nature of such
default, the same cannot be remedied within said 30 days, Tenant fails to
proceed with diligence reasonably satisfactory to Landlord after receipt of the
notice to cure the same or, if Tenant does proceed diligently, Tenant fails to
cure such default within 90 days after receipt of the notice. The foregoing
notice and cure provisions do not apply to any Event of Default otherwise
specifically described in any other subsection of Section 8.1.

(e) Tenant abandons or vacates the Leased
Property or any material part thereof or ceases to do business or ceases to
exist for any reason for any one or more days except as a result of
condemnation or casualty.

(f) [i] The filing by Tenant of a petition under
11 U.S.C. or the commencement of a bankruptcy or similar proceeding by Tenant;
[ii] the failure by Tenant within 60 days to dismiss an involuntary bankruptcy
petition or other commencement of a bankruptcy, reorganization or similar
proceeding against Tenant, or to lift or stay any execution, garnishment or
attachment of such consequence as will impair its ability to carry on its
operation at the Leased Property; [iii] the entry of an order for relief under
11 U.S.C. in respect of Tenant; [iv] any assignment by Tenant for the benefit
of its creditors; [v] the entry by Tenant into an agreement of composition with
its creditors; [vi] the approval by a court of competent jurisdiction of a
petition applicable to Tenant in any proceeding for its reorganization
instituted under the provisions of any state or federal bankruptcy, insolvency,
or similar laws; [vii] appointment by final order, judgment, or decree of a
court of competent jurisdiction of a receiver of a whole or any substantial
part of the properties of Tenant (provided such receiver shall not have been
removed or discharged within 60 days of the date of his qualification).

(g) [i] Any receiver, administrator, custodian or
other person takes possession or control of any of the Leased Property and
continues in possession for 60 days; [ii] any writ against any of the Leased
Property is not released within 60 days; [iii] any judgment is rendered or
proceedings are instituted against the Leased Property or Tenant which affect
the Leased

-23-

<PAGE> 31

Property or any part thereof, which is not dismissed for 60 days (except as
otherwise provided in this Section); [iv] all or a substantial part of the
assets of Tenant are attached, seized, subjected to a writ or distress warrant,
or are levied upon, or come into the possession of any receiver, trustee,
custodian, or assignee for the benefit of creditors; [v] Tenant is enjoined,
restrained, or in any way prevented by court order, or any proceeding is filed
or commenced seeking to enjoin, restrain or in any way prevent Tenant from
conducting all or a substantial part of its business or affairs; or [vi] except
as otherwise permitted hereunder, a final notice of lien, levy or assessment is
filed of record with respect to all or any part of the Leased Property or any
property of Tenant located at the Leased Property and is not dismissed,
discharged, or bonded-off within 30 days.

(h) Any representation or warranty made by Tenant
in this Lease or any other document executed in connection with this Lease, any
guaranty of or other security for this Lease, or any report, certificate,
application, financial statement or other instrument furnished by Tenant
pursuant hereto or thereto shall prove to be false, misleading or incorrect in
any material respect as of the date made.

(i) Tenant defaults on any indebtedness or
obligation to Landlord under this Lease or the Affiliate Lease, or Tenant
receives notice of acceleration of payment in connection with any Material
Obligation unless Tenant can demonstrate to Landlord that such acceleration
will not cause Tenant to be in violation of Section 15.7. This provision
applies to all such indebtedness, obligations and agreements as they may be
amended, modified, extended, or renewed from time to time.

(j) The occurrence of any change in Tenant's
leasehold interest in the Leased Property, or any material change in the
control of Tenant, directly or indirectly, at any time prior to Tenant's
initial public offering, without the prior written consent of Landlord.

(k) The license for the Facility or any other
Government Authorization, is cancelled, suspended or otherwise invalidated,
notice of impending revocation proceedings is received and Tenant fails to
diligently contest such proceeding, or any reduction occurs in the number of
licensed beds or units at the Facility in excess of 3%.

8.2 Remedies. Landlord may exercise any one or more of
the following remedies upon the occurrence of an Event of Default:

(a) Landlord may re-enter and take possession of
the Leased Property without terminating the Lease, and lease the Leased
Property for the account of Tenant at a commercially

-24-

<PAGE> 32

reasonable rate, holding Tenant liable for all costs of the Landlord in
reletting the Leased Property and for the difference in the amount received by
such reletting and the amounts payable by Tenant under the Lease.

(b) Landlord may terminate this Lease, exclude
Tenant from possession of the Leased Property and use efforts to lease the
Leased Property to others at a commercially reasonable rate, holding Tenant
liable for the difference in the amounts received from such reletting and the
amounts payable by Tenant under the Lease.

(c) Landlord may re-enter the Leased Property and
have, repossess and enjoy the Leased Property as if the Lease had not been
made, and in such event, Tenant and its successors and assigns shall remain
liable for any contingent or unliquidated obligations or sums owing at the time
of such repossession.

(d) Landlord may have access to and inspect,
examine and make copies of the books and records and any and all accounts, data
and income tax and other returns of Tenant insofar as they pertain to the
Leased Property.

(e) Landlord may accelerate all of the unpaid
Rent hereunder so that the aggregate Rent for the unexpired term of this Lease
becomes immediately due and payable.

(f) Landlord may take whatever action at law or
in equity as may appear necessary or desirable to collect the Rent and other
amounts payable under the Lease then due and thereafter to become due, or to
enforce performance and observance of any obligations, agreements or covenants
of Tenant under this Lease.

(g) With respect to the Collateral and Landlord's
security interest therein, Landlord may exercise all of its rights as secured
party under Article 9 of the Uniform Commercial Code as adopted in the State.
Landlord may sell the Collateral by public or private sale upon 10 days notice
to Tenant. Tenant agrees that a commercially reasonable manner of disposition
of the Collateral shall include, without limitation and at the option of
Landlord, a sale of the Collateral, in whole or in part, concurrently with the
sale of the Leased Property.

(h) Landlord may obtain control over and collect
the Receivables and apply the proceeds of the collections to satisfaction of
Tenant's Obligations unless prohibited by law. Tenant appoints Landlord or its
designee as attorney for Tenant with powers [i] to receive, to indorse, to sign
and/or to deliver, in Tenant's name or Landlord's name, any and all checks,
drafts, and other instruments for the payment of money relating to the
Receivables, and to waive demand, presentment, notice of dishonor,

-25-

<PAGE> 33

protest, and any other notice with respect to any such instrument; [ii] to sign
Tenant's name on any invoice or bill of lading relating to any Receivable,
drafts against account debtors, assignments and verifications of Receivables,
and notices to account debtors; [iii] to send verifications of Receivables to
any account debtor; and [iv] to do all other acts and things necessary to carry
out this Lease. Landlord shall not be liable for any omissions, commissions,
errors of judgment, or mistakes in fact or law made in the exercise of any such
powers provided Lender's exercise of such powers is commercially reasonable.
At Landlord's option, Tenant shall [i] provide Landlord a full accounting of
all amounts received on account of Receivables with such frequency and in such
form as Landlord may require, either with or without applying all collections
on Receivables in payment of Tenant's Obligations or [ii] deliver to Landlord
on the day of receipt all such collections in the form received and duly
indorsed by Tenant. At Landlord's request, Tenant shall institute any action
or enter into any settlement determined by Landlord to be necessary to obtain
recovery or redress from any account debtor in default of Receivables.
Landlord may give notice of its security interest in the Receivables to any or
all account debtors with instructions to make all payments on Receivables
directly to Landlord, thereby terminating Tenant's authority to collect
Receivables. After terminating Tenant's authority to enforce or collect
Receivables, Landlord shall have the right to take possession of any or all
Receivables and records thereof and is hereby authorized to do so, and only
Landlord shall have the right to collect and enforce the Receivables. Prior to
the occurrence of an Event of Default, at Tenant's cost and expense, but on
behalf of Landlord and for Landlord's account, Tenant shall collect or
otherwise enforce all amounts unpaid on Receivables and hold all such
collections in trust for Landlord, but Tenant may commingle such collections
with Tenant's own funds, until Tenant's authority to do so has been terminated,
which may be done only after an Event of Default. Notwithstanding any other
provision hereof, Landlord does not assume any of Tenant's obligations under
any Receivable, and Landlord shall not be responsible in any way for the
performance of any of the terms and conditions thereof by Tenant.

(i) Without waiving any prior or subsequent Event
of Default, Landlord may waive any Event of Default or, with or without waiving
any Event of Default, remedy any default.

(j) Landlord may terminate its obligation to
disburse Lease Advances.

8.3 Right of Set-Off. After an Event of Default occurs
hereunder and is continuing, Landlord may, and is hereby authorized by Tenant
to, at any time and from time to time without advance notice to Tenant (any
such notice being expressly waived by Tenant), set-off and apply any and all
sums held by Landlord, any

-26-

<PAGE> 34

indebtedness of Landlord to Tenant, and any claims by Tenant against Landlord,
against any obligations of Tenant hereunder and against any claims by Landlord
against Tenant, whether or not such obligations or claims of Tenant are matured
and whether or not Landlord has exercised any other remedies hereunder. The
rights of Landlord under this Section are in addition to any other rights and
remedies Landlord may have against Tenant.

8.4 Performance of Tenant's Covenants. Landlord may
perform any obligation of Tenant which Tenant has failed to perform within 10
days after Landlord has sent a written notice to Tenant informing it of its
specific failure. Tenant shall reimburse Landlord on demand, as Additional
Rent, for any expenditures thus incurred by Landlord and shall pay interest
thereon at the Overdue Rate (as defined in Section 8.6).

8.5 Late Payment Charge. Tenant acknowledges that any
default in the payment of any installment of Rent payable hereunder will result
in loss and additional expense to Landlord in servicing any indebtedness of
Landlord secured by the Leased Property, handling such delinquent payments, and
meeting its other financial obligations, and because such loss and additional
expense is extremely difficult and impractical to ascertain, Tenant agrees that
in the event any Rent payable to Landlord hereunder is not paid within 10 days
after the due date, Tenant shall pay a late charge of 5% of the amount of the
overdue payment as a reasonable estimate of such loss and expenses, unless
applicable law requires a lesser charge, in which event the maximum rate
permitted by such law may be charged by Landlord. The 10 day grace period set
forth in this Section shall not extend the time for payment of Rent or the
period for curing any default or constitute a waiver of such default.

8.6 Interest. In addition to the late payment charge,
any payment not made by Tenant within 10 days after the due date shall
thereafter bear interest at the rate (the "Overdue Rate") of the greater of [i]
18.5% per annum; or [ii] 2.5% per annum above the Lease Rate then in effect;
provided, however, that at no time will Tenant be required to pay interest at a
rate higher than the maximum legal rate and, provided further, that if a court
of competent jurisdiction determines that any other charges payable under this
Lease are deemed to be interest, the Overdue Rate shall be adjusted to ensure
that the aggregate interest payable under this Lease does not accrue at a rate
in excess of the maximum legal rate. Tenant shall not be required to pay
interest upon any late payment fees assessed pursuant to Section 8.5.

8.7 Litigation; Attorneys' Fees. Within 5 days after
Tenant has knowledge of any litigation or other proceeding that may be
instituted against Tenant that is material to the construction or operation of
the Facility or that is material to Tenant's

-27-

<PAGE> 35

business or financial condition, against the Leased Property to secure or
recover possession thereof, or that may affect the title to or the interest of
Landlord in the Leased Property, Tenant shall give written notice thereof to
Landlord. Tenant shall pay all reasonable costs and expenses incurred by
Landlord in enforcing or preserving Landlord's rights under this Lease, whether
or not an Event of Default has actually occurred or has been declared and
thereafter cured, including without limitation, [i] the fees, expenses, and
costs of any litigation, receivership, administrative, bankruptcy, insolvency
or other similar proceeding; [ii] reasonable attorney, paralegal, consulting
and witness fees and disbursements, whether in house counsel or outside
counsel; and [iii] the expenses, including without limitation, lodging, meals,
and transportation, of Landlord and its employees, agents, attorneys, and
witnesses in preparing for litigation, administrative, bankruptcy, insolvency
or other similar proceedings and attendance at hearings, depositions, and
trials in connection therewith. All such costs, charges and fees payable by
Tenant shall be deemed to be Additional Rent under this Lease.

8.8 Escrows and Application of Payments. As security for
the performance of its obligations hereunder, Tenant hereby assigns to Landlord
all its right, title, and interest in and to all monies escrowed with Landlord
under this Lease and all deposits with utility companies, taxing authorities
and insurance companies; provided, however, that Landlord shall not exercise
its rights hereunder until an Event of Default has occurred. Any payments
received by Landlord under any provisions of this Lease during the existence or
continuance of an Event of Default shall be applied to Tenant's obligations in
the order which Landlord may determine.

8.9 Remedies Cumulative. The remedies of Landlord herein
are cumulative to and not in lieu of any other remedies available to Landlord
at law or in equity. The use of any one remedy shall not be taken to exclude
or waive the right to use any other remedy.

ARTICLE 9: DAMAGE AND DESTRUCTION

9.1 Notice of Casualty. If the Leased Property shall be
destroyed, in whole or in part, or damaged by fire, flood, windstorm or other
casualty (a "Casualty"), Tenant shall give written notice thereof to the
Landlord within 3 business days after the occurrence of the Casualty. Within
15 days after the occurrence of the Casualty or as soon thereafter as such
information is reasonably available to Tenant, Tenant shall provide the
following information to Landlord: [i] the date of the Casualty; [ii] the
nature of the Casualty; [iii] a description of the damage or destruction caused
by the Casualty including the type of Leased Property damaged and the area of
the Improvements damaged; [iv] a preliminary estimate of the cost to repair,

-28-

<PAGE> 36

rebuild, restore or replace the Leased Property; [v] a preliminary estimate of
the schedule to complete the repair, rebuilding, restoration or replacement of
the Leased Property; [vi] a description of the anticipated property insurance
claim including the name of the insurer, the insurance coverage limits, the
deductible amount, the expected settlement amount, and the expected settlement
date; and [vii] a description of the business interruption claim including the
name of the insurer, the insurance coverage limits, the deductible amount, the
expected settlement amount, and the expected settlement date. Within five days
after request from Landlord, Tenant will provide Landlord with copies of all
correspondence to the insurer and any other information reasonably requested by
Landlord.

9.2 Substantial Destruction.

9.2.1 If the Improvements are substantially destroyed at
any time other than during the final 18 months of the Initial Term or any
Renewal Term, Tenant shall promptly rebuild and restore the Leased Property in
accordance with Section 9.4 and Landlord shall make the insurance proceeds
available to Tenant for such restoration. The term "Substantially Destroyed"
means any casualty resulting in the loss of use of 35% or more of the licensed
beds at any one Facility.

9.2.2 If the Improvements are substantially destroyed
during the final 18 months of the Initial Term or any Renewal Term, Landlord
may elect to terminate this Lease or terminate this Lease and all Affiliate
Leases, at Landlord's option, and retain the insurance proceeds unless Tenant
exercises its option to renew as set forth in Section 9.2.3 or exercises its
option to purchase as set forth in Section 9.2.4. If Landlord elects to
terminate, Landlord shall give notice ("Termination Notice") of its election to
terminate this Lease (or this Lease and all Affiliate Leases, if elected by
Landlord) within 30 days after receipt of Tenant's notice of the damage. If
Tenant does not exercise its option to renew under Section 9.2.3 or its option
to purchase under Section 9.2.4 within 15 days after delivery of the
Termination Notice, this Lease (or this Lease and all Affiliate Leases, if
elected by Landlord) shall terminate on the 15th day after delivery of the
Termination Notice. If this Lease (or this Lease and all Affiliate Leases, if
elected by Landlord) is so terminated, Tenant shall be liable to Landlord for
all Rent and all other obligations accrued under this Lease through the
effective date of termination and each Affiliate shall be liable to Landlord
for all Rent and all other obligations accrued under its respective Affiliate
Lease through the effective date of termination.

9.2.3 If the Improvements are substantially destroyed
during the final 18 months of the Initial Term or the first or second Renewal
Term and Landlord gives the Termination Notice,

-29-

<PAGE> 37

Tenant shall have the option to renew this Lease. Tenant shall give Landlord
irrevocable notice of Tenant's election to renew, and Tenant shall give
irrevocable notice of renewal of the Affiliate Lease, within 15 days after
delivery of the Termination Notice. If Tenant elects to renew, the Renewal
Term will be in effect for the balance of the then current Term plus a 5 year
period. The Renewal Term will commence on the third day following Landlord's
receipt of Tenant's and notice of renewal. All other terms of this Lease for
the Renewal Term shall be in accordance with Article 12. The Leased Property
will be restored by Tenant in accordance with the provisions of this Article 9
regarding partial destruction.

9.2.4 If the Improvements are substantially destroyed
during the final 18 months of the Initial Term or any Renewal Term and Landlord
gives the Termination Notice, Tenant shall have the option to purchase the
Leased Property. Tenant shall give Landlord notice of Tenant's election to
purchase, and if required by Landlord, Tenant shall give notice of its election
to purchase the Affiliate Facility, within 15 days after delivery of the
Termination Notice. If Tenant elects to purchase the Leased Property and the
Affiliate Facility, the Option Price will be determined in accordance with
Section 13.2 and the Fair Market Value will be determined in accordance with
Section 13.3. For purposes of determining the Fair Market Value, the Leased
Property will be valued as if it had been restored to be equal in value to the
Leased Property existing immediately prior to the occurrence of the damage.
All other terms of the option to purchase shall be in accordance with Article
13. Landlord shall hold the insurance proceeds until the closing of the
purchase of the Leased Property and at closing shall deliver the proceeds to
Tenant.

9.3 Partial Destruction. If the Leased Property is not
substantially destroyed, then Tenant shall comply with the provisions of
Section 9.4 and Landlord shall make the insurance proceeds available to Tenant
for such restoration.

9.4 Restoration. Tenant shall promptly repair, rebuild,
or restore the Leased Property, at Tenant's expense, so as to make the Leased
Property at least equal in value to the Leased Property existing immediately
prior to such occurrence and as nearly similar to it in character as is
practicable and reasonable. Before beginning such repairs or rebuilding, or
letting any contracts in connection with such repairs or rebuilding, Tenant
will submit for Landlord's approval, which approval Landlord will not
unreasonably withhold or delay, plans and specifications meeting the
requirements of Section 16.2 for such repairs or rebuilding. Promptly after
receiving Landlord's approval of the plans and specifications and receiving the
proceeds of insurance, Tenant will begin such repairs or rebuilding and will
prosecute the repairs and rebuilding to completion with diligence, subject,
however, to strikes, lockouts, acts of God, embargoes, governmental
restrictions, and

-30-

<PAGE> 38

other causes beyond Tenant's reasonable control. Landlord will make available
to Tenant the net proceeds of any fire or other casualty insurance paid to
Landlord for such repair or rebuilding as the same progresses, after deduction
of any costs of collection, including reasonable attorneys' fees. Tenant may
assume primary responsibility for collection of the proceeds in consultation
with Landlord. Payments will be made against properly certified vouchers of a
competent architect in charge of the work and approved by Landlord. Prior to
commencing the repairing or rebuilding, Tenant shall deliver to Landlord for
Landlord's approval a schedule setting forth the estimated monthly draws for
such work. Landlord will contribute to such payments out of the insurance
proceeds an amount equal to the proportion that the total net amount received
by Landlord from insurers bears to the total estimated cost of the rebuilding
or repairing, multiplied by the payment by Tenant on account of such work.
Landlord may, however, withhold 10% from each payment until the work is
completed and proof has been furnished to Landlord that no lien or liability
has attached or will attach to the Leased Property or to Landlord in connection
with such repairing or rebuilding. Upon the completion of rebuilding and the
furnishing of such proof, the balance of the net proceeds of such insurance
payable to Tenant on account of such repairing or rebuilding will be paid to
Tenant. Tenant will obtain and deliver to Landlord a temporary or final
certificate of occupancy before the Leased Property is reoccupied for any
purpose. Tenant shall complete such repairs or rebuilding free and clear of
mechanic's or other liens, and in accordance with the building codes and all
applicable laws, ordinances, regulations, or orders of any state, municipal, or
other public authority affecting the repairs or rebuilding, and also in
accordance with all requirements of the insurance rating organization, or
similar body. Any remaining proceeds of insurance after such restoration will
be Tenant's property.

9.5 Insufficient Proceeds. If the proceeds of any
insurance settlement are not sufficient to pay the costs of Tenant's repair,
rebuilding or restoration under Section 9.4 in full, Tenant shall deposit with
Landlord at Landlord's option, and within 10 days of Landlord's request, an
amount sufficient in Landlord's reasonable judgment to complete such repair,
rebuilding or restoration. Tenant shall not, by reason of the deposit or
payment, be entitled to any reimbursement from Landlord or diminution in or
postponement of the payment of the Rent.

9.6 Not Trust Funds. Notwithstanding anything herein or
at law or equity to the contrary, none of the insurance proceeds paid to
Landlord as herein provided shall be deemed trust funds, and Landlord shall be
entitled to dispose of such proceeds as provided in this Article 9. Tenant
expressly assumes all risk of loss, including a decrease in the use, enjoyment
or value, of the

-31-

<PAGE> 39

Leased Property from any casualty whatsoever, whether or not insurable or
insured against.

9.7 Landlord's Inspection. During the progress of such
repairs or rebuilding, Landlord and its architects and engineers may, from time
to time, inspect the Leased Property and will be furnished, if required by
them, with copies of all plans, shop drawings, and specifications relating to
such repairs or rebuilding. Tenant will keep all plans, shop drawings, and
specifications at the building, and Landlord and its architects and engineers
may examine them at all reasonable times. If, during such repairs or
rebuilding, Landlord and its architects and engineers determine that the
repairs or rebuilding are not being done in accordance with the approved plans
and specifications, Landlord will give prompt notice in writing to Tenant,
specifying in detail the particular deficiency, omission, or other respect in
which Landlord claims such repairs or rebuilding do not accord with the
approved plans and specifications. Upon the receipt of any such notice, Tenant
will cause corrections to be made to any deficiencies, omissions, or such other
respect. Tenant's obligations to supply insurance, according to Article 4,
will be applicable to any repairs or rebuilding under this Section.

9.8 Landlord's Costs. Tenant shall, within 30 days after
receipt of an invoice from Landlord, pay the reasonable costs, expenses, and
fees of any architect or engineer employed by Landlord to review any plans and
specifications and to supervise and approve any construction, or for any
services rendered by such architect or engineer to Landlord as contemplated by
any of the provisions of this Lease, or for any services performed by
Landlord's attorneys in connection therewith.

9.9 No Rent Abatement. Except to the extent that
business interruption insurance proceeds are received by Landlord, rent will
not abate pending the repairs or rebuilding of the Leased Property.

ARTICLE 10: CONDEMNATION

10.1 Total Taking. If, by exercise of the right of
eminent domain or by conveyance made in response to the threat of the exercise
of such right ("Taking"), the entire Leased Property is taken, or so much of
the Leased Property is taken that the Leased Property cannot be used by Tenant
for the purposes for which it was used immediately before the Taking, then this
Lease will end on the earlier of the vesting of title to the Leased Property in
the condemning authority or the taking of possession of the Leased Property by
the condemning authority. All damages awarded for such Taking under the power
of eminent domain shall be the property of the Landlord except for damages
awarded to Tenant as compensation for diminution in value of the leasehold of
the Leased Property.

-32-

<PAGE> 40

If this Lease is terminated with respect to the Facility subject to a taking as
described in this section, Landlord may, at its option, terminate the Affiliate
Lease.

10.1.2 If the entire Leased Property is taken during the
final 18 months of the Initial Term or any Renewal Term and Landlord elects to
terminate the Affiliate Lease, Tenant shall have the option to purchase the
Affiliate Facility. Tenant shall give Landlord notice of Tenant's election to
purchase within 15 days after delivery of the notice of Landlord's intent to
terminate. If Tenant elects to purchase the Affiliate Facility, the Option
Price will be determined in accordance with Section 13.2 and the Fair Market
Value will be determined in accordance with Section 13.3. All other terms of
the option to purchase shall be in accordance with Article 13.

10.2 Partial Taking. If, after a Taking, so much of the
Leased Property remains that the Leased Property can be used for substantially
the same purposes for which it was used immediately before the Taking, then [i]
this Lease will end as to the part taken on the earlier of the vesting of title
to the Leased Property in the condemning authority or the taking of possession
of the Leased Property by the condemning authority; [ii] at its cost and to the
extent of the proceeds, Tenant shall restore so much of the Leased Property as
remains to a sound architectural unit substantially suitable for the purposes
for which it was used immediately before the Taking, using good workmanship and
new, first-class materials; [iii] upon completion of the restoration, Landlord
will pay Tenant the lesser of the net award made to Landlord on the account of
the Taking (after deducting from the total award, attorneys', appraisers', and
other reasonable fees and costs incurred in connection with the obtaining of
the award and amounts paid to the holders of mortgages secured by the Leased
Property), or Tenant's actual out-of-pocket costs of restoring the Leased
Property; and [iv] Landlord shall be entitled to the balance of the net award.
The restoration shall be completed in accordance with Section Section 9.4, 9.5,
9.7, 9.8 and 9.9 with such provisions deemed to apply to condemnation instead
of casualty.

10.3 Condemnation Proceeds Not Trust Funds.
Notwithstanding anything in this Lease or at law or equity to the contrary,
none of the condemnation award paid to Landlord shall be deemed trust funds,
and Landlord shall be entitled to dispose of such proceeds as provided in this
Article 10. Tenant expressly assumes all risk of loss, including a decrease in
the use, enjoyment, or value, of the Leased Property from any Condemnation.

-33-

<PAGE> 41

ARTICLE 11: TENANT'S PROPERTY

11.1 Tenant's Property. Tenant shall install, place, and
use on the Leased Property such fixtures, furniture, equipment, inventory and
other personal property in addition to the Personal Property as may be required
or as Tenant may, from time to time, deem necessary or useful to operate the
Leased Property for its permitted purposes. All fixtures, furniture,
equipment, inventory, and other personal property installed, placed, or used on
the Leased Property which is owned by Tenant or leased by Tenant from third
parties is hereinafter referred to as "Tenant's Property".

11.2 Requirements for Tenant's Property. Tenant shall
comply with all of the following requirements in connection with Tenant's
Property:

(a) Tenant shall, at Tenant's sole cost and
expense, maintain, repair, and replace Tenant's Property.

(b) Tenant shall, at Tenant's sole cost and
expense, keep Tenant's Property insured against loss or damage by fire,
vandalism and malicious mischief, sprinkler leakage, earthquake, and other
physical loss perils commonly covered by fire and extended coverage, boiler and
machinery, and difference in conditions insurance in an amount not less than
90% of the then full replacement cost thereof. Tenant shall use the proceeds
from any such policy for the repair and replacement of Tenant's Property. The
insurance shall meet the requirements of Section 4.3.

(d) If Tenant's Property is damaged or destroyed
by fire or any other cause, Tenant shall promptly repair or replace Tenant's
Property unless Landlord elects to terminate this Lease pursuant to Section
9.2.2.

(e) Unless an Event of Default or any event
which, with the giving of notice or lapse of time, or both, would constitute an
Event of Default has occurred, Tenant may remove Tenant's Property from the
Leased Property from time to time provided that [i] the items removed are not
required to operate the Leased Property as a licensed adult congregate living
facility (unless such items are being replaced by Tenant); and [ii] Tenant
repairs any damage to the Leased Property resulting from the removal of
Tenant's Property.

(f) Tenant shall not, without the prior written
consent of Landlord or as otherwise provided in this Lease, remove any Tenant's
Property or Leased Property. Tenant shall, at Landlord's option, remove
Tenant's Property upon the termination or

-34-

<PAGE> 42

expiration of this Lease and shall repair any damage to the Leased Property
resulting from the removal of Tenant's Property. If Tenant fails to remove
Tenant's Property within 30 days after request by Landlord, then Tenant shall
be deemed to have abandoned Tenant's Property, Tenant's Property shall become
the property of Landlord, and Landlord may remove, store and dispose of
Tenant's Property. In such event, Tenant shall have no claim or right against
Landlord for such property or the value thereof regardless of the disposition
thereof by Landlord. Tenant shall pay Landlord, upon demand, all expenses
incurred by Landlord in removing, storing, and disposing of Tenant's Property
and repairing any damage caused by such removal. Tenant's obligations
hereunder shall survive the termination or expiration of this Lease.

(g) Tenant shall perform its obligations under
any equipment lease or security agreement for Tenant's Property. For equipment
loans or leases for equipment having an original cost in excess of $50,000.00,
Tenant shall cause such equipment lessor or lender to enter into a
nondisturbance agreement with Landlord upon terms and conditions acceptable to
Landlord, including without limitation, the following: [i] Landlord shall have
the right (but not the obligation) to assume such equipment lease or security
agreement upon the occurrence of an Event of Default by Tenant hereunder; [ii]
such equipment lessor or lender shall notify Landlord of any default by Tenant
under the equipment lease or security agreement and give Landlord a reasonable
opportunity to cure such default; and [iii] Landlord shall have the right to
assign its interest in the equipment lease or security agreement and
nondisturbance agreement. Tenant shall, within 30 days after receipt of an
invoice from Landlord, reimburse Landlord for all costs and expenses incurred
in reviewing and approving the equipment lease, security agreement and
nondisturbance agreement, including without limitation, reasonable attorneys'
fees and costs.

ARTICLE 12: RENEWAL OPTIONS

12.1 Renewal Options. Tenant has the option to renew
("Renewal Option") this Lease for 3 consecutive 5 year renewal terms (each a
"Renewal Term"). Tenant can exercise the Renewal Option only upon satisfaction
of the following conditions:

(a) There shall be no uncured Event of Default,
or any event which with the passage of time or giving of notice would
constitute an Event of Default, at the time Tenant exercises its Renewal Option
nor on the date the Renewal Term is to commence.

(b) Tenant shall give Landlord written notice of
renewal no later than the date which is [i] 90 days prior to the expiration
date of the then current Term; or [ii] 15 days after Landlord's delivery of the
Termination Notice as set forth in Section 9.2.3. Such notice shall be
irrevocable except to the extent that

-35-

<PAGE> 43

an event occurs which under the provisions of this Lease would permit Tenant to
terminate this Lease and Tenant so elects to terminate this Lease.

12.2 Effect of Renewal. The following terms and
conditions will be applicable if Tenant renews the Lease:

(a) Effective Date. Except as otherwise provided
in Section 9.2.3, the effective date of any Renewal Term will be the first day
after the expiration date of the then current Term. The first day of each
Renewal Term is also referred to as the Renewal Date.

(b) Lease Amount. Effective as of the Renewal
Date, a single Lease Amount will be computed by summing all Lease Advance
Amounts (including the Acquisition Amount).

(c) Lease Rate. Effective as of the Renewal
Date, a single Lease Rate will be computed equal to the Renewal Rate. The
Renewal Rate will be the sum of the Rate Index on the Rate Determination Date
plus the applicable Rate Spread.

(d) Increaser Rate. The Increaser Rate will be 20
basis points per year.

(e) Base Rent. Effective as of the Renewal Date,
the Base Rent will be changed to equal 1/12th of the product of [i] the Lease
Amount on the Renewal Date times [ii] the new Lease Rate equal to the Renewal
Rate.

(f) Other Terms and Conditions. Except for the
modifications set forth in this Section 12.2, all other terms and conditions of
the Lease will remain the same for the Renewal Term.

ARTICLE 13: OPTION TO PURCHASE

13.1 Option to Purchase. Landlord hereby grants to Tenant
an option to purchase ("Option to Purchase") all of the Leased Property (but
not any part thereof) in accordance with the terms and conditions of this
Article 13. Tenant may exercise its Option to Purchase only by giving an
irrevocable notice of Tenant's election to purchase the Leased Property
("Purchase Notice") in accordance with the following:

(a) During years 8, 9 and 10 of the Initial Term
and during any Renewal Term, Tenant must give a Purchase Notice no earlier than
the date which is 270 days, and no later than the date which is 120 days, prior
to [i] the end of the Initial Term, or

-36-

<PAGE> 44

[ii] the expiration date of the then current Term of this Lease and the
Affiliate Lease.

(b) If the Improvements are substantially
destroyed during the final 18 months of the Initial Term or any Renewal Term,
Tenant must give a Purchase Notice within 15 days after Landlord gives the
Termination Notice pursuant to Section 9.2.4.

Tenant shall have no right to exercise the Option to Purchase other than in
accordance with subparagraph [a] or [b].

13.1.2 In the event that the accounting treatment for this
Lease does not permit Tenant to have a fair market value option to purchase the
Facility, Tenant shall have a right of first refusal to purchase the Facility
(or the Affiliate Facility as applicable). If at any time during the Term,
Landlord shall receive a bona fide offer ("Offer") from a third person for the
purchase of the Leased Property, which Offer Landlord desires to accept,
Landlord shall promptly deliver to Tenant a copy of such Offer. Tenant shall
have the right for a period of 60 days thereafter to elect to purchase the
Leased Property on the same terms and conditions as those set forth in the
Offer. If Tenant elects to purchase the Leased Property, Tenant must give
written notice thereof to Landlord no later than the 60th day after the date
Landlord delivers the Offer to Tenant. If Tenant does not elect to exercise
its right of first refusal as set forth in this section, Landlord shall be free
to sell and convey the Leased Property to the third party purchaser in
accordance with the terms and provisions of the Offer, subject to this Lease.
In the event that Landlord does not consummate the sale of the Leased Property
to such purchaser, Tenant's right of first refusal under this section shall
remain applicable to subsequent bona fide offers from third persons.

13.2 Option Price. The option price ("Option Price") will
be the Fair Market Value of the Leased Property determined pursuant to Section
13.3; provided, however, that the Option Price shall not be less than the Lease
Amount. Notwithstanding any provision in this Lease to the contrary, Tenant
shall have the right to revoke its Purchase Notice within 10 days after the
Option Price has been determined if the Option Price is not acceptable to
Tenant or Tenant may revoke to the extent that an event occurs which under the
provisions of this Lease would permit Tenant to terminate this Lease and Tenant
so elects to terminate this Lease. In addition to the Option Price, Tenant
shall pay all closing costs and expenses in connection with the transfer of the
Leased Property to Tenant including but not limited to the following: [a] real
property conveyance or transfer fees or deed stamps; [b] title search fees,
title insurance commitment fees, and title insurance premiums; [c] survey fees;
[d] environmental assessment fees; [e] recording fees; [f] reasonable
attorneys' fees of Landlord's counsel;

-37-

<PAGE> 45

[g] fees of any escrow agent; and [h] all amounts, costs, expenses, charges,
Additional Rent and other items payable by Tenant to Landlord including but not
limited to enforcement costs as set forth in Section 8.7.

13.3 Fair Market Value. The fair market value (the "Fair
Market Value") of the Leased Property shall be determined as follows.

13.3.1 The parties shall attempt to determine the Fair
Market Value by mutual agreement within 15 days after giving the Purchase
Notice. However, if the parties do not agree on the Fair Market Value within
such 15 day period, the following provisions shall apply.

13.3.2 Landlord and Tenant shall each give the other party
notice of the name of an acceptable appraiser 15 days after giving of the
Purchase Notice. The two appraisers will then select a third appraiser within
an additional 5 days. Each appraiser must demonstrate to the reasonable
satisfaction of both Landlord and Tenant that it has significant experience in
appraising properties similar to the Leased Property. Within 5 days after
designation, each appraiser shall submit a resume to Landlord and Tenant
setting forth such appraiser's qualifications including education and
experience with similar properties. A notice of objections to the
qualifications of any appraiser shall be given within 10 days after receipt of
such resume. If a party fails to timely object to the qualifications of an
appraiser, then the appraiser shall be conclusively deemed satisfactory. If a
party gives a timely notice of objection to the qualifications of an appraiser,
then the disqualified appraiser shall be replaced by an appraiser selected by
the qualified appraisers or, if all appraisers are disqualified, then by an
appraiser selected by a commercial arbitrator acceptable to Landlord and
Tenant.

13.3.3 The Fair Market Value shall be determined by the
appraisers within 60 days thereafter as follows. Each of the appraisers shall
be instructed to prepare an appraisal of the Leased Property in accordance with
the following instructions:

The Leased Property is to be valued upon the three
conventional approaches to estimate value known as
the Income, Sales Comparison and Cost Approaches.
Once the approaches are completed, the appraiser
correlates the individual approaches into a final
value conclusion.

The three approaches to estimate value are summarized as follows:

-38-

<PAGE> 46

INCOME APPROACH: This valuation approach
recognizes that the value of the operating
tangible and intangible asset can be
represented by the expected economic
viability of the business giving returns on
and of the assets and shall use a management
fee of 7%.

SALES COMPARISON APPROACH: This valuation
approach is based upon the principal of
substitution. When a facility is replaceable
in the market, the market approach assumes
that value tends to be set at the price of
acquiring an equally desirable substitute
facility. Since healthcare market conditions
change and frequently are subject to
regulatory and financing environments,
adjustments need to be considered. These
adjustments also consider the operating
differences such as services and
demographics.

COST APPROACH: This valuation approach
estimates the value of the tangible assets
only. Value is represented by the market
value of the land plus the depreciated
reproduction cost of all improvements and
equipment.

In general, the Income and Sales Comparison Approaches are considered the best
representation of value because they cover both tangibles and intangible
assets, consider the operating characteristics of the business and have the
most significant influence on attracting potential investors.

The appraised values submitted by the three appraisers shall be ranked from
highest value to middle value to lowest value, the appraised value (highest or
lowest) which is furthest from the middle appraised value shall be discarded,
and the remaining two appraised values shall be averaged to arrive at the Fair
Market Value.

13.3.4 In the event of any condemnation, similar taking or
threat thereof with respect to any part of the Leased Property or any insured
or partially insured casualty loss to any part of the Leased Property after
Tenant has exercised an Option to Purchase, but before settlement, the Fair
Market Value of the Leased Property shall be redetermined as provided in this
Section 13.3 to give effect to such condemnation, taking or loss.

13.3.5 Tenant shall pay, or reimburse Landlord for, all
costs and expenses in connection with the appraisals.

-39-

<PAGE> 47

13.4 Closing. The purchase of the Leased Property by
Tenant shall close on a date agreed to by Landlord and Tenant which shall be
not less than 60 days after Landlord's receipt of the Purchase Notice and not
more than 60 days after the Fair Market Value of the Leased Property has been
determined. At the closing, Tenant shall pay the Option Price and all closing
costs in immediately available funds and Landlord shall convey title to the
Leased Property to Tenant by a transferable and recordable limited warranty
deed and limited warranty bill of sale. The warranties provided for in such
documents shall not be limited by any limitations upon Landlord's liability as
provided in this Lease. Landlord shall also execute those affidavits
reasonably required by the title company for the issuance of an owner's policy
of title insurance.

13.5 Failure to Close Option. If Tenant for any reason
fails to purchase the Leased Property after Tenant has given the Purchase
Notice, then Tenant shall pay Landlord all costs and expenses incurred by
Landlord as a result of the failure to close including costs of unwinding swap
transactions or other interest rate protection devices and preparing for the
closing. Tenant shall continue to be obligated as lessee hereunder for the
remainder of the Term (including the Extended Term as set forth in Section
12.3).

13.6 Failure to Exercise Option to Purchase and Renewal
Option. If Tenant for any reason does not exercise its Option to Purchase or
Renewal Option in accordance with the terms and conditions of this Lease before
the expiration of the then current Term, Tenant shall be deemed to have
forfeited its equity contribution and all proprietary and ownership interest in
the Leased Property.

ARTICLE 14: NEGATIVE COVENANTS

Until Tenant's Obligations shall have been performed in full,
Tenant covenants and agrees that Tenant shall not do any of the following
without the prior written consent of Landlord which consent shall not be
unreasonably withheld:

14.1 No Debt. Tenant shall not create, incur, assume, or
permit to exist any indebtedness related to the Facility other than [i] trade
debt incurred in the ordinary course of Tenant's business; [ii] indebtedness
for Facility working capital purposes in an amount not to exceed $150,000.00;
[iii] indebtedness relating to the Letter of Credit; [iv] indebtedness that is
secured by any Permitted Lien; and [v] unsecured indebtedness that will not
cause Tenant to be in violation of Section 15.7.

14.2 No Liens. Tenant shall not create, incur, or permit
to exist any lien, charge, encumbrance, easement or restriction

-40-

<PAGE> 48

upon the Leased Property or any lien upon or pledge of any interest in Tenant
related to the Facility, except for Permitted Liens.

14.3 No Guaranties. Tenant shall not create, incur,
assume, or permit to exist any guarantee of any loan or other indebtedness
except for the endorsement of negotiable instruments for collection in the
ordinary course of business or guarantees that will not cause Tenant to be in
violation of Section 15.7.

14.4 No Transfer. Tenant shall not sell, lease, sublease,
mortgage, convey, assign or otherwise transfer any legal or equitable interest
in the Leased Property or any part thereof, except for transfers made in
connection with any Permitted Lien and transfers to an Affiliate.

14.5 No Dissolution. Tenant or Manager shall not
dissolve, liquidate, merge, consolidate or terminate its existence or sell,
assign, lease, or otherwise transfer (whether in one transaction or in a series
of transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) except for mergers, consolidations or other structural
changes in Tenant that will not cause Tenant to be in violation of Section
15.7.

14.6 No Change in Control. No material change shall occur
in the control of Tenant at any time prior to Tenant's initial public offering.

14.7 No Investments. Tenant shall not purchase or
otherwise acquire, hold, or invest in securities (whether capital stock or
instruments evidencing indebtedness) of or make loans or advances to any
person, including, without limitation, any Affiliate, or any shareholder,
member or partner of Tenant, or any Affiliate, except for cash balances
temporarily invested in short-term or money market securities and investments
or loans that will not cause Tenant to be in violation of Section 15.7.

14.8 Contracts. Tenant shall not execute or modify any
material contracts or agreements with respect to the Facility except for
contracts and modifications approved by Landlord. Contracts made in the
ordinary course of business and in an amount less than $50,000.00 shall not be
considered "material" for purposes of this paragraph.

14.9 Subordination of Payments to Affiliates. After the
occurrence of an Event of Default and until such Event of Default is cured,
Tenant shall not make any payments or distributions (including, without
limitation, salary, bonuses, fees, principal, interest, dividends, liquidating
distributions, management fees, cash flow distributions or lease payments) to
any Affiliate, or any shareholder, member or partner of Tenant or any
Affiliate.

-41-

<PAGE> 49

14.10 Change of Location or Name. Tenant shall not change
any of the following without giving Landlord at least 60 days' advance written
notice: [i] the location of the principal place of business or chief executive
office of Tenant, or any office where any of Tenant's books and records are
maintained; or [ii] the name under which Tenant conducts any of its business or
operations.

ARTICLE 15: AFFIRMATIVE COVENANTS

15.1 Perform Obligations. Tenant shall perform all of its
obligations under this Lease, the Government Authorizations, the Permitted
Exceptions, and all Legal Requirements. If applicable, Tenant shall take all
necessary action to obtain all Government Authorizations required for the
operation of the Facility as soon as possible after the Effective Date.

15.2 Proceedings to Enjoin or Prevent Construction. If
any proceedings are filed seeking to enjoin or otherwise prevent or declare
invalid or unlawful Tenant's construction, occupancy, maintenance, or operation
of the Facility or any portion thereof, Tenant will cause such proceedings to
be vigorously contested in good faith, and in the event of an adverse ruling or
decision, prosecute all allowable appeals therefrom, and will, without limiting
the generality of the foregoing, resist the entry or seek the stay of any
temporary or permanent injunction that may be entered, and use its best efforts
to bring about a favorable and speedy disposition of all such proceedings and
any other proceedings.

15.3 Documents and Information.

15.3.1 Furnish Documents. Tenant shall periodically during
the term of the Lease deliver to Landlord the Annual Financial Statements,
Periodic Financial Statements and other documents described on Exhibit C within
the specified time periods. With each delivery of Annual Financial Statements
and Periodic Financial Statements to Landlord, Tenant shall also deliver to
Landlord a certificate signed by the Chief Financial Officer of Tenant, an
Annual Facility Financial Report or Quarterly Facility Financial Report, as
applicable, and a Quarterly Facility Accounts Receivable Aging Report all in
the form of Exhibit D. In addition, Tenant shall deliver to Landlord the
Annual Facility Financial Report and a Quarterly Facility Accounts Receivable
Aging Report (based upon internal financial statements) within 90 days after
the end of each fiscal year.

15.3.2 Furnish Information. Tenant shall [i] promptly
supply Landlord with such information concerning its financial condition,
affairs and property, as Landlord may reasonably request from time to time
hereafter; [ii] promptly notify Landlord in

-42-

<PAGE> 50

writing of any condition or event that constitutes a breach or event of default
of any term, condition, warranty, representation, or provisions of this
Agreement or any other agreement, and of any material adverse change in its
financial condition; [iii] maintain a standard and modern system of accounting;
[iv] permit Landlord or any of its agent or representatives to have access to
and to examine all of its books and records regarding the financial condition
of the Facility at any time or times hereafter during business hours and after
reasonable written notice; and [v] permit Landlord to copy and make abstracts
from any and all of said books and records.

15.3.3 Further Assurances and Information. Tenant shall, on
request of Landlord from time to time, execute, deliver, and furnish documents
as may be necessary to fully consummate the transactions contemplated under
this Agreement. Within 15 days after a request from Landlord, Tenant shall
provide to Landlord such additional information regarding Tenant, Tenant's
financial condition or the Facility as Landlord, or any existing or proposed
creditor of Landlord, or any auditor or underwriter of Landlord, may reasonably
require from time to time, including, without limitation, a current Tenant's
Certificate and Schedule of Financial Information in the form of Exhibit D.

15.3.4 Material Communications. Tenant shall transmit to
Landlord, within 5 business days after receipt thereof, any material
communication affecting a Facility, this Lease, the Legal Requirements or the
Government Authorizations, and Tenant will promptly respond to Landlord's
inquiry with respect to such information. Tenant shall promptly notify
Landlord in writing after Tenant has knowledge of any potential, threatened or
existing litigation or proceeding against, or investigation of, Tenant or the
Facility that may affect the right to operate the Facility or Landlord's title
to the Facility or Tenant's interest therein.

15.3.5 Requirements for Financial Statements. Tenant shall
meet the following requirements in connection with the preparation of the
financial statements: [i] all audited financial statements shall be prepared in
accordance with general accepted accounting principles; [ii] all unaudited
financial statements shall be prepared in a manner substantially consistent
with prior audited and unaudited financial statements submitted to Landlord;
[iii] all financial statements shall fairly present the financial condition and
performance for the relevant period in all material respects; [iv] the
financial statements shall include all notes to the financial statements and a
complete schedule of contingent liabilities and transactions with Affiliates;
and [v] the audited financial statements shall contain an unqualified opinion,
except to the extent such opinion references a change in treatment made in
accordance with general accepted accounting principles.

-43-

<PAGE> 51

15.4 Compliance With Laws. Tenant shall comply with all
Legal Requirements and keep all Government Authorizations in full force and
effect. Tenant shall pay when due all taxes and governmental charges of every
kind and nature that are assessed or imposed upon Tenant at any time during the
term of the Lease, including, without limitation, all income, franchise,
capital stock, property, sales and use, business, intangible, employee
withholding, and all taxes and charges relating to Tenant's business and
operations. Tenant shall be solely responsible for compliance with all Legal
Requirements, including the ADA, and Landlord shall have no responsibility for
such compliance.

15.5 Broker's Commission. Tenant and Landlord shall
indemnify each other from claims of brokers arising by the execution hereof or
the consummation of the transactions contemplated hereby and from expenses
incurred by Landlord or Tenant in connection with any such claims (including
attorneys' fees).

15.6 Existence and Change in Control. Tenant shall
maintain its existence throughout the term of this Agreement. Any material
change in the control of Tenant, directly or indirectly prior to Tenant's
initial public offering, shall require Landlord's prior written consent, which
consent shall not be unreasonably withheld.

15.7 Financial Covenants. The defined terms used in this
section are defined in Section 15.7.1. The following financial covenants shall
be met throughout the term of this Lease; provided, however, if Tenant fails to
meet the covenant contained in Section 15.7.2, such failure shall not be an
Event of Default under this Lease provided that Tenant increases the Letter of
Credit by an amount that would effectively reduce the Lease Amount (for
calculation purposes only) to an amount that would permit Tenant to be in
compliance with the covenant. If Tenant increases the Letter of Credit amount,
the increase must remain in place until the Coverage Ratio is satisfied by
Tenant (without adjustment to the Lease Amount) for 2 consecutive quarters. If
Tenant fails to meet the covenant contained in Section 15.7.4, such failure
shall not be an Event of Default under this Lease provided that Tenant
increases the amount of the Letter of Credit by an amount equal to 2.5% of the
Lease Amount. The increase in the Letter of Credit must remain in place until
the current ratio is satisfied by Tenant for 2 consecutive quarters.

15.7.1 Definitions.

(a) "Cash Flow" means the net income of
Tenant as reflected on the income statement of Tenant plus [i] the amount of
the provision for depreciation and amortization; [ii] the amount of the
provision for management fees; plus [iii] the amount of the provision for
income taxes; plus [iv] the amount of the provision

-44-

<PAGE> 52

for Rent payments and interest and lease payments, if any; minus [v] an imputed
management fee equal to 5% of revenues (net of contractual allowances); and
minus [vi] an imputed replacement reserve of $300.00 per licensed unit at the
Facility, per year.

(b) "Coverage Ratio" is the ratio of [i]
Cash Flow for each applicable period; [ii] to the Rent payments due pursuant to
this Lease and all other debt service of Tenant and lease payments relating to
the Leased Property for the applicable period.

(c) "Net Worth" means an amount equal to
the total consolidated fair market value of the tangible assets of the entity
(excluding good will and other intangible assets) minus the total consolidated
liabilities of such entity.

15.7.2 Coverage Ratio. Tenant shall maintain for each
fiscal quarter a Coverage Ratio with respect to the Facility of not less than
1.25 to 1.00 for the second full year that the Facility is operational and for
each year thereafter. Landlord shall determine the Coverage Ratio based upon
the Financial Statements certified by the chief financial officer of Tenant to
be accurate and to fairly present the financial condition of the Facility.

15.7.3 Shareholders' Equity. Tenant and its consolidated
subsidiaries shall maintain combined shareholders' equity and subordinated debt
of at least $10,000,000.00.

15.7.4 Current Ratio. Tenant and its consolidated
subsidiaries shall maintain for each fiscal quarter a ratio of current assets
to current liabilities of not less than 1.25 to 1.00 for the second full year
that the Facility is operational and for each year thereafter.

15.7.5 Minimum Cash Requirement. Tenant shall maintain cash
and cash equivalents with at least $500,000.00.

15.7.6 Working Capital. Tenant shall maintain available
working capital for the Facility in the amount not less than $100,000.00. The
available working capital may be included as part of the cash requirement under
Section 15.7.5.

ARTICLE 16: ALTERATIONS, CAPITAL
IMPROVEMENTS, AND SIGNS

16.1 Prohibition on Alterations and Improvements. Except
for Permitted Alterations (as hereinafter defined), Tenant shall not make any
structural or nonstructural changes, alterations, additions and/or improvements
(hereinafter collectively referred to as "Alterations") to the Leased Property.

-45-

<PAGE> 53

16.2 Approval of Alterations. If Tenant desires to
perform any Permitted Alterations, Tenant shall deliver to Landlord plans,
specifications, drawings, and such other information as may be reasonably
requested by Landlord (collectively the "Plans and Specifications") showing in
reasonable detail the scope and nature of the Alterations that Tenant desires
to perform. It is the intent of the parties hereto that the level of detail
shall be comparable to that which is referred to in the architectural
profession as "design development drawings" as opposed to working or biddable
drawings. Landlord agrees not to unreasonably delay its review of the Plans
and Specifications. Landlord's failure to respond within 60 days of receipt of
the Plans and Specifications shall be deemed to constitute Landlord's approval.
Within 30 days after receipt of an invoice, Tenant shall reimburse Landlord for
all costs and expenses incurred by Landlord in reviewing and, if required,
approving or disapproving the Plans and Specifications, inspecting the Leased
Property, and otherwise monitoring compliance with the terms of this Article
16. Tenant shall comply with the requirements of Section 16.4 in making any
Permitted Alterations.

16.3 Permitted Alterations. Permitted Alterations means
any one of the following: [i] Alterations approved by Landlord; [ii]
Alterations required under Section 7.2; [iii] Alterations having a total cost
of less than $25,000.00; or [iv] repairs, rebuilding and restoration required
or undertaken pursuant to Section 9.4.

16.4 Requirements for Permitted Alterations. Tenant shall
comply with all of the following requirements in connection with any Permitted
Alterations:

(a) The Permitted Alterations shall be made in
accordance with the approved Plans and Specifications.

(b) The Permitted Alterations and the
installation thereof shall comply with all applicable legal requirements and
insurance requirements.

(c) The Permitted Alterations shall be done in a
good and workmanlike manner, shall not impair the value or the structural
integrity of the Leased Property, and shall be free and clear of all mechanic's
liens.

(d) For any Permitted Alterations having a total
cost of $100,000.00 or more, Tenant shall deliver to Landlord a payment and
performance bond, with a surety acceptable to Landlord, in an amount equal to
the estimated cost of the Permitted Alterations, guaranteeing the completion of
the work free and clear of liens and in accordance with the approved Plans and
Specifications, and naming Landlord and any mortgagee of Landlord as joint
obligees on such bond.

-46-

<PAGE> 54

(e) Tenant shall, at Tenant's expense, obtain a
builder's completed value risk policy of insurance insuring against all risks
of physical loss, including collapse and transit coverage, in a nonreporting
form, covering the total value of the work performed, and equipment, supplies,
and materials, and insuring initial occupancy. Landlord and any mortgagee of
Landlord shall be additional insureds of such policy. Landlord shall have the
right to approve the form and substance of such policy.

(f) Tenant shall pay the premiums required to
increase the amount of the insurance coverages required by Article 4 to reflect
the increased value of the Improvements resulting from installation of the
Permitted Alterations, and shall deliver to Landlord a certificate evidencing
the increase in coverage.

(g) Tenant shall, not later than 60 days after
completion of the Permitted Alterations, deliver to Landlord a revised
"as-built" survey of the Leased Property if the Permitted Alterations altered
the Land or "foot-print" of the Improvements and an "as-built" set of Plans and
Specifications for the Permitted Alterations in form and substance satisfactory
to Landlord.

(h) Tenant shall, not later than 30 days after
Landlord sends an invoice, reimburse Landlord for any reasonable costs and
expenses, including attorneys' fees and architects' and engineers' fees,
incurred in connection with reviewing and approving the Permitted Alterations
and ensuring Tenant's compliance with the requirements of this Section. The
daily fee for Landlord's consulting engineer is $750.00.

16.5 Ownership and Removal of Permitted Alterations. The
Permitted Alterations shall become a part of the Leased Property, owned by
Landlord, and leased to Tenant subject to the terms and conditions of this
Lease. Tenant shall not be required or permitted to remove any Permitted
Alterations.

16.6 Signs. Tenant may, at its own expense, erect and
maintain identification signs at the Leased Property, provided such signs
comply with all laws, ordinances, and regulations. Upon the termination or
expiration of this Lease, Tenant shall, within 30 days after notice from
Landlord, remove the signs and restore the Leased Property to its original
condition.

ARTICLE 17: [RESERVED]

ARTICLE 18: ASSIGNMENT AND
SALE OF LEASED PROPERTY

18.1 Prohibition on Assignment and Subletting. Tenant
acknowledges that Landlord has entered into this Lease in reliance on the
personal services and business expertise of Tenant. Tenant

-47-

<PAGE> 55

may not assign, sublet, mortgage, hypothecate, pledge, or transfer any
interest in this Lease, or in the Leased Property, in whole or in part, except
to an Affiliate of Tenant without the prior written consent of Landlord, which
Landlord may withhold in its sole and absolute discretion to the extent
permitted by law. The following transactions will be deemed an assignment or
sublease requiring Landlord's prior written consent: [i] an assignment by
operation of law; [ii] an imposition (whether or not consensual) of a lien,
mortgage, or encumbrance upon Tenant's interest in the Lease; [iii] an
arrangement (including but not limited to, management agreements, concessions,
licenses, and easements) which allows the use or occupancy of all or part of
the Leased Property by anyone other than Tenant; and [iv] a material change in
control of Tenant prior to Tenant's initial public offering. Landlord's
consent to any assignment or sublease will not release Tenant (or any
guarantor) from its payment and performance obligations under this Lease, but
rather Tenant, any guarantor, and Tenant's assignee or sublessee will be
jointly and severally liable for such payment and performance. An assignment
or sublease without the prior written consent of Landlord will be void at the
Landlord's option. Landlord's consent to one assignment or sublease will not
waive the requirement of its consent to any subsequent assignment or sublease.

18.2 Requests for Landlord's Consent to Assignment,
Sublease or Management Agreement. If Tenant requests Landlord's consent to a
specific assignment, sublease, or management agreement, Tenant shall give
Landlord [i] the name and address of the proposed assignee, subtenant or
manager; [ii] a copy of the proposed assignment, sublease or management
agreement; [iii] reasonably satisfactory information about the nature, business
and business history of the proposed assignee, subtenant, or manager and its
proposed use of the Leased Property; and [iv] banking, financial, and other
credit information, and references about the proposed assignee, subtenant or
manager sufficient to enable Landlord to determine the financial responsibility
and character of the proposed assignee, subtenant or manager. Any assignment,
sublease or management agreement shall contain provisions to the effect that
[a] such assignment, sublease or management agreement is subject and
subordinate to all of the terms and provisions of this Lease and to the rights
of Landlord; [b] such assignment, sublease or management agreement may not be
modified without the prior written consent of Landlord not to be unreasonably
withheld or delayed; [c] if this Lease shall terminate before the expiration of
such assignment, sublease or management agreement, the assignee, subtenant or
manager thereunder will, at Landlord's option, attorn to Landlord and waive any
right the assignee, subtenant or manager may have to terminate the assignment,
sublease or management agreement or surrender possession thereunder as a result
of the termination of this Lease; and [d] if the assignee, subtenant or manager
receives a written

-48-

<PAGE> 56

notice from Landlord stating that Tenant is in default under this Lease, the
assignee, subtenant or manager shall thereafter pay all rentals or payments
under the assignment, sublease or management agreement directly to Landlord
until such default has been cured. Tenant hereby collaterally assigns to
Landlord, as security for the performance of its obligations hereunder, all of
Tenant's right, title, and interest in and to any assignment, sublease or
management agreement now or hereafter existing for all or part of the Leased
Property. Tenant shall, at the request of Landlord, execute such other
instruments or documents as Landlord may request to evidence this collateral
assignment. If Landlord, in its sole and absolute discretion, consents to such
assignment, sublease, or management agreement, such consent shall not be
effective until [i] a fully executed copy of the instrument of assignment,
sublease or management agreement has been delivered to Landlord; [ii] in the
case of an assignment, Landlord has received a written instrument in which the
assignee has assumed and agreed to perform all of Tenant's obligations under
the Lease; and [iii] Tenant has paid to Landlord a fee in the amount of
$2,500.00; and [iv] Landlord has received reimbursement from Tenant or the
assignee for all reasonable attorneys' fees and expenses and all other
reasonable out-of-pocket expenses incurred in connection with determining
whether to give its consent, giving its consent and all matters relating to the
assignment.

18.3 Agreements with Residents. Notwithstanding Section
18.1, Tenant may enter into an occupancy agreement with residents of the Leased
Property without the prior written consent of Landlord provided that [i] the
agreement does not provide for lifecare services; [ii] Tenant may not collect
rent for more than two months in advance; and [iii] all residents of the Leased
Property are accurately shown in Tenant's accounting records.

18.4 Sale of Leased Property. If Landlord or any
subsequent owner of the Leased Property sells the Leased Property, its
liability for the performance of its agreements in this Lease will end on the
date of the sale of the Leased Property, and Tenant will look solely to the
purchaser for the performance of those agreements. For purposes of this
Section, any holder of a mortgage or security agreement which affects the
Leased Property at any time, and any landlord under any lease to which this
Lease is subordinate at any time, will be a subsequent owner of the Leased
Property when it succeeds to the interest of Landlord or any subsequent owner
of the Leased Property.

18.5 Assignment by Landlord. Landlord may transfer,
assign, mortgage, collaterally assign, or otherwise dispose of Landlord's
interest in this Lease or the Leased Property.

-49-

<PAGE> 57

ARTICLE 19: HOLDOVER AND SURRENDER

19.1 Holding Over. Should Tenant, with or without the
express or implied consent of Landlord, continue to hold and occupy the Leased
Property after the expiration of the Term, such holding over beyond the Term
and the acceptance or collection of Rent by the Landlord shall operate and be
construed as creating a tenancy from month-to-month and not for any other term
whatsoever. Said month-to-month tenancy may be terminated by Landlord by
giving Tenant 10 days written notice, and at any time thereafter Landlord may
re-enter and take possession of the Leased Property.

19.2 Surrender. Except for [i] Permitted Alterations;
[ii] normal and reasonable wear and tear (subject to the obligation of Tenant
to maintain the Leased Property in good order and repair during the Term); and
[iii] damage and destruction not required to be repaired by Tenant, Tenant
shall surrender and deliver up the Leased Property at the expiration or
termination of the Term in as good order and condition as of the Commencement
Date.

ARTICLE 20: LETTER OF CREDIT

20.1 Terms of Letter of Credit. As security for the
performance of its obligations hereunder, Tenant shall provide Landlord with
the Letter of Credit at the Closing. Tenant shall maintain the Letter of
Credit in favor of Landlord until Tenant's Obligations are performed in full.
The Letter of Credit shall permit partial draws and shall permit drawing upon
presentation of a draft drawn on the issuer and a certificate signed by
Landlord stating that an Event of Default has occurred under this Lease. The
Letter of Credit shall be for an initial term of one year and shall be
automatically renewed annually for successive terms of at least one year unless
Landlord receives notice from the Issuer, by certified mail, at least 60 days
prior to the expiry date then in effect that the Letter of Credit will not be
extended for an additional one-year period.

20.2 Replacement Letter of Credit. Tenant shall provide a
replacement Letter of Credit which satisfies the requirements of Section 20.1
from an Issuer acceptable to Landlord within 30 days after the occurrence of
any of the following: [i] Landlord's receipt of notice from the Issuer that the
Letter of Credit will not be extended for an additional one-year period; [ii]
Landlord gives notice to Tenant that the Lace Financial Service Rating of the
Issuer is less than a "C+"; or [iii] Landlord gives notice to Tenant of the
admission by Issuer in writing of its inability to pay its debts generally as
they become due, or Issuer's filing of a petition in bankruptcy or petitions to
take advantage of any insolvency act, making an assignment for the benefit of
its creditors, consenting to the appointment of a receiver of itself or of the
whole or any substantial part of its property, or filing a

-50-

<PAGE> 58

petition or answer seeking reorganization or arrangement under the federal
bankruptcy laws or any other applicable law or statute of the United States of
America or any state thereof. Tenant's failure to comply with the requirements
of this Section shall be an immediate Event of Default without any notice
(other than as provided for in the section), cure or grace period.

20.3 Draws. Landlord may draw under the Letter of Credit
upon the occurrence of an Event of Default hereunder. Any such draw shall not
cure an Event of Default. Landlord shall have the right, but not the
obligation, to apply all or any portion of the proceeds from the Letter of
Credit to pay all or any portion of [i] all Rent and other charges and expenses
payable by Tenant under this Lease; plus [ii] all expenses and costs incurred
by Landlord in enforcing or preserving Landlord's rights under this Lease or
any security for the Lease, including without limitation, [a] the fees,
expenses, and costs of any litigation, receivership, administrative,
bankruptcy, insolvency, or other similar proceeding; [b] attorney, paralegal,
consulting and witness fees and disbursements; and [c] the expenses, including
without limitation, lodging, meals and transportation of Landlord and its
employees, agents, attorneys, and witnesses in preparing for litigation,
administrative, bankruptcy, insolvency, or similar proceedings and attendance
at hearings, depositions, and trials in connection therewith.

With respect to any portion of the Letter of Credit proceeds
that is not applied to payment of Tenant's Obligations, Landlord shall have the
option to either [i] deposit the proceeds into an interest-bearing account with
a financial institution chosen by Landlord ("LC Account"); or [ii] require
Tenant to obtain a replacement Letter of Credit satisfactory to Landlord, with
the Letter of Credit proceeds made available to Tenant to secure Tenant's
reimbursement obligation for the Letter of Credit. All interest accruing on
the LC Account shall be paid to Landlord and may, from time to time, be
withdrawn from the LC Account by Landlord. At any time and from time to time
until Tenant's Obligations are performed in full, Landlord may apply all or any
portion of the funds held in the LC Account to payment of all or any portion of
Tenant's Obligations. Within 10 days after any such payment from the LC
Account, Landlord shall give written notice to Tenant describing the amount of
such payment and how it was applied to Tenant's Obligations.

Upon the occurrence of either [i] Landlord's receipt of a
replacement Letter of Credit that satisfies the requirements of Section 20.1
and is issued by an Issuer acceptable to Landlord; or [ii] the date on which
all of Tenant's Obligations are performed in full, Landlord shall pay the
principal balance of the LC Account (but not any accrued interest) to Tenant.

-51-

<PAGE> 59

20.4 Partial Draws. Upon the occurrence of a monetary
Event of Default under this Lease, Landlord may, at its option, make a partial
draw on the Letter of Credit in an amount not to exceed the amount of Tenant's
monetary obligations under this Lease then past due. If Landlord then applies
the proceeds from such partial draw on the Letter of Credit to payment of all
or any portion of Tenant's monetary obligations then past due, Tenant shall,
within 10 days after notice from Landlord of such partial draw and payment,
cause the amount of the Letter of Credit to be reinstated to the amount in
effect prior to such partial draw. Tenant's failure to comply with the
requirements of this section shall be an immediate Event of Default under the
Loan Documents without any notice (other than as provided for in this section),
cure or grace period. Landlord's rights under this Section 20.4 are in
addition to, and not in limitation of, Landlord's rights under Section 20.3.

20.5 Substitute Letter of Credit. Tenant may, from time
to time, deliver to Landlord a substitute Letter of Credit meeting the
requirements of this Agreement and issued by an Issuer acceptable to Landlord.
Upon Landlord's approval of the substitute Letter of Credit, Landlord shall
release the previous Letter of Credit to the Tenant.

20.6 Reduction in Letter of Credit Amount. The amount of
the Letter of Credit may be reduced by Tenant from 5% of the Lease Amount to
2.5% of the Lease Amount after the Coverage Ratio equals or exceeds 1.35 to 1
for 4 consecutive quarters.

ARTICLE 21: QUIET ENJOYMENT, SUBORDINATION,
ATTORNMENT AND ESTOPPEL CERTIFICATES

21.1 Quiet Enjoyment. So long as Tenant performs all of
its obligations under this Lease, Tenant's possession of the Leased Property
will not be disturbed by Landlord.

21.2 Subordination. Subject to the terms and conditions
of this section, this Lease and Tenant's rights under this Lease are
subordinate to any ground lease or underlying lease, first mortgage, first deed
of trust, or other first lien against the Leased Property, together with any
renewal, consolidation, extension, modification or replacement thereof, which
now or at any subsequent time affects the Leased Property or any interest of
Landlord in the Leased Property, except to the extent that any such instrument
expressly provides that this Lease is superior. The foregoing subordination
provision is expressly conditioned upon any lessor or mortgagee being obligated
and bound to recognize Tenant as the tenant under this Lease, and such lessor
or mortgagee shall have no right to disturb Tenant's possession, use and
occupancy of the Leased Property or Tenant's enjoyment of its rights under this
Lease unless and until an Event of Default occurs hereunder. Any

-52-

<PAGE> 60

foreclosure action or proceeding by any mortgagee with respect to the Leased
Property shall not affect Tenant's rights under this Lease and shall not
terminate this Lease unless and until an Event of Default occurs hereunder.
The foregoing provisions will be self-operative, and no further instrument will
be required in order to effect them. However, Tenant shall execute,
acknowledge and deliver to Landlord, at any time and from time to time upon
demand by Landlord, such documents as may be requested by Landlord or any
mortgagee or any holder of any mortgage or other instrument described in this
Section, to confirm or effect any such subordination, provided that any such
document shall include a non-disturbance provision as set forth in this section
satisfactory to Tenant. Any mortgagee of the Leased Property shall be deemed
to be bound by the non-disturbance provision set forth in this section. If
Tenant fails or refuses to execute, acknowledge, and deliver any such document
within 20 days after written demand, Landlord may execute acknowledge and
deliver any such document on behalf of Tenant as Tenant's attorney-in-fact.
Tenant hereby constitutes and irrevocably appoints Landlord, its successors and
assigns, as Tenant's attorney-in-fact to execute, acknowledge, and deliver on
behalf of Tenant any documents described in this Section. This power of
attorney is coupled with an interest and is irrevocable.

21.3 Attornment. If any holder of any mortgage,
indenture, deed of trust, or other similar instrument described in Section 21.2
succeeds to Landlord's interest in the Leased Property, Tenant will pay to such
holder all Rent subsequently payable under this Lease. Tenant shall, upon
request of anyone succeeding to the interest of Landlord, automatically become
the tenant of, and attorn to, such successor in interest without changing this
Lease. The successor in interest will not be bound by [i] any payment of Rent
for more than one month in advance; [ii] any amendment or modification of this
Lease thereafter made without its consent as provided in this Lease provided
that Tenant has knowledge that Landlord's interest has been transferred and
that such successor in interest's consent is required; [iii] any claim against
Landlord arising prior to the date on which the successor succeeded to
Landlord's interest; or [iv] any claim or offset of Rent against the Landlord.
Upon request by Landlord or such successor in interest and without cost to
Landlord or such successor in interest, Tenant will execute, acknowledge and
deliver an instrument or instruments confirming the attornment. If Tenant
fails or refuses to execute, acknowledge, and deliver any such instrument
within 20 days after written demand, then Landlord or such successor in
interest will be entitled to execute, acknowledge, and deliver any document on
behalf of Tenant as Tenant's attorney-in-fact. Tenant hereby constitutes and
irrevocably appoints Landlord, its successors and assigns, as Tenant's
attorney-in-fact to execute, acknowledge, and deliver on behalf of Tenant any
such document. This power of attorney is coupled with an interest and is
irrevocable.

-53-
<PAGE> 61

21.4 Estoppel Certificates. At the request of Landlord or
any mortgagee or purchaser of the Leased Property, Tenant shall execute,
acknowledge, and deliver an estoppel certificate, in recordable form, in favor
of Landlord or any mortgagee or purchaser of the Leased Property certifying the
following: [i] that the Lease is unmodified and in full force and effect, or if
there have been modifications that the same is in full force and effect as
modified and stating the modifications; [ii] the date to which Rent and other
charges have been paid; [iii] whether Tenant or Landlord is in default or
whether there is any fact or condition which, with notice or lapse of time, or
both, would constitute a default, and specifying any existing default, if any;
[iv] that Tenant has accepted and occupies the Leased Property; [v] that Tenant
has no defenses, set-offs, deductions, credits, or counterclaims against
Landlord, if that be the case, or specifying such that exist; and [vi] such
other information as may reasonably be requested by Landlord or any mortgagee
or purchaser. Any purchaser or mortgagee may rely on this estoppel
certificate. If Tenant fails to deliver the estoppel certificates to Landlord
within 10 days after the request of the Landlord, then Tenant shall be deemed
to have certified that [a] the Lease is in full force and effect and has not
been modified, or that the Lease has been modified as set forth in the
certificate delivered to Tenant; [b] Tenant has not prepaid any Rent or other
charges except for the current month; [c] Tenant has accepted and occupies the
Leased Property; [d] to Tenant's knowledge, neither Tenant nor Landlord is in
default nor is there any fact or condition which, with notice or lapse of time,
or both, would constitute a default; and [e] to Tenant's knowledge, Tenant has
no defenses, set-offs, deductions, credits, or counterclaims against Landlord.
Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-fact to
execute, acknowledge, and deliver on Tenant's behalf any estoppel certificate
to which Tenant does not object within the time period specified in Landlord's
transmittal of the certificate to Tenant which time period cannot be less than
10 days. This power of attorney is coupled with an interest and is
irrevocable.

ARTICLE 22: REPRESENTATIONS AND WARRANTIES

Tenant hereby makes the following representations and
warranties, as of the Effective Date, to Landlord and acknowledges that
Landlord is granting the Lease in reliance upon such representations and
warranties. Tenant's representations and warranties shall survive the Closing
and, except to the extent made as of a specific date, shall continue in full
force and effect until Tenant's Obligations have been performed in full.

22.1 Organization and Good Standing. Tenant is a
corporation, duly organized, validly existing and in good standing under the
laws of the State of Delaware and is qualified to do business in and is in good
standing under the laws of the State.

-54-
<PAGE> 62

22.2 Power and Authority. Tenant has the power and
authority to execute, deliver and perform this Lease. Tenant has taken all
requisite action necessary to authorize the execution, delivery and performance
of Tenant's obligations under this Lease.

22.3 Enforceability. This Lease constitutes a legal,
valid, and binding obligation of Tenant enforceable in accordance with its
terms.

22.4 Government Authorizations. The Facility is in
compliance with all Legal Requirements. Exhibit E attached hereto contains a
complete list of all Government Authorizations required for the operation of
the Facility as of the Effective Date. All Government Authorizations are in
full force and effect. Tenant holds all Government Authorizations necessary
for the operation of the Facility as an adult congregate living facility.

22.5 Financial Statements. Tenant has furnished Landlord
with true, correct, and complete copies of the Financial Statements. The
Financial Statements fairly present the financial position of Tenant as of the
respective dates and the results of operations for the periods then ended in
conformance with generally accepted accounting principles applied on a basis
consistent with prior periods. The Financial Statements and other information
furnished to Landlord are true, complete and correct and, as of the Effective
Date, no material adverse change has occurred since the furnishing of such
statements and information. As of the Effective Date, the Financial Statements
and other information do not contain any untrue statement or omission of a
material fact and are not misleading in any material respect. Tenant is
solvent, and no bankruptcy, insolvency, or similar proceeding is pending or
contemplated by or, to the knowledge of Tenant, against Tenant.
Notwithstanding anything to the contrary set forth in this Lease, Landlord
hereby acknowledges that Tenant has advised Landlord that Tenant intends to
write off approximately $600,000.00 in capitalized pre-opening costs on its
1995 Financial Statements and intends to net capitalized costs of approximately
$1,000,000.00 relating to Tenant's May, 1995 financing transaction against its
shareholders' equity account (resulting in a reduction of paid in capital and
elimination of these capitalized costs from Tenant's assets) even though
preliminary financial information and Financial Statements delivered to
Landlord reflected a different treatment for such costs, and Landlord has
agreed that such different treatment is acceptable to Landlord and not a
default hereunder.

22.6 Condition of Facility. To the best of Tenant's
knowledge, all of the mechanical and electrical systems, heating and
air-conditioning systems, plumbing, water and sewer systems, and all other
items of mechanical equipment or appliances are in good working order,
condition and repair, are of sufficient size and capacity to service the
Facility as presently operated, and

-55-

<PAGE> 63

conform with all applicable ordinances and regulations, and with all building,
zoning, fire, safety, and other codes, laws and orders. The Improvements,
including the roof and foundation, are structurally sound and free from leaks
and other defects.

22.7 Compliance with Laws. To the best of Tenant's
knowledge, there is no violation of, or noncompliance with, [i] any laws,
orders, rules or regulations, ordinances or codes of any kind or nature
whatsoever relating to the Facility or the ownership or operation thereof
(including without limitation, building, fire, health, occupational safety and
health, zoning and land use, planning and environmental laws, orders, rules and
regulations); [ii] any covenants, conditions, restrictions or agreements
affecting or relating to the ownership, use or occupancy of the Facility; or
[iii] any order, writ, regulation or decree relating to any matter referred to
in [i] or [ii] above.

22.8 No Litigation. As of the Effective Date and except
as disclosed on Exhibit F, [i] there are no actions or suits, or any
proceedings or investigations by any governmental agency or regulatory body
pending against Tenant or the Facility; [ii] Tenant has not received notice of
any threatened actions, suits, proceedings or investigations against Tenant or
the Facility at law or in equity, or before any governmental board, agency or
authority which, if determined adversely to Tenant, would materially and
adversely affect the Facility or title to the Facility (or any part thereof),
the right to operate the Facility as presently operated, or the financial
condition of Tenant; [iii] there are no unsatisfied or outstanding judgments
against Tenant or the Facility; [iv] there is no labor dispute materially and
adversely affecting the operation or business conducted by Tenant or the
Facility; and [v] Tenant has not been notified in writing of any facts or
circumstances which might reasonably form the basis for any such action, suit,
or proceeding.

22.9 Consents. The execution, delivery and performance of
this Lease will not require any consent, approval, authorization, order, or
declaration of, or any filing or registration with, any court, any federal,
state, or local governmental or regulatory authority, or any other person or
entity, the absence of which would materially impair the ability of Tenant to
operate the Facility as presently operated except for the post-acquisition
filing for licensure of the Facility.

22.10 No Violation. The execution, delivery and
performance of this Lease [i] do not and will not conflict with, and do not and
will not result in a breach of the Articles of Incorporation or Bylaws of
Tenant; [ii] do not and will not conflict with, and do not and will not result
in a breach of, and do not and will not constitute a default under (or an event
which, with or without notice or lapse of time, or both, would constitute

-56-

<PAGE> 64

a default under), any of the terms, conditions or provisions of any agreement
or other instrument or obligation to which Tenant is a party or by which its
assets are bound; and [iii] do not and will not violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Tenant or the
Facility.

22.11 Reports and Statements. All reports, statements,
certificates and other data furnished by or on behalf of Tenant to Landlord in
connection with this Lease, and all representations and warranties made herein
or in any certificate or other instrument delivered in connection herewith and
therewith, are true and correct in all material respects and do not omit to
state any material fact or circumstance necessary to make the statements
contained herein or therein, in light of the circumstances under which they are
made, not misleading as of the date of such report, statement, certificate or
other data. The copies of all agreements and instruments submitted to
Landlord, including, without limitation, all agreements relating to management
of the Facility, the Letter of Credit, and Tenant's working capital are true,
correct and complete copies and include all amendments and modifications of
such agreements.

22.12 ERISA. All plans (as defined in Section 4021(a) of
the Employee Retirement Income Security Act of 1974, as amended or supplemented
from time to time ("ERISA")) for which Tenant is an "employer" or a
"substantial employer" (as defined in Section Section 3(5) and 4001(a)(2) of
ERISA, respectively) are in compliance with ERISA and the regulations and
published interpretations thereunder. To the extent Tenant maintains a
qualified defined benefit pension plan: [i] there exists no accumulated
funding deficiency; [ii] no reportable event and no prohibited transaction has
occurred; [iii] no lien has been filed or threatened to be filed by the Pension
Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of
ERISA; and [iv] Tenant has not been deemed to be a substantial employer.

22.13 Chief Executive Office. Tenant maintains its chief
executive office and its books and records at the address set forth in the
introductory paragraph of this agreement. Tenant does not conduct any of its
business or operations other than at its chief executive office, at the
Facility and the following locations: Palmer Club - Sarasota, Florida; Hamilton
House - Ann Arbor, Michigan; Hamilton House II - Farmington Hills, Michigan;
Clare Bridge of Sarasota - Sarasota, Florida; Hamilton House - Lansing,
Michigan; Stonefield - Madison, Wisconsin; Clare Bridge - Brookfield,
Wisconsin; Wynfield - Madison, Wisconsin; Wynwood - Brookfield, Wisconsin;
Hamilton House - Farmington Hills, Michigan; Northhampton Manor - Richboro,
Pennsylvania; Hamilton House - Utica, Michigan; and Naperville, Illinois.

-57-
<PAGE> 65

22.14 Other Name or Entities. Tenant has not, since the
incorporation of Tenant, [i] changed its name, [ii] used any name other than
the name stated at the beginning of this agreement, or other than names under
which Tenant's facilities do business, such as the name of the Facility, or
[iii] merged or consolidated with, or acquired any of the assets of, any
corporation or other business, other than acquisitions of operating facilities.

22.15 Parties in Possession. Except as disclosed on
Exhibit B, there are no parties in possession of any Leased Property or any
portion thereof as managers, lessees, tenants at sufferance, or trespassers.

22.16 Access. Access to the Land is directly from a
dedicated public right-of-way without any easement. To the knowledge of
Tenant, there is no fact or condition which would result in the termination or
reduction of the current access to and from the Land to such right-of-way.

22.17 Utilities. There are available at the Land gas,
municipal water, and sanitary sewer lines, storm sewers, electrical and
telephone services in operating condition which are adequate for the operation
of the Facility at a reasonable cost. The Land has direct access to utility
lines located in a dedicated public right-of-way without any easement. As of
the Effective Date, there is no pending or, to the knowledge of Tenant,
threatened governmental or third party proceeding which would impair or result
in the termination of such utility availability.

22.18 Condemnation and Assessments. As of the Effective
Date, Tenant has not received notice of, and there are no pending or, to the
best of Tenant's knowledge, threatened, condemnation, assessment or similar
proceedings affecting or relating to the Facility, or any portion thereof, or
any utilities, sewers, roadways or other public improvements serving the
Facility.

22.19 Zoning. As of the Effective Date, [i] the use and
operation of the Facility as an adult congregate living facility is a permitted
use under the applicable zoning code; [ii] except as disclosed on Exhibit E
hereto, no special use permits, conditional use permits, variances, or
exceptions have been granted or are needed for such use of the Facility; [iii]
the Land is not located in any special districts such as historical districts
or overlay districts; and [iv] the Facility has been constructed in accordance
with and complies with all applicable zoning laws, including but not limited
to, dimensional, parking, setback, screening, landscaping, sign and curb cut
requirements.

22.20 Pro Forma Statement. Tenant has delivered to
Landlord a true, correct and complete copy of the Pro Forma Statement. Subject
to the matter referenced in Section 22.5, the Pro

-58-

<PAGE> 66

Forma Statement shows Tenant's reasonable expectation of the results of
Facility operations for the next 5 year period.

22.21 Environmental Matters. During the period of Tenant's
ownership of the Leased Property, if any, and based on the environmental audit
provided to Landlord by Tenant, for the period Tenant did not own the Leased
Property, [i] the Leased Property is in compliance with all Environmental Laws;
[ii] there were no releases of Hazardous Materials on, from, or under the
Leased Property, except in compliance with all Environmental Laws; [iii] no
Hazardous Materials have been, are or will be used, generated, stored, or
disposed of on the Leased Property, except in compliance with all Environmental
Laws; [iv] no permit is or has been required to be obtained by Tenant from the
Environmental Protection Agency or any similar agency or department of any
state or local government for the use or maintenance of any Improvements; and
[v] no summons, citation or inquiry has been made by any such environmental
unit, body or agency or a third party demanding any right of recovery for
payment or reimbursement for costs incurred under CERCLA or any other
Environmental Laws and the Land is not subject to the lien of any such agency.
"Disposal" and "release" shall have the meanings set forth in CERCLA. To the
best of Tenant's knowledge, all underground storage tanks located on the Leased
Property, if any, have been removed in accordance with all applicable federal,
state and local laws and regulations and all necessary closure reports have
been filed with the appropriate governmental agencies.

22.22 Leases and Contracts. As of the Effective Date and
except as disclosed on Exhibit G, there are no leases or contracts (including
but not limited to, insurance contracts, maintenance contracts, construction
contracts, employee benefit plans, employment contracts, equipment leases,
security agreements, architect agreements, and management contracts) to which
Tenant is a party relating to any part of the ownership, operation, possession,
construction, management or administration of the Land or the Facility.

22.23 No Default. As of the Effective Date, [i] there is
no existing Event of Default under this Lease; and [ii] no event has occurred
which, with the giving of notice or the passage of time, or both, would
constitute or result in such an Event of Default.

-59-

<PAGE> 67

ARTICLE 23: [RESERVED]

ARTICLE 24: SECURITY INTEREST

24.1 Collateral. Tenant hereby grants to Landlord a
security interest in the following described property, whether now owned or
hereafter acquired by Tenant (the "Collateral"), to secure the payment and
performance of Tenant's obligations under this Lease:

(a) All machinery, furniture, equipment, trade
fixtures, appliances, inventory and all other goods (as "equipment,"
"inventory" and "goods" are defined for purposes of Article 9 ("Article 9") of
the Uniform Commercial Code as adopted in the State) now or hereafter located
in or on or used or usable in connection with the Land, Improvements, or
Fixtures and replacements, additions, and accessions thereto, including without
limitation those items which are to become fixtures or which are building
supplies and materials to be incorporated into an Improvement or Fixture.

(b) All accounts, contract rights, general
intangibles, instruments, documents, and chattel paper [as "accounts",
"contract rights", "general intangibles", "instruments", "documents", and
"chattel paper", are defined for purposes of Article 9] now or hereafter
arising in connection with the business located in or on or used or usable in
connection with the Land, Improvements, or Fixtures, and replacements,
additions, and accessions thereto.

(c) All franchises, permits, licenses, operating
rights, certifications, approvals, consents, authorizations and other general
intangibles regarding the use, occupancy or operation of the Improvements, or
any part thereof, including without limitation, certificates of need, state
health care facility licenses, and Medicare and Medicaid provider agreements,
to the extent permitted by law.

(d) Unless expressly prohibited by the terms
thereof, all contracts, agreements, contract rights and materials relating to
the design, construction or operation of the Improvements, including but not
limited to, plans, specifications, drawings, blueprints, models, mock-ups,
brochures, flyers, advertising and promotional materials and mailing lists.

(e) All ledger sheets, files, records, computer
programs, tapes, other electronic data processing materials, and other
documentation relating to the preceding listed property or otherwise used or
usable in connection with the Land and Improvements.

-60-

<PAGE> 68

(f) The products and proceeds of the preceding
listed property, including without limitation cash and non-cash proceeds,
proceeds of proceeds, and insurance proceeds.

24.2 Additional Documents. At the request of Landlord,
Tenant shall execute additional security agreements, financing statements, and
such other documents as may be requested by Landlord to maintain and perfect
such security interest. Tenant hereby irrevocably appoints Landlord, its
successors and assigns, as Tenant's attorney-in-fact to execute, acknowledge,
deliver and file such documents on behalf of Tenant. This power of attorney is
coupled with an interest and is irrevocable.

24.3 Notice of Sale. With respect to any sale or other
disposition of any of the Collateral after the occurrence of an Event of
Default, Landlord and Tenant agree that the giving of 5 days notice by
Landlord, sent by overnight delivery, postage prepaid, to Tenant's notice
address designating the time and place of any public sale or the time after
which any private sale or other intended disposition of such Collateral is to
be made, shall be deemed to be reasonable notice thereof and Tenant waives any
other notice with respect thereto.

ARTICLE 25: MISCELLANEOUS

25.1 Notices. Landlord and Tenant hereby agree that all
notices, demands, requests, and consents (hereinafter "notices") required to be
given pursuant to the terms of this Lease shall be in writing, shall be
addressed to the addresses set forth in the introductory paragraph of this
Lease, and shall be served by [i] personal delivery; [ii] certified mail,
return receipt requested, postage prepaid; or [iii] nationally recognized
overnight courier. All notices shall be deemed to be given upon the earlier of
actual receipt or 3 days after mailing, or one business day after deposit with
the overnight courier. Any notices meeting the requirements of this Section
shall be effective, regardless of whether or not actually received. Landlord
or Tenant may change its notice address at any time by giving the other party
notice of such change.

25.2 Advertisement of Leased Property. In the event the
parties hereto have not executed a renewal Lease within 120 days prior to the
expiration of this Lease, or Tenant has not exercised its Option to Purchase,
then Landlord or its agent shall have the right to enter the Leased Property at
all reasonable times for the purpose of exhibiting the Leased Property to
others and to place upon the Leased Property for and during the period
commencing 120 days prior to the expiration of this Lease, "for sale" or "for
rent" notices or signs.

-61-

<PAGE> 69

25.3 Entire Agreement. This Lease contains the entire
agreement between Landlord and Tenant with respect to the subject matter
hereof. No representations, warranties, and agreements have been made by
Landlord except as set forth in this Lease.

25.4 Severability. If any term or provision of this Lease
is held or deemed by Landlord to be invalid or unenforceable, such holding
shall not affect the remainder of this Lease and the same shall remain in full
force and effect, unless such holding substantially deprives Tenant of the use
of the Leased Property or Landlord of the rents herein reserved, in which event
this Lease shall forthwith terminate as if by expiration of the Term.

25.5 Captions and Headings. The captions and headings are
inserted only as a matter of convenience and for reference and in no way
define, limit or describe the scope of this Lease or the intent of any
provision hereof.

25.6 Governing Law. This Lease shall be construed under
the laws of the State.

25.7 Memorandum of Lease. Tenant shall not record this
Lease. Tenant may, however, record a memorandum of lease approved by Landlord.

25.8 Waiver. No waiver by Landlord of any condition or
covenant herein contained, or of any breach of any such condition or covenant,
shall be held or taken to be a waiver of any subsequent breach of such covenant
or condition, or to permit or excuse its continuance or any future breach
thereof or of any condition or covenant, nor shall the acceptance of Rent by
Landlord at any time when Tenant is in default in the performance or observance
of any condition or covenant herein be construed as a waiver of such default,
or of Landlord's right to terminate this Lease or exercise any other remedy
granted herein on account of such existing default.

25.9 Binding Effect. This Lease will be binding upon and
inure to the benefit of the heirs, successors, personal representatives, and
permitted assigns of Landlord and Tenant.

25.10 Power of Attorney. Effective upon [i] the occurrence
and during the continuance of an Event of Default or upon, [ii] termination of
the Lease without Tenant exercising its Option to Purchase, Tenant hereby
irrevocably and unconditionally appoints Landlord, or Landlord's authorized
officer, agent, employee or designee, as Tenant's true and lawful
attorney-in-fact, to act for Tenant in Tenant's name, place, and stead, to
execute, deliver and file all applications and any and all other necessary
documents or things to effect the issuance, transfer, reinstatement, renewal
and/or extension of any and all Governmental

-62-

<PAGE> 70

Authorizations issued to Tenant or applied for by Tenant in connection with
Tenant's operation of the Facility, to permit any transferee to operate the
Facility under the Governmental Authorizations, and to do any and all other
acts incidental to any of the foregoing. Tenant irrevocably and
unconditionally grants to Landlord as its attorney-in-fact full power and
authority to do and perform every act necessary and proper to be done in the
exercise of any of the foregoing powers as fully as Tenant might or could do if
personally present or acting, with full power of substitution, hereby ratifying
and confirming all that said attorney shall lawfully do or cause to be done by
virtue hereof. This power of attorney is coupled with an interest and is
irrevocable prior to the full performance of Tenant's Obligations. Except in
the case of an emergency, Landlord shall give Tenant 3 business days prior
written notice before acting on behalf of Tenant pursuant to this power of
attorney.

25.11 No Offer. Landlord's submission of this Lease to
Tenant is not an offer to lease the Leased Property, or an agreement by
Landlord to reserve the Leased Property for Tenant. Landlord will not be bound
to Tenant until Tenant has duly executed and delivered duplicate original
leases to Landlord, and Landlord has duly executed and delivered one of these
duplicate original leases to Tenant.

25.12 Modification. This Lease may only be modified by a
writing signed by both Landlord and Tenant. All references to this Lease,
whether in this Lease or in any other document or instrument, shall be deemed
to incorporate all amendments, modifications and renewals of this Lease, made
after the date hereof. If Tenant requests Landlord's consent to any change in
ownership, merger or consolidation of Tenant or Guarantor, any assumption of
the Lease, or any modification of the Lease, Tenant shall provide Landlord all
relevant information and documents sufficient to enable Landlord to evaluate
the request. In connection with any such request, Tenant shall pay to Landlord
a fee in the amount of $2,500.00 and shall pay all of Landlord's reasonable
attorney's fees and expenses and other reasonable out-of-pocket expenses
incurred in connection with Landlord's evaluation of Tenant's request, the
preparation of any documents and amendments, the subsequent amendment of any
documents between Landlord and its collateral pool lenders (if applicable), and
all related matters.

25.13 Lender's Modification. Tenant acknowledges that
Landlord may mortgage the Leased Property or use the Leased Property as
collateral for a collateralized mortgage obligations or Real Estate Mortgage
Investment Companies (REMICS). If any mortgage lender of Landlord desires any
modification of this Lease, Tenant agrees to consider such modification in good
faith and to execute an amendment of this Lease if Tenant finds such

-63-

<PAGE> 71

modification acceptable in Tenant's reasonable discretion provided such
modification does not materially diminish Tenant's rights under the Lease.

25.14 No Merger. The surrender of this Lease by Tenant or
the cancellation of this Lease by agreement of Tenant and Landlord or the
termination of this Lease on account of Tenant's default will not work a
merger, and will, at Landlord's option, terminate any subleases or operate as
an assignment to Landlord of any subleases. Landlord's option under this
paragraph will be exercised by notice to Tenant and all known subtenants of the
Leased Property.

25.15 Laches. No delay or omission by either party hereto
to exercise any right or power accruing upon any noncompliance or default by
the other party with respect to any of the terms hereof shall impair any such
right or power or be construed to be a waiver thereof.

25.16 Limitation on Tenant's Recourse. Tenant's sole
recourse against Landlord, and any successor to the interest of Landlord in the
Leased Property, is to the interest of Landlord, and any such successor, in the
Leased Property. Tenant will not have any right to satisfy any judgment which
it may have against the Landlord, or any such successor, from any other assets
of Landlord, or any such successor. In this Section, the terms "Landlord" and
"successor" include the shareholders, venturers, and partners of "Landlord" and
"successor" and the officers, directors, and employees of the same. The
provisions of this Section are not intended to limit Tenant's right to seek
injunctive relief or specific performance.

25.17 Construction of Lease. This Lease has been prepared
by Landlord and its professional advisors and reviewed by Tenant and its
professional advisors. Landlord, Tenant, and their advisors believe that this
Lease is the product of all their efforts, that it expresses their agreement,
and agree that it shall not be interpreted in favor of either Landlord or
Tenant or against either Landlord or Tenant merely because of their efforts in
preparing it.

25.18 Counterparts. This Lease may be executed in multiple
counterparts, each of which shall be deemed an original hereof.

25.19 Custody of Escrow Funds. Any funds paid to Landlord
in escrow hereunder may be held by Landlord or, at Landlord's election, by a
financial institution, the deposits or accounts of which are insured or
guaranteed by a federal or state agency. The funds shall not be deemed to be
held in trust, may be

-64-

<PAGE> 72

commingled with the general funds of Landlord or such other institution, and
shall not bear interest.

25.20 Landlord's Status as a REIT. Tenant acknowledges
that Landlord has now and may hereafter elect to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code.

25.21 Exhibits. The following exhibits are attached hereto
and incorporated herein:

<TABLE>
<S> <C>
Exhibit A: Legal Description
Exhibit B: Permitted Exceptions
Exhibit C: Documents to be Delivered
Exhibit D: Certificate and Facility Financial Reports
Exhibit E: Government Authorizations
Exhibit F: Pending Litigation
Exhibit G: List of Leases and Contracts
</TABLE>

25.22 Waiver of Jury Trial. Landlord and Tenant waive
trial by jury in any action, proceeding or counterclaim brought by either of
them against the other on all matters arising out of this Lease or the use and
occupancy of the Leased Property (except claims for personal injury or property
damage). If Landlord commences any summary proceeding for nonpayment of Rent,
Tenant will not interpose, and waives the right to interpose, any counterclaim
in any such proceeding.

25.23 Attorney's Fees and Expenses. Tenant shall pay to
Landlord all reasonable costs and expenses incurred by Landlord in
administering this Lease and the security for this Lease, enforcing or
preserving Landlord's rights under this Lease and the security for this Lease,
and in all matters of collection, whether or not an Event of Default has
actually occurred or has been declared and thereafter cured, including but not
limited to, [a] reasonable attorney's and paralegal's fees and disbursements;
[b] the fees and expenses of any litigation, administrative, bankruptcy,
insolvency, receivership and any other similar proceeding; [c] court costs; [d]
the expenses of Landlord, its employees, agents, attorneys and witnesses in
preparing for litigation, administrative, bankruptcy, insolvency and other
proceedings and for lodging, travel, and attendance at meetings, hearings,
depositions, and trials; and [e] consulting and witness fees incurred by
Landlord in connection with any litigation or other proceeding. All references
in this Lease to attorney's fees shall include reasonable attorney's fees
incurred in connection with appellate proceedings.

25.24 Survival. The following provisions shall survive
termination of the Lease: Article 9 (Damage &

-65-

<PAGE> 73

Destruction), Article 10 (Condemnation); Article 16 (Alterations); and Section
25.24 (Survival).

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

-66-

<PAGE> 74

IN WITNESS WHEREOF, the parties hereto have executed this
Lease or caused the same to be executed by their respective duly authorized
officers as of the date first set forth above.

Signed and acknowledged
in the presence of: HEALTH CARE REIT, INC.

Signature /s/ Rita J. Rogge By: /s/ Erin L. Ibele
-------------------------- ----------------------------
Print Name RITA J. ROGGE
------------------------ Title: Vice President
----------------------

Signature /s/ Lynn M. Edens
--------------------------

Print Name LYNN M. EDENS
-------------------------

STATE OF OHIO )
) SS:
COUNTY OF LUCAS )

The foregoing instrument was acknowledged before me this
18th day of January, 1996 by ERIN C. IBELE, the VICE PRESIDENT of Health
Care REIT, Inc., a Delaware corporation, on behalf of the corporation.

/s/ Rita J. Rogge
-------------------------------
Notary Public

My Commission Expires: [NOTORIAL SEAL]
---------------------

RITA J. ROGGEE
NOTARY PUBLIC, STATE OF OHIO
MY COMMISSION EXPIRES AUGUST 26, 2000

-67-
<PAGE> 75

ALTERNATIVE LIVING SERVICES,
INC.

Signature /s/ J. David Lutich By: William F. Laskey
--------------------------- --------------------------------

Print Name J. DAVID LUTICH Title: President
--------------------------- -------------------------

Signature /s/ Kimberly A. Mosesstad Tax I.D. No.: 39-1771281
---------------------------- -----------------------

Print Name KIMBERLY A. MOSSESTAD
---------------------

STATE OF WISCONSIN )
) SS:
COUNTY OF )
----------------

The foregoing instrument was acknowledged before me this
12 day of January, 1996 by /s/ William F. Larky, the President of Alternative
Living Services, Inc., a Delaware corporation, on behalf of the corporation.

/s/ Catherine A. Musikl
-------------------------------
Notary Public

My Commission Expires:

Sept. 19, 1999 [SEAL]
- -----------------------------

This Instrument Prepared By:

Cynthia L. Rerucha, Esq.
Shumaker, Loop & Kendrick
1000 Jackson Street
Toledo, Ohio 43624

-68-

<PAGE> 76

EXHIBIT A: LEGAL DESCRIPTION

COMMENCE AT THE SOUTHEAST CORNER OF THE SOUTHWEST 1/4 OF SECTION 32,
TOWNSHIP 34 SOUTH, RANGE 17 EAST; THENCE N.89 DEGREES 29'56"W. ALONG THE SOUTH
LINE OF SAID SOUTHWEST 1/4, A DISTANCE OF 84.49 FEET TO THE INTERSECTION WITH
THE WEST RIGHT OF WAY LINE OF 59TH STREET WEST AS DESCRIBED AND RECORDED IN
OFFICIAL RECORDS BOOK 797, PAGE 792, PUBLIC RECORDS OF MANATEE COUNTY, FLORIDA;
THENCE CONTINUE N.89 DEGREES 29'56"W. ALONG SAID SOUTH LINE OF THE SOUTHWEST
1/4, ALSO BEING THE APPROXIMATE CENTERLINE OF "CEDER HAMMOCK DRAINAGE CANAL", A
DISTANCE OF 1007.14 FEET; THENCE N.75 DEGREES 23'56"W. ALONG SAID APPROXIMATE
CENTERLINE OF CANAL, A DISTANCE OF 318.32 FEET TO THE SOUTH EAST CORNER OF CAPE
TOWN VILLAGE, PHASE I & II, A LAND CONDOMINIUM RECORDED IN CONDOMINIUM BOOK 27,
PAGES 134 THROUGH 136, OF SAID PUBLIC RECORDS; FOR A POINT OF BEGINNING; THENCE
N.00 DEGREES 00'00"E. ALONG THE EAST LINE OF SAID CAPE TOWN VILLAGE, A DISTANCE
OF 553.30 FEET TO THE INTERSECTION WITH THE SOUTHERLY RIGHT OF WAY LINE OF
POINTE WEST BOULEVARD, AS SHOWN ON THE PLAT OF POINTE WEST SUBDIVISION,
RECORDED IN PLAT BOOK 20, PAGES 12 THROUGH 15, OF SAID PUBLIC RECORDS; THENCE
S.7947'46"E. ALONG SAID SOUTHERLY RIGHT OF WAY LINE, A DISTANCE OF 50.80 FEET;
THENCE S.50 DEGREES 00'00"E. ALONG SAID RIGHT OF WAY LINE, A DISTANCE OF 270.00
FEET; THENCE S.00 DEGREES 00'00"W. A DISTANCE OF 624.65 FEET TO THE APPROPRIATE
CENTERLINE OF SAID "CEDAR HAMMOCK DRAINAGE CANAL"; THENCE N.89 DEGREES 29'56"W.
ALONG SAID APPROXIMATE CENTERLINE OF CANAL, A DISTANCE OF 11.96 FEET; THENCE
N.75 DEGREES 23'56"W. ALONG SAID APPROXIMATE CENTERLINE OF CANAL, A DISTANCE OF
318.32 FEET TO THE POINT OF BEGINNING.

<PAGE> 77

EXHIBIT B: PERMITTED EXCEPTIONS

1. Taxes and assessments not yet due and payable.

2. Easement in favor of Florida Power & Light Company dated May 15, 1995,
and recorded in Official Records Book 1460, Page 3007, Public Records
of Manatee County, Florida.

3. Easement for water lines in favor of CITY OF BRADENTON, recorded in
Official Records Book 425, page 723, of the Public Records of Manatee
County, Florida.

<PAGE> 78

EXHIBIT C: DOCUMENTS TO BE DELIVERED

Tenant shall deliver each of the following documents to
Landlord no later than the date specified for each document:

1. Annual Financial Statements of Tenant (including
operating statement for each Facility) - within 90 days after the end of each
fiscal year.

2. Periodic Financial Statements of Tenant - within 45
days after the end of each quarter.

3. Tenant's Certificate and Facility Financial Report
(Exhibit D) - with each delivery of Tenant's financial statements.

4. Annual Facility Financial Report (based upon internal
financial records) - within 90 days after the end of each fiscal year.

5. Periodic Facility Financial Report - within 25 days
after the end of each month.

6. Federal tax returns of Tenant - within 15 days after
the filing of the return. If the filing date is extended, also provide a copy
of the extension application within 15 days after filing.

7. State and federal survey and inspection reports for
each Facility - within 7 days after receipt by Tenant.

8. Real estate taxes

(a) Copy of invoice and check - within 10 days
after the due date; and

(b) Copy of official receipt or other
satisfactory evidence of payment - within 30 days after the due date.

9. Certificate of insurance renewal and evidence of
payment of premium - at least 30 days prior to the expiration of each policy.

<PAGE> 79

EXHIBIT D: TENANT'S CERTIFICATE
AND FACILITY FINANCIAL REPORTS

Report Period: Commencing ____________ and ending ___________

Lease: Lease made by Health Care REIT, Inc. ("Landlord") to
Alternative Living Services, Inc. ("Tenant")

I hereby certify to Landlord as follows:

1. The attached [specify audited or unaudited and annual
or quarterly, and if consolidated, so state] financial statements of Tenant [i]
have been prepared in accordance with generally accepted accounting principles
consistently applied; [ii] have been prepared in a manner substantially
consistent with prior financial statements submitted to Landlord; and [iii]
fairly present the financial condition and performance of Tenant in all
material respects.

2. The attached [Annual or Quarterly] Facility Financial
Report for the Report Period is complete, true and accurate and has been
prepared in a manner substantially consistent with prior schedules submitted to
Landlord. As set forth in the [Annual or Quarterly] Facility Financial Report,
Tenant has maintained the Coverage Ratio and the Current Ratio] for the Report
Period as required under the Lease between Tenant and Landlord.

3. To the best of my knowledge, Tenant was in compliance
with all of the provisions of the Lease and all other documents executed by
Tenant in connection with the Lease at all times during the Accounting Period,
and no default, or any event which with the passage of time or the giving of
notice or both would constitute a default, has occurred under the Lease.

Executed this _____ day of _____________, ________.

_______________________________

Name:__________________________________

Title:_________________________________

<PAGE> 80

ANNUAL FACILITY FINANCIAL REPORT

FACILITY NAME:
FACILITY ADDRESS:

REPORT PERIOD: Twelve (12) months beginning ________________ and
ending __________________________________. All
information reported should be for this period only.

<TABLE>
<CAPTION>
CENSUS % RESIDENT
OCCUPANCY DATA DATA DAYS % REVENUES
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Beds/Units: _______ Medicaid: _______% _______%

Total Available Days: _______ Medicare: _______% _______%

Total Occupied Days: _______ Private & Other: _______% _______%

Occupancy Percentage: _______% Total: _______% _______%
</TABLE>

OPERATING DATA

<TABLE>
<S> <C> <C>
1. Gross Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

2. Contractual Allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

3. Net Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

4. Operating Expenses (before interest,
lease/rent, depreciation, amortization and
management fees) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

5. Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

6. Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

7. Lease/Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

8. Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

9. Amortization Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

10. Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

11. Management Fees (as a percent of Gross
Revenues) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
--------------

12. Overhead Allocation (if applicable) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

13. Other (identify) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

14. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------

15. Net Income (amount should agree with the
facility's financial statements) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
---------------
</TABLE>

-2-

<PAGE> 81

FINANCING DATA
(Note: This data breaks out Items 6 and 7 above.)

<TABLE>
<CAPTION>
Related to Health All Other Leases
Care REIT, Inc. and/or Debt Total
------------------------------------------------------------
<S> <C> <C> <C>
Interest or Lease Expense _________ _________ ________

Principal Payments _________ _________ ________
(if any)
$ $ $
=========== =========== ===========
</TABLE>

COVERAGE RATIO

<TABLE>
<S> <C> <C>
1. Net Operating Income $______________

2. Less Imputed Management Fee
(_____% of gross revenues) (______________)

3. Less Imputed Replacement Reserve for period
($_________ per bed [or unit] per year) (______________)

4. Adjusted Net Operating Income $______________

5. Loan/Lease Payments to HCRI $______________

6. Actual Coverage Ratio (Line 4 / Line 5) ______________

7. Minimum Coverage Ratio (per Lease Agreement) ______________
</TABLE>

CURRENT RATIO
[DELETE IF NOT APPLICABLE]

<TABLE>
<S> <C> <C>
1. Current Assets $______________

2. Current Liabilities $______________

3. Actual Current Ratio (Line 1 / Line 2) ______________

4. Minimum Current Ratio (per Lease Agreement) ______________
</TABLE>

I certify that the foregoing is true and accurate.

Date:

Name:

Title:

Phone Number:

-3-

<PAGE> 82

QUARTERLY FACILITY FINANCIAL REPORT

FACILITY NAME:
FACILITY ADDRESS:

REPORT PERIOD: Three (3) months beginning __________________ and
ending __________________________________. All
information reported should be for this period only.