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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
Commission File Number: 0-26980
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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, Suite D-1, 92626
Costa Mesa, California (Zip Code)
(Address of Principal Executive Offices)
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Registrant's Telephone Number, Including Area Code: (714) 751-7400
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class on Which Registered
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Common Stock, No Par Value American Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
As of March 27, 2001, the aggregate market value of the voting stock held by
non-affiliates of registrant was $11,348,798 (for purposes of calculating the
preceding amount only, all directors, executive officers and shareholders
holding 5% or greater of the registrant's Common Stock are assumed to be
affiliates). The number of shares of Common Stock of the registrant outstanding
as of March 27, 2001 was 17,459,689.
DOCUMENTS INCORPORATED BY REFERENCE:
Portion of Registrant's definitive Proxy Statement for its 2001 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.
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ARV ASSISTED LIVING, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2000
PAGE
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PART I
Item 1: Business.................................................... 3
Item 2: Properties.................................................. 15
Item 3: Legal Proceedings........................................... 16
Item 4: Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5: Market for the Registrant's Common Equity and Related
Shareholder Matters....................................... 18
Item 6: Selected Financial Data..................................... 19
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Item 7a: Quantitative and Qualitative Disclosures About Market Risk.. 28
Item 8: Financial Statements and Supplementary Data................. 29
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 29
PART III
Item 10: Directors and Executive Officers of the Registrant.......... 29
Item 11: Executive Compensation...................................... 29
Item 12: Security Ownership of Certain Beneficial
Owners and Management..................................... 29
Item 13: Certain Relationships and Related Transactions.............. 29
PART IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................... 30
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PART I
ITEM 1. BUSINESS
GENERAL
ARV Assisted Living, Inc. ("ARV" or the "Company"), a Delaware corporation
formed in 1998, is one of the largest operators of licensed assisted living
communities ("ALCs") in the United States. We are a fully integrated provider of
assisted living accommodations and services that operates, acquires and develops
ALCs. We have been involved in the senior housing business for more than 20
years. Our operating objective is to provide high quality, personalized assisted
living services to senior residents in a cost-effective manner, while
maintaining residents' independence, dignity and quality of life. Our ALCs offer
a combination of housing, personalized support services and health care in a
non-institutional setting. They are designed to respond to the individual needs
of elderly residents who require assistance with certain activities of daily
living, but who do not require the intensive nursing care provided in a skilled
nursing facility.
In 1999 we embarked on a strategy to focus our efforts in the western United
States. To this end we have divested ourselves of many properties outside the
western United States and have put certain other of our non-core properties up
for sale. We do not have current plans to expand our operations. At December 31,
2000, we operated 55 ALCs containing 6,721 units, all of which are located in
the United States. We currently have no ALCs under construction.
We operate a total of 55 ALCs, 15 of which are owned by us, 33 which are
leased by us and 7 which are managed by us. Owned ALCs ("Owned ALCs") are owned
by us directly, or by affiliated limited partnerships or limited liability
companies for which we serve as managing general partner or member and community
manager and in which we have a majority ownership interest ("Affiliated
Partnerships"). Leased ALCs ("Leased ALCs") are operated by us under long-term
operating leases for our own account or for Affiliated Partnerships in which we
have a majority ownership interest. Managed ALCs are operated by us on behalf of
an affiliated partnership (in which we do not have a majority ownership), joint
ventures or an unrelated third-party. We believe that this blend of ownership,
leasehold and management interest in our ALCs allows us to fund our operations
in a balanced, efficient manner.
We have financed our capital expenditures and operations through lease and
mortgage financing with health care real estate investment trusts ("REITs"),
private companies, commercial banks and a convertible subordinated debt
issuance. We plan to divest our ALCs that do not meet our financial objectives
or that do not lie within our primary geographic focus, the western United
States. To this end, in December 1999, we put our assets outside the western
United States up for sale.
We intend to continue our focus on "private-pay" residents, who pay for our
services from their own funds or through private insurance. Currently,
approximately 97% of our residents are private-pay, while the remaining 3% of
the residents participate in the Supplemental Security Income ("SSI") program.
Certain states have enacted legislation enabling ALCs to receive Medicaid
funding similar to funding generally provided to skilled nursing facilities.
However, we do not try to attract residents with Medicaid funding since it is
insufficient to cover the cost of our accommodations and services.
Our ALCs provide residents with accommodations, basic care services and
assisted living services. Our residents' average age is 84.6 years and they
often require assistance with certain basic activities of daily living. We
provide our residents with private or semi-private rooms or suites, meals in a
restaurant-style setting, housekeeping, linen and laundry services, activities
programs, utilities, and transportation in a van or minibus. For an additional
cost, we also provide assisted living services to residents who require help
with other activities of daily living, such as bathing, grooming, dressing,
personal hygiene, medication management and escort services to meals and
activities.
Most ALCs offer a Wellness Program that arranges for professional care
providers to deliver certain health care services to our residents that our ALCs
are not licensed or equipped to provide.
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THE ASSISTED LIVING MARKET
Assisted Living. Assisted living is a stage in the elder care continuum,
midway between home-based care for independent and lower acuity residents and
the more acute level of care provided by skilled nursing facilities and acute
care hospitals. Assisted living represents a combination of housing,
personalized support services, and health care designed to respond to the
individual needs of the members of the senior population who need help with
activities of daily living, but do not need the medical care provided in a
skilled nursing facility.
We believe our assisted living business benefits from significant trends
affecting the long-term care industry. The first is an increase in the demand
for elder care resulting from the continued aging of the U.S. population, with
the average age of our residents falling within the fastest growing segment of
the U.S. population. While increasing numbers of Americans are living longer and
healthier lives, many gradually require increasing assistance with activities of
daily living, and are not able to continue to age in place at home. The second
trend is the effort to contain health care costs by the government, private
insurers and managed care organizations by limiting lengths of stay, services,
and reimbursement to patients in acute care hospitals and skilled nursing
facilities. Assisted living offers a cost-effective, long-term care alternative
while preserving a more independent lifestyle for seniors who do not need the
broader array of medical services that acute care hospitals and skilled nursing
facilities are equipped to provide. As of December 31, 2000, monthly revenue
generated by our ALCs averaged $2,169 per occupied unit, compared with $2,087
per occupied unit as of December 31, 1999. Other trends include increases in the
financial net worth of the elderly population, the number of individuals living
alone, and the number of women who work outside the home who are less able to
care for their elderly relatives. We believe these trends will result in a
growing demand for assisted living services and communities.
Aging Population. The primary consumers of long-term health care services
are persons over the age of 65. This group represents one of the fastest growing
segments of the population. According to U.S. Bureau of the Census data, the
segment of the population over 65 years of age is currently 13% of the total
population, or 35 million people. That number is projected to grow to 20% of the
total population, or 70 million people, by the year 2030. Additionally, the
number of people aged 85 and older, which comprises the largest percentage of
residents at long-term care facilities, is currently 4.4 million and is
projected to increase to 8.9 million by the year 2030.
Limitation on the Supply of Long-Term Care Facilities. The majority of
states in the U.S. have enacted Certificate of Need or similar legislation,
which generally limits the construction of skilled nursing facilities and the
addition of beds or services in existing skilled nursing facilities. High
construction costs, limitations on government reimbursement for the full cost of
construction, and start-up expenses also constrain growth in the supply of such
facilities. Such legislation benefits the assisted living industry by limiting
the supply of skilled nursing beds for the elderly. Cost factors are placing
pressure on skilled nursing facilities to shift their focus toward higher acuity
care, which enables them to charge more. This contributes to a shortage of lower
acuity care and thereby increases the pool of potential assisted living
residents.
While Certificates of Need generally are not required for ALCs, except in a
few states, most states do require assisted living providers to license their
communities and comply with various regulations regarding building requirements
and operating procedures and regulations. States typically impose additional
requirements on ALCs over and above the standard congregate care requirements.
Further, the limited pool of experienced assisted living staff and management,
as well as the costs and start-up expenses to construct an ALC, provide an
additional barrier to entry into the assisted living business.
Cost Containment Pressures of Health Reform. In response to rapidly rising
health care costs, both government and private pay sources have adopted cost
containment measures that encourage reduced lengths of stay in hospitals and
skilled nursing facilities. The federal government has acted to curtail
increases in health care costs under Medicare by limiting acute care hospital
and skilled nursing facility reimbursement to pre-established fixed amounts.
Private insurers have also begun to limit reimbursement for medical services in
general to predetermined "reasonable" charges. Managed care organizations, such
as health maintenance organizations ("HMOs") and preferred provider
organizations ("PPOs"), are reducing hospitalization costs by negotiating
discounted rates for hospital services and by monitoring and decreasing
hospitalization. We anticipate that both HMOs and PPOs increasingly may direct
patients away from higher cost nursing care facilities into less expensive ALCs.
These cost containment measures have produced a "push-down" effect. As the
number of patients being "pushed down" from acute care hospitals to skilled
nursing facilities increases, the demand for residential options such as ALCs to
serve patients who historically have been served by skilled nursing facilities
will also increase. In addition, skilled nursing facility operators are
continuing to focus on improving occupancy and expanding services (and fees) to
subacute patients requiring very high levels of nursing care. As the
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acuity level of skilled nursing facility patients rises, the supply of nursing
facility beds will be filled by patients with higher acuity needs who pay higher
fees. This will provide opportunities for ALCs to increase their occupancy and
services to residents requiring lower levels of care than patients in skilled
nursing facilities generally receive.
OUR ASSISTED LIVING SERVICES
We provide services and care which are designed to meet the individual needs
of our residents. The services provided are designed to enhance both the
physical and mental well-being of seniors in each of our ALCs by promoting their
independence and dignity in a home-like setting. Our assisted living program
includes the following:
o Personalized Care Plan. The focus of our strategy is to meet the
specific needs of each resident. We customize our services beginning
with the admissions process, at which time the ALC's management staff,
the resident, the resident's family, and the resident's physician
discuss the resident's needs and develop a "personalized" care plan. If
recommended by the resident's physician, additional health care or
medical services may be provided at the community by a third-party home
health care agency or other medical provider. The care plan is reviewed
and modified on a regular basis.
o Basic Service and Care Package. The basic service and care package at
our ALCs generally includes:
-- meals in a restaurant-style, "home-like" setting;
-- housekeeping;
-- linen and laundry service;
-- social and recreational programs;
-- utilities; and
-- transportation in a van or minibus.
Other care services can be provided under the basic package based upon the
individual's personalized health care plan. Our policy is to charge base rents
that are competitive with similar ALCs in the local market. While the amount of
the fee for the basic service package varies from community to community, the
average basic monthly rental rate per unit was approximately $1,811 per month as
of December 31, 2000, compared with an average of $1,733 as of December 31,
1999.
o Additional Services. Our assisted living services program offers levels
of care in addition to the services offered in the basic package. The
level of care a resident receives is determined through an assessment of
a resident's physical and mental health. The assessment is conducted by
the community's assisted living director, with input from other staff
members. The six-tiered level of care rate structure is based on a point
system. We assign points to the various care tasks required by the
resident, based on the amount of staff time and expertise needed to
accomplish the tasks. The point scale and pricing are part of the
admissions agreement between the community, the resident and the
resident's family. The community performs reassessments after the
initial 30 days and periodically throughout the resident's stay to
ensure that the level of care we provide corresponds to changes in a
resident's condition. The types of services included in the assessment
point calculation are:
-- Medication management
-- Assistance with dressing and grooming
-- Assistance with showering
-- Assistance with continence
-- Escort services
-- Status checks related to a recent hospitalization, illness, history
of falls or injuries
-- Help with psychosocial needs, such as memory deficit disorder
-- Special nutritional needs and assistance with eating
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In addition to the above services, we provide other levels of assistance to
residents at selected ALCs in order to meet individual needs, such as assistance
with diabetic care and monitoring, catheter, colostomy and ileosotomy care,
minor wound care needs and light to moderate transferring needs. Some of our
ALCs also operate memory loss units for residents with Alzheimer's disease and
related dementias. These units provide the attention and services required by
cognitively impaired residents to maintain a high quality of life in a secure
environment. Specially trained staffs provide personalized care, specialized
activity programs and oversee medication regimens.
In addition to the base service package, we typically charge between $375
and $1,700 per month or more for higher levels of assisted living services. Fee
levels vary from community to community and we may charge additional fees for
other specialized assisted living services. We expect that an increasing number
of residents will use additional levels of services as they age in our ALCs. Our
internal growth plan is focused on increasing revenue by continuing to improve
our ability to provide residents with these services.
The average monthly revenue per occupied unit for both the basic service
package and the assisted living services increased to $2,158 from $2,070 for the
year ended December 31, 2000 and 1999, respectively. There can be no assurance
that any ALC will be substantially occupied at assumed rates at any time. In
addition, we may only be able to lease up our ALCs to full occupancy at rates
below our set rates due to limitations imposed on rates by local market
conditions or other factors. Even if we achieve substantial occupancy at our set
rates, our set rates may not allow for our projected cost recovery and profit if
operating expenses increase. In addition, in order to increase our set rates, we
must provide advance notice of rate increases, generally at least 30 days.
Because of this advance notice requirement, we are not able to reflect cost
increases in our set rates until at least several months after such cost
increases occur.
Wellness Program. We have implemented a Wellness Program for residents of
our communities designed to identify and respond to changes in a resident's
health or condition. Together with the resident and the resident's family and
physician, as appropriate, we design a solution to fit that resident's
particular needs. We monitor the physical and mental well-being of our
residents, usually at meals and other activities, and informally as the staff
performs services around the facility. Through the Wellness Program we work
with:
o home health care agencies to provide services the community cannot
provide;
o physical and occupational therapists to provide services to residents in
need of such therapy; and
o long-term care pharmacies to facilitate cost-effective and reliable
ordering and distribution of medications.
We arrange for these services to be provided to residents as needed in
consultation with their physicians and families. At the present time, most of
our ALCs have a comprehensive Wellness Program.
GROWTH STRATEGIES
Overview. Our revised strategy to grow earnings and achieve profitability is
to increase our focus on the operations of our current ALCs and reduce the level
of development and acquisition activity we historically pursued. To strengthen
the operations of our ALCs, we will focus on improving margins by increasing
occupancy rates, raising or maintaining pricing structures to ensure that our
rates are competitive with comparable facilities in our local markets, and
expanding the level and depth of our assisted living services. Although our
development has stopped, we will continue efforts to cluster our portfolio of
ALCs within certain geographic areas through the acquisition or divestiture of
selected assets. By concentrating on a clustering strategy we expect to increase
the efficiency of our management and marketing resources and to achieve broader
economies of scale.
Our strategy is to target areas where there is a need for ALCs based on
demographics and market studies. In addition to acquiring ALCs through direct
ownership and the use of long-term leases, we may also divest our ALCs that do
not expand or enhance one of our clusters or do not meet our financial
objectives. During 2000 we completed the sale of three of our ALCs that were
outside of the western United States. Consequently, as of December 31, 2000, a
substantial portion of our business and operations were conducted in California,
where 37 of the 55 ALCs we operate are located.
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The market value of our properties and the income generated from ALCs we
own, manage or lease could be negatively affected by changes in local and
regional economic conditions and by acts of nature. A worsening of local
economic conditions could have a negative effect on our business.
Development. Due to market conditions, the development of ALCs has been
curtailed during 2000. Although we did not abandon any of our current projects
we did not begin any new ones. We do not expect to develop any new facilities in
the foreseeable future.
In 1998, we entered into joint ventures ("LLCs") designed to help us finance
development and renovation projects and to mitigate the impact of start-up
losses associated with the opening of newly constructed ALCs. The joint ventures
were formed to finance and manage the substantial renovation of existing ALCs
acquired in 1998 in the Hillsdale Transaction and to construct three new
communities on land sites we own. Participants in the joint ventures with us
include a third-party investor and a third-party developer. The LLCs have
contracted with the developer to provide development services to perform the
renovation and construction. We account for our investment in the joint ventures
using the equity method and losses incurred by the LLCs will be allocated
disproportionately to the joint venture partners based upon their assumption of
risk. We have an option to purchase the joint venturers' interest in the LLCs
when the ALCs reach stabilization, at a purchase price that is the greater of
fair market value or an amount that generates a guaranteed rate of return on the
joint venturers' capital contribution. In December 2000, we determined that the
value of our investment was impaired based upon projected cash flow, and wrote
down the investment to estimated fair value.
We do not plan to develop new ALCs during 2001. In 2000 we completed three
development projects that were in progress at December 31, 1999.
Acquisitions. In evaluating possible acquisitions, we consider:
o the location, construction quality, condition and design of the ALC;
o the current and projected cash flow of the community and its anticipated
ability to increase revenue through rent and occupancy increases,
additional assisted living services and management; and
o whether we can acquire the community below replacement cost.
Our sources for prospective acquisitions range from Affiliated Partnerships
to management contracts with potential ALC sellers, to our local and regional
personnel who monitor the assisted living market in their area. In certain cases
we may also target additional third-party management contracts. However, we do
not intend to continue our past growth rate and may not expand at all in the
future. Instead we will focus greater attention and resources on enhancing the
profitability of our existing core operations and on leasing up new developments
at a faster rate.
Historically we have financed many of our acquisitions using equity and debt
and through direct long-term operating lease transactions with institutional
investors such as health care REITs, and may continue to do so in the future. In
long-term operating lease transactions, we typically arrange the sale of the
prospective assisted living community to a REIT or other institutional investor
while concurrently entering into a long-term operating lease for the facility.
Our initial cost is generally limited to a security deposit that is typically
provided through standby letters of credit. Thereafter, we are obligated to make
certain rental payments (which may include an additional amount related to
revenue of the community) for the term of the lease. While we have financed a
portion of our direct ownership of ALCs with secured debt from REITs, we do not
have any participation or sponsorship interest in these entities. While we make
our best estimates in projecting lease-up costs and expenses as well as the
achievement of rent stabilization, our failure to generate sufficient revenue
could result in an inability to meet minimum rent obligations under our
long-term operating leases.
Increase in Sales of Additional Assisted Living Services. We believe that
many custodial services provided in skilled nursing facilities are available in
our ALCs at approximately two-thirds of the cost at skilled nursing facilities.
We believe that this differential will enable us to attract additional
residents. By increasing the use of these services by our residents, we believe
residents will be able to age in place at our ALCs over a longer period of time,
rather than having to transfer to more expensive skilled nursing facilities
until absolutely necessary.
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We seek to enhance and increase the amount and diversity of assisted living
services we provide through:
o the continued education of the senior community, and particularly the
residents and their families, concerning the cost-effectiveness of
receiving additional services in an assisted living community;
o the continued development and refinement of assisted living programs
designed to meet the needs of our residents as they age in place; and
o the consistent delivery of quality services for residents.
Employees
At February 28, 2001 we had approximately 2,810 employees. None of our
employees are members of unions and we believe that our relations with our
employees are good.
CAPITAL REQUIREMENTS
Our operating leases require security deposits. At December 31, 2000, the
amount of security deposits was $9.8 million either in cash or letter of credit
supported by cash.
In December 2000, we refinanced four of our ALCs that are held by
majority-owned partnerships to:
o pay off existing debt that matured in 2001; and
o borrow against the increased value of these properties.
The principal repayment of the refinanced debt is based upon a 35 year
amortization schedule with fixed interest rates ranging from 8.5%-8.6% including
mortgage insurance of 0.5%.
In our fiscal year ended December 31, 1999, we began retiring portions of
our 6 3/4% convertible subordinated debt due in 2006 (the "Convertible
Subordinated Notes") from time to time. During our fiscal year 2000 we paid a
total of $9.6 million and 781,025 shares of stock to some of our bondholders in
exchange for a total of $33.0 million aggregate principal amount of the
Convertible Subordinated Notes that were held by those bondholders. These
transactions resulted in an extraordinary gain of $20.6 million net of tax and
costs for our fiscal year ended December 31, 2000. Through these transactions,
we have retired an aggregate of $42.2 million of our Convertible Subordinated
notes yielding extraordinary gains, net of tax and costs, of $27.9 million to
date.
We will be required from time to time to incur additional indebtedness or
issue additional debt or equity securities to finance our business, including
the acquisition of ALCs as well as other capital expenditures and additional
funds to meet increased working capital requirements. We may finance future
acquisitions through a combination of our cash reserves, asset sales, cash flow
from operations, leasing of additional ALCs, sale/leaseback arrangements with
respect to our owned ALCs, and additional indebtedness or public or private
sales of debt securities or capital stock. We have an obligation to fund
start-up losses incurred in the operation of the ALCs prior to the achievement
of stabilized operations for the newly constructed ALCs. The amount of such
obligations are contingent on our ability to achieve profitable operations, and
the probable amount of these obligations cannot be definitively quantified.
Nonetheless, we believe that we have made adequate provision for such
obligations in our financing plan. There can be no assurance, however, that
funds will be available on terms favorable to us, that such funds will be
available when needed, or that we will have adequate cash available for such
requirements.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
Our business, results of operations and financial condition are subject to
many risks, including those set forth below. Certain statements contained in
this report, including without limitation statements containing the words
"believes," "anticipates," "expects," and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. We have made
forward-looking statements in this report concerning, among other things, the
impact of future acquisitions and developments, if any, and the level of future
capital expenditures. These statements are only predictions; however, actual
events or results may differ materially as a result of risks we
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face. These risks include, but are not limited to, those items discussed below.
Certain of these factors are discussed in more detail elsewhere in this report,
including without limitation under the captions "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Given
these uncertainties, we caution readers not to place undue reliance on such
forward-looking statements, which speak only as of the date of this report. We
disclaim any obligation to update any such factors or to publicly announce the
result of any revisions to any of the forward-looking statements contained here
to reflect future events or developments.
Certain risks are inherent with the operation of ALCs. These risks include,
but are not limited to:
o our history of losses;
o our ability to access capital necessary for operations, acquisition and
development;
o our ability to sustain and manage growth and to successfully integrate
new ALCs into our portfolio;
o competition;
o our ability to meet our indebtedness, lease and other obligations;
o our liabilities as a general partner of Affiliated Partnerships;
o dependence on reimbursement from third-party payors;
o governmental regulation; and
o risks common to the assisted living industry.
HISTORY OF LOSSES
For the years ended December 31, 2000, 1999, and 1998, we had net income of
approximately $6.5 million, and net losses of $27.7 million, and $46.0 million,
respectively. At December 31, 2000, our accumulated deficit was approximately
$98.6 million.
Our net income for the year ended December 31, 2000 primarily resulted from:
o extraordinary gain, net of tax, for the retirement of subordinated
public debt: offset by
o impairment losses on joint venture LLCs and loss from operations.
Our net loss for the year ended December 31, 1999 primarily resulted from:
o start-up losses on newly-developed ALCs;
o the impairment losses on ALCs held for sale;
o litigation judgement expenses and settlement of a lawsuit;
o legal expenses for and settlement of a lawsuit; and
o cumulative effect of change in accounting principle.
Our net loss for the year ended December 31, 1998 primarily resulted from:
o start-up losses on newly-developed ALCs;
o the impairment losses on properties and ALCs held for sale;
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o legal expenses on a lawsuit with LFREI and related parties;
o costs incurred in our proxy fight and litigation with Emeritus;
o interest rate lock fees paid in connection with the failed refinancing
of our majority-owned partnerships; and
o severance and other expenses related to changes in executive management
and layoffs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." We cannot provide assurance that the risks associated with
operating our ALCs can be managed to reduce or eliminate start-up losses, that
other similar costs and expenses or losses will not occur in the future. See
"-- Indebtedness, Lease and Other Obligations," "-- General Partner Liability
and Status," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
DEPENDENCE ON THE AVAILABILITY OF ADEQUATE CAPITAL
We depend heavily on our ability to obtain adequate capital to fund our
operations. Our estimated capital needs for operations over the next 12 months
are $ 5.5 million. As of December 31, 2000 we had $ 16.8 million in cash and
cash equivalents and working capital of $10.5 million. This means we have cash
and cash equivalents to meet our estimated capital needs for operations for the
next 12 months. If, however our operating costs exceed our projections, we may
have to obtain significant additional financing. There is no assurance that we
will be able to obtain the financing on a timely basis, if at all. If we are
unable to obtain the required financing on a timely basis we may not be able to
execute our business plan.
RAPID GROWTH
Management of Growth. We have experienced rapid growth over the past several
years. To enable us to more effectively manage growth, we slowed the pace of
acquisitions and development in fiscal 1999 and fiscal 2000. We do not expect to
have any new acquisitions or development in fiscal 2001, although we expect to
complete developments commenced prior to fiscal 2001. See "-- Risks Common to
our Assisted Living Operations." Our failure to effectively manage our growth
could have a material adverse effect on operating results.
External Growth. We may in the future enter into agreements to acquire
properties for development and for the acquisition of existing ALCs that are
subject to certain conditions. We cannot assure that one or more of such
acquisitions will be completed, that we will be able to find additional suitable
properties and ALCs, or that we can obtain financing to continue to acquire or
develop ALCs and property on which to build them. We expect to experience a
slowdown in growth through acquisition of ALCs due to shortages of suitable ALCs
available at attractive prices, due to limitations on obtaining financing, and
due to our intention to manage growth effectively as noted above.
COMPETITION
We operate 55 communities in 38 separate markets. Competition to increase or
maintain high occupancies is significant with 146 different competitors
including 27 national senior housing companies. We are continuing to grow within
these competitive markets by providing excellent value in residential amenities,
staff hospitality, and personal care services.
The health care industry is highly competitive and we expect that the
assisted living business, in particular, will become more competitive in the
future. Sources of competition include:
o family members providing care at home;
o numerous local, regional and national providers of assisted living and
long-term care whose facilities and services range from home-based
health care to skilled nursing facilities; and
o acute care hospitals.
In addition, we believe that as assisted living receives increased attention
among the public and insurance companies, new competitors focused on assisted
living will enter the market, including hospitality companies expanding into the
market. Some of our
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competitors operate on a not-for-profit basis or as charitable organizations,
while others have, or are capable of obtaining, greater financial resources than
those available to us.
We also expect to face increased competition for the acquisition and
development of ALCs. Some of our present and potential competitors are
significantly larger or have, or may obtain, greater financial resources than we
have. These forces could limit our ability to attract residents, attract
qualified personnel, expand our business, or increase the cost of future
acquisitions, each of which could have a material adverse effect on our
financial condition, results of operations and prospects.
INDEBTEDNESS, LEASE AND OTHER OBLIGATIONS
We have financed, and may continue to finance, the acquisition of ALCs
through a combination of loans, leases and other obligations. As of December 31,
2000, we had outstanding consolidated indebtedness of $100.2 million, including
$15.3 million of our 2006 Convertible Notes, whose holders have the right to
convert such notes into our common stock at any time on or before the notes
mature. Subsequent to December 31, 2000, we were able to refinance additional
ALCs leaving $15.3 million in notes maturing within two years. As a result, we
will devote a portion of our cash flow to debt service. There is a risk that we
will not be able to refinance our maturing note obligations on terms favorable
to us, or that we will not be able to generate sufficient cash flow from
operations to make required interest and principal payments.
With respect to loans totaling $45.0 million we are the general partner of
certain limited partnerships that serve as the sole members of the three
borrowing entities formed as limited liability companies. Although a member of a
limited liability company is not personally liable for any contract or other
obligation of that entity, we delivered limited guaranties in connection with
the loans. Due to the limited guaranties, we assumed liability for repayment of
the loan indebtedness as a result of fraudulent or intentional misconduct
regarding the mortgaged properties, an unconsented transfer of a mortgaged
property, a change of control by borrower, or violation of hazardous materials
covenants. Also, we guaranteed the borrower's obligation to rebalance the loans
upon breach of debt service coverage obligations.
At December 31, 2000, approximately $30.3 million of our indebtedness bore
interest at floating rates. We may incur indebtedness in the future that may
also bear interest at a floating rate, or be fixed at some time in the future.
Therefore, increases in prevailing interest rates could increase our interest
payment obligations and could have an adverse effect on our business, financial
condition and operating results. In addition, we have guaranteed mortgage and
construction debt for the benefit of certain Affiliated Partnerships of up to
approximately $45.6 million, including $45.0 million outstanding at December 31,
2000. On January 16, 2001 we sold our interest in these Affiliated Partnerships
and thus eliminated our guaranty of the loan indebtedness.
As of December 31, 2000, we are a party to long-term operating leases for
certain of our Leased ALCs. These leases require minimum annual lease payments
in the aggregate amount of $31.6 million for December 31, 2001 and $32.5 million
for December 31, 2002. These leases are non-cancelable, and typically have an
initial term of 10 to 15 years. In March 2001 we restructured 16 ALCs leases
into two lease pools of 8 ALCs each. In each restructured lease, the lease
termination date was extended through fiscal 2021.
GENERAL PARTNER LIABILITY AND STATUS
We, directly or through our subsidiaries, are a general partner in 14
partnerships as of December 31, 2000. As a general partner we are liable for
partnership obligations such as partnership indebtedness, potential liability
for construction defects, including those presently unknown or unobserved, and
unknown or future environmental liabilities. The cost of any such obligations or
claims, whether we bear part or all of the cost, could materially adversely
affect our operating results and financial condition.
We manage each affiliated partnership property according to a written
management contract. The managing general partner of the partnership may cancel
some contracts with 30 or 60 days' notice. Limited partners in each partnership
may take action on such matters as the removal of the general partners, the
request for approval or disapproval of a sale of a property owned by a
partnership, or other actions affecting the properties or the partnership. Where
we are the general partner of the partnership, termination of the contracts
generally would require removal of the Company as general partner by the vote of
a majority of the holders of limited partner interests. We would lose management
fees if those contracts were terminated.
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DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYERS
GeriCare was a former subsidiary of the Company that specialized in
rehabilitative services, including speech, occupational and physical therapy.
Although we disposed of GeriCare in 1998, revenue received or earned before it
was disposed that directly or indirectly was billed to the Medicare program is
subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, audits and funding restrictions. All could potentially
limit or reduce reimbursement levels for GeriCare's services.
Medicare reimbursed GeriCare monthly for services provided on a cost basis,
subject to certain adjustments. GeriCare submitted cost reports to the Health
Care Financing Administration ("HCFA") on an annual basis and was subject to
having amounts previously reimbursed adjusted retroactively. The result of a
retroactive reimbursement would be either a requirement to repay the amount
previously reimbursed or an adjustment downward in future reimbursements for
services rendered, or both. We have submitted the required documents to HCFA for
an audit that began in October 1999, and have prepared cost reports that were
filed as of August 22, 1996 and thereafter. Due to delay in recovering these
funds and on going audit we have reserved for the full outstanding receivable at
December 31, 2000.
GOVERNMENT REGULATION
Assisted Living. Health care is subject to extensive regulation and frequent
regulatory change. Currently, no federal rules explicitly define or regulate
assisted living. A number of states also have not yet enacted specific assisted
living regulations. However, we are and will continue to be subject to varying
degrees of regulation and licensing by health or social service agencies and
other regulatory authorities in the various states and localities where we
operate or intend to operate. Changes in, or the adoption of, such laws and
regulations, or new interpretations of existing laws and regulations, could have
a significant effect on methods and costs of doing business, and on
reimbursement levels from governmental and other payers. In addition, the
President and Congress have proposed in the past, and may propose in future,
health care reforms that could impose additional regulations on the Company or
limit the amounts that we may charge for our services. We cannot assess the
ultimate timing and impact that any pending or future health care reform
proposals may have on the assisted living, home health care, skilled nursing or
health care industry in general. No assurance can be given that any such reform
will not have a material adverse effect on the business, financial condition or
results of operations of the Company.
SSI Payments. A portion of our revenue comes from residents who receive SSI
payments. During 2000, 3% of our residents were on the SSI program. Revenue from
these residents is generally lower than the amounts we receive from our other
residents and could be subject to payment delay. We cannot assure that our
percentage of revenue received from SSI will not increase, or that the amounts
paid by SSI programs will not be further limited. In addition, if we were to
become a provider of services under the Medicaid program, we would be subject to
Medicaid regulations designed to limit fraud and abuse. Violations of these
regulations could result in civil and criminal penalties and exclusion from
participation in the Medicaid program.
RISKS COMMON TO OUR ASSISTED LIVING OPERATIONS
Staffing and Labor Costs. We compete with other providers of assisted living
and senior housing to attract and retain qualified personnel. We also rely on
the available labor pool of employees, and unemployment rates are very low in
many areas where we operate. We make a genuine effort to remain competitive with
other companies in our industry. Therefore, if it is necessary for us to
increase pay and/or enhance benefits to maintain our competitive status in our
industry, our labor costs could rise. We cannot provide assurance that if our
labor costs do increase, they can be matched by corresponding increases in
rental, assisted living or management revenue.
Obtaining Residents and Maintaining Rates. As of December 31, 2000, the ALCs
we owned or operated had a combined occupancy rate of 88.1%. Newly-developed
ALCs may take longer to lease up than anticipated, causing them to incur
start-up losses for longer periods of time. Occupancy may drop in our existing
ALCs, primarily due to:
o changes in the health of residents;
o increased competition from other assisted living providers, particularly
those offering newer ALCs;
o the reassessment of residents' physical and cognitive state; and
o changes in management and staffing.
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There can be no assurance that any ALC will be substantially occupied at
assumed rates at any time. In addition, we may only be able to lease up our ALCs
to full occupancy at rates below our set rates due to limitations imposed on
rates by local market conditions or other factors. Even if we achieve
substantial occupancy at our set rates, our set rates may not allow for our
projected cost recovery and profit if operating expenses increase. In addition,
in order to increase our set rates, we must provide advance notice of rate
increases, generally at least 30 days. Because of this advance notice
requirement, we are not able to reflect cost increases in our set rates until at
least several months after such cost increases occur. In addition, if we fail to
generate sufficient revenue, we may be unable to meet minimum rent obligations
under our long-term operating leases and to make interest and principal payments
on our indebtedness.
General Real Estate Risks. The performance of our ALCs is influenced by
factors affecting real estate investments, including the general economic
climate. Other real estate risks include:
o an oversupply of, or a reduction in demand for, ALCs in a particular
market;
o the attractiveness of properties to residents;
o zoning, rent control, environmental quality regulations or other
regulatory restrictions;
o competition from other forms of housing;
o our ability to provide adequate maintenance and insurance; and
o our ability to control operating costs, including maintenance, insurance
premiums and real estate taxes.
At the time we acquire existing ALCs or open newly-developed ALCs, we
prepare budgets for known or expected rehabilitation expenses. We may incur
unknown or unforeseen rehabilitation or lease-up expenses. Real estate
investments are also affected by such factors as applicable laws, including tax
laws, interest rates and the availability of financing. Real estate investments
are relatively illiquid and, therefore, limit our ability to vary our portfolio
promptly in response to changes in economic or other conditions. If we fail to
integrate or operate acquired or developed ALCs effectively, it may have a
material adverse effect on our business, financial condition and operating
results.
In addition, we currently lease ALCs from only six different landlords. The
lease agreements with each landlord are interconnected in that we will not be
entitled to exercise our right to renew one lease with a particular landlord
without exercising our right to renew all other leases with that landlord. Also,
leases with each landlord contain certain cross default provisions. Therefore,
in order to exercise all lease renewal terms, we will be required to maintain
and rehabilitate the Leased ALCs on a long-term basis. We anticipate that
similar renewal and cross-default provisions will be included in leases with
other health care REITs or landlords.
Bond Financing. We have entered into four long-term leases of ALCs, the
acquisition and construction of which have been or are being financed by tax
exempt multi-unit housing revenue bonds. In order to meet the lease obligations
and to allow the landlord to continue to qualify for favorable tax treatment of
the interest payable on the bonds, the ALCs must comply with certain federal
income tax requirements. These requirements principally pertain to the maximum
income level of a specified portion of the residents. Should we elect to execute
additional leases for ALCs to be constructed with bond financing, the same and
possibly additional restrictions are anticipated to be imposed. Failure to
satisfy these requirements will constitute an event of default under the leases,
thereby permitting the landlord to accelerate their termination. Failure to
obtain low-income residents in the sequence and time required could materially
affect the lease-up schedule and, therefore, cash flow from such ALCs.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be held liable for the costs of the removal or
remediation of certain hazardous or toxic substances. These include, without
limitation, asbestos-containing materials which could be located on, in or under
such property. Such laws and regulations often impose liability whether or not
the owner or operator knows of, or is responsible for,
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the presence of the hazardous or toxic substances. When we acquire land for
development or existing facilities, we typically obtain environmental reports on
the properties as part of our due diligence in order to lessen our risk of
exposure. Nonetheless, the costs of any required remediation or removal of these
substances could be substantial. The owner's liability is generally not limited
under such laws and regulations and could exceed the value of the property and
the aggregate assets of the owner or operator. The presence of these substances
or failure to remediate such substances properly may also adversely affect the
owner's ability to sell or rent the property or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator, or any entity
that arranges for the disposal of hazardous or toxic substances at a disposal
site may also be liable for the costs of any required remediation or removal of
the hazardous or toxic substances at the disposal site. When entering into
leases with health care REITs and other landlords of facilities, we typically
enter into environmental indemnity agreements in which we agree to indemnify the
landlord against all risk of environmental liability, both during the term of
the lease and beyond. In connection with the ownership or operation of our
properties or those of our Affiliated Partnerships, we could be liable for these
costs, as well as certain other costs, including governmental fines and injuries
to persons or properties.
Restrictions Imposed by Laws Benefiting Disabled Persons. Under the
Americans with Disabilities Act of 1990, all places of public accommodation are
required to meet certain federal requirements related to access and use by
disabled persons. A number of additional federal, state and local laws exist
that also may require us to modify existing and planned properties to allow
disabled persons to access the properties. We believe that our properties are
either substantially in compliance with present requirements or are exempt from
them, and we attempt to check for compliance in all ALCs we consider acquiring.
However, if required changes cost more than anticipated, or must be made sooner
than anticipated, we would incur additional costs. Further legislation may
impose additional burdens or restrictions related to access by disabled persons,
and the costs of compliance could be substantial.
Geographic Concentration. A substantial portion of our business and
operations are conducted in California, where 37 of our ALCs in operation are
located. The market value of these properties and the income generated from
properties we manage or lease could be negatively affected by changes in local
and regional economic conditions, specific laws and the regulatory environment
in the states, and by acts of nature. We cannot provide assurance that such
geographic concentration will not have an adverse impact on our business,
financial condition, operating results and prospects.
Insurance. We believe that we maintain adequate insurance coverage, based on
the nature and risks of our business, historical experience and industry
standards. Our business entails an inherent risk of liability. In recent years,
we and other assisted living providers have become subject to an increasing
number of lawsuits alleging negligence or related legal theories, which may
involve large claims and significant legal costs. From time to time we are
subject to such suits because of the nature of our business. We cannot assure
that claims will not arise that exceed our insurance coverage or are not covered
by it. A successful claim against us that is not covered by, or is in excess of,
our insurance could have a material adverse effect on our financial condition,
operating results or liquidity. Claims against us, regardless of their merit or
eventual outcome, may also have a material adverse effect on our ability to
attract residents or expand our business and would consume considerable
management time. We must renew our insurance policies annually and can provide
no assurance that we will be able to continue to obtain liability insurance
coverage in the future or that it will be available on acceptable terms.
CONFLICTS OF INTEREST
Certain of our current and former executive officers and Directors may have
an actual or potential conflict of interest with our interests. This conflict
may exist because of their investment in or involvement with entities providing
services, office space or guarantees to us, or to Company-sponsored
partnerships, or due to family ties with consultants offering services to us.
See "Certain Relationships and Related Transactions" in our Proxy Statement.
In addition, we are the managing general partner and communities manager for
Affiliated Partnerships owning or leasing 13 ALCs and various apartment
communities. By serving in both capacities, we have conflicts of interest
because of our duty to act in the best interests of the limited partners of
those partnerships and our desire to maximize earnings for our shareholders in
the operation of those ALCs and apartment communities.
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TAX CREDIT APARTMENT PARTNERSHIPS
After the end of fiscal 2000, we disposed of our interests in five of the
eight remaining partnerships in our apartment group (the "Apartment Group") that
we had interests in. As part of tax credit agreements relating to the Apartment
Group we are still responsible for guarantees during the period of time we acted
as the general partner for the tax credit apartment partnerships we have
disposed of and for the three remaining partnerships:
o obligations under development deficit guarantees and operating deficit
guarantees;
o shortfalls in permanent loan financing to replace construction financing
on projects where permanent financing has not been finalized; and
o adjustments if sufficient projected tax credits are not generated in
order to meet agreed-upon levels of tax credit benefits.
We have adjusted our estimated liability for obligations of ARV for the
Apartments Group. The remaining balance of our liability is primarily the $2.9
million required to fund permanent loan shortfalls, which was paid in January
2001. At the same time, we sold our interests in the related partnerships for a
gain of $2.9 million.
ITEM 2. PROPERTIES
The following charts set forth the location, number of units, acquisition
date and ownership percentage for our communities as of December 31, 2000:
MONTH PERCENT
COMMUNITY LOCATION UNITS ACQUIRED OWNERSHIP(a)
- --------- -------- ----- -------- ------------
LEASED
Amberwood............................. FL 183 Jun-96 100.0%
Baypoint Village...................... FL 231 Mar-96 100.0%
Bayside Landing....................... CA 76 Jun-98 100.0%
Buena Vista Knolls.................... CA 91 Feb-96 100.0%
Chateau San Juan...................... CA 113 Dec-95 100.0%
Collier Park.......................... TX 159 Dec-96 100.0%
Eastlake Terrace...................... IN 93 Apr-97 100.0%
El Camino Gardens..................... CA 265 Jun-95 100.0%
Hacienda de Monterey.................. CA 180 Apr-94 100.0%
Hillsdale Manor(c).................... CA 128 Jul-98 100.0%
Inn at Summit Ridge................... NV 72 Apr-97 100.0%
Inn at Willow Glen(b)................. CA 83 Aug-96 52.3%
Kinghaven Manor....................... MI 143 Feb-95 100.0%
Mallard Cove.......................... OH 119 Feb-95 100.0%
Maria del Sol......................... CA 124 Oct-95 100.0%
Northgate Park........................ OH 124 Aug-96 100.0%
Rancho Park Villa..................... CA 164 Oct-95 100.0%
Shorehaven Manor...................... MI 120 Sep-96 100.0%
Seville Terrace ...................... NV 125 Dec-99 100.0%
Sunlake Terrace....................... NV 121 Feb-98 100.0%
Sutton Terrace........................ NV 142 Dec-98 100.0%
Tamalpais Creek....................... CA 120 Oct-95 100.0%
Tanglewood Trace...................... IN 159 Jan-97 100.0%
Villa Bonita.......................... CA 130 Oct-95 100.0%
Villa Encinitas....................... CA 117 Jun-95 100.0%
Villa at Palm Desert.................. CA 77 Nov-95 100.0%
Villa de Palma........................ CA 110 May-95 100.0%
Villa del Obispo...................... CA 95 May-95 100.0%
Villa del Rey......................... CA 102 Jun-95 100.0%
Villa del Sol......................... CA 91 Jun-95 100.0%
Vista del Rio......................... NM 148 Jun-97 100.0%
Willow Glen Villa..................... CA 187 May-98 100.0%
Woodside Village of Columbus.......... OH 154 Feb-96 100.0%
-----
Total Leased................ 4,346
-----
OWNED
Acacia Villa(b)....................... CA 65 Dec-95 89.5%
Collwood Knolls(b).................... CA 113 Jan-96 95.5%
Covell Gardens........................ CA 155 Mar-97 100.0%
Covina Villa(b)....................... CA 63 Aug-96 52.3%
Golden Creek Inn...................... CA 123 Apr-98 100.0%
Hillcrest Inn......................... CA 138 Apr-98 100.0%
Montego Heights Lodge(b).............. CA 162 Aug-96 52.3%
Retirement Inn of Daly City(b)........ CA 94 Aug-96 52.3%
Retirement Inn of Fullerton(b)........ CA 67 Aug-96 52.3%
Retirement Inn of Burlingame(b)....... CA 67 Aug-96 52.3%
Retirement Inn of Campbell(b)......... CA 71 Aug-96 52.3%
Retirement Inn of Fremont(b).......... CA 69 Aug-96 52.3%
Retirement Inn of Sunnyvale(b)........ CA 123 Aug-96 52.3%
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MONTH PERCENT
COMMUNITY LOCATION UNITS ACQUIRED OWNERSHIP(a)
- --------- -------- ----- -------- ------------
Valley View Lodge(b).................. CA 124 Aug-96 52.3%
Villa Colima(b)....................... CA 93 Jun-96 60.5%
-----
Total Owned................. 1,527
-----
Total Leased and Owned...... 5,873
=====
MANAGED
Bay Spring(d)......................... RI 127 Jun-00
Berkshire(d).......................... CA 81 Nov-98
Chandler Villas....................... AZ 164 Sep-90
Encino Hills Terrace(d)............... CA 76 Nov-98
Inn at Lakewood(d).................... CO 137 Nov-00
Lynnbrooke(d)......................... CA 140 Apr-00
Villa Las Posas....................... CA 123 Dec-97
-----
Total Managed............... 848
-----
Total....................... 6,721
=====
- ----------
(a) Represents percentage ownership of Leased ALCs and Owned ALCs through
leasehold or fee ownership of the Company or an Affiliated Partnership.
(b) Community managed by us, owned or leased by Affiliated Partnership in which
we have obtained a majority ownership interest.
(c) We also acquired 64 beds in a skilled nursing facility, as part of this ALC.
(d) Properties are owned by our unconsolidated joint ventures.
ITEM 3. LEGAL PROCEEDINGS
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We are from time to time subject to lawsuits and other matters in the normal
course of business. While we cannot predict the results with certainty, we do
not believe that any liability from any such lawsuits or other matters will have
a material effect on our financial position, results of operations, or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of our security holders during the
fourth quarter of fiscal 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our Common Stock is listed and traded on the American Stock Exchange under
the symbol "SRS." Prior to October 13, 1997, our common stock was listed on the
NASDAQ National Market ("NASDAQ") under the symbol "ARVI." The following table
sets forth, for the periods indicated, the high and low closing prices for our
Common Stock.
HIGH LOW
---- ---
Year Ended December 31, 1999
First Quarter.................. 1/1/99 -- 3/31/99 $ 6.25 $ 3.94
Second Quarter................. 4/1/99 -- 6/30/99 $ 4.56 $ 3.00
Third Quarter.................. 7/1/99 -- 9/30/99 $ 4.06 $ 2.44
Fourth Quarter................. 10/1/99 -- 12/31/99 $ 2.94 $ 1.38
Year Ended December 31, 2000
First Quarter.................. 1/1/00 -- 3/31/00 $ 2.19 $ 1.38
Second Quarter................. 4/1/00 -- 6/30/00 $ 1.44 $ 0.88
Third Quarter.................. 7/1/00 -- 9/30/00 $ 1.06 $ 0.81
Fourth Quarter................. 10/1/00 -- 12/31/00 $ 0.88 $ 0.44
We did not pay dividends in fiscal 1999 or fiscal 2000. We do not anticipate
paying dividends in the foreseeable future. It is the present policy of our
Board of Directors to retain earnings, if any, to finance the expansion of our
business.
VOLATILITY OF STOCK PRICE
Sales of substantial amounts of shares of our Common Stock in the public
market or the perception that those sales could occur could adversely affect the
market price of our Common Stock and our ability to raise additional funds in
the future in the capital markets. The market price of our Common Stock could be
subject to significant fluctuations in response to various factors and events,
including the liquidity of the market for the shares of our Common Stock,
variations in our operating results, changes in our earnings estimates and/or
securities analysts estimates, publicity regarding the industry or the Company
and the adoption of new statutes or regulations (or changes in the
interpretation of existing statutes or regulations) affecting the health care or
real estate industries in general or the assisted living industry in particular.
In addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the shares of Common Stock.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS; ANTI-TAKEOVER MEASURES
As of December 31, 2000, our directors and executive officers and their
affiliates beneficially own approximately 47.9% of our outstanding shares of
Common Stock (exclusive of unexercised options to purchase shares of our Common
Stock). As a result, these shareholders, acting together, would be able to
significantly influence many matters requiring approval by our shareholders,
including the election of directors. Our articles of incorporation provide for
authorized but unissued preferred stock, the terms of which may be fixed by our
board of directors. As a result of Delaware General Corporation Law relating to
the number of holders of Common Stock, our board of directors are classified and
the holders of our Common Stock are not permitted to cumulate votes. Such
provisions could have the effect of delaying, deferring or preventing a change
of control of the Company.
In May 1998, we adopted a shareholders rights plan, under Delaware law,
under which we declared a dividend distribution of one Preferred Share Purchase
Right on each outstanding share of our common stock ( a "Right"). Subject to
limited exceptions, the Rights will be exercisable if a person or group acquires
10% or, in the case of LFREI, 50% or more of our stock or announces a tender
offer for 10% or, in the case of LFREI, 50% or more of the common stock. When
exercisable, each Right will entitle its holder to purchase, at the Right's
then-current exercise price, a number of our common shares having a market value
at the time of twice the Right's exercisable price. If we are acquired in a
merger or other business combination transaction which has not been approved by
our Board of Directors, each Right (except the Rights held by the acquiring
person) will entitle its holder to purchase, at the Right's then-current
exercise price, a number of our common shares having a market value at that time
of twice the Right's exercise price.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
consolidated financial statements as of December 31, 2000; December 31, 1999,
and December 31, 1998 and the years then ended; December 31, 1997, and the
nine-month period then ended; and for the fiscal year ended March 31, 1997.
Amounts for the 1997 periods have been reclassified to reflect the equity in
loss of partnerships for the Apartment Group, which was previously included in
discontinued operations. The data set forth below should be read in conjunction
with the consolidated financial statements and related notes thereto included in
Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K --
Financial Statements," along with Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
NINE-MONTH FISCAL YEAR
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
2000 1999 1998 1997 1997
------------ ------------ ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Assisted living community revenue ............ $ 136,097 $ 137,176 $ 127,309 $ 76,887 $ 73,770
Skilled nursing facility revenue.............. 1,960 -- -- -- --
Management fees .............................. 808 1,003 1,116 388 1,141
--------- --------- --------- -------- --------
Total revenue .......................... 138,865 138,179 128,425 77,275 74,911
--------- --------- --------- -------- --------
Operating expenses:
Assisted living community operating expense .. 87,130 87,665 81,488 49,411 45,595
Skilled nursing facility expenses ............ 2,580 -- -- -- --
Assisted living community lease expense ...... 30,892 32,239 26,628 15,773 12,872
General and administrative ................... 12,288 14,965 27,581 17,595 9,097
Impairment loss .............................. 6,187 16,368 22,727 -- --
Depreciation and amortization ................ 8,483 8,531 9,561 4,896 4,366
--------- --------- --------- -------- --------
Total operating expenses ............... 147,560 159,768 167,985 87,675 71,930
--------- --------- --------- -------- --------
Income (loss) from continuing
operations ........................... (8,695) (21,589) (39,560) (10,400) 2,981
--------- --------- --------- -------- --------
Other income (expense):
Interest income .............................. 1,532 1,027 2,276 1,821 1,668
Other income (expense), net .................. 244 376 198 321 1,402
Equity in income (loss) of partnerships ...... 791 (884) (430) (10,961) (860)
Gain (loss) on sale of properties ............ 500 1,884 (674) 5,511 --
Interest expense ............................. (8,368) (8,933) (7,728) (4,568) (5,470)
Litigation judgment .......................... -- (4,368) -- -- --
--------- --------- --------- -------- --------
Total other income (expense) ........... (5,301) (10,898) (6,358) (7,876) (3,260)
--------- --------- --------- -------- --------
Income (loss) from continuing
operations before income tax expense,
minority interest, extraordinary
items, discontinued operations and
change in accounting principle ............... (13,996) (32,487) (45,918) (18,276) (279)
Income tax expense ............................. 160 35 54 484 297
--------- --------- --------- -------- --------
Income (loss) from continuing
operations before minority interest in
income of majority owned entities,
extraordinary items, discontinued
operations and change in accounting
principle .................................... (14,156) (32,522) (45,972) (18,760) (576)
Minority interest in (income) loss of
majority owned entities ...................... 55 (903) (839) (773) (783)
--------- --------- --------- -------- --------
Loss from continuing operations before
extraordinary items, discontinued
operations and change in accounting
principle .................................... (14,101) (33,425) (46,811) (19,533) (1,359)
Extraordinary gain (loss) from early
extinguishment of debt, net of income tax .... 20,613 7,020 -- -- (386)
--------- --------- --------- -------- --------
Income (loss) from operations before
discontinued operations and change
in accounting principle ...................... 6,512 (26,405) (46,811) (19,533) (1,745)
Discontinued operations ........................ -- -- 830 (2,602) (29)
--------- --------- --------- -------- --------
Cumulative effect of change in accounting
principle .................................... -- 1,260 -- -- --
--------- --------- --------- -------- --------
Net income (loss) ...................... 6,512 (27,665) (45,981) (22,135) (1,774)
========= ========= ========= ======== ========
Basic and diluted earnings (loss) per
common share:
Loss from continuing operations .............. $ (0.81) $ (2.09) $ (2.95) $ (1.75) $ (0.14)
Gain (loss) from extraordinary item .......... 1.19 0.44 -- -- (0.04)
Discontinued operations ...................... -- -- 0.05 (0.23) (0.01)
Loss from cumulative effect of change
in accounting principle, net of tax ........ -- (.08) -- -- --
--------- --------- --------- -------- --------
Net earnings (loss) .................... $ 0.38 $ (1.73) $ (2.90) $ (1.98) $ (.19)
========= ========= ========= ======== ========
Weighted average common shares outstanding ..... 17,357 15,968 15,866 11,171 9,400
========= ========= ========= ======== ========
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DECEMBER 31,
-------------------------------------------- MARCH 31,
2000 1999 1998 1997 1997
-------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Selected Operating Data:
Assisted living units owned or leased (end of period) ........... 5,873 6,371 7,038 5,880 5,599
Assisted living units managed (end of period) ................... 848 821 906 379 256
Weighted average occupancy of assisted living units (end of year) 88% 85% 84% 84% 87%
Balance Sheet Data:
Working capital ................................................. $ 10,467 $ 6,870 $ 11,691 $ 75,279 $ 12,947
Total assets .................................................... 165,940 175,165 205,457 233,085 161,947
Long-term notes payable, excluding current portion .............. 99,130 114,369 88,175 81,560 90,481
Total shareholders' equity ...................................... 46,868 39,124 65,687 111,435 51,374
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Selected Financial Data in Item 6 and the consolidated financial
statements included in this Annual Report on Form 10-K set forth certain data
with respect to our financial position, results of operations and cash flows
that should be read in conjunction with the following discussion and analysis.
OVERVIEW
We are a leading national provider of assisted and independent living
services for the elderly. As of December 31, 2000, we operated 55 ALCs
containing 6,721 units, including 33 Leased ALCs, 15 Owned ALCs and 7 Managed
ALCs.
Since commencing operation of ALCs for our own account in April 1994, we
embarked upon an expansion strategy and achieved significant growth in revenue
resulting primarily from the acquisition of ALCs. We focused our growth efforts
on the acquisition and development of additional ALCs and expansion of services
to our residents as they "age in place." During 1998, we acquired interests in
11 ALCs and one skilled nursing facility from Hillsdale Group, LP and their
affiliates, and opened five newly constructed ALCs. As of December 31, 2000, a
substantial portion of our business and operations are conducted in California,
where 37 of the 55 ALCs we operated are located. We intend to continue to make
the western United States the primary focus of our clustering strategy. However,
we intend to reduce our prior growth rate in order to focus greater attention
and resources on enhancing the profitability of our existing core operations and
on leasing up new developments at a faster rate. In addition we plan to divest
ALCs that do not expand or enhance one of our geographic clusters or do not meet
our financial objectives. In June 2000 we completed the sale of three ALCs and
in December 2000 sold one of our four land sites held for sale. We currently
have 9 ALCs and three land sites in property held for sale.
In March 1999, ARVP II obtained financing and, through its wholly owned
subsidiary ARVP II, LLC, purchased the landlord's interest in four previously
leased ALCs for approximately $14.3 million.
Newly opened ALCs are expected to incur operating losses until sufficient
occupancy levels and operating efficiencies are achieved. Based upon recent
experience, we believe that an ALC typically achieves its targeted occupancy
level 18 to 24 months from the commencement of operations. Accordingly, we will
require substantial liquidity to maintain the operations of newly opened ALCs.
If sufficient occupancy levels are not achieved within reasonable periods, our
results of operations, financial position and liquidity could be materially and
adversely impacted.
On January 1, 2001, Abdo H. Khoury, our Sr. Vice President and Chief
Financial Officer was promoted to President.
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21
THE YEAR ENDED DECEMBER 31, 2000 COMPARED WITH DECEMBER 31, 1999
The following table sets forth a comparison of the year ended December 31,
2000 and the year ended December 31, 1999.
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, INCREASE/
2000 1999 (DECREASE)
------------ ------------ ----------
(DOLLARS IN MILLIONS)
Revenue:
Assisted living community revenue ......... $136.1 $137.2 (0.8)%
Skilled nursing facility revenue ......... 2.0 -- 100.0%
Management fees from affiliates and others 0.8 1.0 (19.4)%
------ ------ ------
Total revenue ..................... 138.9 138.2 (0.5)%
------ ------ ------
Operating expenses:
Assisted living community operating expense 87.1 87.7 (0.6)%
Skilled nursing facility expenses ......... 2.6 -- 100.0%
Assisted living community lease expense ... 30.9 32.2 (4.2)%
General and administrative ................ 12.3 15.0 (17.9)%
Impairment loss ........................... 6.2 16.4 (62.2)%
Depreciation and amortization ............. 8.5 8.5 (0.6)%
------ ------ ------
Total operating expenses .......... 147.6 159.8 (7.6)%
------ ------ ------
Loss from operations ........................ (8.7) (21.6) (59.7)%
------ ------ ------
Other income (expense):
Interest income ........................... 1.5 1.0 49.2%
Other income (expense), net ............... 0.2 0.4 (35.1)%
Equity in income (loss) of partnerships ... 0.8 (0.9) 189.5%
Gain on sale of properties ................ 0.5 1.9 (73.4)%
Interest expense .......................... (8.3) (8.9) (6.3)%
Litigation judgment ....................... -- (4.4) (100.0)%
------ ------ ------
Total other income (expense) ...... (5.3) (10.9) (51.4)%
------ ------ ------
Loss before income taxes, minority
interest in income of majority owned
entities, extraordinary items, and
change in accounting principle ............ (14.0) (32.5) (56.9)%
Income tax expense .......................... 0.2 -- 357.1%
------ ------ ------
Loss before minority interest in income of
majority owned entities, extraordinary
items and change in accounting principle .. (14.2) (32.5) (56.4)%
Minority interest in (income) loss of
majority owned entities ................... 0.1 (0.9) (106.1)%
------ ------ ------
Loss before extraordinary item and change
in accounting principle ................... (14.1) (33.4) (57.8)%
Extraordinary gain from early
extinguishment of debt .................... 20.6 7.0 193.6%
------ ------ ------
Income (loss) before cumulative effect of
accounting change ......................... 6.5 (26.4) 124.7%
Cumulative effect of accounting change ...... -- (1.3) (100.0)%
------ ------ ------
Net income (loss) ...................... $ 6.5 $(27.7) 123.5%
====== ====== ======
The decrease of $1.1 million in assisted living community revenue is
attributable to:
o the sale of three ALCs during the second quarter of 2000; offset by
o the increase in average occupancy for same store ALCs to 88.1% for 2000
as compared with 86.7% for 1999;
o the increase in assisted living penetration to 46.7% for 2000 as
compared with 45.6% for 1999; and
o the increase in average rate per occupied unit to $2,158 for 2000 as
compared with $2,070 for 1999.
The $2.0 million increase in skilled nursing facility revenue is due to the
fact that we began managing the facility ourselves on April 1, 2000. Previously
it was managed by an unrelated third party and was included in other income and
expense.
Management fees from affiliates and others decreased $0.2 million due to:
o the decrease in the number of management contracts to six for two
quarters during 2000.
Assisted living community operating expense decreased $0.6 million due to:
o the sale of three of the ALCs during the second quarter of 2000; offset
by
o staffing requirements related to increased assisted living services
provided; and
o increased wages of staff.
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The decrease in assisted living community lease expense of $1.3 million is
primarily due to:
o the sale of three ALCs during the second quarter of 2000.
General and administrative expenses decreased $2.7 million due to the
following:
o expenses incurred in connection with the lawsuits with Kapson, Atria and
LFREI and Emeritus were less in 2000 as we settled the lawsuits in the
middle of 1999; and
o in 2000 we made substantial reductions in staffing under the current
management team; and
o the provision of $1.0 million in 1999 for the Medicare receivables held
by GeriCare which was discontinued in 1997, versus $0.8 million
additional provision booked in 2000 due to the uncertainty of collection
as a result of an audit by the intermediary for Medicare.
The impairment loss in 1999 was due to the following:
o an $8.6 million impairment loss which represents a write down of the
carrying values in excess of fair market value of the property held for
sale; and
o a $7.7 million write off for Rossmore House which included $3.1 million
of goodwill and $4.6 million for reduction in carrying value as a result
of the decision to sell this facility.
The impairment loss in 2000 was due to the following:
o an additional $0.5 million impairment loss on the properties held for
sale; and
o a $5.7 million impairment loss on the investment in joint ventures that
have carrying values in excess of fair market value and met the criteria
for impairment under Statement of Financial Accounting Standard No. 121.
Depreciation and amortization expenses remained relatively constant.
Expected decreases due to sale of ALCs during 2000 were offset by an increase in
depreciation related to capital expenditures.
Interest income increased due to higher average cash balances carried by us
during 2000 as compared to 1999.
Interest expense decreased $0.6 million due to extinguishment of debt.
Minority interest in income of majority owned entities decreased due to the
interest expense for the 9 refinanced properties held by our majority owned
entities.
The $0.5 million gain from the sale of assets in 2000 was due to the sale of a
parcel of land in Texas that was in property held for sale. The $ 1.9 million
gain in 1999 was due to the sale of assets to Dominium for a portion of the
apartment group.
Equity in income of partnerships was $ 0.8 million for the year ended December
31, 2000 and a loss of $ 0.9 million for the year ended December 31, 1999. The
income in 2000 is a result of the reduction in our estimated liabilities under
guarantees for certain partnerships. The 1999 expense is the result of operating
costs of the Apartment Group, offset by a $ 1.0 million reduction in the
estimated liability under guarantees for certain partnerships.
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23
THE YEAR ENDED DECEMBER 31, 1999 COMPARED WITH DECEMBER 31, 1998
The following table sets forth a comparison of the year ended December 31,
1999 and the year ended December 31, 1998.
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, INCREASE/
1999 1998 (DECREASE)
------------ ------------ ----------
(DOLLARS IN MILLIONS)
Revenue:
Assisted living community revenue .......... $137.2 $127.3 7.8%
Management fees from affiliates and others . 1.0 1.1 (10.1)%
------ ------
Total revenue ...................... 138.2 128.4 7.6%
------ ------
Operating expenses:
Assisted living community operating expense 87.7 81.5 7.6%
Assisted living community lease expense .... 32.2 26.6 21.1%
General and administrative ................. 15.0 27.6 (45.7)%
Impairment loss ............................ 16.4 22.7 (28.0)%
Depreciation and amortization .............. 8.5 9.6 (10.8)%
------ ------
Total operating expenses ........... 159.8 168.0 (4.9)%
------ ------
Loss from operations ......................... (21.6) (39.6) (45.4)%
------ ------
Other income (expense):
Interest income ............................ 1.0 2.3 (54.9)%
Other income, net .......................... 0.4 0.2 89.9%
Equity in income (loss) of partnerships .... (0.9) (0.4) 105.6%
Gain (loss) on sale of assets .............. 1.9 (0.7) 379.5%
Interest expense ........................... (8.9) (7.7) 15.6%
Litigation judgment ........................ (4.4) -- 100.0%
------ ------
Total other income (expense) ....... (10.9) (6.3) 71.4%
------ ------
Loss from continuing operations before income
taxes, minority interest in income of
majority owned entities, extraordinary
items, discontinued operations and change in
accounting principle ....................... (32.5) (45.9) (27.9)%
Income tax expense ........................... -- 0.1 35.2%
------ ------
Loss from continuing operations before
minority interest in income of majority
owned entities, extraordinary items,
discontinued operations and change in
accounting principle ....................... (32.5) (46.0) (27.9)%
Minority interest in income of majority owned
entities ................................... 0.9 0.8 7.6%
------ ------
Loss from continuing operations before
extraordinary item, discontinued operations
and change in accounting principle ......... (33.4) (46.8) (27.2)%
Extraordinary gain from early extinguishment
of debt .................................... 7.0 -- 100.0%
------ ------
Loss before discontinued operations and
cumulative effect of change in accounting
principle .................................. (26.4) (46.8) (42.5)%
Discontinued operations ...................... -- 0.8 (100.0)%
Cumulative effect of acctg. change ........... (1.3) -- 100.0%
------ ------
Net loss ................................ $(27.7) $(46.0) (39.8)%
====== ======
The increase of $9.9 million in assisted living community revenue is
attributable to:
o the acquisition of seven ALCs during the second and third quarters of
1998, offset somewhat by the sale of three communities in March 1999,
the sale of one ALC in June 1999 and the sale of one ALC in October
1999;
o the five ALCs opened in the latter part of 1998 were generating revenues
though still in a "lease up" stage with occupancies in the 50% range
during 1999;
o the increase in average occupancy for same store ALCs to 86.7% for 1999
as compared with 85.7% for 1998;
o the increase in assisted living penetration to 45.6% for 1999 as
compared with 43.5% for 1998; and
o the increase in average rate per occupied unit to $2,070 for 1999 as
compared with $1,828 for 1998.
Management fees from affiliates and others decreased $0.1 million due to:
o the number of management contracts decreased to seven in 1999 from eight
in 1998.
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Assisted living community operating expense increased $6.2 million due to:
o the acquisition of seven ALCs during the second and third quarters of
1998, offset somewhat by the sale of three communities in March 1999,
the sale of one ALC in June 1999 and the sale of one ALC in October
1999;
o the five newly opened ALCs in 1998 have full year expenses in 1999
compared to a partial year in 1998;
o the opening of one ALC in November 1999;
o staffing requirements related to increased assisted living services
provided; and
o increased wages of staff.
The increase in assisted living community lease expense of $5.6 million is
primarily due to:
o the acquisition of two leased ALCs during the second and third quarters
of 1998, offset somewhat by the acquisition of four previously leased
communities; and
o the opening of five ALCs during the latter half of 1998 which incurred
only a partial year of lease expense while 1999 has the full year.
General and administrative expenses decreased $12.6 million due to the
following:
o expenses incurred in connection with the lawsuits with Kapson, Atria and
LFREI and Emeritus were substantially less in 1999 than 1998 as we
settled the lawsuits in the middle of 1999;
o in 1999 there were substantially less severance payments related to
changes in management personnel than experienced in 1998;
o in 1999 there were no investment banking fees, compared to $1.7 million
in 1998; and
o in 1999 we made substantial reductions in staffing under the new
management team ; somewhat offset by
o a provision of $1.0 million in 1999 for Medicare receivables that are
currently under audit versus $0.4 million recorded as a provision in
1998.
The impairment loss in 1998 was due to:
o a $19.0 million write-down of five existing ALCs and five land sites
held for sale that had carrying values in excess of fair market value;
and
o a $3.7 million impairment loss on existing ALCs which had projected
future cash flows that were less than carrying value of the assets.
While the impairment loss in 1999 was due to:
o an $8.6 million impairment loss which represents a write down of the
carrying values in excess of fair market value of the property held for
sale; and
o a $7.7 million write off for Rossmore House which included $3.1 million
of goodwill and $4.6 million for reduction in carrying value as a result
of the decision to sell this facility.
Depreciation and amortization expenses decreased due to sale of ALCs during
1999.
Interest income decreased due to lower average cash balances carried by us
during 1999 as compared to 1998.
Interest expense increased $1.2 million due to:
o decrease for interest rate lock and commitment fees incurred in
connection with the failed refinancing of the majority owned entities
during 1998; offset by
o increase due to additional debt incurred in connection with acquiring
four ALCs in the first quarter of 1999;
o increase due to partial versus full year of interest expenses for the
ALCs acquired in 1998; and
o increase due to refinancing 11 owned properties in June 1999.
Equity in income (loss) of partnerships was due to the operations of the
senior apartment group. As guarantor for various partnership obligations, we
recorded our estimate of these obligations as losses.
24
25
The $1.9 million gain in 1999 was due to the sale of assets to Dominium
for a portion of the Apartment Group.
Gain from discontinued operations in 1998 was due to the reversal of a
portion of the provision in 1997 as all expected future operating costs for our
Apartment Group were recorded in 1997 but, since not sold within one year were
reversed in 1998. Due to the complexities of the transaction most of these
assets were not sold until 1999 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our unrestricted cash and cash equivalents balances were $16.8 million and
$14.6 million at December 31, 2000 and 1999, respectively.
Working capital increased to $10.5 million as of December 31, 2000 compared
to working capital of $6.9 million at December 31, 1999, resulting primarily
from the increase in cash of $2.2 million.
During 2000 cash used in continuing operations was $2.1 million compared to
$11.3 million during 1999 and $11.6 million in 1998.
The cash used in operating activities during 2000 was a result of:
o net income of $6.5 million; adjusted for
o non-cash charges of:
-- $6.2 million loss recorded for impairment of long-lived assets;
-- $8.5 million of depreciation and amortization expense; and
-- $2.7 million decrease in net liabilities; offset by
-- $20.6 million for gain on extraordinary item on early extinguishment
of debt.
The cash used in operating activities during 1999 was a result of:
o our net loss of $27.7 million; adjusted for
o non-cash charges (credits) of:
-- $16.4 million loss recorded for impairment of long-lived assets;
-- $8.5 million of depreciation and amortization expense;
-- $1.3 million for the cumulative effect of the change in accounting
principle.
-- $0.9 million of minority interest in income of majority owned
entities; offset by
-- $7.0 million for gain on extraordinary item on early extinguishment
of debt;
-- $0.6 million decrease in net liabilities;
-- $1.9 million for gain on sale of assets to Dominium
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26
The cash used in operating activities during 1998 was a result of:
o our net loss of $46.0 million;
o $1.4 million of cash used in operating activities of discontinued
operations;
o $0.2 million decrease in net liabilities; offset by
o non-cash charges of:
-- $22.7 million loss recorded for impairment of long-lived assets;
-- $9.6 million of depreciation and amortization expense;
-- $0.8 million of minority interest in income of majority owned
entities;
-- $0.7 million of losses recorded on properties sold to our
development joint ventures;
-- $0.6 million of provisions for discontinued project costs.
In 2000 cash used by investing activities was $2.4 million as compared to
$10.1 million of cash provided in 1999 and $78.1 million used in 1998.
The cash used by investing activities during 2000 was a result of:
o $5.2 million for purchase of property, furniture and equipment; offset
by:
o $0.5 million decrease in security deposit on leased properties; and
o $3.8 million proceeds for sale of assets, net of cost.
The cash provided by investing activities during 1999 was a result of:
o $39.8 million proceeds for sale of ALCs, net of cost;
o $1.9 million proceeds for sale of partnership interests; offset by
o $14.7 million for purchase of previously leased ALCs;
o $7.4 million for purchase of property, furniture and equipment;
o $6.4 million increase in security deposit on leased properties; and
o $1.3 million for the contribution into a joint venture.
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27
The cash used in investing activities during 1998 was a result of:
o $71.7 million related to the acquisition of five Owned ALCs, two Leased
ALCs and four management contracts;
o $12.3 million of purchases of property, furniture and equipment;
o $1.3 million of payments to increase cash security deposits on our
leased ALCs;
o $0.7 million for costs associated with development properties,
investments in joint ventures and a deposit related to the purchase of
additional ALCs; offset by:
o $7.2 million of net proceeds received from the sale of two Owned ALCs
and two land sites to our development joint ventures; and
o $0.7 million distribution received from our investment in Senior Income
Fund LP.
In 2000 the cash provided by financing activities was $6.2 million as
compared to $2.1 million for 1999 and $0.2 million during 1998.
The cash provided by financing activities during 2000 was a result of:
o $10.0 million borrowings under non-secured line of credit;
o $41.0 million of borrowing under notes payable; offset by:
o $33.7 million of repayments of notes payable;
o $10.9 million of repayments of subordinated debt offset by $1.3 million
of associated costs;
o $0.2 million of distributions paid to our minority partners in certain
majority owned entities; and
o $1.3 million of loan fees.
The cash provided by financing activities during 1999 was a result of:
o $41.8 million refinancing proceeds;
o $14.7 million of borrowing under notes payable for purchase of
previously leased ALCs;
o $2.6 million of borrowing under notes payable; offset by:
o $45.2 million of repayments of notes payable;
o $9.0 million of distributions paid to our minority partners in certain
majority owned entities; and
o $1.0 million of repayments of subordinated debt; and
o $1.8 million of loan fees.
The cash provided by financing activities during 1998 was a result of:
o $4.4 million additional draw on a note payable;
o $0.2 million of proceeds received from issuance of common stock; offset
by:
o $2.6 million for issuance costs associated with our conversion of the
Prometheus Notes;
o $0.8 million of distributions paid to our minority partners in certain
majority owned entities;
o $0.7 million of repayments of notes payable;
o $0.3 million of payments for loan and line of credit fees.
On June 28, 1999, we refinanced 11 properties held by various partnerships
that had under-leveraged assets. As the general partner of the partnerships we
distributed most of the net proceeds from the refinancing to the limited
partners and
27
28
enhanced our liquidity position in the partnerships. The term of the loans is
two years with a lender optional 10-year extension and a 25-year amortization
schedule for repayment of principal, fixed interest of 9.15% and a 2%
structuring fee for Banc One that is amortized over two years. In December 2000,
we refinanced four properties. The term of the loan is 35 years with fixed
interest rates ranging from of 8.5-8.6% including mortgage insurance of 0.5%.
Subsequent to year-end we also were able to complete the re-financing of four
others leaving three loans whose maturities have been extended to January 2002.
In our fiscal year ended December 31, 1999, we began retiring portions of
our 6 3/4% convertible subordinated debt from time to time. During 1999 fiscal
year, we issued a total of 799,566 shares of our common stock and paid a total
of $1.0 million to some of our bondholders in exchange for a total of $9.2
million principal amount of the subordinated notes due 2006 that were held by
those bondholders. These transactions resulted in an extraordinary gain of $7.0
million net of tax as of our fiscal year ended December 31, 1999. During the
current fiscal year, we have issued a total of 781,025 share of our common stock
and paid a total of $9.6 million to additional bondholders in exchange for a
total of $33.0 million additional principal amount of the subordinated notes
held by those bondholders. These transactions resulted in an extraordinary gain
of $20.6 million net of tax and costs as of December 31, 2000. Through these
transactions, we have retired a total of $42.2 million of our public debt
resulting in extraordinary gains of $27.9 million to date.
On September 10, 1996, we obtained a $10 million revolving line of credit
with Imperial Bank to be used for acquisition, development, the provision of
letters of credit and general corporate purposes. On November 10, 1998, Imperial
amended the line of credit agreement to require that we provide collateral for
outstanding standby letter of credit obligations. As of December 31, 2000 we no
longer had any credit facility and had fully collateralized our outstanding
standby letter of credit with cash.
In 2000 we obtained a $10 million unsecured revolving line of credit with
our major shareholder Lazard Freres to be used for retirement of the
subordinated 6 3/4% public debt. At December 31, 2000 we had $10.0 million
outstanding on the line of credit at LIBOR plus 10% interest payable monthly.
We believe that our existing liquidity, ability to sell ALCs and land sites
which do not meet our financial objectives or geographic strategy, and ability
to refinance certain Owned ALCs and investments will provide adequate resources
to meet our current operating and investing needs and support our current growth
plans for the next 12 months. We will be required from time to time to incur
additional indebtedness or issue additional debt or equity securities to finance
our growth strategy, including the acquisition of ALCs as well as other capital
expenditures and to provide additional funds to meet increased working capital
requirements.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALCs we operate is the primary source of our revenue.
These ALCs are affected by rental rates which are highly dependent upon market
conditions and the competitive environments where the communities are located.
Employee compensation is the principal cost element of property operations.
Although there can be no assurance we will be able to continue to do so, we have
been able historically to offset the effects of inflation on salaries and other
operating expenses by increasing rental and assisted living rates.
YEAR 2000
Our Year 2000 program, implemented under the direction of our senior management,
was completed on schedule. We did not experience any significant operational
issues nor did our residents experience any problems at our ALCs. The total cost
of our Year 2000 program was approximately $2.0 million. We are not aware of any
obligations related to damages resulting from Year 2000 issues. We do not
believe that any such obligations that may arise in the future will have a
material effect on our business, results of operations, financial position or
liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on
our notes payable. Currently, we do not utilize interest rate swaps. The purpose
of the following analysis is to provide a framework to understand our
sensitivity to hypothetical changes in interest rates as of December 31, 2000.
You should be aware that many of the statements contained in this section are
forward looking and should be read in conjunction with our disclosures under the
heading "Forward-Looking Statements."
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29
For fixed rate debt, changes in interest rates generally affect the fair
market value of the debt instrument, but not our earnings or cash flows.
Conversely, for variable rate debt, changes in interest rates generally do not
impact fair market value of the debt instrument, but do affect our future
earnings and cash flows. We do not have an obligation to prepay fixed rate debt
prior to maturity, and as a result, interest rate risk and changes in fair
market value should not have a significant impact on the fixed rate debt until
we would be required to refinance such debt. Holding the variable rate debt
balance constant, each one-percentage point increase in interest rates would
result in an increase in variable rate interest incurred for the coming year of
approximately $300,000.
The table below details the principal amount and the average interest rates
of notes payable in each category based upon the expected maturity dates. The
fair value estimates for notes payable are based upon future discounted cash
flows of similar type notes or quoted market prices for similar loans. The
carrying value of our variable rate debt approximates fair value due to the
frequency of re-pricing of this debt. Our fixed rate debt consists of
convertible subordinated notes payable and mortgage payables. The fixed rate
debt bears interest at rates that approximate current market value except for
the convertible subordinated debt which bears interest at 6.75%.
EXPECTED MATURITY DATA
FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
------ ------- ----- ----- ----- ---------- ------- -------
Fixed rate debt ..... $ 679 $13,685 $ 354 $ 383 $ 416 $54,421 $69,938 $59,785
Average interest rate 8.04% 7.92% 7.77% 7.77% 7.77% 7.77%
Variable rate debt .. $ 392 $29,871 -- -- -- -- $30,263 $30,263
Average interest rate 11.29% 11.31% -- --
We do not believe that the future market rate risks related to the above
securities will have a material adverse impact on our financial position,
results of operation or liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and the Independent Auditors' Report
are listed at Item 14 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these Items is incorporated by reference to our
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of our fiscal year covered by this Report.
29
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements. The following financial statements of the
Registrant and the Report of Independent Public Accountants therein are
filed as part of this Report on Form 10-K:
Page
----
Independent Auditors' Report.......................... F-1
Consolidated Balance Sheets........................... F-2
Consolidated Statements of Operations................. F-3
Consolidated Statements of Shareholders' Equity....... F-4
Consolidated Statements of Cash Flows................. F-5
Notes to Consolidated Financial Statements............ F-7
(2) Financial Statement Schedules. Schedule II-Valuation and Qualifying
Accounts. Other Financial Statement Schedules have been omitted because
the information required to be set forth therein is not applicable or is
shown in the financial statements or notes thereto.
(b) Reports on Form 8-K. None.
(c) Exhibits: The following exhibits are filed as part of, or incorporated by
reference into this report on Form 10-K:
Exhibit
Number Description
------- -----------
2 Agreement and Plan of Merger by and between ARV Assisted
Living, Inc. and ARV Delaware, Inc., incorporated by
reference to the Company's Proxy Statement for the 1997
Meeting of Shareholders of ARV Assisted Living, Inc.,
filed with the Securities and Exchange Commission on
Schedule 14A on December 31, 1997.
3.1 Certificate of Incorporation of ARV Delaware, Inc.,
incorporated by reference to the Company's Proxy
Statement for the 1997 Meeting of Shareholders of ARV
Assisted Living, Inc., filed with the Securities and
Exchange Commission on Schedule 14A on December 31,
1997.
3.2 By-laws of ARV Delaware, Inc., incorporated by reference
to the Company's Proxy Statement for the 1997 Meeting of
Shareholders of ARV Assisted Living Inc., filed with the
Securities and Exchange Commission on Schedule 14A on
December 31, 1997.
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, incorporated by reference.
4.2 First Amendment to the Right Agreement, dated October
21, 1998, by and between ARV Assisted Living Inc., and
ChaseMellon Shareholder Services LLC, incorporated by
reference to our 8-K filed October 21, 1998.
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.
30
31
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
10.3 Second Amendment 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 Second Amendment 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
incorporated by reference to the Company's 10-K filed with the
Securities and Exchange Commission on March 31, 1997.
10.11 Amendment to Executive Employment Agreement, effective December 5,
1997, by and between ARV Assisted Living, Inc. and Howard G.
Phanstiel incorporated by reference to the Company's 10-K filed with
the Securities and Exchange Commission on March 31, 1997.
10.12 Executive Employment Agreement, as amended, dated June 1, 1998, by
and between ARV Assisted Living, Inc. and Douglas M. Pasquale
incorporated by reference to the Company's 10-Q for June 30, 1998.
10.13 Employment Agreement, as amended, dated June 15, 1998, by and
between ARV Assisted Living, Inc. and Patricia J. Gifford, MD
incorporated by reference to the Company's 10-Q for June 30, 1998.
10.20 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns III, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.1 on August 10, 1999.
10.21 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns III, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.2 on August 10, 1999. (1)
10.22 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.3 on August 10, 1999. (1)
10.23 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.4 on August 10, 1999. (1)
32
Exhibit
Number Description
------- -----------
10.24 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.5 on August 10, 1999. (1)
10.25 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.6 on August 10, 1999. (1)
10.26 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.7 on August 10, 1999. (1)
10.27 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.8 on August 10, 1999.(1)
10.28 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.9 on August 10, 1999. (1)
10.29 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.10 on August 10, 1999. (1)
10.30 Loan Agreement by and between Banc One Capital Funding Corporation
and Acacia Villa, LLC dated June 27, 1998 incorporated by reference
to the Company's 10Q filed with the Securities and Exchange
Commission as exhibit 10.11 on August 10, 1999. (1)
10.31 Letter Agreement as to the Loans in the aggregate amount of
$39,703,100 from Banc One Capital Funding Corporation to Retirements
Inns II LLC dated June 27, 1998 incorporated by reference to the
Company's 10Q filed with the Securities and Exchange Commission as
exhibit 10.12 on August 10, 1999.
10.32 Letter Agreement as to the Loans in the aggregate amount of
$2,116,100 from Banc One Capital Funding Corporation to Acacia Villa
LLC dated June 27, 1998 incorporated by reference to the Company's
10Q filed with the Securities and Exchange Commission as exhibit
10.13 on August 10, 1999.
10.33 Letter Agreement as to the Loans in the aggregate amount of
$13,382,200 from Banc One Capital Funding Corporation to Retirements
Inns III LLC dated June 27, 1998 incorporated by reference to the
Company's 10Q filed with the Securities and Exchange Commission as
exhibit 10.14 on August 10, 1999.
10.34 Note and Agreement as to Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.15 on August 10,
1999.
10.35 Note and Agreement as to Retirement Inns III, LLC dated June 27,
1998 incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.16 on August 10,
1999.
10.36 Note and Agreement as to Acacia Villa, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.17 on August 10,
1999.
10.37 Term Loan Agreement between ARV Assisted Living, Inc. and LFSRI II
Assisted Living, LLC, incorporated by reference to our 10Q filed
with the Securities and Exchange Commission as exhibit 10.1 on May
15, 2000.
10.38 Warrant issued to LFSRI II Assisted Living, LLC to Purchase Common
Stock of ARV Assisted Living, Inc, incorporated by reference to our
10Q filed with the Securities and Exchange Commission as exhibit
10.2 on May 15, 2000.
33
Exhibit
Number Description
------- -----------
10.39 Second Amendment to Rights Agreement, by and between ARV Assisted
Living, Inc, and Chase Mellon Shareholder Services, LLC,
incorporated by reference to our 10Q filed with the Securities and
Exchange Commission as exhibit 10.3 on May 15, 2000.
10.40 Term Note between ARV Assisted Living, Inc. and LFSRI II Assisted
Living LLC, incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.4 on May 15, 2000.
10.41 Waiver, incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.5 on May 15, 2000.
10.42 LLC Articles of Incorporation incorporated by reference to our 10Q
filed with the Securities and Exchange Commission as exhibit 10.1 on
August 10, 2000.
10.43 Multifamily Note incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.2 on August 10,
2000.
10.44 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
in Franklin Commons, L.P. dated January 16, 2001.
10.45 Assignment of interest in the receivable obligation owed by Franklin
Commons, L.P. to Pacific Demographics Corporations, a wholly owned
subsidiary of ARV Assisted Living, Inc. dated January 16, 2001.
10.46 Assignment of interest in management fees owed by Franklin Commons,
L.P. to ARV Assisted Living, Inc. dated on January 16, 2001.
10.47 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty and
David Collins, and Franklin Commons, L.P.
10.48 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary Davidson,
John Booty and David Collins, and Franklin Commons, L.P.
10.49 Purchase Agreement by and between ARV Investment Group, Inc. (wholly
owned subsidiary of ARV Assisted Living, Inc.) and Eenhoorn
Development, LLC for the sale of partnership interest in Franklin,
Grand Rapids, Rosewood, San Marcos and Lansing.
10.50 Amendment to Purchase Agreement dated October 4, 2000 by and between
ARV Investment Group, Inc. (wholly owned subsidiary of ARV Assisted
Living, Inc.) and Eenhoorn Development, LLC.
10.51 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
in Grand Rapids Housing Partners, L.P. dated January 16, 2001.
10.52 Assignment of interest in the receivable obligation owed by Grand
Rapids Housing Partners, L.P. to ARV Assisted Living, Inc. dated
January 16, 2001.
10.53 Assignment of interest in management fees owed by Grand Rapids
Housing Partners,, L.P. to ARV Assisted Living, Inc. dated on
January 16, 2001.
34
Exhibit
Number Description
------- -----------
10.54 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty and
David Collins, and Grand Rapids Housing Partners, L.P.
10.55 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary Davidson,
John Booty and David Collins, and Grand Rapids Housing Partners,
L.P.
10.58 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
Lansing Housing Partners, L.P. dated January 16, 2001.
10.59 Assignment of interest in the receivable obligation owed by Lansing
Housing Partners, L.P. to ARV Assisted Living, Inc. dated January
16, 2001.
10.60 Assignment of interest in management fees owed by Lansing Housing
Partners,, L.P. to ARV Assisted Living, Inc. dated on January 16,
2001.
10.61 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty and
David Collins, and Lansing Housing Partners, L.P.
10.62 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary Davidson,
John Booty and David Collins, and Lansing Housing Partners, L.P.
10.65 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
Rosewood Villas, L.P. dated January 16, 2001.
10.66 Assignment of interest in the receivable obligation owed by Rosewood
Villas, L.P. to ARV Assisted Living, Inc. dated January 16, 2001.
10.67 Assignment of interest in management fees owed by Rosewood Villas,
L.P. to ARV Assisted Living, Inc. dated on January 16, 2001.
10.68 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty and
David Collins, and Rosewood Villas, L.P.
10.69 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary Davidson,
John Booty and David Collins, and Rosewood Villas, L.P.
10.72 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
San Marcos, L.P. dated January 16, 2001.
10.73 Assignment of interest in the receivable obligation owed by San
Marcos, L.P. to ARV Assisted Living, Inc. dated January 16, 2001.
10.74 Assignment of interest in management fees owed by San Marcos, L.P.
to ARV Assisted Living, Inc. dated on January 16, 2001.
35
Exhibit
Number Description
------- -----------
10.75 Deed of Trust Note of ARV Burlingame, L.P. to Red Mortgage Capital,
Inc.
10.76 Allonge #1 to Deed of Trust Note of ARV Burlingame, L.P. to Red
Mortgage Capital, Inc.
10.77 Deed of Trust between ARV Burlingame, L.P. and Fidelity National
Title Insurance
10.78 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Burlingame, L.P. and Secretary of
Housing and Urban Development
10.79 Regulatory Agreement Nursing Homes Projects between ARV Burlingame,
L.P. and Federal Housing Commissioner
10.80 Deed of Trust Note of ARV Campbell, L.P. to Red Mortgage Capital,
Inc.
10.81 Allonge #1 to Deed of Trust Note of ARV Campbell, L.P. to Red
Mortgage Capital, Inc.
10.82 Deed of Trust between ARV Campbell, L.P. and Fidelity National Title
Insurance
10.83 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Campbell, L.P. and Secretary of Housing
and Urban Development
10.84 Regulatory Agreement Nursing Homes Projects between ARV Campbell,
L.P. and Federal Housing Commissioner
10.85 Deed of Trust Note of ARV Sunnyvale, L.P. to Red Mortgage Capital,
Inc.
10.86 Allonge #1 to Deed of Trust Note of ARV Sunnyvale, L.P. to Red
Mortgage Capital, Inc.
10.87 Deed of Trust between ARV Sunnyvale, L.P. and Fidelity National
Title Insurance
10.88 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Sunnyvale, L.P. and Secretary of
Housing and Urban Development
10.89 Regulatory Agreement Nursing Homes Projects between ARV Sunnyvale,
L.P. and Federal Housing Commissioner
10.90 Deed of Trust Note of ARV Valley View, L.P. to Red Mortgage Capital,
Inc.
10.91 Deed of Trust between ARV Valley View, L.P. and Fidelity National
Title Insurance
10.92 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Valley View, L.P. and Secretary of
Housing and Urban Development
10.93 Regulatory Agreement Nursing Homes Projects between ARV Valley View,
L.P. and Federal Housing Commissioner
23.1 Consent of KPMG LLP.
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.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ARV ASSISTED LIVING, INC.
By: /s/ DOUGLAS M. PASQUALE
----------------------------
Douglas M. Pasquale
Chief Executive Officer
Date: March 30, 2001
Pursuant to the requirements of the Securities Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ DOUGLAS M. PASQUALE Chief Executive Officer April 2, 2001
- ----------------------------- (Principal Executive Officer)
Douglas M. Pasquale
/s/ ABDO H. KHOURY President and Chief April 2, 2001
- ----------------------------- Financial Officer
Abdo H. Khoury (Principal Financial &
Accounting Officer)
/s/ JOHN A. MOORE Director April 2, 2001
- -----------------------------
John A. Moore
/s/ DAVID P. COLLINS Director April 2, 2001
- -----------------------------
David P. Collins
/s/ MAURICE J. DEWALD Director April 2, 2001
- -----------------------------
Maurice J. DeWald
/s/ JEFFREY KOBLENTZ Director April 2, 2001
- -----------------------------
Jeffrey Koblentz
31
37
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ARV Assisted Living, Inc.:
We have audited the accompanying consolidated balance sheets of ARV Assisted
Living, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2000. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule described in Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ARV Assisted
Living, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Orange County, California
March 16, 2001
F-1
38
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)
ASSETS
2000 1999
--------- ---------
Current assets:
Cash and cash equivalents ......................... $ 16,817 $ 14,570
Accounts receivable and amounts due
from affiliates ................................. 829 3,039
Prepaids and other current assets ................. 5,547 2,772
Properties held for sale, net ..................... 3,545 4,301
--------- ---------
Total current assets ...................... 26,738 24,682
Property, furniture and equipment ................... 100,461 102,185
Goodwill, net ....................................... 18,939 19,430
Operating lease security deposits ................... 9,778 12,164
Other non-current assets ............................ 10,024 16,704
--------- ---------
$ 165,940 $ 175,165
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 2,645 $ 1,503
Accrued liabilities ............................... 11,956 13,654
Notes payable, current portion .................... 1,071 1,363
Accrued interest payable .......................... 599 1,292
--------- ---------
Total current liabilities ................. 16,271 17,812
Notes payable, less current portion ................. 99,130 114,369
Lease liabilities ................................... 1,752 1,922
Other non-current liabilities ....................... 789 934
--------- ---------
117,942 135,037
Minority interest in majority owned entities ........ 1,130 1,004
Shareholders' equity:
Series A Preferred stock, convertible and
redeemable; 2,000 shares authorized, none
issued or outstanding at December 31,
2000 and 1999 ..................................... -- --
Preferred stock, no par value. 8,000 shares
authorized, none issued and outstanding ........... -- --
Common stock, $0.01 par value. Authorized
100,000 shares; 17,460 and 16,679 shares
issued and outstanding at December 31,
2000 and 1999, respectively ....................... 175 167
Additional paid in capital......................... 145,337 144,113
Accumulated deficit ............................... (98,644) (105,156)
--------- ---------
Total shareholders' equity ................ 46,868 39,124
--------- ---------
Commitments and contingent liabilities .............. $ 165,940 $ 175,165
========= =========
See accompanying notes to consolidated financial statements.
F-2
39
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Revenue:
Assisted living community revenue:
Rental revenue ........................... $ 112,073 $ 110,980 $ 103,402
Assisted living and other services ....... 24,024 26,196 23,907
Skilled nursing facility revenue ......... 1,960 -- --
Management fees .......................... 808 1,003 1,116
--------- --------- ---------
Total revenue ....................... 138,865 138,179 128,425
--------- --------- ---------
Operating expenses:
Assisted living community operating expense . 87,130 87,665 81,488
Skilled nursing facility expenses ........... 2,580
Assisted living community lease expense ..... 30,892 32,239 26,628
General and administrative .................. 12,288 14,965 27,581
Impairment loss ............................. 6,187 16,368 22,727
Depreciation and amortization ............... 8,483 8,531 9,561
--------- --------- ---------
Total operating expenses ............ 147,560 159,768 167,985
--------- --------- ---------
Loss from continuing operations ............... (8,695) (21,589) (39,560)
--------- --------- ---------
Other income (expense):
Interest income ............................. 1,532 1,027 2,276
Other income (expense), net ................. 244 376 198
Equity in income (loss) of partnerships ..... 791 (884) (430)
Gain (loss) on sale of properties ........... 500 1,884 (674)
Interest expense ............................ (8,368) (8,933) (7,728)
Litigation judgment ......................... -- (4,368) --
--------- --------- ---------
Total other income (expense) ........ (5,301) (10,898) (6,358)
--------- --------- ---------
Loss from continuing operations before
income tax expense, minority interest
in income of majority owned entities,
extraordinary item, discontinued operations
and change in accounting principle .......... (13,996) (32,487) (45,918)
Income tax expense ............................ 160 35 54
--------- --------- ---------
Loss from continuing operations before minority
interest in income of majority
owned entities, extraordinary items,
discontinued operations and change in
accounting principle ........................ (14,156) (32,522) (45,972)
Minority interest in (income) loss
of majority owned entities .................. 55 (903) (839)
--------- --------- ---------
Loss from continuing operations before
extraordinary items, discontinued
operations and change in accounting principle (14,101) (33,425) (46,811)
Extraordinary gain from early extinguishment
of debt, net of income tax of $200
in 2000 ..................................... 20,613 7,020 --
--------- --------- ---------
Income (loss) before discontinued operations
and cumulative effect of change in
accounting principle ........................ 6,512 (26,405) (46,811)
Discontinued operations ....................... -- -- 830
Cumulative effect of change in accounting
principle, net of income tax ................ -- (1,260) --
--------- --------- ---------
Net income (loss) ............................. $ 6,512 $ (27,665) $ (45,981)
========= ========= =========
Earnings (loss) per share information:
Loss before extraordinary gain from early
extinguishment of debt, discontinued
operations, and cumulative effect of
change in accounting principle ............ $ (0.81) $ (2.09) $ (2.95)
Extraordinary gain from early extinguishment
of debt, net of income tax ................ 1.19 .44 --
Discontinued operations ..................... -- -- .05
Cumulative effect of change in accounting
principle, net of income tax .............. -- (.08) --
--------- --------- ---------
Net earnings (loss) .................... $ 0.38 $ (1.73) $ (2.90)
========= ========= =========
Weighted average common shares outstanding .... 17,357 15,968 15,866
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
40
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
COMMON STOCK
-------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------- --------- ----------- ---------
Balance at December 31, 1997 ............... $15,848 $ 142,945 $ (31,510) $ 111,435
Issuance of common stock ................. 25 233 -- 233
Net loss ................................. -- -- (45,981) (45,981)
------- --------- --------- ---------
Balance at December 31, 1998 ............... 15,873 143,178 (77,491) 65,687
Issuance of common stock ................. 806 1,474 -- 1,474
Adjustment to stock issuance
cost-litigation judgment ............... -- (372) -- (372)
Net loss ................................... -- -- (27,665) (27,665)
------- --------- --------- ---------
Balance at December 31, 1999 ............... 16,679 144,280 (105,156) 39,124
Issuance of common stock ................. 781 1,232 -- 1,232
Net income ............................... -- -- 6,512 6,512
------- --------- --------- ---------
Balance at December 31, 2000 ............... 17,460 $ 145,512 $ (98,644) $ 46,868
====== ========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
41
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- ----------------- -----------------
Cash flows provided by (used in) operating activities:
Net income (loss) .............................................. $ 6,512 $(27,665) $ (45,981)
Adjustments to reconcile net income (loss) to net cash
provided by (used in)
operating activities:
Impairment loss ............................................. 6,187 16,368 22,727
Extraordinary gain on debt retirement ....................... (20,613) (7,020) --
Change in accounting principle .............................. -- 1,260 --
Loss (gain) on sale of properties ........................... (500) (1,884) 674
Depreciation and amortization ............................... 8,483 8,531 9,561
Provision for discontinued project costs .................... -- -- 644
Minority interest in income (loss) of majority owned entities (55) 903 839
Other ....................................................... (23) 70 (35)
Changes in assets and liabilities, net of acquisitions:
(Increase) decrease in:
Accounts receivable and amounts due from affiliates .... 2,210 (696) (546)
Prepaids and other assets .............................. (2,775) 2,460 (1,743)
Other non-current assets ............................... (92) (407) (1,382)
Increase (decrease) in:
Accounts payable and accrued liabilities ............... (756) (3,476) 2,659
Accrued interest payable ............................... (693) (385) 195
Lease concessions ...................................... 17 596 781
-------- -------- ---------
Net cash provided by (used in) operating activities of
continuing operations ................................ (2,098) (11,345) (11,607)
Net cash provided by (used in) operating activities of
discontinued operations .............................. -- -- (1,354)
-------- -------- ---------
Net cash used in operating activities .................. (2,098) (11,345) (12,961)
-------- -------- ---------
Cash flows provided by (used in) investing activities:
Acquisition of Hillsdale communities ........................... -- -- (71,709)
Payments of deferred project costs ............................. -- -- (258)
Proceeds from the sale of properties, net of selling cost ..... 3,820 39,786 --
Proceeds from sale of partnership interests .................... -- 1,884 --
Purchase of previously leased communities ...................... -- (14,693) --
Additions to property, furniture and equipment ................. (5,187) (7,391) (12,251)
Decrease in leased property security deposits .................. (498) (6,400) (1,286)
Cash contributed to joint venture .............................. -- (1,251) --
Proceeds from sale of communities to joint venture ............. -- -- 7,249
Distributions received from limited partnership ................ -- -- 660
Other .......................................................... -- -- (527)
-------- -------- ---------
Net cash provided by (used in) investing activities .... (1,865) 11,935 (78,122)
-------- -------- ---------
Cash flows provided by (used by) financing activities:
Borrowings under notes payable for purchase of
previously leased communities ................................ -- 14,677 --
Borrowing under refinancing for owned communities .............. -- 41,819 --
Proceeds from issuance of common stock, net of issuance costs .. -- -- 233
Borrowing under non-secured credit line ........................ 10,000
Borrowings under notes payable ................................. 40,987 2,609 4,350
Repayments of notes payable .................................... (33,654) (45,197) (704)
Repurchase of subordinated debt ................................ (9,598) (1,010) --
Distributions paid from majority owned entities ................ (247) (9,039) (817)
Loan fees ...................................................... (1,278) (1,764) --
Payment of costs associated with the conversion of
subordinated notes .......................................... -- -- (2,610)
Other .......................................................... -- -- (260)
-------- -------- ---------
Net cash provided by financing activities .............. 6,210 2,095 192
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents ... 2,247 2,685 (90,891)
Cash and cash equivalents at beginning of period ................. 14,570 11,885 102,776
-------- -------- ---------
Cash and cash equivalents at end of period ....................... $ 16,817 $ 14,570 $ 11,885
======== ======== =========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest .................................................... $ 6,730 $ 9,318 $ 9,097
======== ======== =========
Income taxes ................................................ $ 160 $ 35 $ 54
======== ======== =========
Supplemental schedule of non-cash investing and
financing activities:
Conversion of current liability to long-term debt ........... $ -- $ 1,000 $ --
Additional costs of private placement ....................... -- 372 --
Conversion of subordinated notes to common stock ............ 1,232 1,474 --
Assumption of debt in connection with the Hillsdale
acquisition ............................................... -- -- 15,250
Financing of leased property security deposits .............. -- -- 2,625
F-5
42
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
ARV Assisted Living, Inc. and subsidiaries (the "Company") own, operate,
acquire and develop assisted living communities that provide housing to senior
citizens, some of whom require assistance with the activities of daily living
such as bathing, dressing and grooming.
At December 31, 2000, we operated 55 assisted living communities ("ALCs") in
eleven states including 15 which we own ("Owned ALCs"), 33 which we operate
pursuant to long-term operating leases ("Leased ALCs") and seven in which we
serve as the property manager ("Managed ALCs"). Thirty-seven of the ALCs are
located in California. We also managed 8 affordable senior and multifamily
apartments (the "Apartment Group"), in 7 of which we serve as the general
partner.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Subsidiaries, which include limited partnerships and
limited liability companies in which we have controlling interests, have been
consolidated into the financial statements. All significant intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
In the preparation of our financial statements in conformity with generally
accepted accounting principles, we have made estimates and assumptions that
affect the following:
o reported amounts of assets and liabilities at the date of the financial
statements;
o disclosure of contingent assets and liabilities at the date of the
financial statements; and
o reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, we consider all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
DEFERRED PROJECT COSTS
Deferred project costs are payments incurred prior to the acquisition of
real property and are capitalized as incurred. These preacquisition costs
primarily include land acquisition, legal and architectural fees, feasibility
study costs and other direct costs associated with new ALC developments.
Deferred project costs are transferred to property, furniture and equipment upon
the successful acquisition of an assisted living community or site. If a project
is discontinued, any deferred project costs are expensed.
F-6
43
PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment are stated at cost less accumulated
depreciation which is charged to expense on a straight-line basis over the
estimated useful lives of the assets as follows:
Buildings and improvements.................. 27.5 to 35 years
Furniture, fixtures and equipment........... 3 to 7 years
Property, furniture and equipment consisted of the following (in thousands):
DECEMBER 31,
-----------------------------
2000 1999
--------- ---------
Land ............................ $ 19,404 $ 19,404
Buildings and improvements ...... 84,891 82,043
Furniture, fixtures and equipment 13,631 9,765
--------- ---------
$ 117,926 $ 111,212
Accumulated depreciation ........ (17,465) (9,027)
--------- ---------
$ 100,461 $ 102,185
========= =========
GOODWILL
Goodwill represents the excess of the purchase price of acquired assets over
the estimated fair value of the net tangible assets acquired. Goodwill is
amortized on a straight-line basis over 35 years and includes accumulated
amortization of $1,539,000 and $1,048,000 at December 31, 2000 and 1999,
respectively. We periodically review our goodwill to assess its recoverability
and impairments will be recognized in the statement of operations if a permanent
impairment is determined to have occurred. If we dispose of a significant
segment of the operations acquired which generated goodwill, we would allocate
the goodwill to the disposal based upon its fair value relative to the fair
value of all assets acquired. Recoverability of goodwill is determined based on
undiscounted future operating cash flows from the related business unit. The
amount of impairment, if any, is measured based on discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of intangible assets will be impacted if
estimated future operating cash flows are not achieved.
ACCOUNTING FOR LONG-LIVED ASSETS
We review our long-lived assets, including goodwill, for impairment when
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. In reviewing recoverability, we estimate the
future cash flows expected to result from using the assets and eventually
disposing of them. Cash flows are reviewed at the community level which is
the lowest level of identifiable cash flows. 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. For long-lived assets held for sale fair value is reduced for costs
to sell.
In 1998, our board of directors decided to sell five Owned ALCs and five
development land sites located outside of California. In addition, in 1999 we
decided to sell twelve leased ALCs outside the Western United States. These
decisions were in keeping with our strategy to focus our efforts on occupancy
gains and to lease up ALCs faster. The fair value of the assets, based upon the
offers we received from potential buyers, was below the carrying amount of the
assets. We recorded an impairment loss of $6.2 million in 2000, $16.4 million in
1999 and $22.7 million in 1998 on properties, goodwill and investments that did
not meet the Company's strategy of focusing in the western United States or were
impaired based upon management's analysis described above. Properties were
classified as held for sale and the investments remained in other non-current
assets at their impaired values.
INVESTMENTS
We are the general partner in five limited partnerships, four of which are
consolidated, which operate ALCs (ownership interests range from less than .01%
to 95%). As of December 31, 2000 we were also a general partner in seven tax
credit partnerships (ownership is generally less than 1%). We account for our
investment in partnerships where significant influence exists using the equity
method because we have less than a controlling interest. Under the terms of the
partnership agreements, profits and losses are allocated to the general and
limited partners in specified ratios. We generally have unlimited liability for
obligations of certain partnerships in which we are the general partner.
Liabilities under these obligations have generally not been significant. We have
unlimited liability under separate guarantees related to these partnerships.
Under Statement of Position No. 78-9, "Accounting for Investments in Real Estate
Ventures," we record our obligations under these agreements as a component our
equity in the income or losses of these partnerships. In 1997, we accrued for
our best estimate of our obligation under these guarantees, and revised that
estimate based upon current facts and circumstances. On January 16, 2001 we sold
five of our partnership interests to an unrelated third party (see Note 3).
F-7
44
In 1998, we pursued an additional development strategy by entering into
joint ventures ("LLCs") designed to help us finance development and renovation
projects and to mitigate the impact of start-up losses associated with the
opening of newly constructed ALCs. The joint ventures were formed to finance and
manage the substantial renovation of existing ALCs acquired in 1998 in the
Hillsdale transaction and to construct three new communities on land sites we
own. Participants in the joint ventures with us are a third-party investor and a
third-party developer. The LLCs contracted with the developer to provide
development services to perform the renovation and construction. We manage the
properties operated by the joint venture for an amount equal to three percent of
gross revenues. We account for our investment in the joint ventures on the
equity method and losses incurred by the LLCs are allocated disproportionately
to the joint venture partners based upon their capital investment and assumption
of risk. We will have an option to purchase the joint venturer's interest in the
LLCs when the ALCs reach stabilization, at a purchase price that is the greater
of fair market value or an amount that generates a guaranteed internal rate of
return on the joint venturer's capital contribution. We have determined that the
value of certain of the LLCs is impaired based upon our review of the projected
cash flows, accordingly, we have written down our investment by $5.7 million, to
reflect the fair value.
INCOME TAXES
We account for income taxes using the asset and liability method whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded to adjust net deferred tax assets to the amount which management
believes will more likely than not be recoverable. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
REVENUE RECOGNITION
We recognize rental, assisted living services and skilled nursing facility
revenue from owned and leased communities on a monthly basis as earned. We
receive fees for property management and partnership administration services
from managed communities and recognize such fees as earned.
ASSISTED LIVING COMMUNITY SALE-LEASEBACK TRANSACTIONS
Certain communities were sold subject to leaseback provisions under
operating leases. Gains where recorded were deferred and amortized into income
over the lives of the leases.
GAIN (LOSS) ON SALE OF PROPERTIES
In December 2000, we sold one parcel of land in Texas for a gain of $0.5
million. The Texas parcel of land has been in property held for sale since
December 1999.
In June 1999, we sold nine of our partnership interests in our senior
apartments for a gain of $1.9 million. In 1998 we recorded a loss of $674,000 on
the sale of certain properties.
EARNINGS (LOSS) PER SHARE
We utilize Statement of Financial Accounting Standards 128 "Earnings Per
Share", in determining earnings (loss) per share ("EPS"). Basic EPS excludes all
dilution and is based upon the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised, or converted into common stock. The effect of potentially dilutive
securities was not included for any of the periods presented as the effect was
antidilutive. Potentially dilutive securities include convertible notes and
stock options which convert to 17,736,056, 12,972,313, and 4,183,442, shares of
common stock for the years ended December 31, 2000, 1999 and 1998, respectively.
ACCOUNTING FOR START-UP COSTS
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 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 of any
previously capitalized start-up or organizational costs. We adopted the
provisions of SOP 98-5 in the first quarter of 1999. The carrying amounts of
capitalized start-up costs were approximately $1.3 million.
F-8
45
SEGMENT INFORMATION
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information ("SFAS 131"). 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. We evaluate performance and make resource allocation
decisions on a community by community basis. Accordingly, each community is
considered an "operating segment" under SFAS 131. However, SFAS 131 did not have
an impact on the financial statements because the communities have similar
economic characteristics, as defined by SFAS 131, and meet the criteria for
aggregation into one "reportable segment".
RECLASSIFICATIONS
We have reclassified certain prior period amounts to conform to the December
31, 2000 presentation.
(2) ACQUISITIONS
HILLSDALE PROPERTIES
In 1998 we purchased interests in 11 senior housing communities, including a
skilled nursing component in one community, all located in California, for $83.5
million. The communities acquired are as follows:
DATE
COMMUNITY LOCATION UNITS ACQUIRED
--------- -------- ----- --------
OWNED
Golden Creek Inn Irvine, CA 123 April 16, 1998
Hillcrest Inn Thousand Oaks, CA 137 April 16, 1998
Rossmore House (sold in 1999) Los Angeles, CA 157 May 4, 1998
The Berkshire Berkley, CA 81 May 12, 1998
Encino Hills Terrace Encino, CA 76 July 7, 1998
-----
Total owned 574
-----
LEASED
Willow Glen Villa San Jose, CA 188 May 18, 1998
Hillsdale Manor Retirement San Mateo, CA 159 July 2, 1998
Center(a)
-----
Total Owned 347
-----
MANAGED
Sterling Court(b) San Mateo, CA 149 April 16, 1998
Palo Alto Commons Palo Alto, CA 143 April 16, 1998
San Carlos Retirement Center San Carlos, CA 85 April 16, 1998
The Altenheim Oakland, CA 138 April 16, 1998
-----
Total Managed 515
-----
Total 1,436
=====
- ----------
(a) Includes a skilled nursing center.
(b) In addition, we acquired a twenty percent (20%) general partnership interest
in WHW Associates, the fifty percent (50%) general partner of Fifty
Peninsula Partners, a California limited partnership, which owns Sterling
Court. This interest was sold in 2000 for an amount approximating its
carrying value.
We accounted for the above transactions using the purchase method and paid
approximately $71.7 million of the purchase prices from cash on hand and assumed
$15.25 million of existing mortgage financing. The terms of the loans are as
follows:
o secured by Golden Creek Inn ($2.25 million) and Hillcrest Inn ($13.0
million);
o interest at LIBOR plus 2.50% (Golden Creek Inn) and LIBOR plus 2.25%
(Hillcrest Inn);
o monthly payments of interest only until August 1998 (Golden Creek Inn)
and October 1998 (Hillcrest Inn);
o thereafter, monthly payments of principal and interest based upon a
25-year amortization schedule; and
o 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
for the owned, leased and managed communities acquired aggregated approximately
$23.6 million.
F-9
46
The pro forma effect of the above acquisitions for the year ended December
31, 1998, assuming that the transactions occurred on January 1, 1998, is as
follows (dollars in thousands, except per share amounts):
For the Year Ended
December 31, 1998
------------------
(Unaudited)
(In thousands,
except per share
amounts)
Operating revenues.................. $137,349
Operating expenses.................. $175,522
Net loss............................ $(45,841)
Loss per common share............... $ (2.89)
(3) DISCONTINUED OPERATIONS
In December 1997, our Board of Directors adopted a plan to discontinue the
operations of GeriCare, our therapy business, and the Apartment Group
(previously referred to as Tax Credit Partnerships). In March 1998, we
contracted with a national provider of physical rehabilitation services to
provide residents of ARV communities rehabilitation and wellness care services,
which assists those residents to age in place while allowing us to exit the
rehabilitation business. We were unable to fully dispose of the Apartment Group
and will continue to operate three apartment properties. As a result, we
reclassified the statement of operations to reflect the equity in income (loss)
of the partnerships and sale of the partnership interests and we reclassified
our obligations under our guarantees related to the Apartment Group out of net
liabilities of discontinued operations. In 1998 we reversed the $0.8 million of
the 1997 charge for discontinued operations.
(4) NOTES PAYABLE
Notes payable consist of the following at December 31 (in thousands):
2000 1999
-------- --------
Convertible subordinated notes due April 1, 2006 with
interest at 6.75% The notes require semi-annual
payments of interest and are convertible to common
stock at $18.57 per share. The notes, offered in a
maximum amount of $57,500, may be called by us
beginning in April 1999 at declining premiums
starting at 110% of the principal amount .......... $ 15,253 $ 48,257
Notes payable, bearing interest at fixed rates
between 8.53% and 9.5 %, payable in monthly
installments of principal and interest totaling
$123,479 collateralized by property, maturities
ranging from January 2002 through July 2010 ....... 13,752 41,884
Notes payable, bearing interest at floating rates of
LIBOR (6.44% at December 31, 2000) plus rates
between 2.25% and 2.50% payable in monthly
installments of interest only collateralized by
Owned ALCs, maturities ranging from August 2002
through October 2002 .............................. 18,972 24,404
Notes payable, bearing interest at rates of 8.00% and
8.53%, payable in monthly installments of principal
and interest totaling $302,559 collateralized by
property, maturities ranging from July 2010 to
January 2036 ...................................... 40,932 --
Notes payable to shareholder bearing interest
beginning April 2001 at 30-day Treasury rate with
principle due and payable April 2002 .............. 1,292 1,147
Notes payable to shareholder bearing interest at
LIBOR (6.44% at December 31, 2000) plus 10% payable
in monthly installments of interest only,
unsecured, maturing April 2002 .................... 10,000 --
Other-primarily capitalized equipment leases ........ -- 40
-------- --------
100,201 115,732
Less amounts currently payable ...................... 1,071 1,363
-------- --------
$ 99,130 $114,369
======== ========
F-10
47
The future annual principal payments of the notes payable at December 31,
2000 are as follows (in thousands):
2001.............................. $ 1,071
2002 ............................. 43,556
2003 ............................. 354
2004 ............................. 383
2005 ............................. 416
Thereafter ....................... 54,421
--------
$100,201
========
In 1998, we paid a lender approximately $1.7 million of fees for an interest
rate lock and $0.2 million for loan commitment and other fees. The lender
terminated the loan commitment and underlying interest rate lock in October 1998
due to adverse market conditions. The lender returned $0.4 million of the
interest rate lock fees in January 1999 and $0.5 million in June 2000 as full
and final settlement. We included the amounts paid and received in interest
expense in the accompanying consolidated statements of operations for the years
ended December 31, 2000, 1999 and 1998.
The various debt agreements contain restrictive covenants requiring us to
maintain certain financial ratios, including current ratio, working capital,
minimum net worth, debt-to-equity and debt service coverage, among others. At
December 31, 2000, we were in compliance with the debt covenants.
(5) EMPLOYEE BENEFIT PLANS
SAVINGS PLAN
Effective January 1, 1997, we established a savings plan (the "Savings
Plan") that qualifies as a deferred salary arrangement under Section 401(k) of
the Internal Revenue Code. Under the Savings Plan, participating employees who
are at least 21 years of age may defer a portion of their pretax earnings, up to
the Internal Revenue Service annual contribution limit. We match 25% of each
employee's contributions up to a maximum of 6% of the employee's earnings.
Employees are eligible to enroll at the first enrollment date following the
start of their employment (July 1 or January 1). We match employees'
contributions beginning on the first enrollment date following one year of
service or 1,000 hours of service. Our expense related to the Savings Plan was
approximately $175,000, $191,000, and $198,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
(6) STOCK OPTIONS
The Company has two stock option plans that provide for the granting of
stock options to officers, directors, consultants and key employees. The
objectives of these plans include attracting and retaining the best personnel,
providing for additional performance incentives, and promoting the success of
the Company by providing employees the opportunity to acquire common stock. We
have elected to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related interpretations in
accounting for employee stock options. Under APB 25, because the exercise price
of our employee stock options usually equals the market price of the underlying
stock on the date of grant, no compensation expense is recorded.
The 1995 Stock Option and Incentive Plan of ARV Assisted Living, Inc. is
two-tiered, one for the benefit of key employees and consultants and one for the
benefit of non-employee directors. The maximum number of shares which may be
issued under the Plan is 15% of the total outstanding shares at the end of the
fiscal year. The number of shares which may be issued for Incentive Stock
Options is limited to 1,155,666 shares. As of December 31, 2000, there are
275,537 Incentive Stock Options available for issuance.
The 1999 Stock Option Plan of ARV Assisted Living, Inc. is two-tiered and
very similar to our 1995 Stock Option and Incentive plan. The maximum number of
shares which may be issued under the 1999 Plan is 2,400,000 plus 15% of any
increase in total outstanding shares since June 30, 1999. During the years ended
December 31, 2000 and 1999 additional shares issued were 781,025 and 799,566
respectively. As of December 31, 2000 there are 273,377 Incentive Stock Options
available for issuance. Options granted under both stock option plans vest over
periods ranging from one and one-half to five years from the date of grant. At
December 31, 2000, 503,481 of the options were eligible for exercise.
F-11
48
A summary of stock option plans at December 31, 2000 is as follows:
SHARES UNDER
OUTSTANDING
OPTIONS PRICE PER SHARE
------------ ---------------
Authorization of shares .... 2,637,089 N/A
Options granted ............ 2,350,400 $4.75--$16.25
Options exercised .......... (25,000) $9.00--$10.25
Options canceled ........... (1,238,350) $4.75--$15.40
----------
Balance at December 31, 1998 1,087,050 $4.75--$16.25
Options granted ............ 1,745,000 $1,63--$14.00
Options exercised .......... -- N/A
Options canceled ........... (937,750) $3.00--$16.25
----------
Balance at December 31, 1999 1,894,300 $1.63--$15.75
Options granted ............ 656,500 $1.06--$0.50
Options exercised .......... -- N/A
Options canceled ........... (211,248) $0.56--$14.31
----------
Balance at December 31, 2000 2,339,552 $0.50--$14.00
==========
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if we
have accounted for our employee stock options granted subsequent to December 31,
1994 under the fair value method of SFAS 123. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with a weighted-average expected life of the option of 7 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. Option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those of trade options, and because changes in subjective input assumptions can
materially affect the fair value estimate, actual fair values may differ from
those estimates.
The following represents the estimated fair value of stock options granted
and the assumptions used for calculation:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Average estimated fair value per option at grant date...... $5.10 $3.00 $11.81
Average exercise price per option granted.................. $5.10 $3.00 $11.81
Expected Stock volatility.................................. 60% 60% 60%
Risk -- free interest rate................................. 5.0% 5.0% 4.7%
Option term -- years....................................... 10 10 10
Stock dividend yield....................................... -- -- --
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro forma
information is as follows (in thousands, except per share amounts):
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Pro forma net income (loss)............. $5,769 $(28,436) $(47,362)
Pro forma income (loss) per share....... $ 0.33 $ (1.78) $ (2.99)
A summary of our stock option activity and related information for the years
ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
--------------------------- --------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Outstanding -- beginning of the
period ...................... 1,894,300 $ 6.46 1,087,050 $13.33 1,038,002 $13.12
Granted ....................... 656,500 $ 5.55 1,745,000 $ 3.00 847,500 $11.81
Exercised ..................... -- -- $ -- (25,000) $ 9.33
Forfeited ..................... (211,248) $10.41 (937,750) $10.56 (773,452) $11.52
---------
Outstanding -- end of period .. 2,339,552 $ 3.18 1,894,300 $ 6.46 1,087,050 $13.33
---------
Exercisable at end of period .. 503,481 $ 5.04 96,800 $12.80 141,350 $12.62
Weighted average fair value
of options granted during the
period ...................... $ 5.10 $ 3.00 $11.81
F-12
49
At December 31, 2000, options outstanding had a weighted average life of
8.79 years.
(7) INCOME TAXES
The provision for income tax expense from continuing operations consists of
the following for the years ended December 31, 2000 1999 and 1998 (in
thousands):
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Current:
Federal ....................... $ -- $-- $--
State ......................... 160 35 54
---- --- ---
Total current.......... 160 35 54
---- --- ---
Deferred:
Federal ....................... -- -- --
State ......................... -- -- --
---- --- ---
Total deferred......... -- -- --
---- --- ---
$160 $35 $54
==== === ===
We have Federal net operating loss carryforwards of $52,000,000, which
expire in 2011 to 2019.
A reconciliation of income tax expense (benefit) related to income from
continuing operations to the Federal statutory rate of 34% is as follows (in
thousands):
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 1998
------------ ------------ ------------
Income tax expense (benefit) at statutory rate ........ $(4,759) $(11,046) $(15,612)
State income tax expense, net of federal income taxes . 160 35 36
Reduction of net operating loss carryforwards due to
extraordinary gain .................................. 7,076 -- --
Change in federal valuation allowance ................. (1,998) 11,059 15,282
Other ................................................. (319) (13) 348
------- ------- --------
Total income tax expense .................... $ 160 $ 35 $ 54
======= ======= ========
Temporary differences giving rise to a significant amount of deferred tax
assets and liabilities from continuing operations at December 31, 2000 and 1999
are as follows (in thousands):
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
Deferred tax assets:
Deferred gain on sale .................. $ -- $ --
Other partnership income ............... -- --
Net operating loss carryforwards ....... 18,200 24,760
Write down of properties ............... 14,429 9,625
Other .................................. 512 1,098
-------- --------
Gross deferred tax asset ....... 33,141 35,483
Less valuation allowance ............... (32,595) (34,593)
Deferred tax liabilities -- other ...... (546) (890)
-------- --------
Net long-term deferred tax asset $ -- $ --
======== ========
A valuation allowance is provided against net deferred tax assets when it is
more likely than not that some portion of the deferred tax asset will not be
realized. We have established a valuation allowance for the deferred tax asset
as, in our best estimate, it is not likely to be realized in the near term.
F-13
50
(8) RELATED PARTY TRANSACTIONS
Fees and other amounts receivable from affiliates of $718,000, $1,374,000
and $760,000 at December 31, 2000, 1999 and 1998, respectively, consist of
receivables related to management services we rendered and non-interest bearing
expense advances to various partnerships. Amounts due from affiliates are
generally expected to be repaid in subsequent years with cash from operations or
from bank financing obtained by the affiliates. Related management fee revenue
from affiliates totals $629,000, $722,000, and $742,000 during the year ended
December 31, 2000, 1999 and 1998, respectively.
We are reimbursed for certain expenses such as payroll and retirement
benefit, supplies and other small expenses paid on behalf of Affiliated
Partnerships. During the years ended December 31, 2000, 1999 and 1998,
respectively, the expenses incurred on behalf of affiliates and the related
reimbursements from these affiliates amounted to approximately $22.3 million,
$17.8 million, and $12.8 million, respectively. We account for these
reimbursements as a reduction of the related expenses.
We use the services of J&D Design, as well as others, for interior design
work at our communities. The principal of J&D Design is Joan Davidson, wife of
former Senior Vice President Eric Davidson and daughter-in-law of the former
Chairman, President and Chief Executive Officer, Gary Davidson. Services
provided by J&D Design include design work and the purchase of furniture,
fixtures and equipment ("FF&E") for developed ALCs and rehabilitation of
existing or newly acquired ALCs. We paid J&D Design approximately $24,000,
$13,000, and $560,000, for the years ended December 31, 2000, 1999 and 1998,
respectively, a portion of which was for design services and a portion of which
was for reimbursement of costs for FF&E.
Mr. R. Bruce Andrews, a former member of our Board of Directors, is Chief
Executive Officer of Nationwide Health Properties, Inc. ("NHP"), a health care
REIT. NHP is the owner of 16 ALCs we lease. Of that number, leases for 13 ALCs
were entered into prior to November 29, 1995, the date Mr. Andrews became a
Board member, and leases for three ALCs were entered into during Mr. Andrews'
tenure as a board member. Aggregate lease payments under these leases were
approximately $12.5 million, $11.6 million, and $11.3 million for the years
ended December 31, 2000, 1999 and 1998, respectively.
(9) SHAREHOLDERS' EQUITY
AGREEMENT FOR SALE OF STOCK TO BANK
On June 27, 1999 we signed an agreement with the lender as part of the
refinancing of the 9 ALCs providing for the purchase of 72,000 shares of common
stock at a price of $3.93 per share of common stock of the company; expiring
June 27, 2004.
SHAREHOLDERS RIGHTS PLAN
In May 1998, we adopted a shareholders rights plan under which we have
declared a dividend distribution of one Preferred Share Purchase Right on each
outstanding share of our common stock. Subject to limited exceptions, the Rights
will be exercisable if a person or group acquires 10% or , in the case of Lazard
Freres Real Estate Investors, LLC ("Lazard" or "LFREI"), 50% or more of our
stock or announces a tender offer for 10% or, in the case of LFREI, 50% or more
of the common stock. When exercisable, each Right (except the Rights held by the
acquiring person) will entitle its holder to purchase, at the Right's
then-current exercise price, a number of our common shares having a market value
at the time of twice the Right's exercisable price. If we are acquired in a
merger or other business combination transaction which has not been approved by
our Board of Directors, each Right will entitle its holder to
F-14
51
purchase, at the Right's then-current exercise price, a number of the acquiring
company's common shares having a market value at that time of twice the Right's
exercise price.
(10) ASSISTED LIVING COMMUNITY LEASES
At December 31, 2000, we leased 33 ALCs. The ALC leases expire from 2006 to
2017, and contain two to three renewal options ranging from five to ten years.
Subsequent to year end 16 of these leases had their terms extended to 2021 under
new lease agreements.
Generally, leases for Leased ALCs owned by a common landlord contain cross
default provisions permitting the lessor to declare a default under all leases
in the event of default on one lease. The lease agreements with each landlord
are interconnected in that we will not be entitled to exercise our right to
renew one lease with a particular landlord without exercising our right to renew
all other leases with that landlord. We anticipate that similar renewal and
cross-default provisions will be included in leases with other landlords.
Minimum lease payments required under assisted living community operating
leases in effect at December 31, 2000 are as follows:
AT DECEMBER 31,
2000
----------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31:
2001................................................. $ 31,565
2002................................................. 32,544
2003................................................. 33,451
2004................................................. 34,184
2005................................................. 35,466
Thereafter........................................... 210,939
--------
$378,149
========
Certain of the leases require the payment of additional rent based on a
percentage increase of gross revenues. Leases are subject to increase based upon
changes in the consumer price index or gross revenues, subject to certain
limits, as defined in the individual lease agreements. In the years ended
December 31, 2000 and 1999 such additional rent amounted to $2.7 million and
$2.1 million, respectively.
(11) LIQUIDITY
We believe that our existing liquidity, ability to sell assisted living
communities and land sites which do not meet our financial objectives or
geographic clustering strategy, and ability to refinance certain assisted living
communities will provide adequate resources to meet our current operating and
investing needs and support our current growth plans for the next 12 months. We
will be required from time to time to incur additional indebtedness or issue
additional debt or equity securities to finance our growth strategy, including
the acquisition and development of assisted living communities as well as other
capital expenditures and to provide additional funds to meet increased working
capital requirements.
(12) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
We have guaranteed the indebtedness at December 31, 2000, of certain
unconsolidated affiliated partnerships for $21 million.
With respect to loans totaling $45.0 million we are the general partner of
certain limited partnerships that serve as the sole members of the three
borrowing entities formed as limited liability companies. Although a member of a
limited liability company is not personally liable for any contract or other
obligation of that entity, we delivered limited guaranties in connection with
the loans. Due to the limited guaranties, we assumed liability for repayment of
the loan indebtedness as a result of fraudulent or intentional misconduct
regarding the mortgaged properties, an unconsented transfer of a mortgaged
property, a change of control by borrower, or violation of hazardous materials
covenants. Also, we guaranteed the borrower's obligation to rebalance the loans
upon breach of debt service coverage obligations.
F-15
52
In our opinion, no claims may be currently asserted under any of the
aforementioned guarantees based on the terms of the respective agreements other
than those accrued.
CONTINGENCIES
Bond Financing. We have entered into four long-term leases of ALCs, the
acquisition and construction of which have been or are being financed by tax
exempt multi-unit housing revenue bonds. In order to meet the lease obligations
and to allow the landlord to continue to qualify for favorable tax treatment of
the interest payable on the bonds, the ALCs must comply with certain federal
income tax requirements. These requirements principally pertain to the maximum
income level of a specified portion of the residents. Should we elect to execute
additional leases for ALCs to be constructed with bond financing, the same and
possibly additional restrictions are anticipated to be imposed. Failure to
satisfy these requirements will constitute an event of default under the leases,
thereby permitting the landlord to accelerate their termination. Failure to
obtain low-income residents in the sequence and time required could materially
affect the lease-up schedule and, therefore, cash flow from such ALCs.
F-16
53
We are from time to time subject to lawsuits and other matters in the normal
course of business. While we cannot predict the results with certainty, we do
not believe that any liability from any such lawsuits or other matters will have
a material effect on our financial position, results of operations, or
liquidity.
(13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of our financial instruments have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions or estimation
methodologies may have a material impact on the estimated fair value amounts.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, fees receivable and other amounts due from affiliates and,
accounts payable, accrued liabilities and accrued interest payable, approximate
fair value due to the short-term nature of these instruments. The notes payable
bear interest at rates and other terms that approximate current market rates and
terms. Therefore, we believe that the carrying value approximates fair value,
except for convertible debt which is approximately $5.1 million and $13.5
million at December 31, 2000 and 1999, respectively.
(14) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31,
-----------------------
2000 1999
------- -------
Prepaids and other current assets
Impounds-replacements.......................... $ 2,878 $ 1,483
Other.......................................... 2,669 1,289
------- -------
$ 5,547 $ 2,772
======= =======
Accrued liabilities
Payroll and related............................ $ 3,064 $ 2,863
Property taxes................................. 1,095 1,412
Obligations related to apartment guarantee..... 3,127 4,192
Various other accrueds......................... 4,670 5,187
------- -------
$11,956 $13,654
======= =======
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FOR THE QUARTER ENDED
--------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000
Total revenue ............................. $ 34,557 $ 34,435 $ 34,980 $ 34,893
Income (loss) from operations ............. (7,172) 200 (794) (929)
Net income (loss) ......................... (7,175) (1,553) 12,815 2,425
Basic and diluted earnings (loss) per share (0.41) (0.08) 0.73 0.14
1999
Total revenue ............................. $ 34,060 $ 34,024 $ 34,344 $ 35,758
Loss from operations ...................... (10,632) (1,203) (8,041) (713)
Net loss .................................. (5,513) (2,433) (15,693) (4,026)
Basic and diluted loss per share .......... (0.34) (0.15) (0.99) (0.25)
FOURTH QUARTER TRANSACTIONS AND ADJUSTMENTS
In the fourth quarter, 2000, we determined that costs related to the early
extinguishment of debt in prior quarters had not been written off. Accordingly,
the above amounts reflect adjustments to previously reported results. The impact
was to decrease the net income by $200,000 in the quarter ended March 31, 2000
and $577,000 in the quarter ended June 30, 2000. We have also recorded a $5.7
million impairment charge to the carrying value of the unconsolidated LLCs in
which we are an investor.
(16) SUBSEQUENT EVENTS
On January 16, 2001 we completed the sale of five tax credit partnerships.
In March 2001 we renegotiated the leases on 16 of our properties to allow
for extension of the leases until 2021 and provides arrangements whereby capital
improvements can be made to the sixteen communities. A restructuring fee is
payable over the next three years at $4.5 million.
F-17
54
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
Schedule II -- Valuation and Qualifying Accounts
For the Years Ended December 31, 2000, 1999, and 1998
(In thousands)
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
- ----------- ----------------- --------- ---------- -----------
Allowance for Other Assets:
December 31, 1998....................... -- 776 68 708
December 31, 1999....................... 708 1,212 31 1,889
December 31, 2000....................... 1,889 791 489 2,191
See accompanying independent auditors' report.
F-18
55
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2 Agreement and Plan of Merger by and between ARV Assisted Living,
Inc. and ARV Delaware, Inc., incorporated by reference to the
Company's Proxy Statement for the 1997 Meeting of Shareholders of
ARV Assisted Living, Inc., filed with the Securities and Exchange
Commission on Schedule 14A on December 31, 1997.
3.1 Certificate of Incorporation of ARV Delaware, Inc., incorporated by
reference to the Company's Proxy Statement for the 1997 Meeting of
Shareholders of ARV Assisted Living, Inc., filed with the Securities
and Exchange Commission on Schedule 14A on December 31, 1997.
3.2 By-laws of ARV Delaware, Inc., incorporated by reference to the
Company's Proxy Statement for the 1997 Meeting of Shareholders of
ARV Assisted Living Inc., filed with the Securities and Exchange
Commission on Schedule 14A on December 31, 1997.
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,
incorporated by reference.
4.2 First Amendment to the Right Agreement, dated October 21, 1998, by
and between ARV Assisted Living Inc., and ChaseMellon Shareholder
Services LLC, incorporated by reference to our 8-K filed October 21,
1998.
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 Second Amendment 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 Second Amendment 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.
56
Exhibit
Number Description
------- -----------
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
incorporated by reference to the Company's 10-K filed with the
Securities and Exchange Commission on March 31, 1997.
10.11 Amendment to Executive Employment Agreement, effective December 5,
1997, by and between ARV Assisted Living, Inc. and Howard G.
Phanstiel incorporated by reference to the Company's 10-K filed with
the Securities and Exchange Commission on March 31, 1997.
10.12 Executive Employment Agreement, as amended, dated June 1, 1998, by
and between ARV Assisted Living, Inc. and Douglas M. Pasquale
incorporated by reference to the Company's 10-Q for June 30, 1998.
10.13 Employment Agreement, as amended, dated June 15, 1998, by and
between ARV Assisted Living, Inc. and Patricia J. Gifford, MD
incorporated by reference to the Company's 10-Q for June 30, 1998.
10.20 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns III, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.1 on August 10, 1999.
10.21 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns III, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.2 on August 10, 1999. (1)
10.22 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.3 on August 10, 1999. (1)
10.23 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.4 on August 10, 1999. (1)
10.24 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.5 on August 10, 1999. (1)
10.25 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.6 on August 10, 1999. (1)
57
Exhibit
Number Description
------- -----------
10.26 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.7 on August 10, 1999. (1)
10.27 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.8 on August 10, 1999.(1)
10.28 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.9 on August 10, 1999. (1)
10.29 Loan Agreement by and between Banc One Capital Funding Corporation
and Retirement Inns II, LLC dated June 27, 1998 incorporated by
reference to the Company's 10Q filed with the Securities and
Exchange Commission as exhibit 10.10 on August 10, 1999. (1)
10.30 Loan Agreement by and between Banc One Capital Funding Corporation
and Acacia Villa, LLC dated June 27, 1998 incorporated by reference
to the Company's 10Q filed with the Securities and Exchange
Commission as exhibit 10.11 on August 10, 1999. (1)
10.31 Letter Agreement as to the Loans in the aggregate amount of
$39,703,100 from Banc One Capital Funding Corporation to Retirements
Inns II LLC dated June 27, 1998 incorporated by reference to the
Company's 10Q filed with the Securities and Exchange Commission as
exhibit 10.12 on August 10, 1999.
10.32 Letter Agreement as to the Loans in the aggregate amount of
$2,116,100 from Banc One Capital Funding Corporation to Acacia Villa
LLC dated June 27, 1998 incorporated by reference to the Company's
10Q filed with the Securities and Exchange Commission as exhibit
10.13 on August 10, 1999.
10.33 Letter Agreement as to the Loans in the aggregate amount of
$13,382,200 from Banc One Capital Funding Corporation to Retirements
Inns III LLC dated June 27, 1998 incorporated by reference to the
Company's 10Q filed with the Securities and Exchange Commission as
exhibit 10.14 on August 10, 1999.
10.34 Note and Agreement as to Retirement Inns II, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.15 on August 10,
1999.
10.35 Note and Agreement as to Retirement Inns III, LLC dated June 27,
1998 incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.16 on August 10,
1999.
10.36 Note and Agreement as to Acacia Villa, LLC dated June 27, 1998
incorporated by reference to the Company's 10Q filed with the
Securities and Exchange Commission as exhibit 10.17 on August 10,
1999.
10.37 Term Loan Agreement between ARV Assisted Living, Inc. and LFSRI II
Assisted Living, LLC, incorporated by reference to our 10Q filed
with the Securities and Exchange Commission as exhibit 10.1 on May
15, 2000.
10.38 Warrant issued to LFSRI II Assisted Living, LLC to Purchase Common
Stock of ARV Assisted Living, Inc, incorporated by reference to our
10Q filed with the Securities and Exchange Commission as exhibit
10.2 on May 15, 2000.
58
Exhibit
Number Description
------- -----------
10.39 Second Amendment to Rights Agreement, by and between ARV Assisted
Living, Inc, and Chase Mellon Shareholder Services, LLC,
incorporated by reference to our 10Q filed with the Securities and
Exchange Commission as exhibit 10.3 on May 15, 2000.
10.40 Term Note between ARV Assisted Living, Inc. and LFSRI II Assisted
Living LLC, incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.4 on May 15, 2000.
10.41 Waiver, incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.5 on May 15, 2000.
10.42 LLC Articles of Incorporation incorporated by reference to our 10Q
filed with the Securities and Exchange Commission as exhibit 10.1 on
August 10, 2000.
10.43 Multifamily Note incorporated by reference to our 10Q filed with the
Securities and Exchange Commission as exhibit 10.2 on August 10,
2000.
10.44 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
in Franklin Commons, L.P. dated January 16, 2001.
10.45 Assignment of interest in the receivable obligation owed by Franklin
Commons, L.P. to Pacific Demographics Corporations, a wholly owned
subsidiary of ARV Assisted Living, Inc. dated January 16, 2001.
10.46 Assignment of interest in management fees owed by Franklin Commons,
L.P. to ARV Assisted Living, Inc. dated on January 16, 2001.
10.47 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty and
David Collins, and Franklin Commons, L.P.
10.48 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary Davidson,
John Booty and David Collins, and Franklin Commons, L.P.
10.49 Purchase Agreement by and between ARV Investment Group, Inc. (wholly
owned subsidiary of ARV Assisted Living, Inc.) and Eenhoorn
Development, LLC for the sale of partnership interest in Franklin,
Grand Rapids, Rosewood, San Marcos and Lansing.
10.50 Amendment to Purchase Agreement dated October 4, 2000 by and between
ARV Investment Group, Inc. (wholly owned subsidiary of ARV Assisted
Living, Inc.) and Eenhoorn Development, LLC.
10.51 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
in Grand Rapids Housing Partners, L.P. dated January 16, 2001.
10.52 Assignment of interest in the receivable obligation owed by Grand
Rapids Housing Partners, L.P. to ARV Assisted Living, Inc. dated
January 16, 2001.
10.53 Assignment of interest in management fees owed by Grand Rapids
Housing Partners,, L.P. to ARV Assisted Living, Inc. dated on
January 16, 2001.
59
Exhibit
Number Description
------- -----------
10.54 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty and
David Collins, and Grand Rapids Housing Partners, L.P.
10.55 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary Davidson,
John Booty and David Collins, and Grand Rapids Housing Partners,
L.P.
10.58 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
Lansing Housing Partners, L.P. dated January 16, 2001.
10.59 Assignment of interest in the receivable obligation owed by Lansing
Housing Partners, L.P. to ARV Assisted Living, Inc. dated January
16, 2001.
10.60 Assignment of interest in management fees owed by Lansing Housing
Partners,, L.P. to ARV Assisted Living, Inc. dated on January 16,
2001.
10.61 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty and
David Collins, and Lansing Housing Partners, L.P.
10.62 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary Davidson,
John Booty and David Collins, and Lansing Housing Partners, L.P.
10.65 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
Rosewood Villas, L.P. dated January 16, 2001.
10.66 Assignment of interest in the receivable obligation owed by Rosewood
Villas, L.P. to ARV Assisted Living, Inc. dated January 16, 2001.
10.67 Assignment of interest in management fees owed by Rosewood Villas,
L.P. to ARV Assisted Living, Inc. dated on January 16, 2001.
10.68 First Amendment to Operating Deficit Guaranty Agreement by and
between ARV Assisted Living, Inc., Gary Davidson, John Booty and
David Collins, and Rosewood Villas, L.P.
10.69 First Amendment to Tax Credit Reduction and Recapture Guaranty
Agreement by and between ARV Assisted Living, Inc., Gary Davidson,
John Booty and David Collins, and Rosewood Villas, L.P.
10.72 Agreement of Assignment of ARV Investment Group, Inc. ( a wholly
owned subsidiary of ARV Assisted Living, Inc.) partnership interest
San Marcos, L.P. dated January 16, 2001.
10.73 Assignment of interest in the receivable obligation owed by San
Marcos, L.P. to ARV Assisted Living, Inc. dated January 16, 2001.
10.74 Assignment of interest in management fees owed by San Marcos, L.P.
to ARV Assisted Living, Inc. dated on January 16, 2001.
60
Exhibit
Number Description
------- -----------
10.75 Deed of Trust Note of ARV Burlingame, L.P. to Red Mortgage Capital,
Inc.
10.76 Allonge #1 to Deed of Trust Note of ARV Burlingame, L.P. to Red
Mortgage Capital, Inc.
10.77 Deed of Trust between ARV Burlingame, L.P. and Fidelity National
Title Insurance
10.78 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Burlingame, L.P. and Secretary of
Housing and Urban Development
10.79 Regulatory Agreement Nursing Homes Projects between ARV Burlingame,
L.P. and Federal Housing Commissioner
10.80 Deed of Trust Note of ARV Campbell, L.P. to Red Mortgage Capital,
Inc.
10.81 Allonge #1 to Deed of Trust Note of ARV Campbell, L.P. to Red
Mortgage Capital, Inc.
10.82 Deed of Trust between ARV Campbell, L.P. and Fidelity National Title
Insurance
10.83 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Campbell, L.P. and Secretary of Housing
and Urban Development
10.84 Regulatory Agreement Nursing Homes Projects between ARV Campbell,
L.P. and Federal Housing Commissioner
10.85 Deed of Trust Note of ARV Sunnyvale, L.P. to Red Mortgage Capital,
Inc.
10.86 Allonge #1 to Deed of Trust Note of ARV Sunnyvale, L.P. to Red
Mortgage Capital, Inc.
10.87 Deed of Trust between ARV Sunnyvale, L.P. and Fidelity National
Title Insurance
10.88 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Sunnyvale, L.P. and Secretary of
Housing and Urban Development
10.89 Regulatory Agreement Nursing Homes Projects between ARV Sunnyvale,
L.P. and Federal Housing Commissioner
10.90 Deed of Trust Note of ARV Valley View, L.P. to Red Mortgage Capital,
Inc.
10.91 Deed of Trust between ARV Valley View, L.P. and Fidelity National
Title Insurance
10.92 Regulatory Agreement for U.S. Department of Housing Multifamily
Housing Projects between ARV Valley View, L.P. and Secretary of
Housing and Urban Development
10.93 Regulatory Agreement Nursing Homes Projects between ARV Valley View,
L.P. and Federal Housing Commissioner
23.1 Consent of KPMG LLP.
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.