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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ___________
COMMISSION FILE NUMBER: 0-26980
ARV ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1
COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of outstanding shares of the Registrant's Common Stock, no
par value, as of August 8, 1997 was 11,584,272.
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ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements of ARV Assisted Living, Inc. and subsidiaries (the "Company") have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such regulations. The condensed consolidated financial
statements reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation. All such adjustments are of a
normal recurring nature.
Certain reclassifications have been made to prior period amounts in order to
conform to the presentation at June 30, 1997. The Company has reclassified $8.3
million from "Investments in real estate held for sale" to "Property, furniture
and equipment" at March 31, 1997 to reflect the Company's intention to develop
these properties for its own account. Previously, the Company financed
development of assisted living facilities ("ALFs") by utilizing lease financing
from Health Care real estate investment trusts. Management believes that over
the near term it will develop its ALFs for its own account.
The interim consolidated financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K/A for the fiscal year ended March 31,
1997. The results of operations for the three month period ended June 30, 1997
are not necessarily indicative of the results which may be expected for the full
fiscal year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
On July 14, 1997, the Company entered into a definitive agreement (the
"Stock Purchase Agreement") with Prometheus Assisted Living LLC ("Prometheus"),
an affiliate of Lazard Freres Real Estate Investors LLC ("LFREI"). Subject to
the terms and conditions of the Stock Purchase Agreement, the Company will sell
to Prometheus up to 9,653,325 shares of Common Stock at a purchase price of
$14.00 per share, representing an aggregate investment of $135.1 million (the
"Total Equity Commitment"). The Transaction will be consummated in three phases.
At the Initial Closing, the Company sold to Prometheus 1,921,012 shares,
representing an aggregate investment of $26.9 million. The shares sold to
Prometheus at the Initial Closing represent 16.6% of the outstanding Common
Stock.
Subject to stockholder approval of the Transaction ("Stockholder Approval"), at
the Second Closing the Company will sell to Prometheus 3,078,988 shares.
Thereafter, at one or more Subsequent Closings the Company from time to time at
its election may sell additional shares to Prometheus at $14.00 per share, in
minimum increments of 715,000 shares, until the Total Equity Commitment is
invested or, if earlier, eighteen months after Stockholder Approval or, if
earlier, June 30, 1999 (unless extended by mutual agreement of the parties). If
Prometheus invests the Total Equity Commitment, Prometheus will own
approximately 49.9% of the outstanding Common Stock.
Use of Proceeds. Proceeds from the sale of the shares will be used by the
Company to continue to implement its acquisition and development plans, to repay
debt, to strengthen systems and operations, and to expand services.
Management of the Company; Representation on the Board and Certain Board
Committees. Under the Stockholders Agreement, from and after the date of
Stockholder Approval (the "Stockholder Approval Date") the Company Articles and
the Company's Bylaws (the "Company Bylaws") shall be amended to cause the Board
to be structured to consist of 11 members, of which initially four members will
be designees of Prometheus (the "Prometheus Nominees"). The Stockholders
Agreement provides that Prometheus shall thereafter have on the Board a number
of representatives equal to a percentage of the total number of members of the
Board that is equal to the percentage of Common Stock beneficially owned by
Prometheus; provided, that (i) if Prometheus would be
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entitled to a fractional number of representatives, it will instead be entitled
to a number of representatives equal to the next higher number, (ii) in no event
will Prometheus be entitled to more than four representatives and (iii) after
the occurrence of a Termination Event (which shall occur at any time after the
last Subsequent Closing if either (A) Prometheus no longer owns at least 5% of
the Common Stock on a Fully Diluted Basis or (B) Prometheus no longer owns at
least $25 million of Common Stock), Prometheus shall not be entitled to any
representatives on the Board. If Prometheus' right to nominate directors to the
Board is reduced, Prometheus shall cause the applicable number of Prometheus
Nominees to immediately resign (regardless of the remaining term, if any) from
the Board. So long as the Standstill Period is in effect, the Stockholders
Agreement prohibits Prometheus from seeking additional representation on the
Board. Pursuant to the Stock Purchase Agreement, from and after the date that
the Prometheus Nominees first become members of the Board, any Board action
other than in the ordinary course of business (with certain exceptions) will
require the affirmative vote of eight of the 11 directors.
Pursuant to the Stockholders Agreement, the Company will form an Executive
Committee initially consisting of five members, two of whom will be appointed by
Prometheus, which will be delegated authority to approve certain Board actions
by the affirmative vote of four of the five members. As long as Prometheus
maintains a greater than 30% ownership interest in the Company, it will maintain
its right to have two Prometheus Nominees on the Executive Committee and, in
addition, at least one Prometheus Nominee will serve on each other special
committee of the Board, including the Audit and Compensation committees. Also,
unless a Termination Event occurs, a Prometheus Nominee will serve on the
Nominating Committee, which will generally have the authority to nominate
directors and the Chairman, Chief Executive Officer and President of the
Company. All nominees to the Board (other than the Prometheus Nominees) will
require the unanimous approval of the Nominating Committee, provided that if the
Nominating Committee cannot unanimously agree on a nominee, the nomination will
be referred to the entire Board, which will decide the matter based on a simple
majority vote.
Participation Rights. From and after the date of the Stockholders Agreement
until a Termination Event, Prometheus will generally have the right to
participate in the Company's future equity offerings for cash by purchasing its
proportionate share of the securities offered therein.
Restrictions on Voting Rights. During the Standstill Period, Prometheus has
agreed to vote any shares it owns in favor of directors nominated by the
Nominating Committee or the Board, and, on any other matters, will vote any
shares it owns that represent aggregate ownership of in excess of 49.9% of the
outstanding shares of Common Stock, at its option in accordance with the
recommendation of the Board or proportionally in accordance with the votes of
the other holders of the Common Stock. However, Prometheus may vote all of the
shares of Common Stock that it owns, in its sole and absolute discretion, with
regard to the election of Prometheus Nominees to the Board.
Standstill Provisions. For a period of three years after the shareholder
approval date subject to earlier termination as described below (the "Standstill
Period"), Prometheus may not: (i) acquire more than 49.9% of the outstanding
shares of Common Stock, on an Adjusted Fully Diluted Basis (as defined below);
(ii) act in concert with any other person or group by becoming a member of any
group acquiring, holding, voting or disposing of voting securities pursuant to
Section 13(d) of the Exchange Act (other than such a group comprised exclusively
of Prometheus and one or more of its affiliates); (iii) solicit or propose to
effect or negotiate certain business combination transactions other than
pursuant to the Stock Purchase Agreement; (iv) solicit, initiate or participate
in any "solicitation" of "proxies" or become a "participant" in any "election
contest" (as such terms are defined or used in Regulation 14A under the Exchange
Act, disregarding certain provisions thereof); call, or participate in a call
for, any special meeting of shareholders; request, or take any action to obtain
any list of holders of any securities of the Company; or initiate, propose,
participate in the making of, or solicit shareholders for the approval of any
shareholder proposal; (v) seek Board representation or a change in the
composition or size of the Board, except as permitted by the Stockholders
Agreement; or (vi) assist or encourage any person with respect to any of the
foregoing. As used herein, the term Adjusted Fully Diluted Basis shall mean
Fully Diluted Basis, except that shares of Common Stock issuable upon conversion
of the Company's outstanding convertible debt or upon exercise of options
granted under management benefit plans shall not be included. After giving
effect to the sale of 9,653,325 shares to Prometheus in the Transaction, and
assuming no other change in the number of outstanding shares, Prometheus will
own 49.9% of the Common Stock on an Adjusted Fully Diluted Basis.
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For a period of two years after the shareholder approval date or, if earlier,
until a Termination Event, Prometheus may not sell any shares of Common Stock.
Thereafter, and during the remaining term of the Standstill Period, Prometheus
will not transfer any shares of Common Stock, except (a) in transactions
pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), (b) in negotiated transfers to third parties, other than any
company which is primarily engaged in the assisted living business or derives
$15 million in revenues from the assisted living business (an "Assisted Living
Company"), (c) to certain affiliates who agree to be bound by the terms of the
Stockholders Agreement, (d) in accordance with the Registration Rights Agreement
in a bona fide public offering and (e) subject to certain conditions, to bona
fide financial institutions for the purpose of securing bona fide indebtedness.
Registration Rights. Pursuant to the Registration Rights Agreement, the Company
has granted certain registration rights to Prometheus that will enable
Prometheus to resell in registered offerings certain shares of Common Stock and
other securities of the Company acquired by it to the public under certain
conditions. The shares issued to Prometheus pursuant to the Stock Purchase
Agreement will not be registered under the Securities Act, and may not be sold
in the absence of registration under the Securities Act unless an exemption from
registration is available.
Conditions to Closing. Each of the Company's and Prometheus' obligations to
effect the Second Closing and each of Subsequent Closings are subject to various
mutual and unilateral conditions, including, without limitation, the following:
(i) receipt of Stockholder Approval; (ii) adoption of certain amendments to the
Company Articles and Company Bylaws; (iii) receipt by the Company of title
policies on certain of its properties, a promissory note from an affiliate of
the Company and estoppel certificates from certain of the Company's landlords;
and (iv) the satisfaction of various customary conditions, including the
continuing correctness of the Company's representations and warranties in the
Stock Purchase Agreement, the receipt of any consents necessary for the
Transaction and the absence of a material adverse change in the condition of the
Company.
No Solicitation of Competing Transactions. Under the Stock Purchase Agreement,
the Company has agreed not to solicit any Competing Transaction (as defined
below) and to give notice to Prometheus of any competing proposal that it
receives. The Company's Board may, in accordance with the terms of the Stock
Purchase Agreement, terminate the Transaction with Prometheus at any time in
favor of a Competing Transaction which it determines in good faith will provide
greater value to the Company's stockholders. Prior to entering into a definitive
agreement with respect to a Competing Transaction, however, the Company must
provide Prometheus with a minimum of (A) five business days' notice of the
competing party's interest in pursuing a Competing Transaction and (B) two
business days' notice of the superior proposal of the competing party. Within
such five-business-day period or two-business-day period, as applicable,
Prometheus may propose an improved transaction. For purposes of the Stock
Purchase Agreement, a "Competing Transaction" is defined as (i) any acquisition
in any manner, directly or indirectly (including through any option, right to
acquire or other beneficial ownership), of more than 15% of the equity
securities, on a Fully Diluted Basis, of the Company, or assets representing a
material portion of the assets of the Company, other than any of the
transactions contemplated by the Stock Purchase Agreement or (ii) any merger,
consolidation, sale of assets, share exchange, recapitalization, other than
business combination, liquidation, or other action out of the ordinary course of
business of the Company, other than any of the transactions contemplated by the
Stock Purchase Agreement.
Expenses; Break-Up Fee. The Stock Purchase Agreement provides that (i) if the
Board does not recommend stockholder approval of the Transaction and either (A)
the Company's shareholders fail to approve the Transaction or (B) the Second
Closing has not occurred on or before January 31, 1998, or (ii) the Company
fails to convene the Annual Meeting prior to December 31, 1997, then the Company
shall pay Prometheus a $6.0 million adjustment to the purchase price of the
shares purchased at the Initial Closing, a $7.0 million breakup fee and a
portion of Prometheus' expenses. Alternatively, if the Board recommends
shareholder approval of the Transaction and the shareholders fail to approve the
Transaction, then the Company shall pay Prometheus an $8.7 million adjustment to
the purchase price as well as a portion of Prometheus' expenses. If the
transactions contemplated in the Stock Purchase Agreement do not close as a
result of a willful breach of a material representation, warranty or covenant in
the agreement on the part of the Company, then the Company will pay Prometheus
$13.0 million as both an adjustment to the purchase price of the shares
purchased in the Initial Closing and a breakup fee as well as a portion of
Prometheus' expenses.
Right to Transfer. The Stock Purchase Agreement provides that if the Company
does not receive Stockholder Approval prior to December 31, 1997, Prometheus
shall have the right to transfer
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shares purchased at the Initial Closing without being subject to the
restrictions on transfer set forth in the Stockholders Agreement, so long as it
does not transfer any shares to an Assisted Living Company.
LIQUIDITY AND CAPITAL RESOURCES
In the event that the pending transaction with Prometheus receives
Stockholder Approval, Management believes that the Company's liquidity and
capital resources will be significantly improved. Assuming Stockholder Approval,
the Company will obtain gross equity proceeds of $135.1 million from the sale of
its Common Stock to Prometheus.
The Stock Purchase Agreement provides that (i) if the Board does not
recommend Stockholder Approval of the Transaction and either (A) the Company's
shareholders fail to approve the Transaction or (B) the Second Closing has not
occurred on or before January 31, 1998, or (ii) the Company fails to convene the
Annual Meeting prior to December 31, 1997, then the Company shall pay Prometheus
a $6.0 million adjustment to the purchase price of the shares purchased at the
Initial Closing, a $7.0 million breakup fee and a portion of Prometheus'
expenses. Alternatively, if the Board recommends shareholder approval of the
Transaction and the shareholders fail to approve the Transaction, then the
Company shall pay Prometheus an $8.7 million adjustment to the purchase price as
well as a portion of Prometheus' expenses. If the transactions contemplated in
the Stock Purchase Agreement do not close as a result of a willful breach of a
material representation, warranty or covenant in the agreement on the part of
the Company, then the Company will pay Prometheus $13.0 million as both an
adjustment to the purchase price of the shares purchased in the Initial Closing
and a breakup fee as well as a portion of Prometheus' expenses.
In the event that the Transaction is not consummated, the adjustment to
Prometheus' purchase price and the potential payment of a breakup fee, the
Company's liquidity will be negatively impacted. As a result, the equity
received by Prometheus' initial investment of $26.9 million would be reduced
between $8.7 million to $13 million.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARV ASSISTED LIVING, INC.
By: /s/ Graham P. Espley-Jones
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Graham P. Espley-Jones
Chief Financial Officer
(Duly authorized and principal financial officer)
Date: October 21, 1997
By: /s/ Patrick M. Donovan
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Patrick M. Donovan
Vice President Finance
(Duly authorized officer)
Date: October 21, 1997
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