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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 JUNE 30, 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 33-0160968
(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 August 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
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
Current assets:
Cash and cash equivalents................... $ 15,760 $102,776
Escrow deposits............................. 12,497 --
Fees receivable and other amounts due from
affiliates................................ 950 571
Fees receivable and other amounts due from
others.................................... 241 --
Prepaids and other current assets........... 5,284 3,920
-------- --------
Total current assets................ 34,732 107,267
Deferred project costs........................ 182 246
Property, furniture and equipment, net........ 170,172 117,557
Goodwill, net................................. 18,825 --
Other non-current assets...................... 9,809 6,781
Net non-current assets from discontinued
operations.................................. 861 1,234
-------- --------
$234,581 $233,085
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 7,234 $ 6,696
Accrued liabilities......................... 3,043 7,864
Notes payable, current portion.............. 10,305 9,388
Accrued interest payable.................... 1,605 1,482
Net current liabilities from discontinued
operations................................ 3,613 6,558
-------- --------
Total current liabilities........... 25,800 31,988
Notes payable, less current portion......... 95,581 81,560
Other non-current liabilities............... 1,282 934
-------- --------
122,663 114,482
-------- --------
Commitments and contingent liabilities
Minority interest in majority owned entities.. 7,602 7,168
-------- --------
Series A preferred stock, convertible and
redeemable; 2,000 shares authorized none
issued or outstanding at June 30, 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
15,881 and 15,848 shares at June 30, 1998
and December 31, 1997, respectively....... 143,286 142,945
Accumulated deficit......................... (38,970) (31,510)
-------- --------
Total shareholders' equity.......... 104,316 111,435
-------- --------
$234,581 $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 AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -----------------------
1998 1997 1998 1997
------------ ------------ ------------ ----------
Revenue:
Assisted living community revenue:
Rental revenue $24,915 $20,817 $47,074 $40,517
Assisted living and other services 5,841 3,848 10,820 7,088
Management fees from others 145 -- 145 --
Management fees from affiliates 203 145 392 287
------- ------- ------- -------
Total revenue 31,104 24,810 58,431 47,892
------- ------- ------- -------
Operating expenses:
Assisted living community
operating expense 19,091 15,153 35,652 29,462
Assisted living community lease
expense 6,055 4,970 11,690 9,105
General and administrative 6,669 2,914 12,653 5,946
Depreciation and amortization 2,239 1,477 4,054 2,908
------- ------- ------- -------
Total operating expenses 34,054 24,514 64,049 47,421
------- ------- ------- -------
Income (loss) from operations (2,950) 296 (5,618) 471
------- ------- ------- -------
Other income (expense):
Interest income 445 239 1,701 259
Other income, net 48 310 119 624
Interest expense (1,543) (1,332) (2,827) (2,704)
------- ------- ------- -------
Total other expense (1,050) (783) (1,007) (1,821)
------- ------- ------- -------
Loss from continuing operations
before income taxes (4,000) (487) (6,625) (1,350)
Income tax expense (benefit) 36 (193) 42 (551)
------- ------- ------- -------
Loss from continuing operations
before minority
Interest and discontinued
operations (4,036) (294) (6,667) (799)
Minority interest 409 408 793 806
------- ------- ------- -------
Loss from continuing operations (4,445) (702) (7,460) (1,605)
======= ======= ======= =======
Loss from operations of
discontinued operations,
net of income tax benefit of $66
and $254 for the three and six
month periods ended June 30, 1997 -- (100) -- (1,838)
------- ------- ------- -------
Net loss $(4,445) $ (802) $(7,460) $(3,443)
======= ======= ======= =======
Basic and diluted loss per common share:
Loss from continuing operations $ (.28) $ (.07) $ (.47) $ (.17)
Loss from discontinued operations -- (.01) -- (.19)
------- ------- ------- -------
Net loss $ (.28) $ (.08) $ (.47) $ (.36)
======= ======= ======= =======
Weighted average common shares
outstanding 15,876 9,662 15,866 9,657
======== ======= ======= =======
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 JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
Net cash used in operating activities of continuing
operations......................................... $ (4,953) $ 42
Net cash used in operating activities of discontinued
operations......................................... (2,572) (2,758)
-------- --------
Net cash used in operating activities................ (7,525) (2,716)
-------- --------
Cash flows (used in) provided by investing activities:
Acquisition of Hillsdale Communities............. (56,540) --
Increase in restricted cash...................... (12,497) --
Acquisition of rights under management contracts (1,325) --
Increase in deferred project costs............... (238) (386)
Decrease in investments in real estate, net...... -- 2,080
(Increase) decrease in leased property security
deposits....................................... (509) 446
Proceeds from sale and leaseback of communities.. -- 29,052
Additions to property, furniture and equipment... (3,415) (28,174)
Purchase of limited partnership interests........ (1,200) (2,388)
Increase in other non-current assets............. (719) (159)
-------- --------
Net cash (used in) provided by investing
activities.............................. (76,443) 471
--------- --------
Cash flows (used in) provided by financing activities:
Issuance of common stock, net of issuance costs 233 610
Borrowings under notes payable.................... -- 5,379
Repayments of notes payable....................... (312) (4,420)
Distributions paid from majority owned entities... (359) --
Issuance costs in connection with conversion of
subordinated notes............................. (2,610) --
-------- --------
Net cash (used in) provided by financing
activities............................... (3,048) 1,569
-------- --------
Net decrease in cash and cash equivalents............ (87,016) (676)
Cash and cash equivalents at beginning of period..... 102,776 8,355
-------- --------
Cash and cash equivalents at end of period........... $ 15,760 $ 7,679
======== ========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest........................................ $ 3,544 $ 3,412
======== ========
Income taxes.................................... $ 42 $ 47
======== ========
Supplemental schedule of noncash investing and
financing activities:
Assumption of debt in connection with the
Hillsdale acquisition......................... $ 15,250 $ --
======== =======
Issuance of common stock........................ $ 108 $ --
======== =======
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
JUNE 30, 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 June 30, 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 and six months ended
June 30, 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
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("OP") No. 98-5, "Reporting on the Costs of Start-up Activities,"
which is effective for fiscal years beginning after December 15, 1998. The SOP
provides guidance on the financial reporting of start-up activities and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed when incurred and, upon adoption, the write
off as a cumulative effect of a change in accounting principle any previously
capitalized start-up or organizational costs. The Company plans to adopt the
provisions of SOP 98-5 in the first quarter of 1999. The carrying amount of such
costs were approximately $1.0 million as of June 30, 1998.
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.
RESTRICTED CASH
Restricted cash is comprised of cash deposited in escrow for the purchase of
interests in two communities, which closed during July 1998.
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LOSS PER SHARE
The number of shares used in computing loss per share is equal to the weighted
average number of common shares and common equivalent shares outstanding during
the respective periods. Potentially dilutive securities are not included due to
their antidilutive effect in periods reporting a net loss.
(2) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company has guaranteed indebtedness of certain affiliated partnerships as
follows:
(IN THOUSANDS)
Notes secured by real estate $16,733
Construction loans associated with the
development and construction of
affordable housing apartments $35,515
The maximum aggregate amount of guaranteed land and construction loans is $38.5
million at June 30, 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.
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
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.
The parties are mutually negotiating the terms of a proposed purchase agreement
involving the sale of the landlord's fee interest in the four communities to
ARVP II and settlement of all claims and have agreed to forebear from
prosecuting the litigation during the pendency of the escrow. Management is of
the opinion, based in part upon opinions of legal counsel, that an adverse
outcome is unlikely.
In November 1997, Emeritus Corporation ("Emeritus"), an unaffiliated competitor
of the Company, 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
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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"), an unaffiliated competitor
of the Company. Atria is also named as a defendant in the suit, as are Lazard
Freres ("Lazard") and 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 the Company the right to be the acquiring party and then,
if the Company declines, obtaining the Company's permission to consummate this
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 previously 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
LFREI's acquisition of 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. The Company 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. On July 30, 1998, the
Company's compliant was amended to include allegations of fraud against Lazard,
LFREI and Messrs. Kenneth M. Jacobs, Robert P. Freeman and Murry N. Gunty.
On June 9, 1998, LFREI filed a cross-complaint against the Company, alleging
that the Company's preliminary communication with several potential sources of
capital to assist the Company in financing the acquisition of Atria in the event
that LFREI honors the Company's right of first offer or is ordered to do so by
the court constitutes an early termination event under the Amended and Restated
Stockholders Agreement dated as of October 29, 1997, by and among LFREI,
Prometheus Assisted Living LLC and the Company (the "Amended Stockholders
Agreement"). LFREI also contends that certain standstill provisions under the
Amended Stockholders Agreement have terminated.
On June 25, 1998, the Superior Court of the State of California, County of
Orange, granted the Company's request for a preliminary injunction to enjoin
LFREI and Kapson from closing any transaction to acquire Atria without the
Company's consent. The preliminary injunction remained in effect pending the
outcome of a court trial which began August 3, 1998. On August 14, 1998, the
Judge in the trial ruled from the bench against the Company and in favor of all
defendants on LFREI's motion for judgment on all of the Company's causes of
action, and ordered that the preliminary injunction be dissolved. LFREI's
cross-complaint has not yet been ruled upon. The Judge's formal written ruling
has not yet been filed in this matter. The Company plans to review that order
and assess whether to seek an appeal of the Judge's ruling.
Since the nature of litigation is that results cannot be predicated with
certainty, there can be no assurance the Company will prevail in any of the
foregoing litigation actions.
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.
(3) 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 June 30, 1998, the
Company had $12.5 million of escrow deposits on this transaction. The
transaction has closed in phases beginning April 16, 1998.
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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. Golden Creek Inn is a 123-unit assisted living community located in
Irvine, California.
The Company acquired Hillcrest Inn from 270 Center Associates, Limited
Partnership, an unrelated third party. Hillcrest Inn is a 137-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. WHW Associates is a fifty percent
(50%) 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: Sterling Court, a 149-unit assisted living
community located in San Mateo, California; Palo Alto Commons, a 143-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 138-unit assisted living community located
in Oakland, California.
Phase II of the transaction closed on May 4, 1998. The phase II acquisition was
of Rossmore House from 270 Center Associates, Limited Partnership. 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. The
Berkshire is an 81-unit assisted living community located in Berkley,
California.
Phase IV of the transaction closed May 18, 1998. The phase IV acquisition was of
the rights under a sublease agreement and related rights for Willow Glen Villa
from The Hillsdale Group, L.P. Willow Glen is a 188-unit assisted living
community located in San Jose, California.
Approximately $55.0 million 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. The
purchase price paid in excess of the fair value of identifiable assets acquired
aggregated $18.9 million and is being amortized over the life of the related
assets of 35 years.
The pro forma effect of the above acquisition, assuming that the transaction
occurred on January 1, 1998, follows (dollars in thousands, except per share
amounts):
FOR THE
THREE MONTHS FOR THE SIX
ENDED MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
Revenues...................................... $32,333 $63,413
Net loss...................................... (4,248) (6,843)
Basic and diluted loss per common share....... $ (0.27) $ (0.43)
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(4) SUBSEQUENT EVENTS
On July 2, 1998, phase V of the Hillsdale acquisition closed and the Company
acquired the rights under a lease agreement and related documentation for
Hillsdale Manor Retirement Center and Convalescent Home from The Hillsdale
Group, L.P. Hillsdale Manor is located in San Mateo, California and comprises
159 assisted living and skill nursing units.
On July 7, 1998, phase VI of the Hillsdale acquisition closed and the Company's
wholly-owned subsidiary, Encino Renovation, LLC, a Delaware limited liability
company, acquired Encino Hills Terrace from The Hillsdale Group, L.P. Encino
Hills Terrace is an 76-unit assisted living community located in Encino,
California.
The $13.3 million purchase price for the interest in the two communities was
paid from cash on hand.
In July 1998, the Company's Board of Directors approved the refinancing of seven
of the Company's communities held by majority owned entities. This refinancing
will allow the Company to take advantage of lower interest rates available in
the current environment and provide a return of capital to Company and the
limited partners by borrowing against the increased value of these properties.
As a result of this refinancing, the Company's consolidated long-term debt on
these communities is expected to increase to approximately $36.4 million from
approximately $11.4 million. In July 1998, the Company exercised its option to
borrow the remaining unfunded balance of an existing mortgage totaling
approximately $4.4 million.
In August 1998, the Company extended its $10 million revolving line of credit
with Imperial Bank through September 30, 1999. This line of credit has primarily
been used to provide standby letters of credit used for security deposits on
leased ALCs. As of June 30, 1998, the Company had used approximately $9.2
million of this line for such letters of credit.
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 statement's 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, the
level of future capital expenditures, the Company's ability to obtain financing
in the future at attractive rates and terms, the effect of the Year 2000 Issue,
the impact of inflation and changing prices and the outcome of certain
litigation matters. These statements are only predictions; however, actual
events or results may differ materially as a result of risks facing the Company.
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. Certain of the risks
discussed herein as well as other risks are detailed in the Company's Form 10-K
filed with the Securities and Exchange Commission for the fiscal period ended
December 31, 1997.
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 June 30, 1998, the Company operated 62 assisted living communities
("ALCs") containing 7,731 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 59 communities, 36 are
leased by the Company pursuant to long-term operating leases ("Leased ALCs"), 18
communities are owned by the Company for its own
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account ("Owned ALCs") and 5 communities are managed for unrelated parties
("Managed ALCs"). The Company was in various stages of construction on two ALCs
with an anticipated total of 290 units at June 30, 1998. Subsequent to June 30,
1998, the Company acquired the rights under a lease agreement and related
documentation for Hillsdale Manor Retirement Center and Convalescent Home, a
community located in San Mateo, California, which consists of 159 assisted
living and skilled nursing units and purchased Encino Hills Terrace, a 76-unit
assisted living community located in Encino, California. Encino Hills Terrace
was managed by the Company from May 18, 1998 until the purchase in July 1998.
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 54 ALCs
totaling 6,761 units (87.5% of its portfolio of 7,731 units at June 30, 1998).
Of the owned and leased ALCs operated for its own account as of June 30, 1998,
24 communities (2,453 units) were previously owned or operated by Affiliated
Partnerships, including 10 communities (926 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, 23 communities (3,509 units) were acquired from third party owners
and seven communities (799 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, 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").
Partnerships affiliated with the Company have acquired or developed market rate
senior apartments as well as affordable senior and multifamily apartment
communities (the "Apartment Group"), using the sale of tax credits under a
Federal low-income housing tax credit program (the "Federal Tax Credit Program")
to generate the equity funding for development.
As part of its strategic plan, management and the Board of Directors determined
that GeriCare and the Apartment Group were 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 discontinued the operations 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 provides therapy services.
In addition to its strategic alliance with NovaCare, Inc., the Company entered
into an 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 agreement is for a three-year term and Omnicare, Inc. will
commence operations during the third quarter of 1998.
The Company completed construction of the 130-unit Canterbury Woods community
located in Attleboro, MA, its first in the state; and the 76-unit Bayside
Landing community located in Stockton, CA. Both communities commenced operations
in June 1998.
At June 30, 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.
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ANTICIPATED ANTICIPATED
LOCATION # OF UNITS OPENING
-------- ----------- -----------
The Lakes Fort Myers, FL 148 4th Quarter 1998
Sutton Terrace Las Vegas, NV 142 4th Quarter 1998
---
Total units
under construction 290
===
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
The following information concerning the results of operations for the Company's
"Same Communities" for the three month period ended June 30, 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
42 communities owned, leased or previously managed (now owned or leased) by the
Company for four quarters or more as of June 30, 1998.
ARV Assisted Living, Inc.
Results of Same Communities
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
(In thousands)
JUNE 30,
----------------
1998 1997
------- -------
Revenue:
Assisted living community revenue:
Rental revenue $21,044 $20,367
Assisted living and other services 4,966 3,736
------- -------
Total revenue 26,010 24,103
------- -------
Operating expenses:
Assisted living community operating expense 15,821 14,372
Assisted living community lease expense 4,649 4,436
Depreciation and amortization 1,410 1,197
------- -------
Total operating expenses 21,880 20,005
------- -------
Income from operations 4,130 4,098
Interest expense 711 788
------- -------
Income before minority interest 3,419 3,310
Minority interest in operations 409 408
------- -------
Income from Same Communities $ 3,010 $ 2,902
======= =======
For the Company as a whole, total revenue for the three months ended June 30,
1998 increased $6.3 million to $31.1 million from $24.8 million for the three
months ended June 30, 1997. This increase was primarily due to an increase in
assisted living community revenue as described below.
Assisted living community revenue increased $6.0 million to $30.7 million for
the three months ended June 30, 1998 from $24.7 million for the three months
ended June 30, 1997. Of the increase, $2.8 million is the result of an increase
in the number of Owned ALCs and Leased ALCs operated by the Company. As of June
30, 1998, the Company operated 54 ALCs for its own account consisting of 36
Leased ALCs and 18 Owned ALCs. For the three months ended June 30, 1997, the
Company operated a total of 46 ALCs for its own account consisting of 32 Leased
ALCs and 14 Owned ALCs. Another $1.3 million of the increase is a result of four
leased ALCs which the Company operated for less than four quarters as of June
30, 1998. The remaining $1.9 million of the increased revenue was due to the
Same Communities. The increase is a result of increased occupancies, rates and
the percentage of residents utilizing the Company's assisted living services
during the three months ended June 30, 1998 compared to the same period in the
prior year.
Management fees from affiliates and others increased $0.2 million to $0.3
million for the three months ended June 30, 1998 from $0.1 million for the three
months ended June 30, 1997. The increase is due to the increased number of
management contracts to eight as of June 30, 1998 as compared to three as of
June 30, 1997.
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Operating expenses increased $9.5 million to $34.0 million for the three months
ended June 30, 1998 from $24.5 million for the three months ended June 30, 1997.
Assisted living community operating expense and lease expense increased $3.9
million and $1.1 million, respectively, to $19.1 million and $6.1 million,
respectively, for the three months ended June 30, 1998 from $15.2 million and
$5.0 million, respectively, for the three months ended June 30, 1997. Of these
increases, $1.9 million of ALC operating expense and $0.5 million of ALC lease
expense related to the additional number of Owned and Leased ALCs operated by
the Company during the three months ended June 30, 1998, as discussed above.
Another $0.6 million of ALC operating expenses and $0.4 million of ALC lease
expense is a result of four leased ALCs which the Company operated for less than
four quarters as of June 30, 1998. The remaining $1.4 million increase for ALC
operating expense and $0.2 million increase for ALC lease expense were
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 and increased wages of staff.
General and administrative expenses increased $3.8 million to $6.7 million for
the three months ended June 30, 1998 from $2.9 million for the three months
ended June 30, 1997. The increase was primarily the result of approximately $1.5
million related to the lawsuit with LFREI, $1.0 million of severance payments
and recruitment fees related to the Company's management reorganization, and the
additional staffing necessary to accommodate the increased operations of the
Company.
Depreciation and amortization expenses increased $0.7 million to $2.2 million
for the three months ended June 30, 1998 from $1.5 million for the three months
ended June 30, 1997. Of this increase $0.4 related to the additional number of
Owned and Leased ALCs operated by the Company during the three months ended June
30, 1998, as discussed above. Another $0.1 million of the increase is a result
of four leased ALCs which the Company operated for less than four quarters as of
June 30, 1998. The remaining $0.2 million was attributable to the Same
Communities.
Interest income increased $0.2 million to $0.4 million for the three months
ended June 30, 1998 from $0.2 million for the three months ended June 30, 1997
due to higher average cash balances carried by the Company during the three
months ended June 30, 1998.
Other income decreased $0.3 million to $48,000 for the three months ended June
30, 1998 from $0.3 million for the three months ended June 30, 1997. The
decrease is primarily due to development fees earned in connection with the
construction of ALCs and equity in income recorded on the Company's 12.8 percent
interest in Senior Income Fund, L.P. during the three months ended June 30,
1997. During the three months ended June 30, 1998, the Company did not earn
development fees or recognize any equity in income from its investment in Senior
Income Fund, L.P.
Interest expense increased $0.2 million to $1.5 million for the three months
ended June 30, 1998 compared with $1.3 million for the three months ended June
30, 1997 due primarily to additional debt incurred in connection with acquiring
additional ALCs. 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 $0.2 million to $36,000 for the three months
ended June 30, 1998 from a benefit of $0.2 million for the three months ended
June 30, 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 June 30, 1998.
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SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
The following information concerning the results of operations of the Company's
"Same Communities" for the six-month period ended June 30, 1998 is presented in
order to provide the reader with additional information concerning the
components of the Company's operations.
ARV Assisted Living, Inc.
Results of Same Communities
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(In thousands)
JUNE 30,
----------------
1998 1997
------- -------
Revenue:
Assisted living community revenue:
Rental revenue $41,919 $39,901
Assisted living and other services 9,543 6,949
------- -------
Total revenue 51,462 46,850
------- -------
Operating expenses:
Assisted living community operating expense 30,886 28,352
Assisted living community lease expense 9,274 8,325
Depreciation and amortization 2,796 2,429
------- -------
Total operating expenses 42,956 39,106
------- -------
Income from operations 8,506 7,744
Interest expense 1,461 1,435
------- -------
Income before minority interest 7,045 6,309
Minority interest in operations 793 806
------- -------
Income from Same Communities $ 6,252 $ 5,503
======= =======
For a Company as a whole, total revenue for the six months ended June 30, 1998
increased $10.5 million to $58.4 million from $47.9 million for the six 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 $10.3 million to $57.9 million for
the six months ended June 30, 1998 from $47.6 million for the six months ended
June 30, 1997. Of the increase, $2.9 million is the result of an increase in the
number of Owned ALCs and Leased ALCs operated by the Company. As of June 30,
1998, the Company operated 54 ALCs for its own account consisting of 36 Leased
ALCs and 18 Owned ALCs. For the six months ended June 30, 1997, the Company
operated a total of 46 ALCs for its own account consisting of 32 Leased ALCs and
14 Owned ALCs. Another $2.8 million of the increase is a result of four leased
ALCs which the Company operated for less than four quarters as of June 30, 1998.
The remaining $4.6 million of the increased revenue was due to the Same
Communities. The increase is a result of increased occupancies, rates and the
percentage of residents utilizing the Company's assisted living services during
the six months ended June 30, 1998 compared to the same period in the prior
year.
Management fees from affiliates and others increased $0.2 million to $0.5
million for the six months ended June 30, 1998 from $0.3 million for the six
months ended June 30, 1997. The increase is due to the increased number of
management contracts to eight as of June 30, 1998 as compared to three as of
June 30, 1997.
Operating expenses increased $16.6 million to $64.0 million for the six months
ended June 30, 1998 from $47.4 million for the six months ended June 30, 1997.
Assisted living community operating expense and lease expense increased $6.2
million and $2.6 million, respectively, to $35.7 million and $11.7 million,
respectively, for the six months ended June 30, 1998 from $29.5 million and $9.1
million, respectively, for the six months ended June 30, 1997. Of these
increases, $2.1 million of ALC operating expense and $0.7 million of ALC lease
expense related to the additional number of Owned and Leased ALCs operated by
the Company during the six months ended June 30, 1998, as discussed above.
Another $1.6 million of ALC operating expenses and $1.0 million of ALC lease
expense is a result of four leased ALCs which the Company operated for less than
four quarters as of June 30, 1998. The remaining $2.5 million increase for ALC
operating expense and $0.9 million increase for ALC lease expense were
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 and increased wages of staff.
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General and administrative expenses increased $6.7 million to $12.7 million for
the six months ended June 30, 1998 from $6.0 million for the six months ended
June 30, 1997. The increase was primarily a result of approximately $1.5 million
of additional costs incurred related to the Company's successful battle against
a hostile tender offer of Emeritus, $1.5 million related to the lawsuit with
LFREI, $1.0 million of severance payments and recruitment fees related to the
Company's management reorganization and the additional staffing necessary to
accommodate the increased operations of the Company.
Depreciation and amortization expenses increased $1.1 million to $4.0 million
for the six months ended June 30, 1998 from $2.9 million for the six months
ended June 30, 1997. Of this increase $0.4 related to the additional number of
Owned and Leased ALCs operated by the Company during the six months ended June
30, 1998, as discussed above. Another $0.3 million of the increase is a result
of four leased ALCs which the Company operated for less than four quarters as of
June 30, 1998. The remaining $0.4 million was attributable to the Same
Communities.
Interest income increased $1.4 million to $1.7 million for the six months ended
June 30, 1998 from $0.3 million for the six months ended June 30, 1997 due to
higher average cash balances carried by the Company during the six months ended
June 30, 1998.
Other income decreased $0.5 million to $0.1 million for the six months ended
June 30, 1998 from $0.6 million for the six months ended June 30, 1997. The
decrease is primarily due to development fees earned in connection with the
construction of ALCs and equity in income recorded on the Company's 12.8 percent
interest in Senior Income Fund, L.P. during the six months ended June 30, 1997.
During the six months ended June 30, 1998, the Company did not earn development
fees or recognize any equity in income from its investment in Senior Income
Fund, L.P.
Interest expense increased $0.1 million to $2.8 million for the six months ended
June 30, 1998 compared with $2.7 million for the six months ended June 30, 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 $0.6 million to $42,000 for the six months ended
June 30, 1998 from a benefit of $0.6 million for the six months ended June 30,
1997. The Company recorded a 100% valuation allowance on the income tax benefit
generated as a result of operating losses incurred during the six months ended
June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash balances were $15.8 million and $102.8 million
at June 30, 1998 and December 31, 1997, respectively.
Working capital decreased to $8.9 million as of June 30, 1998 compared to
working capital of $75.3 million at December 31, 1997. The decrease was due
primarily to cash used in the acquisition of four communities, one leasehold
interest and four management contracts during the six months ended June 30,
1998.
For the six months ended June 30, 1998, cash used in operating activities was
$7.5 million compared to $2.7 million for the comparable period in the previous
year. For the six months ended June 30, 1998, the primary components of cash
used in operating activities were a net loss of $7.5 million, $2.4 million of
decreases in various current liabilities and increases in other assets and $2.6
million of cash used in operations of discontinued operations, offset by a
non-cash charge of $4.1 million for depreciation and amortization. The remaining
amount is made up of approximately $0.9 million in other non-cash charges.
Cash used in investing activities was $76.4 million for the six months ended
June 30, 1998, compared to cash provided by investing activities of $0.5 million
for the six months ended June 30, 1997. For the six months ended June 30, 1998,
uses of cash primarily include $59.1 million related to the acquisition of
interests in ALCs, a $12.5 million increase in restricted cash related to an
escrow deposit to fund acquisitions closed in July 1998, a
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$3.4 million increase in property, furniture and equipment, $0.9 million in
costs related to other non-current assets and deferred project costs and $0.5
million for increases in leased property security deposits.
Net cash used in financing activities during the six months ended June 30, 1998
was $3.1 million compared to cash provided by financing activities of $1.6
million for the six months ended June 30, 1997. During the six months ended June
30, 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, $0.3 million for repayments of notes payable, and $0.4 million for
distributions paid from majority owned entities, offset by $0.2 million of
proceeds from the issuance of common stock.
As a result of the Company's pending acquisition of interests in two ALCs, the
Company expended approximately $13.9 million in July 1998 to complete the
acquisition, of which $12.5 million was in escrow as of June 30, 1998. Although
management intends to finance a portion of the purchase price, 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.
In July 1998, the Company's Board of Directors approved the refinancing of seven
of the Company's communities held by majority owned entities. This refinancing
will allow the Company to take advantage of lower interest rates available in
the current environment and provide a return of capital to the limited partners
by borrowing against the increased value of these properties. As a result of
this refinancing, the Company's consolidated long-term debt for these
communities is expected to increase to approximately $36.4 million from
approximately $11.4 million. In August 1998, the Company exercised its option to
borrow the remaining unfunded balance of an existing mortgage totaling
approximately $4.4 million.
The Company extended its $10 million revolving line of credit with Imperial Bank
through September 30, 1999. This line of credit has primarily been used to
provide standby letters of credit used security deposits on leased ALCs. As of
June 30, 1998, the Company has used approximately $9.2 million of this line for
such letters of credit.
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 has
discontinued its 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 ability to issue of common stock and its proposed
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.
YEAR 2000 ISSUE
Certain computer programs utilized by the Company were written using two digits
rather than four to define the year. As a result, those programs may recognize a
date using "00" as the year 1900 rather than the year 2000. In the event this
were to occur with any of the Company's computer programs, a system failure or
miscalculation causing
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disruptions of operations could occur. Such a failure could cause the temporary
inability to process transactions, send invoices or engage in similar normal
business activities.
Unrelated to the Year 2000 Issue, the Company intends to replace substantially
all of its accounting information systems software during 1998/1999. The Company
believes that with the conversion to the new accounting software, the Year 2000
Issue will not pose significant business or operating issues.
The Company is assessing its remaining software and other equipment to determine
whether any existing programs will have to be modified or replaced so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. This assessment is expected to be completed during the fourth
quarter of 1998.
The Company has initiated communications with the third-party providers of
certain of its administrative services, as well as its significant suppliers of
services and products to determine the extent to which the Company is vulnerable
to those parties' failures to remediate their own Year 2000 Issues. The Company
plans to have completed its evaluation of those suppliers during the first
quarter of 1999. The Company does not presently believe that third party Year
2000 issues will have a material adverse effect on the Company. However, there
can be no guarantee that the systems of other companies on which the Company's
operations or systems rely will be timely remedied or that a failure by another
company to remediate its systems in a timely manner would not have a material
adverse effect on the Company.
The Company expects to successfully implement the changes necessary to address
these Year 2000 Issues, and does not believe that the cost of such actions will
have a material adverse effect on the Company's financial position, results of
operations or liquidity. There can be no assurance, however, that there will not
be delays in, or increased costs associated with, the implementation of such
changes, and the Company's inability to implement such changes could have a
material adverse effect on the Company's business, operating results, and
financial condition.
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
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
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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.
The parties are mutually negotiating the terms of a proposed purchase agreement
involving the sale of the landlord's fee interest in the four communities to
ARVP II and settlement of all claims and have agreed to forebear from
prosecuting the litigation during the pendency of the escrow. Management is of
the opinion, based in part upon opinions of legal counsel, that an adverse
outcome is unlikely.
In November 1997, Emeritus Corporation ("Emeritus"), an unaffiliated competitor
of the Company, 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"), an unaffiliated competitor
of the Company. Atria is also named as a defendant in the suit, as are Lazard
Freres ("Lazard") and 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 the Company the right to be the acquiring party and then,
if the Company declines, obtaining the Company'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. The Company 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. On July 30, 1998, the Company's compliant was
amended to include allegations of fraud against Lazard, LFREI and Messrs.
Kenneth M. Jacobs, Robert P. Freeman and Murry N. Gunty.
On June 9, 1998, LFREI filed a cross-complaint against the Company, alleging
that the Company's preliminary communication with several potential sources of
capital to assist the Company in financing the acquisition of Atria in the event
that LFREI honors the Company's right of first offer or is ordered to do so by
the court constitutes an early termination event under the Amended and Restated
Stockholders Agreement dated as of October 29, 1997 by and among LFREI,
Prometheus Assisted Living LLC and the Company (the "Amended Stockholders
Agreement"). LFREI also contends that certain standstill provisions under the
Amended Stockholders Agreement have terminated.
On June 25, 1998, the Superior Court of the State of California, County of
Orange, granted the Company's request for a preliminary injunction to enjoin
LFREI and Kapson from closing any transaction to acquire Atria without the
Company's consent. The preliminary injunction remained in effect pending the
outcome of a court trial which began August 3, 1998. On August 14, 1998, the
Judge in the trial ruled from the bench against the Company and in favor of all
defendants on LFREI's motion for judgment on all of the Company's causes of
action, and ordered that the preliminary injunction be dissolved. LFREI's
cross-complaint has not yet been ruled upon. The Judge's formal written ruling
has not yet been filed in this matter. The Company plans to review that order
and assess whether to seek an appeal of the Judge's ruling.
Since the nature of litigation is that results cannot be predicated with
certainty, there can be no assurance the Company will prevail in any of the
foregoing litigation actions.
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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 matter to a vote of its security holders
during the quarter ended June 30, 1998 which were voted upon at the Company's
Annual Meeting of Stockholders held on June 3, 1998 and adjourned to June 19,
1998:
Election of members of the Class A Board of Directors of the Company (John
Booty, Robert P. Freeman and Howard G. Phanstiel).
The following votes cast for and withheld with respect to the Election
of Directors:
FOR WITHHELD
-----------------------
John A. Booty 7,213,813 727,650
Robert P. Freeman 7,125,772 815,691
Howard G. Phanstiel 7,121,848 819,615
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
4 Rights Agreement, dated May 14, 1998, betweeb ARV Assisted Living Inc.,
and ChaseMellon Shareholder Services LLC which includes the form of
Certificate of Determination of the Series D Junior Participating
Preferred Stock of ARV Assisted Living, Inc. as Exhibit A, the form of
Right Certificate as Exhibit B, and the Summary of Rights to Purchase
Preferred Shares as Exhibit C.
10.1 Purchase and Sale Agreement by and between 270 Center Associates,
Limited Partnership and ARV Assisted Living, Inc. dated as of February
12, 1998, incorporated by reference to Exhibit 10.1 to the Company's 8-K
filed with the Securities and Exchange Commission on May 11, 1998.
10.2 Amendment to Purchase and Sale Agreement by and between 270 Center
Associated, Limited Partnership and ARV Assisted Living, Inc. dated as
of March 2, 1998, incorporated by reference to Exhibit 10.2 to the
Company's 8-K filed with the Securities and Exchange Commission on May
11, 1998.
10.3 SecondAmendment to Purchase and Sale Agreement by and between 270 Center
Associated, Limited Partnership and ARV Assisted Living, Inc. dated as
of April 10, 1998, incorporated by reference to Exhibit 10.3 to the
Company's 8-K filed with the Securities and Exchange Commission on May
11, 1998.
10.4 Purchase and Sale Agreement by and between TH Group, Inc. and ARV
Assisted Living, Inc. dated as of February 12, 1998, incorporated by
reference to Exhibit 10.4 to the Company's 8-K filed with the Securities
and Exchange Commission on May 11, 1998.
10.5 Amendment to Purchase and Sale Agreement by and between TH Group, Inc.
and ARV Assisted Living, Inc. dated as of March 2, 1998, incorporated by
reference to Exhibit 10.5 to the Company's 8-K filed with the Securities
and Exchange Commission on May 11, 1998.
10.6 SecondAmendment to Purchase and Sale Agreement by and between TH Group,
Inc. and ARV Assisted Living, Inc. dated as of April 10, 1998,
incorporated by reference to Exhibit 10.6 to the Company's 8-K filed
with the Securities and Exchange Commission on May 11, 1998.
10.7 Purchase and Sale Agreement by and between The Hillsdale Group, LP and
ARV Assisted Living, Inc. dated as of February 12, 1998, incorporated by
reference to Exhibit 10.7 to the Company's 8-K filed with the Securities
and Exchange Commission on May 11, 1998.
10.8 Amendment to Purchase and Sale Agreement by and between The Hillsdale
Group, LP and ARV Assisted Living, Inc. dated as of March 2, 1998,
incorporated by reference to Exhibit 10.8 to the Company's 8-K filed
with the Securities and Exchange Commission on May 11, 1998.
10.9 Second Amendment to Purchase and Sale Agreement by and between The
Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of April 6,
1998, incorporated by reference to Exhibit 10.9 to the Company's 8-K
filed with the Securities and Exchange Commission on May 11, 1998.
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10.10 Executive Employment Agreement, dated December 5, 1997, by and between
ARV Assisted Living, Inc. and Howard G. Phanstiel.
10.11 Amendment to Executive Employment Agreement, effective December 5, 1997,
by and between ARV Assisted Living, Inc. and Howard G. Phanstiel.
10.12 Executive Employment Agreement, as amended, dated June 1, 1998, by and
between ARV Assisted Living, Inc. and Douglas M. Pasquale.
10.13 Employment Agreement, as amended, dated June 15, 1998, by and between
ARV Assisted Living, Inc. and Patricia J. Gifford, MD.
15 Independent Accountants' Review Report dated August 14, 1998
27 Financial Data Schedule
99.1 Complaint in ARV Assisted Living, Inc. v. Lazard Freres Real Estate
Investors LLC, et al., case no. 787788, incorporated by reference to the
Company's 8-K filed with the Securities and Exchange Commission on May
26, 1998.
(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 June 30, 1998:
The Company's current report on Form 8-K filed with the SEC on May 11, 1998,
reported under Item 2, on April 16, 1998, purchases of two assisted living
communities, a general partnership interest and rights under four management
agreements were completed pursuant to 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, dated February
12, 1998, as amended.
The Company's current report on Form 8-K filed with the SEC on May 19, 1998,
reported under Item 2, on May 4, 1998 and May 13, 1998, purchases of two
assisted living communities were completed pursuant to a Purchase and Sale
Agreement with 270 Center Associates, Limited Partnership dated February 12,
1998, as amended. On May 18, 1998, the Company acquired the rights under a
sublease agreement and related documentation for an assisted living community
from The Hillsdale Group, L.P., an unrelated third party, pursuant to a Purchase
and Sale Agreement dated February 12, 1998, as amended.
The Company's current report on Form 8-K filed with the SEC on May 19, 1998,
reported under Item 5, on May 1, 1998, the Company reincorporated as a Delaware
corporation.
The Company's current report on Form 8-K filed with the SEC on May 26, 1998,
reported under Item 5, 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., from acquiring Atria Communities.
The Company's current report on Form 8-K filed with the SEC on June 22, 1998,
reported under Item 5, effective June 1, 1998, the Company named Douglas M.
Pasquale as the President and Chief Operating Officer and effective June 15,
1998, named Patricia J. Gifford, MD as the Chief Medical Officer.
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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: August 14, 1998
By: /s/Paul Kuliev
-------------------------------
Vice President, Controller
(Duly authorized officer)
Date: August 14, 1998
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
4 Rights Agreement, dated May 14, 1998, between ARV Assisted Living
Inc., and ChaseMellon Shareholder Services LLC which includes the
form of Certificate of Determination of the Series D Junior
Participating Preferred Stock of ARV Assisted Living, Inc. as
Exhibit A, the form of Right Certificate as Exhibit B, and the
Summary of Rights to Purchase Preferred Shares as Exhibit C.
10.1 Purchase and Sale Agreement by and between 270 Center Associates,
Limited Partnership and ARV Assisted Living, Inc. dated as of
February 12, 1998, incorporated by reference to Exhibit 10.1 to
the Company's 8-K filed with the Securities and Exchange
Commission on May 11, 1998.
10.2 Amendment to Purchase and Sale Agreement by and between 270 Center
Associated, Limited Partnership and ARV Assisted Living, Inc.
dated as of March 2, 1998, incorporated by reference to Exhibit
10.2 to the Company's 8-K filed with the Securities and Exchange
Commission on May 11, 1998.
10.3 SecondAmendment to Purchase and Sale Agreement by and between 270
Center Associated, Limited Partnership and ARV Assisted Living,
Inc. dated as of April 10, 1998, incorporated by reference to
Exhibit 10.3 to the Company's 8-K filed with the Securities and
Exchange Commission on May 11, 1998.
10.4 Purchase and Sale Agreement by and between TH Group, Inc. and ARV
Assisted Living, Inc. dated as of February 12, 1998, incorporated
by reference to Exhibit 10.4 to the Company's 8-K filed with the
Securities and Exchange Commission on May 11, 1998.
10.5 Amendment to Purchase and Sale Agreement by and between TH Group,
Inc. and ARV Assisted Living, Inc. dated as of March 2, 1998,
incorporated by reference to Exhibit 10.5 to the Company's 8-K
filed with the Securities and Exchange Commission on May 11, 1998.
10.6 SecondAmendment to Purchase and Sale Agreement by and between TH
Group, Inc. and ARV Assisted Living, Inc. dated as of April 10,
1998, incorporated by reference to Exhibit 10.6 to the Company's
8-K filed with the Securities and Exchange Commission on May 11,
1998.
10.7 Purchase and Sale Agreement by and between The Hillsdale Group, LP
and ARV Assisted Living, Inc. dated as of February 12, 1998,
incorporated by reference to Exhibit 10.7 to the Company's 8-K
filed with the Securities and Exchange Commission on May 11, 1998.
10.8 Amendment to Purchase and Sale Agreement by and between The
Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of
March 2, 1998, incorporated by reference to Exhibit 10.8 to the
Company's 8-K filed with the Securities and Exchange Commission on
May 11, 1998.
10.9 Second Amendment to Purchase and Sale Agreement by and between The
Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of
April 6, 1998, incorporated by reference to Exhibit 10.9 to the
Company's 8-K filed with the Securities and Exchange Commission on
May 11, 1998.
10.10 Executive Employment Agreement, dated December 5, 1997, by and
between ARV Assisted Living, Inc. and Howard G. Phanstiel.
10.11 Amendment to Executive Employment Agreement, effective December 5,
1997, by and between ARV Assisted Living, Inc. and Howard G.
Phanstiel.
10.12 Executive Employment Agreement, as amended, dated June 1, 1998, by
and between ARV Assisted Living, Inc. and Douglas M. Pasquale.
10.13 Employment Agreement, as amended, dated June 15, 1998, by and
between ARV Assisted Living, Inc. and Patricia J. Gifford, MD.
15 Independent Accountants' Review Report dated August 14, 1998
27 Financial Data Schedule
99.1 Complaint in ARV Assisted Living, Inc. v. Lazard Freres Real
Estate Investors LLC, et al., case no. 787788, incorporated by
reference to the Company's 8-K filed with the Securities and
Exchange Commission on May 26, 1998.