1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 0-26980
ARV ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1
COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of outstanding shares of the Registrant's Common Stock, no par
value, as of November 11, 1997 was 11,584,272.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
1997 1997
--------- ---------
ASSETS
Cash and cash equivalents $ 24,724 $ 15,964
Accounts receivable, net 4,019 2,410
Fees receivable from affiliates 1,310 1,105
Investments in real estate held for sale -- 1,984
Restricted cash 121 --
Other assets 9,006 5,965
--------- ---------
Total current assets 39,180 27,428
Restricted cash 193 1,912
Property, furniture and equipment, net 131,601 122,199
Deferred project costs 1,034 1,072
Notes receivable from affiliates, net 235 234
Deferred tax asset 2,265 2,004
Other noncurrent assets 10,055 9,382
--------- ---------
$ 184,563 $ 164,231
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 11,698 $ 8,566
Accrued interest payable 103 1,941
Deferred revenue, current portion 46 --
Notes payable, current portion 879 2,027
Notes payable and other amounts due to affiliates 119 40
Liabilities related to Tax Credit Properties 200 1,219
--------- ---------
Total current liabilities 13,045 13,793
Accrued liabilities, long term 192 --
Deferred revenue, less current portion 904 576
Notes payable, less current portion 90,659 90,481
--------- ---------
104,800 104,850
--------- ---------
Minority interest in majority owned entities 7,923 8,007
--------- ---------
Series B Preferred stock, convertible and redeemable
Stated and liquidation value $2.50; authorized 2,000
shares, none issued and outstanding -- --
Shareholders' equity
Common stock, no par value. Authorized 100,000
shares; issued and outstanding 11,542 and 9,613
shares at September 30 and March 31, 1997,
respectively 86,103 60,749
Accumulated deficit (14,263) (9,375)
--------- ---------
Total shareholders' equity 71,840 51,374
--------- ---------
$ 184,563 $ 164,231
========= =========
See accompanying notes to unaudited condensed
consolidated financial statements.
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3
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1997 1996 1997 1996
-------- ------- -------- --------
REVENUE:
Assisted living facility revenue $ 25,624 $16,585 $ 50,289 $ 30,031
Therapy and other services 2,637 1,763 4,919 2,708
Interest income 413 461 652 1,278
Other income 143 288 313 425
-------- ------- -------- --------
Total revenue 28,817 19,097 56,173 34,442
-------- ------- -------- --------
EXPENSES:
Assisted living facility operating expense 17,419 10,341 33,155 18,802
Assisted living facility lease expense 5,260 2,868 10,229 5,615
General and administrative 4,406 1,690 6,969 3,357
Therapy and other 2,543 682 4,403 682
Depreciation and amortization 1,686 903 3,164 1,571
Interest 1,483 1,252 2,887 2,653
-------- ------- -------- --------
Total expenses 32,797 17,736 60,807 32,680
-------- ------- -------- --------
Income (loss) before income tax expense
(benefit), minority interest in income of
majority owned entities and extraordinary item (3,980) 1,361 (4,634) 1,762
Income tax expense (benefit) 9 509 (249) 659
-------- ------- -------- --------
Income (loss) before minority interest in
income of majority owned entities and
extraordinary item (3,989) 852 (4,385) 1,103
Minority interest in income of majority
owned entities 96 105 503 105
-------- ------- -------- --------
Income (loss) before extraordinary item (4,085) 747 (4,888) 998
Extraordinary item, loss from early
extinguishment of debt, net of income
tax benefit of $231 -- -- -- 386
-------- ------- -------- --------
Net income (loss) $ (4,085) $ 747 $ (4,888) $ 612
======== ======= ======== ========
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ (0.37) $ 0.08 $ (0.47) $ 0.11
Extraordinary loss, early extinguishment of debt -- -- -- (0.04)
-------- ------- -------- --------
Net income (loss) $ (0.37) $ 0.08 $ (0.47) $ 0.07
======== ======= ======== ========
Weighted average number of common shares
Outstanding 11,082 9,523 10,355 9,215
======== ======= ======== ========
See accompanying notes to unaudited condensed
consolidated financial statements.
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ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
SEPTEMBER 30,
1997 1996
-------- --------
Net cash provided by (used in)
operating activities (including changes in
all operating assets and liabilities) $ (8,436) $ 1,081
-------- --------
Cash flows used in investing activities:
(Increase) decrease in deferred project costs (837) 136
Increase in investments in real estate, net (258) (3,690)
Proceeds from sale of real estate 1,851 --
Additions to property, furniture and equipment (11,596) (44,737)
Decrease in restricted cash 1,598 4,057
Proceeds from distributions from Senior Income Fund 3,397 --
Equity investment in affiliated partnerships (620) --
Purchase of limited partnership interests -- (13,912)
Other (283) 175
-------- --------
Net cash used in investing activities (6,748) (57,971)
-------- --------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs 25,354 193
Borrowings under notes payable -- 20,090
Repayments of notes payable (1,410) (7,149)
Issuance of convertible subordinated notes, net of
issuance costs -- 55,195
Repurchase of convertible subordinated notes -- (1,692)
Extraordinary loss from early extinquishment of debt -- (386)
-------- --------
Net cash provided by financing activities 23,944 66,251
-------- --------
Net increase in cash 8,760 9,361
Cash and cash equivalents, at beginning of period 15,964 7,454
-------- --------
Cash and cash equivalents, at end of period $ 24,724 $ 16,815
======== ========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest $ 5,544 $ 3,088
======== ========
Income taxes $ 13 $ 625
======== ========
Supplemental schedule of noncash investing
and financing activities:
Minority interests in joint venture $ 588 $ --
======== ========
Acquisition of SynCare for stock $ -- $ 485
======== ========
Conversion of 8 % convertible redeemable
preferred stock to common stock $ -- $ 2,358
======== ========
Conversion of 10% convertible subordinated
notes to common stock $ -- $ 10,988
======== ========
See accompanying notes to
unaudited condensed consolidated
financial statements.
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5
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of ARV Assisted
Living, Inc. and subsidiaries (the Company) have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
(the Commission). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
regulations. The consolidated financial statements reflect all adjustments and
disclosures which are, in the opinion of management, necessary for a fair
presentation. All such adjustments are of a normal recurring nature. Certain
reclassifications have been made to prior period amounts in order to conform to
the presentation at September 30, 1997. The interim consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K/A for the fiscal year ended March 31, 1997. The results of operations
for the three month and six month periods ended September 30, 1997 are not
necessarily indicative of the results which may be expected for the full fiscal
year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. Joint ventures and limited partnerships in which
the Company has controlling interests have been consolidated into the financial
statements including presentation of the minority interest not controlled by the
Company. All significant intercompany balances and transactions have been
eliminated in consolidation.
NEW PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" which is
effective for both interim and annual reporting periods ending after December
15, 1997. This standard requires restatement of prior interim and annual
earnings per share calculations. SFAS No. 128 replaces fully diluted EPS with
diluted EPS and replaces primary EPS with basic EPS. Basic EPS is computed by
dividing reported earnings by weighted average shares outstanding. Diluted EPS
is computed the same way as fully diluted EPS, except that the calculation now
uses the average share price for the reporting period to compute dilution from
options and warrants under the treasury stock method. The Company will adopt the
new standard in its reporting for the fiscal year and nine month period ended
December 31, 1997 (see Note 3). Management does not believe that adoption of
this standard will have a significant impact on earnings per share.
The FASB has also issued SFAS No. 130, "Reporting Comprehensive Income" which is
effective for fiscal years beginning after December 15, 1997, and requires
restatement of earlier financial statements for comparative purposes. SFAS No.
130 requires that items meeting the criteria of a component of comprehensive
income, including foreign currency items and unrealized gains and losses on
certain investments in debt and equity securities, be shown in the financial
statements. SFAS No. 130 does not require a specific format for disclosure of
comprehensive income and its components in the financial statements. Management
does not believe that SFAS No. 130 will have an impact on the consolidated
financial statements.
The FASB has also issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This standard requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also requires that
all public business enterprises report information about the revenues derived
form the enterprise's products or services (or groups of similar products or
services), about the countries in which the enterprise earns revenues and holds
assets and about major customers regardless of whether that information is used
in making operating decisions. However, this Statement does not require an
enterprise to report information that is not prepared for internal use if
reporting it would be impractical. This Statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is required to be
restated. Comparative information for interim periods is not required until the
second year of application. Management does not believe that SFAS No. 131 will
have an impact on the consolidated financial statements.
5
6
INCOME (LOSS) PER SHARE
The number of shares used in computing income (loss) per share is equal to the
weighted average number of common shares and common equivalent shares
outstanding during the respective periods. Common stock equivalents relating to
options and warrants are not included in 1997 due to their antidilutive effect.
(2) COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain major shareholders have guaranteed indebtedness of
certain affiliated partnerships as follows:
MAJORITY
COMPANY SHAREHOLDERS
------- ------------
(IN THOUSANDS)
Notes secured by real estate $13,051 $13,426
Construction loans associated with the
development and Construction of affordable
housing apartments $36,929 $31,052
The maximum aggregate amount of guaranteed land and construction loans is $42.3
million at September 30, 1997.
The Company has guaranteed tax credits for certain partnerships in the aggregate
amount of $78.4 million, excluding interest, penalties or other charges which
might be assessed against the partners.
Certain claims may be made under the aforementioned loan guarantees based upon
the performance of the assets securing such loans. Management has reserved for
such claims where reasonably estimable. (See Management's Discussion and
Analysis -- Liquidity.)
(3) SUBSEQUENT EVENTS
On October 13, 1997, the Company's Board of Directors approved a change in the
Company's fiscal year end to December 31 from its current March 31 year-end.
This change will be effective with the current year ending December 31, 1997,
and the transition report will be filed with the Securities and Exchange
Commission on Form 10-K.
On October 13, 1997, Gary L. Davidson resigned from his offices as Chairman,
Chief Executive Officer and President of the Company. John J. Rydzewski, an
outside director, was appointed Chairman of the Board. John A. Booty, the
co-founder and former President of the Company, and a director of the Company,
became the President and Chief Executive Officer on an interim basis. In
conjunction with his resignation, the Company entered into a separation
agreement with Mr. Davidson (the "Separation Agreement"). Pursuant to the terms
of the Separation Agreement, the Company paid Mr. Davidson $526,100 plus all
accrued unpaid vacation pay due him and reimbursement of business expenses
incurred on or before October 13, 1997. On January 2, 1998, the Company will pay
Mr. Davidson a second payment of $526,100. In addition, the Company agreed to
reimburse Mr. Davidson's reasonable attorney's fees incurred in the negotiation
of the Separation Agreement in an amount not to exceed $20,000. The Company
recorded a charge to general and administrative expenses related to this
agreement during the quarter ended September 30, 1997.
On October 30, 1997, the Company issued $60 million of Convertible Subordinated
Notes (the "Notes") to Prometheus Assisted Living LLC ("Prometheus"), an
affiliate of Lazard Freres Real Estate Investors LLC ("LFREI"). The Notes, which
bear interest at 6.75%, payable in semi-annual interest only installments, are
due 2007. They are convertible into approximately 3.5 million shares of the
Company's common stock at $17.25 per share. The Company has the option to call
the Notes at any time, subject to a redemption premium schedule as defined in
the Notes. The Notes rank pari passu with the Company's existing 6.75%
Convertible Subordinated Notes due 2006. This transaction replaced a previous
agreement that called for Prometheus to purchase up to $135 million of newly
issued common stock from the Company. Under the earlier arrangement, Prometheus
had acquired, in July, 1.9 million shares of common stock from the Company for
$14 per share. In the event of a change in control or a termination of trading,
as defined, Prometheus (i) may elect to require the Company to repurchase the
Notes at a purchase price equal to 101% of the principal amount of such Notes or
(ii) in the case of a Change of Control not approved by a majority of the
continuing directors of the Company, may require the Company to convert the
Notes at a price of $16.25 per share.
Effective November 10, 1997, the Company listed its common stock for trading on
the American Stock Exchange under the symbol "SRS". Prior to November 10, 1997,
the Company's common stock was listed on the NASDAQ National Market System.
On November 10, 1997, the Company also announced that the Board of Directors
unanimously approved the institution of a stock buy-back program in which the
Company may repurchase ARV common shares on the open market from time-to-time,
depending on market conditions. The Company has allocated up to $25 million for
this stock buy-back program.
6
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
As of September 30, 1997, the Company operated 49 assisted living facilities
("ALFs") containing 6,302 units, including 2 owned by a limited partnership for
which the Company serves as the managing general partner and facility manager
("Affiliated Partnership"). Of the remaining 47 facilities, 32 are leased by the
Company pursuant to long-term operating leases ("Leased ALFs") and 15 facilities
are owned by the Company for its own account ("Owned ALFs"). The Company was in
various stages of construction on 6 ALFs with an anticipated total of 756 units
at September 30, 1997.
From 1980 until 1994 when the Company began operating ALFs for its own account,
all of the ALFs operated by the Company were owned or leased by Affiliated
Partnerships. From 1991 until 1994, other Affiliated Partnerships also acquired
or began development of senior, affordable senior and multifamily apartments
primarily utilizing the sale of tax credits under a low income housing tax
credit program (the "Federal Tax Credit Program") for the equity funding of the
development.
Since commencing operation of ALFs for its own account in April 1994, the
Company has embarked upon an expansion strategy and achieved significant growth
in revenue resulting primarily from the acquisition of ALFs. The Company has
focused its growth efforts on the acquisition and development of additional ALFs
and expansion of services to its residents as they "age in place."
Growth has been achieved through the development and acquisition of ALFs which
the Company owns for its own account or leases pursuant to long-term operating
leases with health care REITs ("Health Care REIT"). Since April 1994 when the
Company entered into its first long-term operating lease with a Health Care
REIT, the Company has developed, acquired for its own account or entered into
long-term operating leases with Health Care REITs or other lessors, 47 ALFs
totaling 6,046 units (95.9% of its portfolio of 6,302 units at September 30,
1997). Of these ALFs, 24 facilities (2,476 units) were previously owned or
leased by Affiliated Partnerships inclusive of 10 facilities (940 units) owned
by American Retirement Villas Properties II, a California limited partnership in
which the Company acquired a controlling interest as described below. Of the
remaining facilities, 15 facilities (2,429 units) were acquired from unrelated
third-party owners. Since March 31, 1997, the Company has opened four additional
development projects: Eastlake Terrace, a 93 unit community located in Elkhart,
Indiana, was opened in April 1997; the Inn at Summit Ridge, a 76 unit community
located in Reno, Nevada, was opened in May 1997; Vista Del Rio, a 150 unit
community located in Albuquerque, New Mexico, was opened in June 1997 and
Prospect Park Residence, a 128 unit community located in Brooklyn, New York, was
opened in July 1997.
On August 23, 1996, the Company acquired a 51% controlling interest in American
Retirement Villas Properties II which operates five Owned ALFs and five Leased
ALFs totaling 940 units. The acquisition was completed pursuant to a tender
offer for limited partnership units not already owned by the Company.
In addition to its acquisition of ALFs, the Company, through ARV Health Care,
Inc., a wholly-owned subsidiary ("ARV Health Care"), acquired all of the
outstanding stock of SynCare, Inc., a California corporation ("SynCare"), and
its three wholly owned subsidiaries, ProMotion Rehab, a California corporation
("ProMotion"), ProMotive Rehabilitation Services, a California corporation
("ProMotive") and BayCare Rehabilitative Services, Inc., a California
corporation, ("BayCare") on August 22, 1996. SynCare, through its ProMotive and
BayCare subsidiaries, provides physical, occupational and speech therapies to
residents of assisted living facilities in California, Texas, Florida, Ohio and
Nevada. As of October 30, 1996, SynCare was merged into ARV Health Care and as
of December 26, 1996, ProMotion and BayCare were merged into ProMotive.
On July 14, 1997, the Company entered into a definitive agreement (the "Stock
Purchase Agreement") with Prometheus Assisted Living LLC ("Prometheus"), a
Delaware limited liability company, an affiliate of Lazard Freres Real Estate
Investors LLC ("LFREI"), a New York limited liability company, pursuant to which
Prometheus committed to invest $135 million to acquire approximately 9.6 million
newly-issued shares of the Company's common stock at $14 per share. Under the
terms of the Stock Purchase Agreement, Prometheus agreed to purchase
approximately 1.9 million newly-issued restricted shares of common stock
(approximately 17.6% of the Company's outstanding stock prior to issuance) upon
completion of its due diligence. On July 23, 1997, Prometheus completed its due
diligence and acquired 1.9 million newly issued restricted common shares for
approximately $26.9 million. Subsequent to the initial purchase of common stock
by Prometheus, the transaction was restructured as described below.
7
8
On July 14, 1997, the Company adopted a shareholders rights plan under which it
declared a dividend distribution of one Preferred Share Purchase Right on each
outstanding share of its common stock. Subject to limited exceptions, the Rights
will be exercisable if a person or group acquires 10% or more of the Company's
stock or announces a tender offer for 10% 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
common shares of the Company having a market value of twice the Right's
exercise price. If the Company is acquired in a merger or other business
combination transaction which has not been approved by the Company's 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. The
shares purchased by Prometheus are exempt from the provisions of the rights plan
as are the shares owned by Gary L. Davidson, the Company's former Chief
Executive Officer and President, who beneficially owned approximately 10% of the
Company's common stock at the time of adoption of the shareholders rights plan.
On September 29, 1997, the Company's Board of Directors entered into a letter
agreement (the "Letter Agreement") to allow Prometheus Senior Quarters LLC, an
affiliate of Prometheus and LFREI, to acquire approximately 92% of the
outstanding stock of Kapson Senior Quarters (the "Kapson Investment"), the
largest public operator of assisted living facilities in the Northeast United
States. LFREI agreed to propose that the Company establish a relationship with
Kapson structured as a strategic alliance, with the two companies remaining
independent. It was agreed that the companies would explore opportunities for
creating economies of scale, especially in the development of new facilities,
and the Company would have the right to manage and/or lease existing Kapson
facilities as well as manage, purchase and/or lease new facilities developed by
Kapson at fair market value. The Letter Agreement was subsequently amended as
outlined below.
On October 29, 1997, the Company amended the Stock Purchase Agreement with
Prometheus and LFREI. Pursuant to the amended agreement on October 30, 1997, the
Company issued $60 million of Convertible Subordinated Notes (the "Notes") to
Prometheus. The Notes, which bear interest at 6.75%, payable in semi-annual
interest only installments, are due 2007. They are convertible into
approximately 3.5 million shares of the Company's common stock at $17.25 per
share. The Company has the option to call these notes at any time, subject to a
redemption premium schedule as defined in the Notes. The Notes rank pari passu
with the Company's existing 6.75% Convertible Subordinated Notes due 2006. This
transaction was entered into in lieu of the purchase by Prometheus of the
remaining balance of the 9.6 million shares of the Company's common stock under
the original Stock Purchase Agreement, as described above. In addition, the
Letter Agreement was amended and restated to provide, among other things, that
if mutually agreeable arrangements regarding leasing or management agreements
of all existing or planned facilities of Kapson are not entered into with the
Company by the later of three months following the closing of the Kapson
Investment or May 1, 1998, the Letter Agreement will terminate.
At September 30, 1997, the Company had the following projects under construction
and anticipates that the schedule set forth below can be met, although there can
be no assurance in this regard. Construction is subject to numerous risks which
could cause delays or the abandonment of a project or projects.
ANTICIPATED
FACILITIES # OF ANTICIPATED
UNDER CONSTRUCTION LOCATION UNITS OPENING*
------------------ ------------- --- ----------------
Las Posas Camarillo, CA 123 4th Quarter 1997
Sun Lake Terrace Las Vegas, NV 129 1st Quarter 1998
Canterbury Woods Attleboro, MA 132 2nd Quarter 1998
Sutton Place Las Vegas, NV 142 3rd Quarter 1998
The Lakes Ft. Myers, FL 154 3rd Quarter 1998
Inn at Brookside Stockton, CA 76 3rd Quarter 1998
----
Total Units Under Construction 756
====
* Denotes calendar quarters.
8
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
Total revenue for the three months ended September 30, 1997 increased $9.7
million to $28.8 million from $19.1 million for the three months ended September
30, 1996. This increase was primarily due to an increase in assisted living
facility revenue as described below.
Assisted living facility revenue increased $9.0 million to $25.6 million for the
three months ended September 30, 1997 from $16.6 million for the three months
ended September 30, 1996. Assisted living revenue increased due to an increase
in the number of Owned ALFs and Leased ALFs operated by the Company. As of
September 30, 1997, the Company operated 47 ALFs for its own account consisting
of 32 Leased ALFs and 15 Owned ALFs. For the three months ended September 30,
1996, the Company operated a total of 39 ALFs for its own account consisting of
22 Leased ALFs pursuant to long-term operating leases with Health Care REITs and
17 Owned ALFs. Since September 30, 1996, the Company has acquired controlling
interests in two Affiliated Partnerships which owned or leased 11 ALFs
previously managed by the Company. The consolidated operations of the Affiliated
Partnerships increased ALF revenue by $3.3 million, when compared with the
comparable period in the prior year. The acquisition of three ALFs from third
parties and development of five ALFs provided additional ALF revenue of $3.6
million, when compared with the comparable period in the prior year. Moreover,
the operations of 24 ALFs acquired at various times during the three months
ended September 30, 1996, were recognized for a full quarter during the three
months ended September 30, 1997 increasing ALF revenue by $2.2 million, when
compared with the comparable period in the prior year.
Therapy and services revenue increased $0.8 million to $2.6 million for the
three months ended September 30, 1997 from $1.8 million for the three months
ended September 30, 1996. ARV Health Care, a wholly owned subsidiary of the
Company, contributed $2.4 million to service revenue from physical, occupational
and speech rehabilitation therapies for the three months ended September 30,
1997, an increase of $1.8 million compared with the corresponding period in the
prior year. This increase is due to an increase in the number of rehabilitation
extension sites increasing from 36 to 66 since September 30, 1996, as well as
the fact that the acquisition of ARV Healthcare occurred during the quarter
ended September 30, 1996 resulting in only 40 days of operations being
recognized in that period. Management fees were approximately $0.4 million for
the three months ended September 30, 1997, which is consistent with the
corresponding period in the prior year. Development fees decreased $0.8 million
to zero for the three months ended September 30, 1997 from $0.8 million for the
three months ended September 30, 1996. This decrease was primarily due to a
reduction of fees earned from the development of apartments under the Federal
Tax Credit Program.
Interest income decreased $0.1 million to $0.4 million for the three months
ended September 30, 1997 from $0.5 million for the three months ended September
30, 1996 primarily due to lower average cash balances carried by the Company
during the three months ended September 30, 1997.
Expenses increased $15.1 million to $32.8 million for the three months ended
September 30, 1997 from $17.7 million for the three months ended September 30,
1996, primarily due to additional assisted living facility operating and lease
expenses.
Assisted living facility operating and lease expenses increased $7.1 million and
$2.4 million to $17.4 million and $5.3 million, respectively, for the three
months ended September 30, 1997 from $10.3 million and $2.9 million,
respectively, for the three months ended September 30, 1996. These increases
were primarily due to the additional number of Owned and Leased ALFs operated by
the Company during the three months ended September 30, 1997, as discussed
above. The acquisition of controlling interests in two Affiliated Partnerships
which owned or leased 11 ALFs previously managed by the Company increased ALF
operating and lease expenses by $2.1 million and $0.2 million, respectively,
when compared with the comparable period in the prior year. The acquisition of
three ALFs from third parties and development of five ALFs increased ALF
operating and lease expenses by $3.1 million and $1.4 million, respectively,
when compared with the comparable period in the prior year. Moreover, the
operations of 24 ALFs acquired at various times during the three months ended
September 30, 1996, were recognized for a full quarter during the three months
ended September 30, 1997 increasing ALF operating and lease expenses by $1.3
million and $0.8 million, respectively, when compared with the comparable period
in the prior year.
General and administrative expenses increased $2.7 million to $4.4 million for
the three months ended September 30, 1997 from $1.7 million for the three months
ended September 30, 1996. The increase was primarily a result of the severance
agreement reached with the former Chairman, Chief Executive Officer and
President and the additional staffing necessary to accommodate the increased
operations of the Company.
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Therapy and other expenses increased $1.8 million to $2.5 million for the three
months ended September 30, 1997 from $0.7 million for the three months ended
September 30, 1996. This increase is primarily the result of expenses incurred
in the operation of 30 new rehabilitation centers of ARV Health Care since
September 30, 1996.
Depreciation and amortization expenses increased $0.8 million to $1.7 million
for the three months ended September 30, 1997 from $0.9 million for the three
months ended September 30, 1996. The increased is primarily due to depreciation
and amortization charges associated with the Company's increased number of Owned
ALFs.
Interest expense increased $0.2 million to $1.5 million for the three months
ended September 30, 1997 compared with $1.3 million for the three months ended
September 30, 1996. Interest expense consisted primarily of interest incurred on
the Company's $57.5 million of 6 3/4%, convertible subordinated notes due 2006
(the "2006 Notes") as well as mortgage interest on Owned ALFs.
Income tax expense decreased by $0.5 million from $0.5 million for the three
months ended September 30, 1996 to zero for the three months ended September 30,
1997. The Company recorded a valuation allowance on the entire income tax
benefit generated as a result of operating losses incurred during the three
months ended September 30, 1997.
Minority interest in income of majority owned entities was $0.1 million for each
of the periods ended September 30, 1997 and 1996. For the three months ended
September 30, 1997, minority interest in income of majority owned entities was
$0.4 million, offset by the minority interest in losses of majority owned
entities of $0.3 million. Such losses were incurred in start-up losses incurred
in the opening of a newly developed owned ALF.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH SIX MONTHS ENDED SEPTEMBER 30,
1996
Total revenue for the six months ended September 30, 1997 increased $21.8
million to $56.2 million from $34.4 million for the six months ended September
30, 1996. This increase was primarily due to an increase in assisted living
facility revenue as described below.
Assisted living facility revenue increased $20.3 million to $50.3 million for
the six months ended September 30, 1997 from $30.0 million for the six months
ended September 30, 1996. Assisted living revenue increased primarily due to an
increase in the number of Owned ALFs and Leased ALFs operated by the Company. As
of September 30, 1997, the Company operated 47 ALFs for its own account
consisting of 32 Leased ALFs and 15 Owned ALFs. For the six months ended
September 30, 1996, the Company operated a total of 39 ALFs for its own account
consisting of 22 Leased ALFs pursuant to long-term operating leases with Health
Care REITs and 17 Owned ALFs. Since September 30, 1996, the Company has acquired
controlling interests in two Affiliated Partnerships which owned or leased 11
ALFs previously managed by the Company. The consolidated operations of the
Affiliated Partnerships increased ALF revenue by $8.4 million, when compared
with the comparable period in the prior year. The acquisition of three ALFs from
third parties and development of five ALFs provided additional ALF revenue of
$6.6 million, when compared with the comparable period in the prior year.
Moreover, the operations of 24 ALFs acquired at various times during the six
months ended September 30, 1996, were recognized for a full six months during
the six months ended September 30, 1997 increasing ALF revenue by $5.5 million,
when compared with the comparable period in the prior year.
Therapy and services revenue increased $2.2 million to $4.9 million for the six
months ended September 30, 1997 from $2.7 million for the six months ended
September 30, 1996. ARV Health Care, a wholly owned subsidiary of the Company,
contributed $4.2 million to service revenue from physical, occupational and
speech rehabilitation therapies for the six months ended September 30, 1997, an
increase of $3.6 million compared with the corresponding period in the prior
year. This increase is due to an increase in the number of rehabilitation sites
increasing from 36 to 66 since September 30, 1996, as well as the fact that the
acquisition of ARV Health Care occurred during the quarter ended September 30,
1996 resulting in only 40 days of operations being recognized in that six month
period. Management fees for the six months ended September 30, 1997 decreased
$0.3 million to $0.7 million from $1.0 million for the six months ended
September 30, 1996. This is primarily due to the Company's purchases of
controlling interests in certain of the Affiliated Partnerships. As a result of
acquiring such controlling interests, the Company no longer recognizes
management fees on those properties. Development fees decreased $1.1 million to
zero for the six months ended September 30, 1997 from $1.1 million for the six
months ended September 30, 1996. This decrease was primarily due to a reduction
of fees earned from the development of apartments under the federal tax credit
program.
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Interest income decreased approximately $0.6 million to $0.7 million for the six
months ended September 30, 1997 from $1.3 million for the six months ended
September 30, 1996 primarily due to lower average cash balances carried by the
Company during the six months ended September 30, 1997. During the six months
ended September 30, 1996, the Company's average cash balances were greater than
usual following the issuance of the convertible subordinated notes due in 2006.
Expenses increased $28.1 million to $60.8 million for the six months ended
September 30, 1997 from $32.7 million for the six months ended September 30,
1996 primarily due to additional assisted living facility operating and lease
expenses.
Assisted living facility operating and lease expenses increased $14.4 million
and $4.6 million to $33.2 million and $10.2 million, respectively, for the six
months ended September 30, 1997 from $18.8 million and $5.6 million,
respectively, for the six months ended September 30, 1996. These increases were
primarily due to the additional number of Owned and Leased ALFs operated by the
Company during the six months ended September 30, 1997, as discussed above. The
acquisition of controlling interests in two Affiliated Partnerships which owned
or leased 11 ALFs previously managed by the Company increased ALF operating and
lease expenses by $5.3 million and $0.5 million, respectively, when compared
with the comparable period in the prior year. The acquisition of three ALFs from
third parties and development of five ALFs increased ALF operating and lease
expenses by $5.2 million and $2.5 million, respectively, when compared with the
comparable period in the prior year. Moreover, the operations of 24 ALFs
acquired at various times during the six months ended September 30, 1996, were
recognized for a full six months during the six months ended September 30, 1997
increasing ALF operating and lease expenses by $3.2 million and $1.6 million,
respectively, when compared with the comparable period in the prior year.
General and administrative expenses increased $3.6 million to $7.0 million for
the six months ended September 30, 1997 from $3.4 million for the six months
ended September 30, 1996. The increase was primarily a result of the severance
agreement reached with the former Chairman, Chief Executive Officer and
President, expenses related to the Company's strategic planning process and the
additional staffing necessary to accommodate the increased operations of the
Company.
Therapy and other expenses increased $3.7 million to $4.4 million for the six
months ended September 30, 1997 from $0.7 million for the six months ended
September 30, 1996. This increase is primarily the result of expenses incurred
in the operation of 30 new rehabilitation centers of ARV Health Care since its
acquisition in August 1996.
Depreciation and amortization expenses increased $1.6 million to $3.2 million
for the six months ended September 30, 1997 from $1.6 million for the six months
ended September 30, 1996. The increased is primarily due to depreciation and
amortization charges associated with the Company's increased number of Owned
ALFs.
Interest expense increased $0.2 million to $2.9 million for the six months ended
September 30, 1997 compared with $2.7 million for the six months ended September
30, 1996. Interest expense consisted primarily of interest incurred 2006 Notes
as well as mortgage interest on Owned ALFs.
Income tax expense decreased by $0.9 million from $0.7 million for the six
months ended September 30, 1996 to an income tax benefit of $0.2 million for the
six months ended September 30, 1997. During the six months ended September 30,
1997, the Company recorded an income tax benefit as a result of operating losses
incurred, which will offset future taxable income.
Minority interest in income of majority owned entities increased $0.4 million to
$0.5 million for the six months ended September 30, 1997 compared with $0.1
million for the six months ended September 30, 1996. The increase is due to the
acquisition of a 51% controlling interest in American Retirement Villas
Properties II in August 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash balances were $24.7 million and $16.0 million at
September 30, 1997 and March 31, 1997, respectively.
In September 1996, the Company obtained a $10 million line of credit from
Imperial Bank (the "Imperial Bank Line") to be used for acquisition, development
and general corporate purposes. As of September 30, 1997, the Company had used
the Imperial Bank Line to provide $9.2 million of letters of credit as security
deposits for Leased ALFs.
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At September 30, 1997, the Company had borrowed $8.8 million under its $35
million credit line with Bank United of Texas (the "Bank United Line"). These
borrowings, which are cross-defaulted and cross-collateralized, were secured by
mortgages recorded against two of the Company's Owned ALFs. In addition, the
Company guaranteed a $7.7 million loan borrowed from the Bank United Line by an
Affiliated Partnership for the construction of an ALF.
On October 30, 1997, the Company issued $60 million of Convertible Subordinated
Notes (the "Notes") to Prometheus Assisted Living LLC ("Prometheus"), an
affiliate of Lazard Freres Real Estate Investors LLC ("LFREI"). The Notes, which
bear interest at 6.75%, payable in semi-annual interest only installments, are
due 2007. They are convertible into approximately 3.5 million shares of the
Company's common stock at $17.25 per share. The Company has the option to call
the Notes at any time, subject to a redemption premium schedule as defined in
the Notes. The Notes rank pari passu with the 2006 Notes.
Working capital increased to $26.1 million as of September 30, 1997 compared to
working capital of $13.6 million at March 31, 1997. The increase was due
primarily to net proceeds from the issuance of common stock of $25.4 million,
offset by investments in fixed assets of $11.6 million.
For the six months ended September 30, 1997, cash used in operating activities
was $8.4 million, while cash provided by operating activities was $1.1 million
for the comparable period in the previous year. For the six months ended
September 30, 1997, the primary components of cash used by operating activities
were net loss, increases in accounts receivable and other assets combined with
decreases in accounts payable and accrued interest payable. For the six months
ended September 30, 1996, the $1.1 million of cash provided by operating
activities was principally the result of net income before extraordinary item
increased by non-cash charges for depreciation and amortization along with
increases in accrued liabilities and deferred revenue partially offset by
increases in other assets.
Cash used in investing activities was $6.7 million for the six months ended
September 30, 1997, compared to $58.0 million for the six months ended September
30, 1996. For the six months ended September 30, 1997, uses of cash primarily
include $11.6 million of additions to property, furniture and equipment and $1.6
million in costs related to the sale of common stock. These amounts were offset
by a $1.6 million increase in restricted cash and $3.4 million in distributions
from Senior Income Fund LP, a limited partnership in which the Company owns a
minority interest. For the six months ended September 30, 1996, the primary
components of the $58.0 million used by investing activities were $44.7 million
used to purchase fixed assets and $13.9 million used in the purchase of limited
partnership interests.
Net cash provided by financing activities during the six months ended September
30, 1997 was $23.9 million compared to $66.3 million provided by financing
activities for the six months ended September 30, 1996. During the six months
ended September 30, 1997, the primary source of cash from financing activities
was the net proceeds from the sale of common stock offset by expenditures of
$1.4 million to repay debt. For the six months ended September 30, 1996, the
Company received $55.2 million, net of issuance costs, from the issuance of the
2006 Notes and $20.1 million of borrowings under notes payable to banks. These
amounts were offset by expenditures of $7.1 million to repay debt, $0.4 million
from the extraordinary loss from the early extinguishment of debt and $1.7
million paid for the repurchase of convertible subordinated notes.
The Company's capital requirements include acquisition and rehabilitation costs
of ALFs, security deposits on Leased ALFs, ALF pre-development costs, initial
operating costs of newly developed ALFs, payment of interest, owner's equity
contributions in connection with certain Affiliated Partnerships financed under
the Federal Tax Credit Program, and working capital. The Company is
discontinuing its future activities with respect to developments under the
Federal Tax Credit Program and, accordingly, expects that its future outlays for
existing developments will diminish. The Company is contingently liable for (i)
certain secured and unsecured indebtedness of affiliates which it has guaranteed
and (ii) tax credit guarantees. The Company does not currently generate
sufficient cash from operations to fund its recurring working capital
requirements, primarily as a result of initial operating costs of newly
developed ALFs. As a result of the Company's issuance of common stock and the
Notes, management believes that the Company has sufficient capital to meet its
requirements in the near term. However, the Company anticipates that it may be
necessary to obtain additional financing in order to continue its aggressive
growth strategy and there can be no assurances that the Company will be able to
obtain financing on favorable terms.
Due to the Company's status as a general partner in tax credit partnerships and
pursuant to the terms of its development and property management agreements,
the Company has provided certain guarantees for the benefit of these
partnerships. Among these guarantees are operating deficit, tax credit and
financing guarantees. During the year ended March 31, 1997, the operations of
certain of the tax credit partnerships declined to the extent that management
believed that obligations under the Company's guarantees would be recognized.
As a result, management established a reserve of $1.2 million associated with
its estimated obligations under operating deficit guarantees. Through the six
months ended September 30, 1997, the Company has funded $1.0 million pursuant
to its obligations under operating deficit guarantees which have been charged
against the reserve. To the extent that the operations of certain tax credit
partnerships do not improve prior to the maturity of the existing construction
financing (calendar year 1999), the Company may be required to fund additional
amounts under the terms of its financing guarantees. Management has not made
reserves for potential funding of obligations under its financing guarantees as
the likelihood of such obligations cannot be reasonably ascertained.
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IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALFs and management fees from apartment communities
operated by the Company are the primary sources of revenue earned by the
Company. These properties are affected by rental rates which are highly
dependent upon market conditions and the competitive environments where the
facilities are located. Employee compensation is the principal cost element of
property operations. Although there can be no assurance it will be able to
continue to do so, the Company has been able historically to offset the effects
of inflation on salaries and other operating expenses by increasing rental and
assisted living rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which the Company is the managing general
partner and a majority limited partner, filed actions seeking declaratory
judgments against the landlords of the Retirement Inn of Campbell (Campbell) and
the Retirement Inn of Sunnyvale (Sunnyvale). ARVP II leases the Campbell and
Sunnyvale assisted living facilities under long-term leases. A dispute has
arisen as to the amount of rent due during the 10-year lease renewal periods
which commenced in August 1995 for Campbell and March 1996 for Sunnyvale. The
Partnership seeks a determination that the Partnership is not required to pay
any higher rent during the 10-year renewal periods than during the original
20-year lease terms.
In the event that the court finds against ARVP II, rent for the Campbell and
Sunnyvale facilities could increase significantly, which will reduce net income
and cash available for distributions to unit holders in the future. These rent
increases would be retroactive to the commencement of the lease renewal periods.
Management is of the opinion, based in part upon opinions of legal counsel, that
an adverse outcome is unlikely.
Two other facilities leased by ARVP II, the Retirement Inn of Fremont (Fremont)
and the Retirement Inn at Burlingame (Burlingame) are owned by entities which
are related to the entities that own the Campbell and Sunnyvale facilities. It
is not known whether the landlords of those facilities will dispute the amount
of rent due during the renewal periods which began January 1997 for Fremont and
August 1997 for Burlingame. If so, the Partnership may be required to file
litigation to determine the rights under those leases.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3 Articles of Incorporation and By Laws, as amended, incorporated by
reference to the Company's S-1 filing on October 17, 1995.
4 Rights Agreement, dated as of July 14, 1997, between ARV Assisted
Living, Inc., and ChaseMellon Shareholder Services, L.L.C. which
includes the form of Certificate of Determination of the Series C
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 to Exhibit 4.1 to the Company's 8-K filed with the
Securities and Exchange Commission on August 8, 1997.
10.1 Stock Purchase Agreement dated as of July 14, 1997, by and among
Prometheus Assisted Living LLC, Lazard Freres Real Estate Investors
L.L.C. and the Company, incorporated by reference to Exhibit 10.1 to
the Company's 8-K filed with the Securities and Exchange Commission on
July 23, 1997.
10.2 Amendment to Stock Purchase Agreement dated as of July 20, 1997, by
and among Prometheus Assisted Living LLC, Lazard Freres Real Estate
Investors L.L.C. and the Company, incorporated by reference to Exhibit
10.2 to the Company's 8-K filed with the Securities and Exchange
Commission on July 23, 1997.
10.3 Second Amendment to Stock Purchase Agreement dated as of July 22,
1997, by and among Prometheus Assisted Living LLC, Lazard Freres Real
Estate Investors L.L.C. and the Company, incorporated by reference to
Exhibit 10.3 to the Company's 8-K filed with the Securities and
Exchange Commission on July 23, 1997.
10.4 Stockholders Agreement dated as of July 14, 1997, by and among
Prometheus Assisted Living LLC, Lazard Freres Real Estate Investors
L.L.C. and the Company, incorporated by reference to Exhibit 10.4 to
the Company's 8-K filed with the Securities and Exchange Commission on
July 23, 1997.
10.5 Registration Rights Agreement dated as of July 14, 1997, by and
between Prometheus Assisted Living LLC and the Company, incorporated
by reference to Exhibit 10.5 to the Company's 8-K filed with the
Securities and Exchange Commission on July 23, 1997.
15 Independent Accountants' Review Report dated November 13, 1997
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed the following reports with the Securities and Exchange
Commission (SEC) on Form 8-K during the quarter ended September 30, 1997:
The Company's current report on Form 8-K filed with the SEC on July 23, 1997
reported under Item 5, concerning the following agreements: (i) a Stock Purchase
Agreement by and among the Company, Lazard Freres Real Estate Investors L.L.C.,
("LFREI") and Prometheus Assisted Living LLC, ("Buyer"); (ii) a Stockholders
Agreement by and among the Company, LFREI and Buyer; and (iii) a Registration
Rights Agreement. Also, on July 14, 1997, LFREI, Buyer and certain stockholders
of the Company entered into a Stockholders' Voting Agreement (the "Stockholders
Voting Agreement").
The Company's current report on Form 8-K filed with the SEC on August 8, 1997
reported under Item 5, concerning the adoption of the Shareholder Rights Plan.
In connection with the Rights Plan, the Board of Directors of the Company
declared a dividend of one preferred share purchase right for each outstanding
share of common stock, no par value, of the Company outstanding at the close of
business on August 8, 1997.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARV ASSISTED LIVING, INC.
By: /s/ Graham P. Espley-Jones
---------------------------------
Graham P. Espley-Jones
Chief Financial Officer
(Duly authorized and principal financial officer)
Date: November 14, 1997
By: /s/ Patrick M. Donovan
---------------------------------
Patrick M. Donovan
Vice President Finance
(Duly authorized officer)
Date: November 14, 1997
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