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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBER: 0-26980
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ARV ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, SUITE D-1, 92626
COSTA MESA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF CLASS ON WHICH REGISTERED
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COMMON STOCK, $0.01 PAR VALUE AMERICAN STOCK EXCHANGE
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
As of March 22, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $16,562,261 (for purposes of calculating
the preceding amount only, all directors, executive officers and shareholders
holding 5% or greater of the registrant's Common Stock are assumed to be
affiliates). The number of shares of Common Stock of the registrant outstanding
as of March 22, 2002 was 17,459,689.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for its 2002 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.
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ARV ASSISTED LIVING, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
PAGE
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PART I
Item 1: Business............................................................................................ 1
Item 2: Properties.......................................................................................... 15
Item 3: Legal Proceedings................................................................................... 17
Item 4: Submission of Matters to a Vote of Security Holders................................................. 17
PART II
Item 5: Market for the Registrant's Common Equity and Related Shareholder Matters .......................... 18
Item 6: Selected Financial Data............................................................................. 19
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 20
Item 7A: Quantitative and Qualitative Disclosures About Market Risk.......................................... 30
Item 8: Financial Statements and Supplementary Data......................................................... 31
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............... 31
PART III
Item 10: Directors and Executive Officers of the Registrant.................................................. 31
Item 11: Executive Compensation.............................................................................. 31
Item 12: Security Ownership of Certain Beneficial Owners and Management ..................................... 31
Item 13: Certain Relationships and Related Transactions...................................................... 31
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................... 31
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PART I
ITEM 1. BUSINESS
GENERAL
ARV Assisted Living, Inc. ("ARV" or the "Company"), originally incorporated
in California in 1980 and subsequently merged into a Delaware corporation in
1998, is one of the largest operators of licensed assisted living communities
("ALCs") in the United States. We are a fully integrated provider of assisted
living accommodations and services that operates, acquires and develops ALCs. We
have been involved in the senior housing business for more than 20 years. Our
operating objective is to provide high quality, personalized assisted living
services to senior residents in a cost-effective manner, while maintaining
residents' independence, dignity and quality of life. Our ALCs offer a
combination of housing, personalized support services and healthcare in a
non-institutional setting. Our ALCs are designed to respond to the individual
needs of elderly residents who require assistance with certain activities of
daily living, but who do not require the intensive nursing care provided in a
skilled nursing facility.
In December 2001, as part of a response to a hostile tender offer for
outstanding units of American Retirement Villas Properties III, L.P., ("ARVP
III") one of the partnerships for which we are the managing general partner, we
acquired an additional 51.8% of the outstanding partnership units of ARVP III.
With this acquisition of ARVP III, two ALCs were added to our portfolio of owned
ALCs bringing our total number of owned ALCs to 17.
In 1999 we embarked on a strategy to focus our business efforts in the
western United States. To this end we have divested ourselves of many properties
outside the western United States and have put certain other of our non-core
properties up for sale. We do not have current plans to expand our operations.
At December 31, 2001, we operated 58 ALCs containing 6,774 units, all of which
were located in the United States. We currently have no ALCs under construction.
We operate a total of 58 ALCs, 17 of which are owned by us, 33 which are
leased by us and 8 which are managed by us. Owned ALCs ("Owned ALCs") are owned
by us directly, or by affiliated limited partnerships or limited liability
companies for which we serve as managing general partner or member and community
manager and in which we have majority ownership interest ("Affiliated
Partnerships"). Leased ALCs ("Leased ALCs") are operated by us under long-term
operating leases for our own account or for Affiliated Partnerships in which we
have a majority ownership interest. Managed ALCs are operated by us on behalf of
an affiliated partnership (in which we did not acquire majority ownership until
December 2001, pursuant to a tender offer), joint ventures in which we do have
majority ownership but not control or an unrelated third-party. We believe that
this blend of ownership, leasehold and management interest in our ALCs allows us
to fund our operations in a balanced, efficient manner.
We have financed our capital expenditures and operations through leasehold
and mortgage financing with healthcare real estate investment trusts ("REITs"),
private companies, commercial banks and a convertible subordinated debt
issuance. In order to implement our refocusing strategy, we planned to dispose
of those ALCs that did not meet our financial objectives or that did not lie
within our primary geographic focus, the western United States. To this end, in
December 1999, we commenced efforts to sell or transfer certain non-core assets
and reclassified the assets to property held for sale. Due to market conditions
no buyer could be found for the nine ALCs held for sale at December 31, 2000 and
in June of 2001, the Company decided to retain these ALCs. The remaining land
site in properties held for sale at December 31, 2001 is currently in escrow.
We however, intend to continue our focus on "private-pay" residents who pay
for our services from their own funds or through private insurance. Currently,
approximately 97% of our residents are private-pay, while the remaining 3% of
the residents participate in the Supplemental Security Income ("SSI") program.
Certain states have enacted legislation enabling ALCs to receive Medicaid
funding similar to funding generally provided to skilled nursing facilities.
Our ALCs provide residents with accommodations, basic care services and
assisted living services. Our resident's average age is 85.1 years and he/she
often require assistance with certain basic activities of daily living. We
provide our residents with private or semi-private housing accomodations, meals
in a restaurant-style setting,
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housekeeping, linen and laundry services, activities programs, utilities, and
transportation in a van or minibus. For an additional cost, we also provide
assisted living services to residents who require help with other activities of
daily living, such as bathing, grooming, dressing, personal hygiene, medication
management and escort services to meals and activities.
Most ALCs offer a Wellness Program that arranges for professional care
providers to deliver certain healthcare services to our residents that our ALCs
are not licensed or equipped to provide.
THE ASSISTED LIVING MARKET
Assisted Living. Assisted living is a stage in the elder care continuum,
midway between home-based care for independent and lower acuity residents and
the more acute level of care provided by skilled nursing facilities and acute
care hospitals. Assisted living represents a combination of housing,
personalized support services, and healthcare designed to respond to the
individual needs of the members of the senior population who need help with
activities of daily living, but do not need the medical care provided in a
skilled nursing facility.
We believe our assisted living business benefits from significant trends
affecting the long-term care industry. One such trend is the increase in the
demand for elder care resulting from the continued aging of the U.S. population,
with the average age of our residents falling within the fastest growing segment
of the U.S. population. While increasing numbers of Americans are living longer
and healthier lives, many gradually require increasing assistance with
activities of daily living and are not able to continue to age in place at home.
A second trend is the effort to contain healthcare costs by the government,
private insurers and managed care organizations by limiting lengths of stay,
services, and reimbursement to patients in acute care hospitals and skilled
nursing facilities. Assisted living offers a cost-effective, long-term care
alternative while preserving a more independent lifestyle for seniors who do not
need the broader array of medical services that acute care hospitals and skilled
nursing facilities are equipped to provide. For the year ended December 31,
2001, monthly revenue generated by our ALCs averaged $2,259 per occupied unit,
compared with $2,145 per occupied unit for the year ended December 31, 2000.
Other trends include increases in the financial net worth of the elderly
population, the number of individuals living alone, and the number of women who
work outside the home who are less able to care for their elderly relatives. We
believe these trends will result in a growing demand for assisted living
services and communities.
Aging Population. The primary consumers of long-term healthcare services are
persons over the age of 65. This group represents one of the fastest growing
segments of the population. According to U.S. Bureau of the Census data as of
January 2000, the segment of the population over 65 years of age is 13% of the
total population, or 35 million people. That number is projected to grow to 20%
of the total population, or 70 million people, by the year 2030. Additionally,
according to U.S. Bureau of the Census data, the number of people aged 85 and
older, which comprises the largest percentage of residents at long-term care
facilities, is currently 4.4 million and is projected to increase to 8.9 million
by the year 2030.
Limitation on the Supply of Long-Term Care Facilities. The majority of
states in the U.S. have enacted Certificate of Need or similar legislation,
which generally limits the construction of skilled nursing facilities and the
addition of beds or services in existing skilled nursing facilities. High
construction costs, limitations on government reimbursement for the full cost of
construction, and start-up expenses also constrain growth in the supply of such
facilities. Such legislation benefits the assisted living industry by limiting
the supply of skilled nursing beds for the elderly. Cost factors are placing
pressure on skilled nursing facilities to shift their focus toward higher acuity
care, which enables them to charge more. This contributes to a shortage of lower
acuity care and thereby increases the pool of potential assisted living
residents.
While Certificates of Need generally are not required for ALCs, except in a
few states, most states do require assisted living providers to license their
communities and comply with various regulations regarding building requirements
and operating procedures and regulations. States typically impose additional
requirements on ALCs over and above the standard congregate care requirements.
Further, the limited pool of experienced assisted living staff and management,
as well as the costs and start-up expenses to construct an ALC, provide an
additional barrier to entry into the assisted living business.
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Cost Containment Pressures of Health Reform. In response to rapidly rising
healthcare costs, both government and private pay sources have adopted cost
containment measures that encourage reduced lengths of stay in hospitals and
skilled nursing facilities. The federal government has acted to curtail
increases in healthcare costs under Medicare by limiting acute care hospital and
skilled nursing facility reimbursement to pre-established fixed amounts. Private
insurers have also begun to limit reimbursement for medical services in general
to predetermined "reasonable" charges. Managed care organizations, such as
health maintenance organizations ("HMOs") and preferred provider organizations
("PPOs"), are reducing hospitalization costs by negotiating discounted rates for
hospital services and by monitoring and decreasing hospitalization. We
anticipate that both HMOs and PPOs increasingly may direct patients away from
higher cost nursing care facilities into less expensive ALCs.
These cost containment measures have produced a "push-down" effect. As the
number of patients being "pushed down" from acute care hospitals to skilled
nursing facilities increases, the demand for residential options such as ALCs to
serve patients who historically have been served by skilled nursing facilities
will also increase. In addition, skilled nursing facility operators are
continuing to focus on improving occupancy and expanding services (and fees) to
subacute patients requiring very high levels of nursing care. As the acuity
level of skilled nursing facility patients rises, the supply of nursing facility
beds will be filled by patients with higher acuity needs who pay higher fees.
This will provide opportunities for ALCs to increase their occupancy and
services to residents requiring lower levels of care than patients in skilled
nursing facilities generally receive.
OUR ASSISTED LIVING SERVICES
We provide services and care which are designed to meet the individual needs
of our residents. The services provided are designed to enhance both the
physical and mental well being of seniors in each of our ALCs by promoting their
independence and dignity in a home-like setting. Our assisted living program
includes the following:
o Personalized Care Plan. The focus of our strategy is to meet the
specific needs of each resident. We customize our services beginning
with the admissions process, at which time the ALC's management staff,
the resident, the resident's family, and the resident's physician
discuss the resident's needs and develop a "personalized" care plan. If
recommended by the resident's physician, additional healthcare or
medical services may be provided at the community by a third-party home
healthcare agency or other medical provider. The care plan is reviewed
and modified on a regular basis.
o Basic Service and Care Package. The basic service and care package at
our ALCs generally includes:
o meals in a restaurant-style, "home-like" setting;
o housekeeping;
o linen and laundry service;
o social and recreational programs;
o utilities; and
o transportation in a van or minibus.
Other care services can be provided under the basic package based upon the
individual's personalized healthcare plan. Our policy is to charge base rents
that are competitive with similar ALCs in the local market. While the amount of
the fee for the basic service package varies from community to community, the
average basic monthly rental rate per unit was approximately $1,904 per month as
of December 31, 2001, compared with an average of $1,811 as of December 31,
2000.
o Additional Services. Our assisted living services program offers levels
of care in addition to the services offered in the basic package. The
level of care a resident receives is determined through an assessment of
a resident's physical and mental health. The assessment is conducted by
the community's assisted living
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director, with input from other staff members. The six-tiered level of care
rate structure is based on a point system. We assign points to the various
care tasks required by the resident, based on the amount of staff time and
expertise needed to accomplish the tasks. The point scale and pricing are
part of the admissions agreement between the community, the resident and the
resident's family. The community performs reassessments after the initial 30
days and periodically throughout the resident's stay to ensure that the
level of care we provide corresponds to changes in a resident's condition.
The types of services included in the assessment point calculation are:
o Medication management
o Assistance with dressing and grooming
o Assistance with showering
o Assistance with continence
o Escort services
o Status checks related to a recent hospitalization, illness, history of
falls or injuries
o Help with psychosocial needs, such as memory deficit disorder
o Special nutritional needs and assistance with eating
In addition to the above services, we provide other levels of assistance to
residents at selected ALCs in order to meet individual needs, such as assistance
with diabetic care and monitoring, catheter, colostomy and ileosotomy care,
minor wound care needs and light to moderate transferring needs. Some of our
ALCs also operate memory loss units for residents with Alzheimer's disease and
related dementia. These units provide the attention and services required by
cognitively impaired residents to maintain a high quality of life in a secure
environment. Specially trained staff provide personalized care, specialized
activity programs and oversee medication regimens.
In addition to the base service package, we typically charge between $375
and $1,700 per month or more for higher levels of assisted living services. Fee
levels vary from community to community and we may charge additional fees for
other specialized assisted living services. We expect that an increasing number
of residents will use additional levels of services as they age in our ALCs. Our
internal growth plan is focused on increasing revenue by continuing to improve
our ability to provide residents with these services.
The average monthly revenue per occupied unit for both the basic service
package and the assisted living services increased to $2,259 from $2,145 for the
year ended December 31, 2001 and 2000, respectively. There can be no assurance
that any ALC will be substantially occupied at assumed rates at any time. In
addition, we may only be able to lease up our ALCs to full occupancy at rates
below our set rates due to limitations imposed on rates by local market
conditions or other factors. Even if we achieve substantial occupancy at our set
rates, our set rates may not allow for our projected cost recovery and profit if
operating expenses increase. In addition, in order to increase our set rates, we
must provide advance notice of rate increases, generally at least 30 days.
Because of this advance notice requirement, we are not able to reflect cost
increases in our set rates until at least several months after such cost
increases occur.
Wellness Program. We have implemented a Wellness Program for residents of
our communities designed to identify and respond to changes in a resident's
health or condition. Together with the resident and the resident's family and
physician, as appropriate, we design a solution to fit that resident's
particular needs. We monitor the physical and mental well being of our
residents, usually at meals and other activities, and informally as the staff
performs services around the facility. Through the Wellness Program we work
with:
o home healthcare agencies to provide services the community cannot
provide;
o physical and occupational therapists to provide services to residents in
need of such therapy; and
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o long-term care pharmacies to facilitate cost-effective and reliable
ordering and distribution of medications.
We arrange for these services to be provided to residents as needed in
consultation with their physicians and families. At the present time, most of
our ALCs have a comprehensive Wellness Program.
GROWTH STRATEGIES
Overview. In order to grow earnings and achieve profitability we have
devised a strategy to increase our focus on the operations of our current ALCs
and reduce the level of development and acquisition activity we historically
pursued. To strengthen the operations of our ALCs, we will focus on improving
margins by increasing occupancy rates, raising or maintaining pricing structures
to ensure that our rates are competitive with comparable facilities in our local
markets, and expanding the level and depth of our assisted living services.
Although we have currently halted the development and construction of new
communities, we will continue efforts to cluster our portfolio of ALCs within
certain geographic areas through the acquisition or divestiture of selected
assets. By concentrating on a clustering strategy we expect to increase the
efficiency of our management and marketing resources and to achieve broader
economies of scale.
Our strategy is to target areas where there is a need for ALCs based on
demographics and market studies. In addition to acquiring ALCs through direct
ownership and the use of long-term leases, we may also divest our ALCs that do
not expand or enhance one of our clusters or do not meet our financial
objectives. In 1999, we sold five ALCs that were outside of the Western United
States. During 2000, we completed the sale of three of our ALCs that were
outside of the western United States. As of December 31, 2001, a substantial
portion of our business and operations were conducted in California, where 37 of
the 58 ALCs we operate are located. We have no operations or customers in
foreign countries.
The market value of our properties and the income generated from ALCs we
own, manage or lease could be negatively affected by changes in local and
regional economic conditions and by acts of nature. A worsening of local
economic conditions could have a negative effect on our business.
Development. Due to market conditions, the development of new ALCs has been
curtailed during 2001. We do not expect to develop any new facilities in the
foreseeable future.
In 1998, we entered into several joint venture arrangements operating as
limited liability companies ("LLCs") designed to help us finance development and
renovation projects and to mitigate the impact of start-up losses associated
with the opening of newly constructed ALCs. The joint ventures were formed to
finance and manage the substantial renovation of two existing ALCs acquired in
1998 in the Hillsdale Transaction and to construct three new communities on land
sites we owned. Participants in the joint ventures with us include a third-party
investor and a third-party developer. The LLCs have contracted with the
developer to provide development services to perform the renovation and
construction. We account for our investment in the joint ventures using the
equity method and losses incurred by the LLCs will be allocated
disproportionately to the joint venture partners based upon their assumption of
risk. In 2000 and 2001, certain joint venture partner's capital was reduced to
zero, consequently, the losses from the joint venture were allocated to us based
upon our capital or percentage interest. The Company has agreed to fund any
operating deficits incurred in connection with the operation of these joint
venture projects operating as limited liability companies ("LLC"), up to an
aggregate amount of $6.0 million for all of the development properties and $6.0
million for all of the renovation properties subject to a $9.0 million cap. The
advances, which are considered capital contributions to the LLC, are
non-interest bearing and will be repaid only if sufficient funds are available
in accordance with the terms of the operating agreements of the respective LLCs.
These agreements will remain in effect from the commencement of operations of
the project until the earlier to occur of 18 months after the project has
achieved stabilization, the sale of the project to a third-party, or the
purchase by the Company of the membership interests of the venture partners. Our
current funding of operating deficits since inception in 1998 is $1.5 million.
We have an option to purchase the joint venture's interest in the LLCs when the
ALCs reach stabilization, at a purchase price that is the greater of fair market
value or an amount that generates a guaranteed rate of return on the joint
ventures' capital contribution. In December 2000, we determined that the value
of our investment in the LLCs was impaired based upon projected cash flow, and
wrote down the investment to estimated fair-market value. In 2001 we declined
the option to purchase two of the LLCs that had reached stabilization and in
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accordance with the LLCs' operating agreement we no longer serve as a manager of
the two LLCs and we no longer manage one of the LLCs that is outside our
geographic clustering strategy.
We do not plan to develop new ALCs during 2002. In 2000, we completed three
development projects that were in progress at December 31, 1999.
Cost Containment To contain costs and maximize operating efficiency, we
employ an integrated structure of management and financial systems and controls.
We utilize centralized accounting systems and computer systems that link each
community with our executive offices to provide management with on-lone revenue
and expense information regarding its residential communities. We provide an
on-line analysis capability for resident billing, occupancy, marketing and
statistical information.
We have recruited experienced key employees from several established
operators in the long-term-care services field and believe that we have
assembled the administrative, operational and financial personnel that will
enable us to manage our growth and operating strategies effectively. We also
recruit individuals with strong backgrounds for our regional director positions.
In addition we have developed internal procedures and policies that we believe
are necessary for effective operation and management of our ALCs. Day to day
community operations are supervised by an on-site executive director who, in
certain jurisdictions, must satisfy certain licensing requirements.
Acquisitions. In evaluating possible acquisitions, we consider:
o the location, construction quality, condition and design of the ALC;
o the current and projected cash flow of the community and its anticipated
ability to increase revenue through rent and occupancy increases,
additional assisted living services and management; and
o whether we can acquire the community below replacement cost.
Our sources for prospective acquisitions range from Affiliated Partnerships
to management contracts with potential ALC sellers, to our local and regional
personnel who monitor the assisted living market in their area. In 2001, we
acquired two ALCs that we had managed since 1989. This acquisition was
accomplished by means of the purchase of 51.8% of the outstanding partnership
units in ARVP III pursuant to a tender offer. In certain cases we may also
target additional third-party management contracts. In the fourth quarter of
2001, we signed a management contract for four ALCs. However, we do not intend
to continue our past growth rate and may not expand at all in the future.
Historically, we have financed many of our acquisitions using equity and
debt and through direct long-term operating lease transactions with
institutional investors such as healthcare REITs, and may continue to do so in
the future. In long-term operating lease transactions, we typically arrange the
sale of the prospective assisted living community to a REIT or other
institutional investor while concurrently entering into a long-term operating
lease for the facility. Our initial investment is generally limited to a
security deposit that is typically provided through cash or standby letters of
credit collateralized by cash. Thereafter, we are obligated to make certain
rental payments (which may include an additional amount related to revenue of
the community) for the term of the lease. While we have financed a portion of
our direct ownership of ALCs with secured debt from lending institutions, we do
not have any participation or sponsorship interest in these entities. While we
make our best estimates in projecting lease-up costs and expenses as well as the
achievement of rent stabilization, our failure to generate sufficient revenue
could result in an inability to meet minimum rent obligations under our
long-term operating leases.
Increase in Sales of Additional Assisted Living Services. We believe that
many custodial services provided in skilled nursing facilities are available in
our ALCs at approximately two-thirds of the cost. We believe that this
differential will enable us to attract additional residents. By increasing the
use of these services by our residents, we believe residents will be able to age
in place at our ALCs over a longer period of time, and not have to transfer to
more expensive skilled nursing facilities until absolutely necessary.
We seek to enhance and increase the amount and diversity of assisted living
services we provide through:
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o the continued education of the senior community, and particularly the
residents and their families, concerning the cost-effectiveness of
receiving additional services in an assisted living community;
o the continued development and refinement of assisted living programs
designed to meet the needs of our residents as they age in place; and
o the consistent delivery of quality services for residents.
EMPLOYEES
At February 28, 2002 we had approximately 3,130 employees. None of our
employees are members of unions and the Company continues to enjoy good
relations with its employees.
CAPITAL REQUIREMENTS
Our operating leases require the tender of security deposits. At December
31, 2001, the amount of security deposits was $9.4 million either in cash or
letters of credit supported by cash. These deposits are classified as
non-current assets in our consolidated balance sheet as of December 31, 2001 and
2000.
In 2001, we refinanced the mortgage debt of five of our ALCs that are held
by majority-owned partnerships in order to:
o pay off existing debt that matured in 2001 and 2002; and
o borrow against the increased value of these properties.
In 2000, we refinanced four of our ALCs that are held by majority-owned
partnerships to:
o pay off existing debt that matured in 2001; and
o borrow against the increased value of these properties.
The principal repayment of the refinanced debt is based upon a 35 year
amortization schedule with fixed interest rates ranging from 7.25%-8.53%,
including the payment of a mortgage insurance premium of 0.5%.
In January, 2001 we restructured 16 ALC leases into two lease pools of 8
ALCs each. In each restructured pool, the lease termination date was extended
through fiscal 2021. As part of the restructure, we are allowed to finance the
additional rent expense of up to $1.0 million during 2001, $1.0 million in 2002,
$1.5 million in 2003, $1.0 million in 2004 and $0.5 million in 2005, converting
this into a note payable with a due date of December 31, 2010 at a fixed
interest rate of 7%. Interest only payments are required monthly with principal
payments beginning in 2006 at $1.0 million per year. We also incurred a
restructuring fee of $4.5 million payable at $1.5 million for each of the first
three years. The restructured lease agreements provide for reimbursement to us
from the landlord of capital improvement expenditures up to $3.0 million.
The Company's various debt and lease agreements contain restrictive
covenants requiring us to maintain certain financial ratios, including current
ratio, working capital, minimum net worth, and debt service coverage, among
others. At December 31, 2001, we were in compliance with all such covenants.
In 1999, we began retiring portions of our 6 3/4% convertible subordinated
debt. During 1999, we issued a total of 799,566 shares of our common stock and
paid a total of $1.0 million to certain of our bondholders in exchange for a
total of $9.2 million principal amount of the subordinated notes due 2006 that
were held by those bondholders. These transactions resulted in an extraordinary
gain of $7.0 million net of tax for the fiscal year ended December 31, 1999.
During 2000, we issued a total of 781,025 shares of our common stock and paid a
total of $9.6 million to additional bondholders in exchange for a total of $33.0
million in principal amount of the subordinated notes held by those bondholders
which yielded an extraordinary gain of $20.6 million net of tax and costs. In
2001 we paid a total
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of $5.7 million to certain of our bondholders in exchange for a total of $8.0
million principal amount of the subordinated notes. The transactions for the
year ended December 31, 2001, resulted in an extraordinary gain of $2.1 million
net of tax and costs. Out of $57.5 million we have retired a total of $50.2
million of our public debt resulting in extraordinary gains of $29.5 million to
date net of tax and costs.
We obtained a $10.0 million unsecured revolving line of credit from our
major shareholder Lazard Freres, through its affiliates, to be used for
retirement of the subordinated 6 3/4% public debt. At December 31, 2001, we had
$10.0 million outstanding on the line of credit at LIBOR plus 10% interest
payable monthly.
Pursuant to the terms of an Operating Deficit Payment Agreement, the Company
has agreed to fund any operating deficits incurred in connection with the
operation of five joint venture projects operating as limited liability
companies ("LLC"), up to an aggregate amount of $6.0 million for all of the
development properties and $6.0 million for all of the renovation properties
subject to the $9.0 million cap. The advances, which are considered capital
contributions to the LLC, are non-interest bearing and are to be repaid only if
sufficient funds are available in accordance with the terms of the operating
agreements of the respective LLCs. This agreement is to remain in effect from
the commencement of operations of the project until the earlier to occur of 18
months after the project has achieved stabilization, the sale of the project to
a third-party, or the purchase by the Company of the membership interests of the
project owner. As of December 31, 2001, operating deficit advances of $1.5
million had been funded since inception in 1998. We declined to purchase two of
the joint venture properties and in accordance with the operating agreement we
were terminated as the manager of those LLCs. In addition we are no longer
managing one of the properties that is outside our geographic clustering
strategy.
We believe that our existing liquidity, our ability to sell ALCs and land
sites which do not meet our financial objectives or geographic clustering
strategy, and our ability to refinance certain owned ALCs and investments will
provide us with adequate resources to meet our current operating and investing
needs. Historically we have not generated sufficient cash from operations
to fund recurring working capital and capital expenditure requirements. We may
be required from time to time to incur additional indebtedness or issue
additional debt or equity securities to finance our strategy, including the
rehabilitation of ALCs as well as other capital expenditures. We anticipate that
we will be able to obtain the additional financing; however, we cannot assure
that we will be able to obtain financing on favorable terms.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
Our 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 statements" 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. We have made
forward-looking statements in this report concerning, among other things, the
impact of future acquisitions and developments, if any, and the level of future
capital expenditures. These statements are only predictions; however, actual
events or results may differ materially as a result of risks we face. These
risks include, but are not limited to, those items discussed below. Certain of
these factors are discussed in more detail elsewhere in this report, including
without limitation under the captions "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Given these
uncertainties, we caution readers not to place undue reliance on such
forward-looking statements, which speak only as of the date of this report. We
disclaim any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained here
to reflect future events or developments.
Certain risks are inherent in the operation of ALCs. These risks include,
but are not limited to:
o our history of losses;
o our ability to access capital necessary for operations and acquisitions;
8
o our ability to sustain and manage growth and to successfully integrate
new ALCs into our portfolio;
o competition;
o our ability to meet our indebtedness, lease and other obligations;
o our liabilities as a general partner of Affiliated Partnerships;
o our liability as a member of the joint venture LLCs where we are
required to fund operating deficits;
o dependence on reimbursement from third-party payers;
o governmental regulation; and
o risks common to the assisted living industry.
HISTORY OF LOSSES
For the years ended December 31, 2001, 2000, and 1999, we had losses before
extraordinary gains of approximately $1.1 million, $14.1 million, and $33.4
million, respectively. At December 31, 2001, our accumulated deficit was
approximately $97.7 million.
Our loss before extraordinary gains for the year ended December 31, 2001
primarily resulted from:
o income from ALC operations which was more than offset by
o net interest expense; and
o equity in losses in partnerships; offset in part by
o gain on sale of properties and partnership interests.
Our loss before extraordinary gain for the year ended December 31, 2000
primarily resulted from:
o impairment losses on joint venture LLCs;
o interest expense; and
o loss from operations.
Our loss before extraordinary gain for the year ended December 31, 1999
primarily resulted from:
o start-up losses on newly-developed ALCs;
o the impairment losses on ALCs held for sale;
o interest expense;
o litigation judgment expenses and settlement of a lawsuit; and
o legal expenses for and settlement of a lawsuit.
We cannot provide assurance that the risks associated with operating our
ALCs can be managed to reduce or eliminate start-up losses, equity loss in
partnerships or that other similar costs and expenses or losses will not occur
9
in the future. See "--Indebtedness, Lease and Other Obligations," "--General
Partner Liability and Status," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
DEPENDENCE ON THE AVAILABILITY OF ADEQUATE CAPITAL
We depend heavily on our ability to obtain adequate capital to fund our
operations. Our estimated capital expenditure needs over the next 12 months are
$6.6 million, which we expect to fund from operations. As of December 31, 2001
we had $13.2 million in cash and cash equivalents and working capital of $1.2
million. This means we have cash and cash equivalents to meet our estimated
capital needs for operations for the next 12 months. If, however our operating
costs exceed our projections, we may have to obtain significant additional
financing. There is no assurance that we will be able to obtain the financing on
a timely basis, if at all. If we are unable to obtain the required financing on
a timely basis we may not be able to execute our business plan.
MANAGEMENT OF GROWTH
Management of Growth. We have slowed our pace of acquisitions and
development during the last three years. We have recently acquired two ALCs
through the ARVP III acquisition that occurred in December 2001. However, these
ALCs were previously managed by us. In addition, we have entered into five new
management contracts. See "-- Risks Common to our Assisted Living Operations."
Our failure to effectively manage our growth could have a material adverse
effect on operating results.
External Growth. We may in the future enter into agreements to acquire
properties for development and for the acquisition of existing ALCs that are
subject to certain conditions. There can be no assurance that one or more of
such acquisitions will be completed, that we will be able to find additional
suitable properties and ALCs, or that we can obtain financing to continue to
acquire or develop ALCs and property on which to build them. We expect to
experience a slowdown in growth through acquisitions of ALCs due to shortages of
suitable ALCs available at attractive prices and due to limitations on obtaining
financing.
COMPETITION
The Company operates in over 40 separate markets. Competition to increase or
maintain high occupancies is significant with numerous other companies
representing national, regional, and local fragmented ownership. No one
competitor tends to have a dominant market share within our niche. The Company
for the most part has created a market niche based on mid-range pricing and
competes on quality of service, services offered, reputation, location, and
market longevity. However, in select markets the Company enjoys market dominance
due to multiple locations in a single market. We are continuing to grow within
these competitive markets by providing excellent value in residential amenities,
staff hospitality, and personal care services.
The healthcare industry is highly competitive and we expect that the
assisted living business, in particular, will become more competitive in the
future. Currently competition includes, family members providing care at home;
numerous local, regional and national providers of retirement, assisted living
and long-term care whose facilities and services range from home-based
healthcare to skilled nursing facilities; and acute care hospitals. In addition,
we believe that as assisted living receives increased attention among the public
and insurance companies, new competitors focused on assisted living will enter
the market, including hospitality companies expanding into the market. Some of
our competitors operate on a not-for-profit basis or as charitable
organizations, while others have, or are capable of obtaining, greater financial
resources than those available to us.
We also expect to face increased competition for the acquisition and
development of ALCs. Some of our present and potential competitors are
significantly larger or have, or may obtain, greater financial resources than we
have. These forces could limit our ability to attract residents, attract
qualified personnel, expand our business, or increase the cost of future
acquisitions, each of which could have a material adverse effect on our
financial condition, results of operations and prospects.
10
SALES AND MARKETING
The Company's marketing strategy focuses on enhancing the reputation of the
Company's communities and creating awareness of the Company and its services
among potential referral sources. The Company emphasizes outreach by developing
relationships and creating awareness among referral sources. Referral sources
include hospital discharge planners, physician offices, skilled nursing
facilities, home healthcare providers and the clergy. We focus on our satisfied
residents and family members who represent a key number of referrals and our
respite program which provides individuals with the opportunity to experience
our services on a trial or short term basis. Each regional cluster generally has
at least one sales and marketing specialist and in each ALC one sales and
marketing director is responsible for implementing sales and marketing programs.
In addition to the direct contacts with referral services we market our
services, through newspapers, direct mail and through internet based referral
organizations.
INDEBTEDNESS, LEASE AND OTHER OBLIGATIONS
We have financed, and may continue to finance, the acquisition of ALCs
through a combination of loans, leases and other obligations. As of December 31,
2001, we had an outstanding consolidated indebtedness of $112.3 million,
including $7.3 million of our 2006 Convertible Notes, whose holders have the
right to convert such notes into our common stock at any time on or before the
notes mature. As a result, we will devote a portion of our cash flow to debt
service. There is a risk that we will not be able to refinance our maturing note
obligations on terms favorable to us, or that we will not be able to generate
sufficient cash flow from operations to make required interest and principal
payments.
We have guaranteed the indebtedness at December 31, 2001, of certain
unconsolidated Affiliated Partnerships for $3.5 million.
We are the general partner of certain limited partnerships that serve as the
sole members of the borrowing entities which carried loan balances of $15.3
million at December 31, 2001. Although a member of a borrowing entity is not
personally liable for any contract or other obligation of that entity, we
delivered limited guaranties in connection with the loans. Due to the limited
guaranties, we assumed liability for repayment of the loan indebtedness as a
result of fraudulent or intentional misconduct regarding the mortgaged
properties, an unconsented transfer of a mortgaged property, a change of control
by borrower, or violation of hazardous materials covenants.
At December 31, 2001, approximately $35.2 million of our indebtedness bore
interest at floating rates. We may incur indebtedness in the future that may
also bear interest at a floating rate, or be fixed at some time in the future.
Therefore, increases in prevailing interest rates could increase our interest
payment obligations and could have an adverse effect on our business, financial
condition and operating results. In addition, we have guaranteed mortgage and
construction debt for the benefit of certain Affiliated Partnerships of up to
approximately $23.5 million, including $22.5 million outstanding at December 31,
2001. On January 16, 2001 we sold our interest in five tax credit partnerships
eliminating any further guarantee on them.
As of December 31, 2001 we are party to long-term operating leases for
certain of our leased ALCs. These require minimum annual lease payments in the
aggregate amount of $32.9 million and $33.4 million for years ending December
31, 2002 and 2003, respectively.
In January 2001, we restructured 16 ALC leases into two lease pools of 8
ALCs each. In each restructured pool, the lease termination date was extended
through fiscal 2021. As part of the lease restructure we are allowed to finance
additional rent expense of up to $1.0 million during 2001, $1.0 million in 2002,
$1.5 million in 2003, $1.0 million in 2004 and $0.5 million in 2005 converting
this into a note payable with a due date of December 31, 2010 at a fixed rate of
7%. Interest only payments are required monthly with principal payments
beginning in 2006 of $1.0 million per year. We also incurred a restructuring fee
of $4.5 million payable at $1.5 million for each of the first three years. The
restructuring fee is accounted for on a straight-line basis. The restructured
lease agreements provide for reimbursement to us from the landlord of capital
improvement expenditures up to $3.0 million. The lease agreements provided for a
total minimum rent of approximately 28.5% of revenue that changes annually. For
the year ending December 31, 2002, 28.3% of revenue is the anticipated total
rent expense but not less than the immediately preceding years rent expense.
11
GENERAL PARTNER LIABILITY AND STATUS
As of December 31, 2001 we, directly or through our subsidiaries, are the
managing general partner in 7 partnerships. As a general partner of a limited
partnership, we are ordinarily liable for partnership obligations including
partnership indebtedness, potential liability for construction defects,
including those presently unknown or unobserved, and unknown or future
environmental liabilities. With respect, however, to the mortgage indebtedness
encumbering the partnership properties, we have no personal liability for the
repayment of said indebtedness except to the extent a lender suffers loss from :
the partnership's failure to properly apply insurance proceeds, to deliver
required books and records or to properly apply rents; fraud by the partnership;
filing of bankruptcy by the partnership or the Company; or environmental
contamination of the secured properties. The cost of any such obligations or
claims, whether we bear part or all of the cost, could materially adversely
affect our operating results and financial condition.
We manage each Affiliated Partnership property according to a written
management contract. The managing general partner of the partnership may cancel
some contracts with 30 or 60 days' notice. Limited partners in each partnership
may take action on such matters as the removal of the general partners, the
request for approval or disapproval of a sale of a property owned by a
partnership, or other actions affecting the properties or the partnership. Where
we are the general partner of the partnership, termination of the contracts
generally would require removal of the Company as general partner by the vote of
a majority of the holders of limited partner interests. We would lose management
fees if those contracts were terminated.
In 2001, we were removed as the manager of one managed ALC outside our
geographic area. In October of 2001, we signed management contracts to manage
four unaffiliated ALCs.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYERS
GeriCare was a former subsidiary of the Company that specialized in
rehabilitative services, including speech, occupational and physical therapy.
Although we disposed of GeriCare in 1998, revenue received or earned before it
was disposed that directly or indirectly was billed to the Medicare program is
subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, audits and funding restrictions. All such restrictions
could potentially limit or reduce reimbursement levels for GeriCare's services.
Medicare reimbursed GeriCare monthly for services provided on a cost basis,
subject to certain adjustments. GeriCare submitted cost reports to the
Healthcare Financing Administration ("HCFA") on an annual basis and was subject
to having amounts previously reimbursed adjusted retroactively. The result of a
retroactive reimbursement would be either a requirement to repay the amount
previously reimbursed or an adjustment downward in future reimbursements for
services rendered, or both. We have submitted the required documents to HCFA for
an audit that began in October 1999, and have prepared cost reports that were
filed as of August 22, 1996 and thereafter. Due to delay in recovering these
funds and the uncertainty as a result of the on-going audit, we have reserved
for the full outstanding receivable at December 31, 2001.
GOVERNMENT REGULATION
Assisted living. Healthcare is subject to extensive regulation and frequent
regulatory change. Currently, no federal rules explicitly define or regulate
assisted living. A number of states also have not yet enacted specific assisted
living regulations. However, we are, and will continue to be, subject to varying
degrees of regulation and licensing by health or social service agencies and
other regulatory authorities in the various states and localities where we
operate or intend to operate. Changes in, or the adoption of, such laws and
regulations, or new interpretations of existing laws and regulations, could have
a significant impact on methods and costs of doing business, and on
reimbursement levels from governmental and other payers. In addition, the
President and Congress have proposed in the past, and may propose in future,
healthcare reforms that could impose additional regulations on the Company or
limit the amounts that we may charge for our services. We cannot assess the
ultimate timing and impact that any pending or future healthcare reform
proposals may have on the assisted living, home healthcare, skilled nursing or
healthcare industry in general. No assurance can be given that any such reform
will not have a material adverse effect on the business, financial condition or
results of operations of the Company.
SSI Payments. A portion of our revenue comes from residents who receive SSI
payments. During 2001, 3% of our residents participated in the SSI program.
Revenue from these residents is generally lower than the amounts we
12
receive from our other residents and could be subject to payment delay. We
cannot assure that our percentage of revenue received from SSI will not
increase, or that the amounts paid by SSI programs will not be further limited.
In addition, if we were to become a provider of services under the Medicaid
program, we would be subject to Medicaid regulations designed to limit fraud and
abuse. Violations of these regulations could result in civil and criminal
penalties and exclusion from participation in the Medicaid program.
RISKS COMMON TO OUR ASSISTED LIVING OPERATIONS
Staffing and Labor Costs. We compete with other providers of assisted living
and senior housing to attract and retain qualified personnel. We also rely on
the available labor pool of employees, and unemployment rates are very low in
many areas where we operate. We make a genuine effort to remain competitive with
other companies in our industry. Therefore, if it is necessary for us to
increase pay and/or enhance benefits to maintain our competitive status in our
industry, our labor costs could rise. We cannot provide assurance that if our
labor costs do increase they can be matched by corresponding increases in
rental, assisted living or management revenue.
Obtaining Residents and Maintaining Rates. As of December 31, 2001, the ALCs
we owned or operated generated a combined occupancy rate of 88.2%. This rate was
impacted by newly-developed ALCs that may take longer to lease up than
anticipated, causing them to incur start-up losses for longer periods of time.
Occupancy may drop in our existing ALCs, primarily due to:
o changes in the health of residents;
o increased competition from other assisted living providers, particularly
those offering newer ALCs;
o the reassessment of residents' physical and cognitive state; and
o changes in management and staffing.
There can be no assurance that any ALC will be substantially occupied at
assumed rates at any time. In addition, we may only be able to lease up our ALCs
to full occupancy at rates below our set rates due to limitations imposed on
rates by local market conditions or other factors. Even if we achieve
substantial occupancy at our set rates, our set rates may not allow for our
projected cost recovery and profit if operating expenses increase. In addition,
in order to increase our set rates, we must provide advance notice of rate
increases, generally at least 30 days. Because of this advance notice
requirement, we are not able to reflect cost increases in our set rates until at
least several months after such cost increases occur. In addition, if we fail to
generate sufficient revenue, we may be unable to meet minimum rent obligations
under our long-term operating leases and to make interest and principal payments
on our indebtedness.
General Real Estate Risks. The performance of our ALCs is influenced by
factors generally affecting real estate investments, including the general
economic climate. Other such real estate risks include:
o an oversupply of, or a reduction in demand for, ALCs in a particular
market;
o the attractiveness of properties to residents;
o zoning, rent control, environmental quality regulations or other
regulatory restrictions;
o competition from other forms of housing;
o our ability to provide adequate maintenance and insurance; and
o our ability to control operating costs, including maintenance, insurance
premiums and real estate taxes.
At the time we acquire existing ALCs or open newly-developed ALCs, we
prepare budgets for known or expected rehabilitation expenses. We may incur
unknown or unforeseen rehabilitation or lease-up expenses. Real estate
investments are also affected by such factors as applicable laws, including tax
laws, interest rates and the
13
availability of financing. Real estate investments are relatively illiquid and,
therefore, limit our ability to vary our portfolio promptly in response to
changes in economic or other conditions. If we fail to integrate or operate
acquired or developed ALCs effectively, it may have a material adverse effect on
our business, financial condition and operating results.
In addition, we currently lease ALCs from only eight different landlords.
The lease agreements with each landlord contain cross-application provisions
that limit our right to renew one lease with a particular landlord without
exercising our right to renew all other leases with that landlord. Also, leases
with a single landlord contain certain cross-default provisions. Therefore, in
order to exercise all lease renewal terms, we will be required to maintain and
rehabilitate the leased ALCs on a long-term basis. We anticipate that similar
renewal and cross-default provisions will be included in leases with other
healthcare REITs or landlords.
Bond Financing. We have entered into four long-term leases of ALCs, the
acquisition and construction of which have been or are being financed by tax
exempt multi-unit housing revenue bonds. In order to meet the lease obligations
and to allow the landlord to continue to qualify for favorable tax treatment of
the interest payable on the bonds, the ALCs must comply with certain federal
income tax requirements. These requirements principally pertain to the maximum
income level of a specified percentage of the residents. Should we elect to
execute additional leases for ALCs to be constructed with bond financing, the
same and possibly additional restrictions are anticipated to be imposed. Failure
to satisfy these income requirements will constitute an event of default under
the leases, thereby permitting the landlord to terminate the leases. Failure to
obtain low-income residents in the sequence and time required could materially
affect the lease-up schedule and, therefore, cash flow from such ALCs.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be held liable for the costs of the removal or
remediation of certain hazardous or toxic substances. Such laws and regulations
often impose liability whether or not the owner or operator knows of, or is
responsible for, the presence of the hazardous or toxic substances. When we
acquire land for development or existing facilities, we typically obtain
environmental reports on the properties as part of our due diligence in order to
lessen our risk of exposure. Nonetheless, the costs of any required remediation
or removal of these substances could be substantial. The owner's liability is
generally not limited under such laws and regulations and could exceed the value
of the property and the aggregate assets of the owner or operator. The presence
of these substances or failure to remediate such substances properly may also
adversely affect the owner's ability to sell or rent the property or to borrow
using the property as collateral. Under these laws and regulations, an owner,
operator, or any entity that arranges for the disposal of hazardous or toxic
substances at a disposal site may also be liable for the costs of any required
remediation or removal of the hazardous or toxic substances at the disposal
site. When entering into leases with healthcare REITs and other landlords of
facilities, we typically enter into environmental indemnity agreements in which
we agree to indemnify the landlord against all risk of environmental liability,
both during the term of the lease and beyond. In connection with the ownership
or operation of our properties or those of our Affiliated Partnerships, we could
be liable for these costs, as well as certain other costs, including
governmental fines and damages for injuries to persons or properties.
Restrictions Imposed by Laws Benefiting Disabled Persons. Under the
Americans with Disabilities Act of 1990, all places of public accommodation are
required to meet certain federal requirements related to access and use by
disabled persons. A number of additional federal, state and local laws exist
that also may require us to modify existing and planned properties to allow
disabled persons to access the properties. We believe that our properties are
either substantially in compliance with present requirements or are exempt from
them, and we attempt to check for compliance in all ALCs we consider acquiring.
However, if required changes cost more than anticipated, or must be made sooner
than anticipated, we would incur additional costs. Further legislation may
impose additional burdens or restrictions related to access by disabled persons,
and the costs of compliance could be substantial.
Geographic Concentration. A substantial portion of our business and
operations are conducted in California, where 37 out of 58 of our ALCs in
operation are located. The market value of these properties and the income
generated from properties we manage or lease could be negatively affected by
changes in local and regional economic conditions, specific laws and the
regulatory environment in the states, and by acts of nature. We cannot provide
assurance that such geographic concentration will not have an adverse impact on
our business, financial condition, operating results and prospects.
14
Insurance. We believe that we maintain adequate insurance coverage, based on
the nature and risks of our business, historical experience and industry
standards. Our business entails an inherent risk of liability. In recent years,
we and other assisted living providers have become subject to an increasing
number of lawsuits alleging negligence or related legal theories, which may
involve large claims and significant legal costs. From time to time we are
subject to such suits because of the nature of our business. We cannot assure
that claims will not arise that exceed our insurance coverage or are not covered
by it. A successful claim against us that is not covered by, or is in excess of,
our insurance could have a material adverse effect on our financial condition,
operating results or liquidity. Claims against us, regardless of their merit or
eventual outcome, may also have a material adverse effect on our ability to
attract residents or expand our business and would consume considerable
management time. We must renew our insurance policies annually and can provide
no assurance that we will be able to continue to obtain liability insurance
coverage in the future or that it will be available on acceptable terms. As a
result of poor loss experience, a number of insurance carriers have stopped
providing insurance coverage for the long-term care industry, and those
remaining have increased premiums and deductibles substantially.
CONFLICTS OF INTEREST
We are the managing general partner and communities manager for Affiliated
Partnerships owning or leasing 13 ALCs and two apartment communities. By serving
in both capacities, we have conflicts of interest because of our duty to act in
the best interests of the limited partners of those partnerships and our desire
to maximize earnings for our shareholders in the operation of those ALCs and
apartment communities.
TAX CREDIT APARTMENT PARTNERSHIPS
In January 2001, we disposed of our interests in five of the eight
remaining partnerships in our apartment group (the "Apartment Group"). As part
of the tax credit agreements relating to the Apartment Group, we remain
responsible for guarantees for the period of time we acted as the general
partner for the tax credit apartment partnerships if sufficient projected tax
credits were not generated in order to meet agreed-upon levels of tax credit
benefits.
The Apartment Group required $2.9 million to fund permanent loan shortfalls in
2000, the balance of which was paid in January 2001. Concurrently, we sold our
interests in the related partnerships for a gain of $2.9 million.
ITEM 2. PROPERTIES
The following charts set forth the location, number of units, acquisition
date and ownership percentage for our communities as of December 31, 2001:
MONTH PERCENT
COMMUNITY LOCATION UNITS ACQUIRED OWNERSHIP(A)
- --------- -------- ----- -------- ------------
LEASED
Amberwood................................................ FL 183 Jun-96 100.0%
Baypoint Village......................................... FL 231 Mar-96 100.0%
Bayside Landing.......................................... CA 76 Jun-98 100.0%
Buena Vista Knolls....................................... CA 90 Feb-96 100.0%
Chateau San Juan......................................... CA 113 Dec-95 100.0%
Collier Park............................................. TX 158 Dec-96 100.0%
Eastlake Terrace......................................... IN 87 Apr-97 100.0%
El Camino Gardens........................................ CA 265 Jun-95 100.0%
Hacienda de Monterey..................................... CA 180 Apr-94 100.0%
Hillsdale Manor(c)....................................... CA 128 Jul-98 100.0%
Inn at Summit Ridge...................................... NV 74 Apr-97 100.0%
Inn at Willow Glen(b).................................... CA 83 Aug-96 52.3%
Kinghaven Manor.......................................... MI 143 Feb-95 100.0%
Mallard Cove............................................. OH 119 Feb-95 100.0%
Maria del Sol............................................ CA 110 Oct-95 100.0%
Northgate Park........................................... OH 124 Aug-96 100.0%
Rancho Park Villa........................................ CA 149 Oct-95 100.0%
15
MONTH PERCENT
COMMUNITY LOCATION UNITS ACQUIRED OWNERSHIP(a)
- --------- -------- ----- -------- ------------
Shorehaven Manor......................................... MI 120 Sep-96 100.0%
Seville Terrace.......................................... NV 125 Dec-99 100.0%
Sunlake Terrace.......................................... NV 121 Feb-98 100.0%
Sutton Terrace........................................... NV 142 Dec-98 100.0%
Tamalpais Creek.......................................... CA 117 Oct-95 100.0%
Tanglewood Trace......................................... IN 159 Jan-97 100.0%
Villa Bonita............................................. CA 130 Oct-95 100.0%
Villa Encinitas.......................................... CA 117 Jun-95 100.0%
Villa at Palm Desert..................................... CA 77 Nov-95 100.0%
Villa de Palma........................................... CA 110 May-95 100.0%
Villa del Obispo......................................... CA 96 May-95 100.0%
Villa del Rey............................................ CA 102 Jun-95 100.0%
Villa del Sol............................................ CA 91 Jun-95 100.0%
Vista del Rio............................................ NM 148 Jun-97 100.0%
Willow Glen Villa........................................ CA 188 May-98 100.0%
Woodside Village of Columbus............................. OH 154 Feb-96 100.0%
-----
Total Leased................................... 4,310
-----
OWNED
Acacia Villa(b).......................................... CA 66 Dec-95 89.5%
Chandler Villas(b)....................................... AZ 164 Dec-01 52.1%
Collwood Knolls(b)....................................... CA 112 Jan-96 95.5%
Covell Gardens........................................... CA 156 Mar-97 100.0%
Covina Villa(b).......................................... CA 63 Aug-96 52.3%
Golden Creek Inn......................................... CA 124 Apr-98 100.0%
Hillcrest Inn............................................ CA 138 Apr-98 100.0%
Montego Heights Lodge(b)................................. CA 163 Aug-96 52.3%
Retirement Inn of Daly City(b)........................... CA 95 Aug-96 52.3%
Retirement Inn of Fullerton(b)........................... CA 68 Aug-96 52.3%
Retirement Inn of Burlingame(b).......................... CA 67 Aug-96 52.3%
Retirement Inn of Campbell(b)............................ CA 71 Aug-96 52.3%
Retirement Inn of Fremont(b)............................. CA 68 Aug-96 52.3%
Retirement Inn of Sunnyvale(b)........................... CA 120 Aug-96 52.3%
Valley View Lodge(b)..................................... CA 125 Aug-96 52.3%
Villa Colima(b).......................................... CA 93 Jun-96 60.5%
Villa Las Posas(b)....................................... CA 123 Dec-01 52.1%
-----
Total Owned.................................... 1,816
-----
Total Leased and Owned......................... 6,126
-----
MANAGED
Berkshire(d)............................................. CA 80 Nov-98 75.0%
Canterbury Court......................................... TX 82 Oct-01
Encino Hills Terrace(d).................................. CA 73 Nov-98 75.0%
Inn at Lakewood(d)....................................... CO 137 Nov-00 67.1%
La Villa................................................. NM 82 Oct-01
Lynnbrooke(d)............................................ CA 140 Apr-00 62.0%
Stone Brook.............................................. TX 44 Nov-01
Villa del Sol............................................ NM 10 Oct-01
-----
Total Managed.................................. 648
-----
Total Leased, Owned and Managed 6,774
-----
OWNED but MANAGED by an UNRELATED 3rd PARTY
Bay Spring(d)............................................ RI 127 Jun-00 64.0%
-----
Total Owned but Managed by 3rd Party................. 127
-----
Grand Total.................................... 6,901
======
- ----------
(a) Represents percentage ownership of Leased ALCs and Owned ALCs through
leasehold or fee ownership of the Company or an Affiliated Partnership.
(b) Community managed by us and owned or leased by an Affiliated Partnership in
which we have obtained a majority ownership interest.
(c) We also acquired 64 beds in a skilled nursing facility as part of this ALC.
16
(d) Properties are owned by our unconsolidated joint ventures where we have a
majority ownership but no control.
ITEM 3. LEGAL PROCEEDINGS
During 2001, the Company was named as a defendant in two lawsuits brought by
employees of an ALC owned by a majority-owned partnership. In addition, four
other employees of the same ALC filed EEOC claims against the Company arising
out of the same facts. Subsequent to year-end, the two lawsuits were submitted
to mediation and settled. The four remaining claims will be submitted to binding
arbitration.
We are from time to time subject to lawsuits and other matters in the normal
course of business. While we cannot predict the results with certainty, we do
not believe that any liability from any such lawsuits or other matters will have
a material effect on our financial position, results of operations, or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the
fourth quarter of fiscal 2001.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The common stock, no par value, of the Company is listed and traded on the
American Stock Exchange under the symbol "SRS." Prior to October 13, 1997, our
common stock was listed on the NASDAQ National Market ("NASDAQ") under the
symbol "ARVI." The following table sets forth, for the periods indicated, the
high and low closing prices for our Common Stock.
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 2001
First Quarter............................... 1/1/01 - 3/31/01 $ 0.99 $ 0.56
Second Quarter.............................. 4/1/01 - 6/30/01 $ 1.95 $ 0.70
Third Quarter............................... 7/1/01 - 9/30/01 $ 2.99 $ 1.30
Fourth Quarter.............................. 10/1/01 - 12/31/01 $ 2.08 $ 1.10
YEAR ENDED DECEMBER 31, 2000
First Quarter............................... 1/1/00 - 3/31/00 $ 2.19 $ 1.38
Second Quarter.............................. 4/1/00 - 6/30/00 $ 1.44 $ 0.88
Third Quarter............................... 7/1/00 - 9/30/00 $ 1.06 $ 0.81
Fourth Quarter.............................. 10/1/00 - 12/31/00 $ 0.88 $ 0.44
We did not pay dividends in fiscal 2000 or fiscal 2001. We do not anticipate
paying dividends in the foreseeable future. It is the present policy of our
Board of Directors to retain earnings, if any, to finance the expansion of our
business.
VOLATILITY OF STOCK PRICE
Sales of substantial amounts of shares of our common stock in the public
market or the perception that those sales could occur could adversely affect the
market price of our common stock and our ability to raise additional funds in
the future in the capital markets. The market price of our common stock could be
subject to significant fluctuations in response to various factors and events,
including the liquidity of the market for the shares of our common stock,
variations in our operating results, changes in our earnings estimates and/or
securities analysts estimates, publicity regarding the industry or the Company
and the adoption of new statutes or regulations (or changes in the
interpretation of existing statutes or regulations) affecting the healthcare or
real estate industries in general or the assisted living industry in particular.
In addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the shares of our common stock.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS; ANTI-TAKEOVER MEASURES
As of December 31, 2001, our directors and executive officers and their
affiliates beneficially own approximately 47.3% of the outstanding shares of our
common stock (exclusive of unexercised options to purchase shares of our common
stock). As a result, these shareholders, acting together, would be able to
significantly influence many matters requiring approval by our shareholders,
including the election of directors. Our articles of incorporation provide for
authorized but unissued preferred stock, the terms of which may be fixed by our
board of directors. As a result of Delaware General Corporation Law relating to
the number of holders of common stock, our board of directors are classified and
the holders of our common stock are not permitted to cumulate votes. Such
provisions could have the effect of delaying, deferring or preventing a change
of control of the Company.
In May 1998, we adopted a shareholders rights plan under Delaware law, under
which we declared a dividend distribution of one Preferred Share Purchase Right
on each outstanding share of our common Stock ( a "Right"). Subject to limited
exceptions, the Rights will be exercisable if a person or group acquires 10% or,
in the case of Lazard Freres, our majority stockholder, 50% or more of our
common stock or announces a tender offer for 10% or, in the case of Lazard
Freres, 50% or more of our common stock. When exercisable, each Right will
entitle its holder to purchase, at the Right's then-current exercise price, a
certain number of shares of our common stock having a market value at the time
of twice the Right's exercisable price. If we are acquired in a merger or other
business combination transaction which has not been approved by our Board of
Directors, each Right (except the Rights held by the acquiring person) will
entitle its holder to purchase, at the Right's then-current exercise price, a
certain number of shares of our common stock having a market value at that time
of twice the Right's exercise price.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
consolidated financial statements as of and for the years ended December 31,
2001, 2000, 1999 and 1998, and as of and for the nine-month period ended
December 31, 1997. The data set forth below should be read in conjunction with
the consolidated financial statements and related notes thereto included in Item
14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K --
Financial Statements," along with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
NINE-MONTH
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------------------------------ DECEMBER 31,
2001 2000 1999 1998 1997
--------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Assisted living community revenue...... $ 141,917 $ 136,097 $137,176 $127,309 $ 76,887
Skilled nursing facility revenue....... 2,323 1,960 -- -- --
Management fees........................ 1,155 808 1,003 1,116 388
--------- --------- -------- -------- --------
Total revenue.................... 145,395 138,865 138,179 128,425 77,275
--------- --------- -------- -------- --------
OPERATING EXPENSES:
Assisted living community operating 88,185 87,130 87,665 81,488 49,411
expense..................................
Skilled nursing facility expenses...... 2,507 1,901 -- -- --
Community lease expense................ 30,943 31,571 32,239 26,628 15,773
General and administrative............. 9,874 12,288 14,965 27,581 17,595
Impairment loss........................ -- 6,187 16,368 22,727 --
Depreciation and amortization.......... 7,878 8,483 8,531 9,561 4,896
--------- --------- -------- -------- --------
Total operating expenses......... 139,387 147,560 159,768 167,985 87,675
--------- --------- -------- -------- --------
Income (loss) from operations.... 6,008 (8,695) (21,589) (39,560) (10,400)
--------- --------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income........................ 1,010 1,532 1,027 2,276 1,821
Other income (expense), net............ 681 244 376 198 321
Equity in income (loss) of partnerships (1,798) 791 (884) (430) (10,961)
Gain (loss) on sale of properties and
partnership interest................. 2,887 500 1,884 (674) 5,511
Interest expense....................... (8,949) (8,368) (8,933) (7,728) (4,568)
Litigation judgment.................... -- -- (4,368) -- --
--------- --------- -------- -------- --------
Total other income (expense)..... (6,169) (5,301) (10,898) (6,358) (7,876)
--------- --------- -------- -------- --------
Loss before income tax expense, minority
interest, extraordinary items,
discontinued operations and change in (161) (13,996) (32,487) (45,918) (18,276)
accounting principle...................
Income tax expense....................... 151 160 35 54 484
Minority interest in (income) loss of
majority owned entities................ (778) 55 (903) (839) (773)
---------- --------- -------- -------- --------
Loss before extraordinary items,
discontinued operations and change in
accounting principle................... (1,090) (14,101) (33,425) (46,811) (19,533)
Extraordinary gain (loss) from early
extinguishment of debt, net of income tax 2,062 20,613 7,020 -- --
--------- --------- -------- -------- --------
Income (loss) from operations before
discontinued operations and change in 972 6,512 (26,405) (46,811) (19,533)
accounting principle....................
Discontinued operations.................. -- -- -- 830 (2,602)
Cumulative effect of change in accounting
principle............................... -- -- 1,260 -- --
--------- --------- -------- -------- --------
Net income (loss)................ $ 972 $ 6,512 $(27,665) $(45,981) $(22,135)
========= ========= ======== ======== ========
Basic and diluted earnings (loss) per
common share:
Loss from continuing operations........ $ (0.06) $ (0.81) $ (2.09) $ (2.95) $ (1.75)
Gain from extraordinary item........... 0.12 1.19 0.44 -- --
Discontinued operations................ -- -- -- 0.05 (0.23)
Loss from cumulative effect of change
in accounting principle, net of tax.. -- -- (.08) -- --
--------- --------- --------- -------- --------
Net earnings (loss).............. $ 0.06 $ 0.38 $ (1.73) $ (2.90) $ (1.98)
========= ========= ========= ========= =========
Weighted average common shares outstanding 17,460 17,357 15,968 15,866 11,171
========= ========= ========= ========= =========
19
DECEMBER 31,
----------------------------------------------------- MARCH 31,
2001 2000 1999 1998 1997
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Assisted living units owned or leased
(end of period) ........................... 6,126 5,873 6,371 7,038 5,880
Assisted living units managed (end of period) 648 848 821 906 379
Annual weighted average occupancy of
assisted living units ..................... 88% 87% 85% 84% 84%
BALANCE SHEET DATA:
Working capital ............................. $ 1,203 $ 10,467 $ 6,870 $ 11,691 $ 75,279
Total assets ................................ 177,177 165,940 175,165 205,457 233,085
Long-term notes payable, excluding current 105,062 99,130 114,369 88,175 81,560
portion......................................
Total shareholders' equity .................. 47,840 46,868 39,124 65,687 111,435
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Selected Financial Data in Item 6 and the consolidated financial
statements included in this Annual Report on Form 10-K set forth certain data
with respect to our financial position, results of operations and cash flows
that should be read in conjunction with the following discussion and analysis.
OVERVIEW
We are a leading national provider of assisted and independent living
services for the elderly. As of December 31, 2001, we operated 58 ALCs
containing 6,774 units, including 33 Leased ALCs, 17 Owned ALCs and 8 Managed
ALCs.
Since commencing operation of ALCs for our own account in April 1994, we
embarked upon an expansion strategy and achieved significant growth in revenue
resulting primarily from the acquisition of ALCs. We focused our growth efforts
on the acquisition and development of additional ALCs and expansion of services
to our residents as they "age in place." During 1998, we acquired interests in
11 ALCs and one skilled nursing facility from Hillsdale Group, LP and their
affiliates, and opened five newly constructed ALCs. In the last three years we
have focused on improving the operations of our existing ALCs. In 2001, we
acquired two ALCs through acquiring a controlling interest in ARVP III a
California partnership described below. As of December 31, 2001, a substantial
portion of our business and operations are conducted in California, where 37 of
the 58 ALCs we operate are located. We intend to continue to make the western
United States the primary focus of our clustering strategy. Our current
attention and resources are focused on enhancing the profitability of our
existing core operations. In addition, we plan to divest ALCs that do not expand
or enhance one of our geographic clusters or do not meet our financial
objectives. In June 2001, we completed the sale of one of our three land sites,
one land site was in escrow at December 31, 2001 and one land site has been
reclassified to property, furniture and equipment as we do not foresee its sale
within the next year. The nine ALCs previously in property held for sale were
reclassified to operations in June 2001, as a buyer could not be found.
As part of the strategy to focus on our current operations, we embarked on a
refinancing campaign. In 2001 we refinanced five ALCs; four ALCs were refinanced
with HUD insured debt for $12.5 million at fixed rates of 7.25% to 7.79% for 35
years. One ALC was refinanced with variable debt of $5.2 million at a rate of
LIBOR plus 3.6% maturing in September 2004. In December 2000, we refinanced four
ALCs for $29.8 million at fixed rates of 8.00% to 8.06% including mortgage
insurance of 0.5%.
The Company is the managing general partner of American Retirement Villas
Properties III, L.P. ("ARVP III"). On October 4, 2001, C3 Capital, LLC, a
California limited liability company ("C3 Capital"), commenced a hostile tender
offer, which was later withdrawn, to purchase up to 10,000 ARVP III limited
partnership units ("units") at a net cash purchase price of $300 per unit (the
"Hostile Offer"), and also filed with the SEC a preliminary consent solicitation
pursuant to which C3 Capital sought to remove the Company as the managing
general partner, and elect C3 Capital as the general partner of ARVP III.
20
In response to the Hostile Offer and the consent solicitation, we, through
ARVP Acquisition, L.P., a California limited partnership wholly-owned by us,
commenced a tender offer on October 18, 2001 for 10,000 outstanding partnership
units of ARVP III for $360 per unit. We amended the tender offer on October 31,
2001 and increased the offer price to $400 per unit from $360 per unit,
increased the number of Units we were seeking to purchase from 10,000 units to
all outstanding Units, and reduced the minimum number of Units that must be
tendered before we are required to purchase any Units to 30% of the outstanding
Units (the "Amended Offer"). The amendment to our original offer was in response
to C3 Capital's withdrawal of its tender offer, and receipt of a highly
conditional offer from Vintage Senior Housing, LLC ("Vintage"), an affiliate of
C3 Capital, to purchase all of ARVP III's non-cash assets for $19.5 million.
Vintage's offer was subject to, among other things, significant due diligence
and financing contingencies. In addition, on November 9, 2001 we received a
revised offer from Vintage increasing the purchase price for the assets of ARVP
III to $20 million. In December, 2001 ARVP Acquisition, L.P., had acquired an
additional 51.8% for a total of 52.1% of the partnership units of ARVP III.
Accordingly, ARVP III is included in our consolidated financial statements from
December 14, 2001. (See Note 2 to the consolidated financial statements).
In 1999, ARVP II obtained financing and, through its wholly owned subsidiary
ARVP II, LLC, purchased the landlord's interest in four previously leased ALCs
for approximately $14.3 million.
In October 2001 we were awarded four management contracts, two in Texas
totaling 126 units and two in New Mexico totaling 92 units. Subsequent to
year-end we were awarded a management contract for a newly completed ALC that is
in the lease-up stage in California.
Newly opened ALCs are expected to incur operating losses until sufficient
occupancy levels and operating efficiencies are achieved. Based upon recent
experience, we believe that an ALC typically achieves its targeted occupancy
level 18 to 24 months from the commencement of operations. Accordingly, we will
require substantial liquidity to maintain the operations of newly opened ALCs.
If sufficient occupancy levels are not achieved within reasonable periods, our
results of operations, financial position and liquidity could be materially and
adversely impacted.
On January 1, 2001, Abdo H. Khoury, our Senior Vice President and Chief
Financial Officer, was promoted to President.
CRITICAL ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries. Subsidiaries, which include
limited partnerships and limited liability companies in which we have
controlling interests, have been consolidated into the financial statements. In
December 2001, we acquired an additional 51.8% interest in American Retirement
Villas Properties III, L.P. ("ARVP III"). The balance sheet on December 31, 2001
includes the accounts of ARVP III while the income statement has the operations
from December 14, 2001; the date we acquired greater than 50% of the partnership
units. All significant intercompany balances and transactions have been
eliminated in consolidation.
Unconsolidated Joint Ventures. In 1998, we pursued an additional development
strategy by entering into joint ventures ("LLCs") designed to help us finance
development and renovation projects and to mitigate the impact of start-up
losses associated with the opening of newly constructed ALCs. The joint ventures
were formed to finance and manage the substantial renovation of existing ALCs
acquired in 1998 in the Hillsdale transaction and to construct three new
communities on land sites we owned. Participants in the joint ventures with us
are a third-party investor and a third-party developer. The LLCs contracted with
the developer to provide development services to perform the renovation and
construction. We manage four of the properties operated by the joint ventures
for an amount equal to three percent of gross revenues. One property is managed
by an unrelated third party. We account for our investment in the joint ventures
using the equity method and losses incurred by the LLCs will be allocated
disproportionately to the joint venture partners based upon their assumption of
risk. In 2000 and 2001, certain joint venture partner's capital was reduced to
zero, consequently, the losses from the joint venture was allocated to us based
upon our capital or percentage interest. We have agreed to fund any operating
deficits incurred in connection with the operation of the five joint venture
projects, up to an aggregate amount of $6.0 million for all of the development
properties and $6.0 million for all of the renovation properties subject to a
$9.0 million cap. The
21
advances, which are considered capital contributions to the LLC, are
non-interest bearing and will be repaid only if sufficient funds are available
in accordance with the terms of the operating agreements of the respective LLCs.
This agreement will remain in effect from the commencement of operations of the
project until the earlier to occur of 18 months after the project has achieved
stabilization, the sale of the project to a third-party, or the purchase by the
Company of the membership interests of the project owner. Our current funding of
operating deficits since inception in 1998 is $1.5 million. We will have an
option to purchase the joint venturer's interest in the LLCs when the ALCs reach
stabilization, at a purchase price that is the greater of fair market value or
an amount that generates a guaranteed internal rate of return on the joint
venturer's capital contribution. In 2000 we determined that the value of the
LLCs was impaired based upon our review of the projected cash flows,
accordingly, we wrote down our investment by $5.7 million, to reflect the fair
value. In 2001 we declined the option to purchase two of the LLCs that had
reached stabilization and in accordance with the LLCs' operating agreement we no
longer serve as a manager of the two LLCs.
Accounting for Long-lived Assets We review our long-lived assets, including
goodwill, for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. In reviewing
recoverability, we estimate the future cash flows expected to result from using
the assets and eventually disposing of them. Cash flows are reviewed at the
community level which is the lowest level of identifiable cash flows. If the sum
of the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is recognized
based upon the asset's fair value. For long-lived assets held for sale, fair
value is reduced for costs to sell.
Revenue Recognition We recognize rental, assisted living services and
skilled nursing facility revenue from owned and leased communities on a monthly
basis as earned. We receive fees for property management and partnership
administration services from managed communities and recognize such fees as
earned.
THE YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
The following table sets forth a comparison of the year ended December 31, 2001
and the year ended December 31, 2000. The percentage increase (decrease) are
based upon whole numbers and will not compute using rounded numbers.
INCREASE/
2001 2000 (DECREASE)
-------- -------- ----------
(DOLLARS IN MILLIONS)
Revenue:
Assisted living community revenue ............................... $ 141.9 $ 136.1 4.3%
Skilled nursing facility revenue ............................... 2.3 2.0 18.5%
Management fees from affiliates and others ...................... 1.2 0.8 42.9%
-------- -------- ----------
Total revenue .................................................... 145.4 138.9 4.7%
-------- -------- ----------
Operating expenses:
Assisted living community operating expense ..................... 88.2 87.1 1.2%
Skilled nursing facility expenses ............................... 2.5 1.9 31.9%
Community lease expense ......................................... 30.9 31.6 (2.0)%
General and administrative ...................................... 9.9 12.3 (19.6)%
Impairment loss ................................................. -- 6.2 (100.0)%
Depreciation and amortization ................................... 7.9 8.5 (7.1)%
-------- -------- ----------
Total operating expenses ......................................... 139.4 147.6 (5.5)%
-------- -------- ----------
Income (loss) from operations ..................................... 6.0 (8.7) 169.1%
-------- -------- ----------
Other income (expense):
Interest income ................................................. 1.0 1.5 (34.1)%
Other income (expense), net ..................................... 0.7 0.2 179.1%
Equity in income (loss) of partnerships ......................... (1.8) 0.8 (327.3)%
Gain on sale of properties and partnership interests ............ 2.9 0.5 477.4%
Interest expense ................................................ (8.9) (8.3) 6.9%
-------- -------- ----------
Total other income (expense) ..................................... (6.1) (5.3) 16.4%
-------- -------- ----------
Loss before income taxes, minority interest in income of majority
owned entities and extraordinary gains ......................... (0.1) (14.0) 98.8%
22
Income tax expense ................................................ (0.2) (0.2) (5.6)%
Minority interest in (income) loss of majority owned entities ..... (0.8) 0.1 (1,514.5)%
-------- -------- ----------
Loss before extraordinary item and change in accounting principle . (1.1) (14.1) (92.3)%
Extraordinary gain from early extinguishment of debt .............. 2.1 20.6 (90.0)%
-------- -------- ----------
Net income ................................................... $ 1.0 $ 6.5 (85.1)%
======== ======== ==========
The increase of $5.8 million in assisted living community revenue is
attributable to:
o the increase in average rate per occupied unit to $2,259 for 2001 as
compared with $2,145 for 2000.
o the increase in average occupancy for same store ALCs to 88.2% for 2001
as compared with 86.8% for 2000; partially offset by
o the sale of three ALCs during the second quarter of 2000;
o the decrease in assisted living penetration to 46.4% for 2001 as
compared with 46.7% for 2000.
The $0.3 million increase in skilled nursing facility revenue in 2001 is due
to the fact that we began managing the facility ourselves on April 1, 2000.
Previously it was managed by an unrelated third party and was included in other
income and expense.
Management fees from affiliates and others increased $0.4 million in 2001
due to the increase in the number of management contracts from four to eight
during the fourth quarter of 2001.
Assisted living community operating expense increased $1.1 million in 2001
due to:
o increased wages of staff; and
o increase in utilities and insurance costs; offset by
o the sale of three ALCs during the second quarter of 2000.
The decrease in assisted living community lease expense of $0.7 million in
2001 is primarily due to:
o the sale of three ALCs during the second quarter of 2000; offset by
o increases in lease payments due to the increase in the Consumer Price
Index, pursuant to the lease terms.
General and administrative expenses decreased $2.4 million in 2001 due to
the following:
o expense management yielded $1.5 million of reductions in payroll costs,
office expense, travel and related expenses and consulting costs; and
o no additional provision for doubtful accounts was required in 2001
whereas $0.8 million was recorded in 2000 due to the uncertainty of
collection as a result of an audit by the intermediary for Medicare.
The impairment loss in 2000 was due to the following:
o an additional $0.5 million impairment loss on the properties held for
sale; and
o a $5.7 million impairment loss on the investment in joint ventures that
had carrying values in excess of fair value and met the criteria for
impairment under Statement of Financial Accounting Standard No. 121.
23
Depreciation and amortization expenses decreased $0.6 million due to the
following:
o the sale of three ALCs during the second quarter of 2000;
o the value of some of the properties held for sale which were
subsequently transferred back into operations, were impaired resulting
in a lower carrying value; partially offset by
o an increase in depreciation related to capital expenditures.
Interest income decreased in 2001 due to lower interest rates and lower
average cash balances carried by us during 2001 as compared to 2000.
Interest expense increased in 2001 $0.6 million due to the increase in debt
due to refinancing.
Minority interest in income of majority owned entities increased $0.9
million due to improved performance of the underlying ALCs.
Gain on the sale of properties and partnership interests in 2001 of $2.9
million is a result of the sale of the apartment partnership interest.
The $0.5 million gain from the sale of assets in 2000 was due to the sale of
a parcel of land in Texas that was in property held for sale.
Equity in income of partnerships was $0.8 million for the year ended
December 31, 2000. The income in 2000 is a result of the reduction in our
estimated liabilities under guarantees for certain partnerships. For the year
ended December 31, 2001 the $1.8 million in the equity in loss of partnerships
is due to the losses in the unconsolidated joint ventures.
THE YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
The following table sets forth a comparison of the year ended December 31, 2000
and the year ended December 31, 1999. The percentage increase (decrease) are
based upon whole numbers and will not compute using rounded numbers.
INCREASE/
2000 1999 (DECREASE)
-------- -------- ----------
(DOLLARS IN MILLIONS)
Revenue:
Assisted living community revenue .............................. $ 136.1 $ 137.2 (0.8)%
Skilled nursing facility revenue .............................. 2.0 -- 100.0%
Management fees from affiliates and others ..................... 0.8 1.0 (19.4)%
-------- -------- ----------
Total revenue ................................................... 138.9 138.2 (0.5)%
-------- -------- ----------
Operating expenses:
Assisted living community operating expense .................... 87.1 87.7 (0.6)%
Skilled nursing facility expenses .............................. 1.9 -- 100.0%
Community lease expense ........................................ 31.6 32.2 (2.1)%
General and administrative ..................................... 12.3 15.0 (17.9)%
Impairment loss ................................................ 6.2 16.4 (62.2)%
Depreciation and amortization .................................. 8.5 8.5 (0.6)%
-------- -------- ----------
Total operating expenses ........................................ 147.6 159.8 (7.6)%
-------- -------- ----------
Loss from operations ............................................. (8.7) (21.6) (59.7)%
-------- -------- ----------
Other income (expense):
Interest income ................................................ 1.5 1.0 49.2%
Other income (expense), net .................................... 0.2 0.4 (35.1)%
Equity in income (loss) of partnerships ........................ 0.8 (0.9) 189.5%
24
Gain on sale of properties ..................................... 0.5 1.9 (73.5)%
Interest expense ............................................... (8.3) (8.9) (6.3)%
Litigation judgment ............................................ -- (4.4) (100.0)%
-------- -------- ----------
Total other income (expense) .................................... (5.3) (10.9) (51.4)%
-------- -------- ----------
Loss before income taxes, minority interest in income of majority
owned entities, extraordinary items and cumulative effect of
accounting change............................................... (14.0) (32.5) (56.9)%
Income tax expense ............................................... (0.2) -- 357.1%
Minority interest in (income) loss of majority owned entities .... 0.1 (0.9) (106.1)%
-------- -------- ----------
Loss before extraordinary item and cumulative effect of accounting
change............................................................ (14.1) (33.4) (57.8)%
Extraordinary gain from early extinguishment of debt ............. 20.6 7.0 193.6%
-------- -------- ----------
Income (loss) before cumulative effect of accounting change ...... 6.5 (26.4) 124.7%
Cumulative effect of accounting change ........................... -- (1.3) (100.0)%
-------- -------- ----------
Net income (loss) ........................................... $ 6.5 $ (27.7) 123.5%
======== ======== ==========
The decrease in 2000 of $1.1 million in assisted living community revenue is
attributable to:
o the sale of three ALCs during the second quarter of 2000; offset by
o the increase in average occupancy for same store ALCs to 88.1% for 2000
as compared with 86.7% for 1999;
o the increase in assisted living penetration to 46.7% for 2000 as
compared with 45.6% for 1999; and
o the increase in average rate per occupied unit to $2,145 for 2000 as
compared with $2,070 for 1999.
The $2.0 million increase in skilled nursing facility revenue in 2000 is due
to the fact that we began managing the facility ourselves on April 1, 2000.
Previously it was managed by an unrelated third party and was included in other
income and expense.
Management fees from affiliates and others decreased $0.2 million due to the
decrease in the number of management contracts to six for two quarters during
2000.
Assisted living community operating expense decreased $0.6 million in 2000
due to:
o the sale of three of the ALCs during the second quarter of 2000; offset
by
o staffing requirements related to increased assisted living services
provided; and
o increased wages of staff.
The decrease in assisted living community lease expense of $0.6 million in
2000 is primarily due to the sale of three ALCs during the second quarter of
2000.
General and administrative expenses decreased $2.7 million due to the
following:
o expenses incurred in connection with the lawsuits with Kapson, Atria and
Lazard Freres and Emeritus were less in 2000 as we settled the lawsuits
in the middle of 1999; and
o in 2000 we made substantial reductions in staffing under the current
management team; and
o the provision of $1.0 million in 1999 for the Medicare receivables held
by GeriCare which was discontinued in 1997, versus $0.8 million
additional provision booked in 2000 due to the uncertainty of collection
as a result of an audit by the intermediary for Medicare.
The impairment loss in 1999 was due to the following:
25
o an $8.6 million impairment loss which represents a write down of the
carrying values in excess of fair market value of the property held for
sale; and
o a $7.7 million write off for Rossmore House which included $3.1 million
of goodwill and $4.6 million for reduction in carrying value as a result
of the decision to sell this facility.
The impairment loss in 2000 was due to the following:
o an additional $0.5 million impairment loss on the properties held for
sale; and
o a $5.7 million impairment loss on the investment in joint ventures that
have carrying values in excess of fair value and met the criteria for
impairment under Statement of Financial Accounting Standard No. 121.
Depreciation and amortization expenses remained relatively constant in 2000.
Expected decreases due to sale of ALCs during 2000 were offset by an increase in
depreciation related to capital expenditures.
Interest income increased due to higher average cash balances carried by us
during 2000 as compared to 1999.
Interest expense decreased $0.6 million in 2000 due to extinguishment of
debt.
Minority interest in income of majority owned entities increased $1.0
million in 2000 due to the interest expense for the nine refinanced properties
held by our majority owned entities.
The $0.5 million gain from the sale of assets in 2000 was due to the sale of a
parcel of land in Texas that was in property held for sale. The $ 1.9 million
gain in 1999 was due to the sale of assets to Dominium for a portion of the
apartment group.
Equity in income of partnerships was $ 0.8 million for the year ended December
31, 2000 and a loss of $ 0.9 million for the year ended December 31, 1999. The
income in 2000 is a result of the reduction in our estimated liabilities under
guarantees for certain partnerships. The 1999 expense is the result of operating
costs of the Apartment Group, offset by a $ 1.0 million reduction in the
estimated liability under guarantees for certain partnerships.
LIQUIDITY AND CAPITAL RESOURCES
Our consolidated cash and cash equivalents balances were $13.2 million and
$16.8 million at December 31, 2001 and 2000, respectively. Working capital
decreased to $1.2 million as of December 31, 2001 compared to working capital of
$10.5 million at December 31, 2000, resulting primarily from the increase in
current maturity of long term debt for one ALC.
In our unrestricted cash balances of $13.2 million, $7.7 million are held by
our consolidated partnerships in which we have ownership of 52.1% to 60.5%. Cash
can only be used to pay the consolidated partnership's obligations and the
excess distributed to all partners. Consequently, our access to this cash is
limited to the distribution received.
During 2001, cash provided by operating activities was $2.5 million compared
to $2.1 million used during 2000 and $11.3 million used in 1999.
The cash provided by operating activities during 2001 was a result of:
o our net income of $1.0 million; adjusted for
o $7.9 million non-cash charge of depreciation and amortization expense;
26
o $0.8 million of minority interest in income of majority owned entities;
offset by
o $2.2 million decrease in net liabilities;
o $2.9 million gain on sale of partnership interests in tax credit
apartments; and
o $2.1 million for gain on extraordinary item on early extingishment of
debt.
The cash used in operating activities during 2000 was a result of:
o net income of $6.5 million; adjusted for
non-cash charges of:
o $6.2 million loss recorded for impairment of long-lived assets; and
o $8.5 million of depreciation and amortization expense; offset by
o $20.6 million for gain on extraordinary item on early extinguishment
of debt; and
o $2.7 million decrease in net liabilities.
The cash used in operating activities during 1999 was a result of:
o our net loss of $27.7 million; adjusted for
non-cash charges (credits) of:
o $16.4 million loss recorded for impairment of long-lived assets;
o $8.5 million of depreciation and amortization expense;
o $1.3 million for the cumulative effect of the change in accounting
principle; offset by
o $7.0 million for gain on extraordinary item on early extinguishment
of debt;
o $0.9 million of minority interest in income of majority owned entities;
offset by
o $0.5 million decrease in net liabilities;
o $1.9 million for gain on sale of assets of the apartment division to
Dominium; and
o $1.3 million for the cumulative effect of the change in accounting
principles.
In 2001, cash used in investing activities was $3.4 million as compared to
$1.9 million in 2000, and $11.9 million provided by investing activities in
1999.
The cash used in investing activities during 2001 was a result of:
o $1.3 million related to the acquisition of an additional 51.8% ownership
interest in American Retirement Villas Properties III, L.P; and
o $6.1 million of purchases of property, furniture and equipment; offset
by
o $0.4 million increase in security deposits;
o $0.7 million of net proceeds from the sale of a land site in Colorado;
and
27
o $2.9 million for the proceeds from the sale of our partnership interest
in five apartment partnerships.
The cash used in investing activities during 2000 was a result of:
o $5.2 million for purchase of property, furniture and equipment; and
o $0.5 million increase in security deposit on leased properties; offset
by
o $3.8 million proceeds for sale of assets, net of cost.
The cash provided by investing activities during 1999 was a result of:
o $39.8 million proceeds for sale of ALCs, net of cost;
o $1.9 million proceeds for sale of partnership interests; offset by
o $14.7 million for purchase of previously leased ALCs;
o $7.4 million for purchase of property, furniture and equipment;
o $6.4 million increase in security deposit on leased properties; and
o $1.3 million for the contribution into a joint venture.
In 2001, the cash used by financing activities was $5.6 million as compared
to $6.2 million provided for 2000 and $2.1 million provided during 1999.
The cash used by financing activities during 2001 was a result of:
o $12.4 million of repayments of notes payable;
o $5.7 million for repayment of subordinated debt;
o $2.5 million for distributions to minority partners; and
o $0.7 million of payments for loan fees; offset by
o $18.7 million borrowings under refinancings.
The cash provided by financing activities during 2000 was a result of:
o $10.0 million borrowings under non-secured line of credit;
o $41.0 million of borrowing under notes payable; offset by:
o $33.7 million of repayments of notes payable;
o $10.9 million of repayments of subordinated debt offset by $1.3 million
of associated costs;
o $0.2 million of distributions paid to our minority partners in certain
majority owned entities; and
o $1.3 million of loan fees.
28
The cash provided by financing activities during 1999 was a result of:
o $41.8 million refinancing proceeds;
o $14.7 million of borrowing under notes payable for purchase of
previously leased ALCs;
o $2.6 million of borrowing under notes payable; offset by:
o $45.2 million of repayments of notes payable;
o $9.0 million of distributions paid to our minority partners in certain
majority owned entities;
o $1.0 million of repayments of subordinated debt; and
o $1.8 million of loan fees.
In 2001, we refinanced five owned ALCs for $17.7 million with fixed
interest rates of 7.25%-7.79% for 35-years. Subsequent to year end we refinanced
two ALCs owned by two of our majority owned partnerships. One refinancing
increased the loan to $2.4 million for 35 years at an interest rate of 7.56%.
The other refinancing amended one of the existing notes to (i) increase the
principal sum of the existing loan by approximately $4.0 million, (ii) extend
the maturity date of the existing loans to July 1, 2003, and (iii) change the
interest rate of the existing loan to 8.5%. In addition, we restructured the
$1.5 million debt to our major shareholder to extend its maturity to April 2003
for a nominal extension fee. Subsequent to year-end we received an extension on
a $12.3 million loan for an ALC until March 2003, while we work to refinance
this property into a 35-year mortgage.
In January, 2001 we restructured 16 ALC leases into two lease pools of 8
ALCs each. In each restructured pool, the lease termination date was extended
through fiscal 2021. As part of the restructure, we are allowed to finance the
additional rent expense of up to $1.0 million during 2001, $1.0 million in 2002,
$1.5 million in 2003, $1.0 million in 2004 and $0.5 million in 2005, converting
this into a note payable with a due date of December 31, 2010 at a fixed
interest rate of 7%. Interest only payments are required monthly with principal
payments beginning in 2006 at $1.0 million per year. We also incurred a
restructuring fee of $4.5 million payable at $1.5 million for each of the first
three years. The restructured lease agreements provide for reimbursement to us
from the landlord of capital improvement expenditures up to $3.0 million.
The various debt and lease agreements contain restrictive covenants
requiring us to maintain certain financial ratios, including current ratio,
working capital, minimum net worth, and debt service coverage, among others. At
December 31, 2001, we were in compliance with all covenants.
In 1999, we began retiring portions of our 6 3/4% convertible subordinated
debt. During 1999, we issued a total of 799,566 shares of our common stock and
paid a total of $1.0 million to certain of our bondholders in exchange for a
total of $9.2 million principal amount of the subordinated notes due 2006 that
were held by those bondholders. These transactions resulted in an extraordinary
gain of $7.0 million net of tax for the fiscal year ended December 31, 1999.
During 2000, we issued a total of 781,025 shares of our common stock and paid a
total of $9.6 million to additional bondholders in exchange for a total of $33.0
million in principal amount of the subordinated notes held by those bondholders
which yielded an extraordinary gain of $20.6 million net of tax and costs. In
2001 we paid a total of $5.7 million to certain of our bondholders in exchange
for a total of $8.0 million principal amount of the subordinated notes. The
transactions for the year ended December 31, 2001, resulted in an extraordinary
gain of $2.1 million net of tax and costs. Out of $57.5 million we have retired
a total of $50.2 million of our public debt resulting in extraordinary gains of
$29.5 million to date net of tax and costs.
Pursuant to the terms of an Operating Deficit Payment Agreement, the
Company has agreed to fund any operating deficits incurred in connection with
the operation of five joint venture projects operating as limited liability
companies ("LLC"), up to an aggregate amount of $6.0 million for all of the
development properties and $6.0 million for all of the renovation properties
subject to a $9.0 million cap. The advances, which are considered capital
contributions to the LLC, are non-interest bearing and will be repaid only if
sufficient funds are available in accordance with the terms of the operating
agreements of the respective LLCs. This agreement will remain in effect from the
commencement of operations of the project until the earlier to occur of 18
months after the project has achieved stabilization, the sale of the project to
a third-party, or the purchase by the Company of the membership
29
interests of the project owner. As of December 31, 2001, operating deficit
advances of $1.5 million had been funded since inception in 1998. We declined to
purchase two of the joint venture properties and in accordance with the
operating agreement we were terminated as the manager of those LLCs. In addition
we are no longer managing one of the properties that is outside our geographic
clustering strategy.
We believe that our existing liquidity, our ability to sell ALCs and land
sites which do not meet our financial objectives or geographic clustering
strategy and our ability to refinance certain owned ALCs and investments will
provide us with adequate resources to meet our current operating and investing
needs. At December 31, 2001 we did not generate sufficient cash from operations
to fund recurring working capital and capital expenditure requirements. We may
be required from time to time to incur additional indebtedness or issue
additional debt or equity securities to finance our strategy, including the
rehabilitation of ALCs as well as other capital expenditures. We anticipate that
we will be able to obtain the additional financing; however, we cannot assure
you that we will be able to obtain financing on favorable terms.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALCs we operate is the primary source of our revenue.
These ALCs are affected by rental rates which are highly dependent upon market
conditions and the competitive environments where the communities are located.
Employee compensation is the principal cost element of property operations.
Although there can be no assurance we will be able to continue to do so, we have
been able historically to offset the effects of inflation on salaries and other
operating expenses by increasing rental and assisted living rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on
our notes payable. Currently, we do not utilize interest rate swaps. The purpose
of the following analysis is to provide a framework to understand our
sensitivity to hypothetical changes in interest rates as of December 31, 2001.
You should be aware that many of the statements contained in this section are
forward looking and should be read in conjunction with our disclosures under the
heading "Forward-Looking Statements."
For fixed rate debt, changes in interest rates generally affect the fair
value of the debt instrument, but not our earnings or cash flows. Conversely,
for variable rate debt, changes in interest rates generally do not impact fair
value of the debt instrument, but do affect our future earnings and cash flows.
We do not have an obligation to prepay fixed rate debt prior to maturity, and as
a result, interest rate risk and changes in fair value should not have a
significant impact on the fixed rate debt until we would be required to
refinance such debt. Holding the variable rate debt balance constant, each
one-percentage point increase in interest rates would result in an increase in
variable rate interest incurred for the coming year of approximately $350,000.
The table below details the principal amount and the average interest rates
of notes payable in each category based upon the expected maturity dates. The
fair value estimates for notes payable are based upon future discounted cash
flows of similar type notes or quoted market prices for similar loans. The
carrying value of our variable rate debt approximates fair value due to the
frequency of re-pricing of this debt. Our fixed rate debt consists of
convertible subordinated notes payable and mortgage payables. The fixed rate
debt bears interest at rates that approximate current market value except for
the convertible subordinated debt which bears interest at 6.75%.
EXPECTED MATURITY DATA
FAIR
2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
Fixed rate debt.................... $ 578 $ 8,372 $ 544 $ 587 $ 8,875 $ 58,154 $77,110 $77,110
Average interest rate.............. 8.05% 7.99% 7.92% 7.92% 8.00% 8.00%
Variable rate debt................. $6,691 $11,877 $ 5,400 $ 353 $ 353 $ 10,547 $35,221 $35,221
Average interest rate.............. 6.63% 6.02% 4.32% 4.07% 4.07% 4.07%
We do not believe that the future market rate risks related to the above
securities will have a material adverse impact on our financial position,
results of operation or liquidity.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the Independent Auditors' Report
are listed at Item 14 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these Items is incorporated by reference to our
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of our fiscal year covered by this Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements. The following financial statements of the
Registrant and the Report of Independent Public Accountants therein are
filed as part of this Report on Form 10-K:
PAGE
----
Independent Auditors' Report............................................................................... F-1
Consolidated Balance Sheets................................................................................ F-2
Consolidated Statements of Operations...................................................................... F-3
Consolidated Statements of Shareholders' Equity............................................................ F-4
Consolidated Statements of Cash Flows...................................................................... F-5
Notes to Consolidated Financial Statements................................................................. F-7
(2) Financial Statement Schedules. Schedule II-Valuation and Qualifying
Accounts. Other Financial Statement Schedules have been omitted because
the information required to be set forth therein is not applicable or is
shown in the financial statements or notes thereto.
(b) Reports on Form 8-K. None.
(c) Exhibits: The following exhibits are filed as part of, or incorporated by
reference into this report on Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2 Agreement and Plan of Merger by and between ARV Assisted
Living, Inc. and ARV Delaware, Inc., incorporated by reference
to the Company's Proxy Statement for the 1997 Meeting of
Shareholders of ARV Assisted Living, Inc., filed with the
Securities and Exchange Commission on Schedule 14A on December
31, 1997.
3.1 Certificate of Incorporation of ARV Delaware, Inc.,
incorporated by reference to the Company's Proxy Statement for
the 1997 Meeting of Shareholders of ARV Assisted Living, Inc.,
filed with the Securities and Exchange Commission on Schedule
14A on December 31, 1997.
3.2 By-laws of ARV Delaware, Inc., incorporated by reference to the
Company's Proxy Statement for the 1997 Meeting of Shareholders
of ARV Assisted Living Inc., filed with the Securities and
Exchange Commission on Schedule 14A on December 31, 1997.
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, incorporated by reference.
31
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
4.2 First Amendment to the Right Agreement, dated October 21, 1998,
by and between ARV Assisted Living Inc., and ChaseMellon
Shareholder Services LLC, incorporated by reference to our 8-K
filed October 21, 1998.
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 Second Amendment 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 Second Amendment 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
incorporated by reference to the Company's 10-K filed with the
Securities and Exchange Commission on March 31, 1997.
10.11 Amendment to Executive Employment Agreement, effective December
5, 1997, by and between ARV Assisted Living, Inc. and Howard G.
Phanstiel incorporated by reference to the Company's 10-K filed
with the Securities and Exchange Commission on March 31, 1997.
10.12 Executive Employment Agreement, as amended, dated June 1, 1998,
by and between ARV Assisted Living, Inc. and Douglas M.
Pasquale incorporated by reference to the Company's 10-Q for
June 30, 1998.
10.13 Employment Agreement, as amended, dated June 15, 1998, by and
between ARV Assisted Living, Inc. and Patricia J. Gifford, MD
incorporated by reference to the Company's 10-Q for June 30,
1998.
32
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.20 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns III, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.1 on August
10, 1999.
10.21 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns III, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.2 on August
10, 1999. (1)
10.22 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.3 on August
10, 1999. (1)
10.23 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.4 on August
10, 1999. (1)
10.24 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.5 on August
10, 1999. (1)
10.25 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.6 on August
10, 1999. (1)
10.26 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.7 on August
10, 1999. (1)
10.27 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.8 on August
10, 1999.(1)
10.28 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.9 on August
10, 1999. (1)
10.29 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.10 on August
10, 1999. (1)
10.30 Loan Agreement by and between Banc One Capital Funding
Corporation and Acacia Villa, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.11 on August
10, 1999. (1)
10.31 Letter Agreement as to the Loans in the aggregate amount of
$39,703,100 from Banc One Capital Funding Corporation to
Retirements Inns II LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.12 on August 10, 1999.
10.32 Letter Agreement as to the Loans in the aggregate amount of
$2,116,100 from Banc One Capital Funding Corporation to Acacia
Villa LLC dated June 27, 1998 incorporated by reference to the
Company's 10Q filed with the Securities and Exchange Commission
as exhibit 10.13 on August 10, 1999.
10.33 Letter Agreement as to the Loans in the aggregate amount of
$13,382,200 from Banc One Capital Funding Corporation to
Retirements Inns III LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.14 on August 10, 1999.
10.34 Note and Agreement as to Retirement Inns II, LLC dated June 27,
1998 incorporated by reference to the Company's 10Q filed with
the Securities and Exchange Commission as exhibit 10.15 on
August 10, 1999.
33
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.35 Note and Agreement as to Retirement Inns III, LLC dated June
27, 1998 incorporated by reference to the Company's 10Q filed
with the Securities and Exchange Commission as exhibit 10.16 on
August 10, 1999.
10.36 Note and Agreement as to Acacia Villa, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.17 on August
10, 1999.
10.37 Term Loan Agreement between ARV Assisted Living, Inc. and LFSRI
II Assisted Living, LLC, incorporated by reference to our 10Q
filed with the Securities and Exchange Commission as exhibit
10.1 on May 15, 2000.
10.38 Warrant issued to LFSRI II Assisted Living, LLC to Purchase
Common Stock of ARV Assisted Living, Inc, incorporated by
reference to our 10Q filed with the Securities and Exchange
Commission as exhibit 10.2 on May 15, 2000.
10.39 Second Amendment to Rights Agreement, by and between ARV
Assisted Living, Inc, and Chase Mellon Shareholder Services,
LLC, incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.3 on May 15,
2000.
10.40 Term Note between ARV Assisted Living, Inc. and LFSRI II
Assisted Living LLC, incorporated by reference to our 10Q filed
with the Securities and Exchange Commission as exhibit 10.4 on
May 15, 2000.
10.41 Waiver, incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.5 on May 15,
2000.
10.42 LLC Articles of Incorporation incorporated by reference to our
10Q filed with the Securities and Exchange Commission as
exhibit 10.1 on August 10, 2000.
10.43 Multifamily Note incorporated by reference to our 10Q filed
with the Securities and Exchange Commission as exhibit 10.2 on
August 10, 2000.
10.44 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest in Franklin Commons, L.P. dated January 16, 2001.
10.45 Assignment of interest in the receivable obligation owed by
Franklin Commons, L.P. to Pacific Demographics Corporations, a
wholly owned subsidiary of ARV Assisted Living, Inc. dated
January 16, 2001.
10.46 Assignment of interest in management fees owed by Franklin
Commons, L.P. to ARV Assisted Living, Inc. dated on January 16,
2001.
10.47 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty
and David Collins, and Franklin Commons, L.P.
10.48 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary
Davidson, John Booty and David Collins, and Franklin Commons,
L.P.
10.49 Purchase Agreement by and between ARV Investment Group, Inc.
(wholly owned subsidiary of ARV Assisted Living, Inc.) and
Eenhoorn Development, LLC for the sale of partnership interest
in Franklin, Grand Rapids, Rosewood, San Marcos and Lansing.
10.50 Amendment to Purchase Agreement dated October 4, 2000 by and
between ARV Investment Group, Inc. (wholly owned subsidiary of
ARV Assisted Living, Inc.) and Eenhoorn Development, LLC.
10.51 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest in Grand Rapids Housing Partners, L.P. dated January
16, 2001.
10.52 Assignment of interest in the receivable obligation owed by
Grand Rapids Housing Partners, L.P. to ARV Assisted Living,
Inc. dated January 16, 2001.
10.53 Assignment of interest in management fees owed by Grand Rapids
Housing Partners, L.P. to ARV Assisted Living, Inc. dated on
January 16, 2001.
34
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.54 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty
and David Collins, and Grand Rapids Housing Partners, L.P.
10.55 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary
Davidson, John Booty and David Collins, and Grand Rapids
Housing Partners, L.P.
10.58 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest Lansing Housing Partners, L.P. dated January 16, 2001.
10.59 Assignment of interest in the receivable obligation owed by
Lansing Housing Partners, L.P. to ARV Assisted Living, Inc.
dated January 16, 2001.
10.60 Assignment of interest in management fees owed by Lansing
Housing Partners, L.P. to ARV Assisted Living, Inc. dated on
January 16, 2001.
10.61 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty
and David Collins, and Lansing Housing Partners, L.P.
10.62 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary
Davidson, John Booty and David Collins, and Lansing Housing
Partners, L.P.
10.65 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest Rosewood Villas, L.P. dated January 16, 2001.
10.66 Assignment of interest in the receivable obligation owed by
Rosewood Villas, L.P. to ARV Assisted Living, Inc. dated
January 16, 2001.
10.67 Assignment of interest in management fees owed by Rosewood
Villas, L.P. to ARV Assisted Living, Inc. dated on January 16,
2001.
10.68 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty
and David Collins, and Rosewood Villas, L.P.
10.69 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary
Davidson, John Booty and David Collins, and Rosewood Villas,
L.P.
10.72 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest San Marcos, L.P. dated January 16, 2001.
10.73 Assignment of interest in the receivable obligation owed by San
Marcos, L.P. to ARV Assisted Living, Inc. dated January 16,
2001.
10.74 Assignment of interest in management fees owed by San Marcos,
L.P. to ARV Assisted Living, Inc. dated on January 16, 2001.
10.75 Deed of Trust Note of ARV Burlingame, L.P. to Red Mortgage
Capital, Inc.
10.76 Allonge #1 to Deed of Trust Note of ARV Burlingame, L.P. to Red
Mortgage Capital, Inc.
10.77 Deed of Trust between ARV Burlingame, L.P. and Fidelity
National Title Insurance
10.78 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Burlingame, L.P. and Secretary of
Housing and Urban Development
10.79 Regulatory Agreement Nursing Homes Projects between ARV
Burlingame, L.P. and Federal Housing Commissioner
10.80 Deed of Trust Note of ARV Campbell, L.P. to Red Mortgage
Capital, Inc.
10.81 Allonge #1 to Deed of Trust Note of ARV Campbell, L.P. to Red
Mortgage Capital, Inc.
10.82 Deed of Trust between ARV Campbell, L.P. and Fidelity National
Title Insurance
10.83 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Campbell, L.P. and Secretary of
Housing and Urban Development
10.84 Regulatory Agreement Nursing Homes Projects between ARV
Campbell, L.P. and Federal Housing Commissioner
10.85 Deed of Trust Note of ARV Sunnyvale, L.P. to Red Mortgage
Capital, Inc.
35
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.86 Allonge #1 to Deed of Trust Note of ARV Sunnyvale, L.P. to Red
Mortgage Capital, Inc.
10.87 Deed of Trust between ARV Sunnyvale, L.P. and Fidelity National
Title Insurance
10.88 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Sunnyvale, L.P. and Secretary of
Housing and Urban Development
10.89 Regulatory Agreement Nursing Homes Projects between ARV
Sunnyvale, L.P. and Federal Housing Commissioner
10.90 Deed of Trust Note of ARV Valley View, L.P. to Red Mortgage
Capital, Inc.
10.91 Deed of Trust between ARV Valley View, L.P. and Fidelity
National Title Insurance
10.92 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Valley View, L.P. and Secretary of
Housing and Urban Development
10.93 Regulatory Agreement Nursing Homes Projects between ARV Valley
View, L.P. and Federal Housing Commissioner
10.94* Deed of Trust Note of ARV Fullerton, L.P. to Red Mortgage
Capital, Inc.
10.95* Allonge #1 to Deed of Trust Note of ARV Fullerton, L.P. to Red
Mortgage Capital, Inc.
10.96* Deed of Trust between ARV Fullerton, L.P. and Fidelity National
Title Insurance
10.97* Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Fullerton, L.P. and Secretary of
Housing and Urban Development
10.98* Regulatory Agreement Nursing Homes Projects between ARV
Fullerton, L.P. and Federal Housing Commissioner
10.99* Deed of Trust Note of ARV Acacia, L.P. to Red Mortgage Capital,
Inc.
10.100* Allonge #1 to Deed of Trust Note of ARV Acacia, L.P. to Red
Mortgage Capital, Inc.
10.101* Deed of Trust between ARV Acacia, L.P. and Fidelity National
Title Insurance
10.102* Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Acacia, L.P. and Secretary of
Housing and Urban Development
10.103* Regulatory Agreement Nursing Homes Projects between ARV Acacia,
L.P. and Federal Housing Commissioner
23.1 Consent of KPMG LLP.
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.
* included herewith
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ARV ASSISTED LIVING, INC.
By: /s/ DOUGLAS M. PASQUALE
----------------------------------------
Douglas M. Pasquale
Chief Executive Officer
Date: March 29, 2002
Pursuant to the requirements of the Securities Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DOUGLAS M. PASQUALE Chief Executive Officer March 29, 2002
- ---------------------------------------------- (Principal Executive Officer)
Douglas M. Pasquale
/s/ ABDO H. KHOURY President and Chief Financial Officer March 29, 2002
- ---------------------------------------------- (Principal Financial Officer)
Abdo H. Khoury
/s/ JOHN A. MOORE Director March 29, 2002
- ----------------------------------------------
John A. Moore
/s/ DAVID P. COLLINS Director March 29, 2002
- ----------------------------------------------
David P. Collins
/s/ MAURICE J. DEWALD Director March 29, 2002
- ----------------------------------------------
Maurice J. DeWald
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ARV Assisted Living, Inc.:
We have audited the accompanying consolidated balance sheets of ARV Assisted
Living, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 2001. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule described in Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ARV Assisted
Living, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Orange County, California
March 15, 2002
F-1
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(IN THOUSANDS)
ASSETS
2001 2000
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 13,234 $ 16,817
Accounts receivable and amounts due from affiliates, net............................ 744 829
Prepaids and other current assets................................................... 3,701 2,291
Impounds............................................................................ 3,779 3,256
Properties held for sale, net....................................................... 763 3,545
----------- -----------
TOTAL CURRENT ASSETS.................................................................. 22,221 26,738
Property, furniture and equipment..................................................... 116,929 100,461
Goodwill, net......................................................................... 18,354 18,939
Operating lease security deposits..................................................... 9,414 9,778
Other non-current assets.............................................................. 10,259 10,024
----------- -----------
$ 177,177 $ 165,940
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................... $ 2,212 $ 2,645
Accrued payroll costs............................................................... 4,055 3,064
Other accrued liabilities........................................................... 6,659 8,892
Notes payable, current portion...................................................... 7,269 1,071
Accrued interest payable............................................................ 823 599
----------- -----------
TOTAL CURRENT LIABILITIES............................................................. 21,018 16,271
Notes payable, less current portion................................................... 105,062 99,130
Lease liabilities..................................................................... 1,995 1,752
Other non-current liabilities......................................................... 641 789
----------- -----------
128,716 117,942
Minority interest in majority owned entities.......................................... 621 1,130
SHAREHOLDERS' EQUITY:
Series A Preferred stock, convertible and redeemable; 2,000 shares authorized,
none issued or outstanding at December 31, 2001 and 2000........................... -- --
Preferred stock, no par value. 8,000 shares authorized, none issued and outstanding... -- --
Common stock, $0.01 par value. Authorized 100,000 shares; 17,460 shares issued and
outstanding at December 31, 2001 and 2000.......................................... 175 175
Additional paid in capital.......................................................... 145,337 145,337
Accumulated deficit................................................................. (97,672) (98,644)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................................................ 47,840 46,868
----------- -----------
Commitments and contingent liabilities................................................
$ 177,177 $ 165,940
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999
----------- ----------- -----------
REVENUE:
Assisted living community revenue:
Rental revenue............................................................... $ 117,249 $ 112,073 $ 110,980
Assisted living and other services........................................... 24,668 24,024 26,196
Skilled nursing facility revenue............................................. 2,323 1,960 --
Management fees.............................................................. 1,155 808 1,003
----------- ----------- -----------
TOTAL REVENUE................................................................. 145,395 138,865 138,179
----------- ----------- -----------
OPERATING EXPENSES:
Assisted living community operating expense.................................. 88,185 87,130 87,665
Skilled nursing facility expenses............................................ 2,507 1,901 --
Community lease expense...................................................... 30,943 31,571 32,239
General and administrative................................................... 9,874 12,288 14,965
Impairment loss.............................................................. -- 6,187 16,368
Depreciation and amortization................................................ 7,878 8,483 8,531
----------- ----------- -----------
TOTAL OPERATING EXPENSES...................................................... 139,387 147,560 159,768
----------- ----------- -----------
Income (loss) from operations.................................................. 6,008 (8,695) (21,589)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income.............................................................. 1,010 1,532 1,027
Other income (expense), net.................................................. 681 244 376
Equity in income (loss) of partnerships...................................... (1,798) 791 (884)
Gain on sale of properties and partnership interests......................... 2,887 500 1,884
Interest expense............................................................. (8,949) (8,368) (8,933)
Litigation judgment.......................................................... -- -- (4,368)
----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE).................................................. (6,169) (5,301) (10,898)
----------- ----------- -----------
Loss before income tax expense, minority interest in income of majority owned
entities, extraordinary gain, and change in accounting principle............. (161) (13,996) (32,487)
Income tax expense............................................................. 151 160 35
Minority interest in (income) loss of majority owned entities.................. (778) 55 (903)
------------ ----------- -----------
Loss before extraordinary gain and change in accounting principle (1,090) (14,101) (33,425)
Extraordinary gain from early extinguishment of debt, net of income tax of
$200 in 2000................................................................. 2,062 20,613 7,020
----------- ----------- -----------
Income (loss) from operations before change in accounting principle............ 972 6,512 (26,405)
Cumulative effect of change in accounting principle, net of income tax......... -- -- (1,260)
----------- ----------- -----------
Net income (loss).............................................................. $ 972 $ 6,512 $ (27,665)
=========== =========== ===========
Earnings (loss) per share information:
Basic and diluted earnings (loss) per common share:
Loss before extraordinary gain from early extinguishment of debt, and
cumulative effect of change in accounting principle......................... $ (0.06) $ (0.81) $ (2.09)
Extraordinary gain from early extinguishment of debt, net of income tax...... 0.12 1.19 .44
Cumulative effect of change in accounting principle, net of income tax....... -- -- (.08)
----------- ----------- -----------
Net earnings (loss)........................................................... $ 0.06 $ 0.38 $ (1.73)
=========== =========== ===========
Weighted average common shares outstanding.................................... 17,460 17,357 15,968
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
COMMON STOCK
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ----------- ------------ -----------
Balance at December 31, 1998......................................... 15,873 $ 143,178 $ (77,491) $ 65,687
Issuance of common stock........................................... 806 1,474 -- 1,474
Adjustment to stock issuance cost-litigation judgment.............. -- (372) -- (372)
Net loss........................................................... -- -- (27,665) (27,665)
--------- ----------- ------------ -----------
Balance at December 31, 1999......................................... 16,679 144,280 (105,156) 39,124
Issuance of common stock........................................... 781 1,232 -- 1,232
Net income......................................................... -- -- 6,512 6,512
--------- ----------- ------------ -----------
Balance at December 31, 2000......................................... 17,460 145,512 (98,644) 46,868
Net income......................................................... -- -- 972 972
--------- ----------- ------------ -----------
Balance at December 31, 2001......................................... 17,460 $ 145,512 $ (97,672) $ 47,840
========= =========== ============ ===========
See accompanying notes to consolidated financial statements.
F-4
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
2001 2000 1999
---------- ---------- ----------
Cash flows provided by (used in) operating activities:
Net income (loss)................................................... $ 972 $ 6,512 $ (27,665)
Adjustments to reconcile net income (loss) to net cash provided by
(used in)
Operating activities:
Impairment loss.................................................. -- 6,187 16,368
Extraordinary gain on debt retirement............................ (2,062) (20,613) (7,020)
Change in accounting principle................................... -- -- 1,260
Gain on sale of properties and partnership interest.............. (2,887) (500) (1,884)
Depreciation and amortization.................................... 7,878 8,483 8,531
Minority interest in income (loss) of majority owned entities 778 (55) 903
Other............................................................ (80) (23) 70
Changes in assets and liabilities, net of acquisitions:
(Increase) decrease in:
Accounts receivable and amounts due from affiliates......... 85 2,210 (696)
Prepaids and other assets................................... (1,009) (2,775) 2,460
Other non-current assets.................................... 694 (92) (407)
Increase (decrease) in:
Accounts payable and accrued liabilities.................... (2,249) (756) (3,476)
Accrued interest payable.................................... 125 (693) (385)
Lease concessions........................................... 243 17 596
---------- ---------- ----------
Net cash provided by (used in) operating activities........ 2,488 (2,098) (11,345)
---------- ---------- ----------
Cash flows provided by (used in) investing activities:
Net cash paid in acquisition of American Retirement Villas Properties
III, L.P partnership interest....................................... (1,242) -- --
Proceeds from the sale of properties, net of selling cost........... 730 3,820 39,786
Proceeds from sale of partnerships, net of selling cost............. 2,887 -- 1,884
Purchase of previously leased communities........................... -- -- (14,693)
Additions to property, furniture and equipment...................... (6,110) (5,187) (7,391)
(Increase) decrease in security deposits............................ 459 (498) (6,400)
Cash contributed to joint venture................................... -- -- (1,251)
Increase in property held for sale.................................. (90) -- --
----------- ---------- ----------
Net cash provided by (used in) investing activities......... (3,366) (1,865) 11,935
---------- ---------- ----------
Cash flows provided by (used by) financing activities:
Borrowings under notes payable for purchase of previously leased
communities....................................................... -- -- 14,677
Borrowing under refinancing for owned communities................... 18,660 -- 41,819
Borrowing under non-secured credit line............................. -- 10,000 --
Borrowings under notes payable...................................... -- 40,987 2,609
Repayments of notes payable......................................... (12,430) (33,654) (45,197)
Repurchase of subordinated debt..................................... (5,720) (9,598) (1,010)
Distributions to minority partners.................................. (2,513) (247) (9,039)
Loan fees........................................................... (702) (1,278) (1,764)
----------- ---------- ----------
Net cash provided by financing activities................... (2,705) 6,210 2,095
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents........ (3,583) 2,247 2,685
Cash and cash equivalents at beginning of period...................... 16,817 14,570 11,885
---------- ---------- ----------
Cash and cash equivalents at end of period............................ $ 13,234 $ 16,817 $ 14,570
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)
2001 2000 1999
---------- ---------- ----------
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest......................................................... $ 8,656 $ 9,061 $ 9,318
========== ========== ==========
Income taxes..................................................... $ 151 $ 160 $ 35
========== ========== ==========
Supplemental schedule of non-cash investing and financing activities:
Conversion of current liability to long-term debt................ $ -- $ -- $ 1,000
Additional costs of private placement............................ -- -- 372
Conversion of subordinated notes to common stock................. -- 1,232 1,474
See accompanying notes to consolidated financial statements.
F-6
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
ARV Assisted Living, Inc. and subsidiaries (the "Company") own, operate,
acquire and develop assisted living communities that provide housing to senior
citizens, some of whom require assistance with the activities of daily living
such as bathing, dressing and grooming.
At December 31, 2001, we operated 58 assisted living communities ("ALCs") in
ten states including 17 which we own ("Owned ALCs"), 33 which we operate
pursuant to long-term operating leases ("Leased ALCs") and 8 in which we serve
as the property manager ("Managed ALCs"). Limited partnerships or limited
liability companies for which we serve as managing general partner or member and
community manager and in which we have majority ownership interest are referred
to as Affiliated Partnerships. Thirty-seven of the ALCs are located in
California. We also manage 3 affordable senior and multifamily apartments (the
"Apartment Group"), in 2 of which we serve as the general partner.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Subsidiaries, which include limited partnerships and
limited liability companies in which we have controlling interests, have been
consolidated into the financial statements. In December 2001, we acquired an
additional 51.8% interest in American Retirement Villas Properties III, L.P.
("ARVP III"). The balance sheet on December 31, 2001 includes the accounts of
ARVP III while the statement of operations includes the operations from December
14, 2001; the date we acquired greater than 50% of the partnership units. All
significant intercompany balances and transactions have been eliminated in
consolidation.
CONSOLIDATED PARTNERSHIPS
Included in the consolidated financial statements are partnerships in which
we own from 52.1% to 60.5%. The following is a recap of the assets and
liabilities of those partnerships as of December 31, 2001 and 2000:
2001 2000
------- -------
Cash $ 7,668 $ 2,912
Other current assets 3,954 3,425
Total assets 72,399 51,041
Current liabilities 4,194 2,610
Long term debt 60,675 40,943
Net equity 7,221 6,424
USE OF ESTIMATES
In the preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America, we have made
estimates and assumptions that affect the following:
o reported amounts of assets and liabilities at the date of the financial
statements;
o disclosure of contingent assets and liabilities at the date of the
financial statements; and
o reported amounts of revenues and expenses during the reporting period.
F-7
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, we consider all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
IMPOUNDS
Impounds consist of cash deposits made by the Company to lenders in
accordance with the loan agreements.
ADVERTISING
Advertising costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") SFAS No. 123, "Accounting for Stock-Based Compensation". As
permitted by SFAS No. 123, the Company continues to follow the guidance of
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees". Consequently, compensation related to stock options reflects the
difference between the grant price and the fair value of the underlying common
shares at the grant date. The Company issues stock options to employees with a
grant price equal to the market value of common stock on the grant date. As
required by SFAS No. 123, the Company discloses in Note 5 "Stock Options" the
pro forma effect on operations, as if compensation costs were recorded at the
estimated fair value of the stock options granted.
PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment are stated at cost less accumulated
depreciation which is charged to expense on a straight-line basis over the
estimated useful lives of the assets as follows:
Buildings and improvements................................................................... 27.5 to 35 years
Furniture, fixtures and equipment............................................................ 3 to 7 years
Property, furniture and equipment consisted of the following (in thousands):
DECEMBER 31,
--------------------------
2001 2000
---------- ----------
Land......................................................................... $ 21,644 $ 19,404
Buildings and improvements................................................... 104,982 84,891
Furniture, fixtures and equipment............................................ 18,251 13,631
---------- ----------
144,877 117,926
Accumulated depreciation..................................................... (27,948) (17,465)
---------- ----------
$ 116,929 $ 100,461
========== ==========
F-8
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
GOODWILL
Goodwill represents the excess of the purchase price of acquired assets over
the estimated fair value of the net tangible assets acquired. Goodwill was
amortized on a straight-line basis over 35 years and includes accumulated
amortization of $2,124,000 and $1,539,000 at December 31, 2001 and 2000,
respectively. We periodically review our goodwill to assess its recoverability
and impairments will be recognized in the statement of operations if an
impairment is determined to have occurred. If we dispose of a significant
segment of the operations acquired which generated goodwill, we would allocate
the goodwill to the disposal based upon its fair value relative to the fair
value of all assets acquired. Recoverability of goodwill is determined based on
undiscounted future operating cash flows from the related business unit. The
amount of impairment, if any, is measured based on discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
Management believes SFAS 142 ("Goodwill and Other Intangible Assets" - see New
Accounting Pronouncements) will not have a material impact on the Company's,
financial position, results of operation or cash flows.
ACCOUNTING FOR LONG-LIVED ASSETS
We review our long-lived assets, including goodwill, for impairment when
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. In reviewing recoverability, we estimate the
future cash flows expected to result from using the assets and eventually
disposing of them. Cash flows are reviewed at the community level which is the
lowest level of identifiable cash flows. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset, an impairment loss is recognized based upon the asset's
fair value. For long-lived assets held for sale, fair value is reduced for costs
to sell.
In 1998, our board of directors decided to sell five Owned ALCs and five
development land sites located outside of California. In addition, in 1999 we
decided to sell twelve leased ALCs outside the Western United States. These
decisions were in keeping with our strategy to focus our efforts on occupancy
gains and to lease up ALCs faster. The fair value of the assets, based upon the
offers we received from potential buyers, was below the carrying amount of the
assets. We recorded an impairment loss of $6.2 million in 2000 and $16.4 million
in 1999 on properties, goodwill and investments that did not meet the Company's
strategy of focusing in the western United States or were impaired based upon
management's analysis described above. Due to market conditions no buyer could
be found for the nine ALCs held for sale at December 31, 2000 and in June of
2001, the Company decided to retain these ALCs. The remaining land site in
properties held for sale at December 31, 2001 is currently in escrow.
INVESTMENTS
We are the general partner in five limited partnerships which operate ALCs,
four of which are consolidated for the entire 2001 year. We acquired a
controlling interest in the remaining partnership in December 2001. As of
December 31, 2000 we were also a general partner in two tax credit partnerships
(ownership is generally less than 1%). We account for our investment in
partnerships where we can exercise significant influence using the equity method
because we have less than a controlling interest. Under the terms of the
partnership agreements, profits and losses are allocated to the general and
limited partners in specified ratios. We generally have unlimited liability for
obligations of certain partnerships in which we are the general partner.
Liabilities under these obligations have generally not been significant. We have
unlimited liability under separate guarantees related to these partnerships.
Under Statement of Position No. 78-9, "Accounting for Investments in Real Estate
Ventures," we record our obligations under these agreements as a component of
our equity in the income or losses of these partnerships.
In 1998, we pursued an additional development strategy by entering into
joint ventures ("LLCs") designed to help us finance development and renovation
projects and to mitigate the impact of start-up losses associated with the
F-9
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
opening of newly constructed ALCs. The joint ventures were formed to finance and
manage the substantial renovation of existing ALCs acquired in 1998 in the
Hillsdale transaction and to construct three new communities on land sites we
owned. Participants in the joint ventures with us are a third-party investor and
a third-party developer. The LLCs contracted with the developer to provide
development services to perform the renovation and construction. We manage four
of the properties operated by the joint ventures for an amount equal to three
percent of gross revenues. One property is managed by an unrelated third party.
We account for our investment in the joint ventures using the equity method and
losses incurred by the LLCs are allocated disproportionately to the joint
venture partners based upon their assumption of risk. In 2000 and 2001, certain
joint venture partner's capital was reduced to zero, consequently, the losses
from the joint venture were allocated to us based upon our capital or percentage
interest. We have agreed to fund any operating deficits incurred in connection
with the operation of the five joint venture projects, up to an aggregate amount
of $6.0 million for all of the development properties and $6.0 million for all
of the renovation properties subject to a $9.0 million cap. The advances, which
are considered capital contributions to the LLC, are non-interest bearing and
will be repaid only if sufficient funds are available in accordance with the
terms of the operating agreements of the respective LLCs. This agreement will
remain in effect from the commencement of operations of the project until the
earlier to occur of 18 months after the project has achieved stabilization, the
sale of the project to a third-party, or the purchase by the Company of the
membership interests of the project owner. Our current funding of operating
deficits since inception in 1998 is $1.5 million. We will have an option to
purchase the joint venturer's interest in the LLCs when the ALCs reach
stabilization, at a purchase price that is the greater of fair market value or
an amount that generates a guaranteed internal rate of return on the joint
venturer's capital contribution. In 2000 we determined that the value of certain
of the LLCs was impaired based upon our review of the projected cash flows,
accordingly, we wrote down our investment by $5.7 million, to reflect the fair
value. In 2001 we declined the option to purchase two of the LLCs that had
reached stabilization and in accordance with the LLCs' operating agreement we no
longer serve as a manager of the two LLCs.
INCOME TAXES
We account for income taxes using the asset and liability method whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded to adjust net deferred tax assets to the amount which management
believes will more likely than not be recoverable. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
REVENUE RECOGNITION
We recognize rental, assisted living services and skilled nursing facility
revenue from owned and leased communities on a monthly basis as earned. We
receive fees for property management and partnership administration services
from managed communities and recognize such fees as earned.
ASSISTED LIVING COMMUNITY SALE-LEASEBACK TRANSACTIONS
Certain communities were sold subject to leaseback provisions under
operating leases. Gains where recorded were deferred and amortized into income
over the lives of the leases.
EARNINGS (LOSS) PER SHARE
We utilize Statement of Financial Accounting Standards 128 "Earnings Per
Share", in determining earnings (loss) per share ("EPS"). Basic EPS excludes all
dilution and is based upon the weighted average number of
F-10
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
common shares outstanding during the period. Diluted EPS reflects the potential
dilution that would occur if securities or other contracts to issue common stock
were exercised, or converted into common stock. Potentially dilutive securities
include convertible notes, warrants and stock options which convert to
1,504,003, 1,729,870, and 2,598,654, shares of common stock for the years ended
December 31, 2001, 2000 and 1999, respectively.
ACCOUNTING FOR START-UP COSTS
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 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 of any
previously capitalized start-up or organizational costs. We adopted the
provisions of SOP 98-5 in the first quarter of 1999. The carrying amounts of
capitalized start-up costs were approximately $1.3 million.
SEGMENT INFORMATION
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information ("SFAS 131"). 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. We evaluate performance and make resource allocation
decisions on a community by community basis. Accordingly, each community is
considered an "operating segment" under SFAS 131. However, SFAS 131 did not have
an impact on the financial statements because the communities have similar
economic characteristics, as defined by SFAS 131, and meet the criteria for
aggregation into one "reportable segment".
RECLASSIFICATIONS
We have reclassified certain prior period amounts to conform to the December
31, 2001 presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS
No. 143 "Accounting for Asset Retirement Obligations". SFAS 141 requires all
business combinations initiated after June 30, 2001, to be accounted for using
the purchase method. SFAS 141 did not have an impact on the Company's financial
position, results of operations, or cash flows. The provisions of SFAS 142
eliminate the amortization of goodwill and identifiable intangible assets with
indefinite lives and require an impairment assessment at least annually by
applying a fair-value-based test. The Company is required to adopt SFAS 142 on
January 1, 2002. Management believes SFAS 142 will not have a material impact on
the Company's, financial position, results of operation or cash flows. The
Company is required to adopt SFAS 143 on January 1, 2002. Management believes
the adoption of SFAS 143 will not have a material effect on the Company's
financial position, results of operations, or cash flows. On October 3, 2001 the
FASB issued SFAS 144 Accounting for the Impairment and Disposal of Long Lived
Assets". SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed Of". However, SFAS 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to
F-11
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
be held and used and (b) measurement of long-lived assets to be disposed of by
sale. The Company is required to adopt SFAS 144 on January 1, 2002. Management
has not determined the impact SFAS 144 will have on the Company's financial
position, results of operations, or cash flows.
(2) ACQUISITIONS
In December 2001, we purchased approximately 9,667 units (51.8%) of ARVP
III. ARVP III has two ALCs one located in Arizona with 164 units and one located
in California with 123 units. We accounted for this transaction using the
purchase method and paid approximately $4.1 million in cash for the units
acquired.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition:
Current Assets $ 3,796
Property and equipment 15,230
Intangibles and other assets 289
--------
Total assets 19,315
Current liabilities 1,057
Long-term debt 13,592
--------
Total liabilities 14,649
Net assets acquired 4,666
Less minority interest 502
--------
Net value to ARV $ 4,164
========
One loan is secured by an ALC for $5.8 million, at an 8.06% fixed interest
rate due in February 2036. The other ALC has a mortgage of $8.0 million, at
9.15% interest due January 2003. Subsequent to December 31, 2001, we amended one
of the existing notes to (i) increase the principal sum of the existing loan by
approximately $4.0 million, (ii) extend the maturity date of the existing loan
to July 1, 2003, and (iii) change the interest rate of the existing loan to
8.5%.
The purchase price paid in excess of the book value of the net assets
acquired required a $3.5 million step-up in basis. This step-up in basis is
being amortized over the remaining useful life of the underlying existing
assets. The pro forma effect on the statement of operations for the acquisition
is as if it had been acquired as of January 1, 2000 is as follows:
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, AND 2000
2001 2000
------------- ---------
REVENUE:
Assisted living community revenue............................................ $ 148,499 $ 144,934
Skilled nursing facility revenue............................................. 2,323 1,960
Management fees.............................................................. 1,155 188
----------- -----------
TOTAL REVENUE................................................................. 151,977 147,082
----------- -----------
OPERATING EXPENSES:
Assisted living community operating expense.................................. 92,911 92,348
Skilled nursing facility expenses............................................ 2,507 1,901
Community lease expense...................................................... 30,943 31,571
General and administrative................................................... 9,874 12,288
Impairment loss.............................................................. -- 6,187
Depreciation and amortization................................................ 8,616 9,587
----------- -----------
F-12
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
TOTAL OPERATING EXPENSES...................................................... 144,851 153,882
----------- -----------
Income (loss) from operations.................................................. 7,126 (6,800)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income.............................................................. 1,139 1,690
Other income, net............................................................ 666 244
Equity in income (loss) of partnerships...................................... (1,798) 791
Gain on sale of properties and partnership interests......................... 2,887 5,323
Interest expense............................................................. (10,118) (9,778)
----------- -----------
TOTAL OTHER INCOME (EXPENSE).................................................. (7,224) (1,730)
----------- -----------
Loss before income tax expense, minority interest in income of majority owned
entities and extraordinary item............................................... (98) (8,530)
Income tax expense............................................................. (160) (170)
Minority interest in (income) loss of majority owned entities.................. (784) (3,259)
----------- -----------
Loss before extraordinary items................................................ (1,042) (11,959)
Extraordinary gain from early extinguishment of debt, net of income tax of
$200 in 2000................................................................. 1,996 20,613
----------- -----------
Net income .................................................................... $ 954 $ 8,654
----------- -----------
Earnings per share basic and diluted........................................... $ 0.05 $ 0.50
=========== ===========
(3) NOTES PAYABLE
Notes payable consist of the following at December 31 (in thousands except
share data):
2001 2000
----------- -----------
Convertible subordinated notes due April 1, 2006 with interest at 6.75%. The
notes Require semi-annual payments of interest and are convertible to common
stock at $18.57 per share. The notes may be called by us at declining premiums
starting at 110% of the principal amount................................................. $ 7,253 $ 15,253
Notes payable, bearing interest at fixed rate of 9.15 %, payable in monthly installments
of principal and interest totaling $108 collateralized by property with a maturity of
January 2002 through January 2003........................................................ 10,036 13,752
Notes payable, bearing interest at floating rates of 30 day LIBOR (1.83% at December 31,
2001) plus rates between 2.25% and 3.60% payable in monthly installments of
principal and interest totaling $169 collateralized by Owned ALCs, maturities
ranging from August 2002 through September 2004.......................................... 23,766 18,972
Note Payable, bearing interest at fixed rate of 7.0%, payable in monthly installments of
interest only with principal due in 2010; $4,000 remaining drawable at $1,000 in 2002,
$1,500 in 2003, $500 in 2004 and $1,000 in 2005.......................................... 1,000 --
Notes payable, bearing interest at rates of 7.25% through 8.53%, payable in monthly
Installments of principal and interest totaling $388 collateralized by property,
Maturities ranging from July 2010 to January 2037........................................ 58,820 40,932
Notes payable to shareholder bearing interest beginning April 2001 at 30-day Treasury
Rate (1.72% at December 31, 2001) with principal due and payable April 2003.............. 1,456 1,292
Notes payable to shareholder bearing interest at 30 day LIBOR (1.83% at December 31,
2001) plus 10% payable in monthly installments of interest only, unsecured, maturing
April 2003............................................................................... 10,000 10,000
----------- -----------
112,331 100,201
Less amounts currently payable............................................................ 7,269 1,071
----------- -----------
$ 105,062 $ 99,130
=========== ===========
The future annual principal payments of the notes payable at December 31,
2001 are as follows (in thousands):
F-13
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2002.......................................................................... $ 7,269
2003.......................................................................... 20,249
2004.......................................................................... 5,944
2005.......................................................................... 941
2006.......................................................................... 9,228
Thereafter.................................................................... 68,700
-----------
$ 112,331
===========
In 1998, we paid a lender approximately $1.7 million of fees for an interest
rate lock and $0.2 million for loan commitment and other fees. The lender
terminated the loan commitment and underlying interest rate lock in October 1998
due to adverse market conditions. The lender returned $0.4 million of the
interest rate lock fees in January 1999 and $0.5 million in June 2000 as full
and final settlement. We included the amounts received in interest expense in
the accompanying consolidated statements of operations for the years ended
December 31, 2000 and 1999.
Subsequent to year end we refinanced two ALCs owned by two of our majority
owned partnerships. One refinancing increased the loan to $2.4 million for 35
years at an interest rate of 7.56%. The other refinancing amended one of the
existing notes to (i) increase the principal sum of the existing loan by
approximately $4.0 million, (ii) extend the maturity date of the existing loans
to July 1, 2003, and (iii) change the interest rate of the existing loan to
8.5%. In addition, we extended the maturity on one mortgage of $12.3 million
until March 2003 while we secure long-term financing. The current portion of
notes payable at December 31, 2001, has been adjusted to reflect the impact of
these transactions.
The various debt agreements contain restrictive covenants requiring us to
maintain certain financial ratios, including current ratio, working capital,
minimum net worth, debt-to-equity and debt service coverage, among others. At
December 31, 2001, we were in compliance with the debt covenants.
(4) EMPLOYEE BENEFIT PLANS
SAVINGS PLAN
Effective January 1, 1997, we established a savings plan (the "Savings
Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code. Under the Savings Plan, participating employees who
are at least 21 years of age may defer a portion of their pretax earnings, up to
the Internal Revenue Service annual contribution limit. We match 25% of each
employee's contributions up to a maximum of 6% of the employee's earnings.
Employees are eligible to enroll at the first enrollment date following the
start of their employment (July 1 or January 1). We match employees'
contributions beginning on the first enrollment date following one year of
service or 1,000 hours of service. Our expense related to the Savings Plan was
approximately $171,000, $175,000, and $191,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
(5) STOCK OPTIONS
The Company has two stock option plans that provide for the granting of
stock options to officers, directors, consultants and key employees. The
objectives of these plans include attracting and retaining the best personnel,
providing for additional performance incentives, and promoting the success of
the Company by providing employees the opportunity to acquire common stock. We
have elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations in
accounting for employee stock options. Under APB 25, because the exercise price
of our employee stock options usually equals the market price of the underlying
stock on the date of grant, no compensation expense is recorded.
The 1995 Stock Option and Incentive Plan of ARV Assisted Living, Inc. is
two-tiered, one for the benefit of key employees and consultants and one for the
benefit of non-employee directors. The maximum number of shares
F-14
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
which may be issued under the Plan is 15% of the total outstanding shares at the
end of the fiscal year. The number of shares which may be issued for Incentive
Stock Options is limited to 1,155,666 shares.
The 1999 Stock Option Plan of ARV Assisted Living, Inc. is two-tiered and
very similar to our 1995 Stock Option and Incentive plan. The maximum number of
shares which may be granted under the 1999 and 1995 Plans are 2,400,000 plus 15%
of any increase in total outstanding shares since June 30, 1999. During the
years ended December 31, 2001 and 2000 additional options granted were 80,000
and 781,025 respectively. As of December 31, 2001 there are 859,129 Incentive
Stock Options available for grant under the 1999 and 1995 Plans. Options granted
under both stock option plans vest over periods ranging from one and one-half to
five years from the date of grant.
A summary of stock option plans at December 31, 2001 is as follows:
SHARES UNDER
OUTSTANDING
OPTIONS PRICE PER SHARE
------------ ---------------
Authorization of shares........................................................ 2,637,089 N/A
Balance at December 31, 1998 1,087,050 $4.75 - 16.25
Options granted................................................................ 1,745,000 $1.63 - 14.00
Options exercised.............................................................. -- N/A
Options canceled............................................................... (937,750) $3.00 - 16.25
-----------
Balance at December 31, 1999 1,894,300 $1.63 - 15.75
Options granted................................................................ 656,500 $1.06 - $0.50
Options exercised.............................................................. -- N/A
Options canceled............................................................... (211,248) $0.56 - 14.31
-----------
Balance at December 31, 2000 2,339,552 $0.50 - 14.00
Options granted................................................................ 80,000 $1.40
Options exercised.............................................................. -- N/A
Options canceled............................................................... (665,752) $0.56 - 14.00
-----------
Balance at December 31, 2001 1,753,800 $0.50 - 14.00
===========
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if we
have accounted for our employee stock options granted subsequent to December 31,
1994 under the fair value method of SFAS 123. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with a weighted-average expected life of the option of 10 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. Option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those of trade options, and because changes in subjective input assumptions can
materially affect the fair value estimate, actual fair values may differ from
those estimates.
The following represents the estimated fair value of stock options granted
and the assumptions used for calculation for the years ended December 31, 2001,
2000 and 1999:
2001 2000 1999
------- ------- -------
Average estimated fair value per option at grant date.............. $ 1.03 $ 5.10 $ 3.00
Average exercise price per option granted.......................... $ 1.40 $ 5.10 $ 3.00
Expected Stock volatility.......................................... 60% 60% 60%
Risk -- free interest rate.......................................... 5.0% 5.0% 5.0%
F-15
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Option term -- years................................................ 10 10 10
Stock dividend yield............................................... -- -- --
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro forma
information is as follows (in thousands, except per share amounts) for the years
ended December 31, 2001, 2000 and 1999:
2001 2000 1999
------- ------- ---------
Pro forma net income (loss)........................................... $ 972 $ 5,769 $ (28,436)
Pro forma income (loss) per share - basic............................. $ 0.06 $ 0.33 $ (1.78)
A summary of our stock option activity and related information for the years
ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
------------------------- ------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding -- beginning of
The period............... 2,339,552 $ 3.18 1,894,300 $ 6.46 1,087,050 $ 13.33
Granted.................... 80,000 $ 1.40 656,500 $ 5.55 1,745,000 $ 3.00
Exercised.................. -- -- -- $ --
Forfeited.................. (665,752) $ 5.66 (211,248) $ 10.41 (937,750) $ 10.56
--------- --------- ---------
Outstanding -- end of
Period................... 1,753,800 $ 2.15 2,339,552 $ 3.18 1,894,300 $ 6.46
--------- --------- ---------
Exercisable at end of
Period................... 619,586 $ 3.47 503,481 $ 5.04 96,800 $ 12.80
--------- --------- ---------
Weighted average fair
Value of options granted
During the period........ $ 1.03 $ 5.10 $ 3.00
At December 31, 2001 options outstanding had a weighted average life of
8.08 years.
(6) INCOME TAXES
The provision for income tax expense from continuing operations consists of
the following for the years ended December 31, 2001 2000 and 1999 (in
thousands):
FOR THE YEARS ENDED
----------------------------------
2001 2000 1999
----- ----- -----
Current:
Federal........................................................ $ -- $ -- $ --
State.......................................................... 151 160 35
----- ----- -----
Total current.......................................... 151 160 35
----- ----- -----
Deferred:
Federal........................................................ -- -- --
State.......................................................... -- -- --
----- ----- -----
Total deferred......................................... -- -- --
----- ----- -----
$ 151 $ 160 $ 35
===== ===== =====
We have Federal net operating loss carryforwards of approximately
$55,000,000, which expire in 2012 to 2021.
F-16
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
A reconciliation of income tax expense (benefit) related to income from
continuing operations to the Federal statutory rate of 34% is as follows (in
thousands):
FOR THE YEARS ENDED
---------------------------------------
2001 2000 1999
--------- --------- ---------
Income tax expense (benefit) at statutory rate........................ $ (55) $ (4,759) $ (15,612)
State income tax expense, net of federal income taxes................. 151 160 36
Reduction of net operating loss carryforwards due to extraordinary
gain................................................................ -- 7,076 --
Change in federal valuation allowance................................. 21 (1,998) 15,282
Other................................................................. 34 (319) 348
--------- --------- ---------
Total income tax expense.................................... $ 151 $ 160 $ 54
========= ========= =========
Temporary differences giving rise to a significant amount of deferred tax
assets and liabilities from continuing operations at December 31, 2001 and 2000
are as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards................................................... $ 22,031 $ 18,200
Write down of properties........................................................... 10,367 14,429
Other.............................................................................. 824 512
------------ ------------
Gross deferred tax asset................................................... 33,222 33,141
Less valuation allowance........................................................... (32,616) (32,595)
Deferred tax liabilities -- other.................................................. (606) (546)
------------ ------------
Net long-term deferred tax asset........................................... $ -- $ --
============ ============
A valuation allowance is provided against net deferred tax assets when it is
more likely than not that some portion of the deferred tax asset will not be
realized. We have established a valuation allowance for 100 percent of the
deferred tax assets as, in our best estimate, it is not likely to be realized in
the near term.
(7) RELATED PARTY TRANSACTIONS
Fees and other amounts receivable from affiliates of $7,000, $718,000 and
$1,374,000 at December 31, 2001, 2000 and 1999, respectively, consist of
receivables related to management services we rendered and non-interest bearing
expense advances to various partnerships. Amounts due from affiliates are
generally expected to be repaid in subsequent years with cash from operations or
from bank financing obtained by the affiliates. Related management fee revenue
from affiliates totals $1,002,000, $629,000, and $722,000 during the year ended
December 31, 2001, 2000 and 1999, respectively.
We are reimbursed for certain expenses such as payroll and retirement
benefit, supplies and other expenses paid on behalf of Affiliated Partnerships.
During the years ended December 31, 2001, 2000 and 1999, respectively, the
expenses incurred on behalf of affiliates and the related reimbursements from
these affiliates amounted to approximately $25.0 million, $22.3 million, and
$17.8 million, respectively. We account for these reimbursements as a reduction
of the related expenses.
Mr. R. Bruce Andrews, a former member of our Board of Directors, is Chief
Executive Officer of Nationwide Health Properties, Inc. ("NHP"), a healthcare
REIT. NHP is the owner of 16 ALCs we lease. Of that number, leases for 13 ALCs
were entered into prior to November 29, 1995, the date Mr. Andrews became a
Board member, and leases for three ALCs were entered into during Mr. Andrews'
tenure as a board member. Aggregate lease payments
F-17
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
under these leases were approximately $13.3 million, $12.5 million, and $11.6
million for the years ended December 31, 2001, 2000 and 1999, respectively.
(8) SHAREHOLDERS RIGHTS PLAN
In May 1998, we adopted a shareholders rights plan under which we have
declared a dividend distribution of one Preferred Share Purchase Right on each
outstanding share of our common stock. Subject to limited exceptions, the Rights
will be exercisable if a person or group acquires 10% or , in the case of Lazard
Freres Real Estate Investors, LLC ("Lazard" or "LFREI"), 50% or more of our
stock or announces a tender offer for 10% or, in the case of LFREI, 50% or more
of the common stock. When exercisable, each Right (except the Rights held by the
acquiring person) will entitle its holder to purchase, at the Right's
then-current exercise price, a number of our common shares having a market value
at the time of twice the Right's exercisable price. If we are acquired in a
merger or other business combination transaction which has not been approved by
our Board of Directors, each Right will entitle its holder to purchase, at the
Right's then-current exercise price, a number of the acquiring company's common
shares having a market value at that time of twice the Right's exercise price.
(9) ASSISTED LIVING COMMUNITY LEASES
We lease 33 ALCs. The original leases expired from 2006 to 2017, and
contained two to three renewal options ranging from five to ten years. In
January, 2001 we restructured 16 ALC leases into two lease pools of 8 ALCs each.
In each restructured pool, the lease termination date was extended through
fiscal 2021. As part of the restructure, we are allowed to finance the
additional rent expense of up to $1.0 million during 2001, $1.0 million in 2002,
$1.5 million in 2003, $1.0 million in 2004 and $0.5 million in 2005, converting
into a note, at 7% interest. Interest only is payable monthly through 2005, and
principal payments of $1.0 million per year beginning in 2006 with a due date of
December 31, 2010. We also incurred a restructuring fee of $4.5 million payable
at $1.5 million for each of the first three years. The restructuring fee is
accounted for on a straight-line basis. The restructured lease agreements
provide for reimbursement to us from the landlord of capital improvement
expenditures up to $3.0 million.
Generally, leases for Leased ALCs owned by a common landlord contain cross
default provisions permitting the lessor to declare a default under all leases
in the event of default on one lease. The lease agreements with each landlord
are interconnected in that we will not be entitled to exercise our right to
renew one lease with a particular landlord without exercising our right to renew
all other leases with that landlord. We anticipate that similar renewal and
cross-default provisions will be included in leases with other landlords.
Minimum lease payments required under assisted living community operating
leases in effect at December 31, 2001 are as follows:
(IN THOUSANDS)
--------------
YEAR ENDED DECEMBER 31:
2002................................................................................ $ 32,947
2003................................................................................ 33,380
2004................................................................................ 33,731
2005................................................................................ 34,285
2006................................................................................ 34,858
Thereafter.......................................................................... 384,538
--------------
$ 553,739
==============
F-18
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Certain of the leases require the payment of additional rent based on a
percentage increase of gross revenues. Leases are subject to increase based upon
changes in the consumer price index or gross revenues, subject to certain
limits, as defined in the individual lease agreements. In the years ended
December 31, 2001, 2000 and 1999 such additional rent amounted to $3.1 million,
$2.7 million and $2.1 million respectively. Total rent expense was $30.9
million, $31.6 million and $32.2 million in the years ended December 31, 2001,
2000 and 1999, respectively.
(11) LIQUIDITY
We believe that our existing liquidity, ability to sell assisted living
communities and land sites which do not meet our financial objectives or
geographic clustering strategy, and ability to refinance certain assisted living
communities will provide adequate resources to meet our current operating and
investing needs and support our current growth plans for the next 12 months. We
will be required from time to time to incur additional indebtedness or issue
additional debt or equity securities to finance our growth strategy, including
the acquisition of assisted living communities as well as other capital
expenditures and to provide additional funds to meet increased working capital
requirements.
(12) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
We have guaranteed the indebtedness at December 31, 2001, of certain
unconsolidated affiliated partnerships for $3.5 million.
We are the general partner of certain limited partnerships that serve as the
sole members of the borrowing entities which carried loan balances of $15.3
million at December 31, 2001. Although a member of a borrowing entity is not
personally liable for any contract or other obligation of that entity, we
delivered limited guaranties in connection with the loans. Due to the limited
guaranties, we assumed liability for repayment of the loan indebtedness as a
result of fraudulent or intentional misconduct regarding the mortgaged
properties, an unconsented transfer of a mortgaged property, a change of control
by borrower, or violation of hazardous materials covenants. Also, we guaranteed
the borrower's obligation to rebalance the loans upon breach of debt service
coverage obligations.
In our opinion, no claims may be currently asserted under any of the
aforementioned guarantees based on the terms of the respective agreements other
than those accrued.
F-19
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CONTINGENCIES
We have entered into four long-term leases of ALCs, the acquisition and
construction of which have been or are being financed by tax exempt multi-unit
housing revenue bonds. In order to meet the lease obligations and to allow the
landlord to continue to qualify for favorable tax treatment of the interest
payable on the bonds, the ALCs must comply with certain federal income tax
requirements. These requirements principally pertain to the maximum income level
of a specified portion of the residents. Should we elect to execute additional
leases for ALCs to be constructed with bond financing, the same and possibly
additional restrictions are anticipated to be imposed. Failure to satisfy these
requirements will constitute an event of default under the leases, thereby
permitting the landlord to accelerate their termination. Failure to obtain
low-income residents in the sequence and time required could materially affect
the lease-up schedule and, therefore, cash flow from such ALCs.
During 2001, the Company was named as a defendant in two lawsuits brought by
employees of an ALC owned by a majority-owned partnership. In addition, four
other employees of the same ALC filed EEOC claims against the Company arising
out of the same facts. Subsequent to year-end, the two lawsuits were submitted
to mediation and settled. The four remaining claims will be submitted to binding
arbitration.
We are from time to time subject to lawsuits and other matters in the normal
course of business. While we cannot predict the results with certainty, we do
not believe that any liability from any such lawsuits or other matters will have
a material effect on our financial position, results of operations, or
liquidity.
(13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value amounts.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable and amounts due from affiliates, net
and, accounts payable, accrued payroll costs and other accrued liabilities and
accrued interest payable, approximate fair value due to the short-term nature of
these instruments. The notes payable bear interest at rates and other terms that
approximate current market rates and terms. Therefore, we believe that the
carrying value approximates fair value, except for convertible debt which is
approximately $5.1 million and $13.5 million at December 31, 2000 and 1999,
respectively.
(14) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
----------------------
2001 2000
--------- ---------
(in thousands)
Accrued liabilities
Property taxes.................................................................... $ 1,097 $ 1,095
Obligations related to the "Apartment Group" guaranties........................... -- 3,127
Various other accruals............................................................ 5,562 4,670
--------- ---------
$ 6,659 $ 8,892
========= =========
F-20
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FOR THE QUARTER ENDED
---------------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001
Total revenue............................................. $ 37,415 $ 36,685 $ 35,852 $ 35,443
Income from operations................................... 1,889 1,724 1,559 836
Net income (loss)......................................... (751) (739) 797 1,665
Basic and diluted earnings (loss) per share............... (0.05) (0.04) 0.05 0.10
2000
Total revenue............................................. $ 34,557 $ 34,435 $ 34,980 $ 34,893
Income (loss) from operations............................. (7,172) 200 (794) (929)
Net income (loss)......................................... (7,175) (1,553) 12,815 2,425
Basic and diluted earnings (loss) per share (0.41) (0.08) 0.73 0.14
F-21
ARV ASSISTED LIVING, INC
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
- ----------- ----------------- --------- ---------- -----------
Allowance for Other Assets:
December 31, 1999...................................... $ 708 $ 1,212 $ 31 $ 1,889
December 31, 2000...................................... 1,889 791 489 2,191
December 31, 2001...................................... 2,191 -- -- 2,191
See accompanying independent auditors' report.
F-22
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2 Agreement and Plan of Merger by and between ARV Assisted
Living, Inc. and ARV Delaware, Inc., incorporated by reference
to the Company's Proxy Statement for the 1997 Meeting of
Shareholders of ARV Assisted Living, Inc., filed with the
Securities and Exchange Commission on Schedule 14A on December
31, 1997.
3.1 Certificate of Incorporation of ARV Delaware, Inc.,
incorporated by reference to the Company's Proxy Statement for
the 1997 Meeting of Shareholders of ARV Assisted Living, Inc.,
filed with the Securities and Exchange Commission on Schedule
14A on December 31, 1997.
3.2 By-laws of ARV Delaware, Inc., incorporated by reference to the
Company's Proxy Statement for the 1997 Meeting of Shareholders
of ARV Assisted Living Inc., filed with the Securities and
Exchange Commission on Schedule 14A on December 31, 1997.
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, incorporated by reference.
4.2 First Amendment to the Right Agreement, dated October 21, 1998,
by and between ARV Assisted Living Inc., and ChaseMellon
Shareholder Services LLC, incorporated by reference to our 8-K
filed October 21, 1998.
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 Second Amendment 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 Second Amendment 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
incorporated by reference to the Company's 10-K filed with the
Securities and Exchange Commission on March 31, 1997.
10.11 Amendment to Executive Employment Agreement, effective December
5, 1997, by and between ARV Assisted Living, Inc. and Howard G.
Phanstiel incorporated by reference to the Company's 10-K filed
with the Securities and Exchange Commission on March 31, 1997.
10.12 Executive Employment Agreement, as amended, dated June 1, 1998,
by and between ARV Assisted Living, Inc. and Douglas M.
Pasquale incorporated by reference to the Company's 10-Q for
June 30, 1998.
10.13 Employment Agreement, as amended, dated June 15, 1998, by and
between ARV Assisted Living, Inc. and Patricia J. Gifford, MD
incorporated by reference to the Company's 10-Q for June 30,
1998.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.20 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns III, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.1 on August
10, 1999.
10.21 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns III, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.2 on August
10, 1999.(1)
10.22 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.3 on August
10, 1999.(1)
10.23 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.4 on August
10, 1999.(1)
10.24 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.5 on August
10, 1999.(1)
10.25 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.6 on August
10, 1999.(1)
10.26 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.7 on August
10, 1999.(1)
10.27 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.8 on August
10, 1999.(1)
10.28 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.9 on August
10, 1999.(1)
10.29 Loan Agreement by and between Banc One Capital Funding
Corporation and Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.10 on August
10, 1999.(1)
10.30 Loan Agreement by and between Banc One Capital Funding
Corporation and Acacia Villa, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.11 on August
10, 1999.(1)
10.31 Letter Agreement as to the Loans in the aggregate amount of
$39,703,100 from Banc One Capital Funding Corporation to
Retirements Inns II LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.12 on August 10, 1999.
10.32 Letter Agreement as to the Loans in the aggregate amount of
$2,116,100 from Banc One Capital Funding Corporation to Acacia
Villa LLC dated June 27, 1998 incorporated by reference to the
Company's 10Q filed with the Securities and Exchange Commission
as exhibit 10.13 on August 10, 1999.
10.33 Letter Agreement as to the Loans in the aggregate amount of
$13,382,200 from Banc One Capital Funding Corporation to
Retirements Inns III LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.14 on August 10, 1999.
10.34 Note and Agreement as to Retirement Inns II, LLC dated June 27,
1998 incorporated by reference to the Company's 10Q filed with
the Securities and Exchange Commission as exhibit 10.15 on
August 10, 1999.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.35 Note and Agreement as to Retirement Inns III, LLC dated June
27, 1998 incorporated by reference to the Company's 10Q filed
with the Securities and Exchange Commission as exhibit 10.16 on
August 10, 1999.
10.36 Note and Agreement as to Acacia Villa, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.17 on August
10, 1999.
10.37 Term Loan Agreement between ARV Assisted Living, Inc. and LFSRI
II Assisted Living, LLC, incorporated by reference to our 10Q
filed with the Securities and Exchange Commission as exhibit
10.1 on May 15, 2000.
10.38 Warrant issued to LFSRI II Assisted Living, LLC to Purchase
Common Stock of ARV Assisted Living, Inc, incorporated by
reference to our 10Q filed with the Securities and Exchange
Commission as exhibit 10.2 on May 15, 2000.
10.39 Second Amendment to Rights Agreement, by and between ARV
Assisted Living, Inc, and Chase Mellon Shareholder Services,
LLC, incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.3 on May 15,
2000.
10.40 Term Note between ARV Assisted Living, Inc. and LFSRI II
Assisted Living LLC, incorporated by reference to our 10Q filed
with the Securities and Exchange Commission as exhibit 10.4 on
May 15, 2000.
10.41 Waiver, incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.5 on May 15,
2000.
10.42 LLC Articles of Incorporation incorporated by reference to our
10Q filed with the Securities and Exchange Commission as
exhibit 10.1 on August 10, 2000.
10.43 Multifamily Note incorporated by reference to our 10Q filed
with the Securities and Exchange Commission as exhibit 10.2 on
August 10, 2000.
10.44 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest in Franklin Commons, L.P. dated January 16, 2001.
10.45 Assignment of interest in the receivable obligation owed by
Franklin Commons, L.P. to Pacific Demographics Corporations, a
wholly owned subsidiary of ARV Assisted Living, Inc. dated
January 16, 2001.
10.46 Assignment of interest in management fees owed by Franklin
Commons, L.P. to ARV Assisted Living, Inc. dated on January 16,
2001.
10.47 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty
and David Collins, and Franklin Commons, L.P.
10.48 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary
Davidson, John Booty and David Collins, and Franklin Commons,
L.P.
10.49 Purchase Agreement by and between ARV Investment Group, Inc.
(wholly owned subsidiary of ARV Assisted Living, Inc.) and
Eenhoorn Development, LLC for the sale of partnership interest
in Franklin, Grand Rapids, Rosewood, San Marcos and Lansing.
10.50 Amendment to Purchase Agreement dated October 4, 2000 by and
between ARV Investment Group, Inc. (wholly owned subsidiary of
ARV Assisted Living, Inc.) and Eenhoorn Development, LLC.
10.51 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest in Grand Rapids Housing Partners, L.P. dated January
16, 2001.
10.52 Assignment of interest in the receivable obligation owed by
Grand Rapids Housing Partners, L.P. to ARV Assisted Living,
Inc. dated January 16, 2001.
10.53 Assignment of interest in management fees owed by Grand Rapids
Housing Partners, L.P. to ARV Assisted Living, Inc. dated on
January 16, 2001.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.54 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty
and David Collins, and Grand Rapids Housing Partners, L.P.
10.55 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary
Davidson, John Booty and David Collins, and Grand Rapids
Housing Partners, L.P.
10.58 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest Lansing Housing Partners, L.P. dated January 16, 2001.
10.59 Assignment of interest in the receivable obligation owed by
Lansing Housing Partners, L.P. to ARV Assisted Living, Inc.
dated January 16, 2001.
10.60 Assignment of interest in management fees owed by Lansing
Housing Partners,, L.P. to ARV Assisted Living, Inc. dated on
January 16, 2001.
10.61 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty
and David Collins, and Lansing Housing Partners, L.P.
10.62 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary
Davidson, John Booty and David Collins, and Lansing Housing
Partners, L.P.
10.65 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest Rosewood Villas, L.P. dated January 16, 2001.
10.66 Assignment of interest in the receivable obligation owed by
Rosewood Villas, L.P. to ARV Assisted Living, Inc. dated
January 16, 2001.
10.67 Assignment of interest in management fees owed by Rosewood
Villas, L.P. to ARV Assisted Living, Inc. dated on January 16,
2001.
10.68 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty
and David Collins, and Rosewood Villas, L.P.
10.69 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary
Davidson, John Booty and David Collins, and Rosewood Villas,
L.P.
10.72 Agreement of Assignment of ARV Investment Group, Inc. (a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership
interest San Marcos, L.P. dated January 16, 2001.
10.73 Assignment of interest in the receivable obligation owed by San
Marcos, L.P. to ARV Assisted Living, Inc. dated January 16,
2001.
10.74 Assignment of interest in management fees owed by San Marcos,
L.P. to ARV Assisted Living, Inc. dated on January 16, 2001.
10.75 Deed of Trust Note of ARV Burlingame, L.P. to Red Mortgage
Capital, Inc.
10.76 Allonge #1 to Deed of Trust Note of ARV Burlingame, L.P. to Red
Mortgage Capital, Inc.
10.77 Deed of Trust between ARV Burlingame, L.P. and Fidelity
National Title Insurance
10.78 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Burlingame, L.P. and Secretary of
Housing and Urban Development
10.79 Regulatory Agreement Nursing Homes Projects between ARV
Burlingame, L.P. and Federal Housing Commissioner
10.80 Deed of Trust Note of ARV Campbell, L.P. to Red Mortgage
Capital, Inc.
10.81 Allonge #1 to Deed of Trust Note of ARV Campbell, L.P. to Red
Mortgage Capital, Inc.
10.82 Deed of Trust between ARV Campbell, L.P. and Fidelity National
Title Insurance
10.83 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Campbell, L.P. and Secretary of
Housing and Urban Development
10.84 Regulatory Agreement Nursing Homes Projects between ARV
Campbell, L.P. and Federal Housing Commissioner
10.85 Deed of Trust Note of ARV Sunnyvale, L.P. to Red Mortgage
Capital, Inc.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.86 Allonge #1 to Deed of Trust Note of ARV Sunnyvale, L.P. to Red
Mortgage Capital, Inc.
10.87 Deed of Trust between ARV Sunnyvale, L.P. and Fidelity National
Title Insurance
10.88 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Sunnyvale, L.P. and Secretary of
Housing and Urban Development
10.89 Regulatory Agreement Nursing Homes Projects between ARV
Sunnyvale, L.P. and Federal Housing Commissioner
10.90 Deed of Trust Note of ARV Valley View, L.P. to Red Mortgage
Capital, Inc.
10.91 Deed of Trust between ARV Valley View, L.P. and Fidelity
National Title Insurance
10.92 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Valley View, L.P. and Secretary of
Housing and Urban Development
10.93 Regulatory Agreement Nursing Homes Projects between ARV Valley
View, L.P. and Federal Housing Commissioner
10.94* Deed of Trust Note of ARV Fullerton, L.P. to Red Mortgage
Capital, Inc.
10.95* Allonge #1 to Deed of Trust Note of ARV Fullerton, L.P. to Red
Mortgage Capital, Inc.
10.96* Deed of Trust between ARV Fullerton, L.P. and Fidelity National
Title Insurance
10.97* Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Fullerton, L.P. and Secretary of
Housing and Urban Development
10.98* Regulatory Agreement Nursing Homes Projects between ARV
Fullerton, L.P. and Federal Housing Commissioner
10.99* Deed of Trust Note of ARV Acacia, L.P. to Red Mortgage Capital,
Inc.
10.100* Allonge #1 to Deed of Trust Note of ARV Acacia, L.P. to Red
Mortgage Capital, Inc.
10.101* Deed of Trust between ARV Acacia, L.P. and Fidelity National
Title Insurance
10.102* Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Acacia, L.P. and Secretary of
Housing and Urban Development
10.103* Regulatory Agreement Nursing Homes Projects between ARV Acacia,
L.P. and Federal Housing Commissioner
23.1* Consent of KPMG LLP.
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.
* included herewith