Document:

exv10w2

 

EXHIBIT 10.2 TO THE SEPARATION AGREEMENT

TAX ALLOCATION AGREEMENT dated as of                , 2006 (this
“Agreement”), among EXTENDICARE, INC., a Canadian
corporation (“Extendicare”), EXTENDICARE HOLDINGS, INC., a
Wisconsin corporation and indirect, wholly owned subsidiary of
Extendicare (“EHI”), and ASSISTED LIVING CONCEPTS, INC., a
Nevada corporation and, prior to the Separation, an indirect,
wholly owned subsidiary of EHI (“ALC” and, collectively
with EHI and Extendicare, the “Companies”).

                WHEREAS, as of the date of this Agreement, EHI and ALC belong to an Affiliated Group that has
elected to file consolidated U.S. federal income Tax Returns;

                WHEREAS, as of the date of this Agreement, ALC is a direct, wholly owned subsidiary of
Extendicare Health Services, Inc. (“EHSI”).

                WHEREAS, Extendicare will purchase the stock of ALC from EHSI in exchange for a note with a
face amount equal to the fair market value of ALC (the “ALC Purchase”);

                WHEREAS, ALC will reorganize its share capital to create two classes of common shares (the ALC
Multiple Voting Shares and the ALC Subordinate Voting Shares) which will have similar voting rights
to the subordinate voting and multiple voting common shares of Extendicare, respectively;

                WHEREAS, pursuant to the Plan of Arrangement, the existing subordinate voting shareholders of
Extendicare (other than any dissenters) will exchange each existing Extendicare Share for one new
Extendicare Share and one ALC Subordinate Voting Share and the multiple voting shareholders of
Extendicare (other than any dissenters) will exchange each existing Extendicare Share for 1.075 new
Extendicare Shares and one ALC Multiple Voting Share (“the ALC Distribution”);

                WHEREAS, pursuant to the Plan of Arrangement and immediately after the ALC Distribution, the
new Extendicare Shares will be transferred to Newco for Newco Notes or, at the election of certain
holders, to the Holding Partnership in exchange for units of Holding Partnership, and the Newco
Notes will then immediately be transferred to Extendicare REIT in exchange for REIT Units (the
“Conversion” and, together with the ALC Distribution, the “Separation”); and

                WHEREAS, the Companies desire to allocate the Tax liabilities and benefits of transactions
that occur on or prior to, and that may occur after, the date on which the Separation occurs (the
“Separation Date”) and to provide for certain other Tax matters.

 

 

                NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the
Companies (each on behalf of itself, each of its Affiliates and its future Affiliates) hereby agree
as follows:

ARTICLE I

Definitions

                The following terms shall have the following meanings:

                “Adjustment Request” means any claim or request filed with any governmental authority
for any adjustment of Tax, Refund or change in available Tax attributes.

                “Affiliate” of any person means any other person that, after the Separation, controls,
is controlled by, or is under common control with such person. For purposes of this definition,
“control” means the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a person, whether through ownership of voting
securities, by contract or otherwise.

                “Affiliated Group” means an affiliated group of corporations within the meaning of
Section 1504(a) of the Code, or any analogous concept under local, state or foreign law for the
taxable period in question.

                “Agreement” is defined in the preamble.

                “ALC” is defined in the preamble.

                “ALC Distribution” is defined in the recitals.

                “ALC Group” means ALC and its Affiliates.

                “ALC Multiple Voting Shares” is defined in the Plan of Arrangement.

                “ALC Purchase” is defined in the recitals.

                “ALC Subordinate Voting Shares” is defined in the Plan of Arrangement.

                “Applicable Rate” means the sum of (i) the prime rate of interest per annum published
in the print edition of the Wall Street Journal, the international daily newspaper published in New
York City, and (ii) 2%; each change in the prime rate shall be effective from and including the date
such change is published in the Wall Street Journal.

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                “Arrangement Agreement” means the Arrangement Agreement, dated as of                , 2006,
between                , Extendicare REIT, the Trust, Extendicare Holding General Partner Inc., Holding
Partnership, Extendicare, Newco, ULC and ALC.

                “Code” means the Internal Revenue Code of 1986, as amended.

                “Companies” is defined in the preamble.

                “Conversion” is defined in the recitals.

                “Due Date” means, with respect to any Tax Return, the date on which such Tax Return is
due to be filed with the appropriate Taxing Authority pursuant to applicable law, giving effect to
any applicable extensions.

                “EHI” is defined in the preamble.

                “EHSI” is defined in the recitals.

                “Employee Benefits Services Agreement” is defined in the Separation Agreement.

                “Extendicare” is defined in the preamble.

                “Extendicare Group” means Extendicare and its Affiliates. For the avoidance of doubt,
the Extendicare Group excludes any entity that is a member of the ALC Group.

                “Extendicare REIT” means Extendicare Real Estate Investment Trust, a trust established
under the laws of the Province of Ontario.

                “Extendicare Shares” is defined in the Plan of Arrangement.

                “Final Determination” means the final resolution of liability for any Tax for any
taxable period by or as a result of: (i) a final and unappealable decision, judgment, decree or
other order by any court of competent jurisdiction; (ii) a final settlement with the IRS, a closing
agreement or accepted offer in compromise under Code Sections 7121 or 7122 or a comparable
settlement, agreement or accepted offer in compromise under the laws of another jurisdiction; (iii)
any allowance of a Refund, but only after the expiration of all periods during which such Refund
may be recovered by the Taxing Authority imposing the Tax; or (iv) any other final disposition,
including by reason of the expiration of the applicable statute of limitations.

                “Group” means the Extendicare Group or the ALC Group, or both, as the context
requires.

                “Holding Partnership” is defined in the Plan of Arrangement.

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                “Indemnifying Party” has the meaning set forth in Section 5.01.

                “Indemnitee” has the meaning set forth in Section 5.01.

                “Intended Tax Treatment” has the meaning set forth in Section 4.01.

                “IRS” means the United States Internal Revenue Service.

                “Joint Return” means any Return for an Affiliated Group that includes both a member of
the Extendicare Group and a member of the ALC Group.

                “Newco” is defined in the Plan of Arrangement.

                “Newco Notes” is defined in the Plan of Arrangement.

                “Past Practices” has the meaning set forth in Section 3.03.

                “Plan of Arrangement” means the Plan of Arrangement, concluded in connection with the
Arrangement Agreement.

                “Pre-Separation Period” means any taxable period (or portion thereof) ending on or
before the Separation Date.

                “Refund” means any cash refund of Tax or reduction of Tax by means of credit, offset
or otherwise.

                “Separate Return” means (i) in the case of the ALC Group, a Tax Return of any member
of that Group (including any consolidated, combined, affiliated or unitary Return) that does not
include, for all or any portion of the relevant taxable period, any member of the Extendicare Group
and (ii) in the case of the Extendicare Group, a Tax Return of any member of that Group (including
any consolidated, combined, affiliated or unitary Return) that does not include, for all or any
portion of the relevant taxable period, any member of the ALC Group.

                “Separation” is defined in the recitals.

                “Separation Agreement” means the Separation Agreement, dated as of              , 2006,
between Extendicare REIT and ALC.

                “Separation Date” is defined in the recitals.

                “Tax” means all forms of taxation, levies or duties imposed, or required to be
collected or withheld, including charges, together with any related interest, penalties or other
additional amounts. For the avoidance of doubt, Tax includes Canadian employment insurance
premiums, Canada or provincial pension plan contributions, Canadian employee health premiums and Canadian workers’ compensation premiums imposed by the
government of Canada or a province of Canada.

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                “Tax Advisor” means a U.S. tax counsel or other tax advisor of recognized national
standing.

                “Tax Contest” means an audit, review, examination, assessment, reassessment or any
other administrative or judicial proceeding with the purpose or effect of determining or
redetermining Tax (including any administrative or judicial review of any Adjustment Request).

                “Tax Dispute” means any dispute arising in connection with this Agreement.

                “Tax Return” or “Return” means any return, filing, report, questionnaire,
information statement, claim for refund, or other document required or permitted to be filed,
including any amendments that may be filed, for any taxable period with any Taxing Authority
(whether or not a payment is required to be made with respect to such filing).

                “Taxing Authority” means any governmental authority that imposes, assesses or collects
Tax, including the IRS, any U.S. state or local taxing authority, the Canada Revenue Agency, the
Ontario Ministry of Finance and any other relevant provincial taxing authority.

                “Transaction Agreements” means this Agreement, the
Arrangement Agreement, the Plan of Arrangement and the Separation Agreement.

                “Transactions”
means the transactions described on Exhibit [A], including the ALC Purchase, the
ALC Distribution and the Conversion, and any other transactions related thereto or otherwise
contemplated by the Transaction Agreements.

                “Trust” is defined in the Plan of Arrangement.

                “ULC” is defined in the Plan of Arrangement.

                “ULC Notes” is defined in the Plan of Arrangement.

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ARTICLE II

Liability For Tax

                SECTION 2.01. Ordinary Course Tax. (a) Subject to Section 2.03, ALC shall be
liable, and shall indemnify and hold the Extendicare Group harmless, for all Tax that is
attributable to members of the ALC Group for all periods. [In the case of any Tax the liability
for which would be determined on a consolidated, combined, affiliated, unitary or similar basis,
the amount of Tax “attributable to” the ALC Group shall be
determined in accordance with the principles described in
Exhibit B.

               (b) EHI shall be liable, and shall indemnify and hold the ALC Group harmless, for
all Tax that is attributable to members of the Extendicare Group for all periods. The
amount of Tax “attributable to” members of the Extendicare
Group shall be determined in accordance with the principles described
in Exhibit B.

               (c) For purposes of this Section 2.01, all Tax that is attributable to each Assisted
Living Facility listed on Schedule 2.01(c) (i) shall be treated as attributable to the
Extendicare Group for all periods (or portion thereof) ending on or before the date listed
on Schedule 2.01(c) with respect to such Assisted Living Facility and (ii) shall be
treated as attributable to the ALC Group for all periods (or portion thereof) beginning
after the date listed on Schedule 2.01(c) with respect to such Assisted Living Facility.

               (d) EHI and ALC shall agree on a reasonable apportionment between the Extendicare
Group and the ALC Group of any existing limitation under Code Section 382 that applies to
any net operating loss carryforwards in the existing Extendicare Group, and any comparable
limitations under state or local law.

                SECTION 2.02. Transaction Taxes. EHI shall be liable, and shall indemnify and hold
the ALC Group harmless, for any Tax resulting from, or arising in connection with, the
Transactions.

                SECTION 2.03. Refunds. Any Refund attributable to (i) any Tax for which any member
of the ALC Group is responsible under this Article II shall be for the account of ALC and (ii) any
Tax for which any member of the Extendicare Group is responsible under this Article II shall be for
the account of EHI. To the extent a party receives a Refund that is for the account of the other
party under the preceding sentence,

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the recipient-party shall pay or cause to be paid the amount of the Refund to the other party.
If all or any portion of such Refund is not paid to the other party within 30 days after receipt,
interest shall accrue on the unpaid portion of such Refund at the Applicable Rate compounded
quarterly.

                SECTION 2.04. Tax Sharing Agreements. Except as set forth in this Agreement, any and
all existing Tax sharing agreements, arrangements, understandings and practices regarding Tax and
its payment, allocation or sharing between any member of the ALC Group and any member of the
Extendicare Group shall be terminated as of the Separation. This Section 2.04 does not address any
Tax sharing agreements solely between members of the ALC Group or solely between members of the
Extendicare Group.

ARTICLE III

Preparation and Filing of Tax Returns

                SECTION 3.01. Extendicare Responsibility. (a) Subject to paragraph (b), EHI shall
make all determinations with respect to, shall have ultimate control over the preparation of, and
shall file all (i) Joint Returns and (ii) Extendicare Separate Returns, in each case as it
determines to be mandatory or advisable and for all taxable periods.

                    (b) If, in connection with the preparation of any Joint Return, EHI modifies any
information relating to, or provided in, the pro forma federal and state income Tax
Returns or other information related to members of the ALC Group prepared by ALC and
provided to EHI pursuant to Section 3.02, the portions of the Joint Returns that include
such information shall be submitted to ALC no later than 15 days prior to the Due Date for
such Joint Returns (or if such Due Date is within 15 days following the Separation Date,
as promptly as practicable following the Separation Date). Within 5 days after delivery
of any such revised portions of any Joint Return, ALC shall provide comments to EHI in
writing where ALC objects to any revisions that could, in its reasonable discretion, be
expected to adversely impact any member of the ALC Group. Such ALC comments shall be
incorporated into the Joint Return.

                SECTION 3.02. ALC Responsibility. (a) ALC shall make all determinations with
respect to, shall have ultimate control over the preparation of, and shall file all ALC Separate
Returns as it determines to be mandatory or advisable and for all taxable periods.

                    (b) ALC shall prepare and provide to EHI all pro forma federal and state income Tax
Returns and other information related to members of the ALC
Group required to complete any Joint Return, at least 30 days
prior to the Due Date of the relevant Joint Return.

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                SECTION 3.03. Tax Accounting Practices. Any Tax Return for any Pre-Separation Period
shall be prepared in accordance with practices, accounting methods, elections, conventions and Tax
positions used with respect to the Tax Return in question for periods prior to the Separation
(“Past Practices”), and, in the case of any item the treatment of which is not addressed by
Past Practices, in accordance with generally accepted Tax accounting practices. Notwithstanding
the foregoing, for any Tax Return described in the preceding sentence, (i) a party will not be
required to follow Past Practices with either the written consent of the other party (not to be
unreasonably withheld) or a “should” level opinion from a Tax Advisor that the proposed method of
reporting is correct and (ii) all Tax Returns shall be filed in a manner consistent with the
Intended Tax Treatment, unless otherwise required by a Final Determination.

                SECTION 3.04. Right to Review Tax Returns. Upon request, each party shall make
available to the other party the portion of Pre-Separation Period Tax Returns that relates to the
ALC Group that the first party is responsible for preparing under this Article III.

                SECTION 3.05. Payment of Tax. The party responsible under this Agreement for
preparing a Tax Return shall remit, or cause to be remitted, in a timely manner to the appropriate
Taxing Authority all Tax due in connection with that Tax Return. For the avoidance of doubt, this
Section shall not in any way affect any right of indemnification under this Agreement.

                SECTION 3.06. Adjustment Requests. (a) Except with the written consent of EHI (not
to be unreasonably withheld), ALC will not file any Adjustment Request with respect to any Joint
Return, unless required by law. Except with the written consent of ALC (not to be unreasonably
withheld), EHI will not file any Adjustment Request with respect to any Joint Return, unless
required by law.

                    (b) Any Adjustment Request made under this Section 3.06 shall be prepared by the
party that filed the Tax Return to be adjusted. The party preparing the Adjustment
Request shall be reimbursed for its preparation and filing costs at a rate of $30 per
hour, without regard to the identity of the persons assigned to prepare the Adjustment
Request, and, if the parties engage a third party to prepare the Adjustment Request, the
parties shall bear the out-of-pocket costs of engaging such third party in proportion to
the benefit that each would receive from such adjustment.

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                    (c) ALC agrees to waive its right to carry back any loss incurred by any member of
the ALC Group during any taxable period following Separation, to the extent permitted by
law.

ARTICLE IV

Intended Tax Treatment

                SECTION 4.01. Intended Tax Treatment. Each of Extendicare, EHI and ALC agree to
treat the Transactions for all U.S. Tax purposes as set out in
Exhibit C (the “Intended Tax
Treatment”), unless otherwise required by a Final Determination.

ARTICLE V

Tax Contests; Indemnification; Cooperation

                SECTION 5.01. Notice. As soon as practicable and, in any event, within 30 days after a party (the “Indemnitee”)
becomes aware of the existence of a Tax Contest that may give rise to an indemnification claim
under this Agreement by it against the other party (the “Indemnifying Party”), the
Indemnitee shall notify
the Indemnifying Party of the Tax Contest, and thereafter shall promptly forward or make available
to the Indemnifying Party copies of notices and communications with a Taxing Authority relating to
such Tax Contest.

                SECTION 5.02. Control of Tax Contests. (a) EHI shall have sole control over any Tax
Contest relating to any Extendicare Separate Returns. In the case of any Tax Contest relating to
any Joint Returns for which ALC determines, in its reasonable discretion, that it could be liable
for an amount greater than $10,000 under Article II as a result of such Tax Contest, ALC may elect
to jointly control, and to have the right to equally participate in, at its own expense, all
material activities and decisions (including strategic decisions) with respect to, any such Tax
Contest and EHI shall not settle any such Tax Contest without ALC’s prior written consent.

                    (b) ALC shall have sole control over any Tax Contest relating to any ALC Separate
Returns; provided, however, that ALC shall notify EHI in writing of, and
consult EHI in good faith about all material activities and decisions (including strategic
decisions) with respect to, any such Tax Contest.

                    (c) Where the parties mutually engage a Tax Advisor to assist them in handling,
settling or contesting a Tax Contest, any out-of-pocket costs shall be borne ratably by
the parties based on their ultimate liability under this Agreement for the Tax to which
the Tax Contest relates. In the absence of such mutual agreement, each party shall be
liable for its own out-of-pocket costs incurred in handling, settling or contesting a Tax
Contest.

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                SECTION 5.03. Indemnification Payments. (a) Subject to paragraph (b), if an
Indemnitee has a claim for an indemnification payment from an Indemnifying Party under this
Agreement, the Indemnitee shall promptly provide to the Indemnifying Party notice of such claim,
including a description of such claim and a detailed calculation of the amount of the
indemnification payment that is claimed; provided, however, that no delay on the
part of the Indemnitee in notifying the Indemnifying Party shall relieve the Indemnifying Party
from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party is
actually and materially prejudiced thereby. The Indemnifying Party shall make the claimed payment
to the Indemnitee within 45 days after receiving such notice, unless the Indemnifying Party
reasonably disputes the amount of, or its liability for, such payment.

                    (b) No party shall be entitled to receive an indemnification payment under this
Agreement more than 5 days before the Tax (including estimated Tax, if any) is required to
be paid.

                    (c) Payments made prior to the Separation by any member of the ALC Group to any
member of the Extendicare Group with respect to a particular Tax shall be credited against
any indemnity obligation of the ALC Group in respect of such Tax
under this Agreement. This Section 5.03(c) shall be applied in a manner consistent with the illustrative examples included in Exhibit D.

                SECTION 5.04. Interest on Late Payments. Interest shall accrue with respect to any
indemnification payment (including any disputed payment that is ultimately required to be made),
not made when due (as determined under Section 5.03 and without regard to whether such payment is
disputed), at the Applicable Rate compounded quarterly.

                SECTION 5.05. Treatment of Payments. Indemnification payments under this Agreement
shall not be adjusted to take into account the Tax treatment of
the relevant Indemnitee with respect to such payments or the indemnified items. Any payments made
to one party by another party pursuant to this Agreement or the Separation Agreement shall be
treated for all Tax purposes as a distribution by, or capital contribution to, ALC, as the case may
be, made immediately prior to the ALC Purchase, except to the extent otherwise required by a Final
Determination.

                SECTION 5.06.  Expenses. Except as otherwise provided herein, each party shall bear
its own expenses incurred in connection with preparation of Tax Returns, Tax Contests and other
matters under this Agreement.

                SECTION 5.07. Cooperation. Each member of the Extendicare Group and the ALC Group
shall cooperate fully with all reasonable requests from the other party in connection with the
preparation and filing of Tax Returns and Adjustment Requests, Tax Contests and other matters
covered by this Agreement.

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                    (a) Such cooperation shall include:

          (i) the retention until the expiration of the applicable statute of
limitations, and the provision upon request, of Tax Returns, books, records
(including information regarding ownership and tax basis of property),
documentation and other information relating to the Tax Returns, including
accompanying schedules, related workpapers, and documents relating to rulings or
other determinations by Taxing Authorities;

          (ii) the execution of any document that may be necessary or reasonably
helpful in connection with any Tax Contest, the filing of a Tax Return or
Adjustment Request by a member of the Extendicare Group or the ALC Group, obtaining
a tax opinion, a private letter ruling or an advance tax ruling, or other matters
covered by this Agreement, including certification (provided in such form as may be
required by applicable law or reasonably requested and made to the best of a
party’s knowledge) of the accuracy and completeness of the information it has
supplied;

          (iii) the use of the parties’ commercially reasonable efforts to obtain any
documentation that may be necessary or reasonably helpful in connection with any of
the foregoing;

          (iv) the use of Extendicare Group’s commercially reasonable efforts to assist
the ALC Group in obtaining a waiver from Section 1504(a)(3) of the Code, including
the making of any representations and the obtaining of any private letter ruling;
provided, however, that ALC shall retain sole control over, and be
liable, and indemnify and hold the Extendicare Group harmless, for all costs
incurred in connection with, the obtaining of such waiver;

          (v) the use of the parties’ commercially reasonable efforts to make the
applicable party’s current or former directors, officers, employees, agents and
facilities available on a reasonable and mutually convenient basis in connection
with the foregoing matters; and

          (vi) the reasonable use
by ALC of Extendicare Group’s systems, including any
relevant hardware and software, for the preparation and filing of Returns for all
tax periods ending on or before the Separation Date.

                    (b) If a party fails ,without good cause, to comply with any of its obligations set forth
in this Section 5.07 upon reasonable request and notice by the

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other party, and such failure results in the imposition of additional Tax, the nonperforming
party shall be liable in full and shall indemnify and hold the other party harmless for such
additional Tax.

                SECTION 5.08. Confidentiality. Any information or documents provided under this
Agreement shall be kept confidential by the recipient-party, except as may otherwise be necessary
in connection with the filing of Tax Returns or with any Tax Contest. In addition, if Extendicare,
EHI or ALC determines that providing such information could be commercially detrimental, violate
any law or agreement or waive any privilege, the parties shall use commercially reasonable efforts
to permit compliance with the obligations under this Agreement in a manner that avoids any such
harm or consequence.

                SECTION 5.09. Retention of Tax Records. If either Extendicare, EHI or ALC intends to
dispose of documentation with respect to any Pre-Separation Period, including books, records, Tax
Returns and all supporting schedules and information relating thereto (after the expiration of the
applicable statute of limitations), of any member of the other Group, they shall provide written
notice to the other party describing the documentation to be disposed of 60 days prior to taking
such action. The other party may arrange to take delivery of the documentation described in the
notice at its own expense during the succeeding 60 day period.

ARTICLE VI

Resolution of Disputes

                SECTION 6.01. Tax Disputes. The parties will endeavor to resolve in an amicable
manner all disputes arising in connection with this Agreement. The parties shall negotiate in good
faith to resolve any Tax Dispute for not less than 45 days. Upon written notice of either party
after 45 days, the matter will be referred to a Tax Advisor acceptable to both parties. The Tax
Advisor may, in its discretion, obtain the services of any third-party necessary to assist it in
resolving the dispute. The Tax Advisor shall provide written notice to the Companies of its
resolution of the dispute as soon as practicable, but in any event no later than 45 days after its
acceptance of the matter for resolution. Any such resolution by the Tax Advisor will be binding on
the parties and the parties shall take, or cause to be taken, any action necessary to implement the
resolution. All fees and expenses of the Tax Advisor shall be shared equally by EHI, on the one
hand, and ALC, on the other hand. If, having determined that the dispute must be referred to a Tax
Advisor, after 45 days the parties are unable to find a Tax Advisor willing to adjudicate the
dispute in question and whom the parties in good faith find acceptable, then the dispute will be
resolved pursuant to the procedures described in Section 7.11 of the Separation Agreement,
provided, however, that only an arbitrator that qualifies as a Tax Advisor shall be
selected.

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ARTICLE VII

Miscellaneous and General

                SECTION 7.01. Modification or Amendment. The parties may modify or amend this
Agreement only by written agreement executed and delivered by duly authorized officers of the
respective parties.

                SECTION 7.02. Termination. In the event the Arrangement Agreement is terminated
pursuant to its terms prior to the Separation, this Agreement shall automatically and
simultaneously terminate without the approval of ALC, EHI, Extendicare or the shareholders of
Extendicare. In the event of such termination, no party shall have any liability to any other
party pursuant to this Agreement, except under Section 5.08. It is understood and agreed that the
consummation of the Transactions shall not constitute a termination of this Agreement.

                SECTION 7.03. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed given upon receipt by
the parties at the following fax numbers (or at such other address for a party as shall be
specified by like notice) of a fax followed by delivery at the following addresses of such notice
by overnight courier of an international reputation:

If to Extendicare or EHI, to:

Extendicare Real Estate Investment Trust

3000 Steeles Avenue East

Markham, Ontario

Canada

L3R 9W2

Attention:

Fax:

with a copy to:

Extendicare Health Services, Inc.

111 West Michigan Street

Milwaukee, Wisconsin 53203

Attention: Tax Department

Fax:

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If to ALC, to:

Assisted Living Concepts, Inc.

111 West Michigan Street

Milwaukee, Wisconsin 53203

Attention:

Fax:

with a copy to:

Attention:

Fax:

                SECTION 7.04. Interpretation. When a reference is made in this Agreement to a
Section, Exhibit, Schedule or party, such reference shall be to a Section of, or an Exhibit,
Schedule or party to, this Agreement unless otherwise indicated. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words “include”, “includes” or “including” are used
in this Agreement, they shall be deemed to be followed by the words “without limitation”. The
words “hereof”, “herein”, “hereby” and “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular provision of this
Agreement. The words “date hereof” shall refer to the date of this Agreement. The term “or” is
not exclusive. The word “extent” in the phrase “to the extent” shall mean the degree to which a
subject or other thing extends, and such phrase shall not mean simply “if”. The definitions
contained in this Agreement are applicable to the singular as well as the plural forms of such
terms. Any agreement or instrument defined or referred to herein or in any agreement or instrument
that is referred to herein means such agreement or instrument as from time to time amended,
modified or supplemented. References to a person are also to its permitted successors and assigns.
IF, AND TO THE EXTENT, THE PROVISIONS OF THIS AGREEMENT CONFLICT WITH THE SEPARATION AGREEMENT,
ARRANGEMENT AGREEMENT OR OTHER AGREEMENT BY AND BETWEEN THE PARTIES TO THIS AGREEMENT, THE
PROVISIONS OF THIS AGREEMENT SHALL CONTROL.

                SECTION 7.05. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any applicable law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full force and effect so
long as the economic or legal substance of the matters contemplated hereby is not affected in any
manner materially adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable
manner to the end that objectives contemplated hereby are fulfilled to the extent possible.

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                SECTION 7.06. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties and delivered to
the other parties. Each party need not sign the same counterpart.

                SECTION 7.07. Entire Agreement; Third-Party Beneficiaries. This Agreement, taken
together with the other Transaction Agreements, constitutes the entire agreement, and supersedes
all prior agreements and understandings, both written and oral, among the parties with respect to
the Transactions. Nothing contained in this Agreement is intended to confer upon any person other
than the parties hereto and their respective successors and permitted assigns, any benefit, right
or remedy under or by reason of this Agreement.

                SECTION 7.08. Certain Obligations. Whenever this Agreement requires any of the
Affiliates of any party to take any action, this Agreement will be deemed to include an undertaking
on the part of such party to cause such Affiliates to take such action.

                SECTION 7.09. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, regardless of the laws that might otherwise
govern under applicable principles of conflicts of laws.

                SECTION 7.10. Assignment. Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part, by operation of law or
otherwise by any of the parties without the prior written consent of the other parties. Any
purported assignment without such consent shall be void. Subject to the preceding sentences, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and assigns.

                SECTION 7.11. Survival. Except with respect to Sections 5.07, 5.08 and 5.09, which
shall remain in effect without limitation as to time, the provisions in this Agreement shall be
unconditional and absolute and shall remain in effect until the expiration of the statute of
limitations for all taxable periods that end before or include December 31 of the calendar year in
which the Separation occurs and, if later, until the resolution of all disputes under this
Agreement that arose during such periods.

15

 

                IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective
officers as the date first set forth above.

	 	 	 	 	 
	 	EXTENDICARE, INC., 

 	 
	 	  by  	 	 
	 	 	 	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 
	 	EXTENDICARE HOLDINGS, INC.,

 	 
	 	  by  	 	 
	 	 	 	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 
	 	ASSISTED LIVING CONCEPTS, INC.,

 	 
	 	  by  	 	 
	 	 	 	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

16exv10w3

 

Exhibit
10.3

AGREEMENT FOR PAYROLL AND BENEFIT SERVICES

This
agreement (the “Agreement”) is entered into this       day of      , 2006 (the “Effective Date”)
between Extendicare Health Services, Inc., a Delaware corporation, Milwaukee, Wisconsin (“EHSI”)
and Assisted Living Concepts, Inc., a Nevada corporation, Milwaukee, Wisconsin (“ALC”).

Whereas, ALC is currently a wholly owned subsidiary of EHSI; and

Whereas, EHSI currently provides ALC with certain Payroll and Benefit services, as hereafter
defined, for all ALC employees; and

Whereas, effective on the Separation Date, as hereafter defined, ALC shall become an independent,
public company; and

Whereas, ALC shall continue to need the Payroll and Benefit Services currently provided by EHSI and
EHSI is willing to provide such Payroll and Benefit Services;

Now, therefore, for good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged between the parties including without limitation the mutual covenants contained in
this Agreement, the parties hereby covenant and agree as follows:

     1. Payroll Services.

	 	1.1.	 	Payroll Services Defined. EHSI covenants and agrees to
provide to ALC, during the Term, as hereafter defined, of this Agreement the
specific Payroll Services which are set forth on Exhibit 1.1 hereto, which is
incorporated herein by reference (the “Payroll Services”). Exhibit 1.1 sets forth
the description of the specific Payroll Services now provided by EHSI to ALC and
the hours per month which are needed to provide the Payroll Services. These
identical Payroll Services shall continue to be provided to ALC during the Term of
this Agreement unless expanded or reduced by ALC as provided for herein.
	 
	 	1.2	 	Additional Payroll Services. The Payroll services do not
include services that may be required upon wage and hour audits, or other specific
projects that ALC may request of EHSI. In the event that ALC determines that it
needs additional payroll services, EHSI agrees to provide such additional payroll
services, provided that EHSI is currently providing such additional payroll
services to its own employees. The parties shall agree upon the additional
compensation to be provided to EHSI by ALC for such additional payroll services
which shall be based upon the actual costs and benefits being paid by EHSI to those
employees who will be providing such additional payroll services plus a reasonable
markup. The parties shall enter into an Addendum to this Agreement setting forth
the terms and conditions governing the

1

 

	 	 	 	delivery of such additional payroll services. Thereafter, such additional
payroll services shall be deemed Payroll Services pursuant to this Agreement.

	 	1.2	 	New Facility Fees. EHSI agrees to provide set-up services for any
newly constructed or acquired assisted living facilities (the “New Facilities”)
that ALC may acquire (the “New Facility Set Up Service”). The new facility set-up
fee for each new assisted living facility added by ALC is:

	 	 	 
	Number of ALF’s Added:	 	Total One Time Set-Up Fee:
	Between 1 to 4 ALF’s
	 	$   800.00
	Between 5 to 9 ALF’s
	 	$2,500.00
	Between 10 to 20 ALF’s
	 	$3,500.00
	More than 20 ALF’s
	To be negotiated be no less than $170 per facility

     2. Employee Benefit Services.

	 	2.1	 	Employee Benefit Services Defined. EHSI covenants and agrees
to provide to ALC, during the Term, as hereafter defined, of this Agreement the
specific Employee Benefit Services which are set forth on Exhibit 2.1, which is
incorporated herein by reference (the “Benefit Services”). Exhibit 2.1 sets forth
the description of the specific benefit services now provided by EHSI to ALC and
the hours per month which are needed to provide such services. These identical
Benefit Services shall continue to be provided to ALC during the Term of this
Agreement unless expanded or reduced by ALC as provided for herein.
	 
	 	2.2	 	Additional Benefit Services. In the event that ALC determines
that it needs additional benefit services, EHSI agrees to provide such additional
benefit services, provided that EHSI is currently providing such additional benefit
services to its own employees. The parties shall agree upon the additional
compensation to be provided to EHSI by ALC for such additional benefit services
which shall be based upon the actual costs and benefits being paid by EHSI to those
employees who will be providing such additional benefit services plus a reasonable
markup equivalent to the markup provided for the Services. The parties shall enter
into an Addendum to this Agreement setting forth the terms and conditions governing
the delivery of such additional benefit services. Thereafter, such additional
benefit services shall be deemed Benefit Services pursuant to this Agreement.

     3. Cancellation or Addition to Payroll and Benefit Services.

In the event that ALC determines that it does not need or plans to add, and EHSI has
agreed to add, certain specific Payroll and/or Benefit Services, ALC shall provide a
Notice, as hereafter defined, to EHSI at least ninety (90) days in advance of the date
the specific Payroll and/or Benefit Services are no longer needed by ALC; and, in

2

 

such event, an adjustment shall be made by the parties in the Per Check Fee and the
Annual and Monthly Fee, as hereafter defined, payable to EHSI by ALC for the Payroll and
Benefit Services.

	 	4.	 	Standard for Performance. The Payroll and Benefit Services shall be provided
to all of ALC’s current employees and any future employees hired by ALC during the Term in
the same manner and quality as are currently provided to ALC employees and to the employees
of EHSI.

	 	5.	 	Term of the Agreement; Termination.

	 	5.1	 	Initial Term. The initial term (the “Term”) of this
Agreement shall be five (5) years commencing on the date ALC becomes an
independent, public company (the “Commencement Date) and expiring, unless sooner
terminated or extended pursuant to the provisions of this Agreement, on the last
day preceding the fifth (5th) anniversary of such Commencement Date
(the “Expiration Date”). The parties shall record the Commencement Date and the
Expiration Date at such time as the Commencement Date has been established on
Exhibit 5.1, which is incorporated herein by reference (the “Term Commencement and
Expiration Date”). In the event the Commencement Date is not the first day of
the month, the Monthly Fee for the first month of payment shall include the
prorated portion of the Monthly Fee from the Commencement Date to the end of the
month in which the Commencement Date occurs.
	 
	 	5.2	 	Renewal Term. ALC shall have the absolute right, exercisable
within its sole discretion, to extend the Term of this Agreement for one (1)
additional period of two (2) years (the “Renewal Term”) on the same terms,
covenants, and conditions as are set forth in this Agreement, except there shall
be no further options to extend the Term or the Renewal Term. The option to extend
shall be exercised by a written Notice from ALC to EHSI at least six (6) months
prior to the Expiration Date of the Term. The Notice shall be give pursuant to
the Notice provisions of this Agreement.
	 
	 	5.3	 	Termination Rights. ALC shall have the absolute right to
terminate this Agreement (a) in the event of an uncured default as provided in
this Agreement and, further, (b) at anytime and for any reason, during the Term or
the Renewal Term upon ninety (90) days prior written Notice . EHSI shall have the
right to terminate this Agreement during the Term or the Renewal Term, solely in
the event of an uncured default as provided in this Agreement. The right of
termination provided to the parties in this Section shall be in addition to any
other rights and remedies available to the parties in the event of a default and
shall not be the exclusive remedy for an uncured default.

3

 

	 	6.	 	Fee for Payroll and Benefit Services.

	 	6.1	 	The Per-Check Fee. 

	 	6.1.1.	 	Per-Check Fee and Fee Annual Procedure and Monthly Payment.

ALC shall pay to EHSI, during the Term of this Agreement including any
renewal term, an annual fee based upon the number of checks processed by
ALC pursuant to this Agreement (the “Annual Per-Check Fee”). The Annual
Per-Check Fee shall be paid by ALC in equal, consecutive monthly
installments (the “Monthly Per-Check Fee Payment”) based upon the parties
estimate of the number of checks to be processed with a annual audit and
“true up” of the actual number of checks processed as described below.
The monthly payment shall be made on or prior to the fifteenth
(15th) day of each month based upon the estimate of the number
of checks to be processed. The first Monthly Payment shall be made on the
fifteenth (15th) day of the first month following the
Commencement Date. If the Commencement Date does not occur on the first
(1st) day of the Month the first Monthly Payment shall include
both the Monthly Payment due and any prorated portion of the Monthly
Payment for the month in which the Commencement Date occurred.

	 	6.1.2	 	Annual Per-Check Fee Estimate. Monthly Fee Payment.
Annual Increase.

The parties agree that the estimated number of checks to be processed for
the first (1st) year of the Term is 113,480 and the Per-Check
fee (the “Per-Check Fee”) for the first (1st) year of the Term
shall be Two and 80/100 Dollars ($2.80). The Monthly Per-Check Fee
Payment, based on the above estimate, shall be Twenty Six Thousand, Four
Hundred Seventy Eight and no/100 Dollars ($26,478.00). The Annual
Per-Check Fee of $2.80 shall be increased on the first anniversary of the
Commencement Date and each anniversary date thereafter during the Term
and any renewal term by three percent (3%) per annum. The Monthly
Per-Check Fee Payment shall be increased on the first anniversary of the
Commencement Date and each anniversary date thereafter during the Term
and any renewal term based upon the prior years’ annual check volume and
the revised annual per-check fee.

	 	6.2	 	Fixed Costs Fee and Payment.

	 	6.2.1	 	EV3 License Fee.

In addition to the Annual Per-Check Fee, ALC shall pay to EHSI a EV3
License Fee of Thirteen Thousand, Six Hundred and Eighty 00/100 Dollars
($13,680.00) for the first (1st) year of the Term (the “EV3
Annual License Fee”), based upon the percentage of ALC

4

 

employees listed on the EV3 master file to the total number of employees
(including all ALC and EHSI and other non-ALC and non-EHSI employees) on
the master file. The EV3 Annual License Fee shall be paid in equal,
consecutive monthly installments of One Thousand, One Hundred Fifty Five
and 00/100 Dollars ($1,155.00) at the same time as the payment of the
Monthly Per-Check Payment Fee with an adjustment and “True up” made on an
annual basis at the same time as the “true up” as provided below. The
EV3 Annual License Fee shall be adjusted annually based the current EV3
Annual License Fee multiplied by 1.25 and then multiplied by the
percentage of ALC employees listed on the EV3 master file to the total
number of employees (including all ALC and EHSI and other non-ALC and
non-EHSI employees) on the master file upon the anniversary date. There
shall be no annual increase in the EV3 License Fee except for the annual
maintenance cost increases for the EV3 software.

	 	6.2.2.	 	Other Fixed Services Costs Paid by ALC.

In addition to the Annual Per-Check Fee and the EV3 License Fee, ALC
shall pay to EHSI a fixed charge of Twenty One Thousand, Two Hundred and
no/100 Dollars ($21,200.00) (the “Other Fixed Services Costs”) in equal,
consecutive monthly installments of One Thousand, Seven Hundred Sixty Six
and 67/100 Dollars ($1,766.67) at the same times as the payment of the
Monthly Per-Check Payment Fee. The Other Fixed Services Costs shall be
subject to an increase on an annual basis of three percent (3%) on the
first anniversary date of the Commencement Date and each anniversary date
thereafter during the Term and any renewal term.

The Other Fixed Services Costs shall not be subject to any adjustment
based upon the number of checks actually processed by EHSI for ALC.

	 	6.3	 	Costs To Be Paid Directly By ALC To Vendors.

	 	6.3.1	 	The following costs and expenses associated with the
performance of the Payroll and Employee Benefit Services are not included
in the payments described above and shall be paid by ALC directly to the
specific vendor providing such services or, if such costs and expenses are
advanced by EHSI , shall be separately reimbursed to EHSI upon submission
of an invoice setting for the such costs and expenses. EHSI shall arrange,
wherever possible, to have these costs and expenses, billed directly to
ALC. The costs and expenses shall be the following:

5

 

(a) All E-Time service fees including without limitation license and
maintenance fees; and
(b) All ADP fees for payroll processing, set-up costs for new facilities,
year end processing and garnishment services.
(c) Courier costs associated with the delivery of checks from ADP or from
EHSI.

	 	6.4	 	Annual True-up of Payment. EHSI covenants to provide ALC with
a summary of the quarterly volume of checks issued, within thirty (30) days of each
quarter end to monitor the final Annual Per-Check Fee fees due pursuant to the
Agreement for the preceding twelve (12) month period. Within 30 days prior to each
anniversary date of the Commencement Date, EHSI agrees to provide ALC with a
summary of the total volume of checks for the preceding twelve (12) months. ALC
covenants to reimburse EHSI for any excess of fees due in excess of the installment
payments made to EHSI during the year and EHSI covenants to reimburse ALC for any
excess of installments paid in excess of fees due upon 30 days of receipt of the
true-up information from EHSI.

	 	7.	 	Default and Remedies.

	 	7.1	 	Event of Default: Payment. An event of default shall occur in
the event that ALC fails to pay to EHSI the Fees, costs or expenses provided for
herein and such default in payment extends for a period of five (5) business days
from the date EHSI delivers Notice of such Payment Default to ALC (“Payment
Default”); provided, that in the event of a dispute, ALC shall not be required to
pay in full within five (5) business days of receipt of a Payment Default Notice
any disputed amounts. If ALC disputes in good faith any portion of the Fees, costs
or expenses, ALC shall notify EHSI in writing of the nature and basis of the
dispute within five (5) days of receipt of the Payment Default Notice, and ALC
shall be entitled to withhold from payment all or a portion of such disputed
amounts. Each of the parties hereto shall use commercially reasonable efforts to
resolve any such dispute as soon as reasonably possible, and if such dispute is not
resolved or if any disputed amounts are not paid on or before the next payment due
date, any of the parties to such dispute may deliver Notice of the existence of a
dispute and refer the matter to arbitration pursuant to dispute resolution
provisions in the Separation Agreement, on the effective date of the Separation
Agreement between Extendicare Real Estate Investment Trust and ALC (the
“Separation Agreement”). ALC shall pay any disputed amounts within five (5) days
after resolution of any disputed items, if such dispute is resolved in EHSI’s favor
after the original payment due date. Without prejudice to the rights of EHSI, in
the event payment of any undisputed amount is not received by EHSI on or prior to
the applicable payment due date, such amount shall be subject to a late payment
charge equal to one and one-half percent (1.5%) per month (or the maximum rate
permissible by law, if less), based on a thirty (30) day month, of the amount

6

 

	 	 	 	overdue for the actual number of calendar days such payment is overdue
(including the date payment is actually made).

	 	7.2	 	Event of Default: Non-Payment. An event of default shall occur
in the event that either party fails to perform any of its obligations provided for
herein (other than the Payment Default which shall be governed by the provisions of
Section 4.1 hereof) and such failure continues for a period of fifteen (15)
business days following the receipt of a Notice of such failure (a “Non-Payment
Default”); provided however, in the event the Non-Payment Default is unable to be
cured within such fifteen (15) business day period there shall not be a default if
the defaulting party has commenced good faith actions to cure such default and
continues to exercise such good faith efforts. (Hereafter, both the Payment
Default and the Non-Payment Default shall be collectively referred to as an “Event
of Default”).
	 
	 	7.3	 	Remedies. In the event of the occurrence of an Event of
Default, the parties shall have the right to exercise all remedies available to
them at law or in equity resulting from such Event of Default, including without
limitation the Termination rights referred to in Section 5.3 above.
	 
	 	7.3	 	Limitation of Liability. None of the parties hereto shall, nor
shall their subsidiaries, employees or agents, be liable to another party hereto
for any claims, liabilities, actions, suits, judgments, fines, losses, injuries,
damages, costs or expenses (all of the foregoing collectively “Losses”) arising out
of or connected to the provision of the Payroll and Benefit Services under this
Agreement, other than any Losses caused by the gross negligence or willful
misconduct of such party, its subsidiaries, employees, or agents arising out of or
in connection with the provision of the Services under this Agreement. Each party
hereto waives all rights to recover against any other party for any Losses to its
respective tangible personal property (whether owned or leased) from any cause
which is covered by insurance maintained by such party or should have been covered
by insurance required to be maintained under this Agreement, including respective
deductibles or self-insured retentions, and agrees to obtain any necessary consent
from its insurers with respect to such waiver.
	 
	 	7.5	 	Amount of Damages. Notwithstanding anything to the contrary in
this Agreement, the maximum liability of EHSI and its subsidiaries and their
employees and agents, and the sole remedy of ALC for any losses under this
Agreement or otherwise arising with respect to the matters addressed herein,
regardless of the form of action that imposes liability, whether in contract,
equity, negligence, intended conduct, tort or otherwise, shall be a refund of the
aggregate annual fee paid to EHSI by ALC for the Payroll and Benefit Services in
the year such liability occurred and a termination of the provision of the services
related to such liability, and none of the parties hereto or their subsidiaries or
their respective employees or agents shall be liable to any other

7

 

	 	 	 	party hereto for loss of profits or consequential, incidental, special, indirect
or punitive damages.
	 	 	 	 
	 	7.6	 	Additional Representations. EHSI does not make any
representations or warranties, express or implied, regarding the merchantability,
suitability, originality, fitness for a particular use or purpose, or results to be
derived from the use of any materials, deliverables or services provided under this
Agreement. EHSI does not guarantee that any work product or deliverable will be
error free.

	 	8.	 	Independent Contractor.

The parties acknowledge and agree that EHSI is being retained by ALC solely as a third
party independent contractor. Neither this Agreement nor the relationship created
between the parties pursuant to this Agreement is intended to, and shall not be
interpreted or construed to, create the relationship of agent, servant, employee,
partnership, joint venture or association between the parties for any purpose.

	 	9.	 	Confidential Information.

As a result of the performance of this Agreement, EHSI shall have access to and the use
of confidential and proprietary information and documents of ALC (the “Confidential
Information”). EHSI hereby agrees that any and all information and documentation
disclosed to EHSI by ALC in the performance of EHSI’s Payroll and Benefit Services shall
be Confidential Information. EHSI covenants to maintain the confidentiality of such
Confidential Information and shall not use or disclose such Confidential Information to
any person except as is required in the performance of the Payroll and Benefit Services.
EHSI shall not disclose, except as required by law, any such Confidential Information
and EHSI shall not copy, reproduce, retain or in any manner appropriate such
Confidential lnformation without the prior written consent of ALC. EHSI agrees that the
remedy at law for any breach of this Confidentiality provision will be inadequate and
that upon a breach hereof, ALC shall be entitled as a matter of right to injunctive
relief in any court having jurisdiction to enforce the provisions hereof by specific
performance without the necessity of proving actual damages or the inadequacy of a legal
remedy. The rights conferred on ALC by this section shall not be exclusive of any other
right or remedy which ALC might have at law, or in equity, upon a breach of this
Confidentiality provision.

	 	10.	 	Restrictive Covenant.

During the Term and any Renewal Term of this Agreement and for a period of one (1) year
following the expiration or earlier termination of this Agreement, neither party shall,
without the prior written consent of the other party, knowingly employ, engage for hire,
solicit for hire, or otherwise contract with or employ, directly or indirectly, through
any subsidiary or affiliate, any employee of the other party who was involved in the
performance of the Payroll and Benefit Services.

8

 

	 	11.	 	Compliance with Governmental Directives

	 	11.1	 	Disqualified Individuals. The parties represent that they are
not excluded or debarred from participation in the Medicare, Medicaid, or other
Federal health care programs, and agree not to employ, contract with, or obtain
goods or services from any person or entity so excluded or debarred in violation of
the Health Insurance Portability and Accountability Act of 1996, Pub. L. No.
104-191, the Balanced Budget Act of 1997, Pub. L. No. 105-33, or the Office of
Inspector General Special Advisory Bulletin 9925427, 9/29/99, or other applicable
laws. The parties shall verify compliance with this paragraph by reviewing the
Website maintained by the US Department of Health and Social Services Office of
Inspector General (http://www.dhhs.gov/oig), and the U.S. General Services
Administration (http://epls.arnet.gov). In the event a party employs, contracts
with, or obtains goods or services from an excluded or debarred person or entity,
the party shall immediately notify the other parties in writing and the other
parties shall have the right to immediately terminate this Agreement,
notwithstanding any other provisions of this Agreement, without penalty or costs
except those incurred prior to the date of termination.
	 
	 	11.2	 	Governmental Agency Access. Until the expiration of five (5)
years after the furnishing of all Payroll Services pursuant to this Agreement, EHSI
shall make available, upon written request to any governmental agency having
jurisdiction, this Agreement, and the books, documents and records of EHSI that are
necessary to certify the nature and extent of the costs incurred by EHSI in the
performance of this Agreement, and, if EHSI carries out any of the duties of the
Agreement through a subcontract, with a value or cost of $10,000 or more over a
twelve-month period, with a related organization (as that term is defined by
regulation), such subcontract shall contain a clause to the effect that until the
expiration of five (5) years after the furnishing of such subcontracted services,
the related organization shall make available, upon written request to such
governmental agency, such subcontract, and any books, documents and records of such
organization that are necessary to verify the nature and extent of such costs.
	 
	 	11.3.	 	HIPAA Compliance. The parties shall comply with the applicable provisions of
the Health Insurance Portability and Accountability Act of 1966, Pub. L. No. 104-191
(“HIPAA”), and the regulations promulgated by the U.S. Department of Health
and Human Services (the “Privacy Rule”) and as further stated in Exhibit 11.3 titled
“Business Associate Requirements”, which is incorporated herein by reference.
	 
	 	11.4.	 	SOX Compliance. The parties covenant and agree to take any and
all actions deemed reasonably required in order to enable ALC to comply the
requirements of the Sarbanes-Oxley Act of 2002 including without limitation the
actions set forth on Exhibit 11.3 attached hereto (the “SOX Compliance
Requirements”).

	 	12.	 	Hardware and Software Compatibility with EHSI’s Payroll and Benefit System

ALC agrees to maintain hardware at its facilities and software compatible to EHSI’s
system and to upgrade such hardware and software to be consistent to the hardware and
software systems deployed by EHSI, including when EHSI may choose to upgrade or replace
such hardware or software. EHSI agrees to provide ALC with a

9

 

minimum notice of ninety (90) days before deployment of any changes to or upgrade of
its hardware or software that may require ALC to upgrade its hardware and software at
its facilities.

EHSI shall utilize software programs to detect errors made by ALC as it normally does
for EHSI. ALC acknowledges that guidelines and regulations for payment are subject to
interpretation by the applicable governmental agency(ies). EHSI does not represent or
guarantee that a governmental agency will not interpret a guideline or regulation in a
manner inconsistent with the software programs used by EHSI. EHSI sole obligation is to
maintain and to utilize its usual and customary software, and the currently available
updates of the software programs. ALC is obligated to ensure that its facilities
maintains hardware, equipment and software that is consistent and compatible with EHSI’s
software systems, hardware and other equipment, so that EHSI may perform the Payroll and
Benefit Services in an efficient, cost-effective manner, without requiring significant
modification to EHSI’s standard systems, software and programs. In the event EHSI
identifies any changes to be made to the ALC’s hardware, equipment, systems or software,
EHSI agrees to provide ninety (90) days advanced notice to ALC including the associated
cost, and ALC agrees that it shall bear the associated cost of any change. ALC hereby
acknowledges and agrees that EHSI is not responsible and shall bear no liability for the
nature or accuracy of the information provided by or used in conjunction with the
software programs or the form and substance of the underlying transactions thereto.
EHSI shall not be responsible for any ALC provided information that is inaccurate or for
any transaction to which such information related that violates or breaches any
applicable Laws. EHSI shall not be responsible and shall bear no liability for data
entry errors or other actions or omissions made by ALC personnel.

	 	13.	 	Notices.

	 	13.1	 	Form of Notice. Delivery Methods. Each party giving any
notice or making any request, demand or other communication (each a “Notice”)
pursuant to this Agreement shall give the Notice in writing and shall use one or
more of the following methods of delivery, each of which for purposes of this
Agreement is a writing: (a) personal delivery with proof thereof by affidavit from
the person who has personally delivered the Notice; or (b) registered or certified
mail, in each case, return receipt requested and postage prepaid; or (c) a
nationally (or internationally) recognized overnight courier, with all fees prepaid
and with a written proof of delivery provided by such courier; or (d) facsimile
along with proof of receipt by the party intending to be bound or such party’s
designated agent by an acknowledgement of transmission report generated from the
machine from which the facsimile was sent.
	 
	 	13.2	 	Persons to Whom Notice Must be Delivered. Each party giving a
Notice shall address the Notice to the appropriate person at the receiving party
(the “Addressee”) at the address listed below or to another or additional Addressee

10

 

	 	 	 	or at another address designated below or by the party in a Notice pursuant to
this Section:

	 	13.2.1	 	If to EHSI:

Extendicare Health Services, Inc.

111 West Michigan Street

Milwaukee, WI 53203

Attention: President

With a copy to:

Extendicare Health Services, Inc.

111 West Michigan Street

Milwaukee, WI 53203

Attention: Vice President and General Counsel

	 	13.2.2	 	If to ALC:

Assisted Living Concepts, Inc.

111 West Michigan Street

Milwaukee, WI 53203

Attention: President

With a copy to:

Assisted Living Concepts, Inc.

111 West Michigan Street

Milwaukee, WI 53203

Attention: Corporate Legal Counsel

	 	13.3	 	Effective Date of Notice. A notice to the Addressee is
effective only when each person required to receive a copy of the Notice has
received the copy. Despite the other clauses of this Section, if any Notice is
received after 5:00 p.m. on a business day where the Addressee is located, or on a
day that is not a business day where the Addressee is located, then the Notice is
deemed received at 9:00 am on the next business day where the Address is located.
For purposes hereof a business day shall mean Monday through Friday excluding any
national holidays.

	 	14.	 	Cooperation and Further Assurances.

Each party and its officers and representatives shall use all reasonable efforts to
take, or cause to be taken, all actions necessary or desirable to consummate and make
effective the performance of this Agreement. If at anytime after the Commencement Date
any action is necessary or desirable to carry out the purposes of this Agreement, each
party and its officers and representatives shall use all commercially reasonable efforts
to take, or cause to be taken, all such action.

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	 	15.	 	Successors and Assigns.

15.1 Assignment Prohibited. Neither party shall have the right to assign this
Agreement nor its rights and interest hereunder except with the other party’s prior
written consent, which consent shall not be unreasonably withheld or delayed.

15.2 Successors and Assigns. This Agreement is for the sole benefit of the
parties and their permitted successors and assigns, and shall be binding upon the
permitted successors and assigns of the parties.

15.3 Delegation of Responsibility. EHSI shall have the right to employ, retain,
or subcontract with other third party persons, firms, or corporations to perform all or
any part of the Payroll and Benefit Services to be performed hereunder with the prior
written consent of ALC, which consent shall not be unreasonably withheld or delayed, but
such delegation shall not relieve EHSI from its obligations hereunder.

	 	16.	 	Governing Law

The laws of the State of Wisconsin (without giving effect to its conflict of laws
principles) govern all matters arising out of or relating to this Agreement and the
transactions it contemplates, including, without limitation, its interpretation,
construction, performance, and enforcement.

	 	17.	 	Force Majeure.

The parties to this Agreement shall not be liable to each other for any delay or failure
to perform any of the terms of this Agreement if such delay or failure is due to or
cause by acts of God, war, rebellion, riot, strike of labor dispute, fire, flood, or
laws or demands of the United States or any State thereof or any governmental agency or
any other such cause which is beyond the control of the parties and for which the
parties have expended every reasonable effort to circumvent or prevent.

	 	18.	 	Severability.

If any part of this Agreement is declared invalid or unenforceable, the remaining
provisions shall remain valid and enforceable.

	 	19.	 	Construction.

The use of the singular or masculine pronoun in this Agreement shall include, wherever
appropriate, the plural and feminine. The language used in this Agreement will be
deemed to be the language chosen by the parties hereto to express their mutual intent
and no rule of strict construction shall be applied against any party by virtue of its
counsel having drafted this Agreement or otherwise. The captions preceding the sections
of this Agreement are solely for the convenience of the parties in the use of

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this Agreement and shall not be used nor are they intended to be used in the
interpretation or construction of the substantive portions of the sections to which they
relate.

	 	20.	 	Entire Agreement. Modifications. Exhibits Incorporated.

	 	19.1	 	Entire Agreement. This Agreement and the Separation Agreement
constitute the entire agreement of the parties relating to its subject matter. Any
and all prior understandings, agreements or courses of conduct, whether in writing
or verbal, are hereby rescinded in full with respect to any and all terms,
covenants and conditions thereof and neither party shall have any liability of any
nature or kind whatsoever with respect thereto. The relationship between the
parties with respect to the subject matter of this Agreement shall be governed
solely in accordance with the terms, covenants and conditions of this Agreement.
	 
	 	19.2	 	Modifications. Any change or modification of this Agreement
must be in writing and signed by both parties.
	 
	 	19.3	 	Exhibits. All exhibits referred to herein shall be an integral
part of this Agreement and shall be deemed incorporated herein.

	 	21.	 	Waivers and Compliance.

Any failure of the parties to comply with any obligation, covenant, agreement or
condition herein may be expressly waived in writing by the other party, but such waiver
or failure to insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any subsequent
or other failure.

	 	22.	 	Counterparts and Facsimiles

This Agreement may be executed in one or more counterparts, each of which will be deemed
an original and all of which, when taken together will be deemed to constitute one and
the same Agreement. The parties agree that facsimile signatures of the parties shall be
binding and enforceable.

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In Witness whereof the parties have executed this Agreement, being fully authorized to do so and
intending to fully bind their respective corporations to the full and faithful performance of the
terms, covenants and conditions set forth herein and in any Exhibits attached hereto or referred to
herein.

	 	 	 	 	 
	Extendicare Health Services, Inc.

	 	 	 	Assisted Living Concepts, Inc.
	a Delaware corporation

	 	 	 	a Nevada corporation
	 
	 	 	 	 
	 

	 	 	 	 
	Philip W. Small, President

	 	 	 	Laurie A. Bebo, President

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