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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
AMENDMENT NO 1 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
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, SUITE D-1
COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
----------------
Registrant's telephone number, including area code: (714) 751-7400
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------- -----------------------------------------
Common Stock, no par value American Stock Exchange
---------------
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of April 26, 2000, the aggregate market value of the voting stock
held by non-affiliates of registrant was $9,705,857 (for purposes of calculating
the preceding amount only, all directors, executive officers and shareholders
holding 5% or greater of the registrant's Common Stock are assumed to be
affiliates). The number of shares of Common Stock of the registrant outstanding
as of April 27, 2000 was 17,459,689.
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ARV ASSISTED LIVING, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K/A
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PAGE
----
PART III
Item 10: Directors and Executive Officers of the Registrant.............. 3
Item 11: Executive Compensation.......................................... 5
Item 12: Security Ownership of Certain Beneficial Owners and Management.. 13
Item 13: Certain Relationships and Related Transactions.................. 13
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K 15
2
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS
The following table sets forth certain information regarding the directors
of the Company as of April 27, 2000.
<TABLE>
<CAPTION>
YEAR FIRST BECAME
A DIRECTOR OF
NAME AGE POSITION THE COMPANY CLASS
---- --- -------- ----------- -----
<S> <C> <C> <C> <C>
Douglas M. Pasquale 45 President, Chief Executive Officer, 1998 A
Chairman
Jeffrey D. Koblentz 32 Director 2000 A
David Collins 61 Director 1985 B
John A. Moore 38 Director 1999 B
Maurice J. DeWald 60 Director 1995 C
</TABLE>
DOUGLAS M. PASQUALE. Mr. Pasquale was appointed Chief Executive Officer
of the Company on March 29, 1999 and elected Chairman of the Board on December
22, 1999. He joined us as President and Chief Operating Officer on June 1, 1998.
Prior to joining the Company, Mr. Pasquale was employed for 12 years by
Richfield Hospitality Services, Inc., and Regal Hotels International-North
America, a leading hotel ownership and hotel management company based in
Englewood, CO. He served as its President and Chief Executive Officer from 1996
to 1998 and as Chief Financial Officer from 1994 to 1996.
JEFFREY D. KOBLENTZ Mr. Koblentz is a Vice President of Lazard Freres
Real Estate Investors L.L.C. He joined Lazard in 1998 from Arthur Andersen LLP,
where he was a Manager in the Real Estate Services Group. Mr. Koblentz joined
Arthur Andersen in 1992.
DAVID P. COLLINS. Mr. Collins currently is President and Chief
Executive Officer of EuroSenior Living, Lisbon, Portugal. He served the Company
in several capacities between 1981 and 1999, last serving as President of ARV
Assisted Living International, Inc., our wholly owned subsidiary, from 1998 to
January 1999. From 1985 until January 1998, Mr. Collins served as the Senior
Executive Vice President of the Company, responsible for investor relations and
for capital formation for the Company and affiliated entities. He has served as
a Director of the Company continuously since 1985.
JOHN A. MOORE. Mr. Moore is a Principal of Lazard Freres Real Estate
Investors L.L.C. and its Chief Financial Officer. He joined Lazard in 1998 from
World Financial Properties, where he was Executive Vice President and Chief
Financial Officer from 1996. Previously, he worked with Olympia and York as
Senior Vice President, Finance. Mr. Moore joined Olympia and York in 1988.
MAURICE J. DeWALD. Mr. DeWald is Chairman and Chief Executive Officer
of Verity Financial Group, Inc., a firm he founded in 1992. He currently is an
incumbent director of ARV Assisted Living Inc. and a director of Tenet
Healthcare Corporation, Dai-Ichi Kangyo Bank of California and Monarch Funds.
INFORMATION ON COMMITTEES OF THE BOARD AND MEETINGS
The Board established a Compensation Committee and an Audit Committee
at or about the time of the initial public offering of our common stock in
October 1995. In addition, our Board has occasionally appointed special
committees of one or more directors to analyze and/or take action on items of
interest to the Board.
The Compensation Committee establishes salaries, incentives and other
forms of compensation for directors and executive officers, administers the
Stock Option and Incentive Plans (the "1995 Stock Option Plan" and the "1999
Stock Option Plan") and recommends policies relating to benefit plans. During
the year ended December 31, 1999, the Compensation Committee consisted of John
Rydzewski (resigned January 13, 1999), Maurice J. DeWald, Chairman, and Robert
Freeman (resigned September 29, 1999). The Compensation Committee met four times
during the year ended December 31, 1999 and at least two members were in
attendance at every meeting.
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The Audit Committee reviews our accounting practices, internal
accounting controls and financial results and oversees the engagement of our
independent auditors. The Audit Committee, during the year ended December 31,
1999, consisted of Maurice J. DeWald, R. Bruce Andrews (resigned January 12,
1999) and Murry Gunty (resigned September 29, 1999). The Audit Committee met one
time in the year ended December 31, 1999. As of May 15, 2000, the Audit
Committee consisted of Maurice J. DeWald, David P. Collins and John A. Moore.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
executive officers of the Company as of April 28, 2000. There are no
arrangements or understanding among these individuals relating to their election
as officers.
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Douglas M. Pasquale 45 President, Chief Executive Officer and
Chairman of the Board
Abdo H. Khoury 51 Senior Vice President, Chief Financial
Officer and Secretary
Robertson K. Chandler 44 Senior Vice President, Operations
Laura J. Loda 42 Senior Vice President, Human Resources and
Vice President Operations
For a description of Mr. Pasquale's background, see "Directors" above.
Biographical information for Mr. Khoury, Mr. Chandler, and Ms. Loda is provided
below:
ABDO H. KHOURY. Mr. Khoury was appointed Senior Vice President, Chief
Financial Officer and Secretary on March 30, 1999. Previously he had served the
Company as Vice President, Asset Strategy and Treasury, since January 1999, and
as President of the Apartment Division since coming to the Company in May 1997.
Mr. Khoury's prior background includes more than 25 years in accounting and real
estate. He was a principal with Financial Performance Group in Newport Beach,
CA, from 1991 to 1997.
ROBERTSON K. CHANDLER. Mr. Chandler was appointed Senior Vice
President, Operations, in February 1999. Previously he was Vice President of
Operations, Home Care and Hospice, with Mariner Specialty Health Services in
Longmont, CO, from 1997 to 1999. From 1993 to 1997, he was Chief Operating
Officer and a Director of Colorado Home Care, a home care agency headquartered
in Broomfield, CO.
LAURA J. LODA. Ms. Loda joined the Company as Vice President, Human
Resources in June 1998. She was promoted to Senior Vice President in February
1999. She became the Senior Vice President, Human Resources and Vice President,
Operations in December, 1999. Previously, she served as Director of Corporate
Human Resources for Taco Bell, an Irvine, CA-based fast food operation of Tricon
Global Restaurants from 1996 to 1998. From 1993 to 1996, Ms. Loda was Director
of Compensation for Gap, Inc., an international clothing chain based in San
Francisco. Prior, Ms. Loda worked for the Marriott Corporation for 13 years.
None of the directors or officers are related to each other by blood or
marriage and none of the directors or officers are involved in any legal
proceedings as described in Section 401(f) of Regulation S-K.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities (collectively, "Reporting
Persons"), to file reports on Forms 3, 4 and 5 of stock ownership and changes in
ownership with the Securities and Exchange Commission. Reporting Persons are
required to furnish the Company with copies of all forms that they file. Based
on the Company's review of copies of Forms 3, 4 and 5, and amendments thereto,
received by the Company for the year ended December 31, 1999, or written
representations from certain Reporting Persons that no Forms 5 were required to
be filed by those persons, the Company believes that during Fiscal 1999 all
filing requirements were complied with by the Reporting Persons, except that the
Form 4 required for Abdo H. Khoury was filed late due to administrative
oversight.
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ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Prior to January 28, 1998, non-employee directors received $12,000 as
an annual retainer, paid quarterly in advance, and $500 for each meeting of the
Board or committee of the Board that they attended. Commencing January 28, 1998,
the annual retainer was increased to $18,000 and the fee per meeting increased
to $1,000. In addition, an annual committee chairmanship fee of $3,000 was added
as of January 28, 1998.
In April 2000, the Company filed the 1999 Stock Option Plan, which Plan
was adopted at the last Annual Shareholder's Meeting. The 1999 Stock Option and
Incentive Plan replaced the 1995 Stock Option Plan. The 1999 Stock Option Plan
provides, among other things, that each non-employee director who is initially
elected or appointed to the Board will, upon such election or appointment,
automatically be granted an option to purchase 10,000 shares of Common Stock,
vesting at the rate of 2,500 shares per year measured from the date of grant, at
an exercise price equal to the fair market value of the Common Stock on the date
of grant. In addition, every fourth year following the date on which a
non-employee director is elected or appointed, on the date of the annual meeting
of the shareholders of the Company, if the person has continuously served as a
non-employee director, he or she will automatically receive an option to
purchase 10,000 shares of Common Stock, at an exercise price equal to the fair
market value of the Common Stock on the date of grant, vesting at the rate of
2,500 shares per year measured from the date of grant. As of January 28, 1998,
each non-employee director also, participates in a stock-based cash compensation
plan that is intended to provide compensation on a deferred basis and link the
directors' interests more directly with those of our stockholders. Under the
plan, 2,500 "stock units" (each stock unit is deemed to be equivalent to one
outstanding share of Common Stock) are credited on each January 1 to each
non-employee director who served as a non-employee director for the entire
preceding calendar year. Stock units are payable in cash based on the fair
market value of the Common Stock at the time the payment is triggered and are
fully vested at the time of crediting. Stock units become payable on the first
to occur of:
o three years after the date such stock units were first credited;
o a change of control of the Company, as defined by the Plan;
o the director is no longer serving as a member of our Board of Directors
(for any reason); or
o termination of the Plan.
In August 1999, Maurice DeWald received 5,600 shares of the Company's common
stock given as special compensation for extraordinary efforts during
1999. No other directors have any vested stock units.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to
compensation earned by the Chief Executive Officer and the four next most highly
compensated executive officers whose annual salary and bonus exceeded $100,000
(the "Named Executive Officers"), for the years ended December 31, 1999 and 1998
and the nine-month period ended December 31, 1997. In October 1997, the Company
changed its fiscal year end from March 31 to December 31. Accordingly, the
nine-month period ended December 31, 1997 (denoted below as 1997T) is the
transition period beginning April 1, 1997 and ending December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM ALL
NAME AND PRINCIPAL POSITION COMPENSATION OTHER
- --------------------------- ANNUAL COMPENSATION AWARDS COMPENSATION
---------------------------------------------- SECURITIES
YEAR SALARY(1) BONUS UNDERLYING OPTIONS (2)(3)(4)
------------ ---------------- -------------- ----------------------- --------------
<S> <C> <C> <C> <C> <C>
Douglas M. Pasquale 1999 345,833 210,000 550,000 13,837
Chairman, President and Chief 1998 175,000 137,500 150,000 4,586
Executive Officer 1997T -- -- -- --
Abdo H. Khoury 1999 196,250 70,951 250,000 10,854
Senior Vice President, Chief 1998 125,000 17,314 7,500 8,868
Financial Officer and Secretary 1997T 30,000 3,000 22,500 60,983
Patricia J. Gifford 1999 186,015 30,000 -- 44,769
Vice President, Chief Medical 1998 108,333 30,000 30,000 2,229
Officer (appointed June 12, 1998, 1997T -- -- -- --
resigned December 1, 1999)
Robertson K. Chandler 1999 153,461 44,650 175,000 7,118
Senior Vice President 1998 -- -- -- --
Operations 1997T -- -- -- --
(hired February 22, 1999)
Suzanne Shirley 1999 150,000 18,000 30,000 80,724
Vice President Investor 1998 105,192 -- -- --
Relations 1997T -- -- -- --
(hired April 20, 1998;
resigned February 29, 2000)
</TABLE>
- ------------
(1) Amounts shown include cash compensation earned by the executive
officers. The amounts do not include the value of certain perquisites
that in the aggregate did not exceed the lesser of either $50,000 or 10
percent of the total annual salary and bonus reported for the Named
Executive Officer.
(2) Includes amounts we paid for consulting fees to Mr. Khoury for services
in 1997 prior to his employment of $59,624.
(3) Includes premiums for term life, medical, dental and disability
insurance purchased for the benefit of certain of the Named Executive
Officers in the following amounts: Mr. Pasquale -- $12,421, $4,586, and
$0; Mr. Khoury -- $10,854, $8,868, and $1,359; Dr. Gifford--$9,769,
$2,229 and $0; for the years ended December 31, 1999 and 1998, and the
nine-month period ended December 31, 1997, respectively. And, Mr.
Chandler and Ms. Shirley for $7,118 and $5,724 for the year ended
December 31, 1999. These amounts represent insurance premiums we paid
over what we pay for other similarly situated employees.
(4) Includes payments and accruals in accordance with Separation Agreements
(see "-- Employment Agreements"): Ms. Shirley $75,000 and Dr. Gifford
$35,000.
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Option Grants in Last Fiscal Year.
The following table sets forth certain information regarding options
granted during the year ended December 31, 1999 to the Named Executive Officers
pursuant to the Stock Option Plans.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME GRANTED(1) FISCAL YEAR(2) PER SHARE DATE 5% 10%
- ---- --------------- ------------------ ------------ -------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Douglas M. Pasquale.... 250,000 14.3% $ 3.00 April 14, 2009 $1,221,671 $1,945,307
Douglas M. Pasquale.... 300,000 17.2% $1.625 December 20, 2009 794,086 1,264,449
Abdo H. Khoury......... 100,000 5.7% $ 3.00 April 14, 2009 488,668 778,123
Abdo H. Khoury......... 150,000 8.6% $1.625 December 20, 2009 397,043 632,225
Robertson K Chandler... 75,000 4.3% $ 3.00 April 14, 2009 366,501 583,592
Robertson K. Chandler.. 100,000 5.7% $1.625 December 20, 2009 264,695 421,483
Laura Loda............. 50,000 2.9% $ 3.00 Apri 14, 2009 244,334 389,061
Laura Loda............. 100,000 5.7% $1.625 December 20,2009 264,695 421,483
</TABLE>
- ------------
(1) These options were granted for a term of 10 years, subject to
termination in certain events related to termination of employment, and
become exercisable in three annual installments beginning in 2000.
Options included in the December 20, 1999 grants for 100,000, 50,000,
33,333 and 33,333 to Mr. Pasquale, Mr. Khoury, Mr. Chandler and Ms.
Loda, respectively, have three year vesting schedules such that on the
first day of the quarter immediately following the Company achieving a
positive cash flow and profitability the option will begin vesting, but
in no case will vesting begin later than December 20, 2004.
(2) In 1999, we granted options to employees to purchase an aggregate of
1,745,000 shares under the Stock Option Plans and this number was used
in calculating the percentage set forth in this column. During 1999,
options to purchase 937,750 shares under the Stock Option Plans were
canceled due to termination of employment.
(3) Assumed rates of stock price appreciation are calculated based on
requirements promulgated by the Securities and Exchange Commission and
are for illustrative purposes only. Actual stock prices will vary from
time to time based upon market factors and our financial performance.
There can be no assurance that the assumed rates of appreciation will
be achieved.
Aggregated Option Exercises and Fiscal Year-End Option Values.
None of the Named Executive Officers exercised options during the year
ended December 31, 1999. The following table sets forth certain information
regarding options held as of the end of such fiscal year by the Named Executive
Officers who held no options at the end of such fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ON VALUE ---------------------------------------- ---------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ----------- ------------------- ------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Douglas M. Pasquale -- -- -- 700,000 -- --
Abdo H. Khoury -- -- -- 280,000 -- --
Robertson K. Chandler -- -- -- 175,000 -- --
Laura Loda -- -- -- 150,000 -- --
</TABLE>
(1) Options are "in-the-money" if the fair market value of the underlying
securities on that date exceeds the exercise price of the option. Based
on the last sale price of $1.50 per share of Common Stock on December
31, 1999 (as reported on the American Stock Exchange), none of the
options held by the Named Executive Officers were "in the money" at
year end.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee consisted of John J. Rydzewski, Robert P.
Freeman and Maurice J. DeWald, who were members of our Board for the fiscal year
1999. Mr. Rydzewski resigned as a member of our Board and the Compensation
Committee as of January 13, 1999 and Mr. Freeman resigned from our Board and the
Compensation Committee as of September 29, 1999. Mr. John Moore and Mr. David
Collins were appointed to the Compensation Committee as of September 29, 1999.
No member of the Compensation Committee is or was an officer of employee of ARV
during 1999.
Employment Agreements.
We have entered into employment agreements with each of the Named
Executive Officers.
Mr. Pasquale's employment agreement requires Mr. Pasquale to devote his
full productive time to the Company during the term of the Agreement, except as
otherwise permitted by the consent of the Board of Directors. Mr. Pasquale's
employment agreement
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provides for a base salary, performance-based increases in the base salary each
year beginning in 1999, a guaranteed bonus of 37.5% of his base salary, and
additional bonuses based on the achievement of agreed-upon targets. Mr. Pasquale
was granted an option to purchase 150,000 shares of Common Stock upon the
execution of his employment agreement. Mr. Pasquale's employment agreement was
renegotiated in light of his promotion to Chief Executive Officer and he was
granted an option to purchase 250,000 shares of Common Stock at an exercise
price of $3.00 per share. On December 20, 1999, Mr. Pasquale was granted an
option to purchase 300,000 shares of Common Stock with an exercise price of
$1.625 per share. Beginning December 20, 2000, 200,000 of these options vest on
a three year schedule and the remaining 100,000 options begin a three year
vesting on the first day of the quarter immediately following the Company
achieving a positive cash flow and profitability, but in no case will vesting
begin later than December 20, 2004. Mr. Pasquale's employment agreement provides
that we may terminate Mr. Pasquale without cause by making him a payment equal
to the greater of:
o three times the sum of his current annual base salary plus target
bonus, plus any additional bonus paid in the last 12 months; plus
o the sum of his current annual base salary plus his minimum bonus
divided by 12 and multiplied by the number of remaining months under
the employment agreement; plus
o the payment of premiums for COBRA benefits for the maximum period of
eligibility and the payment of certain other miscellaneous amounts;
plus
o Mr. Pasquale's stock options would fully vest.
The agreement further provides that if Mr. Pasquale voluntarily
terminates his employment, he will receive a lump-sum payment equal to three
months' base salary. The covenant not to compete is not applicable, however, in
the event severance pay is waived by Mr. Pasquale.
Mr. Khoury's employment agreement requires Mr. Khoury to devote his
full productive time to the Company during the term of the Agreement, except as
otherwise permitted by the consent of the President and/or Chief Executive
Officer and the Board of Directors. Under Mr. Khoury's agreement, his base
salary may be increased effective each January 1st, commencing in 2000, based on
his and the Company's performance results and his annual performance and salary
review. Mr. Khoury may also receive an annual discretionary bonus determined by
the Board based on the Company's earnings and other criteria as may be
determined by the Compensation Committee. The target established by the Company
for this bonus is 35% of his base salary. Mr. Khoury may also receive certain
bonuses based upon the sale of certain assets of the Company's apartment
division. If the Company terminates Mr. Khoury other than for cause, the Company
is required to pay Mr. Khoury the following amounts:
o his accrued base salary;
o his accrued vacation pay;
o his bonus, if any, for the calendar year ending before the date of
termination (if not yet paid);
o one year's current base salary; and
o certain other miscellaneous amounts.
If the Company requires Mr. Khoury to change the location of his
employment to a location outside Orange County, California, Mr. Khoury has the
right to treat such requirement as termination without cause. Pursuant to his
employment agreement Mr. Khoury was granted options to purchase 100,000 shares
of Common Stock at an exercise price of $3.00 per share on April 14, 1999.
Additionally, on December 20, 1999 Mr. Khoury was granted options to purchase
150,000 shares of Common Stock at an exercise price of $ 1.625 per share.
Beginning December 20, 2000, 100,000 of these options vest on a three year
schedule and the remaining 50,000 options begin a three year vesting on the
first day of the quarter immediately following the Company achieving a positive
cash flow and profitability, but in no case will vesting begin later than
December 20, 2004.
Mr. Chandler's employment agreement requires Mr. Chandler to devote his
full productive time to the Company during the term of the Agreement, except as
otherwise permitted by the consent of the President and/or Chief Executive
Officer and the Board of Directors. Under Mr. Chandler's agreement, his base
salary may be increased effective each January 1st, commencing in 2000, based on
his and the Company's performance results and his annual performance and salary
review. Mr. Chandler may also receive an annual discretionary bonus determined
by the Board based on the Company's earnings and other criteria as may be
determined by the Compensation Committee. The target established by the Company
for this bonus is 30% of his base salary. If the Company terminates Mr. Chandler
other than for cause, the Company is required to pay Mr. Chandler the following
amounts:
o his accrued base salary;
o his accrued vacation pay;
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o his bonus, if any, for the calendar year ending before the date of
termination (if not yet paid);
o one year's current base salary; and
o certain other miscellaneous amounts.
If the Company requires Mr. Chandler to change the location of his
employment to a location outside Orange County, California, Mr. Chandler has the
right to treat such requirement as termination without cause. Pursuant to his
employment agreement Mr. Chandler was granted options to purchase 75,000 shares
of Common Stock at an exercise price of $3.00 per share on April 14, 1999.
Additionally, on December 20, 1999 Mr. Chandler was granted options to purchase
100,000 shares of Common Stock at an exercise price of $ 1.625 per share.
Beginning December 20, 2000 for 66,667 of these options and the remaining 33,333
options begin a three year vesting the first day of the quarter immediately
following the Company achieving a positive cash flow and profitability, but no
later than December 20, 2004.
Change in Control Arrangements
To better assure that the Named Executive Officers would continue to provide
independent leadership consistent with our best interests in the event of an
actual or threatened change of control of the Company, the employment agreement
of each of the Named Executive Officers provides certain protections in the
event of a change in control. For Mr. Khoury and Mr. Chandler, a "change in
control" is defined to include the following events:
o Change in Ownership of the Company: for Mr. Khoury and Mr. Chandler,
the date that any person or group acquires ownership of 50% or more
of the voting power of the Company's outstanding voting securities;
o Change in Effective Control of the Company: either (a) a person or
group acquires ownership of capital stock of the Company possessing
50% or more of the total voting power of the Company's capital stock
or (b) a majority of the members of the Board are replaced during
any 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
o Change in Ownership of a Substantial Portion of the Company's
Assets: the date on which any person or group acquires assets from
the Company that have a total fair market value equal to or greater
than 33-1/3% of the total fair market value of all of the Company's
assets immediately prior to such acquisition.
Following a change in control, if Mr. Khoury or Mr. Chandler terminates
their employment with the Company for any reason within the period beginning six
months after the change in control and ending nine months after the change of
control, or if their employment is terminated by the Company (with or without
cause) within nine months after the change in control, the Company is required
to pay the sum of the following amounts:
o their respective accrued base salary;
o their respective accrued vacation pay;
o their respective bonus, if any, for the calendar year ending prior
to the date of termination (if not yet paid);
o a salary payment equal to one and one-half times their base salary
if they terminated their employment, or two times their base salary
if the Company terminated their employment; and
o certain other miscellaneous payments.
In addition, as of the date of the change in control, their stock options become
fully vested, regardless of whether they remain employed by the Company.
Mr. Pasquale's employment agreement also provides for certain
protections in the event of a change in control. Mr. Pasquale's employment
agreement defines a "change in control" as any of the following:
o the acquisition by any person or group of greater than 50% of the
combined voting power of our outstanding voting securities;
o the acquisition by any person other than Prometheus Assisted Living
LLC, an affiliate of Lazard Freres Real Estate Investors, LLC, of
greater than 20% of our outstanding voting securities; or
o the replacement of a majority of the members of the Board during any
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; or
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o the date on which any person acquired assets from us that have total
fair market value equal to or more than 33 1/3% of the total fair
market value of all of our assets.
Following a change in control, if Mr. Pasquale terminates his
employment for any reason within the period beginning six months after the
change in control and ending 12 months after the change of control, or if his
employment is terminated by the Company (with or without cause) at any time
during the 12-month period following the change in control, then the Company is
required to pay him three times the sum of his base salary and target bonus, in
addition to certain other miscellaneous payments. In addition, as of the date of
the change in control, his stock options become fully vested, regardless of
whether he remains employed by the Company.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Decisions regarding compensation of our executive officers, including
those related to stock and stock options, are considered by the Compensation
Committee, based upon the recommendations and analysis performed by our senior
management. The Compensation Committee (the "Committee") is currently composed
of Maurice J. DeWald, John Moore and David Collins. Maurice J. DeWald has
chaired the committee since January 12, 1999.
Fiscal 1999 Executive Compensation Components
Executive compensation consists of three components: base salary, bonus and
long-term incentive awards.
BASE SALARY. Base salaries for the Named Executive Officers were established in
their respective employment contracts, resulting in payment, during Fiscal 1999
of $345,833, $196,250, $186,015, $153,461, and $150,000 to Mr. Pasquale, Mr.
Khoury, Dr. Gifford (resigned December 1, 1999), Robertson K. Chandler and
Suzanne Shirley (resigned February 29, 2000) respectively. The salaries of all
Named Executive Officers are subject to performance-based increases in each
year.
BONUS. Mr. Pasquale is entitled to a guaranteed bonus of $131,250 and additional
bonuses based on achievement of agreed-upon targets up to a maximum of $315,000.
Regarding the remaining Named Executive Officers, for the fiscal year
1999, bonuses were awarded at the discretion of management, subject to the
approval of the Committee. Bonuses of $70,951 and $44,650 were paid to Mr.
Khoury and Mr. Chandler, respectively in recognition of performance in 1999.
LONG TERM INCENTIVE AWARDS. Stock options are granted to provide a long-term
incentive opportunity that is directly linked to shareholder value. Douglas M.
Pasquale was awarded 250,000 options to purchase common stock on April 14, 1999.
The exercise price per share is $3.00 and the option becomes exercisable in
three equal annual increments on April 14, 2000, 2001, and 2002, respectively.
On December 20, 1999, Mr. Pasquale, Mr. Khoury, Mr. Chandler and Ms. Loda were
awarded 300,000,150,000, 100,000 and 100,000, respectively, options to purchase
common stock at an exercise price of $1.625 with 2/3 of the grant amount having
a three year vesting schedule beginning December 20, 2000 and the remaining 1/3
with a three year vesting schedule that begins on the first day of the quarter
immediately following the Company achieving a positive cash flow and
profitability, but not later than December 20, 2004.
In the fiscal year 1999, we granted 1,745,000 stock options to 18
employees, 3 of whom were hired in that period.
Policy with Respect to Section 162(m)
Section 162(m) of the Code includes potential limitations on the
deductibility for federal income tax purposes of compensation in excess of $1
million paid or accrued with respect to any of the executive officers whose
compensation is required to be reported in the Company's proxy statement.
Qualifying performance-based compensation is not subject to the deduction limit
if certain requirements are met. For the fiscal year 1999, the Committee does
not contemplate that there will be any such nondeductible compensation.
Additional information concerning the salary, bonus and stock awards
for the Company's Named Executive Officers can be found in the tables appearing
under "Executive Compensation."
THE COMPENSATION COMMITTEE
MAURICE J. DEWALD, CHAIRMAN
10
<PAGE> 11
PERFORMANCE GRAPH
The following line graph compares the yearly percentage change in the
cumulative total stockholder return on the Common Stock against the cumulative
total return of a peer group of nine assisted living companies selected by the
Company (the "Peer Group") and the AMEX Market Value Index, each for the period
from October 19, 1995 to December 31, 1999. The performance graph assumes the
investment of $100 on October 19, 1995 in the Common Stock and in each index
(except the AMEX Market Value Index, which assumes investment on September 30,
1995), and that all dividends were reinvested.
The Peer Group consists of Alternative Living Services, Inc.; Assisted
Living Concepts, Inc.; Carematrix Corporation; Greenbriar Corporation; Emeritus
Corporation; Just Like Home, Inc.; Karrington Health, Inc.; Regent Assisted
Living, Inc.; and Sunrise Assisted Living, Inc. All of the companies in the Peer
Group are weighted by their respective market capitalization. Atria Communities,
Inc. was deleted from the Peer Group in 1998 because it became a private
company. In 1999 Karrington Health, Inc. merged with Sunrise Assisted Living,
Inc. we included the combined company in the Peer Group.
COMPARISON OF 51 MONTH CUMULATIVE TOTAL RETURN*
AMONG ARV ASSISTED LIVING INC., THE AMEX MARKET VALUE INDEX AND PEER GROUP
[GRAPHIC]
<TABLE>
<CAPTION>
PEER GROUP CUMULATIVE RETURN WEIGHTED CUMULATIVE TOTAL RETURN
- ---------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
(WEIGHTED AVERAGE BY MARKET VALUE) 10/19/95 3/96 3/97 12/97 12/98 12/99
ARV Assisted Living, Inc. 100 121 70 114 44 11
Peer Group Weighted Average 100 115 84 125 129 31
AMEX Market Value 100 105 107 130 132 229
</TABLE>
- ------------
o $100 INVESTED ON 10/19/95 IN STOCK OR 9/30/95 IN INDEX -- INCLUDING
REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of April 26, 2000 (based on a total of
17,459,689 outstanding shares of Common Stock) by each of our directors, each of
the Named Executive Officers and all executive officers and directors as a
group. Except as otherwise indicated, we believe the persons named in the table
have sole voting and investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
11
<PAGE> 12
Amounts and percentages listed below include warrants and options that
are exercisable within 60 days of April 26, 2000.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
OF BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP PERCENTAGE OF CLASS
--------------------------------------- --------- -------------------
<S> <C> <C>
Prometheus Assisted Living LLC(2)..................... 7,595,069 43.5%
John A. Moore(2)...................................... - *
Jeffrey Koblentz(2)................................... - *
Douglas M. Pasquale(3)................................ 131,134 *
David P. Collins(4)................................... 525,745 3.0%
Maurice J. DeWald(5).................................. 16,600 *
Abdo H. Khoury(6)..................................... 48,209 *
Laura Loda(7)......................................... 19,667 *
Robertson K. Chandler(8).............................. 25,000 *
All directors and executive officers as a group (13
persons).............................................. 8,361,524 47.9%
</TABLE>
- ----------
* Less than 1%.
(1) Except where otherwise noted, the address of the Company's directors
and executive officers is c/o ARV Assisted Living, Inc., 245 Fischer
Avenue, Costa Mesa, California 92626.
(2) Messrs. Moore and Koblentz are Principals of LFREI, the managing member
of Prometheus. Mr. Moore is the Chief Financial Officer of LFREI.
(3) Of the 131,134 shares beneficially owned by Mr. Pasquale, 9,800 are
held in his name and 121,334 are options exercisable within 60 days of
April 26, 2000.
(4) Of the 524,745 shares beneficially owned by Mr. Collins, 98,678 are
held of record by the D & V Collins Family Limited Partnership (as to
which Mr. Collins has shared voting and investment power), 416,008
shares are held by the Collins Family Community Property Trust (as to
which Mr. Collins has shared voting and investment power), 8,559 shares
are held by Mr. Collins IRA and 2,500 are options exercisable within 60
days of April 26, 2000.
(5) Of the 16,600 shares beneficially owned by Mr. DeWald, as a
non-employee director, 6,600 are held in his name and 10,000 are
options exercisable within 60 days of April 26, 2000.
(6) Of the 48,209 shares beneficially owned by Mr. Khoury, 13,000 are held
in his name and 35,209 are options exercisable within 60 days of April
26, 2000.
(7) Of the 19,667 shares beneficially owned by Ms. Loda, 3,000 are held in
her name and 16,667 are options exercisable within 60 days of April 26,
2000.
(8) Of the 25,000 shares beneficially owned by Mr. Chandler, 25,000 are
options exercisable within 60 days of April 26, 2000.
12
<PAGE> 13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of April 27, 2000, the following persons are known to the Company to be
the beneficial owners of more than five percent of the Company's Common
Stock. The numbers shown on the table should be interpreted in light of the
related footnote.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS(4)
- -------------- ------------------------------------ -------------------- -------------------
<S> <C> <C> <C>
Common Prometheus Assisted Living LLC(1) 7,595,069 43.5%
Thirty Rockefeller Plaza, 63rd Floor
New York, NY 10020
Common Dimensional Fund Advisors Inc.(2) 1,002,600 5.74%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Common Wellington Management Company LLP(3) 957,100 5.48%
75 State Street
Boston, MA 02109
</TABLE>
- ----------
(1) According to the Schedule 13D/A filed on February 14, 2000 by
Prometheus Assisted Living LLC. LF Strategic Realty Investors II L.P.
and LFSRI II CADIM Alternative Partnership L.P. also have voting and
dispositive power over the shares held by Prometheus Assisted Living
LLC.
(2) According to Schedule 13G filed on February 3, 2000 by Dimensional Fund
Advisors, Inc.
(3) According to Schedule 13F filed on March 31, 1999 by Wellington
Management Company LLP.
(4) Based on 17,459,689 shares of Common Stock issued and outstanding as of
April 27, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We utilize the services of J&D Design, as well as others, for interior
design work at our communities. The principal of J&D Design is Joan Davidson,
wife of former Senior Vice President Eric Davidson and daughter-in-law of the
former Chairman, President and Chief Executive Officer, Gary Davidson. Services
provided by J&D Design include design work and the purchase of furniture,
fixtures and equipment ("FF&E") for developed assisted living communities and
rehabilitation of existing or newly acquired assisted living communities. We
paid J&D Design approximately $13,000, $560,000, and $755,000 for the years
ended December 31, 1999 and 1998 and the nine-month period ended December 31,
1997, respectively, a portion of which was for design services and a portion of
which was for reimbursement of costs for FF&E.
Mr. R. Bruce Andrews, a former member of our Board of Directors, is
President of Nationwide Health Properties, Inc. ("NHP"), a Health Care REIT. NHP
is the owner of 16 assisted living communities that are leased to the Company.
Of that number, leases for 13 assisted living communities were entered into
prior to November 29, 1995, the date Mr. Andrews became a Board member, and
leases for three assisted living communities were entered into during Mr.
Andrews' tenure as Board member. Lease expenses have aggregated approximately
$12.0 million, $11.3 million, and $8.2 million for the years ended December 31,
1999 and 1998, and the nine-month period ended December 31, 1997, respectively.
On September 29, 1999 Prometheus Assisted Living, LLC ("Prometheus")
and certain of its affiliates agreed to settle all outstanding legal actions
with us and accept a promissory note for $1.5 million as full satisfaction of
its claims, $0.4 million of which has been recorded as additional private
placement costs. This note will bear interest beginning on April 1, 2001 at a
rate equal to the 30 day Treasury bill rate quoted by the Wall Street Journal.
Interest payments will be made on the first day of each month beginning on May
1, 2001 and continue until maturity of the note on April 1, 2002. In the event
of default, the note is immediately due and payable and interest shall accrue at
a rate that is 4% above the interest rate otherwise in effect. Because the note
payable is non-interest bearing, a 12% imputed interest discount was used in
recording the obligation. We have the right at any time to prepay the Note in
whole or in part. Any time prior to November 1, 1999 the prepayment price is
equal to 91% of the aggregate principal balance. Such prepayment price shall
increase by 0.5% of the aggregate principal amount of the Note on the 10th day
of each month thereafter until April 1, 2002.
13
<PAGE> 14
The agreement settled all outstanding litigation between us and LFREI
and provided mutual release of certain claims that we and Prometheus may have
had against each other. Pursuant to the settlement agreement, we withdrew our
appeal of the decision issued on May 12, 1999 by the Superior Court of the State
of California, County of Orange. Prometheus dismissed the lawsuit it filed
against us and two of our former directors in the Delaware Chancery Court. As
part of the settlement agreement, the board of directors was reduced to five
persons. Murry N. Gunty, John A. Booty and Robert P. Freeman resigned from the
board.
On April 24, 2000, the Company entered into a Term Loan Agreement with
LFSRI II Assisted Living LLC ("LFSRI"), an affiliate of Prometheus. As of April
27, 2000, Prometheus beneficially owned approximately 43.5% of the Company's
outstanding Common Stock. Pursuant to the term Loan Agreement, the Company may
borrow up to $10,000,000 from LFSRI with a maturity date of April 24, 2002,
which, subject to certain condition, may be extended by one year if no default
has occurred. The outstanding amount under the loan will bear interest at the
annual rate equal to the LIBOR rate for each interest period plus a 10% margin.
In connection with the Term Loan Agreement, the Company issued to LFSRI a
warrant to purchase up to 750,000 share of the company's Common Stock at a price
of $3.00 per share, subject to various adjustments, exercisable until April 24,
2005. The Company also amended its stockholder rights agreement to prevent
shares that Prometheus may be deemed to beneficially own by reason of LFSRI's
rights under the warrant from causing Prometheus to become an "Acquiring Person"
and thus causing a triggering event under the rights agreement.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statement Schedules. None
(b) Reports on Form 8-K. None.
(c) Exhibits: None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, as amended, 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/ DOUGLAS M. PASQUALE
-------------------------------------------
Douglas M. Pasquale
Chairman of the Board, President and
Chief Executive Officer
Date: April 28, 2000
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DOUGLAS M. PASQUALE Chairman of the Board, President and Chief April 28, 2000
- ------------------------- Executive Officer (Principal Executive Officer)
Douglas M. Pasquale
/s/ ABDO H. KHOURY Senior Vice President and Chief Financial Officer April 28, 2000
- ------------------------- (Principal Financial & Accounting Officer)
Abdo H. Khoury
/s/ JOHN A. MOORE Director April 28, 2000
- -------------------------
John A. Moore
/s/ DAVID P. COLLINS Director April 28, 2000
- -------------------------
David P. Collins
/s/ MAURICE J. DEWALD Director April 28, 2000
- -------------------------
Maurice J. DeWald
/s/ JEFFREY KOBLENTZ Director April 28, 2000
- -------------------------
Jeffery Koblentz
</TABLE>
15
