<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(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, 1998
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)
DELAWARE 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 [ ]
The number of outstanding shares of the Registrant's Common Stock, no par value,
as of August 12, 1998 was 15,880,998.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................... $ 15,760 $102,776
Escrow deposits............................. 12,497 --
Fees receivable and other amounts due from
affiliates................................ 950 571
Fees receivable and other amounts due from
others.................................... 241 --
Prepaids and other current assets........... 5,284 3,920
-------- --------
Total current assets................ 34,732 107,267
Deferred project costs........................ 182 246
Property, furniture and equipment, net........ 170,172 117,557
Goodwill, net................................. 18,825 --
Other non-current assets...................... 9,809 6,781
Net non-current assets from discontinued
operations.................................. 861 1,234
-------- --------
$234,581 $233,085
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 7,234 $ 6,696
Accrued liabilities......................... 3,043 7,864
Notes payable, current portion.............. 10,305 9,388
Accrued interest payable.................... 1,605 1,482
Net current liabilities from discontinued
operations................................ 3,613 6,558
-------- --------
Total current liabilities........... 25,800 31,988
Notes payable, less current portion......... 95,581 81,560
Other non-current liabilities............... 1,282 934
-------- --------
122,663 114,482
-------- --------
Commitments and contingent liabilities
Minority interest in majority owned entities.. 7,602 7,168
-------- --------
Series A preferred stock, convertible and
redeemable; 2,000 shares authorized none
issued or outstanding at June 30, 1998 and
December 31, 1997........................... -- --
Shareholders' equity:
Preferred stock, no par value. Authorized
8,000 shares, none issued and outstanding.. -- --
Common stock, no par value. Authorized
100,000 shares; issued and outstanding
15,881 and 15,848 shares at June 30, 1998
and December 31, 1997, respectively....... 143,286 142,945
Accumulated deficit......................... (38,970) (31,510)
-------- --------
Total shareholders' equity.......... 104,316 111,435
-------- --------
$234,581 $233,085
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE> 3
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -----------------------
1998 1997 1998 1997
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenue:
Assisted living community revenue:
Rental revenue $24,915 $20,817 $47,074 $40,517
Assisted living and other services 5,841 3,848 10,820 7,088
Management fees from others 145 -- 145 --
Management fees from affiliates 203 145 392 287
------- ------- ------- -------
Total revenue 31,104 24,810 58,431 47,892
------- ------- ------- -------
Operating expenses:
Assisted living community
operating expense 19,091 15,153 35,652 29,462
Assisted living community lease
expense 6,055 4,970 11,690 9,105
General and administrative 6,669 2,914 12,653 5,946
Depreciation and amortization 2,239 1,477 4,054 2,908
------- ------- ------- -------
Total operating expenses 34,054 24,514 64,049 47,421
------- ------- ------- -------
Income (loss) from operations (2,950) 296 (5,618) 471
------- ------- ------- -------
Other income (expense):
Interest income 445 239 1,701 259
Other income, net 48 310 119 624
Interest expense (1,543) (1,332) (2,827) (2,704)
------- ------- ------- -------
Total other expense (1,050) (783) (1,007) (1,821)
------- ------- ------- -------
Loss from continuing operations
before income taxes (4,000) (487) (6,625) (1,350)
Income tax expense (benefit) 36 (193) 42 (551)
------- ------- ------- -------
Loss from continuing operations
before minority
Interest and discontinued
operations (4,036) (294) (6,667) (799)
Minority interest 409 408 793 806
------- ------- ------- -------
Loss from continuing operations (4,445) (702) (7,460) (1,605)
======= ======= ======= =======
Loss from operations of
discontinued operations,
net of income tax benefit of $66
and $254 for the three and six
month periods ended June 30, 1997 -- (100) -- (1,838)
------- ------- ------- -------
Net loss $(4,445) $ (802) $(7,460) $(3,443)
======= ======= ======= =======
Basic and diluted loss per common share:
Loss from continuing operations $ (.28) $ (.07) $ (.47) $ (.17)
Loss from discontinued operations -- (.01) -- (.19)
------- ------- ------- -------
Net loss $ (.28) $ (.08) $ (.47) $ (.36)
======= ======= ======= =======
Weighted average common shares
outstanding 15,876 9,662 15,866 9,657
======== ======= ======= =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
3
<PAGE> 4
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
Net cash used in operating activities of continuing
operations......................................... $ (4,953) $ 42
Net cash used in operating activities of discontinued
operations......................................... (2,572) (2,758)
-------- --------
Net cash used in operating activities................ (7,525) (2,716)
-------- --------
Cash flows (used in) provided by investing activities:
Acquisition of Hillsdale Communities............. (56,540) --
Increase in restricted cash...................... (12,497) --
Acquisition of rights under management contracts (1,325) --
Increase in deferred project costs............... (238) (386)
Decrease in investments in real estate, net...... -- 2,080
(Increase) decrease in leased property security
deposits....................................... (509) 446
Proceeds from sale and leaseback of communities.. -- 29,052
Additions to property, furniture and equipment... (3,415) (28,174)
Purchase of limited partnership interests........ (1,200) (2,388)
Increase in other non-current assets............. (719) (159)
-------- --------
Net cash (used in) provided by investing
activities.............................. (76,443) 471
--------- --------
Cash flows (used in) provided by financing activities:
Issuance of common stock, net of issuance costs 233 610
Borrowings under notes payable.................... -- 5,379
Repayments of notes payable....................... (312) (4,420)
Distributions paid from majority owned entities... (359) --
Issuance costs in connection with conversion of
subordinated notes............................. (2,610) --
-------- --------
Net cash (used in) provided by financing
activities............................... (3,048) 1,569
-------- --------
Net decrease in cash and cash equivalents............ (87,016) (676)
Cash and cash equivalents at beginning of period..... 102,776 8,355
-------- --------
Cash and cash equivalents at end of period........... $ 15,760 $ 7,679
======== ========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest........................................ $ 3,544 $ 3,412
======== ========
Income taxes.................................... $ 42 $ 47
======== ========
Supplemental schedule of noncash investing and
financing activities:
Assumption of debt in connection with the
Hillsdale acquisition......................... $ 15,250 $ --
======== =======
Issuance of common stock........................ $ 108 $ --
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements of ARV
Assisted Living, Inc. and subsidiaries ("the Company" or "ARV") 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, 1998. The interim
condensed consolidated financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K for the nine-month period ended
December 31, 1997. The results of operations for the three and six months ended
June 30, 1998 are not necessarily indicative of the results which may be
expected for the full fiscal year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. Subsidiaries, which include limited partnerships
in which the Company has controlling interests, have been consolidated into the
financial statements. All significant intercompany balances and transactions
have been eliminated in consolidation.
NEW PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("OP") No. 98-5, "Reporting on the Costs of Start-up Activities,"
which is effective for fiscal years beginning after December 15, 1998. The SOP
provides guidance on the financial reporting of start-up activities and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed when incurred and, upon adoption, the write
off as a cumulative effect of a change in accounting principle any previously
capitalized start-up or organizational costs. The Company plans to adopt the
provisions of SOP 98-5 in the first quarter of 1999. The carrying amount of such
costs were approximately $1.0 million as of June 30, 1998.
The FASB has also issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires that
all public business enterprises report information about the revenues derived
from the enterprise's products or services (or groups of similar products or
services), about the countries in which the enterprise earns revenues and holds
assets and about major customers regardless of whether that information is used
in making operating decisions. However, this Statement does not require an
enterprise to report information that is not prepared for internal use if
reporting it would be impractical. This Statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is required to be
restated. Comparative information for interim periods is not required until the
second year of application. The adoption of this standard is not expected to
have any impact on the consolidated financial statements.
RESTRICTED CASH
Restricted cash is comprised of cash deposited in escrow for the purchase of
interests in two communities, which closed during July 1998.
5
<PAGE> 6
LOSS PER SHARE
The number of shares used in computing loss per share is equal to the weighted
average number of common shares and common equivalent shares outstanding during
the respective periods. Potentially dilutive securities are not included due to
their antidilutive effect in periods reporting a net loss.
(2) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company has guaranteed indebtedness of certain affiliated partnerships as
follows:
(IN THOUSANDS)
Notes secured by real estate $16,733
Construction loans associated with the
development and construction of
affordable housing apartments $35,515
The maximum aggregate amount of guaranteed land and construction loans is $38.5
million at June 30, 1998.
The Company has guaranteed tax credits for certain partnerships in the aggregate
amount of $78.4 million, excluding interest, penalties or other charges which
might be assessed against the partners.
Certain claims may be made under the aforementioned loan guarantees based upon
the performance of the assets securing such loans. Management has provided for
such claims where reasonably estimable.
LITIGATION
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which the Company is the managing general
partner and a majority limited partner, filed actions in the Superior Court for
the State of California, County of Santa Clara, seeking declaratory judgments
against the landlords of the Retirement Inn of Campbell ("Campbell") and the
Retirement Inn of Sunnyvale ("Sunnyvale"). ARVP II leases the Campbell and
Sunnyvale assisted living communities under long-term leases. A dispute has
arisen as to the amount of rent due during the 10-year lease renewal periods,
which commenced in August 1995 for Campbell and March 1996 for Sunnyvale. The
Partnership seeks a determination that the Partnership is not required to pay
any higher rent during the 10-year renewal periods than during the original
20-year lease terms.
In the event that the court finds against ARVP II, rent for the Campbell and
Sunnyvale communities could increase significantly, which will reduce net income
and cash available for distributions to unit holders in the future. These rent
increases would be retroactive to the commencement of the lease renewal periods
Two other communities leased by ARVP II, the Retirement Inn of Fremont
("Fremont") and the Retirement Inn at Burlingame ("Burlingame") are owned by
entities which are related to the entities that own the Campbell and Sunnyvale
communities. It is not known whether the landlords of those communities will
dispute the amount of rent due during the renewal periods which began January
1997 for Fremont and August 1997 for Burlingame. If so, the Partnership may be
required to file litigation to determine the rights under those leases.
The parties are mutually negotiating the terms of a proposed purchase agreement
involving the sale of the landlord's fee interest in the four communities to
ARVP II and settlement of all claims and have agreed to forebear from
prosecuting the litigation during the pendency of the escrow. Management is of
the opinion, based in part upon opinions of legal counsel, that an adverse
outcome is unlikely.
In November 1997, Emeritus Corporation ("Emeritus"), an unaffiliated competitor
of the Company, initiated a proxy contest for control of the ARV Board of
Directors. In addition, in December 1997, Emeritus launched a hostile tender
offer to acquire majority control of ARV. Emeritus' takeover attempts were
rejected by ARV's shareholders, including a majority of non-affiliate
shareholders, at the Company's annual shareholder meeting on January 28, 1998.
In connection with its hostile takeover efforts, Emeritus filed a lawsuit
against ARV in December
6
<PAGE> 7
1997 to, among other things, enjoin a third party investment in ARV. The lawsuit
was dismissed voluntarily and without prejudice by Emeritus on April 23, 1998.
On April 24, 1998, the Company was served with a lawsuit by Emeritus, which was
filed in the Superior Court of California, County of Orange, alleging that share
purchases on January 16, 1998 by Prometheus Assisted Living LLC triggered the
Company's Shareholder Rights Agreement. Emeritus contends that due to the
alleged triggering event the Company is required to distribute one Right per
share of outstanding Company stock and that each right is exercisable for
approximately 9.56 shares at a total purchase price of $70 (or approximately
$7.32 per share). The Company believes that Emeritus' claims are meritless and
intends to contest them vigorously.
On May 12, 1998, the Company filed a lawsuit in the Superior Court for the State
of California, County of Orange, seeking to enjoin Kapson Senior Quarters Corp.
("Kapson"), a controlled affiliate of Lazard Freres Real Estate Investors LLC
("LFREI") from acquiring Atria Communities ("Atria"), an unaffiliated competitor
of the Company. Atria is also named as a defendant in the suit, as are Lazard
Freres ("Lazard") and three LFREI representatives on the Company's Board of
Directors, Messrs. Kenneth M. Jacobs, Robert P. Freeman and Murry N. Gunty. The
Company alleges that LFREI will be violating both its contractual and fiduciary
duties to the Company if it allows Kapson to proceed with the acquisition
without first offering the Company the right to be the acquiring party and then,
if the Company declines, obtaining the Company's permission to consummate this
acquisition.
The lawsuit also seeks to enforce rights the Company obtained as part of the
strategic alliance with LFREI with respect to existing Kapson facilities. When
the Company previously consented to LFREI's acquisition of Kapson, the two
companies signed a letter agreement that was designed to make available to the
Company's shareholders some of the potential benefits of the Kapson acquisition.
Thus, under its agreement with the Company, LFREI is obligated to negotiate in
good faith with the Company to identify commercially reasonable terms on which
the Company will lease or manage the existing Kapson facilities. However, since
LFREI's acquisition of Kapson, the Company alleges, LFREI has failed to
negotiate in good faith. In the complaint, the Company asserts that LFREI
instead proposed lease terms that are commercially unreasonable and refused to
accept lease terms proposed by the Company. The Company also contends in the
lawsuit that LFREI refused to accept the Company's proposal to manage the
existing Kapson properties at below market rates and that the only proposals
LFREI has made to the Company are proposals that would be dilutive to the
Company's earnings and are thus not in the best interests of the Company's
shareholders. In its lawsuit, the Company seeks both injunctive relief and
damages for LFREI's breach of its contractual obligations. On July 30, 1998, the
Company's compliant was amended to include allegations of fraud against Lazard,
LFREI and Messrs. Kenneth M. Jacobs, Robert P. Freeman and Murry N. Gunty.
On June 9, 1998, LFREI filed a cross-complaint against the Company, alleging
that the Company's preliminary communication with several potential sources of
capital to assist the Company in financing the acquisition of Atria in the event
that LFREI honors the Company's right of first offer or is ordered to do so by
the court constitutes an early termination event under the Amended and Restated
Stockholders Agreement dated as of October 29, 1997, by and among LFREI,
Prometheus Assisted Living LLC and the Company (the "Amended Stockholders
Agreement"). LFREI also contends that certain standstill provisions under the
Amended Stockholders Agreement have terminated.
On June 25, 1998, the Superior Court of the State of California, County of
Orange, granted the Company's request for a preliminary injunction to enjoin
LFREI and Kapson from closing any transaction to acquire Atria without the
Company's consent. The preliminary injunction remained in effect pending the
outcome of a court trial which began August 3, 1998. On August 14, 1998, the
Judge in the trial ruled from the bench against the Company and in favor of all
defendants on LFREI's motion for judgment on all of the Company's causes of
action, and ordered that the preliminary injunction be dissolved. LFREI's
cross-complaint has not yet been ruled upon. The Judge's formal written ruling
has not yet been filed in this matter. The Company plans to review that order
and assess whether to seek an appeal of the Judge's ruling.
Since the nature of litigation is that results cannot be predicated with
certainty, there can be no assurance the Company will prevail in any of the
foregoing litigation actions.
The Company is from time to time subject to claims and disputes for legal and
other matters in the normal course of business. While the results of such
matters cannot be predicted with certainty, management does not believe that the
final outcome of any pending matters will have a material effect on the
Company's consolidated financial position, results of operations, or liquidity.
(3) ACQUISITIONS
On February 12, 1998, the Company announced that it had entered into purchase
and sale agreements to purchase interests in 13 senior housing communities,
including a skilled nursing component in one community, containing approximately
1,900 units, located in California, for $88 million. As of June 30, 1998, the
Company had $12.5 million of escrow deposits on this transaction. The
transaction has closed in phases beginning April 16, 1998.
7
<PAGE> 8
On April 16, 1998, in phase I of the transaction, the purchases of two
communities, a general partnership interest and rights under four management
agreements were completed. The following is a description of the closed portion
of the transaction:
The Company acquired Golden Creek Inn from TH Group Inc., an unrelated third
party. Golden Creek Inn is a 123-unit assisted living community located in
Irvine, California.
The Company acquired Hillcrest Inn from 270 Center Associates, Limited
Partnership, an unrelated third party. Hillcrest Inn is a 137-unit assisted
living community located in Thousand Oaks, California.
The Company acquired a twenty percent (20%) general partnership interest in
WHW Associates, an unrelated third party. WHW Associates is a fifty percent
(50%) general partner of Fifty Peninsula Partners, a California limited
partnership, which owns Sterling Court, a 149-unit assisted living community
located in San Mateo, California.
The Company acquired the rights, title and interest as manager in four
management agreements, from The Hillsdale Group, L.P. The management
agreements acquired are for: Sterling Court, a 149-unit assisted living
community located in San Mateo, California; Palo Alto Commons, a 143-unit
assisted living community located in Palo Alto, California; San Carlos
Retirement Center, a 85-unit assisted living community located in San Carlos,
California; and The Altenheim, a 138-unit assisted living community located
in Oakland, California.
Phase II of the transaction closed on May 4, 1998. The phase II acquisition was
of Rossmore House from 270 Center Associates, Limited Partnership. Rossmore
House is a 157-unit assisted living community located in Los Angeles,
California.
Phase III of the transaction closed on May 13, 1998. The phase III acquisition
was of The Berkshire from 270 Center Associates, Limited Partnership. The
Berkshire is an 81-unit assisted living community located in Berkley,
California.
Phase IV of the transaction closed May 18, 1998. The phase IV acquisition was of
the rights under a sublease agreement and related rights for Willow Glen Villa
from The Hillsdale Group, L.P. Willow Glen is a 188-unit assisted living
community located in San Jose, California.
Approximately $55.0 million of the purchase prices were paid from cash on hand.
Concurrent with the purchase, the Company also assumed existing mortgage
financing with an outstanding balance of $15.25 million secured by Golden Creek
Inn and Hillcrest Inn (balances of $2.25 million and $13.0 million,
respectively). The loans bear interest at LIBOR plus 2.5%, require monthly
payments of interest only until August 1998 (Golden Creek Inn) and October 1998
(Hillcrest Inn). Thereafter, the loans require monthly payments of principal and
interest based upon a 25-year amortization schedule. The outstanding balance of
the loans plus all accrued and unpaid interest is due and payable in 2002. The
purchase price paid in excess of the fair value of identifiable assets acquired
aggregated $18.9 million and is being amortized over the life of the related
assets of 35 years.
The pro forma effect of the above acquisition, assuming that the transaction
occurred on January 1, 1998, follows (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS FOR THE SIX
ENDED MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Revenues...................................... $32,333 $63,413
Net loss...................................... (4,248) (6,843)
Basic and diluted loss per common share....... $ (0.27) $ (0.43)
</TABLE>
8
<PAGE> 9
(4) SUBSEQUENT EVENTS
On July 2, 1998, phase V of the Hillsdale acquisition closed and the Company
acquired the rights under a lease agreement and related documentation for
Hillsdale Manor Retirement Center and Convalescent Home from The Hillsdale
Group, L.P. Hillsdale Manor is located in San Mateo, California and comprises
159 assisted living and skill nursing units.
On July 7, 1998, phase VI of the Hillsdale acquisition closed and the Company's
wholly-owned subsidiary, Encino Renovation, LLC, a Delaware limited liability
company, acquired Encino Hills Terrace from The Hillsdale Group, L.P. Encino
Hills Terrace is an 76-unit assisted living community located in Encino,
California.
The $13.3 million purchase price for the interest in the two communities was
paid from cash on hand.
In July 1998, the Company's Board of Directors approved the refinancing of seven
of the Company's communities held by majority owned entities. This refinancing
will allow the Company to take advantage of lower interest rates available in
the current environment and provide a return of capital to Company and the
limited partners by borrowing against the increased value of these properties.
As a result of this refinancing, the Company's consolidated long-term debt on
these communities is expected to increase to approximately $36.4 million from
approximately $11.4 million. In July 1998, the Company exercised its option to
borrow the remaining unfunded balance of an existing mortgage totaling
approximately $4.4 million.
In August 1998, the Company extended its $10 million revolving line of credit
with Imperial Bank through September 30, 1999. This line of credit has primarily
been used to provide standby letters of credit used for security deposits on
leased ALCs. As of June 30, 1998, the Company had used approximately $9.2
million of this line for such letters of credit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including those set forth below. Certain statements
contained in this report, including without limitation statements containing the
words "believes," "anticipates," "expects," and words of similar import
constitute "forward-looking statement's within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company has made forward-looking statements in this report concerning, among
other things, the impact of future acquisitions and developments, if any, the
level of future capital expenditures, the Company's ability to obtain financing
in the future at attractive rates and terms, the effect of the Year 2000 Issue,
the impact of inflation and changing prices and the outcome of certain
litigation matters. These statements are only predictions; however, actual
events or results may differ materially as a result of risks facing the Company.
Given these uncertainties, readers are cautioned not to place undue reliance on
such forward-looking statements, which speak only as of the date of this report.
The Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments. Certain of the risks
discussed herein as well as other risks are detailed in the Company's Form 10-K
filed with the Securities and Exchange Commission for the fiscal period ended
December 31, 1997.
The Company has experienced rapid growth through the acquisition of existing
ALCs, development of new ALCs, and by acquiring property for the development of
new ALCs. Certain risks are inherent with the execution of the Company's growth
strategies. These risks include, but are not limited to, access to capital
necessary for acquisition and development, the Company's ability to sustain and
manage growth, the successful integration of ALCs into the Company's portfolio,
governmental regulation, competition, and the risks common to the assisted
living industry.
OVERVIEW
As of June 30, 1998, the Company operated 62 assisted living communities
("ALCs") containing 7,731 units, including three owned by a limited partnership
for which the Company serves as the managing general partner and community
manager (an "Affiliated Partnership"). Of the remaining 59 communities, 36 are
leased by the Company pursuant to long-term operating leases ("Leased ALCs"), 18
communities are owned by the Company for its own
9
<PAGE> 10
account ("Owned ALCs") and 5 communities are managed for unrelated parties
("Managed ALCs"). The Company was in various stages of construction on two ALCs
with an anticipated total of 290 units at June 30, 1998. Subsequent to June 30,
1998, the Company acquired the rights under a lease agreement and related
documentation for Hillsdale Manor Retirement Center and Convalescent Home, a
community located in San Mateo, California, which consists of 159 assisted
living and skilled nursing units and purchased Encino Hills Terrace, a 76-unit
assisted living community located in Encino, California. Encino Hills Terrace
was managed by the Company from May 18, 1998 until the purchase in July 1998.
Since commencing operation of ALCs for its own account in April 1994, the
Company has embarked upon an expansion strategy and achieved significant growth
in revenue resulting primarily from the acquisition of ALCs. The Company has
focused its growth efforts on the acquisition and development of additional ALCs
and expansion of services to its residents as they "age in place."
Growth has been achieved through the development and acquisition of ALCs, which
the Company owns for its own account or leases pursuant to long-term operating
leases primarily with health care REITs ("Health Care REITs"). Since April 1994,
the Company has developed, acquired for its own account or entered into
long-term operating leases with Health Care REITs or other lessors for 54 ALCs
totaling 6,761 units (87.5% of its portfolio of 7,731 units at June 30, 1998).
Of the owned and leased ALCs operated for its own account as of June 30, 1998,
24 communities (2,453 units) were previously owned or operated by Affiliated
Partnerships, including 10 communities (926 units) owned or leased by American
Retirement Villas Properties II, a California limited partnership in which a
controlling interest was acquired by the Company during 1996. Of the remaining
communities, 23 communities (3,509 units) were acquired from third party owners
and seven communities (799 units) were developed by the Company.
In August 1996, the Company, through its wholly owned subsidiary, ARV Health
Care, Inc., acquired SynCare, Inc., a physical, speech and occupational therapy
provider, in a stock-for-stock merger. SynCare, Inc. was the holding company of
three corporations, BayCare Rehabilitative Services Inc., ProMotive
Rehabilitation Services and Pro Motion Rehab. BayCare Rehabilitative Services
Inc. and Pro Motion Rehab were merged into ProMotive Rehabilitation Services,
which does business under the name GeriCare ("GeriCare").
Partnerships affiliated with the Company have acquired or developed market rate
senior apartments as well as affordable senior and multifamily apartment
communities (the "Apartment Group"), using the sale of tax credits under a
Federal low-income housing tax credit program (the "Federal Tax Credit Program")
to generate the equity funding for development.
As part of its strategic plan, management and the Board of Directors determined
that GeriCare and the Apartment Group were not part of the core business of the
Company, and in the fourth quarter on 1997 adopted a plan for disposing of both
lines of business. The Company discontinued the operations of GeriCare during
the first quarter of 1998. In order to continue to provide rehabilitation
therapy services to its residents, the Company entered into a strategic alliance
with NovaCare, Inc., a national leader in physical rehabilitation services.
Under the terms of the agreement, NovaCare, Inc. leases space in the Company's
ALCs where it provides therapy services.
In addition to its strategic alliance with NovaCare, Inc., the Company entered
into an agreement with Omnicare, Inc., under which network pharmacy and related
clinical information services will be provided for the residents of the
Company's ALCs. The agreement is for a three-year term and Omnicare, Inc. will
commence operations during the third quarter of 1998.
The Company completed construction of the 130-unit Canterbury Woods community
located in Attleboro, MA, its first in the state; and the 76-unit Bayside
Landing community located in Stockton, CA. Both communities commenced operations
in June 1998.
At June 30, 1998, the Company had the following projects under construction and
anticipates that the schedule set forth below can be met, although there can be
no assurance in this regard. Construction is subject to numerous risks which
could cause delays or the abandonment of a project or projects.
10
<PAGE> 11
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
LOCATION # OF UNITS OPENING
-------- ----------- -----------
<S> <C> <C> <C>
The Lakes Fort Myers, FL 148 4th Quarter 1998
Sutton Terrace Las Vegas, NV 142 4th Quarter 1998
---
Total units
under construction 290
===
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
The following information concerning the results of operations for the Company's
"Same Communities" for the three month period ended June 30, 1998 is presented
in order to provide the reader with additional information concerning the
components of the Company's operations. Same Communities represent operations of
42 communities owned, leased or previously managed (now owned or leased) by the
Company for four quarters or more as of June 30, 1998.
ARV Assisted Living, Inc.
Results of Same Communities
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Revenue:
Assisted living community revenue:
Rental revenue $21,044 $20,367
Assisted living and other services 4,966 3,736
------- -------
Total revenue 26,010 24,103
------- -------
Operating expenses:
Assisted living community operating expense 15,821 14,372
Assisted living community lease expense 4,649 4,436
Depreciation and amortization 1,410 1,197
------- -------
Total operating expenses 21,880 20,005
------- -------
Income from operations 4,130 4,098
Interest expense 711 788
------- -------
Income before minority interest 3,419 3,310
Minority interest in operations 409 408
------- -------
Income from Same Communities $ 3,010 $ 2,902
======= =======
</TABLE>
For the Company as a whole, total revenue for the three months ended June 30,
1998 increased $6.3 million to $31.1 million from $24.8 million for the three
months ended June 30, 1997. This increase was primarily due to an increase in
assisted living community revenue as described below.
Assisted living community revenue increased $6.0 million to $30.7 million for
the three months ended June 30, 1998 from $24.7 million for the three months
ended June 30, 1997. Of the increase, $2.8 million is the result of an increase
in the number of Owned ALCs and Leased ALCs operated by the Company. As of June
30, 1998, the Company operated 54 ALCs for its own account consisting of 36
Leased ALCs and 18 Owned ALCs. For the three months ended June 30, 1997, the
Company operated a total of 46 ALCs for its own account consisting of 32 Leased
ALCs and 14 Owned ALCs. Another $1.3 million of the increase is a result of four
leased ALCs which the Company operated for less than four quarters as of June
30, 1998. The remaining $1.9 million of the increased revenue was due to the
Same Communities. The increase is a result of increased occupancies, rates and
the percentage of residents utilizing the Company's assisted living services
during the three months ended June 30, 1998 compared to the same period in the
prior year.
Management fees from affiliates and others increased $0.2 million to $0.3
million for the three months ended June 30, 1998 from $0.1 million for the three
months ended June 30, 1997. The increase is due to the increased number of
management contracts to eight as of June 30, 1998 as compared to three as of
June 30, 1997.
11
<PAGE> 12
Operating expenses increased $9.5 million to $34.0 million for the three months
ended June 30, 1998 from $24.5 million for the three months ended June 30, 1997.
Assisted living community operating expense and lease expense increased $3.9
million and $1.1 million, respectively, to $19.1 million and $6.1 million,
respectively, for the three months ended June 30, 1998 from $15.2 million and
$5.0 million, respectively, for the three months ended June 30, 1997. Of these
increases, $1.9 million of ALC operating expense and $0.5 million of ALC lease
expense related to the additional number of Owned and Leased ALCs operated by
the Company during the three months ended June 30, 1998, as discussed above.
Another $0.6 million of ALC operating expenses and $0.4 million of ALC lease
expense is a result of four leased ALCs which the Company operated for less than
four quarters as of June 30, 1998. The remaining $1.4 million increase for ALC
operating expense and $0.2 million increase for ALC lease expense were
attributable to the Same Communities. The increase for the Same Communities ALC
operating expense was primarily attributable to staffing requirements related to
increased assisted living services and increased wages of staff.
General and administrative expenses increased $3.8 million to $6.7 million for
the three months ended June 30, 1998 from $2.9 million for the three months
ended June 30, 1997. The increase was primarily the result of approximately $1.5
million related to the lawsuit with LFREI, $1.0 million of severance payments
and recruitment fees related to the Company's management reorganization, and the
additional staffing necessary to accommodate the increased operations of the
Company.
Depreciation and amortization expenses increased $0.7 million to $2.2 million
for the three months ended June 30, 1998 from $1.5 million for the three months
ended June 30, 1997. Of this increase $0.4 related to the additional number of
Owned and Leased ALCs operated by the Company during the three months ended June
30, 1998, as discussed above. Another $0.1 million of the increase is a result
of four leased ALCs which the Company operated for less than four quarters as of
June 30, 1998. The remaining $0.2 million was attributable to the Same
Communities.
Interest income increased $0.2 million to $0.4 million for the three months
ended June 30, 1998 from $0.2 million for the three months ended June 30, 1997
due to higher average cash balances carried by the Company during the three
months ended June 30, 1998.
Other income decreased $0.3 million to $48,000 for the three months ended June
30, 1998 from $0.3 million for the three months ended June 30, 1997. The
decrease is primarily due to development fees earned in connection with the
construction of ALCs and equity in income recorded on the Company's 12.8 percent
interest in Senior Income Fund, L.P. during the three months ended June 30,
1997. During the three months ended June 30, 1998, the Company did not earn
development fees or recognize any equity in income from its investment in Senior
Income Fund, L.P.
Interest expense increased $0.2 million to $1.5 million for the three months
ended June 30, 1998 compared with $1.3 million for the three months ended June
30, 1997 due primarily to additional debt incurred in connection with acquiring
additional ALCs. Interest expense consisted primarily of interest incurred on
the Company's $57.5 million of 6-3/4%, convertible subordinated notes due 2006
(the "2006 Notes") as well as mortgage interest on Owned ALCs.
Income tax expense increased by $0.2 million to $36,000 for the three months
ended June 30, 1998 from a benefit of $0.2 million for the three months ended
June 30, 1997. The Company recorded a 100% valuation allowance on the income tax
benefit generated as a result of operating losses incurred during the three
months ended June 30, 1998.
12
<PAGE> 13
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
The following information concerning the results of operations of the Company's
"Same Communities" for the six-month period ended June 30, 1998 is presented in
order to provide the reader with additional information concerning the
components of the Company's operations.
ARV Assisted Living, Inc.
Results of Same Communities
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
JUNE 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Revenue:
Assisted living community revenue:
Rental revenue $41,919 $39,901
Assisted living and other services 9,543 6,949
------- -------
Total revenue 51,462 46,850
------- -------
Operating expenses:
Assisted living community operating expense 30,886 28,352
Assisted living community lease expense 9,274 8,325
Depreciation and amortization 2,796 2,429
------- -------
Total operating expenses 42,956 39,106
------- -------
Income from operations 8,506 7,744
Interest expense 1,461 1,435
------- -------
Income before minority interest 7,045 6,309
Minority interest in operations 793 806
------- -------
Income from Same Communities $ 6,252 $ 5,503
======= =======
</TABLE>
For a Company as a whole, total revenue for the six months ended June 30, 1998
increased $10.5 million to $58.4 million from $47.9 million for the six months
ended March 31, 1997. This increase was primarily due to an increase in assisted
living community revenue as described below.
Assisted living community revenue increased $10.3 million to $57.9 million for
the six months ended June 30, 1998 from $47.6 million for the six months ended
June 30, 1997. Of the increase, $2.9 million is the result of an increase in the
number of Owned ALCs and Leased ALCs operated by the Company. As of June 30,
1998, the Company operated 54 ALCs for its own account consisting of 36 Leased
ALCs and 18 Owned ALCs. For the six months ended June 30, 1997, the Company
operated a total of 46 ALCs for its own account consisting of 32 Leased ALCs and
14 Owned ALCs. Another $2.8 million of the increase is a result of four leased
ALCs which the Company operated for less than four quarters as of June 30, 1998.
The remaining $4.6 million of the increased revenue was due to the Same
Communities. The increase is a result of increased occupancies, rates and the
percentage of residents utilizing the Company's assisted living services during
the six months ended June 30, 1998 compared to the same period in the prior
year.
Management fees from affiliates and others increased $0.2 million to $0.5
million for the six months ended June 30, 1998 from $0.3 million for the six
months ended June 30, 1997. The increase is due to the increased number of
management contracts to eight as of June 30, 1998 as compared to three as of
June 30, 1997.
Operating expenses increased $16.6 million to $64.0 million for the six months
ended June 30, 1998 from $47.4 million for the six months ended June 30, 1997.
Assisted living community operating expense and lease expense increased $6.2
million and $2.6 million, respectively, to $35.7 million and $11.7 million,
respectively, for the six months ended June 30, 1998 from $29.5 million and $9.1
million, respectively, for the six months ended June 30, 1997. Of these
increases, $2.1 million of ALC operating expense and $0.7 million of ALC lease
expense related to the additional number of Owned and Leased ALCs operated by
the Company during the six months ended June 30, 1998, as discussed above.
Another $1.6 million of ALC operating expenses and $1.0 million of ALC lease
expense is a result of four leased ALCs which the Company operated for less than
four quarters as of June 30, 1998. The remaining $2.5 million increase for ALC
operating expense and $0.9 million increase for ALC lease expense were
attributable to the Same Communities. The increase for the Same Communities ALC
operating expense was primarily attributable to staffing requirements related to
increased assisted living services and increased wages of staff.
13
<PAGE> 14
General and administrative expenses increased $6.7 million to $12.7 million for
the six months ended June 30, 1998 from $6.0 million for the six months ended
June 30, 1997. The increase was primarily a result of approximately $1.5 million
of additional costs incurred related to the Company's successful battle against
a hostile tender offer of Emeritus, $1.5 million related to the lawsuit with
LFREI, $1.0 million of severance payments and recruitment fees related to the
Company's management reorganization and the additional staffing necessary to
accommodate the increased operations of the Company.
Depreciation and amortization expenses increased $1.1 million to $4.0 million
for the six months ended June 30, 1998 from $2.9 million for the six months
ended June 30, 1997. Of this increase $0.4 related to the additional number of
Owned and Leased ALCs operated by the Company during the six months ended June
30, 1998, as discussed above. Another $0.3 million of the increase is a result
of four leased ALCs which the Company operated for less than four quarters as of
June 30, 1998. The remaining $0.4 million was attributable to the Same
Communities.
Interest income increased $1.4 million to $1.7 million for the six months ended
June 30, 1998 from $0.3 million for the six months ended June 30, 1997 due to
higher average cash balances carried by the Company during the six months ended
June 30, 1998.
Other income decreased $0.5 million to $0.1 million for the six months ended
June 30, 1998 from $0.6 million for the six months ended June 30, 1997. The
decrease is primarily due to development fees earned in connection with the
construction of ALCs and equity in income recorded on the Company's 12.8 percent
interest in Senior Income Fund, L.P. during the six months ended June 30, 1997.
During the six months ended June 30, 1998, the Company did not earn development
fees or recognize any equity in income from its investment in Senior Income
Fund, L.P.
Interest expense increased $0.1 million to $2.8 million for the six months ended
June 30, 1998 compared with $2.7 million for the six months ended June 30, 1997.
Interest expense consisted primarily of interest incurred on the Company's $57.5
million of 6-3/4%, convertible subordinated notes due 2006 (the "2006 Notes") as
well as mortgage interest on Owned ALCs.
Income tax expense increased by $0.6 million to $42,000 for the six months ended
June 30, 1998 from a benefit of $0.6 million for the six months ended June 30,
1997. The Company recorded a 100% valuation allowance on the income tax benefit
generated as a result of operating losses incurred during the six months ended
June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash balances were $15.8 million and $102.8 million
at June 30, 1998 and December 31, 1997, respectively.
Working capital decreased to $8.9 million as of June 30, 1998 compared to
working capital of $75.3 million at December 31, 1997. The decrease was due
primarily to cash used in the acquisition of four communities, one leasehold
interest and four management contracts during the six months ended June 30,
1998.
For the six months ended June 30, 1998, cash used in operating activities was
$7.5 million compared to $2.7 million for the comparable period in the previous
year. For the six months ended June 30, 1998, the primary components of cash
used in operating activities were a net loss of $7.5 million, $2.4 million of
decreases in various current liabilities and increases in other assets and $2.6
million of cash used in operations of discontinued operations, offset by a
non-cash charge of $4.1 million for depreciation and amortization. The remaining
amount is made up of approximately $0.9 million in other non-cash charges.
Cash used in investing activities was $76.4 million for the six months ended
June 30, 1998, compared to cash provided by investing activities of $0.5 million
for the six months ended June 30, 1997. For the six months ended June 30, 1998,
uses of cash primarily include $59.1 million related to the acquisition of
interests in ALCs, a $12.5 million increase in restricted cash related to an
escrow deposit to fund acquisitions closed in July 1998, a
14
<PAGE> 15
$3.4 million increase in property, furniture and equipment, $0.9 million in
costs related to other non-current assets and deferred project costs and $0.5
million for increases in leased property security deposits.
Net cash used in financing activities during the six months ended June 30, 1998
was $3.1 million compared to cash provided by financing activities of $1.6
million for the six months ended June 30, 1997. During the six months ended June
30, 1998, the primary use of cash from financing activities was the payment of
$2.6 million of issuance costs associated with the conversion of subordinated
notes, $0.3 million for repayments of notes payable, and $0.4 million for
distributions paid from majority owned entities, offset by $0.2 million of
proceeds from the issuance of common stock.
As a result of the Company's pending acquisition of interests in two ALCs, the
Company expended approximately $13.9 million in July 1998 to complete the
acquisition, of which $12.5 million was in escrow as of June 30, 1998. Although
management intends to finance a portion of the purchase price, there can be no
assurances that the Company will be able to do so or that financing will be
available to the Company at attractive rates and terms.
In July 1998, the Company's Board of Directors approved the refinancing of seven
of the Company's communities held by majority owned entities. This refinancing
will allow the Company to take advantage of lower interest rates available in
the current environment and provide a return of capital to the limited partners
by borrowing against the increased value of these properties. As a result of
this refinancing, the Company's consolidated long-term debt for these
communities is expected to increase to approximately $36.4 million from
approximately $11.4 million. In August 1998, the Company exercised its option to
borrow the remaining unfunded balance of an existing mortgage totaling
approximately $4.4 million.
The Company extended its $10 million revolving line of credit with Imperial Bank
through September 30, 1999. This line of credit has primarily been used to
provide standby letters of credit used security deposits on leased ALCs. As of
June 30, 1998, the Company has used approximately $9.2 million of this line for
such letters of credit.
The Company's capital requirements include acquisition and rehabilitation costs
of ALCs, security deposits on Leased ALCs, ALC pre-development costs, initial
operating costs of newly developed ALCs, payment of interest, owner's equity
contributions in connection with certain Affiliated Partnerships financed under
the Federal Tax Credit Program, and working capital. The Company has
discontinued its activities with respect to developments under the Federal Tax
Credit Program and, accordingly, expects that its future outlays for existing
developments will diminish. The Company is contingently liable for (i) certain
secured and unsecured indebtedness of affiliates which it has guaranteed and
(ii) tax credit guarantees. The Company does not currently generate sufficient
cash from operations to fund its recurring working capital requirements,
primarily as a result of initial operating costs of newly developed ALCs. As a
result of the Company's ability to issue of common stock and its proposed
financing arrangements, management believes that the Company has sufficient
capital to meet its requirements in the near term. However, the Company
anticipates that it may be necessary to obtain additional financing in order to
continue its aggressive growth strategy and there can be no assurances that the
Company will be able to obtain financing on favorable terms.
Pursuant to the terms of the Company's development and property management
agreements for certain tax credit partnerships, the Company has provided certain
guarantees for the benefit of these partnerships. Among these guarantees are
operating deficit, tax credit and financing guarantees. To the extent that the
operations of certain tax credit partnerships do not improve prior to the
maturity of the existing construction financing, the Company may be required to
fund additional amounts under the terms of its financing guarantees. Management
has established a provision for the estimated funding of obligations under its
financing guarantees. Actual funding could differ from those estimates.
YEAR 2000 ISSUE
Certain computer programs utilized by the Company were written using two digits
rather than four to define the year. As a result, those programs may recognize a
date using "00" as the year 1900 rather than the year 2000. In the event this
were to occur with any of the Company's computer programs, a system failure or
miscalculation causing
15
<PAGE> 16
disruptions of operations could occur. Such a failure could cause the temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
Unrelated to the Year 2000 Issue, the Company intends to replace substantially
all of its accounting information systems software during 1998/1999. The Company
believes that with the conversion to the new accounting software, the Year 2000
Issue will not pose significant business or operating issues.
The Company is assessing its remaining software and other equipment to determine
whether any existing programs will have to be modified or replaced so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. This assessment is expected to be completed during the fourth
quarter of 1998.
The Company has initiated communications with the third-party providers of
certain of its administrative services, as well as its significant suppliers of
services and products to determine the extent to which the Company is vulnerable
to those parties' failures to remediate their own Year 2000 Issues. The Company
plans to have completed its evaluation of those suppliers during the first
quarter of 1999. The Company does not presently believe that third party Year
2000 issues will have a material adverse effect on the Company. However, there
can be no guarantee that the systems of other companies on which the Company's
operations or systems rely will be timely remedied or that a failure by another
company to remediate its systems in a timely manner would not have a material
adverse effect on the Company.
The Company expects to successfully implement the changes necessary to address
these Year 2000 Issues, and does not believe that the cost of such actions will
have a material adverse effect on the Company's financial position, results of
operations or liquidity. There can be no assurance, however, that there will not
be delays in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have a
material adverse effect on the Company's business, operating results, and
financial condition.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALCs and management fees from apartment communities
operated by the Company are the primary sources of revenue earned by the
Company. These properties are affected by rental rates which are highly
dependent upon market conditions and the competitive environments where the
facilities are located. Employee compensation is the principal cost element of
property operations. Although there can be no assurance it will be able to
continue to do so, the Company has been able historically to offset the effects
of inflation on salaries and other operating expenses by increasing rental and
assisted living rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which the Company is the managing general
partner and a majority limited partner, filed actions in the Superior Court for
the State of California, County of Santa Clara, seeking declaratory judgments
against the landlords of the Retirement Inn of Campbell ("Campbell") and the
Retirement Inn of Sunnyvale ("Sunnyvale"). ARVP II leases the Campbell and
Sunnyvale assisted living communities under long-term leases. A dispute has
arisen as to the amount of rent due during the 10-year lease renewal periods,
which commenced in August 1995 for Campbell and March 1996 for Sunnyvale. The
Partnership seeks a determination that the Partnership is not required to pay
any higher rent during the 10-year renewal periods than during the original
20-year lease terms.
In the event that the court finds against ARVP II, rent for the Campbell and
Sunnyvale communities could increase significantly, which will reduce net income
and cash available for distributions to unit holders in the future. These rent
increases would be retroactive to the commencement of the lease renewal periods
Two other communities leased by ARVP II, the Retirement Inn of Fremont
("Fremont") and the Retirement Inn at Burlingame ("Burlingame") are owned by
entities which are related to the entities that own the Campbell and Sunnyvale
communities. It is not known whether the landlords of those communities will
dispute the amount of rent
16
<PAGE> 17
due during the renewal periods which began January 1997 for Fremont and August
1997 for Burlingame. If so, the Partnership may be required to file litigation
to determine the rights under those leases.
The parties are mutually negotiating the terms of a proposed purchase agreement
involving the sale of the landlord's fee interest in the four communities to
ARVP II and settlement of all claims and have agreed to forebear from
prosecuting the litigation during the pendency of the escrow. Management is of
the opinion, based in part upon opinions of legal counsel, that an adverse
outcome is unlikely.
In November 1997, Emeritus Corporation ("Emeritus"), an unaffiliated competitor
of the Company, initiated a proxy contest for control of the ARV Board of
Directors. In addition, in December 1997, Emeritus launched a hostile tender
offer to acquire majority control of ARV. Emeritus' takeover attempts were
rejected by ARV's shareholders, including a majority of non-affiliate
shareholders, at the Company's annual shareholder meeting on January 28, 1998.
In connection with its hostile takeover efforts, Emeritus filed a lawsuit
against ARV in December 1997 to, among other things, enjoin a third party
investment in ARV. The lawsuit was dismissed voluntarily and without prejudice
by Emeritus on April 23, 1998.
On April 24, 1998, the Company was served with a lawsuit by Emeritus, which was
filed in the Superior Court of California, County of Orange, alleging that share
purchases on January 16, 1998 by Prometheus Assisted Living LLC triggered the
Company's Shareholder Rights Agreement. Emeritus contends that due to the
alleged triggering event the Company is required to distribute one Right per
share of outstanding company stock and that each right is exercisable for
approximately 9.56 shares at a total purchase price of $70 (or approximately
$7.32 per share). The Company believes that Emeritus' claims are meritless and
intends to contest them vigorously.
On May 12, 1998, the Company filed a lawsuit in the Superior Court for the State
of California, County of Orange, seeking to enjoin Kapson Senior Quarters Corp.
("Kapson"), a controlled affiliate of Lazard Freres Real Estate Investors LLC
("LFREI") from acquiring Atria Communities ("Atria"), an unaffiliated competitor
of the Company. Atria is also named as a defendant in the suit, as are Lazard
Freres ("Lazard") and three LFREI representatives on the Company's Board of
Directors, Messrs. Kenneth M. Jacobs, Robert P. Freeman and Murry N. Gunty. The
Company alleges that LFREI will be violating both its contractual and fiduciary
duties to the Company if it allows Kapson to proceed with the acquisition
without first offering the Company the right to be the acquiring party and then,
if the Company declines, obtaining the Company's permission to consummate the
acquisition.
The lawsuit also seeks to enforce rights the Company obtained as part of the
strategic alliance with LFREI with respect to existing Kapson facilities. When
the Company consented to LFREI's acquisition of Kapson, the two companies signed
a letter agreement that was designed to make available to the Company's
shareholders some of the potential benefits of the Kapson acquisition. Thus,
under its agreement with the Company, LFREI is obligated to negotiate in good
faith with the Company to identify commercially reasonable terms on which the
Company will lease or manage the existing Kapson facilities. However, since
acquiring Kapson, the Company alleges, LFREI has failed to negotiate in good
faith. In the complaint, the Company asserts that LFREI instead proposed lease
terms that are commercially unreasonable and refused to accept lease terms
proposed by the Company. The Company also contends in the lawsuit that LFREI
refused to accept the Company's proposal to manage the existing Kapson
properties at below market rates and that the only proposals LFREI has made to
the Company are proposals that would be dilutive to the Company's earnings and
are thus not in the best interests of the Company's shareholders. In its
lawsuit, the Company seeks both injunctive relief and damages for LFREI's breach
of its contractual obligations. On July 30, 1998, the Company's compliant was
amended to include allegations of fraud against Lazard, LFREI and Messrs.
Kenneth M. Jacobs, Robert P. Freeman and Murry N. Gunty.
On June 9, 1998, LFREI filed a cross-complaint against the Company, alleging
that the Company's preliminary communication with several potential sources of
capital to assist the Company in financing the acquisition of Atria in the event
that LFREI honors the Company's right of first offer or is ordered to do so by
the court constitutes an early termination event under the Amended and Restated
Stockholders Agreement dated as of October 29, 1997 by and among LFREI,
Prometheus Assisted Living LLC and the Company (the "Amended Stockholders
Agreement"). LFREI also contends that certain standstill provisions under the
Amended Stockholders Agreement have terminated.
On June 25, 1998, the Superior Court of the State of California, County of
Orange, granted the Company's request for a preliminary injunction to enjoin
LFREI and Kapson from closing any transaction to acquire Atria without the
Company's consent. The preliminary injunction remained in effect pending the
outcome of a court trial which began August 3, 1998. On August 14, 1998, the
Judge in the trial ruled from the bench against the Company and in favor of all
defendants on LFREI's motion for judgment on all of the Company's causes of
action, and ordered that the preliminary injunction be dissolved. LFREI's
cross-complaint has not yet been ruled upon. The Judge's formal written ruling
has not yet been filed in this matter. The Company plans to review that order
and assess whether to seek an appeal of the Judge's ruling.
Since the nature of litigation is that results cannot be predicated with
certainty, there can be no assurance the Company will prevail in any of the
foregoing litigation actions.
17
<PAGE> 18
The Company is from time to time subject to claims and disputes for legal and
other matters in the normal course of business. While the results of such
matters cannot be predicted with certainty, management does not believe that the
final outcome of any pending matters will have a material effect on the
Company's consolidated financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted the following matter to a vote of its security holders
during the quarter ended June 30, 1998 which were voted upon at the Company's
Annual Meeting of Stockholders held on June 3, 1998 and adjourned to June 19,
1998:
Election of members of the Class A Board of Directors of the Company (John
Booty, Robert P. Freeman and Howard G. Phanstiel).
The following votes cast for and withheld with respect to the Election
of Directors:
FOR WITHHELD
-----------------------
John A. Booty 7,213,813 727,650
Robert P. Freeman 7,125,772 815,691
Howard G. Phanstiel 7,121,848 819,615
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
4 Rights Agreement, dated May 14, 1998, betweeb ARV Assisted Living Inc.,
and ChaseMellon Shareholder Services LLC which includes the form of
Certificate of Determination of the Series D Junior Participating
Preferred Stock of ARV Assisted Living, Inc. as Exhibit A, the form of
Right Certificate as Exhibit B, and the Summary of Rights to Purchase
Preferred Shares as Exhibit C.
10.1 Purchase and Sale Agreement by and between 270 Center Associates,
Limited Partnership and ARV Assisted Living, Inc. dated as of February
12, 1998, incorporated by reference to Exhibit 10.1 to the Company's 8-K
filed with the Securities and Exchange Commission on May 11, 1998.
10.2 Amendment to Purchase and Sale Agreement by and between 270 Center
Associated, Limited Partnership and ARV Assisted Living, Inc. dated as
of March 2, 1998, incorporated by reference to Exhibit 10.2 to the
Company's 8-K filed with the Securities and Exchange Commission on May
11, 1998.
10.3 SecondAmendment to Purchase and Sale Agreement by and between 270 Center
Associated, Limited Partnership and ARV Assisted Living, Inc. dated as
of April 10, 1998, incorporated by reference to Exhibit 10.3 to the
Company's 8-K filed with the Securities and Exchange Commission on May
11, 1998.
10.4 Purchase and Sale Agreement by and between TH Group, Inc. and ARV
Assisted Living, Inc. dated as of February 12, 1998, incorporated by
reference to Exhibit 10.4 to the Company's 8-K filed with the Securities
and Exchange Commission on May 11, 1998.
10.5 Amendment to Purchase and Sale Agreement by and between TH Group, Inc.
and ARV Assisted Living, Inc. dated as of March 2, 1998, incorporated by
reference to Exhibit 10.5 to the Company's 8-K filed with the Securities
and Exchange Commission on May 11, 1998.
10.6 SecondAmendment to Purchase and Sale Agreement by and between TH Group,
Inc. and ARV Assisted Living, Inc. dated as of April 10, 1998,
incorporated by reference to Exhibit 10.6 to the Company's 8-K filed
with the Securities and Exchange Commission on May 11, 1998.
10.7 Purchase and Sale Agreement by and between The Hillsdale Group, LP and
ARV Assisted Living, Inc. dated as of February 12, 1998, incorporated by
reference to Exhibit 10.7 to the Company's 8-K filed with the Securities
and Exchange Commission on May 11, 1998.
10.8 Amendment to Purchase and Sale Agreement by and between The Hillsdale
Group, LP and ARV Assisted Living, Inc. dated as of March 2, 1998,
incorporated by reference to Exhibit 10.8 to the Company's 8-K filed
with the Securities and Exchange Commission on May 11, 1998.
10.9 Second Amendment to Purchase and Sale Agreement by and between The
Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of April 6,
1998, incorporated by reference to Exhibit 10.9 to the Company's 8-K
filed with the Securities and Exchange Commission on May 11, 1998.
18
<PAGE> 19
10.10 Executive Employment Agreement, dated December 5, 1997, by and between
ARV Assisted Living, Inc. and Howard G. Phanstiel.
10.11 Amendment to Executive Employment Agreement, effective December 5, 1997,
by and between ARV Assisted Living, Inc. and Howard G. Phanstiel.
10.12 Executive Employment Agreement, as amended, dated June 1, 1998, by and
between ARV Assisted Living, Inc. and Douglas M. Pasquale.
10.13 Employment Agreement, as amended, dated June 15, 1998, by and between
ARV Assisted Living, Inc. and Patricia J. Gifford, MD.
15 Independent Accountants' Review Report dated August 14, 1998
27 Financial Data Schedule
99.1 Complaint in ARV Assisted Living, Inc. v. Lazard Freres Real Estate
Investors LLC, et al., case no. 787788, incorporated by reference to the
Company's 8-K filed with the Securities and Exchange Commission on May
26, 1998.
(b) REPORTS ON FORM 8-K
The Company filed the following reports with the Securities and Exchange
Commission (SEC) on Form 8-K during the quarter ended June 30, 1998:
The Company's current report on Form 8-K filed with the SEC on May 11, 1998,
reported under Item 2, on April 16, 1998, purchases of two assisted living
communities, a general partnership interest and rights under four management
agreements were completed pursuant to Purchase and Sale Agreements with The
Hillsdale Group, L.P., a California limited partnership; 270 Center Associates,
Limited Partnership and TH Group, Inc., a California corporation, dated February
12, 1998, as amended.
The Company's current report on Form 8-K filed with the SEC on May 19, 1998,
reported under Item 2, on May 4, 1998 and May 13, 1998, purchases of two
assisted living communities were completed pursuant to a Purchase and Sale
Agreement with 270 Center Associates, Limited Partnership dated February 12,
1998, as amended. On May 18, 1998, the Company acquired the rights under a
sublease agreement and related documentation for an assisted living community
from The Hillsdale Group, L.P., an unrelated third party, pursuant to a Purchase
and Sale Agreement dated February 12, 1998, as amended.
The Company's current report on Form 8-K filed with the SEC on May 19, 1998,
reported under Item 5, on May 1, 1998, the Company reincorporated as a Delaware
corporation.
The Company's current report on Form 8-K filed with the SEC on May 26, 1998,
reported under Item 5, on May 12, 1998, the Company filed a lawsuit in the
Superior Court for the State of California, County of Orange, seeking to enjoin
Kapson Senior Quarters Corp., from acquiring Atria Communities.
The Company's current report on Form 8-K filed with the SEC on June 22, 1998,
reported under Item 5, effective June 1, 1998, the Company named Douglas M.
Pasquale as the President and Chief Operating Officer and effective June 15,
1998, named Patricia J. Gifford, MD as the Chief Medical Officer.
19
<PAGE> 20
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/ Howard G. Phanstiel
-------------------------------
Howard G. Phanstiel
Chief Executive Officer and
Chairman of the Board
(Duly authorized officer)
Date: August 14, 1998
By: /s/Paul Kuliev
-------------------------------
Vice President, Controller
(Duly authorized officer)
Date: August 14, 1998
20
<PAGE> 21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
4 Rights Agreement, dated May 14, 1998, between ARV Assisted Living
Inc., and ChaseMellon Shareholder Services LLC which includes the
form of Certificate of Determination of the Series D Junior
Participating Preferred Stock of ARV Assisted Living, Inc. as
Exhibit A, the form of Right Certificate as Exhibit B, and the
Summary of Rights to Purchase Preferred Shares as Exhibit C.
10.1 Purchase and Sale Agreement by and between 270 Center Associates,
Limited Partnership and ARV Assisted Living, Inc. dated as of
February 12, 1998, incorporated by reference to Exhibit 10.1 to
the Company's 8-K filed with the Securities and Exchange
Commission on May 11, 1998.
10.2 Amendment to Purchase and Sale Agreement by and between 270 Center
Associated, Limited Partnership and ARV Assisted Living, Inc.
dated as of March 2, 1998, incorporated by reference to Exhibit
10.2 to the Company's 8-K filed with the Securities and Exchange
Commission on May 11, 1998.
10.3 SecondAmendment to Purchase and Sale Agreement by and between 270
Center Associated, Limited Partnership and ARV Assisted Living,
Inc. dated as of April 10, 1998, incorporated by reference to
Exhibit 10.3 to the Company's 8-K filed with the Securities and
Exchange Commission on May 11, 1998.
10.4 Purchase and Sale Agreement by and between TH Group, Inc. and ARV
Assisted Living, Inc. dated as of February 12, 1998, incorporated
by reference to Exhibit 10.4 to the Company's 8-K filed with the
Securities and Exchange Commission on May 11, 1998.
10.5 Amendment to Purchase and Sale Agreement by and between TH Group,
Inc. and ARV Assisted Living, Inc. dated as of March 2, 1998,
incorporated by reference to Exhibit 10.5 to the Company's 8-K
filed with the Securities and Exchange Commission on May 11, 1998.
10.6 SecondAmendment to Purchase and Sale Agreement by and between TH
Group, Inc. and ARV Assisted Living, Inc. dated as of April 10,
1998, incorporated by reference to Exhibit 10.6 to the Company's
8-K filed with the Securities and Exchange Commission on May 11,
1998.
10.7 Purchase and Sale Agreement by and between The Hillsdale Group, LP
and ARV Assisted Living, Inc. dated as of February 12, 1998,
incorporated by reference to Exhibit 10.7 to the Company's 8-K
filed with the Securities and Exchange Commission on May 11, 1998.
10.8 Amendment to Purchase and Sale Agreement by and between The
Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of
March 2, 1998, incorporated by reference to Exhibit 10.8 to the
Company's 8-K filed with the Securities and Exchange Commission on
May 11, 1998.
10.9 Second Amendment to Purchase and Sale Agreement by and between The
Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of
April 6, 1998, incorporated by reference to Exhibit 10.9 to the
Company's 8-K filed with the Securities and Exchange Commission on
May 11, 1998.
10.10 Executive Employment Agreement, dated December 5, 1997, by and
between ARV Assisted Living, Inc. and Howard G. Phanstiel.
10.11 Amendment to Executive Employment Agreement, effective December 5,
1997, by and between ARV Assisted Living, Inc. and Howard G.
Phanstiel.
10.12 Executive Employment Agreement, as amended, dated June 1, 1998, by
and between ARV Assisted Living, Inc. and Douglas M. Pasquale.
10.13 Employment Agreement, as amended, dated June 15, 1998, by and
between ARV Assisted Living, Inc. and Patricia J. Gifford, MD.
15 Independent Accountants' Review Report dated August 14, 1998
27 Financial Data Schedule
99.1 Complaint in ARV Assisted Living, Inc. v. Lazard Freres Real
Estate Investors LLC, et al., case no. 787788, incorporated by
reference to the Company's 8-K filed with the Securities and
Exchange Commission on May 26, 1998.
<PAGE> 1
Exhibit 4
===============================================================================
ARV ASSISTED LIVING, INC.
and
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
as Rights Agent
Rights Agreement
Dated as of May 14, 1998
===============================================================================
<PAGE> 2
RIGHTS AGREEMENT
----------------
Agreement, dated as of May 14, 1998, between ARV Assisted Living, Inc.,
a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services,
L.L.C., a limited liability company, as Rights Agent (the "Rights Agent").
RECITALS
--------
The Board of Directors of the Company has authorized and declared a
dividend of one right (a "Right") for each Common Share (as defined in Section
1.6) of the Company outstanding at the close of business on June 10, 1998 (the
"Record Date") and has authorized the issuance of one Right (subject to
adjustment as provided herein) with respect to each Common Share that shall
become outstanding between the Record Date and the earliest of the Distribution
Date, the Redemption Date and the Final Expiration Date (as such terms are
defined in Sections 3.1 and 7.1), each Right initially representing the right to
purchase one one-hundredth (subject to adjustment) of a share of Series D Junior
Participating Preferred Stock (the "Preferred Shares") of the Company having the
rights, powers and preferences set forth in the form of Certificate of
Designations attached hereto as Exhibit A, upon the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Rights Agreement,
the following terms have the meanings indicated:
1.1 "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 10% or more of the Common Shares
of the Company then outstanding but shall not include (i) an Exempt Person or
(ii) any Approved Holder (as defined below), unless and until such time as such
Approved Holder shall become the Beneficial Owner of 50% or more of the Common
Shares of the Company then outstanding before the termination of the Standstill
Period (as such term is defined in that certain Amended and Restated
Stockholders Agreement dated as of October 29, 1997 by and among Prometheus
Assisted Living LLC ("Prometheus"), Lazard Freres Real Estate Investors L.L.C.
("LFREI") and the Company (the "Stockholders Agreement"); provided, however,
that no Person (including but not limited to the Approved Holder) shall be
deemed to Beneficially Own any Common Shares held by any other person that is a
party to that certain Stockholders' Voting Agreement dated October 29, 1997 by
and among Prometheus, LFREI and certain stockholders of the Company. "Approved
Holder" shall mean LFREI and Prometheus, together with all of their Controlled
Affiliates (as such term is defined in the Stockholders Agreement).
Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as
the result of an acquisition of Common Shares by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 10% (or, in the case of an Approved Holder
during the Standstill Period, 50%) or more of the Common Shares of the Company
then outstanding; PROVIDED, HOWEVER, that if a Person shall become the
Beneficial Owner of 10% (or, in the case of the Approved Holder during the
Standstill Period, 50%) or more of the Common Shares of the Company then
outstanding solely by reason of share purchases by the Company and shall, after
such share purchases by the Company, become the Beneficial Owner of any
additional Common Shares of the Company, then such Person shall be deemed to be
an "Acquiring Person." Notwithstanding the foregoing, if the Board of Directors
of the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
Section 1.1, has become such inadvertently, and
1
<PAGE> 3
without any intention of changing or influencing control of the Company, and
such Person divests as promptly as practicable a sufficient number of Common
Shares so that such Person would no longer be an Acquiring Person, as defined
pursuant to the foregoing provisions of this Section 1.1, then such Person shall
not be deemed to be or have become an "Acquiring Person" for any purposes of
this Agreement (so long as such Person does not become an Acquiring Person after
such divestiture).
1.2 "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations, as in
effect on the date of this Rights Agreement, under the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
1.3 A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly (as determined pursuant
to Rule 13d-3 of the General Rules and Regulations under the Exchange Act as
in effect on the date of this Agreement);
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has (A) the right to acquire (whether
such right is exercisable immediately, or only after the passage of time,
compliance with regulatory requirements, fulfillment of a condition or
otherwise) pursuant to any agreement, arrangement or understanding, whether
or not in writing (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights (other than the Rights), warrants or options, or otherwise;
PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner
of, or to beneficially own, (1) securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted for
purchase or exchange or (2) securities which such Person or any of such
Person's Affiliates or Associates may acquire, does or do acquire or may be
deemed to have the right to acquire, pursuant to any merger or other
acquisition agreement between the Company and such Person (or one or more of
his Affiliates or Associates) if such agreement has been approved by the
Board of Directors of the Company prior to such Person's becoming an
Acquiring Person; or (B) the right to vote pursuant to any agreement,
arrangement or understanding (whether or not in writing); PROVIDED, HOWEVER,
that a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, any security under this clause (B) if the agreement,
arrangement or understanding to vote such security (1) arises solely from a
revocable proxy or consent given to such Person in response to a public
proxy or consent solicitation made pursuant to, and in accordance with, the
applicable rules and regulations of the Exchange Act and (2) is not also
then reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person (or any Affiliate or Associate thereof) with which such Person
or any of such Person's Affiliates or Associates has any agreement,
arrangement or understanding (other than customary agreements with and
between underwriters and selling group members with respect to a bona fide
public offering of securities), whether or not in writing, for the
2
<PAGE> 4
purpose of acquiring, holding, voting (except pursuant to a revocable proxy
as described in the proviso to Section 1.3(ii)(B)) or disposing of any
securities of the Company.
PROVIDED, HOWEVER, that no Person who is an officer, director or employee of an
Exempt Person shall be deemed, solely by reason of such Person's status or
authority as such, to be the "Beneficial Owner" of, to have "Beneficial
Ownership" of or to "beneficially own" any securities that are "beneficially
owned" (as defined in this Section 1.3), including, without limitation, in a
fiduciary capacity, by an Exempt Person or by any other such officer, director
or employee of an Exempt Person.
1.4 "Business Day" shall mean any day other than a Saturday, Sunday, or
a day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
1.5 "close of business" on any given date shall mean 5:00 p.m.,
California time, on such date; PROVIDED, HOWEVER, that if such date is not a
Business Day it shall mean 5:00 p.m., California time, on the next succeeding
Business Day.
1.6 "Common Shares" when used with reference to the Company shall mean
the shares of common stock, par value $.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock with the greatest voting power, or the equity securities or
other equity interest having power to control or direct the management, of such
other Person or, if such Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person, and which has
issued and outstanding such capital stock, equity securities or equity interest.
1.7 "Continuing Director" shall mean (i) any member of the Board of
Directors of the Company, while such Person is a member of the Board, who is not
an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or an
employee, director, representative, nominee or designee of any Acquiring Person
or of any such Affiliate or Associate, and was a member of the Board prior to
the time that any Person becomes an Acquiring Person or (ii) any Person (during
such period in which such Person is a member of the Board) who, after the time
that any Person becomes an Acquiring Person, becomes a member of the Board and
who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring
Person, or an employee, director, representative, nominee or designee of an
Acquiring Person or of any such Affiliate or Associate, if such Person's
nomination for election or election to the Board is recommended or approved by a
majority of the Continuing Directors.
1.8 "Exempt Person" shall mean the Company, any Subsidiary (as such term
is hereinafter defined) of the Company, any employee benefit plan of the Company
or of any Subsidiary of the Company, or any entity or trustee holding shares of
capital stock of the Company for or pursuant to the terms of any such plan, in
its capacity as an agent or trustee for any such plan.
1.9 "Person" shall mean any individual, partnership, joint venture,
limited liability company, firm, corporation, unassociated association, trust or
other entity, and shall include any successor (by merger or otherwise) of such
entity.
1.10 "Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, the filing of a report pursuant to Section 13(d) of the Exchange Act
or pursuant to a comparable successor statute) by the Company or an Acquiring
Person that an Acquiring Person has become such or that discloses information
which reveals
3
<PAGE> 5
the existence of an Acquiring Person or such earlier date as a majority of the
Board of Directors shall become aware of the existence of an Acquiring Person.
1.11 "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interests is owned, of record or beneficially, directly or indirectly,
by such Person.
1.12 A "Trigger Event" shall be deemed to have occurred upon any Person
becoming an Acquiring Person.
1.13 The following terms shall have the meanings defined for such terms
in the Sections set forth below:
Term Section
---- -------
Adjustment Shares 11.1.2
Approved Holder 1.1
common stock equivalent 11.1.3
Company Recitals
current per share market price 11.4
Current Value 11.1.3
Distribution Date 3.1
equivalent preferred stock 11.2
Exchange Act 1.2
Exchange Consideration 27.1
Existing Holder 1.1
Final Expiration Date 7.1
Nasdaq 9
Preferred Shares Recitals
Purchase Price 4
Record Date Recitals
Redemption Date 7.1
Redemption Price 23.1
Right Recitals
Right Certificate 3.1
Rights Agent Recitals
Security 11.4
Spread 11.1.3
Substitution Period 11.1.3
Summary of Rights 3.2
Trading Day 11.4.1
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable. In the event the Company appoints one or more co-Rights
Agents, the respective duties of the Rights Agent and any co-Rights Agent shall
be as the Company shall determine. Contemporaneously with such appointment, if
any, the Company shall notify the Rights Agent thereof.
4
<PAGE> 6
Section 3. Issuance of Right Certificates.
3.1 Rights Evidenced by Share Certificates. Until the earlier of (i) the
tenth day after the Shares Acquisition Date or (ii) the tenth day after the date
of the commencement of, or first public announcement of the intent of any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company or any entity holding
shares of capital stock of the Company for or pursuant to the terms of any such
plan, in its capacity as an agent or trustee for any such plan) to commence, a
tender or exchange offer the consummation of which would result in any Person
becoming the Beneficial Owner of Common Shares aggregating 10% or more of the
then outstanding Common Shares of the Company (the earlier of (i) and (ii) being
herein referred to as the "Distribution Date," whether or not either such date
occurs prior to the Record Date), (x) the Rights (unless earlier expired,
redeemed or terminated) will be evidenced (subject to the provisions of Section
3.2) by the certificates for Common Shares registered in the names of the
holders thereof (which certificates for Common Shares shall also be deemed to be
Right Certificates) and not by separate certificates, and (y) the Rights (and
the right to receive certificates therefor) will be transferable only in
connection with the transfer of the underlying Common Shares. As soon as
practicable after the Distribution Date, the Rights Agent will send, by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the close of business on the Distribution Date (other than any Acquiring Person
or any Associate or Affiliate of an Acquiring Person), at the address of such
holder shown on the records of the Company, one or more certificates for Rights,
in substantially the form of Exhibit B hereto (a "Right Certificate"),
evidencing one Right (subject to adjustment as provided herein) for each Common
Share so held. As of the Distribution Date, the Rights will be evidenced solely
by such Right Certificates.
3.2 Summary of Rights. On the Record Date or as soon as practicable
thereafter, the Company will send or cause to be sent a copy of a Summary of
Rights to Purchase Preferred Shares, in substantially the form attached hereto
as Exhibit C (the "Summary of Rights"), by first-class, postage-prepaid mail, to
each record holder of Common Shares as of the close of business on the Record
Date at the address of such holder shown on the records of the Company. With
respect to certificates for Common Shares outstanding as of the close of
business on the Record Date, until the Distribution Date (or the earlier
Redemption Date or Final Expiration Date), the Rights will be evidenced by such
certificates for Common Shares registered in the names of the holders thereof
together with a copy of the Summary of Rights, and the registered holders of the
Common Shares shall also be registered holders of the associated Rights. Until
the Distribution Date (or the earlier Redemption Date or Final Expiration Date),
the surrender for transfer of any certificate for Common Shares outstanding at
the close of business on the Record Date, with or without a copy of the Summary
of Rights, shall also constitute the transfer of the Rights associated with the
Common Shares represented thereby.
3.3 New Certificates After Record Date. Certificates for Common Shares
which become outstanding (whether upon issuance out of authorized but unissued
Common Shares, issuance out of treasury or transfer or exchange of outstanding
Common Shares) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date, shall be
deemed also to be certificates for Rights, and shall have impressed, printed,
stamped, written or otherwise affixed onto them the following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between ARV Assisted
Living, Inc. and ChaseMellon Shareholder Services, L.L.C., dated as of
May 14, 1998, as the same may be amended from time to time (the "Rights
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal executive
offices of ARV Assisted Living, Inc. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. ARV
Assisted Living, Inc. will mail to the holder of this certificate a copy
5
<PAGE> 7
of the Rights Agreement without charge after receipt of a written
request therefor. AS DESCRIBED IN THE RIGHTS AGREEMENT, RIGHTS WHICH ARE
HELD BY OR HAVE BEEN HELD BY ACQUIRING PERSONS OR ASSOCIATES OR
AFFILIATES THEREOF (AS DEFINED IN THE RIGHTS AGREEMENT) SHALL BECOME
NULL AND VOID.
With respect to such certificates containing the foregoing legend, until the
Distribution Date (or the earlier Redemption Date or Final Expiration Date), the
Rights associated with the Common Shares represented by such certificates shall
be evidenced by such certificates with or without a copy of the Summary of
Rights, and the surrender for transfer of any such certificates, except as
otherwise provided herein, shall also constitute the transfer of the Rights
associated with the Common Shares represented thereby. In the event that the
Company purchases or acquires any Common Shares after the Record Date but prior
to the Distribution Date, any Rights associated with such Common Shares shall be
deemed cancelled and retired so that the Company shall not be entitled to
exercise any Rights associated with the Common Shares which are no longer
outstanding.
Notwithstanding this Section 3.3, the omission of a legend shall not affect the
enforceability of any part of this Agreement or the rights of any holder of the
Rights.
Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase Preferred Shares, certification and assignment to
be printed on the reverse thereof) shall be substantially the same as Exhibit B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Rights
Agreement, or as may be required to comply with any applicable law or with any
rule or regulation made pursuant thereto or with any rule or regulation of any
stock exchange or trading system on which the Rights may from time to time be
listed or quoted, or to conform to usage. Subject to the terms and conditions
hereof, the Right Certificates, whenever issued, shall be dated as of the Record
Date, and shall show the date of countersignature by the Rights Agent, and on
their face shall entitle the holders thereof to purchase such number of one
one-hundredths of a Preferred Share as shall be set forth therein at the price
per one one-hundredth of a Preferred Share set forth therein (the "Purchase
Price"), but the number of such one one-hundredths of a Preferred Share and the
Purchase Price shall be subject to adjustment as provided herein.
Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board of
Directors, the Chief Executive Officer, President or any Vice President, either
manually or by facsimile signature, and shall have affixed thereto the Company's
seal or a facsimile thereof which shall be attested by the Secretary or any
Assistant Secretary of the Company, either manually or by facsimile signature.
The Right Certificates shall be countersigned, either manually or by facsimile
signature, by an authorized signatory of the Rights Agent, but it shall not be
necessary for the same signatory to countersign all of the Right Certificates
hereunder. No Right Certificate shall be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any of
the Right Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent,
and issued and delivered by the Company with the same force and effect as though
the person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of the Company to sign such Right
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office in Los Angeles, California books for
registration and transfer of the Right Certificates
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issued hereunder. Such books shall show the names and addresses of the
respective holders of the Right Certificates, the number of Rights evidenced on
its face by each of the Right Certificates, the certificate number of each of
the Right Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 11.1.2 and Section 14, at any time after the close
of business on the Distribution Date, and at or prior to the close of business
on the earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11.1.2 or that have been
exchanged pursuant to Section 27) may be transferred, split up or combined or
exchanged for another Right Certificate or Right Certificates, entitling the
registered holder to purchase a like number of one one-hundredths of a Preferred
Share as the Right Certificate or Right Certificates surrendered then entitled
such holder to purchase. Any registered holder desiring to transfer, split up or
combine or exchange any Right Certificate shall make such request in writing
delivered to the Rights Agent, and shall surrender, together with any required
form of assignment and certificate duly completed, the Right Certificate or
Right Certificates to be transferred, split up or combined or exchanged at the
office of the Rights Agent designated for such purpose. Neither the Rights Agent
nor the Company shall be obligated to take any action whatsoever with respect to
the transfer of any such surrendered Right Certificate or Right Certificates
until the registered holder shall have completed and signed the certificate
contained in the form of assignment on the reverse side of such Right
Certificate or Right Certificates and shall have provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall countersign and deliver to the person entitled
thereto a Right Certificate or Right Certificates, as the case may be, as so
requested. The Company may require payment from the holders of Right
Certificates of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split up or combination or
exchange of such Right Certificates.
Subject to the provisions of Section 11.1.2, at any time after the
Distribution Date and prior to the Expiration Date, upon receipt by the Company
and the Rights Agent of evidence reasonably satisfactory to them of the loss,
theft, destruction or mutilation of a Right Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to them,
and, at the Company's request, reimbursement to the Company and the Rights Agent
of all reasonable expenses incidental thereto, and upon surrender to the Rights
Agent and cancellation of the Right Certificate if mutilated, the Company will
make and deliver a new Right Certificate of like tenor to the Rights Agent for
countersignature and delivery to the registered owner in lieu of the Right
Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
7.1 Exercise of Rights. Subject to Section 11.1.2 and except as
otherwise provided herein, the registered holder of any Right Certificate may
exercise the Rights evidenced thereby in whole or in part at any time after the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase and certification on the reverse side thereof duly
executed, to the Rights Agent at the office of the Rights Agent designated for
such purpose, together with payment of the aggregate Purchase Price for the
total number of one one-hundredths of a Preferred Share (or other securities,
cash or other assets) as to which the Rights are exercised, at or prior to the
earliest of (i) the close of business on May 14, 2008 ("Final Expiration Date"),
(ii) the time at which the Rights are redeemed as provided in Section 23 (the
"Redemption Date"), (iii) the closing of any merger or other acquisition
transaction involving the Company pursuant to an agreement of the type described
in Section 1.3(ii)(A)(2), at which time the Rights are deemed terminated, or
(iv) the time at which the Rights are exchanged as provided in Section 27.
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7.2 Purchase Price. The Purchase Price for each one one-hundredth of a
Preferred Share pursuant to the exercise of a Right shall initially be $70.00,
shall be subject to adjustment from time to time as provided in Sections 11, 13
and 26 and shall be payable in lawful money of the United States of America in
accordance with Section 7.3.
7.3 Payment Procedures. Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase and certification duly
executed, accompanied by payment of the Purchase Price for the shares to be
purchased and an amount equal to any applicable transfer tax required to be paid
by the holder of such Right Certificate in accordance with Section 9, by
certified or cashier's check or money order payable to the order of the Company,
the Rights Agent shall thereupon promptly (i)(A) requisition from any transfer
agent of the Preferred Shares (or make available, if the Rights Agent is the
transfer agent) certificates for the number of Preferred Shares to be purchased
and the Company hereby irrevocably authorizes its transfer agent to comply with
all such requests, or (B) if the Company shall have elected to deposit the total
number of Preferred Shares issuable upon exercise of the Rights hereunder with a
depositary agent, requisition from the depositary agent depositary receipts
representing such number of one one-hundredths of a Preferred Share as are to be
purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company hereby directs the depositary agent to comply with all
such requests, (ii) when appropriate, requisition from the Company the amount of
cash to be paid in lieu of the issuance of fractional shares in accordance with
Section 14, (iii) promptly after receipt of such certificates or depositary
receipts, cause the same to be delivered to or upon the order of the registered
holder of such Right Certificate, registered in such name or names as may be
designated by such holder and (iv) when appropriate, after receipt, promptly
deliver such cash to or upon the order of the registered holder of such Right
Certificate. In the event that the Company is obligated to issue other
securities of the Company, pay cash and/or distribute other property pursuant to
Section 11.1.3, the Company will make all arrangements necessary so that such
other securities, cash and/or other property are available for distribution by
the Rights Agent, if and when appropriate.
7.4 Partial Exercise. In case the registered holder of any Right
Certificate shall exercise less than all the Rights evidenced thereby, a new
Right Certificate evidencing Rights equivalent to the Rights remaining
unexercised shall be issued by the Rights Agent and delivered to the registered
holder of such Right Certificate or to his duly authorized assigns, subject to
the provisions of Section 14.
7.5 Full Information Concerning Ownership. Notwithstanding anything in
this Rights Agreement to the contrary, neither the Rights Agent nor the Company
shall be obligated to undertake any action with respect to a registered holder
of Rights upon the occurrence of any purported exercise as set forth in this
Section 7 unless the certificate contained in the form of election to purchase
set forth on the reverse side of the Right Certificate surrendered for such
exercise shall have been duly completed and signed by the registered holder
thereof and the Company shall have been provided with such additional evidence
of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon
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the exercise thereof. The Rights Agent shall deliver all cancelled Right
Certificates to the Company, or shall, at the written request of the Company,
destroy such cancelled Right Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock. The Company
covenants and agrees that from and after the Distribution Date it will cause to
be reserved and kept available out of its authorized and unissued Preferred
Shares (and, following the occurrence of a Trigger Event, out of its authorized
and unissued Common Shares or other securities or out of its shares held in its
treasury) the number of Preferred Shares (and, following the occurrence of a
Trigger Event, Common Shares and/or other securities) that will be sufficient to
permit the exercise in full of all outstanding Rights.
So long as the Preferred Shares (and, following the occurrence of a
Trigger Event, Common Shares and/or other securities) issuable upon the exercise
of Rights may be listed on any national securities exchange or traded in the
over-the-counter market and quoted on the Nasdaq National Market ("Nasdaq"), the
Company shall use its best efforts to cause, from and after such time as the
Rights become exercisable, all shares reserved for such issuance to be listed on
such exchange or so traded in such over-the-counter market, upon official notice
of issuance upon such exercise.
The Company covenants and agrees that it will take all such action as
may be necessary to ensure that all Preferred Shares (and, following the
occurrence of a Trigger Event, Common Shares and/or other securities) delivered
upon exercise of Rights shall, at the time of delivery of the certificates for
such shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and
payable any and all Federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares (or Common Shares and/or other securities, as the case may
be) upon the exercise of Rights. The Company shall not, however, be required to
pay any transfer tax which may be payable in respect of any transfer or delivery
of Right Certificates to a person other than, or the issuance or delivery of
certificates for the Preferred Shares (or Common Shares and/or other securities,
as the case may be) in a name other than that of, the registered holder of the
Right Certificate evidencing Rights surrendered for exercise or to issue or
deliver any certificates for Preferred Shares (or Common Shares and/or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until any such tax shall have been paid
(any such tax being payable by the holder of such Right Certificate at the time
of surrender) or until it has been established to the Company's satisfaction
that no such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares (or Common Shares and/or other securities, as
the case may be) is issued upon the exercise of Rights shall for all purposes be
deemed to have become the holder of record of the Preferred Shares (or Common
Shares and/or other securities, as the case may be) represented thereby on, and
such certificate shall be dated, the date upon which the Right Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and any applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the
date of such surrender and payment is a date upon which the Preferred Shares (or
Common Shares and/or other securities, as the case may be) transfer books of the
Company are closed, such person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Shares (or Common
Shares and/or other securities, as the case may be) transfer books of the
Company are open.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares or other securities
or property purchasable upon exercise
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of each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this Section 11.
11.1 Post Execution Events.
11.1.1 Corporate Dividends, Reclassifications, Etc. In the event the
Company shall at any time after the date of this Rights Agreement (A) declare
and pay a dividend on the Preferred Shares payable in Preferred Shares, (B)
subdivide the outstanding Preferred Shares, (C) combine the outstanding
Preferred Shares into a smaller number of shares or (D) issue any shares of its
capital stock in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11.1, the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of capital
stock issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if such Right had
been exercised immediately prior to such date and at a time when the Preferred
Shares transfer books of the Company were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification. If an event occurs which would require an
adjustment under both Section 11.1.1 and Section 11.1.2, the adjustment provided
for in this Section 11.1.1 shall be in addition to, and shall be made prior to,
the adjustment required pursuant to, Section 11.1.2.
11.1.2 Acquiring Person Events; Triggering Events. Subject to Sections
23.1 and 27 of this Agreement, in the event
(A) any Acquiring Person or any Associate or Affiliate of
any Acquiring Person, at any time after the date of this Rights
Agreement, directly or indirectly, shall merge into the Company or
otherwise combine with the Company and the Company shall be the
continuing or surviving corporation of such merger or combination and
the Common Shares of the Company shall remain outstanding and not be
changed into or exchanged for stock or other securities of any other
Person or the Company or cash or any other property, or
(B) that a Trigger Event occurs,
then, from and after the first occurrence of such event, each holder of a Right,
except as provided below, shall thereafter have a right to receive, upon
exercise thereof at a price per Right equal to the then current Purchase Price
multiplied by the number of one one-hundredths of a Preferred Share for which a
Right is then exercisable (without giving effect to this Section 11.1.2), in
accordance with the terms of this Rights Agreement and in lieu of Preferred
Shares, such number of Common Shares as shall equal the result obtained by (x)
multiplying the then current Purchase Price by the then number of one
one-hundredths of a Preferred Share for which a Right is then exercisable
(without giving effect to this Section 11.1.2) and (y) dividing that product by
50% of the current per share market price of the Common Shares (determined
pursuant to Section 11.4) on the first of the date of the occurrence of, or the
date of the first public announcement of, one of the events listed above in this
Section 11.1.2 (the "Adjustment Shares"); PROVIDED, HOWEVER, that if the
transaction that would otherwise give rise to the foregoing adjustment is also
subject to the provisions of Section 13, then only the provisions of Section 13
shall apply and no adjustment shall be made pursuant to this Section 11.1.2;
PROVIDED, FURTHER, that nothing contained in this Section 11.1.2 shall limit or
otherwise diminish the power of the Board of Directors to postpone the
Distribution Date pursuant to Section 3.1; PROVIDED, FURTHER, that the Purchase
Price and the number of Adjustment Shares shall thereafter be subject to further
adjustment pursuant to Section 11.1.1 hereof. Notwithstanding the
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foregoing, upon the occurrence of either of the events listed above in this
Section 11.1.2, any Rights that are or were acquired or beneficially owned by
(1) an Acquiring Person or any Associate or Affiliate thereof, (2) a transferee
of an Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such, or (3) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom the Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect avoidance of this Section 11.1.2, shall become void,
and any holder (whether or not such holder is an Acquiring Person or an
Associate or Affiliate of an Acquiring Person) of such Rights shall thereafter
have no right to exercise such Rights under any provision of this Rights
Agreement or otherwise. The Company shall not enter into any transaction of the
type described in this Section 11.1.2 if at the time of such transaction there
are any rights, warrants, instruments or securities outstanding or any
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. From and after the Trigger Event, no Right Certificate shall be issued
pursuant to Section 3 or Section 6 that represents Rights that are or have
become void pursuant to the provisions of this paragraph, and any Right
Certificate delivered to the Rights Agent that represents Rights that are or
have become void pursuant to the provisions of this paragraph shall be canceled.
The Company shall use all reasonable efforts to ensure that the
provisions of this Section 11.1.2 are complied with, but shall have no liability
to any holder of Right Certificates or other Person as a result of its failure
to make any determinations with respect to any Acquiring Person or its
Affiliates, Associates or transferees hereunder.
11.1.3 Insufficient Shares. The Company may at its option substitute for
a Common Share issuable upon the exercise of Rights in accordance with the
foregoing Section 11.1.2 a number of Preferred Shares or fraction thereof such
that the current per share market price of one Preferred Share multiplied by
such number or fraction is equal to the current per share market price of one
Common Share. In the event that upon the occurrence of one or more of the events
listed in Section 11.1.2 above there shall not be sufficient Common Shares
authorized but unissued, or held by the Company as treasury shares, to permit
the exercise in full of the Rights in accordance with the foregoing Section
11.1.2, the Company shall take all such action as may be necessary to authorize
additional Common Shares for issuance upon exercise of the Rights, PROVIDED,
HOWEVER, that if the Company determines that it is unable to cause the
authorization of a sufficient number of additional Common Shares, then, in the
event the Rights become exercisable, the Company, with respect to each Right and
to the extent necessary and permitted by applicable law and any agreements or
instruments in effect on the date hereof to which it is a party, shall: (A)
determine the excess of (1) the value of the Adjustment Shares issuable upon the
exercise of a Right (the "Current Value"), over (2) the Purchase Price (such
excess, the "Spread") and (B) with respect to each Right (other than Rights
which have become void pursuant to Section 11.1.2), make adequate provision to
substitute for the Adjustment Shares, upon payment of the applicable Purchase
Price, (1) cash, (2) a reduction in the Purchase Price, (3) Preferred Shares or
other equity securities of the Company (including, without limitation, shares,
or fractions of shares, of preferred stock which the Board of Directors of the
Company has deemed to have substantially the same value as Common Shares) (each
such share of preferred stock constituting a "common stock equivalent")), (4)
debt securities of the Company, (5) other assets or (6) any combination of the
foregoing having an aggregate value equal to the Current Value, where such
aggregate value has been determined by the Board of Directors of the Company
based upon the advice of a nationally recognized investment banking firm
selected by the Board of Directors of the Company; PROVIDED, HOWEVER, that if
the Company shall not have made adequate provision to deliver value pursuant
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to clause (B) above within thirty (30) days following the first occurrence of
one of the events listed in Section 11.1.2 above, then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, Common Shares (to the extent available)
and then, if necessary, cash, which in the aggregate are equal to the Spread. If
the Board of Directors of the Company shall determine in good faith that it is
unlikely that sufficient additional Common Shares could be authorized for
issuance upon exercise in full of the Rights, the thirty (30) day period set
forth above may be extended and re-extended to the extent necessary, but not
more than ninety (90) days following the first occurrence of one of the events
listed in Section 11.1.2 above, in order that the Company may seek stockholder
approval for the authorization of such additional shares (such period as may be
extended, the "Substitution Period"). To the extent that the Company determines
that some action need be taken pursuant to the second and/or third sentences of
this Section 11.1.3, the Company (x) shall provide that such action shall apply
uniformly to all outstanding Rights, and (y) may suspend the exercisability of
the Rights until the expiration of the Substitution Period in order to seek any
authorization of additional shares and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11.1.3, the
value of a Common Share shall be the current per share market price (as
determined pursuant to Section 11.4) on the date of the first occurrence of one
of the events listed in Section 11.1.2 above and the value of any "common stock
equivalent" shall be deemed to have the same value as the Common Shares on such
date.
11.2 Dilutive Rights Offering. In case the Company shall fix a record
date for the issuance of rights, options or warrants to all holders of Preferred
Shares entitling them (for a period expiring within 45 calendar days after such
record date) to subscribe for or purchase Preferred Shares (or securities having
the same rights, privileges and preferences as the Preferred Shares ("equivalent
preferred stock")) or securities convertible into Preferred Shares or equivalent
preferred stock at a price per Preferred Share or per share of equivalent
preferred stock (or having a conversion or exercise price per share, if a
security convertible into or exercisable for Preferred Shares or equivalent
preferred stock) less than the current per share market price of the Preferred
Shares (as defined in Section 11.4) on such record date, the Purchase Price to
be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of Preferred Shares outstanding on
such record date plus the number of Preferred Shares which the aggregate
offering price of the total number of Preferred Shares and/or equivalent
preferred stock to be offered (and/or the aggregate initial conversion price of
the convertible securities so to be offered) would purchase at such current per
share market price and the denominator of which shall be the number of Preferred
Shares outstanding on such record date plus the number of additional Preferred
Shares and/or equivalent preferred stock to be offered for subscription or
purchase (or into which the convertible securities so to be offered are
initially convertible). In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent and the
holders of the Rights. Preferred Shares owned by or held for the account of the
Company or any Subsidiary of the Company shall not be deemed outstanding for the
purpose of any such computation. Such adjustments shall be made successively
whenever such a record date is fixed; and in the event that such rights or
warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.
11.3 Distributions. In case the Company shall fix a record date for the
making of a distribution to all holders of the Preferred Shares (including any
such distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences
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of indebtedness, cash, securities or assets (other than a regular periodic cash
dividend at a rate not in excess of 125% of the rate of the last regular
periodic cash dividend theretofore paid or, in case regular periodic cash
dividends have not theretofore been paid, at a rate not in excess of 50% of the
average net income per share of the Company for the four quarters ended
immediately prior to the payment of such dividend, or a dividend payable in
Preferred Shares (which dividend, for purposes of this Agreement, shall be
subject to the provisions of Section 11.1.1(A) hereof)) or convertible
securities, or subscription rights or warrants (excluding those referred to in
Section 11.2), the Purchase Price to be in effect after such record date shall
be determined by multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be the current per
share market price of the Preferred Shares (as defined in Section 11.4) on such
record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent) of the portion of the cash, assets,
securities or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to one Preferred Share and the
denominator of which shall be such current per share market price of the
Preferred Shares. Such adjustments shall be made successively whenever such a
record date is fixed; and in the event that such distribution is not so made,
the Purchase Price shall again be adjusted to be the Purchase Price which would
then be in effect if such record date had not been fixed.
11.4 Current Per Share Market Value.
11.4.1 General. For the purpose of any computation hereunder, the
"current per share market price" of any security (a "Security" for the purpose
of this Section 11.4.1) on any date shall be deemed to be the average of the
daily closing prices per share of such Security for the thirty (30) consecutive
Trading Days (as such term is hereinafter defined) immediately prior to such
date; PROVIDED, HOWEVER, that in the event that the current per share market
price of the Security is determined during any period following the announcement
by the issuer of such Security of (i) a dividend or distribution on such
Security payable in shares of such Security or securities convertible into such
shares or (ii) any subdivision, combination or reclassification of such
Security, and prior to the expiration of thirty (30) Trading Days after the
ex-dividend date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such case, the
"current per share market price" shall be appropriately adjusted to reflect the
current market price per share equivalent of such Security. The closing price
for each day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Security is not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Security is listed or
admitted to trading or, if the Security is not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by Nasdaq or such other system then in use, or, if on any such date
the Security is not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Security selected by the Board of Directors of the Company. If on any
such date no such market maker is making a market in the Security, the fair
value of the Security on such date as determined in good faith by the Board of
Directors of the Company shall be used. The term "Trading Day" shall mean a day
on which the principal national securities exchange on which the Security is
listed or admitted to trading is open for the transaction of business or, if the
Security is not listed or admitted to trading on any national securities
exchange, a Business Day. If the Security is not publicly held or not so listed
or traded, "current per share market price" shall mean the fair value per share
as determined in good faith by the Board of Directors of the Company or, if at
the time of such determination there is an Acquiring Person, by a majority of
the Continuing Directors then in
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office, or if there are no Continuing Directors, by a nationally recognized
investment banking firm selected by the Board of Directors, which shall have the
duty to make such determination in a reasonable and objective manner, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes.
11.4.2 Preferred Shares. Notwithstanding Section 11.4.1, for the purpose
of any computation hereunder, the "current per share market price" of the
Preferred Shares shall be determined in the same manner as set forth above in
Section 11.4.1 (other than the last sentence thereof). If the current per share
market price of the Preferred Shares cannot be determined in the manner
described in Section 11.4.1, the "current per share market price" of the
Preferred Shares shall be conclusively deemed to be an amount equal to 100 (as
such number may be appropriately adjusted for such events as stock splits, stock
dividends and recapitalizations with respect to the Common Shares occurring
after the date of this Agreement) multiplied by the current per share market
price of the Common Shares. If neither the Common Shares nor the Preferred
Shares is publicly held or so listed or traded, "current per share market price"
of the Preferred Shares shall mean the fair value per share as determined in
good faith by the Board of Directors of the Company, or, if at the time of such
determination there is an Acquiring Person, by a majority of the Continuing
Directors then in office, or if there are no Continuing Directors, by a
nationally recognized investment banking firm selected by the Board of Directors
of the Company, which shall have the duty to make such determination in a
reasonable and objective manner, which determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all purposes.
For purposes of this Agreement, the "current per share market price" of one
one-hundredth of a Preferred Share shall be equal to the "current per share
market price" of one Preferred Share divided by 100.
11.5 Insignificant Changes. No adjustment in the Purchase Price shall be
required unless such adjustment would require an increase or decrease of at
least 1% in such price. Any adjustments which by reason of this Section 11.5 are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 11 shall be made to
the nearest cent or to the nearest one-millionth of a Preferred Share or the
nearest ten-thousandth of a Common Share, as the case may be.
11.6 Shares Other Than Preferred Shares. If as a result of an adjustment
made pursuant to Section 11.1, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock of the Company
other than Preferred Shares, thereafter the number of such other shares so
receivable upon exercise of any Right shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Shares contained in Sections 11.1
through 11.3, inclusive, and the provisions of Sections 7, 9, 10 and 13 with
respect to the Preferred Shares shall apply on like terms to any such other
shares.
11.7 Rights Issued Subsequent to Adjustment. All Rights originally
issued by the Company subsequent to any adjustment made to the Purchase Price
hereunder shall evidence the right to purchase, at the adjusted Purchase Price,
the number of one one-hundredths of a Preferred Share purchasable from time to
time hereunder upon exercise of the Rights, all subject to further adjustment as
provided herein.
11.8 Effect of Adjustments. Unless the Company shall have exercised its
election as provided in Section 11.9, upon each adjustment of the Purchase Price
as a result of the calculations made in Sections 11.2 and 11.3, each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-hundredths of a Preferred Share (calculated to the nearest one-millionth
of a Preferred Share) obtained by (i) multiplying (x) the number of one
one-hundredths of a Preferred Share covered by a Right immediately
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prior to this adjustment by (y) the Purchase Price in effect immediately prior
to such adjustment of the Purchase Price and (ii) dividing the product so
obtained by the Purchase Price in effect immediately after such adjustment of
the Purchase Price.
11.9 Adjustment in Number of Rights. The Company may elect on or after
the date of any adjustment of the Purchase Price to adjust the number of Rights,
in substitution for any adjustment in the number of one one-hundredths of a
Preferred Share issuable upon the exercise of a Right. Each of the Rights
outstanding after such adjustment of the number of Rights shall be exercisable
for the number of one one-hundredths of a Preferred Share for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Purchase Price is adjusted or any day thereafter, but,
if the Right Certificates have been issued, shall be at least ten (10) days
later than the date of the public announcement. If Right Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11.9, the Company may, as promptly as practicable, cause to be distributed to
holders of record of Right Certificates on such record date Right Certificates
evidencing, subject to Section 14, the additional Rights to which such holders
shall be entitled as a result of such adjustment, or, at the option of the
Company, shall cause to be distributed to such holders of record in substitution
and replacement for the Right Certificates held by such holders prior to the
date of adjustment, and upon surrender thereof, if required by the Company, new
Right Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Right Certificates so to be distributed shall be
issued, executed and countersigned in the manner provided for herein (and may
bear, at the option of the Company, the adjusted Purchase Price) and shall be
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
11.10 Right Certificates Unchanged. Irrespective of any adjustment or
change in the Purchase Price or the number of one one-hundredths of a Preferred
Share issuable upon the exercise of the Rights, the Right Certificates
theretofore and thereafter issued may continue to express the Purchase Price per
share and the number of one one-hundredths of a Preferred Share which were
expressed in the initial Right Certificates issued hereunder.
11.11 Par Value Limitations. Before taking any action that would cause
an adjustment reducing the Purchase Price below one one-hundredth of the then
par value, if any, of the Preferred Shares issuable upon exercise of the Rights,
the Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Preferred Shares at such adjusted Purchase Price.
11.12 Deferred Issuance. In any case in which this Section 11 shall
require that an adjustment in the Purchase Price be made effective as of a
record date for a specified event, the Company may elect to defer until the
occurrence of such event the issuing to the holder of any Right exercised after
such record date of the Preferred Shares and other capital stock or securities
of the Company, if any, issuable upon such exercise over and above the Preferred
Shares and other capital stock or securities of the Company, if any, issuable
upon such exercise on the basis of the Purchase Price in effect prior to such
adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares upon the occurrence of the event requiring such
adjustment.
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11.13 Reduction in Purchase Price. Anything in this Section 11 to the
contrary notwithstanding, the Company shall be entitled to make such reductions
in the Purchase Price, in addition to those adjustments expressly required by
this Section 11, as and to the extent that it in its sole discretion shall
determine to be advisable in order that any consolidation or subdivision of the
Preferred Shares, issuance wholly for cash of any of the Preferred Shares at
less than the current market price, issuance wholly for cash of Preferred Shares
or securities which by their terms are convertible into or exchangeable for
Preferred Shares, dividends on Preferred Shares payable in Preferred Shares or
issuance of rights, options or warrants referred to hereinabove in this Section
11, hereafter made by the Company to holders of its Preferred Shares shall not
be taxable to such stockholders.
11.14 Company not to Diminish Benefits of Rights. The Company covenants
and agrees that after the Distribution Date it will not, except as permitted by
Section 23, Section 26 or Section 27, take (or permit any Subsidiary to take)
any action if at the time such action is taken it is reasonably foreseeable that
such action will substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights.
11.15 Adjustment of Rights Associated with Common Shares.
Notwithstanding anything contained in this Agreement to the contrary, in the
event that the Company shall at any time after the date hereof and prior to the
Distribution Date (i) declare or pay any dividend on the outstanding Common
Shares payable in Common Shares, (ii) effect a subdivision or consolidation of
the outstanding Common Shares (by reclassification or otherwise than by the
payment of dividends payable in Common Shares), or (iii) combine the outstanding
Common Shares into a greater or lesser number of Common Shares, then in any such
case, the number of Rights associated with each Common Share then outstanding,
or issued or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with
each Common Share following any such event shall equal the result obtained by
multiplying the number of Rights associated with each Common Share immediately
prior to such event by a fraction, the numerator of which shall be the total
number of Common Shares outstanding immediately prior to the occurrence of the
event and the denominator of which shall be the total number of Common Shares
outstanding immediately following the occurrence of such event. The adjustments
provided for in this Section 11.15 shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 and 13, the Company
shall (a) promptly prepare a certificate setting forth such adjustment, and a
brief statement of the facts accounting for such adjustment, (b) promptly file
with the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Right Certificate in accordance with Section 25. The Rights
Agent shall be fully protected in relying on any such certificate and on any
adjustment therein contained and shall not be deemed to have knowledge of any
such adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
13.1 General. In the event that, from and after the first occurrence of
a Trigger Event, directly or indirectly, (A) the Company shall consolidate with,
or merge with and into, any other Person and the Company shall not be the
continuing or surviving corporation, (B) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Shares shall be changed into or exchanged for
stock or other securities of the Company or any other Person or cash or any
other property, or (C) the Company shall sell, exchange, mortgage or otherwise
transfer
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(or one or more of its Subsidiaries shall sell, exchange, mortgage or otherwise
transfer), in one or more transactions, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person or Persons, then, and in each such case,
proper provision shall be made so that (i) each holder of a Right (except as
provided in Section 11.1.2 and as otherwise provided herein) shall thereafter
have the right to receive, upon the exercise thereof at a price per Right equal
to the then current Purchase Price multiplied by the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to the first occurrence of a Trigger Event (as subsequently
adjusted pursuant to Sections 11.1.1, 11.2, 11.3, 11.8, 11.9 and 11.12), in
accordance with the terms of this Rights Agreement and in lieu of Preferred
Shares, such number of Common Shares of such other Person (including the Company
as successor thereto or as the surviving corporation) as shall be equal to the
result obtained by (x) multiplying the then current Purchase Price by the number
of one one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to the first occurrence of a Trigger Event (as subsequently
adjusted pursuant to Sections 11.1.1, 11.2, 11.3, 11.8, 11.9 and 11.12) and (y)
dividing that product by 50% of the then current per share market price of the
Common Shares of such other Person (determined pursuant to Section 11.4) on the
date of consummation of such consolidation, merger, sale or transfer; PROVIDED,
that the price per Right so payable and the number of Common Shares of such
Person so purchasable shall thereafter be adjusted in accordance with Sections
11.1.1, 11.2, 11.3, 11.8, 11.9 and 11.12 by reason of such subsequent events
covered thereby occurring in respect of such Person; (ii) the issuer of such
Common Shares shall thereafter be liable for, and shall assume, by virtue of
such consolidation, merger, sale or transfer, all the obligations and duties of
the Company pursuant to this Rights Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such issuer; and (iv) such issuer shall take
such steps (including, but not limited to, the reservation of a sufficient
number of its Common Shares in accordance with Section 9) in connection with
such consummation as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
Common Shares thereafter deliverable upon the exercise of the Rights. The
Company shall not enter into any transaction of the kind referred to in this
Section 13 if at the time of such transaction there are any rights, warrants,
instruments or securities outstanding or any agreements or arrangements which,
as a result of the consummation of such transaction, would eliminate or
substantially diminish the benefits intended to be afforded by the Rights. The
Company shall not consummate any such consolidation, merger, sale or transfer
unless prior thereto the Company and such issuer shall have executed and
delivered to the Rights Agent a supplemental agreement so providing. The
provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
13.2 Approved Acquisitions. Notwithstanding anything contained herein to
the contrary, in the event of any merger or other acquisition transaction
involving the Company pursuant to a merger or other acquisition agreement
between the Company and any Person (or one or more of such Person's Affiliates
or Associates) which agreement has been approved by the Board of Directors of
the Company prior to any Person becoming an Acquiring Person, this Rights
Agreement and the rights of holders of Rights hereunder shall be terminated in
accordance with Section 7.1.
Section 14. Fractional Rights and Fractional Shares.
14.1 Cash in Lieu of Fractional Rights. The Company shall not be
required to issue fractions of Rights or to distribute Right Certificates which
evidence fractional Rights. In lieu of such fractional Rights, there shall be
paid to the registered holders of the Right Certificates with regard to which
such fractional Rights would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole Right. For the purposes
of this Section 14.1, the current market value of a whole Right shall be the
closing price of the Rights for the Trading Day immediately prior to the date on
which such fractional Rights would have been otherwise issuable. The closing
price for any day shall
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be the last sale price, regular way, or, in case no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Rights are not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Rights are listed or admitted to trading or, if
the Rights are not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the average of the high
bid and low asked prices in the over-the-counter market, as reported by Nasdaq
or such other system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the Rights
selected by the Board of Directors of the Company. If on any such date no such
market maker is making a market in the Rights, the fair value of the Rights on
such date as determined in good faith by the Board of Directors of the Company
shall be used.
14.2 Cash in Lieu of Fractional Shares. The Company shall not be
required to issue fractions of Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share) upon exercise of
the Rights or to distribute certificates which evidence fractional Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share). Fractions of Preferred Shares in integral multiples of
one one-hundredth of a Preferred Share may, at the election of the Company, be
evidenced by depositary receipts, pursuant to an appropriate agreement between
the Company and a depositary selected by it; PROVIDED, that such agreement shall
provide that the holders of such depositary receipts shall have all the rights,
privileges and preferences to which they are entitled as beneficial owners of
the Preferred Shares represented by such depositary receipts. In lieu of
fractional Preferred Shares that are not integral multiples of one one-hundredth
of a Preferred Share, the Company shall pay to the registered holders of Right
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current per share market price of one
Preferred Share. For purposes of this Section 14.2, the current per share market
price of a Preferred Share shall be the closing price of a Preferred Share (as
determined pursuant to the second sentence of Section 11.4.2) for the Trading
Day immediately prior to the date of such exercise.
14.3 Waiver of Right to Receive Fractional Rights or Shares. The holder
of a Right by the acceptance of the Rights expressly waives his right to receive
any fractional Rights or any fractional shares upon exercise of a Right, except
as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
Rights Agreement, except the rights of action given to the Rights Agent under
Section 18, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce this Rights Agreement, and may institute and maintain any suit,
action or proceeding against the Company to enforce this Rights Agreement, or
otherwise enforce or act in respect of his right to exercise the Rights
evidenced by such Right Certificate in the manner provided in such Right
Certificate and in this Rights Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Rights Agreement and shall be entitled to specific performance of
the obligations under, and injunctive relief against actual or threatened
violations of, the obligations of any Person (including, without limitation, the
Company) subject to this Rights Agreement.
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Section 16. Agreement of Right Holders. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) as of and after the Distribution Date, the Right
Certificates are transferable only on the registry books of the Rights
Agent if surrendered at the office of the Rights Agent designated for
such purpose, duly endorsed or accompanied by a proper instrument of
transfer with all required certifications completed; and
(c) the Company and the Rights Agent may deem and treat
the Person in whose name the Right Certificate (or, prior to the
Distribution Date, the associated Common Shares certificate) is
registered as the absolute owner thereof and of the Rights evidenced
thereby (notwithstanding any notations of ownership or writing on the
Right Certificates or the associated Common Shares certificate made by
anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 24), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights evidenced by such
Right Certificate shall have been exercised in accordance with the provisions
hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder in accordance with a fee schedule to be mutually agreed upon and, from
time to time, on demand of the Rights Agent, its reasonable expenses and counsel
fees and other disbursements incurred in the administration and execution of
this Rights Agreement and the exercise and performance of its duties hereunder.
The Company also agrees to indemnify the Rights Agent for, and to hold it
harmless against, any loss, liability, or expense, incurred without negligence,
bad faith or willful misconduct on the part of the Rights Agent, for anything
done or omitted by the Rights Agent in connection with the acceptance and
administration of this Rights Agreement, including the costs and expenses of
defending against any claim of liability in the premises. In no case will the
Rights Agent be liable for special, indirect, incidental or consequential loss
or damage of any kind whatsoever (including but not limited to lost profits),
even if the Rights Agent has been advised of the possibility of such loss or
damage.
The Rights Agent shall be protected and shall incur no liability for or
in respect of any action taken, suffered or omitted by it in connection with its
administration of this Rights Agreement in reliance upon any Right Certificate
or certificate for the Preferred Shares or the Common Shares or for other
securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, instruction, direction,
consent, certificate, statement, or other paper or document believed by it to be
genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons.
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Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the corporate trust or
stock transfer business of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Rights Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, PROVIDED that such corporation would be eligible for appointment
as a successor Rights Agent under the provisions of Section 21. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Rights Agreement, any of the Right Certificates shall have been countersigned
but not delivered, any such successor Rights Agent may adopt the
countersignature of the predecessor Rights Agent and deliver such Right
Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Rights Agreement.
In case at any time the name of the Rights Agent shall be changed and at
such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Rights Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Rights Agreement upon the following terms
and conditions, by all of which the Company and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
20.1 Legal Counsel. The Rights Agent may consult with legal counsel
selected by it (who may be legal counsel for the Company), and the opinion of
such counsel shall be full and complete authorization and protection to the
Rights Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
20.2 Certificates as to Facts or Matters. Whenever in the performance of
its duties under this Rights Agreement the Rights Agent shall deem it necessary
or desirable that any fact or matter be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by any
one of the Chairman of the Board of Directors, the Chief Executive Officer, the
President, the Chief Financial Officer, any Vice President, the Treasurer, the
Secretary or any Assistant Treasurer or Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Rights Agreement in reliance upon such certificate.
20.3 Standard of Care. The Rights Agent shall be liable hereunder only
for its own negligence, bad faith or willful misconduct.
20.4 Reliance on Rights Agreement and Right Certificates. The Rights
Agent shall not be liable for or by reason of any of the statements of fact or
recitals contained in this Rights Agreement
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or in the Right Certificates (except as to its countersignature thereof) or be
required to verify the same, but all such statements and recitals are and shall
be deemed to have been made by the Company only.
20.5 No Responsibility as to Certain Matters. The Rights Agent shall not
be under any responsibility in respect of the validity of this Rights Agreement
or the execution and delivery hereof (except the due execution hereof by the
Rights Agent) or in respect of the validity or execution of any Right
Certificate (except its countersignature thereof); nor shall it be responsible
for any breach by the Company of any covenant or condition contained in this
Rights Agreement or in any Right Certificate; nor shall it be responsible for
any change in the exercisability of the Rights (including the Rights becoming
void pursuant to Section 11.1.2) or any adjustment required under the provisions
of Sections 3, 11, 13, 23 or 27 or responsible for the manner, method or amount
of any such adjustment or the ascertaining of the existence of facts that would
require any such adjustment (except with respect to the exercise of Rights
evidenced by Right Certificates after actual notice of any such adjustment); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any Preferred Shares to be issued
pursuant to this Rights Agreement or any Right Certificate or as to whether any
Preferred Shares will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
20.6 Further Assurance by Company. The Company agrees that it will
perform, execute, acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all such further and other acts, instruments and
assurances as may reasonably be required by the Rights Agent for the carrying
out or performing by the Rights Agent of the provisions of this Rights
Agreement.
20.7 Authorized Company Officers. The Rights Agent is hereby authorized
and directed to accept instructions with respect to the performance of its
duties hereunder from any one of the Chairman of the Board of Directors, the
Chief Executive Officer, the President, the Chief Financial Officer, any Vice
President, the Treasurer, the Secretary or any Assistant Treasurer or Assistant
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties under this Rights Agreement, and it
shall not be liable for any action taken or suffered to be taken by it in good
faith in accordance with instructions of any such officer or for any delay in
acting while waiting for these instructions. Any application by the Rights Agent
for written instructions from the Company may, at the option of the Rights
Agent, set forth in writing any action proposed to be taken or omitted by the
Rights Agent with respect to its duties or obligations under this Rights
Agreement and the date on and/or after which such action shall be taken or
omitted. The Rights Agent shall not be liable to the Company for any action
taken or omitted in accordance with a proposal included in any such application
on or after the date specified therein (which date shall not be less than three
business days after the date any such officer actually receives such
application, unless any such officer shall have consented in writing to an
earlier date) unless, prior to taking of any such action (or the effective date
in the case of omission), the Rights Agent shall have received written
instructions in response to such application specifying the action to be taken
or omitted.
20.8 Freedom to Trade in Company Securities. The Rights Agent and any
shareholder, director, officer or employee of the Rights Agent may buy, sell or
deal in any of the Rights or other securities of the Company or become
pecuniarily interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or otherwise act as
fully and freely as though it were not Rights Agent under this Rights Agreement.
Nothing herein shall preclude the Rights Agent from acting in any other capacity
for the Company or for any other legal entity.
20.9 Reliance on Attorneys and Agents. The Rights Agent may execute and
exercise any of the rights or powers hereby vested in it or perform any duty
hereunder either itself or by or through its attorneys or agents, and the Rights
Agent shall not be answerable or accountable for any act, omission,
21
<PAGE> 23
default, neglect or misconduct of any such attorneys or agents or for any loss
to the Company resulting from any such act, omission, default, neglect or
misconduct, PROVIDED that reasonable care was exercised in the selection and
continued employment thereof.
20.10 Rights Holders List. At any time and from time to time after the
Distribution Date, upon the request of the Company, the Rights Agent shall
promptly deliver to the Company a list, as of the most recent practicable date
(or as of such earlier date as may be specified by the Company), of the holders
of record of Rights.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Rights
Agreement upon thirty (30) days' notice in writing mailed to the Company and to
each transfer agent of the Common Shares and/or Preferred Shares, as applicable,
by registered or certified mail. Following the Distribution Date, the Company
shall promptly notify the holders of the Right Certificates by first-class mail
of any such resignation. The Company may remove the Rights Agent or any
successor Rights Agent upon thirty (30) days' notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to each transfer
agent of the Common Shares and/or Preferred Shares, as applicable, by registered
or certified mail, and to the holders of the Right Certificates by first-class
mail. If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the resigning, removed, or incapacitated Rights Agent shall
remit to the Company, or to any successor Rights Agent designated by the
Company, all books, records, funds, certificates or other documents or
instruments of any kind then in its possession which were acquired by such
resigning, removed or incapacitated Rights Agent in connection with its services
as Rights Agent hereunder, and shall thereafter be discharged from all duties
and obligations hereunder. Following notice of such removal, resignation or
incapacity, the Company shall appoint a successor to such Rights Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent or
by the holder of a Right Certificate (who shall, with such notice, submit his
Right Certificate for inspection by the Company), then the registered holder of
any Right Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be a corporation organized and doing
business under the laws of the United States or of the State of California (or
any other state of the United States so long as such corporation is authorized
to do business as a banking institution in the State of California) in good
standing, having a principal office in the State of California, which is
authorized under such laws to exercise stock transfer or corporate trust powers
and is subject to supervision or examination by Federal or state authority and
which has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $10 million. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Common Shares and/or Preferred Shares, as applicable, and mail a notice
thereof in writing to the registered holders of the Right Certificates. Failure
to give any notice provided for in this Section 21, however, or any defect
therein, shall not affect the legality or validity of the resignation or removal
of the Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Rights Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Right Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Purchase Price and the number or kind or class of shares or
other securities
22
<PAGE> 24
or property purchasable under the Right Certificates made in accordance with the
provisions of this Rights Agreement. In addition, in connection with the
issuance or sale of Common Shares following the Distribution Date and prior to
the exchange, termination or expiration of the Rights, the Company (a) shall,
with respect to Common Shares so issued or sold pursuant to the exercise of
stock options or under any employee plan or arrangement, granted or awarded as
of the Distribution Date, or upon exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Directors of the Company, issue Right
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; PROVIDED, HOWEVER, that (i) no such Right Certificate
shall be issued if, and to the extent that, the Company shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Company or the Person to whom such Right Certificate
would be issued, (ii) no such Right Certificate shall be issued if, and to the
extent that, appropriate adjustment shall otherwise have been made in lieu of
the issuance thereof and (iii) at the time of a determination by the Board of
Directors to cause the Company to issue a Right Certificate under clause (b)
above, there must be Continuing Directors then in office and any such
determination shall require the approval of at least a majority of such
Continuing Directors.
Section 23. Redemption.
23.1 Right to Redeem. The Board of Directors of the Company may, at its
option, at any time prior to the occurrence of a Trigger Event, redeem all but
not less than all of the then outstanding Rights at a redemption price of $.01
per Right, appropriately adjusted to reflect any stock split, stock dividend,
recapitalization or similar transaction occurring after the date hereof (such
redemption price being hereinafter referred to as the "Redemption Price"), and
the Company may, at its option, pay the Redemption Price in Common Shares (based
on the "current per share market price," determined pursuant to Section 11.4, of
the Common Shares at the time of redemption), cash or any other form of
consideration deemed appropriate by the Board of Directors. The redemption of
the Rights by the Board of Directors may be made effective at such time, on such
basis and with such conditions as the Board of Directors in its sole discretion
may establish. The Company may, at its option, pay the Redemption Price in cash,
Common Shares (based on the current per share market price at the time of the
redemption) or any other form of consideration deemed appropriate by the Board
of Directors. Anything contained in this Rights Agreement to the contrary
notwithstanding, the Rights shall not be exercisable following a transaction or
event described in Section 11.1.2 prior to the expiration of the Company's right
of redemption hereunder.
23.2 Redemption Procedures. Immediately upon the action of the Board of
Directors of the Company ordering the redemption of the Rights (or at such later
time as the Board of Directors may establish for the effectiveness of such
redemption),and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price for each Right so held. The
Company shall promptly give public notice of such redemption; PROVIDED, HOWEVER,
that the failure to give, or any defect in, any such notice shall not affect the
validity of such redemption. The Company shall promptly give, or cause the
Rights Agent to give, notice of such redemption to the holders of the then
outstanding Rights by mailing such notice to all such holders at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent for the
Common Shares. Any notice which is mailed in the manner herein provided shall be
deemed given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made. Neither the Company nor any of its Affiliates or Associates may
redeem, acquire or purchase for value any Rights at any time in any manner other
than that specifically set forth in this Section 23 or in Section 27, and other
than in connection with the purchase, acquisition or redemption of Common Shares
prior to the Distribution Date.
23
<PAGE> 25
Section 24. Notice of Certain Events. In case the Company shall propose
at any time after the Distribution Date (a) to pay any dividend payable in stock
of any class to the holders of Preferred Shares or to make any other
distribution to the holders of Preferred Shares (other than a regular periodic
cash dividend at a rate not in excess of 125% of the rate of the last regular
periodic cash dividend theretofore paid or, in case regular periodic cash
dividends have not theretofore been paid, at a rate not in excess of 50% of the
average net income per share of the Company for the four quarters ended
immediately prior to the payment of such dividends, or a stock dividend on, or a
subdivision, combination or reclassification of the Common Shares), or (b) to
offer to the holders of Preferred Shares rights or warrants to subscribe for or
to purchase any additional Preferred Shares or shares of stock of any class or
any other securities, rights or options, or (c) to effect any reclassification
of its Preferred Shares (other than a reclassification involving only the
subdivision of outstanding Preferred Shares), or (d) to effect any consolidation
or merger into or with, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one or
more transactions, of 50% or more of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to, any other Person (other than
pursuant to a merger or other acquisition agreement of the type described in
Section 1.3(ii)(A)(2)), or (e) to effect the liquidation, dissolution or winding
up of the Company, or (f) to declare or pay any dividend on the Common Shares
payable in Common Shares or to effect a subdivision, combination or
consolidation of the Common Shares (by reclassification or otherwise than by
payment of dividends in Common Shares), then, in each such case, the Company
shall give to the Rights Agent and to each holder of a Right Certificate, in
accordance with Section 25, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the Preferred Shares
and/or Common Shares, if any such date is to be fixed, and such notice shall be
so given in the case of any action covered by clause (a) or (b) above at least
ten (10) days prior to the record date for determining holders of the Preferred
Shares for purposes of such action, and in the case of any such other action, at
least ten (10) days prior to the date of the taking of such proposed action or
the date of participation therein by the holders of the Preferred Shares and/or
Common Shares, whichever shall be the earlier.
In case any event set forth in Section 11.1.2 of this Rights Agreement
shall occur, then, in any such case, (i) the Company shall as soon as
practicable thereafter give to the Rights Agent and to each holder of a Right
Certificate, in accordance with Section 25, a notice of the occurrence of such
event, which notice shall describe the event and the consequences of the event
to holders of Rights under Section 11.1.2, and (ii) all references in this
Section 24 to Preferred Shares shall be deemed thereafter to refer to Common
Shares and/or, if appropriate, other securities.
Notwithstanding anything in this Rights Agreement to the contrary, prior
to the Distribution Date a filing by the Company with the Securities and
Exchange Commission shall constitute sufficient notice to the holders of
securities of the Company, including the Rights, for purposes of this Rights
Agreement and no other notice need be given.
Section 25. Notices. Notices or demands authorized by this Rights
Agreement to be given or made by the Rights Agent or by the holder of any Right
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
ARV Assisted Living, Inc.
245 Fischer Avenue, Suite D-1
Costa Mesa, California 92626
Attention: Sheila M. Muldoon, Esq.
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<PAGE> 26
Subject to the provisions of Section 21 and Section 24, any notice or demand
authorized by this Rights Agreement to be given or made by the Company or by the
holder of any Right Certificate to or on the Rights Agent shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed (until
another address is filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, L.L.C.
400 S. Hope Street, 4th Floor
Los Angeles, California 90071
Attention: Raymond Torres
Notices or demands authorized by this Rights Agreement to be given or made by
the Company or the Rights Agent to the holder of any Right Certificate (or,
prior to the Distribution Date, to the holder of any certificate representing
Common Shares) shall be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed to such holder at the address of such holder as shown
on the registry books of the Company.
Section 26. Supplements and Amendments. For so long as the Rights are
then redeemable, the Company may in its sole and absolute discretion, and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Rights Agreement in any respect without the approval of any holders of
Rights or Common Shares. From and after the time that the Rights are no longer
redeemable, the Company may, and the Rights Agent shall, if the Company so
directs, from time to time supplement or amend this Rights Agreement without the
approval of any holders of Right Certificates (i) to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, (ii) to shorten or lengthen any
time period hereunder (which shortening or lengthening, after the time a Person
becomes an Acquiring Person, shall be effective only if there are Continuing
Directors and shall require the approval of at least a majority of such
Continuing Directors) or (iii) to make any other changes or provisions in regard
to matters or questions arising hereunder which the Company and the Rights Agent
may deem necessary or desirable, including but not limited to extending the
Final Expiration Date; PROVIDED, HOWEVER, that no such supplement or amendment
shall adversely affect the interests of the holders of Rights as such (other
than an Acquiring Person or an Affiliate or Associate of an Acquiring Person),
and no such supplement or amendment may cause the Rights again to become
redeemable or cause this Agreement again to become amendable other than in
accordance with this sentence; PROVIDED FURTHER, that the right of the Board of
Directors to extend the Distribution Date shall not require any amendment or
supplement hereunder. Upon the delivery of a certificate from an appropriate
officer of the Company which states that the proposed supplement or amendment is
in compliance with the terms of this Section 26, the Rights Agent shall execute
such supplement or amendment. Without limiting the foregoing, at any time prior
to such time as any Person becomes an Acquiring Person, the Company and the
Rights Agent may amend this Agreement to lower the thresholds set forth in
Sections 1.1 and 3.1 to not less than the greater of (i) any percentage greater
than the largest percentage of the outstanding Common Shares then known by the
Company to be beneficially owned by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any
Subsidiary of the Company, or any entity holding Common Shares for or pursuant
to the terms of any such plan) and (ii) 8%.
Section 27. Exchange.
27.1 Exchange of Common Shares for Rights. The Board of Directors of the
Company may, at its option, at any time after the occurrence of a Trigger Event,
exchange Common Shares for all or part of the then outstanding and exercisable
Rights (which shall not include Rights that have become void pursuant to the
provisions of Section 11.1.2) by exchanging that number of Common Shares having
25
<PAGE> 27
an aggregate value equal to the Spread (with such value being based on the
current per share market price (as determined pursuant to Section 11.4) on the
date of the occurrence of a Trigger Event) per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such amount per Right being hereinafter referred to as the
"Exchange Consideration"). Notwithstanding the foregoing, (i) the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Common Shares then outstanding and (ii) the Board shall not be
empowered to effect an exchange for more than that number of Rights for which
there are sufficient Common Shares authorized but unissued, or held by the
Company as treasury shares, to permit the exchange for Rights. From and after
the occurrence of an event specified in Section 13.1, any Rights that
theretofore have not been exchanged pursuant to this Section 27.1 shall
thereafter be exercisable only in accordance with Section 13 and may not be
exchanged pursuant to this Section 27.1. The exchange of the Rights by the Board
of Directors may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
27.2 Exchange Procedures. Immediately upon the action of the Board of
Directors of the Company ordering the exchange for any Rights pursuant to
Section 27.1 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange
Consideration. The Company shall promptly give public notice of any such
exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such
notice shall not affect the validity of such exchange. The Company promptly
shall mail a notice of any such exchange to all of the holders of such Rights at
their last addresses as they appear upon the registry books of the Rights Agent.
Any notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange will
state the method by which the exchange of the Common Shares for Rights will be
effected and, in the event of any partial exchange, the number of Rights which
will be exchanged. Any partial exchange shall be effected pro rata based on the
number of Rights (other than the Rights which have become void pursuant to the
provisions of Section 11.1.2) held by each holder of Rights.
27.3 No Fractional Shares Upon Exchange. The Company shall not be
required to issue fractions of Common Shares or to distribute certificates which
evidence fractional Common Shares. In lieu of such fractional Common Shares, the
Company shall pay to the registered holders of the Right Certificates, with
regard to which such fractional Common Shares would otherwise be issuable, in an
amount in cash equal to the same fraction of the current market value of a whole
Common Share. For the purposes of this Section 27.3, the current market value of
a whole Common Share shall be the current per share market price (as determined
pursuant to Section 11.4) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 27.
Section 28. Successors. All the covenants and provisions of this Rights
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Rights Agreement. Nothing in this Rights
Agreement shall be construed to give to any Person or corporation other than the
Company, the Rights Agent and the registered holders of the Right Certificates
(and, prior to the Distribution Date, the Common Shares) any legal or equitable
right, remedy or claim under this Rights Agreement; but this Rights Agreement
shall be for the sole and exclusive benefit of the Company, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, the Common Shares).
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<PAGE> 28
Section 30. Determinations and Actions by the Board of Directors. The
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise the rights and powers specifically
granted to the Board of Directors of the Company or to the Company, or as may be
necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement and (ii) make all determinations deemed necessary or advisable for the
administration of this Agreement (including, without limitation, a determination
to redeem or not redeem the Rights or amend this Agreement). All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) that are done or
made by the Board of Directors of the Company in good faith, shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights, as such, and all other parties, and (y) not subject the Board of
Directors to any liability to the holders of the Rights.
Section 31. Severability. If any term, provision, covenant or
restriction of this Rights Agreement is held by a court of competent
jurisdiction or other authority to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Rights
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
Section 32. Governing Law. This Rights Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and performed entirely within such State.
Section 33. Counterparts. This Rights Agreement may be executed in any
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Descriptive Heading. Descriptive headings of the several
Sections of this Rights Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
27
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed and their respective corporate seals to be
hereunto affixed, all as of the day and year first above written.
ARV ASSISTED LIVING, INC.
By ______________________________
Name: Howard G. Phanstiel
Title: Chairman of the Board
and Chief Executive Officer
[SEAL]
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
By ______________________________
Name: Raymond Torres
Title: Assistant Vice President
[SEAL]
28
<PAGE> 30
EXHIBIT A
FORM
of
CERTIFICATE OF DETERMINATION
of
SERIES D JUNIOR PARTICIPATING PREFERRED STOCK
of
ARV ASSISTED LIVING, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
-----------------------------
ARV Assisted Living, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on May 14, 1998.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $.01 per share (the "Preferred Stock"), of the Corporation and
hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series D Junior Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series D Junior Participating Preferred Stock" (the "Series D
Preferred Stock") and the number of shares constituting the Series D Preferred
Stock shall be 400,000. Such number of shares may be increased or decreased by
resolution of the Board of Directors; PROVIDED, that no decrease shall reduce
the number of shares of Series D Preferred Stock to a number less than the
number of shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or warrants or upon
the conversion of any outstanding securities issued by the Corporation
convertible into Series D Preferred Stock.
Section 2. Dividends and Distributions.
A-1
<PAGE> 31
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series D Preferred Stock with respect to dividends, the
holders of shares of Series D Preferred Stock, in preference to the
holders of Common Stock, par value $.01 per share (the "Common Stock"),
of the Corporation, and of any other junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash
on the first day of April, July, October and January in each year (each
such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series D
Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1.00 or (b) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share
amount of all cash dividends, and 100 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series D Preferred Stock. In the
event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a
subdivision, combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount to which
holders of shares of Series D Preferred Stock were entitled immediately
prior to such event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of shares of
Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on
the Series D Preferred Stock as provided in paragraph (A) of this
Section 2 immediately after it declares a dividend or distribution on
the Common Stock (other than a dividend payable in shares of Common
Stock); provided that, in the event no dividend or distribution shall
have been declared on the Common Stock during the period between any
Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1.00 per share on the Series D
Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series D Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date for
the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares,
or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of
Series D Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which events
such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the shares of Series D Preferred Stock
in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of
holders of shares of Series D Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the
payment thereof.
A-2
<PAGE> 32
Section 3. Voting Rights. The holders of shares of Series D Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series D Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the number of votes per share to which holders of
shares of Series D Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) Except as otherwise provided herein, in any other Certificate
of Designations creating a series of Preferred Stock or any similar
stock, or by law, the holders of shares of Series D Preferred Stock and
the holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one
class on all matters submitted to a vote of stockholders of the
Corporation.
(C) Except as set forth herein, or as otherwise provided by law,
holders of Series D Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series D Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series D Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to
the Series D Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding up)
with the Series D Preferred Stock, except dividends paid ratably
on the Series D Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series D Preferred Stock, provided that the Corporation may at
any time redeem,
A-3
<PAGE> 33
purchase or otherwise acquire shares of any such
junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series D Preferred
Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series D Preferred Stock, or any
shares of stock ranking on a parity with the Series D Preferred
Stock, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to
all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend
rates and other relative rights and preferences of the respective
series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any Subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series D Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (1)
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series D Preferred Stock unless,
prior thereto, the holders of shares of Series D Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series D Preferred Stock shall be
entitled to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount to be
distributed per share to holders of shares of Common Stock, or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series D Preferred Stock,
except distributions made ratably on the Series D Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all such
shares are entitled upon such liquidation, dissolution or winding up. In the
event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount to which holders of shares of Series D Preferred
Stock were entitled immediately prior to such event under the proviso in clause
(1) of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that are outstanding immediately prior to such
event.
A-4
<PAGE> 34
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series D Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth in the preceding sentence with respect to the
exchange or change of shares of Series D Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series D Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series D Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Corporation's Preferred Stock, except to the extent
that any such other series specifically provides that it shall rank on a parity
with or junior to the Series D Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series D Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series D Preferred Stock, voting
separately as a single class.
A-5
<PAGE> 35
IN WITNESS WHEREOF, this Certificate of Designations is executed on
behalf of the Corporation by its Chairman of the Board this ___ day of May,
1998.
------------------------------
Chairman of the Board
A-6
<PAGE> 36
EXHIBIT B
---------
Form of Right Certificate
Certificate No. R- _______ Rights
NOT EXERCISABLE AFTER MAY 14, 2008 OR EARLIER IF NOTICE OF REDEMPTION OR
EXCHANGE IS GIVEN OR IF THE COMPANY IS MERGED OR ACQUIRED PURSUANT TO AN
AGREEMENT OF THE TYPE DESCRIBED IN SECTION 1.3(ii)(A)(2) OF THE RIGHTS
AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES (SPECIFIED IN SECTION 11.1.2 OF
THE RIGHTS AGREEMENT), RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON,
OR ITS AFFILIATES OR ASSOCIATES, OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS
MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS CERTIFICATE
ARE HELD OR HAVE BEEN HELD BY A PERSON WHO IS OR WAS AN ACQUIRING PERSON
OR AN ASSOCIATE OR AFFILIATE OF AN ACQUIRING PERSON OR A NOMINEE
THEREOF. THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY HAVE
BECOME NULL AND VOID AS SPECIFIED IN SECTION 11.1.2 OF THE RIGHTS
AGREEMENT.]
Right Certificate
ARV Assisted Living, Inc.
This certifies that , or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of May 14, 1998, as the same may be amended from time to
time (the "Rights Agreement"), between ARV Assisted Living, Inc., a Delaware
corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., a
limited liability company, as Rights Agent (the "Rights Agent"), to purchase
from the Company at any time after the Distribution Date and prior to 5:00 P.M.
(New York time) on May 14, 2008, at the offices of the Rights Agent, or its
successors as Rights Agent, designated for such purpose, one one-hundredth of a
fully paid, nonassessable share of Series D Junior Participating Preferred
Stock, par value $.01 per share (the "Preferred Shares") of the Company, at a
purchase price of $70.00 per one one-hundredth of a share, subject to adjustment
(the "Purchase Price"), upon presentation and surrender of this Right
Certificate with the Form of Election to Purchase and certification duly
executed. The number of Rights evidenced by this Right Certificate (and the
number of one one-hundredths of a Preferred Share which may be purchased upon
exercise thereof) set forth above, and the Purchase Price set forth above, are
the number and Purchase Price as of ______________, _____ based on the Preferred
Shares as constituted at such date. Capitalized terms used in this Right
Certificate without definition shall have the meanings ascribed to them in the
Rights Agreement. As provided in the Rights Agreement, the Purchase Price and
the number of Preferred Shares which may be purchased upon the exercise of the
Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events.
B-1
<PAGE> 37
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal offices of the Company and the
Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the offices of the Rights Agent designated for such purpose, may be
exchanged for another Right Certificate or Right Certificates of like tenor and
date evidencing Rights entitling the holder to purchase a like aggregate number
of one one-hundredths of a Preferred Share as the Rights evidenced by the Right
Certificate or Right Certificates surrendered shall have entitled such holder to
purchase. If this Right Certificate shall be exercised in part, the holder shall
be entitled to receive upon surrender hereof another Right Certificate or Right
Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Board of
Directors may, at its option, (i) redeem the Rights evidenced by this Right
Certificate at a redemption price of $.01 per Right at any time prior to the
occurrence of a Trigger Event or (ii) exchange Common Shares for the Rights
evidenced by this Certificate, in whole or in part, after the occurrence of a
Trigger Event.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions of Preferred Shares which
are integral multiples of one one hundredth of a Preferred Share, which may, at
the election of the Company, be evidenced by depository receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
If any term, provision, covenant or restriction of the Rights Agreement
is held by a court of competent jurisdiction or other authority to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of the Rights Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
This Right Certificate shall not be valid or binding for any purpose
until it shall have been countersigned by the Rights Agent.
B-2
<PAGE> 38
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of _______________.
Attest: ARV Assisted Living, Inc.
By ___________________________ By _____________________________
Title: Title:
Countersigned:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.,
as Rights Agent
By_____________________________
Authorized Signature
B-3
<PAGE> 39
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Right Certificate.)
FOR VALUE RECEIVED
hereby sells, assigns and transfers unto
(Please print name and address
of transferee)
Rights evidenced by this Right Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint Attorney,
to transfer the within Right Certificate on the books of the within-named
Company, with full power of substitution.
Dated:
Signature
Signature Guaranteed:
Signatures must be guaranteed by an "eligible guarantor institution" as defined
in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as
amended.
B-4
<PAGE> 40
- --------------------------------------------------------------------------------
The undersigned hereby certifies that:
(1) the Rights evidenced by this Right Certificate [ ] are [ ] are not
beneficially owned by and are not being assigned to an Acquiring Person or an
Affiliate or an Associate thereof; and
(2) after due inquiry and to the best knowledge of the undersigned, the
undersigned [ ] did [ ] did not acquire the Rights evidenced by this Right
Certificate from any person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate thereof.
Dated:
Signature
B-5
<PAGE> 41
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Right Certificate.)
To: ARV ASSISTED LIVING, INC.
The undersigned hereby irrevocably elects to exercise
__________________ Rights represented by this Right Certificate to purchase the
Preferred Shares issuable upon the exercise of such Rights (or such other
securities of the Company or of any other Person which may be issuable upon the
exercise of the Rights) and requests that certificates for such shares be issued
in the name of:
Please insert social security
or other identifying number
- ------------------------------------------------------------
(Please print name and address)
- ------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- ------------------------------------------------------------
(Please print name and address)
- ------------------------------------------------------------
Dated: __________________
------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by an "eligible guarantor institution" as
defined in Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934,
as amended.
B-6
<PAGE> 42
The undersigned hereby certifies that:
(1) the Rights evidenced by this Right Certificate [ ] are [ ] are
not beneficially owned by and are not being assigned to an Acquiring Person or
an Affiliate or an Associate thereof; and
(2) after due inquiry and to the best knowledge of the undersigned,
the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Right
Certificate from any person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate thereof.
Dated:_______________
------------------------
Signature
- --------------------------------------------------------------------------------
NOTICE
The signature in the foregoing Form of Assignment and Form of Election
to Purchase must conform to the name as written upon the face of this Right
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
In the event the certification set forth above in the Form of Assignment
or Form of Election to Purchase is not completed, the Company will deem the
beneficial owner of the Rights evidenced by this Right Certificate to be an
Acquiring Person or an Affiliate or Associate hereof and, in the case of an
Assignment, will affix a legend to that effect on any Right Certificates issued
in exchange for this Right Certificate.
B-7
<PAGE> 43
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On May 14, 1998 the Board of Directors of ARV Assisted Living, Inc. (the
"Company") declared a dividend of one Right for each share of common stock, par
value .01 (the "Common Shares"), of the Company outstanding at the close of
business on June 10, 1998 (the "Record Date"). As long as the Rights are
attached to the Common Shares, the Company will issue one Right (subject to
adjustment) with each new Common Share so that all such shares will have
attached Rights. When exercisable, each Right will entitle the registered holder
to purchase from the Company one one-hundredth of a share of Series D Junior
Participating Preferred Stock (the "Preferred Shares") at a price of $70.00 per
one one-hundredth of a Preferred Share, subject to adjustment (the "Purchase
Price"). The description and terms of the Rights are set forth in a Rights
Agreement, dated as of May 14, 1998, as the same may be amended from time to
time (the "Rights Agreement"), between the Company and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) the tenth day after a public
announcement that a person or group of affiliated or associated persons (other
than Lazard Freres Real Estate Investors L.L.C. and its affiliates
(collectively, "LFREI") (with respect to the shares purchased or to be purchased
by LFREI in accordance with the Amended and Restated Stock and Note Purchase
Agreement dated October 29, 1997 among the Company, LFREI and Prometheus
Assisted Living LLC ("Prometheus") and the Amended and Restated Stockholders
Agreement dated October 29, 1997 among the Company, LFREI and Prometheus)) (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 10% or more of the Common Shares or (ii) the tenth day after the
commencement or announcement of an intention to make a tender offer or exchange
offer the consummation of which would result in the beneficial ownership by a
person or group of 10% or more of the Common Shares (the earlier of (i) and (ii)
being called the "Distribution Date," whether or not either such date occurs
prior to the Record Date), the Rights will be evidenced, with respect to any of
the Common Share certificates outstanding as of the Record Date, by such Common
Share certificate together with a copy of this Summary of Rights.
The Rights Agreement provides that until the Distribution Date (or
earlier redemption, exchange, termination, or expiration of the Rights), the
Rights will be transferred with and only with the Common Shares. Until the
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Share certificates issued after the close of business on the Record Date
upon transfer or new issuance of the Common Shares will contain a notation
incorporating the Rights Agreement by reference. Until the Distribution Date (or
earlier redemption, exchange, termination or expiration of the Rights), the
surrender for transfer of any certificates for Common Shares, with or without a
copy of this Summary of Rights, will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. As soon as
practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Shares as of the close of business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on May 14, 2008, subject to the Company's right to extend such date
(the "Final Expiration Date"), unless earlier redeemed or exchanged by the
Company or terminated.
Each Preferred Share purchasable upon exercise of the Rights will be
entitled, when, as and if declared, to a minimum preferential quarterly dividend
payment of $1.00 per share but will be entitled to
C-1
<PAGE> 44
an aggregate dividend of 100 times the dividend, if any, declared per Common
Share. In the event of liquidation, the holders of the Preferred Shares will be
entitled to a minimum preferential liquidation payment of $100 per share but
will be entitled to an aggregate payment of 100 times the payment made per
Common Share. Each Preferred Share will have 100 votes and will vote together
with the Common Shares. Finally, in the event of any merger, consolidation or
other transaction in which Common Shares are exchanged, each Preferred Share
will be entitled to receive 100 times the amount received per Common Share.
These rights are protected by customary antidilution provisions. Because of the
nature of the Preferred Share's dividend, liquidation and voting rights, the
value of one one-hundredth of a Preferred Share purchasable upon exercise of
each Right should approximate the value of one Common Share.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares or convertible
securities at less than the current market price of the Preferred Shares or
(iii) upon the distribution to holders of the Preferred Shares of evidences of
indebtedness, cash, securities or assets (excluding regular periodic cash
dividends at a rate not in excess of 125% of the rate of the last regular
periodic cash dividend theretofore paid or, in case regular periodic cash
dividends have not theretofore been paid, at a rate not in excess of 50% of the
average net income per share of the Company for the four quarters ended
immediately prior to the payment of such dividend, or dividends payable in
Preferred Shares (which dividends will be subject to the adjustment described in
clause (i) above)) or of subscription rights or warrants (other than those
referred to above).
In the event that a Person becomes an Acquiring Person or if the Company
were the surviving corporation in a merger with an Acquiring Person or any
affiliate or associate of an Acquiring Person and the Common Shares were not
changed or exchanged, each holder of a Right, other than Rights that are or were
acquired or beneficially owned by the 10% shareholder (which Rights will
thereafter be void), will thereafter have the right to receive upon exercise
that number of Common Shares having a market value of two times the then current
Purchase Price of the Right. With certain exceptions, in the event that the
Company were acquired in a merger or other business combination transaction or
more than 50% of its assets or earning power were sold, proper provision shall
be made so that each holder of a Right shall thereafter have the right to
receive, upon the exercise thereof at the then current Purchase Price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction would have a market value of two times the then
current Purchase Price of the Right.
At any time after a Person becomes an Acquiring Person and prior to the
acquisition by such Acquiring Person of 50% or more of the outstanding Common
Shares, the Board of Directors may cause the Company to acquire the Rights
(other than Rights owned by an Acquiring Person which have become void), in
whole or in part, in exchange for that number of Common Shares having an
aggregate value equal to the Spread (the excess of the value of the Common
Shares issuable upon exercise of a Right after a Person becomes an Acquiring
Person over the Purchase Price) per Right (subject to adjustment).
The Rights may be redeemed in whole, but not in part, at a price of $.01
per Right (the "Redemption Price") by the Board of Directors at any time prior
to the first date that a Person has become an Acquiring Person. The redemption
of the Rights by the Board of Directors may be made effective at such time, on
such basis and with such conditions as the Board of Directors in its sole
discretion may establish. The Company may, at its option, pay the Redemption
Price in cash, Common Shares (based on the current per share market price at the
time of the redemption) or any other form of consideration deemed appropriate by
the Board of Directors. Immediately upon the action of the Board of Directors of
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<PAGE> 45
the Company electing to redeem the Rights, the Company shall make an
announcement thereof, and upon such election, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company beyond those as an existing stockholder,
including, without limitation, the right to vote or to receive dividends.
Any of the provisions of the Rights Agreement may be amended by the
Board of Directors of the Company for so long as the Rights are then redeemable,
and after the Rights are no longer redeemable, the Company may amend or
supplement the Agreement in any manner that does not adversely affect the
interests of the holders of the Rights.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-K. A
copy of the Rights Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
C-3
<PAGE> 1
Exhibit 10.10
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is made and
entered into and is effective as of December 5, 1997, by and between ARV
ASSISTED LIVING, INC., a California corporation (the "Company"), and HOWARD G.
PHANSTIEL, an individual ("Executive").
R E C I T A L
Whereas, the Company and Executive desire to assure that the Company
retains the services of Executive, whose experience, knowledge and abilities are
extremely valuable to the Company.
NOW, THEREFORE, in consideration of the terms, conditions, covenants,
representations, warranties and promises contained in this Agreement, the
Parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive and Executive hereby
accepts employment with the Company on the terms and conditions set forth
herein.
2. DUTIES. At all times while Executive is an employee of the Company,
Executive shall perform the duties and obligations of the Chief Executive
Officer and, upon admittance as a member of the Board of Directors of the
Company, the Chairman of the Board of the Company. Executive shall report to the
Company's Board of Directors (the "Board") and shall at all times perform his
duties and obligations faithfully, diligently, and to the best of his ability,
in accordance with the Company's policies and procedures, and shall instruct and
require all those working with and under him to do the same. Executive's
employment hereunder shall be on a full-time basis, and, except as permitted by
the prior written consent of the Board, Executive shall devote substantially all
of his productive time, ability, and attention to the business of the Company
during the "Term" (as defined in Section 3 below).
3. TERM. The initial term of this Agreement (the "Term") shall commence
upon the date hereof and shall terminate three (3) years thereafter (the
"Termination Date"), unless sooner terminated as provided herein; provided,
however, that if the Company has not given Executive written notice of the
Company's intent to terminate this Agreement at least two (2) years prior to the
Termination Date, the Term shall automatically be extended for a period of one
year (the "Additional Term"), upon all the same terms and conditions.
Thereafter, the Termination Date shall continue to be extended annually unless
and until the Company timely delivers such written notice of termination at
least two (2) years prior to the then effective Termination Date.
4. COMPENSATION.
4.1 ANNUAL BASE SALARY. For Executive's services hereunder, the
Company shall initially pay Executive an annual salary of Two Hundred Fifty
Thousand Dollars ($250,000) (the "Base Salary"). The Base Salary shall be paid
in accordance with the Company's normal procedures for paying salaried
employees, but in no event less frequently than semi-monthly.
4.2 BASE SALARY INCREASES. The Base Salary shall be increased (the
"Base Salary Increase") each January 1st (the "Adjustment Date"), commencing in
1999, as follows: the Base Salary in effect immediately before each Adjustment
Date shall be increased, based on the Executive's and the Company's performance
results and the Annual Performance and Salary Review (as defined in Section
10.1.2 below).
4.3 BONUSES. Commencing on July 1, 1998, and continuing annually
thereafter, the Company shall pay to Executive as a bonus an amount equal to
thirty-seven and one-half percent (37.5%) of the then current Base Salary (the
"Minimum Bonus"). In addition, commencing with the 1998 calendar year,
operational and financial targets for performance for any one calendar year
shall be established by the Board, based on the earnings of the Company and
other criteria as determined by mutual agreement between Executive and the
Compensation Committee of the Board, on or before March 31st of that year. No
later than December 31st of each
<PAGE> 2
year, the Board shall award to Executive an additional bonus (the "Additional
Bonus"), as determined in the discretion of the Board, based on achieving the
agreed-upon targets. The Additional Bonus, when added to the Minimum Bonus, is
expected to range from fifty percent (50%) to one hundred percent (100%) of
Executive's Base Salary, with a target for planning purposes only established at
seventy-seventy-five percent (75%) of Executive's Base Salary. Executive's
Additional Bonus shall be paid, at Executive's election, in either December or
January.
4.4 TAXES. All amounts paid to Executive hereunder shall be subject
to the applicable withholding of social security, federal, state, and other
taxes and deductions as required by law.
5. BENEFITS. Executive shall be entitled to participate in all benefits
offered to employees or similarly situated officers including, without
limitation, the following:
5.1 GROUP MEDICAL, DISABILITY, AND LIFE INSURANCE BENEFITS. During
the Term and any Additional Term, Executive shall be eligible to participate and
the premiums shall be paid by the Company on behalf Executive, in any group
medical, disability, and life insurance programs as provided generally to
officers of the Company.
5.2 BUSINESS CLUB MEMBERSHIP. Executive shall be entitled to an
annual membership in a local business club of his choosing.
5.3 CELLULAR TELEPHONE. During the Term and any Additional Term,
Executive shall be entitled to the use of a cellular telephone and the monthly
access charge and any business-related charges shall be paid by the Company
subject to Section 5.6 below.
5.4 VACATION. Executive shall be entitled to four (4) weeks annual
vacation during the Term and any Additional Term.
5.5 RETIREMENT PLANS. During the Term and any Additional Term,
Executive shall be included in and able to participate in any retirement,
pension, or other deferred or supplemental compensation plans operated by the
Company including, without limitation, the Company's 401(k) Plan and any
subsequent or additional retirement plans established by the Board.
5.6 EXPENSE REIMBURSEMENT. Upon presentment of verifiable invoices
to the Company's Chief Financial Officer and other documentation as may be
requested by the Company, and subject to the Company's expense reimbursement
policies applicable to similarly situated executives, the Company shall
reimburse Executive for the reasonable costs and expenses which he incurs in
connection with the performance of his duties and obligations under this
Agreement. All expenses shall be reviewed by the both the Company's Chief
Financial Officer and the Company's external auditors.
5.7 RELOCATION ASSISTANCE. In order to facilitate relocation of
Executive's primary residence to Costa Mesa, California or its vicinity, the
Company shall pay to Executive a one-time relocation payment (the "Relocation
Payment") equal to the sum of Fifty Thousand Dollars ($50,000) net to Executive
after applicable withholdings, payable either (i) within one (1) week after
Executive's commencement of employment; or (ii) on the first regular pay period
in January 1998, at the sole election of Executive; provided, however, that in
the event Executive is terminated for "cause" (as that term is defined in
Section 7.3 below) within the first three (3) years of employment with the
Company, the Relocation Payment shall be repaid by Executive to the Company
within thirty (30) days thereafter.
6. STOCK OPTIONS. Concurrently with the execution of this Agreement,
Executive and the Company are executing and delivering a Stock Option Agreement
(the "Option Agreement") which grants to Executive the option to purchase, at a
price equal to the closing stock price on December 4, 1997, one hundred fifty
thousand (150,000) shares of the Common Stock of the Company, upon the terms and
conditions set forth in the Option Agreement. As of January 2, 1998, Executive
and the Company shall execute and deliver a second Stock Option Agreement (the
"Second Option Agreement") which shall grant to Executive the option to
purchase, at a
<PAGE> 3
price equal to the closing stock price on December 31, 1997, one hundred
thousand (100,000) shares of the Common Stock of the Company, upon the terms and
conditions set forth in the Second Option Agreement. In addition to the options
granted under the Option Agreements, during the Term, Executive shall be
eligible to receive additional stock option awards as part of the annual
executive performance and salary reviews and to participate in any other stock
option plan instituted by the Company.
7. TERMINATION.
7.1 TERMINATION AT WILL.
7.1.1 BY THE COMPANY. Subject to the provisions of Section 7.2
and 7.5 below, the Company may terminate this Agreement at any time, for any
reason, or for no reason, either with or without "cause" (as that term is
defined in Section 7.3 below). In the event that such termination is without
"cause" the Company shall provide Executive with fifteen (15) days' prior
written notice.
7.1.2 BY EXECUTIVE. Subject to the provisions of Section 7.4 and
7.5 below, Executive may terminate this Agreement at any time, for
any reason, or for no reason, either with or without cause, by delivering thirty
(30) days' prior written notice to the Company; provided, however, that the
Company may reduce such thirty (30) day period in its sole discretion.
7.2 TERMINATION BY THE COMPANY WITHOUT "CAUSE." If the Company
terminates Executive other than for "cause" (as that term is defined in Section
7.3 below) or, if the Company willfully breaches a material provision of this
Agreement and fails to cure such breach within thirty (30) days of written
notice from Executive, in addition to payment of Executive's Base Salary,
accrued vacation and reimbursable expenses through the date of termination,
Executive shall be entitled to the following:
7.2.1 SEVERANCE PAY. The Company shall pay Executive upon such
termination a lump-sum amount equal to the greater of: (1) the sum of one (1)
years' current Base Salary plus the Minimum Bonus amount calculated based on
such Base Salary; or (2) the sum of (i) the monthly portion of the current Base
Salary times the number of months (including partial months) remaining until the
Termination Date (as defined in Section 3 herein) plus (ii) the Minimum Bonus
calculated based on the current Base Salary divided by twelve (12) and
multiplied by the number of months (including partial months) remaining until
the Termination Date (the "Severance Pay").
7.2.2 CONTINUATION COVERAGE. The Company shall pay, on behalf of
Executive, for the maximum period for which COBRA coverage is available, the
premiums payable in order to continue the same coverage of Executive and
Executive's family under the Company's health insurance plan which exists as of
the date of termination, unless and until Executive and Executive's family are
otherwise covered by another health insurance plan (the "Continuation
Coverage").
7.2.3 ACCELERATED VESTING. In addition to the Severance Pay and
the Continuation Coverage, in the event of such a termination of Executive's
employment, any options to purchase the common stock of the Company previously
granted to Executive and not otherwise vested shall be fully vested as of the
Termination Date, and all restrictions regarding the Restricted Stock shall be
removed.
7.3 TERMINATION BY THE COMPANY FOR "CAUSE." For purposes of this
Section 7, termination for "cause" shall include termination of Executive by the
Company for the following, as determined by a majority vote of the Board: (a) A
willful breach by Executive of any material provision of this Agreement that
remains uncured by Executive within thirty (30) days of written notice of such
breach from the Board; (b) Executive's habitual neglect of his duties; or (c) If
Executive is convicted of a felony.
7.4 VOLUNTARY TERMINATION BY EXECUTIVE. If Executive voluntarily
terminates Executive's employment with the Company, Executive shall not be
eligible to receive any severance pay as provided in Section
<PAGE> 4
7.2. herein. Within 72 hours following such termination, Executive shall be paid
Executive's Base Salary and accrued vacation and within ten (10) days following
such termination, Executive shall be paid Executive's reimbursable expenses
payable through the date of the termination of Executive's employment and a
lump-sum amount equal to three (3) months' Base salary. Termination by Executive
shall include the death or "Disability" (as defined herein) of Executive. For
the purposes of this Section 7.4, "Disability" shall mean any physical or mental
disability which causes Executive to be unable to substantially perform
Executive's normal duties as an employee of the Company; provided, however, that
Executive shall not be considered disabled until: (i) Executive has been so
disabled for one hundred eighty (180) days; (ii) Executive's attending physician
shall have furnished to the Company certification that the return of Executive
to his duties as an employee of the company is impossible or improbable; and
(iii) Executive is determined to be totally disabled by the disability insurer
then insuring Executive, if any.
7.5 CHANGE OF CONTROL.
7.5.1 DEFINITIONS. For the purposes of this Agreement, the following
terms shall be defined as follows:
(i) "Change in the Ownership of the Company" shall mean either:
(a) the date that any person, persons, entity or group, (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the
"Exchange Act")) ("Person"), acquires the beneficial ownership (with in the
meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of
fifty percent (50%) or more of the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors of the Company ("Outstanding Voting Securities"); or (b) the date that
any Person, other than Prometheus Assisted Living LLC, acquires the beneficial
ownership (with in the meaning of Rule 13d-3) of twenty percent (20%) or more of
the combined voting power of the then Outstanding Voting Securities and the
Board determines that a Change in the Ownership of the Company, pursuant to this
Section 7.5, has occurred.
(ii) "Change in Effective Control of the Company" shall mean
that either: (A) any Person acquired (or had acquired during the twelve (12)
month period ending on the date of the most recent acquisition by such Person)
the beneficial ownership of the capital stock of the Company possessing fifty
percent (50%) or more of the total voting power of the capital stock of the
Company; or (B) a majority of the members of the Board were replaced during any
twelve (12) month period by directors whose appointment or election was not
endorsed by a majority of the members of the Board prior to the date of such
appointment or election; and
(iii) "Change in Ownership of a Substantial Portion of the
Company's Asset's shall mean the date on which any Person acquired (or had
acquired during the twelve (12) month period ending on the date of the most
recent acquisition by such person or persons) assets from the Company that have
a total fair market value equal to, or more than, thirty three and one-third
percent (33-1/3%) of the total fair market value of all of the assets of the
Company immediately prior to such acquisitions. All determinations of the
applicability of this Section shall be made consistent with the Proposed
Regulations Section 1.280G-1 promulgated by the Internal Revenue Service, or any
successor regulation.
7.5.2 CHANGE OF CONTROL PAYMENT. Following a Change in the
Ownership, or Effective Control of the Company or in the Ownership of a
Substantial Portion of the Company's Assets (any one of which shall be referred
to herein as a "Change of Control"), in the event Executive's employment is
terminated for any reason, either with or without cause or voluntarily within
nine (9) months of a Change of Control or involuntarily within twelve (12)
months of a Change of Control, in lieu of the payment specified in Section 7.2
hereof, the Company shall immediately pay to Executive the sum of the following
amounts: (i) Executive's accrued Base Salary; (ii) Executive's accrued vacation
pay; (iii) reimbursement for expenses through the date of Change of Control; and
(iv) either three (3) times the sum of Executive's Base Salary, Minimum Bonus,
Additional Bonus, and any other compensation received by Executive during the
immediately preceding calendar year, plus two (2) times the Minimum Bonus, or,
in the event that the Change of Control occurs within the first twelve (12)
months of the Term of this Agreement, three (3) times the Base Salary then in
effect, plus six (6) times the Minimum Bonus (the "Change of Control Payment").
In addition to the foregoing amounts, in the event that any portion of the
Change
<PAGE> 5
of Control Payment shall be deemed to be an "excess parachute payment" under
Section 28OG of the Internal Revenue Code of 1986, as amended, or any
replacement statute, the amount of the Change of Control Payment shall be
increased to a new amount (the "Modified Change of Control Payment") such that
the Modified Change of Control Payment less the excise tax payable by Executive
on the Modified Change of Control Payment is equal to the Change of Control
Payment.
7.5.3 ACCELERATED VESTING. In addition to the Change of Control
Payment or the Modified Change of Control Payment, in the event Executive's
employment is terminated voluntarily within nine (9) months of a Change of
Control or involuntarily within twelve (12) months of a Change of Control, any
options to purchase the common stock of the Company previously granted to
Executive and not otherwise vested shall be fully vested as of the date of the
Change of Control, and all restrictions regarding the Restricted Stock shall be
removed.
7.5.4 OUTPLACEMENT ASSISTANCE. In order to ease Executive's
transition to new employment, in the event of a voluntary or involuntary
termination of Executive's employment under this Section 7.5, the Company shall
provide Executive with an office, telephone and secretary, similar to those used
by Executive prior to the termination of Executive's employment, for a period of
up to eighteen (18) months. In addition, the Company shall pay the cost of
outplacement services for Executive, up to a maximum of $50,000 from a service
or provider of Executive's choice.
7.5.5 DISPUTED ISSUES. In the event of a dispute between Executive
and the Company arising under or relating to this Section 7.5, such dispute
shall be submitted to binding arbitration pursuant to the provisions of Section
10.12 below, provided however, that if such a dispute is submitted to
arbitration, the Company shall continue to pay Executive his Base Salary until
such time as there is a final resolution and the Company shall pay Executive's
reasonable attorney's fees, costs and expenses incurred in connection with such
proceeding whether or not Executive is the prevailing party.
8. CONFIDENTIALITY. During the Term and any Additional Term, Executive
will have access to and become acquainted with what Executive and the Company
acknowledge are trade secrets and other confidential information (the
"Confidential Information") which are the exclusive property of the Company. In
light of the sensitive and proprietary nature of the Confidential Information,
Executive agrees to execute and be bound by a Confidentiality and Non-Disclosure
Agreement, to be approved by the Board.
9. COVENANT NOT TO COMPETE. During the Term or any Additional Term, and
for a period of one (1) year following expiration of the Term or any Additional
Term, in all counties of California, the other States of the United States and
the other countries of the world where the Company or its affiliates are engaged
in business, Executive shall not, directly or indirectly, whether as an
Executive, employer, consultant, agent, principal, partner, member, stockholder,
corporate officer or director, or in any other individual or representative
capacity, whether or not for compensation, engage in or participate in or render
services to any business or activity which is competitive in any manner
whatsoever with the Company or any of its affiliates in the business of assisted
living or long-term health care. This Section 9 shall not apply in the event of
a Change of Control under Section 7.5. Further, this Section 9 shall not apply
in the event of termination of employment as described in Section 7.2 or Section
7.4; provided, however, that Executive shall first waive in writing all rights
to receive severance pay other than Executive's Base Salary, accrued vacation
and reimbursable expenses payable through the date of the termination of
Executive's employment.
10. MISCELLANEOUS PROVISIONS.
10.1 EXECUTIVE COMPENSATION, BENEFITS AND PERFORMANCE REVIEW.
10.1.1 1998 EXECUTIVE COMPENSATION AND BENEFITS SURVEY. The
Compensation Committee of the Board shall, during 1998, conduct an executive
compensation and benefits survey and shall, as it deems appropriate, make
adjustments to the Company's executive compensation and benefits in order to
compete for, attract and retain competent executives and to emphasize
shareholder value.
<PAGE> 6
10.1.2 ANNUAL PERFORMANCE AND SALARY REVIEWS. Beginning in 1999,
the Company shall, in accordance with standards and policies to be established
by the Board, conduct annual executive performance and salary reviews (the
"Annual Performance and Salary Review").
10.2 DIRECTORS AND OFFICERS INDEMNITY AGREEMENT. The Company shall
provide Executive with a Directors and Officers Indemnity Agreement to be
mutually agreed upon between Executive and the Board.
10.3 NOTICES. Except as otherwise provided in this Agreement, all
notices, requests, demands, and other communications under this Agreement shall
be given in writing and shall be served either personally, by facsimile or
delivered by first class mail, registered or certified, postage prepaid, and
properly addressed as follows :
If to the Company: ARV Assisted Living, Inc.
245 Fischer Avenue, Bldg. D-1
Costa Mesa, CA 92626-3545
Attention: Board of Directors
Fax No. (714) 751-1743
If to Executive: Howard G. Phanstiel
6014 Kerrmoor Drive
Westlake Village, California 91362
Notices shall be deemed received at the earliest of actual
receipt, confirmed facsimile or three (3) days following mailing.
10.4 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter contained
herein and supersedes all prior agreements, representations, and understandings
of the parties.
10.5 ATTORNEY's FEES. Subject to Section 7.5.5 above, in the event
of any proceeding arising out of or related to this Agreement, the prevailing
party shall be entitled to recover all of its costs and expenses incurred in
connection with such proceeding, including, without limitation, court costs and
reasonable attorney's fees, whether or not such proceeding is prosecuted to
judgment.
10.6 AMENDMENTS. This Agreement may not be amended, supplemented,
canceled, or discharged except by written instrument executed by the parties
hereto.
10.7 WAIVERS. All waivers hereunder shall be in writing. No waiver
by any party hereto of any breach or anticipated breach of any provision of this
Agreement by any other party shall be deemed a waiver of any other
contemporaneous, preceding, or succeeding breach or anticipated breach, whether
or not similar, on the part of the same or any other party.
10.8 SEVERABILITY. In the event that any provision of this Agreement
shall be unenforceable or inoperative as a matter of law, the remaining portions
or provisions shall remain in full force and effect.
10.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
representatives, executors, administrators, successors, and assigns, provided,
however, that Executive may not assign any or all of his rights or duties
hereunder except following the prior written consent of the Company.
10.10 COUNTERPARTS. This Agreement may be executed in two (2) or
more counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute one and the same Agreement.
<PAGE> 7
10.11 SECTION HEADINGS. The section headings used in this Agreement
are inserted for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
10.12 GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with the laws of the state of California.
10.13 ADVICE OF COUNSEL. Executive acknowledges that he has been
advised to seek independent legal counsel for advice regarding the effect of the
terms and provisions hereof, and has either obtained such advice of independent
legal counsel, or has voluntarily and without compulsion elected to enter into
and be bound by the terms of this Agreement without such advice of independent
legal counsel.
<PAGE> 8
10.14 ARBITRATION. Subject to Section 7.5.5 above, any dispute
arising out of or relating to this Agreement or Executive's employment by the
Company shall be submitted to arbitration in Orange county, California, before a
sole arbitrator (the "Arbitrator") selected from the American Arbitration
Association ("AAA"), and shall be conducted in accordance with the AAA's Labor
Arbitration Rules (including the Expedited Labor Arbitration Procedures) and the
provisions of California Code of Civil Procedure Section 1280 et seq. as the
exclusive remedy of such dispute; provided, however, that provisional injunctive
relief may, but need not, be sought in a court of law while arbitration
proceedings are pending, and any provisional injunctive relief granted by such
court shall remain effective until the matter is finally determined by the
Arbitrator. Final resolution of any dispute through arbitration may include any
remedy or relief which the Arbitrator deems just and equitable, including
permanent injunctive relief or specific performance or both, and the Arbitrator
is hereby empowered to award such relief. Any award or relief granted by the
Arbitrator hereunder shall be final and binding on the parties hereto and may be
enforced by any court of competent jurisdiction. Executive and the Company
understand and agree that they are hereby waiving any rights to trial by jury in
any action, proceeding or counterclaim brought by either of the parties against
the other in connection with any matter whatsoever arising out of or in any way
connected with this Employment Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Employment Agreement as of the date first above written.
THE COMPANY
-----------
ARV ASSISTED LIVING, INC.,
a California corporation
By: /s/ John A. Booty
----------------------------
Title: Interim President and Chief
Executive Officer
EXECUTIVE
---------
/s/ Howard G. Phanstiel
------------------------------------
Name: HOWARD G. PHANSTIEL
<PAGE> 1
EXHIBIT 10.11
AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT (this "Amendment") is
made and entered into effective as of December 5, 1997, by and between ARV
ASSISTED LIVING, INC., a California corporation (the "Company") and HOWARD G.
PHANSTIEL, an individual ("Executive").
RECITALS
--------
Whereas, the Company and Executive have entered into that certain
Executive Employment Agreement (the "Agreement") effective as of December 5,
1997; and
Whereas, the Company and Executive desire to amend the Agreement.
NOW, THEREFORE, the Company and Executive agree as follows:
AGREEMENT
---------
1. Capitalized terms used herein shall have the same meaning as set forth in the
Agreement.
2. Section 4.1 of the Agreement is hereby amended to state that Executive's
Base Salary shall be Three Hundred Fifty Thousand Dollars ($350,000).
3. Section 4.3 of the Agreement is deleted and the following is substituted in
its place:
4.3 BONUSES. On July 1, 1998, the Company shall pay to Executive as a bonus
an amount equal to Ninety-Three Thousand Seven Hundred Fifty Dollars
($93,750) (the "Minimum Bonus"). The Minimum Bonus in later years shall in
no event be less than the Minimum Bonus in effect for the prior year and
shall, at the discretion of the Compensation Committee, be increased with
each Base Salary Increase. In addition, commencing with the 1998 calendar
year, operational and financial targets for performance for any one calendar
year shall be established by the Board, based on the earnings of the Company
and other criteria as determined by mutual agreement between Executive and
the Compensation Committee of the Board, on or before March 31st of that
year. No later than December 31st of each year, the Board shall award to
Executive an additional bonus (the "Additional Bonus"), as determined in the
discretion of the Board, based on achieving the agreed-upon targets. The
Additional Bonus, when added to the Minimum Bonus, is expected to range from
One Hundred Twenty-Five Thousand Dollars ($125,000) to Two Hundred Fifty
Thousand Dollars ($250,000) for the year ending December 31, 1998, with a
target, for planning purposes only, established at One Hundred Eighty-Seven
Thousand Five Hundred Dollars ($187,500). Executive's Additional Bonus shall
be paid, at Executive's election, in either December or January.
4. Except as amended hereunder, the Agreement shall remain in full force and
effect.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of
the date first above written.
THE COMPANY EXECUTIVE
ARV ASSISTED LIVING, INC.,
a California corporation
/s/ Howard G. Phanstiel
-------------------------------
By: /s/ Graham P. Espley-Jones HOWARD G. PHANSTIEL
-------------------------------------
Graham P. Espley-Jones,
Executive Vice President, CFO
By: /s/ Sheila M. Muldoon
-------------------------------------
Sheila M. Muldoon
Vice President and General Counsel
<PAGE> 1
Exhibit 10.12
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is made and
entered into and is effective as of June 1, 1998, by and between ARV ASSISTED
LIVING, INC., a Delaware corporation (the "Company"), and DOUGLAS M. PASQUALE,
an individual ("Executive").
R E C I T A L
Whereas, the Company and Executive desire to assure that the Company
retains the services of Executive, whose experience, knowledge and abilities are
extremely valuable to the Company.
NOW, THEREFORE, in consideration of the terms, conditions, covenants,
representations, warranties and promises contained in this Agreement, the
Parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive and Executive hereby
accepts employment with the Company on the terms and conditions set forth
herein.
2. DUTIES. At all times while Executive is an employee of the Company,
Executive shall perform the duties and obligations of the President and Chief
Operating Officer and, upon admittance as such, a member of the Board of
Directors of the Company. Executive shall report to the Company's Chief
Executive Officer and shall at all times perform his duties and obligations
faithfully, diligently, and to the best of his ability, in accordance with the
Company's policies and procedures, and shall instruct and require all those
working with and under him to do the same. A summary of Executive's basic duties
and responsibilities is attached hereto as Exhibit A and by this reference
incorporated herein. Executive's employment hereunder shall be on a full-time
basis, and, except as permitted by the prior written consent of the Chief
Executive Officer and the Board of Directors (the "Board"), Executive shall
devote substantially all of his productive time, ability, and attention to the
business of the Company during the "Term" (as defined in Section 3 below).
Unless otherwise consented to in writing by Employee, Employee's permanent
office location shall be in Orange County, California.
3. TERM. The initial term of this Agreement (the "Term") shall commence
upon the date hereof and shall terminate three (3) years thereafter (the
"Termination Date"), unless sooner terminated as provided herein; provided,
however, that if the Company has not given Executive written notice of the
Company's intent to terminate this Agreement at least two (2) years prior to the
Termination Date, the Term shall automatically be extended for a period of one
year (the "Additional Term"), upon all the same terms and conditions.
Thereafter, the Termination Date shall continue to be extended annually unless
and until the Company timely delivers such written notice of termination at
least two (2) years prior to the then effective Termination Date.
<PAGE> 2
4. COMPENSATION.
4.1 ANNUAL BASE SALARY. For Executive's services hereunder, the
Company shall initially pay Executive an annual salary of Three Hundred Thousand
Dollars ($300,000) (the "Base Salary"). The Base Salary shall be paid in
accordance with the Company's normal procedures for paying salaried employees,
but in no event less frequently than semi-monthly.
4.2 BASE SALARY INCREASES. The Base Salary shall be increased (the
"Base Salary Increase") as of each January 1st (the "Adjustment Date"),
commencing in 1999, as follows: the Base Salary in effect immediately before
each Adjustment Date shall be increased, based on the Executive's and the
Company's performance results and the Annual Performance and Salary Review (as
defined in Section 10.1.2 below).
4.3 BONUSES. Commencing as of December 31, 1998, and continuing as
of July 1 of each year thereafter, the Company shall pay to Executive as a bonus
an amount equal to at least thirty-seven and one-half percent (37.5%) of the
Base Salary (the "Minimum Bonus") then in effect (it being acknowledged that the
Minimum Bonus to be paid as of December 31, 1998 will be based on only seven
months of employment). Commencing with the 1999 calendar year, operational and
financial targets for performance for any one calendar year shall be established
by the Board, based on the earnings of the Company and other criteria as
determined by mutual agreement between Executive and the Compensation Committee
of the Board, on or before March 31st of that year. No later than December 31st
of each year during the Term and Additional Term commencing in 1998, the Board
shall award to Executive an additional bonus (the "Additional Bonus"), as
determined in the discretion of the Board, based on achieving the agreed-upon
targets. The Additional Bonus, when added to the Minimum Bonus, is expected to
range from thirty-seven and one-half percent (37 1/2 %) to seventy-five percent
(75%) of Executive's Base Salary, with a target (the "Target Bonus") for
planning purposes only established at sixty percent (60%) of Executive's Base
Salary. Executive's Additional Bonus shall be paid, at Executive's election, in
either December or January. In addition, Executive shall be paid $25,000 as a
signing bonus, payable at the time of execution of this Agreement.
4.4 TAXES. All amounts paid to Executive hereunder shall be subject
to the applicable withholding of social security, federal, state, and other
taxes and deductions as required by law.
5. BENEFITS. Executive shall be entitled to participate in all benefits
offered to employees or the Chief Executive Officer of the Company, including,
without limitation, the following:
5.1 GROUP MEDICAL, DISABILITY, AND LIFE INSURANCE BENEFITS. During
the Term and any Additional Term, Executive shall be eligible to participate and
the premiums shall be paid by the Company on behalf Executive and Executive's
family, in any group medical,
<PAGE> 3
disability, and life insurance programs as provided generally to officers of the
Company. The Company shall pay, on behalf of Executive, for the period for which
COBRA coverage is required until Executive is eligible to participate in the
Company's group medical plan, the premiums payable in order to continue the same
coverage of Executive and Executive's family under the Executive's prior health
insurance plan.
5.2 BUSINESS CLUB MEMBERSHIP. The Company shall pay all initial and
monthly membership charges (exclusive of charges for personal use) for Executive
to join and participate in a local business club of his choosing during the Term
and any Additional Term.
5.3 CELLULAR TELEPHONE. During the Term and any Additional Term,
Executive shall be entitled to the use of a cellular telephone and the monthly
access charge and any business-related charges shall be paid by the Company
subject to Section 5.6 below.
5.4 VACATION. Executive shall be entitled to four (4) weeks' annual
paid vacation during the Term and any Additional Term. Executive shall be
entitled to carry forward unused vacation indefinitely; provided, however, that
accrued and unused vacation shall never exceed twelve (12) weeks.
5.5 RETIREMENT PLANS. During the Term and any Additional Term,
Executive shall be included in and able to participate in any retirement,
pension, or other deferred or supplemental compensation plans operated by the
Company including, without limitation, the Company's 401(k) Plan and any
subsequent or additional retirement plans established by the Board.
5.6 EXPENSE REIMBURSEMENT. Upon presentment of verifiable invoices
to the Company's Chief Financial Officer and other documentation as may be
requested by the Company, and subject to the Company's expense reimbursement
policies applicable to similarly situated executives, the Company shall
reimburse Executive for the reasonable costs and expenses which he incurs in
connection with the performance of his duties and obligations under this
Agreement. All expenses shall be reviewed by the both the Company's Chief
Financial Officer and the Company's external auditors.
5.7 RELOCATION ASSISTANCE. In order to facilitate relocation of
Executive's primary residence to Costa Mesa, California or its vicinity, the
Company shall pay to Executive a one-time relocation payment equal to $25,000 (a
"Relocation Payment"), payable upon the relocation of Executive's family to a
residence either leased or purchased by Executive in California. In addition,
the Company shall reimburse Executive for the costs associated with the movement
of Executive and Executive's family and household goods from Colorado to
California. Reimbursable expenses shall include the costs of packing, temporary
storage and shipping household goods and up to three automobiles, closing costs
and sales commissions associated with the sale of Executive's Colorado
residence, and the cost of a reasonable number of house hunting trips for
Executive and Executive's family. In addition, until such time as
<PAGE> 4
Executive's family relocates to California, the Company shall pay for
Executive's temporary living and weekly travel back and forth from Colorado.
Payments or reimbursements made hereunder shall be net to Executive. To the
extent that the amount of any reimbursements hereunder other than the Relocation
Payment are includable in Executive's federal and state taxable income and not
deductible for income tax purposes, the Company shall pay to Executive as
reimbursement for such relocation expenses an aggregate amount that is
sufficient to cover all of Executive's out-of-pocket relocation expenses on an
after-tax basis. In the event Executive is terminated for "cause" (as that term
is defined in Section 7.3 below) or voluntarily terminates his employment other
than as a result of a "Change of Control" (as that term is defined in Section
7.5 below) within the first three (3) years of employment with the Company, the
Relocation Payment shall be repaid by Executive to the Company within thirty
(30) days thereafter.
6. STOCK OPTIONS. Concurrently with the execution of this Agreement,
Executive and the Company are executing and delivering a Stock Option Agreement
(the "Option Agreement") which grants to Executive the option to purchase, at a
price equal to the closing stock price on May 29, 1998, one hundred fifty
thousand (150,000) shares of the Common Stock of the Company, upon the terms and
conditions set forth in the Option Agreement. As of January 2, 1998, Executive
and the Company shall execute and deliver a second Stock Option Agreement (the
"Second Option Agreement") which shall be in form and substance the same as the
Option Agreement and shall grant to Executive the option to purchase, at a price
equal to the closing stock price on December 31, 1998, ninety thousand (90,000)
shares of the Common Stock of the Company, upon the terms and conditions set
forth in the Second Option Agreement. All options granted under the Option
Agreement and Second Option Agreement shall begin to vest at the rate of
twenty-five percent (25%) per year commencing on June 1, 2000. In addition to
the options granted under the Option Agreements, during the Term, Executive
shall be eligible to receive additional stock option awards as part of the
Annual Performance and Salary Reviews and to participate in any other stock
option plan instituted by the Company.
7. TERMINATION.
7.1 TERMINATION AT WILL.
7.1.1 BY THE COMPANY. Subject to the provisions of Section 7.2
and 7.5 below, the Company may terminate this Agreement at any time, for any
reason, or for no reason, either with or without "cause" (as that term is
defined in Section 7.3 below). In the event that such termination is without
"cause," the Company shall provide Executive with fifteen (15) days' prior
written notice.
7.1.2 BY EXECUTIVE. Subject to the provisions of Section 7.4 and
7.5 below, Executive may terminate this Agreement at any time, for any reason,
or for no reason, either with or without cause, by delivering thirty (30) days'
prior written notice to the
<PAGE> 5
Company; provided, however, that the Company may reduce such thirty (30) day
period in its sole discretion, but not the amount of any payment tied to the
date of termination under Section 7.4.
7.2 TERMINATION BY THE COMPANY WITHOUT "CAUSE." If the Company
terminates Executive other than for "cause" (as that term is defined in Section
7.3 below) or, if the Company willfully breaches a material provision of this
Agreement and fails to cure such breach within thirty (30) days after written
notice from Executive, or if the Company substantially diminishes Executive's
duties or title, in addition to payment of Executive's Base Salary, accrued
vacation and reimbursable expenses through the date of termination, Executive
shall be entitled to the following:
7.2.1 SEVERANCE PAY. The Company shall pay Executive upon such
termination a lump-sum amount equal to the greater of: (1) the sum of one (1)
years' current Base Salary plus the Minimum Bonus calculated based on such Base
Salary (and, if an Additional Bonus has been paid in the prior twelve months,
plus the Additional Bonus so paid); or (2) the sum of (i) the monthly portion of
the current Base Salary times the number of months (including partial months)
remaining until the Termination Date (as defined in Section 3 herein) plus (ii)
the Minimum Bonus calculated based on the current Base Salary (and, if an
Additional Bonus has been paid in the prior twelve months, plus the Additional
Bonus so paid) divided by twelve (12) and multiplied by the number of months
(including partial months) remaining until the Termination Date (the "Severance
Pay"). In addition, if such termination occurs prior to January 2, 1999, the
Company shall pay Executive an amount equal to the 1998 Change of Control
Addition (as defined in Section 7.5.2 below).
7.2.2 CONTINUATION COVERAGE. The Company shall pay, on behalf of
Executive, for the maximum period for which COBRA coverage is available, the
premiums payable in order to continue the same coverage of Executive and
Executive's family under the Company's health insurance plan which exists as of
the date of termination, unless and until Executive and Executive's family are
otherwise covered by another health insurance plan (the "Continuation
Coverage").
7.2.3 ACCELERATED VESTING. In addition to the Severance Pay and
the Continuation Coverage, in the event of such a termination of Executive's
employment, any options to purchase the common stock of the Company previously
granted to Executive and not otherwise vested shall be fully vested as of the
Termination Date.
7.2.4 OUTPLACEMENT ASSISTANCE. The Company shall provide the
outplacement assistance as set forth in Section 7.5.4 below.
7.3 TERMINATION BY THE COMPANY FOR "CAUSE." For purposes of this
Section 7, termination for "cause" shall mean termination of Executive by the
Company for the
<PAGE> 6
following, as determined by a majority vote of the Board: (a) A willful breach
by Executive of any material provision of this Agreement that remains uncured by
Executive within thirty (30) days after written notice of such breach from the
Board; (b) Executive's habitual neglect of his duties; or (c) If Executive is
convicted of a felony.
7.4 VOLUNTARY TERMINATION BY EXECUTIVE. If Executive voluntarily
terminates Executive's employment with the Company, Executive shall not be
eligible to receive any severance pay as provided in Section 7.2. herein. Within
72 hours following such termination, Executive shall be paid Executive's Base
Salary and accrued vacation and within ten (10) days following such termination,
Executive shall be paid Executive's reimbursable expenses payable through the
date of the termination of Executive's employment and a lump-sum amount equal to
three (3) months' Base salary. Voluntary termination by Executive shall include
the death or "Disability" (as defined herein) of Executive. For the purposes of
this Section 7.4, "Disability" shall mean any physical or mental disability
which causes Executive to be unable to substantially perform Executive's normal
duties as an employee of the Company; provided, however, that Executive shall
not be considered disabled until: (i) Executive has been so disabled for one
hundred eighty (180) days; (ii) Executive's attending physician shall have
furnished to the Company certification that the return of Executive to his
duties as an employee of the Company is impossible or improbable; and (iii)
Executive is determined to be totally disabled by the disability insurer then
insuring Executive, if any.
7.5 CHANGE OF CONTROL.
7.5.1 DEFINITIONS. For the purposes of this Agreement, the
following terms shall be defined as follows:
(i) "Change in the Ownership of the Company" shall mean
either: (a) the date that any person, persons, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934
(the "Exchange Act")) (a "Person"), acquires the beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act ("Rule 13d-3")) of
fifty percent (50%) or more of the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
directors of the Company ("Outstanding Voting Securities"); or (b) the date that
any Person, other than Prometheus Assisted Living LLC, acquires the beneficial
ownership (within the meaning of Rule 13d-3) of twenty percent (20%) or more of
the combined voting power of the then Outstanding Voting Securities and the
Board determines that a Change in the Ownership of the Company, pursuant to this
Section 7.5, has occurred.
(ii) "Change in Effective Control of the Company" shall mean
that either: (A) any Person acquired (or had acquired during the twelve (12)
month period ending on the date of the most recent acquisition by such Person)
the beneficial ownership of the capital stock of the Company possessing fifty
percent (50%) or more of the total voting power of the capital stock of the
Company; or (B) a majority of the members of the Board were replaced during any
twelve (12) month period by directors whose appointment or election
<PAGE> 7
was not endorsed by a majority of the members of the Board prior to the date of
such appointment or election.
(iii) "Change in Ownership of a Substantial Portion of the
Company's Asset's shall mean the date on which any Person acquired (or had
acquired during the twelve (12) month period ending on the date of the most
recent acquisition by such person or persons) assets from the Company that have
a total fair market value equal to, or more than, thirty three and one-third
percent (33-1/3%) of the total fair market value of all of the assets of the
Company immediately prior to such acquisitions. All determinations of the
applicability of this Section shall be made consistent with the Proposed
Regulations Section 1.280G-1 promulgated by the Internal Revenue Service, or any
successor regulation.
7.5.2 CHANGE OF CONTROL PAYMENT. Following a Change in the
Ownership, or Effective Control of the Company or in the Ownership of a
Substantial Portion of the Company's Assets (any one of which shall be referred
to herein as a "Change of Control"), in the event Executive's employment is
terminated for any reason, either with or without cause or voluntarily within
nine (9) months after a Change of Control or involuntarily within twelve (12)
months after a Change of Control, in lieu of the payment specified in Section
7.2 hereof, the Company shall immediately pay to Executive the sum of the
following amounts: (i) Executive's accrued Base Salary; (ii) Executive's accrued
vacation pay; (iii) reimbursement for expenses through the date of Change of
Control; and (iv) three (3) times the sum of Executive's Base Salary and Target
Bonus (collectively, the "Change of Control Payment"). If the Change of Control
shall occur prior to January 2, 1999, the following shall be added to the Change
of Control Payment: a sum equal to ninety thousand (90,000) times the difference
between (a) the greater of (y) the price equal to the closing stock price on the
date of the Change of Control or (z) the amount offered by the Person causing
the Change of Control to all shareholders of the Company in an offer therefor,
and (b) the price equal to the closing stock price on May 29, 1998 (the "1998
Change of Control Addition"). In addition to the foregoing amounts, in the event
that any portion of the Change of Control Payment shall be deemed to be an
"excess parachute payment" under Section 28OG of the Internal Revenue Code of
1986, as amended, or any replacement statute, the amount of the Change of
Control Payment shall be increased to a new amount (the "Modified Change of
Control Payment") such that the Modified Change of Control Payment less the
excise tax payable by Executive on the Modified Change of Control Payment is
equal to the Change of Control Payment.
7.5.3 ACCELERATED VESTING. In addition to the Change of Control
Payment or the Modified Change of Control Payment, in the event Executive's
employment is terminated voluntarily within nine (9) months after a Change of
Control or involuntarily within twelve (12) months of a Change of Control, any
options to purchase the common stock of the Company previously granted to
Executive and not otherwise vested shall be fully vested as of the date of
termination.
<PAGE> 8
7.5.4 OUTPLACEMENT ASSISTANCE. In order to ease Executive's
transition to new employment, in the event of a voluntary or involuntary
termination of Executive's employment under this Section 7.5, the Company shall
provide Executive with an office, telephone and secretary, similar to those used
by Executive prior to the termination of Executive's employment, for a period of
up to eighteen (18) months. In addition, the Company shall pay the cost of
outplacement services for Executive, up to a maximum of $50,000 from a service
or provider of Executive's choice.
7.5.5 DISPUTED ISSUES. In the event of a dispute between
Executive and the Company arising under or relating to this Section 7.5, such
dispute shall be submitted to binding arbitration pursuant to the provisions of
Section 10.14 below, provided however, that if such a dispute is submitted to
arbitration, the Company shall continue to pay Executive his Base Salary until
such time as there is a final resolution and the Company shall pay Executive's
reasonable attorneys' fees, costs and expenses incurred in connection with such
proceeding whether or not Executive is the prevailing party.
8. CONFIDENTIALITY. During the Term and any Additional Term, Executive
will have access to and become acquainted with what Executive and the Company
acknowledge are trade secrets and other confidential information (the
"Confidential Information") which are the exclusive property of the Company. In
light of the sensitive and proprietary nature of the Confidential Information,
Executive agrees to execute and be bound by a Confidentiality and Non-Disclosure
Agreement, to be approved by the Board.
9. COVENANT NOT TO COMPETE. During the Term or any Additional Term, and
for a period of one (1) year following expiration of the Term or any Additional
Term, in all counties of California, the other States of the United States and
the other countries of the world where the Company or its affiliates are engaged
in business, Executive shall not, directly or indirectly, whether as an
Executive, employer, consultant, agent, principal, partner, member, stockholder,
corporate officer or director, or in any other individual or representative
capacity, whether or not for compensation, engage in or participate in or render
services to any business or activity which is competitive in any manner
whatsoever with the Company or any of its affiliates in the business of assisted
living or long-term health care. This Section 9 shall not apply in the event of
a termination under Section 7.2 or a Change of Control under Section 7.5.
Further, this Section 9 shall not apply in the event of termination of
employment as described in Section 7.4; provided, however, that Executive shall
first waive in writing all rights to receive severance pay other than
Executive's Base Salary, accrued vacation and reimbursable expenses payable
through the date of the termination of Executive's employment.
<PAGE> 9
10. MISCELLANEOUS PROVISIONS.
10.1 EXECUTIVE COMPENSATION, BENEFITS AND PERFORMANCE REVIEW.
10.1.1 1998 EXECUTIVE COMPENSATION AND BENEFITS SURVEY. The
Compensation Committee of the Board shall, during 1998, conduct an executive
compensation and benefits survey and shall, as it deems appropriate, make
adjustments to the Company's executive compensation and benefits in order to
compete for, attract and retain competent executives and to emphasize
shareholder value.
10.1.2 ANNUAL PERFORMANCE AND SALARY REVIEWS. Beginning in 1999,
the Company shall, in accordance with standards and policies to be established
by the Board, conduct annual executive performance and salary reviews (the
"Annual Performance and Salary Review").
10.2 DIRECTORS AND OFFICERS INDEMNITY AGREEMENT. Within ninety (90)
days after the date hereof, the Company shall provide Executive with a Directors
and Officers Indemnity Agreement to be mutually agreed upon between Executive
and the Board.
10.3 NOTICES. Except as otherwise provided in this Agreement, all
notices, requests, demands, and other communications under this Agreement shall
be given in writing and shall be served either personally, by facsimile or
delivered by first class mail, registered or certified, postage prepaid, and
properly addressed as follows, or to such other address for which proper notice
has been given:
If to the Company: ARV Assisted Living, Inc.
245 Fischer Avenue, Bldg. D-1
Costa Mesa, CA 92626-3545
Attention: Board of Directors
Fax No. (714) 751-1743
If to Executive: Douglas Pasquale
93 Falcon Hills Drive
Highlands Ranch, CO 80126
Notices shall be deemed received at the earliest of actual receipt,
confirmed facsimile or three (3) days following mailing.
10.4 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter contained
herein and supersedes all prior agreements, representations, and understandings
of the parties.
<PAGE> 10
10.5 ATTORNEY's FEES. Subject to Section 7.5.5 above, in the event
of any proceeding arising out of or related to this Agreement, the prevailing
party shall be entitled to recover all of its costs and expenses incurred in
connection with such proceeding, including, without limitation, court costs and
reasonable attorneys' fees, whether or not such proceeding is prosecuted to
judgment.
10.6 AMENDMENTS. This Agreement may not be amended, supplemented,
canceled, or discharged except by written instrument executed by the parties
hereto.
10.7 WAIVERS. All waivers hereunder shall be in writing. No waiver
by any party hereto of any breach or anticipated breach of any provision of this
Agreement by any other party shall be deemed a waiver of any other
contemporaneous, preceding, or succeeding breach or anticipated breach, whether
or not similar, on the part of the same or any other party.
10.8 SEVERABILITY. In the event that any provision of this Agreement
shall be unenforceable or inoperative as a matter of law, the remaining portions
or provisions shall remain in full force and effect.
10.9 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
representatives, executors, administrators, successors, and assigns, provided,
however, that Executive may not assign any or all of his rights or duties
hereunder except following the prior written consent of the Company.
10.10 COUNTERPARTS. This Agreement may be executed in two (2) or
more counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute one and the same Agreement.
10.11 SECTION HEADINGS. The section headings used in this Agreement
are inserted for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
10.12 GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with the laws of the state of California.
10.13 ADVICE OF COUNSEL. Executive acknowledges that he has been
advised to seek independent legal counsel for advice regarding the effect of the
terms and provisions hereof, and has either obtained such advice of independent
legal counsel, or has voluntarily and without compulsion elected to enter into
and be bound by the terms of this Agreement without such advice of independent
legal counsel.
10.14 ARBITRATION. Subject to Section 7.5.5 above, any dispute
arising out of or relating to this Agreement or Executive's employment by the
Company shall be submitted to
<PAGE> 11
arbitration in Orange County, California, before a sole arbitrator (the
"Arbitrator") selected from the American Arbitration Association ("AAA"), and
shall be conducted in accordance with the AAA's Labor Arbitration Rules
(including the Expedited Labor Arbitration Procedures) and the provisions of
California Code of Civil Procedure Section 1280 et seq. as the exclusive remedy
of such dispute; provided, however, that provisional injunctive relief may, but
need not, be sought in a court of law while arbitration proceedings are pending,
and any provisional injunctive relief granted by such court shall remain
effective until the matter is finally determined by the Arbitrator. Final
resolution of any dispute through arbitration may include any remedy or relief
which the Arbitrator deems just and equitable, including permanent injunctive
relief or specific performance or both, and the Arbitrator is hereby empowered
to award such relief. Any award or relief granted by the Arbitrator hereunder
shall be final and binding on the parties hereto and may be enforced by any
court of competent jurisdiction. Executive and the Company understand and agree
that they are hereby waiving any rights to trial by jury in any action,
proceeding or counterclaim brought by either of the parties against the other in
connection with any matter whatsoever arising out of or in any way connected
with this Employment Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Employment Agreement as of the date first above written.
THE COMPANY EXECUTIVE
ARV ASSISTED LIVING, INC.,
a Delaware corporation
/s/ Douglas M. Pasquale
-------------------------------
By: /s/Howard G. Phanstiel DOUGLAS M. PASQUALE
----------------------------------------
Howard G. Phanstiel
Chairman and Chief Executive Officer
<PAGE> 12
EXHIBIT A
---------
EXECUTIVE'S BASIC DUTIES
Overall operational responsibility for the Company and its performance.
Develop and implement a growth strategy, focused on internal growth, new
lines of business, development of new properties, acquisition of
existing properties, and with the CEO, the acquisition of other
companies within the industry.
Working closely with the Chief Executive Officer, develop detailed
operating plans, budgets and performance targets.
Directly oversee all operations and marketing and, working closely with
the Chief Executive Officer, acquisition and development of new
facilities, development of systems/technology and human resources.
Maintain a team-oriented working environment that promotes open
discussion of important issues, a high level of personal commitment and
accountability to the business, and a continued focus on profitability,
quality and the customer.
Represent the Company, as requested by the Chief Executive Officer, with
market contacts, regulators, the investment community and others.
<PAGE> 1
Exhibit 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
and is effective as of June 15, 1998, by and between ARV ASSISTED LIVING, INC.,
a Delaware corporation (the "Company"), and PATRICIA J. GIFFORD, M.D., an
individual ("Employee").
R E C I T A L
The Company desires to employ Employee and Employee desires to be
employed by the Company upon the terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee and Employee hereby
accepts employment with the Company on the terms and conditions set forth
herein.
2. DUTIES. At all times while Employee is an employee of the Company,
Employee shall perform the duties and obligations of Senior Vice President and
Medical Director of the Company. Employee shall at all times perform such duties
and obligations faithfully, diligently, and to the best of Employee's ability,
under the supervision of, and in accordance with lawful policies and directives
from time to time established by, the Company's Chief Executive Officer and the
Board of Directors (the "Board") and in compliance with all applicable laws and
the Company's Articles of Incorporation and Bylaws, and shall instruct and
require all those working with and under Employee to do the same. Employee's
employment hereunder shall be on a full-time basis and, except as permitted by
the prior written consent of the Board, Employee shall devote substantially all
of Employee's productive time, ability, and attention to the business of the
Company during the term of this Agreement. Unless otherwise consented to in
writing by Employee, Employee's permanent office location shall be in Orange
County, California.
3. COMPENSATION.
3.1 BASE SALARY. For Employee's services hereunder, the Company
shall initially pay the Employee an annual salary of $200,000 (the "Base
Salary"). The Base Salary shall be paid in accordance with the Company's normal
procedures for paying salaried employees.
3.2 BASE SALARY INCREASES. The Base Salary shall be increased
effective as of the first of January of each year (the "Adjustment Date").
<PAGE> 2
3.3 BONUSES. Employee shall receive a bonus for 1998 in the amount
of 15% of Employee's Base Salary. In the sole discretion of the Board or the
Executive Officers of the Company (the "Company's Management"), such bonus may
be increased. In subsequent years, no later than December 31st of each year,
Employee may receive discretionary bonuses, in the form of cash or property, as
determined by the Company's Management based on the earnings of the Company and
other criteria as determined by the Compensation Committee of the Board.
Employee's "target" for such discretionary bonuses shall, for purposes of
planning, be 25% of Employee's Base Salary. Any such bonuses shall be payable in
December or January, at the election of Employee.
3.4 TAXES. All amounts paid to Employee hereunder shall be subject
to the applicable withholding of social security, federal, state, and other
taxes and deductions as required by law.
4. BENEFITS.
4.1 GROUP MEDICAL, DISABILITY, AND LIFE INSURANCE BENEFITS. During
the Term, if any such plans are in effect, Employee shall be eligible to
participate and the premiums shall be paid by the Company, in any group medical,
disability, and life insurance program as provided generally for employees of
the Company.
4.2 VACATION. Employee shall be entitled to three weeks annual
vacation during the Term in accordance with the policies contained in the
Company's Corporate Employee Handbook. Time spent by Employee for required
classes or conferences for physician/executive certification will not be
considered vacation time for purposes of this Agreement.
4.3 RETIREMENT PLANS. During the Term, if any such plans are in
effect, Employee shall be included in and able to participate in any retirement,
pension, or other deferred or supplemental compensation plans operated by the
Company including without limitation, the Company's 401K plan.
4.4 STOCK OPTIONS. During the Term, Employee shall be eligible to
participate in any stock option plan instituted by the Company. Employee will
initially receive an option to purchase 30,000 shares of the common stock of
ARV, which option shall vest 20% per year beginning on the second anniversary of
this Agreement. The strike price for such initial option will be the market
closing price of the Company's stock as of the business day prior to the date
hereof.
5. BUSINESS EXPENSES AND REIMBURSEMENT.
5.1 BUSINESS EXPENSES. Employee shall be entitled to reimbursement
by the Company within ten (10) days following written request for any ordinary
and necessary business expenses incurred by Employee in the performance of
Employee's duties for an on behalf of the Company during the Term, including,
without limitation, the cost of entertainment, travel, lodging and meals. All
such written requests shall be deemed accepted and finally approved if the
Company does not contest any such request within sixty (60) days following
submittal to the Company.
5.2 REIMBURSEMENT. Employee agrees that, if at any time after
Employee's receipt of a business expense reimbursement payment, an appropriate
taxing authority makes an Adverse Determination (as defined herein), Employee
shall reimburse the Company for the amounts subject to the Adverse
Determination. For the purposes of this Section, an "Adverse Determination"
means any determination by a taxing authority (not successfully appealed to or
overturned by a court) that an expense reimbursed to Employee under Section 5.1
hereof was either not: (i) substantiated as required by Section 274 of the
Internal Revenue Code of 1986, as amended (the "Code") and the regulations
promulgated thereunder; or (ii) a bona fide business expense of the Company.
6. CONFIDENTIALITY. During the Term, Employee will have access to and
become acquainted with what Employee and the Company acknowledge are trade
secrets and other confidential information which are owned by the Company,
including, without limitation, any and all files, records, documents,
specifications, equipment, and similar items of or related to the Company, its
operations, and its business, whether prepared by Employee or otherwise coming
into Employee's possession (collectively, the "Information"). Employee shall not
disclose the Information, directly or indirectly, or use it in any way, during
the Term or thereafter except as required in the course of Employee's employment
with the Company.
<PAGE> 3
7. TERMINATION.
7.1 TERMINATION AT WILL.
7.1.1 BY THE COMPANY. Subject to Section 7.2 hereof, the Company
may terminate this Agreement at any time, for any reason, or for no reason,
either with or without cause, by delivering written notice to Employee.
7.1.2 BY EMPLOYEE. Subject to Section 7.2 hereof, Employee may
terminate this Agreement at any time, for any reason, or for no reason, either
with or without cause, by delivering thirty (30) day's prior written notice to
the Company; provided, however, that the Company may reduce such thirty (30) -
day period in its sole discretion.
7.2 SEVERANCE PAY.
7.2.1 TERMINATION BY THE COMPANY WITHOUT CAUSE. If the Company
terminates Employee without cause (as defined below), in addition to payment of
Employee's Base Salary, accrued vacation and reimbursable expenses through the
date of termination, the Company shall pay to Employee upon such termination a
lump-sum amount equal to the remaining amount of Base Salary that would be paid
to Employee if employment continued through the end of the initial two-year term
of this Agreement. For the purposes of this Section 7.2.1, termination "without
cause" shall include termination by the Company for any reason other than if (a)
Employee willfully breaches any material provision of this Agreement or
habitually neglects Employee's duties; or (b) Employee is convicted of a felony.
In addition, Employee shall be deemed to be terminated by the Company if
Employee's title, responsibilities are changed and such change reduces
Employee's responsibility, authority or supervisory abilities within the
Company.
7.2.2 VOLUNTARY TERMINATION BY EMPLOYEE. If Employee voluntarily
terminates Employee's employment with the Company, Employee shall not be
eligible to receive any severance pay as provided in Section 7.2.1 hereof.
Within ten (10) days following such termination, Employee shall be paid
Employee's Base Salary, accrued vacation and reimbursable expenses payable
through the date of the termination of Employee's employment. Termination by
Employee shall include the death or Disability (as defined herein) of Employee.
For the purposes of this Section, "Disability" shall mean any physical or mental
disability which causes Employee to be unable to substantially perform
Employee's normal duties as an employee of the Company; provided, however, that
Employee shall not be considered disabled until: (i) Employee has been so
disabled for one hundred eighty (180) days; (ii) Employee's attending physician
shall have furnished to the Company certification that the return of Employee to
his duties as an employee of the Company is impossible or improbable; and (iii)
Employee is determined to be totally disabled by the disability insurer then
insuring Employee, if any.
7.3 CHANGE IN CONTROL. Notwithstanding anything to the contrary
contained in Section 7.2 hereof, following a change in the ownership, or
effective control of the Company or in the ownership of a substantial portion of
the Company's assets (any one of which shall be referred to herein as "Change in
Control"), in the event Employee's employment is terminated either voluntarily
or involuntarily within three (3) months of the Change in Control, the Company
shall immediately pay to Employee the Base Salary, Employee's accrued vacation
and reimbursable expenses through the date of Change in Control, and an amount
equal to two times the Base Salary (the "Change in Control Bonus"); provided,
however, that, if applicable, the amount of the Change in Control Bonus shall be
reduced so that no portion of the Change in Control Bonus shall be deemed to be
an "excess parachute payment" under Section 280G of the Internal Revenue Code of
1986, as amended, or any replacement statute. The determination of the existence
of an "excess parachute payment" shall be made by the Company's independent
accountants who prepare and file the federal income tax returns for the Company.
The Company shall pay the expenses incurred by such accountants pursuant to this
Section. In addition, any options to purchase the common stock of the Company
previously granted to Employee and not otherwise vested shall be fully vested as
of the date of the Change in Control. For the purposes of this Section: (i)
"change in the ownership of the Company" shall mean the date that any person or
persons acting as a group, acquires ownership of the capital stock of the
Company and the acquired capital stock together with capital stock held by such
person or group, gives the acquiring person or group possession of more than
fifty percent (50%) of the total fair market value or the total voting power of
the capital stock of the Company; (ii) "change in effective control of the
Company" shall mean that either: (A) any one person, or more than one person
acting as a group, would acquire (or had acquired during the twelve (12) - month
period ending on the date of the most recent acquisition by such person or
persons) ownership of the capital stock of the Company possessing fifty percent
(50%) or more of the total voting power of the capital stock of the Company; or
(B) a majority of the members of the Board was replaced during any twelve (12) -
month period by directors whose appointment or election was not endorsed by a
majority of the members of the Board prior to the date of such appointment or
election; and (iii) "change in ownership of a substantial portion of the
Company's assets shall mean
<PAGE> 4
the date on which one person, or more than one person acting as a group, would
acquire (or had acquired during the twelve (12) - month period ending on the
date of the most recent acquisition by such person or persons) assets from the
Company that have a total fair market value equal to, or more than, thirty three
and one-third percent (33-1/3%) of the total fair market value of all of the
assets of the Company immediately prior to such acquisitions. All determinations
of the applicability of this Section shall be made consistent with the Proposed
Regulations Section 1.280G-1 promulgated by the Internal Revenue Service, or any
successor regulations.
7.4 Term. THIS AGREEMENT SHALL COMMENCE UPON THE DATE HEREOF AND
SHALL CONTINUE IN FORCE FOR A PERIOD OF TWO YEARS OR UNTIL EITHER EMPLOYEE OR
EMPLOYER SHALL NOTIFY THE OTHER OF TERMINATION OF EMPLOYMENT PURSUANT TO SECTION
7.1 HEREOF.
7.5 RETURN OF DOCUMENTS. Upon termination (voluntary or otherwise)
of this Agreement, Employee shall immediately deliver to the Company any and all
property, files, records and other documents in Employee's possession or under
Employee's control belonging to the Company, including all copies of such
documents and credit cards.
8. MISCELLANEOUS PROVISIONS.
8.1 NOTICES. Except as otherwise provided in this Agreement, all
notices, requests, demands, and other communications under this Agreement shall
be given in writing and shall be served either personally, by facsimile or
delivered by first class mail, registered or certified, postage prepaid, and
properly addressed as follows:
If to the Company: ARV Assisted Living, Inc.
245 Fischer Avenue, Bldg. D-1
Costa Mesa, CA 92626-3545
Attention: Board of Directors
Fax No. (714) 751-1743
If to Employee: Patricia J. Gifford, M.D.
Notices shall be deemed received at the earliest of the actual
receipt, confirmed facsimile or three (3) days following mailing.
8.2 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter contained
herein and supersedes all prior agreements, representations, and understandings
of the parties.
8.3 ATTORNEY'S FEES. In the event of any proceeding arising out of
or related to this Agreement, the prevailing party shall be entitled to recover
all of its costs and expenses incurred in connection with such proceeding,
including, without limitation, court costs and reasonable attorney's fees,
whether or not such proceeding is prosecuted to judgment.
8.4 AMENDMENTS. This Agreement may not be amended, supplemented,
canceled, or discharged except by written instrument executed by the parties
hereto.
8.5 WAIVERS. All waivers hereunder shall be in writing. No wavier by
any party hereto of any breach or anticipated breach of any provision of this
Agreement by any other party shall be deemed a waiver of any other
contemporaneous, preceding, or succeeding breach or anticipated breach, whether
or not similar, on the part of the same or any other party.
8.6 SEVERABILITY. In the event that any provision of this Agreement
shall be unenforceable or inoperative as a matter or law, the remaining portions
or provisions shall remain in full force and effect.
8.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
representatives, executors, administrators, successors, and assigns; provided,
however, that Employee may not assign any or all of his rights or duties
hereunder except following the prior written consent of the Company.
<PAGE> 5
8.8 COUNTERPARTS. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute one and the same Agreement.
8.9 SECTION HEADINGS. The section headings used in this Agreement
are inserted for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement.
8.10 GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with the laws of the State of California.
8.11 ADVICE OF COUNSEL. Employee acknowledges that Employee has been
advised to seek independent legal counsel for advice regarding the effect of the
terms and provisions hereof, and has either obtained such advice of independent
legal counsel, or has voluntarily and without compulsion elected to enter into
and be bound by the terms of this Agreement without such advice of independent
legal counsel.
8.12 ARBITRATION. Any dispute arising out of or related to this
Agreement shall be submitted to arbitration in Orange County, California, before
a sole arbitrator selected from Judicial Arbitration and Mediation Services,
Inc., Orange County, California, or its successor ("JAM"), or if JAMS is no
longer able to supply the arbitrator, such arbitrator shall be selected from the
American Arbitration Association, and shall be conducted in accordance with the
provisions of California Code of Civil Procedure Section 1280 et seq. as the
exclusive remedy of such dispute; provided, however, that provisional injunctive
relief may, but need not, be sought in a court of law while arbitration
proceeding are pending, and any provisional injunctive relief granted by such
court shall remain effective until the matter is finally determined by the
Arbitrator. Final resolution of any dispute through arbitration may include any
remedy or relief which the Arbitrator deems just and equitable, including
permanent injunctive relief or specific performance, or both, and the Arbitrator
is hereby empowered to award such relief. Any award or relief granted by the
Arbitrator hereunder shall be final and binding on the parties hereto and may be
enforced by any court of competent jurisdiction.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Employment Agreement as of the date first above written.
THE COMPANY
-----------
ARV ASSISTED LIVING, INC., a
Delaware corporation
By: /s/Howard G. Phanstiel
------------------------------------
Howard G. Phanstiel
Chairman and CEO
EMPLOYEE
--------
/s/Patricia J. Gifford, M.D.
----------------------------------------
Patricia J. Gifford, M.D.
<PAGE> 1
EXHIBIT 15
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Stockholders and Board of Directors
ARV Assisted Living, Inc.:
We have reviewed the condensed consolidated balance sheet of ARV Assisted
Living and subsidiaries as of June 30, 1998, and the related condensed
consolidated statements of operations and cash flows for the three-month and
six-month periods ended June 30, 1998 and 1997. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of ARV Assisted Living, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements
of operations, shareholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated March 24, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
KPMG Peat Marwick LLP
Orange County, California
August 14, 1998
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