<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ___________
COMMISSION FILE NUMBER: 0-26980
ARV ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1
COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of outstanding shares of the Registrant's Common Stock, no
par value, as of August 8, 1997 was 11,584,272.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,779 $ 15,964
Accounts receivable, net 3,052 2,410
Fees receivable from affiliates 1,681 1,105
Deferred project costs 1,582 1,072
Investments in real estate held for sale 2,062 1,984
Other assets 9,404 5,965
--------- ---------
Total current assets 25,560 28,500
--------- ---------
Restricted cash 313 1,912
Property, furniture and equipment, net 128,067 122,199
Notes receivable from affiliates, net 234 234
Deferred tax asset 2,004 2,004
Other noncurrent assets 10,992 9,382
--------- ---------
$ 167,170 $ 164,231
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 13,686 $ 8,566
Accrued interest payable 976 1,941
Notes payable, current portion 1,715 2,027
Notes payable and other amounts due to affiliates 44 40
Liabilities related to Tax Credit Properties 826 1,219
--------- ---------
Total current liabilities 17,247 13,793
--------- ---------
Deferred revenue, less current portion 847 576
Notes payable, less current portion 90,613 90,481
--------- ---------
108,707 104,850
--------- ---------
Minority interest in majority owned entities 7,827 8,007
Series B Preferred stock, convertible and redeemable. Stated and liquidation
value $2.50; authorized 2,000 shares, none issued and outstanding -- --
Shareholders' equity
Common stock, no par value. Authorized 100,000 shares; issued and
outstanding 9,663 and 9,613 shares at June 30 and March 31, 1997,
respectively 60,812 60,749
Accumulated deficit (10,176) (9,375)
--------- ---------
Total shareholders' equity 50,636 51,374
--------- ---------
$ 167,170 $ 164,231
========= =========
</TABLE>
See accompanying notes to the unaudited
condensed consolidated financial statements.
<PAGE> 3
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1997 1996
---- ----
<S> <C> <C>
REVENUE:
Assisted living facility revenue $ 24,665 $ 13,446
Therapy and other services 2,283 945
Interest income 239 817
Other income 169 137
-------- --------
Total revenue 27,356 15,345
-------- --------
EXPENSES:
Assisted living facility operating
expense 15,736 8,462
Assisted living facility lease expense 4,970 2,747
General and administrative 2,524 1,606
Therapy and other 1,898 61
Depreciation and amortization 1,477 667
Interest 1,403 1,401
-------- --------
Total expenses 28,008 14,944
-------- --------
Income (loss) before income tax expense
(benefit), minority interest in income of majority
owned entities and extraordinary item (652) 401
Income tax expense (benefit) (259) 150
-------- --------
Income (loss) before minority interest in income of
majority owned entities and extraordinary item (393) 251
Minority interest in income of majority owned
entities 408 --
-------- --------
Income (loss) before extraordinary item (801) 251
Extraordinary item, loss from early
extinguishment of debt, net of income
tax benefit of $231 -- 386
-------- --------
Net loss $ (801) $ (135)
======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item $ (0.08) $ 0.03
Extraordinary loss, early extinguishment of debt -- (0.04)
-------- --------
Net loss $ (0.08) $ (0.01)
======== ========
Weighted average number of common shares
outstanding 9,621 8,805
======== ========
</TABLE>
See accompanying notes to the unaudited
condensed consolidated financial statements
<PAGE> 4
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
-------- --------
Net cash provided by (used in)
operating activities (including changes in
all operating assets and liabilities) (654) 1,243
-------- --------
Cash flows provided by (used in) investing activities:
Increase in notes receivable (1) (102)
Collections of notes and other amounts due from affiliates 1 100
Increase in deferred project costs (542) (155)
Increase in investments in real estate held for sale (78) (1,844)
Additions to property, furniture and equipment (7,102) (19,138)
Increase in leased property security deposits (289) (245)
Release of security deposits 7 491
Increase (decrease) in restricted cash 1,599 (452)
Equity investment in affiliated partnerships (156) --
Purchase of limited partnership interests -- (649)
-------- --------
Net cash used in
investing activities (6,561) (21,994)
-------- --------
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements.
<PAGE> 5
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Cash flows from financing activities:
Issuance of common stock, net of issuance costs $ 64 31
Extraordinary loss from the early extinguishment of debt -- (386)
Minority interest (588) --
Borrowings under notes payable -- 6,341
Repayments of notes payable (446) (4,083)
Issuance of convertible subordinated notes, net of issuance costs -- 55,194
Repurchase of convertible subordinated notes -- (1,692)
-------- --------
Net cash provided by (used in)
financing activities (970) 55,405
-------- --------
Net increase (decrease) in cash (8,185) 34,654
Cash at beginning of period 15,964 7,454
-------- --------
Cash at end of period $ 7,779 42,108
======== ========
Supplemental schedule of cash flow information: Cash paid during the period for:
Interest $ 2,736 732
Income taxes 4 368
======== ========
Supplemental schedule of noncash investing and financing activities:
Minority interests in joint venture $ 588 $ --
Conversion of preferred stock to common stock -- 2,357
Conversion of 10% convertible subordinated notes to common stock
-- 10,106
</TABLE>
See accompanying notes to unaudited
condensed consolidated financial statements.
<PAGE> 6
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying interim unaudited condensed consolidated financial
statements of ARV Assisted Living, Inc. and subsidiaries (the "Company") have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such regulations. The condensed consolidated financial
statements reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation. All such adjustments are of a
normal recurring nature. Certain reclassifications have been made to prior
period amounts in order to conform to the presentation at June 30, 1997. The
interim consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K/A for the fiscal year ended March 31, 1997.
The results of operations for the three month period ended June 30, 1997 are not
necessarily indicative of the results which may be expected for the full fiscal
year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
the Company and its subsidiaries. Joint ventures and limited partnerships in
which the Company has controlling interests have been consolidated into the
financial statements including presentation of the minority interest not
controlled by the Company. All significant intercompany balances and
transactions have been eliminated in consolidation.
On August 22, 1996, ARV Health Care, Inc. ("ARV Health Care"), a wholly
owned subsidiary of the Company, acquired all of the outstanding stock of
SynCare, Inc. in a stock for stock merger valued at approximately $1.2 million.
On August 23, 1996, the Company acquired a 51% controlling interest in
American Retirement Villas Properties II, a California limited partnership,
which owns five assisted living facilities and operates another five assisted
living facilities pursuant to long-term operating leases. The Company acquired
its interest in the partnership for its estimated fair market value and recorded
the assets and liabilities acquired at their fair market value. No goodwill was
recognized.
On December 13, 1996, a wholly-owned subsidiary of the Company, LAVRA,
Inc., a Delaware corporation ("LAVRA"), completed its first tender offer (the
"First Tender Offer") for limited partnership units (the "Units") of Senior
Income Fund, L.P., a Delaware limited partnership ("Senior Income Fund"), at a
net cash price of $5.90 per unit. LAVRA has purchased approximately 620,000
units or approximately 12.8% of the outstanding units of Senior Income Fund. The
Company's investment in Senior Income Fund has been recorded on the equity
method.
LOSS PER SHARE
Net loss per share is computed by dividing net loss, by the weighted
average number of common shares outstanding. Loss per common share is based upon
the following weighted average shares outstanding: 9,621,000 and 8,805,000 for
the three months ending June 30, 1997 and 1996, respectively.
(2) COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its majority shareholders have guaranteed indebtedness
of certain affiliated partnerships as follows:
<PAGE> 7
<TABLE>
<CAPTION>
MAJORITY
COMPANY SHAREHOLDERS
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Notes secured by real estate $13,080 $13,426
Construction loans associated with the development and
construction of affordable housing apartments $35,341 $31,052
</TABLE>
The maximum aggregate amounts of guaranteed land and construction loans
is $42.3 million at June 30, 1997.
The Company has guaranteed tax credits for certain partnerships in the
aggregate amount of $78.4 million, excluding interest, penalties or other
charges which might be assessed against the partners.
In management's opinion, no material claims may be currently asserted
under any of the aforementioned guarantees based on the terms of the respective
agreements.
(3) SUBSEQUENT EVENTS
On July 14, 1997, the Company entered into a definitive agreement with
Prometheus Assisted Living LLC ("Prometheus"), an affiliate of Lazard Freres
Real Estate Investors LLC ("LFREI") pursuant to which Prometheus has committed
to invest $135 million to acquire approximately 9.6 million shares of
newly-issued shares of the Company at $14 per share. Under the terms of the
agreement, Prometheus agreed to purchase approximately 1.9 million newly-issued
restricted shares of common stock (approximately 19.9% of the Company's
outstanding stock following issuance)upon completion of its due diligence. On
July 23, 1997, Prometheus completed its due diligence and acquired 1.92 million
newly-issued restricted common shares for approximately $26.9 million.
Approximately 3.1 million shares of common stock will be purchased by Prometheus
following shareholder approval of the transaction which is expected to be sought
in October 1997. The remaining approximately 4.6 million shares will be
purchased by Prometheus as additional capital is needed by the Company at any
time through June 30, 1999.
Upon shareholder approval of the transaction, the Company's Board of
Directors will be expanded from seven to eleven members. The four additional
directors will be appointed by LFREI. In addition, an Executive Committee of the
Board of Directors, initially consisting of five members, two of whom will be
appointed by LFREI will be delegated authority to approve certain Board actions
by the affirmative vote of four of the five members. LFREI has also been granted
certain participation rights to purchase securities from the Company to maintain
its percentage ownership.
On July 14, 1997, the Company adopted a shareholders rights plan under
which it declared a dividend distribution of one Preferred Share Purchase Right
on each outstanding share of its common stock. Subject to limited exceptions,
the Rights will be exercisable if a person or group acquires 10% or more of the
Company's stock or announces a tender offer for 10% of the common stock. When
exercisable, each Right (except the Rights held by the acquiring person) will
entitle its holder to purchase, at the Right's then-current exercise price, a
number of common shares of the Company having a market value of twice the
Right's exercisable price. If the Company is acquired in a merger or other
business combination transaction which has not been approved by the Company's
Board of Directors, each Right will entitle its holder to purchase, at the
Right's then-current exercise price, a number of the acquiring company's common
shares having a market value at that time of twice the Right's exercise price.
The shares purchased by Prometheus will be exempt from the provisions of the
rights plan as will the shares owned by Gary L. Davidson, the Company's Chief
Executive Officer and President, who beneficially owned approximately 10% of the
Company's common stock at the time of adoption of the shareholders rights plan.
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
As of June 30, 1997, the Company operated 48 assisted living facilities
("ALFs") containing 6,150 units, including 2 owned by a limited partnership for
which the Company serves as the managing general partner and facility manager
("Affiliated Partnership"). Of the remaining facilities, 32 are leased by the
Company pursuant to long-term operating leases ("Leased ALFs") and 14 facilities
are owned ("Owned ALFs") by the Company for its own account. Additionally, the
Company was in various stages of development on 8 ALFs with an anticipated total
of 908 units at June 30, 1997.
From 1980 until 1994 when the Company began operating ALFs for its own
account, all of the ALFs operated by the Company were owned or leased by
Affiliated Partnerships. From 1991 until 1994, other Affiliated Partnerships
also acquired or began development of senior, affordable senior and multifamily
apartments primarily utilizing the sale of tax credits under a low income
housing tax credit program (the "Federal Tax Credit Program") for the equity
funding of the development.
Since commencing operation of ALFs for its own account in April 1994,
the Company has embarked upon an expansion strategy and achieved significant
growth in revenue resulting primarily from the acquisition of ALFs. The Company
has focused its growth efforts on the acquisition and development of additional
ALFs and expansion of services to its residents as they "age in place."
Growth has been achieved through the acquisition of ALFs which the
Company owns for its own account or leases pursuant to long-term operating
leases with Health Care REITs. Since April 1994 when the Company entered into
its first long-term operating lease with a Health Care REIT, the Company has
developed, acquired for its own account or entered into long-term operating
leases with Health Care REITs or other lessors, 46 ALFs totaling 5,894 units
(95.8% of its portfolio of 6,150 units at June 30, 1997). Of these ALFs, 24
facilities (2,476 units) were previously owned or leased by Affiliated
Partnerships inclusive of 10 facilities (940 units) owned by American Retirement
Villas Properties II, a California limited partnership in which a controlling
interest was acquired, as described below. Of the remaining facilities, 15
facilities (2,429 units) were acquired from unrelated third-party owners. In
December 1996, the Company opened a 162 unit facility in Beaumont, Texas, the
first facility developed by the Company since its initial public offering of
stock in October 1995. Two additional development projects, Eastlake Terrace, a
69 unit facility and Inn at Summit Ridge, a 76 unit facility, were opened in
April and May 1997, respectively. A fourth development project, Vista del Rio, a
150 unit facility in Alburquerque, New Mexico was opened in June 1997.
On August 23, 1996, the Company acquired a 51% controlling interest in
American Retirement Villas Properties II, a California limited partnership,
which has five Owned ALFs and five Leased ALFs totaling 940 units. The
acquisition was completed pursuant to a tender offer for limited partnership
units not already owned by the Company.
In addition to its acquisition of ALFs, the Company, through ARV Health
Care, Inc., a wholly-owned subsidiary ("ARV Health Care"), acquired all of the
outstanding stock of SynCare, Inc., a California corporation ("SynCare"), and
its three wholly owned subsidiaries, ProMotion Rehab, a California corporation
("ProMotion"), ProMotive Rehabilitation Services, a California corporation
("ProMotive") and BayCare Rehabilitative Services, Inc., a California
corporation, ("BayCare") on August 22, 1996. SynCare, through its ProMotive and
BayCare subsidiaries, provides physical, occupational and speech therapies
primarily to residents of assisted living facilities in Southern and Northern
California.
<PAGE> 9
At June 30, 1997, the Company had the following projects under
development or construction and anticipates that the schedule set forth below
can be met, although there can be no assurance in this regard. Development and
construction is subject to numerous risks which could cause delays or the
abandonment of a project or projects.
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
FACILITIES # OF CONSTRUCTION ANTICIPATED
UNDER CONSTRUCTION LOCATION UNITS COMMENCEMENT* OPENING*
- ------------------ -------- ----- ------------- --------
<S> <C> <C> <C> <C>
Prospect Park Brooklyn, NY 128 Under construction 3rd Quarter 1997
Eastlake - Phase II Elkhart, IN 24 Under construction 4th Quarter 1997
Las Posas Camarillo, CA 123 Under construction 4th Quarter 1997
Sun Lake Terrace Las Vegas, NV 129 Under construction 1st Quarter 1998
Canterbury Woods Attleboro, MA 132 Under construction 2nd Quarter 1998
-----
Total Units
Under Construction 536
-----
FACILITIES UNDER DEVELOPMENT
- ----------------------------
Flamingo Road Las Vegas, NV 142 3rd Quarter 1997 2nd Quarter 1998
The Lakes Ft. Myers, FL 154 3rd Quarter 1997 3rd Quarter 1998
Inn at Brookside Stockton, CA 76 3rd Quarter 1997 3rd Quarter 1998
--
Total Units
Under Development 372
---
Total Units
Under Construction
and Development 908
---
</TABLE>
* Denotes calendar quarters.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1996
As a result of the Company's continued growth through the acquisition
and development of assisted living facilities, revenue for the three months
ended June 30, 1997 increased to $27.4 million from $15.3 million for the three
months ended June 30, 1996 primarily due to an increase in assisted living
facility revenue as described below.
Assisted living facility revenue increased to $24.7 million for the
three months ended June 30, 1997 from $13.4 million for the three months ended
June 30, 1996. Assisted living revenue increased due to an increase in the
number of Owned ALFs and Leased ALFs operated by the Company. As of June 30,
1997, the Company operated 46 ALFs for its own account consisting of 32 Leased
ALFs and 14 Owned ALFs. For the three months ended June 30, 1996, the Company
operated a total of 26 ALFs for its own account consisting of 17 Leased ALFs
pursuant to long-term operating leases with Health Care REITs and 9 Owned ALFs.
Therapy and services revenue increased to $2.3 million for the three
months ended June 30, 1997 from $945,000 for the three months ended June 30,
1996. ARV Health Care, a wholly-owned subsidiary of the Company, contributed
$1.8 million to service revenue from physical, occupational and speech
rehabilitation therapies. Management fees decreased from $612,000 for the three
months ended June 30, 1996 to $377,000 for the three months ended June 30, 1997
primarily due to the Company's purchases of controlling interests in certain
Affiliated Partnerships. As a result of such controlling interests, the Company
now recognizes management fees only to the extent such fee income is not
eliminated in consolidation. Development fees decreased to $145,000 for the
three months ended June 30, 1997 from $333,000 for the three months ended June
30, 1996.
Interest income decreased to $239,000 for the three months ended June
30, 1997 from $817,000 for the three months ended June 30, 1996 primarily due to
lower cash balances in the current three month period. Cash balances available
for investment during the three
<PAGE> 10
months ended June 30, 1996 were larger than normal following the completion of
the Company's subordinated debt offering in April 1996.
Expenses increased to $28.0 million for the three months ended June
30, 1997 from $14.9 million for the three months ended June 30, 1996 primarily
due to additional assisted living facility operating and lease expenses.
Assisted living facility operating and lease expenses increased to
$15.7 million and $5.0 million, respectively, for the three months ended June
30, 1997 from $8.5 million and $2.7 million, respectively, for the three months
ended June 30, 1996. These increases were due to the additional number of
Owned and Leased ALFs operated by the Company during the three months ended June
30, 1997. As of June 30, 1997, the Company operated 46 ALFs for its own account
consisting of 32 Leased ALFs and 14 Owned ALFs. During the three months ended
June 30, 1996, the Company operated a total of 26 ALFs for its own account
consisting of 17 Leased ALFs pursuant to long-term operating leases with Health
Care REITs and 9 Owned ALFs.
General and administrative expenses increased to $2.5 million for the
three months ended June 30, 1997 from $1.6 million for the three months ended
June 30, 1996. The increase was primarily a result of additional staffing to
accommodate the increased operations of the Company.
Depreciation and amortization expenses increased to $1.5 million for
the three months ended June 30, 1997 from $667,000 for the three months ended
June 30, 1996. The increased depreciation and amortization expense incurred
during the three months ended June 30, 1997 is primarily due to depreciation and
amortization charges associated with the Company's Owned ALFs.
Therapy and other expenses increased to $1.9 million for the three
months ended June 30, 1997 from $61,000 for the three months ended June 30, 1996
as a result of expenses incurred in the operation of ARV Health Care following
the acquisition of SynCare.
Interest expense remained constant at $1.4 million for the three
months ended June 30, 1997 and 1996, respectively. Interest expense consisted
primarily of interest incurred on the Company's $57.5 million of 6 3/4%,
convertible subordinated notes due 2006 (the "2006 Notes") as well as mortgage
interest on Owned ALFs.
Income tax expense decreased by $409,000 from $150,000 for the three
months ended June 30, 1996 to an income tax benefit of $259,000 for the three
months ended June 30, 1997. During the three months ended June 30, 1997, the
Company recorded an income tax benefit as a result of operating losses incurred
which will offset future taxable income.
Minority interest in earnings of majority owned partnerships is the
result of consolidation of partnerships in which the Company purchased a
controlling interest during August, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash balances were $7.8 million and $16.0
million at June 30, 1997 and March 31, 1997, respectively.
<PAGE> 11
In September 1996, the Company obtained a $10 million line of credit
from Imperial Bank (the "Imperial Bank Line") to be used for acquisition,
development and general corporate purposes. As of June 30, 1997, the Company had
used the Imperial Bank Line to provide $8.4 million of letters of credit as
security deposits for Leased ALFs.
At June 30, 1997, the Company had borrowed $8.8 million under its $35
million credit line with Bank United of Texas (the "Bank United Line"). These
borrowings, which are cross-defaulted and cross-collateralized, were secured by
mortgages recorded against two of the Company's Owned ALFs. In addition, the
Company had guaranteed a $7.7 million loan borrowed from the Bank United Line by
an Affiliated Partnership for the construction of an ALF.
Working capital decreased to $8.6 million as of June 30, 1997,
compared to working capital of $46.4 million at June 30, 1996. At June 30, 1996
the Company's working capital was in excess of normal levels following issuance
of the 2006 Notes.
For the three months ended June 30, 1997, cash used by operating
activities was $654,000, while cash provided by operating activities was $1.2
million for the three months ended June 30, 1996. For the three months ended
June 30, 1997, the primary components of cash used by operating activities were
increases in accounts receivable and other assets combined with decreases in
deferred revenue which were offset primarily by increases in accounts payable
and accrued liabilities. For the three months ended June 30, 1996, the $1.2
million of cash provided by operating activities was principally the result of
net income before extraordinary item increased by non-cash charges for
deprecation and amortization along with increases in accrued liabilities offset
by increases in amounts receivable from affiliates.
Cash used in investing activities was $6.6 million for the three
months ended June 30, 1997, compared to $22 million for the three months ended
June 30, 1996. For the three months ended June 30, 1997 additions to property,
furniture and equipment used $7.1 million while increases in deferred project
costs, leased facility security deposits and additional equity investments in
affiliated partnerships used $1 million. These amounts were offset by a $1.6
million decrease in restricted cash. For the three months ended June 30, 1996,
the primary components of the $22 million used by investing activities were
$19.8 million used to purchase fixed assets and limited partnership interests,
and a $1.8 million increase in real estate investments.
Net cash used by financing activities during the three months ended
June 30, 1997 was $970,000 compared to $55.4 million provided by financing
activities for the three months ended June 30, 1996. During the three months
ended June 30, 1997, the primary uses of cash by financing activities were
principal reductions of debt totaling $446,000 and an increase of $588,000 in
the minority interest in consolidated subsidiaries offset by $64,000 received
from the issuance of common stock. For the three months ended June 30, 1996, the
Company received $55.2 million, after issuance costs, from the issuance of the
2006 Notes and $6.3 million from the borrowing under notes payable to banks.
These amounts were offset by expenditures of $4.1 million to repay debt,
$386,000 from the extraordinary loss from the early extinguishment of debt and
$1.7 million paid for the repurchase of convertible subordinated notes.
<PAGE> 12
The Company's capital requirements include acquisition and
rehabilitation costs of ALFs, security deposits on Leased ALFs, ALF
pre-development costs, initial operating costs of newly developed ALFs, payment
of interest, owner's equity contributions in connection with certain Affiliated
Partnerships financed under the Federal Tax Credit Program, and working capital.
The Company is discontinuing its future activities with respect to developments
under the Federal Tax Credit Program and, accordingly, expects that its future
outlays for existing developments will diminish. The Company is contingently
liable for (i) certain secured and unsecured indebtedness of affiliates which it
has guaranteed and (ii) tax credit guaranties. While the Company currently
generates sufficient cash from operations to fund its recurring working capital
requirements, the Company anticipates that it will be necessary to obtain
additional financing in order to continue its aggressive growth strategy.
Moreover, there can be no assurances that the Company will be able to obtain
financing on favorable terms.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALFs and management fees from apartment
communities operated by the Company are the primary sources of revenue earned by
the Company. These properties are affected by rental rates which are highly
dependent upon market conditions and the competitive environments where the
facilities are located. Employee compensation is the principal cost element of
property operations. Although there can be no assurance it will be able to
continue to do so, the Company has been able historically to offset the effects
of inflation on salaries and other operating expenses by increasing rental and
assisted living rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 10, 1996, a Texas developer filed a complaint in Texas
naming the Company and certain of its officers as defendants. The main
contention of the developer's complaint was the Company's alleged breach of an
acquisition and development agreement. Among the causes of action alleged in the
complaint were: fraud, negligent misrepresentation, breach of fiduciary duty,
breach of contract, a suit for an accounting and declaratory relief. The
developer alleged actual damages ranging from $5 million to $15 million and
punitive damages of $10 million. A cross-complaint was filed on December 23,
1996.
On April 10, 1997, the litigation with the developer was settled
pursuant to a release and settlement agreement (the "Release and Settlement")
between the Company and the developer. Contemporaneously with the execution of
the Release and Settlement, the pending action filed by the developer and the
cross complaint filed by the Company were dismissed with prejudice.
On September 27, 1996, American Retirement Villas Partners II, a
California limited partnership ("ARVP II") of which the Company is the managing
general partner and a majority limited partner, filed actions seeking
declaratory judgments against the landlords of the Retirement Inn of Campbell
(Campbell) and the Retirement Inn of Sunnyvale (Sunnyvale). ARVP II leases the
Campbell and Sunnyvale assisted living facilities under long-term leases. A
dispute has arisen as to the amount of rent due during the 10-year lease renewal
periods which commenced in August 1995 for Campbell and March 1996 for
Sunnyvale. The Partnership seeks a determination that the Partnership is not
required to pay any higher rent during the 10-year renewal periods than during
the original 20-year lease terms.
In the event that the court finds against ARVP II, rent for the
Campbell and Sunnyvale facilities could increase significantly, which will
reduce distributions to unit holders in the future. These rent increases would
be retroactive to the commencement of the lease renewal periods. Management is
of the opinion, based in part upon opinions of legal counsel, that an adverse
outcome is unlikely.
Two other facilities leased by ARVP II, the Retirement Inn of Fremont
(Fremont) and the Retirement Inn at Burlingame (Burlingame) are owned by
entities which are related to the entities that own the Campbell and Sunnyvale
facilities. It is not known whether the landlords of those facilities will
dispute the amount of rent due during the renewal periods which began January
1997 for Fremont
<PAGE> 13
and beginning August 1997 for Burlingame. If so, the Partnership may be required
to file litigation to determine the rights under those leases.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
15 Independent Accountants' Review Report dated August 11, 1997
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
<PAGE> 14
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARV ASSISTED LIVING, INC.
By: /s/ Graham P. Espley-Jones
--------------------------
Graham P. Espley-Jones
Chief Financial Officer
(Duly authorized and principal financial officer)
Date: August 14, 1997
By: /s/ Patrick M. Donovan
----------------------
Patrick M. Donovan
Vice President Finance
(Duly authorized officer)
Date: August 14, 1997
<PAGE> 1
EXHIBIT 15
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
--------------------------------------
The Stockholders and Board of Directors
ARV Assisted Living, Inc.:
We have reviewed the condensed consolidated balance sheet of ARV Assisted
Living, Inc. and subsidiaries as of June 30, 1997, and the related condensed
consolidated statements of earnings and cash flows for the three-month period
ended June 30, 1997 and 1996. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of ARV Assisted Living, Inc. and
subsidiaries as of March 31, 1997, and the related consolidated statements of
earnings, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated June 20, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of March 31, 1997, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG PEAT MARWICK LLP
- ---------------------------
Orange County, California
August 11, 1997
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 7,779
<SECURITIES> 0
<RECEIVABLES> 3,052
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,560
<PP&E> 134,179
<DEPRECIATION> 6,112
<TOTAL-ASSETS> 167,170
<CURRENT-LIABILITIES> 17,247
<BONDS> 96,613
0
0
<COMMON> 60,812
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 167,170
<SALES> 0
<TOTAL-REVENUES> 27,356
<CGS> 0
<TOTAL-COSTS> 26,605
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<INTEREST-EXPENSE> 1,403
<INCOME-PRETAX> (652)
<INCOME-TAX> (259)
<INCOME-CONTINUING> (393)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (801)
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