Formation Agreement

Exhibit 10.1


FORMATION AGREEMENT


THIS FORMATION AGREEMENT (this "Agreement") is made and entered into as of the 7th day of May, 1997 by and among (i) BROOKDALE LIVING COMMUNITIES, INC., a Delaware corporation (the "Corporation"), (ii) BROOKDALE HOLDINGS, INC., a Delaware corporation ("Holdings"), (iii) MARK J. SCHULTE ("Schulte"), (iv) THE PRIME GROUP, INC., an Illinois corporation ("PGI"), and (v) PRIME GROUP LIMITED PARTNERSHIP, an Illinois limited partnership ("PGLP").


RECITALS:
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A. The Corporation is a recently organized corporation formed for the purpose of, among other things, acquiring substantially all of the senior and assisted living business and operations of the senior housing division of PGI and its affiliates, including all ownership interests of PGI and PGLP in BLC Property, Inc., a Delaware corporation ("Property"), River Oaks Partners, an Illinois general partnership ("River Oaks") and The Ponds of Pembroke Limited Partnership, an Illinois limited partnership ("Pembroke") (Property, River Oaks and Pembroke being hereinafter referred to collectively as the "Contributed Entities" and River Oaks and Pembroke being hereinafter referred to together as the "Partnerships"), together with all other interests of PGI and PGLP in and to each of the businesses and facilities operated and owned by the Contributed Entities (all of such ownership interests in the Contributed Entities and all of such other assets being together referred to herein as the "Contributed Projects").


B. Holdings is a wholly owned subsidiary of the Corporation.


C. Schulte, PGI and PGLP (collectively, the "Transferors") desire to convey all of their respective right, title and interest in and to the Contributed Projects and the operations relating thereto to the Corporation in connection with an initial public offering (the "Offering") of shares of the Corporation's common stock, par value $0.01 per share (the "Common Stock").


D. Schulte desires to convey certain of his respective right, title and interest in and to The Island on Lake Travis facility in Lago Vista, Texas ("The Island Facility") to the Corporation in connection with the Offering of Common Stock.


E. The Corporation has agreed with PGI to terminate the right, title and interest in and to The Island Facility, conveyed to it by Schulte, and has agreed to cause Schulte, as a condition of his employment by the Corporation, to pay or reimburse PGI or its affiliate for three percent (3.0%) of any negative cash flow incurred or realized by PGI or any affiliate of PGI by or from the operation of The Island Facility.


F. PGI has entered into an agreement (the "Kemper Agreement") with KILICO Realty Corporation and Kemper Investors Life Insurance Company (collectively, the "Kemper Transferors") pursuant to which the Kemper Transferors have agreed to convey certain interests in River Oaks and Pembroke to PGI or its designee or assignee.


G. PGI previously assigned to PGLP, and PGLP has agreed to convey and assign to the Corporation, the rights to receive certain partnership interests as hereinafter described from the Kemper Transferors, and the Corporation has agreed to assume the obligation to pay the purchase price therefor as set forth in the Kemper Agreement.


H. PGI has entered into certain real estate purchase agreements with (i) Hawthorn Lakes Associates dated as of September 16, 1996, (ii) Edina Park Plaza Associates Limited Partnership dated as of September 16, 1996 and (iii) Park Place General Partnership and Park Place II, L.L.C. dated as of February 20, 1997 (collectively, such purchase agreements are referred to herein as the "Facility Acquisition Agreements" and the parties thereto other than PGI are referred to herein as the "Facility Transferors") for the purchase of certain senior and assisted living facilities owned by the Facility Transferors.


I. PGI has agreed to convey and assign to the Corporation or its designee all of PGI's rights under the Facility Acquisition Agreements and the Corporation has agreed to assume PGI's obligations under the Facility Acquisition Agreements.


J. PGI has entered into certain real estate purchase agreement with (i) certain trusts and the direct and indirect beneficiaries thereof with respect to a development site located in Glen Ellyn, Illinois dated as of February 24, 1997, (ii) AC Properties, L.L.C. dated as of February 14, 1997 and (iii) VG Office Partnership '95, Ltd. dated February 21, 1997, as amended (collectively, such purchase agreements are referred to herein as the "Development Site Acquisition Agreements" and the parties thereto other than PGI are referred to herein as the "Development Site Transferors") for the purchase of certain parcels of real estate owned by the Development Site Transferors.


K. PGI has agreed to convey and assign to the Corporation or its designee all of PGI's rights under the Development Site Acquisition Agreements and the Corporation has agreed to assume PGI's obligations under the Development Site Acquisition Agreements.


L. The parties desire to enter into this Agreement to set forth their understanding with respect to the manner in which the Corporation (or its designee) will acquire interests in the Contributed Projects, the operations relating thereto and the rights of PGI and PGLP in the Kemper Agreement, the Facility Acquisition Agreements and the Development Site Acquisition Agreements in exchange for shares of Common Stock, cash and the assumption of certain liabilities.


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


1. TRANSFER OF CONTRIBUTED PROJECTS AND CERTAIN OTHER ASSETS. As part of a single plan, on the Closing Date (as hereinafter defined) the Transferors


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will convey (x) the Contributed Projects together with (y) the rights of PGI in the Kemper Agreement, the Facility Acquisition Agreements and the Development Site Acquisition Agreements, to the Corporation or its designee in connection with the Corporation's initial public offering, in consideration for the issuance by the Corporation of its Common Stock to the Transferors as provided in Section 3, the assumption by the Corporation and Holdings of the liabilities associated with the Contributed Projects referred to in Section 4 and the cash payments referred to in Section 4, all in a transaction designed to meet the requirements of section 351(a) of the Code.


(a) PGI shall transfer to Holdings a 1% general partnership interest in River Oaks and a 1% general partnership interest in Pembroke.


(b) PGI shall transfer to the Corporation the following:


(i) A 49% general partnership interest in River Oaks.


(ii) A 24% general partnership interest in Pembroke.


(iii) All of its rights and interests in the Facility Acquisition Agreements and the Development Site Acquisition Agreements.


(iv) All of its interests in all other assets and properties of the senior housing division of PGI and its affiliates, as more fully described in Exhibit A hereto.


(c) (i) PGLP shall transfer to the Corporation all of its rights under the Kemper Agreement, including its rights to purchase the following partnership interests from the Kemper Transferors pursuant to the Kemper Agreement:


and (1) A 50% general partnership interest in River Oaks;


(2) A 25% limited partnership interest and a 50% general partnership interest in Pembroke; or


(ii) If PGLP's rights under the Kemper Agreement are not transferred to the Corporation pursuant to Section l(c)(i) above, all of its right, title and interest in:


(1) A 50% general partnership interest in River Oaks acquired pursuant to the Kemper Agreement; and


(2) A 25% limited partnership interest and a 50% general partnership interest in Pembroke acquired pursuant to the Kemper Agreement.


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(d) Schulte shall transfer to the Corporation all of his right, title and interest in and to the Contributed Entities, the Contributed Projects and the senior and assisted living business and operations of the senior housing division of PGI and its affiliates held by Schulte pursuant to that certain Employment and Equity Participation Agreement (the "Employment and Equity Participation Agreement"), between Schulte and PGI (which agreement supersedes that certain Compensation Agreement dated September 13, 1995 between Schulte and PGI).


(e) In conjunction with the transfers described in clauses (a), (b), (c) and (d) of this Section 1,


(i) Schulte shall transfer to the Corporation all of his right, title and interest to The Island Facility pursuant to the Employment and Equity Participation Agreement; and


(ii) The Corporation hereby terminates and waives any and all right, title and interest to The Island Facility received pursuant to clause (i) of this Section 1(e), and all agreements and arrangements representing such interest shall have no further force or effect.


2. CERTAIN DISTRIBUTIONS. On or prior to the Closing Date, the Transferors shall have the right to receive distributions from the Partnerships, net of all advances to PGI by the Partnerships, provided, that at the time of the Closing (as defined below), the Partnerships shall have unrestricted cash in the aggregate amount of not less than $800,000 after giving effect to such distributions. Within forty-five (45) days following the Closing Date, the Corporation shall deliver to the Transferors an accounting prepared by its independent accountants showing the actual computation of unrestricted cash of the Corporation as of the Closing Date following the distribution described in the first sentence of this Section 2, and, within ten days of receipt of such accounting, either (a) the Transferors shall pay to the Corporation a sum equal to the amount, if any, by which $800,000 exceeds the amount of unrestricted cash shown on such accounting or (b) the Corporation shall pay, or cause one or more of River Oaks or Pembroke to pay, to the Transferors an aggregate sum equal to the amount, if any, by which the amount of unrestricted cash shown on such accounting exceeds $800,000. In addition to any distributions made to PGI pursuant to the first sentence of this Section 2, the Earnest Money (as defined in the Kemper Agreement) under the Kemper Agreement shall be returned to PGLP (or, if the Earnest Money is credited against the purchase price payable to the Kemper Transferors, the Corporation shall reimburse PGLP for such purchase money) and PGI shall be entitled to reimbursement from the Corporation of all sums delivered by PGI to the Facility Transferors under Facility Acquisition Agreements and the Development Site Acquisition Agreements as a deposit, prepayment or earnest money, all of which is set forth on Schedule 1 hereto.


3. ISSUANCE OF COMMON STOCK. In consideration of the transfer of the assets provided for in Section 1, on the Closing Date, the Corporation shall issue an aggregate of 1,703,043 shares of its Common Stock to PGI and PGLP (100,000 shares of which PGI has agreed to grant to Darryl W. Copeland, Jr. an option to purchase pursuant to the terms, and


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subject to the conditions, of that certain Stock Option and Deposit Agreement dated as of the date hereof by and between Darryl W. Copeland, Jr. and PGI), and 296,957 shares of its Common Stock to Schulte. All such shares of Common Stock shall be fully paid and nonassessable.


4. ASSUMPTION OF LIABILITIES; CERTAIN PAYMENTS.


(a) As partial consideration for the transfer of the assets by the Transferors to the Corporation as provided for in Section 1, on the Closing Date the Corporation and Holdings will enter into an Assignment and Assumption Agreement substantially in the form of Exhibit A pursuant to which the Corporation shall assume all of the outstanding liabilities of each Transferor with respect to the assets being transferred (including the assets and operations of River Oaks and Pembroke and the operations of the senior housing division of PGI) and pursuant to which Holdings will assume certain liabilities relating to the Partnerships, whether or not reflected on the books and records of the Transferors or the entity whose ownership is being transferred, and whether known or unknown, accrued or unaccrued, absolute, contingent or otherwise.


(b) In addition, on the Closing Date, the Corporation will make cash payments as described in Schedule 1 to this Agreement which payments shall be in complete satisfaction of the recipients' obligations hereunder in respect of the Transferors' right, title and interest in the Contributed Projects and each of the Partnerships, including reimbursement to PGI of all costs and expenses incurred by PGI in connection with the Offering and the transactions contemplated thereby.


5. CLOSING DATE. The closing of the transactions contemplated by this Agreement (the "Closing") shall occur on the day (the "Closing Date") immediately following the day that all of the conditions precedent of the Transferors and the Corporation under this Agreement have been met or waived by the party entitled to the benefit thereof, but in any event no later than the date of closing of the Offering.


6. REPRESENTATIONS AND WARRANTIES.


(a) Each of PGI and PGLP hereby represents and warrants to the Corporation and Holdings as follows:


(i) It is a corporation or limited partnership duly organized and validly existing under the laws of its jurisdiction of organization.


(ii) It has the full corporate or partnership power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby.


(iii) This Agreement constitutes its valid and legally binding obligation, enforceable against it in accordance with its terms.


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(iv) It owns the partnership interests and other assets to be transferred by it to the Corporation pursuant to the terms of this Agreement free and clear of all liens and encumbrances, other than restrictions contained in the partnership agreement with respect to a particular Partnership.


(v) Each of the Partnerships is duly organized and validly existing.


(vi) The Contributed Projects have been operated in the ordinary course since December 31, 1996.


(b) Schulte hereby represents and warrants to the Corporation and Holdings as follows:


(i) This Agreement constitutes his valid and legally binding obligation, enforceable against him in accordance with its terms.


(ii) He owns the interests to be transferred by him to the Corporation pursuant to the terms of this Agreement free and clear of all liens and encumbrances.


(c) Except as specifically warranted in Sections 6(a) and 6(b), the Transferors make no representations and warranties to the Corporation or Holdings whatsoever regarding the Contributed Projects, the assets or properties to be acquired under the Facility Acquisition Agreements and the Development Site Acquisition Agreements, or the assets of the Contributed Entities, including, but not limited to, the warranty of merchantability or fitness for a particular use, which is specifically disclaimed. The Corporation acknowledges that all of the assets to be conveyed by the Transferors to the Corporation (and all of the assets of the Contributed Entities) will be conveyed "as is, where is." Transferors make no representation or warranty with respect to any asset which is the subject of any of the Facility Acquisition Agreements or the Development Site Acquisition Agreements.


(d) Each of the Corporation and Holdings hereby represents, warrants and covenants with and to the Transferors as follows:


(i) It is a corporation duly organized and validly existing under the laws of the State of Delaware.


(ii) It has the full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby.


(iii) This Agreement constitutes its valid and legally binding obligation, enforceable against it in accordance with its terms.


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(e) The Corporation hereby represents, warrants and covenants with and to the Transferors as follows:


(i) The Common Stock to be issued by the Corporation to the Transferors pursuant to the terms of this Agreement will be duly authorized, fully paid and nonassessable.


(ii) The Corporation will not take any action which would cause the transfers provided for in Section 1 not to qualify for tax-free treatment under section 351 of the Code.


(iii) On the Closing Date, the Corporation will hire all of the employees of the Transferors associated with the Contributed Projects and will assume all liabilities and obligations to or with respect to such employees, including any accrued but unpaid benefits, bonuses and vacation pay.


(f) All of the representations and warranties provided for in this Section 6 shall survive the Closing Date and the delivery of the closing documents on the Closing Date.


7. CONDITIONS PRECEDENT.


(a) The obligation of the Transferors to consummate the transactions contemplated hereby is subject to the satisfaction of the following conditions (any of which may be waived by the Transferors in writing):


(i) All the terms, covenants and conditions of this Agreement to be complied with and performed by the Corporation and Holdings on or before the Closing Date shall have been fully complied with and performed in all respects.


(ii) All the representations and warranties made by the Corporation and Holdings herein shall be true and correct in all material respects on and as of the Closing Date.


(iii) All consents required for the valid and effective transfer of the assets to be transferred in accordance with Section 1 shall have been obtained and the consent to the assumption by the Corporation of the debts to be assumed by the Corporation and Holdings pursuant to Section 4 shall have been obtained, except for any approvals and consents described in Schedule 2 to this Agreement.


(iv) There shall be no pending or threatened litigation against any of the parties hereto concerning or relating to the transactions contemplated hereby.


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(v) The approval of all administrative agencies, if any, whose approval of the transactions contemplated hereby is necessary or desirable shall have been obtained.


(vi) Each of the transactions contemplated by the Kemper Agreement shall close at or prior to the time of Closing of the transactions contemplated hereby.


(vii) PGI and the Corporation shall have entered into a Space Sharing Agreement substantially in the form of Exhibit B attached hereto and made a part hereof.


(viii) The Corporation, PGI and PGLP shall have entered into a Registration Rights Agreement substantially in the form of Exhibit C attached hereto and made a part hereof.


(ix) The Corporation, PGLP, Michael W. Reschke and PGI shall have entered into a Non-Compete Agreement substantially in the form of Exhibit D attached hereto and made a part hereof.


(x) PGI, PGLP, Prime Group VI, L.P., an Illinois limited partnership, and the Corporation shall have entered into a Voting Agreement substantially in the form of Exhibit E attached hereto and made a part hereof.


(xi) The Corporation and The Island on Lake Travis, Ltd., an affiliate of PGI, shall have entered into a Management Agreement substantially in the form of Exhibit F attached hereto and made a part hereof.


(xii) PGI and Schulte shall have entered into an Indemnity Agreement substantially in the form of Exhibit G attached hereto and made a part hereof.


(b) The obligations of the Corporation and Holdings to consummate the transactions contemplated hereby are subject to the satisfaction of the following conditions (any of which may be waived by the Corporation and Holdings in writing):


(i) All the terms covenants and conditions of this Agreement to be complied with and performed by the Transferors on or before the Closing Date shall have been fully complied with and performed in all respects.


(ii) All the representations and warranties made by the Transferors herein shall be true and correct in all material respects on and as of the Closing Date.


(iii) All required consents necessary for the valid and effective transfer of the assets to be transferred to the Corporation in accordance with the provisions of


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Section 1 shall have been obtained, except for any approvals and consents described in Schedule 2 to this Agreement.


(iv) The Corporation shall have obtained title insurance (or endorsed commitment) insuring that all real property owned by the Contributed Entities, are vested in the respective entities free and clear of all mortgages, liens and encumbrances except those reasonably acceptable to the Corporation.


(v) The conditions referred to in Sections 7(a)(iv) through 7(a)(xii) shall have been complied with or otherwise satisfied .


8. INDEMNIFICATION


(a) Each Transferor hereby agrees to indemnify the Corporation and Holdings for, and to hold the Corporation and Holdings harmless from, the following:


(i) Any and all liabilities, damages, losses, costs or deficiencies resulting from any misrepresentation, breach of any warranty or nonfulfillment of any agreement or covenant on the part of that Transferor, whether contained in this Agreement or in any document furnished in connection with the transactions contemplated hereby; and


(ii) Any and all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to the foregoing, including reasonable attorney's fees.


(b) Each of the Corporation and Holdings hereby agrees to indemnify each Transferor for, and to hold each Transferor harmless from, the following:


(i) Any and all indebtedness, lease, contract or other liabilities and obligations assumed by the Corporation and Holdings in accordance with the terms hereof;


(ii) Any and all liabilities, losses, costs, damages or deficiencies resulting from any misrepresentations, breach of any warranty or nonfulfillment of any agreement or covenant on the part of the Corporation or Holdings, whether contained in this Agreement or in any document furnished in connection with the transactions contemplated hereby;


(iii) Any and all liabilities, damages, losses, costs or deficiencies resulting from any act or circumstance relating to any of the assets transferred (including the assets and operations of the Contributed Entities and operations of PGI's senior housing division) whenever occurring;


(iv) Any loss, claim, damage, or liability, including any loss, claim, damage, or liability under the Securities Act of 1933, as amended, or any applicable state


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securities laws, arising out of, or attributable to the Offering, except for losses, claims, damages or liabilities arising from the inaccuracy of information supplied in writing by PGI for inclusion in the prospectus relating to the Offering; and


(v) Any and all actions, suits, proceedings, demands, assessments, judgments, costs and expenses incident to any of the foregoing, including reasonable attorneys' fees.


(c) Any party seeking indemnification ("Indemnitee") pursuant to this Section 8 shall promptly (within 20 days of service to the Indemnitee if a third party has commenced actual litigation against the Indemnitee) give written notice to the party from which indemnification is sought ("Indemnitor") after the Indemnitee has knowledge of any claim against the Indemnitor as to which recovery may be sought against the Indemnitee pursuant to this Section 8, or of the commencement of any legal proceedings against the Indemnitee as to such claim after the Indemnitee has knowledge of such proceedings, whichever shall first occur, and shall permit the Indemnitor to assume the defense of any such claim or any litigation resulting from such claim. Such notice shall specify in reasonable detail the facts known to the Indemnitee giving rise to such indemnification rights and, if possible, an estimate of the amount of liability which could result therefrom. The right of the Indemnitee to indemnification hereunder shall be deemed agreed to unless, within ten days after the receipt of such notice, the Indemnitee is notified in writing by the Indemnitor that it disputes the right to indemnification as set forth in such notice. Failure by the Indemnitor to notify the Indemnitee of the Indemnitor's election to defend such action within ten days after notice thereof shall have been given to the Indemnitor, or failure to deliver notification to the Indemnitee by the Indemnitor that the Indemnitee's right to indemnification is being disputed, shall be deemed an acknowledgment by Indemnitor that Indemnitee is entitled to indemnification hereunder and shall be deemed to be an election by Indemnitor to defend such action. The Indemnitor shall not, in the defense of such claim or any litigation resulting therefrom, consent to entry of any judgment (except with the consent of the Indemnitee) or enter into any settlement (except with the consent of the Indemnitee) which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnitee of a full, absolute and unconditional release from all liability in respect of such claim or litigation.


(d) If the Indemnitor shall not assume the defense of any such claim or litigation resulting therefrom, the Indemnitee may defend against such claim or litigation in such manner as it may deem appropriate. The Indemnitee may settle such claim or litigation on such terms as it may deem appropriate and the Indemnitor shall promptly reimburse the Indemnitee for the amount of such settlement, and all expenses, legal or otherwise, incurred by the Indemnitee in connection with the defense against, or settlement of, such claim or litigation. If no settlement of such claim or litigation is made, the Indemnitor shall promptly reimburse the Indemnitee for the amount of any judgment rendered with respect to such claim or in such litigation and of all expenses, legal or otherwise, incurred by the Indemnitee in the defense against such claim or litigation. Notwithstanding the foregoing, if the Indemnitor has disputed the Indemnitee's right to indemnification in accordance with the provisions of Section 8(c), the


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Indemnitor shall not be obligated to pay the Indemnitee the amount provided for in this Section 8(d) until such dispute has been resolved and it has been determined that the Indemnitor is required to make such indemnification payment.


(e) The right of any party to seek indemnification hereunder shall expire as to any claim not made on or prior to the first anniversary of the Closing ...