-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WzIGd6y16ofTm1r8Dt1str+n3ILNASNjrWBgqVw3X0lAoCHA8VR1u+g7Z6f4UPNN yOHEHQsKQDmLQ6sm291wdA== 0000892569-98-002377.txt : 19980817 0000892569-98-002377.hdr.sgml : 19980817 ACCESSION NUMBER: 0000892569-98-002377 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARV ASSISTED LIVING INC CENTRAL INDEX KEY: 0000949322 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 330160968 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26980 FILM NUMBER: 98691622 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE STREET 2: SUITE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 1: 245 FISCHER AVENUE STREET 2: SUITE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 10-Q 1 FORM 10-Q PERIOD ENDED JUNE 30, 1998 1 =============================================================================== 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. =============================================================================== 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) ASSETS
JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ 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 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 2 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)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------- ----------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ---------- 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 ======== ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial statements. 3 4 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 1998 1997 -------- -------- 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 $ -- ======== =======
See accompanying notes to unaudited condensed consolidated financial statements. 4 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 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 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 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):
FOR THE THREE MONTHS FOR THE SIX ENDED MONTHS ENDED JUNE 30, 1998 JUNE 30, 1998 ------------- ------------- Revenues...................................... $32,333 $63,413 Net loss...................................... (4,248) (6,843) Basic and diluted loss per common share....... $ (0.27) $ (0.43)
8 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 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 11
ANTICIPATED ANTICIPATED LOCATION # OF UNITS OPENING -------- ----------- ----------- The Lakes Fort Myers, FL 148 4th Quarter 1998 Sutton Terrace Las Vegas, NV 142 4th Quarter 1998 --- Total units under construction 290 ===
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)
JUNE 30, ---------------- 1998 1997 ------- ------- 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 ======= =======
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 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 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)
JUNE 30, ---------------- 1998 1997 ------- ------- 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 ======= =======
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 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 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 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 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 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 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 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 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. EX-4 2 RIGHTS AGREEMENT DATED MAY 14, 1998 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 =============================================================================== 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 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 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 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 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 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 6 8 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. 7 9 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 8 10 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 9 11 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 10 12 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 11 13 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 12 14 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 13 15 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 14 16 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. 15 17 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 16 18 (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 17 19 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. 18 20 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. 19 21 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 20 22 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 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 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 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. 24 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 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). 26 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 C-2 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 EX-10.10 3 EXECUTIVE EMPLOYMENT AGREEMNT - HOWARD PHANSSTIEL 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 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 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 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 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. 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. 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. 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 EX-10.11 4 AMENDEMENT TO EMPLOYMENT AGRMT - HOWARD PHANSTIEL 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. 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 EX-10.12 5 EXECUTIVE EMPLOYMENT AGREEMENT - DOUGLAS PASQUALE 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. 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, 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 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 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 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 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. 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. 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. 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 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 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. EX-10.13 6 EMPLOYMENT AGREEMENT - PATRICIA J. GIFFORD M.D. 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"). 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. 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 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. 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. EX-15 7 INDEPENDENT ACCOUNTANTS REVIEW REPORT 8/13/98 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 15,760 0 0 0 0 34,732 181,942 11,770 234,581 25,800 0 0 0 143,286 (38,970) 234,581 0 31,104 0 33,970 0 0 1,543 (4,409) 36 (4,445) 0 0 0 (4,445) (.28) (.28)
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