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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
COMMISSION FILE NUMBER: 0-26980
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ARV ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, SUITE D-1
COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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Registrant's telephone number, including area code: (714) 751-7400
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------- ---------------------------------------------
Common Stock, no par value NASDAQ National Market
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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.
As of June 19, 1997, the aggregate market value of the voting stock held by
non-affiliates of registrant was $77,019,244 (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 June 19, 1997 was 9,662,990.
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stock-for-stock merger. SynCare, Inc. was the holding company of three
corporations, BayCare Rehabilitative Services Inc., ProMotive Rehabilitation
Services and Pro Motion Rehab. BayCare Rehabilitative Services Inc. and Pro
Motion Rehab have been merged into ProMotive Rehabilitation Services, which does
business under the name GeriCare ("GeriCare"). GeriCare specializes in
rehabilitative services, including speech, occupational and physical therapy.
In addition to operating and managing ALFs, the Company has also acquired
or developed market rate senior apartments, as well as affordable senior and
multifamily apartment communities using the sale of tax credits under a federal
low income housing tax credit program (the "Federal Tax Credit Program") to
generate the equity funding for development. The Company does not intend to
expand its apartment portfolio and will not grow this segment of the business in
the future.
The Company or its affiliated entities have been continuously involved in
the acquisition, development and operation of senior housing facilities for more
than 20 years. In 1980, Mr. Gary L. Davidson, the Company's Chairman, CEO and
President, and Mr. John Booty, retired President and current Vice Chairman of
the Board, with two other individuals who have since retired, formed the
predecessor to the Company. Since that time, the Company has built an executive
management team and assisted living operation with experience and expertise in
the management, financing, acquisition, development and operation of ALFs.
THE ASSISTED LIVING MARKET
Assisted Living. Assisted living can be viewed as falling near the middle
of the elder care continuum, between home-based care at one end and long-term
skilled nursing facilities and acute care hospitals at the other. Assisted
living represents a combination of housing, personalized support services, and
health care designed to respond to the individual needs of the senior elderly
who need help in activities of daily living, but do not need the medical care
provided in a skilled nursing facility.
The Company believes its assisted living business benefits from significant
trends affecting the long-term care industry. The first is an increase in the
demand for elder care resulting from the continued aging of the U.S. population,
with the average age of the Company's assisted living residents falling within
the fastest growing segments 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. The second is the effort to contain health
care costs by the government, private insurers and managed care organizations by
limiting lengths of stay, services, and reimbursement amounts to persons 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 those senior elderly who do not require the broader array of
medical services that acute care hospitals and skilled nursing facilities are
required to provide. As of March 31, 1997, monthly revenue from the Company's
ALFs on a "same facility basis" (defined as those facilities which the Company
owned, managed or leased for a period of 12 months or more as of March 31, 1997)
averaged $1,610 per occupied unit compared to $1,480 per occupied unit as of
March 31, 1996. Other trends benefiting the Company include the increased
financial net worth of the elderly population, the increase in the population of
individuals living alone and the increasing number of women who work outside the
home and are therefore less able to care for their elderly relatives. The
Company believes that these trends will result in an increasing demand for
assisted living services and facilities to fill the gap between aging at home
and aging in more expensive skilled nursing facilities.
Aging Population. The primary consumers of long-term health care 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, the
segment of the population over 85 years of age, which comprises the largest
percentage of residents at long-term care facilities, is projected to increase
by 40% between the years 1990 and 2000.
As the ratio of senior elderly in need of assistance has increased, so too
has the number of senior elderly able to afford assisted living. According to
U.S. Bureau of the Census data, the median net worth of householders age 75 or
older increased from $55,178 in 1984 and $61,491 in 1988 to $77,654 in 1993.
Furthermore, according to the same source, the percentage of people 65 years and
older below the poverty line decreased from 27.3% in 1970 to 14.8% in 1980 to
12.2% in 1993. The increased number of women in the labor
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services may be provided at the facility by a third party home health care
agency or other medical provider. The care plan is reviewed and modified on
a regular basis.
Basic Service and Care Package. The basic service and care package at
the Company's ALFs generally includes the following: meals in a communal,
"home-like" setting, housekeeping, linen and laundry service, social and
recreational programs, security, utilities and transportation in a Company
van or minibus. Other care services can be provided under the basic package
based upon the individual's personalized health care plan. While the amount
of the fee for the basic service package varies from facility to facility,
on a "same facility basis" (defined as those facilities which the Company
owned, managed or leased for a period of four quarters or more as of March
31, 1997) the average basic monthly rate per unit was approximately $1,380
per month as of March 31, 1997, compared to an average of $1,315 as of
March 31, 1996.
Additional Services. The Company has designed its additional assisted
living services generally in a three-tier program available to residents on
a personalized basis.
Level One: Assistance to residents in the self-administration of
medication. Where necessary, the assisted living staff
will consult with the family, the physician or the
insurance company of a resident to designate a home health
care agency to administer the appropriate medication.
Level Two: In addition to the services provided under Level One,
assistance with bathing, dressing and grooming, escorting
to and from meals and activities, reading mail, writing
letters, shopping and other specialized activities. These
services are provided on an as-needed basis and at the
convenience of the resident within the overall operation
of the facility.
Level Three: All of the services provided under Level One and Level
Two, and, in addition, provision of those services on a
24-hour basis. Further, this level provides appropriate
services for individuals who need help with incontinence.
In addition to the above three levels, the Company provides other levels of
assistance to its residents in order to meet their individual needs.
As of March 31, 1997, approximately 63% of the Company's residents were on
the basic plan, 18% on Level One, 15% on Level Two and 4% on Level Three. In
addition to the base rent, the Company typically charges a $375 per month fee
for Level One assisted living services, $700 per month for Level Two assisted
living services and $1,125 to $1,400 per month for Level Three assisted living
services, but the fee levels vary from facility to facility. At some facilities,
the Company may charge additional fees for other specialized assisted living
services. As the Company's residents age at the facilities, the Company expects
that an increasing number of residents will utilize Level Two and Level Three
services. The Company's internal growth plan is focused on increasing revenue by
continuing to expand the number and diversity of its tiered additional assisted
living services and the number of residents using these services. There can be
no assurance that, at any time, any assisted living facility will be
substantially occupied at assumed rents. In addition, lease-up and full
occupancy may be achievable only at rental rates below those assumed. If
operating expenses increase, local rental market conditions may limit the extent
to which rents may be increased. Because rent increases generally can only be
implemented at the time of expiration of leases, rental increases may lag behind
increases in operating expenses.
The average monthly revenue per occupied unit for both the basic service
and the additional services for the year ended March 31, 1997 increased to
$1,610 from $1,480 a year earlier on a same facility basis.
Wellness Program. The Company has implemented a Wellness Program for the
residents of its facilities designed to identify and respond to changes in a
resident's health or condition and then, together with the resident and the
resident's family and physician, as appropriate, design a solution to fit that
resident's particular needs. The Company monitors the physical and mental
well-being of its residents. This monitoring activity takes place at meals and
other scheduled activities, and informally as the staff performs its services
around the facility. Under the Wellness Program, the Company works with home
health care agencies to
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Company at any time on or before maturity of the notes. In addition, at March
31, 1997, the Company had $12.1 million in notes maturing within two years. As a
result, a portion of the Company's cash flow will be devoted to debt service.
There is a risk that the Company will not be able to generate sufficient cash
flow from operations to cover required interest and principal payments.
At March 31, 1997, approximately $15.2 million of the Company's
indebtedness bore interest at floating rates. Indebtedness that the Company has
since that date incurred and may incur in the future 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 the Company's interest payment
obligations and could have an adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company has
guaranteed mortgage and construction debt for the benefit of Affiliated
Partnerships of up to approximately $56.1 million, including $46.9 million
outstanding as of March 31, 1997, of which $34.0 million will become due and
payable within the next two years. This effectively subjects the Company to
risks normally associated with leverage, including the risk that Affiliated
Partnerships will not be able to refinance this debt with permanent financing,
an increased risk of partnership cash flow deficits, and the risk that if
economic performance of any mortgaged asset declines, the obligation to make
payments on the mortgage debt may be borne by the Company, which could adversely
affect the Company's results of operations and financial condition. Because
certain of the indebtedness which the Company has guaranteed bears interest at
rates which fluctuate with certain prevailing interest rates, increases in such
prevailing interest rates could increase the Company's interest payment
obligations and could have an adverse effect on the Company's results of
operations and financial condition.
In addition, as of March 31, 1997, the Company is a party to long-term
operating leases for certain of its Leased ALFs, which leases require minimum
annual lease payments aggregating $18.5 million for fiscal year 1998, and
intends to enter into additional long-term operating leases in the future. These
leases typically have an initial term of 10 to 15 years, and in general are not
cancelable by the Company.
The Company also has entered into guarantees (the "Tax Credit Guarantees")
which extend 15 years after project completion, relating to certain developments
financed under the Federal Tax Credit Program with respect to (i) lien free
construction, (ii) operating deficits and (iii) obtaining and maintaining tax
credit benefits to certain corporate investors (see "-- Tax Credit Properties"),
the obligations under which, excluding potential penalties and interest factors,
could amount to an approximate limit of $78.4 million as of March 31, 1997.
There can be no assurance that the Company will be able to generate sufficient
cash flow from operations to cover required interest, principal and lease
payments, or to perform its obligations under the guarantees to which it is
party were it called on to do so.
In particular, the Company and/or its wholly owned subsidiary, ARV
Investment Group, Inc., have provided such guarantees to General Electric
Capital Corporation and subsidiaries thereof (collectively, "GECC") with regard
to six properties. For two of those properties, the Company has funded
approximately $317,000 as of March 31, 1997, and expects to fund up to an
additional $675,000 in fiscal 1998 under operating deficit guarantees. The
Company expects to fund approximately $1 million for operating deficits for
other properties as of March 31, 1997. In addition, the Company may be required
to fund shortfalls in permanent loan financing to replace construction financing
on projects where permanent financing has not been finalized. Finally, with
regard to tax credit benefits, the Company may be required to make adjustments
if sufficient tax credits are not generated in order to meet agreed-upon levels
of tax credit benefits. (See "-- Tax Credit Properties.")
If the Company were unable to meet interest, principal, lease or guarantee
payments in the future, there can be no assurance that sufficient financing
would be available to cover the insufficiency or, if available, the financing
would be on terms acceptable to the Company. In the absence of financing, the
Company's ability to make scheduled principal and interest payments on its
indebtedness to meet required minimum lease payments, to meet its obligations
under the guarantees, if any, to respond to changing business and economic
conditions, to fund scheduled investments, cash contributions and capital
expenditures, to make future acquisitions and to absorb adverse operating
results would be adversely affected. In addition, the terms of certain of the
Company's indebtedness have imposed, and may in the future impose, constraints
on the Company's operations. If, and to the extent that, the Company fails to
operate within those constraints, the
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ITEM 2. PROPERTIES
The following charts set forth, as of March 31, 1997, the location, number
of units, ownership, occupancy and acquisition date for the Company's
facilities:
OCCUPANCY
MONTH PERCENT 1997 1996 1995
FACILITY STATE UNITS ACQUIRED OWNERSHIP(A) AVERAGE AVERAGE AVERAGE
- -------------------------------------- ----- ----- -------- ------------ ------- --------- -------
LEASED
Amber Wood............................ FL 187 Jun-96 100.0% 97.3% -- --
Baypointe Village..................... FL 232 Mar-96 100.0% 85.1% 89.7% --
Buena Vista Knolls.................... CA 91 Feb-96 100.0% 96.5% 91.9% --
Chateau San Juan...................... CA 114 Dec-95 100.0% 96.0% 91.5% --
Collier Park.......................... TX 162 Dec-96 100.0% 16.2% -- --
El Camino Gardens..................... CA 282 Jun-95 100.0% 76.2% 71.5% --
Hacienda de Monterey.................. CA 180 Apr-94 100.0% 92.8% 94.7% 88.1%
Kinghaven Manor....................... MI 144 Feb-95 100.0% 95.1% 97.4% 73.2%
Inn at Willow Glen(b)................. CA 84 Aug-96 50.9% 94.3% -- --
Lodge................................. OH 216 Jan-97 100.0% 93.8% -- --
Mallard Cove.......................... OH 121 Feb-95 100.0% 78.0% 83.9% 76.0%
Maria del Sol......................... CA 124 Oct-95 100.0% 88.6% 88.7% --
Northgate............................. OH 126 Aug-96 100.0% 96.7% -- --
Rancho Park Villas.................... CA 163 Oct-95 100.0% 73.7% 75.2% --
Shorehaven............................ MI 120 Sep-96 100.0% 95.4% -- --
Retirement Inn of Burlingame(b)....... CA 68 Aug-96 50.9% 96.2% -- --
Retirement Inn of Campbell(b)......... CA 72 Aug-96 50.9% 99.4% -- --
Retirement Inn of Fremont(b).......... CA 70 Aug-96 50.9% 88.3% -- --
Retirement Inn of Sunnyvale(b)........ CA 123 Aug-96 50.9% 94.6% -- --
Tamalpais Creek....................... CA 120 Oct-95 100.0% 98.1% 97.4% --
Tanglewood Trace...................... IN 159 Jan-97 100.0% 94.3% -- --
Villa Bonita.......................... CA 130 Oct-95 100.0% 89.8% 90.7% --
Villa de Palma........................ CA 111 May-95 100.0% 90.4% 92.0% --
Villa del Obispo...................... CA 96 May-95 100.0% 95.9% 94.2% --
Villa del Rey......................... CA 103 Jun-95 100.0% 89.6% 92.2% --
Villa del Sol......................... CA 91 Jun-95 100.0% 95.3% 94.1% --
Villa Encinitas....................... CA 117 Jun-95 100.0% 96.2% 96.7% --
Villa at Palm Desert.................. CA 77 Nov-95 100.0% 93.8% 88.0% --
Woodside Village of Columbus.......... OH 156 Feb-96 100.0% 93.3% 97.1% --
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TOTAL LEASED...................... 3,839
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OWNED
Acacia Villa(b)....................... CA 66 Dec-95 89.5% 77.5% 88.6% --
Amber Park............................ OH 127 Jan-96 100.0% 71.5% 83.3% --
Bella Vita............................ FL 120 Apr-96 100.0% 97.0% -- --
Collwood Knolls....................... CA 117 Jan-96 95.5% 71.3% 73.4% --
Covell Gardens........................ CA 157 Mar-97 100.0% 92.3% -- --
Covina Villa(b)....................... CA 64 Aug-96 50.9% 93.5% -- --
Gayton Terrace........................ VA 92 Aug-96 100.0% 95.2% -- --
Retirement Inn of Daly City(b)........ CA 95 Aug-96 50.9% 92.7% -- --
Retirement Inn of Fullerton(b)........ CA 68 Aug-95 50.9% 93.0% -- --
Montego Heights Lodge(b).............. CA 170 Aug-96 50.9% 88.0% -- --
Valley View Lodge(b).................. CA 125 Aug-96 50.9% 96.1% -- --
Villa Colima(b)....................... CA 94 Jun-96 59.9% 81.7% -- --
Woodside Village of Bedford........... OH 217 Jan-96 100.0% 73.0% 70.7% --
Wyndham Lakes......................... FL 248 Mar-96 100.0% 81.1% -- --
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TOTAL OWNED....................... 1,760
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TOTAL LEASED AND OWNED............ 5,599
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MANAGED
Bradford Square....................... CA 92
Chandler Villa........................ AZ 164
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TOTAL MANAGED..................... 256
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TOTAL............................. 5,855
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(a) Represents percentage ownership of Leased ALFs and Owned ALFs through
leasehold or fee ownership of the Company or an Affiliated Partnership.
(b) Facility managed by the Company, owned or leased by Affiliated Partnership
in which the Company has obtained a majority ownership interest.
Prior to its fiscal year ended March 31, 1995, the Company did not own ALFs for
its own account, or operate them subject to long-term operating leases. Prior to
that time, the Company managed facilities for Affiliated Partnerships.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
consolidated financial statements of the Company and its subsidiaries as of and
for each of the five fiscal years ended March 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."
YEAR ENDED MARCH 31,
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1997 1996 1995 1994 1993
------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Assisted living facility revenue(1)................... $73,770 $25,479 $ 4,838 $ -- $ --
Therapy & other services.............................. 7,850 4,322 4,165 3,492 3,110
Interest income....................................... 1,667 1,070 211 104 109
Other income.......................................... 645 2,192 476 904 606
------- ------- ------- ------- ------
Total revenue.................................. 83,932 33,063 9,690 4,500 3,825
------- ------- ------- ------- ------
Expenses:
Assisted living facility operating expense(1)......... 47,117 16,395 3,201 -- --
Assisted living facility lease expense................ 12,872 6,644 814 -- --
General and administrative............................ 7,620 7,645 8,264 5,765 3,470
Therapy & other....................................... 4,255 -- -- -- --
Depreciation and amortization......................... 4,366 1,031 320 92 69
Provision for liabilities related to Tax Credit
Properties.......................................... 2,032 -- -- -- --
Provision for doubtful accounts and discontinued
project costs....................................... 501 394 1,465 441 345
Interest expense...................................... 5,573 1,544 354 103 75
------- ------- ------- ------- ------
Total expenses................................. 84,336 33,653 14,418 6,401 3,959
------- ------- ------- ------- ------
Loss before income tax expense.......................... (404) (590) (4,728) (1,901) (134)
Income tax expense (benefit)............................ 201 375 (1,729) (248) 2
------- ------- ------- ------- ------
Net loss before minority interest & extraordinary
items................................................. (605) (965) (2,999) (1,653) (136)
Minority interest....................................... 783 -- -- -- --
Early extinguishment of debt............................ 386 -- -- -- --
Net loss................................................ $(1,774) $ (965) $(2,999) $(1,653) $ (136)
------- ------- ------- ------- ------
Preferred dividends declared............................ -- $ 351 $ 398 $ 40 --
Net loss available for common shares(2)................. $(1,774) $(1,316) $(3,397) $(1,693) $ (136)
------- ------- ------- ------- ------
Net loss per common share............................... $ (.19) $ (.21) $ (.69) $ (.34) $ (.03)
------- ------- ------- ------- ------
Weighted average common shares outstanding(2)........... 9,400 6,246 4,903 5,113 5,059
------- ------- ------- ------- ------
YEAR ENDED MARCH 31,
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1997 1996 1995 1994 1993
------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Assisted living units owned or leased (end of
period)(1)............................................ 5,599 3,277 445 -- --
Assisted living units managed (end of period)........... 256 1,289 2,803 3,042 3,042
Weighted average occupancy of assisted living units
(end of year)......................................... 88% 90% 92% 88% 87%
BALANCE SHEET DATA:
Working capital (deficit)............................... $23,054 $10,014 $(4,660) $ 1,363 --(3)
Total assets............................................ 164,231 77,403 15,399 8,054 $3,046
Long-term notes payable, excluding current portion...... 90,481 24,814 3,213 -- 16
Series A Preferred Stock, convertible and redeemable.... -- 2,358 4,586 3,969 --
Total shareholders' equity (deficit).................... 51,374 39,947 (3,536) (1,316) (70)
- ---------------
(1) The Company began operating ALFs under long-term operating leases during
fiscal 1995. Prior to that year, the Company managed those facilities for
affiliated partnerships for which it acted as the managing general partner
and recognized management fees and other income with respect to those
assisted living facilities but did not receive assisted living revenue from
and did not incur assisted living facility operating or lease expenses in
connection with its operations.
(2) Net loss available for common shares reflects the effect of preferred stock
dividends. Weighted average common shares outstanding give effect to the 1
for 3.04 reverse stock split which occurred upon the completion of the IPO
Offering.
(3) Prior to fiscal 1994, the Company did not classify its balance sheet. As a
result, no working capital data is available at March 31, 1993.
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Common Stock. Subsequent to March 31, 1996, the balance of the Series A
Preferred Stock was converted into an additional 338,141 shares of Common Stock.
On April 3, 1996, the Company successfully completed a $57.5 million
private placement offering of the 2006 Convertible Notes. The 2006 Convertible
Notes, which are non-callable by the Company for a period of three years, allow
note holders to convert their 2006 Convertible Notes into common stock of the
Company at a price equal to $18.57 per share.
On April 10, 1996, the Company called for redemption all of its outstanding
1999 Convertible Notes. The Company redeemed all of the outstanding 1999
Convertible Notes as of 5:00 p.m. Pacific Daylight Time on July 10, 1996, unless
the Notes were converted on or prior to June 30, 1996. The price paid for each
$1,000 principal amount of 1999 Convertible Notes was $1,067 plus accrued
interest to the date of redemption. 1999 Convertible Note holders were given the
alternative to convert their Notes into shares of common stock of the Company at
any time up to and including June 30, 1996. Converting holders received one
share of common stock for every $12.16 in principal amount of 1999 Convertible
Notes surrendered for conversion. For those 1999 Convertible Notes surrendered
for conversion into common stock, unpaid interest was disregarded and note
holders were not be entitled to interest accrued to the date of conversion. For
those Notes converted to common stock, the Company issued restricted stock
pursuant to Rule 144 of the Securities Act of 1933. Holders of approximately $11
million principal amount of the 1999 Convertible Notes exercised their right to
convert their notes into 900,662 shares of Common Stock.
Working capital increased to $23.1 million as of March 31, 1997, compared
to working capital of $10.0 million at March 31, 1996 resulting primarily from
the net proceeds from the sale of the 2006 Notes and the sale/leaseback of four
ALFs.
For the year ended March 31, 1997 cash provided by operations was $2.1
million compared to cash used in operating activities of $544,000 for the year
ended March 31, 1996. During the year ended March 31, 1997, the Company's net
loss of $1.8 million was offset by non-cash charges of $4.4 million for
depreciation and amortization, $501,000 for the provision for doubtful accounts
and discontinued project costs, a $2.0 million provision for liabilities related
to Tax Credit Properties and a $386,000 charge (net of $231,000 of taxes) for
the early extinguishment of its 1999 Notes. The Company incurred net loss of
$965,000 offset by non-cash charges of $1.0 million for depreciation and
amortization for the year ended March 31, 1996. Increases in the Company's other
assets used cash of $4.5 million and $1.1 million for the years ended March 31,
1997 and 1996, respectively. Increases in accounts payable provided cash of $2.0
million for both years ended March 31, 1997 and 1996, respectively.
Cash used in investing activities was $59.5 million and $53.9 million for
the years ended March 31, 1997 and 1996, respectively. Purchases of facilities,
fixtures and equipment totaling $70.2 million, investments in real estate of
$3.5 million and purchases of limited partnership interests totaling $18.5
million were the primary uses of cash for investing activities in the year ended
March 31, 1997. These amounts were offset by $29.1 million proceeds from the
sale/leaseback of four ALFs and a $3.0 million decrease in restricted cash as
collateral for letters of credit pledged as security deposits for leased
facilities. Purchases of facilities, fixtures and equipment totaling $45.7
million, investments in real estate of $6.8 million, increases in restricted
cash of $4.9 million as collateral for letters of credit pledged as security
deposits for leased facilities, increases in leased property security deposits
of $559,000 and acquisition of limited partnership interests of $1.8 million
were partially offset by proceeds of $5.1 million from the sale of the Villa de
Palma facility to a Health Care REIT during the year ended March 31, 1996.
Net cash provided by financing activities was $66.2 million and $61.1
million for the years ended March 31, 1997 and 1996, respectively. During the
year ended March 31, 1997, the issuance of the 2006 Notes provided $55.2 million
net of issuance costs while borrowings under notes payable provided $31.1
million. Repayments of debt and the redemption of the 1999 Notes totaled $18.6
million and $1.7 million, respectively for the year ended March 31, 1997. During
the year ended March 31, 1996, $42.7 million (net of issuance cost) was provided
by the issuance of common stock in the IPO Offering, $10.8 million (net of
issuance costs) was provided from the issuance of the 1999 Convertible Notes,
and $14.5 million was provided from mortgage
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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/ GARY L. DAVIDSON
Gary L. Davidson
Chairman of the Board
Date: July 25, 1997
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/ GARY L. DAVIDSON President, Chief Executive July 25, 1997
- --------------------------------------------- Officer and Director
Gary L. Davidson
/s/ JOHN A. BOOTY Vice Chairman of Board and July 25, 1997
- --------------------------------------------- Director
John A. Booty
/s/ DAVID P. COLLINS Senior Executive Vice July 25, 1997
- --------------------------------------------- President and Director
David P. Collins
/s/ GRAHAM P. ESPLEY-JONES Executive Vice President and July 25, 1997
- --------------------------------------------- Chief Financial Officer
Graham P. Espley-Jones
/s/ JAMES M. PETERS Director July 25, 1997
- ---------------------------------------------
James M. Peters
/s/ R. BRUCE ANDREWS Director July 25, 1997
- ---------------------------------------------
R. Bruce Andrews
/s/ MAURICE J. DEWALD Director July 25, 1997
- ---------------------------------------------
Maurice J. DeWald
/s/ JOHN J. RYDZEWSKI Director July 25, 1997
- ---------------------------------------------
John J. Rydzewski
43
9
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 March 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1997 in conformity with generally accepted accounting
principles. 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 PEAT MARWICK LLP
Orange County, California
June 20, 1997
F-1
10
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NOTES PAYABLE
Notes payable at March 31 consists of (in thousands, except per share
data):
1997 1996
------- -------
Convertible subordinated notes due April 1, 2006 with interest at 6.75%.
The notes require monthly semi-annual payments of interest and are
convertible to common stock at $18.57 per share. The notes, offered in a
maximum amount of $57,500, may be called by the Company beginning in
April 1999 at declining premiums starting at 110% of the principal
amount................................................................... $57,500 $ --
Convertible subordinated notes due December 31, 1999 with interest at 10%.
The notes require monthly payments of interest, were convertible to
common stock at $12.16 per share and were guaranteed by certain
shareholders of the Company.............................................. -- 14,888
Notes payable, bearing interest at fixed rates between 9.5% and 10.5%,
payable in monthly installments of principal and interest totaling $157
and $95 for 1997 and 1996, respectively, secured by property, maturities
ranging from June 1997 through March 2006................................ 19,494 11,824
Notes payable bearing interest at floating rates of LIBOR (5.77% at March
31, 1997) plus 2.75% payable in monthly installments of interest only
secured by Owned ALFs, maturing September 30, 1998....................... 8,750 --
Notes payable, bearing interest at floating rates between prime (8.5% at
March 31, 1997 and 8.25% at March 31, 1996) plus rates between 1.0%
through 2.25%, payable in monthly installments of principal and interest
totaling $56 and $12 for 1997 and 1996, respectively, secured by an ALF
and the Company's corporate headquarters................................. 6,453 382
Note payable, bearing interest at fixed and floating rates between 8% and
prime (8.25% at March 31, 1996) plus 1.5%, payable in monthly interest
installments of $5, secured by ALF sites. Repaid during fiscal 1997...... -- 736
Other -- primarily capitalized equipment leases............................ 311 291
------- -------
92,508 28,120
Less amounts currently payable............................................. 2,027 3,306
------- -------
$90,481 $24,814
======= =======
The future annual principal payments of the notes payable at March 31, 1997
are as follows (in thousands):
1998............................................. $ 2,027
1999............................................. 10,110
2000............................................. 552
2001............................................. 697
2002............................................. 438
Thereafter....................................... 78,684
-------
$92,508
=======
The convertible subordinated notes due in 1999 were called by the Company
in fiscal 1997. Note holders who chose to redeem their notes were paid a premium
of 6.7% upon redemption, totalling $261,000, and unamortized note issuance costs
of $335,000 were expensed, resulting in the extraordinary loss of $386,000, net
of income tax benefit. Holders of approximately $11.0 million of the notes
converted the notes into 900,662 shares of common stock.
The Company has entered into separate agreements with Bank United of Texas
and Imperial Bank to provide an additional $22 million of financing for
acquisitions, development and general corporate purposes.
F-13
11
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of stock options at March 31, 1997 is as follows:
SHARES SHARES UNDER
AVAILABLE OUTSTANDING PRICE PER
FOR GRANT OPTIONS SHARE
---------- ------------ --------------
Authorization of shares............. 1,155,666 -- N/A
Options granted..................... (1,243,400) 1,243,400 $10.00 - 15.40
Options canceled.................... 267,008 (267,008) $11.25 - 14.00
---------- --------- --------------
Balance at March 31, 1997........... 179,274 976,392 $10.00 - 15.40
========== ========= ==============
Pro forma information regarding net loss and loss per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its 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 the following weighted-average expected life of the option of
9 years.
The Company uses the Black-Scholes option valuation model, which was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferrable. Option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of trade options, and because
changes in the first subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The following represents the estimated fair value of options granted and
the assumptions used for calculation.
1997 1996
------ ------
Estimated fair value per option granted...................................... $11.21 $13.84
Average exercise price per option granted.................................... $11.21 $13.90
Stock volatility............................................................. 57% 57%
Risk-free interest rate...................................................... 6.5% 6.5%
Option term -- years......................................................... 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. The Company's
pro forma information is as follows (in thousands, except per share amounts):
1997 1996
------- -------
Pro forma net loss before extraordinary item............. $(1,735) (1,368)
Pro forma net loss....................................... $(2,122) (1,368)
Pro forma loss per share before extraordinary item....... $ (.18) (.22)
Pro forma loss per share................................. $ (.23) (.22)
F-15
12
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Temporary differences giving rise to a significant amount of deferred tax
assets and liabilities at March 31, 1997 and 1996 are as follows (in thousands):
1997 1996
------- -------
Deferred tax assets:
Deferred gain on sale.................................. $ 152 $ 169
Deferred partnership fee income........................ 1,438 1,145
Owner equity contributions............................. 930 2,013
Other partnership income............................... -- 164
Liabilities related to Tax Credit Properties........... 585 --
Net operating loss carryforwards....................... 618 --
Other.................................................. 439 373
------- -------
Gross deferred tax asset....................... 4,162 3,864
Less valuation allowance................................. (1,953) (1,685)
Deferred tax liabilities -- other........................ (205) (135)
------- -------
Net deferred tax asset......................... $ 2,004 $ 2,044
======= =======
Management believes it is more likely than not that the Company will
realize certain of the benefits of the existing deferred tax assets as of March
31, 1997 and 1996. Approximately $1.0 million and $2.0 million of the deferred
tax assets at March 31, 1997 and 1996, respectively, result from income that has
been recognized for Federal income tax purposes in advance of recognition for
financial reporting purposes.
Recognition of the remaining balances will require generation of future
taxable income. There can be no assurance that the Company will generate any
earnings or any specific level of earnings in future years. Certain tax planning
or other strategies could be implemented, if necessary, to supplement income
from operations to fully realize recorded net tax benefits.
(7) RELATED PARTY TRANSACTIONS
The results of the Company and its subsidiaries are substantially affected
by transactions and agreements with related parties.
Fees receivable from affiliates of $241,000 and $362,000 at March 31, 1997
and 1996, respectively, consists of receivables related to management services
rendered by the Company. Related management fees received from affiliates total
$1,742,000, $2,766,000, and $3,273,000 during the years ended March 31, 1997,
1996, and 1995, respectively.
Notes receivable from affiliates of $261,000 and $340,000 at March 31, 1997
and 1996, respectively, bear interest at rates between 9% and 10% and are due on
demand. Other amounts due from affiliates of $864,000 and $561,000 at March 31,
1997 and 1996, respectively, consist of non-interest bearing expense advances
and working capital loans made 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.
During the year ended March 31, 1995, $621,000 in consulting fees were
earned by certain shareholders of the Company, who are also general partners in
several limited partnerships. Additionally, approximately $53,000 of legal fees
incurred during the period ending March 31, 1995, were paid to certain
shareholders of the Company.
The Company pays certain expenses such as repair and maintenance, supplies,
payroll and retirement benefit expenses on behalf of affiliated Partnerships and
is subsequently reimbursed by the Partnerships. During the periods ended March
31, 1997, 1996 and 1995, respectively, the expenses incurred on behalf of
F-17
13
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The maximum aggregate amounts of guaranteed indebtedness is $56,078,000 at
March 31, 1997. The Company has guaranteed tax credits for certain partnerships
in the aggregate amount of $78,387,000, excluding interest, penalties or other
charges which might be assessed against the partners. The Company and certain
shareholders have provided operating deficit guarantees for certain Affiliated
Partnerships. As of March 31, 1997, the Company has funded $813,000 under these
guarantees and expects to fund an additional $1.2 million until the Affiliated
Partnerships break even.
In management's 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.
At March 31, 1997, the Company has used $6.9 million of the line of credit
with Imperial Bank in the form of non-cash advances to provide letters of credit
used as security deposits for leased ALFs. The Company intends to finance
certain of its ALFs and investments in property to be developed in order to
redeploy the capital.
At March 31, 1997, the Company leased office space under various operating
leases expiring from 2001 to 2003, some of which are from affiliated entities
(See Note 7). Noncancelable operating lease commitments for office space at
March 31, 1997 are:
YEAR ENDED MARCH 31: (IN THOUSANDS)
---------------------------------------------------------------
1998..................................................... $ 385
1999..................................................... 376
2000..................................................... 336
2001..................................................... 309
2002..................................................... 210
Thereafter............................................... 318
------
Total.................................................... $1,934
======
Rent expense for these leases amounted to $333,000, $161,000 and $215,000
in 1997, 1996 and 1995, respectively.
(12) LIABILITIES RELATED TO TAX CREDIT PROPERTIES
During the year ended March 31, 1997, the Company took a $2.0 million
charge related to its tax credit properties. The charge represents a write-off
of $813,000 in amounts previously advanced to affiliated partnerships and a $1.2
million provision for the Company's anticipated future obligations to these
affiliated partnerships.
(13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value
of Financial Instruments," which was adopted by the Company in 1995. The
estimated fair value amounts 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, management fees receivable, accounts payable and accrued
liabilities and owner equity contributions payable, approximate fair value due
to the short-term nature of these instruments. The notes receivable from an
affiliates, notes payable and other amounts due to affiliates and notes payable
bear interest at rates which
F-21
14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23 Consent of KPMG Peat Marwick LLP