<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 4, 1998
Commission file number 0-26980
ARV ASSISTED LIVING, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0160968
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
245 FISCHER AVENUE, D-1
COSTA MESA, CA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired.
The audited financial statements of Golden Creek Inn, Hillcrest Inn,
Berkshire, Encino Hills Terrace, Willow Glen Villa and Hillsdale Manor
Retirement and Convalescent Home (collectively the "Assisted Living
Group"), as of March 31, 1998, required by this item are attached.
(b) Pro forma financial information
The Unaudited Pro Forma Condensed Financial Statements are presented which
reflect the acquisition of certain assets of the Assisted Living Group by
ARV Assisted Living ("ARV" or the "Registrant"). The Unaudited Pro Forma
Condensed Financial Statements are provided for informational purposes only
and are not necessarily indicative of the results that actually would have
occurred had the acquisition been in effect for the periods presented.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet is based on
the historical balance sheet as of March 31, 1998 and is presented as if
the acquisition had been consummated at that date. The Unaudited Pro Forma
Condensed Consolidated Statements of Operations is based on the historical
statements of operations of each of the Assisted Living Group and the
Registrant for the nine-months ended December 31, 1997 and the three-months
ended March 31, 1998, and reflects certain adjustments to give effect to
the acquisition as if it had occurred on April 1, 1997.
Pro forma adjustments are based on the purchase method of accounting and a
preliminary allocation of the purchase price. However, changes to the
adjustments included in the Unaudited Pro Forma Consolidated Financial
Statements are expected as evaluations of assets are completed and
additional information becomes available. Accordingly, the final allocation
values will differ from the amounts used to calculate the adjustments in
the Unaudited Pro Forma Condensed Consolidated Statement of Operations.
<PAGE> 3
ARV Assisted Living Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheet
(Amounts in thousands)
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA PRO FORMA
MARCH 31, 1998 ADJUSTMENTS MARCH 31, 1998
-------------- ----------- --------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 77,126 $ (40,975)(B) $ 36,151
Restricted cash 14,000 (14,000)(B) --
Fees receivable and other amounts due from affiliates 988 -- 988
Prepaids and other assets 4,137 -- 4,137
--------- --------- ---------
Total current assets 96,251 (54,975) 41,276
--------- --------- ---------
Property, furniture and equipment 118,896 50,200 (A) 169,096
Other non-current assets 7,227 20,025 (C) 27,252
Net non-current assets from discontinued operations 1,016 -- 1,016
--------- --------- ---------
127,139 70,225 197,364
--------- --------- ---------
$ 223,390 $ 15,250 $ 238,640
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,667 $ -- $ 7,667
Accrued liabilities 2,766 -- 2,766
Notes payable, current portion 10,174 88 (D) 10,262
Accrued interest payable 511 -- 511
Net current liabilities from discontinued operations 4,412 -- 4,412
--------- --------- ---------
Total current liabilities 25,530 88 25,618
Other non-current liabilities 1,099 -- 1,099
Notes payable, less current portion 80,633 15,162 (D) 95,795
--------- --------- ---------
Total liabilities 107,262 15,250 122,512
--------- --------- ---------
Minority interest in majority owned entities 7,548 -- 7,548
--------- --------- ---------
Shareholders' equity:
Common stock 143,104 -- 143,104
Accumulated equity (deficit) (34,524) -- (34,524)
--------- --------- ---------
Total shareholders' equity 108,580 -- 108,580
--------- --------- ---------
$ 223,390 $ 15,250 $ 238,640
========= ========= =========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
<PAGE> 4
ARV Assisted Living Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statement of Operations
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
ARV ASSISTED THE ASSISTED ARV ASSISTED
LIVING, INC. LIVING GROUP LIVING, INC.
AS REPORTED FOR THE PRO FORMA
THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED PRO FORMA ENDED
MARCH 31, 1998 MARCH 31, 1998 ADJUSTMENTS MARCH 31, 1998
-------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Assisted living community revenue $ 27,138 $ 5,215 $ 121 (A) $ 32,474
Management fees from affiliates 189 -- -- 189
-------- -------- -------- --------
Total revenue 27,327 5,215 121 32,663
EXPENSES
Assisted living community operating expenses 16,670 3,429 8 (B) 20,107
Assisted living community lease expenses 5,635 1,209 (149)(C) 6,695
General and administrative 5,874 -- -- 5,874
Depreciation and amortization 1,815 280 335 (D) 2,430
-------- -------- -------- --------
Total expenses 29,994 4,918 194 35,106
-------- -------- -------- --------
Income (loss) from operations (2,667) 297 (73) (2,443)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 1,256 -- -- 1,256
Other income, net 71 -- -- 71
Interest expense (1,284) (299) -- (E) (1,583)
-------- -------- -------- --------
Total other income (expense) 43 (299) -- (256)
-------- -------- -------- --------
Loss from operations before income taxes (2,624) (2) (73) (2,699)
Income tax expense 5 -- -- 5
-------- -------- -------- --------
Loss from operations before minority interest in
income of majority owned entities (2,629) (2) (73) (2,704)
Minority interest in income of majority owned entities 385 -- -- 385
-------- -------- -------- --------
Net loss $ (3,014) $ (2) $ (73) $ (3,089)
======== ======== ======== ========
Net loss per common share $ (0.19) $ (0.19)
======== ========
Weighted average common shares outstanding 15,855 15,855
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
<PAGE> 5
ARV Assisted Living Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statement of Operations
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
ARV ASSISTED THE ASSISTED ARV ASSISTED
LIVING, INC. LIVING GROUP LIVING, INC.
AS REPORTED FOR THE PRO FORMA
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED PRO FORMA ENDED
DECEMBER 31, 1997 DECEMBER 31, 1997 ADJUSTMENTS DECEMBER 31, 1997
----------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
REVENUE:
Assisted living community revenue $ 76,887 $ 10,781 $ 5,292 (A) $ 92,960
Management fees from affiliates 388 -- -- 388
--------- --------- --------- ---------
Total revenue 77,275 10,781 5,292 93,348
EXPENSES
Assisted living community operating expenses 51,247 7,036 3,303 (B) 61,586
Assisted living community lease expenses 15,773 3,320 (219)(C) 18,874
General and administrative 15,759 -- -- 15,759
Depreciation and amortization 4,896 375 1,470 (D) 6,741
--------- --------- --------- ---------
Total expenses 87,675 10,731 4,554 102,960
--------- --------- --------- ---------
Income (loss) from operations (10,400) 50 738 (9,612)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 1,821 -- -- 1,821
Other income, net 321 -- -- 321
Gain on sale of LLC interests 5,511 -- -- 5,511
Interest expense (4,568) (350) (583)(E) (5,501)
--------- --------- --------- ---------
Total other income (expense) 3,085 (350) (583) 2,152
--------- --------- --------- ---------
Loss from continuing operations before income taxes (7,315) (300) 155 (7,460)
Income tax expense 484 -- -- 484
--------- --------- --------- ---------
Loss from continuing operations before minority
interest income of majority owned entities (7,799) (300) 155 (7,944)
Minority interest in income of majority owned entities 773 -- -- 773
--------- --------- --------- ---------
Loss from continuing operations $ (8,572) $ (300) $ 155 $ (8,717)
========= ========= ========= =========
Loss per share from continuing operations $ (0.77) $ (0.78)
========= =========
Weighted average common shares outstanding 11,171 11,171
========= =========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
<PAGE> 6
ARV Assisted Living Inc. and Subsidiaries
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
NOTE 1: Unaudited Pro Forma Balance Sheet Adjustments
(A) To record the property, furniture and equipment acquired at
their estimated fair value. The property, furniture and
equipment will be depreciated over five to 35 years.
(B) To record the cash paid to acquire the property, furniture and
equipment.
(C) To record the goodwill related to the assets acquired. The
goodwill will be amortized over assumed lives of the related
properties ranging from 13.5 to 35 years.
(D) To record the assumption of the current and long-term portions
of the long-term debt, related to the property, furniture and
equipment acquired.
NOTE 2: Unaudited Pro Forma Statement of Operations Adjustments
(A) To record the revenues for all communities as if they had been
owned by the Assisted Living Group as of April 1, 1997.
(B) To record the elimination of management fees paid to the
Hillsdale Group. LP. ARV will not pay management fees in
connection with the operation of these communities.
To record an estimated increase in property taxes related to
higher property tax basis for the assets acquired.
To record the assisted living community operating expenses for
all communities as if they had been owned by the Assisted
Living Group as of April 1, 1997.
(C) To record the elimination of lease expense for a community
leased by the Assisted Living Group, which ARV has acquired in
fee and to record the effects of an amendment to one
community's lease agreement.
(D) To record the depreciation and amortization expense associated
with the goodwill and increased book value of the assets
acquired.
To record the depreciation and amortization expenses for all
communities as if they had been owned by the Assisted Living
Group as of April 1, 1997.
(E) To record additional interest expenses on debt related to
acquisitions made by the Assisted Living Group during the
nine-month period ended December 31, 1997 as if these
acquisitions took place as of April 1, 1997.
(c) Exhibits
Number Exhibit
10.1 Purchase and Sale Agreement by and between
270 Center Associates, Limited Partnership
and ARV Assisted Living, Inc. dated as of
February 12, 1998, incorporated by reference
to Exhibit 10.1 to the Company's 8-K filed
with the Securities and Exchange Commission
on May 11, 1998.
10.2 Amendment to Purchase and Sale Agreement by
and between 270 Center Associated, Limited
Partnership and ARV Assisted Living, Inc.
dated as of March 2, 1998, incorporated by
reference to Exhibit 10.2 to the Company's
8-K filed with the Securities and Exchange
Commission on May 11, 1998.
<PAGE> 7
10.3 Second Amendment to Purchase and Sale
Agreement by and between 270 Center
Associated, Limited Partnership and ARV
Assisted Living, Inc. dated as of April 10,
1998, incorporated by reference to Exhibit
10.3 to the Company's 8-K filed with the
Securities and Exchange Commission on May 11,
1998.
10.4 Purchase and Sale Agreement by and between
TH Group, Inc. and ARV Assisted Living, Inc.
dated as of February 12, 1998, incorporated
by reference to Exhibit 10.4 to the
Company's 8-K filed with the Securities and
Exchange Commission on May 11, 1998.
10.5 Amendment to Purchase and Sale Agreement by
and between TH Group, Inc. and ARV Assisted
Living, Inc. dated as of March 2, 1998,
incorporated by reference to Exhibit 10.5 to
the Company's 8-K filed with the Securities
and Exchange Commission on May 11, 1998.
10.6 Second Amendment to Purchase and Sale
Agreement by and between TH Group, Inc. and
ARV Assisted Living, Inc. dated as of April
10, 1998, incorporated by reference to
Exhibit 10.6 to the Company's 8-K filed with
the Securities and Exchange Commission on
May 11, 1998.
10.7 Purchase and Sale Agreement by and between
The Hillsdale Group, LP and ARV Assisted
Living, Inc. dated as of February 12, 1998,
incorporated by reference to Exhibit 10.7 to
the Company's 8-K filed with the Securities
and Exchange Commission on May 11, 1998.
10.8 Amendment to Purchase and Sale Agreement by
and between The Hillsdale Group, LP and ARV
Assisted Living, Inc. dated as of March 2,
1998, incorporated by reference to Exhibit
10.8 to the Company's 8-K filed with the
Securities and Exchange Commission on May
11, 1998.
10.9 Second Amendment to Purchase and Sale
Agreement by and between The Hillsdale
Group, LP and ARV Assisted Living, Inc.
dated as of April 6, 1998, incorporated by
reference to Exhibit 10.9 to the Company's
8-K filed with the Securities and Exchange
Commission on May 11, 1998.
10.10 Letter Re: Assignment of right to take title
of Encino Hills Terrace dated June 30, 1998,
incorporated by reference to Exhibit 10.10
to the Company's 8-K filed with the
Securities and Exchange Commission on July
17, 1998.
99.1 The Assisted Living Group Audited Financial
Statements for the Year Ended March 31, 1998.
<PAGE> 8
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARV Assisted Living, Inc.
By: /s/ Graham Espley-Jones
------------------------------------------------------
Graham Espley-Jones
Executive Vice President and Chief Financial Officer
(Duly authorized officer)
Date: July 20, 1998
<PAGE> 1
Exhibit 99.1
THE ASSISTED LIVING GROUP
(A Defined Group of Entities)
Combined Financial Statements
March 31, 1998
Together with Report of Independent Public Accountants
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of ARV Assisted Living, Inc.:
We have audited the accompanying combined statement of assets and liabilities of
Golden Creek Inn, Hillcrest Inn, 270 Center Associates, The Berkshire, Encino
Hills Terrace, Willow Glen Villa and Hillsdale Manor Retirement and Convalescent
Home (collectively "The Assisted Living Group") as of March 31, 1998 and the
related combined statement of revenues and direct expenses for the Period (see
Note 1). These financial statements are the responsibility of the Assisted
Living Group's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets and liabilities of The Assisted Living Group
as of March 31, 1998 and the revenues and direct expenses for the Period in
conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
San Francisco, California
July 18, 1998
<PAGE> 3
THE ASSISTED LIVING GROUP
Combined Statement of Assets and Liabilities
March 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 385,474
Accounts receivable and other receivables,
net of reserve for doubtful accounts of $78,000 559,437
Prepaid rent 175,000
Prepaid property taxes 196,499
Other current assets 147,267
-----------
Total current assets 1,463,677
PROPERTY, FURNITURE AND EQUIPMENT,
less accumulated depreciation of $505,677 25,267,934
OTHER ASSETS
Goodwill, less accumulated amortization of $113,275 8,236,725
Loan fees, less accumulated amortization of $28,477 279,210
Other 393,487
-----------
Total assets $35,641,033
-----------
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 253,562
Accrued liabilities 313,873
Amounts payable to THGLP 427,382
Notes payable, current portion 87,879
Deferred revenue 309,624
Rental deposits payable 680,773
-----------
Total current liabilities 2,073,093
LONG-TERM LIABILITIES
Deferred rent 494,466
Notes payable, less current portion 15,162,121
-----------
Total liabilities 17,729,680
-----------
Equity in The Assisted Living Group $17,911,353
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 4
THE ASSISTED LIVING GROUP
Combined Statement of Revenues and Direct Expenses
for the Period (see Note 1)
<TABLE>
<S> <C>
Revenues $ 15,996,144
------------
Direct operating expenses:
Community operating expenses 8,121,849
Community lease expense 4,528,998
General and administrative 1,593,772
Depreciation and amortization 654,923
Marketing and advertising 434,254
Property taxes 315,291
------------
Total direct operating expenses 15,649,087
------------
Excess of revenues over direct operating expenses 347,057
Other direct expenses:
Interest expense 649,065
------------
Excess of direct expenses over revenues $ (302,008)
============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE> 5
THE ASSISTED LIVING GROUP
Notes to Combined Financial Statements
March 31, 1998
(1) NATURE OF OPERATIONS
The Hillsdale Group, LP (THGLP), 270 Center Associates LLC (270 Center)
and TH Group Inc., (collectively "Hillsdale") own, manage and operate
retirement living, personal care and skilled nursing communities for
elderly populations. TH Group Inc. and THGLP are under common management.
270 Center and THGLP are under common control. Hillsdale owns, manages
and operates Golden Creek Inn, Hillcrest Inn and The Berkshire and
leases, manages and operates Encino Hills Terrace, Willow Glen Villa and
Hillsdale Manor Retirement and Convalescent Home (referred to herein as
"The Assisted Living Group").
As discussed in Note 9, on February 12, 1998, ARV Assisted Living, Inc.
(ARV), an unrelated third party, entered into agreements to purchase
Golden Creek Inn, Hillcrest Inn and The Berkshire and Hillsdale's lease
rights to Encino Hills Terrace, Willow Glen Villa and Hillsdale Manor
Retirement and Convalescent Home.
PERIODS PRESENTED
The following table sets forth, as of March 31, 1998, the location, the
date on which operations commenced, number of units, and Hillsdale's
interest in the operating entities included in the accompanying statement
of assets and liabilities and statement of revenues and direct expenses:
<TABLE>
<CAPTION>
OPERATIONS
COMMENCED BY
COMMUNITY LOCATION HILLSDALE UNITS INTEREST
--------- -------- --------- ----- --------
<S> <C> <C> <C> <C>
Golden Creek Inn Irvine, CA July 1997 126 Owned
Hillcrest Inn (including 270
Center - see below) Thousand Oaks, CA October 1997 138 Owned
The Berkshire Berkeley, CA January 1998 84 Owned
Encino Hills Terrace Encino, CA December 1997 95 Leased
Willow Glen Villa San Jose, CA December 1993 201 Leased
Hillsdale Manor
Retirement/Convalescent Home San Mateo, CA 1981/1985 119/65 Leased
</TABLE>
The accompanying statement of revenues and direct expenses only includes
activities of the individual entities from the later of April 1, 1997 or
the time that the operations were commenced by Hillsdale (see above) or
leased by Hillsdale through March 31, 1998 (the "Period"). In addition,
no minority interest has been reflected in the accompanying combined
statements of assets and liabilities and revenues and direct expenses.
<PAGE> 6
GOLDEN CREEK INN
THGLP is a General Partner and owns 99.9 percent of Woodside Terrace
Partners, a general partnership, which purchased Golden Creek Inn on July
18, 1997. On December 27, 1997, ownership of Golden Creek Inn was
transferred to TH Group, Inc. The community is managed by THGLP under a
management contract between THGLP and TH Group, Inc.
HILLCREST INN
270 Center purchased Hillcrest Inn on October 1, 1997. THGLP and 270
Center are under common control and, therefore, the assets and
liabilities of 270 Center have been included in the accompanying combined
statement of assets and liabilities. THGLP managed the property on 270
Center's behalf from October 1, 1997 through December 31, 1997 and then
beginning January 1, 1998 leased the community from 270 Center.
THE BERKSHIRE
270 Center purchased The Berkshire on January 24, 1998. THGLP leased the
community from 270 Center.
ENCINO HILLS TERRACE
Encino Hills Terrace was leased from an unrelated third party beginning
December 16, 1997. Subsequent to March 31, 1998, THGLP acquired the real
estate from the lessor (see Note 9).
WILLOW GLEN VILLA
In December 1993, TH Group Inc. entered into a general partnership
agreement forming Willow Glen Investors for the purposes of leasing and
operating a retirement community, Willow Glen Villa, in San Jose,
California. TH Group, Inc. has a 50 percent general partnership interest
in Willow Glen Investors. The community is leased by Willow Glen
Investors which, in turn, sub-leases it to THGLP (see also Note 5.).
HILLSDALE MANOR RETIREMENT AND CONVALESCENT HOME
Hillsdale Manor Partners (HMP), a tenancy in common, was formed in 1988
to own and operate a retirement and convalescent home in San Mateo,
California. TH Group Inc. owns a 74.91 percent interest in HMP. The
community is leased by THGLP (see also Note 5.).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Revenues are generated from rental agreements with tenants on a
month-to-month basis. Only revenue from the rental agreements and other
resident services are included in revenues.
Direct operating expenses include costs associated with the rental
operations and the general administration of the communities included in
The Assisted Living Group. Certain general and administrative expenses
have been excluded from the statement of revenues and direct expenses, as
they are not directly related to the revenue producing activities of the
individual entities. Taxes based on income have also been excluded.
Other expenses include interest related to the Notes Payable discussed in
Note 4.
All intercommunity transactions have been eliminated.
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
<PAGE> 7
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets, ranging from 3 to
approximately 35 years.
Property, furniture and equipment consisted of the following at March 31,
1998:
<TABLE>
<S> <C>
Land $ 3,680,348
Buildings and improvements 20,553,830
Construction in progress 289,880
Furniture, fixtures and equipment 1,249,553
------------
25,773,611
Accumulated depreciation (505,677)
------------
$ 25,267,934
============
</TABLE>
Total depreciation expense for the Period was $513,171.
The Assisted Living Group reviews its long-lived assets for impairments
when events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. In reviewing recoverability, the
Assisted Living Group estimates the future cash flows expected to result
from using the assets and eventually disposing of them. If the sum of the
expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is
recognized based upon the asset's fair value. No such impairment loss was
recorded during the Period.
GOODWILL
Goodwill arose from the acquisition of Hillcrest Inn from an unrelated
third party in October 1997. The goodwill is being amortized on the
straight-line method over 35 years (the estimated useful life of the
property). Amortization expense for the Period was $113,275.
LOAN FEES
Amortization of loan fees is computed using the effective interest method
over the term of the related note payable. Amortization expense for the
Period was $28,477.
DEFERRED RENT
Certain of The Assisted Living Group's leases contain fixed escalation
clauses. The total commitment under the leases will be amortized over the
lives of the leases on the straight-line method. The difference between
the lease payments required and the lease payments on the straight-line
method is recorded as deferred rent.
RENTAL INCOME AND DEFERRED REVENUE
Rent agreements with tenants are on a month-to-month basis. Revenue is
recognized as the services are provided. Deferred revenue arises when
residents prepay rent for months subsequent to March 31, 1998.
(3) ACQUISITIONS
On July 18, 1997, Hillsdale acquired Golden Creek Inn, a 126-unit
community located in Irvine, California for approximately $8.7 million.
On October 1, 1997, Hillsdale acquired Hillcrest Inn, a 138-unit
community located in Thousand Oaks, California for approximately $18.6
million. On January 24, 1998, the Hillsdale acquired Berkshire, an
84-unit community located in Berkeley, California for approximately $6.2
million. On December 16, 1997, Hillsdale entered into an agreement to
acquire Encino Hills Terrace,
<PAGE> 8
a 95-unit community located in Encino, California. At the same time,
Hillsdale entered into a lease agreement for Encino Hills Terrace
commencing December 16, 1997 through the date that the purchase was
completed (see Note 9).
The following unaudited pro forma information presents a summary of the
combined revenues and direct expenses as if the acquisitions took place
as of April 1, 1997. As no financial information is available for any
period prior to Hillsdale's acquisition of certain communities, the pro
forma information is based upon annualized revenues and direct expenses
since Hillsdale's commencement of operations at those communities:
<TABLE>
<CAPTION>
(Unaudited)
<S> <C>
Total revenues $21,264,205
Total direct expenses $20,929,271
Excess of revenues over
direct expenses $ 334,934
</TABLE>
(4) NOTES PAYABLE
At March 31, 1998 notes payable included the following:
<TABLE>
<S> <C>
Note payable to a financial institution, bearing interest at
LIBOR (5.719% at March 31, 1998) plus 2.25 percent; monthly
interest only payments due through October 31, 1998 then
monthly principal and interest payments due through October
1, 2002; collateralized by deed of trust on the Hillcrest Inn $13,000,000
property
Note payable to a financial institution, bearing interest at
LIBOR plus 2.50 percent; monthly interest only payments due through October
31, 1998 then monthly principal and interest payments due through August 1,
2002; collateralized by deed of trust on the Golden Creek Inn property 2,250,000
-----------
15,250,000
Less: current portion (87,879)
-----------
$15,162,121
===========
</TABLE>
The annual principal payments on the notes payable at March 31, 1998 are
due as follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
1999 $ 87,879
2000 205,839
2001 223,004
2002 14,733,278
-------------
$ 15,250,000
=============
</TABLE>
<PAGE> 9
(5) COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
ENCINO HILLS TERRACE
On December 16, 1997, THGLP entered into a lease agreement with an
unrelated third party for the lease of Encino Hills Terrace. The lease
expired upon consummation of the purchase of the property on July 7,
1998.
WILLOW GLEN VILLA
On December 31, 1993, Willow Glen Investors entered into a long-term
operating lease with Willow Glen Villa, an unrelated third party, related
to the operations of a community located in San Jose, California expiring
December 31, 2026. On January 1, 1997, this operating lease was
sub-leased to THGLP, expiring December 31, 2011. Rent expense under the
operating lease for the Period was approximately $1.9 million. Only the
minimum lease payments with respect to the sub-lease are included below.
The lessee has the option to purchase the community pursuant to a
Purchase Option Agreement dated December 23, 1993. The option commences
at various times, the latest being six months prior to the last day of
the operating lease term. The purchase price will be $17.9 million plus
$8.8 million times a factor tied to the increase in the CPI from July 1,
1996 to the exercise date, multiplied by ten.
HILLSDALE MANOR RETIREMENT AND CONVALESCENT HOSPITAL
On January 1, 1997, THGLP entered into a long-term operating lease with
Hillsdale Manor Partners, LP, a related party, related to the operations
of a retirement community and convalescent hospital located in San Mateo,
California expiring December 31, 2011. Rent expense under the operating
lease for the Period was approximately $2.1 million. Only the minimum
lease payments with respect to the lease are included below.
The lessee has the option to purchase the community pursuant to a
Purchase Option Agreement dated January 10, 1997. The option commences on
the later of December 31, 2003 or July 1 of the year following when the
Willow Glen option becomes exercisable. The purchase price will be $2.1
million plus a factor tied to the increase in the CPI from January 1,
1997 to the exercise date, multiplied by ten.
Future minimum lease payments under leases, which are treated as
operating leases are as follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
1999 $ 4,002,564
2000 3,915,264
2001 3,915,264
2002 4,008,233
2003 4,287,139
Thereafter 39,727,305
-----------
$59,855,769
===========
</TABLE>
LITIGATION
The Assisted Living Group is from time to time subject to claims and
disputes for legal and other matters in the normal course of its
business. While the results of such matters cannot be predicted with
certainty, management does not believe that the final outcome of any
pending matters will have a material effect on the Assisted Living
Group's combined assets and liabilities or revenues and direct expenses.
(6) TRANSACTIONS WITH AFFILIATES
THGLP pays certain expenses such as certain repairs and maintenance,
supplies and payroll expenses on behalf of The Assisted Living Group and
is subsequently reimbursed by The Assisted Living Group. The total
reimbursements to THGLP, amounted to approximately $3,839,010 for the
Period, and are included in
<PAGE> 10
rental property operations and general and administrative expenses in the
accompanying statement of revenues and direct expenses.
(7) EMPLOYEE BENEFIT PLAN
Effective January 1, 1998, Hillsdale established a retirement plan (the
Retirement Plan) that qualifies as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code. Under the Retirement Plan,
participating employees may defer a portion of their pretax earnings, up
to the Internal Revenue Service annual contribution limit. Hillsdale
matches 25 - 50 percent of each employee's contributions up to a maximum
of 4% of the employee's earnings based upon years of service. An employee
becomes eligible to participate in the plan upon completing one year of
service. The Assisted Living Group's Retirement Plan expense was
approximately $10,643 (as a reimbursement to Hillsdale) for the Period.
(8) 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." 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.
CASH
The carrying amount for cash approximates fair value because these
instruments are demand deposits and do not present unanticipated interest
rate or credit concerns.
NOTES PAYABLE
The fair value of the notes payable approximates its carrying value as
the notes payable bear rates of interest which approximate the market
rate of interest.
(9) SUBSEQUENT EVENTS
PURCHASE OF ENCINO HILLS TERRACE PROPERTY
On July 7, 1998, Hillsdale purchased the Encino Hills Terrace property
from an unrelated third party for approximately $6.6 million of property
and cash. THGLP then sold the property to ARV Assisted Living, Inc. (see
below).
SALE OF COMMUNITIES
On February 12, 1998, ARV Assisted Living, Inc. entered into Purchase and
Sale Agreements with Hillsdale to purchase its interests in these
communities. The closings have occurred in phases beginning April 16,
1998 through July 7, 1998 as follows:
<TABLE>
<CAPTION>
COMMUNITY CLOSING DATE
--------- ------------
<S> <C>
Golden Creek Inn April 16, 1998
Hillcrest Inn (including 270 April 16, 1998
Center)
The Berkshire May 13, 1998
Willow Glen Villa May 18, 1998
Hillsdale Manor July 2, 1998
Encino Hills Terrace July 7, 1998
</TABLE>
