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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
(Amendment No. 6)
Under the Securities Exchange Act of 1934
ARV Assisted Living, Inc.
(Name of Company)
Common Stock, No Par Value
(Title of Class of Securities)
00204C107
(CUSIP Number)
Lorenzo Lorenzotti
Prometheus Assisted Living LLC
Lazard Freres Real Estate Investors L.L.C.
30 Rockefeller Plaza, 63rd Floor
New York, NY 10020
(212) 632-6000
with a copy to:
Kevin Grehan, Esq.
Cravath, Swaine & Moore
825 Eighth Avenue
New York, NY 10019
(212) 474-1490
----------------------------------------------
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications)
June 2, 1998
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(b)(3) or (4), check the
following box o.
Note: six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are
to be sent.
*The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which
would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of
that section of the Act but shall be subject to all other provisions of the
Act (however, see the Notes).
Page 1 of 6
<PAGE>
SCHEDULE 13D
CUSIP No. 00204C107 Page 2 of 7 Pages
------------- --- ---
- ---------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
SS OR IRS IDENTIFICATION NO OF ABOVE PERSON
Prometheus Assisted Living LLC
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) x
3 SEC USE ONLY
4 SOURCE OF FUNDS*
AF
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS
REQUIRED PURSUANT TO ITEMS 2(d) OR 2(E) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- ------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES 7,595,069
BENEFICIALLY
OWNED BY EACH 8 SHARED VOTING POWER
REPORTING -0-
PERSON WITH
- -------------------
9 SOLE DISPOSITIVE POWER
7,595,069
10 SHARED DISPOSITIVE POWER
-0-
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
7,595,069 shares of Common Stock
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN [ ]
SHARES*
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
47.9%, the number of shares of Common Stock currently owned by
Prometheus (7,595,069) divided by the number of shares of Common Stock
reported by the Company as outstanding on December 5, 1997 (15,868,998).
14 TYPE OF REPORTING PERSON*
OO
- -------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 2 of 6
<PAGE>
SCHEDULE 13D
CUSIP No. 00204C107 Page 3 of 7 Pages
----------- ----- ---
- ---------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
SS OR IRS IDENTIFICATION NO OF ABOVE PERSON
LF Strategic Realty Investors II L.P.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) x
3 SEC USE ONLY
4 SOURCE OF FUNDS*
OO, BK
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS
REQUIRED PURSUANT TO ITEMS 2(d) OR 2(E) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
- ------------------
NUMBER OF 7 SOLE VOTING POWER
SHARES 7,595,069
BENEFICIALLY
OWNED BY EACH 8 SHARED VOTING POWER
REPORTING -0-
PERSON WITH
- ------------------ 9 SOLE DISPOSITIVE POWER
7,595,069
10 SHARED DISPOSITIVE POWER
-0-
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
7,595,069 shares of Common Stock
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN [ ]
SHARES*
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
47.9%, the number of shares of Common Stock currently owned by
Prometheus (7,595,069) divided by the number of shares of Common Stock
reported by the Company as outstanding on December 5, 1997 (15,868,998).
14 TYPE OF REPORTING PERSON*
PN
- ---------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
Page 3 of 6
<PAGE>
Item 1. Security and Company
This Amendment No. 6 to Schedule 13D (this "Amendment"), is filed
by LF Strategic Realty Investors II L.P., a Delaware limited partnership
("LFSRI") and Prometheus Assisted Living LLC, a Delaware limited liability
company ("Prometheus", and collectively with LFSRI, the "Reporting
Persons"). As previously reported in the Schedule 13D filed on July 23,
1997, by Lazard Freres Real Estate Investors L.L.C., a New York limited
liability company ("LFREI") and Prometheus (as amended, the "Initial
Schedule 13D"), pursuant to a Stock Purchase Agreement dated as of July 14,
1997, by and between ARV Assisted Living, Inc. (the "Company"), LFREI and
Prometheus (as amended, the "Stock Purchase Agreement"), Prometheus agreed
to purchase certain shares of the common stock, no par value, of the
Company (the "Common Stock"). This Amendment supplementally amends the
Initial Schedule 13D. Capitalized terms used herein but not defined shall
have the meanings assigned to such terms in the Initial Schedule 13D.
This Amendment relates to LFREI's position, which has been
conveyed to the Company on June 2, 1998, that an Early Standstill
Termination Event has occurred pursuant to Section 4.1 of the Amended and
Restated Stockholders Agreement dated as of October 29, 1997, by and
between LFREI, Prometheus and the Company (the "Amended and Restated
Stockholders Agreement"). The Initial Schedule 13D is hereby amended as
follows:
Item 2. Identity and Background
No Change.
Item 3. Source and Amount of Funds or Other Consideration
No change.
Item 4. Purpose of Transaction
No change.
Item 5. Interest in Securities of the Company
No change.
Item 6. Contract, Arrangements, Understandings or
Relationships with Respect to Securities of the
Company
Page 4 of 6
<PAGE>
On June 2, 1998, through a letter (the "Letter"), sent by
Cravath, Swaine & Moore, counsel to LFREI, to Irell & Manella LLP, counsel
to the Company, LFREI put the Company on written notice that the Company
has triggered an Early Standstill Termination Event (the "Early Standstill
Termination Event"), pursuant to Section 4.1 of the Amended and Restated
Stockholders Agreement. In addition, through the Letter, LFREI informed the
Company that in connection with a legal action styled ARV v. LFREI, et al.,
pending in the Superior Court for Orange County, California, in the absence
of an agreement by the Company that an Early Standstill Termination Event
had occurred, LFREI expected to file a cross claim against the Company
seeking a declaration raising that matter.
On June 9, 1998, LFREI brought cross-claims against the Company
in the pending litigation, seeking, among other things, a declaration that
an Early Standstill Termination event has occurred, freeing LFREI and its
affiliates from the standstill provisions of Section 4 of the Amended and
Restated Stockholders Agreement. LFREI has moved for summary judgment on
each of its claims. All references to LFREI's claims and to the contracts
upon which they are based, the Amended and Restated Stockholders Agreement
and the Amended and Restated Kapson Letter Agreement dated as of October
29, 1997, by and between LFREI, Prometheus and the Company (the "Amended
and Restated Kapson Letter Agreement"), are qualified in their entirety by
the full text of such documents, copies of which are attached as Exhibits
hereto and incorporated by reference herein.
Item 7. Material to be Filed as Exhibits
Exhibit 1: Letter from Cravath, Swaine
& Moore to Irell & Manella LLP,
dated June 2, 1998.
Exhibit 2: Cross-Complaint of Defendants LFREI
and Prometheus for Declaratory
Relief.
Exhibit 3: Amended and Restated Stockholders
Agreement dated as of October 29,
1997.
Exhibit 4: Amended and Restated Kapson Letter
Agreement dated as of October 29,
1997.
Page 5 of 6
<PAGE>
After reasonable inquiry and to the best of my knowledge and
belief, I certify that the information set forth in this statement is true,
complete and correct.
PROMETHEUS ASSISTED LIVING LLC
by LF Strategic Realty Investors II
L.P., as sole member,
by Lazard Freres Real Estate
Investors L.L.C., its general
partner,
by
/s/ ROBERT P. FREEMAN
----------------------------
Name: Robert P. Freeman
Title: Principal
LF STRATEGIC REALTY INVESTORS II L.P.
by Lazard Freres Real Estate
Investors L.L.C., its general partner,
by
/s/ ROBERT P. FREEMAN
-----------------------------
Name: Robert P. Freeman
Title: Principal
Page 6 of 6
[Letterhead of]
CRAVATH, SWAINE & MOORE
[New York Office]
(212) 474-1837
June 2, 1998
ARV v. LFREI, et al.
Dear Alex:
I am writing to advise you that we believe that ARV has triggered
an Early Standstill Termination Event pursuant to Section 4.1 of the
Amended and Restated Stockholders Agreement, dated as of October 29, 1997
(Exh. B to ARV's complaint). We expect to file cross claims within the next
few days, including a cross claim seeking a declaration that an Early
Standstill Termination Event has occurred. Of course, if you agree that ARV
has triggered an Early Standstill Termination Event, we would have no need
to seek a declaration as to that issue.
As you know, the ARV Board of Directors rejected a request that
the Annual Meeting currently scheduled for June 3, 1998, be adjourned
pending a resolution of ARV's lawsuit. We are all heavily engaged in
responding to the demands of the expedited schedule ARV has insisted upon.
In view of the uncertainty surrounding the relationship between our clients
(including the status of the Standstill Period), and what I anticipate will
be further differences in their respective positions, LFREI does not
believe that participation in the Annual Meeting prior to resolution (by
decision or otherwise) of these differences would be productive or in the
best interest of all shareholders. Because the only action proposed at the
Annual Meeting is the reelection of existing directors, who will
automatically continue in their positions in the absence of a meeting, no
damage to ARV would result from its postponement. Consequently, I have been
asked to inform you that neither LFREI nor any of its affiliates will
participate in tomorrow's meeting. We again urge your client to consider
<PAGE>
2
adjournment of the Annual Meeting pending the disposition of the motions
scheduled to be filed on June 9, 1998.
Very truly yours,
/s/ Thomas G. Rafferty
Thomas G. Rafferty
Alexander F. Wiles, Esq.
Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067
BY FACSIMILE
CRAVATH, SWAINE & MOORE
Rowan D. Wilson (State Bar No. 118488)
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
Telephone: (212) 474-1000
Facsimile: (212) 474-3700
Attorneys for Defendants
Lazard Freres Real Estate
Investors LLC, Prometheus
Assisted Living LLC, Robert P.
Freeman, Kenneth M. Jacobs and
Murry N. Gunty
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF ORANGE
ARV ASSISTED LIVING, INC., a Delaware
corporation,
Plaintiff, CASE NO. 794211
-against-
LAZARD FRERES REAL ESTATE INVESTORS CROSS-COMPLAINT OF
LLC, a New York limited liability company; DEFENDANTS LAZARD
PROMETHEUS ASSISTED LIVING LLC, a FRERES REAL ESTATE
Delaware limited liability company; ROBERT P. INVESTORS LLC and
FREEMAN, an individual; KENNETH M. PROMETHEUS ASSISTED
JACOBS, an individual; MURRY N. GUNTY, an LIVING LLC FOR
individual; ATRIA COMMUNITIES, INC., a DECLARATORY RELIEF
Delaware corporation; KAPSON SENIOR
QUARTERS CORP., a Delaware corporation; ASSIGNED FOR ALL
DOES 1 through 20 inclusive, PURPOSES TO JUDGE
WOOLLEY, DEPARTMENT 6
Defendants,
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LAZARD FRERES REAL ESTATE INVESTORS Date of Filing
LLC and PROMETHEUS ASSISTED LIVING This Action: May 12, 1998
LLC, Trial Date: None Set
Cross-plaintiffs,
-against-
ARV ASSISTED LIVING, INC.
Cross-defendant.
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<PAGE>
Cross-plaintiffs Lazard Freres Real Estate Investors LLC and
Prometheus Assisted Living LLC ("Prometheus") (collectively referred to as
"LFREI"), by their undersigned attorneys, allege for their cross-claims
against cross-defendant ARV Assisted Living, Inc. ("ARV") as follows:
PARTIES
1. Cross-plaintiff Lazard Freres Real Estate Investors LLC is a
New York limited liability company and sole owner of Prometheus. The
principal activity of Lazard Freres Real Estate Investors LLC is investing
monies entrusted to it by public and private pension funds and similar
institutional investors as general partner of several real estate
partnerships that are affiliated with Lazard Freres & Co., LLC.
2. Cross-plaintiff Prometheus is a Delaware limited liability
company with its principal offices located in New York, New York.
Prometheus, an affiliate of Lazard Freres Real Estate Investors LLC and
Lazard Freres & Co., LLC, is a company through which Lazard Freres Real
Estate Investors LLC invests monies entrusted to it by public and private
pension funds and other similar institutional investors in the assisted
living field.
3. Cross-defendant ARV is a Delaware corporation with its
principal office located in Costa Mesa, California. ARV is a provider of
assisted living accommodations and services that operates, acquires and
develops assisted living facilities.
NATURE OF THE ACTION
4. These cross-claims arise out of a dispute over certain
contractual provisions that ARV and LFREI negotiated at arm's length in
October 1997. The contract provisions governing the rights of LFREI and its
affiliates to compete with ARV allegedly serve as the basis for ARV's
claims in this action against defendants LFREI, Robert P. Freeman, Murry N.
Gunty and Kenneth M. Jacobs (the three individuals nominated by LFREI to
ARV's Board of Directors), Kapson Senior Quarters Corp. ("Kapson") (an
assisted living company recently
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<PAGE>
acquired by LFREI) and Atria Communities, Inc., ("Atria") an assisted
living company that Kapson has contracted to acquire.
5. The first of the contract provisions at issue is a non-compete
provision contained in the October 29, 1997, Amended and Restated Kapson
Agreement ("Amended Kapson Agreement"). The Consent Rights Provision
(Paragraph 1) of that Agreement reads:
"1) Consent Rights. After the closing of the Kapson Investment, LFREI
will not permit Kapson to and will cause Kapson to enter into an
agreement with ARV under which Kapson will agree not to enter into any
new developments or acquisitions (other than those in its pipeline at
the closing of the Kapson Investment as disclosed in a schedule to be
delivered at that time) without the written consent of a majority of
the independent non-LFREI affiliated or appointed members of the ARV
Board of Directors, which consent may be withheld at the sole
discretion of those directors; provided that upon the funding of that
certain $60,000,000 6 3/4% Convertible Subordinated Note due 2007 by
LFREI or an affiliate this paragraph shall terminate and be of no
further effect." (Emphasis added.)
6. The second of the contract provisions at issue is a
non-compete provision contained in the October 29, 1997, Amended and
Restated Stockholders Agreement ("Amended Stockholders Agreement"). The
Non-Compete Provision (Section 5.1) of that Agreement reads:
"Section 5.1 Restrictions on Investments. Except as contemplated by
the Kapson Agreement, from the date of this Agreement until the
occurrence of a Termination Event or an Early Standstill Termination
Event, the Advancing Party [LFREI], the Buyer [Prometheus], Investor
and their Controlled Affiliates shall not, directly or indirectly, own
any equity interest (other than a de minimis amount) in any public or
private company the principal business of which is the ownership,
management, operation and development of assisted living facilities in
the United States, unless 75% of the Directors of the Company [ARV]
(other than the Investor Nominees) have consented to such ownership.
Upon the termination of the Kapson Agreement or any provisions
thereof, this Section 5.1 shall terminate and be of no further
effect." (Emphasis added.)
7. Section 5.1 of the Amended Stockholders Agreement refers to
the October 29, 1997, Amended and Restated Kapson Agreement as the "Kapson
Agreement" (a defined term in the Amended Stockholders Agreement), which is
referred to herein as the "Amended Kapson Agreement".
8. The two provisions at issue provide that, by operation of the
language of the contract, they terminated on December 1, 1997, when LFREI
funded the $60 million Notes, as referenced in Paragraph 1 of the Amended
Kapson Agreement. Yet, rather than abiding by the
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<PAGE>
terms of the agreement it had negotiated at arm's length, ARV brought this
lawsuit seeking to enforce these expired provisions.
9. The Amended Stockholders Agreement also contained provisions
restricting LFREI's ability, inter alia, to vote its shares in ARV during a
"Standstill Period." (Sections 4.2 and 4.3.) The Amended Stockholders
Agreement provides for the termination of the Standstill Period in the
event of an occurrence of one of several specified events, known as "Early
Standstill Termination Events." (Section 4.1.)
10. On May 12, 1998, ARV moved for a preliminary injunction to
enforce these contract provisions, which by their very terms, are expired.
Under these expired terms, ARV also seeks to enjoin a merger between Kapson
and Atria. In addition to its efforts to require LFREI and Kapson to honor
contractual provisions that terminated by operation of contract on December
1, 1997, by insisting that neither LFREI nor Kapson can proceed with an
investment in Atria without ARV's consent, ARV has also insisted that it,
rather than LFREI or Kapson, is entitled to proceed with the Atria
transaction. In furtherance of that effort to supplant Kapson in the Atria
investment, ARV has taken steps to solicit indications of interest from
financing entities with respect to participating in a business combination
of ARV and Atria. Those steps constitute an Early Standstill Termination
Event pursuant to Paragraph 4.1(ii) of the Amended Stockholders Agreement.
11. Accordingly, LFREI seeks a declaration from this Court that
(1) the Non-Compete Provision (Section 5.1) of the Amended Stockholders
Agreement and the Consent Rights Provision (Paragraph 1) of the Amended
Kapson Agreement terminated by operation of contract upon funding by Lazard
of the $60 million investment in ARV on December 1, 1997; (2) as a
consequence of the termination of these provisions, LFREI and its
affiliates, including Kapson, are free to compete with ARV by making
investments in the assisted living field and are under no obligation to
seek ARV's approval or negotiate with ARV concerning such investments; and
(3) by virtue of the actions taken by ARV to supplant Kapson in the
proposed transaction between Atria and Kapson, ARV has triggered an Early
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<PAGE>
Standstill Termination Event, releasing LFREI from the restrictions of the
Standstill Period contained in the Amended Stockholders Agreement dated as
of October 29, 1997.
BACKGROUND OF THE ACTION
LFREI's Initial Investment in ARV
12. Commencing in late 1996 and continuing into early 1997, LFREI
engaged in a process of investigating investment opportunities in the
assisted living field on behalf of its investors, most of whom are public
and private pension funds. In or around the spring of 1997, ARV began
looking for a financial backer to provide ARV with access to capital, which
it required to meet its severe cash-flow problems and to proceed with
expansion plans. In connection with those efforts, ARV began discussions
with representatives of LFREI in the hope that LFREI would provide ARV with
much-needed capital in exchange for a substantial, yet non-controlling,
equity interest in ARV.
13. On July 14, 1997, following arm's-length negotiations, ARV
and LFREI entered into contracts pursuant to which LFREI agreed to invest
up to approximately $135 million in ARV in exchange for up to 49.9% of
ARV's outstanding common stock. That transaction was evidenced by the
following written agreements, all of which were dated as of July 14, 1997:
(1) a Stock Purchase Agreement by and among LFREI, Prometheus and ARV; (2)
a Registration Rights Agreement by and among ARV and Prometheus; (3) a
Stockholders Agreement by and among LFREI, Prometheus and ARV (the
"Stockholders Agreement"); and (4) a Stockholders' Voting Agreement by and
among LFREI, Prometheus and the stockholders listed therein.
14. Among other things, Section 5.1 of the Stockholders Agreement
contained a Non-Compete Provision that placed certain restrictions on
LFREI's ability to invest in other assisted living businesses.
Specifically, the Non-Compete Provision provided:
"Section 5.1 Restrictions on Investments. From the date of this
Agreement until the occurrence of a Termination Event, the Advancing
Party [LFREI], the Buyer [Prometheus], Investor and their Controlled
Affiliates shall not, directly or indirectly, own any equity interest
(other than a de minimis amount) in any public or private
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<PAGE>
company the principal business of which is the ownership, management,
operation and development of assisted living facilities in the United
States, unless 75% of the Directors of the Company [ARV] (other than
the Investor Nominees) have consented to such ownership."
15. The Stockholders Agreement also provided for a Standstill
Period, during which time, LFREI's ability to pursue certain transactions
was restricted. The Standstill Provisions enumerated various Early
Standstill Termination Events, any one of which, if triggered, would
terminate the Standstill Period.
16. As a balance to ARV's right to prevent LFREI from pursuing
competing investments in the assisted living field, the July 14, 1997,
Stockholders Agreement also granted LFREI certain consent rights.
17. Pursuant to Section 5.5 of the Stock Purchase Agreement dated
July 14, 1997, LFREI's written consent was required before ARV could engage
in a variety of business activities, including: (1) acquiring assets having
a value in excess of 1% of ARV's current value; (2) selling more than 1% of
ARV's assets either in a single transaction or group of related
transactions; (3) incurring indebtedness or obligations with a value in
excess of 1% of ARV's assets; (4) approving any annual operating budgets
for ARV; (5) making any material change to executive management or entering
into any material agreement or arrangement with members of executive
management of ARV; (6) making changes to option and warrant plans; (7)
changing ARV's dividend policy; (8) amending, modifying or terminating any
material contract; (9) transacting with any affiliate of ARV; (10) entering
into any new line of business; (11) filing for bankruptcy; (12)
transferring all or substantially all of ARV's assets; (13) changing ARV's
charter or by-laws; (14) purchasing or leasing or agreeing to purchase any
real property; (15) entering into any employment agreements; (16) making or
changing any tax election or accounting period or accounting method,
including filing any amended tax return; or (17) adopting any "poison pill"
or other similar shareholders' rights plan. These contractual consent
rights gave LFREI the right to prevent any changes in ARV's business
operations with which LFREI disagreed.
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<PAGE>
18. Following shareholder approval of the July 14, 1997,
transaction, the matters covered by Section 5.5 of the July 14, 1997, Stock
Purchase Agreement ("Section 5.5") would have become the subject of a
supermajority voting requirement. Pursuant to that requirement, the four
LFREI nominated directors could have effectively vetoed any actions covered
by the provisions of Section 5.5 by voting together (the "supermajority
rights").
19. Thus, the initial agreement between these parties created a
contractual relationship that, in the event of any serious disagreement,
would have allowed either side to prevent the other from acting with
respect to any further significant investments in the assisted living field
or any other significant change in ARV's business.
20. On July 23, 1997, LFREI completed its first purchase under
the Stock Purchase Agreement and paid ARV approximately $27 million in
exchange for 1,921,012 shares of ARV stock. Under its arrangement with ARV,
LFREI was to purchase the remaining shares in two phases under the Stock
Purchase Agreement. Aside from LFREI's initial investment, the remainder of
the transaction was subject to a vote of all of the shareholders of ARV.
The contract provisions restricting ARV from acting without LFREI's consent
continued in effect until a shareholder vote on the July 1997 agreements
between LFREI and ARV. If the shareholders approved the July transaction,
LFREI's consent rights would have been effectively continued in its
supermajority rights. If ARV's shareholders rejected the deal, then LFREI
would have been free from any further obligation to ARV and entitled to a
breakup fee of as much as $13 million.
The Kapson Opportunity
21. Following LFREI's initial investment in ARV, and prior to any
shareholder vote, LFREI began assisting ARV through a strategic planning
initiative designed to improve ARV's internal controls and systems. As part
of that strategic initiative, the parties recognized that ARV could benefit
from the use of off-balance sheet financing through a so-called "black
box". In the assisted living field, the concept of a "black box" involves
the association of a public company with one or more privately held
entities. The private entity, or "black box", is
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<PAGE>
the development and acquisition vehicle, which carries on its books the
costs and losses associated with new developments, as well as any goodwill
associated with acquisitions involving purchases of stock. The public
company concurrently enters into leasing or management arrangements with
the private entity to operate the newly-acquired facilities and to receive
a portion of the cash flow from the properties. In order to achieve the
proper accounting treatment, it is important that these types of
relationships be the result of arm's-length negotiations conducted as part
of an independent process, which results in a deal economically reasonable
to both parties. The benefits of this arrangement enable both companies to
maximize development and returns to their investors. The public company, in
particular, benefits from the potential ability to avoid the negative
financial and accounting consequences of start-up costs and losses from
development and the goodwill from certain types of acquisitions.
22. In or around August of 1997, LFREI became aware of a
potential investment opportunity in Kapson, the largest operator of
assisted living facilities in the northeastern United States. LFREI
believed that Kapson had the potential to be a "black box" in an alliance
with ARV, as did Kapson's financial advisor at that time, Salomon Brothers,
which also served as financial advisor to ARV in its dealings with LFREI.
23. At the time that Kapson was identified as a potential
investment, the Non-Compete Provision of the original Stockholders
Agreement between LFREI and ARV was in place. Consequently, LFREI
approached the ARV Board of Directors and sought its consent for an
acquisition of Kapson by LFREI or one of its affiliates.
24. On September 30, 1997, after discussions with representatives
of both LFREI and Salomon Brothers, ARV's Board unanimously voted to
consent to LFREI's purchase of Kapson. In exchange for its consent, ARV
demanded, inter alia, that it receive certain consent rights with respect
to future acquisitions by Kapson after the closing of the LFREI/Kapson
transaction. These new consent rights obtained by ARV were similar in all
material respects to the consent rights ARV then had in relation to LFREI
and its existing
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<PAGE>
affiliates pursuant to Section 5.1 of the July 14, 1997, Stockholders
Agreement. A written letter agreement between LFREI and ARV relating to
LFREI's purchase of Kapson was entered into on September 30, 1997 (the
"original Kapson Agreement").
25. The consent rights with respect to Kapson were set forth in
Paragraph 1 of the original Kapson Agreement:
"1) Consent Rights. After the closing of the Kapson Investment, LFREI
will not permit Kapson to and will cause Kapson to enter into an
agreement with ARV under which Kapson will agree not to enter into any
new developments or acquisitions (other than those in its pipeline at
the closing of the Kapson Investment as disclosed in a schedule to be
delivered at the time) without the written consent of a majority of
the independent non-LFREI affiliated or appointed members of the ARV
Board of Directors, which consent may be withheld at the sole
discretion of those directors."
The Emeritus Effort to Acquire Control of ARV
and the Restructuring of LFREI's Investment in ARV
26. During this same period of late 1997, ARV was confronted with
a potential hostile takeover from the Emeritus Corporation ("Emeritus").
Counsel for ARV, Latham & Watkins ("Latham"), and ARV's investment banker,
Salomon Brothers, recommended a restructuring of the contractual
relationship between ARV and LFREI in part due to ARV's changed capital
needs and in part due to the Emeritus offer. By restructuring the LFREI
investment to a convertible security, the ARV Board would have the option
of increasing the number of shares that LFREI was contractually obligated
to vote in support of the existing board.
27. LFREI was prepared to live with the existing July contractual
arrangements. Pursuant to those arrangements, LFREI had made an investment
of about $26 million and obtained approximately 17% of ARV's common stock.
The additional $108.2 million investment commitment by LFREI would not be
required unless and until the ARV shareholders voted to approve the July
ARV-LFREI transaction. Thus, if Emeritus or some other bidder either
acquired or took control of ARV, LFREI would likely be bought out of its
17% stake in ARV. In any event, LFREI would be free to compete in the
assisted living field, because the restrictions of the July contract would
no longer be of any force or effect.
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28. The restructuring proposed by ARV and its counsel greatly
increased the level of risk faced by LFREI in its investment. As part of
the restructuring, ARV asked LFREI to relinquish the supermajority voting
rights LFREI would have had upon shareholder approval and the contractual
consent rights that were in place pending the shareholder vote, pursuant to
Section 5.5 of the original Stock Purchase Agreement. Those rights had
formed the basis of the structure pursuant to which neither side could
effectively act without the agreement of the other. Under the proposed
restructuring, LFREI would lose the ability it had obtained to protect its
investment in ARV by preventing any significant changes in ARV's strategies
going forward through the exercise of its rights under Section 5.5 of the
Stock Purchase Agreement. Furthermore, ARV was requesting LFREI to increase
its investment to almost $90 million by funding $60 million of Notes
immediately, without waiting for shareholder approval or the outcome of the
anticipated Emeritus proxy contest. ARV also wanted to remove LFREI's
consent and supermajority rights as well as its right to up to a $13
million breakup fee, to which LFREI was entitled in the event the July
transaction had not been fully consummated. If Emeritus or any other party
took control of ARV, either through an acquisition or a successful proxy
fight, LFREI would have found itself in the unhappy position of being
locked into an investment controlled by a stranger to the July transaction
and, notably, to the Non-Compete Provision of Section 5.1 of the July 14,
1997, Stockholders Agreement. In such a scenario, before making any further
investments in the assisted living field on behalf of its public and
private pension funds and investors, LFREI would have had to obtain consent
from a stranger-- the new entity controlling ARV. That scenario was not
acceptable to LFREI. Consequently, as part of the October restructuring,
LFREI negotiated for a release of the non-compete provisions of the
original Stockholder Agreement and original Kapson Agreement upon funding
of the additional $60 million investment in ARV represented by the Notes.
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<PAGE>
The October 29, 1997, Amendments to the Contracts
29. On or about October 29, 1997, following lengthy negotiations,
LFREI and ARV entered into amended and restated contracts. The amended
agreements substantially revised the original relationships between ARV and
LFREI. First, LFREI agreed to purchase $60 million in newly issued
convertible debt securities (the "Notes") from ARV, without awaiting a
shareholder vote or resolution of the Emeritus takeover attempt. LFREI also
agreed to surrender certain of the rights it had obtained under the
original contractual agreement with ARV, including: (1) its right to
acquire up to 49.9% of ARV's outstanding stock from ARV at $14 per share;
(2) its supermajority rights and contractual controls over ARV; (3) its
ability to nominate four ARV Directors (LFREI could now nominate only
three); and (4) the right to up to a $13 million breakup fee.
30. In exchange for the concessions from LFREI and the $60
million investment represented by the Notes, ARV agreed to a number of
changes to its rights. Most notably, given LFREI's uncertainty as to who
would ultimately control ARV--the existing Board or a Board controlled by
Emeritus or some other bidder--LFREI insisted that the Non- Compete
Provisions of the original contracts terminate. As a result, the parties
negotiated amended and restated agreements which provided for a termination
of the non-compete provisions of the original agreements immediately upon
LFREI's funding of the Notes and a 90-day sunset period for negotiations on
a proposed Kapson/ARV alliance, as well as a representation that any
agreement on such an alliance be "mutually agreeable". ARV also agreed that
LFREI could immediately nominate three directors (defendants Messrs.
Freeman, Jacobs and Gunty) to the ARV Board, subject to the Board's
approval of those candidates.
31. The revised transaction between LFREI and ARV was evidenced
by the following written agreements, all of which were dated as of October
29, 1997: (1) the Amended and Restated Stock and Note Purchase Agreement
among LFREI, Prometheus and ARV; and (2) the Amended Stockholders Agreement
among LFREI, Prometheus and ARV; (3) the Amended and Restated Registration
Rights Agreement between Prometheus and ARV;
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and (4) the Amended and Restated Stockholders' Voting Agreement among
LFREI, Prometheus and certain individual stockholders. In addition, on
October 29, 1997, ARV and LFREI entered into the Amended Kapson Agreement.
32. Paragraph 1 of the October 29, 1997, Amended Kapson Agreement
(Exhibit C to ARV's Complaint) (the "Amended Consent Rights Provision")
provided that the obligation to secure ARV's consent with respect to any
acquisition by Kapson following the LFREI/Kapson closing would terminate
once LFREI funded the $60 million Notes. The Amended Kapson Agreement did
not give ARV any rights with respect to developments or acquisitions by
Kapson prior to the closing with LFREI. The agreement did provide that any
such developments or acquisitions being contemplated by Kapson as of the
date of the closing with LFREI would be listed in a "pipeline" schedule to
be delivered to ARV at the closing of LFREI's investment in Kapson.
Developments or acquisitions included in the Kapson pipeline would be part
of the parties' negotiations for mutually agreeable arrangements in an
alliance between ARV and Kapson on commercially reasonable terms. LFREI and
ARV further agreed that, in the event that the parties could not reach
mutually acceptable and commercially reasonable arrangements on an alliance
between ARV and Kapson by the later of 90 days following the closing of the
Kapson transaction by LFREI, or May 1, 1998, any surviving provisions of
the Amended Kapson Agreement would terminate, and the entire agreement
would be terminated with no further obligation by either party.
33. Paragraph 5.1 of the October 29, 1997, Amended Stockholders
Agreement (Exhibit B to ARV's Complaint) (the "Amended Non-Compete
Provision"), was amended to provide that the provision would terminate
"upon the termination of the Kapson Agreement or any provisions thereof . .
. ." (Emphasis added.)
34. Specifically, Paragraph 1 (the Amended Consent Rights
Provision) of the Amended Kapson Agreement provided:
"1) Consent Rights. After the closing of the Kapson Investment, LFREI
will not permit Kapson to and will cause Kapson to enter into an
agreement with ARV under which Kapson will agree not to enter into any
new developments or acquisitions (other than those in its pipeline at
the closing of the Kapson Investment as disclosed in a
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schedule to be delivered at that time) without the written consent of
a majority of the independent non-LFREI affiliated or appointed
members of the ARV Board of Directors, which consent may be withheld
at the sole discretion of those directors; provided that upon the
funding of that certain $60,000,000 6 3/4% Convertible Subordinated
Note due 2007 by LFREI or an affiliate this paragraph shall terminate
and be of no further effect." (Emphasis added.)
35. Section 5.1 (the Amended Non-Compete Provision) of the
Amended and Restated Stockholders Agreement provided:
"Section 5.1 Restrictions on Investments. Except as contemplated by
the Kapson Agreement, from the date of this Agreement until the
occurrence of a Termination Event or an Early Standstill Termination
Event, the Advancing Party [LFREI], the Buyer [Prometheus], Investor
and their Controlled Affiliates shall not, directly or indirectly, own
any equity interest (other than a de minimis amount) in any public or
private company the principal business of which is the ownership,
management, operation and development of assisted living facilities in
the United States, unless 75% of the Directors of the Company [ARV]
(other than the Investor Nominees) have consented to such ownership.
Upon the termination of the Kapson Agreement or any provisions
thereof, this Section 5.1 shall terminate and be of no further
effect." (Emphasis added to indicate changes from July version of
agreement.)
36. Thus, in the revised transaction, the operation of the
Amended Non-Compete Provision was clearly and explicitly linked to the
Amended Kapson Agreement. Specifically, the first clause ("Except as
contemplated by the Kapson Agreement") and the last sentence ("Upon the
termination of the Kapson Agreement or any provisions thereof, this Section
5.1 shall terminate and be of no further effect") of the Amended
Non-Compete Provision were added as a result of arm's-length negotiations
between LFREI and ARV. In other words, if any provision of the Amended
Kapson Agreement terminated, so did Section 5.1 of the Amended Stockholders
Agreement. The Amended Consent Rights Provision of the Amended Kapson
Agreement differed from ARV's corresponding rights in the original Kapson
Agreement in that the Amended Consent Rights Provision provided in the last
clause that "upon the funding" of the Notes by LFREI, ARV's consent rights
with respect to Kapson would "terminate and be of no further effect".
37. LFREI funded the $60 million Notes on December 1, 1997.
Because the Amended Consent Rights Provision of the Amended Kapson
Agreement (Paragraph 1) terminated by its express terms when LFREI funded
the $60 million Notes, Section 5.1 of the Amended Stockholders Agreement
also terminated at that time. By the clear and explicit terms
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of the contracts between LFREI and ARV, as of December 1, 1997, ARV's
Amended Consent Rights Provision and the Amended Non-Compete Provision
terminated by operation of contract. Therefore, as of December 1, 1997,
LFREI and Kapson were both free to compete with ARV by investing in other
assisted living companies without obtaining ARV's consent.
Negotiations for the Proposed Kapson/ARV Alliance
38. Paragraph 3 of the Amended Kapson Agreement states in part
that:
"LFREI and Prometheus will seek in good faith to negotiate with ARV
for the leasing or management agreements, on commercially reasonable
and customary terms, of all existing or planned facilities of Kapson
including those in the above-described 'pipeline'."
39. Even though the Amended Kapson Agreement provided that the
period for negotiation on the proposed Kapson/ARV alliance would be the 90
days following the closing of the LFREI/Kapson transaction (which closed on
March 30, 1998), LFREI began the negotiation process by having one of its
representatives travel to California for a Christmas Eve meeting with ARV
in December of 1997. Following that meeting, a series of face-to-face
negotiation discussions took place in New York during January 1998.
40. Prior to the January meetings in New York, LFREI learned that
John J. Rydzewski, one of the ARV independent directors and former CEO of
ARV, had rejected the notion that ARV would seek to negotiate "commercially
reasonable terms" for a Kapson/ARV alliance.
41. Mr. Rydzewski instead took the view, as he stated in writing,
that "merely obtaining commercially reasonable terms" for ARV was "an
insufficiently elevated performance hurdle, inasmuch as commercially
reasonable terms suggests an unacceptably wide range of valuation outcomes
for ARV's shareholders from ARV's ongoing interaction with Kapson".
42. Nonetheless, representatives of LFREI and Kapson
continued in good faith to attempt to reach a "commercially reasonable"
arrangement with ARV relating to the proposed ARV/Kapson alliance. There
were a number of meetings and conferences involving
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exchanges of proposals from each side. Unfortunately, the parties have been
unable to agree upon a mutually acceptable set of terms for the proposed
ARV/Kapson alliance.
The Atria Opportunity
43. On February 2, 1998, Vencor Incorporated announced its
intention to sell its 42% share of Atria, an assisted living provider with
assets of approximately three times that of ARV or Kapson.
44. The Vencor announcement regarding Atria was accompanied by a
press release. The opportunity to negotiate for a transaction involving
Atria was public knowledge, and LFREI learned of it from the public comment
in the course of its own business activities. ARV took no steps at that
time that in any way indicated that ARV or its investment bankers viewed
Atria as a potential acquisition that ARV would wish to secure.
45. LFREI began negotiating the terms of a potential merger
between Kapson and Atria, believing that the acquisition of Atria was an
attractive investment opportunity for LFREI's investors as well as a
potentially worthwhile addition to the proposed business alliance between
ARV and Kapson that was being negotiated at the same time.
46. In early March, representatives of LFREI informed ARV's CEO,
Howard G. Phanstiel, that Kapson was looking at a possible acquisition of
Atria. In a letter dated March 6, 1998, to Mr. Freeman, Mr. Phanstiel
wrote:
"I appreciate your sharing with us your preliminary thinking regarding
the proposed acquisition of one of our assisted living competitors. In
that regard, I have consulted with all of our non-Lazard directors and
we look forward to receiving a proposal from you regarding an
acquisition of that company either by ARV, or if it should be the
case, the proposed terms you would offer for obtaining our waiver
before you proceed with that transaction."
By that letter, Mr. Phanstiel clearly indicated that ARV believed it still
had consent rights over Kapson acquisitions.
47. Following the discussions with Mr. Freeman, Mr. Phanstiel and
representatives of ARV's outside investment bankers met with Kenneth M.
Jacobs, a managing director at Lazard Freres and Co. LLC and one of LFREI's
nominees to the ARV Board of
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Directors; Mr. Jacobs is a defendant in the action filed by ARV. In
response to Mr. Phanstiel's request of March 6, 1998, Mr. Jacobs raised the
possibility of beginning discussions to determine whether a structure could
be created to allow ARV to work with LFREI to allow ARV to acquire Kapson
and/or Atria. Mr. Phanstiel and his advisors rejected that concept, stating
that the goodwill associated with any acquisition of either Kapson or Atria
by ARV would have a disastrous impact on ARV's balance sheet. Mr. Jacobs
was told that ARV was not interested in an acquisition of either Atria or
Kapson for that reason.
48. On April 14, 1998, Mr. Phanstiel wrote to Mr. Freeman and
asserted that:
"[S]ection 5.1 of the Amended and Restated Stockholders Agreement
remains in effect and that nothing in the Kapson Letter Agreement
exempts a purchase by LFREI or Kapson (which is now an LFREI
affiliate) of Atria or ACMC from that section. Thus even if ARV elects
not to acquire Atria or ACMC, LFREI cannot do so without the consent
of 75 percent of the non-LFREI directors of ARV. The non-LFREI
directors have begun to discuss a list of terms [sic] conditions that,
if satisfied by LFREI, would be sufficient to obtain those votes."
49. Mr. Phanstiel also stated that ARV believed that it was
entitled to be presented with the Atria opportunity to decide whether ARV
"should be the acquiring party", and reiterated ARV's demand that it
receive information on the proposed Kapson-Atria transaction. Instead of
claiming that ARV had consent rights, he now indicated that ARV wanted to
be able to exercise what amounted to a "right of first refusal" on Kapson's
potential acquisition of Atria, purportedly pursuant to Paragraph 2 of the
Amended Kapson Agreement.
50. Paragraph 2 of the Amended Kapson Agreement in no way grants
ARV a "right of first refusal" over an acquisition by Kapson. Paragraph 2
simply requires that for any new developments or acquisitions by Kapson
after the closing of the LFREI-Kapson transaction (i.e., not in the
pipeline at closing), ARV be given the first opportunity to negotiate
management, leasing or purchase arrangements on "commercially reasonably"
terms with Kapson. It does not require that LFREI or Kapson, prior to
acquiring a company, bring such opportunity to ARV so that ARV may acquire
it instead.
51. Because ARV's consent rights over Kapson acquisitions had
terminated upon the funding of the $60 million Notes, ARV had no right of
consent over the acquisition of
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Atria by Kapson. The Amended Kapson Agreement required only that the
parties negotiate, pursuant to Paragraph 3, terms on which ARV could lease
or manage the Atria properties, which were included in the Kapson pipeline.
52. As of April 19, 1998, Kapson and Atria signed an agreement
pursuant to which Kapson would acquire 100% of Atria.
ARV's Triggering of the End of the Standstill
53. The October 29, 1997, Amended Stockholders Agreement, like
the original Stockholders Agreement, included Standstill Provisions
restricting activities by LFREI, and Early Standstill Termination Events
triggering an end to the Standstill Period.
54. During the period of the Standstill, LFREI's ability to
engage in certain transactions, including purchasing additional shares and
selling its existing shares, was restricted.
55. In particular, the Standstill Provisions provided:
"Section 4.2 Restrictions During Standstill Period.
(a) During the Standstill Period, the Advancing Party
[LFREI], the Buyer [Prometheus], and Investor will not, and will
cause each of their Controlled Affiliates not to, direct or
indirectly: . . .
(ii) purchase or otherwise acquire shares of Company
Common Stock . . . as a result of which, after giving effect
to such purchase or acquisition, the Advancing Party
[LFREI], the Buyer [Prometheus], and Investor and their
Controlled Affiliates will Beneficially Own in the aggregate
more than 49.9% of the outstanding shares of Company Common
Stock on an Adjusted Fully Diluted basis; . . . .
Section 4.3 Restrictions on Transfer. During the Standstill
Period, the Advancing Party [LFREI], the Buyer [Prometheus] and
Investor will not, and will cause each of their Controlled
Affiliates not to, directly or indirectly, Transfer any shares of
Company Common Stock or Company Notes [except under certain
limited exemptions]. . . . After the expiration of the Standstill
Period, there shall be no restrictions on the ability of the
Advancing Party [LFREI], the Buyer [Prometheus], Investor and
their Controlled Affiliates to Transfer any shares of Company
Common Stock."
56. In addition, pursuant to Section 4.2, during the Standstill
Period, LFREI was also prevented from: 1) seeking a change in the
composition of the Board; 2) permitting Kapson to enter into sale/leaseback
arrangements with any company other than ARV; and
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3) soliciting, encouraging or participating in any solicitation of proxies
or becoming a participant in any election contest.
57. The Early Standstill Termination Events, which, if triggered,
would bring an automatic end to the Standstill Provisions, were set out in
Section 4.1 of the Amended Stockholders Agreement, and included:
"(ii) the authorization by the Company or the Board or
any committee thereof (with all Investor Nominees abstaining
or voting against) of the solicitation of offers or
proposals or indications of interest with respect to any
merger, consolidation, other business combination,
liquidation, sale of the Company or all or substantially all
of the assets of the Company or any other change of control
of the Company or similar extraordinary transaction, but
excluding any merger, consolidation or other business
combination in which the Company is the surviving and
acquiring corporation and in which the business or assets so
acquired do not, or would not reasonably be expected to,
have a value greater than 50% of the assets of the Company
prior to such merger, consolidation or other business
combination (any of the foregoing, a 'Covered
Transaction')." (Emphasis added.)
58. In conjunction with its insistence that ARV had a right to
pursue the Atria transaction, the Kapson Committee, a committee of the
Board of Directors of ARV, authorized Mr. Phanstiel to engage the
investment banking firms of Bear Stearns and J. P. Morgan to solicit
indications of interest in financing a possible acquisition of Atria by
ARV.
59. Mr. Phanstiel and representatives of Bear Stearns met with
representatives of Starwood Capital Group ("Starwood"), including Jonathan
Elian, regarding whether Starwood would be interested in the possibility of
financing a merger, consolidation or other business combination of ARV and
Atria.
60. Mr. Phanstiel and representatives of Bear Stearns also met
with representatives of Northstar Capital Partners ("Northstar"), including
David Hamamoto, regarding whether Northstar would be interested in the
possibility of financing a merger, consolidation or other business
combination of ARV and Atria.
61. Mr. Phanstiel also had discussions with Senior Lifestyles
Corporation regarding whether it would be interested in financing a
business combination of ARV and Atria.
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62. Mr. Phanstiel also had discussions with Security Capital
regarding whether it would be interested in financing a merger, consolation
or other business combination of ARV and Atria.
63. Mr. Phanstiel reported back to the Kapson Committee on the
nature of his discussions with the various entities he had contacted in
soliciting their interest regarding participating in a merger,
consolidation or other business combination of ARV and Atria.
64. Because of Atria's size, a merger, consolidation or other
business combination of ARV and Atria would not fall within the exemptions
from an Early Standstill Termination Event contained in Section 4.1 of the
Amended Stockholders Agreement. Accordingly, ARV has solicited indications
of interest and proposals for a merger, consolidation or other business
combination with Atria and has triggered an Early Standstill Termination
Event pursuant to Section 4.1. By the terms of the Amended Stockholders
Agreement, the Standstill Period has expired, and LFREI is no longer bound
by the restrictions of Sections 4.2 and 4.3.
FIRST CAUSE OF ACTION
(For a Declaratory Judgment That the Amended Consent Rights Provision of the
Amended Kapson Agreement Has Terminated By Operation of Contract)
65. LFREI repeats and realleges each and every allegation set
forth in paragraphs ___-___ above as if fully set forth herein.
66. The Amended Consent Rights Provision (Paragraph 1 of the
Amended Kapson Agreement) provides that "upon the funding of that certain
$60,000,000 6 3/4% Convertible Subordinated Note due 2007 by LFREI or an
affiliate this paragraph shall terminate and be of no further effect".
67. On December 1, 1997, LFREI funded the $60 million Notes.
68. Therefore, on December 1, 1997, by operation of contract, the
Amended Consent Rights Provision (Paragraph 1 of the Amended Kapson
Agreement) terminated, and Kapson was free to invest in any other assisted
living company without ARV's consent.
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69. An actual controversy now exists between the parties in that
ARV denies the foregoing. A judicial declaration is necessary and
appropriate at this time so that the parties will know their respective
rights and obligations.
SECOND CAUSE OF ACTION
(For a Declaratory Judgment That the Amended Non-Compete Provision of the
Amended Stockholders Agreement Has Terminated By Operation of Contract)
70. LFREI repeats and realleges each and every allegation set
forth in paragraphs ___-___ above as if fully set forth herein.
71. The Amended Non-Compete Provision (Section 5.1 of the Amended
Stockholders Agreement) sets forth certain restrictions on LFREI's ability
to compete in the assisted living field with ARV.
72. The Amended Non-Compete Provision provides that "[u]pon the
termination of the Kapson Agreement or any provisions thereof, this Section
5.1 shall terminated and be of no further effect". (Emphasis added.)
73. The Amended Consent Rights provision (Paragraph 1 of the
Amended Kapson Agreement) provides that "upon the funding of that certain
$60,000,000 6 3/4% Convertible Subordinated Note due 2007 by LFREI or an
affiliate this paragraph shall terminate and be of no further effect."
74. On December 1, 1997, LFREI funded the $60 million Notes.
75. Consequently, on December 1, 1997, by operation of contract,
the Amended Consent Rights Provision (Paragraph 1 of the Amended Kapson
Agreement) terminated.
76. Therefore, on December 1, 1997, by operation of contract, the
Amended Non-Compete Provision (Section 5.1 of the Amended Stockholders
Agreement) terminated and LFREI and its affiliates were free to invest in
any other assisted living company without ARV's consent.
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77. An actual controversy now exists between the parties in that
ARV denies the foregoing. A judicial declaration is necessary and
appropriate at this time so the parties will know their respective rights
and obligations.
THIRD CAUSE OF ACTION
(For a Declaratory Judgment That an Early Standstill Termination
Event Has Occurred and the Standstill Period of the Amended
Stockholders Agreement Paragraph 4) Has Terminated By Operation
of Contract)
78. LFREI repeats and realleges each and every allegation set
forth in paragraphs __-__ above as if fully set forth herein.
79. The Amended Stockholders Agreement sets forth Standstill
Provisions limiting LFREI's ability to pursue certain transactions.
80. The Standstill Provisions provide Early Standstill
Termination Events, by which the Standstill Period automatically terminate.
81. Section 4.1(ii) defines an Early Standstill Termination Event
as any "solicitation of offers or proposals or indications of interest" by
ARV with respect to certain mergers, acquisitions or similar business
combinations. An Early Standstill Termination Event results in the
immediate termination of the Standstill Period.
82. ARV, by the authority of a committee of the ARV Board, has
sought solicitations of interest from various financing entities regarding
a merger, consolidation or other business combination with Atria.
83. These solicitations of interest constitute a clearly defined
Early Standstill Termination Event and, by operation of contract, the
Standstill Period has terminated.
84. Thus, LFREI and its affiliates are no longer bound by the
restrictions required by the Amended Stockholders Agreement that are in
effect during the Standstill Period.
85. An actual controversy now exists between the parties in that
ARV denies the foregoing. A judicial declaration is necessary and
appropriate at this time so that the parties will know their respective
rights and obligations.
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PRAYER FOR RELIEF
Wherefore, LFREI requests that this Court enter an order:
(1) on LFREI's First Cause of Action, declaring that the
Amended Consent Rights Provision (Paragraph 1) of the
Amended Kapson Agreement has terminated and is of no
further effect and that Kapson is free to invest in any
company in the assisted living field without ARV's
consent;
(2) on LFREI's Second Cause of Action, declaring that the
Amended Non-Compete Provision (Section 5.1) of the
Amended Stockholders Agreement has terminated and is of
no further effect, and consequently that LFREI and its
affiliates are free of any non-compete obligation to
ARV and may invest in other assisted living companies
without ARV's consent;
(3) on LFREI's Third Cause of Action, declaring that an
Early Standstill Termination Event (Paragraph 4.1(ii)
of the Amended Stockholders Agreement) has been
triggered, terminating the Standstill Period, and as a
consequence, LFREI and its affiliates are not bound by
the restrictions contained in the Amended Stockholders
Agreement that are in effect during the Standstill
Period; and
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(4) ordering such other and further relief as the Court may
deem just and proper, including the costs of this
action and reasonable attorney's fees.
Dated: June 9, 1998
CRAVATH, SWAINE & MOORE
by
----------------------------------
Rowan D. Wilson (State Bar. No. 118488)
A Member of the Firm
Attorneys for Defendant Lazard
Freres Real Estate Investors LLC,
Prometheus Assisted Living LLC, Robert P.
Freeman, Kenneth M. Jacobs and
Murry N. Gunty
Exhibit 3
EXECUTION COPY
------------------------------------------------
AMENDED AND RESTATED
STOCKHOLDERS AGREEMENT
by and among
LAZARD FRERES REAL ESTATE INVESTORS L.L.C.
and
PROMETHEUS ASSISTED LIVING LLC
and
ARV ASSISTED LIVING, INC.
dated as of
October 29, 1997
------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
Definitions........................................................1
"Adjusted Fully Diluted Basis".................................1
"Affiliate" ...................................................1
"Agreement"....................................................2
"Beneficially Own".............................................2
"Board"........................................................2
"Buyer"........................................................2
"Code".........................................................2
"Company"......................................................2
"Company Charter"..............................................2
"Company Common Stock".........................................2
"Control"......................................................2
"Covered Transaction"..........................................2
"Director".....................................................2
"Early Standstill Termination Event"...........................2
"Exercise Notice"..............................................2
"Extraordinary Transaction"....................................2
"Fully Diluted Basis"..........................................2
"Government Authority".........................................3
"Group"........................................................3
"Investor".....................................................3
"Investor Nominees"............................................3
"Kapson".......................................................3
"Kapson Agreement".............................................3
"Key Committees"...............................................3
"1933 Act".....................................................3
"1934 Act".....................................................3
"Participation Notice".........................................3
"person".......................................................3
"Standstill Period"............................................3
"Stock Purchase Agreement".....................................3
"Termination Event"............................................3
"13D Group"....................................................3
"Transfer".....................................................4
"Voting Securities"............................................4
ARTICLE 2
Board of Directors.................................................4
Section 2.1 Members of the Board..............................4
Section 2.2 [Intentionally Omitted]...........................5
Section 2.3 Vacancies.........................................5
Section 2.4 Officers..........................................5
Section 2.5 President/CEO.....................................5
ARTICLE 3
Voting and Participation Rights....................................5
<PAGE>
Page
Section 3.1 Voting Rights.....................................5
Section 3.2 Participation Rights..............................6
ARTICLE 4
Standstill Provisions..............................................8
Section 4.1 Standstill Period.................................8
Section 4.2 Restrictions During Standstill Period.............9
Section 4.3 Restrictions on Transfer.........................10
Section 4.4 Notice to Company................................11
Section 4.5 Compliance with Insider Trading Policy...........11
Section 4.6 Investment Company Matters.......................11
Section 4.7 Waiver of Restrictions and Limits................11
ARTICLE 5
Additional Covenants..............................................11
Section 5.1 Restrictions on Investments......................11
ARTICLE 6
Miscellaneous.....................................................12
Section 6.1 Counterparts.....................................12
Section 6.2 Governing Law....................................12
Section 6.3 Entire Agreement.................................12
Section 6.4 Expenses.........................................12
Section 6.5 Notices..........................................12
Section 6.6 Successors and Assigns...........................13
Section 6.7 Headings.........................................13
Section 6.8 Amendments and Waivers...........................13
Section 6.9 Interpretation; Absence of Presumption...........13
Section 6.10 Severability....................................14
Section 6.11 Further Assurances..............................14
Section 6.12 Specific Performance............................14
Section 6.13 Investor Breach.................................14
Section 6.14 Confidentiality.................................14
Section 6.15 Public Announcements............................15
<PAGE>
THIS AMENDED AND RESTATED STOCKHOLDERS
AGREEMENT (this "Agreement"), dated as of October
29, 1997, is made by and between Lazard Freres
Real Estate Investors L.L.C., a New York limited
liability company (the "Advancing Party"),
Prometheus Assisted Living LLC, a Delaware limited
liability company (the "Buyer"), and ARV Assisted
Living, Inc., a California corporation (the
"Company"). Capitalized terms not otherwise
defined herein have the meaning ascribed to them
in the Stock Purchase Agreement (as hereinafter
defined).
RECITALS:
WHEREAS, the Company, the Buyer and the Advancing Party have
entered into a Stock Purchase Agreement, dated as of July 14, 1997 (as
amended to date, including the Amended and Restated Stock and Note Purchase
Agreement dated as of the date hereof, the "Stock Purchase Agreement"),
that provides for the purchase by Buyer and sale by the Company to Buyer of
shares of Company Common Stock and Company Notes;
WHEREAS, the parties previously entered into a Stockholders
Agreement dated as of July 14, 1997 (the "Stockholders Agreement"),
providing for certain rights and restrictions with respect to the
investment by Investor (as hereinafter defined) in the Company and the
corporate governance of the Company; and
WHEREAS, the Company, the Advancing Party and Buyer desire
to amend and restate the Stockholders Agreement as contemplated by the
Stock Purchase Agreement;
NOW THEREFORE, in consideration of the premises and the
covenants and agreements contained herein and for good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby, agree to amend and restate the Stockholders Agreement as follows:
ARTICLE 1
Definitions
As used in this Agreement, the following terms shall have
the following respective meanings:
"Adjusted Fully Diluted Basis" shall mean on a Fully Diluted
Basis, except that shares of Common Stock issuable upon conversion of the
Convertible Debt or upon exercise of options granted under management
benefit plans shall not be included.
"Affiliate" shall have the meaning ascribed thereto in Rule
12b-2 promulgated under the 1934 Act, and as in effect on the date hereof.
<PAGE>
"Agreement" shall have the meaning set forth in the first
paragraph hereof.
"Beneficially Own" shall mean, with respect to any security,
having direct or indirect (including through any Subsidiary or Affiliate)
"beneficial ownership" of such security, as determined pursuant to Rule
13d-3 under the 1934 Act, including pursuant to any agreement, arrangement
or understanding, whether or not in writing; provided, however, that all of
the shares of Company Common Stock that Investor then has the right to
acquire upon conversion of the Company Notes in accordance with their terms
shall be deemed to be Beneficially Owned by Investor.
"Board" shall mean the board of directors of the Company.
"Buyer" shall have the meaning set forth in the first
paragraph hereof.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and any successor thereto, including all of the rules and
regulations promulgated thereunder.
"Company" shall have the meaning set forth in the first
paragraph hereof.
"Company Charter" shall have the meaning set forth in the
Stock Purchase Agreement.
"Company Common Stock" shall have the meaning set forth in
the second paragraph hereof.
"Control" shall mean with respect to any person, the power
to direct the management and policies of such person, directly or
indirectly, whether through ownership of voting securities, by contract or
otherwise. "Controlled" shall have a correlative meaning.
"Convertible Debt" shall mean the Company's 6-3/4%
Convertible Subordinated Notes due 2006.
"Covered Transaction" shall have the meaning set forth in
Section 4.1.
"Director" shall mean a member of the Board.
"Early Standstill Termination Event" shall have the meaning
set forth in Section 4.1.
"Exercise Notice" shall have the meaning set forth in
Section 3.2(b).
"Extraordinary Transaction" shall mean (a) any merger,
consolidation, sale of a material portion of the Company's assets,
recapitalization, other business combination, liquidation, or other similar
action out of the ordinary course of business of the Company, or (b) any
issuance of securities to any person or Group requiring stockholder
approval in accordance with the guidelines of the NASDAQ National Market
(or any stock exchange on which the Company Common Stock is then listed) as
to such matters, as in effect as of the date of the Stock Purchase
Agreement.
"Fully Diluted Basis" shall mean then outstanding Company
Stock plus any shares of stock or other equity or debt exchangeable for
Company Stock and any shares of stock or other equity or debt the holders
of which have the right to vote with the stockholders of the Company on any
matter, and shall include Company Common Stock issuable under the Company
Notes, the Convertible Debt, the instruments listed in
<PAGE>
Schedule 3.3(a) of the Stock Purchase Agreement and under option or other
equity-incentive plans listed on Schedule 3.13(b) of the Stock Purchase
Agreement and awards issued pursuant thereto.
"Government Authority" shall mean any government or state
(or any subdivision thereof) of or in the United States, or any agency,
authority, bureau, commission, department or similar body or
instrumentality thereof, or any governmental court or tribunal.
"Group" shall mean a "group" as such term is used in Section
13(d)(3) of the 1934 Act.
"Investor" shall mean the Buyer, and shall also include any
permitted assignee of the Buyer pursuant to the Stock Purchase Agreement
and, for purposes only of the provisions of the Registration Rights
Agreement, any bona fide financial institution to which any Investor has
Transferred (including upon foreclosure of a pledge) shares of Company
Common Stock for the purpose of securing bona fide indebtedness of any
Investor and which has agreed to be bound by this Agreement.
"Investor Nominees" shall have the meaning set forth in
Section 2.1(a).
"Kapson" shall mean Kapson Senior Quarters, Corp.
"Kapson Agreement" shall mean the letter agreement dated as
of September 30, 1997, as amended and restated as of October 29, 1997,
among the Advancing Party, Buyer and the Company relating to Kapson.
"Key Committees" shall have the meaning set forth in Section
2.2(a).
"1933 Act" shall mean the Securities Act of 1933, as
amended.
"1934 Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Participation Notice" shall have the meaning set forth in
Section 3.2(b).
"person" shall mean any individual, corporation,
partnership, limited liability company, joint venture, trust,
unincorporated organization, other form of business or legal entity or
Government Authority.
"Standstill Period" shall have the meaning set forth in
Section 4.1.
"Stock Purchase Agreement" shall have the meaning set forth
in the Recitals hereof.
"Termination Event" shall mean the date on which either (i)
Investor no longer Beneficially Owns a number of shares of Company Common
Stock equal to at least 5% of the outstanding Company Common Stock, on a
Fully Diluted Basis or (ii) Investor no longer Beneficially Owns Company
Common Stock having an aggregate market value of at least $25,000,000.
"13D Group" shall mean any group of persons acquiring,
holding, voting or disposing of Voting Securities which would be required
under Section 13(d) of the 1934 Act and the rules and regulations
thereunder (as in effect, and based on legal interpretations thereof
existing, on the date hereof) to file a statement on Schedule 13D with the
Securities and Exchange Commission as a "person" within the meaning of
<PAGE>
Section 13(d)(3) of the 1934 Act if such group beneficially owned Voting
Securities representing more than 5% of any class of Voting Securities then
outstanding.
"Transfer" shall have the meaning set forth in Section 4.3.
"Voting Securities" shall mean at any time shares of any
class of capital stock of the Company which are then entitled to vote
generally in the election of Directors.
ARTICLE 2
Board of Directors
Section 2.1 Members of the Board
(a) As of the Closing Date, the Company and Investor will
take all actions necessary to cause the Board to be structured to consist
of nine members, of which three members will be designees of Investor (at
least one in each class of the Board) (the "Investor Nominees"), and the
Company and Investor will take all actions necessary to cause such nominees
to become members of the Board as of the Closing Date. The initial Investor
Nominees shall be Robert P. Freeman, Murry N. Gunty and Kenneth M. Jacobs.
If necessary to effectuate the placement of Investor Nominees on the Board,
the Company shall solicit the resignations of the appropriate number of
Directors to the extent necessary to permit the Investor Nominees to serve.
Thereafter until the occurrence of a Termination Event, at each annual or
special meeting of stockholders of the Company at, or the taking of action
by written consent of stockholders of the Company with respect to which any
class of Directors is to be elected, Investor shall have the right (but not
obligation) pursuant to this Agreement and pursuant to the By-laws of the
Company to designate three nominees to the Board if the Board is a single
class, and one designee per class if the Board is divided into three
classes.
(b) Investor will not name any person as an Investor Nominee
if (i) such person is not reasonably experienced in business, financial or
real estate matters, (ii) such person has been convicted of, or has pled
nolo contendere to a felony, (iii) the election of such person would
violate any law, or (iv) any event required to be disclosed pursuant to
Item 401(f) of Regulation S-K of the 1934 Act has occurred with respect to
such person. Investor shall use its reasonable efforts to afford the
independent directors of the Company a reasonable opportunity to meet any
individual that Investor is considering naming as an Investor Nominee.
(c) The Company will support the nomination of and the
election of each Investor Nominee to the Board, and the Company will
exercise all authority under applicable law to cause each Investor Nominee
to be elected to the Board. Without limiting the generality of the
foregoing, with respect to each meeting of stockholders of the Company at
which Directors are to be elected, the Company shall use its reasonable
efforts to solicit from the stockholders of the Company eligible to vote in
the election of Directors proxies in favor of each Investor Nominee.
(d) During the period that Investor shall have the right to
designate nominees to the Board under this Agreement, the number of
Directors on the Board shall not exceed nine at any time.
<PAGE>
(e) If Investor's right to nominate directors to the Board
is reduced, Investor shall cause the applicable number of its Investor
Nominees to immediately resign (regardless of the remaining term, if any)
from the Board.
(f) It is hereby agreed that any decision to take or omit to
take any action on the Company's behalf with respect to any transaction or
agreement involving or relating to Investor shall be subject only to the
approval of a majority of non-Investor Nominee Directors.
Section 2.2 [Intentionally Omitted]
Section 2.3 Vacancies. In the event that any Investor
Nominee shall cease to serve as a Director for any reason other than the
fact that Investor no longer has a right to nominate a Director, as
provided in Section 2.1(a), the vacancy resulting thereby shall be filled
by an Investor Nominee designated by Investor; provided, however, that any
Investor Nominee so designated shall satisfy the qualification requirements
set forth in Section 2.1(b).
Section 2.4 Officers. The Investor agrees to cooperate with
the Company in connection with the negotiation, execution and delivery of
employment agreements between the Company and certain key employees of the
Company.
Section 2.5 President/CEO. The Company covenants and agrees
to use commercially reasonable efforts to identify, select and retain a new
President/CEO of the Company within 90 days after the Closing Date. The
retention of such President/CEO shall require the prior written consent of
Investor, such approval not to be unreasonably withheld. The Investor
agrees to cooperate with the Company in the identification, selection and
retention of a new President/CEO of the Company. The parties acknowledge
that the identification, selection and retention of a new President/CEO of
the Company is a critical element for the ongoing success of the Company
and the parties agree to act in good faith in connection therewith. Upon
the retention of a new President/CEO of the Company in accordance with this
Section, the Company shall use its best efforts to cause a Director who is
not an Investor Nominee to resign from the Board, the Company will cause
such new President/CEO to be nominated as a director at the next succeeding
annual meeting of the Company and the Company and the Investor will use
their best efforts to cause such new President/CEO to be elected to the
Board.
ARTICLE 3
Voting and Participation Rights
Section 3.1 Voting Rights. Subject to the provisions of this
Section 3.1, Investor may vote the shares of Company Common Stock which it
owns in its sole and absolute discretion. During the Standstill Period the
Advancing Party, the Buyer and Investor and any of their Controlled
Affiliates will vote all shares of Company Common Stock owned by any of
them that represent aggregate ownership in excess of 35.8% of the
outstanding shares of Company Common Stock, in one of the following two
manners, at their option: (x) in accordance with the recommendation of the
Board, or (y) proportionally in accordance with the votes of the other
holders of Company Common Stock. Notwithstanding anything to the contrary
in the foregoing, during the Standstill Period, the Advancing Party, the
Buyer and Investor and any of their Controlled Affiliates shall vote all
shares of Company Common Stock owned by any of them in favor of the
election of all Directors nominated by the nominating committee, if any, or
the Board provided such nominations are in accordance with Section 2.1(a).
<PAGE>
Section 3.2 Participation Rights
(a) Rights to Participate. From and after the date hereof
until a Termination Event, if any, Investor shall be entitled to a
participation right to purchase or subscribe up to that number of
additional shares of capital stock (including as "capital stock" for
purposes of this Section 3.2, any security, option, warrant, call,
commitment, subscription, right to purchase or other agreement of any
character that is convertible into or exchangeable or redeemable for shares
of capital stock of the Company or any Subsidiary (and all references in
this Section 3.2 to capital stock shall, as appropriate, be deemed to be
references to any such securities), and also including additional shares of
capital stock to be issued pursuant to the conversion, exchange or
redemption of any security, option, warrant, call, commitment,
subscription, right to purchase or other agreement of a character that is
convertible into or exchangeable or redeemable for shares of capital stock,
as if the price at which such additional shares of capital stock is issued
pursuant to any such conversion, exchange or redemption were the market
price on the date of such issuance) to be issued or sold by the Company
which represents the same proportion (the "shareholder percentage") of the
total number of shares of capital stock to be issued or sold by the Company
(including the shares of capital stock to be issued to Investor upon
exercise of its participation rights hereunder; it being understood and
agreed that the Company will accordingly be required to either increase the
number of shares of capital stock to be issued or sold so that Investor may
purchase additional shares to maintain its proportionate interest, or to
reduce the number of shares of capital stock to be issued or sold to
Persons other than Investor) as is represented by the number of shares of
Company Common Stock Beneficially Owned by Investor prior to such sale or
issuance relative to the number of outstanding shares of Company Common
Stock, on an Adjusted Fully Diluted basis, prior to such sale or issuance
(but in no event more than 35.8% of the total number of shares of capital
stock to be issued or sold by the Company at all subsequent offerings);
provided, however, that the provisions of this Section 3.2 shall not to
apply to (i) the issuance or sale by the Company of any of its capital
stock issued to the Company or any of its Subsidiaries or pursuant to
options, rights or warrants or other commitments or securities in effect or
outstanding as of July 14, 1997 (including without limitation, any options
issued or to be issued pursuant to the Employment Agreements), (ii) the
issuance of capital stock pursuant to the conversion, exchange or
redemption of any other capital stock, but shall, without limitation, apply
to the issuance by the Company of any of its capital stock pursuant to
benefit, option, stock purchase, or other similar plans or arrangements,
including pursuant to or upon the exercise of options, rights, warrants, or
other securities or agreements (including those issued pursuant to the
Company's benefit plans) and (iii) the issuance of stock for consideration
other than cash; provided further, however, that in the case of debt
securities of the Company that entitle the Investor to participation rights
hereunder, such participation rights shall apply only to the issuance of
such debt securities, i.e., the Investor shall have participation rights
with respect to such debt securities, and shall have whatever conversion
rights to which holders of such debt securities are entitled, but shall
have no other participation rights with respect thereto and the Investor
shall only have the right to acquire such debt securities themselves.
Notwithstanding the foregoing, any participation rights provided for in
this Section which arise as a result of the exception contained in clause
(ii) of the preceding sentence shall be deferred until such time as
participation rights shall otherwise arise under this Section 3.2. The
provisions of this Section 3.2 shall apply to the Convertible Debt only
upon conversion, in which event the Company agrees from time to time to
issue the number of additional shares necessary to permit the Buyer to
maintain its shareholder percentage (as defined above), provided that the
purchase price for such shares shall be the closing price of the Company
Common Stock on the date of each such conversion; provided further that the
Company shall provide the Buyer within 15 days after the end of each
calendar quarter with a schedule of the conversions during such quarter
(and the related closing prices for the Common Stock on the dates of
conversion),
<PAGE>
the number of additional shares of Common Stock the Buyer is entitled to
purchase hereunder and the purchase price therefor; provided further that
Buyer shall have until 15 days after receipt of such schedule to purchase
such additional shares. Any conversion or exercise of securities acquired
by Investor pursuant to this Section 3.2 shall be deferred by Investor if
it would result in Investor's share percentage exceeding 49.9%.
(b) Notice. In the event the Company proposes to issue or
sell any shares of capital stock in a transaction giving rise to the
participation rights provided for in this Section, the Company shall send a
written notice (the "Participation Notice") to Investor setting forth the
number of shares of such capital stock of the Company that the Company
proposes to sell or issue, the price (before any commission or discount) at
which such shares are proposed to be issued (or, in the case of an
underwritten or privately placed offering in which the price is not known
at the time the Participating Notice is given, the method of determining
such price and an estimate thereof), and all other relevant information as
to such proposed transaction as may be necessary for Investor to determine
whether or not to exercise the rights granted in this Section. At any time
within 20 days after its receipt of the Participation Notice, Investor may
exercise its participation rights to purchase or subscribe for shares of
such shares of capital stock, as provided for in this Section, by so
informing the Company in writing (an "Exercise Notice"). Each Exercise
Notice shall state the percentage of the proposed sale or issuance that the
Investor elects to purchase. Each Exercise Notice shall be irrevocable,
subject to the conditions to the closing of the transaction giving rise to
the participation right provided for in this Section.
(c) Abandonment of Sale or Issuance. The Company shall have
the right, in its sole discretion, at all times prior to consummation of
any proposed sale or issuance giving rise to the participation right
granted by this Section, to abandon, rescind, annul, withdraw or otherwise
terminate such sale or issuance, whereupon all participation rights in
respect of such proposed sale or issuance pursuant to this Section shall
become null and void, and the Company shall have no liability or obligation
to Investor or any Affiliate thereof who has acquired shares of Company
Stock pursuant to the Stock Purchase Agreement or from Investor with
respect thereto by virtue of such abandonment, rescission, annulment,
withdrawal or termination.
(d) Terms of Sale. The purchase or subscription by Investor
or an Affiliate thereof, as the case may be, pursuant to this Section shall
be on the same price and other terms and conditions, including the date of
sale or issuance, as are applicable to the purchasers or subscribers of the
additional shares of capital stock of the Company whose purchases or
subscriptions give rise to the participation rights (except that the price
to Investor to make such purchase or subscription shall be net of payment
of any underwriting, placement agent or similar fee associated with such
purchase or subscription), which price and other terms and conditions shall
be substantially as stated in the relevant Participation Notice (which
standard shall be satisfied if the price, in the case of a negotiated
transaction, is not greater than 110% of the estimated price set forth in
the relevant Participation Notice or, in the case of an underwritten or
privately placed offering, is not greater than of (i) 110% of the estimated
price set forth in the relevant Participation Notice, and (ii) the most
recent closing price on or prior to the date of the pricing of the
offering); provided, however, that in the event the purchases or
subscriptions giving rise to the participation rights are effected by an
offering of securities registered under the 1933 Act and in which offering
it is not legally permissible for the securities to be purchased by
Investor to be included, such securities to be purchased by Investor will
be purchased in a concurrent private placement.
(e) Timing of Sale. If, with respect to any Participation
Notice, Investor fails to deliver an Exercise Notice within the requisite
time period, the Company shall have
<PAGE>
120 days after the expiration of the time in which the Exercise Notice is
required to be delivered in which to sell not more than 110% of the number
of shares of capital stock of the Company described in the Participation
Notice (plus, in the event such shares are to be sold in an underwritten
public offering, an additional number of shares of capital stock of the
Company, not in excess of 15% of 110% of the number of shares of capital
stock of the Company described in the Participation Notice, in respect of
any underwriters over allotment option) and not less than 90% of the number
of shares of capital stock of the Company described in the Participation
Notice at a price of not less than 90% of the estimated price set forth in
the Participation Notice. If, at the end of 120 days following the
expiration of the time in which the Exercise Notice is required to be
delivered, the Company has not completed the sale or issuance of capital
stock of the Company in accordance with the terms described in the
Participation Notice (or at a price which is at least 90% of the estimated
price set forth in the Participation Notice), or in the event of any
contemplated sale or issuance within such 120-day period but outside such
price parameters, the Company shall again be obligated to comply with the
provisions of this Section with respect to, and provide the opportunity to
participate in, any proposed sale or issuance of shares of capital stock of
the Company; provided, however, that notwithstanding the foregoing, if the
price at which such capital stock is to be sold in an underwritten offering
(or a privately placed offering in which the price is not less than 97% of
the most recent closing price at the time of the pricing of the offering)
is not at least 90% of the estimated price set forth in the Participation
Notice, the Company may inform Investor of such fact and Investor shall be
entitled to elect, by written notice delivered within two Business Days
following such notice from the Company, to participate in such offering in
accordance with the provisions of this Section 4.2.
ARTICLE 4
Standstill Provisions
Section 4.1 Standstill Period. The "Standstill Period" shall be
the period commencing on the date of this Agreement and ending on the
earlier of (x) the third anniversary of the Settlement Date or (y) the
earliest of:
(i) the occurrence of any event of default on the part of
the Company or any Subsidiary under any debt agreements,
instruments or arrangements (other than those disclosed to the
Advancing Party or Investor prior to the Closing Date) that would
reasonably be expected to result in a Material Adverse Effect,
and, in the case of a non-monetary event of default, which event
of default cannot be, or is not, cured by the Company within the
applicable cure period under such debt agreement, instrument or
arrangement and that would reasonably be expected to result in a
Material Adverse Effect;
(ii) the authorization by the Company or the Board or any
committee thereof (with all Investor Nominees abstaining or
voting against) of the solicitation of offers or proposals or
indications of interest with respect to any merger,
consolidation, other business combination, liquidation, sale of
the Company or all or substantially all of the assets of the
Company or any other change of control of the Company or similar
extraordinary transaction, but excluding any merger,
consolidation or other business combination in which the Company
is the surviving and acquiring corporation and in which the
business or assets so acquired do not, or would not reasonably be
expected to, have a value greater than 50% of the assets of the
Company prior to such merger, consolidation or other business
combination (any of the foregoing, a "Covered Transaction");
<PAGE>
(iii)the written submission by any person or Group other
than Investor or any Affiliate thereof of a proposal to the
Company (including to the Board or any agent, representative or
Affiliate of the Company ) with respect to, or otherwise
expressing an interest in pursuing, a Covered Transaction;
provided, however, that the Standstill Period shall not terminate
pursuant to this Section 4.1(a)(iii) if, as soon as practicable
after receipt of any such proposal, the Board determines that
such proposal is not in the best interest of the Company and its
stockholders and for so long as the Board continues to reject
such proposal as a result of such determination;
(iv) in connection with any actual or proposed Covered
Transaction, the removal of any rights plan, provisions of the
Company Charter relating to staggered terms of office for
directors, provisions of the Company Charter or the By-laws of
the Company relating to supermajority voting of the Company's
stockholders, "excess share" provisions of the Company Charter or
the By-laws of the Company, or any other similar arrangements,
agreements, commitments or provisions in the Company Charter or
the By-laws of the Company which would reasonably be expected to
impede the consummation of such actual or proposed Covered
Transaction by action of any Government Authority, the Board, the
stockholders of the Company or otherwise;
(v) 90 days after the occurrence of a Termination Event;
(vi) any breach by the Company of the Stock Purchase
Agreement which is neither cured nor desisted from within 30 days
of receipt of written notice from Investor of such breach and
which would reasonably be expected to materially adversely affect
Investor or cause a Material Adverse Effect; or
(vii)any breach of this Agreement by the Company which is
neither cured nor desisted within 30 days of receipt of written
notice from Investor of such breach and which would reasonably be
expected to materially adversely affect Investor or cause a
Material Adverse Effect.
Any event set forth in clauses (i)-(vii) of this Section 4.1 shall be an
"Early Standstill Termination Event."
Section 4.2 Restrictions During Standstill Period
(a) During the Standstill Period, the Advancing Party, the Buyer,
and Investor will not, and will cause each of their Controlled Affiliates
not to, directly or indirectly:
(i) act in concert with any other person or Group by
becoming a member of a 13D Group, other than any 13D Group
comprised exclusively of Investor and one or more of its
Affiliates;
(ii) purchase or otherwise acquire shares of Company Common
Stock (or options, rights or warrants or other commitments to
purchase and securities convertible into (or exchangeable or
redeemable for) shares of Company Common Stock) as a result of
which, after giving effect to such purchase or acquisition, the
Advancing Party, the Buyer, and Investor and their Controlled
Affiliates will Beneficially Own in the aggregate more than 49.9%
of the outstanding shares of Company Common Stock on an Adjusted
Fully Diluted basis;
(iii) solicit, encourage or propose to effect or negotiate any
Covered Transaction;
<PAGE>
(iv) solicit, initiate, encourage or participate in any
"solicitation" of "proxies" or become a "participant" in any
"election contest" (as such terms are defined or used in
Regulation 14A under the 1934 Act, disregarding clause (iv) of
Rule 14a-1(1)(2) and including an exempt solicitation pursuant to
Rule 14a-2(b)(1)); call, or in any way encourage or participate
in a call for, any special meeting of stockholders of the Company
(or take any action with respect to acting by written consent of
the stockholders of the Company); request, or take action to
obtain or retain, any list of holders of any securities of the
Company; or initiate or propose any stockholder proposal or
participate in or encourage the making of, or solicit
stockholders of the Company for the approval of, one or more
stockholder proposals; provided, however, that Investor shall not
be prohibited from communicating with a security holder who is
engaged in any "solicitation" of "proxies" or who is a
"participant" in any "election contest";
(v) seek representation on the Board or a change in the
composition or size of the Board other than as permitted by
Article 2;
(vi) enter into or (to the extent such person has the power
to do so) permit Kapson to enter into sale/leaseback or other
financing arrangements of the type contemplated by the Kapson
Agreement with any public or private company (other than the
Company) the principal business of which is the ownership,
management, operation and development of assisted living
facilities (which shall not include health care real estate
investment trusts) in the United States unless such company
enters into a written standstill agreement with the Company
containing provisions substantially similar to the provisions of
Section 4.1 and this Section 4.2;
(vii)request the Company or any of its directors, officers,
employees or agents to amend or waive any provisions of this
Section 4.2 or seek to challenge the legality or effect thereof;
or
(viii) assist, advise, encourage or act in concert with any
person with respect to, or seek to do, any of the foregoing.
Section 4.3 Restrictions on Transfer. During the Standstill
Period, the Advancing Party, the Buyer and Investor will not, and will
cause each of their Controlled Affiliates not to, directly or indirectly,
Transfer any shares of Company Common Stock or Company Notes except for:
(a) Transfers made in compliance with the requirements of Rule 144 of the
1933 Act, (b) Transfers pursuant to negotiated transactions with third
parties provided that any such Transfer is not made to any public or
private company the principal business of which is, or that derives more
than $15 million of annual revenue from (in either case as of the date of
such Transfer), the ownership, management, operation and development of
assisted living facilities in the United States, unless 75% of the
Directors of the Company (other than Investor Nominees) have consented to
such Transfer and provided further that the transferee acknowledges that it
is subject to the provisions of Article 5 of this Agreement, (c) Transfers
pursuant to or in accordance with the Registration Rights Agreement in a
bona fide public offering, (d) Transfers to one or more Controlled
Affiliates of Investor who agree to be bound by the terms and conditions of
this Agreement, who make the representations set forth in Sections 4.8,
4.10 and 4.11 of the Stock Purchase Agreement and who satisfy the ownership
criteria in the definition of "Investor", and (e) Transfers to a bona fide
financial institution for the purpose of securing bona fide indebtedness of
any Investor. After the expiration of the Standstill Period, there shall be
no restrictions on the ability of the Advancing Party, the Buyer, Investor
and their Controlled Affiliates to Transfer any shares of Company Common
Stock.
<PAGE>
Section 4.4 Notice to Company. During the Standstill Period,
if any party wishes to sell pursuant to Section 4.3(a), (b) or (c) any
shares of Company Common Stock or Company Notes, such party shall give the
Company 15 days' prior written notice of such proposed sale, setting forth
the number of shares of Company Common Stock or the principal amount of
Company Notes (as the case may be) that such party proposes to sell, the
expected timing of the proposed sale, and the expected selling price of
such sale, in order to enable the Company to make an offer to purchase such
shares or Company Notes. During the period described in the preceding
sentence, such party shall also notify the Company if such party reaches a
formal board-level decision to sell shares of Company Common Stock, or
Company Notes convertible into shares of Company Common Stock, representing
more than 2% of the shares of Company Common Stock on an Adjusted Fully
Diluted Basis.
Section 4.5 Compliance with Insider Trading Policy. For as
long as the Advancing Party, the Buyer or Investor Beneficially Owns any
shares of Company Common Stock, such parties will, and will use their
commercially reasonable efforts to cause their directors, officers,
employees, agents, and representatives to, comply with any written policy
of the Company reasonably designed to prevent violations of insider trading
and similar laws.
Section 4.6 Investment Company Matters. From and after the
Stockholder Approval Date, if any, until a Termination Event, if any,
Investor shall use its reasonable best efforts to not be or become an
"investment company" or any entity "controlled" by an "investment company",
as such terms are defined in the Investment Company Act of 1940, as
amended.
Section 4.7 Waiver of Restrictions and Limits. The Company
shall take all actions, including by providing any necessary conditional
exemptions from or amendments to any agreement or instrument which governs
ownership of shares of Company Stock by any person, necessary to permit
Investor to Beneficially Own up to and including 35.8% of the outstanding
shares of Company Common Stock on an Adjusted Fully Diluted Basis. If any
third party shall be given the right to Beneficially Own more than 35.8% of
the outstanding shares of Company Common Stock on an Adjusted Fully Diluted
Basis, the Company shall take all actions (including by providing the
foregoing exemptions and amendments) to waive any and all restrictions or
limits on Investor. Notwithstanding the foregoing but subject to the
provisions of Section 5.1, Investor or the Company may at any time acquire
Beneficial Ownership of the securities of such other party or its
Affiliates to the extent permitted by applicable law and the provisions of
the organizational documents of such party or its Affiliates, as
applicable, and other agreements from time to time governing the ownership
of such securities.
ARTICLE 5
Additional Covenants
Section 5.1 Restrictions on Investments. Except as
contemplated by the Kapson Agreement, from the date of this Agreement until
the occurrence of a Termination Event or an Early Standstill Termination
Event, the Advancing Party, the Buyer, Investor and their Controlled
Affiliates shall not, directly or indirectly, own any equity interest
(other than a de minimis amount) in any public or private company the
principal business of which is the ownership, management, operation and
development of assisted living facilities in the United States, unless 75%
of the Directors of the Company (other than the Investor Nominees) have
consented to such ownership. Upon the
<PAGE>
termination of the Kapson Agreement or any provisions thereof, this Section
5.1 shall terminate and be of no further effect.
ARTICLE 6
Miscellaneous
Section 6.1 Counterparts. This Agreement may be executed in
one or more counterparts, all of which shall be considered one and the same
instrument, and shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other party. Copies
of executed counterparts transmitted by telecopy, telefax or other
electronic transmission service shall be considered original executed
counterparts for purposes of this Section, provided receipt of copies of
such counterparts is confirmed.
Section 6.2 Governing Law. THIS AGREEMENT SHALL BE GOV ERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA
WITHOUT REFERENCE TO THE CHOICE OF LAW PRINCIPLES THEREOF.
Section 6.3 Entire Agreement. This Agreement (including
agreements incorporated herein) and the Schedules and Exhibits hereto
contain the entire agreement between the parties with respect to the
subject matter hereof and there are no agreements, understandings,
representations or warranties between the parties and other than those set
forth or referred to herein. This Agreement is not intended to confer upon
any person not a party hereto (and their successors and assigns) any rights
or remedies hereunder.
Section 6.4 Expenses. Except as set forth in the Stock
Purchase Agreement, all legal and other costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby
shall be paid by the Company including, without limitation, those specified
in Section 9.3(a) of the Stock Purchase Agreement.
Section 6.5 Notices. All notices and other communications
hereunder shall be sufficiently given for all purposes hereunder if in
writing and delivered personally, sent by documented overnight delivery
service or, to the extent receipt is confirmed, telecopy, telefax or other
electronic transmission service to the appropriate address or number as set
forth below. Notice to the Company shall be addressed to:
ARV Assisted Living, Inc.
245 Fischer Avenue, D-1
Costa Mesa, CA 92626
Attention: President and General Counsel
Telecopy: (714) 759-9283
with a copy to:
Latham & Watkins
650 Town Center Drive
20th Floor
Costa Mesa, CA 92626
Attention: William J. Cernius
Telecopy: (714) 755-8290
<PAGE>
or at such other address and to the attention of such other person as the
Company may designate by written notice to Investor. Notices to the
Advancing Party, the Buyer or Investor shall be addressed to:
Lazard Freres Real Estate Investors L.L.C.
30 Rockefeller Plaza, 63rd Floor
New York, NY 10020
Attention: Robert P. Freeman,
Murry N. Gunty and
Klaus Kretschmann
Telecopy: (212) 838-3239
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Attention: Kevin J. Grehan, Esq.
Telecopy: (212) 474-3700
Section 6.6 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors (including, in the case of the Advancing Party, any
successor to the principal business of the Advancing Party). No party shall
be permitted to assign any of its rights hereunder to any third party,
except that the Buyer, the Advancing Party and any Investor shall be
permitted to assign its rights hereunder to the same extent as the Buyer or
the Advancing Party is permitted to assign its rights under the Stock
Purchase Agreement, provided that such person agrees to be bound by this
Agreement.
Section 6.7 Headings. The Section, Article and other
headings contained in this Agreement are inserted for convenience of
reference only and will not affect the meaning or interpretation of this
Agreement. All references to Sections or Articles contained herein means
Sections or Articles of this Agreement unless otherwise stated.
Section 6.8 Amendments and Waivers. This Agreement may not
be modified or amended except by an instrument or instruments in writing
signed by the party against whom enforcement of any such modification or
amendment is sought. Any party hereto may, only by an instrument in
writing, waive compliance by another party hereto with any term or
provision hereof on the part of such other party hereto to be performed or
complied with. The waiver by any party hereto of a breach of any term or
provision hereof shall not be construed as a waiver of any subsequent
breach.
Section 6.9 Interpretation; Absence of Presumption.
(a) For the purposes hereof, (i) words in the singular shall
be held to include the plural and vice versa and words of one gender shall
be held to include the other gender as the context requires, (ii) the terms
"hereof", "herein", and "herewith" and words of similar import shall,
unless otherwise stated, be construed to refer to this Agreement as a whole
(including all of the Schedules and Exhibits hereto) and not to any
particular provision of this Agreement, and Article, Section, paragraph,
Schedule and Exhibit references are to the Articles, Sections, paragraphs,
Schedules and Exhibits to this Agreement unless otherwise specified, (iii)
the word "including" and words of similar import when used in this
Agreement shall mean "including, without limitation," unless the context
otherwise requires or unless otherwise specified, (iv) the word "or" shall
not
<PAGE>
be exclusive, (v) provisions shall apply, when appropriate, to successive
events and transactions and (vi) terms used herein but not otherwise
defined herein shall have the meanings assigned to such terms in the Stock
Purchase Agreement.
(b) This Agreement shall be construed without regard to any
presumption or rule requiring construction or interpretation against the
party drafting or causing any instrument to be drafted.
Section 6.10 Severability. Any provision hereof which is
invalid or unenforceable shall be ineffective to the extent of such
invalidity or unenforceability, without affecting in any way the remaining
provisions hereof.
Section 6.11 Further Assurances. The Company and Investor
agree that, from time to time, each of them will, and will cause their
respective Affiliates to, execute and deliver such further instruments and
take such other action as may be necessary to carry out the purposes and
interests hereof.
Section 6.12 Specific Performance. The Company and Investor
each acknowledge that, in view of the uniqueness of arrangements
contemplated by this Agreement, the parties hereto would not have an
adequate remedy at law for money damages in the event that this Agreement
were not performed in accordance with its terms, and therefore agree that
the parties hereto shall be entitled to specific enforcement of the terms
hereof in addition to any other remedy to which the parties hereto may be
entitled at law or in equity.
Section 6.13 Investor Breach. In the event Investor shall
have breached (i) its obligation to effect a purchase of the Company Notes
pursuant to the Stock Purchase Agreement or (ii) any of its obligations
under this Agreement which breach is neither cured nor desisted from within
30 days of receipt of written notice of such breach and which would
reasonably be expected to materially adversely affect the Company, the
Company shall no longer be required to perform any of its obligations
hereunder.
Section 6.14 Confidentiality. The Advancing Party, the Buyer
and Investor agree that all information provided to any of them or any of
their representatives pursuant to this Agreement shall be kept
confidential, and such parties shall not (x) disclose such information to
any persons other than the directors, officers, employees, financial
advisors, legal advisors, accountants, consultants and affiliates of such
parties who reasonably need to have access to the confidential information
and who are advised of the confidential nature of such information or (y)
use such information in a manner
<PAGE>
which would be detrimental to the Company; provided, however, the foregoing
obligation of such parties shall not (a) relate to any information that (i)
is or becomes generally available other than as a result of unauthorized
disclosure by such parties or by persons to whom such parties have made
such information available; (ii) is or becomes available to such parties on
a non-confidential basis from a third party that is not, to such parties'
knowledge, bound by any other confidentiality agreement with the Company,
or (b) prohibit disclosure of any information if required by law, rule,
regulation, court order or other legal or governmental process.
Section 6.15 Public Announcements. Subject to each party's
disclosure obligations imposed by law and any stock exchange or similar
rules and the confidentiality provisions contained herein and in Section
5.4(b) of the Stock Purchase Agreement, all news releases and other public
information disclosures with respect to this Agreement, the Stock Purchase
Agreement and the Transaction Documents and any of the transactions
contemplated hereby or thereby will require the mutual approval of Buyer
and the Company before such release or disclosure is made. If a party is
required by law or any stock exchange or similar rule to issue a news
release or other public announcement, it shall advise the other party in
advance thereof and use reasonable best efforts to cause a mutually
agreeable release or announcement to be issued.
IN WITNESS WHEREOF, this Agreement has been signed by or on
behalf of each of the parties hereto as of the day first above written.
LAZARD FRERES REAL ESTATE INVESTORS
L.L.C.
by /s/ Robert P. Freeman
------------------------
Name: Robert P. Freeman
Title: President
PROMETHEUS ASSISTED LIVING LLC
by LAZARD FRERES REAL ESTATE
INVESTORS L.L.C.,
by /s/ Robert P. Freeman
------------------------
Name: Robert P. Freeman
Title: President
ARV ASSISTED LIVING, INC.
by /s/ Shiela M. Muldoon
------------------------
Name:
Title:
<PAGE>
LAZARD FRERES REAL ESTATE
INVESTORS, L.L.C.
30 Rockefeller Center, 63rd Floor
New York, N.Y. 10020
----------
Telephone (212) 632-6017
October 29, 1997
The Board of Directors
ARV Assisted Living, Inc.
245 Fischer Avenue D-1
Costa Mesa, CA 92626
Gentlemen:
Lazard Freres Real Estate Investors, L.L.C. ("LFREI") and Prometheus
Assisted Living LLC ("Prometheus") are parties to a Stockholders Agreement
(the "Stockholders Agreement") with ARV Assisted Living, Inc. (the
"Company") dated as of July 14, 1997, pursuant to which, among other
matters, LFREI agreed not to own any equity interest in any public or
private company, the principal business of which is the ownership,
management, operation and development of assisted living facilities (the
"Non-Compete Covenant"), unless 75% of the members of the Board of
Directors of the Company (other than the Investor Nominees (as such term is
defined in the Stockholder Agreement)) have consented to such ownership
(the "Required Board Approval").
Based on a letter agreement dated September 30, 1997 (the "Original Letter
Agreement"), the Company consented (with the Required Board Approval) to a
one-time waiver to the Non-Compete Covenant to permit an investment by an
affiliate of LFREI (the "Kapson Investment") in Kapson Senior Quarters,
Corp. ("Kapson"). Subsequent to that date and the announcement of the
proposed Kapson Investment, the parties have agreed, among other things, to
amend the Original Letter Agreement as set forth herein.
The substantive terms of the Original Letter Agreement are hereby amended
and restated as follows:
Subject to the consummation of the Kapson Investment, LFREI and Prometheus
agree to the following (each of which shall terminate at (i) the time of a
Termination Event (as defined in the Stockholders Agreement as amended and
restated on October 29, 1997 (the "Amended Stockholders Agreement")) or
(ii) the time, after the consummation of the Kapson Investment, LFREI or
its affiliates owns less than 10% of the stock of Kapson);
1) Consent Rights. After the closing of the Kapson Investment, LFREI will
not permit Kapson to and will cause Kapson to enter into an agreement with
ARV under which Kapson will agree not to enter into any new developments or
acquisitions (other than those in its pipeline at the closing of the Kapson
Investment as disclosed in a schedule to be delivered at that time) without
the written consent of a majority of the independent non-LFREI affiliated
or appointed members of the ARV Board of Directors, which consent may
be withheld at the sole discretion of those directors; provided that upon
the funding of that certain $60,000,000 6 3/4% Convertible Subordinated
Note due 2007 by LFREI or an affiliate this paragraph shall terminate and
be of no further effect.
2) Right of First Offer. After the closing of the Kapson Investment, ARV
will have a first right to negotiate management, lease and/or purchase
arrangements on terms commercially reasonable to both parties on any new
developments or acquisitions by Kapson, each right to be exercised by ARV,
upon commercially reasonable notice, before Kapson enters into binding site
contracts.
<PAGE>
The Board of Directors
ARV Assisted Living, Inc.
October 29, 1997
Page 2
3) Existing Facilities and Developments. LFREI and Prometheus will seek in
good faith to negotiate with ARV for the leasing or management agreements,
on commercially reasonable and customary terms, of all existing or planned
facilities of Kapson including those in the above-described "pipeline."
LFREI and Prometheus will agree not to enter into or permit Kapson or any
of their respective affiliates to enter into leasing or management
arrangements on the existing facilities (excluding sale leasebacks, so long
as such sale leasebacks would permit ARV to sublease or manage such
facilities) other than with ARV or controlled affiliates of Kapson.
ARV will have the option to sell development assets to Kapson at fair
market value with the right to leaseback the assets on commercially
reasonable and customary terms.
4) Option. LFREI hereby grants to ARV (or its shareholders, the selection
to be made at ARV's option provided mutual agreement of ARV and LFREI that
such purchase by ARV directly will not adversely affect Kapson's tax and
accounting status) the right to acquire from LFREI shares representing up
to 19.9% of the stock of Kapson at the pro rata amount of LFREI's all-in
cost (defined at LFREI's total equity investment in Kapson at the close of
the Kapson Investment including reasonable capital carrying costs relating
to the Kapson Investment) for a period of 30 days after the completion of
the Kapson Investment (or, if ARV elects to have its shareholders exercise
this option, 30 days after a registration statement is declared effective
with respect to the option). The term of this option will not extend beyond
the timing described in this paragraph despite LFREI's ongoing ownership of
Kapson.
5) Joint Venture. LFREI will explore a joint venture arrangement, on
commercially reasonable terms, between the Company and Kapson which would
house top corporate management of both firms to achieve economies of scale.
The management company would be jointly owned by the Company and Kapson.
Development personnel and activities would in all likelihood remain at
Kapson. Operating personnel and home health care would in all likelihood
remain at ARV. Savings resulting from this alliance will be shared by the
two companies.
6) Press Releases. The Company and LFREI will have the right to review and
comment on all press releases regarding the foregoing arrangements for a
period from the date hereof through October 29, 1998. No such press
releases regarding the foregoing arrangements shall be made without the
written consent of the Company and LFREI.
7) Public Disclosures. The Company will have the right to review and
comment on all public disclosures (e.g. proxy material, 10-K) of Kapson
regarding the foregoing arrangements for a period from the date hereof
through six months following the close of the Kapson Investment. No such
statement in the public disclosures regarding the foregoing arrangements
shall be made without the written consent of the Company, such consent not
to be unreasonably withheld or delayed.
LFREI hereby represents that, upon completion of the Kapson Investment, it
shall have the authority to cause Kapson to enter into all of the foregoing
arrangements. With respect to the foregoing arrangements, it is agreed that
all negotiations, determinations, consents and elections by ARV shall be
made by a majority of the Non-Investor Nominee (as defined in the Amended
Stockholders Agreement) directors of ARV.
The parties hereby agree that if mutually agreeable arrangements regarding
the matters set forth in paragraph 3 above are not entered into by the
later of three months following the closing of the Kapson Investment or May
1, 1998, then this letter agreement shall terminate without further
obligation of any party.
<PAGE>
The Board of Directors
ARV Assisted Living, Inc.
October 29, 1997
Page 3
LFREI believes strongly that a strong alignment of interests between LFREI,
Kapson and ARV and the synergies that could be created by a strategic
alliance between these two industry players, will significantly benefit all
shareholders of ARV and Kapson, including LFREI as their largest
shareholder.
<PAGE>
The Board of Directors
ARV Assisted Living, Inc.
October 29, 1997
Page 4
Very truly yours,
LAZARD FRERES REAL ESTATE INVESTORS, L.L.C.
By: /s/ Robert P. Freeman
------------------------------
Robert P. Freeman
President
PROMETHEUS ASSISTED LIVING L.L.C.,
By: LAZARD FRERES REAL ESTATE INVESTORS, L.L.C.
By: /s/ Robert P. Freeman
------------------------------
Robert P. Freeman
President
ACKNOWLEDGED AND AGREED:
ARV ASSISTED LIVING, INC.
By: /s/ Shiela M. Muldoon
-------------------------
Shiela M. Muldoon
Authorized Signatory
