Assisted Living Concepts, Inc.

Indicate by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrants was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

The Registrant had 17,120,745 shares of common stock, $.01 par value, outstanding at November 7, 2001.

On October 1, 2001 Assisted Living Concepts, Inc. (the “Company”) and its wholly owned subsidiary Carriage House Assisted Living, Inc. (“Carriage House”) filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware in Wilmington (the “Court”). The Company reached an agreement (the “Plan Support Agreement”) for a financial reorganization with the holders (the “Debenture Holders”) of $75,857,000 million aggregate principal amount (out of a total of $161,250,000 million aggregate principal amount outstanding, or approximately 47%) of its two series of convertible subordinated debentures (collectively, the “Debentures”) that will be implemented through a prenegotiated plan of reorganization (the “Prenegotiated Plan”).

Pursuant to the Plan Support Agreement, upon the effective date of the Prenegotiated Plan, (1) the Debentures and certain other unsecured debt of the Company will be exchanged for (a) $40.25 million aggregate principal amount of seven-year secured notes (the “New Senior Secured Notes”), bearing interest at 10% per annum, payable semi-annually in arrears, (b) $15.25 million aggregate principal amount of ten-year secured notes (the “New Junior Secured Notes” and collectively with the New Senior Secured Notes, the “New Notes”), bearing interest payable in additional New Junior Secured Notes for three years at 8% per annum and thereafter payable in cash at 12% per annum payable semi-annually in arrears, and (c) 96% of the common stock of the reorganized Company, and (2) existing holders of the Company’s common stock will exchange their stock for 4% of the common stock of the reorganized Company.

The New Senior Secured Notes will be secured by (1) all presently unencumbered real property owned by the Company and its subsidiaries, and (2) any additional real property owned by the Company and its subsidiaries that may become unencumbered on or before the effective date of the Prenegotiated Plan. The New Junior Secured Note will be secured by a junior lien on the same collateral securing the New Senior Secured Notes. If the aforementioned collateral has a fair market value of less than $75.0 million as determined using an agreed upon formula, then a junior security interest in the collateral securing the obligations of certain wholly-owned subsidiaries of the Company (the “Non-Debtor Heller Borrowers”) under an existing financing with Heller Healthcare Finance, Inc. (“Heller”), which was amended in connection with the Company’s voluntary petition under Chapter 11 of the U.S. Bankruptcy Code, will also be provided to meet this market value requirement. As part of the filing, and pursuant to the Plan Support Agreement, the Company expects its vendors and trade creditors to be paid in the ordinary course and to be unaffected by the bankruptcy filing. The Plan Support Agreement also requires the Debenture Holders to fully support the Prenegotiated Plan and binds the transferees of any Debenture Holders which executed the Plan Support Agreement to fully comply with the terms of the Plan Support Agreement.

The implementation of the Prenegotiated Plan is dependent upon a number of conditions typical in restructures of this type including, among other things, final documentation satisfactory to the Debenture Holders, Court approval of the Prenegotiated Plan and related solicitation materials and the Company’s acquisition of debtor-in-possession financing and takeout financing upon the Company’s exit from bankruptcy. The Company obtained debtor-in-possession financing from Heller, which was approved by the Court by Interim Order on October 3, 2001 and Final Order on October 19, 2001. Among other things, the Final Order also approved the Company’s guaranty of the financing of the acquisition by Texas ALC Partners, L.P. (“Texas ALC”) of sixteen properties currently leased by Texas ALC from the current lessor thereunder, T and F Properties, L.P. (the “Meditrust Properties” and the acquisition by Texas ALC, the “Meditrust Acquisition”). The purchase of the Meditrust Properties was completed on October 24, 2001. See Item 1 Notes 7 and 9 to the Consolidated Financial Statements.

On October 26, 2001, the Company and Carriage House filed a First Amended Plan of Reorganization and a First Amended Disclosure Statement, which amended the previous filings to account for developments in the bankruptcy cases from and after October 1, 2001 and to provide additional disclosure about certain treatment of claims against and interests in the debtors. The disclosure statement, which establishes the timetable and procedures regarding the Company’s solicitation of votes for the Prenegotiated Plan, was approved by the Court on October 30, 2001. Except as otherwise ordered by the Court, a party who deems it necessary to file a proof of claim must do so by November 15, 2001. A confirmation hearing has been

scheduled on December 5, 2001 and the Company and Carriage House expect the Prenegotiated Plan to be effective in early 2002. However, there can be no assurance the Prenegotiated Plan will become effective in early 2002, or at all. See Item 2 Management Discussion and Analysis — Risk Factors.

The accompanying financial statements have been prepared under accounting principles generally accepted in the United States of America. Upon exit from bankruptcy, the Company will adopt fresh start accounting as defined in American Institute of Certified Public Accountants Statement of Position 90-7 (“SOP 90-7”). Fresh start accounting will be required because holders of existing voting shares immediately before the filing of Chapter 11 and Court approval are expected to receive less than 50% of the voting shares of the emerging entity and its reorganization value is expected to be less than its post-petition liabilities and allowed claims. The adoption of fresh start accounting will result in substantial changes to the Company’s future financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

Assisted Living Concepts, Inc., a Nevada Corporation, (the “Company”) owns, leases and operates assisted living residences which provide housing to older persons who need help with the activities of daily living, such as bathing and dressing. The Company provides personal care and support services and makes available routine health care services, as permitted by applicable law, designed to meet the needs of its residents.

On October 1, 2001 the Company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware in Wilmington (the “Court”). The Company reached an agreement (the “Plan Support Agreement”) for a financial reorganization with the holders (the “Debenture Holders”) of $75,857,000 million aggregate principal amount (out of a total of $161,250,000 million aggregate principal amount outstanding, or approximately 47%) of its two series of convertible subordinated debentures (collectively, the “Debentures”) that will be implemented through a prenegotiated plan of reorganization (the “Prenegotiated Plan”).

Statement, which amended the previous filings to account for developments in the bankruptcy cases from and after October 1, 2001 and to provide additional disclosure about certain treatment of claims against and interests in the debtors. The Disclosure Statement, which establishes the timetable and procedures regarding the Company’s solicitation of votes for the Prenegotiated Plan, was approved by the Court on October 30, 2001. A confirmation hearing has been scheduled on December 5, 2001 and the Company and Carriage House expect the Prenegotiated Plan to be effective in early 2002. However, there can be no assurance the Prenegotiated Plan will become effective in early 2002, or at all. See Item 2 Risk Factors.

Under Chapter 11, certain claims against the Company in existence prior to the filing of the petition for relief under the federal bankruptcy laws are stayed while the Company continues business operations as Debtor-in-possession. These claims are reflected in the accompanying consolidated balance sheet as “liabilities subject to compromise.” Additional claims (liabilities subject to compromise) may arise subsequent to the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed upon by parties in interest) of allowed claims for contingent liabilities and other disputed amounts. Claims secured by certain of the Company’s assets (“secured claims”) also are stayed, although the holders of such claims have the right to move the court for relief from the stay in order to foreclose. Secured claims are secured primarily by liens on the Company’s real property and equipment.

The Company has received approval from the Court to pay certain of its prepetition obligations, including employee wages, benefits, refundable tenant deposits and vendor payables.

The Company has incurred $2.8 million and $4.2 million in reorganization costs for the three and nine months ended September 30, 2001, respectively, and expects to incur additional reorganization costs of approximately $2.0 million. Reorganization costs include legal, financial advisory and other professional fees incurred in relation to the reorganization. Since the Company does not expect to raise any new capital as a result of such reorganization, these amounts are expensed as incurred in the accompanying financial statements.

Liabilities subject to compromise primarily include the Debentures and related accrued interest and amounts payable under a previous employee’s separation agreement. These items are expected to be impacted by the Chapter 11 proceedings and have been separately identified on the accompanying consolidated financial statements.

These consolidated financial statements have been prepared without being audited, as allowed by the rules and regulations of the Securities and Exchange Commission. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries that own, lease and operate assisted living residences. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as allowed by rules and regulations of the Securities and Exchange Commission. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

The financial information included in these financial statements contain all adjustments (which consist of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of

results for the quarterly periods. The results of operations for the three and nine month periods ended September 30, 2001 do not necessarily indicate the results that are expected for the full year.

These consolidated financial statements have been prepared assuming the Company will continue as a going concern. Upon exit from bankruptcy, which is expected by management to be in early 2002, the Company will adopt fresh start accounting as defined in American Institute of Certified Public Accountants Statement of Position 90-7 (“SOP 90-7”). Fresh start accounting will be required because holders of existing voting shares immediately before the filing of Chapter 11 and Court approval are expected to receive less than 50% of the voting shares of the emerging entity and its reorganization value is expected to be less than its post-petition liabilities and allowed claims. The adoption of fresh start accounting will result in substantial changes to the Company’s future financial statements. There can be no assurance the Company will emerge from bankruptcy in early 2002, or at all. (See Note 2 and Item 2 Management Discussion and Analysis — Risk Factors).

Certain reclassifications have been made in the prior period’s consolidated financial statements to conform to the current period’s presentation. Such reclassifications had no effect on previously reported net loss or total shareholders’ equity.

The Company’s cash, cash equivalents and cash held for tenant security deposits consist of the following (in thousands):

Cash held for tenant security deposits is a general unrestricted asset of the Company.

The Company’s property and equipment, stated at cost, consists of the following (in thousands):

Effective February 22, 2001, the Company entered into a loan agreement to finance technology equipment in the amount of $550,000. The agreement required an initial payment of $150,000 (which has been paid) and monthly payments of $25,000 (principal and interest) until maturity on August 31, 2002. This loan bears an interest rate of 12.5% and is secured by the related technology equipment that the Company purchased during the year ended December 31, 2000.

On March 2, 2001, the Non-Debtor Heller Borrowers entered into an agreement with Heller Healthcare Finance, Inc. (“Heller”) for a line of credit facility up to $45.0 million (the “Existing Facility”), which was guaranteed by the Company. This line was scheduled to mature on August 31, 2002 and would have been secured by up to 32 properties. This line carried an interest rate of 3.85% over the three-month LIBOR rate floating monthly and required monthly interest-only payments until maturity.

As of June 27, 2001, the Non-Debtor Heller Borrowers amended the Existing Facility, reducing the aggregate line of credit available from $45.0 million to $20.0 million. The Existing Facility was scheduled to mature on September 28, 2001, which maturity was extended to October 12, 2001 by Heller, and was secured by 26 properties.

On October 3, 2001, the Company and Carriage House entered into a debtor-in-possession facility with Heller in an amount of up to $4.4 million (the “DIP Facility”). The DIP Facility was approved by the Court by Interim Order on October 3, 2001 and by Final Order on October 19, 2001. The DIP Facility supplements the Company and Carriage House’s cash position in order to ensure that all on-going working capital needs are met and is secured by eight properties of the Company and Carriage House and a pledge of certain intercompany notes and the stock of certain subsidiaries of the Company (collectively, the “DIP Collateral”). The DIP Facility matures upon the earlier of the Company’s emergence from bankruptcy or twelve months from the effective date of the DIP Facility. Principal is payable at maturity and interest is calculated at 5.0% over three month LIBOR, floating monthly, and payable monthly in arrears. As of October 31, 2001, the Company has drawn $1.0 million on this DIP Facility.

among other things, extends the maturity of the Existing Facility to be coterminous with the DIP Facility, amends the interest to be calculated at 5.0% over three month LIBOR, floating monthly, payable monthly in arrears, and permits the financing of the acquisition by Texas ALC Partners, L.P. (“Texas ALC”) of sixteen properties currently leased by Texas ALC from the current lessor thereunder, T and F Properties, L.P. (the “Meditrust Properties” and the acquisition by Texas ALC, the “Meditrust Acquisition”). The purchase of the Meditrust Properties was completed on October 24, 2001. The DIP Collateral and the collateral for the Existing Facility (including the Meditrust Properties when acquired) cross-collateralize both the DIP Facility and the Existing Facility, as amended. The extension of the Company guarantee was approved by the Court. Fees incurred to date, including commitment fees, funding fees, closing fees and professional fees associated with the establishment of the Heller credit facility are $3.8 million (of which $500,000 was paid in 2000). The balance outstanding under the Heller facilities is $39.5 million (including $1.0 million under the DIP Facility) at October 31, 2001.

The DIP Facility may be refinanced through the Existing Facility, as amended by the second amendment in connection with the exit from bankruptcy (the “Exit Facility”). The principal amount of the Exit Facility will not exceed $44.0 million and will mature 36 months from the date on which the Company exits from bankruptcy. Principal will be payable monthly in a monthly amount of $50,000 for the first year, $65,000 for the second year and $80,000 for the last year of the Exit Facility term. Interest will be calculated at 4.5% over three month LIBOR, floating monthly (not to be less than 8%), and payable monthly in arrears. The Exit Facility is to be secured by 32 properties owned by the Non-Debtor Heller Borrowers. The Company will remain liable for the entire amount of the Exit Facility as a guarantor.

On June 14, 2001, the Company entered into two loan agreements for $1.8 million and $2.7 million, and on July 19, 2001, the Company entered into a loan agreement for $3.0 million, with Red Mortgage Capital, Inc. (“Red Mortgage”) for long-term HUD insured financing. Each loan is secured by a property in Texas and the loans mature between July 1, 2036 and August 1, 2036 and collectively require monthly principal and interest payments of $50,000. The loans bear fixed annual interest rates between 7.40% and 7.55%. Of the $7.5 million in proceeds, $4.0 million was used to pay off bridge financing provided by Red Mortgage, $350,000 was used for loan closing costs, $3.0 million was used to pay down the Heller line of credit and the remaining proceeds were used to fund escrow accounts.

On March 12, 2001, in exchange for a waiver of U.S. Bank’s right to declare an event of default for the Company’s failure to comply with certain financial covenants as of December 31, 2000 and March 31, 2001, and for the modification of certain financial covenants, the Company agreed to maintain minimum cash balances of $11.0 million at the end of each fiscal quarter, except for the fiscal quarter ending September 30, 2001 which has a required minimum balance of $8.0 million. The amendment also requires the Company to deposit $500,000 in cash collateral with U.S. Bank in the event certain regulatory actions are commenced with respect to the properties securing its obligations to U.S. Bank. U.S. Bank is required to release such deposits upon satisfactory resolution of the regulatory action. As of the date of this filing, no such additional deposits have been required. Failure to comply with any covenant constitutes an event of default, which will allow U.S. Bank (at its discretion) to declare any amounts outstanding under the loan documents to be due and payable.

In May, 2001, the Company received a waiver of U.S. Bank’s right to declare an event of default for the Company’s failure to meet the March 31, 2001 cash balance requirements set forth in the March 12, 2001 U.S. Bank loan amendment.

Additionally, in August, 2001, the Company received a waiver of U.S. Bank’s right to declare an event of default for the Company’s failure to meet the June 30, 2001, September 30, 2001 and probable failure to meet the December 31, 2001 cash balance requirements and other financial ratios set forth in the amended U.S. Bank loan agreement. There can be no assurance that the Company will be able to meet these requirements as of the end of future quarters or that U.S. Bank will grant waivers of any such future failure to meet these requirements.

Many of the Company’s debt instruments and leases contain “cross-default” provisions pursuant to which a default under one obligation can cause a default under one or more other obligations. Accordingly, if enforced, the Company could experience a material adverse effect on its financial condition.

In September, 2000, the Company reached an agreement to settle the class action litigation relating to the restatement of its consolidated financial statements for the years ended December 31, 1996 and 1997 and the first three fiscal quarters of 1998. This agreement received final court approval on November 30, 2000 and the Company was dismissed from the litigation with prejudice. On September 28, 2001, the Company made its final installment of $1.0 million on its promissory note for the class action litigation settlement. Although the Company has been dismissed from the litigation with prejudice, an outstanding dispute regarding coverage exists with the Company’s prior directors, officers and corporate liability insurance carriers. The Company and the insurance carriers agreed to resolve this dispute through binding arbitration, and the Company filed a complaint for a declaratory judgment that the Company is not liable to the carriers as claimed. The carriers counter-claimed to recover an amount capped at $4.0 million. The Company believes it has strong defenses regarding this dispute and consequently has not recorded a liability in relation to this matter.

After filing for bankruptcy on October 1, 2001, the Company made a motion for dismissal of its complaint for declaratory relief in the arbitration based upon having filed for bankruptcy protection. An objection was filed to the Company’s motion.

In addition to the matter referred to above, the Company is involved in various lawsuits and claims arising in the normal course of business. In the aggregate, settlement of such suits and claims should not have a material adverse effect on the Company’s financial condition, results of operations, cash flow and liquidity.

On October 1, 2001, the Company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware in Wilmington. See Note 2.

On October 3, 2001, the Court issued an Interim Order approving the DIP Facility with Heller in the principal amount of $4.4 million, on which the Company drew the initial amount of $1.0 million on October 4, 2001. On October 19, 2001, the Court issued its Final Order of the DIP Facility and also approved the Company’s guaranty of financing by the Non-Debtor Heller Borrowers of the Meditrust Acquisition pursuant

to the Second Amendment, among other things. On October 26, 2001, the Company and Carriage House filed a First Amended Plan of Reorganization and a First Amended Disclosure Statement, which amended the previous filings to account for developments in the bankruptcy cases from and after October 1, 2001 and to provide additional disclosure about certain treatment of claims against and interests in the debtors. The disclosure statement, which establishes the timetable and procedures regarding the Company’s solicitation of votes for the Prenegotiated Plan, was approved by the Court on October 30, 2001. See Notes 2 and 7.

On October 25, 2001, the Company received notice from the American Stock Exchange (“AMEX”) that pursuant to the SEC’s approval of AMEX’s application to strike the Company’s common stock and its two series of convertible subordinated debentures from listing and registration on AMEX. These securities were delisted and ceased trading on the AMEX on October 26, 2001. The Company’s common stock is currently listed on the over-the-counter bulletin board.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References in this section to “ALC,” the “Company,” “us” or “we” refer to Assisted Living Concepts, Inc. and its wholly-owned subsidiaries.

We operate, own and lease free-standing assisted living residences. These residences are primarily located in small middle-market rural and suburban communities with a population typically ranging from 10,000 to 40,000. We provide personal care and support services, and make available routine nursing services (as permitted by applicable law) designed to meet the personal and health care needs of our residents. As of September 30, 2001, we had operations in 16 states.

We experienced significant and rapid growth between 1994 and 1998, primarily through the development of assisted living residences and, to a lesser extent, through the acquisition of assisted living residences, opening our last twenty residences in 1999. At the closing of our initial public offering in November 1994, we had an operating base of five leased residences (137 units) located in Oregon. As of September 30, 2001, we operated 185 residences (7,149 units), of which we owned 115 residences (4,515 units) and leased 70 residences (2,634 units).

We derive our revenues primarily from resident fees for room, board and care. Resident fees typically are paid monthly by residents, their families, state Medicaid agencies or other third parties. Resident fees include revenue derived from a multi-tiered rate structure, which varies based on the level of care provided. Resident fees are recognized as revenues when services are provided. Our operating expenses include:


	•	residence operating expenses, such as staff payroll, food, property taxes, utilities, insurance and other direct residence operating expenses;

	•	general and administrative expenses consisting of regional management and corporate support functions such as legal, accounting and other administrative expenses;

	•	building rentals;

	•	depreciation and amortization; and

	•	reorganization costs.

We anticipate that the majority of our revenues will continue to come from private pay sources. However, we believe that by having located residences in states with favorable regulatory and reimbursement climates, we should have a stable source of residents eligible for Medicaid reimbursement to the extent that private pay residents are not available and, in addition, provide our private pay residents with alternative sources of support when their private funds are depleted and they become Medicaid eligible.

Although we manage the mix of private paying tenants and Medicaid paying tenants residing in our facilities, any significant increase in our Medicaid population could have an adverse effect on our financial position, results of operations or cash flows, particularly if states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates. See “Risk Factors — We depend on reimbursement by governmental payors and other third parties for a significant portion of our revenues.”

The following table sets forth, for the periods presented, results of operations (in millions), operating expenses as a percentage of revenue, the number of total residences and units operated, average occupancy and rental rates and the sources of our revenue. The portion of revenues received from state Medicaid agencies are labeled as “Medicaid state paid portion” while the portion of our revenues that a Medicaid-eligible resident must pay out of his or her own resources is labeled “Medicaid resident paid portion.”

We incurred a net loss of $7.3 million, or $0.43 per basic and diluted common share, on revenue of $38.0 million for the three months ended September 30, 2001 (the “September 2001 Quarter”) as compared

Revenues. Revenues were $38.0 million for the September 2001 Quarter as compared to $35.3 million for the September 2000 Quarter, a net increase of $2.7 million. The increase in revenue was attributable to a combination of an increase in average occupancy to 84.34% and average monthly rental rate to $2,082 for the September 2001 Quarter as compared to average occupancy of 81.35% and average monthly rental rate of $2,002 for September 2000 Quarter.

Residence Operating Expenses. Residence operating expenses were $26.1 million for the September 2001 Quarter as compared to $24.1 million for the September 2000 Quarter, a net increase of $2.0 million.


	•	$1.9 million related to increases in payroll costs due to increases in occupancy, wages, benefits, and medical and workers’ compensation insurance premiums;

	•	$200,000 related to a 10% increase in utility costs;

	•	$100,000 related to an increase in kitchen expense as a result of increases in occupancy; and

	•	$500,000 related to increases in professional and property liability insurance premiums and deductibles or retentions.


	•	a decrease of $400,000 in property tax expense as a result of changes in assessments and related estimates; and

	•	a decrease of $300,000 in bad debt expense due to more timely collection of aged accounts receivables.

Corporate, General and Administrative. Corporate, general and administrative expenses were $4.5 million for the September 2001 Quarter compared to $3.2 million for the September 2000 Quarter, an increase of approximately $1.3 million. The September 2000 Quarter included a reduction of $900,000 related to an insurance reimbursement for legal and professional fees incurred in prior periods in connection with the class action litigation. Excluding the $900,000 reimbursement, the September 2000 Quarter was $4.1 million as compared to $4.5 million in the September 2001 Quarter, an increase of $400,000 which was due primarily to an increase in payroll and related expenses.

Building Rentals. Building rentals were $4.1 million for the September 2001 Quarter as compared to $4.0 million for the September 2000 Quarter, an increase of $100,000. The increase was due to annual rent escalators.

Depreciation and Amortization. Depreciation and amortization expense was $2.6 million in the September 2001 Quarter as compared to $2.6 million in the September 2000 Quarter.

Interest Expense. Interest expense was $5.3 million for the September 2001 Quarter compared to $4.1 million for the September 2000 Quarter, an increase of $1.2 million. The increase was related to interest incurred on our $4.0 million bridge loan entered into in November 2000, interest incurred on HUD loans with principal of $7.5 million, and interest costs associated with our draws of $15.0 million on the Heller line of credit and the related amortization of financing fees associated with this line which was entered into in March 2001.

Interest Income. Interest income was $95,000 for the September 2001 Quarter compared to $187,000 for the September 2000 Quarter, a decrease of $92,000. This decrease is the result of decreased balances in cash and cash equivalents.

Reorganization Costs. Reorganization costs were $2.8 million for the September 2001 Quarter. These include professional fees, such as legal and financial advisory fees incurred by the unofficial committee representing 47% of the Debenture Holders (the “Committee”) and us related to the reorganization. Since we

Net Loss. As a result of the above, we incurred a net loss of $7.3 million or $0.43 per basic and diluted common share for the September 2001 Quarter, compared to a net loss of $12.4 million, or $0.73 per basic and diluted common share, for the September 2000 Quarter.

We incurred a net loss of $16.1 million, or $0.94 per basic and diluted common share, on revenue of $112.3 million for the nine months ended September 30, 2001 (the “September 2001 YTD Period”) as compared to a net loss of $20.1 million or $1.17 per basic and diluted common share, on revenues of $102.6 million for the nine months ended September 30, 2000 (the “September 2000 YTD Period”).

Revenues. Revenues were $112.3 million for the September 2001 YTD Period as compared to $102.6 million for the September 2000 YTD Period, a net increase of $9.7 million. The increase in revenue was attributable to a combination of an increase in average occupancy to 83.87% and average monthly rental rate to $2,059 for the September 2001 YTD Period as compared to average occupancy of 79.92% and average monthly rental rate of $1,974 for September 2000 YTD Period.

Residence Operating Expenses. Residence operating expenses were $76.6 million for the September 2001 YTD Period as compared to $69.0 million for the September 2000 YTD Period, a net increase of $7.6 million.


	•	$5.7 million related to an related to increases in payroll costs due to increased occupancy, increased wages and benefits as a result of longer tenure employees, and increases in medical and workers’ compensation insurance premiums;

	•	$900,000 related to a 14% increase in utility costs;

	•	$150,000 related to increase in recruiting expenses;

	•	$450,000 related to tenant care expenses;

	•	$600,000 related to an increase in kitchen expense as a result of increases in occupancy; and

	•	$1.5 million related to increases in professional and property liability insurance premiums and deductibles or retentions.


	•	decrease of $1.1 million in property tax expense as a result of changes in assessments and related estimates; and

	•	decrease in bad debt expense of $600,000 due to more timely collection of aged receivables.

Corporate, General and Administrative. Corporate, general and administrative expenses were $13.2 million for the September 2001 YTD Period compared to $12.3 million for the September 2000 YTD Period, an increase of approximately $900,000. The September 2000 YTD period included a reduction of $900,000 related to an insurance reimbursement for legal and professional fees, $300,000 of which was incurred in prior periods, in connection with the class action litigation. Excluding the $900,000 reimbursement, the September 2001 YTD Period was $13.2 million compared to $13.2 million in the September 2001 YTD Period. Although total corporate, general and administrative expenses remained comparable, fluctuations within this category were as follows:


	•	$200,000 related to recruiting and retention consulting;

	•	$250,000 increase in payroll and related expenses; and

	•	$100,000 related to public company expense due to increased board meetings and related expenses associated with the reorganization.

The principal elements that decreased in corporate, general and administrative expense of:


	•	$300,000 related to decreases in director and officer insurance premiums for 2001 renewals; and

	•	$250,000 related to legal, accounting and consulting fees.

Building Rentals. Building rentals were $12.4 million for the September 2001 YTD Period as compared to $12.0 million for the September 2000 YTD period, an increase of $400,000. The increase was due to scheduled rent escalators and to a retroactive rent increase of $145,000 paid to one lessor during the March 2001 Quarter.

Depreciation and Amortization. Depreciation and amortization expense was $7.7 million in the September 2001 YTD Period as compared to $7.4 million in the September 2000 YTD Period, an increase of $300,000. The increase is due to depreciation expense related to the equipment acquired to support our communications infrastructure.

Interest Expense. Interest expense was $14.6 million for the September 2001 YTD Period compared to $12.3 million for the September 2000 YTD Period, an increase of $2.3 million. The increase was related to interest incurred on our $4.0 million bridge loan entered into in November 2000, interest on HUD loans with principal of $7.5 million and interest costs associated with our draws of $15.0 million on the Heller line of credit and the related amortization of financing fees associated with this line which was entered into in March 2001.

Interest Income. Interest income was $382,000 for the September 2001 YTD Period compared to $576,000 for the September 2000 YTD Period, a decrease of $194,000. This decrease is the result of decreased balances in cash and cash equivalents.

Reorganization Costs. Reorganization costs were $4.2 million for the September 2001 YTD Period. These include professional fees, such as legal and financial advisory fees, incurred by the Committee and us related to the reorganization. Since we do not expect to raise any new capital as a result of such reorganization, these amounts are expensed as incurred in the accompanying consolidated financial statements.

Net Loss. As a result of the above, we incurred a net loss of $16.1 million or $0.94 per basic and diluted common share for the September 2001 YTD Period, compared to a net loss of $20.1 million, or $1.17 per basic and diluted common share, for the September 2000 YTD Period.

At September 30, 2001, we had a working capital deficit of $20.4 million (including Heller line of credit of $15.0 million) and unrestricted cash, cash equivalents and cash held for tenant security deposits of $5.6 million.

Net cash used in operating activities was $14.7 million during the nine months ended September 30, 2001. The primary uses were an increase of $1.6 million in other current assets and a $8.3 million decrease in other current liabilities consisting primarily of payments of $7.8 million on our class action litigation settlement payable. These uses were offset by a decrease of $1.7 million in prepaid expenses.

Net cash used in investing activities was $3.1 million during the nine months ended September 30, 2001. The primary uses were an increase of $1.6 million in restricted cash related to workers’ compensation deposits required by our insurance carrier (funds will be withdrawn from this account as 2001 workers’ compensation claims are incurred and paid) and capital expenditures of $1.5 million.

Net cash provided by financing activities was $13.5 million during the nine months ended September 30, 2001. We received proceeds of $7.5 million in connection with long-term HUD insured financing secured by three Texas properties and $18.0 million in draws on our Heller line of credit during the nine months ended September 30, 2001. Costs associated with the closing of the HUD insured financings and the establishment of the Heller line of credit were $350,000 and $3.8 million ($500,000 of which was paid in 2000), respectively. Of the $7.5 million in proceeds we received from the HUD insured financing, $4.0 million was used to pay off our $4.0 million bridge loan payable, $350,000 was used for HUD insured loan closing costs, $3.0 million was used to pay down the Heller line of credit and the remaining proceeds were used to fund escrow accounts. Principal payments on long term debt and capital lease obligations were $4.3 million for the nine months ended September 30, 2001.

On October 1, 2001 the Company and its wholly owned subsidiary Carriage House Assisted Living, Inc. (“Carriage House”) filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware in Wilmington (the “Court”). We reached an agreement (the “Plan Support Agreement”) for a financial reorganization with the holders (the “Debenture Holders”) of $75,857,000 million aggregate principal amount (out of a total of $161,250,000 million aggregate principal amount outstanding, or approximately 47%) of our two series of convertible subordinated debentures (collectively, the “Debentures”) that will be implemented through a prenegotiated plan of reorganization (the “Prenegotiated Plan”).

Pursuant to the Plan Support Agreement, upon the effective date of the Prenegotiated Plan, (1) the Debentures and certain of our other unsecured debt of will be exchanged for (a) $40.25 million aggregate principal amount of seven-year secured notes (the “New Senior Secured Notes”), bearing interest at 10% per annum, payable semi-annually in arrears, (b) $15.25 million aggregate principal amount of ten-year secured notes (the “New Junior Secured Notes” and collectively with the New Senior Secured Notes, the “New Notes”), bearing interest payable in additional New Junior Secured Notes for three years at 8% per annum and thereafter payable in cash at 12% per annum payable semi-annually in arrears, and (c) 96% of the common stock of the reorganized Company, and (2) existing holders of the our common stock will exchange their stock for 4% of the common stock of the reorganized Company.

The New Senior Secured Notes will be secured by (1) all presently unencumbered real property owned by us, and (2) any additional real property owned by us that may become unencumbered on or before the effective date of the Prenegotiated Plan. The New Junior Secured Note will be secured by a junior lien on the same collateral securing the New Senior Secured Notes. If the aforementioned collateral has a fair market value of less than $75.0 million as determined using an agreed upon formula, then a junior security interest in the collateral securing obligations of certain of our wholly-owned subsidiaries (the “Non-Debtor Heller Borrowers”) under a proposed financing with Heller Healthcare Finance, Inc. (“Heller”), which was amended in connection with our voluntary petition under Chapter 11 of the U.S. Bankruptcy Code, will also be provided to meet this market value requirement. As part of the filing, and pursuant to the Plan Support Agreement, we expect our vendors and trade creditors to be paid in the ordinary course and to be unaffected by the bankruptcy filing. The Plan Support Agreement also requires the Debenture Holders to fully support the Prenegotiated Plan and binds the transferees of any Debenture Holders which executed the Plan Support Agreement to fully comply with the terms of the Plan Support Agreement.

The implementation of the Prenegotiated Plan is dependent upon a number of conditions typical in restructures of this type including, among other things, final documentation satisfactory to the Debenture Holders, Court approval of the Prenegotiated Plan and related solicitation materials and our acquisition of debtor-in-possession financing and takeout financing upon our exit from bankruptcy. We obtained debtor-in-possession financing from Heller, which was approved by the Court by Interim Order on October 3, 2001 and Final Order on October 19, 2001. Except as otherwise ordered by the Court, a party who deems it necessary to file a proof of claim must do so by November 15, 2001. We have a confirmation hearing scheduled on December 5, 2001 and expect the Prenegotiated Plan to be effective in early 2002. However, there can be no assurance the Prenegotiated Plan will become effective in early 2002, or at all. See Item 2 Risk Factors.

We have incurred $2.8 million and $4.2 million in reorganization costs for the three and nine months ended September 30, 2001, respectively, and expect to incur additional reorganization costs of approximately $2.0 million. Reorganization costs include legal, financial advisory and other professional fees incurred by the Committee and us related to reorganization. Since we do not expect to raise any new capital as a result of such reorganization, these amounts are expensed as incurred in the accompanying consolidated financial statements.

On March 12, 2001, in exchange for a waiver of U.S. Bank’s right to declare an event of default for our failure to comply with certain financial covenants as of December 31, 2000 and March 31, 2001, and for the modification of certain financial covenants, we agreed to maintain minimum cash balances of $11.0 million at the end of each fiscal quarter, except for the fiscal quarter ending June 30, 2001, which had a required minimum balance of $8.0 million. The amendment also requires us to deposit $500,000 in cash collateral with

U.S. Bank in the event certain regulatory actions are commenced with respect to the properties securing our obligations to U.S. Bank. U.S. Bank is required to release such deposits upon satisfactory resolution of the regulatory action.

In May, 2001, we received a waiver of U.S. Bank’s right to declare an event of default for our failure to meet the March 31, 2001 cash balance requirements set forth in the March 12, 2001 U.S. Bank loan amendment.

In August, 2001, we received a waiver of U.S. Bank’s right to declare an event of default for our failure to meet the September 30, 2001 and probable failure to meet the December 31, 2001 cash balance requirements and other financial ratios set forth in the amended U.S. Bank loan agreement. There can be no assurance that we will be able to meet these requirements as of the end of future quarters or that U.S. Bank will grant waivers of any such future failure to meet these requirements.

Failure to comply with any covenant constitutes an event of default, which will allow U.S. Bank (at its discretion) to declare any amounts outstanding under the loan documents to be due and payable. Certain of our leases and loan agreements contain covenants and cross-default provisions such that a default on one of those agreements could cause us to be in default on one or more other agreements.

On March 2, 2001, the Non-Debtor Heller Borrowers entered into an agreement with Heller Healthcare Finance, Inc. (“Heller”) for a line of credit facility up to $45.0 million (the “Existing Facility”), which we guaranteed. This line was scheduled to mature on August 31, 2002 and would have been secured by up to 32 properties. This line carried an interest rate of 3.85% over the three-month LIBOR rate floating monthly and required monthly interest-only payments until maturity.

As of June 27, 2001, the Non-Debtor Heller Borrowers amended the Existing Facility, reducing the aggregate line of credit available from $45.0 million to $20.0 million. The Existing Facility, was scheduled to mature on September 28, 2001, which maturity was extended to October 12, 2001 by Heller, and was secured by 26 properties.

On October 3, 2001, the Company and Carriage House entered into a debtor-in-possession facility with Heller in an amount of up to $4.4 million (the “DIP Facility”). The DIP Facility was approved by the Court by Interim Order on October 3, 2001 and by Final Order on October 19, 2001. The DIP Facility supplements our cash position in order to ensure that all on-going working capital needs are met and is secured by eight of our properties and a pledge of certain intercompany notes and the stock of certain of our subsidiaries (collectively, the “DIP Collateral”). The DIP Facility matures upon the earlier of our emergence from bankruptcy or twelve months from the effective date of the DIP Facility. Principal is payable at maturity and interest is calculated at 5.0% over three month LIBOR, floating monthly, and payable monthly in arrears. As of October 31, 2001, the we have drawn $1.0 million on this DIP Facility.

Concurrent with the closing of the DIP Facility, the Company and the Non-Debtor Heller Borrowers entered into a further amendment of the Existing Facility (the “Second Amendment”), which amendment, among other things, extends the maturity of the Existing Facility to be coterminous with the DIP Facility, amends the interest to be calculated at 5.0% over three month LIBOR, floating monthly, payable monthly in arrears, and permits the financing of the acquisition by Texas ALC Partners, L.P. (“Texas ALC”) of sixteen properties currently leased by Texas ALC from the current lessor thereunder, T and F Properties, L.P. (the “Meditrust Properties” and the acquisition by Texas ALC, the “Meditrust Acquisition”). The purchase of the Meditrust Properties was completed on October 24, 2001. The DIP Collateral and the collateral for the Existing Facility (including the Meditrust Properties when acquired) cross-collateralize both the DIP Facility and the Existing Facility, as amended. The extension of the Company guarantee was approved by the Court. Fees incurred to date, including commitment fees, funding fees, closing fees and professional fees associated with the establishment of the Heller credit facility are $3.8 million ($500,000 of which was paid in 2000). The balance outstanding under the Heller facilities is $39.5 million (including $1.0 million under the DIP Facility) at October 31, 2001.

The DIP Facility may be refinanced through the Existing Facility, as amended by the Second Amendment in connection with the exit from bankruptcy (the “Exit Facility”). The principal amount of the

Exit Facility will not exceed $44.0 million and will mature 36 months from the date on which we exit from bankruptcy. Principal will be payable monthly in a monthly amount of $50,000 for the first year, $65,000 for the second year and $80,000 for the last year of the Exit Facility term. Interest will be calculated at 4.5% over three month LIBOR, floating monthly (not to be less than 8%), and payable monthly in arrears. The Exit Facility is to be secured by 32 properties owned by the Non-Debtor Heller Borrowers. We will remain liable for the entire amount of the Exit Facility as a guarantor.

Approximately $27.2 million of our indebtedness was secured by letters of credit held by U.S. Bank as of September 30, 2001, which in some cases have termination dates prior to the maturity of the underlying debt. As such letters of credit expire, beginning in 2003, we will need to obtain replacement letters of credit, post cash collateral or refinance the underlying debt. There can be no assurance that we will be able to procure replacement letters of credit from the same or other lending institutions on terms that are acceptable to us. In the event that we are unable to obtain a replacement letter of credit or provide alternate collateral prior to the expiration of any of these letters of credit, we would be in default on the underlying debt.

In July 2001, the Financial Accounting Standards Board (FASB) issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), “Business Combinations” and “Goodwill and Other Intangible Assets.” FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and FAS 142 are effective for all business combinations initiated after June 30, 2001.

Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001. The Company will adopt FAS 142 on January 1, 2002. In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company has not yet determined the impact these standards will have on its results of operations and financial position.

In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002 The Company has not yet determined what effect this statement will have on its financial statements.

Also in August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived to be Disposed Of”. This new statement also supersedes certain aspects of APB 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as presently required by APB 30). In addition, more dispositions may qualify for discontinued operations treatment. The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company has not yet determined what effect this statement will have on its financial statements.

Set forth below are the risks that we believe are material. This report on Form 10-Q, including the risks discussed below, contains forward-looking statements made pursuant to the safe harbor provisions of the

Private Securities Litigation Reform Act of 1995. These forward-looking statements may be affected by risks and uncertainties, including without limitation (i) our ability to control costs and improve operating margins, (ii) the possibility that we will experience a decrease in occupancy in our residences, which would adversely affect residence revenues and operating margins, (iii) our ability to operate our residences in compliance with evolving regulatory requirements (iv) the degree to which our future operating results and financial condition may be affected by a reduction in Medicaid reimbursement rates, and (v) the possibility that our Prenegotiated Plan of reorganization will not be approved by the Court in a timely manner, or at all. In light of such risks and uncertainties, our actual results could differ materially from such forward-looking statements. Except as may be required by law, we do not undertake any obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

The commencement of the Chapter 11, even in connection with a prenegotiated plan, could adversely affect our relationships with trade creditors, landlords, equipment vendors, employees and residents and their families. If those relationships are adversely affected, our operations could be materially affected. Weakened operating results could adversely affect our ability to obtain confirmation of the Prenegotiated Plan and maintain our operations. To preserve these relationships, we expect to continue to pay vendors in the ordinary course of business.

The Prenegotiated Plan is subject to vote by certain interested parties, including the Debenture holders. In the event that sufficient votes are not received by those eligible to vote on the Plan, we intend to seek confirmation of the Plan under the cramdown provisions of section 1129(b) of the Bankruptcy Code. In order to confirm the Plan using a cramdown, the Court must determine that, in addition to satisfying all the other requirements of confirmation, the Plan “does not discriminate unfairly” and is “fair and equitable” with respect to any interested party which does not accept the Plan. Although we believe the Plan satisfies the requirements of Section 1129(b), there can be no assurance that the Court will decide that all of these requirements have been satisfied. If the Plan is not confirmed, we may seek to accomplish an alternative restructuring of our capitalization and our obligations to creditors and equity holders. There can be no assurance that the terms of any such alternative restructuring would be similar to or as favorable to our creditors and equity holders as those proposed in the Prenegotiated Plan.

Although we believe that the Prenegotiated Plan satisfies all the requirements for confirmation by the Court, there can be no assurance that the Court will reach the same conclusion. The Court may refuse to confirm the Prenegotiated Plan or may require modifications to the Prenegotiated Plan. In addition, the Court may require us to resolicit votes from creditors and equity holders if the Prenegotiated Plan is modified.

Although a confirmation hearing has been scheduled on December 5, 2001 and the Company and Carriage House believe the Prenegotiated Plan will become effect in early 2002, there can be no assurance that this timing or that conditions precedent to the Prenegotiated Plan will be met.

We are highly leveraged. We had total indebtedness, including short-term portion, of $254.5 million and shareholders’ equity of $47.7 million as of September 30, 2001. We expect to obtain relief through approval of


	•	making it difficult to satisfy our debt or lease obligations;

	•	increasing our vulnerability to general adverse economic and industry conditions;

	•	limiting our ability to obtain additional financing;

	•	requiring dedication of a substantial portion of our cash flow from operations to the payment of principal and interest on our debt and leases, thereby reducing the availability of such cash flow to fund working capital, capital expenditures or other general corporate purposes;

	•	limiting our flexibility in planning for, or reacting to, changes in our business or industry; and

	•	placing us at a competitive disadvantage to less leveraged competitors.

Several of our debt instruments and leases contain financial covenants, including debt-to-cash flow and net worth tests. On March 12, 2001, in exchange for a waiver of U.S. Bank’s right to declare an event of default for our failure to comply with certain financial covenants as of December 31, 2000 and March 31, 2001, and for the modification of certain financial covenants, we agreed to maintain minimum cash balances of $11.0 million at the end of each fiscal quarter, except for the fiscal quarter ending June 30, 2001 which had a required minimum balance of $8.0 million. The amendment also requires us to deposit $500,000 in cash collateral with U.S. Bank in the event certain regulatory actions are commenced with respect to the properties securing our obligations to U.S. Bank. U.S. Bank is required to release such deposits upon satisfactory resolution of the regulatory action. As of the date of this filing, no such additional deposits have been required.

In May, 2001, we received a waiver of U.S. Bank’s right to declare an event of default for our failure to meet the quarterly cash balance requirements set forth in the March 12, 2001 U.S. Bank loan amendment.

In August, 2001, we received a waiver of U.S. Bank’s right to declare an event of default for our failure to meet the September 30, 2001 and probable failure to meet the December 31, 2001 quarterly cash balance requirements and other financial ratios set forth in the amended U.S. Bank loan agreement. There can be no assurance that we will be able to meet these requirements as of the end of future quarters or that U.S. Bank will grant waivers of any such future failure to meet these requirements.

Failure to comply with any covenant constitutes an event of default, which will allow U.S. Bank (at its discretion) to declare any amounts outstanding under the loan documents to be due and payable. We cannot provide assurance that we will comply in the future with the modified financial covenants included in the agreement, or with the financial covenants set forth in our other debt agreements and leases. If we fail to comply with one or more of the U.S. Bank covenants or any other debt or lease covenants (after giving effect to any applicable cure period), the lender or lessor may declare us in default of the underlying obligation and exercise any available remedies, which may include:


	•	in the case of debt, declaring the entire amount of the debt immediately due and payable;

	•	foreclosing on any residences or other collateral securing the obligation; and

	•	in the case of a lease, terminating the lease and suing for damages.

Many of our debt instruments and leases contain “cross-default” provisions pursuant to which a default under one obligation can cause a default under one or more other obligations. Accordingly, if enforced, we could experience a material adverse effect on our financial condition.

On October 25, 2001, we received notice from the American Stock Exchange (“AMEX”) that pursuant to the SEC’s approval of AMEX’s application to strike our common stock and our two series of convertible subordinated debentures from listing and registration on AMEX. These securities were delisted and ceased

trading on the AMEX on October 26, 2001. We do not believe we satisfy the requirements for listing our securities on any other U.S. exchange or NASDAQ. Our common stock is currently listed on the over-the-counter bulletin board. We are exploring other options; however, at this time there can be no assurances that there will be an active trading market for our securities.

Utility costs represent a significant percentage of our operating costs. The cost of utilities may continue to rise. While we have not historically included utility surcharges in the rental rates we charge to our residents, we may do so in the future. There can be no assurance that we will be able to do so. Increases in the costs of utilities that we are unable to pass on to our residents could significantly reduce our profits.

In September 2000, we reached an agreement to settle the class action litigation relating to the restatement of our financial statements for the years ended December 31, 1996 and 1997 and the first three fiscal quarters of 1998. This agreement received final court approval on November 30, 2000 and we were dismissed from the litigation with prejudice. On September 28, 2001, we made our final installment of $1.0 million on our promissory note for the class action litigation settlement. Although we have been dismissed from the litigation with prejudice, an outstanding dispute regarding coverage exists with our prior directors, officers and corporate liability insurance carriers. The Company and the insurance carriers agreed to resolve this dispute through binding arbitration, and we filed a complaint for a declaratory judgment that we are not liable to the carriers as claimed. We believe we have strong defenses regarding this dispute and consequently have not recorded a liability in relation to this matter.

After filing for bankruptcy on October 1, 2001, we made a motion for dismissal of our complaint for declaratory relief in the arbitration based upon having filed for bankruptcy protection. The carriers counter-claimed to recover an amount capped at $4.0 million.

Participants in the senior living and long-term care industry, including us, are routinely subject to lawsuits and claims. Many of the persons who bring these lawsuits and claims seek significant monetary damages, and these lawsuits and claims often result in significant defense costs. As a result, the defense and ultimate outcome of lawsuits and claims against us may result in higher operating expenses. Those higher operating expenses could have a material adverse effect on our business, financial condition, results of operations, cash flow or liquidity.

In order to protect ourselves against the lawsuits and claims made against us, we currently maintain insurance policies in amounts and covering risks that are consistent with industry practice. However, as a result of poor loss experience, a number of insurance carriers have stopped providing insurance coverage to the long-term care industry, and those remaining have increased premiums and deductibles substantially. While nursing homes have been primarily affected, assisted living companies, including us, have experienced premium and deductible increases. During our claim year ended December 31, 2000, our professional liability insurance coverage included deductible levels of $100,000 per incident. For the claim year ending December 31, 2001, this deductible has been replaced with a retention level of $250,000, except in Florida and Texas in which the retention level is $500,000. In certain states, particularly Florida and Texas, many long-term care providers are facing very difficult renewals. There can be no assurance that we will be able to obtain liability insurance in the future on commercially reasonable terms or at all. A claim against us, covered by, or in excess of, our insurance, could have a material adverse affect on our operations, cash flows or liquidity.

Our director, officer and corporate liability insurance policy expires on January 31, 2002. If our Plan of Reorganization is not yet effective, we may seek an extension of that policy. There is no guarantee that the policy will be extended or that we can obtain a new policy, if the Plan has become effective. If we fail to

extend the policy or obtain a new policy, there is no assurance that we can retain our directors and officers. Also, if we fail to extend the policy or obtain a new policy, we may be required to cover the cost of any liability under our current indemnification arrangements with our directors and officers, which could have a material adverse effect on our operations, cash flows or liquidity.

The operation of assisted living facilities and the provision of health care services are subject to federal laws, and state and local licensure, certification and inspection laws that regulate, among other matters:


	•	the number of licensed residences and units per residence;

	•	the provision of services;

	•	equipment;

	•	staffing, including professional licensing and criminal background checks;

	•	operating policies and procedures;

	•	fire prevention measures;

	•	environmental matters;

	•	resident characteristics;

	•	physical design and compliance with building and safety codes;

	•	confidentiality of medical information;

	•	safe working conditions;

	•	family leave; and

	•	disposal of medical waste.

The cost of compliance with these regulations is significant for us. In addition, it could adversely affect our financial condition or results of operations if a court or regulatory tribunal were to determine we have failed to comply with any of these laws or regulations. Because these laws and regulations are amended from time to time, we cannot predict when and to what extent liability may arise. See “— We must comply with laws and regulations regarding the confidentiality of medical information,” “— We must comply with restrictions imposed by laws benefiting disabled persons”, “— We may incur significant costs and liability as a result of medical waste” and “— We may incur significant costs related to environmental remediation or compliance.”

In the ordinary course of business, we receive and have received notices of deficiencies for failure to comply with various regulatory requirements. We review such notices and, in most cases, will agree with the regulator upon the steps to be taken to bring the facility into compliance with regulatory requirements. From time to time, we may dispute the matter and sometimes will seek a hearing if we do not agree with the regulator. In some cases or upon repeat violations, the regulator may take one or more adverse actions against a facility, such as:


	•	the imposition of fines — we paid $16,000 and $15,000, respectively, in the aggregate for the year ended December 31, 2000 and the nine months ended September 30, 2001;

	•	temporary stop placement of admission of new residents, or imposition of other conditions to admission of new residents to a facility — these applied to four residences (two in Washington and two in Idaho) in 2000, and were continued for two residences into 2001, one of which is still in stop placement;

	•	termination of a facility’s Medicaid contract;

	•	conversion of a facility’s license to provisional status; and


	•	suspension or revocation of a facility’s license, which in both 2000 and 2001 included one residence in Washington against which the state has commenced license revocation procedures. This matter is still pending.

The operation of our residences is subject to federal and state laws prohibiting fraud by health care providers, including criminal provisions, which prohibit filing false claims or making false statements to receive payment or certification under Medicaid, or failing to refund overpayments or improper payments. Violation of these criminal provisions is a felony punishable by imprisonment and/or fines. We may be subject to fines and treble damage claims if we violate the civil provisions which prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment.

State and federal governments are devoting increasing attention and resources to anti-fraud initiatives against health care providers. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and the Balanced Budget Act of 1997 expanded the penalties for health care fraud, including broader provisions for the exclusion of providers from the Medicaid program. We have established policies and procedures that we believe are sufficient to ensure that our facilities will operate in substantial compliance with these anti-fraud and abuse requirements. While we believe that our business practices are consistent with Medicaid criteria, those criteria are often vague and subject to change and interpretation. Aggressive anti-fraud actions, however, could have an adverse effect on our financial position, results of operations or cash flows.

Because our stock has been publicly traded, we are subject to regulation by the Securities and Exchange Commission (“SEC”). In April, 1999, we received a preliminary inquiry from the SEC regarding the restatement of our financial statements for the years ended December 31, 1996 and 1997 and the first three quarters of 1998 and related matters. We provided the SEC with information and documents in response to the inquiry, and have received no correspondence from the SEC regarding the inquiry since March 2000. The SEC has never alleged any violation of law in connection with the inquiry. There can be no assurance that the SEC will not resume its inquiry.

We must comply with laws and regulations regarding the confidentiality of medical information.

In 1996, the HIPAA law created comprehensive new requirements regarding the confidentiality of medical information that is or has been electronically transmitted or maintained. The Department of Health and Human Services has enacted regulations implementing the law, and we may have to significantly change the way we maintain and transmit healthcare information for our residents to comply with these regulations.

Healthcare providers must take “reasonable steps” to ensure that the provider, as well as the provider’s business partners, comply with the law’s requirements. Therefore, we may be required to ensure that the other entities with which we do business are also in compliance with these laws. HIPAA also created certain consumer rights with which we may be required to comply, including a right of notice regarding our information practices, a right of access to inspect and copy such individual’s protected medical information, and a right to receive an accounting of all disclosures made by us, with certain exceptions. Significant changes in these regulations have recently occurred but enforcement is not expected until April 2003. The costs to comply with these final regulations could have an adverse effect on our financial position, results of operations, cash flows and prospects.

We must comply with restrictions imposed by laws benefiting disabled persons.

Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist that also may require us to modify existing residences to allow disabled persons to access the residences. We believe that our residences are either substantially in compliance with present requirements or are exempt from them. However, if required changes cost more than anticipated, or must be made sooner than anticipated, we would incur additional costs. Further legislation may impose additional burdens or restrictions related to access by disabled persons, and the costs of compliance could be substantial.

Our facilities generate potentially infectious waste due to the illness or physical condition of the residents, including blood-soaked bandages, swabs and other medical waste products and incontinence products of those residents diagnosed with infectious diseases. The management of potentially infectious medical waste, including handling, storage, transportation, treatment and disposal, is subject to regulation under federal and state laws. These laws and regulations set forth requirements for managing medical waste, as well as permit, record keeping, notice and reporting obligations. Any finding that we are not in compliance with these laws and regulations could adversely affect our business operations and financial condition. Because these laws and regulations are amended from time to time, we cannot predict when and to what extent liability may arise. In addition, because these environmental laws vary from state to state, expansion of our operations to states where we do not currently operate may subject us to additional restrictions on the manner in which we operate their facilities.

We may be liable under some laws and regulations as an owner, operator or an entity that arranges for the disposal of hazardous or toxic substances at a disposal site. In that event, we may be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of our properties, we could be liable for these costs, as well as some other costs, including governmental fines and injuries to persons or properties. As a result, any hazardous or toxic substances which are present, with or without our knowledge, at any property held or operated by us could have an adverse effect on our business, financial condition or results of operations.

We are subject to various federal, state and local environmental laws, ordinances and regulations. Some of these laws, ordinances and regulations hold a current or previous owner, lessee or operator of real property liable for the cost of removal or remediation of some hazardous or toxic substances that could be located on, in or under such property. These laws and regulations often impose liability whether or not we knew of, or were responsible for, the presence of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial. Furthermore, there is no limit to our liability under such laws and regulations. As a result, our liability could exceed their property’s value and aggregate assets. The presence of these substances or failure to remediate these substances properly may also adversely affect our ability to sell or our property, or to borrow using our property as collateral.

Many assisted living markets have been or are currently being overbuilt, including certain markets in which we currently operate. In addition, the barriers to entry into the assisted living industry are not substantial. The effects of overbuilding include:


	•	it takes significantly longer for our residences to fill up,

	•	newly opened facilities may attract residents from some or all of our current facilities,

	•	there is pressure to lower or not increase rates paid by residents in our residences,

	•	there is increased competition for workers in already tight labor markets, and

	•	our profit margins are lower until vacant units in our residences are filled.

If we are unable to compete effectively in markets as a result of overbuilding, we will suffer lower revenue and may suffer a loss of market share.

We compete with other providers of long-term care with respect to attracting and retaining qualified personnel. A shortage of qualified personnel may require us to enhance our wage and benefits packages in order to compete. Some of the states in which we operate impose licensing requirements on individuals serving

as administrators at assisted living residences, and others may adopt similar requirements. We also depend upon the available labor pool of low-wage employees. We cannot guarantee that our labor costs will not increase, or that, if they do increase, they can be matched by corresponding increases in revenues.

Our business depends significantly on our properties located in Texas, Indiana, Oregon, Ohio and Washington. As of September 30, 2001, 21.6% of our properties were located in Texas, 11.4% in Indiana, 10.3% in Oregon, 9.7% in Ohio and 8.6% in Washington. An economic downturn, or changes in the laws affecting our business, in these markets could have a material adverse effect on our operating results.

Although revenues at a majority of our residences come primarily from private payors, we derive a substantial portion of our revenues from reimbursements by third-party governmental payors, including state Medicaid waiver programs. We expect that state Medicaid waiver programs will continue to constitute a significant source of our revenues in the future, and it is possible that the proportionate percentage of revenue received by us from Medicaid waiver programs will increase. There are continuing efforts by governmental payors and by non-governmental payors, such as commercial insurance companies and health maintenance organizations, to contain or reduce the costs of health care by lowering reimbursement rates, increasing case management review of services and negotiating reduced contract pricing. Also, there have been, and we expect that there will continue to be, additional proposals to reduce the federal and some state budget deficits by limiting Medicaid reimbursement in general. If any of these proposals are adopted at either the federal or the state level, such change could have a material adverse effect on our business, financial condition, results of operations and prospects. The state of Oregon recently proposed a substantial reduction in Medicaid funding which was ultimately not adopted.

The following table sets forth the sources of our revenue for states where we participate in Medicaid programs. The portion of revenues received from state Medicaid agencies are labeled as “Medicaid State Paid Portion” while the portion of our revenues that a Medicaid-eligible resident must pay out of his or her own resources is labeled “Medicaid Tenant Paid Portion.”

In addition, although we manage the mix of private paying tenants and Medicaid paying tenants residing in our facilities, any significant increase in our Medicaid population could have an adverse effect on our financial position, results of operations or cash flows, particularly if the states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates.

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in our earnings and cash flows.

For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flows. We do not have an obligation to prepay any of our fixed rate debt prior to maturity, and therefore, interest rate risk and changes in the fair market value of our fixed rate debt will not have an impact on our earnings or cash flows until we decide, or are required, to refinance such debt.

For variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect our future earnings and cash flows. We had variable rate debt of $42.2 million outstanding at September 30, 2001 with a weighted average interest rate of 4.1%. Assuming that our balance of variable rate debt remains constant at $42.2 million, each one-percent increase in interest rates would result in an annual increase in interest expense, and a corresponding decrease in cash flows, of $422,000. Conversely, each one-percent decrease in interest rates would result in an annual decrease in interest expense, and a corresponding increase in cash flows, of $422,000.

We are also exposed to market risks from fluctuations in interest rates and the effects of those fluctuations on market values of our cash equivalents and short-term investments. These investments generally consist of overnight investments that are not significantly exposed to interest rate risk, except to the extent that changes in interest rates will ultimately affect the amount of interest income earned and cash flow from these investments.

We do not have any derivative financial instruments in place to manage interest costs, but that does not mean we will not use them as a means to manage interest rate risk in the future.

We do not use foreign currency exchange forward contracts or commodity contracts and do not have foreign currency exposure.

In September 2000, we reached an agreement to settle the class action litigation relating to the restatement of our financial statements for the years ended December 31, 1996 and 1997 and the first three fiscal quarters of 1998. This agreement received final court approval on November 30, 2000 and we were dismissed from the litigation with prejudice. On September 28, 2001, we made our final installment of $1.0 million on our promissory note for the class action litigation settlement. Although we have been dismissed from the litigation with prejudice, an outstanding dispute regarding coverage exists with our prior directors, officers and corporate liability insurance carriers. The Company and the insurance carriers agreed to resolve this dispute through binding arbitration, and we filed a complaint for a declaratory judgment that we are not liable to the carriers as claimed. The carriers counter-claimed to recover an amount capped at $4.0 million. We believe we have strong defenses regarding this dispute and consequently have not recorded a liability in relation to this matter.

In addition to the matter referred to above, we are involved in various lawsuits and claims arising in the normal course of business. In the aggregate, settlement of such suits and claims should not have a material

adverse effect on our financial condition, results of operations, cash flow and liquidity. However, if these matters were determined adversely to us, such a determination could have a material adverse effect on our financial condition, results of operations, cash flow and liquidity.

On July 10, 2001, we filed a report on Form 8-K announcing the closing of an amendment to its secured line of credit facility with Heller Healthcare financial.

On October 1, 2001 we filed a report on Form 8-K announcing the Company had reached an agreement for financial reorganization with the holders of its two series of convertible subordinated debentures that will be implemented through a pre-negotiated plan of reorganization.

On October 9, 2001, we filed a report on Form 8-K announcing the Company received notice from the American Stock Exchange (“AMEX”) indicating that AMEX intends to file an application with the Securities and Exchange Commission to strike the Company’s common stock and its two series of convertible subordinated debentures from listing and registration on the AMEX.

On October 29, 2001, we filed a report on Form 8-K announcing the court issuance of an Interim Order approving debtor-in-possession financing, the acquisition of sixteen previously leased assisted living facilities and notice from AMEX that the Company’s common stock and two series of convertible debentures would be delisted.

On November 6, 2001, we filed a report on Form 8-K announcing the court approval of the Company’s Disclosure Statement on October 30, 2001.

Pursuant to the requirements of Sections 13 or 15(d) the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ DREW Q. MILLER



	Name: Drew Q. Miller


	Title:	Senior Vice President,


	Chief Financial Officer and Treasurer


	By:	/s/ M. CATHERINE MALONEY



	Name: M. Catherine Maloney


	Title:	Vice President and Chief Accounting Officer

34 EX-10.1 3 v76886ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 LOAN NO. 21-139 LOAN AGREEMENT BETWEEN HELLER HEALTHCARE FINANCE, INC., A DELAWARE CORPORATION AS LENDER AND ASSISTED LIVING CONCEPTS, INC., A NEVADA CORPORATION AND CHAPTER 11 DEBTOR-IN-POSSESSION, AND CARRIAGE HOUSE ASSISTED LIVING, INC., A DELAWARE CORPORATION AND CHAPTER 11 DEBTOR-IN-POSSESSION COLLECTIVELY, AS BORROWER $4,400,000 LOAN PORTFOLIO OF 8 ASSISTED LIVING FACILITIES TABLE OF CONTENTS RECITALS.....................................................................................1 ARTICLE I The Loan...........................................................................2 ARTICLE II Security..........................................................................4 ARTICLE III Conditions.......................................................................4 ARTICLE IV Representations and Warranties....................................................7 ARTICLE V Affirmative Covenants.............................................................11 ARTICLE VI Negative Covenants...............................................................14 ARTICLE VII Events of Default; Acceleration of Indebtedness; Remedies.......................14 ARTICLE VIII Miscellaneous..................................................................17

LIST OF EXHIBITS, SCHEDULES AND RIDERS EXHIBIT A - Property Descriptions EXHIBIT B - Subsidiary Indebtedness EXHIBIT C - Interim Financing Order EXHIBIT D - Litigation EXHIBIT E - Approved Pre-Bankruptcy Expenses SCHEDULE I - Calculation of Net Operating Income SCHEDULE II - Index of Defined Terms RIDER - Senior Housing Rider EXHIBIT R-1 - Units and Beds at Each Facility EXHIBIT R-2 - Licenses -i- LOAN NO. 21-139 LOAN AGREEMENT This LOAN AGREEMENT (this "AGREEMENT") is made as of the 3rd day of October, 2001 between ASSISTED LIVING CONCEPTS, INC., a Nevada corporation and Chapter 11 debtor-in-possession ("ALC") and CARRIAGE HOUSE ASSISTED LIVING, INC., a Delaware corporation and Chapter 11 debtor-in-possession ("CARRIAGE HOUSE"; ALC and Carriage House are hereinafter collectively referred to as "BORROWER") and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation ("LENDER"). RECITALS A. Lender has agreed to make a loan (the "LOAN") to Borrower in the aggregate principal amount of up to Four Million Four Hundred Thousand and No/100 Dollars ($4,400,000.00), subject to the terms and conditions contained herein. The Loan is evidenced on the Closing Date by that certain Promissory Note A of even date herewith made by Borrower in the original principal amount of Two Million Eight Hundred Sixty Thousand and No/100 Dollars ($2,860,000.00) ("NOTE A"), and by that certain Subordinated Promissory Note B of even date herewith made by Borrower in the original principal amount of One Million Five Hundred Forty Thousand and No/100 Dollars ($1,540,000.00) ("NOTE B") (Note A and Note B and all amendments thereto and substitutions therefor are hereinafter collectively referred to as the "Notes"). The terms and provisions of the Notes are hereby incorporated herein by reference in this Agreement. B. Each Borrower is the owner of certain real property more particularly described on Exhibit A hereto (collectively, the "PROPERTIES" and individually, a "PROPERTY") including the assisted living facilities and other improvements located thereon. The assisted living facilities and other improvements located at the Properties are collectively called the "IMPROVEMENTS". The Properties including the Improvements are collectively called the "PROJECT". C. Each Borrower is a "debtor-in-possession" pursuant to Chapter 11 of the Bankruptcy Code (defined in Section 1.2 below). D. Subject to the provisions of the Interim Financing Order and, if issued, the Final Financing Order (each defined in Article III below), Borrower will use the proceeds of the Loan for working capital and certain other uses set forth in Section 1.5 below. E. Borrower's obligations under the Loan will be secured by, among other things, (a) first priority Deeds of Trust/Mortgages, Assignments of Rents and Security Agreements (or documents of similar title) (individually, a "MORTGAGE" and collectively, the "MORTGAGES") encumbering each Property including the Improvements located thereon, (b) Assignments of Leases and Rents (collectively, the "ASSIGNMENTS OF LEASES") encumbering each Property including the Improvements located thereon, (c) the Subsidiary Note Assignment (defined in Section 3.12 below), and (d) a Stock Pledge Agreement (the "PLEDGE") by ALC of 100% of the stock of the Subsidiaries (defined in Section 3.12 below). This Agreement, the Notes, the Mortgages, the Assignments of Leases, the Environmental Indemnity, the Subsidiary Note Assignment, the Pledge, the Financing Orders (defined in Section 3.13 below) and any other documents evidencing or securing the Loan or executed in connection therewith, and any modifications, renewals and extensions thereof, are referred to herein collectively as the "LOAN DOCUMENTS." The definition of Loan Documents herein shall not include the Subsidiary Loan Documents (defined in Section 3.12 below). F. An index of defined terms appears on the attached Schedule II. NOW, THEREFORE, in consideration of the foregoing and the mutual conditions and agreements contained herein, the parties agree as follows: ARTICLE I THE LOAN 1.1. DISBURSEMENTS. Subject to the other provisions of this Agreement, and so long as no default under any of the Loan Documents is then continuing, Lender shall disburse the Loan to Borrower for the uses set forth in Section 1.5 hereof. 1.2. LOAN TERM. The Loan shall mature upon the earliest of (i) the date which is one (1) year after the Closing Date and (ii) the occurrence of any of the following: (A) Lender demands payment of Borrower's obligations to it following the occurrence of an Event of Default, (B) the appointment of a Chapter 11 trustee (or appointment of an examiner with expanded powers to operate a Borrower's business) in the Bankruptcy Case of any Borrower, (C) the effective date of a plan of reorganization for any Borrower as confirmed in its Bankruptcy Case, (D) the conversion of the Bankruptcy Case of any Borrower to a case under chapter 7 of the Bankruptcy Code, and (E) the dismissal of the Bankruptcy Case of any Borrower (such earliest date being referred to as the "MATURITY DATE"). "CLOSING DATE" means the date on which the Interim Financing Order is entered. "BANKRUPTCY CASE" means any case under Chapter 11 of the Bankruptcy Code in which any Borrower is the debtor and debtor-in-possession, pending before the Bankruptcy Court. "BANKRUPTCY CODE" means the United States Bankruptcy Code (11 U.S.C. Section 101 et seq.), as amended, and any successor statute. "BANKRUPTCY COURT" means the United States Bankruptcy Court for the District of Delaware or any other court of competent jurisdiction acceptable to ALC having jurisdiction over the Bankruptcy Case. 1.3. INTEREST RATE. Borrower shall pay interest on the outstanding principal balance of the Loan at a floating rate per annum equal to the Base Rate plus five percent (5.00%) (the aggregate rate referred to as the "INTEREST RATE"). "BASE RATE" shall mean the -2- rate published each day in The Wall Street Journal for notes maturing three (3) months after issuance under the caption "Money Rates, London Interbank Offered Rates (LIBOR)". The Interest Rate for each calendar month shall be fixed based upon the Base Rate published prior to and in effect on the first (1st) business day of such month; provided, however, the Interest Rate for the month in which the Closing Date occurs shall be fixed based upon the Base Rate published prior to and in effect on the first (1st) business day prior to the Closing Date. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. 1.4. PAYMENTS. Borrower shall make interest payments monthly in arrears on the first (1st) day of each month, commencing on November 1, 2001, computed on the outstanding principal balance of the Loan at the Interest Rate. 1.5. SOURCES AND USES. The sources and uses of funds for the contemplated transaction are as follows:
SOURCES USES ------- ---- Loan: $4,400,000 Working Capital: $2,400,000 Carveout Account : $2,000,000 Total: $4,400,000 Total: $4,400,000
Provided Borrower is not in default under the terms of any Loan Document and there is no ongoing default under the Subsidiary Loan Documents, Lender shall disburse all or any portion of the amounts allocated to Working Capital and fund the Carveout Account (as defined in the Interim Financing Order) within two (2) business days after Borrower provides written notice to Lender together with such information and documentation as Lender shall reasonably request regarding the uses of such funds. Within fifteen (15) days after the Closing Date Borrower, Lender and the financial institution with which the Carveout Account is established shall enter into a control account agreement reasonably acceptable to Lender and sufficient to create a lien in favor of Lender on the Carveout Account and the funds on deposit therein (subject to the Carveout Professionals' first lien thereon). Lender shall have no obligation to disburse any portion of the Loan for Working Capital unless and until Lender approves of a budget with respect to proposed expenditures on Working Capital. The Carveout Account shall be used by Borrower to make payments to the Carveout Professionals (as defined in, and pursuant to the terms of, the Interim Financing Order). The Carveout Professionals shall be permitted to take a first mortgage lien on the Careveout Account. A reduction in the amounts necessary for any of the uses shall result in an equal reduction in the amount of the Loan; provided, however, any amounts remaining in the Carveout Account after all payments to the Carveout Professionals have been made pursuant to the terms of the Interim Financing Order may be applied towards Working Capital. 1.6. PREPAYMENTS OF LOAN. Borrower may prepay the outstanding principal balance of the Loan in full (but not in part) at any time together with all other amounts owing -3- hereunder, provided Borrower gives Lender at least ten (10) business days prior written notice. ARTICLE II SECURITY 2.1. COLLATERAL. The Loan and all other indebtedness and obligations under the Loan Documents, as well as all of the indebtedness and obligations of certain of the Subsidiaries under the Subsidiary Loan Documents (as such terms are defined in Section 3.12 below), shall be secured by liens on Borrowers' property as set forth in the following instruments (collectively, the "COLLATERAL"): (a) the Mortgages, (b) the Assignments of Leases, (c) the Subsidiary Note Assignment, (d) the Pledge, (e) the Carveout Account (subject to the first lien in favor of the Carveout Professionals) and (f) any other collateral or security described in this Agreement or the other Loan Documents. ARTICLE III CONDITIONS Lender's obligation to disburse the Loan is subject to Borrower's satisfaction of (i) the conditions contained in Sections 3.1, 3.4, 3.7, 3.8, 3.10, 3.12, 3.13 and 3.14 on or before the Closing Date, and (ii) the conditions subsequent contained in the remainder of this Article III within sixty (60) days after written request by Lender. 3.1. LOAN DOCUMENTS. Lender shall have received the following Loan Documents, all in form and substance reasonably satisfactory to Lender, each signed by the Borrower: (a) this Agreement; (b) the Notes; (c) the Mortgages; (d) the Assignments of Leases; (e) such Uniform Commercial Code financing statements as Lender may reasonably require, with respect to the Borrower (but only with respect to property of Borrower used in connection with the Properties or as contemplated by the Mortgages or Assignments of Leases) or the Properties; (f) a hazardous wastes indemnity agreement ("ENVIRONMENTAL INDEMNITY"); (g) the Subsidiary Note Assignment; and (h) the Pledge. -4- In addition, Lender shall have received such Subsidiary Loan Documents executed by Borrower as Lender may reasonably require, including an acknowledgement and consent to the Subsidiary Loan Documents and a ratification of the existing Guaranty given by ALC with respect thereto. 3.2. INTENTIONALLY OMITTED. 3.3. APPRAISAL. Lender shall obtain an appraisal report for each Property, in form and content acceptable to Lender, prepared by an independent MAI appraiser in accordance with the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") and the regulations promulgated pursuant to such act. 3.4. TITLE POLICY AND ENDORSEMENTS. With respect to each Property, Lender shall have received a commitment for title insurance in an amount and issued by a title insurance company satisfactory to Lender (collectively, the "TITLE COMMITMENT"), in a form and amount acceptable to Lender, insuring marketability of title and insuring that the lien of each of the Mortgages is a valid first lien on the respective Property, as applicable, subject only to exceptions to title approved by Lender and as to each Property, the Permitted Liens, if any set forth in an exhibit to the Mortgage encumbering such Property. Within thirty (30) days after the Closing Date, Borrower shall, at its sole cost, cause the title company which issued the Title Commitment to issue to Lender a lender's form of title insurance policy with respect to each Property in the form of the Title Commitment (collectively, the "TITLE POLICY"). The Title Policy shall also contain any reinsurance and endorsements required by Lender including without limitation negative amortization, survey, access, tax parcel, subdivision, contiguity, non-imputation, variable rate, usury, last dollar, first loss, tie-in, subsequent disbursements and extended coverage endorsements (Comprehensive Form 1), to the extent available in the state where the respective Property is located. 3.5. SURVEY. With respect to each Property, Lender shall have received and approved a survey of such Property and the Improvements thereon, dated no more than ninety (90) days prior to the date of the applicable Title Policy, prepared by a registered land surveyor in accordance with the 1999 American Land Title Association/ American Congress on Surveying and Mapping Standards and certified in favor of Lender and the title insurer. The surveyor shall certify that each Property is not in a flood hazard area as identified by the Secretary of Housing and Urban Development. The surveys shall be sufficient for the title insurer to remove the general survey exception in the applicable Title Policy, to the extent possible in the applicable state. 3.6. ENVIRONMENTAL REPORT. Lender shall have received a Phase I Environmental audit of each Property. The audit shall (i) be addressed to Lender; (ii) state that Lender may rely thereon; and (iii) be acceptable to Lender in its reasonable discretion. 3.7. LEASES. All leases, licenses and other agreements with regard to the occupancy of each Property, including patient and resident care agreements and service agreements which include an occupancy agreement (collectively, "LEASES"), shall be in form and substance reasonably acceptable to Lender. Borrower shall submit for Lender's approval -5- a copy of the form of residential Lease Borrower proposes to utilize at each such Property, and all residential Leases entered into after the Closing Date shall be on forms reasonably approved by Lender (it being understood that Lender has already approved of the form of residential Lease used by certain of the Subsidiaries, which form has previously been delivered to Lender, and such form is acceptable for use by Borrower) without material modifications, other than modifications made in accordance with statutory, regulatory or other legal requirements. Lender must approve all non-residential Leases of space greater than 500 square feet or which provide for monthly rent payments greater than $1,000. On the Closing Date: all existing Leases shall be in full force and effect and within thirty (30) days of written request by Lender, Borrower shall submit a certified rent roll for each Property, certifying that all existing Leases are listed therein. If any non-residential Leases exist or are hereafter entered into with respect to any such Property, each tenant thereunder shall execute and deliver to Lender a subordination and attornment agreement in a form reasonably acceptable to Lender. The Property owned by Carriage House is leased to ALC. Upon written request by Lender, Carriage House and ALC will enter into a Subordination Agreement (in substantially the form used in the Subsidiary Loan Documents) in favor of Lender with respect to such lease. 3.8. INSURANCE. With respect to each Property, Borrower shall have provided Lender with and Lender shall have approved copies of certificates evidencing the insurance policies required to be delivered pursuant to the Mortgages. 3.9. COMPLIANCE WITH LAWS. Borrower shall have submitted and Lender shall have approved (a) a final certificate of occupancy (or the equivalent) for each Property and the Improvements thereon, and (b) evidence satisfactory to Lender that each Property and the Improvements thereon comply in all material respects with all applicable laws (including, without limitation, all building, zoning, density, land use, ordinances, regulations and planning requirements), covenants, conditions and restrictions, subdivision requirements (including, without limitation, parcel maps), and environmental impact and other environmental requirements. 3.10. LOAN FEE AND CLOSING COSTS. Borrower and certain of the Subsidiaries have previously deposited with Lender a good faith deposit in the amount of $300,000 relating to proposed future financing by Lender. A portion of such deposit in the amount of $75,000.00 shall be used towards the loan fee in connection with the Loan, which loan fee shall be nonrefundable and shall be deemed fully earned upon receipt. An additional portion of such deposit in the amount of $127,500 shall be used towards closing costs incurred by Borrower in connection with the Loan. In the event that actual closing costs in connection with the Loan exceed $127,500, Borrower shall promptly pay such excess to Lender upon demand therefor by Lender. 3.11. LICENSES. Borrower shall obtain, and deliver to Lender evidence satisfactory to Lender of, all licenses and permits necessary to operate each Property as an assisted living facility. All such licenses and permits shall be issued to and in the name of Borrower. -6- 3.12. SUBSIDIARY INDEBTEDNESS. ALC owns all of the issued and outstanding stock of ALC Ohio, Inc., ALC Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc., ALC New Jersey, Inc., ALC Indiana, Inc., Nevada ALC, Inc., Texas ALC, Inc. and Carriage House (collectively, the "SUBSIDIARIES"). As of October 1, 2001, the outstanding principal balance of the indebtedness owed by each of the Subsidiaries to ALC was as shown on Exhibit B attached hereto (such balance, together with any future indebtedness of any Subsidiary to ALC approved in writing by Lender is hereinafter referred to as the "SUBSIDIARY INDEBTEDNESS"). On or before the Closing Date, ALC shall have caused a portion of the Subsidiary Indebtedness as indicated on Exhibit B to be capitalized by either canceling such indebtedness or contributing such indebtedness to the respective Subsidiary; and ALC shall deliver to Lender on the Closing Date written evidence thereof in form and substance reasonably acceptable to Lender. The promissory notes evidencing the remaining principal balance of the Subsidiary Indebtedness after the capitalization (and any Subsidiary Indebtedness hereinafter approved by Lender), as indicated on Exhibit B, shall be assigned by ALC to Lender on the Closing Date pursuant to a "SUBSIDIARY NOTE ASSIGNMENT". The assignment of such notes shall secure the indebtedness and obligations of Borrower hereunder and the indebtedness and obligations of certain of the Subsidiaries to Lender pursuant to that certain Loan Agreement dated February 20, 2001, as amended by that certain First Amendment to Loan Documents dated June 29, 2001 and as amended by that certain Second Amendment to Loan Documents dated of even date herewith among certain of the Subsidiaries, ALC and Lender (as an agent and a lender) (collectively, the "SUBSIDIARY LOAN AGREEMENT") and all of the loan documents (the "SUBSIDIARY LOAN DOCUMENTS") executed in connection with the Subsidiary Loan Agreement. 3.13. INTERIM FINANCING ORDER. Borrower shall have obtained the entry of a Financing Order in the form of Exhibit C attached hereto (the "INTERIM FINANCING ORDER"). "FINANCING ORDER" and "FINANCING ORDERS" means any order or orders entered in the Bankruptcy Cases of Borrower authorizing Borrower to obtain the financing described in this Agreement. 3.14. BANKRUPTCY COURT FINDINGS. The Bankruptcy Court shall have found that (a) Lender's making of the Loan contemplated by this Agreement is in "good faith" within the meaning of Section 364(e) of the Bankruptcy Code, and (b) the amount of the Loan is not in excess of the amount necessary to avoid immediate and irreparable harm to Borrower. 3.15. ADDITIONAL ITEMS. Lender shall have received such other items as Lender may reasonably require, including without limitation, a physical condition report and UCC, tax, judgment, bankruptcy and lien searches on the Borrower. ARTICLE IV REPRESENTATIONS AND WARRANTIES As an inducement to Lender to disburse the Loan, Borrower hereby represents and warrants to Lender as follows, which representations and warranties shall be true as of the date hereof, and shall remain true throughout the term of the Loan: -7- 4.1. BORROWER EXISTENCE. Each Borrower is a corporation duly formed, validly existing and in good standing under the laws of its jurisdiction of incorporation with its principal place of business at 11835 NE Glen Widing Drive, Building E, Portland, Oregon 97220. ALC is in good standing and authorized to transact business in the states of Oregon, Nevada, Arizona and Nebraska. Carriage House is in good standing and authorized to transact business in the states of Nebraska and Delaware. Each Borrower is a debtor-in-possession pursuant to Chapter 11 of the Bankruptcy Code. Upon the effectiveness of the Interim Financing Order or Final Financing Order (defined in Section 5.10 below), the Loan Documents have each been duly authorized, executed and delivered and each constitutes the duly authorized, valid and legally binding obligation of each Borrower, enforceable against each Borrower in accordance with their respective terms and the terms of the Financing Orders. 4.2. AUTHORITY. Subject to any required approval of the Bankruptcy Court, the Board of Directors of ALC has the authority to make all material business decisions (including a sale or refinance) for each Borrower during the term of the Loan. ALC owns 100% of the issued and outstanding stock in Carriage House free and clear of all liens, claims and encumbrances other than the Pledge. 4.3. CORPORATE DOCUMENTS. A true and complete copy of the articles of incorporation and by-laws of each Borrower and all other documents creating and governing each Borrower (collectively, the "INCORPORATION DOCUMENTS"), have been furnished to Lender. There are no other agreements, oral or written, among any of the owners of any ownership interests in each Borrower relating to any of them. There are no other agreements to which any Borrower is a party which would affect, modify or supersede the Incorporation Documents. The Incorporation Documents were duly executed and delivered, are in full force and effect, and binding upon and enforceable in accordance with their terms. The Incorporation Documents constitute the entire understanding among the shareholders of each Borrower. No breach exists under the Incorporation Documents and no act has occurred and no condition exists which, with the giving of notice or the passage of time would constitute a breach under the Incorporation Documents. 4.4. OTHER AGREEMENTS. No Borrower is in default under any contract, agreement or commitment to which it is a party, which default could reasonably be expected to have a material adverse effect on any Borrower, except as a result of the Bankruptcy Case filing. Subject to the entry of the Interim Financing Order and the Final Financing Order, the execution, delivery and compliance with the terms and provisions of this Agreement and the Loan Documents will not (i) to the best of Borrower's knowledge, violate any provisions of law or any applicable regulation, order or other decree of any court or governmental entity, or (ii) conflict or be inconsistent with, or result in any default under, any material contract, agreement or commitment to which any Borrower is bound. Borrower has delivered to Lender copies of any agreements (including leases) between each Borrower and any Affiliate related in any way to the Project and any other agreements or documents materially affecting the use and operation of the Project (excluding residential rental agreements and non-residential Leases of space less than 500 square feet or which provide for monthly rent payments less than $1,000). -8- 4.5. PROPERTIES. Fee simple title to each Property is owned by the Borrower indicated on Exhibit A free and clear of all liens, claims, encumbrances, covenants, conditions and restrictions, security interests and claims of others, except only such exceptions as have been approved in writing by Lender and except for the liens, if any, listed on Exhibit A (the "PERMITTED LIENS"). To the best of Borrower's knowledge, each Property and the Improvements thereon is in compliance in all material respects with all zoning requirements, building codes, subdivision improvement agreements, and all covenants, conditions and restrictions of record. The zoning and subdivision approval of each Property and the right and ability to, use or operate the Improvements are not in any way dependent on or related to any real estate other than such Property. To the best of Borrower's knowledge, there are no, nor are there any alleged or asserted, violations of law, regulations, ordinances, codes, permits, licenses, declarations, covenants, conditions, or restrictions of record, or other agreements relating to the Project, or any part thereof, except to the extent compliance is excused by the Bankruptcy Code or the Orders. 4.6. PROPERTY ACCESS. Subject to such items as may be disclosed in a Schedule (approved by Lender) to this Agreement, to Borrower's knowledge, each Property is accessible through fully improved and dedicated roads accepted for maintenance and public use by the public authority having jurisdiction. 4.7. UTILITIES. All utility services reasonably necessary and sufficient for the use or operation of each Property and the Improvements thereon are available including water, storm, sanitary sewer, gas, electric and telephone facilities. 4.8. FLOOD HAZARDS/WETLANDS. Subject to such items as may be disclosed in a Schedule (approved by Lender) to this Agreement, to Borrower's knowledge, no Property is situated in an area designated as having special flood hazards as defined by the Flood Disaster Protection Act of 1973, as amended, or as a wetlands by any governmental entity having jurisdiction over any Property. 4.9. TAXES/ASSESSMENTS. There are no unpaid or outstanding real estate or other taxes or assessments on or against any Property or Improvements or any part thereof, except general real estate taxes not yet due or payable or taxes for which payment is stayed by the Bankruptcy Court. Copies of the current general real estate tax bills with respect to each Property and the Improvements thereon have been delivered to Lender. Each such bill covers the entire applicable Property and does not cover or apply to any other property. There is no pending or contemplated action pursuant to which any special assessment may be levied against any portion of the Project. 4.10. EMINENT DOMAIN. There is no eminent domain or condemnation proceeding pending or, to the best of Borrower's knowledge threatened, relating to any Property or Improvements. 4.11. LITIGATION. Except as set forth in Exhibit D attached hereto and except for the Bankruptcy Cases, there is no unstayed litigation, arbitration or other proceeding or governmental investigation pending or, to the best of Borrower's knowledge, threatened -9- against or relating to any Borrower or any of their respective property, assets, or business, including the Project, which if decided adversely would materially and adversely affect the business, affairs, assets or financial condition of any Borrower, any Property or the Improvements located thereon, or the prospects for repayment of the Loan. 4.12. ACCURACY. Neither this Agreement nor any document, financial statement, credit information, certificate or written statement furnished to Lender by any Borrower contains any untrue statement of a material fact or omits to state a material fact which would affect Lender's decision to make the Loan and all projections contained in such documents and statements are based on reasonable assumptions. 4.13. FOREIGN OWNERSHIP. No Borrower is or will be held, directly or indirectly, by a "FOREIGN CORPORATION", "FOREIGN PARTNERSHIP", "FOREIGN TRUST", "FOREIGN ESTATE", "FOREIGN PERSON", "AFFILIATE" of a "FOREIGN PERSON" or a "UNITED STATES INTERMEDIARY" of a "FOREIGN PERSON" within the meaning of IRC Sections 897 and 1445, the Foreign Investments in Real Property Tax Act of 1980, the International Foreign Investment Survey Act of 1976, the Agricultural Foreign Investment Disclosure Act of 1978, or the regulations promulgated pursuant to such Acts or any amendments to such Acts. 4.14. FINANCIAL STATEMENT/NO CHANGE. Borrower has heretofore delivered to Lender copies of the financial statements of ALC dated August 31, 2001. Said financial statements were prepared on a basis consistent with that of preceding years, and all of such financial statements present fairly the financial condition of ALC as of the dates in question and the results of operations for the periods indicated. Since the dates of such statements, other than the filing of the Bankruptcy Cases by Borrower, there has been no material adverse change in the business or financial condition of Borrower. Borrower has no material contingent liabilities not provided for or disclosed in said financial statements or arising as a result of the Bankruptcy Case or incurred in the ordinary course of business. 4.15. NO BROKER. No brokerage commission or finder's fee is owing to any broker or finder arising out of any actions or activity of Borrower in connection with the Loan. 4.16. SUBSIDIARY INDEBTEDNESS. The outstanding principal balance of the Subsidiary Indebtedness indicated on Exhibit B is true and correct in all material respects as of the date specified therein. 4.17. SPECIAL PURPOSE ENTITY. Carriage House: (i) does not hold, directly or indirectly, any ownership interest (legal or equitable) in any real or personal property other than the interest which it owns in its Property and other assisted living facilities and land, any personal property used in connection therewith, any Leases thereof and any contract rights with respect thereto; (ii) is not a shareholder or partner or member of any other entity; and (iii) does not conduct any business other than the ownership, management and operation of its Property and other assisted living facilities and land. 4.18. EMPLOYEES. Carriage House does not have any employees and shall not have any employees until after the date on which the entire principal balance of the Loan and all -10- interest thereon and all other sums due pursuant to the Loan Documents have been repaid in full. ARTICLE V AFFIRMATIVE COVENANTS 5.1. INSPECTION. Subject to the rights of tenants under Leases, Lender and its authorized agents may enter upon and inspect the Project at all reasonable times upon reasonable advance notice given orally or in writing to Borrower. Lender, at Borrower's expense, shall retain one or more independent consultants to periodically inspect the Project and all documents, drawings, plans, and consultants' reports relating thereto; provided, however, that such inspections shall not occur more frequently than annually unless an Event of Default has occurred and is continuing or Lender has a good faith reason to do so. On the first (1st) day of each month during the term of the Loan, each Borrower shall pay to Lender, in addition to all other amounts due under the Loan Documents, the sum of Two Hundred Fifty and No/100 Dollars ($250.00), which Lender shall apply against the cost of the aforesaid inspections. 5.2. BOOKS AND RECORDS/AUDITS. Borrower shall keep and maintain at all times at Borrower's address stated below, or such other place as Lender may approve in writing, complete and accurate books of accounts and records adequate to reflect the results of the operation of the Project on a Property-by-Property basis and to provide the financial statements required to be provided to Lender pursuant to Section 5.3 below and copies of all written contracts, correspondence, reports of Lender's independent consultant, if any, and other documents affecting the Project. Lender and its designated agents shall have the right to inspect and copy any of the foregoing at all reasonable times upon reasonable advance notice. Additionally, Lender may audit and determine, in Lender's sole and absolute discretion, the accuracy of Borrower's records and computations; provided, however, that such audits shall not occur more frequently than annually unless an Event of Default has occurred and is continuing or Lender has a good faith reason to do so. The costs and expenses of the audit shall be paid by Borrower if the audit discloses a monetary variance in any financial information or computation equal to or greater than the greater of: (i) five percent (5%); or (ii) Five Thousand and No/100 Dollars ($5,000.00) more than any computation submitted by Borrower. 5.3. FINANCIAL STATEMENTS; BALANCE SHEETS. Borrower shall furnish to Lender such financial statements and other financial information as Lender may from time to time reasonably request. All such financial statements shall show all material contingent liabilities and shall accurately and fairly present the results of operations and the financial condition of Borrower at the dates and for the period indicated. Without limitation of the foregoing, Borrower shall furnish to Lender the following statements: 5.3.1. MONTHLY AND ANNUAL OPERATING STATEMENTS. Statements of the operation of the Project on a Property-by-Property basis (including a current rent roll, monthly operating statements, monthly delinquency reports and monthly schedules of receivables) as of the last day of each month, to be delivered within twenty (20) days after -11- the end of each month and certified by Borrower as true, correct, and complete, and yearly statements of the operation of the Project on a Property-by-Property basis, to be delivered within ninety (90) days after the end of each fiscal year and certified by Borrower as true, correct, and complete. 5.3.2. ANNUAL BALANCE SHEETS AND FINANCIAL STATEMENTS. Annual audited and quarterly unaudited consolidated balance sheets and financial statements from Borrower, within ninety (90) days of the end of each fiscal year which are true and correct in all respects, have been prepared in accordance with generally accepted accounting principles, and fairly present in all material respects the financial condition(s) of the person(s) referred to therein as of the date(s) indicated. 5.3.3. AUDITS. If Borrower fails to furnish or cause to be furnished promptly any report required by this Section 5.3, or if Lender reasonably deems such reports to be unacceptable, Lender may elect (in addition to exercising any other right and remedy) to conduct an audit of all books and records of Borrower which in any way pertain to the Project and to prepare the statement or statements which Borrower failed to procure and deliver. Such audit shall be made and such statement or statements shall be prepared at Lender's option, either internally by Lender or by an independent firm of certified public accountants to be selected by Lender. Borrower shall pay all reasonable costs and expenses of the audit and other services, whether performed internally or by an independent firm, which costs and expenses shall be immediately due and payable with interest thereon at the default rate contained in the Notes. 5.4. USE OF PROCEEDS. Borrower shall use the proceeds of the Loan for proper business purposes. No portion of the proceeds of the Loan shall be used by Borrower in any manner that might cause the borrowing or the application of such proceeds to violate Regulation U, Regulation T or Regulation X or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Act of 1933 or the Securities Exchange Act of 1934. 5.5. NOTICE OF LITIGATION OR DEFAULT. Borrower shall within a reasonable period of time provide Lender with: (a) written notice of any litigation, arbitration, or other proceeding or governmental investigation pending or, to Borrower's knowledge, threatened against or relating to any Borrower or any Property, which if decided adversely, could reasonably be expected to have a material adverse effect on any Borrower or any Property; and (b) a copy of all notices of material default and violations of laws, regulations, codes, ordinances and the like received by any Borrower relating to any Borrower, the Collateral or any Property (other than any defaults caused by the filing of the Bankruptcy Cases). -12- 5.6. AFFILIATE TRANSACTIONS. Any agreement by a Borrower with an Affiliate pertaining to the Project shall be on terms no less favorable to such Borrower than would be obtained from a non-Affiliate. Borrower shall deliver to Lender a copy of each such agreement. If requested by Lender, such agreement shall provide Lender the right to terminate it upon Lender's (or its designee's) acquisition of the Project through foreclosure, a deed-in-lieu of foreclosure, UCC sale or otherwise. "AFFILIATE" means with respect to any individual, trust, estate, partnership, limited liability company, corporation or any other incorporated or unincorporated organization (each a "PERSON"), a Person that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with any Borrower; any officer, director, partner or shareholder of such Borrower; any relative of any of the foregoing. The term "CONTROL" means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. 5.7. ADVERTISEMENT. Borrower agrees to allow Lender to advertise in the various news or financial media that Lender has provided financing to Borrower. 5.8. REPLACEMENT RESERVE. At the time of and in addition to the monthly installments of interest due under the Notes, Borrower shall pay to Lender, an amount equal to the product of Twenty-Five and No/100 Dollars ($25.00) multiplied by the number of units in the Project (the "REPLACEMENT RESERVE"). The Replacement Reserve funds shall be placed in an interest bearing account, with all interest earned to be credited to Borrower. On the Maturity Date, the monies then remaining on deposit with Lender shall be applied against the Indebtedness or if all Indebtedness has been indefeasibly paid in full, returned to Borrower. So long as no Event of Default is then continuing, Borrower may request Lender to disburse funds from the Replacement Reserve (which request will include a reasonably detailed description of the capital expenditures at the Property which Borrower intends to pay for with such funds), which request shall not be unreasonably denied by Lender. If requested by Lender, each disbursement request will be accompanied by copies of invoices, lien waivers and other evidence reasonably required by Lender. 5.9. NO PROPERTY MANAGER. Borrower is and shall remain the sole manager and operator of each of the Properties, and Borrower shall not permit or contract with any other Person to manage or operate any of the Properties. 5.10. FINAL FINANCING ORDER. Borrower shall obtain the entry of a Financing Order (the "FINAL FINANCING ORDER") on or before October 31, 2001, which Final Financing Order shall contain the same terms as the Interim Financing Order with such changes as Lender may approve in its sole discretion. -13- ARTICLE VI NEGATIVE COVENANTS 6.1. NO AMENDMENTS. Borrower shall not amend, modify or terminate, or permit the amendment, modification or termination of the Incorporation Documents. 6.2. NO ADDITIONAL INDEBTEDNESS. Carriage House shall not, without Lender's prior written consent, incur additional indebtedness, except for (a) trade payables in the ordinary course of business, (b) up to $50,000 in the aggregate for purchase money debt to purchase and, capital leases of, vehicles, equipment and other capital items to be used solely in connection with the operation of its Property and which are reasonably related to the operation of assisted living facilities, and (c) the Subsidiary Indebtedness indicated on Exhibit B with respect to Carriage House. 6.3. INTENTIONALLY OMITTED. 6.4. LIENABLE WORK. No excavation, construction, earth work, site work or any other mechanic's lienable work shall be done to or for the benefit of any Property, without Lender's approval, which shall not be unreasonably withheld, except for normal repair and maintenance in the ordinary course of business and up to $25,000 of work annually at each Property which does not decrease the value of such Property. 6.5. CONVERSION. Borrower shall not, and shall not permit, the Project or any portion thereof to be converted or take any preliminary actions which could lead to a conversion to condominium or cooperative form or ownership. 6.6. USE OF PROPERTY. Unless required by applicable law, Borrower shall not permit changes in the use of any Property from the use existing at the Closing Date. Borrower shall not initiate or acquiesce in a change in the plat of subdivision, or zoning classification of any Property without Lender's prior written consent. ARTICLE VII EVENTS OF DEFAULT; ACCELERATION OF INDEBTEDNESS; REMEDIES 7.1. EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an "EVENT OF DEFAULT" under this Agreement: (a) Failure of Borrower to pay, within five (5) days of the due date, any interest or principal payment required to be made under the Notes or this Agreement, and within five (5) days after notice, any of the other payment obligations of Borrower to Lender, including any other payment due under the Notes or this Agreement or the other Loan Documents (all interest, principal and all other amounts coming due under any of the Loan Documents is referred to collectively as the "INDEBTEDNESS"); or (b) A breach of the representations contained in Section 4.17 (special purpose entity), or failure of Borrower to strictly comply with the provisions of Sections 5.1 -14- (inspection; provided, however, Borrower's obligation to pay for the cost of inspections pursuant to Section 5.1 shall be treated as a payment obligation pursuant to subsection 7.1(a) above.) or 5.10 (final financing order); or (c) Breach of any covenant, representation or warranty, whether in this Agreement or in any other Loan Document, other than as set forth in subsections (a) and (b) above, which is not cured within thirty (30) days after notice; provided, however, if such breach cannot by its nature be cured within thirty (30) days, and Borrower diligently pursues the curing thereof (and then in all events cures such failure within sixty (60) days after the original notice thereof), Borrower shall not be in default hereunder; provided, further that if such breach results from the commencement of any administrative or other proceeding seeking license revocation or suspension or limitation on admission of residents to any of the Properties (collectively, "REGULATORY ACTION") by any federal or state regulatory agency, and Borrower is unable to cure such breach within the cure period set forth in the immediately preceding proviso, then Borrower shall not be in default hereunder as a result of such Regulatory Action unless (a) Borrower fails to promptly, in any event, within thirty (30) days following such Regulatory Action, commence resolution of the matter and thereafter diligently and continuously prosecute in good faith a settlement, dismissal or resolution of such Regulatory Action; (b) the Property in question fails to be continuously operated by Borrower as an assisted living facility; or (c) the license to operate the Property in question has terminated and Borrower has no appeal rights; or (d) Without prior approval of the Bankruptcy Court and the prior written consent of Lender, Borrower makes any payment of any proceeds constituting part of the Loan or other cash to any unsecured creditor of Borrower on account of claims arising prior to the commencement of the Bankruptcy Case (including without limitation payments in respect of reclamation claims of unpaid suppliers of goods delivered to Borrower prior to the commencement of the Bankruptcy Case (regardless of whether such claims have been granted administrative expense priority status pursuant to Section 546(c) of the Bankruptcy Code) prior to confirmation of a plan of reorganization, but excluding any payments necessary to cure defaults under any executory contracts or unexpired leases assumed by Borrower with the approval of the Bankruptcy Court and ALC employee wages, ALC payroll taxes, ALC employee benefits, utility bills and other amounts payable prior to the commencement of the Bankruptcy Case which are described on Exhibit E attached hereto; or (e) A petition under any Chapter of Title 11 of the United States Code or any similar law or regulation is filed by or against any Subsidiary (excluding Carriage House) (and in the case of an involuntary petition in bankruptcy, such petition is not discharged within sixty (60) days of its filing), or a custodian, receiver or trustee for any property owned by any Subsidiary (excluding Carriage House) is appointed, or any Subsidiary (excluding Carriage House) makes an assignment for the benefit of creditors, or any of them are adjudged insolvent by any state or federal court of competent jurisdiction, or any of them admit their insolvency or inability to pay their -15- debts as they become due or an attachment or execution is levied against any of their respective properties. Upon the occurrence of an Event of Default specified in this subsection 7.1(e) which is caused by (A) any Borrower, any Subsidiary or any party to the Plan Support Agreement among Borrower and others dated ______________, 2001, (the "PLAN AGREEMENT"), or (B) any entity or person which is not a party to the Plan Agreement and which causes Lender to suffer a loss, then in addition to all other remedies which Lender may have as a result of such event, Borrower shall also pay Lender an exit fee in the amount of $1,000,000; or (f) Borrower fails to perform any of the terms, covenants, conditions or provisions contained in any of the Financing Orders or any of the Financing Orders is vacated; or (g) The occurrence of a default and the expiration of any cure period applicable thereto under any Loan Document; or (h) Any Event of Default under (and as defined in) any of the Subsidiary Loan Documents; or (i) Except to the extent that such default, or the exercise of remedies with respect to such default, is excused or prevented by the Bankruptcy Court or applicable bankruptcy law, Borrower shall default in the payment of any indebtedness in an aggregate outstanding principal amount greater than $500,000 (other than the Indebtedness), and such default is declared and is not cured within the time, if any, specified therefor in any agreement governing the same; or (j) Any written statement, report or certificate made or delivered to Lender by any Borrower is not materially true and complete when made; or (k) If at any time the Debt Coverage Ratio for the Project for the immediately preceding three (3) months shall fall below 1.50:1.00.; or (l) If at any time the Project Yield for the immediately preceding three (3) months shall fall below twenty-five percent (25%); or (m) If Borrower fails to fulfill a condition subsequent described in Article III above within sixty (60) days after such item is requested in writing by Lender. "DEBT COVERAGE RATIO" means the ratio of (i) Net Operating Income from the Project for a particular period, as determined by Lender's audit, at Borrower's expense (or at Lender's option, as reasonably determined by Lender), to (ii) payments of interest due on the Loan for the same period. "PROJECT YIELD" means the quotient (expressed as a percentage) as reasonably determined by Lender of (x) the annualized Net Operating Income from the Project, as determined by Lender's audit, at Borrower's expense (or at Lender's option, as -16- reasonably estimated by Lender), divided by (y) the then-current outstanding principal balance of the Loan plus all accrued but unpaid interest thereon. For purposes of subsections 7.1(k) and (l) above only, the term "PROJECT" shall also include all of the Included Properties as defined in the Subsidiary Loan Agreement and the term "LOAN" shall also include the Loan as defined in the Subsidiary Loan Agreement. 7.2. ACCELERATION; REMEDIES. Upon the occurrence of an Event of Default, at the option of Lender, the Indebtedness shall become immediately due and payable without notice to Borrower and Lender shall be entitled to all of the rights and remedies provided in the Loan Documents or at law or in equity. Each remedy provided in the Loan Documents is distinct and cumulative to all other rights or remedies under the Loan Documents or afforded by law or equity, and may be exercised concurrently, independently, or successively, in any order whatsoever. ARTICLE VIII MISCELLANEOUS 8.1. EXPENDITURES AND EXPENSES. Borrower shall promptly pay all reasonable Costs (defined below) incurred by Lender in connection with the documentation, closing, making disbursements, modification, workout, collection or enforcement of the Loan or any of the Loan Documents (as applicable); the documentation, negotiation or preparation of any loan documents in connection with a possible financing to be extended to Borrower or any of its subsidiaries by Lender upon the effective date of a confirmed plan or reorganization in any Bankruptcy Case, whether or not such financing closes; and in connection with the Bankruptcy Cases (including, without limitation, reasonable attorneys fees and expenses incurred in connection with any action to lift the automatic stay of Section 362 of the Bankruptcy Code, any other action or participation by Lender in the Bankruptcy Cases or any defense or participation by Lender in any lender liability or other actions involving Lender or the validity, priority, extent of liens or otherwise affecting the Collateral); and all such Costs shall be included as additional Indebtedness bearing interest at the interest rate then applicable to the Indebtedness until paid. For the purposes hereof "COSTS" means all expenditures and expenses which may be paid or incurred by or on behalf of Lender including repair costs, payments to remove or protect against liens, attorneys' fees (including fees of Lender's inside counsel), receivers' fees, engineers' fees, accountants' fees, independent consultants' fees (including environmental consultants), all costs and expenses incurred in connection with any of the foregoing, Lender's out-of-pocket costs and expenses related to any audit or inspection of the Project, outlays for documentary and expert evidence, stenographers' charges, stamp taxes, publication costs, and costs (which may be estimates as to items to be expended after entry of an order or judgment) for procuring all such abstracts of title, title and UCC searches, and examination, title insurance policies, Torrens' Certificates and similar data and assurances with respect to title as Lender may deem reasonably necessary either to prosecute any action or to evidence to bidders at any foreclosure sale of the Project the true condition of the title to, or the value of, the Project or any part thereof. -17- 8.2. DISCLOSURE OF INFORMATION. Lender shall have the right (but shall be under no obligation) to make available to any party for the purpose of granting participations in or selling, transferring, assigning or conveying all or any part of the Loan (including any governmental agency or authority and any prospective bidder at any foreclosure sale of the Project or any part thereof) any and all information which Lender may have with respect to the Project and Borrower, whether provided by Borrower or any third party or obtained as a result of any environmental assessments. Lender agrees to exercise reasonable efforts to keep any confidential information delivered in connection with the Loan Documents, confidential from Persons other than those employed by or engaged by Lender and those employed by or engaged by Lender's assignees or participants, or potential assignees or participants; provided, however, this sentence shall not apply to disclosures required to be made by Lender to any regulatory or governmental agency or pursuant to legal process or in connection with any dispute with Borrower or arising out of the Loan Documents in any way. Borrower agrees that Lender shall have no liability whatsoever as a result of delivering any such information to any third party, and Borrower, on behalf of itself and its successors and assigns, hereby release and discharge Lender from any and all liability, claims, damages, or causes of action, arising out of, connected with or incidental to the delivery of any such information to any third party. 8.3. SALE OF LOAN. Notwithstanding anything to the contrary contained herein but subject to the exceptions listed below, so long as no Event of Default is then continuing, Lender shall not sell or assign its interest in the Loan without the prior written consent of ALC, which consent shall not be unreasonably withheld, conditioned or delayed. The immediately preceding sentence shall not apply to the following situations: (i) the sale (or repurchase) by Lender of any participation(s) in all or any part of its interest in the Loan, (ii) the sale or assignment of Lender's interest in the Loan (or any portion thereof) to any Person with assets of one billion dollars or more on a consolidated basis at the time of such transaction, (iii) the sale or assignment of Lender's interest in the Loan (or any portion thereof) to an affiliate of Lender, or (iv) the sale or assignment of Lender's interest in the Loan (or any portion thereof) if done in connection with the sale, assignment or other disposition of all or any substantial portion of Lender's portfolio of real estate or healthcare loans of a similar nature. 8.4. FORBEARANCE BY LENDER NOT A WAIVER. Any forbearance by Lender in exercising any right or remedy under any of the Loan Documents, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. Lender's acceptance of payment of any sum secured by any of the Loan Documents after the due date of such payment shall not be a waiver of Lender's right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt payment. The procurement of insurance or the payment of taxes or other liens or charges by Lender shall not be a waiver of Lender's right to accelerate the maturity of the Loan, nor shall Lender's receipt of any awards, proceeds, or damages under Section 4 of the Mortgage operate to cure or waive Borrower's default in payment of sums secured by any of the Loan Documents. With respect to all Loan Documents, only waivers made in writing by Lender shall be effective against Lender. Lender may, in its sole discretion, waive, -18- temporarily or permanently, any condition to the making of the Loan or any other term in any of the Loan Documents, by delivering a written confirmation thereof to Borrower. 8.5. GOVERNING LAW; SEVERABILITY. The Loan Documents shall be governed by and construed in accordance with the internal laws of the State of Illinois, except that the provisions of the laws of the state in which each Mortgage is recorded shall be applicable to the creation, perfection and enforcement of the lien created by that Mortgage. The invalidity, illegality or unenforceability of any provision of this Agreement shall not affect or impair the validity, legality or enforceability of the remainder of this Agreement, and to this end, the provisions of this Agreement are declared to be severable. 8.6. RELATIONSHIP. The relationship between Lender and Borrower shall be that of creditor-debtor only. No term in this Agreement or in the other Loan Documents and no course of dealing between the parties shall be deemed to create any relationship of agency, partnership or joint venture or any fiduciary duty by Lender to any other party. 8.7. INDEMNITY. Borrower shall indemnify, protect, hold harmless and defend Lender, its successors, assigns, shareholders, directors, officers, employees, and agents from and against any and all loss, damage, cost, expense (including reasonable attorneys' fees), and claims arising out of or in connection with (a) the Project, (b) the Collateral, (c) the Bankruptcy Case, (d) any act or omission of any Borrower or its employees or agents, whether actual or alleged, and (e) any and all brokers' commissions or other costs of similar type by any party in connection with the Loan, in each case except to the extent arising from the indemnitee's gross negligence or willful misconduct. Upon written request by an indemnitee, Borrower will undertake, at its own costs and expense, on behalf of such indemnitee, using counsel reasonably satisfactory to the indemnitee, the defense of any legal action or proceeding whether or not such indemnitee shall be a party and for which such indemnitee is entitled to be indemnified pursuant to this section. At Lender's option, Lender may, at Borrower's expense, prosecute or defend any action involving the priority, validity or enforceability of any of the Loan Documents. 8.8. NOTICE. Any notice or other communication required or permitted to be given shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier or U.S. Mail and shall be deemed given: (a) if served in person, when served; (b) if telecopied, on the date of transmission if before 3:00 p.m. (Chicago time) on a business day; provided that a hard copy of such notice is also sent pursuant to (c) or (d) below; (c) if by overnight courier, on the first business day after delivery to the courier; or (d) if by U.S. Mail, certified or registered mail, return receipt requested on the fourth (4th) day after deposit in the mail postage prepaid. -19- Notices to Borrower: Assisted Living Concepts, Inc., 11835 NE Glenn Widing Drive Building E Portland, Oregon 97220 Attn: Drew Miller and Sandra Campbell Telecopy: (503) 252-2916 with a copy to: Latham & Watkins 633 West Fifth Street Suite 400 Los Angeles, California 90071 Attn: Gary Olson Telecopy: (213) 891-8763 Notices to Lender: Heller Healthcare Finance, Inc. Loan No. 21-139 2 Wisconsin Circle Suite 400 Chevy Chase, Maryland 20815 Attn: Manager, Portfolio Administration Group Telecopy: (301) 664-9843 With a copy to: Heller Healthcare Finance, Inc. Loan No. 21-139 500 West Monroe Street Chicago, Illinois 60661 Attn: Kevin McMeen, Senior Vice President Telecopy: (312) 441-7119 And a copy to: Heller Healthcare Finance, Inc. Loan No. 21-139 816 Congress Avenue Suite 1900 Austin, Texas 78701 Attn: Diana Pennington, Vice President and Chief Counsel, Senior Living Group Telecopy: (512) 505-5487 8.9. SUCCESSORS AND ASSIGNS BOUND; JOINT AND SEVERAL LIABILITY; AGENTS; AND CAPTIONS. The covenants and agreements contained in the Loan Documents shall bind, and the rights thereunder shall inure to, the respective successors and assigns of Lender and Borrower, subject to the provisions of this Agreement. All covenants and agreements of Borrower shall be joint and several. In exercising any rights under the Loan Documents or taking any actions provided for therein, Lender may act through its employees, agents or independent contractors as authorized by Lender. The captions and headings of the -20- paragraphs and sections of this Agreement are for convenience only and are not to be used to interpret or define the provisions hereof. 8.10. TERMS AND USAGE. As used in the Loan Documents "BUSINESS DAY" means any day, other than a Saturday or a Sunday, when banks in Chicago, Illinois are not required or authorized to be closed. 8.11. INTENTIONALLY OMITTED. 8.12. TIME OF ESSENCE. Time is of the essence of this Agreement and the other Loan Documents and the performance of each of the covenants and agreements contained herein and therein. 8.13. VENUE. BORROWER HEREBY CONSENTS TO THE JURISDICTION OF THE BANKRUPTCY COURT AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURT. BORROWER EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURT AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. IF (A) THE BANKRUPTCY CASE IS DISMISSED, (B) THE BANKRUPTCY COURT ABSTAINS FROM HEARING ANY ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS ("FINANCING AGREEMENT PROCEEDINGS"), OR (C) THE BANKRUPTCY COURT REFUSES TO EXERCISE JURISDICTION OVER A FINANCING AGREEMENT PROCEEDING OR OTHERWISE REFUSES TO HEAR ANY FINANCING AGREEMENT PROCEEDING, THEN ALL SUCH FINANCING AGREEMENT PROCEEDINGS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF COOK, STATE OF ILLINOIS OR, AT THE SOLE OPTION OF LENDER, IN ANY OTHER COURT IN WHICH LENDER SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON BORROWER BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO BORROWER, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED. 8.14. JURY TRIAL WAIVER. BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY BORROWER AND LENDER, AND BORROWER ACKNOWLEDGES THAT NEITHER LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS OF FACT -21- TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER AND LENDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. 8.15. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall constitute an original, and together shall constitute the Agreement. 8.16. FINAL AGREEMENT. This Agreement (including the Senior Housing Rider attached hereto and hereby made a part hereof), together with the other Loan Documents, represents the entire agreement among Borrower and Lender and supersedes all prior agreements among the parties with respect to the Loan. 8.17. AMENDMENTS. Except as otherwise provided herein, no amendment, modification, termination or waiver of any provision of this Agreement, the Notes or any of the other Loan Documents, or consent to any departure by any party therefrom, shall in any event be effective unless the same shall be in writing and signed by Lender. -22- IN WITNESS WHEREOF, the parties hereto have executed this Agreement or has caused the same to be executed by their duly authorized representatives as of the date first above written. BORROWER: ASSISTED LIVING CONCEPTS, INC., a Nevada corporation and Chapter 11 debtor-in-possession By:________________________________________________ Sandra Campbell, Senior Vice President, General Counsel and Secretary CARRIAGE HOUSE ASSISTED LIVING, INC., a Delaware corporation and Chapter 11 debtor-in-possession By:________________________________________________ Sandra Campbell, Secretary LENDER: HELLER HEALTHCARE FINANCE, INC., a Delaware corporation By:________________________________________________ Name:______________________________________________ Its:_______________________________________________ -23- EXHIBIT A PROPERTY DESCRIPTIONS
PROPERTY 1 - ---------- Name of Borrower: Carriage House Assisted Living, Inc. Name and Address of Property: Cottonwood House 3271 29th Avenue Columbus, NE 68601 Legal Description: See following page Permitted Liens: None
EXHIBIT A PROPERTY DESCRIPTIONS
PROPERTY 2 - ---------- Name of Borrower: Assisted Living Concepts, Inc. Name and Address of Property: Baldwin House 10401 North 79th Avenue Peoria, AZ 85345 Legal Description: See following page Permitted Liens: None
EXHIBIT A PROPERTY DESCRIPTIONS
PROPERTY 3 - ---------- Name of Borrower: Assisted Living Concepts, Inc. Name and Address of Property: Mondell House 15155 West Mondell Road Surprise, AZ 85374 Legal Description: See following page Permitted Liens: None
EXHIBIT A PROPERTY DESCRIPTIONS
PROPERTY 4 - ---------- Name of Borrower: Assisted Living Concepts, Inc. Name and Address of Property: Powell House 806 West Longhorn Road Payson, AZ 85541 Legal Description: See following page Permitted Liens: None
EXHIBIT A PROPERTY DESCRIPTIONS
PROPERTY 5 - ---------- Name of Borrower: Assisted Living Concepts, Inc. Name and Address of Property: Grayson House 7509 East Long Look Drive Prescott Valley, AZ 86314 Legal Description: See following page Permitted Liens: None
EXHIBIT A PROPERTY DESCRIPTIONS
PROPERTY 6 - ---------- Name of Borrower: Assisted Living Concepts, Inc. Name and Address of Property: Aurora House 675 West Broadway Apache Junction, AZ 85220 Legal Description: See following page Permitted Liens: None
EXHIBIT A PROPERTY DESCRIPTIONS
PROPERTY 7 - ---------- Name of Borrower: Assisted Living Concepts, Inc. Name and Address of Property: Copper Hills House 12234 E. North Frontage Road Yuma, AZ 85367 Legal Description: See following page Permitted Liens: None
EXHIBIT A PROPERTY DESCRIPTIONS
PROPERTY 8 - ---------- Name of Borrower: Assisted Living Concepts, Inc. Name and Address of Property: Cameron House 244 North Extension Road Mesa, AZ 85201 Legal Description: See following page Permitted Liens: None
EXHIBIT B SUBSIDIARY INDEBTEDNESS
- ------------------------------------------------------------------------------------------------- Outstanding Principal Balance Amount of Remaining Principal of Subsidiary Subsidiary Balance of Indebtedness as of Indebtedness To Be Subsidiary Subsidiary October 1, 2001 Capitalized by ALC Indebtedness - ------------------------------------------------------------------------------------------------- ALC Ohio, Inc., $ 9,985,310.61 $3,000,000.00 $ 6,985,310.61 - ------------------------------------------------------------------------------------------------- ALC Pennsylvania, Inc. $10,059,003.25 $3,000,000.00 $ 7,059,003.25 - ------------------------------------------------------------------------------------------------- ALC, Iowa, Inc. $ 6,563,833.29 $3,000,000.00 $ 3,563,833.29 - ------------------------------------------------------------------------------------------------- ALC Nebraska, Inc. $ 2,835,161.23 $2,835,161.23 $ 0.00 - ------------------------------------------------------------------------------------------------- ALC New Jersey, Inc. $ 4,090,867.77 $3,000,000.00 $ 1,090,867.77 - ------------------------------------------------------------------------------------------------- ALC Indiana, Inc. $20,562,255.74 $3,000,000.00 $17,562,255.74 - -------------------------------------------------------------------------------------------------
EXHIBIT C INTERIM FINANCING ORDER EXHIBIT D LITIGATION 1. Confidential Preliminary Inquiry of the Securities and Exchange Commission (the "SEC"). After the inception of the class action securities litigation against ALC in February, 1999, the enforcement division of the SEC informed ALC that the SEC had begun a confidential preliminary inquiry. The SEC requested that ALC voluntarily participate in the inquiry by providing documents the SEC had requested. ALC voluntarily participated by providing those documents. The SEC has not commenced any formal investigation to ALC's knowledge. 2. Assisted Living Concepts, Inc. v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania ("NUFI"). This arbitration proceeding arises out of the coverage dispute involving the Policy that NUFI issued effective October 21, 1997, insuring ALC and its officers and directors during the three-year policy period against claims of wrongful acts, including securities claims. When the class action securities litigation commenced, ALC tendered the claim to NUFI, which accepted it with a reservation of rights. NUFI never issued any notice of rescission. In fact, on September 1, 2000, NUFI consented to settlement of the class action litigation, including payment of its full policy limits to plaintiffs. However, at the same time and despite having consented to the settlement of the class action and payment of its policy limits, NUFI continues to assert a claim to rescission based on fraud in certain of ALC's financial statements, later restated. NUFI alternatively asserts the right to reimbursement from ALC, asserting that coverage is excluded because the insureds "improperly profited." With regard to NUFI's claims, in the settlement agreement NUFI agreed to cap its potential recovery in an amount not to exceed $4 million. Under the settlement agreement, even if NUFI were to prevail, any amount awarded NUFI would not be due until 90 days after ALC satisfied its obligations to the class action plaintiffs, with any such awarded amount subordinated to new or refinancing of existing obligations. Because mediation between the parties failed, ALC filed a Demand for Arbitration on or about September 19, 2000. The parties have selected the arbitrators, and no hearing is currently scheduled ; however, it is anticipated that if there is a hearing, it will occur in the first quarter of 2002. 3. Complaint Investigations at Bennett House, Christina House and Whitlock House. Between August 8, 2001 and August 16, 2001, the Department of Health for the State of Indiana investigated complaints at the above referenced facilities located in New Albany, Franklin and Crawfordsville, Indiana, respectively. These investigations were to ensure ALC's compliance with the Program Description agreed to with the Department in early 2001 regarding services the Houses are authorized to provide under Indiana law. To the best of ALC's knowledge, the Department has taken no action as a result of the investigations. EXHIBIT E APPROVED PRE-BANKRUPTCY EXPENSES 1. Ordinary Course Professionals $ 158,480 2. Wages and Benefits $ 4,500,000 3. Sales and Use Taxes $ 6,400 4. Utilities $ 1,300,000 5. Worker's Compensation Policies $ 500,000 6. Goods Ordered Prepetition $ 1,500,000 7. Common Carriers and Warehouse Fees $ 38,000 8. Critical Trade Vendors $ 1,000,000 9. Prepetition Refunds to Residents $ 2,500,000 10. Regulatory Agency Fees $ 125,000 11. TOTAL $11,660,000

SCHEDULE I CALCULATION OF NET OPERATING INCOME "NET OPERATING INCOME" means annualized Revenue less Expenses, all as determined by Lender in its reasonable discretion. "REVENUE" means the lesser of (i) annualized Adjusted Actual Rent or (ii) annualized Monthly Effective Rent. In determining Revenue, the occupancy factor utilized shall be the lesser of (a) actual occupancy or (b) an assumed ninety-five percent (95%) occupancy rate. "ADJUSTED ACTUAL RENT" means (a) all amounts collected from tenants of the Property (excluding ALC) for the most current month three (3) months, excluding nonrecurring income and non-property related income (as determined by Lender in its reasonable discretion) and income from tenants (i) that are thirty (30) or more days delinquent, (ii) that are in bankruptcy (even if current), (iii) non-residential tenants whose leases terminate within six (6) months (as adjusted for space re-leased upon terms acceptable to Lender in its reasonable discretion) or (iv) that have been delinquent four (4) or more times during the past twelve (12) months, and (b) other revenue not to exceed ten percent (10%) of the amounts included in clause (a) above for laundry, vending, parking and other occupancy payments (but excluding late fees and interest income) based upon collections for the previous three (3) months annualized. "MONTHLY EFFECTIVE RENT" means an amount equal to (x) total rent due over the term of the leases less any payments or concessions which Lender, in its sole discretion, deems to be a rent concession, divided by (y) the total number of months in the leases. "EXPENSES" means actual and customary operating expenses on a stabilized accrual basis for the previous three (3) month period (as reasonably adjusted and annualized by Lender), incurred by any Borrower, including: (i) recurring expenses (e.g., tenant improvements, leasing commissions, carpeting replacement, appliance and drapery replacement and such others as reasonably determined by Lender), (ii) real estate taxes, (iii) management fees (whether paid or not) in an amount not less than four percent (4%) of effective gross income, and (iv) a replacement reserve (whether drawn and whether reserved or not) of not less than Three Hundred and No/100 Dollars ($300.00) per unit. SCHEDULE II INDEX OF DEFINED TERMS
DEFINED TERM PAGE - ------------ ---- Adjusted Actual Rent - Schedule I.............................................1 Affiliate....................................................................13 Agreement.....................................................................1 ALC...........................................................................1 Assignments of Leases.........................................................1 Bankruptcy Case...............................................................2 Bankruptcy Code...............................................................2 Bankruptcy Court..............................................................2 Base Rate.....................................................................3 Borrower......................................................................1 business day.................................................................21 Carriage House................................................................1 Closing Date..................................................................2 Collateral....................................................................4 control......................................................................13 Costs........................................................................17 Debt Coverage Ratio.......................,..................................17 Environmental Indemnity.......................................................4 Event of Default.............................................................14 Expenses - Schedule I.........................................................1 Final Financing Order........................................................14 FINANCING AGREEMENT PROCEEDINGS..............................................21 Financing Order...............................................................7 FIRREA........................................................................5 Improvements..................................................................1 Incorporation Documents.......................................................8 Indebtedness.................................................................15 Interest Rate.................................................................3 Interim Financing Order.......................................................7 Leases........................................................................5 Lender........................................................................1 Loan..........................................................................1 Loan Documents................................................................2 Management and Operating Agreement............................................4 Maturity Date.................................................................2 Monthly Effective Rent - Schedule I...........................................1 Mortgage......................................................................1 Mortgages.....................................................................1 Net Operating Income - Schedule I.............................................1 Note A........................................................................1 Note B........................................................................1 Notes.........................................................................1 Permitted Liens...............................................................9 Person.......................................................................13 Plan Agreement...............................................................16 Pledge........................................................................2 Project.......................................................................1 Project Yield................................................................17 Properties....................................................................1 Property......................................................................1 Regulatory Action............................................................15 Replacement Reserve..........................................................13 Revenue - Schedule I..........................................................1 Subsidiaries..................................................................7 Subsidiary Indebtedness.......................................................7 Subsidiary Loan Agreement.....................................................7 Subsidiary Loan Documents.....................................................7 Subsidiary Note Assignment....................................................7 Title Commitment..............................................................5 Title Policy..................................................................5
SENIOR HOUSING RIDER THIS SENIOR HOUSING RIDER is attached to and made a part of that certain Loan Agreement dated as of the 3rd day of October, 2001, among ASSISTED LIVING CONCEPTS, INC., a Nevada corporation and Chapter 11 debtor-in-possession ("ALC"), CARRIAGE HOUSE ASSISTED LIVING, INC., a Delaware corporation and Chapter 11 debtor-in-possession ("CARRIAGE HOUSE"; ALC and Carriage House are hereafter collectively referred to as "BORROWER") and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation ("LENDER"). To the extent of any conflict between the terms and provisions of this Rider and the terms and provisions of the Loan Agreement, the terms and provisions of this Rider shall govern and control the rights and obligations of the parties. R-1. All terms not defined in this Rider shall have the meanings ascribed to such terms as set forth in the Loan Agreement. R-2. The following representations, warranties and covenants are hereby added to the representations, warranties and covenants contained in the Loan Agreement Borrower represents, covenants, and warrants, as of the date hereof and through the term of Loan, as follows: (a) Borrower is using and operating or upon completion of the Improvements will use and operate the Properties and Improvements (collectively, the "FACILITIES") as independent and assisted living facilities, with the number of units specified on Exhibit R-1 hereto (as modified from time to time with Lender's consent, which consent Lender may grant or withhold in its reasonable discretion, the "LICENSED USE"). Borrower complies and throughout the term of the Loan will comply in all material respects with all federal, state and local laws, regulations, quality and safety standards, accreditation standards and requirements applicable to use and operation of the Facilities of the applicable state regulatory authority (each a "DOH") and all other federal, state or local governmental authorities including those relating to the quality and adequacy of medical care, distribution of pharmaceuticals, rate setting, equipment, personnel, operating policies, additions to facilities and services and fee splitting. The Facilities which are owned, leased or operated by Borrower shall be operated at all times in compliance with such laws and requirements. (b) All governmental licenses, permits, regulatory agreements or other approvals or agreements necessary or desirable for the Licensed Use of the Facilities are held or upon completion of the Improvements will be held by Borrower in the name of the Borrower as required under applicable law and are or upon completion of the Improvements will be in full force and effect, including a valid certificate of need ("CON"), if applicable or similar certificate, license, or approval issued by the DOH for the requisite number of units and beds in the Facilities, and a provider agreement or other required documentation of approved provider status for each provider payment or reimbursement program listed on Exhibit R-2 hereto (collectively, the "LICENSES"). So long as the Loan remains outstanding, Borrower shall operate the Facilities in a manner such that the Licenses shall remain in full force and effect. True and complete copies of the Licenses have been delivered to Lender. (c) The Licenses, including without limitation, the CON, if applicable: (i) May not be, and have not been, and will not be transferred to any location other than the Facilities; (ii) Are not and will not be pledged as collateral security for any other loan or indebtedness; and (iii) Are held or upon completion of construction of the Facility will be held free and will remain free from restrictions or known conflicts which would materially impair the use or operation of the Facilities for the Licensed Use, and shall not be provisional, probationary or restricted in any way. (d) Borrower shall not: (i) Rescind, withdraw or revoke the Licenses for the Facilities, or amend, modify, supplement, or otherwise alter the nature, tenor or scope of the Licenses for the Facilities; (ii) Amend or otherwise change the Facilities' authorized units or beds capacity and/or the number of units or beds approved by the DOH; (iii) Replace or transfer all or any part of the Facilities' units or beds to another site or location; or (iv) Voluntarily transfer or encourage the transfer of any resident of the Facilities to any other Facilities unless such transfer is for reasons relating to the health or safety of the resident to be transferred, employees, guests and other persons. (e) In the event Borrower elects in its sole discretion to participate in Medicare or Medicaid, each Facility so participating will be and thereafter will remain, in compliance with all requirements for participation in Medicare and Medicaid, as applicable, including the Medicare and Medicaid Patient Protection Act of 1987 for so long as Borrower elects to participate in such program. Such Facilities will be and will thereafter remain for so long as Borrower elects to participate in Medicare or Medicaid or third party provider programs, in conformance in all material respects with all insurance, reimbursement and cost reporting requirements, and will have a provider agreement in full force and effect under Medicare and Medicaid, as applicable. (f) There is no and during the term of the Loan shall be no existing, pending or to Borrower's knowledge, threatened revocation, suspension, termination, probation, restriction, limitation, or nonrenewal affecting Borrower or the Facilities of -2- any participation or provider agreement with any third-party payor, including Medicare, Medicaid, Blue Cross and/or Blue Shield, and any other private commercial insurance managed care and employee assistance program (such programs, the "THIRD-PARTY PAYORS' PROGRAMS") to which Borrower presently or at any time hereafter is subject. All Medicaid, Medicare, and private insurance cost reports and financial reports submitted by Borrower are and will be materially accurate and complete and have not been and will not be misleading in any material respects. No cost reports for the Facilities remain open or unsettled, except as otherwise disclosed in Exhibit R-2 hereto. (g) Except as otherwise disclosed to Lender before the Closing Date, none of Borrower or the Facilities is or will be the subject of any proceeding by any governmental agency, and no notice of any violation has been or will be issued by a governmental agency that would, directly or indirectly, or with the passage of time: (i) Materially impact Borrower's ability to accept and/or retain patients at a Facility; or (ii) Have a material adverse effect on Borrower's ability to accept and/or retain patients or operate the Facilities for the Licensed Use or result in the imposition of a fine or sanction or a lower rate certification or a lower reimbursement rate for services rendered to eligible patients; (iii) Modify, limit or annul or result in the transfer, suspension, or revocation or imposition of probationary use of any of the Licenses; or (iv) Affect Borrower's continued participation in the Medicaid or Medicare programs or any other of the Third-Party Payors' Programs, or any successor programs thereto, at then current rate certifications. (h) The Facilities and the use thereof complies, or upon completion will comply and thereafter will continue to comply, in all material respects with all applicable local, state and federal building codes, fire codes, health care, senior housing and other regulatory requirements (the "PHYSICAL PLANT STANDARDS") and no waivers of Physical Plant Standards exist at the Facilities. (i) No Facility has received a "Level A" (or equivalent) violation under Medicare or Medicaid, as applicable, and no statement of charges or deficiencies has been made or penalty enforcement action has been undertaken against the Facilities, or Borrower, or against any officer or director of Borrower by any governmental agency during the last three calendar years, and there have been no violations over the past three years which would threaten the Facilities' or Borrower's certification for participation in Medicare or Medicaid or the other Third-Party Payors' Programs. -3- (j) There are no current, pending or outstanding Medicaid, Medicare or Third-Party Payors' Programs reimbursement audits or appeals pending at the Facilities, and there are no years that are subject to audit. (k) There are no current or pending Medicaid or Medicare or Third-Party Payors' Programs recoupment efforts at the Facilities. Borrower is not a participant in any federal program whereby any governmental agency may have the right to recover funds by reason of the advance of federal funds, including those authorized under the Hill-Burton Act (42 U.S.C. 291, et seq.). (l) Borrower will not pledge its receivables related to the Facilities as collateral security for any other loan or indebtedness. (m) There are no and there will remain no patient or resident care agreements with patients or residents or with any other persons which deviate in any material adverse respect from the standard form customarily used at the Facilities as of the date hereof, a copy of which standard form agreement has been delivered to Lender. (n) All patient or resident records at the Facilities, including patient or resident trust fund accounts, are true and correct in all material respects, and will remain true and correct in all material respects. (o) Any agreement relating to the management or operation of the Facilities (each a "MANAGEMENT AND OPERATING AGREEMENT") and the manager or operator thereunder shall be subject to Lender's reasonable approval and no Management and Operating Agreement shall be modified, amended or terminated without Lender's prior consent, which consent shall not be unreasonably withheld. ALC will manage and operate each of the Facilities at all times. In the event of foreclosure or other acquisition of the Facilities by Lender or its designee or any purchaser at a foreclosure sale, Borrower, Lender, any subsequent operator or any subsequent purchaser need not obtain a CON prior to applying for and receiving Medicare or Medicaid payments, as applicable. (p) None of Borrower or the Facilities shall, other than in the normal course of business, change the terms of any of the Third-Party Payors' Programs now or hereinafter in effect or their normal billing payment or reimbursement policies and procedures with respect thereto (including the amount and timing of finance charges, fees and write-offs). (q) On or before the Closing Date and from time to time thereafter, upon the request of Lender, and during the continuance of an Event of Default, Borrower shall complete, execute and deliver to Lender any applications, notices, documentation, and other information necessary or desirable, in Lender's sole judgment, to permit Lender or its designee (including a receiver) to obtain, maintain or renew any one or more of the Licenses for the Facilities (or to become the owner of the existing Licenses for the -4- Facilities) and to obtain any other provider agreements, licenses or governmental authorizations then necessary or desirable for the operation of the Facilities by Lender or its designee for the Licensed Use (including, without limitation, any applications for change of ownership of the existing Licenses or change of control of the owner of the existing Licenses). Upon an occurrence of an Event of Default but subject to the Financing Orders, (i) Lender is hereby authorized (without the consent of Borrower) to submit any such applications, notices, documentation or other information which Borrower caused to be delivered to Lender in accordance with the above provisions to the applicable governmental authorities, or to take such other steps as Lender may deem advisable to obtain, maintain or renew any License or other license or governmental authorization in connection with the operation of the Facilities for the Licensed Use, and Borrower agrees to cooperate with Lender in connection with the same and (ii) Borrower, upon demand by Lender, shall take any action necessary or desirable, in Lender's sole judgment, to permit Lender or its designee (including a receiver) to use, operate and maintain the Facilities for the Licensed Use. If Borrower fails to comply with the provisions of this subsection (q) for any reason whatsoever, but subject to the Financing Orders Borrower hereby irrevocably appoints Lender and its designee as Borrower's attorney-in-fact, with full power of substitution, to take any action and execute any documents and instruments necessary or desirable in Lender's sole judgment to permit Lender or its designee to undertake Borrower's obligations under this subsection (q), including without limitation, obtaining any licenses or governmental authorizations then required for the operation of the Facilities by Lender or its designee for the Licensed Use. The foregoing power of attorney is coupled with an interest and is irrevocable and Lender may exercise its rights thereunder in addition to any other remedies which Lender may have against Borrower as a result of Borrower's breach of the obligations contained in this subsection (q). (r) Borrower shall at all times fully comply in all material respects with all obligations under the contracts and leases with residents of the Facilities, and Borrower shall not commit or permit any default by Borrower thereunder. Borrower hereby indemnifies and holds harmless Lender and agrees to defend Lender (with counsel acceptable to Lender) from and against any (i) claims, proceedings or causes of action brought by any resident of the Facilities, and (ii) loss, damage, cost or expense, including reasonable attorneys' fees, incurred or suffered by Lender as a result of any (x) breach by Borrower of any contract or lease with a resident of the Facilities or (y) violation of any license or any federal, state or local law governing the Facilities or the use, operation or maintenance thereof for the Licensed Use, in each case except to the extent arising from such indemnitee's gross negligence or willful misconduct. -5- EXHIBIT R-1 UNITS AT EACH FACILITY
PROPERTIES UNITS ---------- ----- 1. Columbus, NE 39 2. Peoria, AZ 50 3. Surprise, AZ 50 4. Payson, AZ 39 5. Prescott Valley, AZ 39 6. Apache Junction, AZ 48 7. Yuma, AZ 48 8. Mesa, AZ 50
EXHIBIT R-2 LICENSES 1. License to operate an Assisted Living Center between Arizona Department of Health Services and Aurora House dated May 11, 2001. 2. License to operate an Assisted Living Center between Arizona Department of Health Services and Cameron House dated April 11, 2001. 3. License to operate an Assisted Living Center between Arizona Department of Health Services and Powell House dated January 24, 2001. 4. License to operate an Assisted Living Center between Arizona Department of Health Services and Baldwin House dated November 27, 2000. 5. License to operate an Assisted Living Center between Arizona Department of Health Services and Grayson House dated November 24, 1999. 6. License to operate an Assisted Living Center between Arizona Department of Health Services and Mondell House dated February 15, 2001. 7. License to operate an Assisted Living Home between Arizona Department of Health Services and Copper Hills House dated May 9, 2001. 8. License to operate an Assisted Living Facility between State of Nebraska Department of Health and Human Services Regulation and Licensure and Cottonwood House dated April 6, 2001. EX-10.2 4 v76886ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 TEXAS ALC PARTNERS, LP 11835 NE GLENN WIDING DRIVE, BUILDING E PORTLAND, OREGON 97220-9057 Phone (503) 252-6233 Fax (503) 255-9948 September 25, 2001 VIA FACSIMILE AND FEDERAL EXPRESS T and F Properties, L.P. c/o Mr. Michael F. Bushee LaQuinta Properties, Inc. 197 First Avenue, Suite 300 Needham, MA 02494 Re: Option Agreement with Assisted Living Concepts, Inc. Dear Mike: This letter ("Option Agreement") sets forth the terms and conditions pursuant to which T and F Properties, L.P. ("Seller") is granting an option (the "Option") to Texas ALC Partners, L.P. ("Texas ALC") to purchase the Property (as defined in Exhibit "B" to this Option Agreement), together with whatever interest, if any, Seller has in the Personal Property (as defined in Exhibit "B" to this Option Agreement) for the purchase price of TWENTY-THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($23,500,000) (the "Purchase Price") and on the other terms and conditions outlined in Exhibit "B" to this Option Agreement. Texas ALC may not assign its rights hereunder; provided, however, that upon prior written notice to Seller, Texas ALC may designate one or more nominees to take title to all or any portion of the Property. Texas ALC acknowledges that it currently leases the Property from Seller pursuant to five separate facility lease agreements (collectively, the "Facility Lease Agreements"). In return for Seller's hereby granting to Texas ALC the Option to purchase the Property, Texas ALC agrees to deliver to Seller the amount of TWENTY-FIVE THOUSAND DOLLARS ($25,000) (the "Option Payment"). Within one (1) business day after Texas ALC's receipt of this Option Agreement executed by Seller in the space provided below, Texas ALC shall deliver to Seller the Option Payment by wire according to the wiring instructions provided to Texas ALC by Seller. Upon the date of the receipt of the Option Payment by Seller, this Option Agreement shall be effective (the "Effective Date"). The term of the Option shall commence on the Effective Date and will expire on October 31, 2001 (the "Option Expiration Date"). This Option Agreement shall terminate on the earlier to occur of: (i) in the event that Texas ALC does not elect to exercise the Option in accordance with the terms hereof, 11:59 p.m. EST on the Option Expiration Date or (ii) in the Mr. Michael F. Bushee September 25, 2001 Page 2 event that Texas ALC elects to exercise the Option in accordance with the terms hereof, (a) the Close of Escrow (as hereinafter defined), if transaction contemplated hereunder is consummated or (b) 11:59 p.m. EST on the Closing Date (as hereinafter defined) if the transaction contemplated hereunder is not consummated. In order to exercise the Option, Texas ALC shall deliver to Seller by facsimile or overnight mail delivery, a written notice of its intent to exercise such Option (the "Election Notice") on or prior to 5:00 p.m. EST on the Option Expiration Date; time is of the essence. In the event that Texas ALC exercises the Option on or prior to the Option Expiration Date and the transaction contemplated hereunder is consummated, at the Close of Escrow, the amount of the Option Payment shall be applied against and be deemed to be a payment credited against the Purchase Price. On the other hand, in the event Texas ALC fails to exercise the Option on or prior to the Option Expiration Date, Seller may retain the full amount of the Option Payment, and the Option shall automatically expire without any further notice or documentation required of either party. The parties understand and agree that in the event the Option is not exercised on or prior to the Option Expiration Date, then, the parties' respective interests in the Property shall be and remain as they are on the date of this letter set forth above, such failure to exercise the Option having no effect on such interests. In the event Texas ALC exercises the Option on or prior to the Option Expiration Date and the transaction contemplated hereunder does not close due to (i) a failure of any condition precedent to be satisfied (other than a default by Seller), then, Seller may retain the full amount of the Option Payment and the Option shall automatically expire without any further notice or documentation required of either party or (ii) the default of a party, then, the nondefaulting party's remedy shall be as set forth in Exhibit "B" hereto in Section 12. Seller understands and acknowledges that Texas ALC intends to disclose the terms and conditions of this Option Agreement to the unofficial committee of the bondholders for the public holding bonds issued by Texas ALC's parent company, Assisted Living Concepts, Inc. (the "Parent"). Texas ALC's offer to Seller to enter into this Option Agreement is to expire at 5:00 p.m. PDT on September 26, 2001, unless signed and returned to me before such date. Facsimile signatures shall have the same binding effect as originals. By executing this letter, Seller agrees to withdraw the Property from the market until the earlier to occur of (i) in the event that Texas ALC does not elect to exercise the Option, November 1, 2001 or (ii) in the event that the purchase of the Property is not consummated, November 16, 2001. Mr. Michael F. Bushee September 25, 2001 Page 3 We look forward to hearing from you. Very truly yours, TEXAS ALC PARTNERS, LP, A TEXAS LIMITED PARTNERSHIP BY: TEXAS ALC, INC. ITS: GENERAL PARTNER By: ________________________ Wm. James Nicol, Chief Executive Officer SC:kem cc: Kathryn Arnone, Esq. (via facsimile) Robert Klyman, Esq. (via facsimile) James Smith, Esq. (via facsimile) Drew Miller Sandra Campbell, Esq. THE ABOVE OPTION AGREEMENT IS ACCEPTED AND AGREED TO THIS ___ DAY OF SEPTEMBER, 2001. T AND F PROPERTIES, LP, A DELAWARE LIMITED PARTNERSHIP BY: MT GENERAL, LLC ITS: GENERAL PARTNER BY: ___________________________________________ Michael F. Bushee, Chief Operating Officer EXHIBIT "A" TO OPTION AGREEMENT Azalea House (Henderson, Texas) Lakewell House (Mineral Wells, Texas) Santa Fe House (Plainview, Texas) Chisholm House (Abilene, Texas) Marcy House (Big Springs, Texas) Bluebonnet House (College Station, Texas) Meredith House (Pampa, Texas) Millican House (Bryan, Texas) Conner House (Canyon, Texas) Austin House (Nacogdoches, Texas) Hoyt House (Sweetwater, Texas) Lucas House (Beaumont, Texas) Hickory House (Levelland, Texas) Sabine House (Orange, Texas) Wheeler House (Gainesville, Texas) Potter House (Amarillo, Texas) EXHIBIT "B" TO OPTION AGREEMENT The following are the salient terms and conditions for the purchase and sale of the Property in the event the Option is exercised by Texas ALC. 1. PURCHASE OF ASSETS. Texas ALC will purchase from Seller the following assets (collectively, the "Assets"): (a) Fee simple interest in and to the real property and the improvements thereon demised to Texas ALC pursuant to the Facility Lease Agreements, including, without limitation, the assisted living facilities (collectively, the "Facilities"), described on Exhibit "A" to the Option Agreement, together with all rights and appurtenances thereto (such real property , improvements, rights and appurtenances are collectively referred to herein as the "Property"). Seller shall convey such fee simple interest in the Property to Texas ALC by Special Warranty Deed, subject only to the Permitted Exceptions (as defined in Section 8(a) below). (b) All furniture, fixtures, equipment, signs, case goods, soft goods, bedding and linens, kitchen and dining goods, applicants, maintenance and landscaping tools and equipment, and supplies currently owned by Seller, if any, that is located on or used in the operation of the Property ("Personal Property"). Without limiting the foregoing, Seller makes no representation that it owns any Personal Property. Seller shall convey the Personal Property to Texas ALC by Bill of Sale "as is" and without warranties of title. 2. "AS IS" CONDITION. Texas ALC acknowledges that Texas ALC and/or the Parent have been in possession and control of the Assets since Seller or Seller's affiliate first took title to the same. Accordingly, the Assets will be conveyed to Texas ALC in "as is" condition, with Seller making no representations and warranties with regard to the condition of the Assets. Except for the express representations and warranties contained in this Exhibit "B", Seller is not making, and Texas ALC is not relying upon, any representation or warranty, express or implied, of any nature whatsoever with respect to the Property. Consequently, Texas ALC (on its own behalf and its designee, if any) waives any and all claims and causes of action, now or hereafter arising, against Seller in respect of the condition of the Property. SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY, EITHER AS TO ITS FITNESS FOR ANY PARTICULAR PURPOSE OR USE, ITS DESIGN OR CONDITION OR OTHERWISE, OR AS TO DEFECTS IN THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT; IT BEING AGREED THAT ALL RISKS RELATING TO THE DESIGN, CONDITION AND/OR USE OF THE PROPERTY ARE TO BE BORNE BY TEXAS ALC. WITHOUT LIMITING ANY OF THE PROVISIONS OF THE FACILITY LEASE AGREEMENTS, AS OF THE CLOSE OF ESCROW, TEXAS ALC ASSUMES ALL RISK OF (I) THE PHYSICAL CONDITION OF THE PROPERTY, (II) THE SUITABILITY OF THE PROPERTY FOR OPERATION IN ACCORDANCE WITH ITS PRIMARY INTENDED USE (AS DEFINED UNDER THE FACILITY LEASE AGREEMENTS), (III) THE COMPLIANCE OR NON-COMPLIANCE OF THE PROPERTY WITH ALL APPLICABLE REQUIREMENTS OF LAW, INCLUDING BUT, NOT LIMITED TO, ENVIRONMENTAL LAWS AND ZONING AND OTHER LAND USE LAWS, (IV) ALL MATTERS THAT A SURVEY MAY DISCLOSE AND (V) SUBJECT TO SELLER'S PERFORMANCE OF ITS OBLIGATIONS HEREUNDER, WHETHER TITLE TO THE PROPERTY IS INSURABLE. Without limiting the foregoing, Texas ALC acknowledges and agrees that, in connection with the consummation of the transaction contemplated hereunder, in the event that Texas ALC obtains or seeks to obtain title insurance insuring its interest in the Property, Seller shall not be obligated to provide any form of representation or indemnification to the title insurance company issuing such policy; provided, however, that Seller shall provide to such title insurance company (1) a copy of its partnership agreement and the articles of incorporation of its general partner, (2) evidence of its authority to execute and deliver the transaction documents to which it is a party, (3) evidence of Seller's qualification to do business in the state where the Property is located, (4) certificates of good standing relating to the Seller from the state where the Property is located and from the state of its formation, (5) evidence of the clearance of any lien that does not constitute a Permitted Exception under paragraph 8(a)(i) and (6) an affidavit that Seller is not a "foreign person" as defined in Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended. 3. Purchase Price Allocation; Payment and Adjustments. (a) PURCHASE PRICE. The entire Purchase Price shall be allocated to the real estate being conveyed. In the event that Texas ALC exercises the Option in accordance with the terms hereof, then, prior to the Close of Escrow, Seller and Texas ALC agree to the reasonable allocation of the Purchase Price among the properties listed on Exhibit "A" to the Option Agreement. (b) PAYMENT. The Purchase Price shall be payable as follows: (i) The amount of the Option Payment shall be credited as provided above. (ii) The balance of the Purchase Price shall be paid in cash/good funds by wire transfer at the Close of Escrow. (c) CLOSING ADJUSTMENTS. The Purchase Price will be adjusted at the Close of Escrow, to reflect prorations of Rent (as defined under the Facility Lease Agreements) due under Facility Lease Agreements through the date of the Close of Escrow. All expenses relating to the ownership and operation of the Assets are passed through to Texas ALC under the Facility Lease Agreements, so there will be no adjustments for such expenses at Close of Escrow. Without limiting the foregoing and notwithstanding anything to the contrary set forth in the Facility Lease Agreements, at the Close of Escrow, Texas ALC shall pay to Seller an amount equal to the Seller's reasonable estimate of the Additional Rent (as defined under the Facility Lease Agreements) due for the quarter in which the Close of Escrow occurs (the "Closing Quarter"). Within ninety (90) days after the Closing Date, Texas ALC shall deliver to Seller an Officer's Certificate (as defined under the Facility Lease Agreements) in a form reasonably acceptable to Seller and certified by the general partner of Texas ALC setting forth a calculation of the Additional Rent for the period from the commencement of the Closing Quarter through the Closing Date. A final reconciliation of the Additional Rent due for the Closing Quarter shall be made based upon such Officer's Certificate. If, as a result of such reconciliation, (a) the Additional Rent determined to be due for the Closing Quarter exceeds the amount paid by Texas ALC at the applicable Closing, Texas ALC agrees to pay such difference to Seller within ten (10) days after such final reconciliation or (b) the Additional Rent determined to be due for the Closing Quarter is less than the amount paid by Texas ALC at such Closing, Seller agrees to refund such overpayment to such Texas ALC within ten (10) days after such final reconciliation. The provisions of this Paragraph shall survive the Close of Escrow. 4. [INTENTIONALLY DELETED.] 5. CLOSE OF ESCROW. The close of this transaction (the "Close of Escrow") shall occur on November 15, 2001 (the "Closing Date"). Time is of the essence. The Close of Escrow shall occur at a place and time to be designated by Texas ALC in the Election Notice. Notwithstanding the foregoing, the parties hereto are willing to consummate the transaction contemplated hereunder by utilizing a nationally recognized title insurance company designated by Texas ALC as escrow agent for the delivery of the required documents hereunder, subject to such escrow arrangements as are reasonably acceptable to Seller and Texas ALC. The Seller acknowledges and agrees that Chicago Title Insurance Company would be acceptable as an escrow agent. 6. NO ASSUMPTION OF LIABILITIES. Texas ALC will not assume any debts, obligations, or liabilities of Seller, except as may otherwise be provided under the Facility Lease Agreements. 7. CASH COLLATERAL. At the Close of Escrow, Seller shall refund to Texas ALC the Cash Collateral (as defined under the Facility Lease Agreements) held by Seller (as of the Close of Escrow), together with all interest and/or investment income accrued thereon, by providing Texas ALC with a credit against the Purchase Price. The amount of the Cash Collateral held by Seller as of the date hereof is EIGHT HUNDRED THIRTY-THREE THOUSAND THREE HUNDRED TWENTY-SIX AND 38/100 DOLLARS ($833,326.38), plus interest and/or investment income accrued thereon. See Schedule 1 to this Exhibit "B" to Option Agreement, which Schedule 1 is attached hereto and incorporated herein by this reference, and which lists the principal amount of Cash Collateral held by Seller as of the date hereof (allocated by Facility). 8. CONDITIONS OF TEXAS ALC'S OBLIGATION TO CLOSE THE PURCHASE OF ASSETS. In the event Texas ALC exercises the Option on or prior to the Option Expiration Date, Texas ALC's obligation to purchase the Assets shall be conditioned upon the following being satisfied or waived by Texas ALC on or before the Close of Escrow; provided, however, the acceptance by Texas ALC or its designee of the Special Warranty Deeds shall be deemed to be a full performance and discharge of every agreement and obligation of Seller hereunder, except those obligations hereunder that by their express terms survive such acceptance. (a) The condition of title to the Assets must be satisfactory to Texas ALC in its reasonable discretion. (i) Texas ALC shall be responsible for obtaining title insurance for the Property and it shall review the condition of title to the Property pursuant to a current title commitment report for the Property, accompanied by legible copies of all underlying documents, issued by the Chicago Title Insurance Company. Upon review of the title commitment and all underlying documents by Texas ALC, Texas ALC shall provide written notice to Seller of the exceptions to title which Seller must remove prior to closing in order that Texas ALC will be able to take title subject only to Permitted Exceptions. Seller understands that Texas ALC will require Seller to remove at or prior to Close of Escrow any and all liens and encumbrances that do not constitute Permitted Exceptions. As used herein, the term "Permitted Exceptions" shall be defined as and include (1) any exceptions to title subject to which Seller (or its affiliate) took title from ALC as set forth in Seller's (or such affiliate's) owner's policy of title insurance, (2) any exceptions to title created during the term of the Facility Lease Agreements with the consent of Texas ALC or for the benefit of the Property and (3) any exceptions for which the lessee under the Facility Lease Agreements is responsible. In no event shall the term Permitted Exceptions be deemed to include any voluntary monetary liens created by Seller or its affiliate or involuntary liens arising out of the acts or omissions of Seller or its affiliate. (ii) Texas ALC will provide Seller with a UCC search or searches and legible copies of all instruments affecting title to the personal property for Seller to prepare the appropriate terminations and releases. Texas ALC shall review the condition of title to the Personal Property which must be free and clear of all liens attributable to Seller or filed against the Personal Property by Seller. (b) Any as-built survey(s) of the Property, obtained by Texas ALC, shall be satisfactory to ALC in its reasonable discretion. (c) Texas ALC shall have obtained funds from a lender in the amount of the total Purchase Price of the Assets, if Texas ALC elects to take title to the Assets; or, alternatively, if a nominee of Texas ALC is to take title to the Assets, then that nominee shall be committed to leasing back the Property to Texas ALC on terms mutually acceptable to that party as lessor and Texas ALC as lessee, with the lease agreement(s) to commence contemporaneously with the Close of Escrow. (d) Seller shall have executed the following documents in form mutually acceptable to Seller and Texas ALC: (i) recordable Terminations of Facility Lease Agreements for each parcel comprising the Property; (ii) recordable releases or reconveyances of deeds of trust or mortgages and security agreements for each such parcel; (iii) recordable releases of fixture filings for each such parcel; (iv) releases of all UCC-1 Financing Statements filed by Seller identifying Texas ALC or any affiliate of Texas ALC as the debtor/lessee; and (v) terminations or mutual releases of all other agreements reasonably requested by Texas ALC or Seller that arose out of the purchase of the Assets by Seller or its affiliate and the leaseback by Texas ALC or its affiliate; provided, however, that it is acknowledged and agreed that nothing set forth herein or in any terminations of the Facility Lease Agreements and/or any of the other releases or terminations to be executed at the Close of Escrow shall be deemed to amend, modify or limit any provisions set forth in the Facility Lease Agreements or any of the other Lease Documents (as defined under the Facility Lease Agreements) which by their express terms provide that they will survive the expiration or earlier termination of the Facility Lease Agreements and/or the other Lease Documents. 9. CLOSING COSTS. Texas ALC shall pay the cost of its owner's policy of title insurance, any title endorsements to such policy, the cost of the survey, if any, and all transfer tax costs. The escrow fees shall be shared equally by Seller and Texas ALC. Seller will pay the recording costs for any releases or reconveyances of liens or security interests which were created by Seller or which Seller is required to remove hereunder. Texas ALC shall pay the recording costs for the Special Warranty Deeds, the Memoranda of Termination of Facility Lease Agreements, any other termination and/or release agreements not to be paid for by Seller (as provided above), and any liens created by Texas ALC. 10. COMMISSIONS. Texas ALC agrees to hold harmless, indemnify and defend the Seller from and against any and all claims made by (i) Cohen & Steers claiming a right to a fee or commission or (ii) any third party claiming a right to a fee or commission by through or under Texas ALC. Seller agrees to hold harmless, indemnify and defend Texas ALC from and against any and all claims made by any third party, other than Cohen & Steers, claiming a right to a fee or commission by, through or under Seller. Seller represents and warrants to Texas ALC that Seller has not engaged Cohen & Steers as its agent, finder or broker with respect to the Assets. The provision of this Paragraph shall survive the Close of Escrow or any termination of this Option Agreement. 11. CONTINGENT CLOSING. The purchase of the Assets is contingent upon the simultaneous close of the purchase of all the Assets (including, without limitation, the sixteen properties which constitute the real property portion of the Assets), unless otherwise expressly waived, in writing, by Texas ALC and Seller. 12. REMEDIES. In the event of a default by Texas ALC, Seller's sole remedy shall be to terminate this Option Agreement and retain the Option Payment as liquidated damages. In the event of a default by Seller, then Texas ALC's sole remedy shall be to: (i) terminate this Option Agreement and receive a refund of the Option Payment or (ii) enforce specific performance of this Option Agreement and Seller's obligations thereunder. Except as otherwise expressly provided herein, in the event of any termination of this Option Agreement due to a default by either party, both parties shall be released of any further obligations hereunder. 13. REPRESENTATIONS AND WARRANTIES. (a) Seller represents and warrants to Texas ALC that as of the date hereof and as of the Close of Escrow: (i) Seller has been duly organized and is validly existing as a limited partnership, is in good standing in the state of its organization and is qualified to do business and is in good standing in the state in which the Property is located, and the person signing the this Option Agreement and the other documents required hereunder on behalf of Seller is authorized to do so, (ii) no other person or party has any right to purchase the Assets, (iii) Seller has not received any written notice of condemnation, eminent domain and, to Seller's knowledge, no similar proceedings are pending or threatened with regard to the Property, (iv) to the best of Seller's knowledge, Seller has not received any written notice of any pending or threatened liens, special assessments, condemnations, impositions or increases in assessed valuations to be made against the Property by any governmental authority and (v) Seller is not a "foreign person" as defined in Section 1445(f)(3) of the Internal Revenue Code of 1986, as amended. (b) Texas ALC represents and warrants to Seller that as of the date hereof and as of the Close of Escrow: (i) Texas ALC has been duly organized and is validly existing as a limited partnership, is in good standing in the state of its organization and is qualified to do business and is in good standing in the state in which the Property is located, and the person signing this Option Agreement and the other documents required hereunder on behalf of Texas ALC is authorized to do so, and (ii) there is no action or proceeding pending or, to Texas ALC's knowledge, threatened against Texas ALC which challenges or impairs Texas ALC's ability to execute or perform its obligations under the Purchase Agreement and other documents. 14. ATTORNEYS' FEES AND COSTS. In the event that either party institutes legal action against the other party with respect to this Option Agreement , the party which prevails in such action shall be entitled to recover from the other party all courts costs and reasonable attorneys' fees incurred in connection therewith. 15. CASUALTIES; CONDEMNATION. If any portion of the Property is damaged or destroyed by fire or other casualty, or if condemnation proceedings are instituted against any portion of the Property after the exercise of the Option and prior to the Close of Escrow, Seller shall assign the insurance or condemnation proceeds payable in respect of the fire or other casualty or condemnation to Texas ALC at the Close of Escrow and Texas ALC shall close the transaction contemplated hereunder without reduction in the Purchase Price. Nothing set forth herein shall relieve Texas ALC of any of its obligations under the Facility Lease Agreements (including, without limitation, any of its obligations thereunder with respect to casualties or condemnation) unless and until such Facility Lease Agreements are expressly terminated at the Close of Escrow as required hereunder in connection with the consummation of the transaction contemplated hereunder. 16. FURTHER ASSURANCES. From time to time before or after the Close of Escrow, at no additional consideration, the parties hereto each agree that they will promptly execute and deliver all additional documents and perform (or cause the performance of) any other acts that may be reasonably requested in order to effectuate the intent of this Option Agreement and to consummate the transaction contemplated hereby. The provisions of this Paragraph shall survive the Close of Escrow or any termination of this Option Agreement. 17. MODIFICATIONS. This Agreement may not be amended in any respect whatsoever except by a further agreement, in writing, fully executed by each of the parties. SCHEDULE 1 TO EXHIBIT "B" Cash Collateral(1) (as of December 31, 2000) Austin House $45,334.87 Azalea House 47,623.34 Bluebonnet House 55,559.53 Chisolm House 56,805.06 Conner House 48,320.55 Hickory House 39,253.41 Hoyt House 44,347.14 Lakewell House 44,851.49 Lucas House 70,259.07 Marcy House 56,805.06 Meredith House 59,103.79 Millican House 45,414.94 Potter House 70,588.32 Sabine House 52,268.74 Santa Fe House 52,794.43 Wheeler House 43,996.65 -------------- $833,326.39(2)

- -------- (1) Pursuant to Section 6.2.1 of the Facility Lease Agreements, Texas ALC Partners, L.P., as Lessee, deposited Cash Collateral with Seller, as Lessor, as security for Lessee's performance. (2) Pursuant to Section 1.B of the Deposit Pledge Agreements, Texas ALC Partners, L.P. as Lessee, is entitled to all income earned on the Cash Collateral and all proceeds thereof. EX-10.3 5 v76886ex10-3.txt EXHIBIT 10.3 EXHIBIT 10.3 LOAN NO. 20-365 SECOND AMENDMENT TO LOAN DOCUMENTS THIS SECOND AMENDMENT TO LOAN DOCUMENTS (this "AMENDMENT") is made as of the 3rd day of October, 2001, between ALC OHIO, INC., a Nevada corporation, ALC PENNSYLVANIA, INC., a Nevada corporation, ALC IOWA, INC., a Nevada corporation, ALC NEBRASKA, INC., a Nevada corporation and ALC NEW JERSEY, INC., a Nevada corporation (collectively, the "ORIGINAL BORROWER") and ALC INDIANA, INC., a Nevada corporation ("ALC INDIANA") (Original Borrower and ALC Indiana are sometimes hereinafter collectively referred to as "BORROWER"), ASSISTED LIVING CONCEPTS, INC., a Nevada corporation and Chapter 11 debtor-in-possession ("ALC"), the financial institutions who are or hereafter become parties to the Loan Agreement (as defined below) as Lenders, and HELLER HEALTHCARE FINANCE, INC., a Delaware corporation ("HELLER"), as Agent and a Lender. RECITALS A. Original Borrower, Agent and Lenders have entered into that certain Loan Agreement dated as of February 20, 2001 (the "ORIGINAL LOAN AGREEMENT"). The Original Loan Agreement was amended by that certain First Amendment to Loan Documents dated as of June 29, 2001 among Original Borrower, ALC Indiana, ALC, Agent and Lenders (the "FIRST AMENDMENT"; the Original Loan Agreement, as amended by the First Amendment, is hereinafter referred to as the "LOAN AGREEMENT"), pursuant to which Lenders agreed to make loans to Borrower in the aggregate principal amount of Twenty Million and No/100 Dollars ($20,000,000.00), subject to the terms and conditions set forth in the Loan Agreement. The Loan is evidenced by the Notes. As of the date hereof, Heller is the only Lender. All capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement. B. Concurrently with the execution of this Amendment, ALC and Carriage House Assisted Living, Inc., a Delaware corporation and Chapter 11 debtor-in-possession ("CARRIAGE HOUSE"; ALC and Carriage House are collectively referred to as "DIP BORROWER") and Heller (as a lender only and not an agent) will enter into a new and separate Loan Agreement (the "DIP LOAN AGREEMENT") pursuant to which Heller will agree to lend DIP Borrower the sum of Four Million Four Hundred Thousand and No/100 Dollars ($4,400,000.00), subject to the terms and conditions of the DIP Loan Agreement (the "DIP LOAN"). In connection with the DIP Loan, DIP Borrower will execute a promissory note or notes, first priority mortgages or deeds of trust encumbering properties owned by DIP Borrower (the "DIP PROPERTIES"), assignments of leases encumbering such properties, a hazardous materials indemnity agreement, such Uniform Commercial Code financing statements as Heller may require pursuant to the terms of the DIP Loan Agreement, the Pledge and the Subsidiary Note Assignment (each as defined in the DIP Loan Agreement), the DIP Loan Agreement and such other documents as Heller may require (collectively, the "DIP LOAN DOCUMENTS"). C. ALC and Borrower have requested that the Loan Agreement be amended to increase the amount of the Loan, extend the Term and address other matters set forth herein. D. ALC and Borrower have requested, and ALC, Borrower, Agent and Lenders hereby agree, to modify the Loan Documents pursuant to the terms of this Amendment. NOW, THEREFORE, in consideration of the Recitals, which are hereby incorporated into and shall be deemed a part of this Amendment, of the covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by all parties, it is agreed by and among the parties hereto as follows: 1. AMENDMENTS TO LOAN DOCUMENTS. (a) Notwithstanding anything to the contrary contained in the Loan Documents, Lenders shall have no obligation to make any disbursement of any proceeds of the Loan except as explicitly set forth in this Amendment. Lenders will make disbursements with respect to the Pool 2 Properties strictly subject to the conditions precedent that (i) Borrower shall have satisfied all of the conditions to the Pool 2 Properties becoming Included Properties, (ii) the Final Financing Order (as defined in the DIP Loan Agreement) shall have been entered, (iii) with respect to the Pool 1 Properties and Pool 3 Properties, Borrower shall have delivered to Agent date down endorsements to the Title Policies, legal opinions regarding the Loan Documents executed by Borrower in connection with the First Amendment or this Amendment, and any other documents which Agent may reasonably require, (iv) Borrower shall execute and deliver to Agent such documents as Agent may reasonably require in connection with the Pool 2 Properties and the funding thereof (including without limitation, an amendment to the Notes), (v) the Collateral (as defined in the DIP Loan Agreement) shall also secure the Loan, (vi) Heller's credit committee shall have granted all required approvals with respect to such disbursements for the Pool 2 Properties and Heller shall have provided written notice thereof to Borrower, (vii) Texas ALC Partners, L.P., a Texas limited partnership ("ALC TEXAS") shall be joined to the Loan Agreement as a Borrower pursuant to a Joinder (in the form attached to the Loan Agreement) substantially simultaneously with the disbursement for the Pool 2 Properties and (viii) Borrower shall cause Nevada ALC, Inc. and Texas ALC, Inc. to execute and deliver to Agent an assignment of all of their respective partnership interests in ALC Texas in a form reasonably acceptable to Agent. Borrower also authorizes Agent to file amendments to any UCC financing statements as Agent may reasonably require with respect to the Pool 1 Properties and Pool 3 Properties. (b) Upon the Effective Date, subsection 1.1.4 of the Loan Agreement shall automatically (and without further action) be deleted in its entirety and the following inserted in lieu thereof: -2- "1.1.4. INTEREST RESERVE. A portion of the proceeds of the Loan in the amount of One Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00) shall be retained by Lenders to fund an interest reserve (the "INTEREST RESERVE"). The Interest Reserve shall be advanced by Lenders, at Agent's sole discretion, during the continuance of any monetary default under any of the Loan Documents in order to pay the interest due on the Loan. Lenders shall not be required to make any other disbursements from the Interest Reserve except as set forth above. Any disbursement by Lenders of any portion of the Interest Reserve shall not constitute a cure or waiver of such default. No portion of the Interest Reserve shall bear interest hereunder unless and until such portion is advanced by Lenders. (c) Upon the Effective Date, Section 1.2 of the Loan Agreement shall automatically (and without further action) be deleted in its entirety and the following inserted in lieu thereof: "1.2. LOAN TERM. The Loan shall mature upon the earliest of (i) the date on which Agent demands payment of Borrower's obligations to it following the occurrence of an Event of Default, (ii) the date on which the DIP Loan is paid in full or required to be paid in full, whether by acceleration or otherwise or (iii) the date which is one (1) year after the Effective Date (such earliest date being referred to as the "MATURITY DATE")." Any reference to Maturity Date contained in the Loan Documents shall be deemed a reference to the Maturity Date as modified by this Amendment. The "EFFECTIVE DATE" shall mean the date on which the Interim Financing Order (as defined in the DIP Loan Agreement) is entered. (d) Upon the Effective Date, the first sentence of Section 1.3 of the Loan Agreement shall automatically (and without further action) be deleted and the following inserted in lieu thereof: "Borrower shall pay interest on the outstanding principal balance of the Loan at a floating rate per annum equal to the Base Rate plus five percent (5.00%) (the aggregate rate referred to as the "INTEREST RATE")." (e) Upon the Effective Date, Section 1.5 of the Loan Agreement shall automatically (and without further action) be deleted in its entirety and the following inserted in lieu thereof:
SOURCES USES ------- ---- Loan : $39,540,000 Acquisition of Pool 2 Interest Reserve: $ 1,200,000 Properties: $23,500,000 Amounts Previously Funded Prior to this Amendment: $15,000,000 Interest Reserve: $ 1,200,000 Commitment Fee: $ 440,000 Restructuring Fee: $ 577,500 Estimated Closing Costs: $ 22,500 Total: $40,740,000 Total: $40,740,000
-3- Borrower shall deliver such information and documentation as Agent shall reasonably request to verify that the sources and uses are as indicated above. A reduction in the amounts necessary for any of the uses indicated above shall result in an equal reduction in the amount of the Loan. In the event that (i) Borrower does not purchase the Pool 2 Properties before the Maturity Date and (ii) Borrower is not in default under the terms of any of the Loan Documents, Agent shall refund to Borrower a portion of the Restructuring Fee equal to $352,500.00. (f) Upon the Effective Date, Borrower shall pay Agent a restructuring fee of $577,500.00 (the "RESTRUCTURING FEE"). Borrower and DIP Borrower have previously deposited with Agent a good faith deposit in the amount of $300,000 relating to this Amendment. After a portion of such deposit is applied towards the loan fee and closing costs under the DIP Loan Agreement, any remaining portion of such deposit shall be applied towards the Restructuring Fee. (g) Upon the Effective Date, Section 2.1 of the Loan Agreement shall automatically (and without further action) be deleted in its entirety and the following inserted in lieu thereof: "2.1 COLLATERAL. The Loan and all other indebtedness and obligations under the Loan Documents, as well as the DIP Loan and all of the indebtedness and obligations of DIP Borrower under the DIP Loan Documents, shall be secured by the following (collectively, the "COLLATERAL"): (a) the Mortgages, (b) the Assignments of Leases, and (c) any other collateral or security described in this Agreement or the other Loan Documents." (h) Upon the Effective Date, Section 7.1(a) of the Loan Agreement shall automatically (and without further action) be amended by adding the phrase "or the other Loan Documents" after the word "Agreement" on the fifth line. (i) Upon the Effective Date, Section 7.1(c) of the Loan Agreement shall automatically (and without further action) be amended by adding the phrase ", whether in this Agreement or in any other Loan Document," after the word "warranty" on the first line. (j) Upon the Effective Date, Section 7.1 of the Loan Agreement shall automatically (and without further action) be amended by adding the following new subsection: "(k) The occurrence of a default by DIP Borrower under any of the DIP Loan Documents and the expiration of any cure period applicable thereto." (k) Upon the Effective Date, Section 1(a) of the First Amendment shall automatically (and without further action) be deleted in its entirety. -4- (l) Agent shall use reasonable efforts to cooperate with Borrower, at Borrower's sole expense, in connection with Borrower's efforts to cause the Pool 2 Properties to become Included Properties as soon as reasonably practicable. (m) Upon the Effective Date, Borrower shall execute and deliver to Agent (i) an Amended and Restated Promissory Note A in the original principal amount of $26,481,000.00, (ii) an Amended and Restated Subordinated Promissory Note B in the original principal amount of $14,259,000.00, and (iii) a First Amendment to each of the Mortgages, which shall be recorded at Borrower's expense. (n) This Amendment and each of the documents executed in connection herewith shall be deemed to be Loan Documents. Any and all references in the Loan Documents to the "Loan", the "Loan Agreement" or the "Loan Documents" shall mean the Loan, the Loan Agreement, or the Loan Documents, respectively, as amended hereby. Any and all references in the Loan Documents to the "Mortgages" shall mean the Mortgages as amended by the First Amendments to such Mortgages referenced in subsection 1(m) above. Any and all references in the Loan Documents to the "Notes" shall mean the Amended and Restated Notes referenced in subsection 1(m) above. 2. TAKEOUT LOAN TERMS AND CONDITIONS. Provided that Borrower has satisfied all of the Takeout Loan Conditions (defined below), the Loan shall be automatically (and without further action) amended on the Maturity Date pursuant to the terms and conditions provided below (such amended Loan is hereinafter referred to as the "TAKEOUT LOAN"). (a) Takeout Loan Conditions. The "TAKEOUT LOAN CONDITIONS" shall mean each of the following conditions: (i) DIP Borrower shall not be in default under any of the terms and conditions of the DIP Loan Agreement and the DIP Loan shall have been paid in full concurrently with the funding of the Takeout Loan, (ii) Borrower shall not be in default under any of the terms and conditions of the Loan Agreement (as amended by this Amendment), (iii) the reorganization plan for DIP Borrower (the "REORGANIZATION PLAN") shall not be different than the reorganization plan described in the documents referenced in Exhibit A attached hereto, if such difference is adverse to Heller's or Lenders' interests in any material respect, (iv) no material adverse change shall have occurred with respect to the Project or Takeout Borrower, (v) Heller's credit committee shall have granted all required approvals with respect to the Takeout Loan as described herein and subject otherwise only to satisfaction of all of the other Takeout Loan Conditions (the "COMMITTEE APPROVAL") and Heller shall have provided written notice thereof to Takeout Borrower, (vi) the funding of the Takeout Loan shall occur no later than six (6) months after the date on which the Committee Approval was obtained, and (vii) as of the Maturity Date, the Pool 1 Properties and Pool 2 Properties shall provide a Loan Multiple, as determined by Agent, of not greater than 5.5. "LOAN MULTIPLE" shall mean the principal amount of the Takeout Loan divided by the Net Operating Income of the Pool 1 Properties and Pool 2 Properties. For purposes of this Section 2(a), "NET OPERATING INCOME" shall have the meaning given to such term in the Loan Agreement, except that it shall be calculated using (i) expenses for the trailing 12 months (as reasonably adjusted by Agent), incorporating a 5% management fee, a $300 per -5- unit annual replacement reserve and increases in Medicare and Medicaid rates and increases in costs of vendor services, and (ii) annualized revenues for the trailing 3 months incorporating an occupancy factor of the lesser of (A) actual occupancy and (B) an assumed 93% occupancy rate. Net Operating Income shall be verified by an independent audit at Takeout Borrower's expense. (b) Takeout Loan. The "TAKEOUT LOAN" shall be a refinance of the DIP Loan and the Loan in the original principal amount of $44,000,000.00 made to Original Borrower and ALC Texas (collectively, the "TAKEOUT BORROWER"). ALC acknowledges and agrees that the Guaranty executed by ALC shall remain in full force and effect with respect to the Takeout Loan. (c) Takeout Term. The term of the Takeout Loan shall commence on the Maturity Date (as defined in Section 1(b) of this Amendment) and terminate thirty-six (36) months thereafter, unless sooner terminated pursuant to the terms hereof (the "TAKEOUT TERM"). (d) Interest Rate. Takeout Borrower shall pay interest on the outstanding principal balance of the Takeout Loan at a floating rate per annum equal to the Base Rate plus four and one-half percent (4.50%) (the aggregate rate referred to as the "INTEREST RATE"). "BASE RATE" shall mean the rate published each day in The Wall Street Journal for notes maturing three (3) months after issuance under the caption "Money Rates, London Interbank Offered Rates (LIBOR)". The Interest Rate for each calendar month shall be fixed based upon the Base Rate published prior to and in effect on the first (1st) business day of such month; provided, however, the Interest Rate for the remainder of the calendar month in which the Closing Date occurs shall be fixed based upon the Base Rate published prior to and in effect on the first (1st) business day prior to the Closing Date. Interest shall be calculated based on a 360 day year and charged for the actual number of days elapsed. Notwithstanding the foregoing, in no event shall the Interest Rate be less than eight percent (8.00%). (e) Payments. Takeout Borrower shall make interest payments monthly in arrears on the first (1st) day of each calendar month, commencing on the first (1st) day of the calendar month immediately following the commencement of the Takeout Term, computed on the outstanding principal balance of the Loan at the Interest Rate. Takeout Borrower shall also make monthly principal payments to Agent on the first (1st) day of each calendar month of the Takeout Term in the following amounts during the following periods: First Loan Year $50,000 per month Second Loan Year $65,000 per month Third Loan Year $80,000 per month "LOAN YEAR" shall mean a consecutive twelve (12) month period during the Takeout Term, commencing with the first full calendar month thereof. -6- (f) Sources and Uses. The sources and uses of funds for the Takeout Loan are as follows:
SOURCES USES ------- ---- Takeout Loan: $44,000,000 Payoff of Loan and DIP Loan: $43,940,000 Closing Costs: $ 60,000 Total: $44,000,000 Total: $44,000,000
Takeout Borrower shall deliver such information and documentation as Agent shall reasonably request to verify that the sources and uses are as indicated above. A reduction in the amounts necessary for any of the uses shall result in an equal reduction in the amount of the Takeout Loan. (g) Commitment Fee. Takeout Borrower shall pay Agent a commitment fee of $440,000, which fee shall be deemed fully earned by Agent upon Committee Approval regardless of whether the Takeout Loan is funded or not. Upon Committee Approval, such commitment fee may be disbursed to Lenders by Agent as part of the Loan made pursuant to subsection 1(e) of this Amendment. (h) Prepayments of Takeout Loan. Takeout Borrower may not prepay any of the outstanding principal balance of the Takeout Loan during the first Loan Year (the "LOCKOUT PERIOD"). Thereafter, Takeout Borrower may prepay the outstanding principal balance of the Takeout Loan in full at any time together with all other amounts owing under any of the Loan Documents; provided Takeout Borrower gives Agent at least ten (10) business days prior written notice and pays Agent, for the benefit of Lenders, the Exit Fee then due. After the Lockout Period, Takeout Borrower may prepay the outstanding principal balance of the Takeout Loan in part at any time upon at least ten (10) business days prior written notice thereof to Agent. So long as no default then exists hereunder or under any of the other Loan Documents, in connection with the sale by Takeout Borrower of one or more of the Properties to a party that is not an Affiliate of ALC or Borrower or the refinancing by Takeout Borrower of one or more of the Properties, Agent shall release such Properties upon Takeout Borrower's satisfaction of each of the following conditions precedent, each as reasonably determined by Agent: 1. Takeout Borrower shall pay Agent, for the benefit of Lenders, as a payment of a portion of the Indebtedness, an amount equal to the greater of (i) the portion of the Takeout Loan reasonably allocated by Agent to each Property to be released (which allocation shall be made by Agent upon the funding of the Pool 2 Properties), and (ii) the net sales or refinancing proceeds from each such Property; 2. The remaining Properties shall have achieved a Debt Coverage Ratio (as determined by Agent) of at least 1.75 for the immediately preceding three (3) months; -7- 3. The remaining Properties shall have a Project Yield (as determined by Agent) of at least 20% for the immediately preceding three (3) months; 4. The outstanding principal balance of the Takeout Loan after the proposed prepayment would not be less than $10,000,000.00; and 5. Takeout Borrower shall pay Agent, for the benefit of Lenders, the Exit Fee with respect to the Properties being released as set forth below, together with all costs and expenses of Agent in connection with such release. (i) Exit Fee. As additional consideration for Lenders' entering into this Agreement and making the Takeout Loan, Takeout Borrower shall, on the date any payment of principal under the Takeout Loan is made (whether as a partial or full repayment of the Takeout Loan, and whether before, at or after maturity, and whether or not as a result of a casualty or condemnation, acceleration or otherwise), pay to Agent for the benefit of Lenders, an amount (the "EXIT FEE") equal to (A) one percent (1%) of the principal amount being repaid on such date plus (B) if all or any portion of the Takeout Loan is repaid during the Lockout Period, the amount of interest Agent estimates would have been payable under this Agreement with respect to such prepayment of the Takeout Loan from and after the date of such prepayment through the end of the Lockout Period. (j) Defaults. The occurrence of any of the following events shall constitute an Event of Default under the Loan Agreement (in addition to the other Events of Default set forth in the Loan Agreement): (A) if at any time the Debt Coverage Ratio for the Project (which ratio shall be determined by Agent and calculated without consideration for any principal payments made by Takeout Borrower) for the immediately preceding three (3) months shall fall below 1.70:1.00; or (B) if at any time the Project Yield (as determined by Agent) for the immediately preceding three (3) months shall fall below 15%. (k) Release of Pool 3 Properties and DIP Properties. Upon the funding of the Takeout Loan, Agent shall release the Mortgages encumbering the Pool 3 Properties and the DIP Properties, upon which event the Pool 3 Properties shall no longer be deemed to be part of the Project. (l) Secured Bondholders. Concurrently with the funding of the Takeout Loan, ALC may encumber or cause to be encumbered properties of ALC or its direct or indirect subsidiaries that are not then encumbered (collectively, the "BONDHOLDER PROPERTIES") in favor of one or more trustees to be determined (collectively, the "TRUSTEE") for the benefit of the holders (the "BONDHOLDERS") of the senior and junior notes of ALC described in the Reorganization Plan. ALC and Takeout Borrower acknowledge and agree that the Bondholder Properties shall have an aggregate Property Value of no more than $75,000,000.00. The "PROPERTY VALUE" of a Bondholder Property shall mean the greater of (A) the product of 6.50 multiplied by the EBITDA of such Bondholder Property over the six (6) months immediately preceding the Maturity Date multiplied by two (2), and (B) $10,000.00 per unit. The "EBITDA" of a Bondholder Property shall have the meaning set forth on Exhibit B attached hereto. Provided that the aggregate Property Value of all of -8- the then-unencumbered properties of ALC and its direct and indirect subsidiaries is less than $75,000,000 (such difference being referred to as the "DEFICIENCY"), the Trustee, for the benefit of the Bondholders, may take a second mortgage (collectively, the "JUNIOR MORTGAGES"), to secure the obligations of ALC and certain of its Affiliates under the notes held by the Bondholders, encumbering the Properties; provided, however, such Junior Mortgages shall be in an aggregate amount not greater than the Deficiency and shall be subordinated to the Mortgages on such Properties pursuant to a "flat-on-your-back" subordination agreement acceptable to Agent in its sole discretion. The Property Value of a Property shall be calculated in the same manner as that of a Bondholder Property, less the then outstanding principal balance of the amount of the Takeout Loan previously allocated by Agent to such Property. (m) Other Terms. Unless explicitly provided to the contrary in this Amendment, all of the provisions of the Loan Agreement shall apply to the Takeout Loan. 3. ACKNOWLEDGMENT AND AGREEMENT OF BORROWER AND ALC. Borrower and ALC hereby acknowledge and agree that: (a) Neither ALC nor Borrower has any defense, offset or counterclaim with respect to the payment of any sum owed to Lenders, or with respect to the performance or observance of any warranty or covenant contained in any of the other Loan Documents; and (b) Lenders have performed all obligations and duties owed to Borrower through the date hereof. In consideration of the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of Borrower and ALC, for itself and on behalf of all present and former officers, directors, stockholders, agents, employees, predecessors, subsidiaries, affiliates, successors and assigns (all of the foregoing hereafter collectively referred to as "RELEASORS") have fully and forever remised, released and discharged and do hereby fully and forever remise, release and discharge Agent and Lenders, and each and all of their respective subsidiaries and affiliated corporations, companies, divisions, predecessors, successors and assigns, and each and all of their respective directors, officers, employees, attorneys, accountants, consultants, and other agents, of and from all manner of actions, cause and causes of action, suits, debts, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, judgments, executions, claims and demands of whatsoever, whether or not concealed or hidden, arising out of or relating to any matter, cause or thing whatsoever, which the Releasors, jointly or severally, have had, may have had, or now have, or which the Releasors, jointly or severally, hereafter can, shall or may have, for or by reason of any matter, cause or thing whatsoever, whenever arising, to and including the date of this Amendment. 4. REPRESENTATIONS AND WARRANTIES. To induce Lenders to amend the Loan Documents, Borrower and ALC represent and warrant to Lender that: (a) Representations and Warranties. On the date hereof, the representations and warranties set forth in the Loan Documents are true and correct with the same effect as through such representations and warranties had been made on the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date, or, in the case of ALC or Carriage House, to the extent such representations and -9- warranties are rendered untrue as a result of, or in connection with, the Bankruptcy Case (as defined in the DIP Loan Agreement). (b) Authority. Subject to any required approval by the Bankruptcy Court (as defined in the DIP Loan Agreement), Borrower and ALC have full power and authority to consummate this Amendment, and have full power and authority to incur and perform the obligations provided for under this Amendment, all of which have been duly authorized by all proper and necessary corporate action. No consent or approval of shareholders or of any public authority or regulatory body (other than the Bankruptcy Court) which has not been obtained is required as a condition to the validity or enforceability of this Amendment. (c) Amendment as Binding Agreement. This Amendment constitutes the valid and legally binding obligation of Borrower and ALC respectively, fully enforceable against Borrower and ALC respectively, in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditor's rights generally or by equitable principles relating to enforceability. (d) No Conflicting Agreements. The execution and performance by Borrower and ALC of this Amendment, will not (i) to the best of Borrower's and ALC's knowledge, violate any provision of law or any order of any court or other agency of government; or (ii) violate the Incorporation Documents or any material indenture, contract, agreement or other instrument to which Borrower or ALC is a party, or by which any of their respective property is bound, or be in conflict with, result in a breach of or constitute (with due notice and or lapse of time) a default under, any such material indenture, contract, agreement or other instrument; or (iii) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Borrower or ALC, other than in favor of Lenders. (e) Solvency; No Change. No Borrower is insolvent, and there has been no (i) assignment for the benefit of creditors of any of them, (ii) appointment of a receiver for any of them or their property, or (iii) bankruptcy, reorganization, or liquidation proceeding instituted by or against any of them. Since the filing with the Securities Exchange Commission of ALC's 10-Q Report for the three months ended March 31, 2001, there has been no material adverse change in the structure, business operations, credit prospects or financial condition of Borrower or the Project, except for the filing of the Bankruptcy Case. 5. EFFECTIVENESS OF THIS AMENDMENT. In the event of any conflict between the terms of any Loan Document and this Amendment, this Amendment shall prevail. 6. EFFECT ON LOAN DOCUMENTS. Except as specifically amended hereby, the terms and provisions of the Loan Documents are in all other respects ratified and confirmed and remain in full force and effect. No reference to this Amendment need be made in any notice, writing or other communication relating to the Loan Documents, any -10- reference to a Loan Document shall be deemed to be a reference thereto as amended by this Amendment. 7. FEES AND EXPENSES. Borrower hereby agrees to pay all reasonable expenses incurred by Agent and/or Lenders in connection with the preparation, negotiation and consummation of this Amendment (including without limitation, the funding of the Pool 2 Properties and the Takeout Loan), and all other documents related hereto, including, without limitation, the reasonable fees and expenses of Agent and/or Lenders' counsel and paralegals, and any filing fees, title insurance premiums, and recordation tax required in connection with the filing of any documents necessary to consummate the provisions of this Amendment (including without limitation, the funding of the Pool 2 Properties and the Takeout Loan). Without limiting the foregoing in any way, in the event that the amount of closing costs in connection with this Amendment exceeds amounts paid through proceeds of the Loan pursuant to Section 1(d) above, Borrower shall promptly pay such excess to Agent upon demand therefor by Agent. 8. NO CUSTOM. This Agreement shall not establish a custom or course of dealing or waive, limit or condition the rights and remedies of Agent and/or Lenders under the Loan Documents, all of which are expressly reserved. 9. GOVERNING LAW. This Amendment shall be construed in accordance with and governed by the laws of the State of Illinois, without regard to the conflict of laws principles thereof. 10. COUNTERPARTS. This Amendment may be executed in any number of counterparts, each of which shall be deemed original and all of which taken together shall constitute one and the same Amendment. 11. SEVERABILITY. If any provision of this Amendment or the application thereof to any party or circumstance is held to be invalid or unenforceable, the remainder of this Amendment and the application of such provision to other parties and circumstances will not be affected thereby, the provisions of this Amendment being severable in any such instance. 12. MODIFICATIONS. This Amendment may not be modified, amended, waived, changed or terminated orally, but only by an agreement in writing signed by the party against whom the enforcement of the modification, amendment, waiver, change or termination is sought. 13. PRINCIPAL'S AGREEMENTS. In connection with the Loan, ALC has made, executed and delivered to Agent that certain Guaranty dated February 20, 2001 and that certain Hazardous Materials Indemnity Agreement dated February 20, 2001 (as amended, collectively, the "PRINCIPAL'S AGREEMENTS"). ALC expressly reaffirms and ratifies its continuing obligations made under all of the Principal's Agreements. All of the waivers set forth in the Principal's Agreements are hereby incorporated herein by reference. -11- [SIGNATURES APPEAR ON NEXT PAGE] -------------------------------- -12- IN WITNESS WHEREOF, the parties hereto have executed this Amendment or have caused the same to be executed by their duly authorized representatives as of the date first above written. BORROWER: ALC OHIO, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC PENNSYLVANIA, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC IOWA, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC NEBRASKA, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC NEW JERSEY, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC INDIANA, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC: ASSISTED LIVING CONCEPTS, INC., a Nevada corporation and Chapter 11 debtor-in-possession By:____________________________________________ Sandra Campbell, Senior Vice-President, General Counsel and Secretary AGENT AND LENDER: HELLER HEALTHCARE FINANCE, INC., a Delaware corporation, as Agent and a Lender By:____________________________________________ Name:__________________________________________ Its:___________________________________________ EXHIBIT A REORGANIZATION PLAN DOCUMENTS 1. Description of Senior Notes (most recent draft of the exhibit to the disclosure statement received by Agent) 2. Description of Junior Notes (most recent draft of the exhibit to the disclosure statement received by Agent) 3. Term Sheet (most recent draft of the exhibit to the Plan Support Agreement received by Agent) 4. To the extent not inconsistent with the foregoing items 1-3, Article III of the Joint Plan of Reorganization dated as of October 1, 2001 and received by Agent October 2, 2001 EXHIBIT B CALCULATION OF EBITDA "EBITDA" for any period for a particular assisted living facility means the net income (as calculated in accordance with generally accepted accounting principles consistently applied) for such period attributable to that facility of the entity owning such facility plus the following to the extent deducted in calculating such net income: (1) income tax expense; (2) the consolidated interest expense of the entity that owns such facility or, if such entity owns more than one facility or has subsidiaries or other assets, the proportion of consolidated interest expense equal to the proportion of the fair market value of the assets of such entity represented by such facility; (3) depreciation expense related to such facility; (4) amortization expense related to such facility; and (5) any management fee paid with respect to such facility to ALC or any wholly owned subsidiary of ALC. EX-10.4 6 v76886ex10-4.txt EXHIBIT 10.4 EXHIBIT 10.4 LOAN NO. 21-139 STOCK PLEDGE AGREEMENT (SECURITY AGREEMENT) This STOCK PLEDGE AGREEMENT (SECURITY AGREEMENT) is made as of the 3rd day of October, 2001 by ASSISTED LIVING CONCEPTS, INC., a Nevada corporation and Chapter 11 debtor-in-possession ("GRANTOR"), to and in favor of HELLER HEALTHCARE FINANCE, INC., a Delaware corporation ("LENDER"). RECITALS A. Grantor and Carriage House Assisted Living, Inc., a Delaware corporation and Chapter 11 debtor-in-possession (together with Grantor, "BORROWER") and Lender have entered into a Loan Agreement of even date herewith (said Loan Agreement as amended from time to time, the "LOAN AGREEMENT"). All capitalized terms herein shall have the meanings ascribed to them in the Loan Agreement unless otherwise defined in this Pledge. B. Pursuant to the Loan Agreement, Lender agreed, subject to the terms and conditions contained therein, to make the Loan to Borrower as evidenced by the Notes. C. Grantor is the legal and beneficial owner of all of the issued and outstanding capital stock (the "STOCK") of each of the Subsidiaries (all of such entities are collectively referred to as the "CORPORATE SUBSIDIARIES"). D. As a condition precedent to Lender's making the Loan, Lender has further required that Grantor execute and deliver this Pledge to Lender, to secure the prompt and complete performance all of the obligations and payment of all of the indebtedness under the Loan Documents and the Subsidiary Loan Documents (all such obligations and indebtedness are hereinafter referred to collectively as the "LIABILITIES"). NOW, THEREFORE, in consideration of the mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINED TERMS. As used in this Pledge, the following terms shall have the following meanings: "PLEDGE" shall mean this Stock Pledge Agreement (Security Agreement), as the same may from time to time be amended or supplemented. "CODE" shall mean the Uniform Commercial Code as the same may from time to time be in effect in the State of Illinois. "FORMATION AGREEMENT" shall mean, collectively, each of the following as they have been and may hereafter be amended from time to time in accordance with the terms of this Pledge: (i) Certificate and Articles of Incorporation of each Corporate Subsidiary; and (ii) Bylaws of each Corporate Subsidiary. "PROCEEDS" shall mean "proceeds", as such term is defined in the Code and, in any event, shall include, but not be limited to, (a) any and all payments (in any form whatsoever) made or due and payable to Grantor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Collateral by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority), (b) any and all amounts paid or payable to Grantor for or in connection with any sale or other disposition of Grantor's interests in the Corporate Subsidiaries and (c) any and all other amounts from time to time paid or payable under or in connection with any of the Pledged Collateral. 2. GRANT OF SECURITY INTEREST. As security for the prompt and complete payment and performance when due of the Liabilities, Grantor hereby pledges, assigns, hypothecates, transfers, delivers and grants to Lender a security interest in (a) all of the Stock of the Corporate Subsidiaries now or at any time hereafter owned by Grantor and all options, warrants and other rights to purchase Stock of the Corporate Subsidiaries now or hereafter held by Grantor together with the Stock of the Corporate Subsidiaries underlying such options, warrants and other rights (collectively, the "PLEDGED SHARES"), (b) all other property hereafter delivered to Grantor in substitution for or in addition to the Pledged Shares, (c) any other property of Grantor described in Section 4 below now or hereafter delivered to, or in the possession or custody of, Lender and (d) any and all Proceeds of any of the foregoing (all of which being herein collectively called the "PLEDGED COLLATERAL"). All certificates or instruments representing or evidencing the Pledged Shares shall be delivered to and held by or on behalf of Lender pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed undated instruments of transfer or assignment in blank, all in form and substance satisfactory to Lender. Lender shall maintain possession and custody of the certificates representing the Pledged Shares in accordance with Section 5 below. 3. REPRESENTATIONS AND WARRANTIES. Grantor represents and warrants to Lender that: (a) Exhibit A hereto sets forth (i) the authorized capital stock of the Corporate Subsidiaries (ii) the number of shares of capital stock of the Corporate Subsidiaries that are issued and outstanding as of the date hereof, (iii) the number of shares of capital stock of the Corporate Subsidiaries that are held in its treasury and (iv) the percentage of the issued and outstanding shares of capital stock of the Corporate Subsidiaries held by Grantor. Grantor is the record and beneficial owner of, and has good and marketable title to, the Pledged Shares, and such shares are and will remain free and clear of all pledges, liens, security interests and other encumbrances and restrictions whatsoever, except the liens and security interests created by this Pledge; (b) there are no outstanding options, warrants or other agreements with respect to the Pledged Shares; -2- (c) the Pledged Shares have been duly and validly authorized and issued, are fully paid and non-assessable, and represent all of the issued and outstanding shares of capital stock of the Corporate Subsidiaries; (d) No security agreement, financing statement, assignment, equivalent security or lien instrument or continuation statement covering all or any part of the Pledged Collateral is on file or of record in any public office or at the records of the Corporate Subsidiaries, except financing statements with respect to the Pledged Collateral filed by Lender pursuant to this Pledge. (e) Upon the filing of all appropriate financing statements under the applicable Uniform Commercial Code and provided that Lender remains in continuous possession of the Pledged Shares, all steps necessary to create and perfect the security interest created by this Pledge as a valid and continuing first lien on and first perfected security interest in the Pledged Collateral in favor of Lender, prior to all other liens, security interests and other claims of any sort whatsoever will have been taken. This Pledge and the security interest created hereby are enforceable as such against creditors of and purchasers from Grantor. (f) Grantor has not changed its name, or used, adopted or discontinued the use of any trade name, fictitious name or other trade name or trade style. (g) Subject to the approval of the Bankruptcy Court, Grantor has all power, statutory and otherwise, to execute and deliver this Pledge, perform its obligations hereunder and subject the Pledged Collateral to the security interest created hereby; all of which has been duly authorized by all necessary action. (h) No amendments or supplements have been made to the Formation Agreement since it was originally entered into; such Formation Agreement remains in effect; and no party to the Formation Agreement is presently in default thereunder. (i) Grantor has the right to transfer all or any part of the Pledged Collateral free of any lien or encumbrance. (j) No authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body (other than the Bankruptcy Court) is required either (i) for Grantor's granting of a security interest in the Pledged Collateral pursuant to this Pledge or for the execution, delivery or performance of this Pledge by Grantor or (ii) for the exercise by Lender of the rights provided for in this Pledge or the remedies in respect of the Pledged Collateral pursuant to this Pledge (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally). (k) Grantor is a Nevada corporation with its principal place of business at 11835 NE Glenn Widing Drive, Building E, Portland, Oregon. -3- (l) As of the date hereof, Grantor has delivered to Lender all original certificates, instruments or other documents evidencing any of the Pledged Collateral. 4. COVENANTS. Grantor covenants and agrees that from and after the date of this Pledge and until the Liabilities are fully satisfied: (a) Further Documentation; Pledge of Instruments. At any time and from time to time, upon the written request of Lender, and at the sole expense of Grantor, Grantor will promptly and duly execute and deliver any and all such further instruments and documents and take such further actions as Lender may reasonably deem necessary or desirable to obtain the full benefits of this Pledge and of the rights and powers herein granted, including, without limitation, the execution and filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the security interest granted hereby and, if otherwise required hereunder, transferring Pledged Collateral to the possession of Lender (if a security interest in such Pledged Collateral can be perfected by possession). Grantor also hereby authorizes Lender to file any such financing or continuation statement without the signature of Grantor to the extent otherwise permitted by applicable law. If any amount payable under or in connection with any of the Pledged Collateral shall be or become evidenced by any promissory note, certificate, or other instrument (other than an instrument which constitutes chattel paper under the Code), such note or instrument shall be immediately pledged hereunder and a security interest therein hereby granted to Lender and shall be duly endorsed in a manner satisfactory to Lender delivered to Lender. If at any time Grantor's right or interest in any of the Pledged Collateral becomes an interest in real property, Grantor immediately shall execute, acknowledge and deliver to Lender such further documents as Lender deems necessary or advisable to create a first priority perfected mortgage lien in favor of Lender in such real property interest. (b) Priority of Liens. Grantor will defend the right, title and interest hereunder of Lender, as a first priority security interest in the Pledged Collateral, against the claims and demands of all persons whomsoever. (c) Notices. Grantor will advise Lender promptly, in reasonable detail, (i) of any lien, security interest, encumbrance or claim made or asserted against any of the Pledged Collateral, (ii) of any distribution of cash or other property by the Corporate Subsidiaries, whether in complete or partial liquidation or otherwise and of any other change in the composition of the Pledged Collateral, Grantor or the Corporate Subsidiaries, and (iii) of the occurrence of any other event which would have a material adverse effect on the aggregate value of the Pledged Collateral or on the security interest created hereunder, including the priority thereof. (d) Continuous Perfection. Grantor will not change its name in any manner which might make any financing or continuation statement filed hereunder seriously misleading within the meaning of Section 9-402(7) of the Code (or any other then-applicable provision of the Code) unless Grantor shall have given Lender at least thirty (30) days prior written notice thereof and shall have taken all action (or made arrangements to take such -4- action substantially simultaneously with such change if it is impossible to take such action in advance) necessary or reasonably requested by Lender to amend such financing statement or continuation statement so that it is not seriously misleading. Grantor will not sign or authorize the signing on their behalf of any financing statement naming Grantor as a debtor covering all or any portion of the Pledged Collateral, except financing statements naming Lender as secured party. (e) Place of Business. Grantor will not change its principal place of business unless it has previously notified Lender thereof and taken such action as is necessary or reasonably requested by Lender to cause the security interest of Lender in the Pledged Collateral to continue to be perfected. (f) Transfer of Assets. Grantor will not directly or indirectly sell, pledge, mortgage, assign, transfer, or otherwise dispose of or create or suffer to be created any lien, security interest, charging order, or encumbrance on any of the Pledged Collateral or the assets of the Corporate Subsidiaries. (g) Performance of Obligations. Grantor will perform all of its obligations under the Formation Agreement prior to the time that any interest or penalty would attach against Grantor or any of the Pledged Collateral as a result of failure to perform any of such obligations, and Grantor will do all things necessary to maintain each of the Corporate Subsidiaries as a corporation under the laws of the jurisdiction of organization and to maintain Grantor's interest in the Corporate Subsidiaries in full force and effect without diminution. (h) Formation Agreement. Grantor will not (i) suffer or permit any amendment or modification of the Formation Agreement without the prior written consent of Agent, (ii) sell, transfer, encumber or convey any of its interest in the Corporate Subsidiaries or (iii) waive, release, or compromise any rights or claims Grantor may have against any other party with respect to the Corporate Subsidiaries which arise under the Formation Agreement. Grantor will not vote under the Formation Agreement to cause the Corporate Subsidiaries to dissolve, liquidate, merge or consolidate with any other entity or take any other action under the Formation Agreement that would adversely affect the security interest created by this Agreement, including, without limitation, the value or priority thereof. Grantor will not permit, suffer or otherwise consent to the modification or redemption of any Stock in the Corporate Subsidiaries or the issuance of any new or additional Stock in the Corporate Subsidiaries or options or other agreements granting any right to receive Stock in the Corporate Subsidiaries. (i) Stay or Extension Laws. Grantor will not at any time claim, take, insist upon or invoke the benefit or advantage of or from any law now or hereafter in force providing for the valuation or appraisement of the Pledged Collateral prior to any sale or sales thereof to be made pursuant to the provisions hereof or pursuant to the decree, judgment, or order of any court of competent jurisdiction; nor, after such sale or sales, claim or exercise any right under any statute now or hereafter made or enacted by any state to redeem the property so sold or any part thereof, and Grantor hereby expressly waives, on -5- behalf of itself and each and every person claiming by, through and under it, all benefit and advantage of any such law or laws, and covenants that Grantor will not invoke or utilize any such law or laws or otherwise hinder, delay or impede the execution of any power, right or remedy herein or hereby granted and delegated to Lender, but will authorize, allow and permit the execution of every such power, right or remedy as though no such law or laws had been made or enacted. (j) Delivery of Certificates. Grantor agrees (i) immediately to deliver to Lender, or Lender's designee, all certificates, instruments or other documents evidencing any of the Pledged Collateral which may at any time come into the possession of Grantor, together with any executed undated instruments of transfer or assignments in blank with respect thereto, and (ii) to execute and deliver a notice of the security interest of Lender in the Pledged Collateral (which notice shall be satisfactory to Lender in form and substance and which may request acknowledgment from the addressee) to any third party which either has possession of the Pledged Collateral or any certificates evidencing any of the Pledged Collateral or otherwise has the ability under applicable law or the terms of any agreement to record transfers or transfer ownership of any of the Pledged Collateral (whether at the direction of Grantor or otherwise). Grantor hereby appoints Lender as Grantor's attorney-in-fact, with authority at any time or times to take any of the foregoing actions on behalf of Grantor. Grantor agrees that this Pledge or a photocopy of this Pledge shall be sufficient as a financing statement. (k) Corporate Subsidiaries' Records. Grantor shall cause the Corporate Subsidiaries to make a notation on the records of the Corporate Subsidiaries indicating the security interest granted hereby. (l) Certificated Securities. Grantor shall, and shall permit Lender to, promptly take all action necessary or appropriate to cause Lender to have sole and exclusive "control" over the Pledged Collateral, as such term is defined in Article 9 of the UCC. 5. GRANTOR'S POWERS. (a) So long as an Event of Default does not exist, Grantor shall be the sole party entitled (i) to exercise for any purpose any and all (A) voting rights and (B) powers, and (ii) to receive any and all distributions, in each case arising from or relating to the Pledged Collateral; provided, however, that Grantor shall not exercise such rights or powers, or consent to any action of the Corporate Subsidiaries that would be in contravention of the provisions of, or constitute an Event of Default under, this Pledge or any of the other Loan Documents. (b) Upon the occurrence of an Event of Default, unless Lender designates in writing to Grantor to the contrary, all rights of Grantor provided in Section 5(a) hereof shall cease, and all voting rights and powers and rights to distributions included in the Pledged Collateral or otherwise described in such Section 5(a) shall thereupon become vested in Lender, and Lender shall thereafter have the sole and exclusive right and authority to exercise such voting rights and powers. Grantor shall execute such documents and instruments, including but not limited to, statements that Grantor no longer has the right to -6- act as a shareholder of the Corporate Subsidiaries or otherwise relating to such change as Lender may request. Grantor hereby grants to Lender or its nominee an irrevocable proxy to exercise all voting and corporate rights relating to the Pledged Shares in any instance, which proxy shall be effective, at the discretion of Lender, upon the occurrence and during the continuance of an Event of Default. After the occurrence and during the continuance of an Event of Default and upon request of Lender, Grantor agrees to deliver to Lender such further evidence of such irrevocable proxy or such further irrevocable proxies to vote the Pledged Shares as Lender may request. Grantor agrees that the Corporate Subsidiaries may rely conclusively upon any notice from Lender that Lender has the right and authority to exercise all rights and powers of Grantor under the Formation Agreement. Grantor irrevocably waives any claim or cause of action against the Corporate Subsidiaries following receipt of such notice from Lender. 6. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. (a) Grantor hereby irrevocably constitutes and appoints Lender and each officer or agent of Lender with full power of substitution, as Grantor's true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Grantor and in the name of Grantor or in such attorney-in-fact's own name, from time to time in the discretion of each such attorney-in-fact following the occurrence and during the continuance of an Event of Default, for the purpose of carrying out the terms of this Pledge, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Pledge and, without limiting the generality of the foregoing, hereby gives each such attorney-in-fact the power and right, during the continuance of an Event of Default, on behalf of Grantor, without notice to or assent by Grantor, to do the following: (i) to collect and otherwise take possession of and title to any and all distributions of cash or other property due or distributable at any time after the date hereof to Grantor as a shareholder of the Corporate Subsidiaries, whether in complete or partial liquidation or otherwise, and to prosecute or defend any action or proceeding in any court of law or equity and to convert any non-cash distributions to cash, and to apply any such cash distributions, interest or proceeds of conversion in the manner specified in Section 10(d) of this Pledge; (ii) to ask, demand, collect, receive and give acceptances and receipts for any and all moneys due and to become due under any Pledged Collateral and, in the name of Grantor or such attorney-in-fact's own name or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Pledged Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by such attorney-in-fact for the purpose of collecting any and all such moneys due under any Pledged Collateral whenever payable; -7- (iii) to pay or discharge taxes, liens, security interests or other encumbrances levied or placed on or threatened against the Pledged Collateral; and (iv) (A) to direct any party liable for any payment under any of the Pledged Collateral to make payment of any and all moneys due and to become due thereunder directly to Lender or as such attorney-in-fact shall direct; (B) to receive payment of and receipt for any and all moneys, claims and other amounts due and to become due at any time in respect of or arising out of any Pledged Collateral; (C) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Pledged Collateral or any portion thereof and to enforce any other right in respect of any Pledged Collateral; (D) to defend any suit, action or proceeding brought against Grantor with respect to any Pledged Collateral; (E) to settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, to give such discharges or releases as such attorney-in-fact may deem appropriate; and (F) generally to sell, transfer, pledge, exercise any rights or options granted to the owner of, make any agreement with respect to or otherwise deal with any of the Pledged Collateral as fully and completely as though such attorney-in fact were the absolute owner thereof for all purposes, and to do, at the option of such attorney-in-fact at Grantor's expense, at any time, or from time to time, all acts and things which such attorney-in-fact reasonably deems necessary to protect, preserve or realize upon the Pledged Collateral and the security interest of Lender therein, in order to effect the intent of this Pledge, all as fully and effectively as Grantor might do. Grantor hereby ratifies, to the extent permitted by law, all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) The powers conferred on each attorney-in-fact hereunder are solely to protect the interest in the Pledged Collateral of Lender, and shall not impose any duty upon any such attorney-in-fact to exercise any such powers. Each such attorney-in-fact shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to Grantor for any act or failure to act unless such action or failure to act constitutes gross negligence or willful misconduct. (c) Grantor also authorizes Lender and each officer or agent of Lender at any time and from time to time during the continuance of any Event of Default, to execute, in connection with the sale provided for in Section 10 of this Pledge, any endorsements, assignments or other instruments of conveyance or transfer with respect to any of the Pledged Collateral. -8- 7. DISTRIBUTIONS. During the continuance of an Event of Default, Grantor hereby grants Lender full irrevocable power and authority to receive and hold at any such time cash and non-cash distributions by the Corporate Subsidiaries on account of any of the Pledged Collateral (together with all interest, if any, earned thereon), which may be held free and clear of the liens created hereby, and to convert any such non-cash distributions to cash, and to apply any such cash distributions, interest or proceeds of conversion in the manner specified in Section 10(d) of this Pledge. 8. PERFORMANCE BY LENDER OF GRANTOR'S OBLIGATIONS. If Grantor fails to perform or comply with any of their agreements contained herein and Lender as provided for by the terms of this Pledge shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of Lender incurred in connection with such performance or compliance, together with interest thereon at the rate following a default specified in the Notes in effect from time to time shall be payable by Grantor to Lender on demand and shall constitute Liabilities secured hereby. 9. DEFAULT. Any of the following shall constitute an "EVENT OF DEFAULT" hereunder: (a) A failure by Grantor to observe or perform any obligation, covenant, condition, or agreement hereof to be performed by Grantor which involves the payment of money for a period of five (5) days after written demand from Lender; (b) A failure by the Corporate Subsidiaries or Grantor to observe or perform any nonmonetary obligation, covenant, condition, or agreement hereof to be performed by Grantor (which is not otherwise included in Section 9(a), (c), or (d)) which is not cured within thirty (30) days after written notice thereof to Grantor; (c) Any representation or warranty made by Grantor in this Pledge is not true and correct in any material respect; or (d) The occurrence of any "Event of Default" under any of the Loan Documents. 10. REMEDIES, RIGHTS UPON DEFAULT. (a) If any Event of Default shall occur, Lender or Lender's designee may exercise in addition to all other rights and remedies granted to them in this Pledge and in any other instrument or agreement securing, evidencing or relating to the Liabilities, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, Grantor expressly agrees that in any such event Lender, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon Grantor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive, appropriate and realize upon the Pledged Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase, or sell or otherwise dispose of and deliver said Pledged Collateral (or contract to do so), or any -9- part thereof, at public or private sale or sales, at any exchange or broker's board or at any of Lender's offices or elsewhere at such prices as it may deem best, for cash or on credit or for future delivery without the assumption of any credit risk. Grantor expressly acknowledges that private sales may be less favorable to a seller than public sales but that private sales shall nevertheless be deemed commercially reasonable and otherwise permitted hereunder. In view of the fact that federal and state securities laws and/or other applicable laws may impose certain restrictions on the method by which a sale of the Pledged Collateral may be effected, Grantor agrees that during the continuance of an Event of Default, Lender may, from time to time, attempt to sell all or any part of the Pledged Collateral by means of a private placement, restricting the prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution and who otherwise satisfy all of the requirements of applicable federal and state securities laws. In so doing, Lender may solicit offers to buy the Pledged Collateral, or any part thereof, for cash, from a limited number of investors deemed by Lender in its judgment, to be financially responsible parties who might be interested in purchasing the Pledged Collateral, and if Lender solicits such offers, then the acceptance by Lender of the highest offer obtained therefrom shall be deemed to be a commercially reasonable method of disposing of the Pledged Collateral. Lender or Lender's designee shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of said Pledged Collateral so sold, free of any right or equity of redemption, which equity of redemption Grantor hereby releases. Grantor further agrees, at the request of Lender, to deliver to Lender or any purchaser or purchasers of the Pledged Collateral any agreements, instruments and other documents evidencing or relating to the Pledged Collateral. Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale as provided in Section 10(d) of this Pledge. Only after so applying such net proceeds and after the payment by Lender of any other amount required by any provision of law, including Section 9-504(1)(c) of the Code, need Lender account for the surplus, if any, to Grantor. To the extent permitted by applicable law, Grantor waives all claims, damages, and demands against Lender arising out of the repossession, retention or sale of the Pledged Collateral. Grantor agrees that Lender need not give more than ten (10) days' notice (which notification shall be deemed given when mailed or delivered on an overnight basis, postage prepaid, addressed to Grantor at Grantor's addresses referred to in Section 12 hereof) of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. (b) Grantor also agrees to pay all costs of Lender, including reasonable attorneys' fees and expenses, incurred with respect to the collection of any of the Liabilities or the enforcement of any of Lender's rights hereunder. (c) Grantor hereby waives presentment, demand, or protest (to the extent permitted by applicable law) of any kind in connection with this Pledge or any Pledged Collateral. Except for notices expressly provided for herein, Grantor hereby waives notice (to the extent permitted by applicable law) of any kind in connection with this Pledge. -10- (d) The proceeds of any sale, disposition or other realization upon all or any part of the Pledged Collateral shall be distributed by Lender in the following order of priorities: first, to Lender in an amount sufficient to pay in full the expenses of Lender in connection with such sale, disposition or other realization, including all expenses, liabilities and advances incurred or made by Lender in connection therewith, including reasonable attorneys' fees and expenses; second, to Lender, until the other Liabilities are paid in full; and finally, upon payment in full of all of the Liabilities, to Grantor, or their representative or as a court of competent jurisdiction may direct. Grantor agrees to indemnify and hold harmless Lender, its directors, officers, employees, agents and parent, and subsidiary corporations, and each of them, from and against any and all liabilities, obligations, claims, damages, or expenses incurred by any of them arising out of or by reason of entering into this Pledge or the consummation of the transactions contemplated by this Pledge and to pay or reimburse Lender for the fees and disbursements of counsel incurred in connection with any investigation, litigation or other proceedings (whether or not Lender is a party thereto) arising out of or by reason of any of the aforesaid, except to the extent any such liability, obligation, claim, damage or expense results from the gross negligence or willful misconduct of such indemnified party. Any amounts properly due under this Section 10 shall be payable to Lender immediately upon demand. 11. LIMITATION ON LENDER'S DUTY IN RESPECT OF PLEDGED COLLATERAL. Except as expressly provided in the Code, Lender shall have no duty as to any Pledged Collateral in its possession or control or in the possession or control of any agent or nominee of Lender or as to any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. 12. NOTICES. Any notice or other communication required or permitted to be given shall be in writing addressed to the respective party as set forth below and may be personally served, telecopied or sent by overnight courier or U.S. Mail and shall be deemed given: (a) if served in person, when served; (b) if telecopied, on the date of transmission if before 3:00 p.m. (Chicago time) on a business day; provided, that a hard copy of such notice is also sent pursuant to clause (c) or (d) below; (c) if by overnight courier, on the first business day after delivery to the courier; or (d) if by U.S. Mail, on the fourth (4th) day after deposit in the mail, postage prepaid, certified mail, return receipt requested. -11- Notices to Grantor: Assisted Living Concepts, Inc., 11835 NE Glenn Widing Drive Building E Portland, Oregon 97220 Attn: Drew Miller and Sandra Campbell Telecopy: (503) 252-2916 with a copy to: Latham & Watkins 633 West Fifth Street Suite 400 Los Angeles, California 90071 Attn: Gary Olson Telecopy: (213) 891-8763 Notices to Lender: Heller Healthcare Finance, Inc. Loan No. 21-139 2 Wisconsin Circle Suite 400 Chevy Chase, Maryland 20815 Attn: Manager, Portfolio Administration Group Telecopy: (301) 664-9843 With a copy to: Heller Healthcare Finance, Inc. Loan No. 21-139 500 West Monroe Street Chicago, Illinois 60661 Attn: Kevin McMeen, Senior Vice President Telecopy: (312) 441-7119 And a copy to: Heller Healthcare Finance, Inc. Loan No. 21-139 816 Congress Avenue Suite 1900 Austin, Texas 78701 Attn: Diana Pennington, Vice President and Chief Counsel, Senior Living Group Telecopy: (512) 505-5487 Any party may change its respective address for the giving of notice to another address by giving at least 10 business days' notice of such change. 13. SEVERABILITY. Any provision of this Pledge which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. -12- 14. NO WAIVER; CUMULATIVE REMEDIES. Lender shall not, by any act, delay, omission or otherwise, be deemed to have waived any of its rights or remedies hereunder. No waiver hereunder shall be valid unless in writing signed by the party to be charged with such waiver and then only to the extent therein set forth. A waiver of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Lender would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of Lender any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder and under the other Loan Documents provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. Lender may resort to and realize on the Pledged Collateral simultaneously with any acts or proceedings initiated by Lender in its sole and conclusive discretion to resort to or realize upon any other sources of repayment of the Liabilities, including, but not limited to, collateral granted by other security agreements and the personal liability of Grantor and any person or corporation which has guaranteed repayment of the Liabilities. None of the terms or provisions of this Pledge may be waived, altered, modified or amended except by an instrument in writing, duly executed by Grantor and Lender. 15. SUCCESSORS AND ASSIGNS; GOVERNING LAW. This Pledge and all obligations of Grantor hereunder shall be binding upon the successors and assigns of Grantor, except that Grantor, unless otherwise expressly provided in the Loan Agreement and then only to the extent provided in the Loan Agreement and subject to any conditions set forth therein, shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of Lender. All rights and remedies of Lender hereunder shall inure to the benefit of Lender and its participants, successors and assigns. This Pledge shall be governed by, and be construed and interpreted in accordance with, the laws of the State of Illinois. Neither this Pledge nor anything set forth herein is intended to, nor shall it, confer any rights on any person or entity other than the parties hereto and all third party rights are expressly negated. 16. TERMINATION. This Pledge, and the assignments, pledges and security interests created or granted hereby, shall terminate when the Liabilities shall have been fully paid and satisfied, at which time Lender shall release and reassign (without recourse upon, or any warranty whatsoever by Lender), and deliver to Grantors all Pledged Collateral and related documents then in the custody or possession of Lender, including termination statements under the Code, all without recourse upon, or warranty whatsoever, by Lender and at the cost and expense of Grantor. 17. INJUNCTIVE RELIEF. Grantor recognizes that in the event Grantor fails to perform, observe or discharge any of Grantor's obligations hereunder, no remedy of law will provide adequate relief to Lender, and agree that Lender shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. -13- 18. WAIVER OF SUBROGATION. Grantor shall have no rights of subrogation as to any of the Pledged Collateral until full and complete performance and payment of the Liabilities. 19. WAIVER OF JURY TRIAL. GRANTOR AND LENDER, BY ITS ACCEPTANCE OF THIS PLEDGE, HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS PLEDGE AND THE BUSINESS RELATIONSHIP THAT IS BEING ESTABLISHED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY GRANTOR AND LENDER, AND GRANTOR ACKNOWLEDGES THAT NEITHER LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR HAS TAKEN ANY ACTIONS WHICH IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. GRANTOR AND LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH OF THEM HAS ALREADY RELIED ON THIS WAIVER IN ENTERING INTO THIS PLEDGE AND THAT EACH OF THEM WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. GRANTOR AND LENDER FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS PLEDGE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL. 20. CONSENT TO JURISDICTION. GRANTOR HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREE THAT, SUBJECT TO LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS. GRANTOR EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. GRANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE UPON GRANTOR BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, ADDRESSED TO GRANTOR, AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE SAME HAS BEEN POSTED. 21. SUBORDINATION AND RELEASE. All indebtedness now or hereafter owing by the Corporate Subsidiaries, to Grantor for borrowed money or otherwise is hereby subordinated to the payment in full of the Liabilities, and during the continuance of an Event of Default under this Pledge or any of the other Loan Documents, Grantor shall not accept payment of all or any portion of such subordinated indebtedness, and if any such payment is made to Grantor, Grantor shall receive such payment in trust for the benefit of Lender and shall promptly pay over such payment to Lender. -14- 22. LIABILITY OF GRANTOR NOT AFFECTED. This Pledge shall remain in full force and effect without regard to, and shall not be released, discharged or affected in any way by, any circumstances or condition, including, without limitation: (a) the attempt or the absence of any attempt by Lender to obtain payment or performance by Borrower or any other obligor under the Loan Documents (collectively, "OBLIGORS"); (b) Lender's delay in enforcing the Liabilities or the obligations of any other party under the Loan Documents, or any prior partial exercise by Lender of any right or remedy hereunder or under any of the other Loan Documents; (c) any renewal, extension, substitution, modification, replacement of or indulgence with respect to, any indebtedness, liabilities, or obligations under the Loan Documents (collectively, "BORROWER'S OBLIGATIONS"), all of which Lender is hereby authorized to make; (d) the fact that Borrower or any other Obligor may not be liable for the payment or performance of the Borrower's Obligations, or any portion thereof, for any reason whatsoever; (e) any sale, exchange, release, surrender or other disposition of, or realization upon, any collateral securing the Borrower's Obligations, or any settlement or compromise of any guaranties of the Borrower's Obligations, or any other obligation of any person or entity with respect to the Loan Documents; (f) the acceptance by Lender of any additional security for the Borrower's Obligations; (g) the failure by Lender to take any steps to perfect, maintain, or enforce its security interests or remedies under the Loan Documents, or to preserve their rights to or protect any security or collateral, for the Borrower's Obligations; (h) the lack of validity or enforceability of, or Lender's waiver or consent with respect to, any provision of any instrument evidencing, securing or otherwise relating to the Borrower's Obligations, or any part thereof; (i) any voluntary or involuntary bankruptcy, insolvency, reorganization, arrangement, readjustment, assignment for the benefit of creditors, composition, receivership, liquidation, marshaling of assets and liabilities or similar event or proceedings with respect to Borrower, Grantor or any other Obligor, as applicable, or any of their respective properties (each, an "INSOLVENCY PROCEEDING"), or any action taken by Lender, any trustee or receiver or by any court in any such proceeding; (j) the failure by Lender to file or enforce a claim against the estate (either in an Insolvency Proceeding or other proceeding) of Borrower, Grantor or any other Obligor; -15- (k) in any Insolvency Proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended (the "BANKRUPTCY CODE"): (i) any election by Lender under Section 1111(b)(2) of the Bankruptcy Code, (ii) any borrowing or grant of a security interest by Borrower or any other Obligor as debtor-in-possession under Section 364 of the Bankruptcy Code, (iii) the inability of Lender to enforce the Borrower's Obligations against Borrower or any other Obligor by application of the automatic stay provisions of Section 362 of the Bankruptcy Code, or (iv) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of Lender's claim(s) against Borrower or any other Obligor for repayment of the Borrower's Obligations; (l) the failure of Grantor to receive notice of any intended disposition of the collateral for the Borrower's Obligations; (m) any merger or consolidation of Borrower or any other Obligor into or with any other entity, or any sale, lease or transfer of any of the assets of Borrower, Grantor or any other Obligor to any other person or entity; (n) any change in the ownership of Borrower or any other Obligor or any change in the relationship between Borrower or any other Obligor and Grantor, or any termination of any such relationship; (o) the death, incapacity, insanity, disability, dissolution or other change in states of Borrower, Grantor or any other Obligor; (p) the absence, impairment or loss of any right of reimbursement or subrogation or other right or remedy of Grantor; and (q) the making of additional loans to Borrower or any other Obligor, the increase or reduction of the maximum principal amount of the Borrower's Obligations, the increase or reduction in the interest rate provided in the Notes, or any other modification, amendment, release or waiver of the terms of the Loan Documents; (r) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of Borrower, Grantor or any other Obligor. Grantor hereby expressly waives and surrenders any defense to its liability under this Pledge based upon any of the foregoing acts, omissions, agreements, waivers or matters, whether or not Grantor had notice or knowledge of same. It is the purpose and intent of this Pledge that the obligations of Grantor hereunder shall be absolute and unconditional under any and all circumstances. 23. RIGHTS OF LENDER. Lender is hereby authorized, without notice to or demand of Grantor and without affecting the liability of Grantor hereunder, to take any of the following actions from time to time: (a) increase or decrease the amount of, or renew, extend, accelerate or otherwise change the time for payment of, or other terms relating to, Borrower's Obligations, or otherwise modify, amend or change the terms of any promissory note or other agreement evidencing, securing or otherwise relating to any of Borrower's -16- Obligations, including, without limitation, the making of additional advances thereunder; (b) accept and apply any payments on or recoveries against Borrower's Obligations from any source, and any proceeds of any security therefor, to Borrower's Obligations in such manner, order and priority as Lender may elect in its sole discretion; (c) take, hold, sell, release or otherwise dispose of all or any security for Borrower's Obligations or the payment of this Pledge; (d) settle, release, compromise, collect or otherwise liquidate Borrower's Obligations or any portion thereof; (e) accept, hold, substitute, add or release any other Pledge or endorsements of Borrower's Obligations; and (f) upon the failure of Borrower to perform any of Borrower's Obligations, appropriate and apply toward payment of Borrower's Obligations (i) any indebtedness due or to become due from Lender to Grantor, and (ii) any moneys, credits, or other property belonging to Grantor at any time held by or coming into the possession of Lender or any affiliates thereof, whether for deposit or otherwise. 24. GRANTOR'S WAIVERS (a) STATUTES OF LIMITATION. Grantor irrevocably waives all statutes of limitation as a defense to any action or proceeding brought against Grantor by Lender, to the fullest extent permitted by law. (b) ELECTION OF REMEDIES. Grantor irrevocably waives any defense based upon an election of remedies made by Lender or any other election afforded to Lender pursuant to applicable law, including, without limitation, (i) any election to proceed by judicial or nonjudicial foreclosure or by Uniform Commercial Code sale or by deed or assignment in lieu thereof, or any election of remedies which destroys or otherwise impairs the subrogation rights of the Grantor or the rights of the Grantor to proceed against Borrower or any other Obligor for reimbursement, or both, (ii) the waiver by Lender, either by action or inaction of Lender or by operation of law, of a deficiency judgment against Borrower or any other Obligor, and (iii) any election pursuant to an Insolvency Proceeding. (c) DEMANDS AND NOTICES. Grantor irrevocably waives all presentments, demands for performance, protests, notices of protest, notices of dishonor, notices of acceptance of this Pledge and of the existence, creation or incurring of new or additional Borrower's Obligations, notices of defaults by Borrower or any other Obligor and demands and notices of every kind that may be required to be given by any statute or rule or law. (d) BORROWER INFORMATION. Grantor irrevocably waives (i) any duty of Lender to advise Grantor of any information known to Lender regarding the financial condition of Borrower or any other Obligor (it being the obligation of Grantor to keep informed regarding such condition) and (ii) any defense based on any claim that Grantor's obligations exceed or are more burdensome than those of Borrower or any other Obligor. (e) LIMITATION OF LIABILITY. Grantor irrevocably waives any impairment, modification, change, release or limitation of the liability of, or stay of actions or lien enforcement proceedings against, Borrower, Grantor or any other Obligor, their property, or their estate in bankruptcy, resulting from the operation of any provision of the state or federal bankruptcy laws, or from the decision of any court. -17- (f) LACK OF DILIGENCE. Grantor irrevocably waives any and all claims or defenses based upon lack of diligence in: (i) collection of any Borrower's Obligations; (ii) protection of any collateral or other security for the Borrower's Obligations; or (iii) realization upon the other Loan Documents. (g) OTHER DEFENSES. Grantor irrevocably waives any other defenses, set-offs or counterclaims which may be available to Borrower or any other Obligor, and any and all other defenses now or at any time hereafter available to Grantor (including without limitation those given to sureties) at law or in equity. -18- IN WITNESS WHEREOF, Grantor has executed this Stock Pledge Agreement (Security Agreement) or has caused the same to be executed by Grantor's duly authorized representative(s) as of the date first above written. GRANTOR: ASSISTED LIVING CONCEPTS, INC., a Nevada corporation and Chapter 11 debtor-in-possession By:_____________________________________________ Sandra Campbell, Senior Vice President, General Counsel and Secretary -19- ACKNOWLEDGEMENT The undersigned hereby (i) acknowledges receipt of a copy of the foregoing Stock Pledge Agreement, (ii) waives any rights or requirement at any time hereafter to receive a copy of such Stock Pledge Agreement in connection with the registration of any Pledged Shares (as defined therein) in the name of Lender or its nominee or the exercise of voting rights by Lender and (iii) agrees promptly to note on its books and records the grant of the security interest in the stock of the undersigned as provided in such Stock Pledge Agreement. Dated as of October 3, 2001 ALC OHIO, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC PENNSYLVANIA, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC IOWA, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC NEBRASKA, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary -20- ALC NEW JERSEY, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary ALC INDIANA, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary NEVADA ALC, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary TEXAS ALC, INC., a Nevada corporation By:______________________________________ Sandra Campbell, Secretary -21- EX-10.5 7 v76886ex10-5.txt EXHIBIT 10.5 EXHIBIT 10.5 October 22, 2001 VIA FACSIMILE TO (617) 310-9232 Rich Schwartz, Esq. Nutter, McClennen & Fish, LLP One International Place Boston, MA 02110-2699 Dear Rich: Pursuant to that certain Option Agreement, dated September 25, 2001, between T and F Properties, L.P. ("Seller") and Texas ALC Partners, L.P. ("Texas ALC"), Texas ALC hereby exercises its option to purchase the Property, subject to the terms and conditions of the Option Agreement. We understand that Jim Smith of Thompson Knight has provided you with a list of those exceptions to title which Texas ALC has not accepted as Permitted Exceptions, and you are working with your client on clearing title of those exceptions. Additionally, we understand you are working toward providing the other terminations/release documents that are provided for under the Option Agreement. We are diligently working with our lender, Heller, to close on Wednesday, October 24, 2001. There is a minor survey issue which needs to be cleared up, and I have asked today for an update of other conditions to be satisfied before Texas ALC will have "obtained funds" sufficient to purchase the Assets. We look forward to reporting to you when the conditions to close the purchase of the Assets have been satisfied and appreciate your cooperation in preparing for a close on Wednesday. Very truly yours, Sandra Campbell Senior Vice President and General Counsel SC:kem cc: James W. Smith, Esq. Wm. James Nicol Drew Miller Joe West, Esq. Dominic Yoong, Esq. EX-12 8 v76886ex12.txt EXHIBIT 12 EXHIBIT 12 RATIO OF EARNINGS TO FIXED CHARGES:
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------ ------------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2000 2001 2000 2001 ------------- ------------- ------------- ------------- (IN THOUSANDS) (IN THOUSANDS) Net loss ................................................ $(12,445) $ (7,333) $(20,057) $(16,142) Add fixed charges: Interest expense including amortization of debt issuance cost .................................... 4,128 5,303 12,246 14,610 -------- -------- -------- -------- Earnings (loss) ......................................... $ 8,317 $ 2,030 $ 7,811 $ 1,532 Fixed Charges Interest expense including amortization of debt issuance cost .................................... $ 4,128 $ 5,303 $ 12,246 $ 14,610 -------- -------- -------- -------- Total Fixed Charges ..................................... $ 4,128 $ 5,303 $ 12,246 $ 14,610 ======== ======== ======== ======== Ratio of Earnings to Fixed Charges ...................... -- -- -- -- ======== ======== ======== ======== Deficiency of Earnings to Cover Fixed Charges ........... $ 12,445 $ 7,333 $ 20,057 $ 16,142 ======== ======== ======== ========
-----END PRIVACY-ENHANCED MESSAGE-----


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2001

or

o		TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to .


Nevada		93-1148702
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


		Page

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements		4
	Consolidated Balance Sheets, December 31, 2000 and September 30, 2001		4
	Consolidated Statements of Operations, Three and Nine Months Ended September 30, 2000 and 2001		5
	Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2000 and 2001		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Risk Factors		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk and Risk Sensitive Instruments		30
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		31
Item 6.	Exhibits and Reports on Form 8-K		32
Signatures			33
Exhibit Index			34


			December 31,			September 30,
			2000			2001

						(Unaudited)
ASSETS
Current assets:
	Cash, cash equivalents and cash held for tenant security deposits		$	9,889		$	5,588
	Accounts receivable, net of allowance for doubtful accounts of $1,399 and $217, respectively			2,448			2,370
	Prepaid insurance			1,765			527
	Prepaid expenses			1,042			610
	Other current assets			2,729			4,295

		Total current assets		17,873			13,390

Restricted cash				6,466			8,030
Property and equipment, net				298,744			292,752
Goodwill, net				4,785			4,565
Other assets, net				8,590			10,179

		Total assets	$	336,458		$	328,916

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	2,708		$	1,519
	Accrued real estate taxes			4,835			4,843
	Accrued interest expense			1,937			453
	Accrued payroll expense			4,017			3,104
	Other accrued expenses			4,855			4,063
	Bridge loan payable			4,000			—
	Litigation settlement payable			7,765			—
	Tenant security deposits			2,484			2,470
	Other current liabilities			565			519
	Current portion of long-term debt and capital lease obligation			1,690			16,815

		Total current liabilities		34,856			33,786

Other liabilities				6,059			5,596
Liabilities subject to compromise				—			165,320
Long-term debt and capital lease obligation, net of current portion				70,407			76,470
Convertible subordinated debentures				161,250			—

		Total liabilities		272,572			281,172

Commitments and contingencies
Shareholders’ equity:
	Preferred Stock, $.01 par value; 1,000,000 shares authorized; none issued or outstanding			—			—
	Common Stock, $.01 par value; 80,000,000 shares authorized; issued and outstanding 17,120,745 shares in 2000 and 2001.			171			171
	Additional paid-in capital			144,212			144,212
	Accumulated deficit			(80,497	)		(96,639	)

		Total shareholders’ equity		63,886			47,744

		Total liabilities and shareholders’ equity	$	336,458		$	328,916



			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2000			2001			2000			2001

Revenue			$	35,308		$	38,009		$	102,586		$	112,257
Operating expenses:
	Residence operating expenses			24,049			26,140			69,036			76,589
	Corporate general and administrative			3,219			4,546			12,333			13,254
	Building rentals			3,702			4,111			11,032			12,432
	Building rentals to related party			318			—			952			—
	Depreciation and amortization			2,598			2,546			7,349			7,670
	Litigation settlement			10,020			—			10,020			—

		Total operating expenses		43,906			37,343			110,722			109,945

Operating income (loss)				(8,598	)		666			(8,136	)		2,312

Other income (expense):
	Interest expense			(4,128	)		(5,303	)		(12,246	)		(14,610	)
	Interest income			187			95			576			382
	Gain (loss) on sale and disposal of assets			—			—			13			(88	)
	Loss on sale of marketable securities			—			—			(368	)		—
	Other income (expense), net			94			14			104			33

		Total other expense		(3,847	)		(5,194	)		(11,921	)		(14,283	)

Net loss before reorganization costs				(12,445	)		(4,528	)		(20,057	)		(11,971	)

	Reorganization costs			—			2,805			—			4,171

Net loss			$	(12,445	)	$	(7,333	)	$	(20,057	)	$	(16,142	)

Basic and diluted net loss per common share			$	(0.73	)	$	(0.43	)	$	(1.17	)	$	(0.94	)

Basic and diluted weighted average common shares outstanding				17,121			17,121			17,121			17,121


	*Housing and Urban Development (“HUD”) Insured Financing*


	*Three months ended September 30, 2001 compared to three months ended September 30, 2000:*



			Three Months Ended September 30,												Three Months
															Ended
												Percentage			September 30,
									Increase/			Increase/
			2000			2001			Decrease			Decrease			2000			2001


			(In millions, except percentages)												(As percentage
															of revenue)
Revenue			$	35.3		$	38.0		$	2.7			7.6	%		100.0	%		100.0	%
Operating expenses:
	Residence operating expenses			24.1			26.1			2.0			8.3	%		68.1	%		68.7	%
	Corporate general and administrative			3.2			4.5			1.3			40.1	%		9.1	%		12.0	%
	Building rentals			4.0			4.1			.1			2.5	%		11.4	%		10.8	%
	Depreciation and amortization			2.6			2.6			—			—			7.4	%		6.7	%
	Litigation settlement			10.0			—			(10.0	)		(100.0	)%		28.4	%		—

		Total operating expenses		43.9			37.3			(6.6	)		(15.0	)%		124.4	%		98.2	%

Operating income				(8.6	)		0.7			6.5			75.6	%		(24.4	)%		1.8	%

Other income (expense):
	Interest expense			(4.1	)		(5.3	)		(1.2	)		(29.3	)%		(11.6	)%		(13.9	)%
	Interest income			0.2			0.1			(0.1	)		(50.0	)%		0.5	%		0.2	%
	Other income (expense), net			0.1			—			(0.1	)		100.0	%		0.3	%		—

		Total other expense		(3.8	)		(5.2	)		1.4			36.8	%		(10.7	)%		(13.7	)%

	Net loss before reorganization costs			(12.4	)		(4.5	)		(7.9	)		63.7	%		(35.3	)%		(12.0	)%

	Reorganization costs			—			2.8			2.8			100.0	%		—			7.4	%

Net loss			$	(12.4	)	$	(7.3	)	$	5.1			41.1	%		(35.3	)%		(19.3	)%

Other Data:
Residences operated (end of period)				185			185
Units operated (end of period)				7,149			7,149
Average occupancy rate (based on occupied units)				81.35	%		84.34	%
End of period occupancy rate (based on occupied units)				82.68	%		84.89	%
Average monthly rental rate			$	2,002		$	2,082
Sources of revenue:
	Medicaid state paid portion			11.3	%		12.4	%
	Medicaid resident paid portion			6.3			6.6
	Private resident paid portion			82.4			81.0

		Total		100.0	%		100.0	%


	*Nine months ended September 30, 2001 compared to nine months ended September 30, 2000:*



			Nine Months Ended September 30,												Nine Months
															Ended September
												Percentage			30,
									Increase/			Increase/
			2000			2001			Decrease			Decrease			2000			2001


			(In millions, except percentages)												(As percentage
															of revenue)
Revenue			$	102.6		$	112.3		$	9.7			9.5	%		100.0	%		100.0	%
Operating expenses:
	Residence operating expenses			69.0			76.6			7.6			11.0	%		67.3	%		68.2	%
	Corporate general and administrative			12.3			13.2			0.9			7.3	%		12.0	%		11.8	%
	Building rentals			12.0			12.4			0.4			3.3	%		11.7	%		11.1	%
	Depreciation and amortization			7.4			7.7			0.3			4.1	%		7.2	%		6.8	%
	Litigation settlement			10.0			—			(10.0	)		(100.0	)%		9.7	%		—

		Total operating expenses		110.7			109.9			9.2			(9.1	)%		107.9	%		97.9	%

Operating income				(8.1	)		2.4			10.5			129.6	%		(7.9	)%		2.1	%

Other income (expense):
	Interest expense			(12.3	)		(14.6	)		(2.3	)		(18.9	)%		(12.0	)%		(13.0	)%
	Interest income			0.6			0.4			(0.2	)		(33.0	)%		0.6	%		0.4	%
	Gain (loss) on sale and disposal of assets			—			(0.1	)		(0.1	)		(100.0	)%		—			(0.1	)%
	Loss on sale of marketable securities			(0.4	)		—			0.4			100.0	%		(0.4	)%		—
	Other income (expense), net			0.1			—			(0.1	)		(100.0	)%		0.1	%		—

		Total other expense		(12.0	)		(14.3	)		(2.3	)		(19.2	)%		(11.7	)%		(12.7	)%

	Net loss before reorganization costs			(20.1	)		(11.9	)		8.2			40.8	%		(19.6	)%		(10.6	)%

	Reorganization costs			—			4.2			4.2			100.0	%		—			3.7	%

Net loss			$	(20.1	)	$	(16.1	)	$	4.0			(19.9	)%		(19.6	)%		(14.3	)%

Other Data:
Residences operated (end of period)				185			185
Units operated (end of period)				7,149			7,149
Average occupancy rate (based on occupied units)				79.92	%		83.87	%
End of period occupancy rate (based on occupied units)				82.68	%		84.89	%
Average monthly rental rate			$	1,974		$	2,059
Sources of revenue:
	Medicaid state paid portion			10.9	%		12.4	%
	Medicaid resident paid portion			6.1			6.8
	Private resident paid portion			83.0			80.8

		Total		100.0	%		100.0	%


	*The commencement of Chapter 11 proceedings on October 1, 2001 may disrupt our operations.*


	*If we receive insufficient votes regarding the Prenegotiated Plan, we will seek confirmation of the Prenegotiated Plan under the cramdown provisions of the Bankruptcy Code.*


	*We are highly leveraged; our loan and lease agreements contain financial covenants.*


	*If an active trading market does not develop for our securities, stockholders may not be able to resell their securities.*


	*Increases in utility costs could reduce our profitability.*


	*Liabilities Subject to Compromise*


	*Reclassifications*


	*Equipment Financing*


	*Heller Financing*


	*We are involved in a dispute with our prior directors, officers and corporate liability insurance carrier.*


	*We may be liable for losses not covered by or in excess of our insurance.*


	*We may incur significant costs and liability as a result of medical waste.*


	*We could incur significant costs related to environmental remediation or compliance.*


	*We may not be able to attract and retain qualified employees and control labor costs.*


	*Our business relies heavily on certain markets and an economic downturn or changes in the laws affecting our business in those markets could have a material adverse effect on our results.*


	*We depend on reimbursement by governmental payors and other third parties for a significant portion of our revenues.*



	Nine Months Ended									Nine Months Ended
	September 30, 2000									September 30, 2001


	Medicaid						Private			Medicaid						Private

	State			Tenant			Tenant			State			Tenant			Tenant
	Paid			Paid			Paid			Paid			Paid			Paid
	Portion			Portion			Portion			Portion			Portion			Portion

Oregon		28.3	%		15.6	%		56.1	%		28.0	%		16.3	%		55.7	%
Washington		27.2	%		14.2	%		58.6	%		29.4	%		17.3	%		53.3	%
Idaho		6.4	%		3.2	%		90.4	%		16.1	%		9.8	%		74.1	%
Arizona		10.2	%		7.2	%		82.6	%		15.7	%		13.2	%		71.1	%
New Jersey		15.4	%		7.7	%		76.9	%		21.1	%		5.7	%		73.2	%
Texas		13.0	%		8.0	%		79.0	%		15.1	%		7.6	%		77.3	%
Nebraska		8.1	%		4.3	%		87.6	%		9.3	%		5.5	%		85.2	%


Item 3.	*Quantitative and Qualitative Disclosure Regarding Market Risk and Risk Sensitive Instruments*


Exhibit
Number

	10.1	Loan Agreement between Heller Healthcare Finance, Inc. and Assisted Living Concepts, Inc. and Carriage House Assisted Living, Inc., as Debtors-in-Possession, dated October 3, 2001.
	10.2	Option Agreement between T and F Properties, L.P. and Texas ALC Partners, L.P., dated September 25, 2001.
	10.3	Second Amendment to Loan Documents between Assisted Living Concepts, Inc., ALC Ohio, Inc., ALC Pennsylvania, Inc., ALC Iowa, Inc., ALC Nebraska, Inc., ALC New Jersey, Inc., ALC Indiana, Inc., and Heller Healthcare Finance, Inc., dated October 3, 2001.
	10.4	Stock Pledge Agreement by Assisted Living Concepts, Inc., as Debtors-in-Possession to and in favor of Heller Healthcare Finance, Inc. (Security Agreement), dated October 3, 2001.
	10.5	Exercise of Option Agreement between T and F Properties, L.P. and Texas ALC Partners, L.P., dated October 22, 2001.
	12	Ratio of Earnings to Fixed Charges