<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
____________________________________
[MARK ONE]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NUMBER 1-11999
________________________________________
ALTERNATIVE LIVING SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 39-1771281
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
450 N. SUNNYSLOPE ROAD, SUITE 300 53005
BROOKFIELD, WI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 789-9565
_________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $546,029,751 as of March 5, 1998. The number of
outstanding shares of the Registrant's Common Stock is 21,832,796 shares as of
March 5, 1998.
_______________________________
Documents Incorporated by Reference
Part III incorporates information by reference from the Proxy Statement
for the registrant's Annual Meeting of Stockholders to be held on May 14, 1998.
<PAGE> 2
The statements in this annual report on Form 10-K relating to matters that are
not historical facts, including, but not limited to, statements found in Item
1. "Business" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are forward looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from expectations. These include, without limitation,
securing necessary licensing and permits, construction delays, cost increases
on new construction, business conditions, adverse changes in general economic
conditions and availability of financing for these developments. These and
other risks are set forth in the reports filed by the Company with the
Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
OVERVIEW
Alternative Living Services, Inc. (the "Company" or "ALS") is a leading
national assisted living company operating 223 assisted living residences with
an aggregate capacity of approximately 9,500 residents as of December 31, 1997.
Of these residences, the Company owns 32, leases 121, holds majority equity
interests in entities which own 19 and lease 15, holds minority equity
interests in entities which own 7 and lease 13, and manages 16 for other
owners. The Company's rapid growth over the last several years has had a
significant impact on the Company's results of operations and accounts for
substantially all of the changes in its results of operations for the years
ended 1997, 1996 and 1995. As of December 31, 1997, 1996 and 1995, the Company
operated or managed residences with an aggregate capacity to accommodate
approximately 9,500, 5,200 and 1,100 residents, respectively.
Since 1993, the Company has grown significantly as a result of its aggressive
development and acquisition activities, which have focused on purposeful built,
free-standing assisted living residences. The Company intends to continue its
development strategy and, at December 31, 1997, was constructing 109 residences
and developing an additional 58 residences. Of these residences, at least 110
with an aggregate capacity of approximately 5,000 residents are expected to
open during 1998.
In October 1997, the Company completed its merger (the "Sterling Merger") with
Sterling House Corporation ("Sterling"), which at the time of the merger
operated 104 residences with an aggregate capacity of approximately 3,900
residents. In May 1996, the Company acquired New Crossings International
Corporation ("Crossings"), an assisted living company which operated 15
Crossings residences with a capacity to accommodate approximately 1,420
residents throughout the western United States; and in January 1996, the
Company acquired Heartland Retirement Services, Inc. ("Heartland"), an assisted
living company which operated 20 WovenHearts residences with an aggregate
capacity of approximately 330 residents throughout Wisconsin. The Sterling
Merger was accounted for as a pooling-of-interests and both of the 1996
transactions were accounted for as purchases.
As a result of the Sterling Merger: (i) Sterling became a wholly-owned
subsidiary of the Company; (ii) the Company issued approximately 5,550,000
shares of common stock in exchange for the Sterling common stock then
outstanding; (iii) the Company assumed Sterling's 6.75% Convertible
Subordinated Debentures (the "6.75% Debentures"); and (iv) Sterling stock
options then outstanding were converted into options to acquire common stock
based on the merger exchange ratio. The Company recorded charges to earnings in
the quarter ended December 31, 1997 related to the Sterling Merger in the
aggregate amount of $10.4 million. Of the $10.4 million merger related costs
recognized in the fourth quarter of 1997, $4.7 million represent exit costs for
duplicate facility locations, systems consolidation, severance arrangements and
consolidation of corporate office functions. These exit costs are reflected as
a non-recurring restructuring charge in the Statements of Operations. The
balance of the merger related costs, $5.7 million, represent investment
banking, legal, accounting, printing and consulting costs related to the
transaction and are included in general and administrative expense as required
under the pooling-of-interests accounting method.
1
<PAGE> 3
ASSISTED LIVING PRODUCT LINES
The Company operates multiple residence models designed to meet the increasing
personal and health care needs of the private pay elderly population. Each
residence model offers a full range of assisted living services, and its
dementia residence model also offers specialized care for residents with
Alzheimer's disease and other dementias. Each of the Company's residence
models 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 resident's privacy, encouraging individual choice and fostering
independence in a "home-like" setting.
Frail-Elderly Models. The Company's frail-elderly residence models offer
residents a choice of private or shared, fully-furnished accommodations with
ongoing health assessments by a nurse, 24-hour assistance with activities of
daily living ("ADL's"), three meals a day plus snacks, organized social
activities, housekeeping and personal laundry services. 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. In addition, each of the Company's frail-elderly residence
models offers its residents participation in the RISE and ESP ancillary support
programs. See "--Assisted Living Care and Service Programs." The Company's
frail-elderly residence models are described below.
- - Wynwood. These multi-story residences are designed to serve primarily
upper income frail elderly individuals in metropolitan and suburban
markets. The Wynwood residences typically range in size from 37,500 to
45,000 square feet and accommodate 60 to 78 residents. To achieve a more
residential environment in these large 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. The Company generally maintains a minimum care giver
to resident ratio of approximately one to 10 at each of these residences
and increases staffing levels to a ratio as high as one to six to
accommodate the care needs of the resident population. The Company
customarily charges monthly rates per resident ranging from $1,800 to
$2,700 for a shared room and from $2,500 to $3,100 for a private room.
- - Sterling House. These apartment-style residences are generally located in
select suburban communities and in small or medium sized towns with
populations of 10,000 or more persons. These residences range in size
from 20,000 to 30,000 square feet and usually contain from 33 to 50
private apartments, offering residents a choice of studio, one-bedroom and
one-bedroom deluxe apartments. These apartments typically include a
bedroom area, private bath, living area, individual temperature control
and kitchenettes and range in size from 320 to 420 square feet. Like the
Crossings model, common space is dispersed throughout the building and it
is residentially scaled. The Company generally maintains care staff to
resident ratios ranging from approximately one to eight to one to 16,
depending on the care needs of the residents. The Company customarily
charges monthly rates per resident from $1,300 to $2,800 depending on the
apartment type, level of services required, resident acuity and the
geographic location of the residence.
- - Crossings. These apartment-style residences are generally located in
metropolitan markets. Apartment-style residences are favored in certain
markets in the United States, particularly throughout Western states. The
Company believes this residence model 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. Like the Sterling House residence model, 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 generally maintains care staff to resident ratios ranging from
approximately one to 12 to one to 16, depending upon the care needs of the
residents. The Company customarily charges monthly rates per resident
ranging from $1,500 to $3,300.
2
<PAGE> 4
- - WovenHearts. These residences are designed to meet the needs of frail
elderly individuals in smaller markets who may be experiencing the early
stages of Alzheimer's disease. WovenHearts residences range in size from
7,000 to 12,000 square feet, accommodate 20 residents and are being expanded
to accommodate 36 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 approximately one to 12 at its
WovenHearts residences. The Company customarily charges monthly rates per
resident ranging from $1,700 to $2,200.
Dementia Model. The Company's specially designed, free-standing dementia
residence model serves the programmatic needs of individuals with Alzheimer's
disease and other dementias. The Company's dementia model 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. As a result, these
residences have a staffing pattern which includes a full-time nurse and a care
giver to resident ratio of approximately one to six. Due to the generally high
level of care required by residents, a single-tier pricing structure is used.
The Company's dementia residence model is described below.
- - Clare Bridge. The Company's Clare Bridge dementia residence model ranges
in size from 20,500 to 28,000 square feet, is a single-story residence
accommodating 38 to 52 residents and is 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 specifically designed furniture suitable for
incontinent residents. The Company generally charges monthly rates per
resident ranging from $2,800 for a shared room to $4,000 for a private
room in its Clare Bridge residences.
In addition, the Company Sterling House model can be expanded to serve the
needs of individuals with Alzheimer's disease and other more severe dementias
through the addition of a Sterling Cottage. The Sterling Cottage is typically
a 12 apartment modular addition to a Sterling House residence that includes
separate entrances, an internal wandering path and more intensive care giver
staffing. The Company customarily charges monthly rates per resident from
$2,800 to $3,500 for services delivered in the Sterling Cottage setting.
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 residence
models is designed to accommodate residents as they age in place and require
increasing levels of care. To oversee the delivery of care and services, the
Company assigns a licensed nurse to 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. At each of the Company's frail elderly residence models,
residents are placed in one of several care levels depending upon their
individual needs. At its Clare
3
<PAGE> 5
Bridge residences, the Company currently uses a single care structure. 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 planed 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.
RISE (Restoring Independence, Strength and Energy). Crossings residences
also 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. 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.
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.
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 resident's
remaining functional abilities. Whenever possible, residents participate
in all facets of daily life at the residence, such as assisting with
meals, laundry and housekeeping.
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
4
<PAGE> 6
Company is unable to meet the resident's needs, the Company maintains
relationships with local hospitals and skilled nursing facilities to
facilitate resident transfers.
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 residences in target market areas
throughout Pennsylvania, Delaware 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. The joint venture arrangement between ALS and CCC contemplates the
joint development of residences in the ALS-East Territory, and CCC will have a
right of first refusal to provide 20% of the equity for any future residences
developed by ALS in the ALS-East Territory. Losses from the operation of
residences jointly owned by ALS and CCC are allocated on a basis consistent
with the respective partners' interest in cash distributions and economic
substance of the joint venture arrangement which results in losses
disproportionately allocated to CCC to the extent of its capital account. Upon
the six month anniversary of the opening of a residence jointly owned by ALS
and CCC, CCC shall have the right to require the Company to purchase CCC's
interest in such residence (put option) and the Company shall have an option to
acquire (call option) CCC's interest in such residence at a purchase price
based upon the appraised fair market value of the residence.
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
target market areas throughout North and South Carolina (the "ALS-Carolina
Territory"). The joint venture arrangement between ALS and Days contemplates
the joint development of residences in the ALS-Carolina Territory through
November 2000. Days or its affiliates will serve as ALS's exclusive general
contractor in the ALS-Carolina Territory, and Days will have a right of first
refusal to provide 20% of the equity for any future residences developed by ALS
in the ALS-Carolina Territory. Losses from the operation of residences jointly
owned by ALS and Days are allocated on a basis consistent with the respective
partners' interest in cash distributions and economic substance of the joint
venture arrangement which results in losses disproportionately allocated to
Days to the extent of its capital account. Upon the six month anniversary of
the opening of a residence jointly owned by ALS and Days, Days shall have the
right to require the Company to purchase Days' interest in such residence (put
option) and the Company shall have an option to acquire (call option) Days'
interest in such residence at a purchase price based upon the appraised fair
market value of the residence.
Joint Venture with Pioneer Development Company. The Company has entered into a
joint venture relationship (the "ALS-Northeast J.V.") with Pioneer Development
Company, a Syracuse, New York-based commercial real estate development and
construction company ("Pioneer"), to develop, own and operate assisted living
residences in targeted market areas throughout New York, Massachusetts,
Connecticut and Rhode Island (the "ALS-Northeast Territory"). Pioneer and the
Company agreed to capitalize and form separate project entities during a
five-year development term commencing in September 1996 to develop, construct,
open and operate residences in the ALS-Northeast Territory, with the Company
and Pioneer owning and funding either a 51% and 49% equity interest, or an 80%
and 20% equity interest, respectively, in such project entities. During such
development term, the Company and Pioneer have agreed not to independently
engage in other competitive activities in the ALS-Northeast Territory, subject
to certain limited exceptions. Pioneer will provide development and
construction management services to the ALS-Northeast J.V. and ALS will manage
the ALS-Northeast residences, all pursuant to agreed upon arrangements. Losses
from the operation of residences jointly owned by ALS and Pioneer are allocated
on a basis consistent with the respective partners' interest in cash
distributions and economic substance of the joint
5
<PAGE> 7
venture arrangement which results in losses disproportionately allocated to
Pioneer to the extent of its capital account.
With respect to each ALS Northeast Territory residence, upon the first to occur
(i) such residence achieving a 75% occupancy or (ii) the six-month 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) and the
Company shall have an option to acquire (call option) Pioneer's interest in
such ALS-Northeast residence. The purchase price payable upon exercise of the
put and call options are based on the appraised fair market value of the
residence and shall be payable in cash and/or shares of common stock.
Fee Development Relationship with Western Communities Corporation. In May
1996, the Company 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 a
specified time period. 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
during the two year term of the WCC Agreement, the Company and WCC will not
enter into a similar agreement with any other person 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.
Sterling Development Partnerships. In February 1997, Sterling formed a wholly
owned subsidiary, Coventry Corporation ("Coventry"), to enter into joint
venture agreements with certain development partners. Pursuant to the
applicable joint venture agreements, Coventry holds interests in various
limited liability companies and limited partnerships (the "Development
Partnerships") formed to develop Sterling House residences. The Company's
development partners generally provide construction management expertise,
access to 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 while investing
capital and sharing in the development risk of new properties. The Company
participates in financing residences, contributes operational and industry
expertise and has management responsibility for the residences. The Company
has both the option, at its election, and an obligation, at the election of its
development partners, to acquire the equity interests of the other partners at
fair market value (subject to certain limitations) at predetermined times.
Losses from operation of residences jointly owned by Coventry and the
Development Partners are disproportionately allocated to the Development
Partners to the extent of their capital accounts.
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.
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. In some states in which the Company operates, the term
"assisted living" may have a statutory definition limited to a particular type
of program or population. Some of the Company's assisted living residences may
fall into other licensing categories or may not require licensing in states
with specific "assisted living" programs, although such residences may offer
services requiring licensure (e.g., licensed home care services). 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
6
<PAGE> 8
medication, and limited nursing services; physical residence specification;
furnishing of residence units; food and housekeeping services; emergency
evacuation plans; and residence rights and responsibilities. New Jersey and
Connecticut also requires each assisted living residence to obtain a
Certificate of Need ("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 or biannually. The Company
has also obtained a CON for each residence under construction or development in
New Jersey and is in the process of obtaining CONs for the residences under
development in Connecticut.
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.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or, the recommending of, a particular provider of
health care items or services. The Medicare/Medicaid anti-kickback law has
been broadly interpreted to apply to certain contractual relationships between
health care providers and sources of patient referral. Similar state laws vary
from state to state, are sometimes vague and seldom have been interpreted by
courts or regulatory agencies. Violation of these laws can result in loss of
licensure, civil and criminal penalties, and exclusion of health care providers
or suppliers from participation in (i.e., furnishing covered items or services
to beneficiaries) the Medicare and Medicaid programs. Although the Company
receives only a small portion of its total revenues from certain Medicaid
waiver programs and is otherwise not a Medicare or Medicaid provider or
supplier, it is subject to these laws because (i) the state laws typically
apply regardless of whether Medicare or Medicaid payments are at issue and (ii)
as required under some state licensure laws, and for the convenience of its
residents, some of the Company's assisted living residences maintain contracts
with certain health care providers and practitioners, including pharmacies,
home health organizations and hospices, through which the health care providers
make their health care items or services (some of which may be covered by
Medicare or Medicaid) available to the Company's residents. There can be no
assurance that such laws will be interpreted in a manner consistent with the
practices of the Company.
In order to comply with the terms of the revenue bonds used to finance nine of
the Company's residences, the Company is required to lease a minimum of 20% of
the apartments in each such residence to low or moderate income persons as
defined pursuant to the Internal Revenue Code of 1986, as amended.
The Company is subject to the Fair Labor Standards Act, which governs such
matters as minimum wage, overtime and other working conditions. A portion of
the Company's personnel is paid at rates related to the federal minimum wage
and accordingly, increases in the minimum wage will result in an increase in
the Company's labor costs.
7
<PAGE> 9
The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions other than those states where
the Company currently operates. Principally, these regulations require that
certain written disclosures be made prior to the offer for sale of a franchise.
The disclosure documents are subject to state review and registration
requirements and must be periodically updated, not less frequently than
annually. In addition, some states have relationship laws which prescribe the
basis for terminating a franchisee's rights and regulate both the Company's and
its franchisee's post-termination rights and obligations.
Management is not aware of any non-compliance by the Company with applicable
regulatory requirements that would have a material adverse effect on the
Company's financial condition or results of operations.
COMPETITION
The long-term care industry is highly competitive and, given the relatively low
barriers to entry and continuing health care costs 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, extended care centers,
assisted/independent living centers, retirement communities, home health
agencies and similar providers, 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.
TRADEMARKS
Sterling House(R), Crossings(R) and WovenHearts(R) are registered service marks
of the Company and the Company claims service mark protection in the marks
Alternative Living ServicesSM , WynwoodSM, and Clare BridgeSM.
EMPLOYEES
At December 31, 1997, the Company employed approximately 3,475 full-time
employees and 2,460 part-time employees. None of the Company's employees are
represented by a collective bargaining group.
THE COMPANY AND ITS PREDECESSORS
The Company was organized in December 1993, and was initially capitalized by
Evergreen Healthcare, Inc. ("Evergreen") and Care Living Centers, Inc. ("CLC").
Evergreen, then a NYSE-listed operator of long-term care facilities, merged
with GranCare, Inc. ("GranCare") in July 1995. At the time of the Company's
organization, CLC was owned 25% by William F. Lasky, the Company's 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 contributed by Evergreen, of which $330,000
was in cash, $170,000 was in satisfaction of a short-term advance and $2.2
million was in common stock subscribed in exchange for a 51 % interest in the
Company and (ii) certain assets and contractual rights owned by CLC were
contributed in exchange for the remaining 49% interest in the Company issued to
CLC. 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
8
<PAGE> 10
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. Assisted Care and the ALS
Partnership were under common control through Mr. Lasky and one other
shareholder.
ITEM 2. PROPERTIES
The table below sets forth certain information with respect to the Company's
residences which are operated by the Company as of December 31, 1997. The
Company owns, leases, holds equity interest in or manages, on behalf of third
parties, these residences.
OPERATING RESIDENCES
<TABLE>
<CAPTION>
OWNED (1) LEASED (2) UNCONSOLIDATED (3) MANAGED (4) TOTAL
------------ ------------ -------------------- -------------- -----------
LOCATION RES. CAP. RES. CAP. RES. CAP. RES. CAP. RES. CAP.
- -------- ----- ----- ----- ----- --------- --------- ------ ------ ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AZ 2 86 -- -- -- -- -- -- 2 86
CA -- -- 1 140 -- -- -- -- 1 140
CO 4 215 4 376 1 42 3 142 12 775
FL 3 166 17 700 5 210 -- -- 25 1,076
ID 1 76 2 158 -- -- -- -- 3 234
KS 6 176 11 357 -- -- 1 43 18 576
MA -- -- -- -- -- -- 1 72 1 72
MI 5 224 5 168 -- -- -- -- 10 392
MN 2 40 8 259 -- -- 1 72 11 371
NC 3 158 1 38 -- -- -- -- 4 196
ND -- -- 1 63 -- -- -- -- 1 63
NJ 1 50 -- -- -- -- -- -- 1 50
NV -- -- 2 155 -- -- -- -- 2 155
NY 8 580 1 80 -- -- -- -- 9 660
OH 2 84 4 153 6 242 1 42 13 521
OK 1 33 22 763 1 46 2 64 26 906
OR -- -- 8 650 -- -- -- -- 8 650
PA 2 52 4 281 -- -- -- -- 6 333
TX -- -- 21 799 4 166 1 35 26 1,000
WA -- -- 4 404 -- -- -- -- 4 404
WI 11 201 20 503 3 55 6 48 40 807
- -- ----- ----- ----- ----- --------- --------- ------ ------ ---- -----
TOTAL 51 2,141 136 6,047 20 761 16 518 223 9,467
===== ===== ===== ===== ========= ========= ====== ====== ==== =====
</TABLE>
(1) Owned residences are those that are wholly or majority owned by the
Company and may be subject to one or more mortgages.
(2) Leased residences are those that are operated by the Company and are leased
from a third party.
(3) Unconsolidated residences are those residences operated by ALS in which ALS
owns a minority equity interest.
(4) Managed residences are those residences that ALS operates under
management arrangements but does not possess an ownership interest. ALS
has an option to purchase or lease nine of these residences.
86% of all operating residences are four years old or less and the remaining
14% range from five to eleven years old.
At December 31, 1997, the Company was in various stages of constructing 109
residences and is developing 58 residences. Set forth below is certain
information with respect to residences in construction and residence sites in
development on December 31, 1997.
9
<PAGE> 11
<TABLE>
<CAPTION>
UNDER CONSTRUCTION UNDER DEVELOPMENT
--------------------- ---------------------
LOCATION RESIDENCES CAPACITY RESIDENCES CAPACITY
- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
AZ 6 280 5 263
CO 2 92 4 200
CT -- -- 2 130
DE 1 72 -- --
FL 20 894 6 248
IN 6 252 6 256
MI 20 720 -- --
MN 8 310 -- --
NJ 3 102 9 376
NY 1 52 4 180
NC 13 608 1 42
OH 7 295 4 169
OR 1 54 1 52
PA 7 290 3 116
SC 10 414 2 84
TN 2 88 6 254
WA -- -- 5 260
WI 2 62 -- --
- --
TOTAL 109 4,585 58 2,630
=== ===== === =====
</TABLE>
Certain of the residences under construction or development may be
owned directly by joint venture entities in which the Company will
own varying percentages of equity interests. See "Business - Joint
Ventures and Strategic Alliances."
"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).
Residences under development may not in fact be constructed for a variety of
reasons, including zoning, permitting, health care licensing and cost related
issues. In addition to residences listed in the table above as "under
development," the Company is also engaged in preliminary development activities
with respect to other possible sites for future residences.
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to its business, the Company is not
currently a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A special meeting of stockholders was held on October 23, 1997 in
Chicago, Illinois.
(b) The meeting did not involve the election of directors.
(c) The matters voted upon and the results of the voting were as follows:
(1) The stockholders voted 9,593,623 shares in the affirmative
and 44,630 shares in the negative to approve and adopt the Agreement
and Plan of Merger dated as of July 30, 1997, as amended as of
September 2, 1997, by and among the Company, Sterling and Tango
Merger Corporation ("Merger Sub"), a wholly owned subsidiary of the
Company, pursuant
10
<PAGE> 12
to which Merger Sub would merge with and into Sterling.
Stockholders holding 10,435 shares abstained from voting on this
proposal.
(2) The stockholders voted 9,628,615 shares in the affirmative
and 23,315 shares in the negative to approve the proposed amendment
to the Amended and Restated Bylaws of the Company to (i) amend the
bylaw provision regarding filling vacancies arising on the Company's
Board of Directors; (ii) add a bylaw provision establishing an
executive committee of the Company's Board of Directors; and (iii)
amend the bylaw provision regarding amendments to the Company's
Amended and Restated Bylaws. Stockholders holding 41,400 shares
abstained from voting on this proposal.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed and traded on the American Stock Exchange
(AMEX) under the symbol "ALI". The Common Stock has been listed on the AMEX
since August 6, 1996, the date of the Company's initial public offering. The
number of holders of record of the Company's Common Stock as of March 3, 1998
was approximately 3,600.
The following table sets forth, for the periods indicated, the high and low
closing prices for the Common Stock as reported on AMEX.
11
<PAGE> 13
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1997:
First Quarter...................... 17-3/4 11-7/8
Second Quarter..................... 23-1/4 14-7/8
Third Quarter...................... 25-1/2 21-3/16
Fourth Quarter..................... 29-9/16 23
1996:
Third Quarter (commencing 8/6/96).. 15-1/8 12-7/8
Fourth Quarter..................... 15-1/4 10-7/8
</TABLE>
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated historical financial data of the Company presented
below for each of the five years ended December 31, 1997 has been derived from
the Company's audited consolidated financial statements appearing elsewhere in
this report and should be read in conjunction with those financial statements
and related notes. 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 Consolidated Financial
Statements and notes thereto included in the report (in thousands, except per
share data).
12
<PAGE> 14
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
THE COMPANY PREDECESSOR
-------------------------------------------------------------------- ----------
1997 1996 1995 1994 1993(1) 1993(1)
----------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA :
Revenue:
Operating revenue.............................. $130,744 $55,637 $15,061 $7,228 $ 823 $2,641
----------- ------------- -------------- ----------- -------- ------------
Operating expenses:
Residence operations.......................... 81,558 35,977 8,717 3,185 300 1,672
Lease expense................................. 25,524 9,035 944 697 19 563
General and administrative.................... 22,168 11,143 5,890 3,489 545 423
Depreciation and amortization................. 9,271 4,223 1,275 346 31 101
Non-recurring charge.......................... 4,656 976 -- -- -- --
----------- ------------- -------------- ----------- -------- ------------
Total operating expenses................... 143,177 61,354 16,826 7,717 895 2,759
----------- ------------- -------------- ----------- -------- ------------
Operating loss................................. (12,433) (5,717) (1,765) (489) (72) (118)
Other income (expense):
Interest expense, net......................... (3,932) (3,231) (984) (397) (79) (48)
Equity in losses of unconsolidated affiliates. (226) (52) (716) (299) -- --
Minority interest in losses of consolidated
subsidiaries................................. 8,440 76 160 48 (10) --
Other, net.................................... (112) (31) 479 -- -- --
----------- ------------- -------------- ----------- -------- ------------
Total other income (expense), net.......... 4,170 (3,238) (1,061) (648) (89) (48)
----------- ------------- -------------- ----------- -------- ------------
Loss before income taxes....................... (8,263) (8,955) (2,826) (1,137) (161) (166)
Income taxes (benefit)......................... -- (159) (991) -- 15 --
----------- ------------- -------------- ----------- -------- ------------
Loss before extraordinary item................. (8,263) (8,796) (1,835) (1,137) (176) (166)
Extraordinary item - loss from early retirement
Of financing agreements........................ -- -- (1,176) -- -- --
----------- ------------- -------------- ----------- -------- ------------
Net loss................................... $ (8,263) $(8,796) $ (3,011) $(1,137) $ (176) $ (166)
=========== ============= ============== =========== ======== ============
Basic loss per common share:
Loss before extraordinary item (2)............ $ (0.44) $ (0.57) $ (0.24) $(0.26)
Extraordinary item (2)........................ -- -- (0.15) --
----------- ------------- -------------- -----------
Basic and diluted loss per common
share (2)..................................... $ (0.44) $ (0.57) $ (0.39) $(0.26)
Weighted average common shares =========== ============= ============== ===========
outstanding (2)............................... 18,651 15,429 7,782 4,322
=========== ============= ============== ===========
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------- -------------
THE COMPANY PREDECESSOR
------------------------------------------------------------------- -------------
1997 1996 1995 1994 1993(1) 1993(1)
---------- ---------- ---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 79,838 $39,455 $20,394 $ 896 $ 324 --
Short-term investments......................... 90,000 -- -- -- -- --
Working capital (deficit)...................... 129,528 20,532 10,425 (1,723) (472) (369)
Total assets................................... 553,552 204,353 82,450 18,160 3,341 759
Long-term obligations.......................... 318,069 68,625 23,663 7,365 678 134
Stockholders' equity........................... 143,897 91,064 45,466 3,765 25 349
</TABLE>
(1) The Company was organized in December 1993. In connection with the
initial capitalization of the Company, substantially all of the tangible
assets of two operating companies were contributed to the Company
(collectively, referred herein as the "Predecessor"). 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. Per share amounts for the Predecessor, for
periods prior to the inception of the Company, are not presented as they
would not provide comparable or meaningful information.
13
<PAGE> 15
(2) Basic and diluted per share amounts are the same since potentially
issuable shares related to stock options and convertible debt would have
an anti-dilutive effect.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading national assisted living company operating 223
assisted living residences with an aggregate capacity of approximately 9,500
residents as of December 31, 1997. Of these residences, the Company owns 32,
leases 121, holds majority interests in entities which own 19 and lease 15,
holds minority interests in entities which own 7 and lease 13, and manages 16
for other owners. The Company's rapid growth over the last several years has
had a significant impact on the Company's results of operations and accounts
for substantially all of the changes in its results of operations for the
years ended 1997, 1996 and 1995. As of December 31, 1997, 1996 and 1995, the
Company operated or managed residences with an aggregate capacity to
accommodate approximately 9,500, 5,200 and 1,100 residents, respectively.
Since 1993, the Company has grown significantly as a result of its aggressive
development and acquisition activities, which have focused on purposeful built,
free-standing assisted living residences. The Company intends to continue its
development strategy and, at December 31, 1997, was constructing 109 residences
and developing an additional 58 residences. Of these residences, at least 110
with an aggregate capacity of approximately 5,000 residents are expected to
open during 1998.
In October 1997, the Company completed the Sterling Merger, which at the
time of the merger operated 104 residences with an aggregate capacity of
approximately 3,900 residents. In May 1996, the Company acquired Crossings, an
assisted living company which operated 15 Crossings residences with a capacity
to accommodate approximately 1,420 residents throughout the western United
States; and in January 1996, the Company acquired Heartland, an assisted living
company which operated 20 WovenHearts residences with an aggregate capacity of
approximately 330 residents throughout Wisconsin. The Sterling Merger was
accounted for as a pooling-of-interest and both of the 1996 transactions were
accounted for as purchases.
As a result of the Sterling Merger, (i) Sterling became a wholly-owned
subsidiary of the Company; (ii) the Company issued approximately 5,550,000
shares of common stock in exchange for the Sterling common stock then
outstanding; (iii) the Company assumed the 6.75% Debentures; and (iv) the
Sterling stock options then outstanding were converted into options to acquire
common stock based on the merger exchange ratio. Of the $10.4 million merger
related costs recognized in the fourth quarter of 1997, $4.7 million represent
exit costs for duplicate facility locations, systems consolidation, severance
arrangements and consolidation of corporate office functions. These exit costs
are reflected as a non-recurring restructuring charge in the Statement of
Operations. The balance of the merger related costs, $5.7 million, represent
investment banking, legal, accounting, printing and consulting costs related to
the transaction and are included in general and administrative expense as
required under the pooling-of-interests accounting method.
The following discussion and analysis relates to, and should be read in
conjunction with, the consolidated financial statements included elsewhere
herein. These financial statements give retroactive effect to the Sterling
Merger consummated on October 23, 1997, which has been accounted for as a
pooling-of-interests. See "Index to Consolidated Financial Statements."
YEARS ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Operating Revenue. Operating revenues for the year ended December 31, 1997
were $130.7 million representing an increase of $75.1 million, or 135%, from
the $55.6 million for the comparable 1996 period. Substantially all of this
increase resulted from the addition of newly constructed residences, the
acquisition of Crossings in May 1996 and other acquisitions. The Company
operated 223 residences at December 31, 1997 compared to 136 residences at
December 31, 1996.
15
<PAGE> 17
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 1997 increased to $81.6 million from $36.0 million for the
comparable 1996 period primarily as a result of an increase in the number of
residences operated during the 1997 period. Operating expense as a percentage
of operating revenue for the year ended December 31, 1997 and 1996 was 62.4%
and 64.7%, respectively.
Lease Expense. Lease expense for the year ended December 31, 1997 was $25.5
million, compared to $9.0 million in the comparable period in 1996. Such
increase was attributable to the acquisition of Crossings residences in May
1996, 13 residences of which are leased, the sale/leaseback of 12 residences in
December 1996 and utilization of sale/leaseback financing totaling $160.7
million during 1997.
General and Administrative Expense. General and administrative expenses for
the year ended December 31, 1997 were $16.5 million, before Sterling Merger
related charges of $5.7 million, compared to $11.1 million for the comparable
1996 period. General and administrative expense, before Sterling Merger
related charges, as a percentage of operating revenue declined from 20% in the
year ended December 31, 1996 to 13% in the year ended December 31, 1997. The
increase in general and administrative expenses was primarily attributable to
salaries, related payroll taxes and employee benefits for additional corporate
personnel retained to support the Company's rapid growth. The $5.7 million of
Sterling Merger costs represents investment banking, legal, accounting and
consulting costs related to the transaction. The Company expects that its
general and administrative expenses will continue to decrease as a percentage
of operating revenue as the Company grows and achieves additional economies of
scale.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1997 was $9.3 million, representing an increase of $5.0
million, or 120%, from $4.2 million for the comparable period in 1996. This
increase resulted primarily from depreciation of fixed assets and amortization
of pre-opening costs on the larger number of new residences that opened during
1997 and the fourth quarter of 1996. The Company amortizes pre-opening costs
over a twelve month period from the date the residence is available for
occupancy.
Non-recurring Charge. The Company recorded a $4.7 million non-recurring charge
related to the Sterling Merger. The non-recurring charge established reserves
for exit costs for duplicate facility locations, systems consolidation,
severance arrangements and consolidation of corporate office functions.
Interest Expense, and Interest Income. Interest expense, net of interest
income, was $3.9 million for the year ended December 31, 1997 compared to $3.2
million for the comparable period in 1996. Gross interest expense for the 1997
period was $13.4 million compared to $7.0 million for the 1996 period, an
increase of $6.4 million. This increase is primarily attributable to the
issuance of the 7% Convertible Subordinated Debentures due 2004 (the "7%
Debentures") in May 1997, the issuance of the 6.75% Debentures in May 1996 and
an increase in the amount of construction financing used in the 1997 period as
compared to the 1996 period. The Company capitalized $6.7 million of interest
expense in the 1997 period compared to $1.9 million in the comparable 1996
period due to increased construction activity in 1997. Construction in progress
was $114.3 million at December 31, 1997 compared to $53.1 million at December
31, 1996. Interest income for the 1997 period was $2.8 million as compared to
$1.9 million for the 1996 period. This increase was primarily due to the
investment of the proceeds received from the 7% Debentures issued in May
1997.
Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in
losses of consolidated subsidiaries for the year ended December 31, 1997 was
$8.4 million, representing an increase of $8.4 million from $76,000 for the
comparable period in 1996. The increase was primarily attributable to the
increase in the number of residences owned by the Company with joint venture
partners. During 1997, the Company had 39 residences held in consolidated
joint venture relationships compared to one residence held in a consolidated
joint venture relationship during 1996.
Net Loss. As a result of the foregoing, the net loss for the year ended
December 31, 1997 was $8.3 million compared to a net loss of $8.8 million for
the comparable period in 1996.
16
<PAGE> 18
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Operating Revenue. Operating revenues for the year ended December 31, 1996
were $55.6 million, representing an increase of $40.5 million, or 269%, from
$15.1 million for 1995, due to the increased number of residences operated
during 1996. Substantially all of this increase resulted from newly
constructed residences and acquisitions. The Company operated 136 residences at
December 31, 1996 compared to 37 residences at December 31, 1995.
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 1996 were $36.0 million representing an increase of $27.3 million,
or 313%, from $8.7 million for 1995. The increase primarily resulted from the
increased number of residences operated during the 1996 period. Operating
expenses as a percentage of operating revenue for the year ended December 31,
1996 and 1995 was 64.7% and 57.6%, respectively.
Lease Expense. Lease expense for the year ended December 31, 1996 was $9.0
million, representing an increase of $8.1 million from $944,000 for 1995. Such
increase was primarily attributable to the increased utilization of
sale/leaseback financing during 1996, including the acquisition of 15 Crossings
residences in May 1996, 13 of which residences were financed under
sale/leaseback arrangements. The Company completed $91.0 million of
sale/leaseback transactions in 1996.
General and Administrative. General and administrative expenses for year ended
December 31, 1996 were $11.1 million, representing an increase of $5.2 million,
or 88%, from $5.9 million for 1995. The increase in expenses was primarily
attributable to salaries, related payroll taxes and employee benefits relating
to additional corporate personnel retained to support the Company's growth
strategy.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 was $4.2 million, representing an increase of $2.9
million, or 231%, from $1.3 million for 1995. This increase resulted primarily
from a greater number of new openings during 1996 and related amortization of
pre-opening costs.
Non-Recurring Charge. The Company recorded a non-recurring charge of $976,000
in 1996 related to the acquisitions of Heartland and Crossings. The charge
related to the establishment of a reserve for the costs associated with the
physical downsizing of the Crossings corporate office and employee separation
costs at Crossings and Heartland. In 1996, the Company applied costs of
$166,000 against this reserve primarily related to employee separation costs.
Through December 31, 1997, the Company has applied additional costs totaling
$600,000 against the reserve. The Company believes that the provisions for the
non-recurring charge continue to be adequate and will not require material
adjustment in future periods.
Interest Expense and Interest Income. Interest expense, net of interest
income, was $3.2 million for the year ended December 31, 1996 compared to $1.0
million for the year ended December 31, 1995. Gross interest expense in 1996
was $7.0 million as compared to $1.8 million in 1995, an increase of $5.2
million. This increase was primarily attributable to the issuance of the 6.75%
Debentures in May 1996, the bridge financing incurred in January 1996 to
finance the Heartland acquisition, an increase in mortgage financing of
existing residences in 1996 compared to 1995, and increased construction
financing in 1996 compared to 1995. The Company capitalized $1.9 million of
interest expense in 1996 compared to $407,000 in 1995, reflecting the increased
construction activity in 1996. Construction in progress was $53.1 million at
December 31, 1996 compared to $8.4 million at December 31, 1995. Interest
income for 1996 was $1.9 million as compared to $439,000 for 1995. This
increase was primarily due to the investment of proceeds received from the
Company's initial public offering and the issuance of the 6.75% Debentures,
both of which occurred in 1996.
Equity in Losses of Unconsolidated Affiliates. Equity in net losses from
investments in unconsolidated affiliates was $52,000 for the year ended
December 31, 1996, representing a decrease of $664,000, or 93%, from equity in
losses of unconsolidated affiliates of $716,000 in 1995. These losses were
primarily
17
<PAGE> 19
attributable to the Company's investment in five Michigan residences and losses
of unconsolidated affiliates of Sterling, all of which were acquired and
consolidated in late 1995 and 1996.
Net Loss. As a result of the foregoing, the net loss for l996 was $8.8 million
compared to $l.8 million for 1995, an increase of $7.0 million.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1997, 1996 and 1995, the Company experienced
cash flow deficits from operations of $141,000, $1.7 million and $1.3 million,
respectively. These cash flow deficits were primarily a result of the
Company's significant development of new residences, which typically incur cash
flow deficits during the lease-up period and general and administrative
expenses necessary to support the Company's early growth. In 1997, the cash
flow deficit was also caused by restructuring and transaction costs of
approximately $4 million which were expended to effect the Sterling Merger.
During the year ended December 31, 1997, the Company raised approximately $454
million of financing. Financing was provided by $48.0 million in net proceeds
from the May 1997 offering of the 7% Debentures, a concurrent offering of 5.25%
Convertible Subordinated Debentures due 2002 (the "5.25% Debentures") and
common stock in December 1997 which provided net proceeds of $121.8 million and
$60.7 million, respectively, $160.7 million of sale/leaseback financing, $14.6
million of secured bridge loan financing incurred in advance of anticipated
sale/leaseback transactions involving the encumbered residences, $23.8 million
of net additional construction and permanent loan financing, $8.0 million of
unsecured short-term financing, $10 million in short-term financing to be paid
off as construction is completed on six residences pursuant to a sale/leaseback
agreement, $6.4 million of minority partner contributions and cash from
operations. In addition, the Company assumed existing debt of $21.6 million
and $7.6 million of financing under an operating lease on four properties
acquired in 1997.
The above financing was used to fund $293.2 million in construction and
development activity, $23.2 million in acquisition activity, $5.6 million in
joint venture minority interest buy-outs, $91.6 million in investment
purchases, and operating cash flow deficits. The remaining $40.4 million of
financing resulted in an increase in cash and cash equivalents at year end.
In December 1997, the Company completed the offering of $125 million of the
5.25% Debentures and 2,800,000 shares of common stock (together, the
"Concurrent Offering"). Net proceeds to the Company from the Concurrent
Offering totaled $182.5 million. In January 1998, overallotment options were
exercised by the underwriters of the Concurrent Offering resulting in
additional net proceeds to the Company of $27.5 million. Due to the Concurrent
Offering proceeds received in December 1997, the Company had working capital of
approximately $129.5 million at December 31, 1997, compared to working capital
of $20.5 million at December 31, 1996.
On November 21, 1997, the Company completed a sale/leaseback transaction
totaling $62 million of which (i) $41 million was used to repay secured bridge
loan financing outstanding, $6.0 million of which was classified as short-term,
(ii) $14 million was held in escrow to fund construction in progress on six
residences and (iii) $5 million was available to fund future development
activities. This transaction involved the sale and immediate leaseback by the
Company of 24 residences having an aggregate capacity of 775 residents.
Giving effect to the Sterling Merger, the Company's earnings were inadequate to
cover fixed charges by $23.2 million for the year ended December 31, 1997 and
$10.7 million for the year ended December 31, 1996. The Company expects that
its earnings will not be sufficient to cover its fixed charges in future
periods. Accordingly, the Company may have to incur additional indebtedness in
the future to cover its fixed charges.
To achieve its growth objectives, the Company will need to obtain sufficient
financing to fund its development, construction and acquisition activities.
This need for financing has increased substantially due to the Sterling Merger.
The Company has plans to develop approximately $400 million of residences
through the end of 1998. Historically, the Company has financed its
development program and acquisitions
18
<PAGE> 20
through a combination of various forms of real estate financing (mortgage and
sale/leaseback financing), capital contributions from joint venture partners
and the sale of its securities. The Company currently has executed non-binding
letters of intent with various health care REITs for financing commitments
aggregating approximately $548 million, $292 million of which has been utilized
by the Company through December 31, 1997. In addition, the Company has
obtained $130 million of commitments from conventional financing lenders for
the purpose of providing permanent financing on stabilized residences. As of
December 31, 1997, $8 million of this conventional financing has been utilized.
In addition to financing construction and development costs, the Company will
require capital resources to meet its operating and working capital needs
incurred primarily through the start-up and lease-up phases of new residences.
The Company believes that its cash on hand, financing under these commitments
and other financing that the Company expects to be able to access and equity
contributions from its joint venture development partners, will be sufficient
to fund its growth strategy for the next 14 months.
A lack of funds may require the Company to delay or eliminate all or some of
its development projects and acquisition plans. In addition, the Company may
require additional financing to enable it to acquire additional residences, to
respond to changing economic conditions, to expand the Company's development
program or to account for changes in assumptions related to its development
program. There can be no assurance that any newly constructed residences will
achieve a stabilized occupancy level 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. There can be no
assurance that the Company will be successful in securing additional financing
or that adequate funding will be available and, if available, will be on terms
that are acceptable to the Company.
The Company is obligated under its joint venture arrangements to purchase the
equity interests of its joint venture partners upon the election of such
partners upon agreed upon terms and conditions. See "Business -Joint Ventures
and Strategic Alliances." Within the next twelve months, the Company will
become subject to such contingent purchase obligations with respect to equity
interests held by joint venture partners, exercisable at their election,
related to certain of the Company's residences. At such times as such
contingent purchase obligations are exercisable, the Company may also elect to
exercise its rights to purchase such interests. Based on a number of
assumptions, including assumptions as to the number of residences to be
developed with joint venture partners, the timing of such development, the time
at which such options will be exercised and the fair market value of such
residences at the date such options are exercised, the Company estimates that
it may require approximately $25 million to $30 million to satisfy these
purchase obligations during 1998.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company. Inflation
could, however, affect the Company's results of operations due to the Company's
dependence on its senior resident population who rely on liquid assets and
relatively fixed incomes to pay for the Company's services. As a result, the
Company may not be able to increase residence 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. In addition, given the significant amount of
construction and development activity which the Company anticipates,
inflationary pressures could affect the Company's cost of new product
deployment and financing. There can be no assurances that financing will be
available on terms acceptable to the Company.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits rather
than four to define the applicable year, any of the Company's computer systems
that have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000 (the so-called "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in normal business activities.
19
<PAGE> 21
The Company is in the process of evaluating its computer systems to determine
what modification (if any) are necessary to make such systems compatible with
the year 2000 requirements. However, because many of the Company's computer
systems have been put into service within the last several years, or are
currently being replaced with year 2000 compliant systems, the Company does not
expect any such modifications to have a material adverse effect on the
Company's consolidated financial position or results of operations. There can
be no assurance, however, that the computer systems of other companies on which
the Company's systems rely will be timely modified, or that a failure to modify
such systems by another company, or modifications that are incompatible with
the Company's systems, would not have a material adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES:
Independent Auditors' Report.................................................................................... 21
Consolidated Balance Sheets, as of December 31, 1997 and 1996................................................... 22
Consolidated Statements of Operations for Years Ended December 31, 1997, 1996 and 1995.......................... 23
Consolidated Statements of Changes in Stockholders' Equity for Years Ended December 31,
1997, 1996 and 1995............................................................................................. 24
Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996 and 1995.......................... 25
Notes to Consolidated Financial Statements...................................................................... 26-38
</TABLE>
20
<PAGE> 22
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, 1997
and 1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. 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 consolidated financial position of the
Company at December 31, 1997 and 1996, and the consolidated results of its
operations and cash flows for each of the years in the three-year period ended
December 31, 1997 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
February 17, 1998
21
<PAGE> 23
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 79,838 $ 39,455
Short-term investments.................................. 90,000 --
Accounts receivable:
Trade.................................................. 6,120 2,032
Construction due from REIT............................. 439 3,848
Other.................................................. 1,213 143
Pre-opening costs, net of amortization.................. 5,785 2,688
Other current assets.................................... 15,438 4,198
-------- --------
Total current assets................................. 198,833 52,364
-------- --------
Property and equipment, net............................... 323,613 132,922
Long-term investments..................................... 4,435 2,835
Investments in and advances to unconsolidated affiliates.. 1,607 1,649
Goodwill, net............................................. 5,380 5,216
Other assets.............................................. 19,684 9,367
-------- --------
Total assets......................................... $553,552 $204,353
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations........... $ 2,677 $ 985
Short-term notes payable................................ 18,900 8,335
Accounts payable........................................ 20,645 11,771
Accrued expenses........................................ 21,603 7,579
Deferred rent and refundable deposits................... 5,480 3,162
-------- --------
Total current liabilities................................. 69,305 31,832
-------- --------
Long-term obligations, less current installments.......... 108,069 33,625
Convertible debt.......................................... 210,000 35,000
Deferred gain............................................. 12,421 6,944
Minority interest......................................... 9,860 5,888
Stockholders' equity:
Common stock............................................ 214 185
Additional paid-in capital.............................. 165,206 104,139
Accumulated deficit..................................... (21,523) (13,260)
-------- --------
Total stockholders' equity........................... 143,897 91,064
-------- --------
Total liabilities and stockholders' equity........... $553,552 $204,353
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenue:
Resident service fees.......................... $128,856 $54,210 $11,981
Other.......................................... 1,888 1,427 3,080
-------- ------- -------
Operating revenue................................. 130,744 55,637 15,061
-------- ------- -------
Operating expenses:
Residence operations........................... 81,558 35,977 8,717
Lease expense.................................. 25,524 9,035 944
General and administrative..................... 22,168 11,143 5,890
Depreciation and amortization.................. 9,271 4,223 1,275
Non-recurring charge........................... 4,656 976 --
-------- ------- -------
Total operating expenses.................... 143,177 61,354 16,826
-------- ------- -------
Operating loss.................................... (12,433) (5,717) (1,765)
Other income (expense):
Interest expense, net.......................... (3,932) (3,231) (984)
(Loss) gain on sale of assets.................. (29) -- 439
Equity in losses of unconsolidated affiliates.. (226) (52) (716)
Other (expense) income......................... (83) (31) 40
Minority interest in losses of consolidated
subsidiaries.................................. 8,440 76 160
-------- ------- -------
Total other income (expense), net........... 4,170 (3,238) (1,061)
-------- ------- -------
Loss before income taxes.......................... (8,263) (8,955) (2,826)
Income tax benefit................................ -- (159) (991)
-------- ------- -------
Loss before extraordinary item.................... (8,263) (8,796) (1,835)
Extraordinary item - loss from early retirement
of financing agreements.......................... -- -- (1,176)
-------- ------- -------
Net loss.................................... $ (8,263) $(8,796) $(3,011)
======== ======= =======
Basic loss per common share:
Loss before extraordinary item................. $ (0.44) $ (0.57) $ (0.24)
Extraordinary item............................. -- -- (0.15)
-------- ------- -------
Basic and diluted net loss per common share....... $ (0.44) $ (0.57) $ (0.39)
======== ======= =======
Weighted average common shares outstanding........ 18,651 15,429 7,782
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
AND ADDITIONAL
PAID-IN CAPITAL
---------------------
ACCUMULATED
SHARES AMOUNTS DEFICIT TOTAL
------ ------- ----------- ------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994.................. 4,323 $ 5,219 $ (1,453) $ 3,766
Proceeds from issuance of common stock......... 2,403 21,786 -- 21,786
Shares issued in connection with acquisitions.. 529 5,408 -- 5,408
Shares issued - termination fee................ 97 988 -- 988
Net proceeds from private placement............ 4,303 19,029 -- 19,029
Retirement of stock held by minority
stockholder................................... (381) (2,500) -- (2,500)
Common stock issued for contributed capital.... 917 -- -- --
Net loss....................................... -- -- (3,011) (3,011)
------ -------- -------- --------
BALANCES AT DECEMBER 31, 1995.................. 12,191 49,930 (4,464) 45,466
Proceeds from issuance of common stock......... 3,873 41,648 -- 41,648
Shares issued in connection with acquisitions.. 2,483 12,877 -- 12,877
Purchase and retirement of common stock........ (12) (163) -- (163)
Shares issued - options exercised.............. 4 32 -- 32
Net loss....................................... -- -- (8,796) (8,796)
------ -------- -------- --------
BALANCES AT DECEMBER 31, 1996.................. 18,539 104,324 (13,260) 91,064
Proceeds from issuance of common stock......... 2,800 60,744 -- 60,744
Shares issued - options exercised.............. 52 352 -- 352
Net loss....................................... -- -- (8,263) (8,263)
------ -------- -------- --------
BALANCES AT DECEMBER 31, 1997.................. 21,391 $165,420 $(21,523) $143,897
====== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................................. $ (8,263) $ (8,796) $ (3,011)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 9,271 4,223 1,275
Loss (gain) on sale of assets............................................. 29 -- (439)
Income tax benefit........................................................ -- (159) (991)
Equity in net loss from investments in unconsolidated affiliates.......... 226 52 716
Minority interest in losses of consolidated subsidiaries.................. (8,440) (76) (160)
Loss on early retirement of financing agreement........................... -- -- 676
Stock option compensation................................................. -- -- 412
(Increase) decrease in trade accounts receivable.......................... (4,333) (1,293) 170
Increase in pre-opening costs............................................. (3,097) (2,688) --
Increase in other current assets.......................................... (7,899) (782) (359)
Increase (decrease) in accounts payable................................... 7,486 (344) 1,054
Increase in accrued expenses.............................................. 8,583 4,397 269
Increase in accrued merger charges........................................ 5,863 -- --
Changes in other assets and liabilities, net.............................. 433 3,777 (897)
--------- -------- --------
Net cash used in operating activities....................................... (141) (1,689) (1,285)
--------- -------- --------
Cash flows from investing activities:
Payments for property, equipment and project development costs............ (294,153) (115,711) (24,616)
Construction receivable due from REIT..................................... -- (3,848) --
Net proceeds from sale of property and equipment.......................... 2,188 -- 1,102
Acquisitions of affiliates and facilities, net of cash.................... (23,189) (9,998) (1,011)
Changes in investments in and advances to unconsolidated affiliates....... (1,148) (252) (4,894)
Purchase of limited partnership interests................................. (5,590) -- --
Increase in long-term investments......................................... (1,600) (1,663) (1,183)
Increase in short-term investments.......................................... (90,000) -- --
--------- -------- --------
Net cash used in investing activities....................................... (413,492) (131,472) (30,602)
--------- -------- --------
Cash flows from financing activities:
Repayments of short term borrowings....................................... (34,335) (13,844) (5,782)
Repayments of long-term obligations....................................... (53,887) (39,626) (14,020)
Proceeds from issuance of debt............................................ 145,943 39,612 23,700
Proceeds from issuance of convertible debt................................ 175,000 35,000 --
Payments for financing costs.............................................. (7,131) (1,602) (221)
Proceeds from sale/leaseback transactions................................. 160,748 91,034 8,118
Issuance of common stock and other capital contributions.................. 61,285 41,648 40,815
Contributions by minority partners and minority stockholders.............. 6,393 -- 1,275
Retirement of stock held by minority stockholders......................... -- -- (2,500)
--------- -------- --------
Net cash provided by financing activities................................... 454,016 152,222 51,385
--------- -------- --------
Net increase in cash and cash equivalents................................... 40,383 19,061 19,498
--------- -------- --------
Cash and cash equivalents:
Beginning of period....................................................... 39,455 20,394 896
--------- -------- --------
End of period............................................................. $ 79,838 $ 39,455 $ 20,394
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized..................... $ 11,660 $ 6,086 $ 1,494
========= ======== ========
Cash paid (received) during year for income taxes......................... $ 94 $ -- $ (13)
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
ALTERNATIVE LIVING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT BUSINESS AND ACCOUNTING POLICIES
(A) BUSINESS
Alternative Living Services, Inc. (the "Company") develops, owns,
and operates assisted living residences. As of December 31, 1997,
the Company operated and managed 223 residences with approximate
capacity of 9,500 residents located throughout the United States.
(B) 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 balances
and transactions with such subsidiaries have been eliminated in
the consolidation. Investments in other affiliated companies in
which the Company has a minority ownership position are accounted
for on the equity method.
(C) USE OF ESTIMATES
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(D) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income." This
Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.
Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and
other transactions. This Statement requires that all items that
are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This Statement is required to be adopted
for fiscal years beginning after December 15, 1998.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This Statement establishes standards
for the way that public business enterprises report information
about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to
stockholders. It also establishes standards for related
disclosures about products and services geographic areas and major
customers. This statement is required to be adopted for fiscal
years beginning after December 15, 1998.
(E) CASH EQUIVALENTS
26
<PAGE> 28
The Company considers all highly liquid investments with original maturities
of less than ninety days to be cash equivalents for purposes of the consolidated
financial statements. Also see footnote 13.
27
<PAGE> 29
(F) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company determines fair value of financial assets based on
quoted market values. The fair value of debt is estimated based
on quoted market values, where available, or on current rates
offered to the Company for debt of the same maturities.
The Company's financial instruments exposed to concentrations of
credit risk consist primarily of cash and short-term investments.
The Company places its funds into high credit quality financial
institutions and, at times, such funds may be in excess of the
Federal Depository Insurance Corporation limits.
(G) LONG-LIVED ASSETS
Property and equipment are stated at cost, net of accumulated
depreciation. Property and equipment under capital leases are
stated at the present value of minimum lease payments.
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 three to seven years. Maintenance
and repairs are expensed as incurred.
Goodwill represents the costs of acquired net assets in excess of
their fair market values. Amortization of goodwill is computed
using the straight-line method over the expected periods to be
benefited, generally 40 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 entity. Accumulated
amortization of goodwill was $314,264 and $163,000 as of December
31, 1997 and 1996, respectively.
(H) DEFERRED COSTS AND PRE-OPENING COSTS
Deferred costs, which are included in other assets, are composed
of organization costs and deferred financing costs. Organization
costs are amortized on a straight-line basis over five years.
Deferred financing costs are amortized using the
effective-interest method over the term of the related debt.
Pre-opening costs are amortized over 12 months from the date a
residence is available for occupancy.
(I) REVENUE
Revenue, which is recorded when services are rendered, consists
primarily of resident service fees which are reported at net
realizable amounts. Other revenue consists primarily of
management fees and franchise fees which are charged to
unconsolidated affiliates and third parties. Those fees are
recognized as earned in accordance with signed agreements and reported
at net realizable amounts.
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. 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.
(K) NET LOSS PER COMMON SHARE
28
<PAGE> 30
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share. The Company adopted this standard, as
required, for its December 31, 1997 financial statements. For the
years presented, the Company presents both basic and diluted
earnings per share. Basic earnings per share is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that
could occur if common stock equivalents were exercised and then
shared in the earnings of the Company. For all periods presented,
common stock equivalents in the form of stock options and
convertible debentures would be anti-dilutive. As such, per the
requirements of SFAS No. 128, basic and diluted earnings per share
are the same amount.
(L) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995
financial statements to conform with the 1997 presentation.
(2) BUSINESS COMBINATIONS AND ACQUISITIONS
Alternative Living Services, Inc. merged with Sterling House Corporation
("Sterling") on October 23, 1997 (the "Sterling Merger"). On that date,
the Company issued approximately 5,550,000 shares of its common stock in
exchange for approximately 5,045,000 shares of Sterling's common stock
then outstanding based on an exchange ratio of its shares of common stock
for each share of Sterling's common stock (the "Exchange Ratio").
The consolidated financial statements give retroactive effect to the
Sterling Merger, which has been accounted for using the
pooling-of-interests method; and as a result, the financial position,
results of operations and cash flows are presented as if the combining
companies had been consolidated for all periods presented. The
consolidated statements of stockholders' equity also reflect retroactive
combination of the accounts of the Company and Sterling for all periods
presented, with adjustments to outstanding shares based upon the Exchange
Ratio.
The consolidated financial statements, including the notes thereto,
should be read in conjunction with the historical consolidated financial
statements of the Company and Sterling included in their respective
Annual Reports on Forms 10-K dated March 31, 1997.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated
financial statements are summarized below (in thousands):
29
<PAGE> 31
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Operating revenue:
Alternative Living Services, Inc......... $39,599 $10,464
Sterling House Corporation............... 16,038 4,597
------- -------
Combined............................ $55,637 $15,061
======= =======
Extraordinary loss:
Alternative Living Services, Inc......... $ -- $ --
Sterling House Corporation............... -- (1,176)
------- -------
Combined............................ $ -- $(1,176)
======= =======
Net loss:
Alternative Living Services, Inc.......... $(7,811) $(1,746)
Sterling House Corporation................ (726) (2,183)
Effect of restated income (taxes) benefit. (259) 918
------- -------
Combined............................ $(8,796) $(3,011)
======= =======
Basic and diluted loss per share:
Alternative Living Services, Inc.......... $ (0.79) $ (0.37)
Sterling House Corporation................ (0.14) (0.78)
------- -------
Combined............................ $ (0.57) $ (0.39)
======= =======
</TABLE>
There were no transactions between the Company and Sterling prior to
the Sterling Merger.
In addition to the Sterling Merger, the Company completed the following
acquisitions in 1996 and 1997:
- Heartland Retirement Services, Inc., an operator of 20 assisted
living residences headquartered in Madison, Wisconsin in January
1996;
- New Crossings International Corporation, a company which
operated 15 assisted living facilities headquartered in Tacoma,
Washington in May 1996;
- The general and limited partnership interests in five Michigan
limited partnerships owned by unrelated investors in May 1996;
- The minority interests in three partnerships in May 1996;
- A residence the Company had previously leased in August 1996;
- A 45-unit assisted living facility located in Liberal, Kansas in
August 1996;
- Two residences the Company managed located in Brown Deer and
Sussex, Wisconsin in September 1996;
- Six assisted living residences located in northern Wisconsin in
December 1996;
- A residence under construction located in Mesa, Arizona in May 1997;
- A majority interest in two residences located in upstate New York in
May 1997;
- A leasehold interest in a residence located in upstate New York in
May 1997;
- The remaining ownership interests in four residences located in
central Wisconsin in June 1997;
- Two assisted living residences located in Nevada in June 1997;
30
<PAGE> 32
- Two assisted living residences located in upstate New York in June
1997;
- A leasehold interest in three assisted living residences located in
Minnesota in September 1997;
- Two assisted living residences located in Colorado in September
1997 from a franchisee of the Company.
The cost of the 1996 acquisitions totaled $21.8 million and were
accounted for using the purchase method. In addition to cash, the
Company issued 2,482,589 shares of common stock with an estimated fair
value of $12.9 million, and incurred $11.6 million of debt to effect the
acquisitions. Goodwill related to the acquisitions of $4.9 million is
being amortized over 40 years.
Excluding the Sterling Merger, the aggregate purchase price for all 1997
acquisitions totaled $45 million, $22.2 million of which was paid in cash
and the remainder was debt assumed by the Company. All 1997 acquisitions
(other than the Sterling Merger) have been accounted for using the
purchase method.
(3) SHORT-TERM AND LONG-TERM INVESTMENTS
A summary of short-term and long-term investments at December 31, follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1997 1996
---------------- ---------------------
MARKET MARKET
COST VALUE COST VALUE
------- ------- ------ --------
<S> <C> <C> <C> <C>
Short-term investments:
Commercial paper, maturing 3/31/98,
yielding 5.50%-5.57%..................... $90,000 $90,000 $ -- $ --
======= ======= ====== ======
Long-term investments:
U.S. Treasury obligations and
certificates of deposit, maturing at
various times through 1999, restricted
as collateral for letters of credit
and debt service reserves................ $ 4,435 $ 4,435 $2,835 $2,835
======= ======= ====== ======
</TABLE>
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Land and improvements.......................... $ 34,143 $ 11,389
Buildings and leasehold improvements........... 160,991 64,573
Vehicles, furniture, fixtures, and equipment... 23,702 9,143
Construction in progress....................... 114,277 53,127
-------- --------
Total property and equipment................... 333,113 138,232
Less accumulated depreciation.................. (9,500) (5,310)
-------- --------
Property and equipment, net................. $323,613 $132,922
======== ========
</TABLE>
At December 31, 1997, property and equipment includes $9.0 million of
buildings and improvements and $251,623 of fixtures and equipment held
under capital leases and related financing obligations. Combined related
accumulated amortization totaled $1.4 million.
Interest is capitalized in connection with the construction of residences
and is amortized over the estimated useful lives of the residences.
Interest capitalized in 1997, 1996 and 1995 was approximately $6.7
million, $1.9 million and $407,000, respectively.
31
<PAGE> 33
Construction in progress at December 31, 1997 and 1996 consisted
principally of costs related to the construction of assisted living
residences with outstanding construction commitments totaling
approximately $196.9 million and $72.8 million, respectively.
(5) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Investments in and advances to unconsolidated affiliates consist of the
following at December 31 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
------ ------
Investments in unconsolidated affiliates........................ $ 345 $ 285
------ ------
Long-term advances to unconsolidated affiliates:
Partnerships................................................. $1,262 $1,089
Notes receivable............................................. -- 275
------ ------
Total advances to unconsolidated affiliates................. 1,262 1,364
------ ------
Total investments in and advances to unconsolidated
affiliates.................................................. $1,607 $1,649
====== ======
</TABLE>
Advances to unconsolidated affiliates also includes management fees
pursuant to an agreement with an affiliate, which is 50% owned and
controlled by an officer and a stockholder. Under the terms of the
agreement, this affiliate is obligated to pay a monthly management fee of
5% of gross operating revenue. The management fee was 11% of gross
operating revenue for 1996. During 1997 and 1996, the management fees,
included in other revenue, were $78,000 and $195,000, respectively.
The Company was retained by certain of its affiliates as the general
contractor for the construction of residences for which the Company
received a fee for construction services. The Company earned $803,000 in
construction management fees related to this arrangement in 1995, which
is included in other revenue.
Notes receivable at December 31, 1996 included $200,000 due from an
officer and a stockholder of the Company, which accrued interest at 6%
and was payable in full on December 30, 1999. The note was repaid during
1997.
(6) OTHER ASSETS
Other assets are comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Deferred financing costs, net........ $ 9,123 $2,443
Organizational and other costs, net.. 1,087 1,982
Deposits and other................... 9,474 4,942
------- ------
Total other assets................... $19,684 $9,367
======= ======
</TABLE>
(7) LONG-TERM DEBT, CAPITAL LEASES, AND FINANCING OBLIGATIONS
Long-term debt, capital leases, and financing obligations consist of the
following at December 31 (in thousands):
32
<PAGE> 34
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
5.25% convertible subordinated debentures due December
15, 2002, callable by the Company on or after December
31, 2000.................................................... $125,000 $ --
7.00% convertible subordinated debentures due June 1,
2004, callable by the Company on or after June 15,
2000........................................................ 50,000 --
6.75% convertible subordinated debentures due June 30,
2006, callable by the Company on or after July 15, 1999..... 35,000 35,000
-------- --------
Total convertible debt................................. 210,000 35,000
-------- --------
Mortgages payable, due from 1999 through 2021;
weighted average interest rates of 9.0%..................... 66,564 18,571
Sale/leaseback financing obligation, variable interest
at the 11th District FHLB rate plus 2-3/4%, payable in
monthly installments, due 2000.............................. 4,503 4,779
Serial and term revenue bonds maturing serially from
1995 through 2013, interest ranging from 4.0% to 9.5%....... 9,185 4,710
Secured construction loan financing at 10% interest
funded in advance of anticipated sale/leaseback
transactions................................................ 29,364 --
Sale/leaseback financing obligation, fixed interest
rates of 8% to 10.9%........................................ -- 5,954
Other....................................................... 1,130 596
-------- -------
Total long-term obligations............................. 320,746 69,610
Less current installments................................... 2,677 985
-------- -------
Total long-term obligations, less current installments.. $318,069 $68,625
======== =======
</TABLE>
The mortgages payable are secured through security agreement and
guarantees by the Company. In addition, certain security agreements
require the Company to maintain collateral and debt reserve funds. These
funds, which are recorded as long-term investments, consist of
certificates of deposit required to be maintained from 1998 through 2002.
At December 31, 1997, the Company has outstanding $17.2 million of
mortgage notes payable and $4.7 million of serial and term revenue bonds
that were assumed in conjunction with noncash acquisition activities in
1997.
Principal payments on long-term debt, capital leases, and financing
obligations for the next five years and thereafter are as follows (in
thousands):
<TABLE>
<S> <C>
1998.............................................. $ 2,677
1999.............................................. 9,877
2000.............................................. 28,345
2001.............................................. 4,750
2002.............................................. 131,515
Thereafter........................................ 143,582
--------
Total long-term debt, capital leases, and financing obligations $320,746
========
</TABLE>
(8) ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31 (in
thousands):
33
<PAGE> 35
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Accrued salaries and wages.. $ 5,879 $2,995
Accrued merger costs........ 6,672 809
Other....................... 9,052 3,775
------- ------
Total accrued expenses...... $21,603 $7,579
======== ======
</TABLE>
(9) STOCKHOLDERS' EQUITY
The Company completed a private equity placement on May 26, 1995,
resulting in net proceeds of $19.0 million related to the sale of
4,302,994 shares of its common stock. Simultaneously, the Company issued
917,150 shares of its stock to Evergreen Healthcare Inc. as consideration
for $2.7 million of cash received during 1994, which is reflected as
common stock and additional paid-in capital in the accompanying
consolidated balance sheets. Subsequent to the issuance of stock in May
1995, the Company was no longer a majority-owned subsidiary of Evergreen.
In October 1995, the Company (through Sterling) completed a public
offering of 2,403,500 shares of common stock. Net proceeds to the
Company were approximately $22.0 million.
In August 1996, the Company completed a public offering of 6,000,000
shares of common stock, of which 3,443,206 shares were sold by the
Company and 2,556,794 shares were sold by existing stockholders. Net
proceeds to the Company were approximately $40.0 million.
In December 1997, the Company completed a secondary public offering of
2,800,000 shares of common stock. Net proceeds to the Company were
approximately $61.0 million.
The authorized capital stock of the Company consists of 30,000,000 shares
of common stock, $.01 par value, and 5,000,000 shares of $.01 par value
preferred stock. At December 31, 1997, there were 21,402,159 shares of
common stock issued, of which 21,390,520 were outstanding with 11,639
shares held in treasury. At December 31, 1996 there were 18,550,855
shares of common stock issued of which 18,539,216 were outstanding with
11,639 shares held in treasury. At December 31, 1997 and 1996, no shares
of preferred stock were issued and outstanding.
(10) STOCK OPTION PLAN
In 1995, the Company adopted a stock option plan (the "1995 Plan"),
pursuant to which the Company's Board of Directors may grant stock
options to officers and key employees. The 1995 Plan authorizes grants
of options to purchase up to 1,425,000 shares of authorized but unissued
common stock. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant. Generally, stock
options have 10-year terms, vest 25% per year, and become fully
exercisable after 4 years from the date of grant.
At December 31, 1997, 562,326 shares were available for grant under the
1995 Plan. The per share weighted-average fair value of stock options
granted during 1997 and 1996 was $7.25 and $3.49, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: 1997 - expected dividend yield
0.0%, risk free interest rate of 5.6%, and an expected life of 7 years;
1996 - expected dividend yield 0.0%, risk-free interest rate of 6.5%, and
an expected life of 7 years.
In conjunction with the Sterling Merger, Sterling stock options that were
outstanding were exchanged for options to purchase the Company's common
stock, adjusted for the Exchange Ratio. Under the terms of the Sterling
House Corporation 1995 Incentive Stock Option Plan, all options became
vested and immediately exercisable as a result of the Sterling Merger.
For financial reporting, the Company applies the intrinsic value method
of APB Opinion No. 25 in accounting for stock options and, accordingly,
compensation cost has been recognized only for stock options granted
below fair market value. Had the Company determined compensation cost
based on the fair value method prescribed by SFAS No. 123 for stock
options granted in 1997 and 1996, the
34
<PAGE> 36
Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below, (in thousands, except per share
data):
<TABLE>
<CAPTION>
NET LOSS NET LOSS PER SHARE
-------------------- --------------------
1997 1996 1997 1996
---------- -------- --------- ---------
<S> <C> <C> <C> <C>
As reported ....... $ (8,263) $(8,796) $(0.44) $(0.57)
Pro forma ......... $(10,267) $(9,391) $(0.55) $(0.61)
</TABLE>
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Balance at December 31, 1995.. 550,783 $5.13
Granted....................... 444,194 11.29
Exercised..................... (4,219) (0.09)
Forfeited..................... (9,545) (13.88)
Expired....................... -- --
--------- -------
Balance at December 31, 1996.. 981,213 $7.74
Granted....................... 300,132 15.10
Exercised..................... (52,000) (7.08)
Forfeited..................... (41,944) (11.71)
Expired....................... -- --
--------- -------
Balance at December 31, 1997.. 1,187,401 $9.43
========= =======
<CAPTION>
RANGE OF NUMBER AVERAGE WTD.-AVG. NUMBER WTD.-AVG.
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
---------- ------------ ---------------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.09 30,088 7.8 years $ 0.09 30,088 $ 0.09
2.92 - 13.00 650,538 7.0 years 6.23 295,901 5.42
7.50 - 21.59 361,259 8.3 years 12.95 361,259 12.95
13.01 - 25.56 145,516 9.5 years 16.93 1,381 11.75
--------- --------- ------ ------- ------
Total 1,187,401 7.7 years $ 9.43 688,629 $ 9.15
========= ========= ====== ======= ======
</TABLE>
(11) INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 (in thousands) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income tax expense (benefit):
Current:
Federal...................... $ 726 $ -- $ --
State........................ 200 -- --
------- ------- -------
Total current................ 926 -- --
Deferred:
Federal...................... (726) (141) (882)
State........................ (200) (18) (109)
------- ------- -------
Total deferred............... (926) (159) (991)
------- ------- -------
Total........................ $ -- $(159) $(991)
======= ======= =======
</TABLE>
Deferred tax assets and liabilities consist of the following at December
31 (in thousands):
35
<PAGE> 37
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 1,339 $ 2,397
Investment in unconsolidated affiliates............. -- 104
Deferred gain sale/leaseback........................ 4,856 2,887
Accrued expenses.................................... 2,844 619
Investment in consolidated affiliates............... 1,359 1,566
Other............................................... 39 303
------- -------
Total deferred tax assets................................ 10,437 7,876
------- -------
Less valuation allowance............................ (6,816) (4,879)
------- -------
Deferred tax assets, net of valuation allowance.......... $ 3,621 $ 2,997
======= =======
Deferred tax liabilities:
Acquisition basis................................... $ 1,736 $ 1,736
Depreciation........................................ 959 789
Deferred costs...................................... -- 472
------- -------
Deferred tax liabilities................................. $ 2,695 $ 2,997
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1997
and 1996 was $6.8 million and $4.9 million, respectively. During 1997,
the valuation allowance was increased by $1.9 million because the Company
was uncertain that such deferred tax assets in excess of the applicable
reversing deferred tax liabilities would be realized in future years. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. As a result of acquisitions during 1996,
subsequent recognition of $537,000 of tax benefits relating to the
valuation allowance for deferred tax assets will be allocated to
goodwill. The net deferred tax asset is included in other current assets
in the accompanying consolidated balance sheets.
The effective tax rate on income before income taxes varies from the
statutory Federal income tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statutory rate.......... (34.0)% (34.0)% (34.0)%
State taxes, net........ (5.5) (5.5) (5.5)
Valuation allowance..... 39.5 38.4 2.9
Other.................. -- 2.8 1.6
----- ----- -----
Effective tax rate. 0.0% (1.7)% (35.0)%
===== ===== =====
</TABLE>
The Company has approximately $3.4 million of tax net operating loss
carryforwards at December 31, 1997. Any unused net operating loss
carryforwards will expire commencing in the year 2001 through 2009. The
utilization of net operating loss carryforwards may be further limited as
to future use due to the change in control provisions in the Internal
Revenue Code.
(12) EXTRAORDINARY LOSS
During 1995, upon the completion of a public offering, the Company
terminated a certain loan commitment agreement with a REIT and paid an
aggregate termination fee of $1.5 million, of which $500,000 was paid in
cash and $988,000 by delivery of 87,823 shares of the Company's common
stock. The Company incurred an extraordinary pretax loss of $1.9 million
($1.2 million net of income taxes), which represents the termination cost
incurred by the Company related to the early extinguishment of the loan
commitment and the write-off of all unamortized financing costs as of the
completion of the public offering.
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical to
estimate that value:
36
<PAGE> 38
Cash and cash equivalents:
The carrying amount approximates fair value because of the short maturity
of those instruments.
Short-term investments:
The carrying amount approximates fair value because of the short maturity
of those instruments.
Long-term investments:
The carrying amount approximates fair value because of the short maturity
of the underlying investments. Long-term investments are classified as
such because they are restricted as collateral for letters of credit and
debt service reserves.
Short-term notes payable, mortgage notes payable, convertible debentures
payable:
The carrying amount of short-term notes payable approximates fair value
because of the short maturity of those instruments.
The carrying amount of mortgage notes payable approximates fair value
because the stated interest rates approximate fair value.
The fair value of the Company's convertible debentures is estimated based
on quoted market prices. At December 31, 1997, the Company's convertible
debentures had a carrying value of $210 million. Based on the quoted
market prices at December 31, 1997, the fair value of those issues was
estimated to be $274.6 million.
(14) COMMITMENTS AND CONTINGENCIES
The Company has entered into sale/leaseback agreements with certain REITs
as a source of financing the development, construction, and to a lesser
extent, acquisitions of assisted living residences. Under such
agreements, the Company may enter into a series of sale/leaseback
transactions whereby each new residence is sold at its negotiated value
and the Company will enter into a lease agreement for such residence.
The initial terms of the leases vary from 10 to 15 years and include
aggregate renewal options ranging from 15 to 40 years. The Company is
responsible for all operating costs, including repairs, property taxes,
and insurance. All of these lease arrangements provide the Company with
a right of first refusal if the REIT were to seek to sell the property.
The annual minimum lease payments are based upon a percentage of the
negotiated sales value of each residence. The residences sold in the
sale/leaseback transactions are sold for an amount equal to or less than
their fair market value. The leases are accounted for as operating
leases with any applicable gain or loss realized in the initial sales
transaction being deferred and amortized into income in proportion to
rental expense over the initial term of the lease.
In addition to leased residences, the Company leases certain office space
and equipment under noncancelable operating leases from nonaffiliates
that expire at various times through 2017. Rental expense on all such
operating leases, including residences, for the years ended December 31,
1997, 1996, and 1995 was $25.5 million, $9.0 million, and $944,000,
respectively.
Future minimum lease payments for the next five years and thereafter
under noncancelable leases at December 31, 1997 are as follows (in
thousands):
37
<PAGE> 39
<TABLE>
<CAPTION>
CAPTIAL OPERATING
------- ---------
<S> <C> <C>
1998.............. $ 707 $ 41,569
1999.............. 718 41,624
2000.............. 4,354 41,680
2001.............. -- 41,127
2002................................................... -- 41,186
Thereafter............................................. -- 293,423
------ --------
Total minimum lease payments........................... 5,779 $500,609
========
Less amount representing interest...................... 1,276
------
Present value of net minimum capital lease payments.... 4,503
Less current portion................................... 137
------
Long-term capital lease obligations.................... $4,366
======
</TABLE>
On November 11, 1997, the Company entered into a sale/leaseback agreement
with a health care REIT involving 24 residences. The total aggregate
amount financed for the 24 residences was approximately $62.4 million.
The transaction produced a gain of approximately $10.6 million, which
will be deferred and will be amortized over the lease period of 10 years.
During 1997, the Company entered into additional sale and leaseback
financing agreements with certain REITS for approximately $133 million
with financing terms similar to the arrangements described above. Any
gain or loss was deferred and will be amortized into income in proportion
to rental expense over the initial term of the lease.
The Company is required by certain REITs to obtain a letter of credit as
collateral for leased residences. Outstanding letters of credit at
December 31, 1997 and 1996 were $1.2 million for both years.
The Company is obligated under its joint venture arrangements to purchase
the equity interests of its joint venture partners based upon agreed upon
terms and conditions. Based on a number of assumptions, including
assumptions as to the number of residences to be developed with joint
venture partners, the timing of such development, the time at which such
options will be exercised and the fair market value of such residences at
the date such options are exercised, the Company estimates that it may
require approximately $25 million to $30 million to satisfy these
purchase obligations during 1998.
(15) SUBSEQUENT EVENTS
On January 2, 1998, the Company consummated the sale of an additional
$18.75 million aggregate principal amount of the 5.25% Debentures as a
result of the exercise by the underwriters of the over-allotment option
granted to them and, in connection therewith, the Company received net
proceeds (before deduction of expenses) of approximately $18.3 million.
On January 15, 1998, the Company consummated the sale of an
additional 420,000 shares of common stock as a result of the exercise by
the underwriters of the over-allotment option granted to them and, in
connection therewith, the Company received net proceeds (before deduction
of expenses) of approximately $9.2 million.
38
<PAGE> 40
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL SUMMARY
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------
12/31 9/31 6/30 3/31
-------- -------- -------- --------
1997
- --------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues.......................... $41,640 $36,142 $29,262 $23,700
Operating loss.............................. (8,988) (271) (1,469) (1,705)
Net income (loss)........................... (8,342) 1,201 (127) (995)
Basic and diluted income (loss) per share... (0.44) 0.06 0.00 (0.06)
1996
- --------------------------------------------
Operating revenues.......................... $20,348 $17,262 $11,122 $ 6,905
Operating loss.............................. (1,180) (856) (2,029) (1,652)
Net loss.................................... (1,903) (2,207) (2,713) (1,973)
Basic and diluted loss per share............ (0.10) (0.13) (0.20) (0.15)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference to the Alternative Living Services, Inc.
definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 14, 1998.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Alternative Living Services, Inc.
definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 14, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Alternative Living Services, Inc.
definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 14, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Alternative Living Services, Inc.
definitive proxy statement for the Annual Meeting of Stockholders to be
held on May 14, 1998.
39
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. The following documents are filed as part of the report:
(a) FINANCIAL STATEMENTS. The following financial statements of
the Registrant and the Report of Independent Public Accountants
therein are filed as part of this Report on Form 10-K:
Page
-----
Independent Auditor's Report................... 21
Consolidated Balance Sheets.................... 22
Consolidated Statements of Operations.......... 23
Consolidated Statements of Shareholders' Equity 24
Consolidated Statements of Cash Flows.......... 25
Notes to Consolidated Financial Statements..... 26-38
(b) SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES. See Exhibit 11.1
of the Report.
(c) REPORTS ON FORM 8-K. The Registrant filed the following
reports with the Securities and Exchange Commission on Form 8-K
during the quarter ended December 31, 1997:
On November 6, 1997, the Company filed an amendment on Form
8-K/A to its Current Report on Form 8-K dated September 23,
1997 filed with the Commission on October 10, 1997, which
amendment reported under Item 2 thereof the consummation of
the Sterling Merger and reported under Item 5 thereof the
business and management of the Company as a result of such
consummation.
On December 2, 1997, the Company filed a Current Report on
Form 8-K dated November 21, 1997 reporting under Item 2
thereof the sale/leaseback transaction with respect to 24 of
the Company's facilities and reporting under Item 5 thereof
an estimate of the expenses expected to be incurred by the
Company in connection with the Sterling Merger. The report
included the following pro forma financial information:
(i) Alternative Living Services, Inc., Unaudited
Pro Forma Condensed Consolidated Balance Sheet
at September 30, 1997;
(ii) Alternative Living Services, Inc. Unaudited Pro
Forma Condensed Combined Statement of Operations
for the nine months ended September 30, 1997;
(iii) Alternative Living Services, Inc. Unaudited Pro
Forma Condensed Combined Statement of
Operations for the year ended December 31,
1996; and
(iv) Unaudited Pro Forma Notes to Consolidated
Financial Statements.
(b) EXHIBITS. The following exhibits are filed as part of, or
incorporated by reference into this report on Form 10-K:
40
<PAGE> 42
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-04595,
filed with the Commission on July 30, 1996 (the "Form S-1")).
3.2 Certificate of Merger, dated May 24, 1996 (incorporated herein by
reference to Exhibit 3.1 to the Registrant's Registration Statement
on Form S-3, Registration No. 333-37737, filed with the Commission
on October 14, 1997 (the "Form S-3")).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation, dated August 1, 1996 (incorporated herein by
reference to Exhibit 3.2 to the Form S-3).
3.4 Restated Bylaws of the Registrant (incorporated herein by reference
to Exhibit 3.4 to the Registrant's Registration Statement on Form
S-3, Registration No. 333-39705, filed with the Commission on
November 6, 1997 (the "November S-3")).
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Form S-1).
4.2 See Articles Four, Six, Seven, Eight, Nine, Ten and Eleven of the
Registrant's Restated Certificate of Incorporation (incorporated
herein by reference to Exhibit 3.1 to the Form S-1) and the
Certificate of Amendment to the Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.2 to the Form
S-3).
4.3 See Articles 2, 3, 5, 7 and 8 of the Registrant's Restated Bylaws
(incorporated herein by reference to Exhibit 3.4 to the November
S-3).
4.4 Indenture dated as of May 23, 1996 by and between Sterling House
Corporation ("Sterling") and Fleet National Bank, as Trustee
(incorporated by reference to Exhibit 4.11 to Sterling's
Registration Statement on Form S-3 (Registration No. 333-15329 filed
on November 1, 1996 (the "Sterling S-3")).
4.5 Form of Registration Rights Agreement dated as of May 17, 1996 by
and between Sterling and the initial purchasers of the 6.75%
Convertible Subordinated Debentures due 2006 (incorporated herein by
reference to Exhibit 4.9 to the Sterling S-3).
4.6 First Supplemental Indenture dated as of October 23, 1997 among the
Registrant, Sterling and State Street Bank and Trust Company, as
successor Trustee (incorporated herein by reference to Exhibit 4.9
to the November S-3).
4.7 Indenture dated as of May 21, 1996 by and between Alternative Living
Services, Inc. and IBJ Schroder Bank & Trust Company, as Trustee
(incorporated by reference to Exhibit 4.1 to the Registrant's
Current Report on Form 8-K filed on May 27, 1997 (the "Form 8-K")).
4.8 Form of Registration Rights Agreement dated as of May 21, 1997 by
and between Alternative Living Services, Inc. and the purchasers of
the 7% Convertible Subordinated Debentures due 2004 (incorporated by
reference to Exhibit 99.2 to the Form 8-K).
4.9 Indenture dated as of December 19, 1997 by and between Alternative
Living Services, Inc. and United States Trust Company of New York,
as Trustee (incorporated by reference to Exhibit 1.1 to Registrant's
Registration Statement on Form 8-A, relating to Registration file
number 333-39705, filed with the Commission on December 16, 1997
(the "Form 8-A")).
41
<PAGE> 43
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
4.10 Form of First Supplemental Indenture dated as of December 19, 1997
by and between Alternative Living Services, Inc. and United States
Trust Company of New York, as Trustee, relating to the 5.25%
Convertible Subordinated Debentures due 2002 (incorporated by
reference to Exhibit 1.2 to the Form 8-A).
4.11 Form of Second Supplemental Indenture dated as of January 2, 1998 by
and between Alternative Living Services, Inc. and United States
Trust Company of New York, as Trustee, relating to the 5.25%
Convertible Subordinated Debenture due 2002 (incorporated by
reference to Exhibit 4.3 to the Registrant's Form 8-K filed on
January 26, 1998).
10.1 Services Agreement effective as of January 1, 1996 by and between
Petty, Kneen & Company, L.L.C. and the Company. (Incorporated by
reference to Exhibit 10.2 of the Form S-1.) Represents an executive
compensation plan or arrangement.
10.2 Purchase Agreement dated as of May 22, 1996 by and between Petty,
Kneen & Company, L.L.C. and the Company. (Incorporated by reference
to Exhibit 10.3 of the Form S-1.)
10.3 Services Agreement by and between Richard W. Boehlke and the Company
dated as of May 23, 1996. (Incorporated by reference to Exhibit 10.7
of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.4 Employment Agreement by and between D. Lee Field and the Company
dated as of May 23, 1996. (Incorporated by reference to Exhibit 10.8
of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.5 Employment Agreement by and between David M. Boitano and the Company
dated as of May 23, 1996. (Incorporated by reference to Exhibit 10.9
of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.6 Amended and Restated Alternative Living Services, Inc. 1995
Incentive Compensation Plan. (Incorporated by reference to Exhibit
10.10 of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.7 Employment Agreement by and between G. Faye Godwin and the Company
dated as of May 23, 1996. (Incorporated by reference to Exhibit
10.11 of the Form S-1.) Represents an executive compensation plan or
arrangement.
10.8 Employment Arrangement dated as of December 30, 1996 by and between
William F. Lasky and the Company, as amended. (Incorporated by
reference to Exhibit 10.14 of the Company's Form 10-K, as Amended,
for the year ended December 31, 1996). Represents an executive
compensation plan or arrangement.
10.9 Employment Agreement dated as of July 30, 1997 by and between
Alternative Living Services, Inc. and Timothy J. Buchanan.
Represents an executive compensation plan or arrangement.
10.10 Employment Agreement dated as of July 30, 1997 by and between
Alternative Living Services, Inc. and Steven L. Vick. Represents an
executive compensation plan or arrangement.
10.11 Employment Agreement dated as of October 23, 1997 by and between
Alternative Living Services, Inc. and Mark W. Ohlendorf. Represents
an executive compensation plan or arrangement.
10.12 Employment Agreement dated as of October 23, 1997 by and between
Alternative Living Services, Inc. and Gary Anderson. Represents an
executive compensation plan or arrangement.
42
<PAGE> 44
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
10.13 Loan Agreement by and between South Trust Bank of Alabama, National
Association and the Company dated as of June 19, 1995. (Incorporated
by reference to Exhibit 10.20 of the Form S-1.)
10.14 Joint Venture Agreement dated as of November 15, 1996 by and between
Days Development Company, LLC and the Company. (Incorporated by
reference to Exhibit 10.22 of the Form S-1.)
10.15 Member Interest Modification Agreement and Amendment to Joint
Venture Agreement dated as of January 17, 1997 between the Company
and Days Development Company, among others.
10.16 Acquisition Agreement dated as of September 20, 1994 by and between
CCCI/Northampton Limited Partnership, Continuing Care Concepts, Inc.
and the Company, as amended. (Incorporated by reference to Exhibit
10.23 of the Form S-1.)
10.17 Partner Interest Acquisition Agreement dated as of August 1, 1996
between the Company, CCCI/Northampton Limited Partnership and
Continuing Care Concepts, Inc.
10.18 First Amended Joint Venture Agreement dated as of April 30, 1997
between the Company and Assisted Living Equities, LLC.
10.19 Assisted Living Consultant and Management Services Agreement by and
between Alternative Living Services and the Company dated as of
December 14, 1993. (Incorporated by reference to Exhibit 10.32 of
the Form S-1.)
10.20 Purchase and Sale Agreement dated as of December 15, 1995 by and
between Nationwide Health Properties, Inc. and New Crossings
International Corporation. (Incorporated by reference to Exhibit
10.33 of the Form S-1.)
10.21 Schedule of Purchase and Sale Agreements substantially similar to
Exhibit 10.20. (Incorporated by reference to Exhibit 10.34 of the
Form S-1.)
10.22 Lease and Security Agreement by and between Nationwide Health
Properties, Inc. and New Crossings International Corporation dated
as of December 15, 1995 (the Atrium). (Incorporated by reference to
Exhibit 10.35 of the Form S-1.)
10.23 Schedule of Lease and Security Agreements by and between Nationwide
Health Properties, Inc. and New Crossings International Corporation
substantially similar to Exhibit 10.22. (Incorporated by reference
to Exhibit 10.36 of the Form S-1.)
10.24 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). (Incorporated by reference to Exhibit
10.53 of the Form S-1.)
10.25 Schedule of Assumption Agreements substantially similar to Exhibit
10.24. (Incorporated by reference to Exhibit 10.53 of the Form S-1.)
10.26 Lease Approval Agreement dated December 18, 1995 by and between
National Health Properties, Inc., New Crossings International
Corporation and Oregon Housing Agency (Albany Residential).
(Incorporated by reference to Exhibit 10.55 of the Form S-1.)
10.27 Schedule of Lease Approval Agreements substantially similar to
Exhibit 10.26. (Incorporated by reference to Exhibit 10.56 of the
Form S-1.)
43
<PAGE> 45
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
10.28 Management Agreement dated August 30, 1990 by and between Housing
Division, State of Oregon and New Crossing International Corporation
(Albany Residential). (Incorporated by reference to Exhibit 10.59 of
the Form S-1.)
10.29 Employment Agreement by and between Thomas E. Komula and the Company
dated as of July 3, 1996. (Incorporated by reference to Exhibit
10.63 of the Form S-1). Represents an executive compensation plan or
arrangement.
10.30 Facility Lease dated as of December 30, 1996, between Meditrust
Acquisition Corporation III and ALS Leasing, Inc. ("Form of Facility
Lease"). (Incorporated by reference to Exhibit 99.1 of the Company's
Form 8-K dated January 14, 1997.)
10.31 Schedule of Additional Facility Leases which are substantially
similar to the Form of Facility Lease attached as Exhibit 10.30.
(Incorporated by reference to Exhibit 99.2 of the Company's Form 8-K
dated January 14, 1997.)
10.32 Guaranty by Alternative Living Services, Inc. to Meditrust
Acquisition Corporation III. (Incorporated by reference to Exhibit
99.3 of the Company's Form 8-K dated January 14, 1997.)
10.33 Affiliated Party Subordination Agreement dated December 30, 1996, by
and among ALS Leasing, Inc., the Company, the parties listed on
Schedule A thereto, all other Affiliates as defined therein and
Meditrust Acquisition Corporation III. (Incorporated by reference to
Exhibit 99.4 of the Company's Form 8-K dated January 14, 1997.)
10.34 Agreement Regarding Related Lease Transactions dated December 30,
1996, by and among ALS Leasing, Inc., the Company and Meditrust
Acquisition Corporation III. (Incorporated by reference to Exhibit
99.5 of the Company's Form 8-K dated January 14, 1997.)
10.35 Bridge Loan Agreement dated April 28, 1997, between Alternative
Living Services, Inc. and RDV Capital Management L.P. (Incorporated
by reference to Exhibit 10.1 of the Company's Form 10-Q for the
quarter ended March 31, 1997.)
10.36 Promissory Note dated April 28, 1997, between Alternative Living
Services, Inc. and RDV Capital Management L.P. (Incorporated by
reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter
ended March 31, 1997.)
10.37 Form of Facility Lease dated as of November 21, 1997, between
Meditrust Acquisition Corporation III and ALS Leasing, Inc. ("Form
of Facility Lease"). (Incorporated by reference to Exhibit 99.1 of
the Company's Form 8-K filed December 2, 1997.)
10.38 Schedule of Additional Facility Leases which are substantially
similar to the Form of Facility Lease referenced in Exhibit 10.37.
(Incorporated by reference to Exhibit 99.2 of the Company's Form 8-K
filed December 2, 1997.)
10.39 Guaranty by Alternative Living Services, Inc. to Meditrust
Acquisition Corporation III. (Incorporated by reference to Exhibit
99.3 of the Company's Form 8-K filed December 2, 1997.)
10.40 Affiliated Party Subordination Agreement dated November 21, 1997, by
and among ALS Leasing, Inc., the Company, the parties listed on
Schedule A thereto, all other Affiliates as defined therein and
Meditrust Acquisition Corporation III. (Incorporated by reference to
Exhibit 99.4 of the Company's Form 8-K filed December 2, 1997.)
44
<PAGE> 46
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------
10.41 Agreement Regarding Related Lease Transactions dated November 21,
1997, by and among ALS Leasing, Inc., the Company and Meditrust
Acquisition Corporation III. (Incorporated by reference to Exhibit
99.5 of the Company's Form 8-K filed December 2, 1997.)
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule (for SEC use only).
27.2 Financial Data Schedule (for SEC use only).
27.3 Financial Data Schedule (for SEC use only).
45
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Brookfield, State of Wisconsin, on the 27th day of March, 1998.
ALTERNATIVE LIVING SERVICES, INC.
By: /s/ THOMAS E. KOMULA
--------------------------------------
Senior Vice President, Treasurer, Chief
Financial Officer and Secretary
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------- ------------------------------------- --------------
/S/ WILLIAM F. LASKY
- --------------------
William F. Lasky Chief Executive Officer and Director March 27, 1998
(Principal Executive Officer)
/S/ TIMOTHY J. BUCHANAN
- -----------------------
Timothy J. Buchanan President and Director March 27, 1998
/S/ THOMAS E. KOMULA
- --------------------
Thomas E. Komula Senior Vice President, Treasurer, March 27, 1998
Chief Financial Officer
/S/ JOHN D. PETERSON
- --------------------
John D. Peterson Vice President and Controller March 27, 1998
(Principal Accounting Officer)
/S/ WILLIAM G. PETTY, JR.
- -------------------------
William G. Petty , Jr. Chairman of the Board and Director March 27, 1998
/S/ RICHARD W. BOEHLKE
- ----------------------
Richard W. Boehlke Vice Chairman and Director March 27, 1998
/S/ GENE E. BURLESON
- --------------------
Gene E. Burleson Director March 27, 1998
/S/ ROBERT HAVEMAN
- ------------------
Robert Haveman Director March 27, 1998
/S/ RONALD G. KENNY
- -------------------
Ronald G. Kenny Director March 27, 1998
/S/ JERRY L. TUBERGEN
- ---------------------
Jerry L. Tubergen Director March 27, 1998
/s/ D. Ray Cook, M.D.
- -----------------------
D. Ray Cook, M.D. Director March 27, 1998
46
<PAGE> 48
SIGNATURES TITLE DATE
--------------------- ---------------------- -----------------
/S/ STEVEN L. VICK
- ------------------
Steven L. Vick Chief Operating Officer and Director March 27, 1998
47
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into this
30th day of July, 1997, by and between Timothy J. Buchanan, a resident of the
State of Kansas ("Employee"), and Alternative Living Services, Inc., a Delaware
corporation (the "Company").
W I T N E S S E T H:
WHEREAS, concurrent with the execution hereof, the Company,
Tango Merger Corporation, a Kansas corporation and a wholly owned subsidiary of
the Company ("Merger Sub"), and Sterling House Corporation, a Kansas corporation
("Twister"), have entered into that certain Agreement and Plan of Merger, dated
July 30, 1997 (the "Merger Agreement"), whereby Merger Sub will be merged with
and into Twister, with Twister as the surviving corporation (the "Surviving
Corporation"), and Twister shall become a wholly owned subsidiary of the Company
(the "Merger");
WHEREAS, the Employee has been an employee, officer,
director, and shareholder of Twister;
WHEREAS, after the Merger, the Surviving Corporation will
continue to carry on the business previously carried on by Twister;
WHEREAS, the Company desires to employ Employee as a senior
executive officer of the Company effective as of the Effective Time (as defined
in the Merger Agreement);
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 and conditions hereof, the Company hereby employs
Employee, and Employee hereby accepts such employment. Employee agrees that he
will faithfully perform his duties hereunder and will devote his full business
time to the business and affairs of the Company.
1
<PAGE> 2
SECTION 2. Title; Location; Duties.
2.1 Title. Employee shall serve as the President of the Company, and as
such, Employee will report directly to the Board of Directors of the Company.
Employee's duties as President are set forth in Section 2.3. At no time shall
Employee be requested to perform duties which are not commensurate with his
status as the President of the Company. The Company hereby agrees that, during
the term hereof, the Company will nominate Employee for election as a director
of the Company and Employee hereby consents to serve, without additional
compensation, when elected, as a director of the Company.
2.2 Location. Employee's location of employment shall be at the
Surviving Corporation's principal executive offices in Wichita, Kansas;
provided, however, that Employee agrees to relocate his residence to Wisconsin
and that the location of his employment shall be at the Company's principal
executive offices in Brookfield, Wisconsin not later than the first anniversary
of the Closing Date (as defined in the Merger Agreement); provided, further,
that the Company may not transfer Employee to any other location without
Employee's prior written consent unless the 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.
2.3 Duties. Employee, as President, jointly with the Company's Chief
Executive Officer (the "CEO"), shall have general responsibility for the
management of the business and strategic direction of the Company and its
subsidiaries, including the Surviving Corporation. Accordingly, the various
officers of the Company will report jointly to the CEO and Employee. Such
responsibilities to be performed jointly with the CEO shall include, but not be
limited to, the following: (i) supervising all of the day-to-day operations of
the Company; (ii) managing the Company's financial, capital-raising and
accounting functions, including interfacing and communicating with investment
banking firms, lenders, counsel, institutional investors and shareholders: (iii)
development of strategic health care initiatives, both domestically and
internationally, such as strategic alliances, acquisitions, joint ventures,
mergers, divestitures and third-party provider contracts; (iv) overseeing the
Company's merger and acquisition activities, both domestic and foreign, such as
the identification of acquisition candidates within the assisted living and
long-term care industries, the negotiation of acquisition opportunities and
directing the Company's merger and acquisition personnel in reviewing and
analyzing merger and acquisition opportunities; and (v) overseeing the Company's
development, both domestically and internationally, of new assisted living and
other long-term care
2
<PAGE> 3
facilities, including identifying and developing joint ventures and other
strategic alliances with development partners and others. The Company hereby
agrees to take, and to cause its Chairman of the Board and CEO to take, all
reasonable action in order to effectively implement the foregoing provisions of
this Section 2.3, including, but not limited to, the adopting of procedures and
policies to ensure the sharing of authority and responsibilities by the Employee
and the CEO, using best efforts to clearly communicate their shared authority
and responsibilities to the Company's employees, vendors, clients, advisors,
lenders and investors and otherwise ensuring that Employee is provided with
access to all members of management and all employees, commensurate with the
access provided to the CEO with respect to all policy and strategy decisions.
SECTION 3. Term; Payments Upon Termination.
3.1 Term. The employment of Employee hereunder shall commence on the
Closing Date (as such term is defined in the Merger Agreement) and shall
continue until the earlier of (a) the third anniversary of the Closing Date (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 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 only (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
3
<PAGE> 4
(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 the 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 duly called meeting of the Board; 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 (x) 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 Employee, (y) the
Company shall diminish Employee's title, duties, base salary or
benefits, except, in the case of base salary or benefits, if such
diminution is part of an overall diminution of base salary and benefits
for all senior executive officers, or (z) any breach by the Company of
its agreements set forth in Section 5.17 of the Merger Agreement.
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.
(a) If during the Original Term hereof, or any renewal term, Employee's
employment is terminated (i) by the Company without "cause" or, (ii) by Employee
for "good reason," then the Company shall pay to Employee the Employee's Base
Salary at the rate in effect at the time notice of termination is given,
together with any applicable bonuses (without pro-ration as
4
<PAGE> 5
provided in Section 4.2) 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 period (the "Extended Period") equal to the
greater of (x) the balance of the Original Term or renewal term, as applicable,
or (y) the twelve (12) month period following the date of such termination.
(b) If during the Original Term, or any renewal term, Employee's
employment is terminated as a result of the death or disability of Employee
(disability having the meaning set forth in Section 3.1(i) of this Agreement),
the Company shall continue to pay Employee (or his estate) his Base Salary at
the rate in effect on the date of death or the date disability is conclusively
determined, as applicable, together with any applicable bonuses (without
pro-ration as provided in Section 4.2) 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
the date of death or the date disability is conclusively determined, as
applicable.
(c) If during the Original Term, or any renewal term, Employee's
employment is terminated (i) by the Company for "cause" or (ii) Employee for any
reason other than "good reason," then 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.
3.3 Payments Upon Change of Control. During the Original Term hereof,
or any renewal term, if there is a Change of Control (as hereinafter defined)
and any one of (i) the Employee's location of employment as set forth herein
changes, (ii) the Company takes any action which would entitle Employee to
terminate his employment for "good reason" pursuant to clauses (x) or (z) of the
definition thereof, or (iii) the Company shall diminish Employee's title,
duties, base salary or benefits (each of the events described in the foregoing
clauses (i), (ii) and (iii) being herein referred to as a "Triggering Event"),
then Employee may at his election, at any time within one year after any such
Triggering Event, terminate this Agreement (a "Voluntary Termination"), and
Employee shall be entitled to the following compensation, in addition to the
other compensation and bonuses provided for herein:
5
<PAGE> 6
(a) in lieu of any further salary payments to Employee for
periods subsequent to the date of Voluntary Termination, the Company
shall pay as severance payment to Employee, no later than the fifth day
following the date of Voluntary Termination, a lump-sum severance
payment to Employee equal to 300% of Employee's annual base salary rate
in effect as of the date of Voluntary Termination or, if greater, such
rate as may be in effect immediately prior to the Change of Control. In
addition, Employee shall be paid an amount equal to 300% of his bonus
for the calendar year immediately preceding the year in which such
Voluntary Termination shall occur or, if greater, his bonus for the
full calendar year preceding the year in which such Change of Control
occurs; and
(b) the Company shall provide Employee with all employee
benefits and programs of the Company which the Employee was entitled to
receive or participate in immediately prior to the effective date of
the Voluntary Termination for the thirty six (36) month period
following the date of such Voluntary Termination.
For the purposes of this Agreement, "Change of Control" shall mean the
occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used under
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as Amended (the
"Exchange Act"), whether or not such Sections are applicable) is or becomes,
whether by means of any issuance or direct or indirect transfer of securities,
merger, consolidation, liquidation, dissolution or otherwise, the "beneficial
owner" (as that term is used under Rules 13d-3 and 13d-5 under the Exchange Act,
whether or not such rules are applicable, except that a "person" or "group"
shall be deemed to have "beneficial ownership" of all shares that he or it has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time or otherwise), directly or indirectly through one or
more intermediaries, of 35% or more of the total voting power represented by all
of the voting stock of the Company; or
(ii) directly or indirectly, a transfer, sale, lease or other
disposition of all or substantially all of the assets of the Company and its
subsidiaries taken as a whole to any "person" or "group" (as such terms are used
un Sections 13(d) and 14(d) of the Exchange Act, whether or not such sections
are applicable), excluding any disposition to or among the Company and/or one or
more of its subsidiaries; or
(iii) any "person" or "group" (as such terms are used under
Sections 13(d) and 14(d) of the Exchange Act, whether or
6
<PAGE> 7
not such sections are applicable) otherwise obtains the right or power (through
any arrangement, contract, proxy or other means) to elect or designate a
majority of the members of the Board of Directors then in office, without regard
to whether such right or power is exercised or invoked and without taking into
account the necessity of a special or annual stockholders meeting or the taking
of other procedural actions to exercise or invoke such right or power.
Section 3.4. If pursuant to Section 3.2 or 3.3, Employee is entitled to
receive benefits under employee benefit plans subsequent to his termination of
employment and such benefits or programs cannot be made available following
termination of Employee in circumstances in which Employee is entitled thereto
hereunder, the Company shall pay Employee an amount in cash sufficient to enable
Employee to purchase such benefits or programs on his own behalf. Employee shall
retain all grants and awards issued to him under the Company's stock incentive
plans during any period subsequent to termination of Employee's employment and
during which Employee is entitled to receive salary or benefits pursuant to
Section 3.2 or Section 3.3.
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 Two
Hundred Sixty Five Thousand Dollars ($265,000), 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. 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 Two Hundred Sixty Five Thousand Dollars ($265,000). (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. Subject to Section 3.2 hereof, 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
7
<PAGE> 8
Directors. Any such discretionary or pro rated bonus shall be due and payable
upon the submission and verification of the Company's annual financial
statements for the applicable bonus period.
4.3 Stock Options. The Board of Directors of the Company shall grant to
Employee options to purchase shares of common stock of the Company pursuant to
the terms of the 1995 Incentive Compensation Plan of the Company, which options
shall (i) be granted at such times as the Board of Directors of the Company
shall grant options to other senior executive officers of the Company, (ii) be
equivalent in amount and exercise price to options granted to other senior
executive officers of the Company, and (iii) vest and become exercisable at the
same rates and times as options granted to other senior executive officers of
the Company.
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 other 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. In addition, the Company shall maintain Employee's split dollar and
deferred compensation life insurance policies maintained by Twister immediately
prior to the consummation of the Merger.
(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, as is provided from time to time
for other senior executives of the Company.
4.5 Vacation. Employee 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,
Employee shall have the same rights as other senior executive officers of the
Company to participate in all profit-sharing, pension and other retirement plans
as are now, or as may
8
<PAGE> 9
hereafter be, established by the Company; provided, however, that for so long as
any Twister employee benefit plans are maintained in effect in accordance with
Section 5.6 of the Merger Agreement, Employee shall have the option to continue
to participate in such plans.
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 per month.
4.9 Moving and Relocation Expenses. In addition to the salary and
benefits set forth in this Section 4, the Company shall provide to Employee the
following benefits in connection with his moving and relocating to Wisconsin:
(i) Employee agrees to use reasonable efforts to sell his
residence located at 816 Terradyne, Andover, Kansas (the "Residence")
prior to the date he relocates to Wisconsin, which relocation shall
occur no later than the first anniversary of the date hereof. The
Company agrees to reimburse Employee for his reasonable out-of-pocket
expenses incurred in connection with his efforts to sell the Residence,
including, but not limited to, real estate broker's commissions. If
Employee is unable to sell the Residence prior to the date he relocates
to Wisconsin, then the Company shall purchase the Residence for a
purchase price determined as follows: each of Employee and the Company
shall obtain an appraisal of the value of the Residence from licensed
real estate appraisers selected by each of them; if such appraisals do
not vary by more than $10,000, the purchase price to be paid shall be
the average of the two appraisals; if such appraisals vary by more than
$10,000, then the two appraisers shall jointly appoint a third
appraiser, whose appraisal shall be final and binding on the Company
and Employee. The Company shall bear the cost of the appraisals and all
other costs and expenses related to such purchase and sale of the
Residence from Employee;
(ii) until such time as Employee shall have completely relocated to
Wisconsin, the Company shall (A) provide Employee a two (2) bedroom
furnished apartment (at a monthly rental rate not to exceed $1,500),
and (B) reimburse Employee for all reasonable costs and expenses in
commuting from Wichita, Kansas to Brookfield, Wisconsin.
9
<PAGE> 10
(iii) the Company shall pay on behalf of Employee or reimburse
Employee, at Employee's option, for the actual costs paid to third
parties relating to Employee's relocation from Kansas to Wisconsin,
including, but not limited to, (a) reasonable moving company expenses
and insurance, and (b) reasonable travel expenses for Employee and his
spouse from Kansas to Wisconsin in order to enable Employee and his
spouse to locate a suitable residence in Wisconsin.
SECTION 5. Restrictive Covenants.
(a) Employee acknowledges that the covenants herein are necessary to
protect the goodwill and other value of the Company and in view of the unique
and essential nature of the services Employee is to perform hereunder, 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).
(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 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 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
10
<PAGE> 11
Employee became aware by reason of his employment with or
ownership in the Company;
(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 to solicit or divert or tempt 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 five
(5%) 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).
(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. Notwithstanding the
immediately preceding sentence, Employee shall be permitted to retain his
personal memorabilia belonging to him, notes taken by him as a member of the
Board of Directors, or any committee thereof, and any other such materials which
Employee deems to be of value to him in the event the same may be needed by
Employee in connection with the defense of any
11
<PAGE> 12
lawsuit, action or proceeding brought against him for any reason whatsoever.
(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 (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
and that has value to the Company and is not generally known by its competitors.
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 in this Section 5 shall include, unless the context
otherwise requires, all subsidiaries and affiliates of the Company.
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.
12
<PAGE> 13
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 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 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.
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:
Timothy J. Buchanan
816 Terradyne
Andover, Kansas 67002
(b) If to the Company, addressed to:
Alternative Living Services, Inc.
450 N. Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attn: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP
2700 Cain Tower, Peachtree Center
13
<PAGE> 14
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attn: 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.
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. The waiver by either party hereto of a breach of any
provision, agreement or covenant of this Agreement by the other party hereto
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 such other party
hereto.
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 may be modified only by written
instrument signed by each of the parties hereto.
6.9 Effectiveness. This Agreement shall become effective at the
Effective Time of the Merger; provided, however, that this Agreement shall
become null and void upon any termination of the Merger Agreement.
14
<PAGE> 15
IN WITNESS WHEREOF, the 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 as of
the day and year first written above.
ALTERATIVE LIVING SERVICES, INC.
By: /S/ WILLIAM F. LASKY
-------------------------------
Its: President and CEO
-------------------------------
EMPLOYEE:
/S/ TIMOTHY J. BUcHANAN
------------------------------------
Timothy J. Buchanan
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into this
30th day of July, 1997, by and between Steven L. Vick, a resident of the State
of Kansas ("Employee"), Sterling House Corporation, a Kansas corporation (the
"Company"), and Alternative Living Services, Inc., a Delaware corporation (the
"Tango").
W I T N E S S E T H:
WHEREAS, concurrent with the execution hereof, Tango, Tango
Merger Corporation, a Kansas corporation and a wholly owned subsidiary of Tango
("Merger Sub"), and the Company, have entered into that certain Agreement and
Plan of Merger, dated July 30, 1997 (the "Merger Agreement"), whereby Merger Sub
will be merged with and into the Company, with the Company as the surviving
corporation, and the Company shall become a wholly owned subsidiary of Tango
(the "Merger");
WHEREAS, the Employee has been an employee, officer,
director, and shareholder of the Company;
WHEREAS, after the Merger, the Company, as a wholly owned
subsidiary of Tango, will continue to carry on the business previously carried
on by the Company;
WHEREAS, the Company and Tango each desire to employ Employee
as a senior executive officer of the Company effective at the Effective Time (as
defined in the Merger Agreement);
WHEREAS, the Company and Tango, on the one hand, and Employee,
on the other hand, each desire to enter into this Agreement, pursuant to which
Employee will be employed by the Company and Tango 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 and conditions hereof, the Company and Tango
hereby employ Employee, and Employee hereby accepts such employment. Employee
agrees that he will faithfully perform his duties hereunder and will devote his
full business time to the business and affairs of the Company and Tango.
<PAGE> 2
SECTION 2. Titles; Location; Duties.
2.1 Titles. Employee shall serve as the President of the Company, and
as such, Employee will report directly to the Board of Directors of the Company
from and after the Relocation Date (as hereinafter defined). Employee shall also
serve as the Chief Operating Officer of Tango, and as such, Employee will report
directly to the Chief Executive Officer and President of Tango. Employee's
duties are set forth in Section 2.3. At no time shall Employee be requested to
perform duties which are not commensurate with his status as the President of
the Company or, after the Relocation Date, as Chief Operating Officer of Tango.
Tango hereby agrees that, during the term hereof, Tango will nominate Employee
for election as a director of Tango and Employee hereby consents to serve,
without additional compensation, when elected, as a director of Tango.
2.2 Location. Employee's location of employment shall be at the
Company's principal executive offices in Wichita, Kansas; provided, however,
that Employee agrees to relocate his residence to Wisconsin and that the
location of his employment shall be at Tango's principal executive offices in
Brookfield, Wisconsin not later than the first anniversary of the Closing Date
(as defined in the Merger Agreement (the date on which Employee actually so
relocates being herein referred to as the "Relocation Date"); provided, further,
that Tango may not transfer Employee to any other location after the Relocation
Date without Employee's prior written consent unless the transfer results from
the relocation of Tango's principal executive offices and the actual relocation
thereto of other executive officers of Tango holding positions and
responsibilities comparable to those of Employee.
2.3 Duties. Employee, as President of the Company, shall have the
duties customarily associated with that of a president, including, but not
limited to, overall management responsibility for the Company, as well as
responsibility for the coordination and integration of the business and
operations of the Company with the business and operations of Tango after the
Closing Date. Commencing on the Relocation Date, Employee, as Chief Operating
Officer of Tango, also shall have the duties customarily associated with that of
a chief operating officer, including, but not limited to, general management
responsibility for the day-to-day business and operations of Tango and its
subsidiaries.
SECTION 3. Term; Payments Upon Termination.
3.1 Term. The employment of Employee hereunder shall commence on the
Closing Date (as such term is defined in the Merger Agreement) and shall
continue until the earlier of (a) the third anniversary of the Closing Date (the
"Original Term") or (b) the occurrence of any of the following events:
2
<PAGE> 3
(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 and Tango 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 terminate
Employee's employment hereunder;
(iii) the Company's and Tango's termination of Employee's employment
hereunder for "cause." For the purposes of this Agreement, "cause" for
termination of Employee's employment shall exist only (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 or
Tango, 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 or Tango by Employee shall be a ground for such
a determination by the Company and Tango) 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 and Tango believe 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 the vote of not less than a majority of the
Board of Directors of Tango then in office, after reasonable notice to
Employee and an opportunity for Employee, together with counsel, to be
heard before a duly called meeting of such Board; or
3
<PAGE> 4
(iv) the Employee's termination of his employment with the Company
and Tango for "good reason" upon reasonable notice to the Company and
Tango. For purposes of this Agreement, "good reason" shall exist if (x)
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 Employee, (y)
the Company shall diminish Employee's title, duties, base salary or
benefits, except, in the case of base salary or benefits, if such
diminution is part of an overall diminution of base salary and benefits
for all senior executive officers, or (z) any breach by the Company of
its agreements set forth in Section 5.17 of the Merger Agreement.
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 and Tango 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.
(a) If during the Original Term hereof, or any renewal term, Employee's
employment is terminated (i) by the Company and Tango without "cause" or, (ii)
by Employee for any "good reason," then the Company and Tango shall pay to
Employee the Employee's Base Salary at the rate in effect at the time notice of
termination is given, together with any applicable bonuses (without pro-ration
as provided in Section 4.2) and rights and benefits the Employee may have under
employee benefits plans and programs of the Company and Tango in existence as of
the date of such termination, all for the period (the "Extended Period") equal
to the greater of (x) the balance of the Original Term or renewal term, as
applicable, or (y) the twelve (12) month period following the date of such
termination.
(b) If during the Original Term, or any renewal term, Employee's
employment is terminated as a result of the death or disability of Employee
(disability having the meaning set forth in Section 3.1(i) of this Agreement),
the Company and Tango shall continue to pay Employee (or his estate) his Base
Salary at the rate in effect on the date of death or the date disability is
conclusively determined, as applicable, together with any applicable bonuses
(without pro-ration as provided in Section 4.2) and rights and benefits the
Employee may have under employee benefits plans and programs of the Company and
Tango in existence as of the date of such termination, all for the twelve (12)
month
4
<PAGE> 5
period following the date of death or the date disability is conclusively
determined, as applicable.
(c) If during the Original Term, or any renewal term, Employee's
employment is terminated (i) by the Company and Tango for "cause" or (ii)
Employee for any reason other than "good reason," then the Company and Tango
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 and Tango 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
and Tango in existence as of the effective date of such termination, if any,
which shall be determined in accordance therewith.
3.3 Payments Upon Change of Control. During the Original Term hereof,
or any renewal term, if there is a Change of Control (as hereinafter defined)
and any one of (i) the Employee's location of employment as set forth herein
changes, (ii) the Company takes any action which would entitle Employee to
terminate his employment for "good reason" pursuant to clauses (x), or (z) of
the definition thereof, or (iii) the Company and Tango shall diminish Employee's
title, duties, base salary or benefits (each of the events described in the
foregoing clauses (i), (ii) and (iii) being herein referred to as a "Triggering
Event"), then Employee may at his election, at any time within one year after
any such Triggering Event, terminate this Agreement (a "Voluntary Termination"),
and Employee shall be entitled to the following compensation, in addition to the
other compensation and bonuses provided for herein:
(a) in lieu of any further salary payments to Employee for
periods subsequent to the date of Voluntary Termination, the Company
and Tango shall pay as severance payment to Employee, no later than the
fifth day following the date of Voluntary Termination, a lump-sum
severance payment to Employee equal to 300% of Employee's annual base
salary rate in effect as of the date of Voluntary Termination or, if
greater, such rate as may be in effect immediately prior to the Change
of Control. In addition, Employee shall be paid an amount equal to 300%
of his bonus for the calendar year immediately preceding the year in
which such Voluntary Termination shall occur or, if greater, his bonus
for the full calendar year preceding the year in which such Change of
Control occurs; and
(b) the Company and Tango shall provide Employee with all
employee benefits and programs of the Company which the Employee was
entitled to receive or participate in immediately prior to the
effective date of the Voluntary
5
<PAGE> 6
Termination for the thirty six (36) month period following the date of
such Voluntary Termination.
For the purposes of this Agreement, "Change of Control" shall mean the
occurrence of any of the following events:
(i) any "person" or "group" (as such terms are used under
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as Amended (the
"Exchange Act"), whether or not such Sections are applicable) is or becomes,
whether by means of any issuance or direct or indirect transfer of securities,
merger, consolidation, liquidation, dissolution or otherwise, the "beneficial
owner" (as that term is used under Rules 13d-3 and 13d-5 under the Exchange Act,
whether or not such rules are applicable, except that a "person" or "group"
shall be deemed to have "beneficial ownership" of all shares that he or it has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time or otherwise), directly or indirectly through one or
more intermediaries, of 35% or more of the total voting power represented by all
of the voting stock of Tango; or
(ii) directly or indirectly, a transfer, sale, lease or other
disposition of all or substantially all of the assets of Tango and its
subsidiaries taken as a whole to any "person" or "group" (as such terms are used
un Sections 13(d) and 14(d) of the Exchange Act, whether or not such sections
are applicable), excluding any disposition to or among Tango and/or one or more
of its subsidiaries; or
(iii) any "person" or "group" (as such terms are used under
Sections 13(d) and 14(d) of the Exchange Act, whether or not such sections are
applicable) otherwise obtains the right or power (through any arrangement,
contract, proxy or other means) to elect or designate a majority of the members
of the Board of Directors of Tango then in office, without regard to whether
such right or power is exercised or invoked and without taking into account the
necessity of a special or annual stockholders meeting or the taking of other
procedural actions to exercise or invoke such right or power.
Section 3.4. If pursuant to Section 3.2 or 3.3, Employee is entitled to
receive benefits under employee benefit plans subsequent to his termination of
employment and such benefits or programs cannot be made available following
termination of Employee in circumstances in which Employee is entitled thereto
hereunder, the Company and Tango shall pay Employee an amount in cash sufficient
to enable Employee to purchase such benefits or programs on his own behalf.
Employee shall retain all grants and awards issued to him under Tango's stock
incentive plans during any period subsequent to termination of Employee's
employment and
6
<PAGE> 7
during which Employee is entitled to receive salary or benefits pursuant to
Section 3.2 or Section 3.3.
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 Two
Hundred Twenty Five Thousand Dollars ($225,000), 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. 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 Two Hundred Sixty Five Thousand Dollars ($265,000). (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 and Tango may, in the discretion of the Board of Directors of Tango, pay
Employee an annual bonus (the "Annual Bonus") for each fiscal year during the
term of Employee's employment hereunder. Subject to Section 3.2 hereof, 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 and Tango. The Employee shall be eligible to receive an Annual Bonus
of up to 35% of the Base Salary payable if Tango'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 of Tango.
Any such discretionary or pro rated bonus shall be due and payable upon the
submission and verification of Tango's annual financial statements for the
applicable bonus period.
4.3 Stock Options. The Board of Directors of Tango shall grant to
Employee options to purchase shares of common stock of Tango pursuant to the
terms of the 1995 Incentive Compensation Plan of Tango, which options shall (i)
be granted at such times as the Board of Directors of Tango shall grant options
to other senior executive officers of Tango, (ii) be equivalent in amount and
exercise price to options granted to other senior executive officers of Tango,
and (iii) shall vest and become exercisable at the same rates and times as
options granted to other senior executive officers of Tango.
4.4. Insurance.
7
<PAGE> 8
(a) Life and Other Insurance. The Company and Tango 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 other senior executives
of the Company and Tango. The Company and Tango shall be entitled, at their 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 of Tango, such
policy or policies to name Tango or its designee as the beneficiary. Employee
shall reasonably cooperate with the Company and Tango in procuring such key man
insurance as the Company and Tango shall elect to purchase. In addition, the
Company and Tango shall maintain Employee's split dollar and deferred
compensation life insurance policies maintained by the Company immediately prior
to the consummation of the Merger.
(b) Medical Insurance. During the term of Employee's
employment hereunder, the Company and Tango shall, at their expense, provide or
arrange for and keep in effect, hospitalization, major medical and similar
medical and health insurance for Employee and his family, as is provided from
time to time for other senior executives of the Company and Tango.
4.5 Vacation. Employee 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,
Employee shall have the same rights as other senior executive officers of the
Company and Tango to participate in all profit-sharing, pension and other
retirement plans as are now, or as may hereafter be, established by the Company
and Tango; provided, however, that for so long as any Company employee benefit
plans are maintained in effect in accordance with Section 5.6 of the Merger
Agreement, Employee shall have the option to continue to participate in such
plans.
4.7 Out-of-Pocket Expenses. The Company and Tango 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 and Tango shall pay to Employee an automobile
allowance of $600 per month.
4.9 Moving and Relocation Expenses. In addition to the salary and
benefits set forth in this Section 4, the Company and
8
<PAGE> 9
Tango shall provide to Employee the following benefits in connection with his
moving and relocating to Wisconsin:
(i) Employee agrees to use reasonable efforts to sell his
residence located at 1345 St. Andrews, Wichita, Kansas (the
"Residence") prior to the date he relocates to Wisconsin, which
relocation shall occur no later than the first anniversary of the date
hereof. The Company and Tango agree to reimburse Employee for his
reasonable out-of-pocket expenses incurred in connection with his
efforts to sell the Residence, including, but not limited to, real
estate broker's commissions. If Employee is unable to sell the
Residence prior to the date he relocates to Wisconsin then the Company
or Tango shall purchase the Residence for a purchase price determined
as follows: each of Employee and the Company or Tango shall obtain an
appraisal of the value of the Residence from licensed real estate
appraisers selected by each of them; if such appraisals do not vary by
more than $10,000, the purchase price to be paid shall be the average
of the two appraisals; if such appraisals vary by more than $10,000,
then the two appraisers shall jointly appoint a third appraiser, whose
appraisal shall be final and binding on the Company, Tango and
Employee. The Company and Tango shall bear the cost of the appraisals
and all other costs and expenses related to such purchase and sale of
the Residence from Employee.
(ii) until such time as Employee shall have completely relocated to
Wisconsin, the Company and Tango shall (A) provide Employee a two (2)
bedroom furnished apartment (at a monthly rental rate not to exceed
$1,500), and (B) reimburse Employee for all reasonable costs and
expenses in commuting from Wichita, Kansas to Brookfield, Wisconsin.
(iii) the Company and Tango shall pay on behalf of Employee or
reimburse Employee, at Employee's option, for the actual costs paid to
third parties relating to Employee's relocation from Kansas to
Wisconsin, including, but not limited to, (a) reasonable moving company
expenses and insurance, and (b) reasonable travel expenses for Employee
and his spouse from Kansas to Wisconsin in order to enable Employee and
his spouse to locate a suitable residence in Wisconsin.
SECTION 5. Restrictive Covenants.
(a) Employee acknowledges that the covenants herein are necessary to
protect the goodwill and other value of the Company and Tango and in view of the
unique and essential nature of the services Employee is to perform hereunder,
the irreparable injury
9
<PAGE> 10
that would befall the Company and Tango should Employee breach such covenants.
(b) Employee further acknowledges that his services hereunder are of a
special, unique and extraordinary character and that his positions with the
Company and Tango place him in a position of confidence and trust with the
customers and employees of the Company and Tango 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 and Tango are
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 and Tango conduct their
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 and Tango.
(e) Having acknowledged the foregoing, Employee covenants and agrees
with the Company and Tango that he will not, directly or indirectly:
(i) while he is in the Company's and Tango'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 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 and Tango;
(ii) while he is in the Company's and Tango'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 to solicit or divert or
tempt appropriate to any such Competing Business, within the Area, any
person or entity who was a customer of the Company or Tango 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;
10
<PAGE> 11
(iii) while he is in the Company's and Tango'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 or Tango (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 and Tango'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 and Tango 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 five (5%) 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).
(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 or Tango, originals and all copies of all papers, files or other
documents containing any Confidential Information and all other property
belonging to the Company and Tango and in his possession or under his control.
Notwithstanding the immediately preceding sentence, Employee shall be permitted
to retain his personal memorabilia belonging to him, notes taken by him as a
member of the Board of Directors of the Company or Tango, or any committee
thereof, and any other such materials which Employee deems to be of value to him
in the event the same may be needed by Employee in connection with the defense
of any lawsuit, action or proceeding brought against him for any reason
whatsoever.
(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 or Tango 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 Tango (whether or not constituting a trade
secret) that is, has been or will be disclosed to
11
<PAGE> 12
Employee or of which Employee became or becomes aware as a consequence of or
through his relationship with the Company or Tango and that has value to the
Company or Tango and is not generally known by its competitors. Confidential
Information shall not include any data or information that has been voluntarily
disclosed to the public by the Company or Tango (except where such public
disclosure has been made without authorization by the Company or Tango), 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
Tango'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 and Tango 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 or Tango 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 Tango in this Section 5 shall
include, unless the context otherwise requires, all subsidiaries and affiliates
of Tango.
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 Tango and their respective
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 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
12
<PAGE> 13
covenant constitutes an enforceable obligation between the Company and Tango, on
the one hand, and Employee on the other hand. 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.
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 prior to the Relocation Date,
addressed to:
Steven L. Vick
1345 St. Andrews
Wichita, Kansas 67230
(b) If to the Company and Tango, addressed to:
Sterling House Corporation
453 S. Webb Road
Suite 500
Wichita, Kansas 67207
Attn: Chairman
Alternative Living Services, Inc.
450 N. Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attn: Chief Executive Officer
with a copy to:
Rogers & Hardin LLP
2700 Cain Tower, Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attn: Alan C. Leet, Esq.
13
<PAGE> 14
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. The waiver by either party hereto of a breach of any
provision, agreement or covenant of this Agreement by the other party hereto
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 such other party
hereto.
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 may be modified only by written
instrument signed by each of the parties hereto.
6.9 Effectiveness. This Agreement shall become effective at the
Effective Time of the Merger; provided, however, that this Agreement shall
become null and void upon any termination of the Merger Agreement.
14
<PAGE> 15
IN WITNESS WHEREOF, the 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 as of
the day and year first written above.
ALTERNATIVE LIVING SERVICES, INC.
By: /S/ WILLIAM F. LASKY
------------------------------
Its: President and CEO
------------------------------
STERLING HOUSE CORPORATION
By: /S/ TIMOTHY J. BUCHANAN
------------------------------
Its: Chairman
------------------------------
EMPLOYEE:
/S/ STEVEN L. VICK
------------------------------------
Steven L. Vick
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into this
23rd day of October, 1997, by and between Mark W. Ohlendorf, a resident of the
State of Kansas (the "Employee"), and Alternative Living Services, Inc., a
Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company, Tango Merger Corporation, a Kansas
corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and
Sterling House Corporation, a Kansas corporation ("Sterling"), have entered into
that certain Agreement and Plan of Merger, dated as of July 30, 1997, as amended
as of September 2, 1997 (the "Merger Agreement"), whereby Merger Sub will be
merged with and into Sterling, with Sterling as the surviving corporation, and
Sterling shall become a wholly owned subsidiary of the Company (the "Merger");
WHEREAS, the Employee has been an employee and officer
of Sterling;
WHEREAS, after the Merger, Sterling, as a wholly owned
subsidiary of the Company, will continue to carry on the business previously
carried on by Sterling;
WHEREAS, the Company desires to employ Employee as an
executive officer of the Company effective at the Effective Time (as defined in
the Merger Agreement);
WHEREAS, the Company, on the one hand, and Employee, on the
other hand, desires 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, hereby agree as follows:
SECTION l. Employment; Effective Date; Waiver of Severance Payments.
Subject to the terms and conditions hereof, the Company hereby
employs the Employee, and the Employee hereby accepts such employment,
commencing as of the Closing Date (as defined in the Merger Agreement). Except
as set forth in Section 4.10 hereof, as a condition to the Company entering into
this Agreement, the Employee shall waive, and Employee hereby waives, any rights
which Employee may have to severance or termination payments, including, but not
limited to, rights to salary, bonuses or
<PAGE> 2
benefits, payable upon the termination of any employment agreement or
arrangement which Employee may have in effect with Sterling prior to the Closing
Date (the "Sterling Employment Agreement").
SECTION 2. Position.
2.1. Title. The Employee shall serve as an executive officer
of the Company with the title of Senior Vice President and, as such, shall
report directly to the Chief Financial Officer of the Company; provided,
however, that at no time shall the Employee be requested to perform duties which
are not commensurate with his status as an executive officer 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
Sterling's principal executive offices in Wichita, Kansas; provided, however,
that Employee agrees to relocate his residence to Wisconsin on or after June 1,
1998 and that thereafter the location of his employment shall be at the
Company's principal executive offices in Brookfield, Wisconsin; provided,
further, that the Company may not transfer Employee to any other location
without Employee's prior written consent unless the 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.
2.3. Responsibilities. The Employee shall have such
responsibilities as are directed by the President of the Company from time to
time. The Employee agrees to devote his time during normal business hours to the
business and affairs of the Company (except as otherwise provided herein), 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 Employee 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 Employee is
entitled.
SECTION 3. Term.
3.1. Term. The initial term of employment of the Employee (the
"Initial Term") hereunder shall commence on the Closing Date and shall continue
until the earlier (a) the first anniversary date of the Closing Date or (b) the
occurrence of any of the following events:
-2-
<PAGE> 3
(i) the death or disability of the Employee
(disability meaning a physical illness or incapacity that
prevents the Employee from performing all of the substantial
and material duties of Employee's then current position of
employment with the Company; provided, however, that a
disability shall be considered to exist only if the 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 Employee remained so prevented, or
if, prior to the expiration of such three (3) month period,
the Employee's attending physician provides the Company with a
written prognosis that the illness, injury or other incapacity
that results in the Employee's current disabled condition may
be reasonably expected to prevent the Employee from performing
all of the substantial and material duties of Employee's 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 Employee's employment hereunder;
(iii) the Company's termination of the Employee's
employment hereunder for "cause." For purposes of this
Agreement, "cause" for termination of the Employee's
employment shall exist only (x) if the Employee is convicted
of, or pleads guilty to, any act of fraud, misappropriation or
embezzlement, or any felony; (y) if the 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 the Employee's
exercise of Employee's good faith business judgment nor
unintentional physical damage to any property of the Company
by the Employee shall be a ground for such a determination by
the Company); or (z) if the Employee has willfully and
continuously failed to substantially perform Employee's 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
Employee that specifically identifies the manner in which the
Company believes that the Employee has not substantially
performed those duties, and the 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 the Employee and an opportunity
-3-
<PAGE> 4
for the Employee, together with counsel, to be heard
before a duly called meeting of the Board; or
(iv) the Employee's termination of employment with
the Company for "good reason" upon reasonable notice to the
Company. For purposes of this Agreement "good reason" shall
exist if (x) 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, or (y) the
Company changes the duties of the Employee hereunder in any
manner which constitutes a diminution of the duties to be
performed by the Employee under this Agreement.
The Initial Term hereof, and any renewal term, shall be automatically renewed
for an additional one (l) year period unless either the Employee or the Company
gives notice to the other party that it does not wish to renew this Agreement at
least ninety (90) days preceding the expiration of the Initial Term or any
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 the Employee for any reason other
than "good reason," the Company shall pay Employee the Base Salary (as defined
below) through the effective date of termination at the rate in effect when
notice of termination is given, and the Company shall have no further
obligations to the 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 the 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 a 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 (as defined below) in the Area (as defined below) in the
capacity of officer, managerial or executive employee, director, consultant or
shareholder (other than as the owner of less than one percent (1%) of the shares
of a publicly-owned corporation
-4-
<PAGE> 5
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 Initial Term of employment
hereunder, Employee shall be paid a salary (the "Base Salary") at the annual
rate of One Hundred Ninety Thousand Dollars ($190,000), 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.
Employee'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 Employee's initial Base Salary as provided above without
the consent of Employee.
4.2. Not Used.
4.3. Incentive Bonuses. As additional compensation hereunder,
the Company may, in the sole discretion of the Board of Directors, pay Employee
an annual bonus (the "Annual Bonus") for each fiscal year during the term of the
Employee's employment hereunder. Subject to Section 3.2 of this Agreement, if
the Employee's employment hereunder is terminated pursuant to the terms of this
Agreement prior to the end of a calendar year, the Employee's Annual Bonus with
respect to that year shall be prorated for such portion of that year as Employee
was employed by the Company.
4.4. Stock Options. The Board of Directors of the Company
shall grant to Employee, as of the Closing Date, options to purchase the number
of shares of common stock of the Company (the "Common Stock") equal to the
quotient of $285,000 divided by the closing sales price of the Common Stock as
reported by the American Stock Exchange on the Closing Date (the "Closing Date
Price") pursuant to the terms of the Company's Amended and Restated 1995
Incentive Compensation Plan, which options shall have an exercise price per
share equal to the Closing Date Price and 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 options shall no longer be
exercisable as of and following the tenth (10th) anniversary of the date of
grant of such options.
4.5. Insurance.
(a) Life and Other Insurance. The Company shall provide to the 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 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,
-5-
<PAGE> 6
during the term of the Employee's employment hereunder, so long as Employee is
insurable, key man insurance on the Employee 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 Employee 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 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 the Employee and his family, as is provided from time to time for executive
officers of the Company of comparable stature and title.
4.6. Vacation. The Employee shall be entitled to paid vacation
during each year of employment hereunder in accordance with the Company's
vacation policy for executive employees. For purposes of determining the number
of vacation days to which the Employee is entitled pursuant to the Company's
vacation policy, the Employee shall be entitled to credit for his time as an
employee of Sterling.
4.7. Retirement Benefits. During the term of employment
hereunder, the Employee shall have the same rights as comparable executive
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
for such executives.
4.8. Out-of-Pocket Expenses. The Company shall reimburse the
Employee for all reasonable out-of-pocket expenses incurred by the Employee in
connection with the performance of his duties hereunder upon presentation to the
Company of appropriate vouchers therefor.
4.9. Automobile. During the term of Employee's employment
hereunder, the Company shall pay to the Employee 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.
4.10 Moving and Relocation Expenses. In addition to the salary
and benefits set forth in this Section 4, the Company shall provide to Employee
the following benefits in connection with his moving and relocating to
Wisconsin:
(i) the Company agrees that, to the extent that the Employee
has not received benefits to which he is entitled pursuant to Section
10 of the Sterling Employment Agreement as of the commencement of
Employee's employment hereunder, the Employee shall be entitled to
receive such benefits from the Company.
-6-
<PAGE> 7
(ii) until such time as Employee shall have completely relocated to
Wisconsin, the Company shall (A) provide Employee a two (2) bedroom
furnished apartment (at a monthly rental rate not to exceed $1500.00),
and (B) reimburse Employee for all reasonable costs and expenses in
commuting from Wichita, Kansas to Brookfield, Wisconsin.
(iii) the Company shall pay on behalf of Employee or reimburse
Employee, at Employee's option, for the actual costs paid to third
parties relating to Employee's relocation to Wisconsin, including, but
not limited to, (a) reasonable moving company expenses and insurance,
(b) reasonable travel expenses for Employee and his spouse from Kansas
to Wisconsin in order to enable Employee and his spouse to locate a
suitable residence in Wisconsin, and (c) reasonable selling costs
incurred in selling Employee's principal residence in Kansas.
SECTION 5. Restrictive Covenants.
(a) Employee acknowledges that the covenants herein are necessary to
protect the goodwill and other value of the Company and in view of the unique
and essential nature of the services Employee is to perform hereunder, the
irreparable injury that would befall the Company should Employee breach such
covenants.
(b) The Employee further acknowledges that Employee's services to be
provided hereunder are of a special, unique and extraordinary character and that
Employee's position with the Company will place Employee in a position of
confidence and trust with the customers and other employees of the Company and
allow Employee access to Confidential Information (as defined below).
(c) The 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 the Employee from earning a
livelihood.
(d) The 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 defined below); and (iii) Competing
Businesses (as defined below) are engaged in businesses like and similar to the
business of the Company.
(e) Having acknowledged the foregoing, the Employee covenants and
agrees with the Company that Employee will not, directly or indirectly:
(i) while in the Company's employ and after the
termination of his employment for any reason whatsoever
-7-
<PAGE> 8
(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 Employee or of which the Employee
became aware by reason of his employment with the Company;
(ii) while 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 executive employee of the Company (whether
or not such employment is full time or is pursuant to a
written contract with the Company); and
(iii) while 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 (x) termination by the Company
without cause or (y) termination by the Employee for "good
reason" or (z) expiration of the Initial Term without renewal
pursuant to Section 3.1 hereof by virtue of notice of
nonrenewal given by the Company to the Employee 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 (l%) 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 Employee agrees that upon the termination of Employee's
employment for any reason whatsoever (whether voluntarily or involuntarily),
Employee will not take with Employee or retain without written authorization,
and Employee 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 Employee's possession or
under Employee's control.
(g) For purposes of this Section 5, the term (i) "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 Employee's employment hereunder is terminated; (ii) "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
-8-
<PAGE> 9
disease or congregate living communities; and (iii) "Confidential Information"
means any and all data, knowledge and information relating to the business of
the Company (whether or not constituting a trade secret) that is, has been or
will be obtained by or disclosed to the Employee or of which the Employee became
or becomes aware as a consequence of or through Employee's relationship with the
Company 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 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, executive officers or employees
compensation, research, development, purchasing, accounting or marketing.
(h) The 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. The Employee hereby agrees that, in addition to any 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 Employee of any covenant contained in this Section 5. The parties
hereto agree that all references to the Company in this Section 5 shall include,
unless the context otherwise requires, all subsidiaries and affiliates of the
Company.
SECTION 6. Miscellaneous.
6.1. Binding Effect. This Agreement shall inure to the benefit
of and shall be binding upon the Employee, Employee's 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 Employee may not be assigned or delegated.
6.2. Governing Law. This Agreement shall be deemed to be made
in, and 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 agree that
the agreements, provisions and covenants contained in this
-9-
<PAGE> 10
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 or its enforceability, and that each such agreement,
provision and covenant constitutes an enforceable obligation between the Company
and the 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.
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 the Employee, addressed to:
Mark W. Ohlendorf
Sterling House Corporation
453 S. Webb Road
Suite 500
Wichita, Kansas 67207
Facsimile: (316) 684-8948
(b) If to the Company, addressed to:
Alternative Living Services, Inc.
450 N. Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: President
Facsimile: (414) 789-6677
with a copy to:
Rogers & Hardin LLP
2700 International Tower
Peachtree Center
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: (404) 525-2224
-10-
<PAGE> 11
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 the
Employee of a breach of any provision, agreement or covenant of this Agreement
by the 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.
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 Employee relating to the Employee'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.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the 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 as of
the day and year first written above.
COMPANY:
ALTERNATIVE LIVING SERVICES, INC.
By: _________________________________
Its: _________________________________
EMPLOYEE:
______________________________________
Mark W. Ohlendorf
-12-
<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made and entered into this
23rd day of October, 1997, by and between Gary Anderson, a resident of the State
of Kansas (the "Employee"), and Alternative Living Services, Inc., a Delaware
corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company, Tango Merger Corporation, a Kansas
corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and
Sterling House Corporation, a Kansas corporation ("Sterling"), have entered into
that certain Agreement and Plan of Merger, dated as of July 30, 1997, as amended
as of September 2, 1997 (the "Merger Agreement"), whereby Merger Sub will be
merged with and into Sterling, with Sterling as the surviving corporation, and
Sterling will become a wholly owned subsidiary of the Company (the "Merger");
WHEREAS, the Employee has been an employee and officer
of Sterling;
WHEREAS, after the Merger, Sterling, as a wholly owned
subsidiary of the Company, will continue to carry on the business previously
carried on by Sterling;
WHEREAS, the Company desires to employ the Employee as an
executive officer of the Company effective as of the Effective Time (as defined
in the Merger Agreement);
WHEREAS, the Company, on the one hand, and the Employee, on
the other hand, desires to enter into this Agreement, pursuant to which the
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, hereby agree as follows:
SECTION l. Employment; Effective Date.
Subject to the terms and conditions hereof, the Company hereby
employs the Employee, and the Employee hereby accepts such employment,
commencing on the Closing Date (as defined in the Merger Agreement).
<PAGE> 2
SECTION 2. Position.
2.1. Title. The Employee shall serve as an officer of the
Company with the title of Senior Vice President of Operations and, as such,
shall report directly to the Executive Vice President of Operations of the
Company; provided, however, that at no time shall the Employee be requested to
perform duties which are not commensurate with the Employee's status as an
executive of the Company. The Employee also consents to serve, without
additional compensation, if elected, as a director of the Company and its
subsidiaries.
2.2. Location. The Employee's location of employment
shall be at Sterling's principal executive offices in Wichita,
Kansas.
2.3. Responsibilities. The Employee shall have such additional
responsibilities as directed by the Executive Vice President of Operations of
the Company from time to time. The Employee agrees to devote the Employee's time
during normal business hours to the business and affairs of the Company (except
as otherwise provided herein), to use the Employee's best efforts to promote the
interests of the Company and to perform faithfully and efficiently the
responsibilities assigned to the Employee in accordance with the terms of this
Agreement, to the extent necessary to discharge such responsibilities. This
shall not preclude the Employee from (i) performing services on civic or
charitable boards or committees not significantly interfering with the
performance of the Employee's responsibilities under this Agreement, and (ii)
taking periods of vacation and sick leave to which the Employee is entitled.
SECTION 3. Term.
3.1. Term. The initial term of employment of the Employee (the
"Initial Term") hereunder shall commence on the Closing Date and shall continue
until the earlier (a) the first anniversary date of the Closing Date or (b) the
occurrence of any of the following events:
(i) the death or disability of the Employee
(disability meaning a physical illness or incapacity that
prevents the Employee from performing all of the substantial
and material duties of the Employee's then current position of
employment with the Company; provided, however, that a
disability shall be considered to exist only if the 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 the Employee remained so
prevented, or if, prior to the expiration of such three
-2-
<PAGE> 3
(3) month period, the Employee's attending physician provides
the Company with a written prognosis that the illness, injury
or other incapacity that results in the Employee's current
disabled condition may be reasonably expected to prevent the
Employee from performing all of the substantial and material
duties of the Employee's 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 Employee's employment hereunder;
(iii) the Company's termination of the Employee's
employment hereunder for "cause." For purposes of this
Agreement, "cause" for termination of the Employee's
employment shall exist only (x) if the Employee is convicted
of, or pleads guilty to, any act of fraud, misappropriation or
embezzlement, or any felony; (y) if the 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 the Employee's
exercise of good faith business judgment nor unintentional
physical damage to any property of the Company by the Employee
shall be a ground for such a determination by the Company); or
(z) if the Employee has willfully and continuously failed to
substantially perform the Employee's 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 Employee that
specifically identifies the manner in which the Company
believes that the Employee has not substantially performed
those duties, and the 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 the Employee and an opportunity for the
Employee, together with counsel, to be heard before a duly
called meeting of the Board; or
(iv) the Employee's termination of employment with
the Company for "good reason" upon reasonable notice to the
Company. For purposes of this Agreement "good reason" shall
exist if (x) 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
-3-
<PAGE> 4
which are remedied by the Company promptly after receipt of
notice thereof given by the Employee, or (y) the Company
changes the duties of the Employee hereunder in any manner
which constitutes a diminution of the duties to be performed
by the Employee under this Agreement.
The Initial Term hereof, and any renewal term, shall be automatically renewed
for an additional one (l) year period unless either the Employee or the Company
gives notice to the other party that it does not wish to renew this Agreement at
least ninety (90) days preceding the expiration of the Initial Term or any
renewal term, as the case may be.
3.2. Payments Upon Termination. If the Employee's employment
is terminated by the Company for "cause" or by the Employee for any reason other
than "good reason," the Company shall pay the Employee the Base Salary (as
defined below) through the effective date of termination at the rate in effect
when notice of termination is given, and the Company shall have no further
obligations to the 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 the Employee's employment is
terminated by the Company for any reason other than for "cause" or by the
Employee for "good reason," the Company shall continue to pay the Employee 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 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 the Employee if
the 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 (as defined below) in the Area (as defined below) in the
capacity of officer, managerial or executive employee, director, consultant or
shareholder (other than as the owner of less than one percent (1%) 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 Initial Term of the Employee's
employment hereunder, Employee shall be paid a salary (the "Base Salary") at the
annual rate of One Hundred Thirty Five
-4-
<PAGE> 5
Thousand Dollars ($135,000), 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 Employee'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 Employee's
initial Base Salary as provided above without the consent of the Employee.
4.2. Bonus. The Company shall pay the Employee a bonus in an
amount equal to 30% of the Base Salary on the earlier to occur of (i) the first
anniversary of the Closing Date or (ii) the date on which the Employee's
employment is terminated by the Company for any reason other than for "cause" or
by the Employee for "good reason."
4.3. Incentive Bonuses. As additional compensation hereunder,
the Company may, in the sole discretion of the Board of Directors, pay the
Employee an annual bonus (the "Annual Bonus") for each fiscal year during the
term of the Employee's employment hereunder. Subject to Section 3.2 of this
Agreement, if the Employee's employment hereunder is terminated pursuant to the
terms of this Agreement prior to the end of a calendar year, the Employee's
Annual Bonus with respect to that year shall be prorated for the portion of such
year during which the Employee was employed by the Company.
4.4. Stock Options. The Board of Directors of the Company
shall grant to the Employee, as of the Closing Date, options to purchase the
number of shares of common stock of the Company (the "Common Stock") equal to
the quotient of $101,250 divided by the closing price per share of the Common
Stock as reported by the American Stock Exchange on the Closing Date (the
"Closing Date Price") pursuant to the terms of the Company's Amended and
Restated 1995 Incentive Compensation Plan, which options shall have an exercise
price per share equal to the Closing Date Price and 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 options shall no longer be
exercisable as of and following the tenth (10th) anniversary of the date of
grant of such options.
4.5. Insurance.
(a) Life and Other Insurance. The Company shall provide to the 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 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,
-5-
<PAGE> 6
during the term of the Employee's employment hereunder, so long as the Employee
is insurable, key man insurance on the Employee 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 Employee 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 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 the Employee and the Employee's family, as is provided from time to time for
executive officers of the Company of comparable stature and title.
4.6. Vacation. The Employee shall be entitled to paid vacation
during each year of employment hereunder in accordance with the Company's
vacation policy for executive employees. For purposes of determining the number
of vacation days to which the Employee is entitled pursuant to the Company's
vacation policy, the Employee shall be entitled to credit for his time as an
employee of Sterling.
4.7. Retirement Benefits. During the term of employment
hereunder, the Employee shall have the same rights as comparable executive
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
for such executives.
4.8. Out-of-Pocket Expenses. The Company shall reimburse the
Employee for all reasonable out-of-pocket expenses incurred by the Employee in
connection with the performance of the Employee's duties hereunder upon
presentation to the Company of appropriate vouchers therefor.
4.9. Automobile Expense Allowance. During the term of the
Employee's employment hereunder, the Company shall pay to the 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.
4.10. Payroll Processing. The parties hereto agree that
payroll processing of amounts due Employee by the Company hereunder may be
executed by either the Company or one of its subsidiaries, including Sterling
and BCI Construction, Inc.
-6-
<PAGE> 7
SECTION 5. Restrictive Covenants.
(a) The Employee acknowledges that the covenants herein are necessary
to protect the goodwill and other value of the Company and in view of the unique
and essential nature of the services the Employee is to perform hereunder, the
irreparable injury that would befall the Company should the Employee breach such
covenants.
(b) The Employee further acknowledges that the Employee's services to
be provided hereunder are of a special, unique and extraordinary character and
that the Employee's position with the Company will place the Employee in a
position of confidence and trust with the customers and employees of the Company
and allow the Employee access to Confidential Information (as defined below).
(c) The 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 the Employee from earning a
livelihood.
(d) The 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 defined below); and (iii) Competing
Businesses (as defined below) are engaged in businesses like and similar to the
business of the Company.
(e) Having acknowledged the foregoing, the Employee covenants and
agrees with the Company that the Employee will not, directly or indirectly:
(i) while in the Company's employ and after the
termination of the Employee's employment for any reason
whatsoever (whether voluntarily or involuntarily), disclose,
use or otherwise exploit, except as may be necessary in the
performance of the Employee's duties hereunder, any
Confidential Information disclosed to the Employee or of which
the Employee became aware by reason of the Employee's
employment with the Company;
(ii) while in the Company's employ and through the
period ending eighteen (18) months after the termination of
the Employee's 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
-7-
<PAGE> 8
managerial or executive employee of the Company (whether or
not such employment is full time or is pursuant to a written
contract with the Company); and
(iii) while in the Company's employ and through the
period ending twelve (12) months after the termination of the
Employee's employment (whether voluntarily or involuntarily)
for any reason whatsoever, except for (x) termination by the
Company without cause or (y) termination by the Employee for
"good reason" or (z) expiration of the Initial Term without
renewal pursuant to Section 3.1 hereof by virtue of notice of
nonrenewal given by the Company to the Employee 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 (l%) 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 Employee agrees that upon the termination of the Employee's
employment for any reason whatsoever (whether voluntarily or involuntarily), the
Employee will not take or retain without written authorization, and the Employee
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 the Employee's possession or under the
Employee's control.
(g) For purposes of this Section 5, the term (i) "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 Employee's employment hereunder is terminated; (ii) "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 (iii) "Confidential Information" means any and all data,
knowledge and information relating to the business of the Company (whether or
not constituting a trade secret) that is, has been or will be obtained by or
disclosed to the Employee or of which the Employee became or becomes aware as a
consequence of or through the Employee's relationship with the Company 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 Employee to be confidential information or has been reduced to
writing and
-8-
<PAGE> 9
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.
(h) The 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. The Employee hereby agrees that, in addition to any 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 Employee of any covenant contained in this Section 5. The parties
hereto agree that all references to the Company in this Section 5 shall include,
unless the context otherwise requires, all subsidiaries and affiliates of the
Company.
SECTION 6. Miscellaneous.
6.1. Binding Effect. This Agreement shall inure to the benefit
of and shall be binding upon the Employee, the Employee's 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 Employee may not be assigned or delegated.
6.2. Governing Law. This Agreement shall be deemed to be made
in, and 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 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
or its enforceability, and that each such agreement, provision and covenant
constitutes an enforceable obligation between the Company and the Employee.
Consequently, the parties hereto agree that neither the invalidity nor the
unenforceability
-9-
<PAGE> 10
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.
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 the Employee, addressed to:
Gary Anderson
453 S. Webb Road
Suite 500
Wichita, KS 67207
Facsimile: (316) 684-8948
(b) If to the Company, addressed to:
Alternative Living Services, Inc.
450 N. Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: President
Facsimile: (414) 789-6677
with a copy to:
Rogers & Hardin LLP
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
6.7. 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 the 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.
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 Employee relating to the Employee'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.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the 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 as of
the day and year first written above.
COMPANY:
ALTERNATIVE LIVING SERVICES, INC.
By: _________________________________
Its: _________________________________
EMPLOYEE:
______________________________________
Gary Anderson
-12-
<PAGE> 1
EXHIBIT 10.15
MEMBER INTEREST
MODIFICATION AGREEMENT
AND AMENDMENT TO
JOINT VENTURE AGREEMENT
BY AND AMONG
ALTERNATIVE LIVING SERVICES, INC.,
DAYS DEVELOPMENT COMPANY, LC,
DAYS DEVELOPMENT OF NORTH CAROLINA, L.L.C.,
AND THE OTHER PARTIES SIGNATORY HERETO
DATED AS OF
JANUARY 8, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. Definitions................................................................................... 2
2. Agreement to Alter Rights and Interests in 80/20 Entities..................................... 3
2.1 Alteration of Ownership of 80/20 Entities............................................ 3
2.2 Reconciliation Payment............................................................... 3
2.3 The Closing.......................................................................... 3
2.4 Deliveries at the Closing............................................................ 3
3. Representations and Warranties of DD.......................................................... 4
3.1 Legal Status......................................................................... 4
3.2 Authority............................................................................ 4
3.3 No Violation......................................................................... 4
3.4 Brokers' Fees........................................................................ 4
3.5 DD Interest/Title.................................................................... 5
3.6 Required Consents.................................................................... 5
4. Representations and Warranties of DD-Carolina................................................. 5
4.1 Legal Status......................................................................... 5
4.2 Authority............................................................................ 5
4.3 No Violation......................................................................... 6
4.4 Brokers' Fees........................................................................ 6
4.5 DD Interest/Title.................................................................... 6
4.6 Required Consents.................................................................... 6
5. Representations and Warranties of ALS......................................................... 6
5.1 Legal Status......................................................................... 7
5.2 Authority............................................................................ 7
5.3 No Violation......................................................................... 7
5.4 No Brokers or Finders................................................................ 7
5.5 Required Consents.................................................................... 7
6. Amendments to Joint Venture Agreement......................................................... 7
6.1 Definitions.......................................................................... 8
6.2 Covenants............................................................................ 8
7. Conditions to ALS's Obligation to Close....................................................... 21
7.1 Representations and Warranties....................................................... 21
7.2 Performance.......................................................................... 21
7.3 Litigation........................................................................... 21
7.4 No Material Adverse Event............................................................ 21
7.5 Proceedings and Instruments Satisfactory............................................. 21
7.6 Other Documents...................................................................... 22
7.7 Required Consents.................................................................... 22
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
8. Conditions to DD's and DD-Carolina's Obligation to Close...................................... 22
8.1 Representations and Warranties....................................................... 22
8.2 Performance.......................................................................... 22
8.3 Litigation........................................................................... 22
8.4 Proceedings and Instruments Satisfactory............................................. 22
8.5 Other Documents...................................................................... 23
9. Termination, Amendment and Waiver............................................................. 23
9.1 Termination of Agreement............................................................. 23
9.2 Amendment, Extension and Waiver...................................................... 24
10. Other Agreements.............................................................................. 24
10.1 Amendment to Operating Agreements.................................................... 24
11. Miscellaneous................................................................................. 24
11.1 Survival of Representations and Warranties............................................. 24
11.2 Expenses, Taxes, Etc................................................................... 24
11.3 Further Assurances..................................................................... 24
11.4 Successors and Assigns................................................................. 24
11.5 Severability........................................................................... 24
11.6 Entire Agreement....................................................................... 25
11.7 Headings............................................................................... 25
11.8 Notices................................................................................ 25
11.9 Law Governing.......................................................................... 26
11.10 Counterparts/Telecopies................................................................ 26
11.11 No Third Party Beneficiaries........................................................... 26
11.12 Construction........................................................................... 26
11.13 Number; Gender......................................................................... 27
11.14 Incorporation of Schedules and Exhibits................................................ 27
11.15 Taxes and Fees......................................................................... 27
</TABLE>
SCHEDULES
Schedule A Holders of Interests in 80/20 Entities
<PAGE> 4
MEMBER INTEREST
MODIFICATION AGREEMENT
AND AMENDMENT TO JOINT VENTURE AGREEMENT
THIS MEMBER INTEREST MODIFICATION AGREEMENT AND AMENDMENT TO JOINT
VENTURE AGREEMENT, dated as of January 8, 1997 ("Agreement"), by and among
Alternative Living Services, Inc., a Delaware corporation ("ALS"), Days
Development Company, LC, a Virginia limited liability company ("DD"), Days
Development of North Carolina, L.L.C., a North Carolina limited liability
company ("DD- Carolina") and the DD Entities (hereinafter defined).
W I T N E S S E T H:
WHEREAS, DD-Carolina or another DD Entity and ALS own all of the member
interests in (i) Wynwood of Chapel Hill, LLC, a North Carolina limited liability
company ("Chapel Hill"); (ii) Clare Bridge of Cary, LLC, a North Carolina
limited liability company ("Cary"); (iii) Clare Bridge of Winston-Salem, LLC, a
North Carolina limited partnership ("Winston-Salem"); (iv) Clare Bridge of
Greensboro, LLC, a North Carolina limited partnership ("Greensboro"); (v)
Wynwood of Greensboro, LLC, a North Carolina limited partnership ("Greensboro
II"); (vi) Clare Bridge of Charlotte, LLC, a North Carolina limited partnership
("Charlotte"); and (vii) Wynwood of Charlotte, LLC, a North Carolina limited
partnership ("Charlotte II"; each of Chapel Hill, Cary, Winston- Salem,
Greensboro, Greensboro II, Charlotte and Charlotte II being referred to herein
individually as an "Existing Entity", and collectively as the "Existing
Entities");
WHEREAS, DD and ALS have entered into that certain Joint Venture
Agreement dated as of November 15, 1995 (the "Joint Venture Agreement"),
pursuant to which DD and ALS have set forth their agreement with respect to the
future development, construction and joint ownership of assisted living and/or
specialty care facilities for the elderly in North Carolina and South Carolina;
WHEREAS, DD-Carolina has agreed to be bound by all the provisions of
the Joint Venture Agreement pursuant to that certain Agreement to be Bound to
Joint Venture Agreement dated as of November 15, 1995; and
WHEREAS, DD, DD-Carolina, the DD Entities and ALS desire to amend and
revise the Joint Venture Agreement and their respective rights and interest with
respect to each of the Existing Entities other than Chapel Hill and Cary (each
such Existing Entity referred to as a "80/20 Entity" and collectively as "80/20
Entities") in the manner set forth herein.
<PAGE> 5
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:
"80/20 Entity" and "80/20 Entities" shall have the meanings
set forth in the premises of this Agreement.
"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.
"DD Assignment" shall mean an assignment of a portion of the
DD Interests pursuant to Section 2.1 hereof to be executed and delivered at
Closing by each DD Entity.
"DD Entity" shall mean each affiliate of DD or DD- Carolina
that is a member of any of the 80/20 Entities as set forth on Schedule A
attached hereto.
"DD Interests" shall mean all of the member (or equity)
interests of the DD Entities in the 80/20 Entities.
"Existing Entity" and "Existing Entities" shall have the
meanings set forth in the premises of this Agreement.
"Joint Venture Agreement" shall have the meaning set forth in
the premises of this Agreement.
"Law" shall mean any federal, state, or local law, rule,
regulation or governmental requirement of any kind, including without limitation
those governing the handling, management and disposal of infectious wastes or
medical wastes, and the rules, regulations and orders promulgated thereunder.
"Operating Agreements" shall mean the limited liability
company operating agreements with respect to each of the 80/20 Entities.
2
<PAGE> 6
"Person" shall mean a natural person, corporation, trust,
partnership, limited liability company, governmental entity, agency or branch or
department thereof, or any other legal entity.
"Securities Act" shall mean the Securities Act of 1933,
as amended.
2. AGREEMENT TO ALTER RIGHTS AND INTERESTS IN 80/20
ENTITIES.
2.1 ALTERATION OF OWNERSHIP OF 80/20 ENTITIES. On and subject
to the terms and conditions of this Agreement, the parties hereto agree to alter
the member interest of each of ALS and the respective DD Entity with respect to
each of the 80/20 Entities such that ALS has an 80% member interest therein and
the applicable DD Entity shall have a 20% member interest therein, with such
alteration of member interests to be confirmed and reflected in an Operating
Agreement with respect to such 80/20 Entity as contemplated by Section 10.1
hereto. If such DD Entity shall be any person other than DD or DD-Carolina, then
DD and DD-Carolina shall cause such DD Entity to authorize, execute and approve
the modification of member interests and Operating Agreement (or the amendment
thereto) contemplated hereby. To the extent that as of the Closing Date the
aggregate equity capital contributed to the 80/20 Entities by the DD Entities
exceeds 25% of the aggregate equity capital contributed to the 80/20 Entities by
ALS and its affiliates, then ALS shall pay said excess amount (the
"Reconciliation Payment") to DD, as agent for all of the DD Entities, at the
Closing in the manner provided in Section 2.2 hereof.
2.2 RECONCILIATION PAYMENT. ALS agrees to pay at the Closing
(hereinafter defined) the Reconciliation Payment, by certified or bank check or
by wire transfer, to an account (or accounts) designated in writing by DD.
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 10:00, a.m. local time on the second
Business Day following the satisfaction or waiver of all conditions to the
obligations of ALS, DD and DD-Carolina 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, DD and DD-Carolina may mutually determine (the "Closing Date").
2.4 DELIVERIES AT THE CLOSING. At the Closing, (i) all DD
Entities shall deliver to ALS a DD Assignment duly executed by each of them,
(ii) ALS shall deliver to DD and DD-Carolina the
3
<PAGE> 7
payment payable pursuant to Section 2.2 hereof, and (iii) each DD Entity and ALS
shall execute and deliver an Operating Agreement (or amendment thereto) to
incorporate and effectuate the amendments thereto and agreements contemplated by
this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF DD. DD 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 LEGAL STATUS. DD is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Virginia 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 instruments to be executed and delivered by DD pursuant hereto and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by the members of DD. No other act or proceeding on the part of
DD or its members is necessary to authorize this Agreement, the other
instruments to be executed and delivered by DD 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 DD pursuant hereto will constitute, the legal, valid and binding agreements
of DD, enforceable against DD 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).
3.3 NO VIOLATION. Neither the execution, delivery and
performance of this Agreement or the other instruments to be executed and
delivered by DD pursuant hereto, nor the consummation by DD of the transactions
contemplated hereby or thereby (a) will violate any statute, law, rule,
regulation, order, writ, injunction or decree of any court or governmental
authority by which DD is bound or (b) will violate or conflict with or
constitute a default under any term or provision of the articles of
organization, the operating agreement, or any other document governing DD.
3.4 BROKERS' FEES. DD 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.
4
<PAGE> 8
3.5 DD INTEREST/TITLE. The DD Entities hold of record and own
beneficially the DD Interest in the 80/20 Entities as described on Schedule A,
attached hereto, free and clear of any restrictions on transfer (other than
ALS's rights pursuant to Section 2.1 hereof and any restrictions set forth in
the Operating Agreement for the respective 80/20 Entity 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. No DD Entity is a party to
any option, warrant, purchase right, or other contract or commitment that could
require such DD Entity to sell, transfer, or otherwise dispose of all or any
part of its respective DD Interest (other than this Agreement), and no DD Entity
has sold, transferred or conveyed any interest in any 80/20 Entity to any other
person.
3.6 REQUIRED CONSENTS. There are no third-party approvals or
consents required for the consummation at the Closing of the transactions
contemplated hereby which have not been obtained.
4. REPRESENTATIONS AND WARRANTIES OF DD-CAROLINA. Each DD Entity and
DD-Carolina represent and warrant to ALS 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 Date (as though then made).
4.1 LEGAL STATUS. DD-Carolina and each DD Entity is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of North Carolina and has the requisite power and
authority to own, lease and operate its respective 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 instruments to be executed and delivered by DD-Carolina and each
DD Entity pursuant hereto and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by the members of DD-Carolina and
each DD Entity. No other act or proceeding on the part of DD-Carolina or any DD
Entity or their members is necessary to authorize this Agreement, the other
instruments to be executed and delivered by DD-Carolina or any DD Entity
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 DD-Carolina and each DD Entity pursuant hereto will
constitute, the legal, valid and binding agreements of DD-Carolina or the
applicable DD Entity, enforceable against DD-Carolina or such DD Entity, as
applicable, in accordance with their respective terms
5
<PAGE> 9
(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 the other instruments to be executed and
delivered by DD-Carolina or any DD Entity pursuant hereto, nor the consummation
by DD-Carolina or any DD Entity of the transactions contemplated hereby or
thereby (a) will violate any statute, law, rule, regulation, order, writ,
injunction or decree of any court or governmental authority by which DD-Carolina
or any DD Entity is bound or (b) will violate or conflict with or constitute a
default under any term or provision of the articles of organization, the
operating agreement, or any other document governing DD-Carolina or any DD
Entity.
4.4 BROKERS' FEES. Neither DD-Carolina nor any DD Entity 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
for which ALS could become liable or obligated.
4.5 DD INTEREST/TITLE. The DD Entities hold of record and own
beneficially the DD Interest in the 80/20 Entities as described on Schedule A,
attached hereto, free and clear of any restrictions on transfer (other than
ALS's rights pursuant to Section 2.1 hereof and any restrictions set forth in
the Operating Agreement for the respective 80/20 Entity 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. No DD Entity is a party to
any option, warrant, purchase right, or other contract or commitment that could
require such DD Entity to sell, transfer, or otherwise dispose of all or any
part of its respective DD Interest (other than this Agreement), and no DD Entity
has sold, transferred or conveyed any interest in any 80/20 Entity to any other
person.
4.6 REQUIRED CONSENTS. There are no third-party approvals or
consents required for the consummation at the Closing of the transactions
contemplated hereby which have not been obtained.
5. REPRESENTATIONS AND WARRANTIES OF ALS. ALS represents and warrants
to DD, DD-Carolina and each DD Entity 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).
6
<PAGE> 10
5.1 LEGAL STATUS. 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. 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 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 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 DD and DD-Carolina
could become liable or obligated.
5.5 REQUIRED CONSENTS. There are no third-party approvals or
consents required for the consummation at the Closing of the transactions
contemplated hereby which have not been obtained.
6. AMENDMENTS TO JOINT VENTURE AGREEMENT. Effective at the Closing, the
Joint Venture Agreement is hereby amended as set forth in this Section 6;
provided, however, that the parties hereto recognize that the terms of the
operating agreements for Chapel
7
<PAGE> 11
Hill and Cary are not consistent with certain provisions of this Section 6 and,
in such cases, such operating agreements shall control as to Chapel Hill and
Cary.
6.1 DEFINITIONS. Section 1.31 of the Joint Venture Agreement
is hereby amended and replaced in its entirety, and a new Section 1.36 is added
to the Joint Venture Agreement, each as set forth below:
"1.31 Agreement. "Agreement" means
this Joint Venture Agreement, as
amended from time to time."
"1.36 Project Entity. "Project
Entity" means any entity formed by
ALS and DD (or a DD Affiliate) for
their joint ownership of a Facility
pursuant to Section 3.1 hereof."
6.2 COVENANTS. Article III of the Joint Venture Agreement is
hereby amended as set forth in this Section 6.2.
6.2.1 FORMATION AND CAPITALIZATION OF ALS-CAROLINA;
FORMATION OF PROJECT ENTITIES; CAPITALIZATION OF PROJECT ENTITIES; PROJECT
FINANCING. Sections 3.1, 3.2, 3.3 and 3.4 of the Joint Venture Agreement are
hereby deleted in their entireties and replaced with the following new Sections
3.1, 3.2, 3.3 and 3.4, respectively:
"3.1 EQUITY PARTICIPATION OF DD; FORMATION OF PROJECT
ENTITIES. Commencing on the "Closing Date" as defined in that certain
Member Interest Modification Agreement and Amendment to Joint Venture
Agreement dated as of January 8, 1997 between DD, ALS and Days
Development of North Carolina, L.L.C., and during the remaining
Development Term, DD shall have the right, but not the obligation, to
participate as an equity investor, in the manner set forth herein, in
the ownership of all Facilities (other than Small Facilities
(hereinafter defined)) to be newly constructed by ALS in the Territory.
If DD elects to make the equity investment contemplated hereby with
respect to any such Facility, ALS and DD shall cooperate in the
formation of a limited liability company (unless the parties agree upon
some other form of legal entity) to develop, construct, own and operate
such Facility. The operating agreement, partnership agreement or other
governing documents of such Project Entity ("Entity Documents") shall
8
<PAGE> 12
incorporate the terms set forth in this Agreement, and shall otherwise
be in such form as is mutually acceptable to ALS and DD. DD's member
interest in any such Project Entity ("DD Member Interest") shall
represent (unless adjusted pursuant to Section 3.3(b)(ii) hereof) a
twenty (20%) percent equity contribution to the Project Entity (the "DD
Contribution Percentage") and ALS's member interest in any such Project
Entity ("ALS Member Interest") shall represent (unless adjusted
pursuant to Section 3.3(b)(ii) hereof) an eighty (80%) percent equity
contribution to the Project Entity (the "ALS Contribution Percentage").
DD's interest in the profits, losses, and distributions of each Project
Entity shall be as set forth in Section 3.16 hereof.
3.2 OFFER OF DD MEMBER INTEREST. If ALS shall elect to develop
and construct a Facility in which DD shall have a right to invest
pursuant to Section 3.1 hereof, ALS shall prepare a business plan for
such entity providing a description of such Facility, estimated
construction and development costs, a statement of the total initial
equity capital required for such Facility (the "Initial Capital") and
the total additional equity capital that may be required for such
Facility ("Additional Capital") and a five (5) year budget for such
Facility (the "Business Plan"), and shall provide a copy of such
Business Plan to DD. Upon its receipt of such Business Plan, DD shall
have thirty (30) days to elect either to exercise its right to provide
twenty (20%) percent of such Initial and Additional Capital pursuant to
the DD Member Interest, or to reject such opportunity. If DD shall not
notify ALS of its decision to provide such equity capital during such
thirty day period, DD shall be deemed to have waived its right to
provide such capital with respect to such Facility and ALS shall be
free to develop such Facility substantially in accordance with the
terms of the applicable Business Plan, either alone or with one or more
equity partners. If DD shall elect to provide such equity capital, DD
and ALS shall cooperate in the prompt preparation of Entity Documents
for such Facility in accordance herewith and shall promptly fund to
such Project Entity their respective portions of the Initial Capital.
DD's failure to promptly fund its portion of the Initial Capital shall
constitute a waiver of its right to provide equity capital in
connection with such Facility pursuant to Section 3.1 hereof.
3.3 ADDITIONAL CAPITAL CALLS.
9
<PAGE> 13
(a) Within thirty (30) days' written request of ALS, ALS and
DD shall provide Additional Capital as necessary to each Project Entity
(on a basis proportionate to their 80%/20% equity contribution
percentages in such Project Entity and in amounts that do not exceed,
in the aggregate, the total Additional Capital for such Project Entity
set forth in the Business Plan) to fund development, construction and
start-up operations of such Project Entity (any capital call of Initial
Capital or Additional Capital, a "Mandatory Capital Call").
(b) If either DD or ALS fails to make any Mandatory Capital
Call hereunder, then the other party may, at its option and in addition
to any other remedies: (i) request and receive a return of any
Mandatory Capital Call contribution made by it disproportionate to its
respective equity contribution percentage; (ii) make its or its and
such defaulting party's Mandatory Capital Call contribution to such
entity, and in such event the respective ownership interests in the
entity shall be adjusted as of the date such capital contribution is
made such that each party's percentage ownership interest shall equal
its cumulative capital contributions made by it to such entity compared
to all cumulative capital contributions made by the parties to such
entity or (iii) loan such amounts to such entity on the terms set forth
in Section 3.3(d) below.
(c) In addition, if either ALS or DD reasonably believes in
the exercise of its business judgment that additional capital is
required by any Project Entity to complete a Facility in accordance
with the Business Plan and applicable construction plans and
specifications previously agreed to by the parties, and the other party
does not agree to contribute a proportionate share of such capital,
then such party may loan such required funds to such entity on the
terms set forth in Section 3.3(d) below.
(d) The loans referred to in Sections 3.3(b) and 3.3(c) above
shall be evidenced by written promissory notes, shall be nonrecourse
(i.e., limited only to the assets of the borrowing entity),
subordinated to all other obligations of the entity to which the loan
is made on such terms as the entity's institutional lender(s) may
reasonably required, shall bear interest at three (3) percentage points
over the entity's existing mortgage loan rate from time to time in
effect and shall be repaid only as and when such entity has sufficient
cash flow (in
10
<PAGE> 14
the lending party's reasonable discretion) to repay the loan (but, in
any event, such loans shall be repaid prior to the entity making any
distributions to DD and ALS to which such parties might otherwise be
entitled).
3.4 PROJECT FINANCING. The parties will use their best efforts to cause
each Project Entity to obtain the necessary construction and permanent
financing for the Facility owned by it. ALS will be the sole guarantor
of such financing if a guaranty is required."
6.2.2 RESPONSIBILITIES OF THE PARTIES. Section
3.5(c) of the Joint Venture Agreement is hereby deleted in its entirety and
replaced with the following new Section 3.5(c), as well as the following new
Sections 3.5(d), 3.5(e) and 3.5(f):
"(c) All charges associated with the foregoing services
provided by ALS or DD or a DD Affiliate including, without limitation,
pre-marketing, pre-opening, operating, pre-development, third party,
overhead and aborted project costs, shall be paid by the Project Entity
with respect to which such charges are incurred, or as agreed on by
both parties in writing. Each Project Entity shall reimburse ALS or DD
or a DD Affiliate for any site selection, development costs and other
expenses incurred by such party and directly relating to such Project
Entity, together with costs for services pursuant to Sections 3.5(a)
and 3.5(b) directly related to such Project Entity. A detailed schedule
of services to be performed by ALS and DD or a DD Affiliate as set
forth in Sections 3.5(a) and 3.5(b) and the related charges are set
forth in Exhibit I attached hereto ("Listed Services"). Except for the
Listed Services, and except as otherwise expressly contemplated by this
Agreement or agreed upon subsequently by ALS and DD, Project Entities
will not pay any compensation of any type to ALS, DD or their
respective Affiliates.
(d) Each Project Entity shall be "member managed", if a
limited liability company, and "general partner managed," if a general
or limited partnership.
(e) The requirement to make any capital calls, other than
Mandatory Capital Calls, shall require the approval of both ALS and DD.
(f) All other matters, whether pertaining to the management,
operation and activities of such Project Entity or otherwise, shall be
decided by the affirmative vote, approval or consent of the member(s)
or partners of
11
<PAGE> 15
such Project Entity holding in excess of fifty percent (50%) of the
equity interest in such Project Entity; provided, however, that prior
to the first day that the Put Option (hereinafter defined) for such
entity becomes exercisable in accordance with Section 3.9 hereof, the
following actions shall require the approval of both ALS and DD:
(i) Any merger, consolidation, dissolution or
reorganization of such Project Entity, or adoption of any plan
or agreement to do any of the foregoing;
(ii) Any amendment to the Entity Documents for such
Project Entity;
(iii) Any sale, issuance or purchase by such Project
Entity of equity interests in the such Project Entity, or any
sale or issuance by such Project Entity of any rights,
warrants, options or convertible securities granting the
holder thereof the right to purchase from such Project Entity
any equity interests in such Project Entity;
(iv) Any sale or other transfer by an equity owner of
such Project Entity of its interest in such Project Entity,
except a transfer to the other equity owner of such Project
Entity or an Affiliate thereof;
(v) Any change in the principal place of business of
such Project Entity;
(vi) Any declaration or payment by such Project
Entity of any distribution to its equity owners; and
(vii) Guarantee or otherwise act as a surety or
accommodation party to any indebtedness or liability of any
Person, other than endorsement of checks in the normal course
of collection.
6.2.3 CONSTRUCTION SERVICES. Section 3.6 of the
Joint Venture Agreement is hereby deleted in its entirety and replaced with the
following new Section 3.6:
"3.6 DEVELOPMENT AND CONSTRUCTION SERVICES. During the
Development Term, Days Construction Company, a Virginia corporation
("Days Construction"), shall provide development and construction
services to ALS or any Project Entity (ALS or such entity, as
applicable, the "Developer Entity"), on an exclusive basis in the
manner contemplated hereby, in connection with the construction and
development by such
12
<PAGE> 16
Developer Entity of new assisted living or specialty care facilities
for the elderly ("New Facilities") in the Territory in the manner
contemplated hereby:
(a) Except as provided in Section 3.6(b) below, Days
Construction shall construct each New Facility pursuant to this Section
3.6 for a guaranteed maximum price agreed upon by Days Construction and
the Developer Entity in accordance with the terms of a construction
agreement for such New Facility, such agreement to be substantially in
the form of the Construction Agreement (Future Project Entities). The
Developer Entity will pay Days Construction a construction fee which
shall be Days Construction's entire compensation for all services
provided by Days Construction as construction manager, including all
construction profit and overhead. The construction fee shall be 11% of
labor, material and subcontract costs set forth in Section 7.1.1
through 7.1.4.5., and Section ;7.2.1, of AIA Form A-111 (such costs,
the "Contract Costs"). 3% will be allocated to development and will be
payable when title to the land is acquired by the Developer Entity;
provided, however, with respect to any Small Facility (hereinafter
defined), the amount payable for development shall be the greater of 3%
of the Contract Costs or $50,000. The remaining 8% will be payable in
accordance with the applicable Construction Agreement. Days
Construction will construct each Facility in accordance with the
applicable Construction Agreement, and for a guaranteed maximum price
to be agreed upon by the parties.
(b) In the event the Developer Entity and Days Construction
are unable to agree upon a guaranteed maximum price for any
construction agreement, despite all reasonable efforts to do so, at the
election of the Developer Entity, the Developer Entity may solicit from
other competent construction companies a competitive bid for the
construction of the New Facility. If, as a result of such competitive
bidding process, the guaranteed maximum price bid (project hard costs,
excluding the cost of any furniture, fixtures and equipment purchased
directly by the Developer Entity and the 8% construction fee) last
submitted by Days Construction shall be more than 105% of the
guaranteed maximum price bid (project hard costs, excluding the cost of
any FF&E purchased directly by the Developer Entity and a reasonable
construction fee (based on the relevant market)) submitted by the other
competent construction company (the "Lower Bidder"), then Days
Construction will have the option exercisable within twenty (20) days
following notice of said Lower Bidder by the Developer Entity to Days
Construction to (i) match the Bid and receive its full 8% construction
management fee, or (ii) have the Developer Entity assign its rights to
the Lower Bidder's
13
<PAGE> 17
contract to Days Construction, such that Days Construction can act as
the construction manager on behalf of the Developer Entity, for which
Days Construction will be paid a construction management fee of 5% of
all costs of construction paid to the Lower Bidder. Payment of the
proportional amount of the construction management fee will be made to
Days Construction at the same time each payment of construction costs
is made to the Lower Bidder. If Days Construction fails to elect either
option, Days Construction shall be deemed to have elected the option
outlined in clause (ii) above.
6.2.4 PUT AND CALL OPTIONS. Section 3.9 of the
Joint Venture Agreement is hereby deleted in its entirety and hereby replaced
with the following new Section 3.9:
"3.9 PUT AND CALL OPTIONS.
(a) ALS hereby grants to DD, and shall confirm in the Entity
Documents for each Project Entity, the right to sell to ALS all (but
not less than all) of the DD Member Interest in any one or more Project
Entities at the fair market value (determined as set forth below) of
such DD Member Interest in such Project Entity or Entities pursuant to
the terms and conditions set forth herein ("Put Option"). The Put
Option with respect to a Project Entity shall be exercisable by DD at
any time from and after the six-month anniversary of the acquisition of
the Facility owned by such Project Entity (with respect to any existing
Facility acquired by an ALS Affiliate and a DD Affiliate pursuant to
this Agreement) or Completion of Construction of the Facility owned by
such Project Entity (with respect to any Facility developed and
constructed by an ALS Affiliate and a DD Affiliate pursuant to this
Agreement) (the "6th Month Date"), through and until the tenth (10th)
anniversary of the date of acquisition or Completion of Construction of
such Facility, as applicable (the "Exercise Period").
(b) At ALS's election, the purchase price for any DD Member
Interest pursuant to Section 3.9(a) above shall be payable either: (a)
in cash or (b) in cash and a note (the "Note Option") as provided
below. The Note Option shall only be available if such purchase price
(or such purchase price together with the aggregate purchase price paid
by ALS within the 180 day period preceding the exercise of such Put
Option for DD Member Interests pursuant to prior exercise of any Put
Option(s) with respect thereto exceeds $500,000. To the extent a Put
Option is exercised and ALS is entitled to elect and so elects to pay
the purchase price using the Note Option,
14
<PAGE> 18
an amount equal to 1/2 of such price shall be paid in cash at the
closing of the purchase of the DD Interest, and ALS shall give to DD at
such closing ALS's promissory note for the remaining 1/2 of the price
due DD. Such note shall provide for payment of (i) 50% of the principal
amount of the note on the six-month anniversary date of the note, (ii)
the balance of the principal amount of the note on the one-year
anniversary date of the note, and (iii) quarterly installments of
interest only in arrears at a rate of 3% over the rate of interest
charged from time to time by the first mortgage lender of the Facility
owned by such Project Entity (or if there is no such lender, at prime
plus 5%). Such note shall be secured by a pledge of the DD Member
Interest so purchased and may be prepaid at ALS's option without
penalty. Otherwise, the purchase price shall be paid in cash.
The Put Option shall be exercised by written notice from DD to
ALS during such times as such Put Option is exercisable in accordance
herewith, and the exercise by DD of its Put Option or a failure to
exercise such Put Option for one Project Entity shall not preclude DD
from later exercising one or more Put Options for other Project
Entities.
(c) DD hereby grants to ALS, and shall confirm in the Entity
Documents for each Project Entity, the right to purchase all (but not
less than all) of the DD Member Interest in any one or more Project
Entities at the fair market value (determined as set forth below) of
such DD Member Interest in such Project Entity or Entities pursuant to
the terms and conditions set forth herein ("Call Option"). The Call
Option shall be exercisable as to each Project Entity at any time
during the applicable Exercise Period, such purchase price to be
payable in cash. The Call Option shall be exercised by written notice
from ALS to DD during such times as such Call Option is exercisable in
accordance herewith, and the exercise by ALS of its Call Option or a
failure to exercise such Call Option for a Project Entity shall not
preclude ALS from later exercising one or more Call Options for other
Project Entities.
(d) The purchase price for the DD Member Interest in each
Project Entity payable upon the exercise of a Put or Call Option shall
be equal to the proceeds that DD would receive if such Project Entity
were to sell its Facility at its then-fair market value (allocating any
gain or loss resulting therefrom pursuant to the
15
<PAGE> 19
methodology set forth in Sections 3.16(a) and (b) below), satisfy all
creditors, and then liquidate. For this purpose, the fair market value
of each Facility shall be determined as of the end of the calendar
month preceding the date on which a Put or Call Option is exercised, as
follows: The fair market value of a Facility shall be the fair market
value of such Facility as established by an appraiser jointly agreed
upon by both parties. If the parties are unable to agree to an
appraiser, then each party will designate an appraiser and the two
appraisers will each determine a fair market value. If any party shall
fail to designate an appraiser within fifteen (15) days following its
receipt of notice from the other party containing (i) the identity of
the appraiser designated by such other party and (ii) reference to such
party's obligation to designate an appraiser pursuant to this Section
3.9 within said fifteen (15) day period, then the appraiser for such
other party shall be deemed to be jointly agreed upon by both parties.
If the fair market value amounts determined by the two appraisers are
equal to or within 5% of their average, then the fair market value
shall be equal to such average. Otherwise, the two appraisers will
mutually select and appoint a third appraiser to determine the fair
market value, in which event the fair market value of the Facility
shall be equal to the result obtained by averaging the two of the three
appraisals which deviate the least from the average of the first two
appraisals. Each party will bear equally the fees and expenses of the
appraiser jointly agreed upon or selected and if applicable the third
appraiser, but each party will be solely responsible for the fees and
expenses of any appraiser selected solely by such party. In determining
such fair market value of a Facility, the assumption shall be made that
the management agreement with ALS or another manager will continue
indefinitely and that the percentage management fee then being charged
to the applicable Project Entity is equal to the greater of (i) the
percentage management fee which is actually being charged at such time,
or (ii) six (6) percent. Each appraiser selected hereunder shall be a
reputable appraisal firm which has experience in appraising commercial
real estate and long term care and/or assisted living facilities (or
similar businesses). All appraisers shall have complete access to the
relevant books and records of the Project Entity they are appraising
during the conduct of their appraisals. Notwithstanding the provisions
of this Section 3.9(d), if a DD Member Interest is to be acquired by
ALS pursuant to the exercise of a Call Option at any time prior to the
twelve month anniversary of the
16
<PAGE> 20
Completion of Construction of the Facility owned by the Project Entity
to which such DD Member Interest relates, the fair market value for
such Facility shall be determined in the manner described in this
Section 3.9(d), except that the assumption shall be made that such
Facility has achieved and is maintaining stabilized occupancy and is
operating at corresponding revenue and expense levels (based on such
occupancy) as contemplated by the Business Plan for such Project
Entity.
(e) Either party may invoke the appraisal process of this
Section 3.9 for any Facility prior to the exercise of its Put or Call
Option, as the case may be, so as to enable such party to determine the
fair market value of such Facility and, accordingly, the purchase price
for the DD Member Interest, before it exercises its option and the
price so determined shall govern any subsequent exercise of such Put or
Call Option that occurs within the 90-day period after the
determination thereof; provided, however, that if the party invoking
the appraisal process or the other party does not exercise its Put or
Call Option within ninety (90) days after the determination of the fair
market value in accordance herewith, then the party invoking the
appraisal process will bear all the costs of the appraisal(s). Any and
all transfers to ALS of the DD Member Interest in such Project Entity
pursuant to the exercise of a Put or a Call Option as provided herein
shall be closed, and all payments and deliveries contemplated thereby
made, upon the last to occur of (i) thirty (30) days after the fair
market value of the DD Member Interest in such Project Entity or
Entities is determined in accordance herewith or (ii) ninety (90) days
following the exercise of such Put or Call Option.
(f) At the closing of the exercise of a Put or Call Option
required by this Section 3.9:
(i) DD shall deliver to ALS an instrument
evidencing the transfer of the DD Member
Interest in the Project Entity being
purchased and sold, free and clear of all
security interests, liens and
restrictions, together with such other
documents as ALS may reasonably request
in connection therewith; and
(ii) ALS shall deliver to DD cash and ALS's promissory
note, if applicable, constituting the purchase price
for the
17
<PAGE> 21
DD Member Interest in such Project Entity, together
with such other documents as DD may reasonably
request.
At the time of the exercise of a Put or Call Option, if DD has
at the request of ALS guaranteed any financing of a Project Entity
subject to such option, then ALS will use its best efforts to obtain a
release of DD of such guaranty. If ALS is unable to obtain such a
release, and following the closing of a Put or Call Option there occurs
a default in the payment or performance of any obligation whatsoever,
whether monetary or otherwise, in connection with such financing, then
ALS will indemnify DD for any damages, costs and expenses (including
reasonable attorneys' fees) which DD incurs pursuant to any guaranty.
(g) Notwithstanding any provision contained in this Section
3.9 to the contrary:
(i) if a Put or Call Option is exercised,
then ALS may assign its rights and
obligations in respect of the Put or Call
Option to an affiliate of ALS so as to
preserve the legal existence or tax
status of the Project Entity, but no such
assignment shall relieve ALS from any
obligations to DD;
(ii) any reasonable closing costs or real estate transfer
tax or fee which arises in connection with any
purchase and sale hereunder shall be borne equally by
the parties;
(iii) equitable adjustments shall be made (in the case of
the value of a Project Entity) for any distributions
or capital contributions which occur between the date
of the determination of the fair market value of the
Project Entity and the closing of the Put Option or
Call Option transaction; and
(iv) DD shall not be entitled to exercise its Put Option
for a Project Entity if the Project Entity is
materially in default in the financing for the
Facility owned by such Project Entity.
(h) The Put Option and the Call Option provided for in this
Section 3.9 are intended (to the extent that such
18
<PAGE> 22
Put or Call Option would otherwise be deemed to be a "roll-up
transaction" pursuant to said Item 901) to be agreements of the type
described in Item 901(c)(2)(i) of Regulation S-K promulgated by the
Securities and Exchange Commission.
(i) DD shall have the right to designate an Affiliate
Controlled by Messrs. Goodwin and Dillon to be the owner of a Project
Entity rather than DD. In such event, all references in this Section
3.9 to DD with respect to the purchase and sale of the ownership
interest in such Project Entity shall be to such Affiliate rather than
DD, and this Section 3.9 shall be construed consistently therewith. In
the event that an Affiliate of DD is designated by DD to own an
interest in a Project Entity, then as a condition thereto the Project
Entity shall execute in form and substance reasonably satisfactory to
ALS an agreement in which the DD Affiliate agrees to be bound by the
provisions of this Agreement applicable to such DD Affiliate, including
without limitation the provisions of this Section 3.9 and the DD
Affiliate shall execute in form and substance reasonably satisfactory
to ALS a Collateral Assignment Agreement.
6.2.5 SECTION 3.10. Section 3.10 is deleted in its
entirety and shall not be used.
6.2.6 AMENDMENT TO NONCOMPETITION PROVISION.
Section 3.11(c) of the Joint Venture Agreement is hereby amended by the addition
of paragraphs (v) and (vi) below to Section 3.11(c):
"(v) such restrictions shall not apply to any assisted living,
dementia or other specialty care facility that has a projected
capital budget (excluding budgeted lease-up deficit) of less
than $2 million (provided that such facilities are in fact
constructed for less than $2 million) (herein referred to as a
"Small Facility"); and
(vi) such restrictions shall not be violated by reason of ALS,
DD or any of their respective Affiliates acquiring all or
substantially all of the operations of another multi-facility
operator (or a multi-facility division or operating unit of
such operator) of assisted living, dementia or other specialty
care facilities, whether by merger, stock or asset purchase or
otherwise, provided that none of the acquired assisted living,
dementia or other specialty care facilities (the "Acquired
Facilities") are located within ten (10) miles of any Facility
then jointly owned by ALS and DD."
19
<PAGE> 23
6.2.7 INTERESTS IN PROFITS, LOSSES AND DISTRIBUTIONS.
A new Section 3.16 is hereby added to the Joint Venture Agreement to read as
follows:
"3.16 Interests in Profits, Losses and Distributions.
The Entity Documents for each Project Entity shall provide as
follows:
(a) Net Losses. Any net loss with respect to the particular
Facility, as determined on a quarterly basis, shall be allocated (i)
first, one percent (1%) to ALS and ninety-nine percent (99%) to DD
until DD's invested capital is thereby exhausted, (ii) then, one
hundred percent (100%) to ALS until its invested capital is exhausted,
and (iii) then, in proportion to the parties' respective equity
contribution percentages (provided, however, that any such net loss to
be allocated pursuant to this clause (iii) after both parties' invested
capital is exhausted shall instead be first allocated to any party who
has guaranteed any debt of the Project Entity, up to the amount of such
guaranty).
(b) Net Profits. Any net profits with respect to a particular
Facility, as determined on a quarterly basis, shall be allocated first
to "reverse out" any prior net loss allocations in the reverse order
made, with any remaining profit (i.e., any net overall profit from that
Facility) to be allocated in proportion to the parties' respective
equity contribution percentages. That is (unless the DD Contribution
Percentage and ALS Contribution Percentage are modified in accordance
with Section 3.3(b)(ii) hereof), any quarterly net profits shall be
allocated (i) first, eighty percent (80%) to ALS and twenty percent
(20%) to DD to restore any net losses previously allocated to them
after the exhaustion of all their collective capital (as adjusted in
the event that either party has been allocated any net loss by reason
of its guarantee of any debt of the Project Entity), (ii) then, one
hundred percent (100%) to ALS to restore any net losses allocated to it
by reason of the exhaustion of DD's capital, (iii) then, one percent
(1%) to ALS and ninety-nine percent (99%) to DD to reverse the initial
losses allocated to the parties in that same proportion, and (iv) then,
eighty percent (80%) to ALS and twenty percent (20%) to DD.
(c) Distributions. Any distributions of current cash flow
shall be made in proportion to the parties' respective equity
contribution percentages. No distributions shall be made with respect
to any quarter
20
<PAGE> 24
in which the Project Entity derives a net loss, without the consent of
both parties. Distributions upon liquidation of the Project Entity
(i.e., the distribution of proceeds from the sale of the Project
Entity) shall be distributed in accordance with the parties' respective
capital account balances (after giving effect to the allocation of any
gain or loss resulting from such liquidating sale)."
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 DD, DD-Carolina and the DD Entities in this Agreement and the
statements contained in any other instrument, list, certificate or writing
delivered by DD, DD-Carolina and the DD Entities 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. DD, DD-Carolina and the DD Entities 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 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. There shall not have occurred
any damage to or destruction of the properties or assets of any Existing Entity
by fire or by other casualty, or any other business development, which would
have a material adverse effect on any Existing Entity 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.
7.5 PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings
to be taken in connection with the transactions contemplated by this Agreement,
and all documents incident thereto, shall be reasonably satisfactory in form and
substance to ALS, and DD, DD-Carolina and the DD Entities shall have made
available to ALS for examination the originals or true and correct copies of all
documents which ALS may reasonably request and DD, DD-Carolina and
21
<PAGE> 25
the DD Entitites can reasonably obtain in connection with the transactions
contemplated by this Agreement.
7.6 OTHER DOCUMENTS. DD, DD-Carolina and the DD Entities shall
have delivered to ALS such certificates and documents of officers and partners
of DD, DD-Carolina and the DD Entities and public officials as shall be
reasonably requested by ALS's counsel to establish the existence and status of
DD, DD- Carolina and the DD Entities and the due authorization of this Agreement
and the transactions contemplated hereby by DD, DD- Carolina and the DD
Entities.
7.7 REQUIRED CONSENTS. Prior to the Closing, DD, DD- Carolina
and the DD Entities shall have obtained all third-party approvals and consents
required for the consummation of the matters contemplated hereby.
8. CONDITIONS TO DD'S AND DD-CAROLINA'S OBLIGATION TO CLOSE. The
obligation of DD, DD-Carolina and the DD Entities 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 if both DD and
DD-Carolina so agree):
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 PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings
to be taken in connection with the transactions contemplated by this Agreement,
and all documents incident thereto, shall be reasonably satisfactory in form and
substance to DD and DD-Carolina, and ALS shall have made available to DD and DD-
Carolina for examination the originals or true and correct copies
22
<PAGE> 26
of all documents which DD and DD-Carolina may reasonably request in connection
with the transactions contemplated by this Agreement.
8.5 OTHER DOCUMENTS. ALS shall have delivered to DD and
DD-Carolina such certificates and documents of officers of ALS and of public
officials as shall be reasonably requested by DD's and DD-Carolina's counsel to
establish the existence and status of ALS and the due authorization of this
Agreement and the transactions contemplated hereby by ALS.
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:
(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 DD, DD-Carolina or any DD Entity of any of 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
January 31, 1997 and shall not have been waived in writing by ALS;
(D) DD and DD-Carolina, 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
DD and DD-Carolina; and
(E) DD and DD-Carolina, if any of the conditions precedent to
Closing set forth in Section 8 of this Agreement shall not be fulfilled prior to
or by January 31, 1997 and shall not have been waived in writing by DD and
DD-Carolina.
The termination of this Agreement by ALS pursuant to this Section 9.1 shall be
effective with respect to DD, DD-Carolina and the DD Entities regardless of
whether the failure to fulfill a condition precedent or the violation or breach
giving rise to ALS's right to terminate this Agreement is attributable to only
one or more than one of DD, DD-Carolina and the DD Entities. Further, the
termination of this Agreement by DD or DD-Carolina shall be effective with
respect to DD, DD-Carolina and the DD Entities regardless of whether the failure
to fulfill a condition precedent or the violation or breach at issue gives rise
to the right of only one or both of DD and DD-Carolina to terminate this
Agreement.
23
<PAGE> 27
9.2 AMENDMENT, EXTENSION AND WAIVER. At any time prior to the
Closing Date, ALS and DD and DD-Carolina 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. DD is hereby authorized to act on
behalf of each DD Entity in connection with any action taken pursuant to this
Section 9.2.
10. OTHER AGREEMENTS.
10.1 AMENDMENT TO OPERATING AGREEMENTS. At the Closing, ALS
and the applicable DD Entity shall execute, amend or restate each of the
Operating Agreements to conform the terms of each of the Operating Agreements to
those contemplated by this Agreement with respect to Entity Documents.
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) and
continue in full force and effect thereafter.
11.2 EXPENSES, TAXES, ETC. Each of DD, DD-Carolina and the DD
Entities will pay all fees and expenses incurred by it in connection with this
Agreement and the transactions contemplated hereby. ALS will pay all fees and
expenses incurred by it in connection with this Agreement and the transactions
contemplated hereby.
11.3 FURTHER ASSURANCES. From time to time, at the request of
a party hereto and without further consideration, the other party will execute
and deliver to such requesting party such documents and take such other action
as such requesting party may reasonably request in order to consummate more
effectively the transactions contemplated hereby.
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
24
<PAGE> 28
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.
11.6 ENTIRE AGREEMENT. Except as provided herein to the
contrary, 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:
(a) 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 copies to:
Rogers & Hardin
2700 International Tower
229 Peachtree Street, N.W.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: (404) 525-2224
25
<PAGE> 29
(b) If to DD, DD-Carolina, or any DD Entity to:
Days Construction Company
108 Second Street, S.W.
Roanoke, VA 24016
Attention: Mr. Thompson W. Goodwin
Facsimile: (540) 345-9521
with copies to:
Mr. Douglas D. Wilson
Parvin, Wilson & Barnett, P.C.
200 Market Place Center
114 Market Street
Roanoke, VA 24011
Facsimile: (540) 343-8483
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
North Carolina 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 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
26
<PAGE> 30
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.
11.14 INCORPORATION OF SCHEDULES AND EXHIBITS. The Schedules
and Exhibits identified in this Agreement are incorporated herein by reference
and made a part hereof.
11.15 TAXES AND FEES. DD, DD-Carolina or the DD Entities, as
applicable, shall pay any transfer, sales or use taxes arising out of the
modification and alteration of the DD Interests contemplated by this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
ALTERNATIVE LIVING SERVICES, INC.
By: ________________________________
Its: _______________________________
DAYS DEVELOPMENT COMPANY, LC
By: ________________________________
Its: _______________________________
DAYS DEVELOPMENT OF NORTH CAROLINA,
L.L.C.
By: ________________________________
Its: _______________________________
27
<PAGE> 31
DAYS DEVELOPMENT OF WINSTON-SALEM,
L.L.C.
By: ________________________________
Its: _______________________________
DAYS AZ OF GREENSBORO, L.L.C.
By: ________________________________
Its: _______________________________
DAYS AL OF GREENSBORO, L.L.C.
By: ________________________________
Its: _______________________________
DAYS AZ OF CHARLOTTE, L.L.C.
By: ________________________________
Its: _______________________________
DAYS AL OF CHARLOTTE, L.L.C.
By: ________________________________
Its: _______________________________
28
<PAGE> 32
SCHEDULE A
80/20 ENTITY DD ENTITY DD INTEREST
- ------------ --------- -----------
Winston-Salem Days Development of 49%
Winston-Salem, L.L.C.
Greensboro Days AZ of Greensboro, L.L.C. 49%
Greensboro II Days AL of Greensboro, L.L.C. 49%
Charlotte Days AZ of Charlotte, L.L.C. 49%
Charlotte II Days AL of Charlotte, L.L.C. 49%
<PAGE> 1
EXHIBIT 10.17
PARTNER INTEREST
ACQUISITION AGREEMENT
BY AND AMONG
ALTERNATIVE LIVING SERVICES, INC.,
CCCI/NORTHHAMPTON LIMITED PARTNERSHIP,
AND CONTINUING CARE CONCEPTS, INC.
DATED AS OF
AUGUST 1, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
1. Definitions................................................................................... 1
2. Purchase and Sale of CCC Interests............................................................ 3
2.1 Purchase Transaction........................................................ 3
2.2 Purchase Price.............................................................. 4
2.3 The Closing................................................................. 4
2.4 Deliveries at the Closing................................................... 4
3. Representations and Warranties of CCC......................................................... 4
3.1 Corporate................................................................... 4
3.2 Authority................................................................... 4
3.3 No Violation................................................................ 5
3.4 Brokers' Fees............................................................... 5
3.5 CCC Interests/Title......................................................... 5
3.6 Required Consents........................................................... 5
4. Representations and Warranties of ALS......................................................... 5
4.1 Corporate................................................................... 5
4.2 Authority................................................................... 6
4.3 No Violation................................................................ 6
4.4 Acquisition of CCC Interests for Investment................................. 6
4.5 No Brokers or Finders....................................................... 6
4.6 Required Consents........................................................... 6
5. Matters Pertaining to ALS-East Entities....................................................... 7
5.1 Equity Participation of CCC; Formation of
ALS-East Entities........................................................... 7
5.2 Offer of CCC Member Interest................................................ 7
5.3 Construction Financing...................................................... 8
5.4 Deferral of Fees; Working Capital Loan...................................... 8
5.5 Construction Services....................................................... 8
6. Matters Pertaining to Each ALS-East Entity.................................................... 9
6.1 Additional Capital Calls.................................................... 9
6.2 Failure to Make Mandatory Capital Calls..................................... 9
6.3 Decision-Making............................................................. 10
6.4 Interests in Profits, Losses and
Distributions............................................................... 11
6.5 Put and Call Options........................................................ 12
6.6 Management Agreements. .................................................... 16
6.7 Not Used.................................................................... 16
6.8 Not Used.................................................................... 16
6.9 Nontransferability of Interest.............................................. 16
7. Conditions to ALS's Obligation to Close....................................................... 16
7.1 Representations and Warranties.............................................. 16
7.2 Performance................................................................. 16
7.3 Litigation.................................................................. 17
7.4 No Material Adverse Event Regarding the
Partnerships................................................................ 17
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
7.5 Proceedings and Instruments Satisfactory.................................... 17
7.6 Other Documents............................................................. 17
7.7 Material Consents........................................................... 17
7.8 IPO Closing................................................................. 17
8. Conditions to CCC's Obligation to Close....................................................... 17
8.1 Representations and Warranties.............................................. 17
8.2 Performance................................................................. 18
8.3 Litigation.................................................................. 18
8.4 Proceedings and Instruments Satisfactory.................................... 18
8.5 Other Documents............................................................. 18
8.6 IPO Closing................................................................. 18
9. Termination, Amendment and Waiver............................................................. 18
9.1 Termination of Agreement.................................................... 18
9.2 Amendment, Extension and Waiver............................................. 19
10. Other Agreements.............................................................................. 19
10.1 Release of Guarantees....................................................... 19
10.2 Amendment of 1994 Agreement................................................. 19
10.3 Amendment to Existing ALS-East Projects..................................... 19
10.4 Westhampton Facility........................................................ 20
10.5 ALS-East Development Fund................................................... 20
10.6 Amendment to Pre-Formation Agreements....................................... 20
11. Miscellaneous................................................................................. 21
11.1 Survival of Representations and Warranties.................................. 21
11.2 Expenses.................................................................... 21
11.3 Further Assurances.......................................................... 21
11.4 Successors and Assigns...................................................... 21
11.5 Severability................................................................ 21
11.6 Entire Agreement............................................................ 21
11.7 Headings.................................................................... 21
11.8 Notices..................................................................... 21
11.9 Law Governing............................................................... 22
11.10 Counterparts/Telecopies..................................................... 23
11.11 No Third Party Beneficiaries................................................ 23
11.12 Construction................................................................ 23
11.13 Number; Gender.............................................................. 23
11.14 Incorporation of Schedules and Exhibits..................................... 23
11.15 Confidentiality............................................................. 23
11.16 Arbitration................................................................. 24
11.17 Announcement................................................................ 24
11.18 Taxes and Fees.............................................................. 24
</TABLE>
SCHEDULES
Schedule A Holders of Interests in Partnerships
EXHIBITS
Exhibit A Form of Assignment and Release
<PAGE> 4
PARTNER INTEREST
ACQUISITION AGREEMENT
THIS PARTNER INTEREST ACQUISITION AGREEMENT, dated as of August 1, 1996
("Agreement"), by and among Alternative Living Services, Inc., a Delaware
corporation ("ALS"), CCCI/Northampton Limited Partnership, a Pennsylvania
limited partnership ("NLP"), and Continuing Care Concepts, Inc., a Pennsylvania
corporation ("CCC").
W I T N E S S E T H:
WHEREAS, CCC and ALS hold all of the general and limited partner
interests in (i) NLP, (ii) Clare Bridge of Lower Makefield, a Pennsylvania
general partnership, and (iii) Clare Bridge of Montgomery, a Pennsylvania
general partnership (each, a "Partnership", and collectively, the
"Partnerships"), in the respective amounts and percentages set forth on Schedule
A, attached hereto; and
WHEREAS, CCC desires to sell, and ALS desires to purchase, all of the
general and limited partner interests held by CCC in the Partnerships for the
consideration and in the manner set forth herein; and
WHEREAS, CCC and ALS desire to amend and revise their agreements with
respect to the future development, construction and joint ownership of assisted
living residences in Pennsylvania, Delaware and New Jersey 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:
"AAA Rules" shall have the meaning set forth in Section
11.16 hereof.
"ALS-East Entity" shall have the meaning set forth in
Section 5.1 hereof.
"ALS-East Facility" shall mean any new assisted living and/or
specialty care facility for the elderly to be developed and constructed by ALS
(alone or with CCC as contemplated by this Agreement) located in Delaware,
Pennsylvania and New Jersey.
"Announcement" shall mean any notice, release, statement or
other communication to employees, suppliers, distributors, customers, the
general public, the press or any securities exchange or securities quotation
system relating to the transactions described in this Agreement.
<PAGE> 5
"Business Day" shall mean each day upon which state and
national banks are open for business in the City of Milwaukee, Wisconsin, or
Philadelphia, Pennsylvania.
"CCC Interests" shall mean all of the general and limited
partner interests of CCC in the Partnerships.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"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.
"Construction Contract" shall mean the contract in
substantially the form attached to each Pre-Formation Agreement, with such
changes as are expressly contemplated by Section 5.5 of this Agreement, pursuant
to which CCC (or DEI or an affiliate of DEI) will construct ALS-East Facilities
for ALS or ALS-East Entities, as applicable.
"Control" shall mean the direct or indirect ownership of or
right to vote fifty percent (50%) or more of the voting stock or other interests
of an entity or the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of an entity, whether
through the ownership of voting securities, by contract or otherwise.
"DEI" shall mean DeLuca Enterprises, Inc., a Pennsylvania
corporation.
"Disclosing Party" shall have the meaning set forth in
Section 11.15 hereof.
"Law" shall mean any federal, state, or local law, rule,
regulation or governmental requirement of any kind, including without limitation
those governing the handling, management and disposal of infectious wastes or
medical wastes, and the rules, regulations and orders promulgated thereunder.
"Management Agreement" shall mean the Assisted Living
Consultant and Management Services Agreement by and between ALS and any ALS-East
Entity, in substantially the form attached to the Pre- Formation Agreements,
with such changes as are contemplated hereunder or are necessary to carry out
the intent of this Agreement.
"Mandatory Capital Calls" shall have the meaning set forth in
Section 6.1 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 general and
limited partnership agreements with respect to each of the Partnerships entered
into among ALS and CCC: (i) Amended and Restated Limited Partnership Agreement
of NLP dated as of September 20, 1994; (ii) General Partnership Agreement of
Clare Bridge of Lower Makefield dated as of July 13, 1995; and (iii) General
Partnership Agreement of Clare Bridge of Montgomery dated as of May 25, 1995.
"Person" shall mean a natural person, corporation, trust,
partnership, limited liability company, governmental entity, agency or branch or
department thereof, or any other legal entity.
"Pre-Formation Agreements" shall mean those certain ALS- East
Pre-Formation Agreements dated July 13, 1995 and March 11, 1996 entered into by
ALS and CCC with respect to Lower Makefield and Montgomery, respectively.
"Purchase Price" shall have the meaning set forth in
Section 2.2 hereof.
"Put Option," "6th Month Date," "Exercise Period," "Note
Option," "Put Notice," "Put Price," "Put Right," "Put Shares," and "Putting
Partners" shall each have the meaning set forth in Section 6.5 hereof.
"Recipient" shall have the meaning set forth in Section
11.15 hereof.
"Securities Act" shall mean the Securities Act of 1933,
as amended.
"Westhampton" means Clare Bridge of Westhampton, a New Jersey
limited liability company, of which ALS and CCC are the sole members.
"1994 Agreement" shall mean the Acquisition Agreement dated as
of September 20, 1994, by and among ALS, NLP and CCC.
2. PURCHASE AND SALE OF CCC INTERESTS.
2.1 PURCHASE TRANSACTION. On and subject to the terms and
conditions of this Agreement, ALS agrees to purchase from CCC, and CCC agrees to
sell to ALS, all of the CCC Interests for the consideration specified in Section
2.2 hereof. CCC and ALS hereby consent, pursuant to the applicable sections of
each of the Partnership Agreements for the respective Partnerships, to the
transfer by CCC of the CCC Interests, and further acknowledge that ALS will be
admitted, pursuant to the applicable section of each such Partnership Agreement,
as a general or limited partner of each Partnership, as applicable, in
substitution of CCC. ALS may assign its rights to purchase the CCC Interests
under this Agreement to a wholly owned subsidiary of ALS to preserve the
existence of all or
3
<PAGE> 7
any of the Partnerships, at ALS's election, provided, however, that ALS shall
remain liable to CCC for all of its obligations under this Agreement (ALS and,
if such purchased rights are so assigned, such ALS subsidiary, are referred to
collectively as "Buyer").
2.2 PURCHASE PRICE. Buyer agrees to pay at the Closing
(hereinafter defined) the sum of $3,150,000, by wire transfer to an account
designated in writing by CCC.
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 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 CCC 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 CCC may
mutually determine (the "Closing Date").
2.4 DELIVERIES AT THE CLOSING. At the Closing, (i) CCC shall
deliver to Buyer all certificates issued by any Partnership representing all of
the CCC Interests, if any, endorsed in blank or accompanied by duly executed
assignment documents, (ii) CCC and ALS shall execute and deliver to each other
the Assignment and Release substantially in the form of Exhibit A attached
hereto, and (iii) Buyer shall deliver to CCC the consideration payable pursuant
to Section 2.2 hereof.
3. REPRESENTATIONS AND WARRANTIES OF CCC. CCC 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 CORPORATE. CCC is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of Pennsylvania
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 instruments to be executed and delivered by CCC pursuant hereto
and the consummation of the transactions contemplated hereby and thereby have
been duly authorized by the Board of Directors of CCC. No other corporate act or
proceeding on the part of CCC or its stockholders is necessary to authorize this
Agreement, the other instruments to be executed and delivered by CCC 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 CCC pursuant hereto will constitute, the legal, valid
and binding
4
<PAGE> 8
agreements of CCC, enforceable against CCC 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).
3.3 NO VIOLATION. Neither the execution, delivery and
performance of this Agreement or the other instruments to be executed and
delivered by CCC pursuant hereto, nor the consummation by CCC of the
transactions contemplated hereby or thereby (a) will violate any statute, law,
rule, regulation, order, writ, injunction or decree of any court or governmental
authority by which CCC 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 CCC.
3.4 BROKERS' FEES. CCC 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 CCC INTERESTS/TITLE. CCC holds of record and owns
beneficially the CCC Interests described on Schedule A, attached hereto, free
and clear of any restrictions on transfer (other than any restrictions set forth
in the Partnership Agreement or other agreements executed by CCC in favor of ALS
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. CCC is not a party to any option, warrant, purchase right, or other
contract or commitment that could require CCC to sell, transfer, or otherwise
dispose of all or any part of its CCC Interests (other than this Agreement). At
Closing, ALS will acquire good and marketable title to CCC's entire CCC
Interests, free of any claim of any type.
3.6 REQUIRED CONSENTS. There are no third-party approvals or
consents required for the sale of the CCC Interests to Buyer and the
consummation at the Closing of the transactions contemplated hereby which have
not been obtained.
4. REPRESENTATIONS AND WARRANTIES OF ALS. ALS represents and warrants
to CCC 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 Date (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 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
<PAGE> 9
4.2 AUTHORITY. The execution and delivery of this Agreement
and all other instruments 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 CCC. 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).
4.3 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 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 ACQUISITION OF CCC INTERESTS FOR INVESTMENT. ALS is an
"accredited investor", as defined in Rule 501 of Regulation D promulgated under
the Securities Act, and, to the extent the CCC Interests, or any portion
thereof, is a security under the Securities Act or applicable state securities
laws, is acquiring the CCC 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 CCC Interests. ALS acknowledges that
any 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.
4.5 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 CCC could become
liable or obligated.
4.6 REQUIRED CONSENTS. There are no third-party approvals or
consents required for the purchase of the CCC Interests by Buyer and the
consummation at the Closing of the transactions contemplated hereby which have
not been obtained.
6
<PAGE> 10
5. MATTERS PERTAINING TO ALS-EAST ENTITIES.
5.1 EQUITY PARTICIPATION OF CCC; FORMATION OF ALS-EAST
ENTITIES. During the period commencing on the date of this Agreement and ending
on December 31, 1999, CCC shall have the right, but not the obligation, to
participate as an equity investor, in the manner set forth herein, in the
ownership of all new ALS-East Facilities. If CCC elects to make the equity
investment contemplated hereby with respect to any ALS-East Facility, ALS and
CCC shall cooperate in the formation of a Delaware or New Jersey limited
liability company or a Pennsylvania general or limited partnership, as agreed by
ALS and CCC, to develop, construct, own and operate such ALS-East Facility (such
entity referred to herein as an "ALS-East Entity"). The operating agreement,
partnership agreement or other governing documents of the ALS-East Entity
("Entity Documents") shall incorporate the terms set forth in this Agreement
including, without limitation, the provisions of Sections 5 and 6 hereof. CCC's
member interest in an ALS-East Entity ("CCC Member Interest") shall represent
(unless adjusted pursuant to Section 6.2(a)(ii) hereof) a twenty (20%) percent
equity contribution to the ALS-East Entity (the "CCC Contribution Percentage")
and ALS's member interest in an ALS-East Entity ("ALS Member Interest") shall
represent (unless adjusted pursuant to Section 6.2(a)(ii) hereof) an eighty
(80%) percent equity contribution to the ALS-East Entity (the "ALS Contribution
Percentage"). CCC's interest in the profits, losses, and distributions of each
ALS-East Entity shall be as set forth in Section 6.4 hereof.
5.2 OFFER OF CCC MEMBER INTEREST. If ALS shall elect to
develop and construct an ALS-East Facility in which CCC shall have a right to
invest pursuant to Section 5.1 hereof, ALS shall prepare a business plan for
such entity providing a description of such facility, estimated construction and
development costs, a statement of the total initial equity capital required for
such facility (the "Initial Capital") and the total additional equity capital
that may be required for such facility ("Additional Capital") and a five (5)
year budget for such facility (the "Business Plan"), and shall provide a copy of
such Business Plan to CCC. Upon its receipt of such Business Plan, CCC shall
have thirty (30) days to elect either to exercise its right to provide twenty
(20%) percent of such Initial and Additional Capital pursuant to the CCC Member
Interest, or to reject such opportunity. If CCC shall not notify ALS of its
decision to provide such equity capital during such thirty (30) day period, CCC
shall be deemed to have waived its right to provide such capital with respect to
such ALS-East Facility and ALS shall be free to develop such Facility
substantially in accordance with the terms of the applicable Business Plan,
either alone or with one or more equity partners. If CCC shall elect to provide
such equity capital, CCC and ALS shall cooperate in the prompt preparation of
Entity Documents for such ALS-East Facility in accordance herewith and shall
promptly fund to such ALS-East Entity their respective portion of the Initial
Capital.
7
<PAGE> 11
5.3 CONSTRUCTION FINANCING. ALS and CCC shall cause each
ALS-East Entity to secure construction loan financing on such terms and
conditions as the parties may mutually agree. If required by the applicable
lending institution as a condition for making such construction loans, ALS may
guarantee the payment and performance of such loans. Except as may otherwise be
expressly agreed in writing by CCC (at its sole discretion), all construction
loan financing for each ALS-East Facility shall be expressly made without
recourse to CCC (other than its interest in such ALS-East Facility).
5.4 DEFERRAL OF FEES; WORKING CAPITAL LOAN. (a) In the event
that any ALS-East Entity requires working capital loans to cover operating
deficits incurred after the lease-up period projected in the applicable Business
Plan following the funding of all Initial Capital and Additional Capital by ALS
and CCC and the closing of the financings contemplated by Section 5.3 hereof,
and cash is not available from any other ALS-East Entity, ALS shall defer any
management fees otherwise due to it under its management agreement with such
ALS-East Entity on a non-interest bearing basis, but the amount of such fees so
deferred (together with working capital loans pursuant to Section 5.4(b)) shall
not exceed $100,000 for any one ALS-East Entity.
(b) To the extent that any such deferred management fees are
insufficient to fund such working capital deficit(s), ALS shall make one or more
working capital loans to such ALS-East Entity: (i) in an amount not to exceed
$100,000 per ALS-East Entity less any amount of fees deferred pursuant to
Section 5.4(a) for such entity; (ii) at an interest rate of six percent (6%) per
annum; (iii) to be evidenced by one or more unsecured promissory notes which
shall be subordinated on such terms as the entity's institutional lender(s) may
reasonably require; and (iv) which shall be repayable out of available cash flow
from any ALS-East Entity. Until such time as the outstanding balance of all
deferred management fees due from all ALS-East Entities pursuant to Section
5.4(a) hereof and all working capital loans from ALS to all ALS-East Entities
pursuant to Section 5.4(b) hereof are repaid in full, any distributions to which
CCC may otherwise be entitled from any ALS-East Entity shall not be made.
5.5 CONSTRUCTION SERVICES. (a) ALS and CCC hereby agree that
CCC shall provide construction and general construction services to ALS or the
ALS-East Entities, as applicable, as the owner of such ALS-East Facility (the
"Owner"), with respect to any ALS-East Facility as to which construction
commences after the Closing Date but on or before December 31, 1999 ("New
Facility"). Such services shall include, without limitation, on-site supervision
and field office work. In consideration therefor, the Owner shall pay to CCC:
(i) construction services fees ("Service Fee") equal to fifteen percent (15%) of
the aggregate engineering and contractor costs incurred by the Owner in
connection with the construction of a New Facility; (ii) construction
development fees
8
<PAGE> 12
("Development Fee") equal to $1,000 per bed; and (iii) construction supervision
fees of $1,000 per bed ("Supervision Fee"). All such fees shall be paid at such
time and upon such further terms and conditions as CCC and the Owner may
mutually agree; provided that the Development Fee shall be fully earned, and due
and payable, at the time all pre-construction development approvals are obtained
(including receipt of zoning approvals and a building permit) but may be
deferred to a date not later than the opening of the New Facility as may be
reasonably required by any lender of the Owner. None of the Services Fee,
Supervision Fee or Development Fee payable to CCC hereunder shall be included in
the construction cost for purposes of calculating the Services Fee contemplated
hereby. All expenses that are classified as "General Conditions" shall be a
direct expense to Owner with no additional mark-up for overhead and profit. CCC
hereby agrees and acknowledges that fees paid pursuant to this Section 5.5 shall
cover its field office expenses, construction profit and overhead, and any other
construction incentive or developer fees to which it would otherwise be
entitled.
(b) CCC shall construct each New Facility at a guaranteed
price, and no Owner shall be required to assume any cost overruns in connection
therewith unless such overruns result or arise from: changes in costs based on
soil conditions experienced during construction; Owner-approved change orders or
changes to plans during construction requested by such Owner; hiring of union
contractors or other union activities, including strikes; and acts of God.
(c) CCC may assign any Construction Contract to DEI or another
affiliate of CCC, but no such assignment shall relieve CCC from any obligations
under such Construction Contract.
6. MATTERS PERTAINING TO EACH ALS-EAST ENTITY
6.1 ADDITIONAL CAPITAL CALLS. Within thirty (30) days' written
request of ALS, ALS and CCC shall provide Additional Capital as necessary to
each ALS-East Entity (on a basis proportionate to their 80%/20% equity
contribution percentages in such ALS-East Entity and in amounts that do not
exceed, in the aggregate, the total Additional Capital for such Entity set forth
in the Business Plan) to fund development, constru778ction and start-up
operations of such ALS-East Entity (in each case, a "Mandatory Capital Call").
6.2 FAILURE TO MAKE MANDATORY CAPITAL CALLS. (a) If either CCC
or ALS fails to make any Mandatory Capital Call here- under, then the other
party may, at its option and in addition to any other remedies: (i) request and
receive a return of any Manda- tory Capital Call contribution made by it
disproportionate to its respective equity contribution percentage; (ii) make its
or its and such defaulting party's capital contribution to such entity, and in
such event the respective ownership interests in the entity shall
9
<PAGE> 13
be adjusted as of the date such capital contribution is made such that each
party's percentage ownership interest shall equal its cumulative capital
contributions made by it to such entity compared to all cumulative capital
contributions made by the parties to such entity; or (iii) loan such amounts to
such entity on the terms set forth in Section 6.2(c) hereof.
(b) In addition, if either ALS or CCC reasonably believes in
the exercise of its business judgment that additional capital is required by an
ALS-East Entity to complete an ALS-East Facility in accordance with the Business
Plan and applicable construction plans and specifications previously agreed to
by the parties, and the other party does not agree to contribute a proportionate
share of such capital, then such party may loan such required funds to such
entity on the terms set forth in Section 6.2(c) hereof.
(c) The loans referred to in Section 6.2(a) and 6.2(b) shall
be evidenced by written promissory notes, shall be nonre- course (i.e., limited
only to the assets of the borrowing entity), subordinated to all other
obligations of the entity to which the loan is made on such terms as the
entity's institutional lender(s) may reasonably required, shall bear interest at
three (3) percentage points over the entity's existing mortgage loan rate from
time to time in effect and shall be repaid only as and when such entity has
sufficient cash flow (in the lending party's reasonable discretion) to repay the
loan (but, in any event, such loans shall be repaid prior to the entity making
any distributions to CCC and ALS to which such parties might otherwise be
entitled).
6.3 DECISION-MAKING. (a) Each ALS-East Entity shall be "member
managed," if a limited liability company, and "general partner managed," if a
general or limited partnership. With respect to each ALS-East Entity, site
selection, facility design, the selection of an architectural firm,
architectural features, site layout and construction budgets shall require the
approval of both ALS and CCC.
(b) The requirement to make any capital calls, including any
capital calls with respect to partnership interests of ALS which are subject to
any pledge in favor of CCC as described in 6.5(b) below, other than Mandatory
Capital Calls, shall require the approval of both ALS and CCC.
(c) All other matters pertaining to the operation and
activities of such ALS-East Entity (i) prior to the first day that the Put
Option (hereinafter defined) for such entity becomes exercisable in accordance
with Section 6.5 hereof (the "First Put Date"), and at any time thereafter
following the occurrence of any Triggering Event (hereinafter defined), shall
require the approval of both ALS and CCC, except as specifically set forth to
the contrary herein, and (ii) on and after the First Put Date for such entity
(but only prior to the occurrence of any Triggering Event),
10
<PAGE> 14
shall be decided by the affirmative vote, approval or consent of the member(s)
or partners of such entity holding in excess of fifty percent (50%) of the
equity interest in such entity. As used herein, "Triggering Event" means either
(i) the failure of ALS to complete the acquisition of any interest of CCC
pursuant to the exercise of any Put Option or Call Option with respect to any
ALS- East Entity, or (ii) the failure of ALS to make any payment under, or any
default by ALS in the performance of any obligation under, any note or other
instrument executed and delivered in favor of CCC in connection with any
purchase of the interest of CCC upon the exercise of any Put Option or Call
Option with respect to any ALS- East Entity.
6.4 INTERESTS IN PROFITS, LOSSES AND DISTRIBUTIONS.
(a) Net Losses. The Entity Documents for each ALS-East Entity
shall provide that any net loss with respect to the particular ALS-East
Facility, as determined on a quarterly basis, shall be allocated (i) first, one
percent (1%) to ALS and ninety-nine percent (99%) to CCC until CCC's invested
capital is thereby exhausted, (ii) then, one hundred percent (100%) to ALS until
its invested capital is exhausted, and (iii) then, in proportion to the parties'
respective equity contribution percentages (provided, however, that any such net
loss to be allocated pursuant to this clause (iii) after both parties' invested
capital is exhausted shall instead be first allocated to any party who has
guaranteed any debt of the ALS-East Entity, up to the amount of such guaranty).
(b) Net Profits. Any net profits with respect to a particular
ALS-East Facility, as determined on a quarterly basis, shall be allocated first
to "reverse out" any prior net loss allocations in the reverse order made, with
any remaining profit (i.e., any net overall profit from that ALS-East Facility)
to be allocated in proportion to the parties' respective equity contribution
percentages. That is (unless the CCC Contribution Percentage and ALS
Contribution Percentage are modified in accordance with Section 6.2(a)(ii)
hereof), any quarterly net profits shall be allocated (i) first, eighty percent
(80%) to ALS and twenty percent (20%) to CCC to restore any net losses
previously allocated to them after the exhaustion of all their collective
capital (as adjusted in the event that either party has been allocated any net
loss by reason of its guarantee of any debt of the ALS-East Entity), (ii) then,
one hundred percent (100%) to ALS to restore any net losses allocated to it by
reason of the exhaustion of CCC's capital, (iii) then, one percent (1%) to ALS
and ninety-nine percent (99%) to CCC to reverse the initial losses allocated to
the parties in that same proportion, and (iv) then, eighty percent (80%) to ALS
and twenty percent (20%) to CCC.
(c) Distributions. Any distributions of current cash flow
shall be made in proportion to the parties' respective equity contribution
percentages. No distributions shall be made with
11
<PAGE> 15
respect to any quarter in which the ALS-East Entity derives a net loss, without
the consent of both parties. Distributions upon liquidation of the ALS-East
Entity (i.e., the distribution of proceeds from the sale of the ALS-East Entity)
shall be distributed in accordance with the parties' respective capital account
balances (after giving effect to the allocation of any gain or loss resulting
from such liquidating sale).
6.5 PUT AND CALL OPTIONS.
(a) ALS hereby grants to CCC, and shall confirm in the Entity
Documents for each ALS-East Entity, the right to sell to ALS all (but not less
than all) of the CCC Member Interest in any one or more ALS-East Entities at the
fair market value (determined as set forth below) of such CCC Member Interest in
such ALS-East Entity or Entities pursuant to the terms and conditions set forth
herein ("Put Option"). The Put Option and the Call Option (as hereinafter
defined) with respect to an ALS-East Entity shall be exercisable at any time
from and after the six-month anniversary of the issuance of the certificate of
occupancy for the ALS-East Facility owned by such ALS-East Entity (the "6th
Month Date"), through and until the tenth (10th) year anniversary of the date of
issuance of the certificate of occupancy for such Facility (the "Exercise
Period").
(b) At ALS' election, the purchase price for any CCC Member
Interest pursuant to Section 6.5(a) shall be payable either (a) in cash or (b)
in cash and a note (the "Note Option") as provided below. The Note Option shall
only be available if such purchase price (or such purchase price together with
the aggregate purchase price paid by ALS within the 180 day period preceding the
exercise of such Put Option for CCC Member Interests pursuant to prior exercise
of any Put Option(s) with respect thereto) exceeds $500,000. To the extent a Put
Option is exercised and ALS is entitled to elect and so elects to pay the
purchase price using the Note Option, an amount equal to 1/2 of such price shall
be paid in cash at the closing of the purchase of the CCC Interest, and ALS
shall give to CCC at such closing ALS's promissory note for the remaining 1/2 of
the price due CCC. Such note shall provide for payment of (i) 50% of the
principal amount of the note on the six-month anniversary date of the note, (ii)
the balance of the principal amount of the note on the one-year anniversary date
of the note, and (iii) quarterly installments of interest only in arrears at a
rate of prime plus 1%. Such note shall be secured by a pledge, in form and
substance satisfactory to CCC, of the CCC Member Interest so purchased and may
be prepaid at ALS's option without penalty. Otherwise, the purchase price shall
be paid in cash.
The Put Option shall be exercised by written notice from CCC
to ALS during such times as such Put Option is exercisable in accordance
herewith, and the exercise by CCC of its Put Option or a failure to exercise
such Put Option for one ALS-East Entity shall
12
<PAGE> 16
not preclude CCC from later exercising one or more Put Options for other
ALS-East Entities.
(c) CCC hereby grants to ALS, and shall confirm in the Entity
Documents for each ALS-East Entity, the right to purchase all (but not less than
all) of the CCC Member Interest in any one or more ALS-East Entities at the fair
market value (determined as set forth below) of such CCC Member Interest in such
ALS-East Entity or Entities pursuant to the terms and conditions set forth
herein ("Call Option"). The Call Option shall be exercisable as to each ALS-East
Entity at any time during the applicable Exercise Period, such purchase price to
be payable in cash. The Call Option shall be exercised by written notice from
ALS to CCC during such times as such Call Option is exercisable in accordance
herewith, and the exercise by ALS of its Call Option or a failure to exercise
such Call Option for an ALS-East Entity shall not preclude ALS from later
exercising one or more Call Options for other ALS-East Entities.
(d) The purchase price for the CCC Member Interest in each
ALS-East Entity payable upon the exercise of a Put or Call Option shall be equal
to the proceeds that CCC would receive if such ALS-East Entity were to sell its
entire ALS-East Facility at its then-fair market value (allocating any gain or
loss resulting therefrom pursuant to the methodology set forth in Sections
6.4(a) and (b) above), satisfy all creditors, and then liquidate. For this
purpose, the fair market value of each ALS-East Facility shall be determined as
of the end of the calendar month preceding the date on which a Put or Call
Option is exercised, as follows: The fair market value of an ALS-East Facility
shall be the fair market value of such ALS-East Facility as established by an
appraiser jointly agreed upon by both parties. If the parties are unable to
agree to an appraiser, then each party will designate an appraiser and the two
appraisers will each determine a fair market value. If any party shall fail to
designate an appraiser within fifteen (15) days following its receipt of notice
from the other party containing (i) the identity of the appraiser designated by
such other party and (ii) reference to such party's obligation to designate an
appraiser pursuant to this Section 6.5 within said fifteen (15) day period, then
the appraiser for such other party shall be deemed to be jointly agreed upon by
both parties. If the fair market value amounts determined by the two appraisers
are equal to or within 5% of their average, then the fair market value shall be
equal to such average. Otherwise, the two appraisers will mutually select and
appoint a third appraiser to determine the fair market value, in which event the
fair market value of the ALS-East Facility shall be equal to the result obtained
by averaging the two of the three appraisals which deviate the least from the
average of the first two appraisals. Each party will bear equally the fees and
expenses of the appraiser jointly agreed upon or selected and if applicable the
third appraiser, but each party will be solely responsible for the fees and
expenses of any appraiser selected solely by such party. In determining such
fair market value of an ALS-East
13
<PAGE> 17
Facility, the assumption shall be made that the management agreement with ALS or
another manager will continue indefinitely and that the percentage management
fee then being charged to the applicable ALS-East Entity is equal to the greater
of (i) the percentage management fee which is actually being charged at such
time minus one percent (1%), or (ii) six (6) percent. Each appraiser selected
hereunder shall be a reputable appraisal firm which has experience in appraising
commercial real estate and long term care and/or assisted living facilities (or
similar businesses). All appraisers shall have complete access to the relevant
books and records of the ALS-East Entity they are appraising during the conduct
of their appraisals. Notwithstanding the provisions of this Section 6.5(d), if a
CCC Member Interest is to be acquired by ALS pursuant to the exercise of a Call
Option at any time prior to the sixteenth month anniversary of the issuance of
the certificate of occupancy for the ALS-East Facility owned by the ALS-East
Entity to which such CCC Member Interest relates, the fair market value for such
ALS-East Facility shall be determined in the manner described in this Section
6.5(d), except that the assumption shall be made that such ALS-East Facility has
achieved and is maintaining stabilized occupancy and is operating at
corresponding revenue and expense levels (based on such occupancy) as
contemplated by the Business Plan for such ALS-East Entity.
(e) Either party may invoke the appraisal process of this
Section 6.5 for any ALS-East Facility prior to the exercise of its Put or Call
Option, as the case may be, so as to enable such party to determine the fair
market value of such ALS-East Facility and, accordingly, the purchase price for
the CCC Member Interest, before it exercises its option and the price so
determined shall govern any subsequent exercise of such Put or Call Option that
occurs within the 90-day period after the determination thereof; provided,
however, that if the party invoking the appraisal process or the other party
does not exercise its Put or Call Option within ninety (90) days after the
determination of the fair market value in accordance herewith, then the party
invoking the appraisal process will bear all the costs of the appraisal(s). Any
and all transfers to ALS of the CCC Member Interest in such ALS-East Entity
pursuant to the exercise of a Put or a Call Option as provided herein shall be
closed, and all payments and deliveries contemplated thereby made, upon the last
to occur of (i) thirty (30) days after the fair market value of the CCC Member
Interest in such ALS- East Entity or Entities is determined in accordance
herewith or (ii) ninety (90) days following the exercise of such Put or Call
Option.
(f) At the closing of the exercise of a Put or Call Option
required by Section 6.5 of this Agreement, among other things:
(i) CCC shall deliver to ALS an instrument evidencing the
transfer of the CCC Member Interest in the ALS- East
Entity being purchased and sold, free and
14
<PAGE> 18
clear of all security interests, liens and
restrictions, together with such other documents as
ALS may reasonably request in connection therewith;
(ii) ALS shall deliver to CCC cash and ALS's promissory
note, if applicable, constituting the purchase price
for the CCC Member Interest in such ALS-East Entity,
together with such other documents as CCC may
reasonably request; and
(iii) ALS shall deliver to CCC an instrument in form, scope
and substance similar to the Section 2.4 Release to
release and indemnify CCC from certain liabilities it
may have by reason of its participation as a partner
or member of such ALS-East Entity.
At the time of the exercise of a Put Option, if CCC has at the
request of ALS or any lender guaranteed any financing of an ALS-East Entity
subject to such option, then ALS will use its best efforts to obtain a release
of CCC of such guaranty. If ALS is unable to obtain such a release, and
following the closing of a Put Option there occurs a default in the payment or
performance of any obligation whatsoever, whether monetary or otherwise, in
connection with such financing, then ALS will indemnify CCC for any damages,
costs and expenses (including reasonable attorneys' fees) which CCC incurs
pursuant to any guaranty. If CCC has guaranteed any financing of an ALS-East
Entity at the request of ALS or any lender and such guaranty is outstanding at
the time a Call Option is exercised, it shall be a condition to the closing of
such Call Option that such guaranty be released at or prior to such closing.
(g) Notwithstanding any provision contained in this Section
6.5 to the contrary:
(i) if a Put or Call Option is exercised, then
ALS may assign its rights and obligations in
respect of the Put or Call Option to an
affiliate of ALS so as to preserve the legal
existence or tax status of the ALS-East
Entity, but no such assignment shall relieve
ALS from any obligations to CCC;
(ii) all reasonable closing costs (other than the
parties' respective legal costs), or real
estate transfer tax or fee which arises in
connection with any purchase and sale
hereunder shall be borne by CCC in case CCC
exercises its Put Option, and by ALS in case
ALS exercises its Call Option; and
15
<PAGE> 19
(iii) equitable adjustments shall be made (in the
case of the value of an ALS-East Entity) for
any distributions or capital contributions
which occur between the date of the
determination of the fair market value of
the ALS-East Entity and the closing of the
Put Option or Call Option transaction.
(h) The Put Option and the Call Option provided for in this
Section 6.5 are intended (to the extent that such Put or Call Option would
otherwise be deemed to be a "roll-up transaction" pursuant to said Item 901) to
be agreements of the type described in Item 901(c)(2)(i) of Regulation S-K
promulgated by the Securities and Exchange Commission.
6.6 MANAGEMENT AGREEMENTS. On the date on which an ALS- East
Entity is formed, ALS and such ALS-East Entity shall execute a Management
Agreement in respect of the management of the ALS-East Facility to be
constructed and operated by such entity.
6.7 NOT USED.
6.8 NOT USED.
6.9 NONTRANSFERABILITY OF INTEREST. Neither ALS nor CCC shall
transfer its ownership interest in any ALS-East Entity except to the other
party. A transfer by CCC shall be deemed to have occurred in violation of the
foregoing restriction if a combination of CCC's shareholders (or upon their
death a combination of their heirs and personal representatives) cease to
Control CCC. A transfer means any disposition of an interest or any interest
therein, including, without limitation, any sale, gift, assignment, pledge or
encumbrance, whether such disposition occurs voluntarily, by operation of law or
otherwise.
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 CCC in this Agreement and the statements contained in any
other instrument, list, certificate or writing delivered by CCC 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. CCC 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.
16
<PAGE> 20
7.3 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.
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.
7.5 PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings,
corporate or other, to be taken in connection with the transactions contemplated
by this Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to ALS, and CCC shall have made available to
ALS for examination the originals or true and correct copies of all docu- ments
which ALS may reasonably request and CCC can reasonably obtain in connection
with the transactions contemplated by this Agreement.
7.6 OTHER DOCUMENTS. CCC shall have delivered to ALS such
certificates and documents of officers and partners of CCC and public officials
as shall be reasonably requested by ALS' counsel to establish the existence and
status of CCC and the due authorization of this Agreement and the transactions
contemplated hereby by CCC.
7.7 MATERIAL CONSENTS. Prior to the Closing, CCC shall have
obtained all third-party approvals and consents required for ALS' purchase of
the CCC Interests.
7.8 IPO CLOSING. ALS shall have sold shares of its common
stock in a public offering in substantially the manner outlined in and pursuant
to ALS's Registration Statement on Form S- 1 (Registration No. 333-04595)
(referred to herein as the "IPO Closing").
8. CONDITIONS TO CCC'S OBLIGATION TO CLOSE. The obligation of CCC 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 CCC:
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
17
<PAGE> 21
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 PROCEEDINGS AND INSTRUMENTS SATISFACTORY. All proceedings,
corporate or other, to be taken in connection with the transactions contemplated
by this Agreement, and all documents incident thereto, shall be reasonably
satisfactory in form and substance to CCC, and ALS shall have made available to
CCC for examination the originals or true and correct copies of all documents
which CCC may reasonably request in connection with the transactions
contemplated by this Agreement.
8.5 OTHER DOCUMENTS. ALS shall have delivered to CCC such
certificates and documents of officers of ALS and of public officials as shall
be reasonably requested by CCC's counsel to establish the existence and status
of ALS and the due authorization of this Agreement and the transactions
contemplated hereby by ALS.
8.6 IPO CLOSING. The IPO Closing shall have occurred.
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:
(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 CCC of any of 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
August 31, 1996 and shall not have been waived in writing by ALS;
(D) by CCC, 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 CCC; and
18
<PAGE> 22
(E) by CCC, if any of the conditions precedent to Closing set
forth in Section 8 of this Agreement shall not be fulfilled prior to or by
August 31, 1996 and shall not have been waived in writing by CCC.
9.2 AMENDMENT, EXTENSION AND WAIVER. At any time prior to the
Closing Date, ALS and CCC 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. OTHER AGREEMENTS.
10.1 RELEASE OF GUARANTEES. Effective at the Closing, ALS
shall indemnify CCC and its affiliates for, and shall defend and hold CCC and
its affiliates harmless from and against, all liabilities of CCC arising as the
result of any liability arising under any guarantees given by CCC or its
affiliates to secure indebtedness of the Partnerships (the "Guaranteed
Indebtedness"). Within 120 days after the Closing, ALS shall secure the release
of CCC and any of its affiliates under any such guarantees; provided, however,
if ALS shall not be able to secure the release of any such guaranty within said
120 day period, then ALS shall use best efforts to promptly refinance such
Guaranteed Indebtedness, or otherwise provide security or other assurances
reasonably satisfactory to CCC for the performance of its indemnification
obligations under this Section. Within ten (10) days following the Closing, ALS
shall cause the $400,000 letter of credit of Meridian Bank delivered by CCC in
connection with the NLP loans to be returned to CCC for cancellation.
10.2 AMENDMENT OF 1994 AGREEMENT. Pursuant to Section 10.5 of
the 1994 Agreement, effective upon the Closing of this Agreement, Sections 2.7,
2.8, 2.9, 2.15, 3.1 through 3.4, 4.1 through 4.8, 10.1 and 10.6 of the 1994
Agreement shall be terminated and no longer of any force and effect. In
addition, effective upon the Closing of this Agreement, Exhibit 1.48(b) shall be
amended so as to exclude the one (1) remaining $50,000 security deposit from the
"Retained Liabilities" as defined in the 1994 Agreement, thereby terminating the
responsibility of CCC to return such security deposit. All other provisions of
the 1994 Agreement shall remain unaffected by this Agreement.
10.3 AMENDMENT TO EXISTING ALS-EAST PROJECTS. At or promptly
following the Closing, ALS and CCC shall execute Amended Entity Documents for
any ALS-East Facility currently in development or construction pursuant to the
1994 Agreement (a "Pending Project") including without limitation the
Westhampton, New Jersey facility, to conform the terms of the Entity Documents
for such Pending Projects to those contemplated by this Agreement. To the
19
<PAGE> 23
extent necessary, ALS shall in connection therewith purchase a portion of CCC's
interest in any such Pending Projects to the extent necessary to achieve the
80%/20% equity interest contemplated by Section 5.1 hereof.
10.4 WESTHAMPTON FACILITY. The parties acknowledge that
Westhampton (a) is a limited liability company in which ALS currently has a 60%
equity interest and CCC currently has a 40% equity interest and (b) is currently
developing and constructing a specialty care facility in Westhampton, New
Jersey. Within 60 days following the Closing, ALS shall provide to CCC a
business plan for Westhampton of the type contemplated by Section 5.1 hereof,
whereupon CCC shall have the right to elect either to (i) retain a 20% equity
interest in Westhampton of the type contemplated by Section 5.1 hereof or (ii)
to sell its 40% equity interest in Westhampton to ALS. Such election shall be
made by CCC in the manner and in the time periods contemplated by Section 5.2
hereof. In the event CCC shall elect to retain a 20% equity interest in
Westhampton, ALS shall purchase one half of CCC's equity interest in Westhampton
at a price equal to 50% of CCC's invested equity capital in Westhamp- ton. In
the event CCC shall elect to sell its 40% equity interest in Westhampton to ALS,
the purchase price payable by ALS will equal 100% of CCC's invested equity
capital in Westhampton. The closing of either of the purchase transactions
contemplated by this Section 10.4 shall be held within 120 days following the
Closing at a time and a place mutually agreeable to CCC and ALS.
10.5 ALS-EAST DEVELOPMENT FUND. The parties hereto acknowledge
that each of ALS and CCC have contributed funds to a bank account at Mainline
Bank to be used to provide seed money for future development projects pursuant
to the 1994 Agreement, the balance of which is approximately $30,000. From and
after the date of the Closing, neither party shall have any further obligation
to contribute funds to or to receive distributions from such account, and,
promptly following the Closing, any balance in such account shall be returned to
ALS, and ALS and CCC shall cooperate in closing such account.
10.6 AMENDMENT TO PRE-FORMATION AGREEMENTS. Effective at
Closing, each of the Pre-Formation Agreements shall be amended to replace
Section 8.20 thereof in its entirety with the following:
8.20 Rights to Copyrights. The parties hereby agree
that all drawings, designs, documents, details and other
proprietary rights (including copyrights), now or hereafter
acquired by the Partnership and created or otherwise produced
in connection with any assisted living or specialty care
facility owned by the Partnership may be used by ALS any time
and may be used by CCC outside Pennsylvania, New Jersey and
Delaware at such time as CCC no longer owns an interest in NLP
20
<PAGE> 24
or any ALS-East Entity, but that the use of the same within
Pennsylvania, New Jersey and Delaware shall be made only by
the Partnership and ALS unless ALS and CCC mutually agree
otherwise.
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) and
continue in full force and effect thereafter.
11.2 EXPENSES. CCC will pay all professional fees and expenses
incurred by it 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. From time to time, at the request of
a party hereto and without further consideration, the other party will execute
and deliver to such requesting party such documents and take such other action
as such requesting party may reasonably request in order to consummate more
effectively the transactions contemplated hereby.
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.
11.6 ENTIRE AGREEMENT. Except as provided herein to the
contrary, 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, re-
quests, demands and other communications hereunder will be in
21
<PAGE> 25
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 Buyer, to:
Alternative Living Services, Inc.
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attention: William F. Lasky
Facsimile: (414) 789-9592
with copies to:
Rogers & Hardin
2700 International Tower
229 Peachtree Street, N.W.
Atlanta, Georgia 30303
Attention: Alan C. Leet, Esq.
Facsimile: (404) 525-2224
(b) If to CCC, to:
Continuing Care Concepts, Inc.
c/o DeLuca Enterprises, Inc.
842 Durham Road
Suite 200
Newtown, Pennsylvania 18940
Attention: Vincent G. DeLuca
Facsimile: (215) 598-7920
with copies to:
Drinker Biddle & Reath
Suite 1100
1345 Chestnut Street
Philadelphia, Pennsylvania 19107
Attention: Rush T. Haines, II, Esq.
Facsimile: (215) 998-2757
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
22
<PAGE> 26
the Commonwealth of Pennsylvania 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 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.
11.14 INCORPORATION OF SCHEDULES AND EXHIBITS. The Schedules
and Exhibits identified in this Agreement are incorporated herein by reference
and made a part hereof.
11.15 CONFIDENTIALITY. Each of ALS and CCC (the "Recipient")
will at all times hold and cause its employees, advisors and consultants to hold
in strict confidence all documents and information concerning the other party or
any ALS-East Entity (the "Disclosing Party") which have been or will be
furnished to the Recipient by the Disclosing Party or its employees, advisors
and consultants in connection with the transactions contemplated by this
Agreement. If such transactions are not consummated, such confidence will be
maintained by the Recipient after the date hereof, except to the extent such
information (a) was previously known to the Recipient prior to disclosure by the
Disclosing Party, (b) is in the public domain through no fault of the Recipient,
(c) is lawfully acquired by the Recipient from a third party under no obligation
of confidentiality to the Disclosing Party, or (d) is required by Law or legal
process to be disclosed. Such documents
23
<PAGE> 27
and information will not be used to the detriment of the Disclosing Party or
otherwise in any other manner and all documents, materials and other written
information provided by the Disclosing Party to the Recipient, including all
copies and extracts thereof, will be returned to the Disclosing Party
immediately upon its written request. For a period of twelve (12) months from
the date hereof, neither party will employ or seek to employ any employee of the
other party (or in the case of CCC any employee of any Partnership or ALS-East
Entity), except that the parties acknowledge that Anthony R. Geonnotti, Jr. is
currently employed by ALS pursuant to an Employment Agreement dated September
20, 1994.
11.16 ARBITRATION. Any controversy or claim arising out of or
relating to this Agreement, or the breach thereof, shall be finally settled in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association (the "AAA Rules"), and judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof. The
Expedited Procedures set forth in the AAA Rules shall be used. One (1)
arbitrator shall be selected in accordance with the AAA Rules. The place of
arbitration shall be held at such place as is agreed on by the parties to such
arbitration or, if they cannot so agree, at Chicago, Illinois. The award of the
arbitrator: shall be the sole and exclusive remedy between the parties regarding
any claims, counterclaims, issues or accountings presented or plead to the
arbitrator; shall be paid promptly; and any costs, fees or taxes incident to
enforcing the award shall to the maximum extent permitted by Law be charged
against the party or parties resisting such enforcement. All notices in
connection with the arbitration shall be made in the manner set forth in Section
11.8 hereof. Notwithstanding the foregoing, in the event that disputes,
controversies and claims arise under this Agreement and any one or more of the
documents, instruments or agreements required hereby, and such disputes,
controversies and claims require arbitration, then the parties shall use the
same arbitrator for all such disputes, controversies and claims, if feasible,
and in such event the arbitrator shall be chosen in the manner set forth in this
Section 11.16.
11.17 ANNOUNCEMENT. The parties hereto agree that
Announcements regarding the transactions contemplated by this Agreement shall be
made jointly by and subject to the approval in writing of ALS and CCC, except to
the extent required by Law or as otherwise agreed by ALS and CCC.
11.18 TAXES AND FEES. ALS and CCC shall each bear one half of
any transfer, sales or use taxes arising out of the purchase by ALS of the CCC
Interests contemplated by this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
24
<PAGE> 28
ALTERNATIVE LIVING SERVICES, INC.
By: ________________________________
Its: _______________________________
CONTINUING CARE CONCEPTS, INC.
By: ________________________________
Its: _______________________________
CCCI/NORTHAMPTON LIMITED PARTNERSHIP
By: ALTERNATIVE LIVING SERVICES,
INC., its General Partner
By: ____________________________
Its: ___________________________
By: CONTINUING CARE CONCEPTS, INC.,
its General Partner
By: ____________________________
Its: ___________________________
25
<PAGE> 29
SCHEDULE A
CCCI/Northampton Limited Partnership
CCC: 1% limited partnership interest
39% general partnership interest
ALS: 1% limited partnership interest
59% general partnership interest
Clare Bridge of Montgomery
CCC: 40% general partnership interest
ALS: 60% general partnership interest
Clare Bridge of Lower Makefield
CCC: 40% general partnership interest
ALS: 60% general partnership interest
26
<PAGE> 1
EXHIBIT 10.18
FIRST AMENDED JOINT VENTURE AGREEMENT
between
ALTERNATIVE LIVING SERVICES, INC.
and
ASSISTED LIVING EQUITIES, LLC
APRIL 30, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1
DEFINITIONS............................................................................................ 1
1.1. Affiliate............................................................................ 1
1.2. ALE Affiliate........................................................................ 1
1.3. ALE Ancillary Agreements............................................................. 1
1.4. ALS Affiliate........................................................................ 1
1.5. ALS Ancillary Agreements............................................................. 1
1.6. ALS-Northeast........................................................................ 2
1.7. ALS-Northeast Entities............................................................... 2
1.8. Ancillary Agreements................................................................. 2
1.9. Architect's Agreement................................................................ 2
1.10. Business............................................................................. 2
1.11. Business Plan........................................................................ 2
1.12. Capital Account...................................................................... 2
1.13. Certificate of Occupancy............................................................. 2
1.14. Collateral Assignment Agreement...................................................... 2
1.15. Commons Acquisition Agreement........................................................ 3
1.16. Commons Facility..................................................................... 3
1.17. Completion of Construction........................................................... 3
1.18. Not used............................................................................. 3
1.19. Confidential Information............................................................. 3
1.20. Construction Agreement............................................................... 3
1.21. Contracting ALE Affiliates........................................................... 3
1.22. Deal Flow Standard................................................................... 3
1.23. Defaulting Party..................................................................... 3
1.24. Default Loan Rate.................................................................... 3
1.25. Development Term..................................................................... 3
1.26. Facility or Facilities............................................................... 4
1.27. Family Member........................................................................ 4
1.28. 49% Entity........................................................................... 4
1.29. Joint Venture Agreement Year......................................................... 4
1.30. Large Facility....................................................................... 4
1.31. Majority Vote........................................................................ 4
1.32. Management Agreement................................................................. 5
1.33. Mandatory Capital Call Contribution.................................................. 5
1.34. Mandatory Capital Call Schedule...................................................... 5
1.35. Non-Defaulting Party................................................................. 5
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
1.36. Nonexclusive Year.................................................................... 5
1.37. Operating Agreement (ALS Northeast).................................................. 5
1.38. Operating Agreement.................................................................. 5
1.39. Original Agreement................................................................... 5
1.40. Original NY Facilities............................................................... 5
1.41. PDC.................................................................................. 5
1.42. PDC Guaranty Amendment............................................................... 6
1.43. Percentage Interest.................................................................. 6
1.44. Person............................................................................... 6
1.45. Prime Rate........................................................................... 6
1.46. Project Agreements................................................................... 6
1.47. Project Entity....................................................................... 6
1.48. Project Start........................................................................ 6
1.49. Small Facility....................................................................... 6
1.50. Territory............................................................................ 6
1.51. Total Development Cost............................................................... 7
1.52. 20% Entity........................................................................... 7
1.53. Waived Facility...................................................................... 7
ARTICLE 2
APPLICABILITY AND PURPOSE OF JOINT VENTURE............................................................. 7
ARTICLE 3
COVENANTS.............................................................................................. 8
3.1. Joint Ownership and Development...................................................... 8
3.2. Formation of Project Entities........................................................ 10
3.3. Not Used............................................................................. 10
3.4. Capitalization of Project Entities................................................... 10
3.5. Failure to Meet Capital Calls........................................................ 11
3.6. Project Financing.................................................................... 12
3.7. Responsibilities of the Parties...................................................... 14
3.8. Decision-Making...................................................................... 15
3.9. Construction......................................................................... 17
3.10. Management........................................................................... 20
3.11. Restrictions on Transferability of Interests......................................... 21
3.12. Put and Call Options................................................................. 22
3.13. Collateral Assignment................................................................ 29
3.14. Noncompetition....................................................................... 29
3.15. Interests in Profits, Losses and Distributions....................................... 32
3.16. Confidentiality...................................................................... 34
3.17. Further Assurances................................................................... 35
3.18. No Liens............................................................................. 35
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
3.19. Public Statement..................................................................... 35
3.20. PDC Guaranty Amendment............................................................... 36
3.21. Special Project Entity Profit and Loss Allocations................................... 36
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF ALS.................................................................. 36
4.1. Organization......................................................................... 36
4.2. Authorization; Enforceability........................................................ 36
4.3. No Violation or Conflict............................................................. 37
4.4. Brokers.............................................................................. 37
4.5. Litigation........................................................................... 37
4.6. Governmental Approvals............................................................... 37
4.7. Required Consent..................................................................... 37
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF ALE.................................................................. 37
5.1. Organization......................................................................... 37
5.2. Authorization; Enforceability........................................................ 38
5.3. No Violation or Conflict............................................................. 38
5.4. No Broker............................................................................ 38
5.5. No Litigation........................................................................ 38
5.6. Governmental Approvals............................................................... 38
5.7. Required Consent..................................................................... 39
ARTICLE 6
NOT USED............................................................................................... 39
ARTICLE 7
NOT USED............................................................................................... 39
ARTICLE 8
NOT USED............................................................................................... 39
ARTICLE 9
INDEMNIFICATION........................................................................................ 39
9.1. ALE's Indemnity...................................................................... 39
9.2. ALS's Indemnity...................................................................... 40
9.3. Provisions Regarding Indemnities..................................................... 41
ARTICLE 10
Not used............................................................................................... 41
</TABLE>
iii
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
ARTICLE 11
MISCELLANEOUS.......................................................................................... 41
11.1. Entire Agreement; Amendment.......................................................... 41
11.2. Fees and Expense..................................................................... 42
11.3. Applicable Law....................................................................... 42
11.4. Binding Effect; Assignment........................................................... 42
11.5. Notices.............................................................................. 42
11.6. Counterparts......................................................................... 43
11.7. Headings............................................................................. 43
11.8. Construction......................................................................... 43
11.9. Severability......................................................................... 43
11.10. Knowledge............................................................................ 43
11.11. Survival of Representations and Warranties........................................... 44
11.12. Arbitration.......................................................................... 44
11.13. Waiver of Compliance................................................................. 45
11.14. Third Parties........................................................................ 45
11.15. Set Off Rights of Parties............................................................ 45
11.16. Effect of Commons Acquisition Agreement.............................................. 45
</TABLE>
iv
<PAGE> 6
FIRST AMENDED JOINT VENTURE AGREEMENT
THIS FIRST AMENDED JOINT VENTURE AGREEMENT ("Agreement") is made and
entered into as of the 30th day of April, 1997, by and between ALTERNATIVE
LIVING SERVICES, INC., a Delaware corporation ("ALS"), and ASSISTED LIVING
EQUITIES, LLC, a New York limited liability company ("ALE").
W I T N E S S E T H :
WHEREAS, the parties agreed to form a joint venture pursuant to that
certain Joint Venture Agreement dated as of September 11, 1996, between ALS and
ALE (together with the several agreements and instruments entered into in
connection therewith or pursuant thereto, including without limitation the New
York Addendum, referred to herein as the "Original Agreement"); and
WHEREAS, the parties desire to amend and restate the Original Agreement
in the manner set forth herein;
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:
ARTICLE 1
DEFINITIONS
In addition to the other definitions contained elsewhere herein, the
following definitions shall apply for purposes of this Agreement:
1.1. Affiliate. "Affiliate" shall have the meaning set forth in Rule
12b-2 of the Securities Exchange Act of 1934, as amended.
1.2. ALE Affiliate. "ALE Affiliate" means any Affiliate of ALE,
excluding any ALS- Northeast Entity owned jointly by ALS and ALE.
1.3. ALE Ancillary Agreements. "ALE Ancillary Agreements" means any
Ancillary Agreement to which ALE or any ALE Affiliate is a party.
1.4. ALS Affiliate. "ALS Affiliate" means any Affiliate of ALS,
excluding any ALS- Northeast Entity owned jointly by ALE and ALS.
1.5. ALS Ancillary Agreements. "ALS Ancillary Agreements" means any
Ancillary Agreement to which ALS is a party.
<PAGE> 7
1.6. ALS-Northeast. "ALS-Northeast" means ALS-Northeast, L.L.C., a New
York limited liability company, which has been organized and formed for the
purposes referred to in the Original Agreement.
1.7. ALS-Northeast Entities. "ALS-Northeast Entities" means
ALS-Northeast and the Project Entities.
1.8. Ancillary Agreements. "Ancillary Agreements" means all of the
agreements executed and delivered by ALS and ALE, or either of them (or any ALS
Affiliate or ALE Affiliate), with an ALS-Northeast Entity or with each other,
pursuant to this Agreement or in connection with the transactions contemplated
by this Agreement, including without limitation the Operating Agreement of each
of the Project Entities.
1.9. Architect's Agreement. "Architect's Agreement" means an agreement
in substantially the form of Exhibit A, attached hereto and incorporated herein
by this reference.
1.10. Business. "Business" means the business of developing or
acquiring, owning and operating the Facilities and activities related or
incidental thereto.
1.11. Business Plan. "Business Plan" means a business plan developed
and agreed upon by ALS and ALE for each Project Entity contemporaneous with the
formation of such Project Entity as contemplated by Section 3.2 or a business
plan developed by ALS as contemplated by Section 3.1.3 hereof.
1.12. Capital Account. "Capital Account" shall have the meaning set
forth in the Operating Agreement (ALS-Northeast) with respect to the members of
ALS-Northeast, or the applicable Operating Agreement with respect to the members
of Project Entities, as the context may require.
1.13. Certificate of Occupancy. "Certificate of Occupancy" means the
certificate or other official document issued by a state or local governmental
unit or agency to evidence the permission to occupy a Facility in accordance
with applicable building ordinances and regulations (in jurisdictions, such as
certain local jurisdictions in the State of New York, where a temporary
certificate of occupancy permits occupancy of the premises, the term
"Certificate of Occupancy" shall mean such a temporary certificate of occupancy,
and in jurisdictions where no such certificate or official document is
customarily issued, a "Certificate of Occupancy" will be deemed to have been
granted upon substantial completion of the Facility in accordance with the
Construction Agreement).
1.14. Collateral Assignment Agreement. "Collateral Assignment
Agreement" means that certain Collateral Assignment Agreement dated as of
September 11, 1996 between ALS and ALE.
2
<PAGE> 8
1.15. Commons Acquisition Agreement. "Commons Acquisition Agreement"
shall mean that certain Acquisition Agreement dated February 12, 1997, by and
among ALS, Pioneer Liberty Square Company, LLC, Liberty Common Associates, LLC,
Pioneer Kenmore Company, LLC, Pioneer Niskayuna Company, LLC, and Pioneer
Commons Associates, LLC, as amended by the First Amendment to Acquisition
Agreement dated as of March 24, 1997 an the Second Amendment to Acquisition
Agreement dated as of April 15, 1997.
1.16. Commons Facility. "Commons Facility" shall mean each of Liberty
Commons located in Manlius, New York, The Commons at Kenmore located in Kenmore,
New York and The Commons at Niskayuna located in Niskayuna, New York.
1.17. Completion of Construction. "Completion of Construction" of a
Facility means the issuance of a Certificate of Occupancy or the equivalent for
each Facility.
1.18. Not used.
1.19. Confidential Information. "Confidential Information" shall have
the meaning provided in Section 3.16 of this Agreement.
1.20. Construction Agreement. "Construction Agreement" means each
Construction Agreement between an Affiliate of ALE and a Project Entity
established to acquire and develop a Facility, in substantially the form of
Exhibit D, attached hereto and incorporated herein by this reference, subject to
such modifications as will necessarily vary by Facility and to any changes to
properly reflect the identity of the Future Project Entity and location of the
Facility being constructed, with such changes as the parties to such agreement
may agree upon.
1.21. Contracting ALE Affiliates. "Contracting ALE Affiliates" shall
have the meaning provided in Section 5.1 of this Agreement.
1.22. Deal Flow Standard. "Deal Flow Standard" means that Project
Starts have occurred during a Joint Venture Agreement Year for at least five
Facilities, the Total Development Cost of which is at least $26 million.
1.23. Defaulting Party. "Defaulting Party" shall have the meaning
provided in Section 3.5.1 of this Agreement.
1.24. Default Loan Rate. "Default Loan Rate" shall have the meaning
provided in Section 3.5.1 of this Agreement.
1.25. Development Term. "Development Term" means the five (5) year
period commencing on September 11, 1996; provided, however, such Development
Term may be immediately terminated by (A) ALS if an "Event of Default", as
defined in the PDC Guaranty, shall arise or (B) either party hereto upon written
notice to the other party if (i) no Project Entity has been formed and funded
during any consecutive 365 day period during the Development
3
<PAGE> 9
Term; (ii) the other party files a voluntary petition of bankruptcy, is adjudged
bankrupt or insolvent or any involuntary bankruptcy proceeding is filed against
such other party, and such proceeding is not dismissed within 90 days
thereafter; (iii) the other party has become a Defaulting Party as to a
Mandatory Capital Call Contribution; or (iv) the other party or an Affiliate of
the other party has breached and failed to timely cure an Ancillary Agreement
following notice and opportunity to cure in the manner provided therein;
provided, however, that any termination of the Development Term pursuant to
clauses (iii) or (iv) hereof shall be effective only if notice of termination by
the non-defaulting party is given within 120 days of such right to terminate
(pursuant to such clauses (iii) or (iv), respectively) first becoming
exercisable by such non-defaulting party (it being understood that no such
termination will affect the obligations of the parties with respect to a Project
Entity that has already been formed).
1.26. Facility or Facilities. "Facility" or "Facilities" means the land
and improvements constituting an assisted living, dementia or other specialty
care facility or facilities for the elderly (other than a Commons Facility, an
Original NY Facility, a Waived Facility pursuant to Section 3.1.3 or a Refused
Facility pursuant to Section 3.14(d)(i)) which is or are developed or acquired
by ALE, ALS or by a Project Entity pursuant to or as contemplated by this
Agreement.
1.27. Family Member. "Family Member" means, with respect to any natural
person, (a) the spouse of such natural person, (b) any parent, grandparent,
brother, sister, child or other ancestor or descendant of such natural person,
or the spouse of any of the foregoing natural persons described in this clause
(b), (c) a custodian, guardian or personal representative of a natural person
described in clause (a) or (b); or (d) a trust for the benefit of one or more of
the natural persons described in clause (a) or (b).
1.28. 49% Entity. "49% Entity" shall mean any Project Entity formed
pursuant to Section 3.2 hereof and as to which ALE is obligated to contribute
49% of the Mandatory Capital Call Contributions of the members as more fully set
forth in the form of Project Entity Operating Agreement attached hereto as
Exhibit G.
1.29. Joint Venture Agreement Year. "Joint Venture Agreement Year"
means each successive period of October 1 through September 30 (provided that
the Joint Venture Agreement year ended September 30, 1997, shall be deemed to
include the period from September 11, 1996 through September 30, 1996).
1.30. Large Facility. "Large Facility" means any Facility other than a
Small Facility.
1.31. Majority Vote. "Majority Vote" with respect to any ALS-Northeast
Entity means the affirmative vote, approval or consent, as the case may be, of
equity owners of such ALS- Northeast Entity holding in excess of fifty percent
(50%) of the total Percentage Interests held by all equity owners of such
ALS-Northeast Entity entitled to vote on, approve or consent to the particular
matter, decision or action.
4
<PAGE> 10
1.32. Management Agreement. "Management Agreement" means each Assisted
Living Consultant and Management Services Agreement between ALS and a Project
Entity in substantially the form of the Assisted Living Consultant and
Management Services Agreement (Future Project Entities), attached hereto as
Exhibit E and incorporated herein by this reference, together with any changes
to properly reflect the identity of the applicable Project Entity and location
of the Facility being managed and any other changes that the parties to such
agreement may agree upon.
1.33. Mandatory Capital Call Contribution. "Mandatory Capital Call
Contribution" means the funding of equity obligations, either in the form of
contributions of equity capital to a Project Entity and/or the provision of
services, as required of each party hereto by the Operating Agreement for such
Project Entity.
1.34. Mandatory Capital Call Schedule. "Mandatory Capital Call
Schedule" means the mandatory capital call schedule for a Project Entity
included in the respective Business Plan for such Project Entity.
1.35. Non-Defaulting Party. "Non-Defaulting Party" shall have the
meaning provided in Section 3.5.1 of this Agreement.
1.36. Nonexclusive Year. "Nonexclusive Year" means any Joint Venture
Agreement Year (other than the Joint Venture Agreement Year ended September 30,
1997) immediately following a Joint Venture Agreement Year in which the Deal
Flow Standard has not been met.
1.37. Operating Agreement (ALS Northeast). "Operating Agreement
(ALS-Northeast)" means the Operating Agreement of ALS-Northeast dated September
11, 1996 between ALS and ALE.
1.38. Operating Agreement. "Operating Agreement" means an Operating
Agreement in substantially the form of the Operating Agreement attached hereto
as Exhibit G as to 49% Entities and as contemplated by Section 1.52 hereof as to
20% Entities, together with changes to properly reflect the identity,
characteristics and location of the applicable Project Entity.
1.39. Original Agreement. "Original Agreement" shall have the meaning
set forth in the premises of this Agreement.
1.40. Original NY Facilities. "Original NY Facilities" shall mean each
of the first four assisted living facilities in development and/or construction
in the State of New York pursuant to the terms of the Original Agreement.
1.41. PDC. "PDC" means Pioneer Development Company, LLC, a New York
limited liability company.
5
<PAGE> 11
1.42. PDC Guaranty Amendment. "PDC Guaranty Amendment" shall mean the
Amended Guaranty of PDC and others to be executed and delivered pursuant to
Section 3.20 hereof.
1.43. Percentage Interest. "Percentage Interest" means, as applied to
an ALS-Northeast Entity, the percentage interest of ALS or ALE in such Entity,
which shall initially be a fifty-one percent (51%) or eighty percent (80%)
interest for ALS and a forty-nine percent (49%) interest or twenty percent (20%)
interest for ALE, respectively, depending upon ALE's election pursuant to
Section 3.1 hereof unless modified pursuant to Section 3.5.1.
1.44. Person. "Person" means a natural person, corporation, trust,
partnership, limited liability company, governmental entity (or agency, branch
or department thereof) or any other legal entity.
1.45. Prime Rate. "Prime Rate" means the prime interest rate in effect
from time to time as published in the "Money Rates" section of the Wall Street
Journal, or its successor.
1.46. Project Agreements. "Project Agreements" means the agreements
entered into by ALS, ALE and their respective Affiliates, or any of them, with a
Project Entity or with each other, in connection with the formation of a Project
Entity and the development and ownership of a Facility, including, without
limitation, an Operating Agreement or other charter documents, a Management
Agreement, and a Construction Agreement for such Entity.
1.47. Project Entity. "Project Entity" means any limited liability
company or other entity formed by an ALS Affiliate and an ALE Affiliate pursuant
to Section 3.1 hereof to jointly develop or acquire and own a Facility.
1.48. Project Start. "Project Start" means the commencement of
development of a Large Facility or a Small Facility by a Project Entity
hereunder or by ALS using the development services of ALE or an ALE Affiliate as
contemplated by Section 3.9.1, which shall be deemed to have occurred when (i)
if such Facility is being developed by a Project Entity, a Business Plan for
such Facility has been approved by ALS and ALE, (ii) control of the site for the
Facility has been obtained by or on behalf of a Project Entity or ALS and (iii)
all building permits required to commence construction (or in the case of a
Facility located in the State of New York all approvals required to obtain all
building permits necessary to commence construction) of such Facility have been
obtained by or on behalf of such Project Entity or ALS.
1.49. Small Facility. "Small Facility" means a Facility that has a
projected Total Development Cost (excluding budgeted lease-up deficit) of less
than $3 million.
1.50. Territory. "Territory" means the States of New York,
Massachusetts, Connecticut and Rhode Island.
6
<PAGE> 12
1.51. Total Development Cost. "Total Development Cost" means the
aggregate development cost of a Facility as reflected in the construction and
development budget that is part of the Business Plan for such Facility,
including the fees and expenses described in Sections 3.9.1 and 3.9.2 for such
Facility and the value of the services described in Section 3.9.3 for such
Facility.
1.52. 20% Entity. "20% Entity" shall mean any Project Entity formed
pursuant to Section 3.1 hereof and as to which ALE is obligated to contribute
20% of the Mandatory Capital Call Contributions of the members as more fully set
forth in a form of Project Entity Operating Agreement to be mutually agreed upon
by ALS and ALE, such agreement to be based on the form of Operating Agreement
for the 49% Entities, with such changes as are contemplated hereby.
1.53. Waived Facility. "Waived Facility" shall have the meaning
provided in Section 3.1.3.
ARTICLE 2
APPLICABILITY AND PURPOSE OF JOINT VENTURE
This Agreement amends and restates in its entirety the Original
Agreement and governs the affairs of the parties hereto with respect to the
subject matter hereof effective simultaneously with the execution hereof;
provided, however, the Original Agreement, as presently agreed and unmodified by
this Agreement, shall survive and continue to govern the affairs of the parties
hereto with respect to the Original NY Facilities in the manner set forth in the
Original Agreement and the Ancillary Agreements (as defined in and contemplated
by the Original Agreement), as they may now exist or be entered into or modified
in the future, without giving effect to any modification that would otherwise be
required by this Agreement except that the parties hereto hereby agree to amend
the forms of documents applicable to the Original NY Facilities in such a way as
the parties agree, each in its reasonable discretion, will preserve the existing
business arrangement as reflected in the Original Agreement with respect to the
Original NY Facilities and at the same time will incorporate profit, loss and
distribution provisions based on the model of Section 3.15 hereof and Put Option
pricing provisions based on the model of Section 3.12(e) hereof. The parties are
entering into the joint venture contemplated by this Agreement to develop or
acquire, own or lease and operate Facilities in targeted market areas throughout
the Territory through jointly owned limited liability companies or other
entities agreed to by the parties. The Facilities shall vary in size depending
on market conditions. The parties intend to operate multiple Facilities in
targeted market areas in the Territory in order to become the market leader and
preferred provider of assisted living, dementia or other specialty care services
for the elderly in each target market.
7
<PAGE> 13
ARTICLE 3
COVENANTS
3.1.Joint Ownership and Development.
3.1.1. Formation and Capitalization of ALS Northeast. ALS and
ALE have formed ALS Northeast by entering into the Operating Agreement (ALS
Northeast). ALS Northeast will own no real property, unless the parties agree
otherwise; rather, ALS Northeast will fund and engage in site selection and
preliminary development activities with respect to a specified Facility to be
owned by a Project Entity until ALS and ALE mutually agree to develop such
Facility, a specific site is agreed upon and a Project Entity is formed to
acquire such site. Capital contributions to ALS-Northeast will be made by ALS
and ALE on a 51%/49% basis, as more fully set forth in the Operating Agreement
(ALS Northeast).
3.1.2. Joint Development of Large Facilities. During (i) the
Joint Venture Agreement Year ending September 30, 1997, and (ii) any subsequent
Joint Venture Agreement Year if for the immediately preceding Joint Venture
Agreement Year (A) the Deal Flow Standard has been met or (B) the Deal Flow
Standard would have been met but for the failure of ALS to act on or respond to
proposals of ALE for development of Facilities on a timely basis or otherwise
fulfill its obligations under the Joint Venture Agreement with reasonable
promptness, the development of Large Facilities hereunder shall be governed by
this Section 3.1.2. During the period of the Development Term when the
development of Facilities hereunder is governed by this Section 3.1.2, (i) the
decision as to whether or not to proceed to develop a Large Facility and enter
into a Project Agreement for an applicable Project Entity shall be made by ALS
and ALE in their sole and absolute discretion, (ii) a Business Plan will be
finalized prior to the formation of a Project Entity to develop any Large
Facility, (iii) with respect to each such Large Facility, ALE shall act as
developer of such Large Facility on the terms contemplated by Section 3.9 and
shall have the right, but not the obligation, to own equity in and to make
capital contributions to the Project Entity owning the Large Facility in
accordance with the terms contemplated hereby as a member of, at ALE's election,
a 20% Entity or a 49% Entity, and (iv) the other terms and conditions of the
respective equity investments of ALS and ALE in, and the respective activities
and involvement of ALS and ALE with respect to, such Project Entity shall be
governed by the terms of this Article 3 (other than Section 3.1.3 and any
provisions of this Article 3 that are by their terms inapplicable to a given
Project Entity).
3.1.3. Development Activity Not Governed by Section 3.1.2.
During any period during the Development Term when the development of Large
Facilities hereunder is no longer governed by Section 3.1.2, and at all times
during the Development Term with respect to Small Facilities, the development of
such Facilities shall be governed by this Section 3.1.3. For each Facility the
development of which is governed by this Section 3.1.3, ALS shall prepare a
Business Plan for such Facility providing a description of such facility,
estimated construction and development costs, the Mandatory Capital Call
Schedule required for such Facility and a five (5) year budget for such
Facility, and shall provide a copy of such Business Plan to ALE.
8
<PAGE> 14
Upon its receipt of such business Plan for such a Facility, ALE shall have
thirty (30) days to make one of the following elections:
(i) In the case of a Large Facility, (w) act as the developer
of such Facility on the terms contemplated by Section 3.9; (x) to act as the
developer of such Facility on the terms contemplated by Section 3.9 and to own
equity in and to make capital contributions to the Project Entity owning the
Large Facility in accordance with the terms contemplated hereby as a member of a
20% Entity, (y) to act as the developer of such Facility on the terms
contemplated by Section 3.9 and to own equity in and to make capital
contributions to the Project Entity owning the Large Facility in accordance with
the terms contemplated hereby as a member of a 49% Entity, or (z) not to
participate in the development or equity ownership of such Facility; or
(ii) In the case of a Small Facility, (x) to act as the
developer of such Facility on the terms contemplated by Section 3.9, (y) to act
as the developer of such Facility on the terms contemplated by Section 3.9 and
to own equity in and to make capital contributions to the Project Entity owning
the Small Facility in accordance with the terms contemplated hereby as a member
of a 20% Entity, or (z) not to participate in the development or equity
ownership of such Facility;
provided, however, that ALE's right to act as a developer of any Large or Small
Facility pursuant to this Section 3.1.3 and Section 3.9 shall be extinguished as
to any Facility having its Project Start occurring in any Nonexclusive Year
unless ALE shall elect to own equity in such Facility in the manner contemplated
by this Section 3.1.3.
If ALE makes the election described in either clause (i) (z) or (ii)(z) above
with respect to a Facility or if ALE shall fail to make an election with respect
to a Facility within the applicable thirty day period (any such Facility so
described or as to which such election has not been made, a "Waived Facility"),
ALE shall be deemed to have waived its right to participate in the development
of such Facility and ALS shall be free to develop such Facility in accordance
with the terms of the applicable Business Plan in all material respects, either
alone or with one or more equity partners. If ALE makes any election to own
equity in and make capital contributions to a Project Entity as contemplated by
this Schedule 3.1.3, the Entity Documents and Mandatory Capital Call Schedule
shall be developed and implemented in the same manner as would be applicable to
a 20% Entity or a 49% Entity governed by Section 3.1.2. If ALS proceeds with the
development of a Waived Facility and after the delivery of a Business Plan to
ALE as contemplated by this Section 3.1.3 but prior to the Project Start of such
Facility the Business Plan for such Waived Facility shall change in any material
respect that is within the control of ALS (excluding, however, such changes as
would be materially adverse to such Facility or an investment therein), ALS
shall be obligated to offer or to cause the entity owning such Facility to offer
to ALE the right to make an equity investment representing an ownership interest
of 20% or 49% if such Facility is a Large Facility or 20% if such Facility is a
Small Facility in consideration of a cash payment to the equity owners of such
Facility equal to the
9
<PAGE> 15
allocable portion (20% or 49% as the case may be) of such equity owners' actual
capital investment in such Facility.
3.2. Formation of Project Entities. When a Project Entity is formed,
each of ALS- Northeast, ALE and ALS will be reimbursed by the Project Entity for
the jointly approved site selection and development costs expended by them with
respect to the Facility to be owned by such Project Entity. Pursuant to the
terms of the Entity Documents for any Project Entity, unless consented to by ALS
and ALE, such Project Entity shall not: (i) materially change the character of
the business, Business Plan, strategy or licensing status of the Facility owned
by such Project Entity from that contemplated by this Agreement and the
applicable Business Plan; (ii) make any material investment in any person or
entity other than as contemplated by the applicable Business Plan or money
market-type investments; (iii) make any distribution in kind of assets of the
Project Entity (other than distributions of distributable cash); (iv) initiate
any litigation not in the ordinary course of business of such Project Entity; or
(v) use the proceeds of any insurance or condemnation award other than to
rebuild or repair the Facility owned by such Project Entity.
3.3. Not Used.
3.4. Capitalization of Project Entities. The parties shall make
Mandatory Capital Call Contributions to each Project Entity as more fully set
forth in the Entity Documents for such Project Entity. Unless otherwise mutually
agreed to by the parties hereto, it is contemplated that, with respect to each
Project Entity, (i) ALE will fund a portion of its Mandatory Capital Call
Contribution obligation in the form of a contribution of development services,
which services shall be valued for purposes of this Agreement as set forth in
Section 3.9.3 hereof (such value, with respect to each Project Entity, is
referred to herein as the "Development Services Contribution Amount" as defined
in Section 3.9.3 hereof), and contribute equity capital to such Project Entity
in the form of cash in an amount sufficient to satisfy the balance of its
Mandatory Capital Call Contribution obligation, and (ii) ALS will contribute
equity capital to such Project Entity in the form of cash in an amount
sufficient to satisfy its Mandatory Capital Call Contribution obligation in
full. ALE will not receive any Capital Account credit for the Development
Services Contribution Amount upon its contribution of the development services
to each Project Entity (although for all other purposes, including internal
monitoring of compliance with the parties' economic deal, ALE shall be viewed as
contributing capital in the form of development services, equal to the
Development Services Contribution Amount). The Mandatory Capital Call
Contributions for each Project Entity shall not exceed, in the aggregate, the
amounts shown in the Mandatory Capital Call Schedule in the Business Plan with
respect to such Project Entity, unless the parties otherwise agree. Neither ALS
nor ALE will have any obligation to make an expenditure, provide capital or loan
funds to any ALS-Northeast Entity except as specifically provided in the Entity
Documents for such Project Entity, the Project Agreements for such Project
Entity or as otherwise expressly agreed to by the parties in writing from time
to time. Additional equity capital beyond the Mandatory Capital Call
Contribution amounts for a Project Entity will be contributed only upon the
mutual agreement of the equity owners of such Project Entity.
10
<PAGE> 16
3.5. Failure to Meet Capital Calls.
3.5.1. If either ALS or ALE fails to meet a Mandatory Capital
Call Contribution for a Project Entity (such party referred to herein as a
"Defaulting Party"), then the non-defaulting party (the "Non-Defaulting Party")
may, at its option and in addition to any and all other remedies available to
it, (a) make its or its and the Defaulting Party's Mandatory Capital Call
Contributions to such Project Entity, and in such event the respective
Percentage Interests in the Project Entity will be adjusted to reflect the
relative cumulative capital contributions made by the parties to the Project
Entity after giving effect to such contribution by the Non-Defaulting Party, (b)
loan its and/or the Defaulting Party's Mandatory Capital Call Contribution
(provided that such Non-Defaulting Party has either made its Mandatory Capital
Call Contribution or loaned such amount as contemplated hereby) to such Project
Entity in exchange for a note bearing interest at a rate equal to three (3)
percentage points over the Project Entity's mortgage loan rate in effect from
time to time, (or if there is no mortgage loan, then at a rate equal to the
Prime Rate from time to time in effect plus five (5) percentage points) (such
applicable rate, the "Default Loan Rate") or (c) elect not make its Mandatory
Capital Call Contribution. If, with respect to any Mandatory Capital Call
Contribution, the Non-Defaulting Party shall make its Mandatory Capital Call
Contribution and shall loan the Defaulting Party's portion of such contribution,
then any repayment of such loan (or interest thereon) by the Project Entity
shall be treated, as between ALS and ALE, as a distribution by such Project
Entity for the benefit of such Defaulting Party (and shall be so reflected in
the Capital Account of the Defaulting Party for such Project Entity) such that
distributions to the Non-Defaulting Party will not be reduced as a result of
such loan payments. In addition, upon a failure to meet a Mandatory Capital Call
Contribution for any Project Entity, the Non-Defaulting Party shall also have
the right pursuant to the provisions of the applicable Operating Agreement to
designate a majority of the governing board of, and otherwise assume control of,
such Project Entity, and to terminate any one or more Ancillary Agreements
between such Project Entity and the Defaulting Party or its Affiliates.
3.5.2. All notes from a Project Entity to a Non-Defaulting
Party pursuant to Section 3.5.1 hereof shall be non-recourse to ALS and ALE
(except the parties hereby agree that such note shall be recourse to the
respective interests of ALS and ALE in and to some or all Project Entities
pursuant to the Collateral Assignment Agreement), shall be subordinated only to
the senior and other debt of the Project Entity issuing the note, and shall be
repaid only as and when cash becomes available from such Project Entity or any
other Project Entity, but in any event, within one year.
3.5.3. If after the expenditure or commitment of the Mandatory
Capital Call Contributions for a Project Entity either ALS or ALE reasonably
believes that additional capital ("Additional Capital") is required by such
Project Entity in accordance with the Business Plan for such Project Entity and
the construction plans and specifications, and the other party herein does not
agree to contribute its proportionate share of such Additional Capital (based on
its Percentage Interest in the Project Entity at the time the contribution is
requested) after being advised by the first party of the required amount of
Additional Capital and the portion thereof
11
<PAGE> 17
that would be required to be contributed by each of the parties, then the
contributing party may loan such required funds to such Project Entity in
exchange for a note bearing interest at a rate equal to the Prime Rate from time
to time in effect plus two (2) percentage points (such interest to begin to
accrue only when such Additional Capital is actually applied or invested by such
Project Entity). Notwithstanding the foregoing, if the party who declines to
contribute such Additional Capital is able to arrange for financing from a third
party on a non-recourse basis (except for recourse by the third party to the
respective Percentage Interest of ALS and ALE in and to such Project Entity,
which recourse shall be prior in right to any security interest granted to ALE
or ALS pursuant to the Collateral Assignment Agreement) in a timely manner on
the same or more favorable economic terms to the Project Entity than the loan
terms from the first party, then the Project Entity shall borrow the funds from
the third party.
3.5.4. All notes from a Project Entity to either party
pursuant to Section 3.5.3 hereof shall be subordinated only to the senior and
other debt of the Project Entity issuing the note and shall be repaid only as
and when cash becomes available from the cash flow of the Project Entity (but
prior to distributions to the parties), but in any event, within ten years. Such
notes shall be non-recourse to ALS and ALE except that (i) in the case of
Additional Capital to fund operating deficits, such note shall be recourse to
the respective Percentage Interests of ALS and ALE in and to all Project
Entities pursuant to the Collateral Assignment Agreement and (ii) in the case of
Additional Capital to fund capital improvements and other non-operating items,
such note shall be recourse to the respective interests of ALS and ALE solely in
and to the Project Entity receiving such Additional Capital.
3.5.5. No reduction of a party's Percentage Interest in a
Project Entity pursuant to Section 3.5.1 shall reduce the percentage of a
Mandatory Capital Call Contribution required to be contributed to such Project
Entity by such party or otherwise reduce the indemnification or other
obligations of such party to the other party pursuant to this Agreement, the
Operating Agreement (ALS-Northeast), the Entity Documents for any Project Entity
or any Ancillary Agreement.
3.6. Project Financing
3.6.1. ALS Northeast will use its best efforts to obtain the
necessary construction and permanent financing for each new Facility constructed
by a 49% Entity. If required by the construction loan lender, ALE or an ALE
Affiliate acceptable to the lender will guaranty the construction financing for
each new Facility to be constructed by any 49% Entity. With respect to any
payment or call upon such guaranty occurring prior to such time as a Certificate
of Occupancy is issued for such Facility, ALS shall indemnify ALE for 51% of
such payment or call provided that such payment or call is not the result of any
breach or failure to perform by ALE or an ALE Affiliate under the Construction
Agreement for that Facility (in which case, ALS shall have no such indemnity or
contribution obligation with respect thereto). Subsequent to receiving the
Certificate of Occupancy and until such time as a Facility owned by a 49% Entity
reaches 75% of full occupancy ("75% Occupancy"), provided that the interest of
ALE in the 49% Entity has not been acquired by ALS pursuant to Section 3.12, ALS
and ALE shall,
12
<PAGE> 18
as between each other, bear a portion of any risk or obligation arising under
any guarantee given by ALS or ALE to secure financing for such Facility on a
51%/49% basis, respectively. The 49% Entity and ALS will each use its best
efforts to obtain permanent financing promptly after a Facility reaches 75%
Occupancy, and ALS will be the sole guarantor of such permanent financing if a
guaranty is required. During any period after 75% Occupancy has been initially
attained and regardless of whether permanent financing has been obtained, ALS
shall indemnify ALE and its Affiliates for any obligation ALE or its Affiliates
may have arising under, and shall thereafter bear all risk associated with, any
guaranty given by ALS or ALE and its Affiliates to secure financing for such
Facility. Promptly following such time as a Facility reaches 75% occupancy, ALS
shall offer to the lender with respect to such Facility its unsecured guaranty
in substitution for the guaranty or guaranties of ALE or such ALE Affiliate as
has guaranteed the construction financing for such Facility and will cooperate
with ALE or such ALE Affiliate to obtain the release by such lender of any such
existing guarantees of ALE or such ALE Affiliate, provided that the terms of the
construction financing that is then in place or the permanent financing that has
been arranged for such Facility remain the same as those previously approved by
ALS or are otherwise acceptable to ALS in its sole discretion. ALE shall have no
obligation to indemnify ALS in respect of any indebtedness of a 49% Entity after
the interest of ALE in such 49% Entity has been acquired by ALS pursuant to
Section 3.12.
3.6.2. ALS will use its best efforts to obtain the necessary
construction and permanent financing for each new Facility constructed by a 20%
Entity. If required by the construction loan lender, ALS will guaranty the
construction financing for each new Facility to be constructed by a 20% Entity.
With respect to any payment or call upon such guaranty occurring prior to such
time as a 75% Occupancy has been initially attained at such Facility, provided
that the interest of ALE in the 20% Entity has not been acquired by ALS pursuant
to Section 3.12, ALE and ALS shall, as between each other, bear a portion of any
risk or obligation arising under any guarantee given by ALS to secure financing
for such Facility on a 20%/80% basis, respectively. The 20% Entity and ALS will
each use its best efforts to obtain permanent financing promptly after a
Facility reaches 75% Occupancy, and ALS will be the sole guarantor of such
permanent financing if a guaranty is required. During any period after 75%
Occupancy has been initially attained and regardless of whether permanent
financing has been obtained, ALS shall bear all risk associated with any
guaranty given by ALS to secure financing for such Facility.
3.6.3. If an existing Facility is acquired by a Project Entity
and a guaranty of the financing for such Facility is required by the lender,
then (i) ALS and, if required by the lender, ALE will guarantee such financing
for such Facility and (ii) if either or both of the parties are called on as
guarantors to pay any obligations pursuant to their guaranties, then the parties
shall make payments on such obligations in proportion to their Percentage
Interests in the Project Entity as of the date of acquisition (except that ALE
shall have no such liability following a purchase of ALE's interest by ALS
pursuant to Section 3.12), so that at all times neither party has paid more than
its proportionate share of such obligations based on its Percentage Interests in
the Project Entity as of the date of acquisition.
13
<PAGE> 19
3.6.4. If either party is called upon to make any payment to a
lender pursuant to any guaranty described in this Section 3.6, the Project
Entity shall evidence its obligations to repay such advance by delivery to such
party of a promissory demand note bearing interest at the Default Loan Rate.
3.7. Responsibilities of the Parties. With respect to the activities to
be conducted by the Project Entities:
(a) ALS shall be responsible for:
(i) providing to the Project Entities market
research with site-specific market studies
for purposes of obtaining debt and/or equity
capital;
(ii) providing to the Project Entities sales,
pre-marketing and ongoing marketing
supervision;
(iii) obtaining state (and, if applicable,
federal) licensing for Project Entities or
Facilities, compliance with state (and, if
applicable, federal) regulations;
(iv) day-to-day facility operations management
for Project Entities pursuant to the
applicable Management Agreement; and
(v) obtaining construction financing for 20%
Entities and permanent financing for Project
Entities, as contemplated hereby.
(b) ALE will be responsible for:
(i) providing to the Project Entities analysis
and advice regarding site acquisition,
right-to-build, zoning and use issues;
(ii) obtaining any permits and approvals
necessary from municipal, state or federal
agencies to construct Facilities for Project
Entities;
(iii) obtaining construction financing for 49%
Entities;
(iv) hiring of all necessary consultants for
building design and construction for Project
Entities; and
(v) building construction supervision for
Facilities.
(c) All charges associated with the foregoing services
provided by ALS or ALE, including, without limitation, pre-marketing,
pre-opening, operating, pre- development, third party, overhead and
aborted project costs, shall be paid by ALS-
14
<PAGE> 20
Northeast (or if incurred for the benefit of an existing Project
Entity, then by such Project Entity) or as agreed to by both parties in
writing. Each Project Entity shall reimburse ALS-Northeast for any site
selection, development or other costs incurred by ALS-Northeast for
such Project Entity's benefit. A detailed schedule of services to be
performed by ALS and ALE (or their respective Affiliates) as set forth
in Sections 3.7(a) and 3.7(b) of this Agreement ("Listed Services") and
any related charges are set forth in Exhibit H, attached hereto and
incorporated herein by reference. Except for the Listed Services, and
except as otherwise expressly contemplated by this Agreement or as
subsequently agreed on by ALS and ALE, the Project Entities will not
pay any compensation of any type to ALS, ALE or their Affiliates.
3.8. Decision-Making.
(a) Except as otherwise provided in Section 3.8(c), approval
of a Sale Transaction (as defined in Section 3.12(n) hereof) shall
require the approval of the equity owners of the respective Project
Entity holding the right to cast a Majority Vote (provided that prior
to or upon the consummation of the Sale Transaction any guarantees by
ALE or any ALE Affiliate of indebtedness of such Project Entity are
released). The prior approval of both ALS and ALE shall be required for
any activities related to the following:
(i) site selection, facility design,
architectural features, site layout and
facility type for Facilities jointly
developed pursuant to Section 3.1.2 and
equity capital calls of Project Entities
other than Mandatory Capital Call
Contributions; and
(ii) approval of a Business Plan for each
ALS-Northeast Entity and approval of
amendments to the Entity Documents of any
Project Entity;
(iii) the retention by any ALS-Northeast Entity of
the following professionals or any other
professionals in connection with the
construction or development of a Facility
(and any contract or engagement letter
executed in connection therewith):
1. geotechnical professionals;
2. environmental consulting
professionals; and
3. architectural professionals;
(iv) the execution or amendment of, or any waiver
under or early termination of, any agreement
between any ALS-Northeast Entity, on the one
hand, and ALS, ALE or any of their
respective Affiliates, on the other hand;
15
<PAGE> 21
(v) the determination by any ALS-Northeast
Entity to commence bankruptcy, insolvency or
dissolution proceedings; and
(vi) any tax election not in the ordinary course
of business that materially alters the
anticipated tax treatment of the equity
owners of any ALS- Northeast Entity.
Subject to Section 3.2 and the preceding provisions of this Section
3.8(a) and the delegation of authority to ALS for the day-to-day
management of the Facilities pursuant to applicable Management
Agreements, all other matters pertaining to the operation and
activities of (i) ALS-Northeast shall require the approval of both ALS
and ALE and (ii) each Project Entity shall require the approval of (A)
both ALS and ALE with respect to matters arising prior to the first to
occur of the achievement of the 75% Trigger (as defined in Section
3.12(a)) for such Project Entity or the second anniversary of the
issuance of the Certificate of Occupancy for the Facility owned by such
Project Entity (such first to occur date, the "First Date") and (B)
equity owners of the Project Entity holding the right to cast a
Majority Vote with respect to matters arising after the First Date.
(b) ALE shall be responsible for the preparation of a
construction budget for each Facility, and ALS shall be responsible for
the preparation of the annual operating budgets for each Facility;
provided, however, that with respect to each such construction budget
and operating budget, the non-preparing party shall have a minimum of a
twenty (20) day period to review, comment and approve each such budget.
Notwithstanding the foregoing provisions of this Section 3.8(b), each
party to this Agreement shall be entitled to enforce on behalf of an
ALS-Northeast Entity, or solely direct the actions of an ALS- Northeast
Entity with respect to, any obligation of the other party to this
Agreement or its Affiliate to such ALS-Northeast Entity or solely
direct the exercise by such ALS- Northeast Entity of any significant
discretionary action to be taken by such ALS- Northeast Entity pursuant
to any agreement with the other party to this Agreement or its
Affiliate.
(c) In the event a Project Entity has not achieved 95% of full
occupancy on or before the second anniversary of the issuance of a
Certificate of Occupancy for the Facility owned by such entity, during
the two year period following said second anniversary (the "Disposition
Period") ALE shall be entitled to authorize and approve, without the
consent of ALS, the marketing and sale of such Facility by such Project
Entity as contemplated by this Section 3.8(c). If during any
Disposition Period ALE wishes to offer such Facility for sale, ALE
shall give notice of the terms on which ALE wishes to make such offer,
including the price (the "Offer Price") at which ALE proposes to offer
such Facility for sale. Within fifteen (15) days after ALE gives ALS
notice of the Offer Price for a Facility, ALS shall have the right to
either (x) by notice given to ALE exercise its Call Option on the terms
described in Section 3.12(c), by paying to ALE in lieu of the price
determined pursuant to Section 3.12(d), a purchase
16
<PAGE> 22
price equal to the product obtained by multiplying (I) ALE's Percentage
Interest in such Project Entity at the time of exercise of such Call
Option times (II) such Offer Price, or (y) by notice given to ALE
exercise its Call Option with respect to the interest of ALE in the
Project Entity owning such Facility on the terms described in Section
3.12(c) by paying to ALE the lower of the purchase price determined
pursuant to clause (x) of this sentence and the purchase price
determined pursuant to Section 3.12(d) (including the price protection
afforded by the last sentence thereof). During any period when the
purchase price for ALS's Call Option with respect to ALE's interest in
a Project Entity is being determined pursuant to Section 3.12(d), ALE's
right to cause the Facility owned by such Project Entity to be marketed
and sold shall be stayed, provided that (i) ALS shall not have the
right to stay ALE's authority to market and sell a Facility by giving
notice of its exercise of its Call Option more than 15 days after ALE
gives notice to ALS of the Offer Price at which ALE proposes to offer
such Facility for sale, and (ii) ALE's right to cause a Facility to be
marketed and sold shall be reinstated, and shall not thereafter be
stayed, if ALS shall, after notice from ALE and a reasonable
opportunity to cure, fail to diligently pursue the procedures
contemplated by Section 3.12(d) or upon the determination of the price
for the Call Option to consummate the acquisition of ALE's interest in
the Project Entity owning such Facility. During any period after ALE's
exercise of its Put Option with respect to a Project Entity when the
procedures contemplated by Sections 3.12(a) and 3.12(e) are being
implemented, ALE's right to cause the Facility owned by such Project
Entity to be marketed and sold shall be stayed. Upon the consummation
of the exercise of the Put Option or the Call Option, ALE's right to
cause the Facility owned by such Project Entity to be marketed and sold
shall be extinguished. Upon the consummation of the sale of a Facility
by ALE using its authority granted in this Section 3.8(c), the
Management Agreement then in effect with respect to such Facility shall
terminate without further liability to either party thereto.
3.9. Construction and Development Services.
3.9.1. Feasibility and Right-to-Build Phase Expenses. During
the Development Term, ALE shall provide development services to each
Project Entity formed to develop a Facility. Each Project Entity will
reimburse ALE for personnel costs expended in connection with ALE's
services to such Project Entity during the feasibility and right-to-
build phase of a specific Facility's development, as per an agreed upon
rate schedule, up to a not-to-exceed cost of $3,500.00 and $3,200.00
per bed for Large and Small Facilities, respectively. Costs that exceed
the applicable per bed cap will not be reimbursed unless otherwise
agreed upon by ALS and ALE. ALS and ALE shall each be separately
entitled to reimbursement for reasonable travel and subsistence
expenses of their respective personnel incurred during the feasibility
and right-to-build phase of such Facility (the parties agreeing that
such costs shall not exceed $350.00 per bed per party for any Large or
Small Facility). Except as otherwise provided herein with respect to
Listed Services, all miscellaneous and "soft costs" related to site,
feasibility, right-to- build and preconstruction services will be
charged directly to the Facility, with no additional mark-up, "at
cost". During the Development Term, ALE shall also have the
17
<PAGE> 23
right to provide to ALS development services in accordance with Section
3.9.3 with respect to Waived Facilities other than Waived Facilities
whose Project Start occurs during a Nonexclusive Year and shall be
entitled to reimbursement of personnel, travel and subsistence expenses
in accordance herewith with respect to Waived Facilities other than
such expenses incurred after notice from ALS during a Nonexclusive Year
with regard to Waived Facilities whose Project Start occurs during a
Nonexclusive Year.
3.9.2. Construction Services. During the Development Term, ALE
or an ALE Affiliate ("ALE Construction"), shall have the right to
provide construction services to (i) any Project Entity or (ii) ALS
with respect to any Waived Facility whose Project Start occurs during
the Development Term (but not during any Nonexclusive Year) (ALS or
such Project Entity, as applicable in such cases, the "Developer
Entity") on an exclusive basis, in the manner contemplated hereby, in
connection with the construction by such Developer Entity of new
assisted living or specialty care facilities for the elderly ("New
Facilities") in the Territory in the manner set forth below:
(a) Except as provided in Section 3.9.2(b) below, ALE
Construction shall cause each New Facility to be constructed for a
guaranteed maximum price agreed upon by ALE Construction and the
Developer Entity in accordance with the terms of a construction
agreement for such New Facility, such agreement (if ALE Construction
shall be the successful bidder pursuant to Section 3.9.2(b)) to be
substantially in the form of the Construction Agreement.
(b) The Developer Entity shall solicit from ALE Construction
and, at the election of the Developer Entity, from others, sealed bids
for the construction of the New Facility prior to executing the
Construction Agreement with ALE Construction (such bids from others,
but not from ALE Construction, to be inclusive of a payment and
performance bond from a nationally recognized insurer). Such sealed
bids shall be opened in the presence of a representative of ALE
Construction. If (i) as a result of such competitive bidding process,
the guaranteed maximum price bid (covering project hard costs,
excluding the cost of any furniture, fixtures and equipment purchased
directly by the Developer Entity, excluding the amounts reimbursable to
ALE pursuant to Section 3.9.1, excluding the value of the development
services to be provided by ALE pursuant to Section 3.9.3 and excluding
any construction management personnel costs reimbursable to ALE
pursuant to Section 3.9.3) made by ALE Construction shall be 105% or
more than the comparable bid (the "Lower Bid") made by another
reputable, qualified, bona fide bidder (the "Lower Bidder") and (ii)
within ten (10) Business days following notice of such Lower Bid to ALE
Construction, ALE Construction does not revise its bid to no higher
than 105% of the Lower Bid, then the Developer Entity shall be entitled
to engage such Lower Bidder to construction the New Facility and the
Developer Entity shall have no further obligation to engage ALE
Construction with respect to the construction of such New Facility;
provided, however, ALE or ALE Construction shall be entitled to all
fees to which they may otherwise be entitled in accordance with the
terms of this Agreement,
18
<PAGE> 24
including without limitation recognition of the value of development
services provided or contributed to the Developer Entity as
contemplated by Section 3.9.3.
3.9.3. Development Services. ALE shall contribute development
services to each Project Entity in connection with the development of
New Facilities in the Territory during the Development Term and shall
have the right to provide development services to ALS in connection
with the development of New Facilities in the circumstances specified
in Section 3.9.1. Such services will be valued at an amount (the
"Development Services Contribution Amount") equal to (a) in the case of
any Large Facility, the product obtained by multiplying $6,000 times
the number of beds in the New Facility if such New Facility is intended
to have 55 beds or less, or $5,000 times the number of beds in the New
Facility if the New Facility is intended to have more than 55 beds or
(b) in the case of any Small Facility with more than forty (40) beds,
the product obtained by multiplying $4,500.00 times the number of beds
in the New Facility or (c) in the case of a Small Facility with forty
(40) or fewer beds, the product obtained by multiplying $4,500 times
the number of beds for the first such three (3) Small Facilities having
a Project Start in any calendar year and $4,000 times the number of
beds for any additional Small Facilities having a Project Start within
said year. Except as otherwise provided in the Construction Agreement,
the Development Services Contribution Amount shall encompass within it
all construction profit and overhead except for construction management
personnel (at cost) pursuant to an agreed upon rate schedule expressly
allowed pursuant to the applicable Construction Agreement. If the
Development Service Contribution Amount for any Project Entity exceeds
ALE's Mandatory Capital Call Contribution to such Project Entity, such
excess shall be payable by such Project Entity to ALE in cash in the
manner set forth in the following sentence. If ALE shall provide
development services to ALS (and not to a Project Entity) as
contemplated by Section 3.9.1 hereof, ALS shall pay ALE the Development
Services Contribution Amount as follows: fifty percent (50%) of the
Development Services Contribution Amount shall be paid at the point of
issuance of a building permit to ALS; an additional twenty-five percent
(25%) of the Development Services Contribution Amount shall be paid at
the point at which as mutually agreed by the parties construction is
fifty percent (50%) complete; and the final twenty-five percent (25%)
of the Development Services Contribution Amount shall be paid at
issuance of a certificate of occupancy.
3.9.4. CPI Adjustment. All per bed dollar amounts and caps set
forth in Section 3.9.3 shall be CPI adjusted on December 31 of each
year commencing in 1996 using December 31, 1995 as the base year, in
the same manner as described in Section 4.1 of the Management
Agreement.
3.9.5. Architect. The architect shall be Aldrian Guszkowski,
Elm Grove, Wisconsin or such other architect hereafter approved by ALS
and ALE (the "Architect"), and each contract with the Architect shall
be in the form of the Architect's Agreement, with such changes as
agreed to by the parties therein.
19
<PAGE> 25
3.10. Management. ALS shall perform management services for each
Project Entity. Such services will be provided pursuant to a management
agreement pursuant to which ALS will manage the Facility owned by such Project
Entity for an initial term of eight (8) years, subject to an extension by
agreement of ALS and ALE for two additional five (5) year periods. The term of a
management agreement for a Facility shall expire automatically upon a sale of
the Facility. The management fee (which shall be applicable to both Large
Facilities and Small Facilities) under each such management agreement shall be
as follows:
<TABLE>
<CAPTION>
Individual Project No. of Large Facilities
Revenue Managed by ALS Fee (% of Revenue)
- ------------------ ----------------------- ------------------
<S> <C> <C>
Up to $2 million 1 - 2 7.5%
in annual revenue 3 - 5 7.0%
more than 5 6.5%
Greater than $2 million 1 - 2 7.0%
in annual revenue 3 - 5 6.5%
more than 5 6.0%
</TABLE>
The $2 million revenue threshold will be adjusted for inflation for
each calendar year based upon the change in the Consumer Price Index for Medical
Care Services ("CPI", as defined as "Medical Care Services - United States City
Average," as published by the United States Department of Labor, Bureau of Labor
Statistics, converted to 1982 - 1984 base 100, or successor index most
comparable thereto) from December 31, 1995 to December 31 of each such calendar
year. Each management agreement for a Facility (an "Existing Facility") shall
state that as other Facilities within the same "Individual Project Revenue"
category as such Existing Facility are developed, the management fee payable
under the management agreement for such Existing Facility shall be reduced, if
necessary, so that the management fee payable shall be the same for all
Facilities in such category.
For purposes of the above table, (i) annual revenue will be measured on
a calendar year basis for each Facility (and annualized for any partial calendar
year falling within the term of the management agreement) and (ii) the number of
Large Facilities shall consist of all Large Facilities located in the Territory
and managed by ALS for its own account or for the account of entities in which
ALS owns a majority equity interest or for a Project Entity (including a Project
Entity as to which the applicable Put Option or Call Option (each, as
hereinafter defined) has been exercised) and any Managed Facilities (hereinafter
defined in Section 3.14(d)(ii)), provided that such Managed Facility, had it
been developed by ALS and ALE hereunder, would have been a Large Facility.
The management agreements will provide that ALS will be reimbursed at
ALS's actual cost for pre-opening, operating, sales and marketing costs provided
to ALS-Northeast and/or each new Project Entity during the construction period
but not to exceed the amounts shown in
20
<PAGE> 26
each Facility operating proforma budget (the "Proforma") included as part of the
applicable Business Plan. During the lease-up period set forth in the Proforma
for each Facility, the management fee will be equal to a fixed amount determined
by multiplying the monthly fee which would be payable once the projected
stabilized revenue is attained by the number of months in such lease-up period,
and shall be payable monthly on a pro-rata basis during such period. Thereafter,
the management fee shall be based on a percentage of revenues as set forth
above, regardless of whether stabilized revenue has been obtained, and payable
monthly.
If a 75% occupancy level for a Facility is not attained within the
timeframe set forth in the Proforma, ALS shall thereafter continue to earn its
management fee at the rate specified in the table above, but the payment of such
management fee (up to $100,000) shall be deferred until (a) such 75% occupancy
level is achieved, or (b) the Facility is sold or the Project Entity is
liquidated. Thereafter, any deferred management fees due ALS shall be paid as
soon as cash becomes available from such Project Entity to pay such deferred
management fees after the payment of operating expenses then due (and funding of
appropriate working capital reserves) but before any distributions to the equity
owners of such Project Entity, provided that the payment of such deferred fees
does not cause the Project Entity paying such deferred fees to violate any
covenants in the loan documentation to which such Project Entity is a party.
ALS shall enter into a Management Agreement in the form of the
Management Agreement, subject to such modifications that will necessarily vary
by Facility in accordance herewith, which agreement will be executed by ALS, as
facility manager, and the applicable Project Entity, as the owner, when such
Project Entity is formed.
3.11. Restrictions on Transferability of Interests. From and after the
date hereof, neither ALS nor ALE shall transfer any of its Percentage Interest
in any ALS-Northeast Entity except to the other party or pursuant to the
Collateral Assignment Agreement; provided, however, that ALS may transfer a
nominal portion of its Percentage Interest in a Project Entity to an ALS
Affiliate prior to the exercise and closing of a Put or Call Option solely to
preserve the existence of such Project Entity following such purchase. Any
purported transfer prohibited by this Section 3.11 shall be void ab initio, and
shall be deemed a breach of both this Agreement and the Operating Agreement of
the applicable ALS-Northeast Entity. A transfer means any disposition of a
Percentage Interest, including, without limitation, any sale, gift, assignment,
pledge or encumbrance, whether such disposition occurs voluntarily, by operation
of law or otherwise. A transfer shall be deemed to have occurred by ALE in
violation of the foregoing restriction if a combination of Messrs. Michael J.
Falcone, Michael P. Falcone and Mark G. Falcone (or, upon their respective
deaths, their Family Members) and trusts for the benefit of Michael P. Falcone,
Mark G. Falcone and their sisters and their respective children cease to control
ALE (a "ALE Change in Control") and any transfers of interests in ALE that do
not result in a ALE Change in Control shall not be prohibited by this Section
3.11. No change or changes in ownership of ALS shall be deemed to be a transfer
by ALS in violation of this Section 3.11.
21
<PAGE> 27
3.12. Put and Call Options.
(a) ALS hereby grants to ALE, and shall confirm in each
Project Entity Operating Agreement, the right to sell to ALS all (but
not less than all) of ALE's equity interest in any one or more Project
Entities at the purchase price (determined as set forth below) for
ALE's interest in such Project Entity or Entities pursuant to the terms
and conditions set forth herein ("Put Option"). The Put Option with
respect to a Facility shall be exercisable by ALE at any time from and
after the earlier to occur of (i) achievement of 75% Occupancy at such
Facility (the "75% Trigger"); or (ii) the six month anniversary of the
issuance of the Certificate of Occupancy for the Facility owned by such
Project Entity, through and until the tenth (10th) anniversary of the
date of issuance of the Certificate of Occupancy for such Facility
(such period, the "Put/Call Period"). ALE shall not be entitled to
exercise a Put Option in any given Put Year (as hereafter defined)
utilizing the 75% Trigger if during the then-existing Put Year ALE's
equity interest in one or more Facilities already have been put to ALS
utilizing such 75% Trigger, and such equity interests have an aggregate
purchase price in excess of $5 million. "Put Year" shall refer to each
consecutive twelve (12) month period commencing on the first day of the
first Put/Call Period.
(b) At ALS' election, the purchase price for ALE's equity
interest in such Facility pursuant to Section 3.12(a) shall be payable
either: (a) all in cash or in cash and a note as provided below (the
"Non-Stock Option") or (b) in cash and/or ALS common stock ("ALS
Stock"), such cash and ALS stock to be in such combination as ALS may
elect.
(i) To the extent a Put Option is exercised and
ALS elects to pay the purchase price using
the Non-Stock Option, (A) if the price is
$500,000 or less, the entire price shall be
paid in cash at the closing of the sale of
ALE's equity interest to ALS; and (B) if the
price to be paid is in excess of $500,000,
an amount equal to 1/3 of such price shall
be paid in cash at the closing of the sale
of ALE's interest to ALS, and ALS shall give
to ALE at such closing ALS's promissory note
for the remaining 2/3 of the price. Such
note shall provide for payment of (C) 50% of
the principal amount of the note on the
six-month anniversary of the note, (D) the
balance of the principal amount of the note
on the one-year anniversary date of the
note, (E) monthly installments of interest
only in arrears at the Default Loan Rate
applicable to such Project Entity, and (F)
acceleration of the entire balance due at
the election of the holder of the note upon
default in the payment of any installment of
principal or interest which continues for at
least ten (10) days uncured or upon the sale
of the Project Entity or ALS's ownership
interest therein. Such note may be prepaid
at ALS's option without penalty. The note
shall be secured by a collateral pledge of
the ownership interest in the Project Entity
which is sold.
22
<PAGE> 28
(ii) To the extent a Put Option is exercised and
ALS elects to pay the purchase price using
ALS Stock, then (A) ALE shall be entitled to
confirm ALS's intentions with respect
thereto prior to exercising the Put Option
and rely upon such expression of intention;
(B) if a Public Offering (hereinafter
defined) shall not have occurred prior to
the closing of such Put Option exercise, ALS
shall pay a portion of the purchase price in
cash to the extent necessary to permit ALE
to pay state and federal income taxes due as
a result of the sale of its interest in the
Project Entity pursuant to the exercise of
such Put Option (such cash portion of the
purchase price referred to as a "Required
Cash Portion"); and (C) if ALS Stock shall
have been sold in a public offering
registered under the Securities Act of 1933
(a "Public Offering") prior to the closing
of such Put Option exercise, but ALS shares
to be delivered as payment (or partial
payment) of the purchase price shall be
subject to resale restrictions under
applicable securities laws, then ALS shall
either (1) pay a portion of the purchase
price in cash equal to the Required Cash
Portion or (2) register such ALS Stock to be
delivered in connection therewith pursuant
to applicable federal and state securities
laws, and cause such shares to be listed on
any applicable exchange or trading system
upon which the ALS Stock is listed, prior to
or concurrently with its delivery. ALE shall
advise ALS of the amount and its basis of
calculation of the Required Cash Portion
prior to requesting ALS's confirmation
referenced in clause (A) of this Section
3.12(b)(ii).
The Put Option shall be exercised by written notice from ALE to ALS
during such times as such Put Option is exercisable in accordance
herewith, and the exercise by ALE of its Put Option or a failure to
exercise such Put Option for one Project Entity shall not preclude ALE
from later exercising one or more Put Options for other Project
Entities.
(c) ALE hereby grants to ALS, and shall confirm in each
Project Entity Operating Agreement, the right to purchase all (but not
less than all) of ALE's equity interest in any one or more Project
Entities at the purchase price (determined as set forth below) for
ALE's interest in such Project Entity or Entities pursuant to the terms
and conditions set forth herein ("Call Option"). The Call Option shall
be exercisable as to each Project Entity at any time during the
applicable Put/Call Period, such purchase price to be payable either in
cash or ALS Stock (or a combination thereof, provided that the stock
portion shall constitute at least 50% of such consideration and have a
value of at least $500,000) at ALE's election, payable at the closing.
The Call Option shall be exercised by written notice from ALS to ALE
during such times as such Call Option is exercisable in accordance
herewith, and the exercise by ALS of its Call Option or a failure to
exercise such Call Option for a Project Entity shall not preclude ALS
from later exercising one or more Call Options for other Project
Entities. Prior to exercising the Call Option, ALS shall use
commercially reasonable efforts to seek to release ALE and any ALE
Affiliate from any loan guarantees that may exist with respect to loans
to
23
<PAGE> 29
the Project Entity to which such Call Option relates. ALS shall be
deemed to have made commercially reasonable efforts if ALS shall have
taken such steps as are contemplated by the second to last sentence of
Section 3.6.1 hereof in an effort to secure such release or releases.
If ALS is not successful in securing such release or releases, then
ALS's indemnity pursuant to Section 3.12(h) hereof shall be secured
pursuant to the Collateral Assignment and by a pledge of ALS's equity
interest in said Project Entity, which collateral security interest for
such Section 3.12(h) indemnity obligations shall be extinguished upon
the release or releases of ALE or its Affiliates contemplated hereby.
(d) The purchase price for ALE's equity interest in each
Project Entity payable upon the exercise of a Call Option shall be
equal to the product obtained by multiplying (a) ALE's Percentage
Interest in the Project Entity at the time of exercise of such Call
Option times (b) the fair market value of the Project Entity, which
fair market value shall be determined as of the end of the calendar
month preceding the date on which a Call Option is exercised, as
follows: The fair market value of a Project Entity shall be the fair
market value of such Project Entity as established by an appraiser
jointly agreed upon by both parties. If the parties are unable to agree
to an appraiser, then each party will designate an appraiser and the
two appraisers will each determine a fair market value. If any party
shall fail to designate an appraiser within fifteen (15) days following
its receipt of notice from the other party containing (i) the identity
of the appraiser designated by such other party and (ii) reference to
such party's obligation to designate an appraiser pursuant to this
Section 3.12 within said fifteen (15) day period, then the appraiser
for such other party shall be deemed to be jointly agreed upon by both
parties. If the fair market value amounts determined by the two
appraisers are equal to or within 5% of their average, then the fair
market value shall be equal to such average. Otherwise, the two
appraisers will mutually select and appoint a third appraiser to
determine the fair market value, in which event the fair market value
of the Project Entity shall be equal to the result obtained by
averaging the two of the three appraisals which deviate the least from
the average of the first two appraisals, and multiplying the result by
ALE's Percentage Interest in the Project Entity. Each party will bear
equally the fees and expenses of the appraiser jointly agreed upon or
selected and if applicable the third appraiser, but each party will be
solely responsible for the fees and expenses of any appraiser selected
solely by such party. In determining such fair market value of a
Project Entity (on the condition, however, that ALS is not a Defaulting
Party with respect to such Project Entity), the assumption shall be
made that the management agreement with ALS or another manager will
continue indefinitely and that the percentage management fee then being
charged to the applicable Project Entity is equal to the greater of (i)
the percentage management fee which is actually being charged at such
time, or (ii) six percent (6%). Each appraiser selected hereunder shall
be a reputable appraisal firm which has experience in appraising
commercial real estate and long-term care and/or assisted living
facilities (or similar businesses). All appraisers shall have complete
access to the relevant books and records of the Project Entity they are
appraising during the conduct of their appraisals. Notwithstanding the
provisions of this Section 3.12(d), if ALE's equity interest in a
Project Entity is to be acquired by ALS
24
<PAGE> 30
pursuant to the exercise of a Call Option at any time prior to the
second anniversary of the issuance of the Certificate of Occupancy for
the Facility owned by such Project Entity, the fair market value for
such Project Entity shall be determined in the manner described in this
Section 3.12(d), except that the assumption shall be made that such
Facility has achieved and is maintaining stabilized occupancy and is
operating at corresponding revenue and expense levels (based on such
occupancy) as contemplated by the Business Plan for such Project Entity
unless the fair market value determination based on such assumption is
less than the fair market value determination made hereunder without
such assumption (in which case such fair market value determination
shall be made without such assumption). Notwithstanding the foregoing,
the purchase price for ALE's equity interest in a Project Entity
payable upon the exercise of a Call Option shall in no event be less
than (x) the Percentage Interest of ALE in such Project Entity (as a
fraction of one) times the sum of the total capital contributions by
the equity owners of such Project Entity and the amount of the
Development Service Contribution Amount for such Project Entity and (y)
any payments by ALE or any ALE Affiliates pursuant to a loan repayment
guaranty given by them for which reimbursement pursuant to ALS's
indemnity obligation under Section 3.12(h) has not been received.
(e) The purchase price for ALE's equity interest in each
Project Entity payable upon the exercise of a Put Option shall be equal
to the proceeds that ALE would receive if such Project Entity were to
sell its Facility at its then-fair market value (allocating any gain or
loss resulting therefrom pursuant to the methodology set forth in
Sections 3.15(b), 3.15(d) and 3.21 hereof), satisfy all creditors, and
then liquidate in accordance with Section 3.15(e) hereof. For this
purpose, the fair market value of a Facility shall be determined as of
the end of the calendar month preceding the date on which a Put Option
is exercised, as follows: The fair market value of a Facility shall be
the fair market value of such Facility as established by an appraiser
jointly agreed upon by both parties. If the parties are unable to agree
to an appraiser, then each party will designate an appraiser and the
two appraisers will each determine a fair market value. If any party
shall fail to designate an appraiser within fifteen (15) days following
its receipt of notice from the other party containing (i) the identity
of the appraiser designated by such other party and (ii) reference to
such party's obligation to designate an appraiser pursuant to this
Section 3.12 within said fifteen (15) day period, then the appraiser
for such other party shall be deemed to be jointly agreed upon by both
parties. If the fair market value amounts determined by the two
appraisers are equal to or within 5% of their average, then the fair
market value shall be equal to such average. Otherwise, the two
appraisers will mutually select and appoint a third appraiser to
determine the fair market value, in which event the fair market value
of the Facility shall be equal to the result obtained by averaging the
two of the three appraisals which deviate the least from the average of
the first two appraisals. Each party will bear equally the fees and
expenses of the appraiser jointly agreed upon or selected and if
applicable the third appraiser, but each party will be solely
responsible for the fees and expenses of any appraiser selected solely
by such party. In determining such fair market value of a Facility (on
the condition, however, that ALS is not a Defaulting Party with respect
to such Facility), the assumption shall
25
<PAGE> 31
be made that the management agreement with ALS or another manager will
continue indefinitely and that the percentage management fee then being
charged to the applicable Project Entity is equal to the greater of (i)
the percentage management fee which is actually being charged at such
time, or (ii) six percent (6%). Each appraiser selected hereunder shall
be a reputable appraisal firm which has experience in appraising
commercial real estate and long-term care and/or assisted living
facilities (or similar businesses). All appraisers shall have complete
access to the relevant books and records of the Project Entity which
owns the Facility that they are appraising during the conduct of their
appraisals.
(f) Either party may invoke the appraisal process of this
Section 3.12 for a Project Entity prior to the exercise of its Put or
Call Option, as the case may be, so as to enable such party to
determine the fair market value of such Project Entity or Facility (as
the case may be) before it exercises its option, and the price so
determined shall govern any subsequent exercise of such Put or Call
Option that occurs within the 60-day period after the determination
thereof; provided, however, that if the party invoking the appraisal
process or the other party does not exercise its Put or Call Option
within sixty (60) days after the determination of the fair market value
in accordance herewith, then the party invoking the appraisal process
will bear all the costs of the appraisal(s).
(g) Any and all transfers to ALS of ALE's equity interest in
such Project Entity pursuant to the exercise of a Put or a Call Option
as provided herein shall be closed, and all payments and deliveries
contemplated thereby made, upon the last to occur of (i) thirty (30)
days after the purchase price for ALE's equity interest in such Project
Entity or Entities is determined in accordance herewith or (ii) ninety
(90) days following the exercise of such Put or Call Option.
(h) At the closing of the exercise of a Put or Call Option
required by Section 3.12(g) of this Agreement:
(i) ALE shall deliver to ALS an instrument
evidencing the transfer of the ownership
interest in the Project Entity being
purchased and sold, free and clear of all
security interests, liens and restrictions
(other than liens arising under the
Collateral Assignment Agreement and
restrictions imposed by this Agreement and
the Ancillary Agreements and any Loan
Documents), together with such other
documents as ALS may reasonably request in
connection therewith; and
(ii) ALS shall deliver to ALE cash, ALS's
promissory note and pledge securing such
note and/or ALS Stock, if applicable,
constituting the purchase price for ALE's
equity interest in such Project Entity,
together with such other documents as ALE
may reasonably request.
26
<PAGE> 32
At the time of the exercise of an Option, if ALE has guaranteed any
financing of a Project Entity subject to such option, then ALS will use
its best efforts to obtain a release of ALE of such guaranty. If ALS is
unable to obtain such a release, and following the closing of a Put or
Call Option there occurs a default in the payment or performance of any
obligation whatsoever, whether monetary or otherwise, in connection
with such financing, then ALS will indemnify ALE for any damages, costs
and expenses (including reasonable attorneys' fees) which ALE incurs
pursuant to any guaranty.
(i) If at the time of the closing of a Put or Call Option ALS
Stock is being publicly traded on either the New York, American,
Philadelphia or Pacific Stock Exchange or quoted on NASDAQ or in the
over-the-counter market, the price of ALS Stock to be utilized for
purposes of a Put or Call Option shall be the average closing sales
price per share of ALS Stock (or in the case where no closing sales
prices are reported, the average of the bid and the asked price) during
the period commencing thirty (30) trading days prior to the exercise of
the Put or Call Option and ending on the date of the exercise of the
Put or Call Option. If the ALS Stock is not publicly traded in such
manner, the value per share shall be equal to the fair market value of
ALS (determined by an appraiser jointly agreed to by the parties)
divided by the total number of shares of common stock of ALS then
issued and outstanding. If the parties are unable to agree upon an
appraiser, then each party will designate an appraiser and the two
appraisers will each determine a fair market value. If the two fair
market value amounts are equal to or within 5% of their average, then
the fair market value shall be equal to such average. Otherwise, the
two appraisers will mutually select and appoint a third appraiser to
determine the fair market value, in which event the fair market value
of ALS shall be equal to the result obtained by averaging the two of
the three appraisals which deviate the least from the average of the
first two appraisals. If any party shall fail to designate an appraiser
within fifteen (15) days following its receipt of notice from the other
party containing (i) the identity of the appraiser designated by such
other party and (ii) reference to such party's obligation to designate
an appraiser pursuant to this Section 3.12 within said fifteen (15) day
period, then the appraiser for such other party shall be deemed to be
jointly agreed upon by both parties. Each party will bear equally the
fees and expenses of the appraiser jointly agreed upon or selected and
if applicable the third appraiser, but each party will be solely
responsible for the fees and expenses of any appraiser selected solely
by such party. Either party may invoke the foregoing appraisal process
for ALS Stock prior to the exercise of its Put or Call Option, so as to
enable such party to determine the fair market value of such stock
before it exercises its Put or Call Option and the price so determined
shall govern any subsequent exercise of such Put or Call Option that
occurs within the 60-day period after the determination thereof;
provided, however, that if the party invoking the appraisal process or
the other party does not exercise the Put or Call Option within a
specified period after completion of the appraisal(s), the party
invoking the appraisal process will bear all the costs of the
appraisals.
27
<PAGE> 33
(j) Notwithstanding any provision contained in this
Section 3.12 to the contrary:
(i) if a Put or Call Option is exercised, then
ALS may assign its rights and obligations in
respect of the Put or Call Option to an
Affiliate of ALS so as to preserve the legal
existence of the Project Entity, but no such
assignment shall relieve ALS from any
obligations to ALE;
(ii) any real estate transfer fee which arises in
connection with any purchase and sale
hereunder shall be borne by the parties in
proportion to their respective Percentage
Interests; and
(iii) equitable adjustments shall be made for any
distributions or capital contributions which
occur between the date of the determination
of the fair market value of the Project
Entity and the closing of the Put Option or
Call Option transaction.
(k) The Put Option and the Call Option provided for in this
Section 3.12 are intended to be agreements of the type described in
Item 901(c)(2)(i) of Regulation S-K promulgated by the Securities and
Exchange Commission.
(l) Any shares of ALS Stock acquired pursuant to Section 3.12
that are not registered at the time of delivery will be acquired by ALE
for investment only and not with a view to resell or otherwise
distribute them, and ALE will not sell, transfer, give, pledge or
otherwise transfer or dispose of the shares, or any of them, unless and
until such disposition of such shares is registered or, in the written
opinion of counsel to ALE reasonably acceptable to ALS, such sale,
transfer, pledge or other disposition of the shares, or any of them,
does not contravene any provision of the federal securities laws or
applicable state securities laws. ALE acknowledges that ALS may cause
the stock certificate(s) representing such shares to have the following
legend printed or typed thereon:
The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), or the securities laws of any state. No transfer of
the shares represented by this certificate may be made without
compliance with or exception from the Act and other applicable
securities laws.
(m) Neither ALS nor ALE shall take any action that would have
the effect of frustrating the Put Option or Call Option, respectively.
(n) If any Project Entity (i) shall sell or lease any Facility
or any material portion thereof or any material interest or estate
therein (a "Sale Transaction") and (ii) such Sale Transaction has not
been approved by both ALS and ALE, then,
28
<PAGE> 34
notwithstanding anything herein to the contrary, ALE (or the ALE
Affiliate owning an equity interest in such Project Entity) may
exercise the Put Option regardless of whether the Put Option is then
exercisable and the purchase price for ALE's equity interest shall be
determined in the manner provided in Section 3.12(d) hereof in the case
of the exercise of a Call Option (and, accordingly, the penultimate (as
well as the last) sentence of Section 3.12(d) shall be applicable in
determining such purchase price). The Put Option pursuant to this
Section 3.12(n) shall be exercisable at any time during the thirty (30)
day period following the last to occur of (x) the consummation of such
Sale Transaction and (y) notice by the Project Entity or ALS to ALE of
the principal terms of such Sale Transaction. Any exercise of a Put
Option pursuant to this Section 3.12(n) shall not be considered to be
the exercise of a Put Option using the 75% Trigger described in Section
3.12(a).
(o) ALS will consider in connection with the exercise of a Put
or Call Option for a Project Entity, (a) participating in an Internal
Revenue Code Section 1031 exchange for the Facility owned by the
Project Entity or (b) structuring the purchase of ALE's equity interest
in the Project Entity as a tax-free exchange under Internal Revenue
Code Section 368. However, in any such case ALE shall bear the entire
amount of transactional costs, and legal and tax costs and risks,
created by such alternative structuring.
3.13. Collateral Assignment. Simultaneously with the execution of this
Agreement, the Collateral Assignment Agreement shall be amended to (i)
incorporate the matters described in Section 3.12(c), (ii) include within the
definition of "Joint Venture Agreement" therein both this Agreement and the
Original Agreement, and (iii) provide for the securing pursuant to the
Collateral Assignment (as well as by a pledge of ALS's equity interest in
Pioneer Kenmore Company, LLC or Pioneer Niskayuna Company, LLC, corresponding to
the pledge contemplated by Section 3.12(c) hereof) of ALS's corresponding
indemnity obligations (including tax penalties and interest indemnities) under
the operating agreements governing Pioneer Kenmore Company, LLC and Pioneer
Niskayuna Company, LLC if the interest of the ALE Affiliates is acquired by ALS
pursuant to the put/call options contained in such operating agreements prior to
the release of any guarantees of any ALE Affiliates with respect to the senior
debt financing incurred by such entities.
3.14. Noncompetition.
(a) During the Development Term, neither ALE nor ALS will
directly or indirectly (except through or in connection with
ALS-Northeast Entities, the Original NY Facilities, the Commons
Facilities or as otherwise permitted by Section 3.1.3 hereof) own,
operate, develop, construct, manage or participate in the ownership,
development, construction, operation or management of an assisted
living, dementia or other specialty care facility for the elderly
located in the Territory.
29
<PAGE> 35
(b) Beginning on the date hereof and ending on the first
anniversary of the last date on which ALS and ALE jointly own equity
interests in a given Facility, neither party will directly or
indirectly (except through or in connection with ALS-Northeast
Entities, the Original NY Facilities, the Commons Facilities or Waived
Facilities) own, operate, develop, construct, manage or participate in
the ownership, operation, development, construction, or management of
an assisted living, dementia or other specialty care facility for the
elderly located within ten (10) miles of any such jointly- owned
Facility or any Waived Facility, Original NY Facility or Commons
Facility. In the event that either ALE or ALS ceases to own an equity
interest in one or more ALS- Northeast Entities by reason of the
failure to make a Mandatory Capital Call Contribution or otherwise
through the foreclosure of its equity interest in a Project Entity or
Entities pursuant to the Collateral Assignment Agreement, such party
shall nonetheless be deemed to be restricted by the provisions of this
Section 3.14 as if such party were a joint owner of all ALS-Northeast
Entities, until the first to occur of: (i) such time as the other party
ceases to have an interest in every ALS-Northeast Entity, or (ii) three
(3) years after such party ceases to have an interest in any
ALS-Northeast Entity.
(c) The restrictions on ALE set forth in Section 3.14(a) and
(b) also apply to Messrs. Michael J. Falcone, Michael P. Falcone and
Mark G. Falcone, and any entities directly or indirectly under the
control of ALE or such individuals. The restrictions on ALS set forth
in Section 3.14(a) and (b) herein also apply to any entity directly or
indirectly under the control of ALS, but in no event shall such
restrictions apply to the shareholders of ALS.
(d) The restrictions set forth heretofore in this Section 3.14
(the "Restrictions") are subject to the following exceptions:
(i) The Restrictions shall not be violated by
reason of ALS or ALE, or any of their
respective Affiliates, acquiring any
assisted living, dementia or other specialty
care facility for the elderly located in the
Territory ("Assisted Living Facilities"), or
acquiring an entity that owns such a
facility, as long as (A) such facility is
not located within ten (10) miles of a
Commons Facility, a Waived Facility or any
Facility owned jointly by ALS and ALE or any
Facility in which a Defaulting Party once
owned an interest if that party or its
Affiliates are the acquiring party and (B)
ALS or ALE, as the case may be, has first
offered to ALE or ALS, respectively, in
writing, an opportunity to participate in
such acquisition on substantially the same
terms as contemplated herein, and ALE or
ALS, respectively, has declined such offer
(such facility, a "Refused Facility"). ALE
or ALS, respectively, shall have thirty (30)
days following its receipt of any such offer
and of all material economic information
regarding such offer to accept or reject, in
writing, such offer made to it by the other
party in this regard, and a failure to
timely respond shall be deemed a rejection.
30
<PAGE> 36
(ii) The Restrictions shall not be violated by
ALS if ALS manages an Assisted Living
Facility or the Person(s) that own such
facility, so long as ALS has no direct or
indirect equity interest in the facility or
the entity that owns such facility and no
right to receive a fee based on the
profitability (other than gross revenues) of
such facility (such facilities referred to
herein as "Managed Facilities");
(iii) The Restrictions shall not be considered
violated solely by reason of the activities
of a person or entity which is not an
Affiliate of ALS or ALE at the time this
Agreement is signed but which subsequently
becomes an Affiliate of such party insofar
as the activities of such Affiliate that
predate such affiliation are concerned;
(iv) The Restrictions in Section 3.14(a) shall
not apply to a Non-Defaulting Party from and
after any default by the other party in the
making of a Mandatory Capital Call
Contribution to any ALS-Northeast Entity;
(v) The Restrictions shall not apply to a party
during the continuance of any order or other
action by a regulatory agency or body which
prohibits or restricts the other party from
owning, operating or managing an Assisted
Living Facility in the Territory;
(vi) The Restrictions shall not prevent ALE or
its Affiliates from managing any
ALS-Northeast Facility following the
termination of the Management Agreement with
ALS for such Facility;
(vii) Not Used.
(viii) The Restrictions shall not be violated by
reason of ALS, ALE or any of their
respective Affiliates acquiring all or
substantially all of the operations of
another multi-facility operator (or a
multi-facility division or operating unit of
such operator) of Assisted Living
Facilities, whether by merger, stock or
asset purchase or otherwise, provided that
(A) none of the acquired Assisted Living
Facilities (the "Acquired Facilities") are
located within ten (10) miles of any
Facility then jointly owned by ALS and ALE
or any Facility in which a Defaulting Party
once owned an interest if that party is the
acquiring party or any Facility not yet
completed but for which a Project Entity has
been formed, and (B) the Acquired Facilities
include one or more facilities located
outside of the Territory; and
(ix) The Restrictions shall not be violated by
ALS by ALS providing feasibility studies and
related services to third parties on a fee
basis (i.e., compensation that is not
calculated on or with respect to, or that
otherwise constitutes a participation in,
the profits (as opposed to gross revenue or
31
<PAGE> 37
adjusted gross revenue) of any subject
facility) so long as ALS has no direct or
indirect equity interest in such third party
or in the facilities owned or operated by
such third party.
(e) Each party to this Agreement hereby agrees that the
restrictions set forth in this Section 3.14 are founded on valuable
consideration and are reasonable in duration and geographic area in
view of the circumstances under which this Agreement was executed, and
that such restrictions are necessary to protect the legitimate
interests of the parties. If any provision of this Section 3.14 is
determined to be invalid by any arbitrator or court of competent
jurisdiction, then the provisions of this Section 3.14 shall be deemed
to have been amended, and the parties agree to execute any documents
and take whatever action is necessary to evidence such amendment, so as
to eliminate or modify any such invalid provision and to carry out the
intent of this Section 3.14 and to render the terms of this Section
3.14 enforceable in all respects as so modified.
(f) Each party to this Agreement acknowledges and agrees that
irreparable injury may result to the other party and/or a Project
Entity if the other party breaches any covenant contained in this
Section 3.14, and that the remedy at law for the breach of any such
covenant will be inadequate. Therefore, if either party shall engage in
any act which is a violation of any of the provisions of this Section
3.14, then the other party and the affected Project Entity (or either
of them) shall be entitled to, in addition to such other remedies and
damages as may be available to either or both of them at law or
pursuant to this Agreement, injunctive relief to enforce the provisions
of this Section 3.14.
3.15. Interests in Profits, Losses and Distributions. The Entity
Documents for each Project Entity shall provide as follows:
(a) Net Losses from Operations. Any net losses with respect to
a particular Facility, other than net losses resulting from a sale or
other disposition of such Facility, as determined on a quarterly basis,
shall be allocated (i) first, to the extent that net profits have been
allocated pursuant to Section 3.15(c)(iv) hereof in proportion to the
parties' respective Percentage Interests for any prior fiscal quarter
and such net profits have not been distributed by the Project Entity to
the members or already reversed out pursuant to Section 3.15(b)(i)
hereof or this Section 3.15(a)(i), net losses shall be allocated to
offset such undistributed net profits pro rata among the members in
proportion to their shares of the retained net profits being offset
(and thereafter such allocations of retained profits, to the extent
offset pursuant to this Section 3.15(a)(i), shall be disregarded for
purposes of computing subsequent allocations pursuant to this Section
3.15); (ii) second, one percent (1%) to ALS and ninety-nine percent
(99%) to ALE until ALE's Capital Account is a negative number that is
equal to ALE's limited Capital Account restoration obligation as set
forth in clause (b) of the second to last sentence of Section 3.21
hereof (the "ALE Restoration Amount"); (iii) third, one hundred percent
(100%) to ALS until its Capital Account is a positive number that is
equal to the ALE
32
<PAGE> 38
Restoration Amount; and (iv) lastly, in proportion to the parties' then
respective Percentage Interests (provided, however, that any such net
loss to be allocated pursuant to this clause (iv) that is attributable
to Partner Nonrecourse Debt (as such term is defined in Section
1.704-2(b)(4) of the Treasury Regulations (herein, "Regulations")
promulgated under the Internal Revenue Code of 1986, as amended (the
"Code")) shall be allocated to the member that bears the economic risk
of loss pursuant to Section 1.752-2(b)-(j) of the Regulations for such
Partner Nonrecourse Debt and, if more than one member bears such
economic risk of loss, such Partner Nonrecourse Deductions shall be
allocated among the members in accordance with the ratios in which they
share such economic risk of loss). Nonrecourse Deductions (as such term
is defined in Section 1.704-2(b)(1) of the Regulations) shall be
allocated to ALS and ALE in proportion to their Percentage Interests.
(b) Net Losses from Dispositions. Except as otherwise provided
in Section 3.21 hereof, any net loss resulting from a sale or other
disposition of a Facility shall be allocated (i) first, to the extent
that net profits have been allocated pursuant to Section 3.15(c)(iv)
hereof in proportion to the parties' respective Percentage Interests
for any prior fiscal quarter and such net profits have not been
distributed by the Project Entity to the members or already reversed
out pursuant to Section 3.15(a)(i) hereof or this Section 3.15(b)(i),
net loss on a sale or other disposition of a Facility shall be
allocated to offset such undistributed net profits pro rata among the
members in proportion to their shares of the retained net profits being
offset; (ii) second, one hundred percent (100%) to ALS until the sum of
the cumulative net losses allocated to ALS pursuant to this Section
3.15(b)(ii) and the cumulative net losses previously allocated to ALS
pursuant to Sections 3.15(a)(ii) and (iii) hereof (but only to the
extent such net losses have not been previously reversed out by net
profit allocations made to ALS pursuant to Sections 3.15(c)(ii) and
(iii) hereof) equal 51/49ths (assuming that the Percentage Interests of
ALS and ALE are 51% and 49%, respectively, and if such Percentage
Interests are different, the applicable ratio for each loss allocation
offset shall be the ratio of the Percentage Interest held by ALS at the
time of such loss allocation to the Percentage Interest held by ALE at
such time) of the cumulative net losses allocated to ALE pursuant to
Section 3.15(a)(ii) (but only to the extent such net losses have not
been previously reversed out by net profit allocations made to ALE
pursuant to Section 3.15(c)(iii) hereof); (iii) to ALE and ALS, in
proportion to their positive Capital Account balances, until the
Capital Account balances of both ALE and ALS equal zero; and (iv)
lastly, in proportion to the parties' then respective Percentage
Interests.
(c) Net Profits from Operations. Any net profits with respect
to a particular Facility, other than net profits resulting from a sale
or other disposition of such Facility, as determined on a quarterly
basis, shall be allocated first to "reverse out" any prior net loss
allocations made pursuant to Sections 3.15(a)(ii), (iii) or (iv) hereof
in the reverse order made, with any remaining net profit (i.e., any net
overall profit in excess of losses previously allocated pursuant to
such sections) to be allocated in proportion to the parties' then
respective Percentage Interests. That is, any quarterly net profits
shall be allocated
33
<PAGE> 39
(i) first, between ALS and ALE to restore any
net losses previously allocated to them
pursuant to Section 3.15(a)(iv) hereof, in
proportion to their relative shares of such
net losses; (ii) second, one hundred percent
(100%) to ALS to restore any net losses
allocated to it pursuant to Section
3.15(a)(iii) hereof; (iii) third, one
percent (1%) to ALS and ninety-nine percent
(99%) to ALE to reverse the net losses
allocated to the parties in that same
proportion pursuant to Section 3.15(a)(ii)
hereof, and (iv) lastly, between ALS and ALE
in proportion to their then respective
Percentage Interests.
(d) Net Profits from Dispositions. Except as otherwise
provided in Section 3.21 hereof, any net profits resulting from a sale
or other disposition of a Facility shall be allocated (i) first, one
hundred percent (100%) to ALE until its Capital Account balance (as
increased by the amounts, if any, which ALE is deemed to be obligated
to restore pursuant to the penultimate sentences of Treasury Regulation
Sections 1.704- 2(g)(1) and 1.704-2(i)(5)) is equal to 49/51ths
(assuming that the Percentage Interests of ALS and ALE are 51% and 49%,
respectively, and if such Percentage Interests are different, the
applicable ratio shall be the ratio of the Percentage Interest held by
ALE at the time of the relevant loss allocation that is being restored
by this net profits allocation to the Percentage Interest held by ALS
at such time) of ALS's Capital Account balance (as increased by the
amounts, if any, which ALS is deemed to be obligated to restore
pursuant to the penultimate sentences of Treasury Regulation Sections
1.704- 2(g)(1) and 1.704-2(i)(5)), and (ii) then, to ALS and ALE in
proportion to their respective Percentage Interests.
(e) Distributions. Any distributions of current cash flow
shall be made in proportion to the parties' respective Percentage
Interests. No distributions shall be made with respect to any quarter
in which the Project Entity derives a net loss, without the consent of
both parties. Distributions upon liquidation of the Project Entity
(i.e., the distribution of proceeds from the sale of the respective
Facility) shall be distributed in accordance with the parties'
respective Capital Account balances (after giving effect to the
allocation of any gain or loss resulting from such liquidating sale in
accordance with the provisions of this Section 3.15 as modified by
Section 3.21 hereof).
3.16. Confidentiality. Except to the extent permitted by Section 3.19
hereof, the parties hereto will at all times hold and cause their officers,
employees, agents, consultants and advisors (collectively, "Representatives") to
hold in confidence the information contained in this Agreement. In addition,
each party (the "Receiving Party") who receives any Confidential Information
(hereinafter defined) concerning the other party (the "Disclosing Party") will
at all times hold and cause its Representatives to hold in strict confidence
such Confidential Information which shall have been or will be furnished by the
Disclosing Party to the Receiving Party or its Representatives in connection
with the transactions contemplated by this Agreement. All such Confidential
Information shall be disclosed by a Receiving Party only to its Representatives
engaged in the evaluation of such information. The provisions of this Section
3.16 shall not apply to the extent that such Confidential Information (a) was
previously known to the Receiving Party prior to disclosure by the Disclosing
Party, (b) is in the public domain through
34
<PAGE> 40
no fault of the Receiving Party, (c) is lawfully acquired by the Receiving Party
from a third party under no obligation of confidence to the Disclosing Party, or
(d) is required by any law or by any governmental or judicial body to be
disclosed. Such Confidential Information shall not be used to the detriment of
the Disclosing Party in any manner. Notwithstanding the foregoing, the parties
acknowledge that the financial position and results of operations of, and other
operating characteristics or data relating to, any Facility may be disclosed by
ALS in connection with its public reporting under applicable securities laws and
stock exchange rules.
For purposes of this Section 3.16, the term "Confidential Information"
shall mean any data or information that is designated as "confidential" by the
Disclosing Party, is of value to the Disclosing Party and is not generally known
to competitors of the Disclosing Party or to the public, and whose
confidentiality is maintained by the Disclosing Party. Confidential Information
shall include, but not be limited to, written lists of the Disclosing Party's
current or potential residents or other customers, the identity of various
suppliers, non-public information concerning the Disclosing Party's executives
and employees and its financial affairs, business plans, services, research,
development, purchasing, accounting, engineering and marketing.
Nothing in this Section 3.16 will limit or restrict a Non-Defaulting
Party in respect of its ownership or operation of a Facility following a default
by the other party or its Affiliates in an obligation to make a Mandatory
Capital Call Contribution or under an Ancillary Agreement relating to such
Facility.
3.17. Further Assurances. Each party agrees to execute such further
documents and perform such further acts as may be reasonably necessary to
consummate the transactions contemplated by this Agreement, the Commons
Acquisition Agreement and the Ancillary Agreements and in accordance with the
terms of this Agreement, the Commons Acquisition Agreement and the Ancillary
Agreements, to aid the more efficient execution of the transactions contemplated
hereby and thereby.
3.18. No Liens. Each of ALS and ALE hereby agrees to keep its ownership
interest in all ALS-Northeast Entities free and clear from any and all security
interests, liens, restrictive covenants or other encumbrances in favor of any
and all third parties other than those arising pursuant to the Collateral
Assignment Agreement or the Loan Documents.
3.19. Public Statement. Each party to this Agreement will consult with
the other party prior to issuing any press release or making any other public
statement with respect to this Agreement and the transactions contemplated in
this Agreement, and will not issue any such release or make any such statement
without the approval of the other party (in the other party's sole discretion),
except, such disclosure as is required to be reported in any regulatory filings,
and as may be required or appropriate in the reasonable judgment of such party's
counsel pursuant to any applicable state or federal securities law or the rules
and regulations of any relevant securities exchange or quotation system upon
which such party's securities are listed or traded.
35
<PAGE> 41
3.20. PDC Guaranty Amendment. Within thirty (30) days following the
execution hereof, ALE shall deliver to ALS an Amended Guaranty Amendment (the
"PDC Guaranty Amendment," such PDC Guaranty Amendment to be based upon the
Guaranty dated September 11, 1996 given by ALE and others in connection with the
Original Agreement (the "Original Guaranty") and to secure the obligations of
ALE and the ALE Affiliates hereunder and under the Original Agreement) duly
executed by PDC, ALE and Assisted Living Equity Investors, and ALS shall execute
the PDC Guaranty Amendment.
3.21. Special Project Entity Profit and Loss Allocations. Each
Operating Agreement for a Project Entity shall, except as otherwise provided in
the balance of this Section, generally allocate all profits, gains, losses and
deductions (including nonrecourse deductions), as well as any distributions,
among the parties hereto in accordance with the provisions of Section 3.15
hereof. Notwithstanding the provisions of Section 3.15 hereof, each Operating
Agreement shall contain special allocation provisions whereby, prior to any
allocations provided for in Section 3.15 hereof, (i) ALE shall be specially
allocated any gain realized on any sale or other disposition of a Facility in an
amount necessary to reflect in its Capital Account (after consideration of all
prior special gain and loss allocations provided for in this Section 3.21), and
limited to, the Development Services Contribution Amount, and (ii) ALS shall be
specially allocated losses realized on any sale or other disposition of a
Facility in an amount equal to (after consideration of all such prior special
gain and loss allocations provided for in this Section 3.21), and limited to,
51/49ths of the Development Services Contribution Amount. Upon liquidation of
the Project Entity, ALE shall be obligated to restore the lesser of (a) its
negative Capital Account balance, if any, or (b) 51% of the Development Services
Contribution Amount. Liquidating distributions upon the liquidation of a Project
Entity shall be made to ALE and ALS in accordance with the balances in their
respective Capital Accounts (after taking into account all allocations of
profits, gains, losses, and deductions of the Project Entity, including all
special gain or loss allocations described in this Section).
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF ALS
ALS hereby represents and warrants to ALE that:
4.1. Organization. ALS is a corporation validly existing and in good
standing under the laws of the State of Delaware and has full corporate power
and authority to conduct its business as presently conducted and to become an
owner of the ALS-Northeast Entities. ALS will be qualified to transact business
as a foreign corporation in the States of New York, Massachusetts, Connecticut
and Rhode Island, as necessary to carry out the transactions contemplated by
this Agreement and the Ancillary Agreements.
4.2. Authorization; Enforceability. The execution, delivery and
performance by ALS of this Agreement and the ALS Ancillary Agreements are within
the corporate power of ALS and have been duly authorized by all necessary
corporate action. A certified copy of resolutions
36
<PAGE> 42
of the Board of Directors of ALS authorizing this Agreement and the ALS
Ancillary Agreements has been delivered to ALE. This Agreement, and the ALS
Ancillary Agreements when executed and delivered by ALS, will be the valid and
binding obligations of ALS, enforceable against ALS in accordance with the
respective terms of such agreements.
4.3. No Violation or Conflict. The execution, delivery and performance
of this Agreement and the ALS Ancillary Agreements by ALS will not conflict with
or violate any law, judgment, order, decree or regulation, the Certificate of
Incorporation or Bylaws of ALS, or any contract or agreement to which ALS is a
party or by which ALS is bound.
4.4. Brokers. Neither ALS nor any Affiliate of ALS has incurred any
brokers', finders' or any similar fee in connection with the transactions
contemplated by this Agreement or the ALS Ancillary Agreements.
4.5. Litigation. There is no litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind pending or, to the
knowledge of ALS, proposed or threatened, against ALS which could have a
material adverse effect on the transactions contemplated hereby. There is no
action, suit or proceeding against ALS by any person or entity which questions
the validity, legality or propriety of the transactions contemplated by this
Agreement or the ALS Ancillary Agreements.
4.6. Governmental Approvals. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required on the part of ALS in
connection with its execution and delivery of this Agreement and the ALS
Ancillary Agreements and the consummation by ALS of the transactions
contemplated in this Agreement and the ALS Ancillary Agreements, other than such
licenses as may be required to operate or manage Facilities in the Territory.
4.7. Required Consent. There are no approvals or consents which ALS is
required to obtain from any third parties to enter into this Agreement or the
ALS Ancillary Agreements which have not been obtained.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF ALE
ALE hereby represents and warrants to ALS that:
5.1. Organization. ALE is a limited liability company validly existing
and in good standing under the laws of the State of New York. Each ALE Affiliate
that is or is intended to be a party to the Ancillary Agreements, including
without limitation PDC (the "Contracting ALE Affiliates") is (or upon formation
will be) a corporation, partnership or limited liability company, as applicable,
validly existing and in good standing under the laws of its organization. ALE
and each Contracting ALE Affiliate have (or, as to Contracting ALE Affiliates,
upon
37
<PAGE> 43
formation will have) full corporate, partnership or limited liability company
(as applicable) power and authority to conduct its business as presently
conducted and, in the case of ALE, to become an owner of the ALS-Northeast
Entities. ALE and the Contracting ALE Affiliates are (or upon formation will be)
duly qualified to transact business as a limited liability company or other
entity in the States of New York, Massachusetts, Connecticut and Rhode Island,
as necessary to carry out the transactions contemplated by this Agreement and
the Ancillary Agreements. Exhibit I, attached hereto and incorporated herein by
this reference, contains a correct list of the current owners of ALE, PDC and
Central New York Contractors, Inc. (the ALE Affiliate that will enter into the
Construction Agreement).
5.2. Authorization; Enforceability. The execution, delivery and
performance by ALE of this Agreement and by ALE and the Contracting ALE
Affiliates of the ALE Ancillary Agreements are within the corporate, partnership
or limited liability company (as applicable) power of, and have been duly
authorized by, ALE and the Contracting ALE Affiliates, respectively. This
Agreement, and the ALE Ancillary Agreements when executed and delivered by ALE
and the Contracting ALE Affiliates, will be the valid and binding obligations of
ALE and the Contracting ALE Affiliates, as applicable, enforceable against ALE
and such Contracting ALE Affiliates in accordance with their respective terms
and conditions. A certified copy of the resolutions of the members of ALE and
the Contracting ALE Affiliates authorizing this Agreement and ALE Ancillary
Agreements has been delivered to ALS.
5.3. No Violation or Conflict. The execution, delivery and performance
by ALE of this Agreement and by ALE and the Contracting ALE Affiliates of the
ALE Ancillary Agreements will not conflict with or violate any law, judgment,
order, decree or regulation, the Articles of Incorporation, Articles of
Organization or operating agreement of ALE and the Contracting ALE Affiliates,
respectively, or any contract or agreement to which ALE and the Contracting ALE
Affiliates are a party or by which they are bound.
5.4. No Broker. Neither ALE nor any Affiliate of ALE (including the
Contracting ALE Affiliates) has incurred any brokers', finders' or any similar
fee in connection with the transactions contemplated by this Agreement or the
ALE Ancillary Agreements.
5.5. No Litigation. There is no litigation, arbitration, proceeding,
governmental investigation, citation or action of any kind pending or, to the
knowledge of ALE, proposed or threatened, against ALE or any Contracting ALE
Affiliate which could have a material adverse effect on the transactions
contemplated hereby. There is no action, suit or proceeding by any person or
governmental agency against ALE or any Contracting ALE Affiliate which questions
the legality, validity or propriety of the transactions contemplated by this
Agreement or the ALE Ancillary Agreements.
5.6. Governmental Approvals. No permission, approval, determination,
consent or waiver by, or any declaration, filing or registration with, any
governmental or regulatory authority is required on the part of ALE or any
Contracting ALE Affiliate in connection with its execution and delivery of this
Agreement and the ALE Ancillary Agreements and the
38
<PAGE> 44
consummation by ALE and the Contracting ALE Affiliates of the transactions
contemplated in this Agreement and the ALE Ancillary Agreements, other than such
licenses and permits as may be required in connection with the construction of
Facilities.
5.7. Required Consent. There are no approvals or consents which ALE or
any Contracting ALE Affiliate are required to obtain from third parties to enter
into this Agreement or the ALE Ancillary Agreements which have not been
obtained.
ARTICLE 6
NOT USED
ARTICLE 7
NOT USED
ARTICLE 8
NOT USED
ARTICLE 9
INDEMNIFICATION
9.1. ALE's Indemnity. ALE hereby agrees to indemnify ALS, each ALS
Affiliate and, except for the matters referenced in (c) and (d) below, the
ALS-Northeast Entities, or any of them, and hold them harmless from and against
any and all losses, damages, costs, expenses, liabilities, obligations and
claims of any kind (including, without limitation, reasonable attorneys fees and
other reasonable legal costs and expenses) which any of them may at any time
suffer or incur, or become subject to, as a result of or in connection with:
(a) any breach or inaccuracy when made of any of the
representations and warranties made by ALE or any ALE Affiliates in
this Agreement or in any ALE Ancillary Agreement;
(b) any failure by ALE or any ALE Affiliate to carry out,
perform, satisfy or discharge any of its covenants, agreements,
undertakings, liabilities or obligations under this Agreement or under
any ALE Ancillary Agreement;
(c) any unpaid or unsatisfied indemnification right of ALS
pursuant to Section 3.6 hereof;
(d) provided that the interest of ALE in the ALS-Northeast
Entity has not been acquired by ALS pursuant to Section 3.12, any
payments by ALS with respect to any
39
<PAGE> 45
obligations of any ALS-Northeast Entity not described in Section 3.6
which have been jointly guaranteed in writing by ALS and ALE, to the
extent such payments exceed the initial ALS Percentage Interest in such
ALS-Northeast Entity upon its organization;
(e) any suit, action or other proceeding brought by any Person
against ALS, any ALS Affiliate or any ALS-Northeast Entity arising out
of, or in any way related to, any obligation in respect of which an
indemnity obligation is owed pursuant to paragraphs (a) through (d) of
this Section 9.1.
9.2. ALS's Indemnity. ALS hereby agrees to indemnify ALE, each ALE
Affiliate and, except for the matters referenced in (c) and (d) below, the
ALS-Northeast Entities or any of them, for and hold them harmless from and
against any and all losses, damages, costs, expenses, liabilities, obligations
and claims of any kind (including reasonable attorneys' fees and other
reasonable legal costs and expenses) which any of them may at any time suffer or
incur, or become subject to, as a result of or in connection with:
(a) any breach or inaccuracy when made of any of the
representations and warranties made by ALS in this Agreement or in any
and all ALS Ancillary Agreements;
(b) any failure by ALS to carry out, perform, satisfy or
discharge any of its covenants, agreements, undertakings, liabilities
or obligations under this Agreement or under any and all ALS Ancillary
Agreements;
(c) any unpaid or unsatisfied indemnification right of ALE
pursuant to Section 3.6 hereof;
(d) any payments by ALE with respect to any obligations of any
ALS- Northeast Entity not described in Section 3.6 which have been
jointly guaranteed in writing by ALE and ALS, to the extent such
payments exceed the initial ALE Percentage Interest in such
ALS-Northeast Entity upon its organization; or
(e) any suit, action or other proceeding brought by any Person
against ALE, any ALE Affiliate or any ALS-Northeast Entity arising out
of, or in any way related to, any obligation in respect of which an
indemnity obligation is owed pursuant to paragraphs (a) through (d) of
this Section 9.2.
Further, in the event that any net losses of a Project Entity properly allocated
to ALE pursuant to Section 3.15(a)(ii) are disallowed upon federal and/or state
income tax audit and additional federal, state or local income tax, interest
thereon and/or penalties related thereto are therefore assessed upon the members
of ALE by reason of such disallowance, ALS shall indemnify such members for 100%
of such penalties and an amount equal to the product of (i) ALS's initial
Percentage Interest with respect to such Project Entity times (ii) any interest
(but no portion of the additional tax itself) incurred by such members solely by
reason of such disallowance; provided, however, that such indemnification
obligation shall arise and apply only to the extent
40
<PAGE> 46
that such disallowance is solely attributable to ALE's being allocated a portion
of net loss pursuant to Section 3.15(a)(ii) that is greater than its Percentage
Interest at the time of such net loss allocation with respect to such Project
Entity.
9.3. Provisions Regarding Indemnities.
(a) The obligations of ALE and ALS under Section 9 of this
Agreement shall survive for the statute of limitations period
applicable to claims in respect of which such rights of indemnification
apply. Delivery of any written demand for indemnification by an
indemnified party shall toll the survival period for the subject of the
particular demand and, once notice is given, the indemnified party may
pursue the particular claim to its conclusion to the extent permitted
by applicable law.
(b) The indemnified party shall promptly notify the
indemnifying party in writing and in reasonable detail of any claim,
demand, action or proceeding for which indemnification will be sought
under Section 9 of this Agreement, and if such claim, demand, action or
proceeding is a third party claim, demand, action or proceeding, the
indemnifying party will have the right, at its expense, to assume the
defense thereof using counsel reasonably acceptable to the indemnified
party. The indemnified party shall have the right to participate, at
its own expense, with respect to any such third party claim, demand,
action or proceeding. In connection with any such third party claim,
demand, action or proceeding, the parties shall cooperate with each
other and provide each other with access to relevant books and records
in their possession. No such third party claim, demand, action or
proceeding shall be settled without the prior written consent of the
indemnified party, unless the settlement is for money damages only and
is satisfied in full simultaneously with the conclusion of the
settlement.
(c) Any indebtedness or other obligations of ALE or ALS to its
respective Affiliates will be subordinated to any indemnification
obligations of ALE to ALS or ALS to ALE, respectively.
ARTICLE 10
Not used.
ARTICLE 11
MISCELLANEOUS
11.1. Entire Agreement; Amendment. This Agreement, the Commons
Acquisition Agreement and the other agreements and documents executed in
connection therewith or contemplated thereby, constitute the entire agreement
between the parties pertaining to the subject matter of this Agreement, and
(except as otherwise provided in Article 2 and Section
41
<PAGE> 47
11.16 hereof) supersede all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto. No amendment,
supplement, modification or waiver of this Agreement shall be binding unless
executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision of this Agreement, whether or not similar, nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
11.2. Fees and Expense. Whether or not the transactions contemplated by
this Agreement are consummated, and except as expressly provided herein or in
any Ancillary Agreement, each of the parties hereto shall pay the fees and
expenses of such party's counsel, accountants, brokers, consultants, investment
bankers and other experts incident to the negotiation and preparation of this
Agreement and the consummation of the transactions contemplated by this
Agreement.
11.3. Applicable Law. All questions concerning the construction,
validity and interpretation of this Agreement, and the performance of the
obligations imposed by this Agreement, shall be governed by the law of the State
of New York without giving effect to principles of conflicts of laws.
11.4. Binding Effect; Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned or
delegated by any of the parties hereto without the prior written consent of the
other party, whether by operation of law or otherwise.
11.5. Notices. Each notice, request, demand or other communication
("Notice") by either party to the other party pursuant to this Agreement shall
be in writing and shall be personally delivered or sent by U.S. certified mail,
return receipt requested, postage prepaid, or by nationally recognized overnight
commercial courier, charges prepaid, or by facsimile transmission (but each such
Notice sent by facsimile transmission shall be confirmed by sending an original
thereof to the other party by U.S. mail or commercial courier as provided herein
no later than the following business day), addressed to the address of the
receiving party set forth below or to such other address as such party shall
have communicated to the other party in accordance with this Section. Any Notice
hereunder shall be deemed to have been given and received on the date when
personally delivered, on the date of sending when sent by facsimile, on the
third business day following the date of sending when sent by mail or on the
first business day following the date of sending when sent by commercial
courier.
42
<PAGE> 48
If to ALE: Assisted Living Equities, LLC
250 South Clinton Street, Suite 200
Syracuse, New York 13202-1258
Attn: Legal Department
Telephone: (315) 471-3181
Fax: (315) 471-1154
with a copy to: Kalkines, Arky, Zall & Bernstein LLP
1675 Broadway
New York, New York 10019-5809
Attn: Peter F. Olberg, Esq.
Telephone: (212) 541-9090
Fax: (212) 541-9250
If to ALS: Alternative Living Services, Inc.
450 North Sunnyslope Road
Suite 300
Brookfield, Wisconsin 53005
Attn: Mr. William F. Lasky
Fax: (414) 789-9592
with a copy to: Rogers & Hardin
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attn: Alan C. Leet, Esq.
Fax: (404) 525-2224
11.6. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but such counterparts
shall together constitute one and the same Agreement.
11.7. Headings. The Article and Section headings in this Agreement are
inserted for convenience of reference only and shall not constitute a part
hereof.
11.8. Construction. Common nouns and pronouns shall be deemed to refer
to the masculine, feminine, neuter, singular and plural, as the identity of the
person may in the context require. References to Sections herein include all
subsections which are subsidiary to the Section referred to. No provision of
this Agreement shall be construed in favor of or against any party hereto by
reason of the extent to which any such party or its counsel participated in the
drafting thereof.
11.9. Severability. If any provision, clause or part of this Agreement,
or the application thereof under certain circumstances, is held invalid, then
the remainder of this Agreement, or the application of such provision, clause or
part under other circumstances, shall not be affected
43
<PAGE> 49
thereby unless such invalidity materially impairs the ability of the
parties to consummate the transactions contemplated by this Agreement,
11.10. Knowledge. Any representation, warranty, covenant or statement
which is made to the knowledge of any party to this Agreement shall require that
such party make reasonable investigation and inquiry with respect thereto to
ascertain the correctness and validity thereof.
11.11. Survival of Representations and Warranties. All representations
and warranties of the parties contained in this Agreement or made pursuant to
this Agreement shall survive the execution of this Agreement and the
consummation of the transactions contemplated by this Agreement. All obligations
of the parties hereunder with respect to any Project Entity will survive the
term hereof for so long as the parties or their Affiliates have interests in or
rights or obligations in respect of such Project Entity. Any termination of the
Development Term shall not affect the obligations of ALE or ALS or their
respective Affiliates to complete any Facilities then under development for
which a Project Entity has been formed.
11.12. Arbitration. The parties hereto agree that, subject to the
provisions of this Section 11.12, any and all controversies or claims arising
out of or relating to this Agreement, any of the ALS Ancillary Agreements or ALE
Ancillary Agreements or the breach of any of the foregoing, shall be settled by
arbitration pursuant to the Federal Arbitration Act, 9 U.S.C. ss.1 et seq., in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The parties hereto further agree that the arbitrators in any such
arbitration shall not be authorized to award any punitive damages in connection
with any controversy or a claim settled by arbitration hereunder. The decision
of the arbitrator in any such arbitration shall be final and binding upon the
parties and judgment upon the award may be entered in any court having
jurisdiction thereof. Any arbitration shall take place in such place as is
agreed on by the parties hereto, or, if they cannot agree, in Chicago, Illinois,
and the expenses of the arbitrators shall be borne by the losing party. The
arbitration shall be conducted before a panel of three (3) arbitrators, one
selected by ALE, one selected by ALS, and one selected by mutual agreement of
the arbitrators selected by ALE and ALS. The arbitrators shall have the right to
retain and consult experts and competent authorities skilled in the matters
under arbitration. The arbitrators shall render their award, upon the
concurrence of at least two (2) of their number, if practicable, within sixty
(60) days after the appointment of the third arbitrator. Such award shall be in
writing and shall be final and conclusive on the parties and counterpart copies
thereof shall be delivered to each of the parties. In rendering such decision
and award, the arbitrators shall not add to, subtract from or otherwise modify
the provisions of this Agreement. Judgment may be had on the decision and award
of the arbitrators so rendered, in any court of competent jurisdiction. Each
party shall pay the fees and expenses of the one of the two original arbitrators
appointed by or for such party, as well as the attorneys' fees, witness fees and
similar expenses incurred by such party, and the fees and expenses of the third
arbitrator and all other expenses of the arbitration shall be borne by the
parties equally. Notwithstanding the foregoing, if a majority of the arbitrators
determine that the position of either party was taken willfully and is without
merit, the arbitrators may require such party to bear all of the expenses of the
arbitration as well as all or part of the prevailing party's witness fees,
attorney fees and similar expenses.
44
<PAGE> 50
To the extent that one or more of the provisions of this Section 11.12 shall be
declared invalid, void or unenforceable, the remainder of the provisions of this
Section 11.12 shall remain in full force and effect. All notices in connection
with the arbitration shall be made in the manner set forth in Section 11.5
hereof. Notwithstanding the foregoing, any determination of value of a Project
Entity or of ALS Stock in the manner set forth in Section 3.12 of this Agreement
shall be final and binding upon the parties and not subject to arbitration under
this Section 11.12.
11.13. Waiver of Compliance. Any failure of ALS or ALE to comply with
any obligation, covenant, agreement or condition contained herein may be
expressly waived in writing by ALE or ALS, respectively; provided, however, that
such waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure by the other party.
11.14. Third Parties. Except as specifically set forth or referred to
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any Person other than the parties hereto and their
successors or assigns, any rights or remedies under or by reason of this
Agreement.
11.15. Set Off Rights of Parties. Each of ALS and any ALS Affiliate
shall have the right to set off against any liquidated monetary obligation it
may owe ALE or any ALE Affiliate under this Agreement or any Ancillary Agreement
any liquidated monetary obligation which ALE or any ALE Affiliate may owe ALS or
any ALS Affiliate. Similarly, each of ALE and any ALE Affiliate shall have the
right to set off against any liquidated monetary obligation it may owe ALS or
any ALS Affiliate under this Agreement or any Ancillary Agreement any liquidated
monetary obligation which ALS or any ALS Affiliate may owe ALE or any ALE
Affiliate. This mutual dollar-for-dollar set off of liquidated monetary
obligations due and owing between ALS and the ALS Affiliates, on the one hand,
and ALE and the ALE Affiliates, on the other hand is contained in this Agreement
because the parties understand and acknowledge that such mutual set off right in
all events arises out of the single transaction memorialized by this Agreement.
The ALS Affiliates and ALE Affiliates having obligations under this Agreement or
an Ancillary Agreement are intended beneficiaries of this Section 11.15.
11.16. Effect of Commons Acquisition Agreement. The parties' respective
rights and obligations hereunder, and under any other Project Agreement or
Ancillary Agreement, shall not be dependent on or in any manner affected by the
performance or lack of performance by any party to the Commons Acquisition
Agreement. The entities owning the Commons Facilities are not ALS-Northeast
Entities and the Commons Acquisition Agreement is not an Ancillary Agreement.
The rights and responsibilities of the parties with respect to the Commons
Facilities shall be solely as set forth in the Commons Acquisition Agreement and
in the other agreements and instruments entered into or to be entered into
directly in connection therewith or pursuant thereto. Notwithstanding the
foregoing, it is understood that the Collateral Assignment will be amended to
collateralize certain indemnity obligations of ALS related to Pioneer Kenmore
Company, LLC and Pioneer Niskayuna Company, LLC as contemplated by Section 3.13.
45
<PAGE> 51
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first written above.
ALTERNATIVE LIVING SERVICES, INC.
By:______________________________
Its:_____________________________
ASSISTED LIVING EQUITIES, LLC
By:______________________________
Its:_____________________________
46
<PAGE> 52
LIST OF EXHIBITS
EXHIBIT DESCRIPTION
A Form of Architect's Agreement
B Not Used
C Not Used
D Form of Construction Agreement
E Form of Management Agreement
F Not Used
G Form of Operating Agreement (49%
Entities)
H Services and related charges
I Current owners of ALE and any of its
Affiliates which will be a party to
an Ancillary Agreement
J Not Used
K Not Used
47
<PAGE> 1
EXHIBIT 11.1
<TABLE>
<CAPTION>
COMPUTATION OF NET LOSS PER SHARE
1997 1996 1995
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic:
Net loss attributable to common shares....... $(8,263) $(8,796) $(3,011)
========== ========== ==========
Weighted average common shares outstanding... 18,651 15,429 7,782
========== ========== ==========
Per share amount............................. $ (0.44) $ (0.57) $ (0.39)
========== ========== ==========
Diluted:
Net loss..................................... $(8,263) $(8,796) $(3,011)
Net effect of convertible debentures based
on the if-converted method, assuming
100% conversion:
$35,000,000, 6.75%, due 2006................. 2,363 1,457 --
$50,000,000, 7.0%, due 2004.................. 2,178 -- --
$125,000,000, 5.25%, due 2002................ 219 -- --
---------- ---------- ----------
Net loss attributable to common shares........... $(3,504) $(7,339) $(3,011)
========== ========== ==========
Weighted average common shares outstanding....... 18,651 15,429 7,782
Net effect of convertible debentures based
on the if-converted method, assuming
100% conversion:
$35,000,000, 6.75%, due 2006................. 1,561 949 --
$50,000,000, 7.0%, due 2004.................. 1,515 -- --
$125,000,000, 5.25%, due 2002................ 143 -- --
Net effect of dilutive stock options based
on the treasury stock method, using
average market price......................... 380 314 176
---------- ---------- ----------
Totals........................................... 22,250 16,692 7,958
========== ========== ==========
Per share amount................................. $ (0.16) $ (0.44) $ (0.38)
========== ========== ==========
</TABLE>
48
<PAGE> 1
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
State of
Incorporation Name of Subsidiary
------------- ------------------
Kansas Sterling House Corporation
Kansas BCI Construction, Inc.
Delaware ALS-Crossings Co.
Delaware ALS-Clare Bridge, Inc.
Delaware ALS-Leasing, Inc.
Delaware ALS-Stonefield, Inc.
Delaware ALS-WovenHearts, Inc.
Delaware ALS-WovenHearts Minnesota, Inc.
Delaware ALS-Wynwood, Inc.
Kansas Assisted Living Properties, Inc.
Kansas Coventry Corporation
Michigan ALS-Midwest, Inc.
Washington Crossings International Corporation
Wisconsin Heartland Retirement Services, Inc.
Wisconsin Wovencare Systems, Inc.
<PAGE> 1
EXHIBIT 23.1 CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Alternative Living Services, Inc.:
We consent to incorporation by reference in the registration statements
(No. 333-32907) on Form S-8 (No. 333-37737) on Form S-3 (No. 333-38595) on Form
S-8 (No. 333-39705) on Form S-3 and (No. 333-45433) on Form S-3 of Alternative
Living Services, Inc. of our report dated February 17, 1998, relating to the
consolidated balance sheets of Alternative Living Services, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, and all
related schedules, which report appears in the December 31, 1997, annual report
on Form 10-K of Alternative Living Services, Inc.
KPMG PEAT MARWICK LLP
Chicago, Illinois
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF
ALTERNATIVE LIVING SERVICES, INC., FILED WITH THE COMPANY'S FORM 10-K FOR THE
PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND RELATED FOOTNOTES. THE FOLLOWING RESTATED
FINANCIAL DATA SCHEDULES HAVE BEEN PROVIDED TO RESTATE ALL PREVIOUS FILED
FINANCIAL DATA SCHEDULES GIVING EFFECT TO THE STERLING MERGER WHICH HAS BEEN
ACCOUNTED FOR AS A POOLING-OF-INTERESTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 79,838
<SECURITIES> 90,000
<RECEIVABLES> 6,120
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 198,833
<PP&E> 333,113
<DEPRECIATION> 9,500
<TOTAL-ASSETS> 553,552
<CURRENT-LIABILITIES> 69,305
<BONDS> 318,069
0
0
<COMMON> 165,420
<OTHER-SE> (21,523)
<TOTAL-LIABILITY-AND-EQUITY> 553,552
<SALES> 130,744
<TOTAL-REVENUES> 130,744
<CGS> 0
<TOTAL-COSTS> 143,177
<OTHER-EXPENSES> 112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,932
<INCOME-PRETAX> (8,263)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,263)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,263)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF
ALTERNATIVE LIVING SERVICES, INC., FILED WITH THE COMPANY'S FORM 10-K FOR THE
PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND RELATED FOOTNOTES. THE FOLLOWING RESTATED
FINANCIAL DATA SCHEDULES HAVE BEEN PROVIDED TO RESTATE ALL PREVIOUS FILED
FINANCIAL DATA SCHEDULES GIVING EFFECT TO THE STERLING MERGER WHICH HAS BEEN
ACCOUNTED FOR AS A POOLING-OF-INTERESTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 19,566 27,982 16,500
<SECURITIES> 0 0 0
<RECEIVABLES> 5,562 2,496 1,868
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 51,535 39,791 25,654
<PP&E> 297,355 242,089 170,176
<DEPRECIATION> 8,679 7,185 5,987
<TOTAL-ASSETS> 366,588 313,148 208,735
<CURRENT-LIABILITIES> 59,766 49,721 26,426
<BONDS> 195,478 157,556 79,046
0 0 0
0 0 0
<COMMON> 104,444 104,359 104,324
<OTHER-SE> (13,893) (14,945) (14,803)
<TOTAL-LIABILITY-AND-EQUITY> 366,588 313,148 208,735
<SALES> 89,104 52,962 23,700
<TOTAL-REVENUES> 89,104 52,962 23,700
<CGS> 0 0 0
<TOTAL-COSTS> 92,549 56,136 25,405
<OTHER-EXPENSES> 68 24 3
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2,236 620 127
<INCOME-PRETAX> 79 (1,122) (995)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 79 (1,122) (995)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 79 (1,122) (995)
<EPS-PRIMARY> 0.00 (0.06) (0.06)
<EPS-DILUTED> 0.00 (0.06) (0.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF
ALTERNATIVE LIVING SERVICIES, INC., FILED WITH THE COMPANY'S FORM 10-K FOR THE
PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS AND RELATED FOOTNOTES. THE FOLLOWING RESTATED
FINANCIAL DATA SCHEDULES HAVE BEEN PROVIDED TO RESTATE ALL PREVIOUS FILED
FINANCIAL DATA SCHEDULES GIVING EFFECT TO THE STERLING MERGER WHICH HAS BEEN
ACCOUNTED FOR AS A POOLING-OF-INTERESTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996
<CASH> 39,455 42,599 42,038
<SECURITIES> 0 0 0
<RECEIVABLES> 2,032 1,177 1,298
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 52,364 65,105 56,180
<PP&E> 138,232 139,615 101,647
<DEPRECIATION> 5,310 727 558
<TOTAL-ASSETS> 204,353 218,127 172,624
<CURRENT-LIABILITIES> 31,832 26,318 26,057
<BONDS> 68,625 92,718 85,532
0 0 0
0 0 0
<COMMON> 104,324 105,264 62,093
<OTHER-SE> (13,260) (12,148) (10,089)
<TOTAL-LIABILITY-AND-EQUITY> 204,353 218,127 172,624
<SALES> 55,637 35,289 18,027
<TOTAL-REVENUES> 55,637 35,289 18,027
<CGS> 0 0 0
<TOTAL-COSTS> 61,354 39,826 21,708
<OTHER-EXPENSES> 7 35 7
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 3,231 2,448 1,124
<INCOME-PRETAX> (8,955) (7,052) (4,845)
<INCOME-TAX> (159) (159) (159)
<INCOME-CONTINUING> (8,796) (6,893) (4,686)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (8,796) (6,893) (4,686)
<EPS-PRIMARY> (0.57) (0.48) (0.35)
<EPS-DILUTED> (0.57) (0.48) (0.35)
</TABLE>
