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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
COMMISSION FILE NUMBER: 0-26980
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ARV ASSISTED LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, SUITE D-1 92626
COSTA MESA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, no par value NASDAQ National Market
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of June 19, 1997, the aggregate market value of the voting stock held by
non-affiliates of registrant was $77,019,244 (for purposes of calculating the
preceding amount only, all directors, executive officers and shareholders
holding 5% or greater of the registrant's Common Stock are assumed to be
affiliates). The number of shares of Common Stock of the registrant outstanding
as of June 19, 1997 was 9,662,990.
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ARV ASSISTED LIVING, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
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PART I
Item 1: Business...................................................................... 1
Item 2: Properties.................................................................... 20
Item 3: Legal Proceedings............................................................. 22
Item 4: Submission of Matters to a Vote of Security Holders........................... 23
PART II
Item 5: Market for Registrant's Common Equity and Related Shareholder................. 23
Item 6: Matters Selected Financial Data............................................... 25
Item 7: Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 26
Item 8: Financial Statements and Supplementary Data................................... 34
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 34
PART III
Item 10: Directors and Executive Officers of the Registrant............................ 35
Item 11: Executive Compensation........................................................ 38
Item 12: Security Ownership of Certain Beneficial Owners and Management................ 41
Item 13: Certain Relationships and Related Transactions................................ 44
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 45
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PART I
ITEM 1. BUSINESS
GENERAL
ARV Assisted Living, Inc. ("ARV" or the "Company") is one of the largest
operators of licensed assisted living facilities ("ALFs") in the United States.
The Company is a fully integrated provider of assisted living accommodations and
services that operates, acquires and develops assisted living facilities. The
Company's operating objective is to provide high quality, personalized assisted
living services to senior elderly residents in a cost effective manner, while
maintaining residents' independence, dignity and quality of life. ALFs comprise
a combination of housing, personalized support services and health care in a
non-institutional setting designed to respond to the individual needs of the
senior elderly who need assistance with certain activities of daily living, but
who do not need the level of health care provided in a skilled nursing facility.
The Company has implemented its plan to expand its operations through the
acquisition and development of new ALFs. To this end, the Company has expanded
its operations through acquisitions in California, Ohio, Florida, Indiana,
Michigan and Virginia, and it has developed or is in the process of constructing
new ALFs in California, Florida, Texas, New Mexico, Indiana, Massachusetts, New
York and Nevada. At March 31, 1997, the Company operated 45 ALFs containing
5,855 units. As of June 19, 1997, the Company operated 47 ALFs containing
approximately 6,000 units. Of the 47 ALFs, the Company operates 14 Owned ALFs
(as defined below) and 31 Leased ALFs (as defined below), and manages two ALFs
("Managed ALFs"). "Owned ALFs" means ALFs owned by the Company directly or by
affiliated limited partnerships for which the Company serves as managing general
partner and facility manager ("Affiliated Partnerships") in which the Company
has a majority ownership interest. "Leased ALFs" means ALFs operated under long-
term operating leases for the Company's own account or for Affiliated
Partnerships in which the Company has a majority ownership interest. In
addition, the Company has five ALFs currently under construction that are
expected to contain 661 units.
The Company has utilized lease and mortgage financing with health care real
estate investment trusts ("Health Care REITs"), private companies and commercial
banks to help facilitate its growth strategy. The Company has also used the
proceeds of a $57.5 million convertible subordinated debt issuance to help
effectuate its growth strategy.
The Company intends to continue to expand its existing portfolio through
the acquisition and development of Owned ALFs as well as through the operation
of Leased ALFs. This blend of ownership structures is anticipated by management
to allow the Company to fund its growth in a balanced and efficient manner.
The Company intends to continue to focus on "private-pay" residents, who
pay for the Company's services from their own funds or through private
insurance, rather than relying on potential residents who live in the few states
that have enacted legislation enabling ALFs to receive Medicaid funding similar
to funding generally provided to skilled nursing facilities. Currently,
approximately 96% of the Company's ALF revenue comes from private-pay residents,
while the remaining 4% of such revenue comes from residents in the Supplemental
Security Income ("SSI") program.
The Company's ALFs provide residents with a combination of living
accommodations, basic care services and assisted living services. The residents
of the Company's ALFs average 85 years of age and often require assistance with
certain activities of daily living. The Company provides its assisted living
residents with private or semi-private rooms or suites, meals in a communal
setting, housekeeping, linen and laundry services, activities programs,
security, utilities, and transportation in a Company van or minibus. The Company
also provides a three-tier assisted living service structure to which residents
can subscribe as they require assistance with other activities of daily living,
including personal care, assistance with bathing, grooming, dressing, personal
hygiene and escort services to meals and activities.
Further, the Company has implemented a Wellness Program at all of its 47
facilities, pursuant to which the Company arranges for the provision of certain
health care services to its residents. As a means of strengthening its Wellness
Program, the Company, through its wholly owned subsidiary, ARV Health
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Care, Inc., acquired SynCare, Inc., a physical, speech and occupational therapy
provider, as of August 22, 1996 in a stock-for-stock merger. SynCare, Inc. was
the holding company of three corporations, BayCare Rehabilitative Services Inc.,
ProMotive Rehabilitation Services and Pro Motion Rehab. BayCare Rehabilitative
Services Inc. and Pro Motion Rehab have been merged into ProMotive
Rehabilitation Services, which does business under the name GeriCare
("GeriCare"). GeriCare specializes in rehabilitative services, including speech,
occupational and physical therapy.
In addition to operating and managing ALFs, the Company has also acquired
or developed market rate senior apartments, as well as affordable senior and
multifamily apartment communities using the sale of tax credits under a federal
low income housing tax credit program (the "Federal Tax Credit Program") to
generate the equity funding for development. The Company does not intend to
expand its apartment portfolio and will not grow this segment of the business in
the future.
The Company or its affiliated entities have been continuously involved in
the acquisition, development and operation of senior housing facilities for more
than 20 years. In 1980, Mr. Gary L. Davidson, the Company's Chairman, CEO and
President, and Mr. John Booty, retired President and current Vice Chairman of
the Board, with two other individuals who have since retired, formed the
predecessor to the Company. Since that time, the Company has built an executive
management team and assisted living operation with experience and expertise in
the management, financing, acquisition, development and operation of ALFs.
THE ASSISTED LIVING MARKET
Assisted Living. Assisted living can be viewed as falling near the middle
of the elder care continuum, between home-based care at one end and long-term
skilled nursing facilities and acute care hospitals at the other. Assisted
living represents a combination of housing, personalized support services, and
health care designed to respond to the individual needs of the senior elderly
who need help in activities of daily living, but do not need the medical care
provided in a skilled nursing facility.
The Company believes its assisted living business benefits from significant
trends affecting the long-term care industry. The first is an increase in the
demand for elder care resulting from the continued aging of the U.S. population,
with the average age of the Company's assisted living residents falling within
the fastest growing segments of the U.S. population. While increasing numbers of
Americans are living longer and healthier lives, many gradually require
increasing assistance with activities of daily living, and are not able to
continue to age in place at home. The second is the effort to contain health
care costs by the government, private insurers and managed care organizations by
limiting lengths of stay, services, and reimbursement amounts to persons in
acute care hospitals and skilled nursing facilities. Assisted living offers a
cost effective long-term care alternative while preserving a more independent
lifestyle for those senior elderly who do not require the broader array of
medical services that acute care hospitals and skilled nursing facilities are
required to provide. As of March 31, 1997, monthly revenue from the Company's
ALFs on a "same facility basis" (defined as those facilities which the Company
owned, managed or leased for a period of 12 months or more as of March 31, 1997)
averaged $1,610 per occupied unit compared to $1,480 per occupied unit as of
March 31, 1996. Other trends benefiting the Company include the increased
financial net worth of the elderly population, the increase in the population of
individuals living alone and the increasing number of women who work outside the
home and are therefore less able to care for their elderly relatives. The
Company believes that these trends will result in an increasing demand for
assisted living services and facilities to fill the gap between aging at home
and aging in more expensive skilled nursing facilities.
Aging Population. The primary consumers of long-term health care services
are persons over the age of 65. This group represents one of the fastest growing
segments of the population. According to U.S. Bureau of the Census data, the
segment of the population over 85 years of age, which comprises the largest
percentage of residents at long-term care facilities, is projected to increase
by 40% between the years 1990 and 2000.
As the ratio of senior elderly in need of assistance has increased, so too
has the number of senior elderly able to afford assisted living. According to
U.S. Bureau of the Census data, the median net worth of householders age 75 or
older increased from $55,178 in 1984 and $61,491 in 1988 to $77,654 in 1993.
Furthermore, according to the same source, the percentage of people 65 years and
older below the poverty line
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decreased from 27.3% in 1970 to 14.8% in 1980 to 12.2% in 1993. The increased
number of women in the labor force has reduced the supply of care givers.
Historically, unpaid women (mostly daughters or daughters-in-law) represented a
large portion of the care givers of the non-institutionalized senior elderly.
Since 1960, the population of individuals living alone has increased
significantly as a percentage of the total elderly population. This increase has
been the result of an aging population in which women outlive men by an average
of 6.8 years, rising divorce rates, and an increase in the number of unmarried
individuals.
Limitation on the Supply of Long-Term Care Facilities. The majority of
states in the U.S. have enacted Certificates of Need or similar legislation,
which generally limits the construction of skilled nursing facilities and the
addition of beds or services in existing skilled nursing facilities. High
construction costs, limitations on government reimbursement for the full cost of
construction, and start-up expenses also act to constrain growth in the supply
of such facilities. Such legislation benefits the assisted living industry by
limiting the supply of skilled nursing beds for the senior elderly. Cost factors
are placing pressure on skilled nursing facilities to shift their focus toward
higher acuity care which enables them to charge higher fees, thus creating a
shortage of lower acuity care availability, and thereby increasing the pool of
potential assisted living residents.
While Certificates of Need generally are not required for assisted living
facilities, except in a few states, most states do require assisted living
providers to license their facilities and comply with various regulations
regarding building requirements and operating procedures and regulations. States
typically impose additional requirements on assisted living facilities over and
above the standard congregate care requirements. Further, the limited pool of
experienced assisted living staff and management, as well as the costs and
start-up expenses to construct an assisted living facility, provide an
additional barrier of entry to the assisted living business.
Cost Containment Pressures of Health Reform. In response to rapidly rising
health care costs, both government and private pay sources have adopted cost
containment measures that have encouraged reduced length of stay in hospitals
and skilled nursing facilities. The federal government has acted to curtail
increases in health care costs under Medicare by limiting acute care hospital
reimbursement for specific services to preestablished fixed amounts. Private
insurers have also begun to limit reimbursement for medical services in general
to predetermined "reasonable" charges. Managed care organizations, such as
health maintenance organizations ("HMOs") and preferred provider organizations
("PPOs") are reducing hospitalization costs by negotiating for discounted rates
for hospital services and by monitoring and decreasing hospitalization. The
Company anticipates that both HMOs and PPOs increasingly may direct patients
away from the more expensive nursing care facilities into less expensive ALFs.
These cost containment measures have produced a "push-down" effect. As the
number of patients being "pushed down" from acute care hospitals to skilled
nursing facilities increases, the demand for residential options such as
assisted living facilities to serve patients who historically have been served
by skilled nursing facilities will also increase. In addition, skilled nursing
facility operators are continuing to focus on improving occupancy and expanding
services (and fees) to subacute patients requiring very high levels of nursing
care. As the level of skilled nursing facility patients increases, the supply of
nursing facility space will be filled by patients with higher acuity needs
paying higher fees, which again will provide opportunities for assisted living
facilities to increase their occupancy and services to residents requiring
lesser levels of care than generally can be expected for patients in skilled
nursing facilities.
THE COMPANY'S ASSISTED LIVING SERVICES
The Company provides services and care which are designed to meet the
individual needs of its residents. The services provided by the Company are
designed to enhance both the physical and mental well-being of the senior
elderly in each of its facilities by promoting their independence and dignity in
a home-like setting. The Company's assisted living program includes the
following:
Personalized Care Plan. A primary element of the Company's strategy is
the concept of "personalized" care to meet each resident's specific needs.
This concept of customizing services to meet the needs of the residents
begins with the resident admissions process, where the facility's
management staff, the resident, the resident's family, and the resident's
physician discuss the resident's needs and develop a plan for the
resident's care. If recommended by the resident's physician, additional
health care or medical
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services may be provided at the facility by a third party home health care
agency or other medical provider. The care plan is reviewed and modified on
a regular basis.
Basic Service and Care Package. The basic service and care package at
the Company's ALFs generally includes the following: meals in a communal,
"home-like" setting, housekeeping, linen and laundry service, social and
recreational programs, security, utilities and transportation in a Company
van or minibus. Other care services can be provided under the basic package
based upon the individual's personalized health care plan. While the amount
of the fee for the basic service package varies from facility to facility,
on a "same facility basis" (defined as those facilities which the Company
owned, managed or leased for a period of four quarters or more as of March
31, 1997) the average basic monthly rate per unit was approximately $1,380
per month as of March 31, 1997, compared to an average of $1,315 as of
March 31, 1996.
Additional Services. The Company has designed its additional assisted
living services generally in a three-tier program available to residents on
a personalized basis.
Level One: Assistance to residents in the self-administration of
medication. Where necessary, the assisted living staff
will consult with the family, the physician or the
insurance company of a resident to designate a home health
care agency to administer the appropriate medication.
Level Two: In addition to the services provided under Level One,
assistance with bathing, dressing and grooming, escorting
to and from meals and activities, reading mail, writing
letters, shopping and other specialized activities. These
services are provided on an as-needed basis and at the
convenience of the resident within the overall operation
of the facility.
Level Three: All of the services provided under Level One and Level
Two, and, in addition, provision of those services on a
24-hour basis. Further, this level provides appropriate
services for individuals who need help with incontinence.
In addition to the above three levels, the Company provides other levels of
assistance to its residents in order to meet their individual needs.
As of March 31, 1997, approximately 63% of the Company's residents were on
the basic plan, 18% on Level One, 15% on Level Two and 4% on Level Three. In
addition to the base rent, the Company typically charges a $375 per month fee
for Level One assisted living services, $700 per month for Level Two assisted
living services and $1,125 to $1,400 per month for Level Three assisted living
services, but the fee levels vary from facility to facility. At some facilities,
the Company may charge additional fees for other specialized assisted living
services. As the Company's residents age at the facilities, the Company expects
that an increasing number of residents will utilize Level Two and Level Three
services. The Company's internal growth plan is focused on increasing revenue by
continuing to expand the number and diversity of its tiered additional assisted
living services and the number of residents using these services. There can be
no assurance that, at any time, any assisted living facility will be
substantially occupied at assumed rents. In addition, lease-up and full
occupancy may be 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. Because rent increases generally can only be
implemented at the time of expiration of leases, rental increases may lag behind
increases in operating expenses.
The average monthly revenue per occupied unit for both the basic service
and the additional services for the year ended March 31, 1997 increased to
$1,610 from $1,480 a year earlier on a same facility basis.
Wellness Program. The Company has implemented a Wellness Program for the
residents of its facilities designed to identify and respond to changes in a
resident's health or condition and then, together with the resident and the
resident's family and physician, as appropriate, design a solution to fit that
resident's particular needs. The Company monitors the physical and mental
well-being of its residents. This monitoring activity takes place at meals and
other scheduled activities, and informally as the staff performs its services
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around the facility. Under the Wellness Program, the Company works with home
health care agencies to provide services the facility cannot provide, with
physical and occupational therapists to provide these services to residents in
need of such therapy, and with a long-term care pharmacy to facilitate cost
effective and reliable ordering and distribution of medication. The Company
arranges for these services to be provided to residents as needed in
consultation with their physicians and families. At the present time, all of
Company's ALFs have a comprehensive Wellness Program. The Company is in the
process of implementing the Wellness Program at the balance of its facilities,
the majority of which have been recently acquired.
GROWTH STRATEGIES
Overview. The Company's growth strategy focuses on development of ALFs,
expansion of the level and depth of assisted living services, and continued
intensive facilities management.
The Company will seek to grow by increasing its portfolio of ALFs through
acquisition and development. The Company's strategic plan calls for the
acquisition and development of ALFS through direct ownership and the use of
long-term operating leases with institutional investors such as Health Care
REITs, as well as through direct ownership financed with secured debt from
Health Care REITs or other lenders. While the Company has financed a portion of
its direct ownership of ALFs with secured debt from Health Care REITs, it does
not have any participation or sponsorship interest in these entities. The
Company believes that this blend of ownership structures allows the Company to
fund its growth in a balanced and cost effective manner.
The Company and its predecessors have acquired and developed assisted
living and senior housing facilities over the past 17 years. During this period,
the Company and its predecessors have acquired 37 ALFs, including one portfolio
of eight facilities, and developed ten ALFs currently in operation. In addition,
the Company's recent or current development of 18 apartment communities it
operates throughout the U.S. has further increased its development experience.
As the Company continues its expansion, it may become more difficult to manage
geographically dispersed operations. Management believes the Company has
developed and expanded its operational, financial and management information
systems and procedures and has established an infrastructure to support
development on a national basis.
The Company's strategy is to expand by targeting areas where there is a
need for ALFs based on demographics and market studies. The Company intends to
continue to expand its assisted living operations throughout the U.S., locating
its facilities in clusters, that is, areas where it has other existing
facilities or geographic areas where it intends to acquire or develop other
ALFs. In this way, the Company seeks to increase the efficiency of its
management resources and to achieve broader economies of scale.
A substantial portion of the business and operations of the Company are
conducted in California, where 30 of the 55 ALFs operated, managed or in
development by the Company are located. Other regional concentrations of ALFS
are planned for Florida, Texas, Ohio, Michigan and the Northeast. 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 and by acts of nature. A worsening of current
economic conditions in these areas of concentration, or a downturn in the
economic conditions in its other regions, could have a negative effect on the
Company's business.
Increase Sales of Additional Assisted Living Services. The Company believes
that many custodial services provided in skilled nursing facilities are
available at approximately two-thirds of the cost in the Company's ALFs. The
Company believes that this differential will enable the Company to attract
additional residents. By increasing the usage of these services by its
residents, the Company believes it should enable residents to stay at the
Company's ALFs longer, rather than having to transfer to more expensive skilled
nursing facilities. The Company has been a pioneer in providing these services,
which allow its senior elderly residents to age in place at the facility without
having to move to a more expensive alternative until that move becomes
absolutely necessary.
The Company seeks to enhance and increase the amount and diversity of
assisted living services it provides through (i) the continued education of the
senior community, and particularly the residents and their families, concerning
the cost effectiveness of receiving additional services in an assisted living
facility, (ii) the
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continued development and refinement of assisted living programs designed to
meet the needs of its residents as they age in place and (iii) the consistent
delivery of quality services for residents.
Development. The Company will seek to grow primarily through the
development of new ALFs in its targeted markets. The Company's primary
development strategy is to conduct its development activities in conjunction
with developers and builders in clustered geographic areas throughout the U.S.
Typically, the Company's regional developers receive development or construction
fees in connection with the construction of the project. In all cases, the
Company has the right to approve acquisitions and all aspects of development
including site selection, design, plans and specifications, development budgets,
choice of general contractor and major subcontractors, and other significant
criteria.
In long-term operating lease transactions, when the subject property is
ready for construction, it typically is acquired by the Health Care REIT
financing the project, with the development performed by the Company, or in
conjunction with regional developers in certain cases, under a contractual
arrangement with the Health Care REIT. Concurrently, the Company enters into a
long-term operating lease which becomes effective when the facility is
completed. The Health Care REIT typically bears 100% of the development costs
which may also include development or construction supervision fees for the
Company. The Company typically incurs up-front development costs in connection
with the due diligence and entitlement process and architectural and engineering
fees incurred in connection with preparing the property for purchase by the
Health Care REIT at the beginning of construction. The Company currently leases
facilities from four Health Care REITs. 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
that 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 facilities on a long-term
basis.
As part of its growth strategy, the Company plans to develop new ALFs. 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. These and other factors
are detailed below. See Risk Factors -- Risks Common to the Company's assisted
living operations -- Development and Construction Risks. The successful
development of additional ALFs would involve 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. 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 to exceed estimates. In order to keep its internal costs to a
minimum, the Company relies, and will continue to rely, on third party general
contractors to construct its new ALFs. 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 is subject to
risks including 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.
Acquisitions. The Company believes that the assisted living industry's
fragmentation and ongoing consolidation provide attractive acquisition
opportunities. Through its internal acquisition team, its network of real estate
broker contacts and its regional partners and allies, the Company seeks to
acquire single ALFs or groups of ALFs from smaller owners and operators in its
targeted markets. In evaluating possible acquisitions, the Company considers (i)
the location, construction quality, condition and design of the facility, (ii)
the current and projected cash flow of the facility and the anticipated ability
to increase revenue through rent and occupancy increases, additional assisted
living services and management and (iii) the ability to acquire the facility
below replacement cost. However, there can be no assurance that the Company will
be able to find additional suitable facilities to continue its current growth
rate.
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By developing and operating ALFs and senior and multifamily apartment
communities in 14 states, the Company has generated numerous contacts through
which it is able to identify possible acquisitions in the early stage of the
sale process. The Company's sources for prospective acquisitions range from
Affiliated Partnerships to management's contacts with potential ALF sellers to
the Company's local and regional personnel who monitor the assisted living
market in their area. Management intends to pursue both individual and portfolio
acquisitions and believes the Company will be able to achieve greater value from
its acquisitions as the facilities manager.
In certain instances, the Company may target existing ALFs which may be
redeveloped or repositioned as management believes a number of acquisition
opportunities may reflect situations where existing owners are not operating,
maintaining or leasing such facilities efficiently. Although the Company will
focus future acquisition efforts primarily on the acquisition, directly or
through long-term operating leases, of additional ALFs, it may in certain cases
also target additional third party management contracts as an interim step to
facilities acquisition.
The Company has acquired certain existing ALFs from affiliated entities as
well as third parties and may consider acquiring additional existing ALFs from
other Affiliated Partnerships. There can be no assurance that the Company will
pursue any such transactions or that, if pursued, such transactions will be
completed successfully by the Company.
The Company's acquisitions of existing ALFs are anticipated to be financed
through direct long-term operating lease transactions with institutional
investors such as Health Care REITs, as well as ownership acquisitions using
equity and secured debt. In long-term operating lease transactions, the Company
typically arranges the sale of the prospective assisted living facility to a
Health Care REIT or other institutional investor while concurrently entering
into a long-term operating lease for the facility. The Company's initial cost
generally is limited to a security deposit. Thereafter, the Company is obligated
to make certain rental payments (which may include an additional amount related
to revenue of the facility) for the term of the lease. While the Company
believes that it has been and will continue to be conservative in projecting
lease-up costs and expenses as well as the achievement of rent stabilization,
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.
FACTORS AFFECTING FUTURE RESULTS REGARDING FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including those set forth below. Certain statements
contained in this report, including without limitation statements containing the
words "believes," "anticipates," "expects," and words of similar import,
constitute "forward-looking 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, which speak only as of the date of
this report. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
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
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limited to, access to capital 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 March 31, 1997, the Company has expended substantially all of the $55.2
million net proceeds received from the sale of its 6 3/4% Convertible
Subordinated Notes due 2006 (the "2006 Note Offering"). The Company intends to
refinance certain facilities and investments to replace expended funds.
Additionally, as of March 31, 1997, the Company had borrowed $20.9 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 $210 million of financing for acquisitions,
development and general corporate purposes. At March 31, 1997, $39.9 million of
these commitments had been expended ($23.4 million for Leased ALFS, $8.8 million
for mortgage financing of Owned ALFs, and $7.7 million for the construction of
an ALF owned by an Affiliated Partnership which is guaranteed by the Company).
Additionally, at March 31, 1997, the Company has used $6.9 million of the line
of credit with Imperial Bank in the form of non-cash advances to provide letters
of credit used as security deposits for leased ALFs. The Company intends to
finance certain of its ALFs and investments in property to be developed in order
to redeploy the capital.
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 development and acquisition program for additional ALFs over
the next 12 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 flow 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. The Company has arranged financing of its ALFs under
construction and development, through its commitments from various Healthcare
REITs. With respect to these ALFs, the Company's commitments for capital
expenditures consist of potential liability for cost overruns incurred during
the construction of ALFs and the Company's obligation to fund start-up losses
incurred in the operation of the ALFs prior to the achievement of stabilized
operations. While the amount of such obligations are contingent on the Company's
ability to develop its ALFs within budget and achieve profitable operations, the
probable amount of these obligations can not be definitively quantified. While
such obligations may not be definitively quantified, management believes that it
has made adequate provision for such obligations in its financing plan 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 years ended March 31, 1997, 1996 and 1995, respectively, the
Company had net losses of $1.8 million, $965,000 and $3.0 million, respectively.
At March 31, 1997, the Company's accumulated deficit was $9.4 million. 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 guarantees have been reduced to
specified levels, (ii) provision for estimated future obligations of the Company
for its tax credit properties and certain allowances established for Medicare
reimbursement regarding the Company's rehabilitation subsidiary, GeriCare, (iii)
the expansion of the Company's staffing and infrastructure to accommodate the
Company's acquisition and development strategy, (iv) start-up losses incurred in
operations of newly developed ALFs, and (v) certain discontinued project costs.
See "Management's Discussion and Analysis of Financial
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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
operating issues can be managed to reduce or eliminate obligations under
operating deficit guarantees, 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," "-- General Partner Liability and Status," "-- Tax Credit Properties"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "-- Liquidity and Capital Resources."
While management believes that internal review procedures have been put into
place which should reduce Medicare disallowances in future quarters, there can
be no assurance that the risks associated with the Medicare-reimbursed segment
of the Company's business can be eliminated or even substantially reduced. See
"-- Dependence on Reimbursement by Third-Party Payors."
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 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. 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, or has contracted to operate ALFs being
developed by third-party developers. 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 current and new market entrants, including companies focused on
assisted living, will increase. 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 available to 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
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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, expand its business, or 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 March 31, 1997, the Company had outstanding consolidated
indebtedness of $92.5 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 March 31, 1997, the Company had $12.1 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.
At March 31, 1997, approximately $15.2 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 $56.1 million, including $46.9 million
outstanding as of March 31, 1997, of which $34.0 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 March 31, 1997, the Company is a party to long-term
operating leases for certain of its Leased ALFs, which leases require minimum
annual lease payments aggregating $18.5 million for fiscal year 1998, 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) obtaining and maintaining tax
credit benefits to certain corporate investors (see "-- Tax Credit Properties"),
the obligations under which, excluding potential penalties and interest factors,
could amount to an approximate limit of $78.4 million as of March 31, 1997.
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 guarantees to which it is
party were it called on to do so.
In particular, the Company and/or its wholly owned subsidiary, ARV
Investment Group, Inc., have provided such guarantees to General Electric
Capital Corporation and subsidiaries thereof (collectively, "GECC") with regard
to six properties. For two of those properties, the Company has funded
approximately $317,000 as of March 31, 1997, and expects to fund up to an
additional $675,000 in fiscal 1998 under operating deficit guarantees. The
Company expects to fund approximately $1 million for operating deficits for
other properties as of March 31, 1997. In addition, the Company may be required
to fund shortfalls in permanent loan financing to replace construction financing
on projects where permanent financing has not been finalized. Finally, with
regard to tax credit benefits, the Company may be required to make adjustments
if sufficient tax
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credits are not generated in order to meet agreed-upon levels of tax credit
benefits. (See "-- Tax Credit Properties.")
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 guarantees, 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 March 31, 1997, was approximately
$58.3 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 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.
The Company has funded and expects to fund certain amounts in its capacity
as general partner or guarantor for a subsidiary general partner regarding
certain tax credit properties. In addition, adjustments to cover tax credit
benefit shortfalls may need to be made. See "-- Indebtedness, Lease and Other
Obligations of the Company" and Tax Credit Properties."
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
As of August 22, 1996, the Company acquired GeriCare. GeriCare specializes
in rehabilitative services, including speech, occupational and physical therapy.
Revenue received directly or indirectly from the Medicare program for GeriCare's
services represents a significant portion of GeriCare'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 GeriCare'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 services provided by
GeriCare or rent paid for space in facilities in which GeriCare manages
rehabilitation management programs (including 33 ALFs owned, leased or managed
by the Company) will continue to receive Medicare payments at current levels.
Medicare reimburses GeriCare monthly for services provided and is
reimbursed on a cost basis, subject to certain adjustments. GeriCare 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
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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 GeriCare
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. Mutual of Omaha, GeriCare's intermediary with HCFA, made a
retroactive rate adjustment regarding services provided by GeriCare from 1995
through the early spring of 1997, resulting in the disallowance of approximately
$106,000 of fees previously paid to GeriCare. In addition, GeriCare has been
placed on a temporary 50% review, meaning that Mutual of Omaha will temporarily
withhold payment on 50% of GeriCare's billings until it has reviewed the files
documenting the requested reimbursement. Management believes that the file
review will result in payment of substantially all of the amounts requested, but
the review period will temporarily slow cash flows for GeriCare.
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 GeriCare. 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 that 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 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. A portion of the Company's revenue (currently, approximately
4% of the Company's assisted living revenue) is derived from residents who are
recipients of Supplemental 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
GeriCare is reimbursed or paid for by Medicare and, therefore, GeriCare is
subject to the HCFA rules governing survey and certification. While the Company
believes GeriCare and the rehabilitation services it provides are in substantial
compliance with program requirements, the corporation could be subject to
adjustments in addition to those already made in reimbursement or penalties due
to an alleged failure to comply with regulatory requirements. See "-- Dependence
on Reimbursement by Third Party Payors."
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INTEGRATION OF BUSINESSES
Prior to August 1996, the Company had not provided health care services
other than those associated with its assisted living licensure requirements. In
August 1996, the Company acquired GeriCare which includes 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 that of the
acquired business, such acquisition has placed and may continue to place
significant demands on the Company's management and other resources. New
management has been hired by the Company to oversee GeriCare. Nonetheless, there
can be no assurance that GeriCare's 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.
Due to the regulatory scheme in New York regarding assistance with
activities of daily living, the Company and its partner, Castle Senior Living,
LLC, have formed a subsidiary, Prospect Park Residence Home Health Care, Inc., a
New York corporation which has been licensed as a Licensed Home Care Service
Agency in order to provide assisted living services to the residents of its
soon-to-be opened facility in Brooklyn, New York known as Prospect Park
Residence. 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 only the
hourly employees at the Company's Prospect Park Residence facility in Brooklyn,
New York are currently unionized, any further 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 March 31, 1997, the
ALFs owned or operated by the Company had a combined occupancy rate of 88%.
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,
increased competition from other providers of assisted living services, giving
residents more choices with respect to the provision of such services 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 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
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expenses are prepared and funds therefor are reserved. Unknown or unforeseen
rehabilitation or lease-up 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 four Health Care REITs. 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 longterm
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 four long-term leases of ALFs,
the acquisition and construction of which have been or are being financed by tax
exempt multi-unit housing revenue bonds. In order to meet the lease obligations
and to allow the landlord to continue to qualify for favorable tax treatment of
the interest payable on the bonds, the 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 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 is 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
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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 properties or those of its Affiliated Partnerships, 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. The Company
believes that its properties are substantially in compliance with present
requirements or are exempt therefrom and it attempts to check for such
compliance in all facilities it considers acquiring. However, 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 30 of the 55 ALFs
currently operated, managed or in development by the Company are located. Other
regional concentrations of ALFs 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 governing laws, 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 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 guarantees to the Company or to Company-sponsored partnerships, or by
virtue of familial ties with consultants offering services to the Company, have
an actual or potential conflict of interest with the interests of the Company.
See "Certain Transactions."
17
<PAGE> 18
In addition, the Company is the managing general partner and facilities
manager for partnerships owning or leasing 15 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 ALFs 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 loss of a portion of the tax credits awarded and a delay in the
timing in which remaining tax credits may be offset against income. 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 substantial 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.
The Company may be required to fund shortfalls in permanent loan financing
to replace construction financing on projects where permanent financing has not
been finalized. With regard to tax credit benefits, the Company may be required
to make adjustments if sufficient tax credits are not generated in order to meet
agreed-upon levels of tax credit benefits. In addition, the Company and/or its
wholly owned subsidiary, ARV Investment Group, Inc., have provided certain
operating deficit guarantees and tax credit guarantees to General Electric
Capital Corporation and subsidiaries thereof (collectively, "GECC") with regard
to six properties. For two of those properties, the Company has funded
approximately $317,000 as of March 31, 1997, and expects to fund up to an
additional $675,000 in fiscal 1998 under operating deficit guarantees. The
Company expects to fund approximately $1 million for operating deficits for
other properties in fiscal 1998. (See "-- Indebtedness, Lease and Other
Obligations of the Company" and "-- General Partner Liability and Status.")
SHARES ELIGIBLE FOR FUTURE SALE
As of June 19, 1997, the Company had outstanding 9,662,990 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 tradable in calendar year 1997 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 June 19, 1997,
approximately 6,000,259 shares of Common Stock were eligible for sale under Rule
144.
18
<PAGE> 19
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 tradable without
registration under Rule 144 at June 19, 1997. The Company issued 903,373 shares
of Common Stock upon its call for redemption of its 1999 Convertible Notes in
1996 all of which were tradable without registration under Rule 144 at June 19,
1997. The Company issued an aggregate of 85,146 restricted shares to the former
shareholders of SynCare, Inc. in 1996, all of which will be tradable without
registration under Rule 144 in September 1997. At June 19, 1997, the Company had
issued an aggregate of 25,276 restricted shares upon the exercise of warrants
held by certain broker-dealers, all of which will be eligible for sale under
Rule 144 by June 19, 1998.
In addition to the outstanding shares described above, options to purchase
a total of 1,057,355 shares of Common Stock, warrants to purchase a total of
114,501 shares of Common Stock, and Convertible Notes convertible into
approximately 3,096,392 shares of Common Stock are outstanding as of June 19,
1997. 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
the Company and/or 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 March 31, 1997, the Company's Directors and executive officers and
their affiliates beneficially own approximately 29% of the Company's outstanding
shares of Common Stock (exclusive of unexercised options to purchase shares of
Common Stock). See Item 12 "Security Ownership of Certain Beneficial Owners and
Management -- Security Ownership of Directors and Named Executive Officers." As
a result, these stockholders, acting together, would be able to significantly
influence many matters requiring approval by the 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. Further, the articles provide, 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. These conditions have been met. Such
provisions could have the effect of delaying, deferring or preventing a change
of control of the Company.
19
<PAGE> 20
ITEM 2. PROPERTIES
The following charts set forth, as of March 31, 1997, the location, number
of units, ownership, occupancy and acquisition date for the Company's
facilities:
<TABLE>
<CAPTION>
OCCUPANCY
MONTH PERCENT 1997 1996 1995
FACILITY STATE UNITS ACQUIRED OWNERSHIP(A) AVERAGE AVERAGE AVERAGE
- ------------------------------------------------- ----- ----- -------- ------------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
LEASED
Amber Wood....................................... FL 187 Jun-96 100.0% 97.3% -- --
Baypointe Village................................ FL 232 Mar-96 100.0% 85.1% 89.7% --
Buena Vista Knolls............................... CA 91 Feb-96 100.0% 96.5% 91.9% --
Chateau San Juan................................. CA 114 Dec-95 100.0% 96.0% 91.5% --
Collier Park..................................... TX 162 Dec-96 100.0% 16.2% -- --
El Camino Gardens................................ CA 282 Jun-95 100.0% 76.2% 71.5% --
Hacienda de Monterey............................. CA 180 Apr-94 100.0% 92.8% 94.7% 88.1%
Kinghaven Manor.................................. MI 144 Feb-95 100.0% 95.1% 97.4% 73.2%
Inn at Willow Glen(b)............................ CA 84 Aug-96 50.9% 94.3% -- --
Lodge............................................ OH 216 Jan-97 100.0% 93.8% -- --
Mallard Cove..................................... OH 121 Feb-95 100.0% 78.0% 83.9% 76.0%
Maria del Sol.................................... CA 124 Oct-95 100.0% 88.6% 88.7% --
Northgate........................................ OH 126 Aug-96 100.0% 96.7% -- --
Rancho Park Villas............................... CA 163 Oct-95 100.0% 73.7% 75.2% --
Shorehaven....................................... MI 120 Sep-96 100.0% 95.4% -- --
Retirement Inn of Burlingame(b).................. CA 68 Aug-96 50.9% 96.2% -- --
Retirement Inn of Campbell(b).................... CA 72 Aug-96 50.9% 99.4% -- --
Retirement Inn of Fremont(b)..................... CA 70 Aug-96 50.9% 88.3% -- --
Retirement Inn of Sunnyvale(b)................... CA 123 Aug-96 50.9% 94.6% -- --
Tamalpais Creek.................................. CA 120 Oct-95 100.0% 98.1% 97.4% --
Tanglewood Trace................................. IN 159 Jan-97 100.0% 94.3% -- --
Villa Bonita..................................... CA 130 Oct-95 100.0% 89.8% 90.7% --
Villa de Palma................................... CA 111 May-95 100.0% 90.4% 92.0% --
Villa del Obispo................................. CA 96 May-95 100.0% 95.9% 94.2% --
Villa del Rey.................................... CA 103 Jun-95 100.0% 89.6% 92.2% --
Villa del Sol.................................... CA 91 Jun-95 100.0% 95.3% 94.1% --
Villa Encinitas.................................. CA 117 Jun-95 100.0% 96.2% 96.7% --
Villa at Palm Desert............................. CA 77 Nov-95 100.0% 93.8% 88.0% --
Woodside Village of Columbus..................... OH 156 Feb-96 100.0% 93.3% 97.1% --
-----
TOTAL LEASED................................... 3,839
-----
OWNED
Acacia Villa(b).................................. CA 66 Dec-95 89.5% 77.5% 88.6% --
Amber Park....................................... OH 127 Jan-96 100.0% 71.5% 83.3% --
Bella Vita....................................... FL 120 Apr-96 100.0% 97.0% -- --
Collwood Knolls.................................. CA 117 Jan-96 95.5% 71.3% 73.4% --
Covell Gardens................................... CA 157 Mar-97 100.0% 92.3% -- --
Covina Villa(b).................................. CA 64 Aug-96 50.9% 93.5% -- --
Gayton Terrace................................... VA 92 Aug-96 100.0% 95.2% -- --
Retirement Inn of Daly City(b)................... CA 95 Aug-96 50.9% 92.7% -- --
Retirement Inn of Fullerton(b)................... CA 68 Aug-95 50.9% 93.0% -- --
Montego Heights Lodge(b)......................... CA 170 Aug-96 50.9% 88.0% -- --
Valley View Lodge(b)............................. CA 125 Aug-96 50.9% 96.1% -- --
Villa Colima(b).................................. CA 94 Jun-96 59.9% 81.7% -- --
Woodside Village of Bedford...................... OH 217 Jan-96 100.0% 73.0% 70.7% --
Wyndham Lakes.................................... FL 248 Mar-96 100.0% 81.1% -- --
-----
TOTAL OWNED.................................... 1,760
-----
TOTAL LEASED AND OWNED......................... 5,599
=====
MANAGED
Bradford Square.................................. CA 92
Chandler Villa................................... AZ 164
-----
TOTAL MANAGED.................................. 256
-----
TOTAL.......................................... 5,855
=====
</TABLE>
- ---------------
(a) Represents percentage ownership of Leased ALFs and Owned ALFs through
leasehold or fee ownership of the Company or an Affiliated Partnership.
(b) Facility managed by the Company, owned or leased by Affiliated Partnership
in which the Company has obtained a majority ownership interest.
Prior to its fiscal year ended March 31, 1995, the Company did not own ALFs for
its own account, or operate them subject to long-term operating leases. Prior to
that time, the Company managed facilities for Affiliated Partnerships.
20
<PAGE> 21
ASSISTED LIVING FACILITIES -- AVERAGE MONTHLY RENTAL RATES
<TABLE>
<CAPTION>
FACILITY 1997 1996 1995
------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
LEASED
Amber Wood....................................... $ 917 $ -- $ --
Baypointe Village................................ 1,272 1,234
Buena Vista Knolls............................... 1,441 1,373
Chateau San Juan................................. 1,559 1,504 --
Collier Park..................................... 1,649 -- --
El Camino Gardens................................ 1,014 838 --
Hacienda de Monterey............................. 1,816 1,759 1,792
Kinghaven Manor.................................. 1,121 1,035 818
Inn at Willow Glen............................... 1,450 -- --
Lodge............................................ 1,299 -- --
Mallard Cove..................................... 1,131 1,057 1,018
Maria del Sol.................................... 1,159 1,117 --
Northgate........................................ 1,312 -- --
Rancho Park Villas............................... 1,297 1,258 --
Shorehaven....................................... 1,597 -- --
Retirement Inn of Burlingame..................... 1,563 -- --
Retirement Inn of Campbell....................... 1,445 -- --
Retirement Inn of Fremont........................ 1,380 -- --
Retirement Inn of Sunnyvale...................... 1,467 -- --
Tamalpais Creek.................................. 1,457 1,403 --
Tanglewood Trace................................. 1,405 -- --
Villa Bonita..................................... 1,421 1,403 --
Villa de Palma................................... 1,357 1,363 --
Villa del Obispo................................. 1,557 1,513 --
Villa del Rey.................................... 1,487 1,426 --
Villa del Sol.................................... 1,607 1,539 --
Villa Encinitas.................................. 1,470 1,464 --
Villa at Palm Desert............................. 1,825 1,765 --
Woodside Village of Columbus..................... 1,388 1,380 --
OWNED
Acacia Villa..................................... $1,285 $1,288 --
Amber Park....................................... 1,334 1,324 --
Bella Vita....................................... 1,872 -- --
Collwood Knolls.................................. 1,381 1,373 --
Covell Gardens................................... 1,571 -- --
Covina Villa..................................... 1,339 -- --
Gayton Terrace................................... 1,544 -- --
Retirement Inn of Daly City...................... 1,227 -- --
Retirement Inn of Fullerton...................... 1,368 -- --
Montego Heights Lodge............................ 1,470 -- --
Valley View Lodge................................ 1,782 -- --
Villa Colima..................................... 1,452 -- --
Woodside Village of Bedford...................... 1,160 1,136 --
Wyndham Lakes.................................... 1,213 1,232 --
</TABLE>
- ---------------
* Average monthly rental is calculated on the base monthly rental per occupied
unit.
Prior to its fiscal year ended March 31, 1995, the Company did not own for its
own account, or operate subject to long-term operating leases, ALFs. Prior to
that time, the company managed facilities for Affiliated Partnerships.
21
<PAGE> 22
At March 31, 1997, the Company had the following projects under development
or construction:
<TABLE>
<CAPTION>
ANTICIPATED
ANTICIPATED CONSTRUCTION ANTICIPATED/
LOCATION # OF UNITS COMMENCEMENT* ACTUAL OPENING*
---------------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
FACILITIES UNDER CONSTRUCTION
Eastlake Village -- Phase I........... Elkhart, IN 69 Under construction April, 1997
The Inn at Summit Ridge............... Reno, NV 76 Under construction May, 1997
Vista del Rio......................... Albuquerque, NM 150 Under construction 2nd Quarter 1997
Prospect Park......................... Brooklyn, NY 127 Under construction 3rd Quarter 1997
Eastlake Village -- Phase II.......... Elkhart, IN 24 Under construction 4th Quarter 1997
Las Posas............................. Camarillo, CA 123 Under construction 4th Quarter 1997
Sun Lake Terrace...................... Las Vegas, NV 129 Under construction 4th Quarter 1997
Canterbury Woods...................... Attleboro, MA 132 Under construction 2nd Quarter 1998
-----------
Total Facilities Under
Construction.................... 830
-----------
FACILITIES UNDER DEVELOPMENT
Flamingo Road......................... Las Vegas, NV 100 2nd Quarter 1997 2nd Quarter 1998
The Lakes............................. Fort Myers, FL 136 3rd Quarter 1997 3rd Quarter 1998
Inn at Brookside...................... Stockton, CA 76 3rd Quarter 1997 3rd Quarter 1998
-----------
Total Facilities Under
Development..................... 312
-----------
Total Facilities Under
Construction and Development.... 1,142
==========
</TABLE>
- ---------------
* Denotes calendar quarters.
ITEM 3. LEGAL PROCEEDINGS
On December 10, 1996, a Texas developer filed a complaint in Texas naming
the Company and certain of its officers as defendants. The main contention of
the developer's complaint was the Company's alleged breach of an acquisition and
development agreement. Among the causes of action alleged in the complaint were:
fraud, negligent misrepresentation, breach of fiduciary duty, breach of
contract, a suit for an accounting and declaratory relief. The developer alleged
actual damages ranging from $5 million to $15 million and punitive damages of
$10 million. A cross-complaint was filed on December 23, 1996.
On April 10, 1997, the litigation with the developer was settled pursuant
to a release and settlement agreement (the "Release and Settlement") between the
Company and the developer. Contemporaneously with the execution of the Release
and Settlement, the pending action filed by the developer and the cross
complaint filed by the Company were dismissed with prejudice. A lump sum of
$650,000 was paid to the developer for services previously rendered and the
developer was engaged to provide construction management services on two
projects for a total fee of $1 million. In addition, the developer is to receive
20% of the net cash flow from these projects upon completion. The developer is
also entitled to receive $200,000 of its $1 million construction management fee
upon the earlier of August 1, 1997 or the date the Company secures construction
financing commitments for the two projects to be built. In the event that the
Company does not commence construction by February 1, 1998, the developer shall
be paid $200,000 for its 20% participation in net cash flow and have no further
rights to cash flow or construction management fees.
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which the Company is the managing general
partner and a majority limited partner, filed actions seeking declaratory
judgments against the landlords of the Retirement Inn of Campbell (Campbell) and
the Retirement Inn of Sunnyvale (Sunnyvale). ARVP II leases the Campbell and
Sunnyvale assisted living facilities under long-term leases. A dispute has
arisen as to the amount of rent due during the 10-year lease renewal periods
which commenced in August 1995 for Campbell and March 1996 for Sunnyvale. ARVP
II seeks a determination that it is not required to pay any higher rent during
the 10-year renewal periods than during the original 20-year lease terms.
22
<PAGE> 23
In the event that the court finds against ARVP II, rent for the Campbell
and Sunnyvale facilities could increase significantly, which would reduce
distributions to unit holders (including the Company as the majority unit
holder) in the future. These rent increases would be retroactive to the
commencement of the lease renewal periods. Management is of the opinion, based
in part upon opinions of legal counsel, that an adverse outcome is unlikely.
Two other facilities leased by ARVP II, the Retirement Inn of Fremont
(Fremont) and the Retirement Inn at Burlingame (Burlingame) are owned by
entities which are related to the entities that own the Campbell and Sunnyvale
facilities. It is not known whether the landlords of those facilities will
dispute the amount of rent due during the renewal periods which began January
1997 for Fremont and begins in August 1997 for Burlingame. If so, ARVP II may be
required to file litigation to determine its rights under those leases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security holders
during the fourth quarter of its fiscal year ended March 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed and traded on the NASDAQ National
Market ("NASDAQ") under the symbol "ARVI." The following table sets forth, for
the periods indicated, the high and low closing prices for the Common Stock as
reported on NASDAQ.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C> <C>
FISCAL YEAR 1996
Third Quarter(1).................. 10/17/95 - 12/31/95 $15.25 $ 9.25
Fourth Quarter.................... 1/1/96 - 3/31/96 $17.75 $10.50
FISCAL YEAR 1997
First Quarter..................... 4/1/96 - 6/30/96 $20.25 $15.50
Second Quarter.................... 7/1/96 - 9/30/96 $17.00 $12.50
Third Quarter..................... 10/1/96 - 12/31/96 $15.25 $10.06
Fourth Quarter.................... 1/1/97 - 3/31/97 $11.63 $ 9.00
FISCAL YEAR 1998
First Quarter (Through June 19,
1997).......................... 4/1/97 - 6/19/97 $11.38 $ 7.94
</TABLE>
- ---------------
(1) The Company completed its initial public offering on October 17, 1995.
The Company does not currently pay dividends on its Common Stock and does
not anticipate paying dividends in the foreseeable future. It is the present
policy of the Company's Board of Directors to retain earnings, if any, to
finance the expansion of the Company's business.
SHARES ELIGIBLE FOR FUTURE SALE
As of June 19, 1997, the Company had outstanding 9,662,990 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 tradable in calendar year 1997 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 June 19, 1997,
approximately 6,000,259 shares of Common Stock were eligible for sale under Rule
144.
23
<PAGE> 24
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 tradable without
registration under Rule 144 at June 19, 1997. The Company issued 903,373 shares
of Common Stock upon its call for redemption of its 1999 Convertible Notes in
1996 all of which were tradable without registration under Rule 144 at June 19,
1997. The Company issued an aggregate of 85,146 restricted shares to the former
shareholders of SynCare, Inc. in 1996, all of which will be tradable without
registration under Rule 144 in September 1997. At June 19, 1997, the Company had
issued an aggregate of 25,276 restricted shares upon the exercise of warrants
held by certain broker-dealers, all of which will be eligible for sale under
Rule 144 by June 19, 1998.
In addition to the outstanding shares described above, options to purchase
a total of 1,057,355 shares of Common Stock, warrants to purchase a total of
114,501 shares of Common Stock, and Convertible Notes convertible into
approximately 3,096,392 shares of Common Stock are outstanding as of June 19,
1997. The Company has registered for public resale all of the shares of Common
Stock issuable on conversion of the Convertible Notes.
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
the Company and/or 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 March 31, 1997, the Company's Directors and executive officers and
their affiliates beneficially own approximately 29% of the Company's outstanding
shares of Common Stock (not including unexercised options to purchase Common
Stock). See Item 12, "Security Ownership of Certain Beneficial Owners and
Management -- Security Ownership of Directors and Named Executive Officers." As
a result, these stockholders, acting together, would be able to significantly
influence many matters requiring approval by the 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. These conditions have been satisfied. Such
provisions could have the effect of delaying, deferring or preventing a change
of control of the Company.
24
<PAGE> 25
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
consolidated financial statements of the Company and its subsidiaries as of and
for each of the five fiscal years ended March 31, 1997. The data set forth below
should be read in conjunction with the consolidated financial statements and
related notes thereto included in Item 14, "Exhibits, Financial Statement
Schedules and Reports on Form 8-K -- Financial Statements," along with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Assisted living facility revenue(1)................................ $ 73,770 $ 25,479 $ 4,838 $ -- $ --
Therapy & other services........................................... 7,850 4,322 4,165 3,492 3,110
Interest income.................................................... 1,667 1,070 211 104 109
Other income....................................................... 645 2,192 476 904 606
------- ------- ------- ------- -----
Total revenue.................................................... 83,932 33,063 9,690 4,500 3,825
------- ------- ------- ------- -----
Expenses:
Assisted living facility operating expense(1)...................... 47,117 16,395 3,201 -- --
Assisted living facility lease expense............................. 12,872 6,644 814 -- --
General and administrative......................................... 7,620 7,645 8,264 5,765 3,470
Therapy & other.................................................... 4,255 -- -- -- --
Depreciation and amortization...................................... 4,366 1,031 320 92 69
Provision for liabilities related to Tax Credit Properties......... 2,032 -- -- -- --
Provision for doubtful accounts and discontinued project costs..... 501 394 1,465 441 345
Interest expense................................................... 5,573 1,544 354 103 75
------- ------- ------- ------- -----
Total expenses................................................... 84,336 33,653 14,418 6,401 3,959
------- ------- ------- ------- -----
Loss before income tax expense....................................... (404) (590) (4,728) (1,901) (134)
Income tax expense (benefit)......................................... 201 375 (1,729) (248) 2
------- ------- ------- ------- -----
Net loss before minority interest & extraordinary items.............. (605) (965) (2,999) (1,653) (136)
Minority interest.................................................... 783 -- -- -- --
Early extinguishment of debt......................................... 386 -- -- -- --
Net loss............................................................. $ (1,774) $ (965) $ (2,999) $ (1,653) $ (136)
------- ------- ------- ------- -----
Preferred dividends declared......................................... -- $ 351 $ 398 $ 40 --
Net loss available for common shares(2).............................. $ (1,774) $ (1,316) $ (3,397) $ (1,693) $ (136)
------- ------- ------- ------- -----
Net loss per common share............................................ $ (.19) $ (.21) $ (.69) $ (.34) $ (.03)
------- ------- ------- ------- -----
Weighted average common shares outstanding(2)........................ 9,400 6,246 4,903 5,113 5,059
------- ------- ------- ------- -----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- -------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Assisted living units owned or leased (end of period)(1)............... 5,599 3,277 445 -- --
Assisted living units managed (end of period).......................... 256 1,289 2,803 3,042 3,042
Weighted average occupancy of assisted living units (end of year)...... 88% 90% 92% 88% 87%
Balance Sheet Data:
Working capital (deficit).............................................. $ 23,054 $10,014 $ (4,660) $ 1,363 --(3)
Total assets........................................................... 164,231 77,403 15,399 8,054 $3,046
Long-term notes payable, excluding current portion..................... 90,481 24,814 3,213 -- 16
Series A Preferred Stock, convertible and redeemable................... -- 2,358 4,586 3,969 --
Total shareholders' equity (deficit)................................... 51,374 39,947 (3,536) (1,316) (70)
</TABLE>
- ---------------
(1) The Company began operating ALFs under long-term operating leases during
fiscal 1995. Prior to that year, the Company managed those facilities for
affiliated partnerships for which it acted as the managing general partner
and recognized management fees and other income with respect to those
assisted living
25
<PAGE> 26
facilities but did not receive assisted living revenue from and did not
incur assisted living facility operating or lease expenses in connection
with its operations.
(2) Net loss available for common shares reflects the effect of preferred stock
dividends. Weighted average common shares outstanding give effect to the 1
for 3.04 reverse stock split which occurred upon the completion of the IPO
Offering.
(3) Prior to fiscal 1994, the Company did not classify its balance sheet. As a
result, no working capital data is available at March 31, 1993.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
As of March 31, 1997, the Company operated 45 ALFs containing 5,855 units,
including 29 Leased ALFs, 14 Owned ALFs and two Managed ALFs. Additionally, the
Company was in various stages of development on 10 ALFs with an anticipated
total of 1,142 units at March 31, 1997. As of June 19, 1997, the Company has
opened two newly developed Leased ALFs totaling 145 units bringing its total of
operated ALFs to 47 containing 6,000 units.
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 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 embarked upon an expansion strategy and achieved significant growth in
revenue resulting primarily from the acquisition of ALFs. The Company 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
primarily from Health Care REITs. Since April 1994 when the Company entered into
its first long-term operating lease from a Health Care REIT, the Company has
developed, acquired for its own account or entered into long-term operating
leases from Health Care REITs or other lessors, 45 ALFs totaling 5,744 units
(95.7% of its portfolio of 6,000 units at June 19, 1997). Of the ALFs operated
by the Company for its own account as of June 19, 1997, 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, 18 facilities (2,961 units) were
acquired from unrelated third-party owners. In December 1996, the Company opened
a 162 unit ALF in Beaumont, Texas, the first ALF developed by the Company since
its initial public offering of stock in October 1995. The Company has also
opened two newly developed ALFs totalling 145 units since March 31, 1997.
On April 3, 1996, the Company successfully completed a $50 million private
placement offering of 6.75% Convertible Subordinated Notes due 2006 (the "2006
Notes"). Subsequently, on April 12, 1996, the initial purchaser of the 2006
Notes exercised its over-allotment right to purchase an additional $7.5 million
of the 2006 Notes. The 2006 Notes, which are non-callable by the Company for a
period of three years, allow noteholders to convert their 2006 Notes into common
stock of the Company at a rate of $18.57 per share.
On June 30, 1996, the Company acquired a 52% controlling interest in San
Gabriel Retirement Villa (dba "Villa Colima"), a California limited partnership
which owned a 94 unit ALF. The Company currently owns a 60% interest in Villa
Colima. On August 23, 1996, the Company acquired a 51% controlling interest in
American Retirement Villas Properties II, a California limited partnership, the
portfolio of which included five Owned ALFs and five Leased ALFs totaling 940
units. Each of these acquisition was completed pursuant to a tender offer for
limited partnership units not already owned by the Company.
26
<PAGE> 27
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 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.
In addition to its acquisition of ALFs, as of August 22, 1996, the Company
acquired GeriCare. GeriCare provides physical, occupational and speech therapies
primarily to residents of assisted living facilities in Southern and Northern
California.
EVENTS SUBSEQUENT TO MARCH 31, 1997
On April 10, 1997, litigation filed by a Texas developer against the
Company was settled pursuant to a release and settlement agreement (the "Release
and Settlement"). Contemporaneously with the execution of the Release and
Settlement, the pending action filed by the developer and the cross complaint
filed by the Company were dismissed with prejudice. See Item 3, "Legal
Proceedings."
On April 3, 1997, the Company opened 69 units in the first phase of
Eastlake Village, a planned 93 unit Leased ALF located in Elkhart, Indiana.
On May 6, 1997, the Company opened the Inn at Summit Ridge, a 76 unit
Leased ALF located in Reno, Nevada.
Mutual of Omaha, GeriCare's fiscal intermediary with HCFA, conducted an
audit of GeriCare in May 1997 of records going back to 1995. As a result of the
audit, reimbursement of approximately $106,000 for services previously rendered
was denied. In addition, GeriCare has been placed on a temporary 50% review,
meaning that Mutual of Omaha will temporarily withhold payment on 50% of
GeriCare's billings until it has reviewed the files documenting the requested
reimbursement. Management believes that the file review will result in payment
of substantially all of the amounts requested, but the review period will
temporarily slow cash flows for GeriCare.
RESULTS OF OPERATIONS
Revenue for the year ended March 31, 1997 increased to $83.9 million from
$33.1 million for the year ended March 31, 1996 due primarily to an increase in
ALF revenue. Similarly, expenses increased to $84.3 million for the year ended
March 31, 1997 from $33.7 million for the year ended March 31, 1996 primarily
due to additional assisted living facility operating and lease expenses. For the
year ended March 31, 1997, the Company reported a loss of ($1.8 million)
compared to a loss of ($965,000) for the year ended March 31, 1996.
YEAR ENDED MARCH 31, 1997 COMPARED WITH YEAR ENDED MARCH 31, 1996.
As a result of the Company's growth through acquisition and development,
revenue for the year ended March 31, 1997 increased to $83.9 million from $33.1
million for the year ended March 31, 1996 due primarily to an increase in
assisted living facility revenue and the addition of therapy revenue following
the Company's acquisition of GeriCare. During the year ended March 31, 1997, the
Company added a total of 20 ALFs to its portfolio of Owned ALFs and Leased ALFs.
ALF revenue increased to $73.8 million for the year ended March 31, 1997
from $25.5 million for the year ended March 31, 1996. ALF revenue increased due
to an increase in the number of Owned ALFs and
27
<PAGE> 28
Leased ALFs operated by the Company. As of March 31, 1997, the Company operated
14 Owned ALFs, 29 Leased ALFs and two Managed ALFs compared to six Owned ALFs,
17 Leased ALFs and 13 Managed ALFs as of March 31, 1996. During the year ended
March 31, 1997, the Company acquired controlling interests in two Affiliated
Partnerships which owned or leased 11 ALFs previously managed by the Company.
The consolidated operations of these Affiliated Partnerships for a portion of
the year, increased ALF revenue by $12.0 million. The acquisition of eight ALFs
from third parties and the development of one ALF provided additional ALF
revenue of $9.2 million. Moreover, the operations of 19 ALFs acquired at various
times during the year ended March 31, 1996 were recognized for a full twelve
months during the year ended March 31, 1997 increasing ALF revenue by $25.2
million over the prior year.
During the year ended March 31, 1997, therapy and other services revenue
increased to $7.9 million from $4.3 million for the year ended March 31, 1996.
The primary component of this increase was the addition of therapy revenue of
$3.9 million following the Company's acquisition of GeriCare in August 1996.
Management fees decreased from $2.8 million for the year ended March 31, 1996 to
$1.8 million for the year ended March 31, 1997. This decrease occurred primarily
as a result of the Company's purchase of controlling interests in Affiliated
Partnerships and the resultant elimination of a portion of management fee income
resulting from those purchases. Development fee income increased to $2.2 million
for the year ended March 31, 1997 from $1.5 million during the year ended March
31, 1996 as a result of development fees earned in connection with ALFs which
the Company developed on behalf of a Health Care REIT as well as those owned and
operated by Affiliated Partnerships under the Federal Tax Credit Program.
Interest income increased to $1.7 million for the year ended March 31, 1997
from $1.1 million for the year ended March 31, 1996 due primarily to higher
average cash and cash equivalents on hand in fiscal 1997 following the
successful offering of the 2006 Notes in April 1996.
Other income decreased to $645,000 for the year ended March 31, 1997 from
$2.2 million for the year ended March 31, 1996. During the year ended March 31,
1996, the Company had recognized gains primarily resulting from the sale of ALFs
owned by Affiliated Partnerships in which the Company held ownership interests.
All but one of these ALFs are currently operated by the Company as Leased ALFs.
As a result of the growth experienced by the Company, expenses increased to
$84.3 million for the year ended March 31, 1997 from $33.7 million for the year
ended March 31, 1996. The principal components of the increased expenses, higher
ALF operating and lease expenses, were incurred as additional ALFs were leased
or purchased by the Company in the execution of its growth strategy. The Company
also incurred operating expenses attributable to the acquisition of GeriCare in
August 1996.
ALF operating and lease expenses increased to $47.1 million and $12.9
million, respectively, for the year ended March 31, 1997 from $16.4 million and
$6.6 million respectively, for the year ended March 31, 1996. The increases
reflect the net addition of eight Owned ALFs and 12 Leased ALFs acquired by the
Company during the year ended March 31, 1997. Of these ALFs, six Owned ALFs and
five Leased ALFs were procured through the Company's purchases of controlling
interests in Affiliated Partnerships. Five Owned ALFs were acquired from
third-party owners, three of which were subsequently sold to a Health Care REIT
and leased back by the Company. The Company added four Leased ALFs pursuant to
long-term operating leases, one of which was developed by the Company for a
Health Care REIT. The consolidated operations of these Affiliated Partnerships
for a portion of the year, increased ALF operating and lease expenses by $7.5
million and $685,000, respectively. The acquisition of eight ALFs from third
parties and the development of one ALF increased ALF operating and lease
expenses by $6.3 million and $1.0 million, respectively. Moreover, the
operations of 19 ALFs acquired at various times during the year ended March 31,
1996 were recognized for a full twelve months during the year ended March 31,
1997 increasing ALF operating and lease expenses by $16.1 million and $4.1
million, respectively over the prior year.
General and administrative expenses remained constant at $7.6 million for
the years ended March 31, 1997 and 1996, respectively. During the year ended
March 31, 1997, the Company incurred $4.3 million of therapy and other expenses.
Therapy and other expenses consist of expenses directly attributable to the
provision of therapy services and the portion of management fees payable to the
Company from consolidated Affiliated Partnerships which are not eliminated in
consolidation. Of the $4.3 million of therapy and other
28
<PAGE> 29
expenses incurred during the year ended March 31, 1997, $3.9 million was
attributable to the Company's health care operations following the acquisition
of GeriCare for which there was no comparable amount in the prior year. The
balance of $400,000 consisted of management fees payable to the Company from
consolidated Affiliated Partnerships which are not eliminated in consolidation
for which there was no comparable amount in the prior year.
Depreciation and amortization expenses increased to $4.4 million for the
year ended March 31, 1997 from $1.0 million for the prior year ended March 31,
1996 primarily due to an increase in depreciation expenses incurred as a result
of the increased number of Owned ALFs. Depreciation expense for Owned ALFs was
$3.6 million for the year ended March 31, 1997 compared to $420,000 for the year
ended March 31, 1996. The Company also incurred amortization of issuance costs
associated with 1999 Notes and the 2006 Notes totaling $291,000 for the year
ended March 31, 1997 compared to $342,000 for the year ended March 31, 1996.
The Company reported a $2.0 million charge as a provision for liabilities
related to Tax Credit Properties during the year ended March 31, 1997. The
charge taken in the year ended March 31, 1997 consisted of a provision for
expected future obligations of the Company as a guarantor and general partner of
Affiliated Partnerships which developed apartment projects under the Federal Tax
Credit Program. The provision for doubtful accounts and discontinued project
costs incurred during the year ended March 31, 1997 consisted of direct and
indirect development costs related to the discontinuance of projects that did
not meet the Company's criteria for continued development. The majority of these
costs were associated with projects considered for inclusion in the Federal Tax
Credit Program.
Interest expense increased to $5.6 million for the year ended March 31,
1997 from $1.5 million for the year ended March 31, 1996 due primarily to
additional interest incurred on the 2006 Convertible Notes and mortgage
financing of certain of the Company's Owned ALFs.
Income tax expense decreased to $201,000 for the year ended March 31, 1997
from $375,000 for the year ended March 31, 1996. The primary component of this
decrease resulted from the recognition of a net operating loss carry forward for
federal income tax purposes.
During the year ended March 31, 1997, the Company recognized an expense of
$783,000 attributable to the minority interest in the income of Affiliated
Partnerships in which the Company acquired a controlling interest.
During the year ended March 31, 1997, 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.
Primarily as a result of the provision for liabilities related to Tax
Credit Properties and the extraordinary loss incurred for the early
extinguishment of the 1999 Notes, the net loss increased to $1.8 million for the
year ended March 31, 1997 from a net loss of $965,000 for the year ended March
31, 1996.
YEAR ENDED MARCH 31, 1996 COMPARED WITH YEAR ENDED MARCH 31, 1995.
As the Company grew through the acquisition of ALFs, revenue for the year
ended March 31, 1996 increased to $33.1 million from $9.7 million for the year
ended March 31, 1995, due primarily to an increase in assisted living facility
revenue and other income as described below. During the year ended March 31,
1996, the Company purchased six ALFs (four from third-party owners and two in
which the Company purchased controlling interests in Affiliated Partnerships)
that contributed three months of revenue. In addition, the Company, as operator,
entered into long-term operating leases for 14 Leased ALFs, 12 of which the
Company previously managed for Affiliated Partnerships. These leases, when
averaged, contributed six months of revenue.
29
<PAGE> 30
ALF revenue increased to $25.5 million for the year ended March 31, 1996
from $4.8 million for the year ended March 31, 1995. Assisted living facility
revenue increased due to an increase in the number of Owned ALFs and Leased ALFs
operated by the Company. As of March 31, 1996, the Company operated six Owned
ALFs for its own account while operating 17 Leased ALFs pursuant to long-term
operating leases with Health Care REITs. For the year ended March 31, 1995, the
Company operated three Leased ALFs pursuant to a long-term operating lease with
a Health Care REIT.
During the year ended March 31, 1996, revenue from other services increased
$157,000 over the year ended March 31, 1995. Management fees decreased by
$641,000 to $2.8 million during the year ended March 31, 1996 from $3.5 million
for the year ended March 31, 1995. Management fees decreased due to the fact
that the Company no longer provided management services to Affiliated
Partnerships with respect to 12 ALFs sold by the Affiliated Partnerships to
Health Care REITs. Instead, the Company received ALF revenue from these 12
facilities operated as Leased ALFs under long-term operating leases. This
decrease in management fee income derived from management services provided to
Affiliated Partnerships was consistent with the Company's strategy of growth
through leasing and operating assets it previously managed.
Development fees earned in connection with an ALF which the Company
developed on behalf of a Health Care REIT as well as properties owned and
operated by Affiliated Partnerships under the Federal Tax Credit Program
increased to $1.5 million for the year ended March 31, 1996 from $702,000 for
the year ended March 31, 1995. This increase was the result of a greater number
of apartment projects completed during the year compared with the prior year
along with provision of development services to the Health Care REIT.
Interest income increased to $1.1 million for the year ended March 31, 1996
from $211,000 for the year ended March 31, 1995 due primarily to higher average
cash and cash equivalents on hand in fiscal 1996 following the Company's
successful initial public offering in October 1995 (the "IPO Offering").
Other income increased to $2.2 million for the year ended March 31, 1996
from $476,000 for the year ended March 31, 1995. The primary reason for the
increase was income earned as a result of the sale of ALFs owned by Affiliated
Partnerships in which the Company held ownership interests.
As a result of the growth experienced by the Company, expenses increased to
$33.7 million for the year ended March 31, 1996 from $14.4 million for the year
ended March 31, 1995. The principal components of the increased expenses, ALF
operating and lease expenses, were incurred as additional properties were leased
or purchased by the Company in the execution of its growth strategy.
ALF operating and lease expenses increased to $16.4 million and $6.6
million, respectively, for the year ended March 31, 1996 from $3.2 million and
$814,000 respectively, for the year ended March 31, 1995. The increases reflect
the purchase of six ALFs and the addition of 16 long-term operating leases
executed by the Company between February 1995 and March 1996. During the year
ended March 31, 1995, the Company operated one Owned ALF and three Leased ALFs
for its own account pursuant to long-term operating leases.
General and administrative expenses increased to $7.6 million for the year
ended March 31, 1996 from $7.5 million for the year ended March 31, 1995. The
modest increase was primarily the result of inflationary increases offset by the
Company's reduced emphasis on the development of apartment projects under the
Federal Tax Credit Program.
During the year ended March 31, 1996, the Company did not make an employee
benefit plan contribution, whereas in the year ended March 31, 1995, the Company
made a contribution of $811,000 to the ARV Housing Group, Inc. Employee Stock
Option Plan (the "ESOP").
Depreciation and amortization expenses increased to $1.0 million for the
year ended March 31, 1996 from $320,000 for the prior year ended March 31, 1995
due to an increase in depreciation expenses incurred as a result of the
Company's ownership of ALFs. The Company also incurred amortization of 1999
Convertible Notes issuance costs totaling $342,000 for the year ended March 31,
1996. Since nearly $12.0 million of the approximately $15.0 million principal
amount of the 1999 Convertible Notes were issued subsequent to March 31, 1995, a
comparable expense was not incurred during the year ended March 31, 1995.
30
<PAGE> 31
Provision for doubtful accounts and discontinued project costs decreased to
$394,000 for the year ended March 31, 1996 from $1.5 million for the year ended
March 31, 1995. Discontinued project costs were incurred during each of these
years in connection with direct and indirect development costs related to the
discontinuance of projects that did not meet the Company's criteria for
continued development. The majority of these costs were associated with projects
considered for inclusion in the Federal Tax Credit Program.
Interest expense increased to $1.5 million for the year ended March 31,
1996 from $354,000 for the year ended March 31, 1995 due primarily to additional
interest incurred on the 1999 Convertible Notes.
Income tax expense for the year ended March 31, 1996 was $375,000 compared
to an income tax benefit of $1.7 million for the year ended March 31, 1995. The
$2.1 million increase in the income tax expense is primarily the result of
development fees recognized for federal income tax purposes in conjunction with
projects developed under the Federal Tax Credit Program. During March 1996, $5.2
million of current and future receivables were sold to former employees of the
Company in exchange for $191,000 in cash and notes receivable of $1.4 million.
These receivables consisted of deferred development fees which were carried on
the books of the Company, yet they were fully reserved as the potential for
collection was deemed remote. In determining the valuation of these receivables,
management considered their potential for collection and applied a discount
factor to a projected future stream of cash flows based upon the associated risk
of collection. These deferred development fees had been recognized as income by
the Company for Federal Income Tax purposes, but had not been recognized under
generally accepted accounting principles. During the year ended March 31, 1996,
the sale of these receivables reduced the Company's income tax expense by $1.2
million.
Primarily as a result of the foregoing, the net loss decreased to
($965,000) for the year ended March 31, 1996 from a net loss of ($3.0 million)
for the year ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents balances were $16.0
million and $7.5 million at March 31, 1997 and March 31, 1996, respectively.
On February 7, 1996, the Company exercised its right to redeem all
outstanding shares of Series A Preferred Stock on May 9, 1996. Preferred
shareholders had the option of converting their Series A Preferred Stock into
Common Stock at any time prior to April 29, 1996. All shares were fully
converted and the Company issued 657,805 new shares of Common Stock. As of March
31, 1996, holders of 971,905 shares of the Series A Preferred Stock exercised
their right to convert their Preferred Stock into 319,664 shares of Common
Stock. Subsequent to March 31, 1996, the balance of the Series A Preferred Stock
was converted into an additional 338,141 shares of Common Stock.
On April 3, 1996, the Company successfully completed a $57.5 million
private placement offering of the 2006 Convertible Notes. The 2006 Convertible
Notes, which are non-callable by the Company for a period of three years, allow
note holders to convert their 2006 Convertible Notes into common stock of the
Company at a price equal to $18.57 per share.
On April 10, 1996, the Company called for redemption all of its outstanding
1999 Convertible Notes. The Company redeemed all of the outstanding 1999
Convertible Notes as of 5:00 p.m. Pacific Daylight Time on July 10, 1996, unless
the Notes were converted on or prior to June 30, 1996. The price paid for each
$1,000 principal amount of 1999 Convertible Notes was $1,067 plus accrued
interest to the date of redemption. 1999 Convertible 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 Convertible
Notes surrendered for conversion. For those 1999 Convertible Notes surrendered
for conversion into common stock, unpaid interest was disregarded and note
holders were not be entitled to interest accrued to the date of conversion. For
those Notes converted to common stock, the Company issued restricted stock
pursuant to Rule 144 of the Securities Act of 1933. Holders of approximately $11
million principal amount of the 1999 Convertible Notes exercised their right to
convert their notes into 900,662 shares of Common Stock.
31
<PAGE> 32
Working capital increased to $23.1 million as of March 31, 1997, compared
to working capital of $10.0 million at March 31, 1996 resulting primarily from
the net proceeds from the sale of the 2006 Notes and the sale/leaseback of four
ALFs.
For the year ended March 31, 1997 cash provided by operations was $2.1
million compared to cash used in operating activities of $544,000 for the year
ended March 31, 1996. During the year ended March 31, 1997, the Company's net
loss of $1.8 million was offset by non-cash charges of $4.4 million for
depreciation and amortization, $501,000 for the provision for doubtful accounts
and discontinued project costs, a $2.0 million provision for liabilities related
to Tax Credit Properties and a $386,000 charge (net of $231,000 of taxes) for
the early extinguishment of its 1999 Notes. The Company incurred net loss of
$965,000 offset by non-cash charges of $1.0 million for depreciation and
amortization for the year ended March 31, 1996. Increases in the Company's other
assets used cash of $4.5 million and $1.1 million for the years ended March 31,
1997 and 1996, respectively. Increases in accounts payable provided cash of $2.0
million for both years ended March 31, 1997 and 1996, respectively.
Due to the Company's status as a general partner in tax credit partnerships
and pursuant to the terms of its development and property management agreements,
the Company has provided certain guarantees for the benefit of these
partnerships. Among these guarantees are operating deficit, tax credit and
financing guarantees. During the year ended March 31, 1997, the operations of
certain of the tax credit partnerships declined to the extent that management
believed that obligations under the Company's guarantees would be recognized. As
a result, management established a reserve of $1.2 million associated with its
estimated obligations under operating deficit guarantees. Additionally, the
Company recognized write-offs of $813,000 for advances made to tax credit
partnerships under its development agreements and $184,000 of management fees
earned, collection of which was deemed remote by management.
Cash used in investing activities was $59.5 million and $53.9 million for
the years ended March 31, 1997 and 1996, respectively. Purchases of facilities,
fixtures and equipment totaling $70.2 million, investments in real estate of
$3.5 million and purchases of limited partnership interests totaling $18.5
million were the primary uses of cash for investing activities in the year ended
March 31, 1997. These amounts were offset by $29.1 million proceeds from the
sale/leaseback of four ALFs and a $3.0 million decrease in restricted cash as
collateral for letters of credit pledged as security deposits for leased
facilities. Purchases of facilities, fixtures and equipment totaling $45.7
million, investments in real estate of $6.8 million, increases in restricted
cash of $4.9 million as collateral for letters of credit pledged as security
deposits for leased facilities, increases in leased property security deposits
of $559,000 and acquisition of limited partnership interests of $1.8 million
were partially offset by proceeds of $5.1 million from the sale of the Villa de
Palma facility to a Health Care REIT during the year ended March 31, 1996.
Net cash provided by financing activities was $66.2 million and $61.1
million for the years ended March 31, 1997 and 1996, respectively. During the
year ended March 31, 1997, the issuance of the 2006 Notes provided $55.2 million
net of issuance costs while borrowings under notes payable provided $31.1
million. Repayments of debt and the redemption of the 1999 Notes totaled $18.6
million and $1.7 million, respectively for the year ended March 31, 1997. During
the year ended March 31, 1996, $42.7 million (net of issuance cost) was provided
by the issuance of common stock in the IPO Offering, $10.8 million (net of
issuance costs) was provided from the issuance of the 1999 Convertible Notes,
and $14.5 million was provided from mortgage and loan borrowings. These proceeds
were offset by $6.1 million of debt repayments, $400,000 of preferred stock
dividends paid and $351,000 paid to repurchase common stock.
Working capital increased to $10.0 million as of March 31, 1996, compared
to a working capital deficit $4.7 million at March 31, 1995 resulting primarily
from the net proceeds from the sale of common stock in the IPO Offering.
For the years ended March 31, 1996 and 1995, the Company used cash in
operating activities of $544,000 and $2.5 million, respectively. The Company
used cash in operating activities primarily because it incurred net losses of
$965,000 and $3.0 million for the years ended March 31, 1996 and 1995,
respectively. In addition, the Company received development fees from, and was
required to make equity contributions to Affiliated Partnerships. The Company
received development fees of $1.4 million and $4.4 million for the years ended
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<PAGE> 33
March 31, 1996 and 1995. The Company made owner equity contributions of $1.7
million and $3.9 million during the years ended March 31, 1996 and 1995.
Cash used in investing activities was $53.9 million for the year ended
March 31, 1996. Purchases of facilities, fixtures and equipment totaling $45.7
million, investments in real estate of $6.8 million, increases in restricted
cash of $4.9 million as collateral for letters of credit pledged as security
deposits for leased facilities, increases in leased property security deposits
of $559,000 and acquisition of limited partnership interests of $1.6 million
were partially offset by proceeds of $5.1 million from the sale of the Villa de
Palma facility to a Health Care REIT. For the year ended March 31, 1995, $2.3
million was used in investing activities consisting primarily of a $1.3 million
increase in leased property security deposits, an $806,000 increase in notes
receivable, a $537,000 increase in furniture, fixtures and improvements offset
by a $496,000 decrease in deferred project costs.
Net cash provided by financing activities was $61.1 million and $3.5
million for the years ended March 31, 1996 and 1995, respectively. During the
year ended March 31, 1996, $42.7 million (net of issuance cost) was provided by
the issuance of common stock in the IPO Offering, $10.8 million (net of issuance
costs) was provided from the issuance of the 1999 Convertible Notes, and $14.5
million was provided from mortgage and loan borrowings. These proceeds were
offset by $6.1 million of debt repayments, $400,000 of preferred stock dividends
paid and $351,000 paid to repurchase common stock. During the year ended March
31, 1995, the following amounts were provided by financing activities: $2.7
million from the issuance of the 1999 Convertible Notes, $1.2 million from the
sale of common stock to the ESOP, $750,000 from increases in amounts owed to
affiliates and $738,000 from bank borrowings. These amounts were offset by $1.6
million of debt repayment, $595,000 of amounts repaid to affiliates and $337,000
of preferred stock dividends paid.
The Company used cash in operating activities of $2.6 million for the year
ended March 31, 1995, as compared to cash provided by operating activities of
$310,000 for 1994. The Company used cash in operating activities primarily
because it has incurred net losses. The Company incurred net losses of $3.0
million and $1.7 million for the years ended March 31, 1995 and 1994,
respectively. In addition, the Company received significant development fees and
was required to make owner equity contributions to Affiliated Partnerships. The
Company received development fees from Affiliated Partnerships of $4.4 million
and $2.7 million for the years ended March 31, 1995 and 1994. The Company made
owner equity contributions of $3.9 million and $215,000 during the years ended
March 31, 1995 and 1994.
On June 6, 1996, the Company obtained a $60 million commitment from Health
Care REIT, Inc. for financing the construction of new ALFs. Pursuant to the
terms of the commitment, Health Care REIT, Inc. will finance up to 100% of the
approved costs, as defined, for the construction of new ALFs. Upon completion of
construction, the Company will lease the facilities from Health Care REIT, Inc.
on an initial lease term of 15 years, with three options to renew, at the
Company's option, for periods of ten years each. The initial lease rate will be
based upon the yield of comparable term U.S. Treasury Notes plus 3.75%. In
December, 1996, this commitment was increased to $90 million to include $30
million for the acquisition of existing ALFs. The initial lease rate to be paid
by the Company on acquisitions funded under this facility will be based upon the
yield of comparable term U.S. Treasury Notes plus 3.40%.
On June 24, 1996, the Company obtained a $35 million commitment from Bank
United for the construction or acquisition of ALFs. The terms of the commitment
provide for interest at 2.75% over the thirty day LIBOR rate. Of the commitment,
a $20 million sub-limit has been established for the construction of ALFs. As of
March 31, 1997, the Company had outstanding indebtedness of $8.8 million used as
mortgage financing of existing ALFs. Additionally, the Company had guaranteed a
$7.7 million loan borrowed by an Affiliated Partnership for the construction of
a new ALF.
On September 10, 1996, the Company closed a $10 million revolving line of
credit with Imperial Bank to be used for acquisition, development, the provision
of letters of credit and general corporate purposes. Advances under this line of
credit are priced at the Imperial Bank prime rate plus 0% to .5% or LIBOR plus
2.0% to 2.5% based upon the Company's achievement of financial ratios. As of
March 31, 1997, the Company had used $6.9 million of this line of credit for the
provision of letters of credit used as Leased ALF security deposits.
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<PAGE> 34
The Company believes that funds from the net proceeds of the 2006 Notes,
its financing commitments, existing liquidity and ability to refinance certain
Owned ALFs and investments will provide adequate resources to meet its current
operating and investing needs and support its current growth plans for the next
12 months. The Company's long-term plans for acquisition and development of ALFs
will require substantial amounts of additional capital. 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.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALFs operated by the Company is the primary source
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the Independent Auditors' Report are listed at
Item 14 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the executive
officers and Directors of the Company as of March 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
------------------------- --- --------------------------------------------------
<S> <C> <C>
Gary L. Davidson 62 Chairman of the Board, President, Chief Executive
Officer and Director
John A. Booty 58 Vice Chairman of the Board and Director
David P. Collins 59 Senior Executive Vice President and Director
Graham Espley-Jones 37 Executive Vice President and Chief Financial
Officer
Sheila M. Muldoon 41 Vice President, Secretary and General Counsel
Eric K. Davidson 35 Senior Vice President
R. Bruce Andrews 57 Director
Maurice J. DeWald 57 Director
James M. Peters 61 Director
John J. Rydzewski 44 Director
</TABLE>
GARY L. DAVIDSON. In 1980, with Mr. Booty and others, Mr. Davidson founded
the predecessor to the Company, and has served as Chairman of the Board and
Chief Executive Officer since its inception in 1985. Since October 1, 1996, Mr.
Davidson has also acted as President of the Company. Mr. Davidson, an attorney
(inactive), received his Bachelor's Degree and his Juris Doctor Degree from the
University of California at Los Angeles. Mr. Davidson was co-founder and first
president of both the American Basketball and the World Hockey Associations, and
also founded and served as the first commissioner and president of the World
Football League. In 1994, Sports Illustrated honored him as one of the forty
most influential persons in sports over the past forty years. Mr. Davidson is
the father of Eric K. Davidson, Senior Vice President of the Company.
JOHN A. BOOTY. In 1980, with Mr. Davidson and others, Mr. Booty founded the
predecessor to the Company, and served as President of the Company since its
inception in 1985 through September 30, 1996, when he retired. Mr. Booty
received a Bachelor's Degree at the University of California at Berkeley, from
which he also holds a Master's Degree in Business Administration. Prior to
founding the Company, Mr. Booty was with Ford Motor Company Aeronutronics,
Development Research Associates, and Booz Allen and Hamilton, of which Mr. Booty
was a Vice-President.
DAVID P. COLLINS. Mr. Collins, Senior Executive Vice President, has served
the Company in several capacities since 1981. He is currently in charge of ARV
Assisted Living International, Inc., a wholly owned subsidiary of the Company.
Prior to that he was in charge of Investor Relations and was responsible for
capital formation for the Company and for affiliated entities. Prior to 1981,
Mr. Collins was active in international finance. Mr. Collins received his
Bachelors Degree from St. Anselm College, Manchester, New Hampshire.
GRAHAM P. ESPLEY-JONES. Mr. Espley-Jones has served as Chief Financial
Officer of the Company since 1989, and prior to that time served the Company as
Director of Finance. Mr. Espley-Jones graduated from Pepperdine University with
a Master's Degree in Business Administration and from San Diego State University
with a Bachelor's Degree in Business Administration. Prior to joining the
Company in 1988, he served as the Controller for the real estate division of
First California Savings Bank. Mr. Espley-Jones serves on the Executive Board of
the American Senior Housing Association.
SHEILA M. MULDOON. Ms. Muldoon has acted as the Company's General Counsel
since April 1996, and prior to that time was employed as Assistant General
Counsel since September 1994. Prior to that date Ms. Muldoon was the General
Counsel of Osprey Financial Group, Inc. From 1990 to 1993, she worked with the
FDIC as a Senior Attorney in the Real Estate Section of the Legal Division.
Prior to that time,
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<PAGE> 36
Ms. Muldoon was a partner in the San Diego law firm of Higgs, Fletcher & Mack.
Ms. Muldoon did her undergraduate work at the University of Notre Dame, and
received her law degree from The Hastings College of the Law.
ERIC K. DAVIDSON. Mr. Eric Davidson, the son of Chairman, President and CEO
Gary L. Davidson, became the Senior Vice President of the Company in charge of
acquisitions in April 1996. He has been employed by the Company since September
of 1994. Prior to that time, Mr. Davidson was a real estate broker with Cushman
& Wakefield for more than nine years, specializing in commercial real estate
transactions. Mr. Davidson is a graduate of U.C. Berkeley.
R. BRUCE ANDREWS. Mr. Andrews has served as President and Chief Executive
Officer of Nationwide Health Properties, Inc. since September 1989 and a
director of that company since October 1989. Mr. Andrews had previously served
as a director of American Medical International, Inc., a hospital management
company, and served as its Chief Financial Officer from 1970 to 1985 and its
Chief Operating Officer in 1985 and 1986. Mr. Andrews is also a director of
Alexander Haagen Properties, Inc.
MAURICE J. DEWALD. Mr. DeWald is Chairman and Chief Executive Officer of
Verity Financial Group, Inc. which he founded in 1992. Previously, Mr. DeWald
was a Managing Partner and served on the Board of Directors of KPMG Peat
Marwick. Mr. DeWald is currently a director of Tenet Healthcare Corporation,
Dai-Ichi Kangyo Bank of California and Monarch Funds. Mr. DeWald received a
B.B.A. Degree from the University of Notre Dame and serves on its School of
Business Administration Advisory Council.
JAMES M. PETERS. Mr. Peters was the founder of the J.M. Peters Company (an
American Stock Exchange listed company), a California-based home building firm.
Mr. Peters served as President and Chief Executive Officer of the J.M. Peters
Company from its inception in 1975 until his retirement in 1992. During his
career, Mr. Peters has been responsible for building and marketing more than
12,000 housing units. Mr. Peters is a principal of the Peters -- Hover Company,
Inc. and serves as a member of the Board of Trustees of the UCLA Foundation.
JOHN J. RYDZEWSKI. Mr. Rydzewski is an investment banker specializing in
health care finance and has been a principal of Benedetto, Gartland & Company,
Inc. (formerly Benedetto, Gartland and Greene, Inc.) since 1993. Mr. Rydzewski
served as Executive Vice-President and Chief Financial Officer in 1992 for Four
Winds, Inc. He also served as a Vice President in the Health Care Finance group
of Kidder, Peabody & Co. Incorporated from 1986 to 1992. He has served as a
director of United Medical Corporation and Maxim Healthcare Corporation. Mr.
Rydzewski is a Certified Public Accountant and received a Master of Business
Administration and a Bachelor of Science Degree from the Wharton School of the
University of Pennsylvania.
INFORMATION ON COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS
The Company's Board of Directors established a Compensation Committee and
an Audit Committee at or about the time of the initial public offering of the
Company's common stock in October 1995. The Company currently has no Nominating
Committee and the full Board of Directors selects nominees for election of
directors.
The Compensation Committee establishes salaries, incentives and other forms
of compensation for directors and executive officers, administers the 1995 Stock
Option and Incentive Plan and recommends policies relating to benefit plans. The
Compensation Committee consists of John J. Rydzewski, R. Bruce Andrews and James
M. Peters. Mr. Peters is the current Chairman of the Committee. The Compensation
Committee met six times during fiscal 1997 and all members were in attendance.
The Audit Committee reviews the Company's accounting practices, internal
accounting controls and financial results and oversees the engagement of the
Company's independent auditors. The Audit Committee consists of Maurice J.
DeWald, R. Bruce Andrews and John J. Rydzewski. Mr. Dewald is the current
Chairman of the Committee. The Audit Committee met four times in fiscal 1997 and
all members were in attendance.
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<PAGE> 37
During fiscal 1997, there were four meetings of the Board of Directors and
all directors attended at least 75% of the meetings of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Two members of the Compensation Committee, Messrs. Andrews and Peters, are
not present or former employees of the Company and have no relationships with
the Company requiring disclosure pursuant to rules promulgated by the Securities
and Exchange Commission. Regarding Mr. Rydzewski, the Company retained
Benedetto, Gartland and Company, Inc., of which Mr. Rydzewski is a principal, to
act as financial adviser concerning the Company's investment in Senior Income
Fund, L.P., a Delaware limited partnership that owns four congregate care
facilities in Southern California. See Item 13, "Certain Relationships and
Related Transactions."
COMPENSATION OF DIRECTORS
Non-employee directors receive $12,000 per year, paid quarterly in advance,
and $500 for each meeting of the Board of Directors or committee of the Board of
Directors that they attend. In October 1995, the Company established the 1995
Stock Option and Incentive Plan which provides, among other things, that each
nonemployee director who is initially elected or appointed to the Board of
Directors will, upon such election or appointment, be automatically granted an
option to purchase 10,000 shares of Common Stock, vesting at the rate of 2,500
per year measured from the date of grant, at an exercise price equal to the fair
market value of the Common Stock on the date of grant. In addition, every fourth
year following the date on which such nonemployee director is elected or
appointed, on the date of the annual meeting of the shareholders of the Company,
if such person has continuously served as a nonemployee director, such
nonemployee director shall automatically receive an option to purchase 10,000
shares of Common Stock, at an exercise price equal to the fair market value of
the Common Stock on the date of grant, vesting at the rate of 2,500 per year
measured from the date of grant.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than ten percent of a registered class
of the Company's equity securities (collectively, "Reporting Persons"), to file
reports on Forms 3, 4 and 5 of stock ownership and changes in ownership with the
Securities and Exchange Commission. Reporting Persons are required to furnish
the Company with copies of all forms that they file. Based on the Company's
review of copies of Forms 3, 4 and 5, and amendments thereto, received by the
Company for the year ended March 31, 1997, or written representations from
certain Reporting Persons that no Forms 5 were required to be filed by those
persons, the Company believes that during fiscal year 1997 all filing
requirements were complied with by the Reporting Persons except that Forms 3 and
5 required for Eric K. Davidson were not timely filed due to administrative
oversight.
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<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to
compensation paid by the Company in the fiscal years ended 1997, 1996 and 1995
to the Company's Chief Executive Officer and the Company's four next most highly
compensated executive officers as of March 31, 1997 whose annual salary and
bonus exceeded $100,000 and John A. Booty, former President who retired
September 30, 1996 (the "Named Executive Officers") .
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION OTHER
FISCAL --------------------- AWARDS OF COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS STOCK OPTIONS(1) (2)(3)(4)
- ------------------------------- ----- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Gary L. Davidson............... 1997 $272,414 $ 84,634 10,000 $ 8,483
Chairman, CEO and President 1996 $263,100 $140,785 101,085 15,476
1995 $250,250 $148,575 -- 49,918
John A. Booty.................. 1997 $136,207 $ 50,582 -- $ 6,426
Former President (retired 1996 $263,100 $140,785 33,695 13,274
September 30, 1996)(5) 1995 $250,250 $148,575 -- 49,918
David P. Collins............... 1997 $204,791 $ 63,329 10,000 3,474
Senior Executive Vice
President 1996 $186,132 $120,062 59,539 $ 3,971
1995 $229,968 $ 70,043 -- 33,608
Graham P. Espley-Jones......... 1997 $193,882 -- 10,000 $ 7,226
Executive Vice President and 1996 $166,000 $ 33,000 33,618 12,485
Chief Financial Officer...... 1995 $135,500 $ 56,610 -- 33,228
Sheila M. Muldoon.............. 1997 $156,981 $ 7,000 20,000 $ 2,624
Vice President, General
Counsel 1996 $112,000 $ 21,500 10,000 --
and Secretary(6) 1995 $ 51,667 $ 3,000 -- --
Eric K. Davidson............... 1997 $132,230 $ 6,167 20,000 $ 5,741
Senior Vice President(7) 1996 $ 96,667 $ 20,000 30,655 5,827
1995 $ 75,141 $ -- -- 8,677
</TABLE>
- ---------------
(1) Options have been granted to each of the Named Executive Officers as more
fully described in "Option Grants in Last Fiscal Year" below.
(2) Includes consulting fees from ARV Management, Inc. and ARV Housing Partners,
Inc., former subsidiaries of the Company. Both subsidiaries have been merged
into the Company and all compensation from them were discontinued as of
fiscal 1996. Fees paid by ARV Management, Inc. to the Named Executive
Officers in fiscal year 1995 are as follows: Mr. Gary Davidson -- $30,720;
Mr. Booty -- $30,720; Mr. Collins -- $18,360; and Mr.
Espley-Jones -- $23,000. Fees paid by ARV Housing Partners, Inc. to the
Named Executive Officers in fiscal year 1996 are as follows: Mr. Gary
Davidson -- $6,475; Mr. Booty -- $6,475 and Mr. Espley-Jones -- $11,000.
(3) Also includes premiums for term life, medical, dental and disability
insurance purchased for the benefit of certain of the Named Executive
Officers in the following amounts: Mr. Gary Davidson -- $8,483, $9,001 and
$3,248; Mr. Booty -- $6,426, $6,799 and $3,248; Mr. Collins -- $3,474,
$3,971 and $3,248; Mr. Espley-Jones $7,226, $1,485 and $2,948; and Mr. Eric
Davidson -- $5,741, $5,827 and $5,785 for the fiscal years ended March 31,
1997, 1996 and 1995, respectively and $2,624 for fiscal year ended March 31,
1997 for Ms. Muldoon. These amounts represent insurance premiums paid by the
Company beyond what it pays for other similarly situated employees.
(4) Also includes contributions made by the Company or affiliates under the
Company's ESOP for the fiscal year ended March 31, 1995 in the following
amounts: Mr. Gary Davidson -- $15,950; Mr. Booty -- $15,950; Mr. Collins
$12,000; Mr. Espley-Jones -- $7,280; and Mr. Eric Davidson -- $2,892. There
were no contributions made in the fiscal years ended March 31, 1997 and
1996.
(5) Mr. Booty retired as President of the Company on September 30, 1996. His
bonus reflects the bonus earned under his employment agreement and his
salary includes compensation paid to Mr. Booty as a
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<PAGE> 39
consultant from and after his retirement date of September 30, 1996 through
March 31, 1997. See Item 13, "Certain Relationships and Related
Transactions."
(6) Ms. Muldoon joined the Company in September of 1994.
(7) Regarding options to purchase Common Stock granted to Mr. Eric Davidson,
options to purchase 30,655 shares were granted at an exercise price of
$15.40 per share, 10% higher than their fair market value as of the date of
grant, October 17, 1995.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options
granted during fiscal 1997 to the Named Executive Officers pursuant to the
Company's 1995 Stock Option and Incentive Plan.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR(2) PER SHARE DATE 5% 10%
- ------------------------------ ---------- -------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gary L. Davidson.............. 10,000 2.6% $ 11.25 10/17/2006 $ 70,751 $179,296
John A. Booty(4).............. -- -- -- -- -- --
David P. Collins.............. 10,000 2.6% $ 11.25 10/17/2006 $ 70,751 $179,296
Graham P. Espley-Jones........ 10,000 2.6% $ 11.25 10/17/2006 $ 70,751 $179,296
Sheila M. Muldoon............. 20,000 5.1% $ 11.25 10/17/2006 $141,501 $358,592
Eric K. Davidson.............. 20,000 5.1% $ 11.25 10/17/2006 $141,501 $358,592
</TABLE>
- ---------------
(1) These options were granted for a term of 10 years, subject to termination in
certain events related to termination of employment, and become exercisable
in four annual installments beginning on October 17, 1998.
(2) In fiscal 1997, the Company granted options to purchase an aggregate of
389,000 shares under the Plan and this number was used in calculating the
percentage set forth in this column. During fiscal 1997, options to purchase
188,390 shares under the Plan were canceled due to termination of
employment.
(3) Assumed rates of stock price appreciation are calculated based on
requirements promulgated by the Securities and Exchange Commission and are
for illustrative purposes only. Actual stock prices will vary from time to
time based upon market factors and the Company's financial performance.
There can be no assurance that the assumed rates of appreciation will be
achieved.
(4) Mr. Booty retired as President of the Company on September 30, 1996, prior
to the granting of options in fiscal 1997.
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<PAGE> 40
FISCAL YEAR-END OPTION VALUES
None of the Named Executive Officers exercised options during fiscal 1997.
The following table sets forth certain information regarding options held as of
the end of such fiscal year by each of the Named Executive Officers.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
NUMBER OF UNEXERCISED AT YEAR-END(1)
ACQUIRED OPTIONS AT YEAR-END --------------------------
ON VALUE --------------------------- EXERCISABLE UNEXERCISABLE
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE 5% 10%
- ---------------------------------- -------- -------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary L. Davidson.................. -- -- 33,695 77,390 -- --
John A. Booty..................... -- -- 33,695 -- -- --
David P. Collins.................. -- -- 19,846 49,693 -- --
Graham P. Espley-Jones............ -- -- 11,206 32,412 -- --
Sheila M. Muldoon................. -- -- -- 30,000 -- --
Eric K. Davidson.................. -- -- 2,770 47,885 -- --
</TABLE>
- ---------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities on that date exceeds the exercise price of the option. The amount
set forth represents the difference between the fair market value of the
securities underlying the options on March 31, 1997, based on the last sale
price of $9.75 per share of Common Stock on that date (as reported on the
Nasdaq National Market) and the exercise price of the options, multiplied by
the applicable number of options, without giving effect to the diminution of
value attributable to the restrictions on such stock.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with the Named Executive
Officers. Employment agreements with Messrs. Davidson, Booty, Collins and
Espley-Jones (referred to collectively as the "Four Executive Officers"),
commenced October 1, 1995 and will terminate September 30, 1998, subject to
automatic 1-year extensions unless the Named Executive Officer receives written
notice at least 30 days prior to termination date of the Company's intent to
terminate the agreement (Mr. Davidson's employment agreement requires that he be
given at least two years' notice prior to the termination date). (Mr. Booty
retired from the Company as of September 30, 1996.) The agreements require the
Four Executive Officers to devote their full productive time to the Company
during the term of the agreement and to refrain from competing with the Company
in the business of assisted living or long-term healthcare for a period of one
year following expiration of the term of the agreements.
The agreements for the Four Executive Officers include provisions for a
base salary paid on a monthly basis (the "Base Salary"), annual increases in
Base Salary based on increases in the Consumer Price Index, guaranteed bonuses
each quarter equal to 6.25% of Base Salary (the "Minimum Bonus") (Mr.
Espley-Jones does not receive Minimum Bonuses), and additional bonuses no later
than May 1 of each year, determined in the discretion of the Board, based on
earnings of the Company and other criteria as determined by the Compensation
Committee of the Board. No discretionary bonuses were earned by Messrs.
Davidson, Collins and Espley-Jones for fiscal 1997, and Mr. Booty retired as of
September 30, 1996. Each of the Four Executive Officers has also been granted
certain stock options. The Company may terminate any of the Four Executive
Officers without cause by making such individual a cash payment equal to the
greater of (i) one year's Base Salary and, if applicable, Minimum Bonus, or (ii)
the current annual Base Salary and, if applicable, Minimum Bonus divided by 12
and multiplied by the number of remaining months under the employment agreement,
and, in addition, the payment by the Company of premiums of COBRA benefits for
the maximum period of eligibility. Any of the Four Executive Officers
voluntarily terminating his employment with the Company will receive a lump-sum
payment equal to 3 months' Base Salary. The covenant not to compete discussed in
the preceding paragraph is not applicable, however, in the event severance pay
is waived.
The Company has entered into a written employment agreement with Ms.
Muldoon and Mr. Eric Davidson (the "Two Executive Officers") commencing April
23, 1997 and terminating April 23, 2000, subject
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<PAGE> 41
to automatic 1-year extensions unless they receive written notice at least 30
days prior to termination date of the Company's intent to terminate the
agreements. The agreements require the Two Executive Officers to devote their
full productive time to the Company during the term of the agreement and to
refrain from competing with the Company in the business of assisted living or
long-term healthcare for a period of one year following expiration of the term
of the agreement.
The agreements for the Two Executive Officers include provisions for a base
salary paid on a monthly basis (the "Base Salary"), annual increases in Base
Salary as of January 1st and September 16, respectively, and bonuses no later
than December 31 of each year, both as determined at the discretion of the
management of the Company. The Two Executive Officers have also been granted
certain stock options. The Company may terminate the Two Executive Officers
without cause by making them a cash payment equal to three month's Base Salary.
If either of the Two Executive Officers voluntarily terminates employment with
the Company such person will receive a lump-sum payment equal to 3 months' Base
Salary. The covenant not to compete discussed in the preceding paragraph is not
applicable, however, in the event severance pay is waived.
Change in Control Arrangements. In fiscal 1997, the Compensation Committee
took action to better assure that the Named Executive Officers would continue to
provide independent leadership consistent with the Company's best interests in
the event of an actual or threatened change of control of the Company. The
employment agreements of each of the Named Executive Officers provide certain
protections in the event of a change in control. A "change in control" of the
Company is defined as a change in ownership such that any one person, or more
than one person acting as a group, would have possession of more than 50% of the
total fair market value or the total voting power of the capital stock of the
Company; or a change in effective control of the Company such that any one
person or more than one person acting as a group would acquire ownership of
capital stock possessing 50% or more of the voting power of the Company, or a
majority of the members of the Board of Directors of the Company was replaced
during any 12-month period by directors whose appointment or election was not
endorsed by a majority of the members of the Board prior to the date of such
appointment or election; or a change in the ownership of a substantial portion
of the Company's assets such that any one person or more than one person acting
as a group would acquire, within a 12-month period, assets from the Company
having a total fair market value equal to or more than 33 1/3% of the total fair
market value of all of the assets of the Company immediately prior to such
acquisitions. Upon any "change in control," the Named Executive Officers are
entitled to receive a lump sum equal to three times the total compensation
received during the immediately preceding calendar year. In addition, the stock
option agreements between the Company and the Named Executive Officers include a
provision authorizing the Compensation Committee to accelerate vesting of the
options, and the Compensation Committee has authorized such vesting acceleration
in the Employment Agreements discussed above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF DIRECTORS AND NAMED EXECUTIVE OFFICERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of June 19, 1997 (based on a total of 9,662,990
outstanding shares of Common Stock) by (i) each of the Company's directors, (ii)
each of the Named Executive Officers and (iii) all executive officers and
directors as a group. Except as otherwise indicated, the Company believes the
persons named in the table have sole voting and investment power with respect to
all shares beneficially owned, subject to community property laws where
applicable.
41
<PAGE> 42
Amounts and percentages listed below include warrants and options that are
exercisable within 60 days of June 19, 1997.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENTAGE OF SHARES
BENEFICIAL OWNER(1) OWNED BENEFICIALLY OWNED
---------------------------------------- ------------------- ---------------------
<S> <C> <C>
Gary L. Davidson(2)(3).................. 969,826 10.0%
John A. Booty(2)(4)..................... 699,246 7.2%
David P. Collins(2)(5).................. 539,093 5.6%
Graham P. Espley-Jones(6)............... 263,758 2.7%
Sheila M. Muldoon(7).................... 1,000 --
Eric K. Davidson(8)..................... 6,873 --
R. Bruce Andrews(9)..................... 2,500 --
Maurice J. DeWald(9).................... 3,500 --
James M. Peters(9)...................... 2,500 --
John J. Rydzewski(9)(10)................ 7,500 --
Directors and officers as a group (10
persons).............................. 2,495,796 25.5%
</TABLE>
- ---------------
(1) Except where otherwise noted, the address of the Company's directors,
executive officers and selling shareholders is c/o ARV Assisted Living,
Inc., 245 Fischer Avenue, Costa Mesa, California 92626.
(2) Excludes 402,257 shares owned of record by the Company's employee stock
ownership plan (the "ESOP"), of which Messrs. Gary Davidson, Booty and
Collins are trustees.
(3) Of the 969,826 shares beneficially owned by Mr. Gary Davidson, 593,029 are
held of record by the Davidson Family Partnership, 343,102 shares are held
by the Gary L. Davidson Funded Revocable Living Trust, and the remaining
33,695 shares are subject to options exercisable within 60 days of June 19,
1997. Excludes 9,423 shares beneficially owned by Mr. Gary Davidson held of
record by the ESOP as of June 19, 1997.
(4) Of the 699,246 shares beneficially owned by Mr. Booty, 107,773 are held of
record by the Booty-Jones Family Partnership (of which Mr. Booty is the
managing partner and holds a pecuniary interest equal to 1% thereof),
418,028 shares are held by the Booty Family Trust (as to which Mr. Booty
has shared voting and investment power), 750 shares are held in Mr. Booty's
name alone, 69,500 shares are owned by the Karen A. Booty Charitable
Remainder Trust of which Mr. Booty has sole voting and investment power,
and the remaining 69,500 shares are owned by the John A. Booty Charitable
Remainder Uni Trust (of which Mr. Booty has sole voting and investment
power), and the remaining 33,695 shares are subject to options exercisable
within 60 days of June 19, 1997. Excludes 9,423 shares beneficially owned
by Mr. Booty held of record by the ESOP as of June 19, 1997.
(5) Of the 539,093 shares beneficially owned by Mr. Collins, 98,678 are held of
record by the D & V Collins Family Limited Partnership (as to which Mr.
Collins has shared voting and investment power), 408,591 shares are held by
the Collins Family Community Property Trust (as to which Mr. Collins has
shared voting and investment power), 11,978 shares are held by the David P.
Collins Annuity Trust, and the remaining 19,846 shares are subject to
options exercisable within 60 days of June 19, 1997. Excludes 8,531 shares
beneficially owned by Mr. Collins held of record by the ESOP on June 19,
1997.
(6) Of the 263,758 shares beneficially owned by Mr. Espley-Jones, 11,206 shares
are subject to options exercisable within 60 days of June 19, 1997.
Excludes 5,372 shares beneficially owned by Mr. Espley-Jones held of record
by the ESOP as of June 19, 1997.
(7) All of the 1,000 shares beneficially owned by Ms. Muldoon are held of
record by Charles Schwab & Co. Inc. IRA Rollover.
42
<PAGE> 43
(8) Of the 6,873 shares beneficially owned by Mr. Eric Davidson, 4,000 are held
of record by Eric K. Davidson UTA Fidelity 401(k) and 103 are held by Eric
K. Davidson UTA Principal Financial 401(k) and 2,770 shares are subject to
options exercisable within 60 days of June 19, 1997. Excludes 1,716 shares
beneficially owned by Mr. Eric Davidson held of record by the ESOP on June
19, 1997.
(9) All non-employee directors have options exercisable within 60 days of June
19, 1997 to purchase 2,500 shares.
(10) 5,000 of the shares beneficially owned by Mr. Rydzewski are held of record
by Merrill Lynch Custodian FBO Benedetto, Gartland & Greene, Inc. SEP FBO
John J. Rydzewski.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of June 19, 1997, the following persons are known to the Company to be
the beneficial owners of more than five percent of the Company's Common Stock.
In preparing the table shown below with respect to the four entities, the
Company has relied, without further investigation, on the information contained
on the copy of the Schedule 13G delivered to it, which was filed by the
respective reporting persons with the SEC under the Securities Exchange Act of
1934. The numbers shown on the table should be interpreted in light of the
related footnotes.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
- --------------- ------------------------------------- ---------------------- ----------
<C> <S> <C> <C>
Common Ardsley Advisory Partners............ 730,000 7.6%
646 Steamboat Road
Greenwich, CT 06836
Common Morgan Stanley Group, Inc............ 669,500 6.9%
1585 Broadway
New York, NY 10036
Common Wellington Management Company, LLP... 641,356 6.6%
75 State Street
Boston, MA 02109
Common Scudder, Stevens & Clark, Inc........ 592,900 6.1%
345 Park Avenue
New York, NY 10154
</TABLE>
- ---------------
(1) Ardsley Advisory Partners, a Connecticut general partnership ("Ardsley"), is
an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940, as amended. Philip J. Hempleman ("Mr. Hempleman") is
the managing partner of Ardsley. The shares of the Company are held in
discretionary accounts managed by Ardsley and Mr. Hempleman (including
accounts of certain clients, including investment partnerships for which (i)
Ardsley serves as the management company and (ii) a general partnership
comprised of the partners that comprise Ardsley serves as general partner).
As a result of their roles as investment advisor, Ardsley and Mr. Hempleman
may be deemed to be the beneficial owners of the shares of the Company held
in such discretionary accounts. Each client for whose account Ardsley had
purchased shares of the Company has the right to receive or the power to
direct the receipt of dividends from, or the proceeds from the sale of, such
shares purchased for his account.
(2) Morgan Stanley Group, Inc. ("Morgan Stanley"), a Delaware corporation and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, is the beneficial owner of 669,500 shares of the Common Stock
of the Company. Accounts managed on a discretionary basis by wholly-owned
subsidiaries of Morgan Stanley, including Miller Anderson & Sherred LLP, a
Delaware limited liability partnership and an investment adviser registered
under Section 203 of the Investment Advisers Act of 1940, are known to have
the right to receive or the power to direct the receipt of dividends from,
or the proceeds from, the sale of such securities. No such account holds
more than 5 percent of the class.
(3) Wellington Management Company, LLP, a Massachusetts limited liability
partnership ("Wellington"), an investment adviser registered under Section
203 of the Investment Advisers Act of 1940, may be deemed to beneficially
own 641,356 shares of the Common Stock of the Company which are held of
43
<PAGE> 44
record by clients of Wellington. Those clients have the right to receive, or the
power to direct the receipt of, dividends from, or the proceeds from the sale
of, such securities. The shares of Common Stock were acquired by Wellington
Trust Company, NA, a wholly owned subsidiary of Wellington and a bank as
defined in Section 3(a)(6) of the Securities Exchange Act of 1934.
Wellington has shared power to vote or direct to vote of 265,500 shares of
the Common Stock of the Company, and shared power to dispose or to direct
the disposition of 641,356 shares.
(4) Scudder, Stevens & Clark, Inc., a Delaware corporation, an investment
adviser registered under Section 203 of the Investment Advisers Act of 1940,
has sole power to vote or to direct the vote of 259,400 shares of the Common
Stock of the Company, shared power to vote or to direct the vote of 228,200
shares, and sole power to dispose or to direct the disposition of 592,900
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To address certain structural issues in connection with tax credit
partnerships, Pacific Demographics Corporation ("Pacific Demographics")(formerly
ARVTC, Inc.), was formed in August 1994 by Messrs. Gary Davidson, Booty, Collins
and Espley-Jones, as well as two former Company officers, to provide certain
development services for these partnerships in exchange for cash and deferred
development fees generated by the tax credit partnerships. The Company provided
services to Pacific Demographics for which it received certain fees from Pacific
Demographics. The Company believes that these arrangements were fair to the
Company and that the compensation paid to Pacific Demographics by the tax credit
partnerships and by Pacific Demographics to the Company appropriately reflected
the services rendered by Pacific Demographics and the Company, respectively, and
the risks incurred by the shareholders of Pacific Demographics who provided the
guarantees for these projects.
In order to lessen potential conflicts of interest, in July 1995, the
Company's then principal shareholders, who included but were not limited to
Messrs. Gary Davidson, Booty, Collins and Espley-Jones sold Pacific
Demographics, Inc. to the Company for $100,000 in cash. In addition, they formed
a general partnership, Hunter Development ("Hunter") and became co-developers
with Pacific Demographics and retained the right to receive 20% of all developer
fees up to a maximum of $850,000. Subsequently each of the general partners of
Hunter assigned his interest in Hunter to Redhill Development, LLC. Of the
maximum amount of $850,000 which could be distributed, $215,553 has been
distributed to date of which Messrs. Gary Davidson, Booty, Collins and
Espley-Jones have received $40,437, $40,437, $23,800 and $13,460, respectively.
John A. Booty, former President of the Company and the current Vice
Chairman of the Board of Directors, provides consulting services to the Company
for which Mr. Booty is paid a varying sum not to exceed $30,000 per month for
development and acquisition services. In fiscal 1997, Mr. Booty was paid
$180,000 for consulting services.
The Company utilizes the services of J&D Design, as well as others, for
interior design work at its facilities. The principal of J&D Design is Joan
Davidson, wife of Senior Vice President Eric Davidson and daughter-in-law of
Chairman, President and Chief Executive Officer Gary Davidson. Services provided
by J&D Design include design work and the purchase of furniture, fixtures and
equipment ("FF&E") for developed facilities and rehabilitation of existing or
newly acquired facilities. In fiscal 1997, the Company paid J&D Design
approximately $431,000, a portion of which was for design services and a portion
of which was for reimbursement of costs for FF&E. In fiscal 1996 and fiscal
1995, the total paid by the Company to J&D Design approximated $328,000 and
$57,000, respectively.
Mr. R. Bruce Andrews, a member of the Board of Directors, is President of
Nationwide Health Properties, Inc. ("NHP"), a Health Care REIT. NHP is the owner
of 16 ALFs which are leased to the Company. Of that number, leases for 13 ALFs
were entered into prior to November 29, 1995, the date Mr. Andrews became a
Board member, and leases for three ALFs were entered into during Mr. Andrews'
tenure as Board member. Lease payments have aggregated approximately $10.3
million in fiscal 1997 and $3.7 million from November 1, 1995 through March 31,
1996.
44
<PAGE> 45
John J. Rydzewski, a Director of the Company and member of the Audit
Committee and the Compensation Committee, is a principal in the investment
banking firm of Benedetto, Gartland and Company, Inc. ("BG&C"). The Company
retained BG&C to provide advice concerning the Company's investment in Senior
Income Fund L.P., a Delaware limited partnership owning four congregate care
facilities in Southern California.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) Financial Statements. The following financial statements of the
Registrant and the Report of Independent Public Accountants therein are
filed as part of this Report on Form 10-K:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report....................................... F-1
Consolidated Balance Sheets........................................ F-2
Consolidated Statements of Operations Consolidated Statements of
Shareholders' Equity (Deficit)................................... F-4
Consolidated Statements of Cash Flows.............................. F-5
Notes to Consolidated Financial Statements......................... F-7
</TABLE>
(2) Financial Statement Schedules. Schedule II is filed as Exhibit 27.
(b) Reports on Form 8-K. The Registrant filed the following reports with
the Securities and Exchange Commission on Form 8-K during the quarter ended
March 31, 1997:
(1) The Company's current report on Form 8-K filed with the Securities
and Exchange Commission on January 7, 1997 reported under Item 2,
concerning the acquisition of minority interests in Senior Income Fund,
L.P., a California limited partnership.
(2) The Company's current report on Form 8-K filed with the Securities
and Exchange Commission on March 14, 1997 reported under Items 2 and 7,
concerning the Company's sale/leaseback transaction with Meditrust for the
Villa at Palm Desert, Amber Wood, Northgate and Shorehaven ALFs.
(3) The Company's current report on Form 8-K filed with the Securities
and Exchange Commission on March 29, 1997 reported under Items 2 and 7,
concerning the acquisition of Covell Gardens.
(c) EXHIBITS: The following exhibits are filed as a part of, or
incorporated by reference into this report on Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------
<C> <S> <C>
4.1 (1) -- Form of Indenture Agreement between ARV Assisted Living, Inc. and the initial
purchaser of the Company's $57.5 million, 6 3/4% Convertible Subordinated
Notes due 2006
10.1 (1) -- Amended Employment Agreement between the Company and Gary L. Davidson dated
April 23, 1997
10.2 (1) -- Amended Employment Agreement between the Company and David P. Collins dated
April 23, 1997
10.3 (1) -- Amended Employment Agreement between the Company and Graham P. Espley-Jones
dated April 23, 1997
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------
<C> <S> <C>
10.4 (1) -- Employment Agreement between the Company and Sheila M. Muldoon dated April
23, 1997
10.5 (1) -- Employment Agreement between the Company and Erik K. Davidson dated April 23,
1997
10.6 (1) -- Indemnification Agreement between the Company and Sheila M. Muldoon dated
August 13, 1997
10.7 (1) -- Indemnification Agreement between the Company and Erik K. Davidson dated
August 13, 1997
10.8 (2) -- Stock Purchase Agreement dated August 22, 1996 by and among ARV Assisted
Living, Inc., a California corporation, SynCare, Inc., a California
corporation, Pegye Jann Bechler and Eric Christopher Bechler
10.9 (3) -- Facility Lease Agreement between Meditrust Acquisition Corporation III (a
Delaware corporation) as Lessor and ARVIM, Inc. (a California corporation)
for the Villa at Palm Desert
10.10(3) -- Facility Lease Agreement between Meditrust Acquisition Corporation III (a
Delaware corporation) as Lessor and ARVIM, Inc. (a California corporation)
for Northgate Park
10.11(3) -- Facility Lease Agreement between Meditrust Acquisition Corporation III (a
Delaware corporation) as Lessor and ARVIM, Inc. (a California corporation)
for Shorehaven Manor
10.12(3) -- Facility Lease Agreement between Meditrust Acquisition Corporation III (a
Delaware corporation) as Lessor and ARVIM, Inc. (a California corporation)
for Amber Wood
11.1 (1) -- Statement of the Company regarding computation of per share earnings
21 (1) -- Subsidiaries of the Company as of June 19, 1997
23 (1) -- Consent of KPMG Peat Marwick LLP
27 (1) -- Financial Data Schedule
</TABLE>
- ---------------
(1) Filed with the Company's report on Form 10-K filed with the Securities and
Exchange Commission on July 1, 1996.
(2) Filed with the Company's report on Form 8-K filed with the Securities and
Exchange Commission on September 11, 1996.
(3) Filed with the Company's report on Form 8-K filed with the Securities and
Exchange Commission on March 14, 1997.
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ARV ASSISTED LIVING, INC.
By: /s/ JOHN J. RYDZEWSKI
--------------------------------------
John J. Rydzewski
Chairman of the Board
Date: October 21, 1997
Pursuant to the requirements of the Securities Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ----------------------------------- -----------------
<C> <S> <C>
/s/ JOHN A. BOOTY President, Chief Executive Officer, October 21, 1997
- ---------------------------------------- Vice Chairman of Board and Director
John A. Booty
/s/ DAVID P. COLLINS Senior Executive Vice President and October 21, 1997
- ---------------------------------------- Director
David P. Collins
/s/ GRAHAM P. ESPLEY-JONES Executive Vice President and Chief October 21, 1997
- ---------------------------------------- Financial Officer
Graham P. Espley-Jones
/s/ JAMES M. PETERS Director October 21, 1997
- ----------------------------------------
James M. Peters
/s/ R. BRUCE ANDREWS Director October 21, 1997
- ----------------------------------------
R. Bruce Andrews
/s/ MAURICE J. DEWALD Director October 21, 1997
- ----------------------------------------
Maurice J. Dewald
/s/ JOHN J. RYDZEWSKI Director October 21, 1997
- ----------------------------------------
John J. Rydzewski
</TABLE>
47
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ARV Assisted Living, Inc.:
We have audited the accompanying consolidated balance sheets of ARV
Assisted Living, Inc. and subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1997. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule described in Item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ARV Assisted
Living, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
June 20, 1997
F-1
<PAGE> 49
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................................. $ 15,964 $ 7,454
Accounts receivable, less allowance for doubtful accounts of $120 at
March 31, 1997...................................................... 2,410 --
Fees receivable and other amounts due from affiliates (note 7)......... 1,105 922
Deferred project costs................................................. 1,072 1,008
Investments in real estate held for sale............................... 10,330 6,807
Prepaids and other current assets...................................... 5,966 1,497
-------- -------
Total current assets........................................... 36,847 17,688
Restricted cash.......................................................... 1,912 4,915
Property, furniture and equipment (notes 1, 3 and 7)..................... 113,852 47,234
Notes receivable from affiliates, less allowance for doubtful amounts of
$27 and $65 at March 31, 1997 and 1996, respectively (note 7).......... 234 275
Deferred tax asset (note 6).............................................. 2,004 2,043
Other noncurrent assets (notes 2 and 7).................................. 9,382 5,248
-------- -------
$164,231 $77,403
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................... $ 8,566 $ 4,126
Notes payable, current portion (note 3)................................ 2,027 3,306
Notes payable and other amounts due to affiliates (note 7)............. 40 112
Liabilities related to Tax Credit Properties (note 12)................. 1,219 --
Accrued interest payable............................................... 1,941 130
-------- -------
Total current liabilities...................................... 13,793 7,674
Deferred revenue, less current portion................................... 576 1,327
Notes payable, less current portion (note 3)............................. 90,481 24,814
-------- -------
104,850 33,815
-------- -------
Minority interest in majority owned entities............................. 8,007 1,283
Series A Preferred stock, convertible and redeemable. Stated and
liquidation value $2.50; authorized and outstanding none and 1,029
shares at March 31, 1997 and 1996, respectively (note 9)............... -- 2,358
Series B Preferred stock, convertible and redeemable. Stated and
liquidation value $2.50; authorized 2,000 shares, none issued and
outstanding (note 9)................................................... -- --
Shareholders' equity (notes 5 and 8):
Common stock, no par value. Authorized 100,000 shares; issued and
outstanding 9,613 and 8,308 shares at March 31, 1997 and 1996,
respectively........................................................ 60,749 47,548
Accumulated deficit.................................................... (9,375) (7,601)
-------- -------
Total shareholders' equity..................................... 51,374 39,947
-------- -------
Commitments and contingent liabilities (notes 7, 10 and 11)
Subsequent events (note 14)..............................................
-------- -------
$164,231 $77,403
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 50
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenue (note 7):
Assisted living facility revenue............................ $73,770 $25,479 $ 4,838
Therapy and other services.................................. 7,850 4,322 4,165
Interest income............................................. 1,667 1,070 211
Other income................................................ 645 2,192 476
------ ------ ------
Total revenue....................................... 83,932 33,063 9,690
------ ------ ------
Expenses:
Assisted living facility operating expense.................. 47,117 16,395 3,201
Assisted living facility lease expense (notes 7 and 10)..... 12,872 6,644 814
Therapy and other........................................... 4,255 -- --
General and administrative.................................. 7,620 7,645 7,453
Employee benefit plan contributions......................... -- -- 811
Depreciation and amortization............................... 4,366 1,031 320
Provision for doubtful accounts and discontinued project
costs.................................................... 501 394 1,465
Provision for liabilities related to Tax Credit Properties
(note 12)................................................ 2,032 -- --
Interest (note 3)........................................... 5,573 1,544 354
------ ------ ------
Total expenses...................................... 84,336 33,653 14,418
------ ------ ------
Loss before income tax expense (benefit), minority interest in
income of majority owned entities and extraordinary item.... (404) (590) (4,728)
Income tax expense (benefit).................................. 201 375 (1,729)
------ ------ ------
Loss before minority interest in income of majority owned
entities and extraordinary item............................. (605) (965) (2,999)
Minority interest in income of majority owned entities........ 783 -- --
------ ------ ------
Loss before extraordinary item................................ (1,388) (965) (2,999)
Extraordinary loss from early extinguishment of debt, net of
income tax benefit of $231 (note 3)......................... 386 -- --
------ ------ ------
Net loss............................................ $(1,774) $ (965) $(2,999)
====== ====== ======
Loss per common share (note 1):
Before extraordinary loss................................... $ (.15) $ (.21) $ (.69)
Extraordinary loss.......................................... (.04) -- --
------ ------ ------
Net loss............................................ $ (.19) $ (.21) $ (.69)
====== ====== ======
Weighted average common shares outstanding.................... 9,400 6,246 4,903
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 51
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK RECEIVABLE
---------------- FROM ACCUMULATED
SHARES AMOUNT ESOP DEFICIT TOTAL
------ ------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994....................... 4,838 $ 1,659 $ (88) $(2,887) $(1,316)
Collection of ESOP receivable................... -- -- 88 -- 88
Preferred stock dividends declared.............. -- -- -- (398) (398)
Common stock issued to ESOP..................... 260 1,350 (262) -- 1,088
Net loss........................................ -- -- -- (2,999) (2,999)
----- ------- ----- ------- -------
Balance at March 31, 1995....................... 5,098 3,009 (262) (6,284) (3,537)
Issuance of common stock (IPO), net of issuance
costs of $4,893............................... 3,384 42,662 -- -- 42,662
Collection of ESOP receivable................... -- -- 262 -- 262
Preferred stock dividends declared.............. -- -- -- (352) (352)
Repurchase of common stock...................... (493) (351) -- -- (351)
Preferred stock conversion...................... 320 2,228 -- -- 2,228
Net loss........................................ -- -- -- (965) (965)
----- ------- ----- ------- -------
Balance at March 31, 1996....................... 8,309 47,548 -- (7,601) 39,947
Issuance of common stock, net issuance costs of
$1,572 (notes 3 and 9)........................ 1,304 13,201 -- -- 13,201
Net loss........................................ -- -- -- (1,774) (1,774)
----- ------- ----- ------- -------
Balance at March 31, 1997....................... 9,613 $ 60,749 $ -- $(9,375)
===== ======= ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 52
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss.................................................................................. $ (1,774) $ (965) $(2,999)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Extraordinary loss from early extinguishment of debt.................................... 386 -- --
Provision for liabilities related to Tax Credit Properties.............................. 2,032 -- --
Depreciation and amortization........................................................... 4,366 1,031 320
Provision for doubtful accounts and discontinued project costs.......................... 501 -- 200
Minority interest in income of majority owned entities.................................. 783 -- --
Other................................................................................... (90) (96) (28)
Changes in assets and liabilities, net of acquisitions:
(Increase) decrease in:
Accounts receivable................................................................. (1,360) -- --
Fees receivable and other amounts due from affiliates............................... (408) 905 (119)
Deferred tax asset.................................................................. 109 -- (1,777)
Prepaids and other assets........................................................... (4,499) (1,087) 193
Increase (decrease) in:
Accounts payable and accrued liabilities............................................ 1,984 2,031 1,363
Deferred revenue.................................................................... (1,677) (771) 1,523
Owner equity contributions payable.................................................. (10) (757) (1,195)
Accrued interest payable............................................................ 1,811 130 --
Due to affiliates................................................................... (72) (965) (20)
-------- -------- -------
Net cash provided by (used in) operating activities............................... 2,082 (544) (2,539)
-------- -------- -------
Cash flows provided by (used in) investing activities:
Increase in notes receivable.............................................................. (140) -- (806)
Collections of notes and other amounts due from affiliates................................ 181 -- --
(Increase) decrease in deferred project costs............................................. (227) 1,273 496
Increase in investments in real estate held for sale...................................... (3,769) (6,807) --
Additions to property, furniture and equipment (Note 7)................................... (70,202) (45,747) (537)
Decrease in leased property security deposits............................................. 879 (559) (1,346)
(Increase) decrease in restricted cash.................................................... 3,003 (4,915) --
Proceeds from sale and leaseback of facilities............................................ 29,052 5,083 --
Purchase of limited partnership interests................................................. (18,542) (1,794) (97)
Other..................................................................................... -- (442) 22
-------- -------- -------
Net cash used in investing activities............................................. $(59,765) $(53,908) $(2,268)
-------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net of issuance costs............................. $ 254 $ 42,661 $ --
Common stock purchased by ESOP............................................................ -- 262 1,177
Proceeds from issuance of preferred stock, net of issuance costs.......................... -- -- 617
Borrowings under notes payable............................................................ 31,081 14,475 738
Repayments of notes payable............................................................... (18,648) (6,140) (1,561)
Borrowings under notes payable to affiliates.............................................. -- -- 750
Repayments of notes payable to affiliates................................................. -- -- (595)
Proceeds from convertible subordinated notes, net of issuance costs....................... 55,195 10,762 2,677
Repurchase of convertible subordinated notes.............................................. (1,689) (137) --
Repurchase of common stock................................................................ -- (352) --
Preferred stock dividends paid............................................................ -- (400) (337)
-------- -------- -------
Net cash provided by financing activities......................................... 66,193 61,131 3,466
-------- -------- -------
Net increase (decrease) in cash and cash equivalents.............................. 8,510 6,679 (1,341)
Cash and cash equivalents at beginning of year............................................. 7,454 775 2,116
-------- -------- -------
Cash and cash equivalents at end of year................................................... $ 15,964 $ 7,454 $ 775
======== ======== =======
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest................................................................................ $ 4,481 $ 1,183 $ 314
Income taxes............................................................................ 671 128 68
======== ======== =======
Supplemental schedule of noncash investing and financing activities:
Minority interests in majority owned entities............................................. $ 7,141 $ 1,283 $ --
Purchase of buildings..................................................................... -- 9,350 14,450
Sale of buildings, net of closing costs................................................... -- 9,400 14,945
Debt assumed in conjunction with purchases of building.................................... -- 350 --
Note receivable from ESOP for purchase of common stock.................................... -- -- 262
Preferred stock dividends declared........................................................ -- 51 100
Conversion of preferred stock to common stock............................................. 2,356 2,228 --
Conversion of 10% convertible subordinated notes to common stock.......................... 10,106 -- --
Acquisition of SynCare.................................................................... 485 -- --
Fair value of assets acquired in the purchase of California Retirement Inn -- Placentia... -- -- 5,100
Liabilities assumed in acquisitions....................................................... -- -- 5,026
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 53
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
ARV Assisted Living, Inc. and subsidiaries (the Company) owns, operates,
acquires and develops assisted living facilities that provide housing to senior
citizens, some of whom require assistance with the activities of daily living
such as bathing, dressing and grooming. The Company is also involved in the
development and management of senior apartment communities and affordable senior
and multifamily apartment communities that qualify for low income housing tax
credits in its capacity as general partner in limited partnerships which operate
such facilities.
At March 31, 1997, the Company operated 45 assisted living facilities
("ALFs") including 14 which are owned by the Company ("Owned ALFs"), 29 which
the Company operates pursuant to long-term operating leases ("Leased ALFs") and
2 in which the Company serves as the general partner of the owner partnership
("Managed ALFs") (see note 6). The Company also managed 22 senior apartment
communities and affordable senior and multifamily apartment limited partnerships
in which the Company serves as the general partner.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Entities, which include limited partnerships and limited
liability companies 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.
Investments in Partnerships
The Company is general partner in 5 limited partnerships which operate ALFs
(ownership interests range from less than 1% to 89.5%) and in 22 tax credit
partnerships that operate apartment facilities (ownership interests range up to
1%). Under the terms of the partnership agreements, profits and losses are
allocated to the general and limited partners in specified ratios, and the
Company generally has unlimited liability for obligations of partnerships in
which it is the general partner. The Company accounts for its investments in
partnerships on the cost method for those partnerships in which the Company has
a minor interest (less than 3% interest).
The Company accounts for its investments in partnerships using the equity
method for those partnerships in which the Company has less than a controlling
interest.
On January 31, 1997, the Company acquired a 12.8% limited partnership
interest in Senior Income Fund, L.P. ("Senior Income Fund") pursuant to a tender
offer for any and all outstanding limited partnership units in Senior Income
Fund. The partnership is a limited partnership that owns and operates four
senior residential properties. The Company accounts for its investment in Senior
Income Fund under the equity method.
F-6
<PAGE> 54
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
The results of operations for the Senior Income Fund for the three months
ended March 31, 1997 and the financial position at that date are summarized
below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1997
--------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
CONDENSED INCOME STATEMENT INFORMATION
Revenue........................................................ $ 2,882
Costs and expenses............................................. 2,277
Net Income..................................................... 605
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
CONDENSED BALANCE SHEET INFORMATION
Real estate held for disposition............................... $ 18,301
Cash and cash equivalents...................................... 3,815
Total assets................................................... 22,239
Accounts payable and accrued expenses.......................... 410
Deferred rent payable.......................................... 1,203
Total liabilities.............................................. 2,355
</TABLE>
The Senior Income Fund has a December 31, 1996 year end. Prior to January
1, 1997, the Company owned less than a 5% interest. Therefore, only relevant
period financial information has been included.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.
Investment in Real Estate Held for Sale
Investment in real estate held for sale includes costs related to projects
expected to be sold within one year, at the lower of cost or market.
Property, Furniture and Equipment
Property, furniture and equipment are stated at cost less accumulated
depreciation which is charged to expense on a straight-line basis over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 27.5 to 35 years
Furniture, fixtures and equipment........................... 3 to 7 years
</TABLE>
F-7
<PAGE> 55
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
Property, furniture and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Land.................................................... $ 19,897 $ 9,913
Construction in progress................................ 10,577 243
Buildings and improvements.............................. 77,365 34,212
Furniture, fixtures and equipment....................... 10,483 4,002
-------- -------
118,322 48,370
Accumulated depreciation................................ (4,470) (1,136)
-------- -------
$113,852 $47,234
======== =======
</TABLE>
Capitalized interest amounted to $721,000 for 1997. No interest was
capitalized during 1996 or 1995.
Loss Per Share
Net loss per share is calculated using the weighted average number of
common shares outstanding during the period. The effect of common share
equivalents was not included as the effect was antidilutive. Common share
equivalents are comprised of the dilutive effect of outstanding stock options
and warrants. The computation of loss per common share gives effect to the
preferred stock dividends in the fiscal years ended March 31, 1996 and 1995.
Revenue Recognition
The Company recognizes rental and assisted living services revenue from
owned and leased facilities. The Company receives fees for property management
and partnership administration services from managed facilities. The Company
also receives wholesaling commissions for the sale of limited partnership
interests, acquisition fees for the selection, development and purchase of
partnership properties, commissions on the sale of partnership properties and
certain other fees as specified in the partnership agreements. Fees are
recognized when earned.
The Company is the general partner in various tax credit partnerships.
These partnerships are generally in the start-up phase and the Company provides
services related to the purchase, development, construction and, later,
management of the projects. Fees earned for services provided are reduced by
amounts that the general partner is required to advance to the tax credit
partnerships, such as Owner Equity Contributions (OEC), as defined in the
partnership agreements, plus any anticipated operating support requirements. The
Company earns fees from tax credit partnerships for the provision of development
and property management services to these partnerships in accordance with the
terms of its respective development agreements and property management
agreements. Fees are recognized when there is reasonable assurance that future
rent receipts will cover operating expenses and debt service, including payments
due the Company under the terms of the transaction, under the provisions of
Statement of Financial Accounting Standards No. 66.
Therapy revenue is reported at the estimated net realizable amounts due
from patients, third-party payors and others for services rendered, including
estimated retroactive adjustments under reimbursement agreements with
third-party payors. Such contractual adjustments are accrued on an estimated
basis during the period the related services are rendered. Therapy revenue is
adjusted as required in subsequent periods based on final settlements.
Assisted Living Facility Sale-Leaseback Transactions
Gains are deferred and amortized into income over the lives of the leases.
F-8
<PAGE> 56
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
Deferred Project Costs
Deferred project costs primarily include land acquisition, legal and
architectural fees, feasibility study costs and other direct costs associated
with new ALF development. Deferred project costs are capitalized upon the
successful acquisition of an assisted living facility or site. If a project is
discontinued, any deferred project costs are expensed. Deferred project costs at
March 31, 1997 are expected to be recovered by March 31, 1998 as the related
projects are expected to be completed by then.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded to adjust net deferred assets to the
amount which management believes will more likely than not be recoverable. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Restricted Cash
Restricted cash represents cash held as collateral for letters of credit
issued to the lessor in lieu of security deposits.
Notes Receivable Valuation Allowance
The Company has established a valuation allowance for three notes
receivable from affiliates. In each case the property owned by each affiliate
has sufficient value, based on appraisals, to satisfy all obligations of the
affiliate including amounts owed to the Company. The valuation allowance
reflects the uncertainty inherent in the appraisal process, the timing and
amount of future principal payments and the related property's inability to
generate sufficient cash flow to meet current operating needs and service the
notes.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. An impairment loss must be recorded as a reduction to operating
income if the sum of the expected undiscounted cash flows derived from an asset
is less than the asset's carrying value. The Company adopted SFAS 121 in fiscal
1997 without any material impact on the consolidated financial statements.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). This
pronouncement establishes the accounting and reporting standards for stock-based
compensation plans, including stock purchase plans, stock options and stock
appreciation rights. This new standard defines a fair value-based method of
accounting for these equity
F-9
<PAGE> 57
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
instruments. This method measures compensation cost based on the value of the
award and recognizes that cost over the service period. Companies may elect to
adopt this standard or to continue accounting for these types of equity
instruments under current guidance, APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Companies that elect to continue using the rules of APB
Opinion No. 25 must make pro forma disclosures of net income and earnings per
share as if this new statement had been applied. This new standard is required
for fiscal years beginning after December 15, 1995. The Company has elected to
continue to use the existing accounting rules of APB Opinion No. 25 and make the
pro forma disclosures required under the new standard. Such disclosures are
included in note 5.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This statement is effective for both interim and annual periods ending after
December 15, 1997, and replaces the presentation of "primary" earnings per share
with "basic" earnings per share and the presentation of "fully diluted" earnings
per share with "diluted" earnings per share. Earlier application is not
permitted. When adopted, all previously reported earnings per common share
amounts must be restated based on the provisions of the new standard. Pro forma
basic and diluted loss per share calculated in accordance with SFAS No. 128 does
not differ from the amounts shown for loss per share on the consolidated
statements of operations.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" (SFAS 129). This statement is effective for both interim and
annual financial statement periods ending after December 15, 1997. This
statement requires disclosure in summary form of the pertinent rights and
privileges of various securities outstanding including dividend and liquidation
preferences, participation rights, call prices and dates, sinking-fund
requirements, unusual voting rights and significant terms of contracts to issue
additional shares.
(2) ACQUISITIONS
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., a California corporation and its three wholly owned subsidiaries
("GeriCare"), in a stock for stock merger valued at approximately $1.2 million.
The Company recorded the acquisition under the purchase method of accounting at
the cost of approximately $1.2 million and recorded the assets and liabilities
of the merged entity at their estimated fair value. Goodwill of $443,000 was
recorded in the transaction. As part of the SynCare acquisition, the Company
entered into a Holdback Escrow Agreement (the "Agreement") with Pegye Jann
Bechler and Eric Christopher Bechler ("Sellers"), the former sole shareholders
of SynCare. Under the Agreement, one-half of the 85,146 shares issued to Sellers
as consideration for their stock in SynCare were delivered to the General
Counsel for the Company as escrowholder, defined as the "Buyer's Agent" in the
Agreement. Pursuant to the Agreement, Buyer's Agent retains possession of the
escrowed shares pending distribution of all or a portion thereof to Sellers on
the first, second and third anniversaries of the closing date, as determined by
offsetting, as of each such anniversary, uncollected accounts receivable listed
on the closing balance sheet against the reserves established therefor on the
closing balance sheet. It was a further condition to delivery of the escrowed
shares to Sellers that Sellers remain as full-time employees of the Company or a
subsidiary thereof as of each anniversary, without being terminated for cause
prior to such anniversary dates. Prior to the first anniversary of the closing
date, both Sellers were terminated for cause. Based thereon, the Company has
taken the position that the undelivered shares are the property of the Company
under the Agreement, and the matter is in dispute between the parties.
F-10
<PAGE> 58
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 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 June 1995, the Company purchased an aggregate 18.6% limited partner
interests in San Gabriel Retirement Villa ("Villa Colima") for which it serves
as the general partner for $469,000. Subsequently, the Company purchased an
additional 19.0% for $954,000. The Company currently owns 60% of the
partnership.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Syncare, Inc. as if the
acquisition took place on April 1, 1995.
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total revenue.................................... $86,705 $38,517
Total expenses................................... $87,340 $38,392
Net loss......................................... $(1,920) $ (517)
Loss per common share............................ $ (.20) $ (.08)
</TABLE>
The following unaudited pro forma information presents a summary of the
consolidated results of operations of American Retirement Villas Properties II
as if the acquisition took place on April 1, 1995.
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total revenue.................................... $91,240 $47,528
Total expenses................................... $90,888 $46,055
Net loss......................................... $(1,371) $ (132)
Loss per common share............................ $ (.15) $ (.02)
</TABLE>
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Villa Colima as if the
acquisition took place on April 1, 1995.
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total revenue.................................... $84,320 $34,683
Total expenses................................... $84,652 $34,936
Net loss......................................... $(1,749) $ (850)
Loss per common share............................ $ (.19) $ (.09)
</TABLE>
F-11
<PAGE> 59
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(3) NOTES PAYABLE
Notes payable at March 31 consists of (in thousands, except per share
data):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Convertible subordinated notes due April 1, 2006 with interest at
6.75%. The notes require monthly semi-annual payments of
interest and are convertible to common stock at $18.57 per
share. The notes, offered in a maximum amount of $57,500, may
be called by the Company beginning in April 1999 at declining
premiums starting at 110% of the principal amount.............. $57,500 $ --
Convertible subordinated notes due December 31, 1999 with
interest at 10%. The notes require monthly payments of
interest, were convertible to common stock at $12.16 per share
and were guaranteed by certain shareholders of the Company..... -- 14,888
Notes payable, bearing interest at fixed rates between 9.5% and
10.5%, payable in monthly installments of principal and
interest totaling $157 and $95 for 1997 and 1996, respectively,
secured by property, maturities ranging from June 1997 through
March 2006..................................................... 19,494 11,824
Notes payable bearing interest at floating rates of LIBOR (5.77%
at March 31, 1997) plus 2.75% payable in monthly installments
of interest only secured by Owned ALFs, maturing September 30,
1998........................................................... 8,750 --
Notes payable, bearing interest at floating rates between prime
(8.5% at March 31, 1997 and 8.25% at March 31, 1996) plus rates
between 1.0% through 2.25%, payable in monthly installments of
principal and interest totaling $56 and $12 for 1997 and 1996,
respectively, secured by an ALF and the Company's corporate
headquarters................................................... 6,453 382
Note payable, bearing interest at fixed and floating rates
between 8% and prime (8.25% at March 31, 1996) plus 1.5%,
payable in monthly interest installments of $5, secured by ALF
sites. Repaid during fiscal 1997............................... -- 736
Other -- primarily capitalized equipment leases.................. 311 291
------- -------
92,508 28,120
Less amounts currently payable................................... 2,027 3,306
------- -------
$90,481 $24,814
======= =======
</TABLE>
The future annual principal payments of the notes payable at March 31, 1997
are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................. $ 2,027
1999............................................. 10,110
2000............................................. 552
2001............................................. 697
2002............................................. 438
Thereafter....................................... 78,684
-------
$92,508
=======
</TABLE>
The convertible subordinated notes due in 1999 were called by the Company
in fiscal 1997. Note holders who chose to redeem their notes were paid a premium
of 6.7% upon redemption, totalling $261,000, and unamortized note issuance costs
of $335,000 were expensed, resulting in the extraordinary loss of $386,000, net
of income tax benefit. Holders of approximately $11.0 million of the notes
converted the notes into 900,662 shares of common stock.
F-12
<PAGE> 60
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
The Company has entered into separate agreements with Bank United of Texas
and Imperial Bank to provide an additional $22 million of financing for
acquisitions, development and general corporate purposes.
The various debt agreements contain restrictive covenants requiring the
Company to maintain certain financial ratios, including current ratio, working
capital, minimum net worth, debt-to-equity and debt service coverage, among
others. At March 31, 1997, the Company was not in compliance with its minimum
net worth and debt service coverage ratios. For those debt covenants which the
Company was not in compliance, it has obtained waivers, for such requirements.
The lenders have waived compliance with these covenants through September 30,
1997. Had the Company not obtained waivers, it would have been in default on
$8.8 million of mortgage debt, $685,000 of guaranteed debt and $6.3 million of
standby letters of credit issued as security for ALF operating leases.
(4) EMPLOYEE BENEFIT PLANS
ESOP
The Company has an Employee Stock Ownership Plan (ESOP) which covers all
employees of the Company. Contributions to the ESOP are made at the discretion
of the Company's Board of Directors.
ESOP contributions of $1,350,000 during the year ended March 31, 1995, were
utilized by the ESOP to purchase 790,229 shares of the Company's common stock.
For the years ended March 31, 1997 and 1996, no contributions were made to the
ESOP by the Company. The Company's compensation expense related to these
contributions for the year ended March 31, 1995 amounted to $811,000. Retirement
expense paid by affiliated partnerships for the year ended March 31, 1995 was
$471,000.
Savings Plan
Effective January 1, 1997, the Company established a savings plan (the
Savings Plan) that qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. Under the Savings Plan, participating
employees may defer a portion of their pretax earnings, up to the Internal
Revenue Service annual contribution limit. The Company matches 25% of each
employee's contributions up to a maximum of 6% of the employee's earnings. An
employee becomes eligible to participate in the plan upon completing one year of
service.
(5) STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123, "Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
usually equals the market price of the underlying stock on the date of grant, no
compensation expense is recorded.
Effective October 1, 1995, the Company adopted the 1995 Stock Option and
Incentive Plan of ARV Assisted Living, Inc. (the Plan) for the benefit of its
eligible employees, consultants and directors. The Plan consists of two plans,
one for the benefit of key employees and consultants and one for the benefit of
nonemployee directors. The Company has reserved 1,155,666 shares for issuance
under the Plan. Options granted under the Plan vest over periods ranging from
three to five years from the date of the grant. During the year ended March 31,
1997, 142,415 of the options were eligible for exercise. None of the vested
options had been exercised as of March 31, 1997.
F-13
<PAGE> 61
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
A summary of stock options at March 31, 1997 is as follows:
<TABLE>
<CAPTION>
SHARES SHARES UNDER
AVAILABLE OUTSTANDING PRICE PER
FOR GRANT OPTIONS SHARE
---------- ------------ --------------
<S> <C> <C> <C>
Authorization of shares................. 1,155,666 -- N/A
Options granted......................... (1,243,400) 1,243,400 $10.00 - 15.40
Options canceled........................ 267,008 (267,008) $11.25 - 14.00
---------- --------- ------------
Balance at March 31, 1997............... 179,274 976,392 $10.00 - 15.40
========== ========= ============
</TABLE>
Pro forma information regarding net loss and loss per share is required by
SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average expected life of the option of
9 years.
The Company uses the Black-Scholes option valuation model, which was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferrable. Option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of trade options, and because
changes in the first subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The following represents the estimated fair value of options granted and
the assumptions used for calculation.
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Estimated fair value per option granted.................... $11.21 $13.84
Average exercise price per option granted.................. $11.21 $13.90
Stock volatility........................................... 57% 57%
Risk-free interest rate.................................... 6.5% 6.5%
Option term -- years....................................... 10 10
Stock dividend yield....................................... -- --
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Pro forma net loss before extraordinary item.............. $(1,735) (1,368)
Pro forma net loss........................................ $(2,122) (1,368)
Pro forma loss per share before extraordinary item........ $ (.18) (.22)
Pro forma loss per share.................................. $ (.23) (.22)
</TABLE>
F-14
<PAGE> 62
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
A summary of the Company's stock option activity and related information
for the years ended March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding -- beginning of the
year............................... 775,782 $13.89 -- --
Granted.............................. 389,000 $11.21 854,400 $13.90
Exercised............................ -- -- -- --
Forfeited............................ (188,390) $13.68 (76,618) 14.00
Outstanding -- end of year........... 976,392 $12.86 775,782 13.90
Exercisable at end of year........... 142,415 $13.74 -- --
-------- ------ ------- ------
Weighted average fair value of
options granted during the year.... $11.21 $13.84
====== ======
</TABLE>
At March 31, 1997, the Company had 976,392 options outstanding with prices
ranging from $10.00 to $15.40 per share and a weighted average life of 9 years.
(6) INCOME TAXES
The provision for income tax expense (benefit) consists of the following
for the years ended March 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -------
<S> <C> <C> <C>
Current:
Federal........................................ $ (56) $ 293 $ 36
State.......................................... 91 81 11
----- ----- -------
Total current.......................... 35 374 47
----- ----- -------
Deferred:
Federal........................................ 106 1 (1,396)
State.......................................... 60 -- (380)
----- ----- -------
Total deferred......................... 166 1 (1,776)
----- ----- -------
$ 201 $ 375 $(1,729)
===== ===== =======
</TABLE>
The current and deferred income tax benefit relating to the extraordinary
item is $231,000. The Company has net operating loss carryovers of $1,800,000
which expire in 2011.
F-15
<PAGE> 63
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
A reconciliation of income tax expense (benefit) at the Federal statutory
rate of 34% to the Company's provision for income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -------
<S> <C> <C> <C>
Income tax benefit at statutory rate............. $(137) $(201) $(1,607)
State income tax expense (benefit), net of
Federal income taxes........................... 100 54 (439)
Elimination of preacquisition losses of acquired
companies...................................... -- 26 --
Change in valuation allowance.................... 424 423 300
Impact on taxes of minority interest in income of
majority owned partnerships.................... (292) -- --
Other............................................ 106 74 17
----- ----- -------
Total income tax expense (benefit)..... $ 201 $ 376 $(1,729)
===== ===== =======
</TABLE>
Temporary differences giving rise to a significant amount of deferred tax
assets and liabilities at March 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred gain on sale.................................. $ 152 $ 169
Deferred partnership fee income........................ 1,438 1,145
Owner equity contributions............................. 930 2,013
Other partnership income............................... -- 164
Liabilities related to Tax Credit Properties........... 585 --
Net operating loss carryforwards....................... 618 --
Other.................................................. 439 373
------- -------
Gross deferred tax asset....................... 4,162 3,864
Less valuation allowance................................. (1,953) (1,685)
Deferred tax liabilities -- other........................ (205) (135)
------- -------
Net deferred tax asset......................... $ 2,004 $ 2,044
======= =======
</TABLE>
Management believes it is more likely than not that the Company will
realize certain of the benefits of the existing deferred tax assets as of March
31, 1997 and 1996. Approximately $1.0 million and $2.0 million of the deferred
tax assets at March 31, 1997 and 1996, respectively, result from income that has
been recognized for Federal income tax purposes in advance of recognition for
financial reporting purposes.
Recognition of the remaining balances will require generation of future
taxable income. There can be no assurance that the Company will generate any
earnings or any specific level of earnings in future years. Certain tax planning
or other strategies could be implemented, if necessary, to supplement income
from operations to fully realize recorded net tax benefits.
(7) RELATED PARTY TRANSACTIONS
The results of the Company and its subsidiaries are substantially affected
by transactions and agreements with related parties.
Fees receivable from affiliates of $241,000 and $362,000 at March 31, 1997
and 1996, respectively, consists of receivables related to management services
rendered by the Company. Related management fees
F-16
<PAGE> 64
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
received from affiliates total $1,742,000, $2,766,000, and $3,273,000 during the
years ended March 31, 1997, 1996, and 1995, respectively.
Notes receivable from affiliates of $261,000 and $340,000 at March 31, 1997
and 1996, respectively, bear interest at rates between 9% and 10% and are due on
demand. Other amounts due from affiliates of $864,000 and $561,000 at March 31,
1997 and 1996, respectively, consist of non-interest bearing expense advances
and working capital loans made to various partnerships. Amounts due from
affiliates are generally expected to be repaid in subsequent years with cash
from operations or from bank financing obtained by the affiliates.
During the year ended March 31, 1995, $621,000 in consulting fees were
earned by certain shareholders of the Company, who are also general partners in
several limited partnerships. Additionally, approximately $53,000 of legal fees
incurred during the period ending March 31, 1995, were paid to certain
shareholders of the Company.
The Company pays certain expenses such as repair and maintenance, supplies,
payroll and retirement benefit expenses on behalf of affiliated Partnerships and
is subsequently reimbursed by the Partnerships. During the periods ended March
31, 1997, 1996 and 1995, respectively, the expenses incurred on behalf of
affiliates and the related reimbursements from these affiliates amounted to
approximately $7.1 million, $10.0 million and $16 million, respectively. The
Company accounts for these reimbursements as a reduction of the related
expenses.
The Company leases office space under operating leases from affiliated
entities. During the year ended March 31, 1996, the leases were amended to
provide for a three year term. Previously, the leases were on a month-to-month
basis. Total rental expense related to these leases for the years ended March
31, 1997, 1996 and 1995 was $141,000, $161,000 and $215,000, respectively.
In May 1995, the Company purchased from an affiliated entity one of the
offices that it occupies for $611,000. Debt assumed in the transaction was
$531,000, prior to a principal payment of $181,000. The balance of the purchase
price was paid in cash. The remaining $350,000 obligation was due in two years
and requires monthly principal and interest payments based on a ten year
amortization schedule. The note was repaid in April 1997.
In fiscal 1996, three partnerships, for which the Company is the General
Partner, obtained the limited partners' approval to sell their assisted living
facilities to an unrelated third party. The sales were consummated in fiscal
1996, and the Company simultaneously entered into leases for these facilities.
The Company is the general partner of Fullerton Equities, Limited, a
California limited partnership (Fullerton). The Company had loaned Fullerton in
excess of $1.1 million, $1.0 million of which was secured by a deed of trust. On
January 3, 1996, Fullerton sold its sole physical asset, an assisted living and
Alzheimer facility, to an unrelated third party and took back a $2.0 million
note secured by a deed of trust which wrapped the Company's deed of trust. Gary
L. Davidson, John A. Booty, David P. Collins and Graham P. Espley-Jones
(Executive Officers of the Company), as tenants-in-common, purchased the $2.0
million note from Fullerton for full value on March 6, 1996, which enabled
Fullerton to pay off all of its secured indebtedness and a portion of the
unsecured debt to the Company. Fullerton was dissolved in calendar 1996.
To address certain structural issues in connection with tax credit
partnerships, Pacific Demographics Corporation ("Pacific Demographics")(formerly
ARVTC, Inc.), was formed in August 1994 by Messrs. Gary Davidson, Booty, Collins
and Espley-Jones, as well as two former Company officers, to provide certain
development services for these partnerships in exchange for cash and deferred
development fees generated by the tax credit partnerships. Among these
structural issues was a more accurate matching of the receipt of cash
consideration and the recognition of development fee income. Due to the receipt
of
F-17
<PAGE> 65
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
development fees on a deferred basis, such fees were recognized for federal
income tax purposes in advance of the actual receipt of such fees. The Company
provided services and personnel to Pacific Demographics for which it received
certain fees from Pacific Demographics. The Company believes that these
arrangements were fair to the Company and that the compensation paid to Pacific
Demographics by the tax credit partnerships and by Pacific Demographics to the
Company appropriately reflected the services rendered by Pacific Demographics
and the Company, respectively, and the risks incurred by the shareholders of
Pacific Demographics who provided the guarantees for these projects.
In order to lessen potential conflicts of interest, in July 1995, the
Company's then principal shareholders, who included but were not limited to
Messrs. Gary Davidson, Booty, Collins and Espley-Jones sold Pacific
Demographics, Inc. to the Company for $100,000 in cash. In addition, they formed
a general partnership, Hunter Development ("Hunter") and became co-developers
with Pacific Demographics and retained the right to receive 20% of all developer
fees up to a maximum of $850,000. Subsequently each of the general partners of
Hunter assigned his interest in Hunter to Redhill Development, LLC. Of the
maximum amount of $850,000 which could be distributed, $215,553 has been
distributed to date of which Messrs. Gary Davidson, Booty, Collins and
Espley-Jones have received $40,437, $40,437, $23,800 and $13,460, respectively.
During March 1996, $5.2 million of current and future receivables were sold to
former employees of the Company in exchange for $191,000 in cash and notes
receivable of $1.4 million. These receivables consisted of deferred development
fees which were carried on the books of the Company, yet they were fully
reserved as the potential for collection was deemed remote. In determining the
valuation of these receivables, management considered their potential for
collection and applied a discount factor to a projected future stream of cash
flows based upon the associated risk of collection. These deferred development
fees had been recognized as income by the Company for Federal Income Tax
purposes, but had not been recognized under generally accepted accounting
principles. During the year ended March 31, 1996, the sale of these receivables
reduced the Company's income tax expense by $1.2 million.
John A. Booty, former President of the Company and the current Vice
Chairman of the Board of Directors, provides consulting services to the Company
for which Mr. Booty is paid a varying sum not to exceed $30,000 per month for
development and acquisition services. In fiscal 1997, Mr. Booty was paid
$180,000 for consulting services.
The Company utilizes the services of J&D Design, as well as others, for
interior design work at its facilities. The principal of J&D Design is Joan
Davidson, wife of Senior Vice President Eric Davidson and daughter-in-law of
Chairman, President and Chief Executive Officer Gary Davidson. Services provided
by J&D Design include design work and the purchase of furniture, fixtures and
equipment ("FF&E") for developed facilities and rehabilitation of existing or
newly acquired facilities. In fiscal 1997, the Company paid J&D Design
approximately $431,000, a portion of which was for design services and a portion
of which was for reimbursement of costs for FF&E. In fiscal 1996 and fiscal
1995, the total paid by the Company to J&D Design approximated $328,000 and
$57,000, respectively.
Mr. R. Bruce Andrews, a member of the Board of Directors, is President of
Nationwide Health Properties, Inc. ("NHP"), a Health Care REIT. NHP is the owner
of 16 ALFs which are leased to the Company. Of that number, leases for 13 ALFs
were entered into prior to November 29, 1995, the date Mr. Andrews became a
Board member, and leases for three ALFs were entered into during Mr. Andrews'
tenure as Board member. Lease payments have aggregated approximately $10.3
million in fiscal 1997 and $3.7 million from November 1, 1995 through March 31,
1996.
John J. Rydzewski, a Director of the Company and member of the Audit
Committee and the Compensation Committee, is a principal in the investment
banking firm of Benedetto, Gartland and Company, Inc. ("BG&C"). The Company
retained BG&C to provide advice concerning the Company's
F-18
<PAGE> 66
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
investment in Senior Income Fund L.P., a Delaware limited partnership owning
four congregate care facilities in Southern California.
Common Stock
During the year ended March 31, 1996, the Company repurchased 493,000
shares of its common stock from three former employee shareholders for
approximately $351,000.
(8) SHAREHOLDERS' EQUITY
Warrants
At March 31, 1997, 1996 and 1995, the Company had outstanding warrants
issued in connection with its Series A Preferred Stock which give the holders
the option to purchase approximately 35,695, 54,197 and 54,197 shares of common
stock, respectively, at $7.60 per share. These warrants are exercisable at any
time at the option of the holder within three years of the date of issuance, the
latest of which was August 1, 1994. At March 31, 1997 and 1996, the Company had
outstanding warrants issued to selling brokerage firms in connection with its
convertible subordinated notes which give the holders the option to purchase an
aggregate maximum of 117,650 and 115,304 shares of common stock, respectively at
$12.16 per share. These warrants are exercisable at any time at the option of
the holder within three years of the date of issuance, the latest of which was
July 31, 1995. As of March 31, 1997, warrants to purchase 19,459 shares of
Common Stock have been exercised.
(9) REDEEMABLE PREFERRED STOCK
The Series A 8% cumulative, convertible and redeemable preferred stock was:
convertible at any time, unless previously redeemed, at the option of the
holder, in whole or in part, into one share of common stock; redeemable, at the
option of the holder, any time after December 31, 1998 for $7.60 per share.
As of February 7, 1996, the Company exercised its right to redeem all
outstanding shares of the Series A 8% cumulative convertible redeemable
preferred stock on May 9, 1996. Preferred shareholders had the option of
converting their Preferred Stock into Common Stock at any time prior to April
29, 1996. As of March 31, 1996, 48.6% of the shareholders converted their
Preferred Stock into 319,664 shares of Common Stock. During fiscal 1997, the
balance of the shareholders converted their Preferred Stock into 338,141 shares
of Common Stock.
The Series B convertible redeemable preferred stock, none of which is
outstanding, has substantially the same terms as the Series A preferred stock,
except the Series A preferred stock has priority with respect to dividends.
(10) ASSISTED LIVING FACILITY LEASES
At March 31 the Company leased 29 ALFs. The facility leases expire from
1997 to 2037, and contain two to three renewal options ranging from five to ten
years. During 1997, the Company sold 4 owned ALFs to a subsidiary of Meditrust
for proceeds of $29.1 million and simultaneously entered into long-term
operating leases. The minimum annual payments for these leases are $2.9 million,
subject to future increase as described below. The leases are for terms of 15
years, with similar renewal options to extend for 5 years each. No gain was
recognized on the transaction.
Generally, leases for Leased ALFs owned by a common lessor contain cross
default provisions permitting the lessor to declare a default under all leases
in the event of a default on one lease.
F-19
<PAGE> 67
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
Minimum lease payments required under assisted living facility operating
leases in effect at March 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31: (IN THOUSANDS)
----------------------------------------------- --------------
<S> <C>
1998...................................... $ 18,535
1999...................................... 18,595
2000...................................... 18,595
2001...................................... 18,595
2002...................................... 18,595
Thereafter................................ 130,291
--------
$223,206
========
</TABLE>
Certain of the leases require the payment of additional rent based on a
percentage increase of gross revenues. Such amounts were not material. Leases
are subject to increase based upon changes in the consumer price index or gross
revenues, subject to certain limits, as defined in the lease agreements.
(11) COMMITMENTS AND CONTINGENT LIABILITIES
The Company and certain shareholders have guaranteed indebtedness at March
31, 1997 of certain affiliated partnerships as follows:
<TABLE>
<CAPTION>
CERTAIN
COMPANY SHAREHOLDERS
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Notes secured by real estate........................... $13,109 13,109
Land and construction loans associated with the
development and construction of affordable housing
apartments........................................... 33,745 29,583
</TABLE>
The maximum aggregate amounts of guaranteed indebtedness is $56,078,000 at
March 31, 1997. The Company has guaranteed tax credits for certain partnerships
in the aggregate amount of $78,387,000, excluding interest, penalties or other
charges which might be assessed against the partners. The Company and certain
shareholders have provided operating deficit guarantees for certain Affiliated
Partnerships. As of March 31, 1997, the Company has funded $813,000 under these
guarantees and expects to fund an additional $1.2 million until the Affiliated
Partnerships break even.
In management's opinion, no claims may be currently asserted under any of
the aforementioned guarantees based on the terms of the respective agreements
other than those accrued.
At March 31, 1997, the Company has used $6.9 million of the line of credit
with Imperial Bank in the form of non-cash advances to provide letters of credit
used as security deposits for leased ALFs. The Company intends to finance
certain of its ALFs and investments in property to be developed in order to
redeploy the capital.
F-20
<PAGE> 68
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
At March 31, 1997, the Company leased office space under various operating
leases expiring from 2001 to 2003, some of which are from affiliated entities
(See Note 7). Noncancelable operating lease commitments for office space at
March 31, 1997 are:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31: (IN THOUSANDS)
----------------------------------------------- --------------
<S> <C>
1998...................................... $ 385
1999...................................... 376
2000...................................... 336
2001...................................... 309
2002...................................... 210
Thereafter................................ 318
------
Total................................ $1,934
======
</TABLE>
Rent expense for these leases amounted to $333,000, $161,000 and $215,000
in 1997, 1996 and 1995, respectively.
(12) LIABILITIES RELATED TO TAX CREDIT PROPERTIES
During the year ended March 31, 1997, the Company took a $2.0 million
charge related to its tax credit properties. The charge represents a write-off
of $813,000 in amounts previously advanced to affiliated partnerships and a $1.2
million provision for the Company's anticipated future obligations to these
affiliated partnerships.
(13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value
of Financial Instruments," which was adopted by the Company in 1995. The
estimated fair value amounts have been determined using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions or estimation methodologies
may have a material impact on the estimated fair value amounts.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, management fees receivable, accounts payable and accrued
liabilities and owner equity contributions payable, approximate fair value due
to the short-term nature of these instruments. The notes receivable from an
affiliates, notes payable and other amounts due to affiliates and notes payable
bear interest at rates which approximate current market rates. Therefore,
management believes that carrying value approximates fair value.
(14) SUBSEQUENT EVENTS
On April 10, 1997, litigation filed by a Texas developer against the
Company was settled pursuant to a release and settlement agreement (the "Release
and Settlement"). The settlement was not significantly different than amounts
already provided for by the Company. Contemporaneously with the execution of the
Release and Settlement, the pending action filed by the developer and the cross
complaint filed by the Company were dismissed with prejudice. A lump sum of
$650,000 was paid to the developer for services previously rendered and the
developer was engaged to provide construction management services on two
F-21
<PAGE> 69
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1996 AND 1995
projects for a total fee of $1 million. In addition, the developer is to receive
20% of the net cash flow from these projects upon completion. The developer is
also entitled to receive $200,000 of its $1 million construction management fee
upon the earlier of August 1, 1997 or the date the Company secures construction
financing commitments for the two projects to be built. In the event that the
Company does not commence construction by February 1, 1998, the developer shall
be paid $200,000 for its 20% participation in net cash flow and have no further
rights to cash flow or construction management fees. See Item 3, "Legal
Proceedings."
On April 3, 1997, the Company opened 69 units in the first phase of
Eastlake Village, a planned 93 unit Leased ALF located in Elkhart, Indiana.
On May 6, 1997, the Company opened the Inn at Summit Ridge, a 76 unit
Leased ALF located in Reno, Nevada.
Mutual of Omaha, GeriCare's fiscal intermediary with HCFA, conducted an
audit of GeriCare in May 1997 of records going back to 1995. As a result of the
audit, reimbursement of approximately $106,000 for services previously rendered
was denied. In addition, GeriCare has been placed on a temporary 50% review,
meaning that Mutual of Omaha will temporarily withhold payment on 50% of
GeriCare's billings until it has reviewed the files documenting the requested
reimbursement. Management believes that the file review will result in payment
of substantially all of the amounts requested, but the review period will
temporarily slow cash flows for GeriCare.
F-22
<PAGE> 70
ARV ASSISTED LIVING, INC.
AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF YEAR ADDITIONS DEDUCTIONS END OF YEAR
- ---------------------------------------- ----------------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
March 31, 1995........................ $ -- -- -- --
March 31, 1996........................ -- -- -- --
March 31, 1997........................ -- 203 83 120
Allowance for Doubtful Notes Receivable:
March 31, 1995........................ -- -- -- --
March 31, 1996........................ -- 65 -- 65
March 31, 1997........................ 65 -- 38 27
Liabilities Related to Tax Credit
Properties and Related Accounts:
March 31, 1995........................ -- -- -- --
March 31, 1996........................ -- 536 272 264
March 31, 1997........................ $ 264 1,828 421 1,671
</TABLE>
F-23
