LAZARD FRERES REAL ESTATE
INVESTORS, L.L.C.
00 Xxxxxxxxxxx Xxxxxx, 00xx Xxxxx
Xxx Xxxx, X.X. 00000
----------
Telephone (000) 000-0000
October 29, 1997
The Board of Directors
ARV Assisted Living, Inc.
000 Xxxxxxx Xxxxxx X-0
Xxxxx Xxxx, XX 00000
Gentlemen:
Lazard Freres Real Estate Investors, L.L.C. ("LFREI") and Prometheus
Assisted Living LLC ("Prometheus") are parties to a Stockholders Agreement
(the "Stockholders Agreement") with ARV Assisted Living, Inc. (the
"Company") dated as of July 14, 1997, pursuant to which, among other
matters, LFREI agreed not to own any equity interest in any public or
private company, the principal business of which is the ownership,
management, operation and development of assisted living facilities (the
"Non-Compete Covenant"), unless 75% of the members of the Board of
Directors of the Company (other than the Investor Nominees (as such term is
defined in the Stockholder Agreement)) have consented to such ownership
(the "Required Board Approval").
Based on a letter agreement dated September 30, 1997 (the "Original Letter
Agreement"), the Company consented (with the Required Board Approval) to a
one-time waiver to the Non-Compete Covenant to permit an investment by an
affiliate of LFREI (the "Kapson Investment") in Kapson Senior Quarters,
Corp. ("Kapson"). Subsequent to that date and the announcement of the
proposed Kapson Investment, the parties have agreed, among other things, to
amend the Original Letter Agreement as set forth herein.
The substantive terms of the Original Letter Agreement are hereby amended
and restated as follows:
Subject to the consummation of the Kapson Investment, LFREI and Prometheus
agree to the following (each of which shall terminate at (i) the time of a
Termination Event (as defined in the Stockholders Agreement as amended and
restated on October 29, 1997 (the "Amended Stockholders Agreement")) or
(ii) the time, after the consummation of the Kapson Investment, LFREI or
its affiliates owns less than 10% of the stock of Kapson);
1) Consent Rights. After the closing of the Kapson Investment, LFREI will
not permit Kapson to and will cause Kapson to enter into an agreement with
ARV under which Kapson will agree not to enter into any new developments or
acquisitions (other than those in its pipeline at the closing of the Kapson
Investment as disclosed in a schedule to be delivered at that time) without
the written consent of a majority of the independent non-LFREI affiliated
or appointed members of the ARV Board of Directors, which consent may
be withheld at the sole discretion of those directors; provided that upon
the funding of that certain $60,000,000 6 3/4% Convertible Subordinated
Note due 2007 by LFREI or an affiliate this paragraph shall terminate and
be of no further effect.
2) Right of First Offer. After the closing of the Kapson Investment, ARV
will have a first right to negotiate management, lease and/or purchase
arrangements on terms commercially reasonable to both parties on any new
developments or acquisitions by Kapson, each right to be exercised by ARV,
upon commercially reasonable notice, before Kapson enters into binding site
contracts.
The Board of Directors
ARV Assisted Living, Inc.
October 29, 1997
Page 2
3) Existing Facilities and Developments. LFREI and Prometheus will seek in
good faith to negotiate with ARV for the leasing or management agreements,
on commercially reasonable and customary terms, of all existing or planned
facilities of Kapson including those in the above-described "pipeline."
LFREI and Prometheus will agree not to enter into or permit Kapson or any
of their respective affiliates to enter into leasing or management
arrangements on the existing facilities (excluding sale leasebacks, so long
as such sale leasebacks would permit ARV to sublease or manage such
facilities) other than with ARV or controlled affiliates of Kapson.
ARV will have the option to sell development assets to Kapson at fair
market value with the right to leaseback the assets on commercially
reasonable and customary terms.
4) Option. LFREI hereby grants to ARV (or its shareholders, the selection
to be made at ARV's option provided mutual agreement of ARV and LFREI that
such purchase by ARV directly will not adversely affect Xxxxxx'x tax and
accounting status) the right to acquire from LFREI shares representing up
to 19.9% of the stock of Kapson at the pro rata amount of LFREI's all-in
cost (defined at LFREI's total equity investment in Kapson at the close of
the Kapson Investment including reasonable capital carrying costs relating
to the Kapson Investment) for a period of 30 days after the completion of
the Kapson Investment (or, if ARV elects to have its shareholders exercise
this option, 30 days after a registration statement is declared effective
with respect to the option). The term of this option will not extend beyond
the timing described in this paragraph despite LFREI's ongoing ownership of
Kapson.
5) Joint Venture. LFREI will explore a joint venture arrangement, on
commercially reasonable terms, between the Company and Kapson which would
house top corporate management of both firms to achieve economies of scale.
The management company would be jointly owned by the Company and Kapson.
Development personnel and activities would in all likelihood remain at
Kapson. Operating personnel and home health care would in all likelihood
remain at ARV. Savings resulting from this alliance will be shared by the
two companies.
6) Press Releases. The Company and LFREI will have the right to review and
comment on all press releases regarding the foregoing arrangements for a
period from the date hereof through October 29, 1998. No such press
releases regarding the foregoing arrangements shall be made without the
written consent of the Company and LFREI.
7) Public Disclosures. The Company will have the right to review and
comment on all public disclosures (e.g. proxy material, 10-K) of Kapson
regarding the foregoing arrangements for a period from the date hereof
through six months following the close of the Kapson Investment. No such
statement in the public disclosures regarding the foregoing arrangements
shall be made without the written consent of the Company, such consent not
to be unreasonably withheld or delayed.
LFREI hereby represents that, upon completion of the Kapson Investment, it
shall have the authority to cause Kapson to enter into all of the foregoing
arrangements. With respect to the foregoing arrangements, it is agreed that
all negotiations, determinations, consents and elections by ARV shall be
made by a majority of the Non-Investor Nominee (as defined in the Amended
Stockholders Agreement) directors of ARV.
The parties hereby agree that if mutually agreeable arrangements regarding
the matters set forth in paragraph 3 above are not entered into by the
later of three months following the closing of the Kapson Investment or May
1, 1998, then this letter agreement shall terminate without further
obligation of any party.
The Board of Directors
ARV Assisted Living, Inc.
October 29, 1997
Page 3
LFREI believes strongly that a strong alignment of interests between LFREI,
Kapson and ARV and the synergies that could be created by a strategic
alliance between these two industry players, will significantly benefit all
shareholders of ARV and Kapson, including LFREI as their largest
shareholder.
The Board of Directors
ARV Assisted Living, Inc.
October 29, 1997
Page 4
Very truly yours,
LAZARD FRERES REAL ESTATE INVESTORS, L.L.C.
By: /s/ Xxxxxx X. Xxxxxxx
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Xxxxxx X. Xxxxxxx
President
PROMETHEUS ASSISTED LIVING L.L.C.,
By: LAZARD FRERES REAL ESTATE INVESTORS, L.L.C.
By: /s/ Xxxxxx X. Xxxxxxx
------------------------------
Xxxxxx X. Xxxxxxx
President
ACKNOWLEDGED AND AGREED:
ARV ASSISTED LIVING, INC.
By: /s/ Xxxxxx X. Xxxxxxx
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Xxxxxx X. Xxxxxxx
Authorized Signatory
