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EXHIBIT 1
COMPENSATION OF DIRECTORS
Non-employee directors receive $12,000 per year, paid quarterly in advance,
and $500 for each meeting of the Board or committee of the Board that they
attend. John J. Rydzewski served as Chairman of the Board of the Company from
October 1997 to December 1997 and received $18,750 for his services in such
capacity. In October 1995, the Company established the 1995 Stock Option Plan
which provides, among other things, that each non-employee director who is
initially elected or appointed to the Board will, upon such election or
appointment, be automatically granted an option to purchase 10,000 shares of
Common Stock, vesting at the rate of 2,500 per year measured from the date of
grant, at an exercise price equal to the fair market value of the Common Stock
on the date of grant. In addition, every fourth year following the date on which
such non-employee director is elected or appointed, on the date of the annual
meeting of the shareholders of the Company, if such person has continuously
served as a non-employee director, such non-employee director shall
automatically receive an option to purchase 10,000 shares of Common Stock, at an
exercise price equal to the fair market value of the Common Stock on the date of
grant, vesting at the rate of 2,500 per year measured from the date of grant.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to
compensation paid by the Company in the fiscal years ended 1997, 1996 and 1995
to the Company's Chief Executive Officer during fiscal 1997 and the Company's
four next most highly compensated executive officers as of March 31, 1997 whose
annual salary and bonus exceeded $100,000 and John A. Booty, who resigned as
President effective as of September 30, 1996 (the "Named Executive Officers").
LONG-TERM
ANNUAL COMPENSATION COMPENSATION OTHER
NAME AND -------------------------- AWARDS OF COMPENSATION
PRINCIPAL POSITION YEAR SALARY BONUS STOCK OPTIONS(1) (2)(3)(4)
--------------------------------- ---- -------- -------- ---------------- ------------
Gary L. Davidson,................ 1997 $272,414 $ 84,634 10,000(5) $ 8,483
former Chairman, CEO and 1996 263,100 140,785 101,085(5) 15,476
President (retired October 13, 1995 250,250 148,575 -- 49,918
1997)
John A. Booty,................... 1997 136,207 50,582 -- 6,426
Interim President(6) 1996 263,100 140,785 33,695 13,274
1995 250,250 148,575 -- 49,918
David P. Collins................. 1997 204,791 63,329 10,000 3,474
Senior Executive Vice 1996 186,132 120,062 59,539 3,971
President 1995 229,968 70,043 -- 33,608
Graham P. Espley-Jones,.......... 1997 193,882 -- 10,000 7,226
Executive Vice President and 1996 166,000 33,000 33,618 12,485
Chief Financial Officer 1995 135,500 56,610 -- 33,228
Sheila M. Muldoon,............... 1997 156,981 7,000 20,000 2,624
Vice President, General 1996 112,000 21,500 10,000 --
Counsel and Secretary(7) 1995 51,667 3,000 -- --
Eric K. Davidson,................ 1997 132,230 4,500 20,000 5,741
Senior Vice President(8) 1996 96,667 20,000 30,655 5,827
1995 75,141 -- -- 8,677
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(1) Options have been granted to certain of the Named Executive Officers as more
fully described in "-- Option Grants in Last Fiscal Year" below.
(2) Includes consulting fees from ARV Management, Inc. and ARV Housing Partners,
Inc., former subsidiaries of the Company. Both subsidiaries have been merged
into the Company and all compensation from them were discontinued as of
fiscal 1996. Fees paid by ARV Management, Inc. to the Named Executive
Officers in fiscal year 1995 are as follows: Mr. Gary Davidson -- $30,720;
Mr. Booty -- $30,720; Mr. Collins -- $18,360; and Mr.
Espley-Jones -- $23,000. Fees paid by ARV Housing Partners, Inc. to the
Named Executive Officers in fiscal year 1996 are as follows: Mr. Gary
Davidson -- $6,475; Mr. Booty -- $6,475 and Mr. Espley-Jones -- $11,000.
(3) Also includes premiums for term life, medical, dental and disability
insurance purchased for the benefit of certain of the Named Executive
Officers in the following amounts: Mr. Gary Davidson -- $8,483, $9,001 and
$3,248; Mr. Booty -- $6,426, $6,799 and $3,248; Mr. Collins -- $3,474,
$3,971 and $3,248;
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Mr. Espley-Jones -- $7,226, $7,485 and $2,948; and Mr. Eric
Davidson -- $5,741, $5,827 and $5,785 for the fiscal years ended March 31,
1997, 1996 and 1995, respectively and $2,624 for fiscal year ended March 31,
1997 for Ms. Muldoon. These amounts represent insurance premiums paid by the
Company beyond what it pays for other similarly situated employees.
(4) Also includes contributions made by the Company or affiliates under the
Company's ESOP for the fiscal year ended March 31, 1995 in the following
amounts: Mr. Gary Davidson -- $15,950; Mr. Booty -- $15,950; Mr.
Collins -- $12,000; Mr. Espley-Jones -- $7,280; and Mr. Eric
Davidson -- $2,892. There were no contributions made in the fiscal years
ended March 31, 1997 and 1996.
(5) As of the date of Mr. Gary Davidson's resignation as President and Chief
Executive Officer of the Company in October 1997, options granted to Mr.
Gary Davidson in fiscal 1996 covering 33,695 shares of Common Stock had
vested. Options granted to Mr. Gary Davidson in fiscal 1996 covering 67,390
shares of Common Stock and all of the options granted to Mr. Gary Davidson
in fiscal 1997 were terminated upon such resignation.
(6) Mr. Booty retired as President of the Company on September 30, 1996 and was
not an employee of the Company from October 1, 1996 through March 31, 1997.
His bonus reflects the bonus earned under his employment agreement, but his
salary does not include compensation paid to Mr. Booty as a consultant from
and after his retirement date of September 30, 1996 through March 31, 1997.
Mr. Booty's compensation as a consultant is discussed in "-- Employment
Agreements."
(7) Ms. Muldoon joined the Company in September of 1994.
(8) Regarding options to purchase Common Stock granted to Mr. Eric Davidson,
options to purchase 30,655 shares were granted at an exercise price of
$15.40 per share, 10% higher than their fair market value as of the date of
grant, October 17, 1995.
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted during fiscal 1997 to the Named Executive Officers pursuant to the 1995
Stock Option Plan.
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION -------------------
NAME GRANTED(1) YEAR(2) PER SHARE DATE 5% 10%
------------------------ ---------- ------------- --------- ---------- -------- --------
Gary L. Davidson(4)..... 10,000 2.6% $ 11.25 10/17/06 $ 70,751 $179,296
John A. Booty(5)........ -- -- -- -- -- --
David P. Collins........ 10,000 2.6% $ 11.25 10/17/06 70,751 179,296
Graham P.
Espley-Jones.......... 10,000 2.6% $ 11.25 10/17/06 70,751 179,296
Sheila M. Muldoon....... 20,000 5.1% $ 11.25 10/17/06 141,501 358,592
Eric K. Davidson........ 20,000 5.1% $ 11.25 10/17/06 141,501 358,952
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(1) These options were granted for a term of 10 years, subject to termination in
certain events related to termination of employment, and become exercisable
in four annual installments beginning on October 17, 1998.
(2) In fiscal 1997, the Company granted options to purchase an aggregate of
389,000 shares under the 1995 Stock Option Plan and this number was used in
calculating the percentage set forth in this column. During fiscal 1997,
options to purchase 188,390 shares under the 1995 Stock Option Plan were
canceled due to termination of employment.
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(3) Assumed rates of stock price appreciation are calculated based on
requirements promulgated by the Securities and Exchange Commission and are
for illustrative purposes only. Actual stock prices will vary from time to
time based upon market factors and the Company's financial performance.
There can be no assurance that the assumed rates of appreciation will be
achieved.
(4) Options granted to Mr. Gary Davidson in fiscal 1997 terminated upon Mr. Gary
Davidson's resignation as President and Chief Executive Officer of the
Company in October 1997.
(5) Mr. Booty retired as President of the Company on September 30, 1996, prior
to the granting of options in fiscal 1997.
Fiscal Year-End Option Values.
None of the Named Executive Officers exercised options during fiscal 1997.
The following table sets forth certain information regarding options held as of
the end of such fiscal year by each of the Named Executive Officers.
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT YEAR-END AT YEAR-END(1)
ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- -------- -------- ----------- ------------- ----------- -------------
Gary L. Davidson....................... -- -- 33,695 77,390(2) -- --
John A. Booty.......................... -- -- 33,695 -- -- --
David P. Collins....................... -- -- 19,846 49,693 -- --
Graham P. Espley-Jones................. -- -- 11,206 32,412 -- --
Sheila M. Muldoon...................... -- -- -- 30,000 -- --
Eric K. Davidson....................... -- -- 2,770 47,885 -- --
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(1) Options are "in-the-money" if the fair market value of the underlying
securities on that date exceeds the exercise price of the option. The amount
set forth represents the difference between the fair market value of the
securities underlying the options on March 31, 1997, based on the last sale
price of $9.75 per share of Common Stock on that date (as reported on the
Nasdaq National Market) and the exercise price of the options, multiplied by
the applicable number of options, without giving effect to the diminution of
value attributable to the restrictions on such stock.
(2) Mr. Gary Davidson's unexercisable options terminated upon his resignation as
President and Chief Executive Officer of the Company in October 1997.
Employment Agreements
The Company entered into employment agreements with the Named Executive
Officers. Employment agreements with Messrs. Gary Davidson, Booty, Collins and
Espley-Jones (referred to collectively as the "Four Executive Officers")
commenced October 1, 1995 and provide for an initial termination date of
September 30, 1998; however, the employment agreements of Messrs. Davidson,
Collins and Espley-Jones provide that each of them be given at least two years'
notice prior to the termination date. Mr. Collins' agreement will terminate as
of October 1, 1999. As discussed below, the employment agreement with Mr. Booty
was terminated on October 1, 1996 after Mr. Booty's retirement as an officer of
the Company, and the employment agreement with Mr. Gary Davidson was terminated
on October 13, 1997 after Mr. Davidson resigned as an officer of the Company.
The agreements with the Four Executive Officers require the Four Executive
Officers to devote their full productive time to the Company during the term of
the agreements and to refrain from competing with the Company in the business of
assisted living or long-term healthcare for a period of one year following
expiration of the term of the agreements. Such employment agreements include
provisions for a base salary paid on a monthly basis (the "Base Salary"), annual
increases in Base Salary based on increases in the Consumer Price Index,
guaranteed bonuses each quarter equal to 6.25% of Base Salary (the "Minimum
Bonus") (Mr. Espley-Jones does not receive Minimum Bonuses), and additional
bonuses no later than May 1 of each year,
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determined in the discretion of the Board, based on earnings of the Company and
other criteria as determined by the Compensation Committee of the Board. No
discretionary bonuses were earned by the Four Executive Officers. Each of
Messrs. Davidson, Collins and Espley-Jones were granted certain stock options
during fiscal 1997. The employment agreements provide that the Company may
terminate any of the Four Executive Officers without cause by making such
individual a cash payment equal to the greater of (i) one year's Base Salary
and, if applicable, Minimum Bonus, or (ii) the current annual Base Salary and,
if applicable, Minimum Bonus divided by 12 and multiplied by the number of
remaining months under the employment agreement, and, in addition, the payment
by the Company of premiums of COBRA benefits for the maximum period of
eligibility. The agreements further provide that if any of the Four Executive
Officers voluntarily terminates his employment with the Company, he will receive
a lump-sum payment equal to 3 months' Base Salary. The covenant not to compete
discussed above is not applicable, however, in the event severance pay is
waived.
Mr. Davidson's employment agreement was terminated upon his resignation as
the Chairman, Chief Executive Officer and President and as a director of the
Company effective as of October 13, 1997. In connection with Mr. Davidson's
resignation, the Company and Mr. Davidson entered into a Confidential Separation
Agreement dated as of October 13, 1997 (the "Separation Agreement"). Under the
Separation Agreement, Mr. Davidson was paid $526,100 on October 24, 1997 and
will be paid an additional $526,100 on January 2, 1998. The Separation Agreement
contains customary non-disparagement and confidentiality provisions.
Concurrently with the execution of the Separation Agreement, Mr. Davidson and
the Company executed a mutual release of all claims against one another.
Mr. Booty's employment agreement was terminated upon his retirement as of
October 1, 1996. Following the termination of Mr. Booty's employment agreement,
the Company and Mr. Booty entered into a consulting agreement under which it was
agreed that Mr. Booty would be paid varying amounts not to exceed $30,000 per
month through September 30, 1997 and $15,000 per month thereafter through
September 30, 1998. Upon Mr. Booty's appointment as interim President and Chief
Executive Officer of the Company, the consulting agreement was amended to
provide that Mr. Booty will be paid a salary of $29,250 per month during his
term as an interim officer of the Company, and will be compensated at a rate of
$15,000 per month for the 18 months following his term as interim officer. The
consulting agreement further provides that upon a "change of control" (as
described in " -- Change in Control Arrangements") at any time during the term
of the agreement, Mr. Booty will be paid in full the entire amount outstanding
under the consulting agreement.
The Company has entered into written employment agreements with Ms. Muldoon
and Mr. Eric Davidson (the "Two Executive Officers") commencing April 23, 1997.
The agreements require the Two Executive Officers to devote their full
productive time to the Company during the term of the agreement and to refrain
from competing with the Company in the business of assisted living or long-term
healthcare for a period of one year following expiration of the term of the
agreement.
The agreements for the Two Executive Officers include provisions for a base
salary paid on a monthly basis (the "Base Salary"), annual increases in Base
Salary and bonuses no later than December 31 of each year, as determined at the
discretion of the Compensation Committee following receipt of recommendations
therefor from management of the Company. The Two Executive Officers have also
been granted certain stock options. The Company may terminate the Two Executive
Officers without cause by making them a cash payment equal to 12 months' Base
Salary. If either of the Two Executive Officers voluntarily terminates
employment with the Company such person will receive a lump-sum payment equal to
three months' Base Salary. The covenant not to compete discussed in the
preceding paragraph is not applicable, however, in the event severance pay is
waived.
On December 5, 1997, the Company entered into an employment agreement with
Howard G. Phanstiel. Mr. Phanstiel's employment agreement has an initial
termination date of December 5, 2000; provided, however, that if the Company has
not given Mr. Phanstiel written notice of the Company's intent to terminate the
agreement at least two years prior to the termination date, the term will
automatically be extended for successive periods of one year. Mr. Phanstiel's
employment agreement requires him to devote his full productive time to the
Company during the term of the agreement, unless otherwise permitted by the
Board,
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and to refrain from competing with the Company in the business of assisted
living or long-term healthcare for a period of one year following expiration of
the term of the agreement.
Mr. Phanstiel's employment agreement provides for a base salary,
performance-based increases in the base salary each year beginning in 1999, a
guaranteed bonus of 37.5% of the then current base salary, and additional
bonuses based on the achievement of agreed-upon targets in the range of 12.5% to
62.5% of the then current base salary. Mr. Phanstiel was granted stock options
to purchase 150,000 shares of Common Stock upon the execution of his employment
agreement and, on January 2, 1998, will receive additional options to purchase
100,000 shares of Common Stock. Mr. Phanstiel's employment agreement provides
that the Company may terminate Mr. Phanstiel without cause by making him a
payment equal to the greater of (i) the sum of his current annual base salary
plus minimum bonus and (ii) the sum of his current annual base salary plus his
minimum bonus divided by 12 and multiplied by the number of remaining months
under the employment agreement, and, in addition, the payment by the Company of
premiums of COBRA benefits for the maximum period of eligibility. The agreement
further provides that if Mr. Phanstiel voluntarily terminates his employment
with the Company, he will receive a lump-sum payment equal to three months' base
salary. The covenant not to compete discussed above is not applicable, however,
in the event severance pay is waived.
Change in Control Arrangements
In fiscal 1997, the Compensation Committee took action to better assure
that the Named Executive Officers would continue to provide independent
leadership consistent with the Company's best interests in the event of an
actual or threatened change of control of the Company. The employment agreements
of each of the Named Executive Officers provide certain protections in the event
of a change in control. A "change in control" of the Company is defined as a
change in ownership such that any one person, or more than one person acting as
a group, would have possession of more than 50% of the total fair market value
or the total voting power of the capital stock of the Company; or a change in
effective control of the Company such that any one person or more than one
person acting as a group would acquire ownership of capital stock possessing 50%
or more of the voting power of the Company, or a majority of the members of the
Board was replaced during any 12 month period by directors whose appointment or
election was not endorsed by a majority of the members of the Board prior to the
date of such appointment or election; or a change in the ownership of a
substantial portion of the Company's assets such that any one person or more
than one person acting as a group would acquire, within a 12 month period,
assets from the Company having a total fair market value equal to or more than
33 1/3% of the total fair market value of all of the assets of the Company
immediately prior to such acquisitions. Upon any "change in control," the Named
Executive Officers (other than Mr. Booty, who will be entitled to payment in
full of all sums due under his consulting agreement with the Company) are
entitled to receive a lump sum equal to three times the total compensation
received during the immediately preceding calendar year. In addition, the stock
option agreements between the Company and the Named Executive Officers (other
than Mr. Booty) include a provision authorizing the Compensation Committee to
accelerate vesting of the options, and the Compensation Committee has authorized
such vesting acceleration in the Employment Agreements discussed above.
Howard G. Phanstiel's employment agreement also provides for certain
protections in the event of a change in control. Mr. Phanstiel's employment
agreement defines a "change of control" as any of the following: (i) the
acquisition by any person or group of greater than 50% of the combined voting
power of the Company's outstanding voting securities; (ii) the acquisition by
any person other than Prometheus of greater than 20% of the Company's
outstanding voting securities if the Board determines that a change of control
has occurred; (iii) the replacement of a majority of the members of the Board
during any 12 month period by directors whose appointment or election was not
endorsed by a majority of the members of the Board prior to the date of such
appointment or election; or (iv) the date on which any person acquired assets
from the Company that have a total fair market value equal to or more than 33
1/3% of the total fair market value of all of the assets of the Company.
Following a change of control, in the event that Mr. Phanstiel is terminated for
any reason, with or without cause, or voluntarily within nine months of the
change of control, or involuntarily within 12 months of a change of control, in
lieu of his severance payment, if any, the Company will pay Mr. Phanstiel the
sum of (i) his base salary, (ii) his accrued vacation pay, (iii) reimbursement
for expenses through the date of the change of control, and (iv) either three
times the sum of his base salary, minimum bonus, additional bonus, and other
compensation received in the preceding calendar year, plus two times the minimum
bonus or, if the change of control occurs before December 5, 1998, three times
his base salary plus six times the minimum bonus. In addition, in the event that
Mr. Phanstiel's employment is terminated voluntarily within nine months of a
change of control or involuntarily within 12 months of a change of control, any
stock options held by Mr. Phanstiel will become fully vested.
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SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of December 18, 1997 (based on a total of
15,848,498 outstanding shares of Common Stock) by (i) each of the Company's
directors, (ii) each of the Named Executive Officers and (iii) all executive
officers and directors as a group. Except as otherwise indicated, the Company
believes the persons named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable.
Amounts and percentages listed below include warrants and options that are
exercisable within 60 days of December 18, 1997.
SHARES BENEFICIALLY PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER(1) OWNED BENEFICIALLY OWNED
---------------------------------------------------- ------------------- --------------------
Robert P. Freeman(2)................................ 6,183,238 39.1%
Murry N. Gunty(2)................................... 6,183,238 39.1%
Kenneth M. Jacobs(2)................................ 6,183,238 39.1%
Gary L. Davidson(3)(4).............................. 969,826 6.1%
John A. Booty(3)(5)................................. 699,246 4.4%
David P. Collins(3)(6).............................. 558,939 3.5%
Graham P. Espley-Jones(7)........................... 274,964 1.7%
Howard G. Phanstiel................................. 0 --
Sheila M. Muldoon(8)................................ 3,500 *
Eric K. Davidson(9)................................. 14,538 *
R. Bruce Andrews(10)................................ 5,000 *
Maurice J. DeWald(10)............................... 6,000 *
John J. Rydzewski(10)(11)........................... 10,000 *
All directors and executive officers as a group (13
persons).......................................... 8,717,751 54.5%
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* Less than 1%
(1) Except where otherwise noted, the address of the Company's directors,
executive officers and selling shareholders is c/o ARV Assisted Living,
Inc., 245 Fischer Avenue, D-1, Costa Mesa, California 92626.
(2) Messrs. Freeman and Gunty are the President and a Vice President,
respectively, of LFREI, the managing member of Prometheus. Mr. Jacobs is a
Managing Director of Lazard Freres & Co., LLC, the managing member of LFREI.
Each of Messrs. Freeman, Gunty and Jacobs have shared voting and investment
power over the securities held by Prometheus and each may be deemed to
beneficially own Prometheus' shares. Each of Messrs. Freeman, Gunty and
Jacobs disclaims beneficial ownership of Prometheus' shares except to the
extent of their pecuniary interest therein.
(3) Excludes 402,257 shares owned of record by the Company's employee stock
ownership plan (the "ESOP"), of which Messrs. Booty and Collins are
trustees.
(4) Of the 969,826 shares beneficially owned by Mr. Gary Davidson, 593,029 are
held of record by the Davidson Family Partnership, 343,102 shares are held
by the Gary L. Davidson Funded Revocable Living Trust, and the remaining
33,695 shares are subject to options exercisable within 60 days of December
18, 1997. Excludes 9,724 shares beneficially owned by Mr. Gary Davidson held
of record by the ESOP as of December 18, 1997.
(5) Of the 699,246 shares beneficially owned by Mr. Booty, 107,773 are held of
record by the Booty-Jones Family Partnership (of which Mr. Booty is the
managing partner and holds a pecuniary interest equal to 1% thereof),
418,028 shares are held by the Booty Family Trust (as to which Mr. Booty has
shared voting and investment power), 750 shares are held in Mr. Booty's name
alone, 69,500 shares are owned by the Karen A. Booty Charitable Remainder
Trust of which Mr. Booty has sole voting and investment power, and the
remaining 69,500 shares are owned by the John A. Booty Charitable Remainder
Uni Trust (of
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which Mr. Booty has sole voting and investment power), and the remaining
33,695 shares are subject to options exercisable within 60 days of December
18, 1997. Excludes 9,724 shares beneficially owned by Mr. Booty held of
record by the ESOP as of December 18, 1997.
(6) Of the 558,939 shares beneficially owned by Mr. Collins, 98,678 are held of
record by the D & V Collins Family Limited Partnership (as to which Mr.
Collins has shared voting and investment power), 408,591 shares are held by
the Collins Family Community Property Trust (as to which Mr. Collins has
shared voting and investment power), 11,978 shares are held by the David P.
Collins Annuity Trust, and the remaining 39,692 shares are subject to
options exercisable within 60 days of December 18, 1997. Excludes 8,831
shares beneficially owned by Mr. Collins held of record by the ESOP on
December 18, 1997.
(7) Of the 274,964 shares beneficially owned by Mr. Espley-Jones, 22,412 shares
are subject to options exercisable within 60 days of December 18, 1997.
Excludes 5,672 shares beneficially owned by Mr. Espley-Jones held of record
by the ESOP as of December 18, 1997.
(8) Of the 3,500 shares beneficially owned by Ms. Muldoon, 1,000 are held of
record by Charles Schwab & Co. Inc. IRA Rollover and 2,500 shares are
subject to options exercisable within 60 days of December 18, 1997. Excludes
73 shares beneficially owned by Ms. Muldoon held of record by the ESOP as of
December 18, 1997.
(9) Of the 14,538 shares beneficially owned by Mr. Eric Davidson, 4,000 are held
of record by Eric K. Davidson UTA Fidelity 401(k) and 103 are held by Eric
K. Davidson UTA Principal Financial 401(k) and 10,435 shares are subject to
options exercisable within 60 days of December 18, 1997. Excludes 405 shares
beneficially owned by Mr. Eric Davidson held of record by the ESOP on
December 18, 1997.
(10) Messrs. Andrews, DeWald, Peters and Rydzewski, as non-employee directors,
have options exercisable within 60 days of December 18, 1997 to purchase
5,000 shares.
(11) 5,000 of the shares beneficially owned by Mr. Rydzewski are held of record
by Merrill Lynch Custodian FBO Benedetto, Gartland & Greene, Inc. SEP FBO
John J. Rydzewski.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of December 18, 1997, the following persons are known to the Company to
be the beneficial owners of more than five percent of the Company's Common
Stock. The numbers shown on the table should be interpreted in light of the
related footnotes.
TITLE AMOUNT AND NATURE
OF NAME AND ADDRESS OF OF BENEFICIAL PERCENT
CLASS BENEFICIAL OWNERS OWNERSHIP OF CLASS
------- ----------------------------------------------- ----------------- --------
Common Prometheus Assisted Living LLC(1) 6,183,238 39.1%
Thirty Rockefeller Plaza, 63rd Floor
New York, NY 10020
Common Emeritus Corporation(2) 1,077,200 6.8%
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Common Morgan Stanley, Dean Witter, Discover & Co.(3) 965,197 6.1%
1585 Broadway
New York, NY 10036
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(1) According to the Schedule 13D filed on December 12, 1997 by Prometheus.
(2) According to the Schedule 13D filed on November 10, 1997 by Emeritus
Corporation, a Washington corporation ("Emeritus"), Emeritus is the
beneficial owner of 1,077,200 shares and has the sole power to vote and
dispose of the shares. Emeritus has disclaimed any ownership of 200 shares
held by Kelly Price, Chief Financial Officer of Emeritus, and 1,000 shares
held by Stanley L. Baty, the son of Daniel R. Baty, the Chief Executive
Officer of Emeritus.
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(3) According to the Schedule 13G filed on July 14, 1997 by Morgan Stanley, Dean
Witter, Discover & Co. ("Morgan Stanley"), a Delaware corporation and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940 (the "Investment Advisors Act"), is the beneficial owner of
965,197 shares of the Common Stock of the Company. Accounts managed on a
discretionary basis by wholly-owned subsidiaries of Morgan Stanley,
including Miller Anderson & Sherred LLP, a Delaware limited liability
partnership and an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, are known to have the right to receive or
the power to direct the receipt of dividends from, or the proceeds from, the
sale of such securities. No such account holds more than 5 percent of the
class.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Two members of the Compensation Committee during fiscal 1997, Messrs.
DeWald and Peters, are not present or former employees of the Company and have
no relationships with the Company requiring disclosure pursuant to rules
promulgated by the Securities and Exchange Commission. Regarding Mr. Rydzewski,
the Company retained Benedetto, Gartland and Company, Inc., of which Mr.
Rydzewski is a principal, to act as financial adviser concerning the Company's
investment in Senior Income Fund, L.P., a Delaware limited partnership that owns
four congregate care facilities in Southern California.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To address certain structural issues in connection with tax credit
partnerships, Pacific Demographics Corporation ("Pacific Demographics")
(formerly ARVTC, Inc.), was formed in August 1994 by Messrs. Gary Davidson,
Booty, Collins and Espley-Jones, as well as two former Company officers, to
provide certain development services for these partnerships in exchange for cash
and deferred development fees generated by the tax credit partnerships. The
Company provided services to Pacific Demographics for which it received certain
fees from Pacific Demographics. The Company believes that these arrangements
were fair to the Company and that the compensation paid to Pacific Demographics
by the tax credit partnerships and by Pacific Demographics to the Company
appropriately reflected the services rendered by Pacific Demographics and the
Company, respectively, and the risks incurred by the shareholders of Pacific
Demographics who provided the guarantees for these projects.
In order to lessen potential conflicts of interest, in July 1995, the
Company's then principal shareholders, who included but were not limited to
Messrs. Gary Davidson, Booty, Collins and Espley-Jones sold Pacific
Demographics, Inc. to the Company for $100,000 in cash. In addition, they formed
a general partnership, Hunter Development ("Hunter") and became co-developers
with Pacific Demographics and retained the right to receive 20% of all developer
fees up to a maximum of $850,000. Subsequently each of the general partners of
Hunter assigned his interest in Hunter to Redhill Development, LLC. Of the
maximum amount of $850,000 which could be distributed, approximately $198,400
has been distributed through October 31, 1997 of which Messrs. Gary Davidson,
Booty, Collins and Espley-Jones have received approximately $55,300, $55,300,
$32,500 and $18,400, respectively.
The Company utilizes the services of J&D Design, as well as others, for
interior design work at its facilities. The principal of J&D Design is Joan
Davidson, wife of Senior Vice President Eric Davidson and daughter-in-law of
former Chairman, President and Chief Executive Officer Gary Davidson. Services
provided by J&D Design include design work and the purchase of furniture,
fixtures and equipment ("FF&E") for developed facilities and rehabilitation of
existing or newly acquired facilities. In fiscal 1997 and through October 31,
1997, the Company paid J&D Design approximately $863,000 for design services and
reimbursement of costs for FF&E. In fiscal 1996 and fiscal 1995, the total paid
by the Company to J&D Design approximated $328,000 and $57,000, respectively.
The Company does not expect to enter into any new contractual arrangements with
J&D Design.
Mr. R. Bruce Andrews, a member of the Board, is President of Nationwide
Health Properties, Inc. ("NHP"), a Health Care REIT. NHP is the owner of 16
assisted living facilities which are leased to the Company. Of that number,
leases for 13 assisted living facilities were entered into prior to November 29,
1995, the date Mr. Andrews became a Board member, and leases for three assisted
living facilities were entered into
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during Mr. Andrews' tenure as Board member. Lease payments have aggregated
approximately $15.6 million in fiscal 1997 and through October 31, 1997 and $3.7
million from November 1, 1995 through March 31, 1996.
John J. Rydzewski, a Director of the Company and member of the Audit
Committee and the Compensation Committee, is a principal in the investment
banking firm of Benedetto, Gartland and Company, Inc. ("BG&C"). The Company
retained BG&C to provide advice concerning the Company's investment in Senior
Income Fund L.P., a Delaware limited partnership owning four congregate care
facilities in Southern California.
Robert P. Freeman and Murry N. Gunty, each a Director of the Company, are
the President and a Vice President, respectively, of LFREI, the managing member
of Prometheus. Kenneth M. Jacobs, also a Director of the Company, is a Managing
Director of Lazard Freres & Co. LLC, the managing member of LFREI. On October
29, 1997, Prometheus committed to purchase $60,000,000 aggregate principal
amount of the Company's 6.75% Convertible Subordinated Notes due 2007. Pursuant
to a related agreement, Prometheus previously purchased 1,921,012 shares of
Common Stock for an aggregate purchase price of $26,894,168. In connection with
these transactions, the Company entered into a registration rights agreement
with Prometheus and the Stockholders Agreement with Prometheus and LFREI.
Pursuant to the registration rights agreement between the Company and
Prometheus, the Company granted Prometheus limited demand registration rights to
facilitate the resale of certain securities owned by it and certain piggyback
rights to sell a portion of its securities in connection with certain offerings
of securities of the Company.
Pursuant to the Stockholders Agreement, as of October 30, 1997, the Board
was expanded to its current authorized number of nine members, and Messrs.
Freeman, Jacobs and Gunty, each nominees of Prometheus, were appointed as
Directors of the Company. Until the occurrence of a Termination Event (which
shall occur if either (i) Prometheus no longer owns at least 5% of the Common
Stock on a fully diluted basis or (ii) Prometheus no longer owns at least $25
million of Common Stock), at each annual or special meeting of shareholders of
the Company, Prometheus will have the right pursuant to the Stockholders
Agreement and the Company's Bylaws to designate three nominees to the Board if
the Board is a single class or one designee per class if the Board is divided
into three classes. The Company has agreed to support the nomination and the
election of each designee of Prometheus to the Board, and the Company will
exercise all authority under applicable law to cause each designee of Prometheus
to be elected to the Board.
The Stockholders Agreement further provides that during a standstill period
of three years (which period is subject to early termination in certain
circumstances), Prometheus will be subject to certain limitations and
restrictions relating to, among other matters, acquisitions of additional shares
of Common Stock (generally limiting Prometheus to beneficially owning no more
than 49.9% of the shares of Common Stock on a fully diluted basis), transfers of
Common Stock held by Prometheus and seeking representation on the Board other
than as contemplated by the Stockholders Agreement. In addition, during the
standstill period, Prometheus is required to vote all shares of Common Stock
owned by it representing an aggregate ownership in excess of 35.8% of the
outstanding shares of Common Stock in one of the following two manners: (x) in
accordance with the recommendation of the Board or (y) proportionally in
accordance with the votes of the other holders of Common Stock. Prometheus is
also required to vote its shares of Common Stock in favor of the election of all
directors nominated by the nominating committee of the Company, if any, or the
Board, provided such nominations are in accordance with certain provisions of
the Amended Stockholders Agreement.
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