<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 DECEMBER 31, 1996
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 February 10, 1997 was 9,646,127.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 8,386 $ 7,454
Fees receivable from affiliates 4,167 922
Real estate held for sale 35,351 --
Investments in real estate 12,783 6,807
Other current assets 6,684 2,505
--------- -------
Total current assets 67,371 17,688
Restricted cash 314 4,915
Property, furniture and equipment, net 87,634 47,234
Other non-current assets 8,129 7,566
-------- -------
$163,448 $77,403
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 8,710 $ 4,200
Notes payable, current portion 1,796 3,306
Other current liabilities 150 168
-------- -------
Total current liabilities 10,656 7,674
Deferred revenue, less current portion 1,114 1,327
Notes payable, less current portion 89,324 24,814
-------- -------
101,094 33,815
-------- -------
Minority interest in joint venture 8,405 1,283
Series A Preferred stock, convertible and redeemable;
$2.50 stated and liquidation value, none and 2,000,000
shares issued and outstanding at December 31, and
March 31, 1996, respectively -- 2,358
Shareholders' equity (notes 2 and 3):
Preferred stock; 8,000,000 shares authorized, none issued
and outstanding -- --
Common stock; no par value, authorized 100,000,000 shares,
issued and outstanding 9,646,127 and 8,308,142 at
December 31, and March 31, 1996, respectively 60,682 47,548
Accumulated deficit (6,733) (7,601)
-------- -------
Total shareholders' equity 53,949 39,947
-------- -------
$163,448 $77,403
======== =======
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
2
<PAGE> 3
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- -----------------------
1996 1995 1996 1995
------- ------ ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Assisted living facility revenue $20,799 $6,863 $50,830 $14,803
Therapy and services 2,615 672 5,323 3,036
Interest income 369 517 1,647 718
Other income 37 1,457 462 1,824
------- ------ ------- -------
Total revenue 23,820 9,509 58,262 20,381
------- ------ ------- -------
EXPENSES:
Assisted living facility operating
expense 13,627 4,394 32,429 9,595
Assisted living facility lease expense 3,122 1,945 8,736 4,179
General and administrative 1,688 1,886 4,932 5,745
Therapy and other 1,898 89 2,694 377
Depreciation and amortization 1,364 203 2,935 566
Interest 1,497 384 4,149 914
------- ------ ------- -------
Total expenses 23,196 8,901 55,875 21,376
------- ------ ------- -------
Income (loss) before income tax expense
(benefit), minority interest and
extraordinary item 624 608 2,387 (995)
Income tax expense 233 504 893 273
------- ------ ------- -------
Income (loss) before minority interest
and extraordinary item 391 104 1,494 (1,268)
Minority interest in earnings of
majority owned partnerships 135 -- 241 --
------- ------ ------- -------
Income (loss) before extraordinary item 256 104 1,253 (1,268)
Extraordinary item, loss from early
extinguishment of debt, net of income
tax benefit of $231 (note 3) -- -- 386 --
------- ------ ------- -------
Net income (loss) $ 256 $ 104 $ 867 $(1,268)
======= ====== ======= =======
Net income (loss) $ 256 $ 104 $ 867 $(1,268)
Preferred dividends declared -- 100 -- 300
------- ------ ------- -------
Net income (loss) available to common
shareholders $ 256 $ 4 $ 867 $(1,568)
======= ====== ======= =======
Earnings (loss) per common share:
Income (loss) before extraordinary item $ .03 $ .00 $ .13 $ (.28)
Extraordinary item, early extinguishment
of debt -- -- (.04) --
------- ------ ------- -------
Net income (loss) $ .03 $ .00 $ .09 $ (.28)
======= ====== ======= =======
Weighted average number of common shares
and common share equivalents outstanding 9,606 7,400 9,366 5,638
======= ====== ======= =======
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
3
<PAGE> 4
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1996 1995
-------- -------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Income (loss) before extraordinary item $ 1,253 $ (1,268)
Adjustments to reconcile income (loss) before extraordinary
item to net cash provided by (used in) operating
activities:
Depreciation and amortization 2,935 566
Gain on sale of Villa De Palma -- (61)
Other -- (34)
Changes in assets and liabilities, net of acquisitions
(Increase) decrease in:
Fees receivable and other amounts due from affiliates (1,261) (516)
Deferred tax asset -- 400
Other assets (988) (2,018)
Increase (decrease) in:
Accounts payable and accrued liabilities 2,044 210
Deferred revenue (1,149) (208)
Other current liabilities (67) (1,494)
Minority interest 94 --
-------- --------
Net cash provided by (used in) operating activities 2,861 (4,423)
-------- --------
Cash flow provided by (used in) investing activities:
Additions to property, furniture, and equipment (49,043) (10,175)
Purchase of limited partnership interests (14,300) (1,589)
Proceeds from the sale of limited partnership interest,
net of cash acquired -- 5,083
Additional equity investment in partnerships (1,854) --
(Increase) decrease in restricted cash 4,601 (3,869)
Increase in investments in real estate, net (5,927) (2,673)
Increase in leased property security deposits (340) (2,398)
Increase in deferred project costs 42 396
Increase in escrow deposits -- (2,175)
Purchase of other assets -- (438)
Release of security deposits 491 2,668
Increase in notes receivable (105) --
Collections of notes and other due from affiliates 150 --
Other -- (196)
-------- --------
Net cash used in investing activities (66,285) (15,366)
-------- --------
(continued)
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
4
<PAGE> 5
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
1996 1995
-------- -------
<S> <C> <C>
Cash flow from financing activities:
Extraordinary loss from early extinguishment of debt $ (386) $ --
Issuance of convertible subordinated notes, net of
issuance costs 55,195 11,846
Borrowing under notes payable 25,256 3,929
Repayments of notes payable to banks (14,210) (4,911)
Repurchase of convertible subordinated notes (1,692) (137)
Repurchase of common stock -- (350)
Common stock purchased by ESOP -- 262
Preferred stock dividends paid -- (300)
Issuance of common stock, net of issuance costs 193 42,760
------- -------
Net cash provided by financing activities 64,356 53,099
------- -------
Net increase in cash 932 33,310
Cash at beginning of period 7,454 775
------- -------
Cash at end of period $ 8,386 $34,085
======= =======
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest $ 3,805 $ 789
======= =======
Income taxes $ 628 $ 8
======= =======
Supplemental schedule of non cash investing and financing
activities:
Conversion of 8% Convertible Redeemable Preferred Stock to
Common Stock $ 2,358 --
======= =======
Conversion of 10% Convertible Subordinated Notes Payable to
Common Stock, net of issuance costs $10,988 --
======= =======
Acquisition of SynCare for stock $ 485 --
======= =======
Minority interests in joint venture -- $ 840
======= =======
Purchase of Building -- $ 9,350
======= =======
Sale of Building, Net of Closing Costs -- $ 9,400
======= =======
Debt Assumed in conjunction with purchase of building -- $ 350
======= =======
Preferred stock dividends declared -- $ 100
======= =======
</TABLE>
See accompanying notes to the unaudited condensed consolidated financial
statements
5
<PAGE> 6
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(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 December 31, 1996.
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, 1996. The results of operations for the three and nine month periods ended
December 31, 1996 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 280,000
units or approximately 5.8% of the outstanding units of Senior Income Fund and
an additional approximately 8,000 units will be purchased when cleared by the
transfer agent. When added to the units previously owned by LAVRA, the Company
owned approximately 6.8% of Senior Income Fund at December 31, 1996. The
Company's investment in Senior Income Fund has been recorded on the equity
method. --See Note (5) Tender Offer and Note (8) Subsequent Events.
INCOME (LOSS) PER SHARE
Income (loss) per share is computed by dividing net income or loss,
adjusted for the dividend declared on the preferred stock ($100,000 and
$300,000 for the three and nine month periods ended December 31, 1995,
respectively), by the weighted average number of common shares outstanding
including the effect of common stock equivalents unless they are
6
<PAGE> 7
anti-dilutive. Income (loss) per common share is based upon the following
weighted average shares outstanding: 9,606,000 and 7,400,000 for the three
months ending December 31, 1996 and 1995, respectively, and 9,366,000 and
5,638,000 for the nine months ending December 31, 1996 and 1995, respectively,
after giving effect to the reverse common stock split as described below.
(2) SHAREHOLDERS' EQUITY
In July 1995 the Board of Directors authorized, contingent upon the
completion of the Company's public offering, a 1-for-3.04 reverse common stock
split. The public offering was completed on October 23, 1995. The results of
this reverse common stock split, therefore, have been reflected in the
financial statements.
On October 28, 1996, the Company granted options to purchase up to
335,000 shares of the Company's common stock pursuant to the terms of the
Company's 1995 Stock Option and Incentive Plan. The options, which vest equally
over a four year term commencing October 17, 1998, provide for the purchase of
the Company's common stock at $11.25 per share.
(3) REDEMPTION OF CONVERTIBLE SUBORDINATED NOTES DUE 1999
On July 10, 1996, the Company completed the redemption of its 10%
Convertible Subordinated Notes due 1999 (the "1999 Notes") which had been
called for redemption on April 10, 1996. The Company paid $1,067 plus accrued
interest for each $1,000 principal amount of notes redeemed. Note holders were
given the alternative to convert their notes into shares of common stock of the
Company at any time up to and including June 30, 1996. Converting holders
received one share of common stock for every $12.16 in principal amount of 1999
Notes surrendered for conversion. Holders of approximately $11 million
principal amount of 1999 Notes exercised their right to convert to 900,662
shares of common stock. The Company redeemed the balance of the 1999 Notes for
$4.2 million (which includes the premium described above).
Upon the redemption of the 1999 Notes, the Company recognized a
$386,000 extraordinary loss, net of a tax benefit of $231,000, for the early
extinguishment of debt. This extraordinary loss consisted primarily of a 6.67%
redemption premium and unamortized 1999 Note issuance costs at the time of
redemption.
(4) REAL ESTATE HELD FOR SALE
On December 18, 1996, the Company entered into an agreement with
Meditrust, a publicly traded real estate investment trust that focuses on
health care related properties (a "Health Care REIT") for the sale and
subsequent lease of four facilities currently owned by the Company. The
agreement, which is subject to the completion of due diligence and the
negotiation of a lease between the Company and Meditrust, contemplates a sale
of the Villa at Palm Desert, Amber Wood, Northgate and Shorehaven facilities at
a price of approximately $30 million. Concurrently upon sale, a wholly-owned
subsidiary of the Company will enter into long-term operating leases for each
of the facilities.
As of December 31, 1996, the Company intends to sell the Gayton
Terrace facility located in Richmond, Virginia and subsequently enter into a
long-term operating lease with the purchaser.
(5) TENDER OFFER
On December 23, 1996, LAVRA initiated a tender offer (the "Second
Tender Offer") to purchase any and all units of Senior Income Fund not already
owned at a net cash price of $5.90 per unit, less the amount of distributions
made, announced or paid by Senior Income Fund from the date of the Second
Tender Offer until the date on which the tendered units are purchased. --See
Note (8) Subsequent Events.
7
<PAGE> 8
(6) COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its majority shareholders have guaranteed indebtedness
of certain affiliated partnerships as follows:
MAJORITY
COMPANY SHAREHOLDERS
------- ------------
(IN THOUSANDS)
Notes secured by real estate $13,426 $13,426
Construction loans associated with the
development and construction of affordable
housing apartments $34,552 $31,052
The maximum aggregate amounts of guaranteed land and construction
loans is $34.6 million at December 31, 1996.
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.
(7) RELATED PARTY TRANSACTIONS
The Company retained the investment banking firm of Benedetto,
Gartland & Greene, Inc. (the "Firm") to act in an advisory capacity with
respect to the Company's acquisition of limited partnership units in Senior
Income Fund, L.P. John J. Rydzewski, a member of the Board of Directors of the
Company, is a principal of the Firm and expected to share in the revenue paid
to the Firm. As of December 31, 1996, the Firm had been paid $200,000 for these
services.
(8) SUBSEQUENT EVENTS
On January 1, 1997, the Company entered into two long-term operating
leases with affiliates of the Healthquest Development Company. The first of
these facilities, Tanglewood Trace Retirement Community, is a 159-unit facility
located in Mishawaka, Indiana. The second of these facilities, Eastlake
Terrace Retirement Community ("Eastlake"), located in Elkhart, Indiana, is a
93-unit facility currently under construction. The first phase of Eastlake
containing 69 independent living units is expected to open in the Spring of
1997, while the second phase containing 24 assisted living units is expected to
open in late 1997.
On January 16, 1997, the Company entered into a long-term operating
lease with Health Care REIT, Inc., a Health Care REIT("HCR"), for The Lodge, a
216 unit retirement community located in Cincinnati, Ohio.
On January 31, 1997, LAVRA completed the Second Tender Offer for the
purchase of any and all Units of Senior Income Fund not previously owned by
LAVRA at a net cash price of $5.90 per Unit, less the amount of distributions
made by the partnership from the date of the offer until the date on which the
tendered units are purchased. As of the completion of the Second Tender Offer,
approximately 270,000 Units were validly tendered and not withdrawn. When
combined with the Units previously purchased by LAVRA, the Company will own
approximately 12.6% of Senior Income Fund.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
OVERVIEW
As of December 31, 1996, the Company operated 42 assisted living
facilities ("ALFs") containing 5,323 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, 23
are leased by the Company pursuant to long-term operating leases ("Leased
ALFs") and 17 facilities are owned ("Owned ALFs") by the Company for its own
account. Additionally, the Company was in various stages of development on 18
ALFs with an anticipated total of 2,379 units at December 31, 1996.
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, 40 ALFs totaling 5,067 units
(95.0% of its portfolio of 5,323 units at December 31, 1996). 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.
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.
9
<PAGE> 10
At December 31, 1996, 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. These risks are described in detail in
"Other Information -- Risks Common to the Company's Assisted Living Operations
- -- Development and Construction Risks" herein.
<TABLE>
<CAPTION>
ANTICIPATED ANTICIPATED
FACILITIES # OF CONSTRUCTION ANTICIPATED
UNDER CONSTRUCTION LOCATION UNITS COMMENCEMENT* OPENING*
- ------------------ -------- ----------- ------------- --------
<S> <C> <C> <C>
Inn at Summit Ridge Reno, NV 76 Under construction 1st Quarter 1997
Vista del Rio Albuquerque, NM 150 Under construction 2nd Quarter 1997
Prospect Park Brooklyn, NY 127 Under construction 2nd Quarter 1997
Eastlake Elkhart, IN 93 Under construction 2nd Quarter 1997
Las Posas Camarillo, CA 123 Under construction 3rd Quarter 1997
Willow Terrace Attleboro, MA 132 Under construction 4th Quarter 1997
Sun Lake Terrace Las Vegas, NV 129 Under construction 4th Quarter 1997
-----
Total Units
Under Construction 830
-----
FACILITIES UNDER DEVELOPMENT
- ----------------------------
Flamingo Road Las Vegas, NV 100 1st Quarter 1997 4th Quarter 1997
Waterside Villas Jamesburg, NJ 138 1st Quarter 1997 1st Quarter 1998
The Lakes Ft. Myers, FL 136 1st Quarter 1997 1st Quarter 1998
Bay Hill Park Plano, TX 156 1st Quarter 1997 2nd Quarter 1998
Park at Bay Terrace Houston, TX 155 2nd Quarter 1997 2nd Quarter 1998
Park at Cypresswood Houston, TX 150 2nd Quarter 1997 2nd Quarter 1998
Tiffany Park Houston, TX 167 2nd Quarter 1997 3rd Quarter 1998
Lakewood Denver, CO 137 2nd Quarter 1997 3rd Quarter 1998
Woodbridge II Irvine, CA 140 2nd Quarter 1997 3rd Quarter 1998
Park at Great Hills Austin, TX 150 3rd Quarter 1997 4th Quarter 1998
Laurel Ridge Highlands Ranch, CO 120 3rd Quarter 1997 4th Quarter 1998
-----
Total Units
Under Development 1,549
-----
Total Units
Under Construction
and Development 2,379
=====
</TABLE>
* Denotes calendar quarters.
10
<PAGE> 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1995.
As a result of the Company's continued growth through the acquisition
and development of assisted living facilities, revenue for the three months
ended December 31, 1996 increased to $23.8 million from $9.5 million for the
three months ended December 31, 1995 primarily due to an increase in assisted
living facility revenue as described below.
Assisted living facility revenue increased to $20.8 million for the
three months ended December 31, 1996 from $6.9 million for the three months
ended December 31, 1995. Assisted living revenue increased due to an increase
in the number of Owned ALFs and Leased ALFs operated by the Company. As of
December 31, 1996, the Company operated 40 ALFs for its own account consisting
of 23 Leased ALFs and 17 Owned ALFs. For the three months ended December 31,
1995, the Company operated a total of 16 ALFs for its own account consisting of
14 Leased ALFs pursuant to long-term operating leases with a Health Care REIT
and two Owned ALFs.
Therapy and services revenue increased to $2.6 million for the three
months ended December 31, 1996 from $672,000 for the three months ended December
31, 1995. ARV Health Care, a wholly-owned subsidiary of the Company, contributed
$1.7 million to service revenue from physical, occupational and speech
rehabilitation therapies. Management fees decreased from $548,000 for the three
months ended December 31, 1995 to $381,000 for the three months ended December
31, 1996 primarily due to the fact that the Company no longer provides
management services to Affiliated Partnerships with respect to ALFs sold by the
Affiliated Partnerships to Health Care REITs. Instead, the Company now receives
assisted living facility revenue from these Leased ALFs. Additionally, due to
the Company's purchases of controlling interests in certain Affiliated
Partnerships, it now recognizes management fees only to the extent such fee
income is not eliminated in consolidation. Development fees increased to
$505,000 for the three months ended December 31, 1996 from $124,000 for the
three months ended December 31, 1995.
Interest income decreased to $369,000 for the three months ended
December 31, 1996 from $517,000 for the three months ended December 31, 1995
primarily due to lower cash balances in the current three month period. Cash
balances available for investment during the three months ended December 31,
1995 were larger than normal following the completion of the Company's initial
public offering of its stock during October 1995.
Expenses increased to $23.2 million for the three months ended
December 31, 1996 from $8.9 million for the three months ended December 31,
1995 primarily due to additional assisted living facility operating and lease
expenses.
Assisted living facility operating and lease expenses increased to
$13.6 million and $3.1 million, respectively, for the three months ended
December 31, 1996 from $4.4 million and $1.9 million, respectively, for the
three months ended December 31, 1995. These increases were primarily due to the
purchase of 15 Owned ALFs and the addition of 9 Leased ALFs by the Company
between December 31, 1995 and December 31, 1996. As of December 31, 1996, the
Company operated 40 ALFs for its own account consisting of 23 Leased ALFs and
17 Owned ALFs. During the three months ended December 31, 1995, the Company
operated a total of 16 ALFs for its own account consisting of 14 Leased ALFs
pursuant to long-term operating leases with a Health Care REIT and two Owned
ALFs.
General and administrative expenses decreased to $1.7 million for the
three months ended December 31, 1996 from $1.9 million for the three months
ended December 31, 1995. The decline was primarily a result of an allocation of
general and administrative expenses to the physical, occupational and speech
rehabilitation therapy business, which is included in other expenses.
Depreciation and amortization expenses increased to $1.4 million for
the three months ended December 31, 1996 from $203,000 for the three months
ended December 31, 1995. The increased depreciation and amortization expense
incurred during the three months ended
11
<PAGE> 12
December 31, 1996 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 December 31, 1996 from $89,000 for the three months ended December
31, 1995 primarily as a result of $1.7 million incurred in the operation of ARV
Health Care following the acquisition of SynCare.
Interest expense increased to $1.5 million for the three months ended
December 31, 1996 from $384,000 for the three months ended December 31, 1995
primarily as a result 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 $271,000 from $504,000 for the three
months ended December 31, 1995 to $233,000 for the three months ended December
31, 1996. During the three months ended December 31, 1995, the Company incurred
income tax expense in excess of ordinary statutory rates as a result of timing
differences resulting from development fee income recognized for income tax
purposes, but not recognized for financial reporting purposes.
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.
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH NINE MONTHS ENDED
DECEMBER 31, 1995.
As a result of the Company's continued growth through the acquisition
and development of assisted living facilities, revenue for the nine months
ended December 31, 1996 increased to $58.3 million from $20.4 million for the
nine months ended December 31, 1995 primarily due to an increase in assisted
living facility revenue as described below.
Assisted living facility revenue increased to $50.8 million for the
nine months ended December 31, 1996 from $14.8 million for the nine months
ended December 31, 1995. Assisted living revenue increased due to an increase
in the number of Owned ALFs and Leased ALFs.
Therapy and services revenue increased to $5.3 million for the nine
months ended December 31, 1996 from $3.0 million for the nine months ended
December 31, 1995. ARV Health Care, a wholly-owned subsidiary of the Company
contributed $2.3 million to service revenue through the provision of physical,
occupational and speech rehabilitation therapies. Management fees decreased from
$2.2 million for the nine months ended December 31, 1995 to $1.4 million for the
nine months ended December 31, 1996 primarily due to the fact that the Company
no longer provides management services to Affiliated Partnerships with respect
to ALFs sold by the Affiliated Partnerships to Health Care REITs. Instead, the
Company now receives assisted living facility revenue from these Leased ALFs.
Additionally, due to the Company's purchases of controlling interests in certain
Affiliated Partnerships, it now recognizes management fees only to the extent
such fee income is not eliminated in consolidation. Development fees increased
to $1.6 million for the nine months ended December 31, 1996 from $834,000 for
the nine months ended December 31, 1995.
Interest income increased to $1.6 million for the nine months ended
December 31, 1996 from $718,000 for the nine months ended December 31, 1995
primarily due to interest earned on larger cash balances following the
completion of the Company's private placement offering of its 2006 Notes as
well as interest earned on restricted cash used as collateral for security
deposits on Leased ALFs.
Other income decreased by $1.4 million to $462,000 for the nine months
ended December 31, 1996 from $1.8 million for the nine months ended December
31, 1995. During the nine months ended December 31, 1995, the Company earned
$1.3 million as a result of its general partnership interest in entities which
sold their facilities to Health Care REITs and $400,000 in gains from the sale
of real estate.
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Expenses increased to $55.9 million for the nine months ended December
31, 1996 from $21.4 million for the nine months ended December 31, 1995
primarily due to additional assisted living facility operating and lease
expenses.
Assisted living facility operating and lease expenses increased to
$32.4 million and $8.7 million, respectively, for the nine months ended
December 31, 1996 from $9.6 million and $4.2 million respectively, for the nine
months ended December 31, 1995. These increases were primarily due to the
purchase of 15 Owned ALFs and the addition of 9 Leased ALFs by the Company
between December 31, 1995 and December 31, 1996.
General and administrative expenses decreased to $4.9 million for the
nine months ended December 31, 1996 from $5.7 million for the nine months ended
December 31, 1995. The decline was primarily a result of a decrease in the
amount of resources required as the Company completed the remainder of the
apartment projects under development pursuant to the Federal Tax Credit Program
and discontinued further development activities in this area along with an
allocation of general and administrative expenses to the Company's physical,
occupational and speech rehabilitation therapy business, which is included in
other expenses.
Depreciation and amortization expenses increased to $2.9 million for
the nine months ended December 31, 1996 from $566,000 for the nine months ended
December 31, 1995. The increased depreciation and amortization expense incurred
during the nine months ended December 31, 1996 is due to depreciation and
amortization charges primarily associated with the Company's Owned ALFs.
Therapy and other expenses increased to $2.7 million for the nine
months ended December 31, 1996 from $377,000 for the nine months ended December
31, 1995 primarily as a result of $2.4 million incurred in the operation of ARV
Health Care following the acquisition of SynCare.
Interest expense increased to $4.1 million for the nine months ended
December 31, 1996 from $914,000 for the nine months ended December 31, 1995
primarily as a result of interest incurred on the 2006 Notes as well as
mortgage interest on Owned ALFs.
Income tax expense increased by $620,000 from a tax expense of $273,000
for the nine months ended December 31, 1995 to a tax expense of $893,000 for the
nine months ended December 31, 1996. The increase is a result of a provision for
taxes on operating profits before minority interest and extraordinary item of
$2.4 million earned by the Company during the nine months ended December 31,
1996 compared with a loss of $995,000 for the nine months ended December 31,
1995. Although the Company incurred a loss during the nine months ended December
31, 1995, income tax expense reflects timing differences resulting from income
recognized for income tax purposes during the nine months ended December 31,
1995, but not recognized for financial reporting purposes.
During the nine months ended December 31, 1996, the Company recognized
an extraordinary loss of $386,000, net of income tax benefit of $231,000
resulting primarily from the early extinguishment of the 1999 Notes. Pursuant
to the terms of the 1999 Notes, Note holders who chose to redeem their 1999
Notes rather than convert into common stock were paid a premium of 6.7% upon
redemption. These premiums totaled $261,000. Additionally, unamortized note
issuance costs of $335,000 were expensed upon the redemption.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash balances were $8.4 million and $7.5
million at December 31, 1996 and March 31, 1996, respectively.
In April 1996, the Company successfully completed the $57.5 million
private placement offering of its 2006 Notes ("The Note Offering"). Each $1,000
principal amount of the 2006 Notes outstanding is: (i) convertible at any time
prior to maturity after 90 days from issuance, unless previously redeemed, into
approximately 54 shares of Common Stock (a conversion ratio equal to $18.57 per
share), subject to adjustment, (ii) accrues interest from April 1, 1996 at
6.75% per annum, payable in arrears semi-annually on October 1 and
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March 1 of each year, commencing October 1, 1996, (iii) is unsecured and
subordinated to certain present and future Senior Indebtedness (as defined in
the 2006 Notes) of the Company and is structurally subordinated to all
indebtedness of subsidiaries of the Company, (iv) is non-callable by the
Company for a period of three years until April 1, 1999 (the "Non-call
Period"), and (v) is redeemable for cash at the option of the Company following
the expiration of the Non-call Period upon not less than 20 nor more than 60
days prior notice, together with accrued interest to the redemption date, at
premiums declining ratably from 104.725% prior to April 1, 2000 to 100.675%
prior to maturity. On January 14, 1997, a Registration Statement on Form S-3
was filed by the Company to register the resale of the 2006 Notes and the stock
issuable upon conversion thereof was declared effective by the Securities and
Exchange Commission.
The Note Offering generated net proceeds to the Company of
approximately $55.2 million. The net proceeds of the 2006 Notes have been used
to retire the 1999 Notes, acquire ALFs and land, fund preconstruction
development activities, reduce short-term liabilities, purchase interests in
Affiliated Partnerships, make security deposits on Leased ALFs, and provide for
working capital.
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 December 31, 1996, the
Company had used the Imperial Bank Line to provide letters of credit as
security deposits for Leased ALFs. By doing so, the Company was able to release
$4.6 million of restricted cash previously used as collateral for letters of
credit for Leased ALFs.
As December 31, 1996, the Company had borrowed $13.1 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 three of the Company's Owned ALFs.
Working capital increased to $56.7 million as of December 31, 1996,
compared to working capital of $10.0 million at March 31, 1996 resulting
primarily from the reclassification as current assets those four Owned ALFs
which the Company intends to sell to Meditrust. (See "Financial Statements" -
Note 4.")
For the nine months ended December 31, 1996 cash provided by operating
activities was $2.9 million, while the Company used cash in operating
activities of $4.4 million for the nine months ended December 31, 1995. For the
nine months ended December 31, 1996, the primary components of cash provided by
operating activities were net income before extraordinary item increased by
non-cash charges for depreciation and amortization along with increases in
accrued liabilities offset by decreases in deferred revenue, increases in fees
and other amounts due from affiliates and increases in other assets. For the
nine months ended December 31, 1995, the $4.4 million of cash used by operating
activities was principally the result of a net loss of $1.3 million sustained
during the nine month period, increased by reductions in liabilities of $1.5
million and increases in other assets of $2.0 million.
Cash used in investing activities was $66.3 million for the nine
months ended December 31, 1996, compared to $15.4 million for the nine months
ended December 31, 1995. For the nine months ended December 31, 1996, purchases
of ALFs and investments in real estate used $55.0 million while purchases of
partnership interests and additional equity investments in partnerships used
$16.2 million. These amounts were offset by $4.6 million of restricted cash
previously used as collateral for letters of credit issued as security deposits
for Leased ALFs which was released through the issuance of letters of credit
under the Company's line of credit with Imperial Bank. For the nine months
ended December 31, 1995, the primary components of the $15.4 million used by
investing activities were $11.8 million used to purchase fixed assets and
limited partnership interests, a $3.9 million increase in restricted cash used
as collateral for letters of credit issued as security deposits for Leased
ALFs, a $2.7 million increase in real estate investments and a $2.2
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million increase in escrow deposits offset by proceeds of $5.1 million from the
sale of the Villa de Palma ALF.
Net cash provided by financing activities during the nine months ended
December 31, 1996 was $64.4 million compared to $53.1 million for the nine
months ended December 31, 1995. During the nine months ended December 31, 1996,
the primary sources of cash provided by financing activities were the 2006
Notes, which generated $55.2 million to the Company after issuance costs, and
borrowings of $25.3 million. These sources were offset by the $386,000 loss
from the early extinguishment of debt and the Company's repayment of $14.2
million of debt and $1.7 million paid to redeem the 1999 Notes. For the nine
months ended December 31, 1995, the Company received $11.8 million, after
issuance costs, from the issuance of the 1999 Notes, $42.8 million, after
issuance costs, from the issuance of common stock and $262,000 from the sale of
common stock to the Company's Employee Stock Ownership Plan. These amounts were
offset by expenditures of $4.9 million to repay debt, $350,000 to purchase
shares of its common stock from former employees, dividends of $300,000 paid on
the Company's 8% Convertible, Redeemable Preferred Stock and $137,000 paid for
the repurchase of convertible subordinated notes.
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. (See "Other Information - Capital
Requirements.")
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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On December 10, 1996, Medistar Corporation ("Medistar") filed
litigation in the District Court of Harris County, Texas naming the Company and
certain of its officers as defendants. The main contention of Medistar's
complaint is the Company's alleged breach of an acquisition and development
agreement. Among the causes of action alleged in the complaint are: (i)
Fraud/Fraudulent Inducement; (ii) Negligent Misrepresentation; (iii) Civil
Conspiracy to Defraud; (iv) Breach of Fiduciary Duty/Good Faith and Fair
Dealing; (v) Unjust Enrichment/Constructive Trust; (vi) Tortious Interference
with Business Relationship; (vii) Breach of Contract; (vii) Suit for
Accounting; and (ix) Declaratory Relief. Medistar has alleged actual damages,
ranging from $5 million to $15 million, and seeks $10 million in punitive
damages.
On December 23, 1996, the Company filed its answer to the complaint
denying the allegations and concurrently filed a counterclaim against Medistar.
The Company contends that Medistar has breached the terms of the acquisition
and development agreement due to its inability to perform pursuant to the terms
of the agreement.
It is management's belief that the potential for Medistar's recovery
of the amounts sought in both compensatory and punitive damages is remote.
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.
Certain statements contained in this report, including without
limitation statements containing the words "believes," "anticipates,"
"expects," and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. The Company has made forward-looking
statements in this report concerning, among other things, the impact of future
acquisitions and developments, if any, and the level of future capital
expenditures. These statements are only predictions, however; actual events or
results may differ materially as a result of risks facing the Company. These
risks include, but are not limited to, those items discussed below. 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, readers are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
The Company has experienced rapid growth through the acquisition of
existing ALFs and by acquiring property for the development of new ALFs.
Although the Company has been successful in implementing its growth strategy,
certain risks are inherent with the execution of this plan. These risks
include, but are not limited to, access to capital
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necessary for acquisition and development, the Company's ability to sustain and
manage growth, governmental regulation, competition, and the risks common to
the assisted living industry.
CAPITAL REQUIREMENTS
In implementing its planned growth strategy by acquiring existing ALFs
and properties for development, and in funding development of acquired
properties, as of December 31, 1996, the Company has expended all of the $98.3
million net proceeds received from the initial public offering of its stock
(the "IPO Offering") and the Note Offering. Additionally, as of December 31,
1996, the Company had borrowed $24.4 million to partially fund the costs of
facility acquisitions. The Company has entered into separate agreements with
Health Care REIT, Inc., Meditrust, Bank United of Texas and Imperial Bank to
provide up to $172.6 million of additional financing for acquisitions,
development and general corporate purposes.
The Company estimates that the net proceeds of these financing
agreements, in conjunction with other financial resources, will provide
adequate capital to fund the Company's acquisition and development program for
additional ALFs over the next 12-18 months. The Company will be required from
time to time to incur additional indebtedness or issue additional debt or
equity securities to finance its growth strategy, including the acquisition and
development of facilities as well as other capital expenditures and additional
funds to meet increased working capital requirements. The Company may finance
future acquisitions and development through a combination of its cash reserves,
its cash flows from operations, utilization of its current lines of credit,
leasing of existing ALFs and ALFs in development, sale/leaseback arrangements
with respect to its Owned ALFs, and additional indebtedness or public or
private sales of debt securities or capital stock. There can be no assurance,
however, that funds will be available on terms favorable to the Company, that
such funds will be available when needed, or that the Company will have
adequate cash flows from operations for such requirements.
HISTORY OF LOSSES
For the most recent quarter ended December 31, 1996, the Company
earned net income of $256,000 compared to net income of $104,000 for the same
period in the prior year. At December 31, 1996, the Company's accumulated
deficit was $6.7 million. The Company also experienced significant negative
operating cash flow in the most recently completed fiscal year and had an
accumulated deficit of $7.6 million as of March 31, 1996. The Company's net
losses have resulted principally from (i) the development of its affordable
apartment communities financed through the Federal Tax Credit Program, in which
the Company receives fees that are not recognized under generally accepted
accounting principles until certain risks associated with the assumed operating
deficits and tax credit guaranties have been reduced to specified levels, (ii)
the expansion of the Company's staffing and infrastructure to accommodate the
Company's acquisition and development strategy and (iii) certain discontinued
project costs. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations." There can be no assurance
that the risks associated with the tax credit financed developments will be
reduced sufficiently to allow recognition of the associated fees, that other
similar costs and expenses or losses will not occur in the future or that other
expected revenue will be recognized when expected. See "--Indebtedness, Lease
and Other Obligations of the Company," "--Tax Credit Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "--Liquidity and Capital Resources."
RAPID GROWTH
Management of Growth. As part of its ongoing business, the Company has
experienced and expects to continue to experience rapid growth. The Company
is planning significant expansion both through internal expansion and
acquisitions and development. In order to maintain and improve operating
results, the Company's management must manage growth and expansion effectively.
See "--Risks Common to the Company's Assisted Living Operations." The Company's
ability to manage its growth effectively requires it to continue to expand
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its operational, financial and management information systems and to continue
to attract, train, motivate, manage and retain key employees. As the Company
continues its expansion, it may become more difficult to manage geographically
dispersed operations and effectively manage each ALF. The Company's failure to
effectively manage growth could have a material adverse effect on the Company's
results of operations.
External Growth. In line with its growth strategy, the Company has
entered into, and will continue to enter into, a number of agreements to
acquire properties for development and for the acquisition of existing ALFs
which are subject to certain conditions. There can be no assurance that one or
more of such acquisitions will be completed or that the Company will be able to
find additional suitable properties and ALFs to continue its current rate of
growth. The Company has recently experienced a slowing of its growth through
acquisition of ALFs due to what management believes is a current shortage of
suitable ALFs available for acquisition at prices attractive to the Company.
Although management believes that this is a temporary situation, there can be
no assurance that suitable ALFs will become available for future acquisition at
prices attractive to the Company. Similarly, the Company has acquired a number
of properties to be developed into ALFs. The development of ALFs is subject to
a number of risks, many of which are outside the Company's control. There can
be no assurance that the Company will be able to complete its planned
facilities in the manner, for the amount, or in the time frame currently
anticipated. Delays in the progress or completion of development projects could
affect the Company's ability to generate revenue or to recognize revenue when
anticipated. See "--Risks Common to the Company's Assisted Living and Apartment
Operations--Development and Construction Risks."
COMPETITION
The health care industry is highly competitive and the Company expects
that the assisted living business in particular will become more competitive in
the future. The Company continues to face competition from numerous local,
regional and national providers of assisted living and long-term care whose
facilities and services are on either end of the senior care continuum from
skilled nursing facilities and acute care hospitals to companies providing home
based health care, and even family members. In addition, the Company expects
that as assisted living receives increased attention among the public and
insurance companies, competition from new market entrants, including companies
focused on assisted living, will grow. Some of the Company's competitors
operate on a not-for-profit basis or as charitable organizations, while others
have, or may obtain, greater financial resources than those of the Company.
Moreover, in the implementation of the Company's growth program, the
Company expects to face competition for the acquisition and development of
ALFs. Some of the Company's present and potential competitors are significantly
larger or have, or may obtain, greater financial resources than those of the
Company. Consequently, there can be no assurance that the Company will not
encounter increased competition in the future which could limit its ability to
attract residents or expand its business, or could increase the cost of future
acquisitions, each of which could have a material adverse effect on the
Company's financial condition, results of operations and prospects.
INDEBTEDNESS, LEASE AND OTHER OBLIGATIONS OF THE COMPANY
The Company has financed, and will continue to finance, the
acquisition and development of ALFs through a combination of loans, leases and
other obligations. As of December 31, 1996, the Company had outstanding
consolidated indebtedness of $91.1 million, including $57.5 million of the
Company's 2006 Convertible Notes, the holders of which have the right to
convert such notes into the common stock of the Company at any time on or
before maturity of the notes. In addition, at December 31, 1996, the Company
had $15.2 million in notes maturing within two years. As a result, a portion
of the Company's cash flow will be devoted to debt service. There is a risk
that the Company will not be able to generate sufficient cash flow from
operations to cover required interest and principal payments.
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At December 31, 1996, approximately $13.1 million of the Company's
indebtedness bore interest at floating rates. Indebtedness that the Company has
since that date incurred and may incur in the future 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 the Company's interest payment
obligations and could have an adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company has
guaranteed mortgage and construction debt for the benefit of Affiliated
Partnerships of up to approximately $48.4 million, including $44.5 million
outstanding as of December 31, 1996, of which $31.6 million will become due and
payable within the next two years. This effectively subjects the Company to
risks normally associated with leverage, including the risk that Affiliated
Partnerships will not be able to refinance this debt with permanent financing,
an increased risk of partnership cash flow deficits, and the risk that if
economic performance of any mortgaged asset declines, the obligation to make
payments on the mortgage debt may be borne by the Company, which could
adversely affect the Company's results of operations and financial condition.
Because certain of the indebtedness which the Company has guaranteed bears
interest at rates which fluctuate with certain prevailing interest rates,
increases in such prevailing interest rates could increase the Company's
interest payment obligations and could have an adverse effect on the Company's
results of operations and financial condition.
In addition, as of December 31, 1996, the Company is a party to
long-term operating leases for certain of its Leased ALFs, which leases require
minimum annual lease payments aggregating $11.3 million for fiscal year 1997,
and intends to enter into additional long-term operating leases in the future.
These leases typically have an initial term of 10 to 15 years, and in general
are not cancelable by the Company.
The Company also has entered into guarantees (the "Tax Credit
Guarantees") which extend 15 years after project completion, relating to
certain developments financed under the Federal Tax Credit Program with respect
to (i) lien free construction, (ii) operating deficits and (iii) maintenance of
tax credit benefits to certain corporate investors, the obligations under
which, excluding potential penalties and interest factors, could amount to an
approximate limit of $78.4 million as of December 31, 1996. There can be no
assurance that the Company will be able to generate sufficient cash flow from
operations to cover required interest, principal and lease payments, or to
perform its obligations under the guaranties to which it is party were it
called on to do so.
If the Company were unable to meet interest, principal, lease or
guarantee payments in the future, there can be no assurance that sufficient
financing would be available to cover the insufficiency or, if available, the
financing would be on terms acceptable to the Company. In the absence of
financing, the Company's ability to make scheduled principal and interest
payments on its indebtedness to meet required minimum lease payments, to meet
its obligations under the guaranties, if any, to respond to changing business
and economic conditions, to fund scheduled investments, cash contributions and
capital expenditures, to make future acquisitions and to absorb adverse
operating results would be adversely affected. In addition, the terms of
certain of the Company's indebtedness have imposed, and may in the future
impose, constraints on the Company's operations. If, and to the extent that,
the Company fails to operate within those constraints, the Company will be
required to either seek waivers or to find alternative sources of financing
with which to pay off the applicable indebtedness.
GENERAL PARTNER LIABILITY AND STATUS
The Company, directly or through its subsidiaries, is a general
partner in 21 partnerships. As a general partner, it is liable for partnership
obligations such as partnership indebtedness (which at December 31, 1996, was
approximately $58.4 million), 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, if
partially or wholly borne by the Company, could materially adversely affect the
Company's results of operations and financial condition.
Each partnership property is managed by the Company pursuant to a
written management contract, some of which are cancelable on 30 or 60 days
notice at the election of the
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managing general partner of the partnership. Action can be taken in each
partnership by a majority in interest of limited partners on such matters as
the removal of the general partners, the request for or approval or disapproval
of a sale of a property owned by a partnership, or other actions affecting the
properties or the partnership. Where the Company is 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 and would result in loss of the management fee income
under those contracts.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
As of August 22, 1996, a wholly-owned subsidiary of the Company, ARV
Health Care, Inc., acquired all of the stock in Syncare, Inc., the holding
company of the three corporations, BayCare Rehabilitative Services Inc. and
ProMotive Rehabilitation Services (collectively, "Geri Care"), and Pro Motion
Rehab. These corporations specialize in rehabilitative services, including
speech, occupational and physical therapy. Based on the billing records of Geri
Care, revenue received directly or indirectly from the Medicare program for
Geri Care's services represents a significant portion of Geri Care's net
revenue. The Medicare program is subject to statutory and regulatory changes,
retroactive and prospective rate adjustments, administrative rulings and
funding restrictions, all of which could have the effect of limiting or
reducing reimbursement levels for Geri Care's services. During late 1995,
Congress considered (but did not enact) legislation to reduce Medicare spending
significantly. The Company cannot predict whether any changes in this program
will be adopted or, if adopted, the effect, if any, such changes will have on
the Company. Any significant decrease in Medicare reimbursement levels could
have a material adverse effect on the Company. There can be no assurance that
rehabilitation offices operated by Geri Care or facilities in which Geri Care
manages rehabilitation management programs (including 25 ALFs owned, leased or
managed by the Company) will continue to receive Medicare payments at current
levels.
Geri Care bills Medicare monthly for services provided and is
reimbursed on a cost basis, subject to certain adjustments. Geri Care submits
cost reports to the Health Care Financing Administration ("HCFA") on an annual
basis and is 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. The Company has
reviewed cost reports for Geri Care filed prior to August 22, 1996, and has
prepared cost reports which it filed as of August 22, 1996. The Company has
established reserves for amounts which it reasonably believes may be adjusted
by HCFA, but there can be no certainty that significant charges in addition to
those reserved for may be denied, which could materially adversely affect the
Company's results of operations and financial condition.
A certain portion of the Company's general and administrative expenses
are believed to be reimbursable by Medicare because the Company provides
accounting, legal and general office services to Geri Care. To the extent
Medicare would deny reimbursement for such overhead, the Company's general and
administrative expenses will increase accordingly.
GOVERNMENT REGULATION
Assisted Living. Health care is an area subject to extensive
regulation and frequent regulatory change. Currently, no federal rules
explicitly define or regulate assisted living. While a number of states have
not yet enacted specific assisted living regulation, the Company is 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 in which it operates or intends 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 of
doing business, costs of doing business and amounts of reimbursement from
governmental and other payors. In addition, the President and Congress have
proposed in the past, and may propose in future, health care reforms which
could impose additional regulations on the Company or limit the amounts that
the Company may charge for its services. The Company cannot make any assessment
as to the ultimate timing and impact that any pending or future health care
reform proposals may have
20
<PAGE> 21
on the assisted living, home health care, nursing facility and rehabilitation
care industries, or on the 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. Additionally, a portion of the Company's revenue
(approximately 7% of the Company's assisted living revenue) is derived from
residents who are recipients of Social Security Income ("SSI") SSI payments.
Revenue derived from these residents is generally lower than that received from
the Company's other residents and could be subject to payment delay. There can
be no assurance that the Company's proportionate percentage of revenue received
from SSI receipts will not increase, or that the amounts paid under SSI programs
will not be further limited. In addition, if the Company were to become a
provider of services under the Medicaid program, the Company would be subject to
Medicaid regulations designed to limit fraud and abuse, violations of which
could result in civil and criminal penalties and exclusion from participation in
the Medicaid program.
Rehabilitation Services. The cost of many of the services offered by
Geri Care and ProMotion Rehab are reimbursed or paid for by Medicare and,
therefore, the corporations providing these services are subject to the HCFA
rules governing survey and certification. While the Company believes these
corporations and the rehabilitation services provided by them are in
substantial compliance with program requirements, the corporations could be
subject to adjustments in reimbursement or penalties due to an alleged failure
to comply with regulatory requirements. See "--Dependence on Reimbursement by
Third Party Payors."
INTEGRATION OF BUSINESSES
Prior to August 1996, the Company had not provided healthcare services
other than those associated with its assisted living licensure requirements. In
August 1996, the Company acquired Geri Care and Pro Motion Rehab, which include
rehabilitation services and a Medicare Part B billing and supply component. Due
in part to differences between the historical core business of the Company and
those of the acquired businesses, such acquisitions have placed and may
continue to place significant demands on the Company's management and other
resources. There can be no assurance that these business can be integrated
successfully, that there will be any operating efficiencies between the
businesses or that the combined businesses can be operated profitably. The
Company may acquire other complementary businesses in the future. The failure
to integrate and operate these or other acquired companies successfully could
have a material adverse effect on the Company's business and future prospects.
RISKS COMMON TO THE COMPANY'S ASSISTED LIVING OPERATIONS
Staffing and Labor Costs. The Company competes with other providers of
assisted living and senior housing with respect to attracting and retaining
qualified personnel. The Company also is dependent upon the available labor
pool of employees. A shortage of qualified personnel may require the Company to
enhance its wage and benefits package in order to compete. In addition, many
health care workers in the nursing home industry are unionized. While none of
the Company's employees are currently unionized, any unionization or threat of
unionization of workers in the assisted living industry or at the Company's
facilities could increase the Company's labor costs. No assurance can be given
that the Company's labor costs will not increase, or that if they do increase,
they can be matched by corresponding increases in rental or management revenue.
Obtaining Residents and Maintaining Rental Rates. As of December 31,
1996, the ALFs owned or operated by the Company had a combined occupancy rate
of 89%. Lease-up on development projects may take longer than assumed periods
of time, thereby lengthening the time in which newly developed ALFs are
experiencing start-up losses. The Company may revise its schedule of
construction of new developments in order to phase in start-up losses from new
ALFs. Occupancy may drop in existing ALFs primarily due to changes in the
health of residents and in ALFs acquired by the Company due to re-evaluation of
residents regarding retention criteria, changes in management and staffing, and
implementation of the Company's assisted living programs. There can be no
assurance that, at any time, any ALF will be substantially occupied at assumed
rents. In addition, lease-up and full occupancy may be
21
<PAGE> 22
achievable only at rental rates below those assumed. If operating expenses
increase, local rental market conditions may limit the extent to which rents
may be increased. With respect to the new acquisitions, rental increases may
lag behind increases in operating expenses since rent increases generally can
only be implemented at the time of expiration of leases. In addition, the
failure of the Company to generate sufficient revenue could result in an
inability to meet minimum rent obligations under the Company's long-term
operating leases and make interest and principal payments on its indebtedness.
General Real Estate Risks. The performance of the Company's ALFs is
influenced by factors affecting real estate investments, including the general
economic climate and local conditions, such as an oversupply of, or a reduction
in demand for, ALFs. Other factors include the attractiveness of properties to
residents, zoning, rent control, environmental quality regulations or other
regulatory restrictions, competition from other forms of housing and the
ability of the Company to provide adequate maintenance and insurance and to
control operating costs, including maintenance, insurance premiums and real
estate taxes. At the time the Company acquires existing ALFs, or opens newly
developed ALFS, budgets for known or expected rehabilitation expenses are
prepared and funds therefor are reserved. Unknown or unforeseen rehabilitation
expenses may be incurred. 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 the ability of the Company to vary its portfolio promptly in
response to changes in economic or other conditions. Any failure by the Company
to integrate or operate acquired or developed ALFs effectively may have a
material adverse effect on the Company's business, financial condition and
results from operations. In addition, the Company currently leases facilities
from only three Health Care REITs. A fourth REIT has committed to provide
financing, but has not yet done so. (See "Financial Statements - Note 4.") The
lease agreements with each of the Health Care REITs are interconnected in that
the Company will not be entitled to exercise its right to renew one lease with
a particular Health Care REIT without exercising its right to renew all other
leases with that Health Care REIT and leases with each Health Care REIT contain
certain cross default provisions. Therefore, in order to exercise all lease
renewal terms, the Company will be required to maintain and rehabilitate the
leased ALFs on a long-term basis. The Company anticipates that similar renewal
and cross-default provisions will be included in leases with other Health Care
REITs.
Bond Financing. The Company has entered into a long-term lease of an
ALF, the acquisition and construction of which 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 facility must comply with certain
federal income tax requirements, principally pertaining to the maximum income
level of a specified portion of the residents. The Company anticipates
executing additional leases for ALFs to be constructed with bond financing, and
the same and possibly additional restrictions are anticipated to be imposed
for such facilities. 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 facilities.
Development and Construction Risks. As part of its growth strategy
during the next few years, the Company plans to develop a number of new ALFs.
See -- "Management's Discussion and Analysis of Financial Condition and Results
of Operation -- Overview." The Company's ability to achieve its development
plans will depend upon a variety of factors, many of which are beyond the
Company's control. The successful development of additional ALFs involves a
number of risks, including the possibility that the Company may be unable to
locate suitable sites at acceptable prices or may be unable to obtain, or may
experience delays in obtaining, necessary zoning, land use, building,
occupancy, licensing and other required governmental permits and
authorizations. Development schedules may be changed by the Company in order to
accommodate requirements of staffing of new ALFs and to allow a phase-in of
start-up losses inherent in the marketing and lease-up of new facilities.
Certain construction risks are beyond the Company's control, including strikes,
adverse weather, natural disasters, supply of materials and labor, and other
unknown contingencies which could cause the cost of construction and the time
required to complete construction
22
<PAGE> 23
to exceed estimates. If construction is not commenced or completed, or if there
are unpaid subcontractors or suppliers, or if required occupancy permits are
not issued in a timely manner, cash flow could be significantly reduced. In
addition, any property in construction carries with it its own risks such as
construction defects, cost overruns, adverse weather conditions, the discovery
of geological or environmental hazards on the property and changes in zoning
restrictions or the method of applying such zoning restrictions. The nature of
licenses and approvals necessary for development and construction, and the
timing and likelihood for obtaining them vary widely from state to state, and
from community to community within a state.
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 removal
or remediation of certain hazardous or toxic substances including, without
limitation, asbestos-containing materials ("ACMs"), which could be located on,
in or under such property. Such laws and regulations often impose liability
whether or not the owner or operator know of, or was responsible for, the
presence of the hazardous or toxic substances. When acquiring land for
development or existing facilities, the Company typically obtains environmental
reports on the properties as part of its due diligence in order to lessen its
risk of exposure. Nonetheless, the costs of any required remediation or removal
of these substances could be substantial and the owner's liability as to any
property 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 who arranges for the
disposal of hazardous or toxic substances such as ACMs 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, the Company typically
enters into environmental indemnity agreements in which it agrees to indemnify
the landlord against all risk of environmental liability both during the term
of the lease and beyond such term. In connection with the ownership or
operation of its or its Affiliated Partnerships' properties, the Company 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 (the "ADA"), 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 which also may require modifications to existing and planned
properties to create access to the properties by disabled persons. While the
Company believes that its properties are substantially in compliance with
present requirements or are exempt therefrom, and attempts to check for such
compliance in all facilities it considers acquiring, if required changes
involve a greater expenditure than anticipated or must be made on a more
accelerated basis than anticipated, additional costs would be incurred by the
Company. Further legislation may impose additional burdens or restrictions
with respect to access by disabled persons and the costs of compliance
therewith could be substantial.
Geographic Concentration. A substantial portion of the business and
operations of the Company are conducted in California, where 29 of the 62
assisted living facilities operated, managed or in development by the Company
are located. Other regional concentrations of assisted living facilities are
planned for Florida, Texas, the Midwest and the Northeast. The creation of
regions allows the Company to manage the ALFs without undue increases in
management personnel. The market value of these properties and the income
generated from properties managed or leased by the Company could be negatively
affected by changes in local and regional economic conditions or the laws
governing, and regulatory environment in, states within those regions, and by
acts of nature. There can be no assurance that such geographic concentration
will not have an adverse effect on the Company's business, financial condition,
results of operations and prospects.
Insurance. The Company currently maintains insurance policies in
amounts and with such coverage and deductibles as it believes are adequate,
based on the nature and risks of
23
<PAGE> 24
its business, historical experience and industry standards. The Company's
business entails an inherent risk of liability. In recent years, participants
in the assisted living industry, including the Company, have become subject to
an increasing number of lawsuits alleging negligence or related legal theories,
many of which may involve large claims and significant legal costs. The Company
is from time to time subject to such suits as a result of the nature of its
business. There can be no assurance that claims will not arise which are in
excess of the Company's insurance coverage or are not covered by the Company's
insurance coverage. A successful claim against the Company not covered by, or
in excess of, the Company's insurance, could have a material adverse effect on
the Company's financial condition and results of operations. Claims against
the Company, regardless of their merit or eventual outcome, may also have a
material adverse effect on the Company's ability to attract residents or expand
its business and would require management to devote time to matters unrelated
to the operation of the Company's business. In addition, the Company's
insurance policies must be renewed annually and there can be no assurance that
the Company will be able to continue to obtain liability insurance coverage in
the future or, if available, that such coverage will be available on acceptable
terms.
CONFLICTS OF INTEREST
Certain of the Company's executive officers and Directors may, by
virtue of their investment in or involvement with entities providing services,
office space or guaranties to the Company or to Company-sponsored partnerships,
have an actual or potential conflict of interest with the interests of the
Company.
In addition, the Company is the managing general partner and
facilities manager for partnerships owning or leasing 13 ALFs and various
apartment communities. By serving in both capacities, the Company has conflicts
of interest in that it has both a duty to act in the best interests of the
limited partners of those partnerships and the desire to maximize earnings for
the Company's shareholders in the operation of those assisted living facilities
and apartment communities.
TAX CREDIT PROPERTIES
The Company's tax credit partnerships obtain equity capital to build
apartments through the sale of tax credits under the Federal Tax Credit
Program. In order to qualify for the Federal Tax Credit Program, the owner of
the project must agree to restrict the use of the property for moderate- to
low-income purposes for a period of 15 years. Some tax credit financed
partnerships for which the Company serves as general partner have entered into
agreements restricting use of their respective properties for moderate- to
low-income housing purposes for periods of up to 40 years beyond the base
15-year compliance period. All tax credit projects must be placed in service by
the end of the second calendar year after the year in which the initial
allocation of tax credits was made. In addition, if all apartments in a project
are not initially occupied during the year in which tax credits are first
taken, this could cause a delay in the timing in which tax credits may be
offset against income and/or cause a forfeiture of some of the tax credits.
Failure to place a tax credit project in service or cause the apartments to be
initially occupied on a timely basis is likely to cause the forfeiture of some
or all the tax credits allocated and would trigger the Company's obligations
under the Tax Credit Guarantees (see "-- Indebtedness, Lease and Other
Obligations of the Company") or otherwise risk exposure of liability to limited
partners of the tax credit partnerships. In addition, projects financed under
the Federal Tax Credit Program are subject to detailed regulations concerning
tenant income and other requirements. The Internal Revenue Service has
identified these regulations as being the subject of increased scrutiny
regarding compliance of applicable regulations under the Internal Revenue Code
of 1986 as amended (the "Code"). While the Company believes that it is
currently in compliance with applicable regulations, no assurance can be given
that the Company will not be challenged in this regard. These restrictions may
limit the Company's management of and ability to sell properties developed
under the Federal Tax Credit Program.
Although the Company does not anticipate the development of new
properties under the Federal Tax Credit Program to be a significant source of
its growth, changes to federal or state tax laws or to the Federal Tax Credit
Program could reduce or eliminate the value or
24
<PAGE> 25
availability of the tax credits and, accordingly, the Company's ability to
engage in this aspect of its business.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1996, the Company had outstanding 9,646,127 shares
of Common Stock, assuming no conversion of the Convertible Notes or exercise of
outstanding warrants and options. Of these shares, 3,565,000 shares of Common
Stock sold in the IPO Offering are tradeable in calendar year 1996 without
restriction or limitation under the Securities Act, except for any shares owned
or purchased by "affiliates" of the Company which will be subject to resale
limitations under Rule 144 of the Securities Act. The remaining outstanding
shares of Common Stock are "restricted securities" within the meaning of Rule
144 (the "Restricted Shares"). The Restricted Shares may not be sold except in
compliance with the registration requirements of the Securities Act or pursuant
to an exemption, including that provided by Rule 144. At December 31, 1996,
approximately 5,138,466 shares of Common Stock were eligible for sale under
Rule 144.
The Company issued 657,803 shares of Common Stock upon its call for
redemption of the 8% Convertible Redeemable Series A Preferred Stock (the
"Series A Preferred Stock") in 1996, all of which were tradeable without
registration under Rule 144 at December 31, 1996. The Company issued 903,373
shares of Common Stock upon its call for redemption of its 1999 Convertible
Notes in 1996, of which approximately 53,441 and 849,932 shares have or will
become tradeable without registration under Rule 144 in 1996 and 1997,
respectively. The Company issued an aggregate of 85,146 restricted shares to
the former shareholders of SynCare, Inc. in 1996, all of which will be
tradeable without registration under Rule 144 in September 1998. The Company
issued an aggregate of 7,583 restricted shares upon the exercise of warrants
held by certain broker-dealers, all of which will be tradeable without
registration under Rule 144 by December 31, 1998.
The Commission has proposed to amend the holding period required by
Rule 144 to permit sales of "restricted securities" after one year rather than
the current two years (and two years rather than three years for
"non-affiliates" who desire to trade free of other Rule 144 restrictions). If
such proposed amendment were enacted, the "restricted securities" described
above would become freely tradeable (subject to any applicable contractual
restrictions) at correspondingly earlier dates.
In addition to the outstanding shares described above, options to
purchase a total of 636,892 shares of Common Stock warrants to purchase a total
of 161,970 shares of Common Stock Convertible Notes convertible into
approximately 3,096,392 shares of Common Stock are outstanding as of December
31, 1996. The Company has registered for public resale all of the shares of
Common Stock issuable on conversion of the Convertible Notes.
Sales of substantial amounts of Common Stock in the public market
under Rule 144 or otherwise, and the potential for such sales, may have a
material adverse effect on the prevailing market price of the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities.
VOLATILITY OF STOCK PRICE
Sales of substantial amounts of shares of Common Stock in the public
market or the perception that those sales could occur could adversely affect
the market price of the Common Stock and the Company's ability to raise
additional funds in the future in the capital markets. The market price of the
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 the Common Stock, variations in the Company's operating results,
changes in earnings estimates by securities analysts, 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 industry 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, 1996, the Company's Directors and executive
officers and their affiliates beneficially own approximately 33% of the
Company's outstanding shares of Common Stock. See "Principal Shareholders." As
a result, these stockholders, acting together, would be able to significantly
influence many matters requiring approval by the
25
<PAGE> 26
stockholders of the Company, including the election of Directors. The Company's
articles of incorporation provides for authorized but unissued preferred stock,
the terms of which may be fixed by the Board of Directors, and provides, among
other things, that upon the satisfaction of certain conditions specified in the
California General Corporation Law relating to the number of holders of Common
Stock, the Board of Directors will be classified and the holders of Common
Stock will not be permitted to cumulate votes. Such provisions could have the
effect of delaying, deferring or preventing a change of control of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
15 Independent Accountants' Review Report dated February 11, 1997
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed the following reports with the Securities and
Exchange Commission on Form 8-K during the quarter ended December 31, 1996:
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on October 9, 1996 reported under Item 2, concerning the
Company's purchase of Shorehaven Manor, a 120 unit retirement facility located
in Sterling Heights, Michigan.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on October 25, 1996 reported under Item 7, to provide
the financial statements required pursuant to Rule 3.05 of Regulation S-X with
respect to the Company's acquisition of Syncare, Inc., a California
corporation.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on October 30, 1996 reported under Item 7, to provide
the financial statements required pursuant to Rule 3.05 and Rule 3.14 of
Regulation S-X with respect to the Company's acquisitions of a controlling
limited partnership interest in American Retirement Villas Properties II, a
California limited partnership and Northgate Park, a 126 unit retirement
facility located in Cincinnati, Ohio.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on October 31, 1996 reported under Item 7, amending the
Company's Form 8-K/A filed with the Securities and Exchange Commission on
October 30, 1996 referenced above.
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on November 21, 1996 reported under Item 2, concerning the
tender offer by a wholly-owned subsidiary of the Company, LAVRA, Inc., a
Delaware corporation, to purchase up to 42% of the outstanding limited
partnership units of Senior Income Fund, L.P., a Delaware limited partnership,
at a net cash price of $5.00 per limited partnership unit, net of any
distributions made from the date of the tender offer until the date validly
tendered limited partnership units were purchased.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on November 26, 1996 reported under Item 7, to provide
the financial statements required pursuant to Rule 3.14 of Regulation S-X with
respect to the Company's acquisition of Shorehaven Manor, a 120 unit retirement
facility located in Sterling Heights, Michigan.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on December 6, 1996 reported under Item 2, to announce
the increase in the purchase price to $6.50 net cash per limited partnership
unit offered by LAVRA for limited partnership units of Senior Income Fund.
26
<PAGE> 27
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: February 14, 1997
By: /s/ Patrick M. Donovan
--------------------------------
Patrick M. Donovan
Vice President Finance
(Duly authorized officer)
Date: February 14, 1997
27
<PAGE> 1
EXHIBIT 15
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
The Board of Directors
ARV Assisted Living, Inc.:
We have reviewed the condensed consolidated balance sheet of ARV Assisted
Living, Inc. and subsidiaries as of December 31, 1996, and the related
condensed consolidated statements of operations and cash flows for the
three-month and nine-month periods ended December 31, 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, 1996, and the related consolidated statements of
operations and cash flows for the year then ended (not presented herein); and
in our report dated May 25, 1996, 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, 1996 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Orange County, California
February 11, 1997
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<ARTICLE> 5
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<S> <C>
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<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,386
<SECURITIES> 0
<RECEIVABLES> 4,167
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<CURRENT-ASSETS> 67,370
<PP&E> 90,961
<DEPRECIATION> (3,327)
<TOTAL-ASSETS> 163,448
<CURRENT-LIABILITIES> 10,656
<BONDS> 89,324
0
0
<COMMON> 60,682
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