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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 MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER: 0-26980
ARV ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-016096
(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 May 12, 1998 was 15,880,998.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
Current assets:
Cash and cash equivalents ......................................... $ 77,126 $ 102,776
Restricted cash ................................................... 14,000 --
Fees receivable and other amounts due from affiliates ............. 988 571
Prepaids and other current assets ................................. 4,137 3,920
--------- ---------
Total current assets ...................................... 96,251 107,267
Deferred project costs .............................................. 194 246
Property, furniture and equipment ................................... 118,896 117,557
Other non-current assets ............................................ 7,033 6,781
Net non-current assets from discontinued operations ................. 1,016 1,234
--------- ---------
$ 223,390 $ 233,085
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 7,667 $ 6,696
Accrued liabilities ............................................... 2,766 7,864
Notes payable, current portion .................................... 10,174 9,388
Accrued interest payable .......................................... 511 1,482
Net current liabilities from discontinued operations .............. 4,412 6,558
--------- ---------
Total current liabilities ................................. 25,530 31,988
Lease concessions ................................................... 742 565
Deferred revenue, less current portion .............................. 357 369
Notes payable, less current portion ................................. 80,633 81,560
--------- ---------
107,262 114,482
--------- ---------
Commitments and contingent liabilities
Minority interest in majority owned entities ........................ 7,548 7,168
--------- ---------
Series A Preferred stock, convertible and redeemable; 2,000 shares
authorized none issued or outstanding at March 31, 1998 and
December 31, 1997 ................................................. -- --
Shareholders' equity:
Preferred stock, no par value. Authorized 8,000 shares, none issued
and outstanding ................................................ -- --
Common stock, no par value. Authorized 100,000 shares; issued and
outstanding 15,861 and 15,848 shares at March 31, 1998 and
December 31, 1997, respectively ................................ 143,104 142,945
Accumulated deficit ............................................... (34,524) (31,510)
--------- ---------
Total shareholders' equity ................................ 108,580 111,435
--------- ---------
$ 223,390 $ 233,085
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
--------- --------
Revenue:
Assisted living community revenue:
Rental revenue ................................... $ 22,158 $ 19,700
Assisted living and other services ............... 4,980 3,240
Management fees from affiliates ..................... 189 142
-------- --------
Total revenue ............................... 27,327 23,082
-------- --------
Operating expenses:
Assisted living community operating expense ......... 16,670 14,308
Assisted living community lease expense ............. 5,635 4,136
General and administrative .......................... 5,874 3,032
Depreciation and amortization ....................... 1,815 1,431
-------- --------
Total operating expenses .................... 29,994 22,907
-------- --------
Income (loss) from operations ......................... (2,667) 175
Other income (expense):
Interest income ..................................... 1,256 20
Other income, net ................................... 71 314
Interest expense .................................... (1,284) (1,371)
-------- --------
Total other income (expense) ................ 43 (1,037)
-------- --------
Loss from continuing operations before income taxes .. (2,624) (862)
Income tax expense (benefit) .......................... 5 (358)
-------- --------
Loss from continuing operations before minority
interest in income of majority owned entities and
discontinued operations ............................. (2,629) (504)
Minority interest in income of majority owned entities 385 398
-------- --------
Loss from continuing operations ....................... (3,014) (902)
Loss from operations of discontinued operations,
net of income tax benefit of $188 for the three-month
period ended March 31, 1997 ......................... -- (1,740)
-------- --------
Net loss .................................... $ (3,014) $ (2,642)
======== ========
Basic and diluted loss per common share:
Loss from continuing operations ..................... $ (0.19) $ (0.09)
Loss from discontinued operations ................... -- (0.18)
-------- --------
Net loss .................................... $ (0.19) $ (0.27)
======== ========
Weighted average common shares outstanding ............ 15,855 9,652
======== ========
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
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
--------- ---------
Net cash used in operating activities of continuing operations ................... $ (3,527) $ (1,047)
Net cash used in operating activities of discontinued
operations .................................................................. (1,928) (513)
--------- ---------
Net cash used in operating activities ............................................ (5,455) (1,560)
--------- ---------
Cash flows (used in) provided by investing activities:
(Increase) decrease in deferred project costs ................................ (85) 156
Decrease in investments in real estate, net .................................. -- 2,158
(Increase) decrease in leased property security deposits ..................... (10) 728
Proceeds from sale and leaseback of communities .............................. -- 29,052
Additions to property, furniture and equipment ............................... (2,833) (21,073)
Increase in restricted cash .................................................. (14,000) (1,598)
Purchase of limited partnership interests .................................... -- (2,388)
Increase in other non-current assets ......................................... (568) --
--------- ---------
Net cash (used in) provided by investing activities .................... (17,496) 7,035
--------- ---------
Cash flows (used in) provided by financing activities:
Issuance of common stock, net of issuance costs ............................... 52 546
Borrowings under notes payable ................................................ -- 5,825
Repayments of notes payable ................................................... (141) (4,423)
Issuance costs in connection with conversion of
subordinated notes ......................................................... (2,610) --
--------- ---------
Net cash (used in) provided by financing activities .................... (2,699) 1,948
--------- ---------
Net (decrease) increase in cash and cash equivalents.................... (25,650) 7,423
Cash and cash equivalents at beginning of period ................................. 102,776 8,386
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 77,126 $ 15,809
========= =========
Supplemental schedule of cash flow information: Cash paid during the
period for:
Interest .................................................................... $ 2,690 $ 676
========= =========
Income taxes ................................................................ $ 5 $ 43
========= =========
Supplemental schedule of noncash investing and financing activities:
Conversion of 10% convertible subordinated
notes to common stock ..................................................... $ -- $ 882
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements of ARV
Assisted Living, Inc. and subsidiaries ("the Company" or "ARV") have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the Commission). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. The condensed consolidated financial statements
reflect all adjustments and disclosures which are, in the opinion of management,
necessary for a fair presentation. All such adjustments are of a normal
recurring nature. Certain reclassifications have been made to prior period
amounts in order to conform to the presentation at March 31, 1998. The interim
condensed consolidated financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K for the nine-month period ended
December 31, 1997. The results of operations for the three months ended March
31, 1998 are not necessarily indicative of the results which may be expected for
the full fiscal year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. Subsidiaries, which include limited partnerships
in which the Company has controlling interests, have been consolidated into the
financial statements. All significant intercompany balances and transactions
have been eliminated in consolidation.
NEW PRONOUNCEMENTS
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. The
adoption of this standard did not have a significant 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
from the enterprise's products or services (or groups of similar products or
services), about the countries in which the enterprise earns revenues and holds
assets and about major customers regardless of whether that information is used
in making operating decisions. However, this Statement does not require an
enterprise to report information that is not prepared for internal use if
reporting it would be impractical. This Statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is required to be
restated. Comparative information for interim periods is not required until the
second year of application. The adoption of this standard is not expected to
have any impact on the consolidated financial statements.
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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. Dilutive securities are not included
due to their antidilutive effect.
(2) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has guaranteed indebtedness of certain affiliated partnerships as
follows:
(IN THOUSANDS)
Notes secured by real estate $16,776
Construction loans associated with the
development and construction of affordable
housing apartments $35,556
The maximum aggregate amount of guaranteed land and construction loans is $38.5
million at March 31, 1998.
The Company has guaranteed tax credits for certain partnerships in the
aggregate amount of $78.4 million, excluding interest, penalties or other
charges which might be assessed against the partners.
Certain claims may be made under the aforementioned loan guarantees based upon
the performance of the assets securing such loans. Management has provided for
such claims where reasonably estimable.
(3) SUBSEQUENT EVENTS
Reincorporation
On May 1, 1998, the Company reincorporated as a Delaware corporation. This
reincorporation was approved by the shareholders of the Company at the
Company's Annual Meeting of Shareholders held on January 28, 1998.
Acquisitions
On February 12, 1998, the Company announced that it had entered into purchase
and sale agreements to purchase interests in 13 senior housing communities,
including a skilled nursing component in one community, containing approximately
1,900 units, located in California, for $88 million. As of March 31, 1998, the
Company had $14 million of restricted cash representing escrow deposits on this
transaction. The transaction is closing in phases beginning April 12, 1998 and
expected to conclude in July 1998.
On April 16, 1998, in phase I of the transaction, the purchases of two
communities, a general partnership interest and rights under four management
agreements were completed. The following is a description of the closed portion
of the transaction:
The Company acquired Golden Creek Inn from TH Group Inc., an unrelated
third party, for $14.5 million. Golden Creek Inn is a 126-unit assisted
living community located in Irvine, California.
The Company acquired Hillcrest Inn from 270 Center Associates, Limited
Partnership, an unrelated third party, for $27.5 million. Hillcrest Inn is
a 138-unit assisted living community located in Thousand Oaks, California.
The Company acquired a twenty percent (20%) general partnership interest in
WHW Associates, an unrelated third party, for $1.2 million. WHW Associates
is a general partner of Fifty Peninsula Partners, a California limited
partnership, which owns Sterling Court, a 149-unit assisted living
community located in San Mateo, California.
The Company acquired the rights, title and interest as manager in four
management agreements, from The Hillsdale Group, L.P. The management
agreements acquired are for senior housing communities identified as
follows: Sterling Court, a 149-unit assisted living community located in
San Mateo, California; Palo Alto Commons, a 105-unit assisted living
community located in Palo Alto, California; San Carlos Retirement Center, a
85-unit assisted living community located in San Carlos, California; and
The Altenheim, a 161-unit assisted living community located in Oakland,
California. The purchase price of the management contracts was $1.325
million.
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A portion of the purchase prices were paid from cash on hand. Concurrent
with the purchase, the Company also assumed existing mortgage financing
with an outstanding balance of $15.25 million secured by Golden Creek Inn
and Hillcrest Inn (balances of $2.25 million and $13.0 million,
respectively). The loans bear interest at LIBOR plus 2.5%, require monthly
payments of interest only until August 1998 (Golden Creek Inn) and October
1998 (Hillcrest Inn). Thereafter, the loans require monthly payments of
principal and interest based upon a 25-year amortization schedule. The
outstanding balance of the loans plus all accrued and unpaid interest is
due and payable in 2002.
Phase II of the transaction closed on May 4, 1998. The phase II acquisition was
of Rossmore House from 270 Center Associates, Limited Partnership, for $10.8
million. Rossmore House is a 157-unit assisted living community located in Los
Angeles, California.
Phase III of the transaction closed on May 13, 1998. The phase III acquisition
was of The Berkshire from 270 Center Associates, Limited Partnership, for $6.9
million. The Berkshire is an 84-unit assisted living community located in
Berkley, California.
Following the closing of the entire transaction, which further consolidates
ARV's position as California's largest assisted living provider, the company
will operate 43 communities containing 5,300 units in California. On a national
basis, ARV will have 63 operating communities containing 8,300 units located in
10 states.
Litigation
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which the Company is the managing general
partner and a majority limited partner, filed actions in the Superior Court for
the State of California, County of Santa Clara, seeking declaratory judgments
against the landlords of the Retirement Inn of Campbell (Campbell) and the
Retirement Inn of Sunnyvale (Sunnyvale). ARVP II leases the Campbell and
Sunnyvale assisted living communities under long-term leases. A dispute has
arisen as to the amount of rent due during the 10-year lease renewal periods,
which commenced in August 1995 for Campbell and March 1996 for Sunnyvale. The
Partnership seeks a determination that the Partnership is not required to pay
any higher rent during the 10-year renewal periods than during the original
20-year lease terms.
In the event that the court finds against ARVP II, rent for the Campbell and
Sunnyvale communities could increase significantly, which will reduce net income
and cash available for distributions to unit holders in the future. These rent
increases would be retroactive to the commencement of the lease renewal periods.
Management is of the opinion, based in part upon opinions of legal counsel, that
an adverse outcome is unlikely.
Two other communities leased by ARVP II, the Retirement Inn of Fremont (Fremont)
and the Retirement Inn at Burlingame (Burlingame) are owned by entities which
are related to the entities that own the Campbell and Sunnyvale communities. It
is not known whether the landlords of those communities will dispute the amount
of rent due during the renewal periods which began January 1997 for Fremont and
August 1997 for Burlingame. If so, the Partnership may be required to file
litigation to determine the rights under those leases.
In November 1997, Emeritus initiated a proxy contest for control of the ARV
Board of Directors. In addition, in December 1997, Emeritus launched a hostile
tender offer to acquire majority control of ARV. Emeritus' takeover attempts
were rejected by ARV's shareholders, including a majority of non-affiliate
shareholders, at the Company's annual shareholder meeting on January 28, 1998.
In connection with its hostile takeover efforts, Emeritus filed a lawsuit
against ARV in December 1997 to, among other things, enjoin a third party
investment in ARV. The lawsuit was dismissed voluntarily and without prejudice
by Emeritus on April 23, 1998.
On April 24, 1998, the Company was served with a lawsuit by Emeritus, which was
filed in the Superior Court of California, County of Orange, alleging that
share purchases on January 16, 1998 by Prometheus Assisted Living LLC triggered
the Company's Shareholder Rights Agreement. Emeritus contends that due to the
alleged triggering event the Company is required to distribute one Right per
share of outstanding company stock and that each right is exercisable for
approximately 9.56 shares at a total purchase price of $70 (or approximately
$7.32 per share). The Company believes that Emeritus' claims are meritless and
intends to contest them vigorously.
On May 12, 1998, the Company filed a lawsuit in the Superior Court for the
State of California, County of Orange, seeking to enjoin Kapson Senior Quarters
Corp. ("Kapson"), a controlled affiliate of Lazard Freres Real Estate Investors
LLC ("LFREI") from acquiring Atria Communities ("Atria"). Atria is also named
as a defendant in the suit, as are three LFREI representatives on the Company's
Board of Directors, Messrs. Kenneth M. Jacobs, Robert P. Freeman and Murry N.
Gunty. The Company alleges that LFREI will be violating both its contractual
and fiduciary duties to the Company if it allows Kapson to proceed with the
acquisition without first offering ARV the right to be the acquiring party and
then, if ARV declines, obtaining ARV's permission to consummate the acquisition.
The lawsuit also seeks to enforce rights the Company obtained as part of the
strategic alliance with LFREI with respect to existing Kapson facilities. When
the Company consented to LFREI's acquisition of Kapson, the two companies signed
a letter agreement that was designed to make available to the Company's
shareholders some of the potential benefits of the Kapson acquisition. Thus,
under its agreement with the Company, LFREI is obligated to negotiate in good
faith with the Company to identify commercially reasonable terms on which the
Company will lease or manage the existing Kapson facilities. However, since
acquiring Kapson, the Company alleges, LFREI has failed to negotiate in good
faith. In the complaint, the Company asserts that LFREI instead proposed lease
terms that are commercially unreasonable and refused to accept lease terms
proposed by the Company. ARV also contends in the lawsuit that LFREI refused to
accept the Company's proposal to manage the existing Kapson properties at below
market rates and that the only proposals LFREI has made to the Company are
proposals that would be dilutive to the Company's earnings and are thus not in
the best interests of the Company's shareholders. In its lawsuit, the Company
seeks both injunctive relief and damages for LFREI's breach of its contractual
obligations.
The Company is from time to time subject to claims and disputes for legal and
other matters in the normal course of business. While the results of such
matters cannot be predicted with certainty, management does not believe that the
final outcome of any pending matters will have a material effect on the
Company's consolidated financial position, results of operations, or liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including those set forth below. Certain statements
contained in this report, including without limitation statements containing the
words "believes," "anticipates," "expects," and words of similar import
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company has made forward-looking statements in this report concerning, among
other things, the impact of future acquisitions and developments, if any, and
the level of future capital expenditures. These statements are only predictions,
however, actual events or results may differ materially as a result of risks
facing the Company. These risks include, but are not limited to, those items
discussed below. Given these uncertainties, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date of this report. The Company disclaims any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
The Company has experienced rapid growth through the acquisition of existing
ALCs, development of new ALCs, and by acquiring property for the development of
new ALCs. Certain risks are inherent with the execution of the Company's growth
strategies. These risks include, but are not limited to, access to capital
necessary for acquisition and development, the Company's ability to sustain and
manage growth, the successful integration of ALCs into the Company's portfolio,
governmental regulation, competition, and the risks common to the assisted
living industry.
OVERVIEW
As of March 31, 1998, the Company operated 50 assisted living communities
("ALCs") containing 6,426 units, including three owned by a limited partnership
for which the Company serves as the managing general partner and community
manager (an "Affiliated Partnership"). Of the remaining 47 communities, 33 are
leased by the Company pursuant to long-term operating leases ("Leased ALCs") and
14 communities are owned by the Company for its own account ("Owned ALCs"). The
Company was in various stages of construction on four ALCs with an anticipated
total of 504 units at March 31, 1998. On February 12, 1998, the Company entered
into purchase and sale agreements to purchase interests in 13 ALCs, including a
skilled nursing component in one community, located in California containing
approximately 1900 units, for approximately $88 million.
Since commencing operation of ALCs for its own account in April 1994, the
Company has embarked upon an expansion strategy and achieved significant growth
in revenue resulting primarily from the acquisition of ALCs. The Company has
focused its growth efforts on the acquisition and development of additional ALCs
and expansion of services to its residents as they "age in place."
Growth has been achieved through the development and acquisition of ALCs, which
the Company owns for its own account or leases pursuant to long-term operating
leases primarily with health care REITs ("Health Care REITs"). Since April 1994,
the Company has developed, acquired for its own account or entered into
long-term operating leases with Health Care REITs or other lessors for 47 ALCs
totaling 6,047 units (94.1% of its portfolio of 6,426 units at March 31, 1998).
Of the owned and leased ALCs operated for its own account as of March 31, 1998,
24 communities (2,476 units) were previously owned or operated by Affiliated
Partnerships, including 10 communities (941 units) owned or leased by American
Retirement Villas Properties II, a California limited partnership in which a
controlling interest was acquired by the Company during 1996. Of the remaining
communities, 18 communities (2,961 units) were acquired from third party owners
and five communities (457 units) were developed by the Company.
In August 1996, the Company, through its wholly owned subsidiary, ARV Health
Care, Inc., acquired SynCare, Inc., a physical,
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speech and occupational therapy provider, in a stock-for-stock merger. SynCare,
Inc. was the holding company of three corporations, BayCare Rehabilitative
Services Inc., ProMotive Rehabilitation Services and Pro Motion Rehab. BayCare
Rehabilitative Services Inc. and Pro Motion Rehab were merged into ProMotive
Rehabilitation Services, which does business under the name GeriCare
("GeriCare"). GeriCare specializes in rehabilitative services, including speech,
occupational and physical therapy.
Partnerships affiliated with the Company have 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" or the "Apartment Group")
to generate the equity funding for development.
As part of its strategic plan, management and the Board of Directors have
determined that GeriCare and the Apartment Group are not part of the core
business of the Company, and in the fourth quarter on 1997 adopted a plan for
disposing of both lines of business. The Company disposed of GeriCare during the
first quarter of 1998. In order to continue to provide rehabilitation therapy
services to its residents, the Company entered into a strategic alliance with
NovaCare, Inc., a national leader in physical rehabilitation services. Under the
terms of the agreement, NovaCare, Inc. leases space in the Company's ALCs
where it will provide therapy services.
In addition to its strategic alliance with NovaCare, Inc., the Company entered
into a joint venture agreement with Omnicare, Inc., under which network pharmacy
and related clinical information services will be provided for the residents of
the Company's ALCs. The joint venture agreement is for a three-year term and is
expected to commence operations during the second quarter of 1998.
At March 31, 1998, the Company had the following projects under construction and
anticipates that the schedule set forth below can be met, although there can be
no assurance in this regard. Construction is subject to numerous risks which
could cause delays or the abandonment of a project or projects.
ANTICIPATED ANTICIPATED
LOCATION # OF UNITS OPENING
-------- -----------
Canterbury Woods Attleboro, MA 132 2nd Quarter 1998
Bayside Landing Stockton, CA 76 2nd Quarter 1998
The Lakes Fort Myers, FL 154 3rd Quarter 1998
Sutton Place Las Vegas, NV 142 3rd Quarter 1998
---
Total units under construction 504
===
RESULTS OF OPERATIONS
The following information concerning the results of the Company's "Same
Communities", operations for the three month period ended March 31, 1998 is
presented in order to provide the reader with additional information concerning
the components of the Company's operations. Same Communities represent
operations of 40 communities owned, leased or previously managed (now owned or
leased) by the Company over four quarters or more as of March 31, 1998.
ARV Assisted Living, Inc.
Results of Same Communities
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
(In thousands)
MARCH 31,
-------------------
1998 1997
------- -------
Revenue:
Assisted living community revenue:
Rental revenue $19,360 $18,687
Assisted living and other services 4,418 3,215
------- -------
Total revenue 23,778 21,902
------- -------
Operating expenses:
Assisted living community operating expense 14,239 13,553
Assisted living community lease expense 4,316 3,628
Depreciation and amortization 1,287 1,190
------- -------
Total operating expenses 19,842 18,371
------- -------
Income from operations 3,936 3,531
Interest expense 626 647
------- -------
Income before minority interest 3,310 2,884
Minority interest in operations 385 398
------- -------
Net income $ 2,925 $ 2,486
======= =======
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THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Total revenue for the three months ended March 31, 1998 increased $4.2 million
to $27.3 million from $23.1 million for the three months ended March 31, 1997.
This increase was primarily due to an increase in assisted living community
revenue as described below.
Assisted living community revenue increased $4.2 million to $27.1 million for
the three months ended March 31, 1998 from $22.9 million for the three months
ended March 31, 1997. Of these increases, $2.3 million is the result of an
increase in the number of Owned ALCs and Leased ALCs operated by the Company. As
of March 31, 1998, the Company operated 47 ALCs for its own account consisting
of 33 Leased ALCs and 14 Owned ALCs. For the three months ended March 31, 1997,
the Company operated a total of 43 ALCs for its own account consisting of 29
Leased ALCs pursuant to long-term operating leases primarily with Health Care
REITs and 14 Owned ALCs. The remaining $1.9 million of the increased revenue was
due to the Same Communities. The increase is a result of increased occupancies
and the percentage of residents utilizing the Company's assisted living services
during the three months ended March 31, 1998 compared to the same period in the
prior year.
Management fees were approximately $0.2 million for the three months ended
March 31, 1998, which is consistent with the corresponding period in the prior
year.
Operating expenses increased $7.1 million to $30.0 million for the three months
ended March 31, 1998 from $22.9 million for the three months ended March 31,
1997, primarily due to additional assisted living community operating and lease
expenses and general and administrative costs.
Assisted living community operating expense and lease expense increased $2.4
million and $1.5 million, respectively, to $16.7 million and $5.6 million,
respectively, for the three months ended March 31, 1998 from $14.3 million and
$4.1 million, respectively, for the three months ended March 31, 1997. Of these
increases, $1.7 million of ALC operating expense and $0.6 million of ALC lease
expense related to the additional number of Owned and Leased ALCs operated by
the Company during the three months ended March 31, 1998, as discussed above.
The remaining $0.7 million increases for each of ALC operating expense and ALC
lease expense was attributable to the Same Communities. The increase for the
Same Communities ALC operating expense was primarily attributable to staffing
requirements related to increased assisted living services. The increase for the
Same Communities ALC lease expense was due to certain communities previously
owned by the Company which are now leased.
General and administrative expenses increased $2.9 million to $5.9 million for
the three months ended March 31, 1998 from $3.0 million for the three months
ended March 31, 1997. The increase was primarily a result of approximately $1.5
million of additional costs incurred in the first quarter of 1998 related to the
Company's successful battle against the hostile tender offer of Emeritus and the
additional staffing necessary to accommodate the increased operations of the
Company.
Depreciation and amortization expenses increased $0.4 million to $1.8 million
for the three months ended March 31, 1998 from $1.4 million for the three months
ended March 31, 1997. The increase is primarily due to depreciation and
amortization charges associated with the Company's increased number of ALCs.
Interest income increased $1.2 million to $1.2 million for the three months
ended March 31, 1998 from $20,000 for the three months ended March 31, 1997 due
to higher average cash balances carried by the Company during the three months
ended March 31, 1998.
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Interest expense decreased $0.1 million to $1.3 million for the three months
ended March 31, 1998 compared with $1.4 million for the three months ended March
31, 1997. Interest expense consisted primarily of interest incurred on the
Company's $57.5 million of 6-3/4%, convertible subordinated notes due 2006 (the
"2006 Notes") as well as mortgage interest on Owned ALCs.
Income tax expense increased by $0.4 million to $5,000 for the three months
ended March 31, 1998 from a benefit of $0.4 million for the three months ended
March 31, 1997. The Company recorded a 100% valuation allowance on the income
tax benefit generated as a result of operating losses incurred during the three
months ended March 31, 1998.
Minority interest in income of majority owned entities was consistent at $0.4
million for the periods ended March 31, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash balances were $77.1 million and $102.8 million
at March 31, 1998 and December 31, 1997, respectively.
Working capital decreased to $70.7 million as of March 31, 1998 compared to
working capital of $75.3 million at December 31, 1997. The decrease was due
primarily to cash used in the operations of discontinued operations and
additions to property, furniture and equipment.
For the three months ended March 31, 1998, cash used in operating activities was
$5.5 million compared to $1.6 million for the comparable period in the previous
year. For the three months ended March 31, 1998, the primary components of cash
used by operating activities were a net loss of $3.0 million, $2.4 million of
decreases in various current liabilities and interest payable and $1.9 million
of cash used in operations of discontinued operations, offset by a non-cash
charge of $1.8 million for depreciation and amortization.
Cash used in investing activities was $17.5 million for the three months ended
March 31, 1998, compared to cash provided by investing activities of $7.0
million for the three months ended March 31, 1997. For the three months ended
March 31, 1998, uses of cash primarily include a $14 million increase in
restricted cash related to an escrow deposit to fund acquisitions, a $2.8
million increase in property, furniture and equipment and $0.7 million in costs
related to other non-current assets and deferred project costs.
Net cash used in financing activities during the three months ended March 31,
1998 was $2.7 million compared to cash provided by financing activities of $2.0
million for the three months ended March 31, 1997. During the three months ended
March 31, 1998, the primary use of cash from financing activities was the
payment of $2.6 million of issuance costs associated with the conversion of
subordinated notes, and $0.1 million for repayments of notes payable.
As a result of the Company's pending acquisition of interests in thirteen
senior housing communities, management currently anticipates that the Company
will expend approximately $73 million of its available cash reserves by July
1998 to complete the acquisition. Although management intends to finance a
portion of the purchase price in addition to the debt assumed upon closing,
there can be no assurances that the Company will be able to do so or that
financing will be available to the Company at attractive rates and terms.
The Company's capital requirements include acquisition and rehabilitation costs
of ALCs, security deposits on Leased ALCs, ALC pre-development costs, initial
operating costs of newly developed ALCs, payment of interest, owner's equity
contributions in connection with certain Affiliated Partnerships financed under
the Federal Tax Credit Program, and working capital. The Company 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 ALCs. As a result of the Company's issuance of common stock and the
current financing arrangements, management believes that the Company has
sufficient capital to meet its requirements in the near term. However, the
Company anticipates that it may be necessary to obtain additional financing in
order to continue its aggressive growth strategy and there can be no assurances
that the Company will be able to obtain financing on favorable terms.
Pursuant to the terms of the Company's development and property management
agreements for certain tax credit partnerships, the Company has provided certain
guarantees for the benefit of these partnerships. Among these guarantees are
operating deficit, tax credit and financing guarantees. To the extent that the
operations of certain tax credit partnerships do not improve prior to the
maturity of the existing construction financing, the Company may be required to
fund additional amounts under the terms of its financing guarantees. Management
has established a provision for the estimated funding of obligations under its
financing guarantees. Actual funding could differ from those estimates.
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IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALCs and management fees from apartment communities
operated by the Company are the primary sources of revenue earned by the
Company. These properties are affected by rental rates which are highly
dependent upon market conditions and the competitive environments where the
facilities are located. Employee compensation is the principal cost element of
property operations. Although there can be no assurance it will be able to
continue to do so, the Company has been able historically to offset the effects
of inflation on salaries and other operating expenses by increasing rental and
assisted living rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which the Company is the managing general
partner and a majority limited partner, filed actions in the Superior Court for
the State of California, County of Santa Clara, seeking declaratory judgments
against the landlords of the Retirement Inn of Campbell ("Campbell") and the
Retirement Inn of Sunnyvale ("Sunnyvale"). ARVP II leases the Campbell and
Sunnyvale assisted living communities under long-term leases. A dispute has
arisen as to the amount of rent due during the 10-year lease renewal periods
which commenced in August 1995 for Campbell and March 1996 for Sunnyvale. The
Partnership seeks a determination that the Partnership is not required to pay
any higher rent during the 10-year renewal periods than during the original
20-year lease terms.
In the event that the court finds against ARVP II, rent for the Campbell and
Sunnyvale communities could increase significantly, which will reduce net income
and cash available for distributions to unit holders in the future. These rent
increases would be retroactive to the commencement of the lease renewal periods.
Management is of the opinion, based in part upon opinions of legal counsel, that
an adverse outcome is unlikely.
Two other communities leased by ARVP II, the Retirement Inn of Fremont
("Fremont") and the Retirement Inn at Burlingame ("Burlingame") are owned by
entities which are related to the entities that own the Campbell and Sunnyvale
communities. It is not known whether the landlords of those communities will
dispute the amount of rent due during the renewal periods which began January
1997 for Fremont and August 1997 for Burlingame. If so, the Partnership may be
required to file litigation to determine the rights under those leases.
In November 1997, Emeritus Corporation ("Emeritus") initiated a proxy contest
for control of the ARV Board of Directors. In addition, in December 1997,
Emeritus launched a hostile tender offer to acquire majority control of ARV.
Emeritus' takeover attempts were rejected by ARV's shareholders, including a
majority of non-affiliated shareholders, at the Company's annual shareholder
meeting on January 28, 1998. In connection with its hostile takeover efforts,
Emeritus filed a lawsuit against ARV in December 1997 to, among other things,
enjoin a third party investment in ARV. On January 30, 1998, Emeritus announced
that it had terminated its hostile tender offer. The lawsuit was dismissed
voluntarily and without prejudice by Emeritus on April 23, 1998.
On April 24, 1998, the Company was served with a lawsuit by Emeritus, which was
filed in the Superior Court for the State of California, County of Orange,
alleging that share purchases on January 16, 1998 by Prometheus Assisted Living
LLC triggered the Company's Shareholder Rights Agreement. Emeritus contends that
due to the alleged triggering event the Company is required to distribute one
Right per share of outstanding company stock and that each right is exercisable
for approximately 9.56 shares at a total purchase price of $70 (or approximately
$7.32 per share). The Company believes that Emeritus' claims are meritless and
intends to contest them vigorously.
On May 12, 1998, the Company filed a lawsuit in the Superior Court for the
State of California, County of Orange, seeking to enjoin Kapson Senior Quarters
Corp. ("Kapson"), a controlled affiliate of Lazard Freres Real Estate Investors
LLC ("LFREI") from acquiring Atria Communities ("Atria"). Atria is also named
as a defendant in the suit, as are three LFREI representatives on the Company's
Board of Directors, Messrs. Kenneth J. Macobs, Robert P. Freeman and Murry N.
Gunty. The Company alleges that LFREI will be violating both its contractual
and fiduciary duties to the Company if it allows Kapson to proceed with the
acquisition without first offering ARV the right to be the acquiring party and
then, if ARV declines, obtaining ARV's permission to consummate the acquisition.
The lawsuit also seeks to enforce rights the Company obtained as part of the
strategic alliance with LFREI with respect to existing Kapson facilities. When
the Company consented to LFREI's acquisition of Kapson, the two companies
signed a letter agreement that was designed to make available to the Company's
shareholders some of the potential benefits of the Kapson acquisition. Thus,
under its agreement with the Company, LFREI is obligated to negotiate in good
faith with the Company to identify commercially reasonable terms on which the
Company alleges, LFREI has failed to negotiate in good faith. In the complaint,
the Company asserts that LFREI instead proposed lease terms that are
commercially unreasonable and refused to accept lease terms proposed by the
Company. ARV also contends in the lawsuit that LFREI refused to accept the
Company's proposal to manage the existing Kapson properties at below market
rates and that the only proposals LFREI has made to the Company are proposals
that would be dilutive to the Company's earnings and are thus not in the best
interests of the Company's shareholders. In its lawsuit, the Company seeks both
injunctive relief and damages for LFREI's breach of its contractual obligations.
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proposed by the Company. LFREI also refused to accept the Company's proposal to
manage the existing Kapson properties at below market rates. The only proposals
LFREI has made to the Company are proposals that would be dilutive to the
Company's earnings and are thus not in the best interests of the Company's
shareholders. In its lawsuit, the Company seeks both injunctive relief and
damages for LFREI's breach of its contractual obligations.
The Company is from time to time subject to claims and disputes for legal and
other matters in the normal course of business. While the results of such
matters cannot be predicted with certainty, management does not believe that the
final outcome of any pending matters will have a material effect on the
Company's consolidated financial position, results of operations, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted the following matters to a vote of its security
holders during the quarter ended December 31, 1997 which were voted upon at the
Company's Annual Meeting of Stockholders held on January 28, 1998:
1. Approval of the reincorporation of the Company as a Delaware
corporation, renamed ARV Assisted Living, Inc., pursuant to a merger of
the Company into a wholly-owned Delaware subsidiary and the conversion
of the Common Stock of the Company into the common stock, par value
$.01 per share, of the surviving corporation and of all of the
provisions set forth in the Certificate of Incorporation and Bylaws of
the surviving corporation.
2. Approval of the Amendment to the Restated Articles of Incorporation
of the Company to, among other things, increase the maximum number of
authorized directors from nine to ten.
3. Election of members of the Board of Directors of ARV Assisted Living,
Inc. as follows:
Class A Directors (to serve until the 1998 annual meeting of
shareholders): John Booty, Robert P. Freeman and Howard
G. Phanstiel.
Class B Directors (to serve until the 1999 annual meeting of
shareholders): R. Bruce Andrews, David P. Collins and
Kenneth M. Jacobs.
Class C Directors (to serve until the 2000 annual meeting of
shareholders): Maurice J. Dewald, Murry N. Gunty and
John J. Rydzewski.
The Stockholders approved, among other things, the proposals discussed
above. A copy of the final report of the Inspectors of Election relating to the
Annual Meeting of Stockholders is included in the Company's Form 8-K filed
February 19, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
2 Agreement and Plan of Merger, by and between ARV Assisted Living,
Inc. and ARV Delaware, Inc., incorporated by reference to the
Company's Proxy Statement for the 1997 Meeting of Shareholders of ARV
Assisted Living, Inc., filed with the Securities and Exchange
Commission on Schedule 14A on December 31, 1997.
3.1 Certificate of Incorporation of ARV Delaware, Inc., incorporated by
reference to the Company's Proxy Statement for the 1997 Meeting of
Shareholders of ARV Assisted Living, Inc., filed with the Securities
and Exchange Commission on Schedule 14A on December 31, 1997.
3.2 By-laws of ARV Delaware, Inc., incorporated by reference to the
Company's Proxy Statement for the 1997 Meeting of Stockholders of ARV
Assisted Living Inc., filed with the Securities and Exchange
Commission on Schedule 14A on December 31, 1997.
15 Independent Accountants' Review Report dated May 12, 1998
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 March 31, 1998:
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The Company's current report on Form 8-K filed with the SEC on January 13, 1998,
reported under Item 2, the sale of Prospect Park Residence, LLC and Waterside
Villas, LLC to Castle Senior Living, LLC, a Delaware limited liability company,
for approximately $24.5 million. Pursuant to the terms of the transaction, ARV
sold its 50 percent interest in one operating assisted living community and one
assisted living community in the development phase.
The Company's current report on Form 8-K filed with the SEC on February 19,
1998, reported under Item 5, concerning the Annual Meeting of Shareholders of
ARV Assisted Living, Inc. held on January 28, 1998. The shareholders of the
Company approved, among other things, the re-election of the Company's existing
Board of Directors and a proposal to reincorporate the Company under the laws of
Delaware.
The Company's current report on Form 8-K filed with the SEC on March 6, 1998,
reported under Item 5, as of February 12, 1998, the Company entered into
Purchase and Sale Agreements with The Hillsdale Group, L.P., a California
limited partnership; 270 Center Associates, Limited Partnership and TH Group,
Inc., a California corporation, to purchase interests in thirteen (13) senior
housing communities located in California, containing approximately 1,900 units,
for approximately $88 million.
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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/ Howard G. Phanstiel
-------------------------------
Howard G. Phanstiel
Chief Executive Officer and
Chairman of the Board
(Duly authorized officer)
Date: May 15, 1998
By: /s/ Graham P. Espley-Jones
-------------------------------
Graham P. Espley-Jones
Chief Financial Officer
(Duly authorized and
principal financial officer)
Date: May 15, 1998
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2 Agreement and Plan of Merger by and between ARV Assisted
Living, Inc. and ARV Delaware, Inc., incorporated by reference
to the Company's Proxy Statement for the 1997 Meeting of
Shareholders of ARV Assisted Living, Inc., filed with the
Securities and Exchange Commission on Schedule 14A on December
31, 1997.
3.1 Certificate of Incorporation of ARV Delaware, Inc., incorporated by
reference to the Company's Proxy Statement for the 1997
Meeting of Shareholders of ARV Assisted Living, Inc., filed
with the Securities and Exchange Commission on Schedule 14A on
December 31, 1997.
3.2 By-laws of ARV Delaware, Inc., incorporated by reference to the
Company's Proxy Statement for the 1997 Meeting of Stockholders
of ARV Assisted Living Inc., filed with the Securities and
Exchange Commission on Schedule 14A on December 31, 1997.
15 Independent Accountants' Review Report dated May 12, 1998
27 Financial Data Schedule
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