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Exhibit 99.1
THE ASSISTED LIVING GROUP
(A Defined Group of Entities)
Combined Financial Statements
March 31, 1998
Together with Report of Independent Public Accountants
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of ARV Assisted Living, Inc.:
We have audited the accompanying combined statement of assets and liabilities of
Golden Creek Inn, Hillcrest Inn, 270 Center Associates, The Berkshire, Encino
Hills Terrace, Willow Glen Villa and Hillsdale Manor Retirement and Convalescent
Home (collectively "The Assisted Living Group") as of March 31, 1998 and the
related combined statement of revenues and direct expenses for the Period (see
Note 1). These financial statements are the responsibility of the Assisted
Living Group's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets and liabilities of The Assisted Living Group
as of March 31, 1998 and the revenues and direct expenses for the Period in
conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
San Francisco, California
July 18, 1998
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THE ASSISTED LIVING GROUP
Combined Statement of Assets and Liabilities
March 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 385,474
Accounts receivable and other receivables,
net of reserve for doubtful accounts of $78,000 559,437
Prepaid rent 175,000
Prepaid property taxes 196,499
Other current assets 147,267
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Total current assets 1,463,677
PROPERTY, FURNITURE AND EQUIPMENT,
less accumulated depreciation of $505,677 25,267,934
OTHER ASSETS
Goodwill, less accumulated amortization of $113,275 8,236,725
Loan fees, less accumulated amortization of $28,477 279,210
Other 393,487
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Total assets $35,641,033
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LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 253,562
Accrued liabilities 313,873
Amounts payable to THGLP 427,382
Notes payable, current portion 87,879
Deferred revenue 309,624
Rental deposits payable 680,773
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Total current liabilities 2,073,093
LONG-TERM LIABILITIES
Deferred rent 494,466
Notes payable, less current portion 15,162,121
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Total liabilities 17,729,680
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Equity in The Assisted Living Group $17,911,353
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The accompanying notes are an integral part of these combined financial
statements.
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THE ASSISTED LIVING GROUP
Combined Statement of Revenues and Direct Expenses
for the Period (see Note 1)
Revenues $ 15,996,144
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Direct operating expenses:
Community operating expenses 8,121,849
Community lease expense 4,528,998
General and administrative 1,593,772
Depreciation and amortization 654,923
Marketing and advertising 434,254
Property taxes 315,291
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Total direct operating expenses 15,649,087
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Excess of revenues over direct operating expenses 347,057
Other direct expenses:
Interest expense 649,065
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Excess of direct expenses over revenues $ (302,008)
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The accompanying notes are an integral part of these combined financial
statements.
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THE ASSISTED LIVING GROUP
Notes to Combined Financial Statements
March 31, 1998
(1) NATURE OF OPERATIONS
The Hillsdale Group, LP (THGLP), 270 Center Associates LLC (270 Center)
and TH Group Inc., (collectively "Hillsdale") own, manage and operate
retirement living, personal care and skilled nursing communities for
elderly populations. TH Group Inc. and THGLP are under common management.
270 Center and THGLP are under common control. Hillsdale owns, manages
and operates Golden Creek Inn, Hillcrest Inn and The Berkshire and
leases, manages and operates Encino Hills Terrace, Willow Glen Villa and
Hillsdale Manor Retirement and Convalescent Home (referred to herein as
"The Assisted Living Group").
As discussed in Note 9, on February 12, 1998, ARV Assisted Living, Inc.
(ARV), an unrelated third party, entered into agreements to purchase
Golden Creek Inn, Hillcrest Inn and The Berkshire and Hillsdale's lease
rights to Encino Hills Terrace, Willow Glen Villa and Hillsdale Manor
Retirement and Convalescent Home.
PERIODS PRESENTED
The following table sets forth, as of March 31, 1998, the location, the
date on which operations commenced, number of units, and Hillsdale's
interest in the operating entities included in the accompanying statement
of assets and liabilities and statement of revenues and direct expenses:
OPERATIONS
COMMENCED BY
COMMUNITY LOCATION HILLSDALE UNITS INTEREST
--------- -------- --------- ----- --------
Golden Creek Inn Irvine, CA July 1997 126 Owned
Hillcrest Inn (including 270
Center - see below) Thousand Oaks, CA October 1997 138 Owned
The Berkshire Berkeley, CA January 1998 84 Owned
Encino Hills Terrace Encino, CA December 1997 95 Leased
Willow Glen Villa San Jose, CA December 1993 201 Leased
Hillsdale Manor
Retirement/Convalescent Home San Mateo, CA 1981/1985 119/65 Leased
The accompanying statement of revenues and direct expenses only includes
activities of the individual entities from the later of April 1, 1997 or
the time that the operations were commenced by Hillsdale (see above) or
leased by Hillsdale through March 31, 1998 (the "Period"). In addition,
no minority interest has been reflected in the accompanying combined
statements of assets and liabilities and revenues and direct expenses.
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GOLDEN CREEK INN
THGLP is a General Partner and owns 99.9 percent of Woodside Terrace
Partners, a general partnership, which purchased Golden Creek Inn on July
18, 1997. On December 27, 1997, ownership of Golden Creek Inn was
transferred to TH Group, Inc. The community is managed by THGLP under a
management contract between THGLP and TH Group, Inc.
HILLCREST INN
270 Center purchased Hillcrest Inn on October 1, 1997. THGLP and 270
Center are under common control and, therefore, the assets and
liabilities of 270 Center have been included in the accompanying combined
statement of assets and liabilities. THGLP managed the property on 270
Center's behalf from October 1, 1997 through December 31, 1997 and then
beginning January 1, 1998 leased the community from 270 Center.
THE BERKSHIRE
270 Center purchased The Berkshire on January 24, 1998. THGLP leased the
community from 270 Center.
ENCINO HILLS TERRACE
Encino Hills Terrace was leased from an unrelated third party beginning
December 16, 1997. Subsequent to March 31, 1998, THGLP acquired the real
estate from the lessor (see Note 9).
WILLOW GLEN VILLA
In December 1993, TH Group Inc. entered into a general partnership
agreement forming Willow Glen Investors for the purposes of leasing and
operating a retirement community, Willow Glen Villa, in San Jose,
California. TH Group, Inc. has a 50 percent general partnership interest
in Willow Glen Investors. The community is leased by Willow Glen
Investors which, in turn, sub-leases it to THGLP (see also Note 5.).
HILLSDALE MANOR RETIREMENT AND CONVALESCENT HOME
Hillsdale Manor Partners (HMP), a tenancy in common, was formed in 1988
to own and operate a retirement and convalescent home in San Mateo,
California. TH Group Inc. owns a 74.91 percent interest in HMP. The
community is leased by THGLP (see also Note 5.).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Revenues are generated from rental agreements with tenants on a
month-to-month basis. Only revenue from the rental agreements and other
resident services are included in revenues.
Direct operating expenses include costs associated with the rental
operations and the general administration of the communities included in
The Assisted Living Group. Certain general and administrative expenses
have been excluded from the statement of revenues and direct expenses, as
they are not directly related to the revenue producing activities of the
individual entities. Taxes based on income have also been excluded.
Other expenses include interest related to the Notes Payable discussed in
Note 4.
All intercommunity transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the
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reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, ranging from 3 to
approximately 35 years.
Property, furniture and equipment consisted of the following at March 31,
1998:
Land $ 3,680,348
Buildings and improvements 20,553,830
Construction in progress 289,880
Furniture, fixtures and equipment 1,249,553
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25,773,611
Accumulated depreciation (505,677)
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$ 25,267,934
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Total depreciation expense for the Period was $513,171.
The Assisted Living Group reviews its long-lived assets for impairments
when events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. In reviewing recoverability, the
Assisted Living Group estimates the future cash flows expected to result
from using the assets and eventually disposing of them. If the sum of the
expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is
recognized based upon the asset's fair value. No such impairment loss was
recorded during the Period.
GOODWILL
Goodwill arose from the acquisition of Hillcrest Inn from an unrelated
third party in October 1997. The goodwill is being amortized on the
straight-line method over 35 years (the estimated useful life of the
property). Amortization expense for the Period was $113,275.
LOAN FEES
Amortization of loan fees is computed using the effective interest method
over the term of the related note payable. Amortization expense for the
Period was $28,477.
DEFERRED RENT
Certain of The Assisted Living Group's leases contain fixed escalation
clauses. The total commitment under the leases will be amortized over the
lives of the leases on the straight-line method. The difference between
the lease payments required and the lease payments on the straight-line
method is recorded as deferred rent.
RENTAL INCOME AND DEFERRED REVENUE
Rent agreements with tenants are on a month-to-month basis. Revenue is
recognized as the services are provided. Deferred revenue arises when
residents prepay rent for months subsequent to March 31, 1998.
(3) ACQUISITIONS
On July 18, 1997, Hillsdale acquired Golden Creek Inn, a 126-unit
community located in Irvine, California for approximately $8.7 million.
On October 1, 1997, Hillsdale acquired Hillcrest Inn, a 138-unit
community located in Thousand Oaks, California for approximately $18.6
million. On January 24, 1998, the Hillsdale acquired Berkshire, an
84-unit community located in Berkeley, California for approximately $6.2
million. On December 16, 1997, Hillsdale entered into an agreement to
acquire Encino Hills Terrace,
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a 95-unit community located in Encino, California. At the same time,
Hillsdale entered into a lease agreement for Encino Hills Terrace
commencing December 16, 1997 through the date that the purchase was
completed (see Note 9).
The following unaudited pro forma information presents a summary of the
combined revenues and direct expenses as if the acquisitions took place
as of April 1, 1997. As no financial information is available for any
period prior to Hillsdale's acquisition of certain communities, the pro
forma information is based upon annualized revenues and direct expenses
since Hillsdale's commencement of operations at those communities:
(Unaudited)
Total revenues $21,264,205
Total direct expenses $20,929,271
Excess of revenues over
direct expenses $ 334,934
(4) NOTES PAYABLE
At March 31, 1998 notes payable included the following:
Note payable to a financial institution, bearing interest at
LIBOR (5.719% at March 31, 1998) plus 2.25 percent; monthly
interest only payments due through October 31, 1998 then
monthly principal and interest payments due through October
1, 2002; collateralized by deed of trust on the Hillcrest Inn $13,000,000
property
Note payable to a financial institution, bearing interest at
LIBOR plus 2.50 percent; monthly interest only payments due through October
31, 1998 then monthly principal and interest payments due through August 1,
2002; collateralized by deed of trust on the Golden Creek Inn property 2,250,000
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15,250,000
Less: current portion (87,879)
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$15,162,121
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The annual principal payments on the notes payable at March 31, 1998 are
due as follows:
Year ending March 31:
1999 $ 87,879
2000 205,839
2001 223,004
2002 14,733,278
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$ 15,250,000
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(5) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
ENCINO HILLS TERRACE
On December 16, 1997, THGLP entered into a lease agreement with an
unrelated third party for the lease of Encino Hills Terrace. The lease
expired upon consummation of the purchase of the property on July 7,
1998.
WILLOW GLEN VILLA
On December 31, 1993, Willow Glen Investors entered into a long-term
operating lease with Willow Glen Villa, an unrelated third party, related
to the operations of a community located in San Jose, California expiring
December 31, 2026. On January 1, 1997, this operating lease was
sub-leased to THGLP, expiring December 31, 2011. Rent expense under the
operating lease for the Period was approximately $1.9 million. Only the
minimum lease payments with respect to the sub-lease are included below.
The lessee has the option to purchase the community pursuant to a
Purchase Option Agreement dated December 23, 1993. The option commences
at various times, the latest being six months prior to the last day of
the operating lease term. The purchase price will be $17.9 million plus
$8.8 million times a factor tied to the increase in the CPI from July 1,
1996 to the exercise date, multiplied by ten.
HILLSDALE MANOR RETIREMENT AND CONVALESCENT HOSPITAL
On January 1, 1997, THGLP entered into a long-term operating lease with
Hillsdale Manor Partners, LP, a related party, related to the operations
of a retirement community and convalescent hospital located in San Mateo,
California expiring December 31, 2011. Rent expense under the operating
lease for the Period was approximately $2.1 million. Only the minimum
lease payments with respect to the lease are included below.
The lessee has the option to purchase the community pursuant to a
Purchase Option Agreement dated January 10, 1997. The option commences on
the later of December 31, 2003 or July 1 of the year following when the
Willow Glen option becomes exercisable. The purchase price will be $2.1
million plus a factor tied to the increase in the CPI from January 1,
1997 to the exercise date, multiplied by ten.
Future minimum lease payments under leases, which are treated as
operating leases are as follows:
Year ending March 31:
1999 $ 4,002,564
2000 3,915,264
2001 3,915,264
2002 4,008,233
2003 4,287,139
Thereafter 39,727,305
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$59,855,769
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LITIGATION
The Assisted Living Group is from time to time subject to claims and
disputes for legal and other matters in the normal course of its
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 Assisted Living
Group's combined assets and liabilities or revenues and direct expenses.
(6) TRANSACTIONS WITH AFFILIATES
THGLP pays certain expenses such as certain repairs and maintenance,
supplies and payroll expenses on behalf of The Assisted Living Group and
is subsequently reimbursed by The Assisted Living Group. The total
reimbursements to THGLP, amounted to approximately $3,839,010 for the
Period, and are included in
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rental property operations and general and administrative expenses in the
accompanying statement of revenues and direct expenses.
(7) EMPLOYEE BENEFIT PLAN
Effective January 1, 1998, Hillsdale established a retirement plan (the
Retirement Plan) that qualifies as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code. Under the Retirement Plan,
participating employees may defer a portion of their pretax earnings, up
to the Internal Revenue Service annual contribution limit. Hillsdale
matches 25 - 50 percent of each employee's contributions up to a maximum
of 4% of the employee's earnings based upon years of service. An employee
becomes eligible to participate in the plan upon completing one year of
service. The Assisted Living Group's Retirement Plan expense was
approximately $10,643 (as a reimbursement to Hillsdale) for the Period.
(8) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts
have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value
amounts.
CASH
The carrying amount for cash approximates fair value because these
instruments are demand deposits and do not present unanticipated interest
rate or credit concerns.
NOTES PAYABLE
The fair value of the notes payable approximates its carrying value as
the notes payable bear rates of interest which approximate the market
rate of interest.
(9) SUBSEQUENT EVENTS
PURCHASE OF ENCINO HILLS TERRACE PROPERTY
On July 7, 1998, Hillsdale purchased the Encino Hills Terrace property
from an unrelated third party for approximately $6.6 million of property
and cash. THGLP then sold the property to ARV Assisted Living, Inc. (see
below).
SALE OF COMMUNITIES
On February 12, 1998, ARV Assisted Living, Inc. entered into Purchase and
Sale Agreements with Hillsdale to purchase its interests in these
communities. The closings have occurred in phases beginning April 16,
1998 through July 7, 1998 as follows:
COMMUNITY CLOSING DATE
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Golden Creek Inn April 16, 1998
Hillcrest Inn (including 270 April 16, 1998
Center)
The Berkshire May 13, 1998
Willow Glen Villa May 18, 1998
Hillsdale Manor July 2, 1998
Encino Hills Terrace July 7, 1998