-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Naek7ycJDfN9XuhvNHrfh1oTnaGLJXjInMUzaBaRp5j5obLvpGA7vFdO0C3XUiWH WfUmQRfkRUdG6f2tj86uVA== 0000892569-02-000678.txt : 20020415 0000892569-02-000678.hdr.sgml : 20020415 ACCESSION NUMBER: 0000892569-02-000678 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARV ASSISTED LIVING INC CENTRAL INDEX KEY: 0000949322 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 330160968 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26980 FILM NUMBER: 02596465 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE STREET 2: SUITE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 1: 245 FISCHER AVENUE STREET 2: SUITE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 10-K405 1 a80456e10-k405.txt FORM 10-K405 FISCAL YEAR ENDED DECEMBER 31, 2001 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K ------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 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, SUITE D-1, 92626 COSTA MESA, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ---------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF CLASS ON WHICH REGISTERED -------------- ------------------- COMMON STOCK, $0.01 PAR VALUE AMERICAN STOCK EXCHANGE
---------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] No [ ] As of March 22, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was $16,562,261 (for purposes of calculating the preceding amount only, all directors, executive officers and shareholders holding 5% or greater of the registrant's Common Stock are assumed to be affiliates). The number of shares of Common Stock of the registrant outstanding as of March 22, 2002 was 17,459,689. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. ================================================================================ ARV ASSISTED LIVING, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
PAGE ---- PART I Item 1: Business............................................................................................ 1 Item 2: Properties.......................................................................................... 15 Item 3: Legal Proceedings................................................................................... 17 Item 4: Submission of Matters to a Vote of Security Holders................................................. 17 PART II Item 5: Market for the Registrant's Common Equity and Related Shareholder Matters .......................... 18 Item 6: Selected Financial Data............................................................................. 19 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 20 Item 7A: Quantitative and Qualitative Disclosures About Market Risk.......................................... 30 Item 8: Financial Statements and Supplementary Data......................................................... 31 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............... 31 PART III Item 10: Directors and Executive Officers of the Registrant.................................................. 31 Item 11: Executive Compensation.............................................................................. 31 Item 12: Security Ownership of Certain Beneficial Owners and Management ..................................... 31 Item 13: Certain Relationships and Related Transactions...................................................... 31 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................................... 31
i PART I ITEM 1. BUSINESS GENERAL ARV Assisted Living, Inc. ("ARV" or the "Company"), originally incorporated in California in 1980 and subsequently merged into a Delaware corporation in 1998, is one of the largest operators of licensed assisted living communities ("ALCs") in the United States. We are a fully integrated provider of assisted living accommodations and services that operates, acquires and develops ALCs. We have been involved in the senior housing business for more than 20 years. Our operating objective is to provide high quality, personalized assisted living services to senior residents in a cost-effective manner, while maintaining residents' independence, dignity and quality of life. Our ALCs offer a combination of housing, personalized support services and healthcare in a non-institutional setting. Our ALCs are designed to respond to the individual needs of elderly residents who require assistance with certain activities of daily living, but who do not require the intensive nursing care provided in a skilled nursing facility. In December 2001, as part of a response to a hostile tender offer for outstanding units of American Retirement Villas Properties III, L.P., ("ARVP III") one of the partnerships for which we are the managing general partner, we acquired an additional 51.8% of the outstanding partnership units of ARVP III. With this acquisition of ARVP III, two ALCs were added to our portfolio of owned ALCs bringing our total number of owned ALCs to 17. In 1999 we embarked on a strategy to focus our business efforts in the western United States. To this end we have divested ourselves of many properties outside the western United States and have put certain other of our non-core properties up for sale. We do not have current plans to expand our operations. At December 31, 2001, we operated 58 ALCs containing 6,774 units, all of which were located in the United States. We currently have no ALCs under construction. We operate a total of 58 ALCs, 17 of which are owned by us, 33 which are leased by us and 8 which are managed by us. Owned ALCs ("Owned ALCs") are owned by us directly, or by affiliated limited partnerships or limited liability companies for which we serve as managing general partner or member and community manager and in which we have majority ownership interest ("Affiliated Partnerships"). Leased ALCs ("Leased ALCs") are operated by us under long-term operating leases for our own account or for Affiliated Partnerships in which we have a majority ownership interest. Managed ALCs are operated by us on behalf of an affiliated partnership (in which we did not acquire majority ownership until December 2001, pursuant to a tender offer), joint ventures in which we do have majority ownership but not control or an unrelated third-party. We believe that this blend of ownership, leasehold and management interest in our ALCs allows us to fund our operations in a balanced, efficient manner. We have financed our capital expenditures and operations through leasehold and mortgage financing with healthcare real estate investment trusts ("REITs"), private companies, commercial banks and a convertible subordinated debt issuance. In order to implement our refocusing strategy, we planned to dispose of those ALCs that did not meet our financial objectives or that did not lie within our primary geographic focus, the western United States. To this end, in December 1999, we commenced efforts to sell or transfer certain non-core assets and reclassified the assets to property held for sale. Due to market conditions no buyer could be found for the nine ALCs held for sale at December 31, 2000 and in June of 2001, the Company decided to retain these ALCs. The remaining land site in properties held for sale at December 31, 2001 is currently in escrow. We however, intend to continue our focus on "private-pay" residents who pay for our services from their own funds or through private insurance. Currently, approximately 97% of our residents are private-pay, while the remaining 3% of the residents participate in the Supplemental Security Income ("SSI") program. Certain states have enacted legislation enabling ALCs to receive Medicaid funding similar to funding generally provided to skilled nursing facilities. Our ALCs provide residents with accommodations, basic care services and assisted living services. Our resident's average age is 85.1 years and he/she often require assistance with certain basic activities of daily living. We provide our residents with private or semi-private housing accomodations, meals in a restaurant-style setting, 1 housekeeping, linen and laundry services, activities programs, utilities, and transportation in a van or minibus. For an additional cost, we also provide assisted living services to residents who require help with other activities of daily living, such as bathing, grooming, dressing, personal hygiene, medication management and escort services to meals and activities. Most ALCs offer a Wellness Program that arranges for professional care providers to deliver certain healthcare services to our residents that our ALCs are not licensed or equipped to provide. THE ASSISTED LIVING MARKET Assisted Living. Assisted living is a stage in the elder care continuum, midway between home-based care for independent and lower acuity residents and the more acute level of care provided by skilled nursing facilities and acute care hospitals. Assisted living represents a combination of housing, personalized support services, and healthcare designed to respond to the individual needs of the members of the senior population who need help with activities of daily living, but do not need the medical care provided in a skilled nursing facility. We believe our assisted living business benefits from significant trends affecting the long-term care industry. One such trend is the increase in the demand for elder care resulting from the continued aging of the U.S. population, with the average age of our residents falling within the fastest growing segment of the U.S. population. While increasing numbers of Americans are living longer and healthier lives, many gradually require increasing assistance with activities of daily living and are not able to continue to age in place at home. A second trend is the effort to contain healthcare costs by the government, private insurers and managed care organizations by limiting lengths of stay, services, and reimbursement to patients in acute care hospitals and skilled nursing facilities. Assisted living offers a cost-effective, long-term care alternative while preserving a more independent lifestyle for seniors who do not need the broader array of medical services that acute care hospitals and skilled nursing facilities are equipped to provide. For the year ended December 31, 2001, monthly revenue generated by our ALCs averaged $2,259 per occupied unit, compared with $2,145 per occupied unit for the year ended December 31, 2000. Other trends include increases in the financial net worth of the elderly population, the number of individuals living alone, and the number of women who work outside the home who are less able to care for their elderly relatives. We believe these trends will result in a growing demand for assisted living services and communities. Aging Population. The primary consumers of long-term healthcare 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 as of January 2000, the segment of the population over 65 years of age is 13% of the total population, or 35 million people. That number is projected to grow to 20% of the total population, or 70 million people, by the year 2030. Additionally, according to U.S. Bureau of the Census data, the number of people aged 85 and older, which comprises the largest percentage of residents at long-term care facilities, is currently 4.4 million and is projected to increase to 8.9 million by the year 2030. Limitation on the Supply of Long-Term Care Facilities. The majority of states in the U.S. have enacted Certificate of Need or similar legislation, which generally limits the construction of skilled nursing facilities and the addition of beds or services in existing skilled nursing facilities. High construction costs, limitations on government reimbursement for the full cost of construction, and start-up expenses also constrain growth in the supply of such facilities. Such legislation benefits the assisted living industry by limiting the supply of skilled nursing beds for the elderly. Cost factors are placing pressure on skilled nursing facilities to shift their focus toward higher acuity care, which enables them to charge more. This contributes to a shortage of lower acuity care and thereby increases the pool of potential assisted living residents. While Certificates of Need generally are not required for ALCs, except in a few states, most states do require assisted living providers to license their communities and comply with various regulations regarding building requirements and operating procedures and regulations. States typically impose additional requirements on ALCs over and above the standard congregate care requirements. Further, the limited pool of experienced assisted living staff and management, as well as the costs and start-up expenses to construct an ALC, provide an additional barrier to entry into the assisted living business. 2 Cost Containment Pressures of Health Reform. In response to rapidly rising healthcare costs, both government and private pay sources have adopted cost containment measures that encourage reduced lengths of stay in hospitals and skilled nursing facilities. The federal government has acted to curtail increases in healthcare costs under Medicare by limiting acute care hospital and skilled nursing facility reimbursement to pre-established fixed amounts. Private insurers have also begun to limit reimbursement for medical services in general to predetermined "reasonable" charges. Managed care organizations, such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs"), are reducing hospitalization costs by negotiating discounted rates for hospital services and by monitoring and decreasing hospitalization. We anticipate that both HMOs and PPOs increasingly may direct patients away from higher cost nursing care facilities into less expensive ALCs. These cost containment measures have produced a "push-down" effect. As the number of patients being "pushed down" from acute care hospitals to skilled nursing facilities increases, the demand for residential options such as ALCs to serve patients who historically have been served by skilled nursing facilities will also increase. In addition, skilled nursing facility operators are continuing to focus on improving occupancy and expanding services (and fees) to subacute patients requiring very high levels of nursing care. As the acuity level of skilled nursing facility patients rises, the supply of nursing facility beds will be filled by patients with higher acuity needs who pay higher fees. This will provide opportunities for ALCs to increase their occupancy and services to residents requiring lower levels of care than patients in skilled nursing facilities generally receive. OUR ASSISTED LIVING SERVICES We provide services and care which are designed to meet the individual needs of our residents. The services provided are designed to enhance both the physical and mental well being of seniors in each of our ALCs by promoting their independence and dignity in a home-like setting. Our assisted living program includes the following: o Personalized Care Plan. The focus of our strategy is to meet the specific needs of each resident. We customize our services beginning with the admissions process, at which time the ALC's management staff, the resident, the resident's family, and the resident's physician discuss the resident's needs and develop a "personalized" care plan. If recommended by the resident's physician, additional healthcare or medical services may be provided at the community by a third-party home healthcare agency or other medical provider. The care plan is reviewed and modified on a regular basis. o Basic Service and Care Package. The basic service and care package at our ALCs generally includes: o meals in a restaurant-style, "home-like" setting; o housekeeping; o linen and laundry service; o social and recreational programs; o utilities; and o transportation in a van or minibus. Other care services can be provided under the basic package based upon the individual's personalized healthcare plan. Our policy is to charge base rents that are competitive with similar ALCs in the local market. While the amount of the fee for the basic service package varies from community to community, the average basic monthly rental rate per unit was approximately $1,904 per month as of December 31, 2001, compared with an average of $1,811 as of December 31, 2000. o Additional Services. Our assisted living services program offers levels of care in addition to the services offered in the basic package. The level of care a resident receives is determined through an assessment of a resident's physical and mental health. The assessment is conducted by the community's assisted living 3 director, with input from other staff members. The six-tiered level of care rate structure is based on a point system. We assign points to the various care tasks required by the resident, based on the amount of staff time and expertise needed to accomplish the tasks. The point scale and pricing are part of the admissions agreement between the community, the resident and the resident's family. The community performs reassessments after the initial 30 days and periodically throughout the resident's stay to ensure that the level of care we provide corresponds to changes in a resident's condition. The types of services included in the assessment point calculation are: o Medication management o Assistance with dressing and grooming o Assistance with showering o Assistance with continence o Escort services o Status checks related to a recent hospitalization, illness, history of falls or injuries o Help with psychosocial needs, such as memory deficit disorder o Special nutritional needs and assistance with eating In addition to the above services, we provide other levels of assistance to residents at selected ALCs in order to meet individual needs, such as assistance with diabetic care and monitoring, catheter, colostomy and ileosotomy care, minor wound care needs and light to moderate transferring needs. Some of our ALCs also operate memory loss units for residents with Alzheimer's disease and related dementia. These units provide the attention and services required by cognitively impaired residents to maintain a high quality of life in a secure environment. Specially trained staff provide personalized care, specialized activity programs and oversee medication regimens. In addition to the base service package, we typically charge between $375 and $1,700 per month or more for higher levels of assisted living services. Fee levels vary from community to community and we may charge additional fees for other specialized assisted living services. We expect that an increasing number of residents will use additional levels of services as they age in our ALCs. Our internal growth plan is focused on increasing revenue by continuing to improve our ability to provide residents with these services. The average monthly revenue per occupied unit for both the basic service package and the assisted living services increased to $2,259 from $2,145 for the year ended December 31, 2001 and 2000, respectively. There can be no assurance that any ALC will be substantially occupied at assumed rates at any time. In addition, we may only be able to lease up our ALCs to full occupancy at rates below our set rates due to limitations imposed on rates by local market conditions or other factors. Even if we achieve substantial occupancy at our set rates, our set rates may not allow for our projected cost recovery and profit if operating expenses increase. In addition, in order to increase our set rates, we must provide advance notice of rate increases, generally at least 30 days. Because of this advance notice requirement, we are not able to reflect cost increases in our set rates until at least several months after such cost increases occur. Wellness Program. We have implemented a Wellness Program for residents of our communities designed to identify and respond to changes in a resident's health or condition. Together with the resident and the resident's family and physician, as appropriate, we design a solution to fit that resident's particular needs. We monitor the physical and mental well being of our residents, usually at meals and other activities, and informally as the staff performs services around the facility. Through the Wellness Program we work with: o home healthcare agencies to provide services the community cannot provide; o physical and occupational therapists to provide services to residents in need of such therapy; and 4 o long-term care pharmacies to facilitate cost-effective and reliable ordering and distribution of medications. We arrange for these services to be provided to residents as needed in consultation with their physicians and families. At the present time, most of our ALCs have a comprehensive Wellness Program. GROWTH STRATEGIES Overview. In order to grow earnings and achieve profitability we have devised a strategy to increase our focus on the operations of our current ALCs and reduce the level of development and acquisition activity we historically pursued. To strengthen the operations of our ALCs, we will focus on improving margins by increasing occupancy rates, raising or maintaining pricing structures to ensure that our rates are competitive with comparable facilities in our local markets, and expanding the level and depth of our assisted living services. Although we have currently halted the development and construction of new communities, we will continue efforts to cluster our portfolio of ALCs within certain geographic areas through the acquisition or divestiture of selected assets. By concentrating on a clustering strategy we expect to increase the efficiency of our management and marketing resources and to achieve broader economies of scale. Our strategy is to target areas where there is a need for ALCs based on demographics and market studies. In addition to acquiring ALCs through direct ownership and the use of long-term leases, we may also divest our ALCs that do not expand or enhance one of our clusters or do not meet our financial objectives. In 1999, we sold five ALCs that were outside of the Western United States. During 2000, we completed the sale of three of our ALCs that were outside of the western United States. As of December 31, 2001, a substantial portion of our business and operations were conducted in California, where 37 of the 58 ALCs we operate are located. We have no operations or customers in foreign countries. The market value of our properties and the income generated from ALCs we own, manage or lease could be negatively affected by changes in local and regional economic conditions and by acts of nature. A worsening of local economic conditions could have a negative effect on our business. Development. Due to market conditions, the development of new ALCs has been curtailed during 2001. We do not expect to develop any new facilities in the foreseeable future. In 1998, we entered into several joint venture arrangements operating as limited liability companies ("LLCs") designed to help us finance development and renovation projects and to mitigate the impact of start-up losses associated with the opening of newly constructed ALCs. The joint ventures were formed to finance and manage the substantial renovation of two existing ALCs acquired in 1998 in the Hillsdale Transaction and to construct three new communities on land sites we owned. Participants in the joint ventures with us include a third-party investor and a third-party developer. The LLCs have contracted with the developer to provide development services to perform the renovation and construction. We account for our investment in the joint ventures using the equity method and losses incurred by the LLCs will be allocated disproportionately to the joint venture partners based upon their assumption of risk. In 2000 and 2001, certain joint venture partner's capital was reduced to zero, consequently, the losses from the joint venture were allocated to us based upon our capital or percentage interest. The Company has agreed to fund any operating deficits incurred in connection with the operation of these joint venture projects operating as limited liability companies ("LLC"), up to an aggregate amount of $6.0 million for all of the development properties and $6.0 million for all of the renovation properties subject to a $9.0 million cap. The advances, which are considered capital contributions to the LLC, are non-interest bearing and will be repaid only if sufficient funds are available in accordance with the terms of the operating agreements of the respective LLCs. These agreements will remain in effect from the commencement of operations of the project until the earlier to occur of 18 months after the project has achieved stabilization, the sale of the project to a third-party, or the purchase by the Company of the membership interests of the venture partners. Our current funding of operating deficits since inception in 1998 is $1.5 million. We have an option to purchase the joint venture's interest in the LLCs when the ALCs reach stabilization, at a purchase price that is the greater of fair market value or an amount that generates a guaranteed rate of return on the joint ventures' capital contribution. In December 2000, we determined that the value of our investment in the LLCs was impaired based upon projected cash flow, and wrote down the investment to estimated fair-market value. In 2001 we declined the option to purchase two of the LLCs that had reached stabilization and in 5 accordance with the LLCs' operating agreement we no longer serve as a manager of the two LLCs and we no longer manage one of the LLCs that is outside our geographic clustering strategy. We do not plan to develop new ALCs during 2002. In 2000, we completed three development projects that were in progress at December 31, 1999. Cost Containment To contain costs and maximize operating efficiency, we employ an integrated structure of management and financial systems and controls. We utilize centralized accounting systems and computer systems that link each community with our executive offices to provide management with on-lone revenue and expense information regarding its residential communities. We provide an on-line analysis capability for resident billing, occupancy, marketing and statistical information. We have recruited experienced key employees from several established operators in the long-term-care services field and believe that we have assembled the administrative, operational and financial personnel that will enable us to manage our growth and operating strategies effectively. We also recruit individuals with strong backgrounds for our regional director positions. In addition we have developed internal procedures and policies that we believe are necessary for effective operation and management of our ALCs. Day to day community operations are supervised by an on-site executive director who, in certain jurisdictions, must satisfy certain licensing requirements. Acquisitions. In evaluating possible acquisitions, we consider: o the location, construction quality, condition and design of the ALC; o the current and projected cash flow of the community and its anticipated ability to increase revenue through rent and occupancy increases, additional assisted living services and management; and o whether we can acquire the community below replacement cost. Our sources for prospective acquisitions range from Affiliated Partnerships to management contracts with potential ALC sellers, to our local and regional personnel who monitor the assisted living market in their area. In 2001, we acquired two ALCs that we had managed since 1989. This acquisition was accomplished by means of the purchase of 51.8% of the outstanding partnership units in ARVP III pursuant to a tender offer. In certain cases we may also target additional third-party management contracts. In the fourth quarter of 2001, we signed a management contract for four ALCs. However, we do not intend to continue our past growth rate and may not expand at all in the future. Historically, we have financed many of our acquisitions using equity and debt and through direct long-term operating lease transactions with institutional investors such as healthcare REITs, and may continue to do so in the future. In long-term operating lease transactions, we typically arrange the sale of the prospective assisted living community to a REIT or other institutional investor while concurrently entering into a long-term operating lease for the facility. Our initial investment is generally limited to a security deposit that is typically provided through cash or standby letters of credit collateralized by cash. Thereafter, we are obligated to make certain rental payments (which may include an additional amount related to revenue of the community) for the term of the lease. While we have financed a portion of our direct ownership of ALCs with secured debt from lending institutions, we do not have any participation or sponsorship interest in these entities. While we make our best estimates in projecting lease-up costs and expenses as well as the achievement of rent stabilization, our failure to generate sufficient revenue could result in an inability to meet minimum rent obligations under our long-term operating leases. Increase in Sales of Additional Assisted Living Services. We believe that many custodial services provided in skilled nursing facilities are available in our ALCs at approximately two-thirds of the cost. We believe that this differential will enable us to attract additional residents. By increasing the use of these services by our residents, we believe residents will be able to age in place at our ALCs over a longer period of time, and not have to transfer to more expensive skilled nursing facilities until absolutely necessary. We seek to enhance and increase the amount and diversity of assisted living services we provide through: 6 o the continued education of the senior community, and particularly the residents and their families, concerning the cost-effectiveness of receiving additional services in an assisted living community; o the continued development and refinement of assisted living programs designed to meet the needs of our residents as they age in place; and o the consistent delivery of quality services for residents. EMPLOYEES At February 28, 2002 we had approximately 3,130 employees. None of our employees are members of unions and the Company continues to enjoy good relations with its employees. CAPITAL REQUIREMENTS Our operating leases require the tender of security deposits. At December 31, 2001, the amount of security deposits was $9.4 million either in cash or letters of credit supported by cash. These deposits are classified as non-current assets in our consolidated balance sheet as of December 31, 2001 and 2000. In 2001, we refinanced the mortgage debt of five of our ALCs that are held by majority-owned partnerships in order to: o pay off existing debt that matured in 2001 and 2002; and o borrow against the increased value of these properties. In 2000, we refinanced four of our ALCs that are held by majority-owned partnerships to: o pay off existing debt that matured in 2001; and o borrow against the increased value of these properties. The principal repayment of the refinanced debt is based upon a 35 year amortization schedule with fixed interest rates ranging from 7.25%-8.53%, including the payment of a mortgage insurance premium of 0.5%. In January, 2001 we restructured 16 ALC leases into two lease pools of 8 ALCs each. In each restructured pool, the lease termination date was extended through fiscal 2021. As part of the restructure, we are allowed to finance the additional rent expense of up to $1.0 million during 2001, $1.0 million in 2002, $1.5 million in 2003, $1.0 million in 2004 and $0.5 million in 2005, converting this into a note payable with a due date of December 31, 2010 at a fixed interest rate of 7%. Interest only payments are required monthly with principal payments beginning in 2006 at $1.0 million per year. We also incurred a restructuring fee of $4.5 million payable at $1.5 million for each of the first three years. The restructured lease agreements provide for reimbursement to us from the landlord of capital improvement expenditures up to $3.0 million. The Company's various debt and lease agreements contain restrictive covenants requiring us to maintain certain financial ratios, including current ratio, working capital, minimum net worth, and debt service coverage, among others. At December 31, 2001, we were in compliance with all such covenants. In 1999, we began retiring portions of our 6 3/4% convertible subordinated debt. During 1999, we issued a total of 799,566 shares of our common stock and paid a total of $1.0 million to certain of our bondholders in exchange for a total of $9.2 million principal amount of the subordinated notes due 2006 that were held by those bondholders. These transactions resulted in an extraordinary gain of $7.0 million net of tax for the fiscal year ended December 31, 1999. During 2000, we issued a total of 781,025 shares of our common stock and paid a total of $9.6 million to additional bondholders in exchange for a total of $33.0 million in principal amount of the subordinated notes held by those bondholders which yielded an extraordinary gain of $20.6 million net of tax and costs. In 2001 we paid a total 7 of $5.7 million to certain of our bondholders in exchange for a total of $8.0 million principal amount of the subordinated notes. The transactions for the year ended December 31, 2001, resulted in an extraordinary gain of $2.1 million net of tax and costs. Out of $57.5 million we have retired a total of $50.2 million of our public debt resulting in extraordinary gains of $29.5 million to date net of tax and costs. We obtained a $10.0 million unsecured revolving line of credit from our major shareholder Lazard Freres, through its affiliates, to be used for retirement of the subordinated 6 3/4% public debt. At December 31, 2001, we had $10.0 million outstanding on the line of credit at LIBOR plus 10% interest payable monthly. Pursuant to the terms of an Operating Deficit Payment Agreement, the Company has agreed to fund any operating deficits incurred in connection with the operation of five joint venture projects operating as limited liability companies ("LLC"), up to an aggregate amount of $6.0 million for all of the development properties and $6.0 million for all of the renovation properties subject to the $9.0 million cap. The advances, which are considered capital contributions to the LLC, are non-interest bearing and are to be repaid only if sufficient funds are available in accordance with the terms of the operating agreements of the respective LLCs. This agreement is to remain in effect from the commencement of operations of the project until the earlier to occur of 18 months after the project has achieved stabilization, the sale of the project to a third-party, or the purchase by the Company of the membership interests of the project owner. As of December 31, 2001, operating deficit advances of $1.5 million had been funded since inception in 1998. We declined to purchase two of the joint venture properties and in accordance with the operating agreement we were terminated as the manager of those LLCs. In addition we are no longer managing one of the properties that is outside our geographic clustering strategy. We believe that our existing liquidity, our ability to sell ALCs and land sites which do not meet our financial objectives or geographic clustering strategy, and our ability to refinance certain owned ALCs and investments will provide us with adequate resources to meet our current operating and investing needs. Historically we have not generated sufficient cash from operations to fund recurring working capital and capital expenditure requirements. We may be required from time to time to incur additional indebtedness or issue additional debt or equity securities to finance our strategy, including the rehabilitation of ALCs as well as other capital expenditures. We anticipate that we will be able to obtain the additional financing; however, we cannot assure that we will be able to obtain financing on favorable terms. FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS Our business, results of operations and financial condition are subject to many risks, including those set forth below. Certain statements contained in this report, including without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. We have made forward-looking statements in this report concerning, among other things, the impact of future acquisitions and developments, if any, and the level of future capital expenditures. These statements are only predictions; however, actual events or results may differ materially as a result of risks we face. These risks include, but are not limited to, those items discussed below. Certain of these factors are discussed in more detail elsewhere in this report, including without limitation under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Given these uncertainties, we caution readers not to place undue reliance on such forward-looking statements, which speak only as of the date of this report. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained here to reflect future events or developments. Certain risks are inherent in the operation of ALCs. These risks include, but are not limited to: o our history of losses; o our ability to access capital necessary for operations and acquisitions; 8 o our ability to sustain and manage growth and to successfully integrate new ALCs into our portfolio; o competition; o our ability to meet our indebtedness, lease and other obligations; o our liabilities as a general partner of Affiliated Partnerships; o our liability as a member of the joint venture LLCs where we are required to fund operating deficits; o dependence on reimbursement from third-party payers; o governmental regulation; and o risks common to the assisted living industry. HISTORY OF LOSSES For the years ended December 31, 2001, 2000, and 1999, we had losses before extraordinary gains of approximately $1.1 million, $14.1 million, and $33.4 million, respectively. At December 31, 2001, our accumulated deficit was approximately $97.7 million. Our loss before extraordinary gains for the year ended December 31, 2001 primarily resulted from: o income from ALC operations which was more than offset by o net interest expense; and o equity in losses in partnerships; offset in part by o gain on sale of properties and partnership interests. Our loss before extraordinary gain for the year ended December 31, 2000 primarily resulted from: o impairment losses on joint venture LLCs; o interest expense; and o loss from operations. Our loss before extraordinary gain for the year ended December 31, 1999 primarily resulted from: o start-up losses on newly-developed ALCs; o the impairment losses on ALCs held for sale; o interest expense; o litigation judgment expenses and settlement of a lawsuit; and o legal expenses for and settlement of a lawsuit. We cannot provide assurance that the risks associated with operating our ALCs can be managed to reduce or eliminate start-up losses, equity loss in partnerships or that other similar costs and expenses or losses will not occur 9 in the future. See "--Indebtedness, Lease and Other Obligations," "--General Partner Liability and Status," and "Management's Discussion and Analysis of Financial Condition and Results of Operations". DEPENDENCE ON THE AVAILABILITY OF ADEQUATE CAPITAL We depend heavily on our ability to obtain adequate capital to fund our operations. Our estimated capital expenditure needs over the next 12 months are $6.6 million, which we expect to fund from operations. As of December 31, 2001 we had $13.2 million in cash and cash equivalents and working capital of $1.2 million. This means we have cash and cash equivalents to meet our estimated capital needs for operations for the next 12 months. If, however our operating costs exceed our projections, we may have to obtain significant additional financing. There is no assurance that we will be able to obtain the financing on a timely basis, if at all. If we are unable to obtain the required financing on a timely basis we may not be able to execute our business plan. MANAGEMENT OF GROWTH Management of Growth. We have slowed our pace of acquisitions and development during the last three years. We have recently acquired two ALCs through the ARVP III acquisition that occurred in December 2001. However, these ALCs were previously managed by us. In addition, we have entered into five new management contracts. See "-- Risks Common to our Assisted Living Operations." Our failure to effectively manage our growth could have a material adverse effect on operating results. External Growth. We may in the future enter into agreements to acquire properties for development and for the acquisition of existing ALCs that are subject to certain conditions. There can be no assurance that one or more of such acquisitions will be completed, that we will be able to find additional suitable properties and ALCs, or that we can obtain financing to continue to acquire or develop ALCs and property on which to build them. We expect to experience a slowdown in growth through acquisitions of ALCs due to shortages of suitable ALCs available at attractive prices and due to limitations on obtaining financing. COMPETITION The Company operates in over 40 separate markets. Competition to increase or maintain high occupancies is significant with numerous other companies representing national, regional, and local fragmented ownership. No one competitor tends to have a dominant market share within our niche. The Company for the most part has created a market niche based on mid-range pricing and competes on quality of service, services offered, reputation, location, and market longevity. However, in select markets the Company enjoys market dominance due to multiple locations in a single market. We are continuing to grow within these competitive markets by providing excellent value in residential amenities, staff hospitality, and personal care services. The healthcare industry is highly competitive and we expect that the assisted living business, in particular, will become more competitive in the future. Currently competition includes, family members providing care at home; numerous local, regional and national providers of retirement, assisted living and long-term care whose facilities and services range from home-based healthcare to skilled nursing facilities; and acute care hospitals. In addition, we believe that as assisted living receives increased attention among the public and insurance companies, new competitors focused on assisted living will enter the market, including hospitality companies expanding into the market. Some of our competitors operate on a not-for-profit basis or as charitable organizations, while others have, or are capable of obtaining, greater financial resources than those available to us. We also expect to face increased competition for the acquisition and development of ALCs. Some of our present and potential competitors are significantly larger or have, or may obtain, greater financial resources than we have. These forces could limit our ability to attract residents, attract qualified personnel, expand our business, or increase the cost of future acquisitions, each of which could have a material adverse effect on our financial condition, results of operations and prospects. 10 SALES AND MARKETING The Company's marketing strategy focuses on enhancing the reputation of the Company's communities and creating awareness of the Company and its services among potential referral sources. The Company emphasizes outreach by developing relationships and creating awareness among referral sources. Referral sources include hospital discharge planners, physician offices, skilled nursing facilities, home healthcare providers and the clergy. We focus on our satisfied residents and family members who represent a key number of referrals and our respite program which provides individuals with the opportunity to experience our services on a trial or short term basis. Each regional cluster generally has at least one sales and marketing specialist and in each ALC one sales and marketing director is responsible for implementing sales and marketing programs. In addition to the direct contacts with referral services we market our services, through newspapers, direct mail and through internet based referral organizations. INDEBTEDNESS, LEASE AND OTHER OBLIGATIONS We have financed, and may continue to finance, the acquisition of ALCs through a combination of loans, leases and other obligations. As of December 31, 2001, we had an outstanding consolidated indebtedness of $112.3 million, including $7.3 million of our 2006 Convertible Notes, whose holders have the right to convert such notes into our common stock at any time on or before the notes mature. As a result, we will devote a portion of our cash flow to debt service. There is a risk that we will not be able to refinance our maturing note obligations on terms favorable to us, or that we will not be able to generate sufficient cash flow from operations to make required interest and principal payments. We have guaranteed the indebtedness at December 31, 2001, of certain unconsolidated Affiliated Partnerships for $3.5 million. We are the general partner of certain limited partnerships that serve as the sole members of the borrowing entities which carried loan balances of $15.3 million at December 31, 2001. Although a member of a borrowing entity is not personally liable for any contract or other obligation of that entity, we delivered limited guaranties in connection with the loans. Due to the limited guaranties, we assumed liability for repayment of the loan indebtedness as a result of fraudulent or intentional misconduct regarding the mortgaged properties, an unconsented transfer of a mortgaged property, a change of control by borrower, or violation of hazardous materials covenants. At December 31, 2001, approximately $35.2 million of our indebtedness bore interest at floating rates. We may incur indebtedness in the future that may also bear interest at a floating rate, or be fixed at some time in the future. Therefore, increases in prevailing interest rates could increase our interest payment obligations and could have an adverse effect on our business, financial condition and operating results. In addition, we have guaranteed mortgage and construction debt for the benefit of certain Affiliated Partnerships of up to approximately $23.5 million, including $22.5 million outstanding at December 31, 2001. On January 16, 2001 we sold our interest in five tax credit partnerships eliminating any further guarantee on them. As of December 31, 2001 we are party to long-term operating leases for certain of our leased ALCs. These require minimum annual lease payments in the aggregate amount of $32.9 million and $33.4 million for years ending December 31, 2002 and 2003, respectively. In January 2001, we restructured 16 ALC leases into two lease pools of 8 ALCs each. In each restructured pool, the lease termination date was extended through fiscal 2021. As part of the lease restructure we are allowed to finance additional rent expense of up to $1.0 million during 2001, $1.0 million in 2002, $1.5 million in 2003, $1.0 million in 2004 and $0.5 million in 2005 converting this into a note payable with a due date of December 31, 2010 at a fixed rate of 7%. Interest only payments are required monthly with principal payments beginning in 2006 of $1.0 million per year. We also incurred a restructuring fee of $4.5 million payable at $1.5 million for each of the first three years. The restructuring fee is accounted for on a straight-line basis. The restructured lease agreements provide for reimbursement to us from the landlord of capital improvement expenditures up to $3.0 million. The lease agreements provided for a total minimum rent of approximately 28.5% of revenue that changes annually. For the year ending December 31, 2002, 28.3% of revenue is the anticipated total rent expense but not less than the immediately preceding years rent expense. 11 GENERAL PARTNER LIABILITY AND STATUS As of December 31, 2001 we, directly or through our subsidiaries, are the managing general partner in 7 partnerships. As a general partner of a limited partnership, we are ordinarily liable for partnership obligations including partnership indebtedness, potential liability for construction defects, including those presently unknown or unobserved, and unknown or future environmental liabilities. With respect, however, to the mortgage indebtedness encumbering the partnership properties, we have no personal liability for the repayment of said indebtedness except to the extent a lender suffers loss from : the partnership's failure to properly apply insurance proceeds, to deliver required books and records or to properly apply rents; fraud by the partnership; filing of bankruptcy by the partnership or the Company; or environmental contamination of the secured properties. The cost of any such obligations or claims, whether we bear part or all of the cost, could materially adversely affect our operating results and financial condition. We manage each Affiliated Partnership property according to a written management contract. The managing general partner of the partnership may cancel some contracts with 30 or 60 days' notice. Limited partners in each partnership may take action on such matters as the removal of the general partners, the request for approval or disapproval of a sale of a property owned by a partnership, or other actions affecting the properties or the partnership. Where we are the general partner of the partnership, termination of the contracts generally would require removal of the Company as general partner by the vote of a majority of the holders of limited partner interests. We would lose management fees if those contracts were terminated. In 2001, we were removed as the manager of one managed ALC outside our geographic area. In October of 2001, we signed management contracts to manage four unaffiliated ALCs. DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYERS GeriCare was a former subsidiary of the Company that specialized in rehabilitative services, including speech, occupational and physical therapy. Although we disposed of GeriCare in 1998, revenue received or earned before it was disposed that directly or indirectly was billed to the Medicare program is subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings, audits and funding restrictions. All such restrictions could potentially limit or reduce reimbursement levels for GeriCare's services. Medicare reimbursed GeriCare monthly for services provided on a cost basis, subject to certain adjustments. GeriCare submitted cost reports to the Healthcare Financing Administration ("HCFA") on an annual basis and was subject to having amounts previously reimbursed adjusted retroactively. The result of a retroactive reimbursement would be either a requirement to repay the amount previously reimbursed or an adjustment downward in future reimbursements for services rendered, or both. We have submitted the required documents to HCFA for an audit that began in October 1999, and have prepared cost reports that were filed as of August 22, 1996 and thereafter. Due to delay in recovering these funds and the uncertainty as a result of the on-going audit, we have reserved for the full outstanding receivable at December 31, 2001. GOVERNMENT REGULATION Assisted living. Healthcare is subject to extensive regulation and frequent regulatory change. Currently, no federal rules explicitly define or regulate assisted living. A number of states also have not yet enacted specific assisted living regulations. However, we are, and will continue to be, subject to varying degrees of regulation and licensing by health or social service agencies and other regulatory authorities in the various states and localities where we operate or intend to operate. Changes in, or the adoption of, such laws and regulations, or new interpretations of existing laws and regulations, could have a significant impact on methods and costs of doing business, and on reimbursement levels from governmental and other payers. In addition, the President and Congress have proposed in the past, and may propose in future, healthcare reforms that could impose additional regulations on the Company or limit the amounts that we may charge for our services. We cannot assess the ultimate timing and impact that any pending or future healthcare reform proposals may have on the assisted living, home healthcare, skilled nursing or healthcare industry in general. No assurance can be given that any such reform will not have a material adverse effect on the business, financial condition or results of operations of the Company. SSI Payments. A portion of our revenue comes from residents who receive SSI payments. During 2001, 3% of our residents participated in the SSI program. Revenue from these residents is generally lower than the amounts we 12 receive from our other residents and could be subject to payment delay. We cannot assure that our percentage of revenue received from SSI will not increase, or that the amounts paid by SSI programs will not be further limited. In addition, if we were to become a provider of services under the Medicaid program, we would be subject to Medicaid regulations designed to limit fraud and abuse. Violations of these regulations could result in civil and criminal penalties and exclusion from participation in the Medicaid program. RISKS COMMON TO OUR ASSISTED LIVING OPERATIONS Staffing and Labor Costs. We compete with other providers of assisted living and senior housing to attract and retain qualified personnel. We also rely on the available labor pool of employees, and unemployment rates are very low in many areas where we operate. We make a genuine effort to remain competitive with other companies in our industry. Therefore, if it is necessary for us to increase pay and/or enhance benefits to maintain our competitive status in our industry, our labor costs could rise. We cannot provide assurance that if our labor costs do increase they can be matched by corresponding increases in rental, assisted living or management revenue. Obtaining Residents and Maintaining Rates. As of December 31, 2001, the ALCs we owned or operated generated a combined occupancy rate of 88.2%. This rate was impacted by newly-developed ALCs that may take longer to lease up than anticipated, causing them to incur start-up losses for longer periods of time. Occupancy may drop in our existing ALCs, primarily due to: o changes in the health of residents; o increased competition from other assisted living providers, particularly those offering newer ALCs; o the reassessment of residents' physical and cognitive state; and o changes in management and staffing. There can be no assurance that any ALC will be substantially occupied at assumed rates at any time. In addition, we may only be able to lease up our ALCs to full occupancy at rates below our set rates due to limitations imposed on rates by local market conditions or other factors. Even if we achieve substantial occupancy at our set rates, our set rates may not allow for our projected cost recovery and profit if operating expenses increase. In addition, in order to increase our set rates, we must provide advance notice of rate increases, generally at least 30 days. Because of this advance notice requirement, we are not able to reflect cost increases in our set rates until at least several months after such cost increases occur. In addition, if we fail to generate sufficient revenue, we may be unable to meet minimum rent obligations under our long-term operating leases and to make interest and principal payments on our indebtedness. General Real Estate Risks. The performance of our ALCs is influenced by factors generally affecting real estate investments, including the general economic climate. Other such real estate risks include: o an oversupply of, or a reduction in demand for, ALCs in a particular market; o the attractiveness of properties to residents; o zoning, rent control, environmental quality regulations or other regulatory restrictions; o competition from other forms of housing; o our ability to provide adequate maintenance and insurance; and o our ability to control operating costs, including maintenance, insurance premiums and real estate taxes. At the time we acquire existing ALCs or open newly-developed ALCs, we prepare budgets for known or expected rehabilitation expenses. We may incur unknown or unforeseen rehabilitation or lease-up expenses. Real estate investments are also affected by such factors as applicable laws, including tax laws, interest rates and the 13 availability of financing. Real estate investments are relatively illiquid and, therefore, limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. If we fail to integrate or operate acquired or developed ALCs effectively, it may have a material adverse effect on our business, financial condition and operating results. In addition, we currently lease ALCs from only eight different landlords. The lease agreements with each landlord contain cross-application provisions that limit our right to renew one lease with a particular landlord without exercising our right to renew all other leases with that landlord. Also, leases with a single landlord contain certain cross-default provisions. Therefore, in order to exercise all lease renewal terms, we will be required to maintain and rehabilitate the leased ALCs on a long-term basis. We anticipate that similar renewal and cross-default provisions will be included in leases with other healthcare REITs or landlords. Bond Financing. We have entered into four long-term leases of ALCs, the acquisition and construction of which have been or are being financed by tax exempt multi-unit housing revenue bonds. In order to meet the lease obligations and to allow the landlord to continue to qualify for favorable tax treatment of the interest payable on the bonds, the ALCs must comply with certain federal income tax requirements. These requirements principally pertain to the maximum income level of a specified percentage of the residents. Should we elect to execute additional leases for ALCs to be constructed with bond financing, the same and possibly additional restrictions are anticipated to be imposed. Failure to satisfy these income requirements will constitute an event of default under the leases, thereby permitting the landlord to terminate the leases. Failure to obtain low-income residents in the sequence and time required could materially affect the lease-up schedule and, therefore, cash flow from such ALCs. Possible Environmental Liabilities. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of the removal or remediation of certain hazardous or toxic substances. Such laws and regulations often impose liability whether or not the owner or operator knows of, or is responsible for, the presence of the hazardous or toxic substances. When we acquire land for development or existing facilities, we typically obtain environmental reports on the properties as part of our due diligence in order to lessen our risk of exposure. Nonetheless, the costs of any required remediation or removal of these substances could be substantial. The owner's liability is generally not limited under such laws and regulations and could exceed the value of the property and the aggregate assets of the owner or operator. The presence of these substances or failure to remediate such substances properly may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Under these laws and regulations, an owner, operator, or any entity that arranges for the disposal of hazardous or toxic substances at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. When entering into leases with healthcare REITs and other landlords of facilities, we typically enter into environmental indemnity agreements in which we agree to indemnify the landlord against all risk of environmental liability, both during the term of the lease and beyond. In connection with the ownership or operation of our properties or those of our Affiliated Partnerships, we could be liable for these costs, as well as certain other costs, including governmental fines and damages for injuries to persons or properties. Restrictions Imposed by Laws Benefiting Disabled Persons. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws exist that also may require us to modify existing and planned properties to allow disabled persons to access the properties. We believe that our properties are either substantially in compliance with present requirements or are exempt from them, and we attempt to check for compliance in all ALCs we consider acquiring. However, if required changes cost more than anticipated, or must be made sooner than anticipated, we would incur additional costs. Further legislation may impose additional burdens or restrictions related to access by disabled persons, and the costs of compliance could be substantial. Geographic Concentration. A substantial portion of our business and operations are conducted in California, where 37 out of 58 of our ALCs in operation are located. The market value of these properties and the income generated from properties we manage or lease could be negatively affected by changes in local and regional economic conditions, specific laws and the regulatory environment in the states, and by acts of nature. We cannot provide assurance that such geographic concentration will not have an adverse impact on our business, financial condition, operating results and prospects. 14 Insurance. We believe that we maintain adequate insurance coverage, based on the nature and risks of our business, historical experience and industry standards. Our business entails an inherent risk of liability. In recent years, we and other assisted living providers have become subject to an increasing number of lawsuits alleging negligence or related legal theories, which may involve large claims and significant legal costs. From time to time we are subject to such suits because of the nature of our business. We cannot assure that claims will not arise that exceed our insurance coverage or are not covered by it. A successful claim against us that is not covered by, or is in excess of, our insurance could have a material adverse effect on our financial condition, operating results or liquidity. Claims against us, regardless of their merit or eventual outcome, may also have a material adverse effect on our ability to attract residents or expand our business and would consume considerable management time. We must renew our insurance policies annually and can provide no assurance that we will be able to continue to obtain liability insurance coverage in the future or that it will be available on acceptable terms. As a result of poor loss experience, a number of insurance carriers have stopped providing insurance coverage for the long-term care industry, and those remaining have increased premiums and deductibles substantially. CONFLICTS OF INTEREST We are the managing general partner and communities manager for Affiliated Partnerships owning or leasing 13 ALCs and two apartment communities. By serving in both capacities, we have conflicts of interest because of our duty to act in the best interests of the limited partners of those partnerships and our desire to maximize earnings for our shareholders in the operation of those ALCs and apartment communities. TAX CREDIT APARTMENT PARTNERSHIPS In January 2001, we disposed of our interests in five of the eight remaining partnerships in our apartment group (the "Apartment Group"). As part of the tax credit agreements relating to the Apartment Group, we remain responsible for guarantees for the period of time we acted as the general partner for the tax credit apartment partnerships if sufficient projected tax credits were not generated in order to meet agreed-upon levels of tax credit benefits. The Apartment Group required $2.9 million to fund permanent loan shortfalls in 2000, the balance of which was paid in January 2001. Concurrently, we sold our interests in the related partnerships for a gain of $2.9 million. ITEM 2. PROPERTIES The following charts set forth the location, number of units, acquisition date and ownership percentage for our communities as of December 31, 2001:
MONTH PERCENT COMMUNITY LOCATION UNITS ACQUIRED OWNERSHIP(A) - --------- -------- ----- -------- ------------ LEASED Amberwood................................................ FL 183 Jun-96 100.0% Baypoint Village......................................... FL 231 Mar-96 100.0% Bayside Landing.......................................... CA 76 Jun-98 100.0% Buena Vista Knolls....................................... CA 90 Feb-96 100.0% Chateau San Juan......................................... CA 113 Dec-95 100.0% Collier Park............................................. TX 158 Dec-96 100.0% Eastlake Terrace......................................... IN 87 Apr-97 100.0% El Camino Gardens........................................ CA 265 Jun-95 100.0% Hacienda de Monterey..................................... CA 180 Apr-94 100.0% Hillsdale Manor(c)....................................... CA 128 Jul-98 100.0% Inn at Summit Ridge...................................... NV 74 Apr-97 100.0% Inn at Willow Glen(b).................................... CA 83 Aug-96 52.3% Kinghaven Manor.......................................... MI 143 Feb-95 100.0% Mallard Cove............................................. OH 119 Feb-95 100.0% Maria del Sol............................................ CA 110 Oct-95 100.0% Northgate Park........................................... OH 124 Aug-96 100.0% Rancho Park Villa........................................ CA 149 Oct-95 100.0%
15 MONTH PERCENT COMMUNITY LOCATION UNITS ACQUIRED OWNERSHIP(a) - --------- -------- ----- -------- ------------ Shorehaven Manor......................................... MI 120 Sep-96 100.0% Seville Terrace.......................................... NV 125 Dec-99 100.0% Sunlake Terrace.......................................... NV 121 Feb-98 100.0% Sutton Terrace........................................... NV 142 Dec-98 100.0% Tamalpais Creek.......................................... CA 117 Oct-95 100.0% Tanglewood Trace......................................... IN 159 Jan-97 100.0% Villa Bonita............................................. CA 130 Oct-95 100.0% Villa Encinitas.......................................... CA 117 Jun-95 100.0% Villa at Palm Desert..................................... CA 77 Nov-95 100.0% Villa de Palma........................................... CA 110 May-95 100.0% Villa del Obispo......................................... CA 96 May-95 100.0% Villa del Rey............................................ CA 102 Jun-95 100.0% Villa del Sol............................................ CA 91 Jun-95 100.0% Vista del Rio............................................ NM 148 Jun-97 100.0% Willow Glen Villa........................................ CA 188 May-98 100.0% Woodside Village of Columbus............................. OH 154 Feb-96 100.0% ----- Total Leased................................... 4,310 ----- OWNED Acacia Villa(b).......................................... CA 66 Dec-95 89.5% Chandler Villas(b)....................................... AZ 164 Dec-01 52.1% Collwood Knolls(b)....................................... CA 112 Jan-96 95.5% Covell Gardens........................................... CA 156 Mar-97 100.0% Covina Villa(b).......................................... CA 63 Aug-96 52.3% Golden Creek Inn......................................... CA 124 Apr-98 100.0% Hillcrest Inn............................................ CA 138 Apr-98 100.0% Montego Heights Lodge(b)................................. CA 163 Aug-96 52.3% Retirement Inn of Daly City(b)........................... CA 95 Aug-96 52.3% Retirement Inn of Fullerton(b)........................... CA 68 Aug-96 52.3% Retirement Inn of Burlingame(b).......................... CA 67 Aug-96 52.3% Retirement Inn of Campbell(b)............................ CA 71 Aug-96 52.3% Retirement Inn of Fremont(b)............................. CA 68 Aug-96 52.3% Retirement Inn of Sunnyvale(b)........................... CA 120 Aug-96 52.3% Valley View Lodge(b)..................................... CA 125 Aug-96 52.3% Villa Colima(b).......................................... CA 93 Jun-96 60.5% Villa Las Posas(b)....................................... CA 123 Dec-01 52.1% ----- Total Owned.................................... 1,816 ----- Total Leased and Owned......................... 6,126 ----- MANAGED Berkshire(d)............................................. CA 80 Nov-98 75.0% Canterbury Court......................................... TX 82 Oct-01 Encino Hills Terrace(d).................................. CA 73 Nov-98 75.0% Inn at Lakewood(d)....................................... CO 137 Nov-00 67.1% La Villa................................................. NM 82 Oct-01 Lynnbrooke(d)............................................ CA 140 Apr-00 62.0% Stone Brook.............................................. TX 44 Nov-01 Villa del Sol............................................ NM 10 Oct-01 ----- Total Managed.................................. 648 ----- Total Leased, Owned and Managed 6,774 ----- OWNED but MANAGED by an UNRELATED 3rd PARTY Bay Spring(d)............................................ RI 127 Jun-00 64.0% ----- Total Owned but Managed by 3rd Party................. 127 ----- Grand Total.................................... 6,901 ======
- ---------- (a) Represents percentage ownership of Leased ALCs and Owned ALCs through leasehold or fee ownership of the Company or an Affiliated Partnership. (b) Community managed by us and owned or leased by an Affiliated Partnership in which we have obtained a majority ownership interest. (c) We also acquired 64 beds in a skilled nursing facility as part of this ALC. 16 (d) Properties are owned by our unconsolidated joint ventures where we have a majority ownership but no control. ITEM 3. LEGAL PROCEEDINGS During 2001, the Company was named as a defendant in two lawsuits brought by employees of an ALC owned by a majority-owned partnership. In addition, four other employees of the same ALC filed EEOC claims against the Company arising out of the same facts. Subsequent to year-end, the two lawsuits were submitted to mediation and settled. The four remaining claims will be submitted to binding arbitration. We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to a vote of our security holders during the fourth quarter of fiscal 2001. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The common stock, no par value, of the Company is listed and traded on the American Stock Exchange under the symbol "SRS." Prior to October 13, 1997, our common stock was listed on the NASDAQ National Market ("NASDAQ") under the symbol "ARVI." The following table sets forth, for the periods indicated, the high and low closing prices for our Common Stock.
HIGH LOW ---- --- YEAR ENDED DECEMBER 31, 2001 First Quarter............................... 1/1/01 - 3/31/01 $ 0.99 $ 0.56 Second Quarter.............................. 4/1/01 - 6/30/01 $ 1.95 $ 0.70 Third Quarter............................... 7/1/01 - 9/30/01 $ 2.99 $ 1.30 Fourth Quarter.............................. 10/1/01 - 12/31/01 $ 2.08 $ 1.10 YEAR ENDED DECEMBER 31, 2000 First Quarter............................... 1/1/00 - 3/31/00 $ 2.19 $ 1.38 Second Quarter.............................. 4/1/00 - 6/30/00 $ 1.44 $ 0.88 Third Quarter............................... 7/1/00 - 9/30/00 $ 1.06 $ 0.81 Fourth Quarter.............................. 10/1/00 - 12/31/00 $ 0.88 $ 0.44
We did not pay dividends in fiscal 2000 or fiscal 2001. We do not anticipate paying dividends in the foreseeable future. It is the present policy of our Board of Directors to retain earnings, if any, to finance the expansion of our business. VOLATILITY OF STOCK PRICE Sales of substantial amounts of shares of our common stock in the public market or the perception that those sales could occur could adversely affect the market price of our common stock and our ability to raise additional funds in the future in the capital markets. The market price of our common stock could be subject to significant fluctuations in response to various factors and events, including the liquidity of the market for the shares of our common stock, variations in our operating results, changes in our earnings estimates and/or securities analysts estimates, publicity regarding the industry or the Company and the adoption of new statutes or regulations (or changes in the interpretation of existing statutes or regulations) affecting the healthcare or real estate industries in general or the assisted living industry in particular. In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated to the operating performance of particular companies. These market fluctuations may adversely affect the market price of the shares of our common stock. CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS; ANTI-TAKEOVER MEASURES As of December 31, 2001, our directors and executive officers and their affiliates beneficially own approximately 47.3% of the outstanding shares of our common stock (exclusive of unexercised options to purchase shares of our common stock). As a result, these shareholders, acting together, would be able to significantly influence many matters requiring approval by our shareholders, including the election of directors. Our articles of incorporation provide for authorized but unissued preferred stock, the terms of which may be fixed by our board of directors. As a result of Delaware General Corporation Law relating to the number of holders of common stock, our board of directors are classified and the holders of our common stock are not permitted to cumulate votes. Such provisions could have the effect of delaying, deferring or preventing a change of control of the Company. In May 1998, we adopted a shareholders rights plan under Delaware law, under which we declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of our common Stock ( a "Right"). Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 10% or, in the case of Lazard Freres, our majority stockholder, 50% or more of our common stock or announces a tender offer for 10% or, in the case of Lazard Freres, 50% or more of our common stock. When exercisable, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a certain number of shares of our common stock having a market value at the time of twice the Right's exercisable price. If we are acquired in a merger or other business combination transaction which has not been approved by our Board of Directors, each Right (except the Rights held by the acquiring person) will entitle its holder to purchase, at the Right's then-current exercise price, a certain number of shares of our common stock having a market value at that time of twice the Right's exercise price. 18 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data has been derived from our audited consolidated financial statements as of and for the years ended December 31, 2001, 2000, 1999 and 1998, and as of and for the nine-month period ended December 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."
NINE-MONTH YEAR ENDED DECEMBER 31, PERIOD ENDED ------------------------------------------------------ DECEMBER 31, 2001 2000 1999 1998 1997 --------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUE: Assisted living community revenue...... $ 141,917 $ 136,097 $137,176 $127,309 $ 76,887 Skilled nursing facility revenue....... 2,323 1,960 -- -- -- Management fees........................ 1,155 808 1,003 1,116 388 --------- --------- -------- -------- -------- Total revenue.................... 145,395 138,865 138,179 128,425 77,275 --------- --------- -------- -------- -------- OPERATING EXPENSES: Assisted living community operating 88,185 87,130 87,665 81,488 49,411 expense.................................. Skilled nursing facility expenses...... 2,507 1,901 -- -- -- Community lease expense................ 30,943 31,571 32,239 26,628 15,773 General and administrative............. 9,874 12,288 14,965 27,581 17,595 Impairment loss........................ -- 6,187 16,368 22,727 -- Depreciation and amortization.......... 7,878 8,483 8,531 9,561 4,896 --------- --------- -------- -------- -------- Total operating expenses......... 139,387 147,560 159,768 167,985 87,675 --------- --------- -------- -------- -------- Income (loss) from operations.... 6,008 (8,695) (21,589) (39,560) (10,400) --------- --------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest income........................ 1,010 1,532 1,027 2,276 1,821 Other income (expense), net............ 681 244 376 198 321 Equity in income (loss) of partnerships (1,798) 791 (884) (430) (10,961) Gain (loss) on sale of properties and partnership interest................. 2,887 500 1,884 (674) 5,511 Interest expense....................... (8,949) (8,368) (8,933) (7,728) (4,568) Litigation judgment.................... -- -- (4,368) -- -- --------- --------- -------- -------- -------- Total other income (expense)..... (6,169) (5,301) (10,898) (6,358) (7,876) --------- --------- -------- -------- -------- Loss before income tax expense, minority interest, extraordinary items, discontinued operations and change in (161) (13,996) (32,487) (45,918) (18,276) accounting principle................... Income tax expense....................... 151 160 35 54 484 Minority interest in (income) loss of majority owned entities................ (778) 55 (903) (839) (773) ---------- --------- -------- -------- -------- Loss before extraordinary items, discontinued operations and change in accounting principle................... (1,090) (14,101) (33,425) (46,811) (19,533) Extraordinary gain (loss) from early extinguishment of debt, net of income tax 2,062 20,613 7,020 -- -- --------- --------- -------- -------- -------- Income (loss) from operations before discontinued operations and change in 972 6,512 (26,405) (46,811) (19,533) accounting principle.................... Discontinued operations.................. -- -- -- 830 (2,602) Cumulative effect of change in accounting principle............................... -- -- 1,260 -- -- --------- --------- -------- -------- -------- Net income (loss)................ $ 972 $ 6,512 $(27,665) $(45,981) $(22,135) ========= ========= ======== ======== ======== Basic and diluted earnings (loss) per common share: Loss from continuing operations........ $ (0.06) $ (0.81) $ (2.09) $ (2.95) $ (1.75) Gain from extraordinary item........... 0.12 1.19 0.44 -- -- Discontinued operations................ -- -- -- 0.05 (0.23) Loss from cumulative effect of change in accounting principle, net of tax.. -- -- (.08) -- -- --------- --------- --------- -------- -------- Net earnings (loss).............. $ 0.06 $ 0.38 $ (1.73) $ (2.90) $ (1.98) ========= ========= ========= ========= ========= Weighted average common shares outstanding 17,460 17,357 15,968 15,866 11,171 ========= ========= ========= ========= =========
19
DECEMBER 31, ----------------------------------------------------- MARCH 31, 2001 2000 1999 1998 1997 -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED OPERATING DATA: Assisted living units owned or leased (end of period) ........................... 6,126 5,873 6,371 7,038 5,880 Assisted living units managed (end of period) 648 848 821 906 379 Annual weighted average occupancy of assisted living units ..................... 88% 87% 85% 84% 84% BALANCE SHEET DATA: Working capital ............................. $ 1,203 $ 10,467 $ 6,870 $ 11,691 $ 75,279 Total assets ................................ 177,177 165,940 175,165 205,457 233,085 Long-term notes payable, excluding current 105,062 99,130 114,369 88,175 81,560 portion...................................... Total shareholders' equity .................. 47,840 46,868 39,124 65,687 111,435
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Selected Financial Data in Item 6 and the consolidated financial statements included in this Annual Report on Form 10-K set forth certain data with respect to our financial position, results of operations and cash flows that should be read in conjunction with the following discussion and analysis. OVERVIEW We are a leading national provider of assisted and independent living services for the elderly. As of December 31, 2001, we operated 58 ALCs containing 6,774 units, including 33 Leased ALCs, 17 Owned ALCs and 8 Managed ALCs. Since commencing operation of ALCs for our own account in April 1994, we embarked upon an expansion strategy and achieved significant growth in revenue resulting primarily from the acquisition of ALCs. We focused our growth efforts on the acquisition and development of additional ALCs and expansion of services to our residents as they "age in place." During 1998, we acquired interests in 11 ALCs and one skilled nursing facility from Hillsdale Group, LP and their affiliates, and opened five newly constructed ALCs. In the last three years we have focused on improving the operations of our existing ALCs. In 2001, we acquired two ALCs through acquiring a controlling interest in ARVP III a California partnership described below. As of December 31, 2001, a substantial portion of our business and operations are conducted in California, where 37 of the 58 ALCs we operate are located. We intend to continue to make the western United States the primary focus of our clustering strategy. Our current attention and resources are focused on enhancing the profitability of our existing core operations. In addition, we plan to divest ALCs that do not expand or enhance one of our geographic clusters or do not meet our financial objectives. In June 2001, we completed the sale of one of our three land sites, one land site was in escrow at December 31, 2001 and one land site has been reclassified to property, furniture and equipment as we do not foresee its sale within the next year. The nine ALCs previously in property held for sale were reclassified to operations in June 2001, as a buyer could not be found. As part of the strategy to focus on our current operations, we embarked on a refinancing campaign. In 2001 we refinanced five ALCs; four ALCs were refinanced with HUD insured debt for $12.5 million at fixed rates of 7.25% to 7.79% for 35 years. One ALC was refinanced with variable debt of $5.2 million at a rate of LIBOR plus 3.6% maturing in September 2004. In December 2000, we refinanced four ALCs for $29.8 million at fixed rates of 8.00% to 8.06% including mortgage insurance of 0.5%. The Company is the managing general partner of American Retirement Villas Properties III, L.P. ("ARVP III"). On October 4, 2001, C3 Capital, LLC, a California limited liability company ("C3 Capital"), commenced a hostile tender offer, which was later withdrawn, to purchase up to 10,000 ARVP III limited partnership units ("units") at a net cash purchase price of $300 per unit (the "Hostile Offer"), and also filed with the SEC a preliminary consent solicitation pursuant to which C3 Capital sought to remove the Company as the managing general partner, and elect C3 Capital as the general partner of ARVP III. 20 In response to the Hostile Offer and the consent solicitation, we, through ARVP Acquisition, L.P., a California limited partnership wholly-owned by us, commenced a tender offer on October 18, 2001 for 10,000 outstanding partnership units of ARVP III for $360 per unit. We amended the tender offer on October 31, 2001 and increased the offer price to $400 per unit from $360 per unit, increased the number of Units we were seeking to purchase from 10,000 units to all outstanding Units, and reduced the minimum number of Units that must be tendered before we are required to purchase any Units to 30% of the outstanding Units (the "Amended Offer"). The amendment to our original offer was in response to C3 Capital's withdrawal of its tender offer, and receipt of a highly conditional offer from Vintage Senior Housing, LLC ("Vintage"), an affiliate of C3 Capital, to purchase all of ARVP III's non-cash assets for $19.5 million. Vintage's offer was subject to, among other things, significant due diligence and financing contingencies. In addition, on November 9, 2001 we received a revised offer from Vintage increasing the purchase price for the assets of ARVP III to $20 million. In December, 2001 ARVP Acquisition, L.P., had acquired an additional 51.8% for a total of 52.1% of the partnership units of ARVP III. Accordingly, ARVP III is included in our consolidated financial statements from December 14, 2001. (See Note 2 to the consolidated financial statements). In 1999, ARVP II obtained financing and, through its wholly owned subsidiary ARVP II, LLC, purchased the landlord's interest in four previously leased ALCs for approximately $14.3 million. In October 2001 we were awarded four management contracts, two in Texas totaling 126 units and two in New Mexico totaling 92 units. Subsequent to year-end we were awarded a management contract for a newly completed ALC that is in the lease-up stage in California. Newly opened ALCs are expected to incur operating losses until sufficient occupancy levels and operating efficiencies are achieved. Based upon recent experience, we believe that an ALC typically achieves its targeted occupancy level 18 to 24 months from the commencement of operations. Accordingly, we will require substantial liquidity to maintain the operations of newly opened ALCs. If sufficient occupancy levels are not achieved within reasonable periods, our results of operations, financial position and liquidity could be materially and adversely impacted. On January 1, 2001, Abdo H. Khoury, our Senior Vice President and Chief Financial Officer, was promoted to President. CRITICAL ACCOUNTING POLICIES Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries, which include limited partnerships and limited liability companies in which we have controlling interests, have been consolidated into the financial statements. In December 2001, we acquired an additional 51.8% interest in American Retirement Villas Properties III, L.P. ("ARVP III"). The balance sheet on December 31, 2001 includes the accounts of ARVP III while the income statement has the operations from December 14, 2001; the date we acquired greater than 50% of the partnership units. All significant intercompany balances and transactions have been eliminated in consolidation. Unconsolidated Joint Ventures. In 1998, we pursued an additional development strategy by entering into joint ventures ("LLCs") designed to help us finance development and renovation projects and to mitigate the impact of start-up losses associated with the opening of newly constructed ALCs. The joint ventures were formed to finance and manage the substantial renovation of existing ALCs acquired in 1998 in the Hillsdale transaction and to construct three new communities on land sites we owned. Participants in the joint ventures with us are a third-party investor and a third-party developer. The LLCs contracted with the developer to provide development services to perform the renovation and construction. We manage four of the properties operated by the joint ventures for an amount equal to three percent of gross revenues. One property is managed by an unrelated third party. We account for our investment in the joint ventures using the equity method and losses incurred by the LLCs will be allocated disproportionately to the joint venture partners based upon their assumption of risk. In 2000 and 2001, certain joint venture partner's capital was reduced to zero, consequently, the losses from the joint venture was allocated to us based upon our capital or percentage interest. We have agreed to fund any operating deficits incurred in connection with the operation of the five joint venture projects, up to an aggregate amount of $6.0 million for all of the development properties and $6.0 million for all of the renovation properties subject to a $9.0 million cap. The 21 advances, which are considered capital contributions to the LLC, are non-interest bearing and will be repaid only if sufficient funds are available in accordance with the terms of the operating agreements of the respective LLCs. This agreement will remain in effect from the commencement of operations of the project until the earlier to occur of 18 months after the project has achieved stabilization, the sale of the project to a third-party, or the purchase by the Company of the membership interests of the project owner. Our current funding of operating deficits since inception in 1998 is $1.5 million. We will have an option to purchase the joint venturer's interest in the LLCs when the ALCs reach stabilization, at a purchase price that is the greater of fair market value or an amount that generates a guaranteed internal rate of return on the joint venturer's capital contribution. In 2000 we determined that the value of the LLCs was impaired based upon our review of the projected cash flows, accordingly, we wrote down our investment by $5.7 million, to reflect the fair value. In 2001 we declined the option to purchase two of the LLCs that had reached stabilization and in accordance with the LLCs' operating agreement we no longer serve as a manager of the two LLCs. Accounting for Long-lived Assets We review our long-lived assets, including goodwill, for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, we estimate the future cash flows expected to result from using the assets and eventually disposing of them. Cash flows are reviewed at the community level which is the lowest level of identifiable cash flows. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based upon the asset's fair value. For long-lived assets held for sale, fair value is reduced for costs to sell. Revenue Recognition We recognize rental, assisted living services and skilled nursing facility revenue from owned and leased communities on a monthly basis as earned. We receive fees for property management and partnership administration services from managed communities and recognize such fees as earned. THE YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000 The following table sets forth a comparison of the year ended December 31, 2001 and the year ended December 31, 2000. The percentage increase (decrease) are based upon whole numbers and will not compute using rounded numbers.
INCREASE/ 2001 2000 (DECREASE) -------- -------- ---------- (DOLLARS IN MILLIONS) Revenue: Assisted living community revenue ............................... $ 141.9 $ 136.1 4.3% Skilled nursing facility revenue ............................... 2.3 2.0 18.5% Management fees from affiliates and others ...................... 1.2 0.8 42.9% -------- -------- ---------- Total revenue .................................................... 145.4 138.9 4.7% -------- -------- ---------- Operating expenses: Assisted living community operating expense ..................... 88.2 87.1 1.2% Skilled nursing facility expenses ............................... 2.5 1.9 31.9% Community lease expense ......................................... 30.9 31.6 (2.0)% General and administrative ...................................... 9.9 12.3 (19.6)% Impairment loss ................................................. -- 6.2 (100.0)% Depreciation and amortization ................................... 7.9 8.5 (7.1)% -------- -------- ---------- Total operating expenses ......................................... 139.4 147.6 (5.5)% -------- -------- ---------- Income (loss) from operations ..................................... 6.0 (8.7) 169.1% -------- -------- ---------- Other income (expense): Interest income ................................................. 1.0 1.5 (34.1)% Other income (expense), net ..................................... 0.7 0.2 179.1% Equity in income (loss) of partnerships ......................... (1.8) 0.8 (327.3)% Gain on sale of properties and partnership interests ............ 2.9 0.5 477.4% Interest expense ................................................ (8.9) (8.3) 6.9% -------- -------- ---------- Total other income (expense) ..................................... (6.1) (5.3) 16.4% -------- -------- ---------- Loss before income taxes, minority interest in income of majority owned entities and extraordinary gains ......................... (0.1) (14.0) 98.8%
22 Income tax expense ................................................ (0.2) (0.2) (5.6)% Minority interest in (income) loss of majority owned entities ..... (0.8) 0.1 (1,514.5)% -------- -------- ---------- Loss before extraordinary item and change in accounting principle . (1.1) (14.1) (92.3)% Extraordinary gain from early extinguishment of debt .............. 2.1 20.6 (90.0)% -------- -------- ---------- Net income ................................................... $ 1.0 $ 6.5 (85.1)% ======== ======== ==========
The increase of $5.8 million in assisted living community revenue is attributable to: o the increase in average rate per occupied unit to $2,259 for 2001 as compared with $2,145 for 2000. o the increase in average occupancy for same store ALCs to 88.2% for 2001 as compared with 86.8% for 2000; partially offset by o the sale of three ALCs during the second quarter of 2000; o the decrease in assisted living penetration to 46.4% for 2001 as compared with 46.7% for 2000. The $0.3 million increase in skilled nursing facility revenue in 2001 is due to the fact that we began managing the facility ourselves on April 1, 2000. Previously it was managed by an unrelated third party and was included in other income and expense. Management fees from affiliates and others increased $0.4 million in 2001 due to the increase in the number of management contracts from four to eight during the fourth quarter of 2001. Assisted living community operating expense increased $1.1 million in 2001 due to: o increased wages of staff; and o increase in utilities and insurance costs; offset by o the sale of three ALCs during the second quarter of 2000. The decrease in assisted living community lease expense of $0.7 million in 2001 is primarily due to: o the sale of three ALCs during the second quarter of 2000; offset by o increases in lease payments due to the increase in the Consumer Price Index, pursuant to the lease terms. General and administrative expenses decreased $2.4 million in 2001 due to the following: o expense management yielded $1.5 million of reductions in payroll costs, office expense, travel and related expenses and consulting costs; and o no additional provision for doubtful accounts was required in 2001 whereas $0.8 million was recorded in 2000 due to the uncertainty of collection as a result of an audit by the intermediary for Medicare. The impairment loss in 2000 was due to the following: o an additional $0.5 million impairment loss on the properties held for sale; and o a $5.7 million impairment loss on the investment in joint ventures that had carrying values in excess of fair value and met the criteria for impairment under Statement of Financial Accounting Standard No. 121. 23 Depreciation and amortization expenses decreased $0.6 million due to the following: o the sale of three ALCs during the second quarter of 2000; o the value of some of the properties held for sale which were subsequently transferred back into operations, were impaired resulting in a lower carrying value; partially offset by o an increase in depreciation related to capital expenditures. Interest income decreased in 2001 due to lower interest rates and lower average cash balances carried by us during 2001 as compared to 2000. Interest expense increased in 2001 $0.6 million due to the increase in debt due to refinancing. Minority interest in income of majority owned entities increased $0.9 million due to improved performance of the underlying ALCs. Gain on the sale of properties and partnership interests in 2001 of $2.9 million is a result of the sale of the apartment partnership interest. The $0.5 million gain from the sale of assets in 2000 was due to the sale of a parcel of land in Texas that was in property held for sale. Equity in income of partnerships was $0.8 million for the year ended December 31, 2000. The income in 2000 is a result of the reduction in our estimated liabilities under guarantees for certain partnerships. For the year ended December 31, 2001 the $1.8 million in the equity in loss of partnerships is due to the losses in the unconsolidated joint ventures. THE YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999 The following table sets forth a comparison of the year ended December 31, 2000 and the year ended December 31, 1999. The percentage increase (decrease) are based upon whole numbers and will not compute using rounded numbers.
INCREASE/ 2000 1999 (DECREASE) -------- -------- ---------- (DOLLARS IN MILLIONS) Revenue: Assisted living community revenue .............................. $ 136.1 $ 137.2 (0.8)% Skilled nursing facility revenue .............................. 2.0 -- 100.0% Management fees from affiliates and others ..................... 0.8 1.0 (19.4)% -------- -------- ---------- Total revenue ................................................... 138.9 138.2 (0.5)% -------- -------- ---------- Operating expenses: Assisted living community operating expense .................... 87.1 87.7 (0.6)% Skilled nursing facility expenses .............................. 1.9 -- 100.0% Community lease expense ........................................ 31.6 32.2 (2.1)% General and administrative ..................................... 12.3 15.0 (17.9)% Impairment loss ................................................ 6.2 16.4 (62.2)% Depreciation and amortization .................................. 8.5 8.5 (0.6)% -------- -------- ---------- Total operating expenses ........................................ 147.6 159.8 (7.6)% -------- -------- ---------- Loss from operations ............................................. (8.7) (21.6) (59.7)% -------- -------- ---------- Other income (expense): Interest income ................................................ 1.5 1.0 49.2% Other income (expense), net .................................... 0.2 0.4 (35.1)% Equity in income (loss) of partnerships ........................ 0.8 (0.9) 189.5%
24 Gain on sale of properties ..................................... 0.5 1.9 (73.5)% Interest expense ............................................... (8.3) (8.9) (6.3)% Litigation judgment ............................................ -- (4.4) (100.0)% -------- -------- ---------- Total other income (expense) .................................... (5.3) (10.9) (51.4)% -------- -------- ---------- Loss before income taxes, minority interest in income of majority owned entities, extraordinary items and cumulative effect of accounting change............................................... (14.0) (32.5) (56.9)% Income tax expense ............................................... (0.2) -- 357.1% Minority interest in (income) loss of majority owned entities .... 0.1 (0.9) (106.1)% -------- -------- ---------- Loss before extraordinary item and cumulative effect of accounting change............................................................ (14.1) (33.4) (57.8)% Extraordinary gain from early extinguishment of debt ............. 20.6 7.0 193.6% -------- -------- ---------- Income (loss) before cumulative effect of accounting change ...... 6.5 (26.4) 124.7% Cumulative effect of accounting change ........................... -- (1.3) (100.0)% -------- -------- ---------- Net income (loss) ........................................... $ 6.5 $ (27.7) 123.5% ======== ======== ==========
The decrease in 2000 of $1.1 million in assisted living community revenue is attributable to: o the sale of three ALCs during the second quarter of 2000; offset by o the increase in average occupancy for same store ALCs to 88.1% for 2000 as compared with 86.7% for 1999; o the increase in assisted living penetration to 46.7% for 2000 as compared with 45.6% for 1999; and o the increase in average rate per occupied unit to $2,145 for 2000 as compared with $2,070 for 1999. The $2.0 million increase in skilled nursing facility revenue in 2000 is due to the fact that we began managing the facility ourselves on April 1, 2000. Previously it was managed by an unrelated third party and was included in other income and expense. Management fees from affiliates and others decreased $0.2 million due to the decrease in the number of management contracts to six for two quarters during 2000. Assisted living community operating expense decreased $0.6 million in 2000 due to: o the sale of three of the ALCs during the second quarter of 2000; offset by o staffing requirements related to increased assisted living services provided; and o increased wages of staff. The decrease in assisted living community lease expense of $0.6 million in 2000 is primarily due to the sale of three ALCs during the second quarter of 2000. General and administrative expenses decreased $2.7 million due to the following: o expenses incurred in connection with the lawsuits with Kapson, Atria and Lazard Freres and Emeritus were less in 2000 as we settled the lawsuits in the middle of 1999; and o in 2000 we made substantial reductions in staffing under the current management team; and o the provision of $1.0 million in 1999 for the Medicare receivables held by GeriCare which was discontinued in 1997, versus $0.8 million additional provision booked in 2000 due to the uncertainty of collection as a result of an audit by the intermediary for Medicare. The impairment loss in 1999 was due to the following: 25 o an $8.6 million impairment loss which represents a write down of the carrying values in excess of fair market value of the property held for sale; and o a $7.7 million write off for Rossmore House which included $3.1 million of goodwill and $4.6 million for reduction in carrying value as a result of the decision to sell this facility. The impairment loss in 2000 was due to the following: o an additional $0.5 million impairment loss on the properties held for sale; and o a $5.7 million impairment loss on the investment in joint ventures that have carrying values in excess of fair value and met the criteria for impairment under Statement of Financial Accounting Standard No. 121. Depreciation and amortization expenses remained relatively constant in 2000. Expected decreases due to sale of ALCs during 2000 were offset by an increase in depreciation related to capital expenditures. Interest income increased due to higher average cash balances carried by us during 2000 as compared to 1999. Interest expense decreased $0.6 million in 2000 due to extinguishment of debt. Minority interest in income of majority owned entities increased $1.0 million in 2000 due to the interest expense for the nine refinanced properties held by our majority owned entities. The $0.5 million gain from the sale of assets in 2000 was due to the sale of a parcel of land in Texas that was in property held for sale. The $ 1.9 million gain in 1999 was due to the sale of assets to Dominium for a portion of the apartment group. Equity in income of partnerships was $ 0.8 million for the year ended December 31, 2000 and a loss of $ 0.9 million for the year ended December 31, 1999. The income in 2000 is a result of the reduction in our estimated liabilities under guarantees for certain partnerships. The 1999 expense is the result of operating costs of the Apartment Group, offset by a $ 1.0 million reduction in the estimated liability under guarantees for certain partnerships. LIQUIDITY AND CAPITAL RESOURCES Our consolidated cash and cash equivalents balances were $13.2 million and $16.8 million at December 31, 2001 and 2000, respectively. Working capital decreased to $1.2 million as of December 31, 2001 compared to working capital of $10.5 million at December 31, 2000, resulting primarily from the increase in current maturity of long term debt for one ALC. In our unrestricted cash balances of $13.2 million, $7.7 million are held by our consolidated partnerships in which we have ownership of 52.1% to 60.5%. Cash can only be used to pay the consolidated partnership's obligations and the excess distributed to all partners. Consequently, our access to this cash is limited to the distribution received. During 2001, cash provided by operating activities was $2.5 million compared to $2.1 million used during 2000 and $11.3 million used in 1999. The cash provided by operating activities during 2001 was a result of: o our net income of $1.0 million; adjusted for o $7.9 million non-cash charge of depreciation and amortization expense; 26 o $0.8 million of minority interest in income of majority owned entities; offset by o $2.2 million decrease in net liabilities; o $2.9 million gain on sale of partnership interests in tax credit apartments; and o $2.1 million for gain on extraordinary item on early extingishment of debt. The cash used in operating activities during 2000 was a result of: o net income of $6.5 million; adjusted for non-cash charges of: o $6.2 million loss recorded for impairment of long-lived assets; and o $8.5 million of depreciation and amortization expense; offset by o $20.6 million for gain on extraordinary item on early extinguishment of debt; and o $2.7 million decrease in net liabilities. The cash used in operating activities during 1999 was a result of: o our net loss of $27.7 million; adjusted for non-cash charges (credits) of: o $16.4 million loss recorded for impairment of long-lived assets; o $8.5 million of depreciation and amortization expense; o $1.3 million for the cumulative effect of the change in accounting principle; offset by o $7.0 million for gain on extraordinary item on early extinguishment of debt; o $0.9 million of minority interest in income of majority owned entities; offset by o $0.5 million decrease in net liabilities; o $1.9 million for gain on sale of assets of the apartment division to Dominium; and o $1.3 million for the cumulative effect of the change in accounting principles. In 2001, cash used in investing activities was $3.4 million as compared to $1.9 million in 2000, and $11.9 million provided by investing activities in 1999. The cash used in investing activities during 2001 was a result of: o $1.3 million related to the acquisition of an additional 51.8% ownership interest in American Retirement Villas Properties III, L.P; and o $6.1 million of purchases of property, furniture and equipment; offset by o $0.4 million increase in security deposits; o $0.7 million of net proceeds from the sale of a land site in Colorado; and 27 o $2.9 million for the proceeds from the sale of our partnership interest in five apartment partnerships. The cash used in investing activities during 2000 was a result of: o $5.2 million for purchase of property, furniture and equipment; and o $0.5 million increase in security deposit on leased properties; offset by o $3.8 million proceeds for sale of assets, net of cost. The cash provided by investing activities during 1999 was a result of: o $39.8 million proceeds for sale of ALCs, net of cost; o $1.9 million proceeds for sale of partnership interests; offset by o $14.7 million for purchase of previously leased ALCs; o $7.4 million for purchase of property, furniture and equipment; o $6.4 million increase in security deposit on leased properties; and o $1.3 million for the contribution into a joint venture. In 2001, the cash used by financing activities was $5.6 million as compared to $6.2 million provided for 2000 and $2.1 million provided during 1999. The cash used by financing activities during 2001 was a result of: o $12.4 million of repayments of notes payable; o $5.7 million for repayment of subordinated debt; o $2.5 million for distributions to minority partners; and o $0.7 million of payments for loan fees; offset by o $18.7 million borrowings under refinancings. The cash provided by financing activities during 2000 was a result of: o $10.0 million borrowings under non-secured line of credit; o $41.0 million of borrowing under notes payable; offset by: o $33.7 million of repayments of notes payable; o $10.9 million of repayments of subordinated debt offset by $1.3 million of associated costs; o $0.2 million of distributions paid to our minority partners in certain majority owned entities; and o $1.3 million of loan fees. 28 The cash provided by financing activities during 1999 was a result of: o $41.8 million refinancing proceeds; o $14.7 million of borrowing under notes payable for purchase of previously leased ALCs; o $2.6 million of borrowing under notes payable; offset by: o $45.2 million of repayments of notes payable; o $9.0 million of distributions paid to our minority partners in certain majority owned entities; o $1.0 million of repayments of subordinated debt; and o $1.8 million of loan fees. In 2001, we refinanced five owned ALCs for $17.7 million with fixed interest rates of 7.25%-7.79% for 35-years. Subsequent to year end we refinanced two ALCs owned by two of our majority owned partnerships. One refinancing increased the loan to $2.4 million for 35 years at an interest rate of 7.56%. The other refinancing amended one of the existing notes to (i) increase the principal sum of the existing loan by approximately $4.0 million, (ii) extend the maturity date of the existing loans to July 1, 2003, and (iii) change the interest rate of the existing loan to 8.5%. In addition, we restructured the $1.5 million debt to our major shareholder to extend its maturity to April 2003 for a nominal extension fee. Subsequent to year-end we received an extension on a $12.3 million loan for an ALC until March 2003, while we work to refinance this property into a 35-year mortgage. In January, 2001 we restructured 16 ALC leases into two lease pools of 8 ALCs each. In each restructured pool, the lease termination date was extended through fiscal 2021. As part of the restructure, we are allowed to finance the additional rent expense of up to $1.0 million during 2001, $1.0 million in 2002, $1.5 million in 2003, $1.0 million in 2004 and $0.5 million in 2005, converting this into a note payable with a due date of December 31, 2010 at a fixed interest rate of 7%. Interest only payments are required monthly with principal payments beginning in 2006 at $1.0 million per year. We also incurred a restructuring fee of $4.5 million payable at $1.5 million for each of the first three years. The restructured lease agreements provide for reimbursement to us from the landlord of capital improvement expenditures up to $3.0 million. The various debt and lease agreements contain restrictive covenants requiring us to maintain certain financial ratios, including current ratio, working capital, minimum net worth, and debt service coverage, among others. At December 31, 2001, we were in compliance with all covenants. In 1999, we began retiring portions of our 6 3/4% convertible subordinated debt. During 1999, we issued a total of 799,566 shares of our common stock and paid a total of $1.0 million to certain of our bondholders in exchange for a total of $9.2 million principal amount of the subordinated notes due 2006 that were held by those bondholders. These transactions resulted in an extraordinary gain of $7.0 million net of tax for the fiscal year ended December 31, 1999. During 2000, we issued a total of 781,025 shares of our common stock and paid a total of $9.6 million to additional bondholders in exchange for a total of $33.0 million in principal amount of the subordinated notes held by those bondholders which yielded an extraordinary gain of $20.6 million net of tax and costs. In 2001 we paid a total of $5.7 million to certain of our bondholders in exchange for a total of $8.0 million principal amount of the subordinated notes. The transactions for the year ended December 31, 2001, resulted in an extraordinary gain of $2.1 million net of tax and costs. Out of $57.5 million we have retired a total of $50.2 million of our public debt resulting in extraordinary gains of $29.5 million to date net of tax and costs. Pursuant to the terms of an Operating Deficit Payment Agreement, the Company has agreed to fund any operating deficits incurred in connection with the operation of five joint venture projects operating as limited liability companies ("LLC"), up to an aggregate amount of $6.0 million for all of the development properties and $6.0 million for all of the renovation properties subject to a $9.0 million cap. The advances, which are considered capital contributions to the LLC, are non-interest bearing and will be repaid only if sufficient funds are available in accordance with the terms of the operating agreements of the respective LLCs. This agreement will remain in effect from the commencement of operations of the project until the earlier to occur of 18 months after the project has achieved stabilization, the sale of the project to a third-party, or the purchase by the Company of the membership 29 interests of the project owner. As of December 31, 2001, operating deficit advances of $1.5 million had been funded since inception in 1998. We declined to purchase two of the joint venture properties and in accordance with the operating agreement we were terminated as the manager of those LLCs. In addition we are no longer managing one of the properties that is outside our geographic clustering strategy. We believe that our existing liquidity, our ability to sell ALCs and land sites which do not meet our financial objectives or geographic clustering strategy and our ability to refinance certain owned ALCs and investments will provide us with adequate resources to meet our current operating and investing needs. At December 31, 2001 we did not generate sufficient cash from operations to fund recurring working capital and capital expenditure requirements. We may be required from time to time to incur additional indebtedness or issue additional debt or equity securities to finance our strategy, including the rehabilitation of ALCs as well as other capital expenditures. We anticipate that we will be able to obtain the additional financing; however, we cannot assure you that we will be able to obtain financing on favorable terms. IMPACT OF INFLATION AND CHANGING PRICES Operating revenue from ALCs we operate is the primary source of our revenue. These ALCs are affected by rental rates which are highly dependent upon market conditions and the competitive environments where the communities are located. Employee compensation is the principal cost element of property operations. Although there can be no assurance we will be able to continue to do so, we have been able historically to offset the effects of inflation on salaries and other operating expenses by increasing rental and assisted living rates. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks related to fluctuations in interest rates on our notes payable. Currently, we do not utilize interest rate swaps. The purpose of the following analysis is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of December 31, 2001. You should be aware that many of the statements contained in this section are forward looking and should be read in conjunction with our disclosures under the heading "Forward-Looking Statements." For fixed rate debt, changes in interest rates generally affect the fair value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact fair value of the debt instrument, but do affect our future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair value should not have a significant impact on the fixed rate debt until we would be required to refinance such debt. Holding the variable rate debt balance constant, each one-percentage point increase in interest rates would result in an increase in variable rate interest incurred for the coming year of approximately $350,000. The table below details the principal amount and the average interest rates of notes payable in each category based upon the expected maturity dates. The fair value estimates for notes payable are based upon future discounted cash flows of similar type notes or quoted market prices for similar loans. The carrying value of our variable rate debt approximates fair value due to the frequency of re-pricing of this debt. Our fixed rate debt consists of convertible subordinated notes payable and mortgage payables. The fixed rate debt bears interest at rates that approximate current market value except for the convertible subordinated debt which bears interest at 6.75%. EXPECTED MATURITY DATA
FAIR 2002 2003 2004 2005 2006 THEREAFTER TOTAL VALUE ---- ---- ---- ---- ---- ---------- ----- ----- Fixed rate debt.................... $ 578 $ 8,372 $ 544 $ 587 $ 8,875 $ 58,154 $77,110 $77,110 Average interest rate.............. 8.05% 7.99% 7.92% 7.92% 8.00% 8.00% Variable rate debt................. $6,691 $11,877 $ 5,400 $ 353 $ 353 $ 10,547 $35,221 $35,221 Average interest rate.............. 6.63% 6.02% 4.32% 4.07% 4.07% 4.07%
We do not believe that the future market rate risks related to the above securities will have a material adverse impact on our financial position, results of operation or liquidity. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and the Independent Auditors' Report are listed at Item 14 and are included beginning on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by these Items is incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of our fiscal year covered by this Report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of the report: (1) Financial Statements. The following financial statements of the Registrant and the Report of Independent Public Accountants therein are filed as part of this Report on Form 10-K:
PAGE ---- Independent Auditors' Report............................................................................... F-1 Consolidated Balance Sheets................................................................................ F-2 Consolidated Statements of Operations...................................................................... F-3 Consolidated Statements of Shareholders' Equity............................................................ F-4 Consolidated Statements of Cash Flows...................................................................... F-5 Notes to Consolidated Financial Statements................................................................. F-7
(2) Financial Statement Schedules. Schedule II-Valuation and Qualifying Accounts. Other Financial Statement Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (b) Reports on Form 8-K. None. (c) Exhibits: The following exhibits are filed as part of, or incorporated by reference into this report on Form 10-K: EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2 Agreement and Plan of Merger by and between ARV Assisted Living, Inc. and ARV Delaware, Inc., incorporated by reference to the Company's Proxy Statement for the 1997 Meeting of Shareholders of ARV Assisted Living, Inc., filed with the Securities and Exchange Commission on Schedule 14A on December 31, 1997. 3.1 Certificate of Incorporation of ARV Delaware, Inc., incorporated by reference to the Company's Proxy Statement for the 1997 Meeting of Shareholders of ARV Assisted Living, Inc., filed with the Securities and Exchange Commission on Schedule 14A on December 31, 1997. 3.2 By-laws of ARV Delaware, Inc., incorporated by reference to the Company's Proxy Statement for the 1997 Meeting of Shareholders of ARV Assisted Living Inc., filed with the Securities and Exchange Commission on Schedule 14A on December 31, 1997. 4 Rights Agreement, dated May 14, 1998, between ARV Assisted Living Inc., and ChaseMellon Shareholder Services LLC which includes the form of Certificate of Determination of the Series D Junior Participating Preferred Stock of ARV Assisted Living, Inc. as Exhibit A, the form of Right Certificate as Exhibit B, and the Summary of Rights to Purchase Preferred Shares as Exhibit C, incorporated by reference. 31 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 4.2 First Amendment to the Right Agreement, dated October 21, 1998, by and between ARV Assisted Living Inc., and ChaseMellon Shareholder Services LLC, incorporated by reference to our 8-K filed October 21, 1998. 10.1 Purchase and Sale Agreement by and between 270 Center Associates, Limited Partnership and ARV Assisted Living, Inc. dated as of February 12, 1998, incorporated by reference to Exhibit 10.1 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.2 Amendment to Purchase and Sale Agreement by and between 270 Center Associated, Limited Partnership and ARV Assisted Living, Inc. dated as of March 2, 1998, incorporated by reference to Exhibit 10.2 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.3 Second Amendment to Purchase and Sale Agreement by and between 270 Center Associated, Limited Partnership and ARV Assisted Living, Inc. dated as of April 10, 1998, incorporated by reference to Exhibit 10.3 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.4 Purchase and Sale Agreement by and between TH Group, Inc. and ARV Assisted Living, Inc. dated as of February 12, 1998, incorporated by reference to Exhibit 10.4 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.5 Amendment to Purchase and Sale Agreement by and between TH Group, Inc. and ARV Assisted Living, Inc. dated as of March 2, 1998, incorporated by reference to Exhibit 10.5 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.6 Second Amendment to Purchase and Sale Agreement by and between TH Group, Inc. and ARV Assisted Living, Inc. dated as of April 10, 1998, incorporated by reference to Exhibit 10.6 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.7 Purchase and Sale Agreement by and between The Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of February 12, 1998, incorporated by reference to Exhibit 10.7 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.8 Amendment to Purchase and Sale Agreement by and between The Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of March 2, 1998, incorporated by reference to Exhibit 10.8 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.9 Second Amendment to Purchase and Sale Agreement by and between The Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of April 6, 1998, incorporated by reference to Exhibit 10.9 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.10 Executive Employment Agreement, dated December 5, 1997, by and between ARV Assisted Living, Inc. and Howard G. Phanstiel incorporated by reference to the Company's 10-K filed with the Securities and Exchange Commission on March 31, 1997. 10.11 Amendment to Executive Employment Agreement, effective December 5, 1997, by and between ARV Assisted Living, Inc. and Howard G. Phanstiel incorporated by reference to the Company's 10-K filed with the Securities and Exchange Commission on March 31, 1997. 10.12 Executive Employment Agreement, as amended, dated June 1, 1998, by and between ARV Assisted Living, Inc. and Douglas M. Pasquale incorporated by reference to the Company's 10-Q for June 30, 1998. 10.13 Employment Agreement, as amended, dated June 15, 1998, by and between ARV Assisted Living, Inc. and Patricia J. Gifford, MD incorporated by reference to the Company's 10-Q for June 30, 1998. 32 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.20 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.1 on August 10, 1999. 10.21 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.2 on August 10, 1999. (1) 10.22 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.3 on August 10, 1999. (1) 10.23 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.4 on August 10, 1999. (1) 10.24 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.5 on August 10, 1999. (1) 10.25 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.6 on August 10, 1999. (1) 10.26 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.7 on August 10, 1999. (1) 10.27 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.8 on August 10, 1999.(1) 10.28 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.9 on August 10, 1999. (1) 10.29 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.10 on August 10, 1999. (1) 10.30 Loan Agreement by and between Banc One Capital Funding Corporation and Acacia Villa, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.11 on August 10, 1999. (1) 10.31 Letter Agreement as to the Loans in the aggregate amount of $39,703,100 from Banc One Capital Funding Corporation to Retirements Inns II LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.12 on August 10, 1999. 10.32 Letter Agreement as to the Loans in the aggregate amount of $2,116,100 from Banc One Capital Funding Corporation to Acacia Villa LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.13 on August 10, 1999. 10.33 Letter Agreement as to the Loans in the aggregate amount of $13,382,200 from Banc One Capital Funding Corporation to Retirements Inns III LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.14 on August 10, 1999. 10.34 Note and Agreement as to Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.15 on August 10, 1999. 33 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.35 Note and Agreement as to Retirement Inns III, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.16 on August 10, 1999. 10.36 Note and Agreement as to Acacia Villa, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.17 on August 10, 1999. 10.37 Term Loan Agreement between ARV Assisted Living, Inc. and LFSRI II Assisted Living, LLC, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.1 on May 15, 2000. 10.38 Warrant issued to LFSRI II Assisted Living, LLC to Purchase Common Stock of ARV Assisted Living, Inc, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.2 on May 15, 2000. 10.39 Second Amendment to Rights Agreement, by and between ARV Assisted Living, Inc, and Chase Mellon Shareholder Services, LLC, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.3 on May 15, 2000. 10.40 Term Note between ARV Assisted Living, Inc. and LFSRI II Assisted Living LLC, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.4 on May 15, 2000. 10.41 Waiver, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.5 on May 15, 2000. 10.42 LLC Articles of Incorporation incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.1 on August 10, 2000. 10.43 Multifamily Note incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.2 on August 10, 2000. 10.44 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest in Franklin Commons, L.P. dated January 16, 2001. 10.45 Assignment of interest in the receivable obligation owed by Franklin Commons, L.P. to Pacific Demographics Corporations, a wholly owned subsidiary of ARV Assisted Living, Inc. dated January 16, 2001. 10.46 Assignment of interest in management fees owed by Franklin Commons, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 10.47 First Amendment to Operating Deficit Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Franklin Commons, L.P. 10.48 First Amendment to Tax Credit Reduction and Recapture Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Franklin Commons, L.P. 10.49 Purchase Agreement by and between ARV Investment Group, Inc. (wholly owned subsidiary of ARV Assisted Living, Inc.) and Eenhoorn Development, LLC for the sale of partnership interest in Franklin, Grand Rapids, Rosewood, San Marcos and Lansing. 10.50 Amendment to Purchase Agreement dated October 4, 2000 by and between ARV Investment Group, Inc. (wholly owned subsidiary of ARV Assisted Living, Inc.) and Eenhoorn Development, LLC. 10.51 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest in Grand Rapids Housing Partners, L.P. dated January 16, 2001. 10.52 Assignment of interest in the receivable obligation owed by Grand Rapids Housing Partners, L.P. to ARV Assisted Living, Inc. dated January 16, 2001. 10.53 Assignment of interest in management fees owed by Grand Rapids Housing Partners, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 34 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.54 First Amendment to Operating Deficit Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Grand Rapids Housing Partners, L.P. 10.55 First Amendment to Tax Credit Reduction and Recapture Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Grand Rapids Housing Partners, L.P. 10.58 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest Lansing Housing Partners, L.P. dated January 16, 2001. 10.59 Assignment of interest in the receivable obligation owed by Lansing Housing Partners, L.P. to ARV Assisted Living, Inc. dated January 16, 2001. 10.60 Assignment of interest in management fees owed by Lansing Housing Partners, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 10.61 First Amendment to Operating Deficit Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Lansing Housing Partners, L.P. 10.62 First Amendment to Tax Credit Reduction and Recapture Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Lansing Housing Partners, L.P. 10.65 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest Rosewood Villas, L.P. dated January 16, 2001. 10.66 Assignment of interest in the receivable obligation owed by Rosewood Villas, L.P. to ARV Assisted Living, Inc. dated January 16, 2001. 10.67 Assignment of interest in management fees owed by Rosewood Villas, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 10.68 First Amendment to Operating Deficit Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Rosewood Villas, L.P. 10.69 First Amendment to Tax Credit Reduction and Recapture Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Rosewood Villas, L.P. 10.72 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest San Marcos, L.P. dated January 16, 2001. 10.73 Assignment of interest in the receivable obligation owed by San Marcos, L.P. to ARV Assisted Living, Inc. dated January 16, 2001. 10.74 Assignment of interest in management fees owed by San Marcos, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 10.75 Deed of Trust Note of ARV Burlingame, L.P. to Red Mortgage Capital, Inc. 10.76 Allonge #1 to Deed of Trust Note of ARV Burlingame, L.P. to Red Mortgage Capital, Inc. 10.77 Deed of Trust between ARV Burlingame, L.P. and Fidelity National Title Insurance 10.78 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Burlingame, L.P. and Secretary of Housing and Urban Development 10.79 Regulatory Agreement Nursing Homes Projects between ARV Burlingame, L.P. and Federal Housing Commissioner 10.80 Deed of Trust Note of ARV Campbell, L.P. to Red Mortgage Capital, Inc. 10.81 Allonge #1 to Deed of Trust Note of ARV Campbell, L.P. to Red Mortgage Capital, Inc. 10.82 Deed of Trust between ARV Campbell, L.P. and Fidelity National Title Insurance 10.83 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Campbell, L.P. and Secretary of Housing and Urban Development 10.84 Regulatory Agreement Nursing Homes Projects between ARV Campbell, L.P. and Federal Housing Commissioner 10.85 Deed of Trust Note of ARV Sunnyvale, L.P. to Red Mortgage Capital, Inc. 35 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.86 Allonge #1 to Deed of Trust Note of ARV Sunnyvale, L.P. to Red Mortgage Capital, Inc. 10.87 Deed of Trust between ARV Sunnyvale, L.P. and Fidelity National Title Insurance 10.88 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Sunnyvale, L.P. and Secretary of Housing and Urban Development 10.89 Regulatory Agreement Nursing Homes Projects between ARV Sunnyvale, L.P. and Federal Housing Commissioner 10.90 Deed of Trust Note of ARV Valley View, L.P. to Red Mortgage Capital, Inc. 10.91 Deed of Trust between ARV Valley View, L.P. and Fidelity National Title Insurance 10.92 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Valley View, L.P. and Secretary of Housing and Urban Development 10.93 Regulatory Agreement Nursing Homes Projects between ARV Valley View, L.P. and Federal Housing Commissioner 10.94* Deed of Trust Note of ARV Fullerton, L.P. to Red Mortgage Capital, Inc. 10.95* Allonge #1 to Deed of Trust Note of ARV Fullerton, L.P. to Red Mortgage Capital, Inc. 10.96* Deed of Trust between ARV Fullerton, L.P. and Fidelity National Title Insurance 10.97* Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Fullerton, L.P. and Secretary of Housing and Urban Development 10.98* Regulatory Agreement Nursing Homes Projects between ARV Fullerton, L.P. and Federal Housing Commissioner 10.99* Deed of Trust Note of ARV Acacia, L.P. to Red Mortgage Capital, Inc. 10.100* Allonge #1 to Deed of Trust Note of ARV Acacia, L.P. to Red Mortgage Capital, Inc. 10.101* Deed of Trust between ARV Acacia, L.P. and Fidelity National Title Insurance 10.102* Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Acacia, L.P. and Secretary of Housing and Urban Development 10.103* Regulatory Agreement Nursing Homes Projects between ARV Acacia, L.P. and Federal Housing Commissioner 23.1 Consent of KPMG LLP. 99.1 Complaint in ARV Assisted Living, Inc. v. Lazard Freres Real Estate Investors LLC, et al., case no. 787788, incorporated by reference to the Company's 8-K filed with the Securities and Exchange Commission on May 26, 1998. * included herewith 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARV ASSISTED LIVING, INC. By: /s/ DOUGLAS M. PASQUALE ---------------------------------------- Douglas M. Pasquale Chief Executive Officer Date: March 29, 2002 Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DOUGLAS M. PASQUALE Chief Executive Officer March 29, 2002 - ---------------------------------------------- (Principal Executive Officer) Douglas M. Pasquale /s/ ABDO H. KHOURY President and Chief Financial Officer March 29, 2002 - ---------------------------------------------- (Principal Financial Officer) Abdo H. Khoury /s/ JOHN A. MOORE Director March 29, 2002 - ---------------------------------------------- John A. Moore /s/ DAVID P. COLLINS Director March 29, 2002 - ---------------------------------------------- David P. Collins /s/ MAURICE J. DEWALD Director March 29, 2002 - ---------------------------------------------- Maurice J. DeWald
37 INDEPENDENT AUDITORS' REPORT The Board of Directors ARV Assisted Living, Inc.: We have audited the accompanying consolidated balance sheets of ARV Assisted Living, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule described in Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ARV Assisted Living, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Orange County, California March 15, 2002 F-1 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
ASSETS 2001 2000 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents........................................................... $ 13,234 $ 16,817 Accounts receivable and amounts due from affiliates, net............................ 744 829 Prepaids and other current assets................................................... 3,701 2,291 Impounds............................................................................ 3,779 3,256 Properties held for sale, net....................................................... 763 3,545 ----------- ----------- TOTAL CURRENT ASSETS.................................................................. 22,221 26,738 Property, furniture and equipment..................................................... 116,929 100,461 Goodwill, net......................................................................... 18,354 18,939 Operating lease security deposits..................................................... 9,414 9,778 Other non-current assets.............................................................. 10,259 10,024 ----------- ----------- $ 177,177 $ 165,940 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................... $ 2,212 $ 2,645 Accrued payroll costs............................................................... 4,055 3,064 Other accrued liabilities........................................................... 6,659 8,892 Notes payable, current portion...................................................... 7,269 1,071 Accrued interest payable............................................................ 823 599 ----------- ----------- TOTAL CURRENT LIABILITIES............................................................. 21,018 16,271 Notes payable, less current portion................................................... 105,062 99,130 Lease liabilities..................................................................... 1,995 1,752 Other non-current liabilities......................................................... 641 789 ----------- ----------- 128,716 117,942 Minority interest in majority owned entities.......................................... 621 1,130 SHAREHOLDERS' EQUITY: Series A Preferred stock, convertible and redeemable; 2,000 shares authorized, none issued or outstanding at December 31, 2001 and 2000........................... -- -- Preferred stock, no par value. 8,000 shares authorized, none issued and outstanding... -- -- Common stock, $0.01 par value. Authorized 100,000 shares; 17,460 shares issued and outstanding at December 31, 2001 and 2000.......................................... 175 175 Additional paid in capital.......................................................... 145,337 145,337 Accumulated deficit................................................................. (97,672) (98,644) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY............................................................ 47,840 46,868 ----------- ----------- Commitments and contingent liabilities................................................ $ 177,177 $ 165,940 =========== ===========
See accompanying notes to consolidated financial statements. F-2 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999 ----------- ----------- ----------- REVENUE: Assisted living community revenue: Rental revenue............................................................... $ 117,249 $ 112,073 $ 110,980 Assisted living and other services........................................... 24,668 24,024 26,196 Skilled nursing facility revenue............................................. 2,323 1,960 -- Management fees.............................................................. 1,155 808 1,003 ----------- ----------- ----------- TOTAL REVENUE................................................................. 145,395 138,865 138,179 ----------- ----------- ----------- OPERATING EXPENSES: Assisted living community operating expense.................................. 88,185 87,130 87,665 Skilled nursing facility expenses............................................ 2,507 1,901 -- Community lease expense...................................................... 30,943 31,571 32,239 General and administrative................................................... 9,874 12,288 14,965 Impairment loss.............................................................. -- 6,187 16,368 Depreciation and amortization................................................ 7,878 8,483 8,531 ----------- ----------- ----------- TOTAL OPERATING EXPENSES...................................................... 139,387 147,560 159,768 ----------- ----------- ----------- Income (loss) from operations.................................................. 6,008 (8,695) (21,589) ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest income.............................................................. 1,010 1,532 1,027 Other income (expense), net.................................................. 681 244 376 Equity in income (loss) of partnerships...................................... (1,798) 791 (884) Gain on sale of properties and partnership interests......................... 2,887 500 1,884 Interest expense............................................................. (8,949) (8,368) (8,933) Litigation judgment.......................................................... -- -- (4,368) ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSE).................................................. (6,169) (5,301) (10,898) ----------- ----------- ----------- Loss before income tax expense, minority interest in income of majority owned entities, extraordinary gain, and change in accounting principle............. (161) (13,996) (32,487) Income tax expense............................................................. 151 160 35 Minority interest in (income) loss of majority owned entities.................. (778) 55 (903) ------------ ----------- ----------- Loss before extraordinary gain and change in accounting principle (1,090) (14,101) (33,425) Extraordinary gain from early extinguishment of debt, net of income tax of $200 in 2000................................................................. 2,062 20,613 7,020 ----------- ----------- ----------- Income (loss) from operations before change in accounting principle............ 972 6,512 (26,405) Cumulative effect of change in accounting principle, net of income tax......... -- -- (1,260) ----------- ----------- ----------- Net income (loss).............................................................. $ 972 $ 6,512 $ (27,665) =========== =========== =========== Earnings (loss) per share information: Basic and diluted earnings (loss) per common share: Loss before extraordinary gain from early extinguishment of debt, and cumulative effect of change in accounting principle......................... $ (0.06) $ (0.81) $ (2.09) Extraordinary gain from early extinguishment of debt, net of income tax...... 0.12 1.19 .44 Cumulative effect of change in accounting principle, net of income tax....... -- -- (.08) ----------- ----------- ----------- Net earnings (loss)........................................................... $ 0.06 $ 0.38 $ (1.73) =========== =========== =========== Weighted average common shares outstanding.................................... 17,460 17,357 15,968 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
COMMON STOCK ----------------------- ACCUMULATED SHARES AMOUNT DEFICIT TOTAL --------- ----------- ------------ ----------- Balance at December 31, 1998......................................... 15,873 $ 143,178 $ (77,491) $ 65,687 Issuance of common stock........................................... 806 1,474 -- 1,474 Adjustment to stock issuance cost-litigation judgment.............. -- (372) -- (372) Net loss........................................................... -- -- (27,665) (27,665) --------- ----------- ------------ ----------- Balance at December 31, 1999......................................... 16,679 144,280 (105,156) 39,124 Issuance of common stock........................................... 781 1,232 -- 1,232 Net income......................................................... -- -- 6,512 6,512 --------- ----------- ------------ ----------- Balance at December 31, 2000......................................... 17,460 145,512 (98,644) 46,868 Net income......................................................... -- -- 972 972 --------- ----------- ------------ ----------- Balance at December 31, 2001......................................... 17,460 $ 145,512 $ (97,672) $ 47,840 ========= =========== ============ ===========
See accompanying notes to consolidated financial statements. F-4 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
2001 2000 1999 ---------- ---------- ---------- Cash flows provided by (used in) operating activities: Net income (loss)................................................... $ 972 $ 6,512 $ (27,665) Adjustments to reconcile net income (loss) to net cash provided by (used in) Operating activities: Impairment loss.................................................. -- 6,187 16,368 Extraordinary gain on debt retirement............................ (2,062) (20,613) (7,020) Change in accounting principle................................... -- -- 1,260 Gain on sale of properties and partnership interest.............. (2,887) (500) (1,884) Depreciation and amortization.................................... 7,878 8,483 8,531 Minority interest in income (loss) of majority owned entities 778 (55) 903 Other............................................................ (80) (23) 70 Changes in assets and liabilities, net of acquisitions: (Increase) decrease in: Accounts receivable and amounts due from affiliates......... 85 2,210 (696) Prepaids and other assets................................... (1,009) (2,775) 2,460 Other non-current assets.................................... 694 (92) (407) Increase (decrease) in: Accounts payable and accrued liabilities.................... (2,249) (756) (3,476) Accrued interest payable.................................... 125 (693) (385) Lease concessions........................................... 243 17 596 ---------- ---------- ---------- Net cash provided by (used in) operating activities........ 2,488 (2,098) (11,345) ---------- ---------- ---------- Cash flows provided by (used in) investing activities: Net cash paid in acquisition of American Retirement Villas Properties III, L.P partnership interest....................................... (1,242) -- -- Proceeds from the sale of properties, net of selling cost........... 730 3,820 39,786 Proceeds from sale of partnerships, net of selling cost............. 2,887 -- 1,884 Purchase of previously leased communities........................... -- -- (14,693) Additions to property, furniture and equipment...................... (6,110) (5,187) (7,391) (Increase) decrease in security deposits............................ 459 (498) (6,400) Cash contributed to joint venture................................... -- -- (1,251) Increase in property held for sale.................................. (90) -- -- ----------- ---------- ---------- Net cash provided by (used in) investing activities......... (3,366) (1,865) 11,935 ---------- ---------- ---------- Cash flows provided by (used by) financing activities: Borrowings under notes payable for purchase of previously leased communities....................................................... -- -- 14,677 Borrowing under refinancing for owned communities................... 18,660 -- 41,819 Borrowing under non-secured credit line............................. -- 10,000 -- Borrowings under notes payable...................................... -- 40,987 2,609 Repayments of notes payable......................................... (12,430) (33,654) (45,197) Repurchase of subordinated debt..................................... (5,720) (9,598) (1,010) Distributions to minority partners.................................. (2,513) (247) (9,039) Loan fees........................................................... (702) (1,278) (1,764) ----------- ---------- ---------- Net cash provided by financing activities................... (2,705) 6,210 2,095 ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents........ (3,583) 2,247 2,685 Cash and cash equivalents at beginning of period...................... 16,817 14,570 11,885 ---------- ---------- ---------- Cash and cash equivalents at end of period............................ $ 13,234 $ 16,817 $ 14,570 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-5 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
2001 2000 1999 ---------- ---------- ---------- Supplemental schedule of cash flow information: Cash paid during the year for: Interest......................................................... $ 8,656 $ 9,061 $ 9,318 ========== ========== ========== Income taxes..................................................... $ 151 $ 160 $ 35 ========== ========== ========== Supplemental schedule of non-cash investing and financing activities: Conversion of current liability to long-term debt................ $ -- $ -- $ 1,000 Additional costs of private placement............................ -- -- 372 Conversion of subordinated notes to common stock................. -- 1,232 1,474
See accompanying notes to consolidated financial statements. F-6 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL ARV Assisted Living, Inc. and subsidiaries (the "Company") own, operate, acquire and develop assisted living communities that provide housing to senior citizens, some of whom require assistance with the activities of daily living such as bathing, dressing and grooming. At December 31, 2001, we operated 58 assisted living communities ("ALCs") in ten states including 17 which we own ("Owned ALCs"), 33 which we operate pursuant to long-term operating leases ("Leased ALCs") and 8 in which we serve as the property manager ("Managed ALCs"). Limited partnerships or limited liability companies for which we serve as managing general partner or member and community manager and in which we have majority ownership interest are referred to as Affiliated Partnerships. Thirty-seven of the ALCs are located in California. We also manage 3 affordable senior and multifamily apartments (the "Apartment Group"), in 2 of which we serve as the general partner. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries, which include limited partnerships and limited liability companies in which we have controlling interests, have been consolidated into the financial statements. In December 2001, we acquired an additional 51.8% interest in American Retirement Villas Properties III, L.P. ("ARVP III"). The balance sheet on December 31, 2001 includes the accounts of ARVP III while the statement of operations includes the operations from December 14, 2001; the date we acquired greater than 50% of the partnership units. All significant intercompany balances and transactions have been eliminated in consolidation. CONSOLIDATED PARTNERSHIPS Included in the consolidated financial statements are partnerships in which we own from 52.1% to 60.5%. The following is a recap of the assets and liabilities of those partnerships as of December 31, 2001 and 2000:
2001 2000 ------- ------- Cash $ 7,668 $ 2,912 Other current assets 3,954 3,425 Total assets 72,399 51,041 Current liabilities 4,194 2,610 Long term debt 60,675 40,943 Net equity 7,221 6,424
USE OF ESTIMATES In the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America, we have made estimates and assumptions that affect the following: o reported amounts of assets and liabilities at the date of the financial statements; o disclosure of contingent assets and liabilities at the date of the financial statements; and o reported amounts of revenues and expenses during the reporting period. F-7 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, we consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. IMPOUNDS Impounds consist of cash deposits made by the Company to lenders in accordance with the loan agreements. ADVERTISING Advertising costs are expensed as incurred. STOCK-BASED COMPENSATION The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") SFAS No. 123, "Accounting for Stock-Based Compensation". As permitted by SFAS No. 123, the Company continues to follow the guidance of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees". Consequently, compensation related to stock options reflects the difference between the grant price and the fair value of the underlying common shares at the grant date. The Company issues stock options to employees with a grant price equal to the market value of common stock on the grant date. As required by SFAS No. 123, the Company discloses in Note 5 "Stock Options" the pro forma effect on operations, as if compensation costs were recorded at the estimated fair value of the stock options granted. PROPERTY, FURNITURE AND EQUIPMENT Property, furniture and equipment are stated at cost less accumulated depreciation which is charged to expense on a straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements................................................................... 27.5 to 35 years Furniture, fixtures and equipment............................................................ 3 to 7 years
Property, furniture and equipment consisted of the following (in thousands):
DECEMBER 31, -------------------------- 2001 2000 ---------- ---------- Land......................................................................... $ 21,644 $ 19,404 Buildings and improvements................................................... 104,982 84,891 Furniture, fixtures and equipment............................................ 18,251 13,631 ---------- ---------- 144,877 117,926 Accumulated depreciation..................................................... (27,948) (17,465) ---------- ---------- $ 116,929 $ 100,461 ========== ==========
F-8 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 GOODWILL Goodwill represents the excess of the purchase price of acquired assets over the estimated fair value of the net tangible assets acquired. Goodwill was amortized on a straight-line basis over 35 years and includes accumulated amortization of $2,124,000 and $1,539,000 at December 31, 2001 and 2000, respectively. We periodically review our goodwill to assess its recoverability and impairments will be recognized in the statement of operations if an impairment is determined to have occurred. If we dispose of a significant segment of the operations acquired which generated goodwill, we would allocate the goodwill to the disposal based upon its fair value relative to the fair value of all assets acquired. Recoverability of goodwill is determined based on undiscounted future operating cash flows from the related business unit. The amount of impairment, if any, is measured based on discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. Management believes SFAS 142 ("Goodwill and Other Intangible Assets" - see New Accounting Pronouncements) will not have a material impact on the Company's, financial position, results of operation or cash flows. ACCOUNTING FOR LONG-LIVED ASSETS We review our long-lived assets, including goodwill, for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, we estimate the future cash flows expected to result from using the assets and eventually disposing of them. Cash flows are reviewed at the community level which is the lowest level of identifiable cash flows. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based upon the asset's fair value. For long-lived assets held for sale, fair value is reduced for costs to sell. In 1998, our board of directors decided to sell five Owned ALCs and five development land sites located outside of California. In addition, in 1999 we decided to sell twelve leased ALCs outside the Western United States. These decisions were in keeping with our strategy to focus our efforts on occupancy gains and to lease up ALCs faster. The fair value of the assets, based upon the offers we received from potential buyers, was below the carrying amount of the assets. We recorded an impairment loss of $6.2 million in 2000 and $16.4 million in 1999 on properties, goodwill and investments that did not meet the Company's strategy of focusing in the western United States or were impaired based upon management's analysis described above. Due to market conditions no buyer could be found for the nine ALCs held for sale at December 31, 2000 and in June of 2001, the Company decided to retain these ALCs. The remaining land site in properties held for sale at December 31, 2001 is currently in escrow. INVESTMENTS We are the general partner in five limited partnerships which operate ALCs, four of which are consolidated for the entire 2001 year. We acquired a controlling interest in the remaining partnership in December 2001. As of December 31, 2000 we were also a general partner in two tax credit partnerships (ownership is generally less than 1%). We account for our investment in partnerships where we can exercise significant influence using the equity method because we have less than a controlling interest. Under the terms of the partnership agreements, profits and losses are allocated to the general and limited partners in specified ratios. We generally have unlimited liability for obligations of certain partnerships in which we are the general partner. Liabilities under these obligations have generally not been significant. We have unlimited liability under separate guarantees related to these partnerships. Under Statement of Position No. 78-9, "Accounting for Investments in Real Estate Ventures," we record our obligations under these agreements as a component of our equity in the income or losses of these partnerships. In 1998, we pursued an additional development strategy by entering into joint ventures ("LLCs") designed to help us finance development and renovation projects and to mitigate the impact of start-up losses associated with the F-9 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 opening of newly constructed ALCs. The joint ventures were formed to finance and manage the substantial renovation of existing ALCs acquired in 1998 in the Hillsdale transaction and to construct three new communities on land sites we owned. Participants in the joint ventures with us are a third-party investor and a third-party developer. The LLCs contracted with the developer to provide development services to perform the renovation and construction. We manage four of the properties operated by the joint ventures for an amount equal to three percent of gross revenues. One property is managed by an unrelated third party. We account for our investment in the joint ventures using the equity method and losses incurred by the LLCs are allocated disproportionately to the joint venture partners based upon their assumption of risk. In 2000 and 2001, certain joint venture partner's capital was reduced to zero, consequently, the losses from the joint venture were allocated to us based upon our capital or percentage interest. We have agreed to fund any operating deficits incurred in connection with the operation of the five joint venture projects, up to an aggregate amount of $6.0 million for all of the development properties and $6.0 million for all of the renovation properties subject to a $9.0 million cap. The advances, which are considered capital contributions to the LLC, are non-interest bearing and will be repaid only if sufficient funds are available in accordance with the terms of the operating agreements of the respective LLCs. This agreement will remain in effect from the commencement of operations of the project until the earlier to occur of 18 months after the project has achieved stabilization, the sale of the project to a third-party, or the purchase by the Company of the membership interests of the project owner. Our current funding of operating deficits since inception in 1998 is $1.5 million. We will have an option to purchase the joint venturer's interest in the LLCs when the ALCs reach stabilization, at a purchase price that is the greater of fair market value or an amount that generates a guaranteed internal rate of return on the joint venturer's capital contribution. In 2000 we determined that the value of certain of the LLCs was impaired based upon our review of the projected cash flows, accordingly, we wrote down our investment by $5.7 million, to reflect the fair value. In 2001 we declined the option to purchase two of the LLCs that had reached stabilization and in accordance with the LLCs' operating agreement we no longer serve as a manager of the two LLCs. INCOME TAXES We account for income taxes using the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to adjust net deferred tax assets to the amount which management believes will more likely than not be recoverable. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. REVENUE RECOGNITION We recognize rental, assisted living services and skilled nursing facility revenue from owned and leased communities on a monthly basis as earned. We receive fees for property management and partnership administration services from managed communities and recognize such fees as earned. ASSISTED LIVING COMMUNITY SALE-LEASEBACK TRANSACTIONS Certain communities were sold subject to leaseback provisions under operating leases. Gains where recorded were deferred and amortized into income over the lives of the leases. EARNINGS (LOSS) PER SHARE We utilize Statement of Financial Accounting Standards 128 "Earnings Per Share", in determining earnings (loss) per share ("EPS"). Basic EPS excludes all dilution and is based upon the weighted average number of F-10 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised, or converted into common stock. Potentially dilutive securities include convertible notes, warrants and stock options which convert to 1,504,003, 1,729,870, and 2,598,654, shares of common stock for the years ended December 31, 2001, 2000 and 1999, respectively. ACCOUNTING FOR START-UP COSTS In April 1998, the Accounting Standards Executive Committee issued Statement of Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities," which is effective for fiscal years beginning after December 15, 1998. The SOP provides guidance on the financial reporting of start-up activities and organizational costs. It requires costs of start-up activities and organizational costs to be expensed when incurred and, upon adoption, the write-off as a cumulative effect of a change in accounting principle of any previously capitalized start-up or organizational costs. We adopted the provisions of SOP 98-5 in the first quarter of 1999. The carrying amounts of capitalized start-up costs were approximately $1.3 million. SEGMENT INFORMATION The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information ("SFAS 131"). This standard requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. We evaluate performance and make resource allocation decisions on a community by community basis. Accordingly, each community is considered an "operating segment" under SFAS 131. However, SFAS 131 did not have an impact on the financial statements because the communities have similar economic characteristics, as defined by SFAS 131, and meet the criteria for aggregation into one "reportable segment". RECLASSIFICATIONS We have reclassified certain prior period amounts to conform to the December 31, 2001 presentation. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 143 "Accounting for Asset Retirement Obligations". SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. SFAS 141 did not have an impact on the Company's financial position, results of operations, or cash flows. The provisions of SFAS 142 eliminate the amortization of goodwill and identifiable intangible assets with indefinite lives and require an impairment assessment at least annually by applying a fair-value-based test. The Company is required to adopt SFAS 142 on January 1, 2002. Management believes SFAS 142 will not have a material impact on the Company's, financial position, results of operation or cash flows. The Company is required to adopt SFAS 143 on January 1, 2002. Management believes the adoption of SFAS 143 will not have a material effect on the Company's financial position, results of operations, or cash flows. On October 3, 2001 the FASB issued SFAS 144 Accounting for the Impairment and Disposal of Long Lived Assets". SFAS 144 supercedes SFAS 121, "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of". However, SFAS 144 retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to F-11 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 be held and used and (b) measurement of long-lived assets to be disposed of by sale. The Company is required to adopt SFAS 144 on January 1, 2002. Management has not determined the impact SFAS 144 will have on the Company's financial position, results of operations, or cash flows. (2) ACQUISITIONS In December 2001, we purchased approximately 9,667 units (51.8%) of ARVP III. ARVP III has two ALCs one located in Arizona with 164 units and one located in California with 123 units. We accounted for this transaction using the purchase method and paid approximately $4.1 million in cash for the units acquired. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition: Current Assets $ 3,796 Property and equipment 15,230 Intangibles and other assets 289 -------- Total assets 19,315 Current liabilities 1,057 Long-term debt 13,592 -------- Total liabilities 14,649 Net assets acquired 4,666 Less minority interest 502 -------- Net value to ARV $ 4,164 ========
One loan is secured by an ALC for $5.8 million, at an 8.06% fixed interest rate due in February 2036. The other ALC has a mortgage of $8.0 million, at 9.15% interest due January 2003. Subsequent to December 31, 2001, we amended one of the existing notes to (i) increase the principal sum of the existing loan by approximately $4.0 million, (ii) extend the maturity date of the existing loan to July 1, 2003, and (iii) change the interest rate of the existing loan to 8.5%. The purchase price paid in excess of the book value of the net assets acquired required a $3.5 million step-up in basis. This step-up in basis is being amortized over the remaining useful life of the underlying existing assets. The pro forma effect on the statement of operations for the acquisition is as if it had been acquired as of January 1, 2000 is as follows: ARV ASSISTED LIVING, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, AND 2000
2001 2000 ------------- --------- REVENUE: Assisted living community revenue............................................ $ 148,499 $ 144,934 Skilled nursing facility revenue............................................. 2,323 1,960 Management fees.............................................................. 1,155 188 ----------- ----------- TOTAL REVENUE................................................................. 151,977 147,082 ----------- ----------- OPERATING EXPENSES: Assisted living community operating expense.................................. 92,911 92,348 Skilled nursing facility expenses............................................ 2,507 1,901 Community lease expense...................................................... 30,943 31,571 General and administrative................................................... 9,874 12,288 Impairment loss.............................................................. -- 6,187 Depreciation and amortization................................................ 8,616 9,587 ----------- -----------
F-12 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 TOTAL OPERATING EXPENSES...................................................... 144,851 153,882 ----------- ----------- Income (loss) from operations.................................................. 7,126 (6,800) ----------- ----------- OTHER INCOME (EXPENSE): Interest income.............................................................. 1,139 1,690 Other income, net............................................................ 666 244 Equity in income (loss) of partnerships...................................... (1,798) 791 Gain on sale of properties and partnership interests......................... 2,887 5,323 Interest expense............................................................. (10,118) (9,778) ----------- ----------- TOTAL OTHER INCOME (EXPENSE).................................................. (7,224) (1,730) ----------- ----------- Loss before income tax expense, minority interest in income of majority owned entities and extraordinary item............................................... (98) (8,530) Income tax expense............................................................. (160) (170) Minority interest in (income) loss of majority owned entities.................. (784) (3,259) ----------- ----------- Loss before extraordinary items................................................ (1,042) (11,959) Extraordinary gain from early extinguishment of debt, net of income tax of $200 in 2000................................................................. 1,996 20,613 ----------- ----------- Net income .................................................................... $ 954 $ 8,654 ----------- ----------- Earnings per share basic and diluted........................................... $ 0.05 $ 0.50 =========== ===========
(3) NOTES PAYABLE Notes payable consist of the following at December 31 (in thousands except share data):
2001 2000 ----------- ----------- Convertible subordinated notes due April 1, 2006 with interest at 6.75%. The notes Require semi-annual payments of interest and are convertible to common stock at $18.57 per share. The notes may be called by us at declining premiums starting at 110% of the principal amount................................................. $ 7,253 $ 15,253 Notes payable, bearing interest at fixed rate of 9.15 %, payable in monthly installments of principal and interest totaling $108 collateralized by property with a maturity of January 2002 through January 2003........................................................ 10,036 13,752 Notes payable, bearing interest at floating rates of 30 day LIBOR (1.83% at December 31, 2001) plus rates between 2.25% and 3.60% payable in monthly installments of principal and interest totaling $169 collateralized by Owned ALCs, maturities ranging from August 2002 through September 2004.......................................... 23,766 18,972 Note Payable, bearing interest at fixed rate of 7.0%, payable in monthly installments of interest only with principal due in 2010; $4,000 remaining drawable at $1,000 in 2002, $1,500 in 2003, $500 in 2004 and $1,000 in 2005.......................................... 1,000 -- Notes payable, bearing interest at rates of 7.25% through 8.53%, payable in monthly Installments of principal and interest totaling $388 collateralized by property, Maturities ranging from July 2010 to January 2037........................................ 58,820 40,932 Notes payable to shareholder bearing interest beginning April 2001 at 30-day Treasury Rate (1.72% at December 31, 2001) with principal due and payable April 2003.............. 1,456 1,292 Notes payable to shareholder bearing interest at 30 day LIBOR (1.83% at December 31, 2001) plus 10% payable in monthly installments of interest only, unsecured, maturing April 2003............................................................................... 10,000 10,000 ----------- ----------- 112,331 100,201 Less amounts currently payable............................................................ 7,269 1,071 ----------- ----------- $ 105,062 $ 99,130 =========== ===========
The future annual principal payments of the notes payable at December 31, 2001 are as follows (in thousands): F-13 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2002.......................................................................... $ 7,269 2003.......................................................................... 20,249 2004.......................................................................... 5,944 2005.......................................................................... 941 2006.......................................................................... 9,228 Thereafter.................................................................... 68,700 ----------- $ 112,331 ===========
In 1998, we paid a lender approximately $1.7 million of fees for an interest rate lock and $0.2 million for loan commitment and other fees. The lender terminated the loan commitment and underlying interest rate lock in October 1998 due to adverse market conditions. The lender returned $0.4 million of the interest rate lock fees in January 1999 and $0.5 million in June 2000 as full and final settlement. We included the amounts received in interest expense in the accompanying consolidated statements of operations for the years ended December 31, 2000 and 1999. Subsequent to year end we refinanced two ALCs owned by two of our majority owned partnerships. One refinancing increased the loan to $2.4 million for 35 years at an interest rate of 7.56%. The other refinancing amended one of the existing notes to (i) increase the principal sum of the existing loan by approximately $4.0 million, (ii) extend the maturity date of the existing loans to July 1, 2003, and (iii) change the interest rate of the existing loan to 8.5%. In addition, we extended the maturity on one mortgage of $12.3 million until March 2003 while we secure long-term financing. The current portion of notes payable at December 31, 2001, has been adjusted to reflect the impact of these transactions. The various debt agreements contain restrictive covenants requiring us to maintain certain financial ratios, including current ratio, working capital, minimum net worth, debt-to-equity and debt service coverage, among others. At December 31, 2001, we were in compliance with the debt covenants. (4) EMPLOYEE BENEFIT PLANS SAVINGS PLAN Effective January 1, 1997, we established a savings plan (the "Savings Plan") that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees who are at least 21 years of age may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. We match 25% of each employee's contributions up to a maximum of 6% of the employee's earnings. Employees are eligible to enroll at the first enrollment date following the start of their employment (July 1 or January 1). We match employees' contributions beginning on the first enrollment date following one year of service or 1,000 hours of service. Our expense related to the Savings Plan was approximately $171,000, $175,000, and $191,000 for the years ended December 31, 2001, 2000 and 1999, respectively. (5) STOCK OPTIONS The Company has two stock option plans that provide for the granting of stock options to officers, directors, consultants and key employees. The objectives of these plans include attracting and retaining the best personnel, providing for additional performance incentives, and promoting the success of the Company by providing employees the opportunity to acquire common stock. We have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for employee stock options. Under APB 25, because the exercise price of our employee stock options usually equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The 1995 Stock Option and Incentive Plan of ARV Assisted Living, Inc. is two-tiered, one for the benefit of key employees and consultants and one for the benefit of non-employee directors. The maximum number of shares F-14 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 which may be issued under the Plan is 15% of the total outstanding shares at the end of the fiscal year. The number of shares which may be issued for Incentive Stock Options is limited to 1,155,666 shares. The 1999 Stock Option Plan of ARV Assisted Living, Inc. is two-tiered and very similar to our 1995 Stock Option and Incentive plan. The maximum number of shares which may be granted under the 1999 and 1995 Plans are 2,400,000 plus 15% of any increase in total outstanding shares since June 30, 1999. During the years ended December 31, 2001 and 2000 additional options granted were 80,000 and 781,025 respectively. As of December 31, 2001 there are 859,129 Incentive Stock Options available for grant under the 1999 and 1995 Plans. Options granted under both stock option plans vest over periods ranging from one and one-half to five years from the date of grant. A summary of stock option plans at December 31, 2001 is as follows:
SHARES UNDER OUTSTANDING OPTIONS PRICE PER SHARE ------------ --------------- Authorization of shares........................................................ 2,637,089 N/A Balance at December 31, 1998 1,087,050 $4.75 - 16.25 Options granted................................................................ 1,745,000 $1.63 - 14.00 Options exercised.............................................................. -- N/A Options canceled............................................................... (937,750) $3.00 - 16.25 ----------- Balance at December 31, 1999 1,894,300 $1.63 - 15.75 Options granted................................................................ 656,500 $1.06 - $0.50 Options exercised.............................................................. -- N/A Options canceled............................................................... (211,248) $0.56 - 14.31 ----------- Balance at December 31, 2000 2,339,552 $0.50 - 14.00 Options granted................................................................ 80,000 $1.40 Options exercised.............................................................. -- N/A Options canceled............................................................... (665,752) $0.56 - 14.00 ----------- Balance at December 31, 2001 1,753,800 $0.50 - 14.00 ===========
Pro forma information regarding net loss and net loss per share is required by SFAS 123, which also requires that the information be determined as if we have accounted for our employee stock options granted subsequent to December 31, 1994 under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with a weighted-average expected life of the option of 10 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our employee stock options have characteristics significantly different from those of trade options, and because changes in subjective input assumptions can materially affect the fair value estimate, actual fair values may differ from those estimates. The following represents the estimated fair value of stock options granted and the assumptions used for calculation for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ------- ------- ------- Average estimated fair value per option at grant date.............. $ 1.03 $ 5.10 $ 3.00 Average exercise price per option granted.......................... $ 1.40 $ 5.10 $ 3.00 Expected Stock volatility.......................................... 60% 60% 60% Risk -- free interest rate.......................................... 5.0% 5.0% 5.0%
F-15 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Option term -- years................................................ 10 10 10 Stock dividend yield............................................... -- -- --
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information is as follows (in thousands, except per share amounts) for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ------- ------- --------- Pro forma net income (loss)........................................... $ 972 $ 5,769 $ (28,436) Pro forma income (loss) per share - basic............................. $ 0.06 $ 0.33 $ (1.78)
A summary of our stock option activity and related information for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ------------------------- ------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- Outstanding -- beginning of The period............... 2,339,552 $ 3.18 1,894,300 $ 6.46 1,087,050 $ 13.33 Granted.................... 80,000 $ 1.40 656,500 $ 5.55 1,745,000 $ 3.00 Exercised.................. -- -- -- $ -- Forfeited.................. (665,752) $ 5.66 (211,248) $ 10.41 (937,750) $ 10.56 --------- --------- --------- Outstanding -- end of Period................... 1,753,800 $ 2.15 2,339,552 $ 3.18 1,894,300 $ 6.46 --------- --------- --------- Exercisable at end of Period................... 619,586 $ 3.47 503,481 $ 5.04 96,800 $ 12.80 --------- --------- --------- Weighted average fair Value of options granted During the period........ $ 1.03 $ 5.10 $ 3.00
At December 31, 2001 options outstanding had a weighted average life of 8.08 years. (6) INCOME TAXES The provision for income tax expense from continuing operations consists of the following for the years ended December 31, 2001 2000 and 1999 (in thousands):
FOR THE YEARS ENDED ---------------------------------- 2001 2000 1999 ----- ----- ----- Current: Federal........................................................ $ -- $ -- $ -- State.......................................................... 151 160 35 ----- ----- ----- Total current.......................................... 151 160 35 ----- ----- ----- Deferred: Federal........................................................ -- -- -- State.......................................................... -- -- -- ----- ----- ----- Total deferred......................................... -- -- -- ----- ----- ----- $ 151 $ 160 $ 35 ===== ===== =====
We have Federal net operating loss carryforwards of approximately $55,000,000, which expire in 2012 to 2021. F-16 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 A reconciliation of income tax expense (benefit) related to income from continuing operations to the Federal statutory rate of 34% is as follows (in thousands):
FOR THE YEARS ENDED --------------------------------------- 2001 2000 1999 --------- --------- --------- Income tax expense (benefit) at statutory rate........................ $ (55) $ (4,759) $ (15,612) State income tax expense, net of federal income taxes................. 151 160 36 Reduction of net operating loss carryforwards due to extraordinary gain................................................................ -- 7,076 -- Change in federal valuation allowance................................. 21 (1,998) 15,282 Other................................................................. 34 (319) 348 --------- --------- --------- Total income tax expense.................................... $ 151 $ 160 $ 54 ========= ========= =========
Temporary differences giving rise to a significant amount of deferred tax assets and liabilities from continuing operations at December 31, 2001 and 2000 are as follows (in thousands):
DECEMBER 31, DECEMBER 31, 2001 2000 ------------ ------------ Deferred tax assets: Net operating loss carryforwards................................................... $ 22,031 $ 18,200 Write down of properties........................................................... 10,367 14,429 Other.............................................................................. 824 512 ------------ ------------ Gross deferred tax asset................................................... 33,222 33,141 Less valuation allowance........................................................... (32,616) (32,595) Deferred tax liabilities -- other.................................................. (606) (546) ------------ ------------ Net long-term deferred tax asset........................................... $ -- $ -- ============ ============
A valuation allowance is provided against net deferred tax assets when it is more likely than not that some portion of the deferred tax asset will not be realized. We have established a valuation allowance for 100 percent of the deferred tax assets as, in our best estimate, it is not likely to be realized in the near term. (7) RELATED PARTY TRANSACTIONS Fees and other amounts receivable from affiliates of $7,000, $718,000 and $1,374,000 at December 31, 2001, 2000 and 1999, respectively, consist of receivables related to management services we rendered and non-interest bearing expense advances to various partnerships. Amounts due from affiliates are generally expected to be repaid in subsequent years with cash from operations or from bank financing obtained by the affiliates. Related management fee revenue from affiliates totals $1,002,000, $629,000, and $722,000 during the year ended December 31, 2001, 2000 and 1999, respectively. We are reimbursed for certain expenses such as payroll and retirement benefit, supplies and other expenses paid on behalf of Affiliated Partnerships. During the years ended December 31, 2001, 2000 and 1999, respectively, the expenses incurred on behalf of affiliates and the related reimbursements from these affiliates amounted to approximately $25.0 million, $22.3 million, and $17.8 million, respectively. We account for these reimbursements as a reduction of the related expenses. Mr. R. Bruce Andrews, a former member of our Board of Directors, is Chief Executive Officer of Nationwide Health Properties, Inc. ("NHP"), a healthcare REIT. NHP is the owner of 16 ALCs we lease. Of that number, leases for 13 ALCs were entered into prior to November 29, 1995, the date Mr. Andrews became a Board member, and leases for three ALCs were entered into during Mr. Andrews' tenure as a board member. Aggregate lease payments F-17 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 under these leases were approximately $13.3 million, $12.5 million, and $11.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. (8) SHAREHOLDERS RIGHTS PLAN In May 1998, we adopted a shareholders rights plan under which we have declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of our common stock. Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 10% or , in the case of Lazard Freres Real Estate Investors, LLC ("Lazard" or "LFREI"), 50% or more of our stock or announces a tender offer for 10% or, in the case of LFREI, 50% or more of the common stock. When exercisable, each Right (except the Rights held by the acquiring person) will entitle its holder to purchase, at the Right's then-current exercise price, a number of our common shares having a market value at the time of twice the Right's exercisable price. If we are acquired in a merger or other business combination transaction which has not been approved by our Board of Directors, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value at that time of twice the Right's exercise price. (9) ASSISTED LIVING COMMUNITY LEASES We lease 33 ALCs. The original leases expired from 2006 to 2017, and contained two to three renewal options ranging from five to ten years. In January, 2001 we restructured 16 ALC leases into two lease pools of 8 ALCs each. In each restructured pool, the lease termination date was extended through fiscal 2021. As part of the restructure, we are allowed to finance the additional rent expense of up to $1.0 million during 2001, $1.0 million in 2002, $1.5 million in 2003, $1.0 million in 2004 and $0.5 million in 2005, converting into a note, at 7% interest. Interest only is payable monthly through 2005, and principal payments of $1.0 million per year beginning in 2006 with a due date of December 31, 2010. We also incurred a restructuring fee of $4.5 million payable at $1.5 million for each of the first three years. The restructuring fee is accounted for on a straight-line basis. The restructured lease agreements provide for reimbursement to us from the landlord of capital improvement expenditures up to $3.0 million. Generally, leases for Leased ALCs owned by a common landlord contain cross default provisions permitting the lessor to declare a default under all leases in the event of default on one lease. The lease agreements with each landlord are interconnected in that we will not be entitled to exercise our right to renew one lease with a particular landlord without exercising our right to renew all other leases with that landlord. We anticipate that similar renewal and cross-default provisions will be included in leases with other landlords. Minimum lease payments required under assisted living community operating leases in effect at December 31, 2001 are as follows:
(IN THOUSANDS) -------------- YEAR ENDED DECEMBER 31: 2002................................................................................ $ 32,947 2003................................................................................ 33,380 2004................................................................................ 33,731 2005................................................................................ 34,285 2006................................................................................ 34,858 Thereafter.......................................................................... 384,538 -------------- $ 553,739 ==============
F-18 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Certain of the leases require the payment of additional rent based on a percentage increase of gross revenues. Leases are subject to increase based upon changes in the consumer price index or gross revenues, subject to certain limits, as defined in the individual lease agreements. In the years ended December 31, 2001, 2000 and 1999 such additional rent amounted to $3.1 million, $2.7 million and $2.1 million respectively. Total rent expense was $30.9 million, $31.6 million and $32.2 million in the years ended December 31, 2001, 2000 and 1999, respectively. (11) LIQUIDITY We believe that our existing liquidity, ability to sell assisted living communities and land sites which do not meet our financial objectives or geographic clustering strategy, and ability to refinance certain assisted living communities will provide adequate resources to meet our current operating and investing needs and support our current growth plans for the next 12 months. We will be required from time to time to incur additional indebtedness or issue additional debt or equity securities to finance our growth strategy, including the acquisition of assisted living communities as well as other capital expenditures and to provide additional funds to meet increased working capital requirements. (12) COMMITMENTS AND CONTINGENT LIABILITIES COMMITMENTS We have guaranteed the indebtedness at December 31, 2001, of certain unconsolidated affiliated partnerships for $3.5 million. We are the general partner of certain limited partnerships that serve as the sole members of the borrowing entities which carried loan balances of $15.3 million at December 31, 2001. Although a member of a borrowing entity is not personally liable for any contract or other obligation of that entity, we delivered limited guaranties in connection with the loans. Due to the limited guaranties, we assumed liability for repayment of the loan indebtedness as a result of fraudulent or intentional misconduct regarding the mortgaged properties, an unconsented transfer of a mortgaged property, a change of control by borrower, or violation of hazardous materials covenants. Also, we guaranteed the borrower's obligation to rebalance the loans upon breach of debt service coverage obligations. In our opinion, no claims may be currently asserted under any of the aforementioned guarantees based on the terms of the respective agreements other than those accrued. F-19 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 CONTINGENCIES We have entered into four long-term leases of ALCs, the acquisition and construction of which have been or are being financed by tax exempt multi-unit housing revenue bonds. In order to meet the lease obligations and to allow the landlord to continue to qualify for favorable tax treatment of the interest payable on the bonds, the ALCs must comply with certain federal income tax requirements. These requirements principally pertain to the maximum income level of a specified portion of the residents. Should we elect to execute additional leases for ALCs to be constructed with bond financing, the same and possibly additional restrictions are anticipated to be imposed. Failure to satisfy these requirements will constitute an event of default under the leases, thereby permitting the landlord to accelerate their termination. Failure to obtain low-income residents in the sequence and time required could materially affect the lease-up schedule and, therefore, cash flow from such ALCs. During 2001, the Company was named as a defendant in two lawsuits brought by employees of an ALC owned by a majority-owned partnership. In addition, four other employees of the same ALC filed EEOC claims against the Company arising out of the same facts. Subsequent to year-end, the two lawsuits were submitted to mediation and settled. The four remaining claims will be submitted to binding arbitration. We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity. (13) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of our financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or estimation methodologies may have a material impact on the estimated fair value amounts. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and amounts due from affiliates, net and, accounts payable, accrued payroll costs and other accrued liabilities and accrued interest payable, approximate fair value due to the short-term nature of these instruments. The notes payable bear interest at rates and other terms that approximate current market rates and terms. Therefore, we believe that the carrying value approximates fair value, except for convertible debt which is approximately $5.1 million and $13.5 million at December 31, 2000 and 1999, respectively. (14) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31, ---------------------- 2001 2000 --------- --------- (in thousands) Accrued liabilities Property taxes.................................................................... $ 1,097 $ 1,095 Obligations related to the "Apartment Group" guaranties........................... -- 3,127 Various other accruals............................................................ 5,562 4,670 --------- --------- $ 6,659 $ 8,892 ========= =========
F-20 ARV ASSISTED LIVING, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FOR THE QUARTER ENDED --------------------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 ----------- ------------ ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 Total revenue............................................. $ 37,415 $ 36,685 $ 35,852 $ 35,443 Income from operations................................... 1,889 1,724 1,559 836 Net income (loss)......................................... (751) (739) 797 1,665 Basic and diluted earnings (loss) per share............... (0.05) (0.04) 0.05 0.10 2000 Total revenue............................................. $ 34,557 $ 34,435 $ 34,980 $ 34,893 Income (loss) from operations............................. (7,172) 200 (794) (929) Net income (loss)......................................... (7,175) (1,553) 12,815 2,425 Basic and diluted earnings (loss) per share (0.41) (0.08) 0.73 0.14
F-21 ARV ASSISTED LIVING, INC AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS)
BALANCE AT BALANCE AT DESCRIPTION BEGINNING OF YEAR ADDITIONS DEDUCTIONS END OF YEAR - ----------- ----------------- --------- ---------- ----------- Allowance for Other Assets: December 31, 1999...................................... $ 708 $ 1,212 $ 31 $ 1,889 December 31, 2000...................................... 1,889 791 489 2,191 December 31, 2001...................................... 2,191 -- -- 2,191
See accompanying independent auditors' report. F-22 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2 Agreement and Plan of Merger by and between ARV Assisted Living, Inc. and ARV Delaware, Inc., incorporated by reference to the Company's Proxy Statement for the 1997 Meeting of Shareholders of ARV Assisted Living, Inc., filed with the Securities and Exchange Commission on Schedule 14A on December 31, 1997. 3.1 Certificate of Incorporation of ARV Delaware, Inc., incorporated by reference to the Company's Proxy Statement for the 1997 Meeting of Shareholders of ARV Assisted Living, Inc., filed with the Securities and Exchange Commission on Schedule 14A on December 31, 1997. 3.2 By-laws of ARV Delaware, Inc., incorporated by reference to the Company's Proxy Statement for the 1997 Meeting of Shareholders of ARV Assisted Living Inc., filed with the Securities and Exchange Commission on Schedule 14A on December 31, 1997. 4 Rights Agreement, dated May 14, 1998, between ARV Assisted Living Inc., and ChaseMellon Shareholder Services LLC which includes the form of Certificate of Determination of the Series D Junior Participating Preferred Stock of ARV Assisted Living, Inc. as Exhibit A, the form of Right Certificate as Exhibit B, and the Summary of Rights to Purchase Preferred Shares as Exhibit C, incorporated by reference. 4.2 First Amendment to the Right Agreement, dated October 21, 1998, by and between ARV Assisted Living Inc., and ChaseMellon Shareholder Services LLC, incorporated by reference to our 8-K filed October 21, 1998. 10.1 Purchase and Sale Agreement by and between 270 Center Associates, Limited Partnership and ARV Assisted Living, Inc. dated as of February 12, 1998, incorporated by reference to Exhibit 10.1 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.2 Amendment to Purchase and Sale Agreement by and between 270 Center Associated, Limited Partnership and ARV Assisted Living, Inc. dated as of March 2, 1998, incorporated by reference to Exhibit 10.2 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.3 Second Amendment to Purchase and Sale Agreement by and between 270 Center Associated, Limited Partnership and ARV Assisted Living, Inc. dated as of April 10, 1998, incorporated by reference to Exhibit 10.3 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.4 Purchase and Sale Agreement by and between TH Group, Inc. and ARV Assisted Living, Inc. dated as of February 12, 1998, incorporated by reference to Exhibit 10.4 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.5 Amendment to Purchase and Sale Agreement by and between TH Group, Inc. and ARV Assisted Living, Inc. dated as of March 2, 1998, incorporated by reference to Exhibit 10.5 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.6 Second Amendment to Purchase and Sale Agreement by and between TH Group, Inc. and ARV Assisted Living, Inc. dated as of April 10, 1998, incorporated by reference to Exhibit 10.6 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.7 Purchase and Sale Agreement by and between The Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of February 12, 1998, incorporated by reference to Exhibit 10.7 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.8 Amendment to Purchase and Sale Agreement by and between The Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of March 2, 1998, incorporated by reference to Exhibit 10.8 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.9 Second Amendment to Purchase and Sale Agreement by and between The Hillsdale Group, LP and ARV Assisted Living, Inc. dated as of April 6, 1998, incorporated by reference to Exhibit 10.9 to the Company's 8-K filed with the Securities and Exchange Commission on May 11, 1998. 10.10 Executive Employment Agreement, dated December 5, 1997, by and between ARV Assisted Living, Inc. and Howard G. Phanstiel incorporated by reference to the Company's 10-K filed with the Securities and Exchange Commission on March 31, 1997. 10.11 Amendment to Executive Employment Agreement, effective December 5, 1997, by and between ARV Assisted Living, Inc. and Howard G. Phanstiel incorporated by reference to the Company's 10-K filed with the Securities and Exchange Commission on March 31, 1997. 10.12 Executive Employment Agreement, as amended, dated June 1, 1998, by and between ARV Assisted Living, Inc. and Douglas M. Pasquale incorporated by reference to the Company's 10-Q for June 30, 1998. 10.13 Employment Agreement, as amended, dated June 15, 1998, by and between ARV Assisted Living, Inc. and Patricia J. Gifford, MD incorporated by reference to the Company's 10-Q for June 30, 1998. EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.20 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.1 on August 10, 1999. 10.21 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns III, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.2 on August 10, 1999.(1) 10.22 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.3 on August 10, 1999.(1) 10.23 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.4 on August 10, 1999.(1) 10.24 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.5 on August 10, 1999.(1) 10.25 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.6 on August 10, 1999.(1) 10.26 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.7 on August 10, 1999.(1) 10.27 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.8 on August 10, 1999.(1) 10.28 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.9 on August 10, 1999.(1) 10.29 Loan Agreement by and between Banc One Capital Funding Corporation and Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.10 on August 10, 1999.(1) 10.30 Loan Agreement by and between Banc One Capital Funding Corporation and Acacia Villa, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.11 on August 10, 1999.(1) 10.31 Letter Agreement as to the Loans in the aggregate amount of $39,703,100 from Banc One Capital Funding Corporation to Retirements Inns II LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.12 on August 10, 1999. 10.32 Letter Agreement as to the Loans in the aggregate amount of $2,116,100 from Banc One Capital Funding Corporation to Acacia Villa LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.13 on August 10, 1999. 10.33 Letter Agreement as to the Loans in the aggregate amount of $13,382,200 from Banc One Capital Funding Corporation to Retirements Inns III LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.14 on August 10, 1999. 10.34 Note and Agreement as to Retirement Inns II, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.15 on August 10, 1999. EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.35 Note and Agreement as to Retirement Inns III, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.16 on August 10, 1999. 10.36 Note and Agreement as to Acacia Villa, LLC dated June 27, 1998 incorporated by reference to the Company's 10Q filed with the Securities and Exchange Commission as exhibit 10.17 on August 10, 1999. 10.37 Term Loan Agreement between ARV Assisted Living, Inc. and LFSRI II Assisted Living, LLC, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.1 on May 15, 2000. 10.38 Warrant issued to LFSRI II Assisted Living, LLC to Purchase Common Stock of ARV Assisted Living, Inc, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.2 on May 15, 2000. 10.39 Second Amendment to Rights Agreement, by and between ARV Assisted Living, Inc, and Chase Mellon Shareholder Services, LLC, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.3 on May 15, 2000. 10.40 Term Note between ARV Assisted Living, Inc. and LFSRI II Assisted Living LLC, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.4 on May 15, 2000. 10.41 Waiver, incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.5 on May 15, 2000. 10.42 LLC Articles of Incorporation incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.1 on August 10, 2000. 10.43 Multifamily Note incorporated by reference to our 10Q filed with the Securities and Exchange Commission as exhibit 10.2 on August 10, 2000. 10.44 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest in Franklin Commons, L.P. dated January 16, 2001. 10.45 Assignment of interest in the receivable obligation owed by Franklin Commons, L.P. to Pacific Demographics Corporations, a wholly owned subsidiary of ARV Assisted Living, Inc. dated January 16, 2001. 10.46 Assignment of interest in management fees owed by Franklin Commons, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 10.47 First Amendment to Operating Deficit Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Franklin Commons, L.P. 10.48 First Amendment to Tax Credit Reduction and Recapture Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Franklin Commons, L.P. 10.49 Purchase Agreement by and between ARV Investment Group, Inc. (wholly owned subsidiary of ARV Assisted Living, Inc.) and Eenhoorn Development, LLC for the sale of partnership interest in Franklin, Grand Rapids, Rosewood, San Marcos and Lansing. 10.50 Amendment to Purchase Agreement dated October 4, 2000 by and between ARV Investment Group, Inc. (wholly owned subsidiary of ARV Assisted Living, Inc.) and Eenhoorn Development, LLC. 10.51 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest in Grand Rapids Housing Partners, L.P. dated January 16, 2001. 10.52 Assignment of interest in the receivable obligation owed by Grand Rapids Housing Partners, L.P. to ARV Assisted Living, Inc. dated January 16, 2001. 10.53 Assignment of interest in management fees owed by Grand Rapids Housing Partners, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.54 First Amendment to Operating Deficit Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Grand Rapids Housing Partners, L.P. 10.55 First Amendment to Tax Credit Reduction and Recapture Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Grand Rapids Housing Partners, L.P. 10.58 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest Lansing Housing Partners, L.P. dated January 16, 2001. 10.59 Assignment of interest in the receivable obligation owed by Lansing Housing Partners, L.P. to ARV Assisted Living, Inc. dated January 16, 2001. 10.60 Assignment of interest in management fees owed by Lansing Housing Partners,, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 10.61 First Amendment to Operating Deficit Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Lansing Housing Partners, L.P. 10.62 First Amendment to Tax Credit Reduction and Recapture Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Lansing Housing Partners, L.P. 10.65 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest Rosewood Villas, L.P. dated January 16, 2001. 10.66 Assignment of interest in the receivable obligation owed by Rosewood Villas, L.P. to ARV Assisted Living, Inc. dated January 16, 2001. 10.67 Assignment of interest in management fees owed by Rosewood Villas, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 10.68 First Amendment to Operating Deficit Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Rosewood Villas, L.P. 10.69 First Amendment to Tax Credit Reduction and Recapture Guaranty Agreement by and between ARV Assisted Living, Inc., Gary Davidson, John Booty and David Collins, and Rosewood Villas, L.P. 10.72 Agreement of Assignment of ARV Investment Group, Inc. (a wholly owned subsidiary of ARV Assisted Living, Inc.) partnership interest San Marcos, L.P. dated January 16, 2001. 10.73 Assignment of interest in the receivable obligation owed by San Marcos, L.P. to ARV Assisted Living, Inc. dated January 16, 2001. 10.74 Assignment of interest in management fees owed by San Marcos, L.P. to ARV Assisted Living, Inc. dated on January 16, 2001. 10.75 Deed of Trust Note of ARV Burlingame, L.P. to Red Mortgage Capital, Inc. 10.76 Allonge #1 to Deed of Trust Note of ARV Burlingame, L.P. to Red Mortgage Capital, Inc. 10.77 Deed of Trust between ARV Burlingame, L.P. and Fidelity National Title Insurance 10.78 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Burlingame, L.P. and Secretary of Housing and Urban Development 10.79 Regulatory Agreement Nursing Homes Projects between ARV Burlingame, L.P. and Federal Housing Commissioner 10.80 Deed of Trust Note of ARV Campbell, L.P. to Red Mortgage Capital, Inc. 10.81 Allonge #1 to Deed of Trust Note of ARV Campbell, L.P. to Red Mortgage Capital, Inc. 10.82 Deed of Trust between ARV Campbell, L.P. and Fidelity National Title Insurance 10.83 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Campbell, L.P. and Secretary of Housing and Urban Development 10.84 Regulatory Agreement Nursing Homes Projects between ARV Campbell, L.P. and Federal Housing Commissioner 10.85 Deed of Trust Note of ARV Sunnyvale, L.P. to Red Mortgage Capital, Inc. EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.86 Allonge #1 to Deed of Trust Note of ARV Sunnyvale, L.P. to Red Mortgage Capital, Inc. 10.87 Deed of Trust between ARV Sunnyvale, L.P. and Fidelity National Title Insurance 10.88 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Sunnyvale, L.P. and Secretary of Housing and Urban Development 10.89 Regulatory Agreement Nursing Homes Projects between ARV Sunnyvale, L.P. and Federal Housing Commissioner 10.90 Deed of Trust Note of ARV Valley View, L.P. to Red Mortgage Capital, Inc. 10.91 Deed of Trust between ARV Valley View, L.P. and Fidelity National Title Insurance 10.92 Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Valley View, L.P. and Secretary of Housing and Urban Development 10.93 Regulatory Agreement Nursing Homes Projects between ARV Valley View, L.P. and Federal Housing Commissioner 10.94* Deed of Trust Note of ARV Fullerton, L.P. to Red Mortgage Capital, Inc. 10.95* Allonge #1 to Deed of Trust Note of ARV Fullerton, L.P. to Red Mortgage Capital, Inc. 10.96* Deed of Trust between ARV Fullerton, L.P. and Fidelity National Title Insurance 10.97* Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Fullerton, L.P. and Secretary of Housing and Urban Development 10.98* Regulatory Agreement Nursing Homes Projects between ARV Fullerton, L.P. and Federal Housing Commissioner 10.99* Deed of Trust Note of ARV Acacia, L.P. to Red Mortgage Capital, Inc. 10.100* Allonge #1 to Deed of Trust Note of ARV Acacia, L.P. to Red Mortgage Capital, Inc. 10.101* Deed of Trust between ARV Acacia, L.P. and Fidelity National Title Insurance 10.102* Regulatory Agreement for U.S. Department of Housing Multifamily Housing Projects between ARV Acacia, L.P. and Secretary of Housing and Urban Development 10.103* Regulatory Agreement Nursing Homes Projects between ARV Acacia, L.P. and Federal Housing Commissioner 23.1* Consent of KPMG LLP. 99.1 Complaint in ARV Assisted Living, Inc. v. Lazard Freres Real Estate Investors LLC, et al., case no. 787788, incorporated by reference to the Company's 8-K filed with the Securities and Exchange Commission on May 26, 1998. * included herewith EX-10.94 3 a80456ex10-94.txt EXHIBIT 10.94 EXHIBIT 10.94 DEED OF TRUST NOTE $2,207,400.00 Los Angeles, California December 1, 2001 FOR VALUE RECEIVED, the undersigned, ARV FULLERTON, L.P., a California limited partnership, promises to pay RED MORTGAGE CAPITAL, INC., an Ohio corporation, or order, at its principal office at 150 East Gay Street, 22nd Floor, Columbus, Ohio 43215 or at such other place as may be designated in writing by the holder of this Note, the principal sum of TWO MILLION TWO HUNDRED SEVEN THOUSAND FOUR HUNDRED AND 00/100THS DOLLARS ($2,207,400.00), with interest thereon from the date hereof at the rate of Seven and one-quarter per centum (7.25 %) per annum on the unpaid balance until paid. The principal and interest of this Note are to be paid in monthly installments as follows: Interest alone shall be due and payable on the first day of January, 2002. Thereafter, commencing on February 1, 2002, monthly installments of principal and interest at the rate of Seven and one-quarter per centum (7.25 %) per annum shall be due and payable in the sum of FOURTEEN THOUSAND FOUR HUNDRED NINETY AND 86/100THS DOLLARS ($14,490.86) each, such payments to continue monthly thereafter on the first day of each succeeding month until the entire indebtedness has been paid in full. In any event, the balance of principal (if any) remaining unpaid, plus accrued interest, shall be due and payable on January 1, 2037. The installments of principal and interest shall be applied first to interest at the rate aforesaid upon the principal sum or so much thereof as shall from time to time remain unpaid, and the balance thereof shall be applied on account of principal. Both principal and interest under this Note, as well as the additional payments set forth in the Deed of Trust, shall be payable at the office of RED MORTGAGE CAPITAL, INC., at its principal office at 150 East Gay Street, 22nd Floor, Columbus, Ohio 43215 or such other place as the holder may designate in writing. Prepayment of this Note is subject to the terms and provisions set forth in Allonge #1 attached hereto and incorporated herein by this reference. Commencing on February 1, 2007, privilege is reserved to pay the debt in whole or in an amount equal to one or more monthly payments of principal next due, on the last day of any month prior to maturity upon at least thirty (30) days' prior written notice to holder upon the terms and conditions set forth in Paragraph 1 of said Allonge #1. If default be made in the payment of any installment under this Note, and if the default is not made good prior to the due date of the next such installment, the entire principal sum and accrued interest shall at once become due and payable without notice at the option of the holder of this Note. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default. The makers and endorsers severally waive diligence, presentment, protest, and demand, and also notice of protest, dishonor, and nonpayment of this Note, and expressly agree that this Note, or any payment thereunder, may be extended from time to time, and consent to the acceptance of further security for this Note, including other types of security, all without in any way affecting the liability of the makers and endorsers hereof. The right to plead any and all statutes of limitations as a defense to any demand on this Note, or any guaranty thereof, or to any agreement to pay the same, or to any demand secured by the Deed of Trust or other security, securing this Note, or any and all obligations or liabilities arising out of or in connection with said Note or Deed of Trust by any of the parties hereto, is expressly waived by each and every of the makers, endorsers, guarantors or sureties. Principal and interest are payable in lawful money of the United States. If action be instituted on this Note, the undersigned promise(s) to pay in addition to the costs and disbursements allowed by law such sum as the Court may adjudge reasonable as attorney's fees in said action. This Note is secured by a Deed of Trust, of even date herewith, to Fidelity National Title Insurance Company, as Trustee, on real estate situated in the City of Fullerton, County of Orange, California (the "Deed of Trust"). In the event any installment or part of any installment due hereunder becomes delinquent for more than fifteen (15) days, there shall be due, at the option of the holder, in addition to other sums due hereunder, a sum equal to two percent (2%) of the amount of such installment of principal and interest so delinquent. Whenever under the law of the jurisdiction where the - 2 - property is located, the amount of any such late charge is considered to be additional interest, this provision shall not be effective if the rate of interest specified in this Note, together with the amount of the late charge, would aggregate an amount in excess of the maximum rate of interest permitted and would constitute usury. Notwithstanding any other provision contained in this Note, it is agreed that the execution of this Note shall impose no personal liability on the maker hereof for payment of the indebtedness evidenced hereby and in the event of a default, the holder of this Note shall look solely to the property described in the Deed of Trust and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced hereby and will not seek or obtain any deficiency or personal judgment against the maker hereof except such judgment or decree as may be necessary to foreclose and bar its interest in the property and all other property mortgaged, pledged, conveyed or assigned to secure payment of this Note, except as set out in the Deed of Trust of even date given to secure this indebtedness. Should this Note be signed by more than one person and/or firm and/or corporation, all of the obligations herein contained shall be considered joint and several obligations of each signer. Signed and sealed as of the 1st day of December, 2001. ARV FULLERTON, L.P. a California limited partnership By: American Retirement Villas Properties II a California limited partnership General Partner By: ARV Assisted Living, Inc. a Delaware corporation General Partner By: ----------------------------------- Douglas Armstrong Vice President I HEREBY CERTIFY that this is the Note described in and secured by the Deed of Trust of even date herewith, and in the same principal amount as herein stated, to Fidelity National Title Insurance Company, Trustee(s), on real estate in the City of Fullerton, Orange County, California. Dated this ____ day of December, 2001. [SEAL] ---------------------------------------- Notary Public My Commission Expires: ------------------------------- - -------------------------------------------------------------------------------- STATE OF CALIFORNIA LOAN NO. 143-22015 PM/ALF/REF -------------------------------------------------- Deed of Trust Note -------------------------------------------------- ARV FULLERTON, L.P. TO RED MORTGAGE CAPITAL, INC. No. 143-22015 PM/ALF/REF Insured under ss.232 pursuant to 223 (f) of the National Housing Act and Regulations published thereunder In effect on October 23, 2001 A total sum of $ 2,207,400.00 has been approved for insurance hereunder by the Secretary of Housing and Urban Development acting by and through the Federal Housing Commissioner By ------------------------------------ (Authorized Agent) Date -------------------------------- Reference is made to the Act and to the Regulations thereunder covering assignments of the insurance protections on this note. - -------------------------------------------------------------------------------- EX-10.95 4 a80456ex10-95.txt EXHIBIT 10.95 EXHIBIT 10.95 ALLONGE #1 TO DEED OF TRUST NOTE OF ARV FULLERTON, L.P. TO RED MORTGAGE CAPITAL, INC. IN THE ORIGINAL PRINCIPAL SUM OF $2,207,400.00 DATED DECEMBER 1, 2001 ================================================================================ 1. Except as provided in Paragraphs 2, and 3 below, Maker may not prepay any sums due under the Mortgage Note (the "Note") prior to February 1, 2007. Commencing on February 1, 2007, upon thirty (30) days advance written notice to the Holder, Maker may prepay the indebtedness evidenced by this Note, in whole or in an amount equal to one or more monthly payments of principal next due, on the last day of any month, provided such prepayment is accompanied by the prepayment penalty (expressed as a percentage of the principal amount so prepaid) set forth below:
PREPAYMENT PERIODS PREPAYMENT PENALTY ------------------ ------------------ February 1, 2007 through January 31, 2008 5 % February 1, 2008 through January 31, 2009 4 % February 1, 2009 through January 31, 2010 3 % February 1, 2010 through January 31, 2011 2 % February 1, 2011 through January 31, 2012 1 % February 1, 2012 and thereafter None
All such prepayments, including the principal sum and interest thereon to and including the date of such prepayment, shall be paid in immediately available Federal Funds. 2. Notwithstanding any prepayment prohibition imposed and/or penalty required by this Allonge #1 with respect to voluntary prepayments made prior to February 1, 2011, the indebtedness may be prepaid in whole or in part without the consent of the holder and without prepayment premium if the Commissioner determines that prepayment will avoid a mortgage insurance claim and is therefore in the best interest of the Federal Government. 3. The provisions of Paragraph 1 of this Allonge #1 shall not apply and no prepayment premium shall be collected by the holder with respect to any prepayment which is made by or on behalf of Maker from insurance proceeds as a result of damage to the property or condemnation awards which may, at the option of the holder, be applied to reduce the indebtedness evidenced by the Note pursuant to the terms of the Mortgage given of even date to secure the indebtedness evidenced by the Note. 4. A reduction in the principal amount of the Note required by the Commissioner at the time of Initial/Final Endorsement by the Commissioner as a result of the Commissioner's cost certification requirements shall not be construed as a prepayment hereunder. If a reduction is required by the Commissioner as aforesaid, or if any prepayment from any source (to the extent permitted herein) is made, the remaining payments due on the Note may, with the approval of the holder and the Commissioner, be recast such that the required monthly payments of principal and interest shall be in equal amounts sufficient to amortize the Note over the then remaining term thereof. ARV FULLERTON, L.P. a California limited partnership By: American Retirement Villas Properties II a California limited partnership, General Partner By: ARV Assisted Living, Inc. a Delaware corporation, General Partner By: ---------------------------------------- Douglas Armstrong Vice President - 2 - END OF ALLONGE #1 EX-10.96 5 a80456ex10-96.txt EXHIBIT 10.96 Exhibit 10.96 DEED OF TRUST With Assignment of Rents THIS DEED OF TRUST, made into this 1st day of December, 2001, by and between ARV FULLERTON, L.P., a California limited partnership, with offices at 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626, herein called Trustor, and FIDELITY NATIONAL TITLE INSURANCE COMPANY, a California corporation, Trustee(s), and RED MORTGAGE CAPITAL, INC., an Ohio corporation, with offices at 150 East Gay Street, 22nd Floor, Columbus, Ohio 53215, herein called Beneficiary. WITNESSETH: That Trustor grants, transfers, and assigns to Trustee in trust, upon the trusts, covenants, conditions and agreements and for the uses and purposes hereinafter contained, with power of sale, all that real property situate, lying and being in Orange County, State of California, described as follows: SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF. Together with the rents, issues, and profits thereof, SUBJECT, HOWEVER, to the right, power, and authority hereinafter given to and conferred upon Beneficiary to collect and apply such rents, issues, and profits; and together with all buildings and improvements of every kind and description now or hereafter erected or placed thereon, and all fixtures, including but not limited to all gas and electric fixtures, engines and machinery, radiators, heaters, furnaces, heating equipment, laundry equipment, steam and hot-water boilers, stoves, ranges, elevators and motors, bath tubs, sinks, water closets, basins, pipes, faucets and other plumbing and heating fixtures, mantels, cabinets, refrigerating plant and refrigerators, whether mechanical or otherwise, cooking apparatus and appurtenances, and all shades, awnings, screens, blinds and other furnishings, it being hereby agreed that all such fixtures and furnishings shall to the extent permitted by law be deemed to be permanently affixed to and a part of the realty; and Together with all building materials and equipment now or hereafter delivered to said premises and intended to be installed therein; and Together with all articles of personal property now or hereafter attached to or used in and about the building or buildings now erected or hereafter to be erected on the lands described which are necessary to the complete and comfortable use and occupancy of such building or buildings for the purposes for which they were or are to be erected, including all other goods and chattels and personal property as are ever used or furnished in operating a building, or the activities conducted therein, similar to the one herein described and referred to, and all renewals - 2 - or replacements thereof or articles in substitution therefor, whether or not the same are, or shall be attached to said building or buildings in any manner, and said Trustor agrees to execute a Security Agreement covering the aforesaid fixtures and articles of personal property, at the time of placing such personal property or any part thereof in the building or buildings to be erected on the lands herein described in the manner and form required by law, at its expense and satisfactory to the Beneficiary. To have and to hold the property hereinbefore described together with appurtenances to the Trustee, its or his successors and assigns forever. FOR THE PURPOSE of securing performance of each agreement of Trustor herein and payment of a just indebtedness of the Trustor to the Beneficiary in the principal sum of TWO MILLION TWO HUNDRED SEVEN THOUSAND FOUR HUNDRED AND NO/100THS DOLLARS ($2,207,400.00), evidenced by its Note of even date herewith, bearing interest from date on outstanding balances at Seven and one-quarter percent (7.25%) per annum, said principal and interest being payable in monthly installments as provided in said Note with a final maturity of January 1, 2037, which Note is identified as being secured hereby by a certificate thereon. Said Note and all of its terms are incorporated herein by reference and this conveyance shall secure any and all extensions thereof, however evidenced. AND TO PROTECT THE SECURITY OF THIS DEED OF TRUST, TRUSTOR COVENANTS AND AGREES: 1. That it will pay the Note at the times and in the manner provided therein; 2. That it will not permit or suffer the use of any of the property for any purpose other than the use for which the same was intended at the time this Deed of Trust was executed; 3. That the Regulatory Agreement, if any, executed by the Trustor and the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, which is being recorded simultaneously herewith, is incorporated in and made a part of this Deed of Trust. Upon default under the Regulatory Agreement and upon the request of the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, the Beneficiary, at its option, may declare the whole of the indebtedness secured hereby to be due and payable; 4. That all rents, profits and income from the property covered by this Deed of Trust are hereby assigned to the Beneficiary for the purpose of discharging the debt hereby secured. Permission is hereby given to Trustor so long as no default exists hereunder, to collect such rents, profits and income for use in accordance with the provisions of the Regulatory Agreement; That the Trustor grants to the holder or holders of the Note secured hereby the right and power to appoint a substitute Trustee or Trustees hereunder for any reason whatsoever by instrument of appointment duly executed and acknowledged by the holder or holders of the Note and to be filed for record in the office wherein this Deed of Trust is recorded. Such power of appointment may be exercised as often as deemed necessary by the holder or holders of the Note. Upon such appointment, the substitute Trustee or Trustees shall be vested with all the rights, powers, authority and duties vested in the Trustee hereunder; 5. That upon default hereunder or under the aforementioned Regulatory Agreement, Beneficiary shall be entitled to the Appointment of a receiver by any court having jurisdiction, - 3 - without notice, to take possession and protect the property described herein and operate same and collect the rents, profits and income therefrom; 6. That at the option of the Trustor the principal balance secured hereby may be reamortized on terms acceptable to the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner if a partial prepayment results from an award in condemnation in accordance with provisions of Paragraph 21 herein, or from an insurance payment made in accordance with provisions of Paragraph 7 herein, where there is a resulting loss of project income; 7. That the Trustor will keep the improvements now existing or hereafter erected on the deeded property insured against loss by fire and such other hazards, casualties, and contingencies, as may be stipulated by the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner upon the insurance of the Deed of Trust and other hazards as may be required from time to time by the Beneficiary, and all such insurance shall be evidenced by standard fire and extended coverage insurance policy or policies, in amounts not less than necessary to comply with the applicable Coinsurance Clause percentage, but in no event shall the amounts of coverage be less than 80 percent of the Insurable Values or not less than the unpaid balance of the insured Deed of Trust, whichever is the lesser, and in default thereof the Beneficiary shall have the right to effect insurance. Such policies shall be endorsed with standard Mortgagee clause with loss payable to the Beneficiary and the Secretary of Housing and Urban Development as their interests may appear, and shall be deposited with the Beneficiary; The insurance carrier providing the insurance shall be chosen by Trustor, subject to approval by Beneficiary, provided that such approval shall not be unreasonably withheld. That if the premises covered hereby, or any part thereof, shall be damaged by fire or other hazard against which insurance is held as hereinabove provided, the amounts paid by any insurance company in pursuance of the contract of insurance to the extent of the indebtedness then remaining unpaid, shall be paid to the Beneficiary, and, at its option, may be applied to the debt or released for the repairing or rebuilding of the premises. Any unexpired insurance shall inure to the benefit of, and pass to, the purchaser of the property covered thereby at any Trustee's sale held hereunder; 8. Together with and in addition to the monthly payments of interest or of principal and interest payable under the terms of said Note, to pay to Beneficiary monthly until said Note is fully paid, beginning on the first day of the first month after the date hereof, the following sums: (a) An amount sufficient to provide the Beneficiary with funds to pay the next mortgage insurance premium if this instrument and the Note secured hereby are insured, or a monthly service charge, if they are held by the Secretary of Housing and Urban Development, as follows: (I) If and so long as said Note of even date and this instrument are insured or are reinsured under the provisions of the National Housing Act, an amount sufficient to accumulate in the hands of the Beneficiary one month prior to its due date the annual mortgage insurance premium, in order to provide such Beneficiary with funds to pay such premium to the Secretary of Housing and Urban Development, pursuant to the National Housing Act, as amended, and applicable Regulations thereunder, or - 4 - (II) Beginning with the first day of the month following an assignment of this instrument and the Note secured hereby to the Secretary of Housing and Urban Development, a monthly service charge which shall be an amount equal to one-twelfth of one-half percent (1/12 of 1/2%) of the average outstanding principal balance due on the Note computed for each successive year beginning with the first of the month following such assignment, without taking into account delinquencies or prepayments. (b) A sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other property insurance covering the premises covered hereby, plus water rates, taxes and assessments next due on the premises covered hereby (all as estimated by the Beneficiary) less all sums already paid therefor divided by the number of months to elapse before one month prior to the date when such ground rents, premiums, water rates, taxes and assessments will become delinquent, such sums to be held by Beneficiary in trust to pay said ground rents, premiums, water rates, taxes, and special assessments. (c) All payments mentioned in the two preceding subsections of this paragraph and all payments to be made under the Note secured hereby shall be added together and the aggregate amount thereof shall be paid each month in a single payment to be applied by Beneficiary to the following items in the order set forth: (I) premium charges under the Contract of Insurance with the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner or service charge; (II) ground rents, taxes, special assessments, water rates, fire and other property insurance premiums; (III) interest on the Note secured hereby; (IV) amortization of the principal of said Note. 9. Any excess funds accumulated under paragraph (b) above remaining after payment of the items therein mentioned, shall be credited to subsequent monthly payments of the same nature required thereunder; but if any such item shall exceed the estimate therefor, the Trustor shall without demand forthwith make good the deficiency. Failure to do so before the due date of such item shall be a default hereunder. In case of termination of the Contract of Mortgage Insurance by prepayment of the mortgage in full, or otherwise (except as hereinafter provided), accumulations under paragraph (a) above not required to meet payments due under the Contract of Mortgage Insurance, shall be credited to the Trustor. If the property is sold under foreclosure or is otherwise acquired by the Beneficiary after default, any remaining balance of the accumulations under paragraph (b) above shall be credited to the principal of the debt as of the date of commencement of foreclosure proceedings or as of the date the property is otherwise acquired; and accumulations under paragraph (a) above shall be similarly applied unless required to pay sums due to the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner under the Contract of Mortgage Insurance; - 5 - 10. To keep said property in good condition and repair, not to remove or demolish any buildings thereon; to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged, or destroyed thereon and to pay when due all claims for labor performed and materials furnished therefor; to comply with all laws affecting said property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereof; not to commit, suffer or permit any act upon said property in violation of law and/or covenants, conditions and/or restrictions affecting said property; not to permit or suffer any alterations of or addition to the buildings or improvements hereafter constructed in or upon said property without the consent of the Beneficiary; 11. To appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee, and to pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any such action or proceeding in which Beneficiary or Trustee may appear; 12. Should Trustor fail to make any payment or do any act as herein provided, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon said property for such purposes; may commence, appear in and/or defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; may pay, purchase, contest, or compromise any encumbrance, charge, or lien which in the judgment of either appears to be prior or superior hereto; and, in exercising any such powers, may pay necessary expenses, employ counsel, and pay his reasonable fees; 13. The Beneficiary shall have the right to pay mortgage insurance premiums or fire and other property insurance premiums when due to the extent that monthly payments made hereunder for the purpose of meeting same are insufficient. All such payments made by the Beneficiary shall be added to the principal sum secured hereby; 14. To pay immediately and without demand all sums so expended by Beneficiary or Trustee, under permission given under this Deed of Trust, with interest from date of expenditure at the rate specified in said Note; 15. The Trustor further covenants that it will not voluntarily create, suffer, or permit to be created against the property subject to this Deed of Trust any lien or liens inferior or superior to the lien of this Deed of Trust and further that it will keep and maintain the same free - 6 - from the claim of all persons supplying labor or materials which will enter into the construction of any and all buildings now being erected or to be erected on said premises; 16. That the improvements upon the premises, covered by the Deed of Trust, and all plans and specifications comply with all municipal ordinances and regulations and all of other regulations made or promulgated, now or hereafter, by lawful authority, and that the same will comply with all such municipal ordinances and regulations and with the rules of the applicable fire rating or inspection organization, bureau, association or office; 17. That so long as this Deed of Trust and the said Note secured hereby are insured under the provisions of the National Housing Act, or held by the Secretary of Housing and Urban Development, it will not execute or file for record any instrument which imposes a restriction upon the sale or occupancy of the mortgaged property on the basis of race, color, creed or national origin. ABOVE IT IS MUTUALLY AGREED THAT: 18. Trustor herein agrees to pay to Beneficiary or to the authorized loan servicing representative of the Beneficiary a charge not to exceed $15 for providing a statement regarding the obligation secured by this Deed of Trust as provided by Section 2954, Article 2, chapter 2, Title 14, Part 4, Division 3, of the Civil Code of the State of California. 19. Should the property or any part thereof be taken or damaged by reason of any public improvement or condemnation preceding, or damaged by fire, or earthquake, or in any other manner, the Beneficiary shall be entitled to all compensation, awards, and other payments or relief therefor, and shall be entitled at its option to commence, appear in and prosecute in its own name any action to proceedings, or to make any compromise or settlement in connection with such taking or damage. All awards of compensation in connection with condemnation for public use of or a taking of any of that property, shall be paid to the Beneficiary to be applied to the amount due under this Note secured hereby in (1) amounts equal to the next maturing installment or installments or principal and (2) with any balance to be credited to the next payment due under the Note. All awards of damages in connection with any condemnation for public use of or injury to any residue of that property shall be paid to the Beneficiary to be applied to a fund held for and on behalf of the Trustor which fund shall, at the option of the - 7 - Beneficiary, and with the prior approval of the Secretary of Housing and Urban Development, either be applied to the amount due under the Note as specified in the preceding sentence, or be disturbed for the restoration or repair of the damage to the residue. No amount applied to the reduction of the principal amount due in accordance with (1) shall be considered an optional prepayment as the term is used in this Deed of Trust and the Note secured hereby, nor relieve the Trustor from making regular monthly payments commencing on the first day of the first month following the date of receipt of the award. The Beneficiary is hereby authorized in the name of the Trustor to execute and deliver valid acquittances for such awards and to appeal from such award; 20. Upon default by Trustor in making any monthly payment provided for herein or in the Note secured hereby, and if such default is not made good prior to the due date of the next such installment, or if Trustor shall fail to perform any covenant or agreement in this Deed of Trust, all sums secured hereby shall, at the option of the Beneficiary, be deemed to have become immediately due and payable, and shall thereupon be collectable by foreclosure of this Deed of Trust. In the event of default, Trustee hereunder shall be, and is authorized and empowered when given notice to do so by Beneficiary after such default, to cause the property to be sold, which notice Trustee shall cause to be duly filed for record. 21. After the lapse of such time as may then be required by law following the recordation of said notice of defaults, and notice of sale having been given as then required by law, Trustee, without demand on Trustor, shall sell said property at the time and place fixed by it in said notice of sale, either as a whole or in separate parcels, and in such order as it may determine at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Trustee may postpone sale of all or any portion of said property by public announcement at the time and place of sale, and from time to time thereafter may postpone the sale by public announcement at the time fixed by the preceding postponement. Trustee shall deliver to the purchaser its Deed conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in the Deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee, or Beneficiary, may purchase at the sale. The Trustee shall apply the proceeds of sale to payment of (1) the expenses of such sale, together with the reasonable expenses of this trust including therein reasonable Trustee's fees or attorney's fees for conducting the sale, and the actual cost of publishing, recording, mailing and posting notice of the sale; (2) the cost of any search and/or other evidence of title procured in connection with such sale and revenue stamps on Trustees' Deed; (3) all sums expended under the terms hereof, not then repaid, with accrued interest at the rate specified in said Note; (4) all other sums then secured hereby; and (5) the remainder, if any, to the person or persons legally entitled thereto; 22. Beneficiary may from time to time substitute a successor or successors to any Trustee named herein or acting hereunder to execute this Trust. Upon such appointment, and without conveyance to the successor trustee, the latter shall be vested with all title, powers, and duties conferred upon any Trustee herein named or acting hereunder. Each such appointment and substitution shall be made by written instrument executed by Beneficiary, containing reference to this Deed and its place of record which, when duly recorded in the proper office of the county or counties in which the property is situated, shall be conclusive proof of proper appointment of the successor trustee. In the event of default, Trustee hereunder shall be, and is authorized and empowered when given notice to do so by Beneficiary after such default to cause the property to be sold, which notice Trustee shall cause to be duly filed for record. - 8 - 23. The pleading of any statute of limitations as a defense to any and all obligations secured by this Deed is hereby waived to the full extent permissible by law; 24. Upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed of Trust and said Note to Trustee for cancellation and retention and upon payment of its fees, Trustee shall reconvey, without warranty, the property then held hereunder. The recitals in such reconveyance of any matters or fact shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto;" 25. The trust created hereby is irrevocable by Trustor; 26. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors, and assigns. The term "Beneficiary" shall include not only the original Beneficiary hereunder but also any future owner and holder including pledgees, of the Note secured hereby. In this Deed, whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. All obligations of each Trustor hereunder are joint and several; 27. Trustee accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made public record as provided by law. Except as otherwise provided by law the Trustee is not obligated to notify any party hereto of pending sale under this Deed of Trust or of any action of proceeding in which Trustor, Beneficiary, or Trustee shall be a party unless brought by Trustee; 28. The Undersigned TRUSTOR REQUESTS that a copy of any notice of default and of any notice of sale hereunder be mailed to him at the mailing address opposite his name hereto. Failure to insert such address shall be deemed a waiver of any request hereunder for a copy of such notices. Mailing Address for Notices 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 29. Notwithstanding any other provision contained herein or in the Note, hereinabove referred to, it is agreed that the execution of the Note shall impose no personal liability upon the Trustor for payment of the indebtedness evidenced thereby and in the event of a default, the Beneficiary, as holder of the Note, shall look solely to the property subject to this Deed of Trust and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced by the Note and will not seek or obtain any deficiency or personal judgment against the Trustor except such judgment or decree as may be necessary to foreclose or bar its interest in the property subject to this Deed of Trust and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Note; provided, that nothing in this condition and no action so taken shall operate to impair any obligation of the Trustor under the Regulatory Agreement herein referred to and made a part hereof. 30. Notwithstanding any other provision contained herein or in the Note, hereinafter referred to, it is agreed that the execution of the Note shall impose no personal liability upon the Trustor (or any of its present or future limited and general partners) for payment of the - 9 - indebtedness evidenced thereby and in the event of a default, the Beneficiary, as holder of the Note, shall look solely to the property subject to this Deed of Trust and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced by the Note and will not seek or obtain any deficiency or personal judgment against the Trustor (or any of its present or future limited and general partners) except such judgment or decree as may be necessary to foreclose or bar its interest in the property subject to this Deed of Trust and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Note; provided, that nothing in this condition and no action so taken shall operate to impair any obligation of the Trustor under the Regulatory Agreement herein referred to and made a part hereof. IN WITNESS WHEREOF the Trustor has caused its name to be hereunto subscribed by its duly authorized General Partner as of the day and year herein first above written. ARV FULLERTON, L.P. a California limited partnership By: American Retirement Villas Properties II a California limited partnership General Partner By: ARV Assisted Living, Inc. a Delaware corporation General Partner By: ------------------------------------- Douglas Armstrong Vice President - 10 - - 11 - CALIFORNIA ============================================================== DEED OF TRUST ============================================================== Between ARV FULLERTON, L.P. Trustor and FIDELITY NATIONAL TITLE INSURANCE COMPANY Trustee, and RED MORTGAGE CAPITAL, INC. Beneficiary. ============================================================== Dated: December 1, 2001 Recorded: December ___, 2001 at minutes past in Liber at page records of Orange County, California RECORDER'S INSTRUCTIONS Index this document as a Deed of Trust and as an Assignment of Rents. Escrow No. Order No. EX-10.97 6 a80456ex10-97.txt EXHIBIT 10.97 EXHIBIT 10.97 REGULATORY AGREEMENT FOR U.S. DEPARTMENT OF HOUSING MULTIFAMILY HOUSING PROJECTS AND URBAN DEVELOPMENT Office of Housing Federal Housing Commissioner - -------------------------------------------------------------------------------- Under Sections 207,220,221(d)(4), 231 and 232, Except Nonprofits - -------------------------------------------------------------------------------- Project No. 143-22015 PM/ALF/REF Mortgagee: RED MORTGAGE CAPITAL, INC. Amount of Mortgage Note: $2,207,400.00 Date: December 1, 2001 Mortgage: Recorded: State: California County: Orange Date: December ___, 2001 Concurrently Herewith Book _________ Page ____________ Originally endorsed for insurance under Section 232 pursuant to Section 223(f) of the National Housing Act, as amended. This Agreement entered into this 1st day of December, 2001, between ARV FULLERTON, L.P., a California limited partnership whose address is 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626, their successors, heirs, and assigns (jointly and severally, hereinafter referred to as Owners) and the undersigned SECRETARY OF HOUSING AND URBAN DEVELOPMENT and his successors (hereinafter referred to as Secretary). In consideration of the endorsement for insurance by the Secretary of the above described note or in consideration of the consent of the Secretary to the transfer of the mortgaged property or the sale and conveyance of the mortgaged property by the Secretary, and in order to comply with the requirements of the National Housing Act, as amended, and the Regulations adopted by the Secretary pursuant thereto, Owners agree for themselves, their successors, heirs and assigns, that in connection with the mortgaged property and the project operated thereon and so long as the contract of mortgage insurance continues in effect, and during such further period of time as the Secretary shall be the owner, holder or reinsurer of the mortgage, or during any time the Secretary is obligated to insure a mortgage on the mortgage property: 1. Owners, except as limited by paragraph 17 hereof, assume and agree to make promptly all payments due under the note and mortgage. - 2 - 2. (a) Owners shall establish or continue to maintain a reserve fund for replacements by the allocation to such reserve fund in a separate account with the mortgagee or in a safe and responsible depository designated by the mortgagee, concurrently with the beginning of payments towards amortization of the principal of the mortgage insured or held by the Secretary of an amount equal to $1,971.67 per month unless a different date or amount is approved in writing by the Secretary. Said monthly deposit consists of $1,638.75 for Realty and $332.92 for Non-Realty. In addition, the Owner has made an initial deposit to the fund of $225,657.40 ($23,852.40 to Realty and $201,805.00 to Non-Realty). Such fund, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America shall at all times be under the control of the mortgagee. Disbursements from such fund, whether for the purpose of effecting replacement of structural elements and mechanical equipment of the project or for any other purpose, may be made only after receiving the consent in writing of the Secretary. In the event that the owner is unable to make a mortgage note payment on the due date and that payment cannot be made prior to the due day of the next such installment or when the mortgagee has agreed to forgo making an election to assign the mortgage to the Secretary based on a monetary default, or to withdraw an election already made, the Secretary is authorized to instruct the mortgagee to withdraw funds from the reserve fund for replacements to be applied to the mortgage payment in order to prevent or cure the default. In addition, in the event of a default in the terms of the mortgage, pursuant to which the loan has been accelerated, the Secretary may apply or authorize the application of the balance in such fund to the amount due on the mortgage debt as accelerated. (b) Where Owners are acquiring a project already subject to an insured mortgage, the reserve fund for replacements to be established will be equal to the amount due to be in such fund under existing agreements or charter provisions at the time Owners acquire such project, and payments hereunder shall begin with the first payment due on the mortgage after acquisition, unless some other method of establishing and maintaining the fund is approved in writing by the Secretary. 3. Real property covered by the mortgage and this agreement is described in Exhibit A attached hereto. (This paragraph 4 is not applicable to cases insured under Section 232). - 3 - 4. (a) If the mortgage is originally a Secretary-held purchase money mortgage, or is originally endorsed for insurance under any Section other than Sections 231 or 232 and is not designed primarily for occupancy by elderly persons, Owners shall not in selecting tenants discriminate against any person or persons by reason of the fact that there are children in the family. (b) If the mortgage is originally endorsed for insurance under Section 221, Owners shall in selecting tenants give to displaced persons or families an absolute preference or priority of occupancy which shall be accomplished as follows: - 4 - (1) For a period of sixty (60) days from the date of original offering, unless a shorter period of time is approved in writing by the Secretary, all units shall be held for such preferred applicants, after which time any remaining unrented units may be rented to non-preferred applicants; (2) Thereafter, and on a continuing basis, such preferred applicants shall be given preference over non-preferred applicants in their placement on a waiting list to be maintained by the Owners; and (3) Through such further provisions agreed to in writing by the parties. (c) Without the prior written approval of the Secretary not more than 25% of the number of units in a project insured under Section 231 shall be occupied by persons other than elderly persons. (d) All advertising or efforts to rent a project insured under Section 231 shall reflect a bona fide effort of the Owners to obtain occupancy by elderly persons. 5. Owners shall not without the prior written approval of the Secretary: (a) Convey, transfer, or encumber any of the mortgaged property, or permit the conveyance, transfer or encumbrance of such property. (b) Assign, transfer, dispose of, or encumber any personal property of the project, including rents, or pay out any funds except from surplus cash, except for reasonable operating expenses and necessary repairs. (c) Convey, assign, or transfer any beneficial interest in any trust holding title to the property, or the interest of any general partner in a partnership owning the property, or any right to manage or receive the rents and profits from the mortgaged property. (d) Remodel, add to, reconstruct, or demolish any part of the mortgaged property or subtract from any real or personal property of the project. (e) Make, or receive and retain, any distribution of assets or any income of any kind of the project except surplus cash and except on the following conditions: - 5 - (1) All distributions shall be made only as of and after the end of a semiannual or annual fiscal period, and only as permitted by the law of the applicable jurisdiction; (2) No distribution shall be made from borrowed funds, prior to the completion of the project or when there is any default under this Agreement or under the note or mortgage; (3) Any distribution of any funds of the project, which the party receiving such funds is not entitled to retain hereunder, shall be held in trust separate and apart from any other funds; and (4) There shall have been compliance with all outstanding notices of requirements for proper maintenance of the project. (f) Engage, except for natural persons, in any other business or activity, including the operation of any other rental project, or incur any liability or obligation not in connection with the project. (g) Require, as a condition of the occupancy or leasing of any unit in the project, any consideration or deposit other than the prepayment of the first month's rent plus a security deposit in an amount not in excess of one month's rent to guarantee the performance of the covenants of the lease. Any funds collected as security deposits shall be kept separate and apart from all other funds of the project in a trust account the amount of which shall at all times equal or exceed the aggregate of all outstanding obligations under said account. (h) Permit the use of the dwelling accommodations or nursing facilities of the project for any purpose except the use which was originally intended, or permit commercial use greater than that originally approved by the Secretary. 6. Owners shall maintain the mortgaged premises, accommodations and the grounds and equipment appurtenant thereto, in good repair and condition. In the event all or any of the buildings covered by the mortgage shall be destroyed or damaged by fire or other casualty, the money derived from any insurance on the property shall be applied in accordance with the terms of the mortgage. 7. Owners shall not file any petition in bankruptcy or for a receiver or in insolvency or for reorganization or composition, or make any assignment for the benefit of creditors or to a trustee for creditors, or permit an adjudication in bankruptcy or - 6 - the taking possession of the mortgaged property or any part thereof by a receiver or the seizure and sale of the mortgaged property or any part hereof under judicial process or pursuant to any power of sale, and fail to have such adverse actions set aside within forty-five (45) days. 8. (a) Any management contract entered into by Owners or any of them involving the project shall contain a provision that, in the event of default hereunder, it shall be subject to termination without penalty upon written request by the Secretary. Upon such request Owners shall immediately arrange to terminate the contract within a period of not more than thirty (30) days and shall make arrangements satisfactory to the Secretary for continuing proper management of the project. (b) Payment for services, supplies, or materials shall not exceed the amount ordinarily paid for such services, supplies, or materials in the area where the services are rendered or the supplies or materials furnished. (c) The mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and other papers relating thereto shall at all times be maintained in reasonable condition for proper audit and subject to examination and inspection at any reasonable time by the Secretary or his duly authorized agents. Owners shall keep copies of all written contracts or other instruments which affect the mortgaged property, all or any of which may be subject to inspection and examination by the Secretary or his duly authorized agents. (d) The books and accounts of the operations of the mortgaged property and of the project shall be kept in accordance with the requirements of the Secretary. (e) Within sixty (60) days following the end of each fiscal year the Secretary shall be furnished with a complete annual financial report based upon an examination of the books and records of mortgagor prepared in accordance with the requirements of the Secretary, prepared and certified to by an officer or responsible Owner and, when required by the Secretary, prepared and certified by a Certified Public Accountant, or other person acceptable to the Secretary. (f) At the request of the Secretary, his agents, employees, or attorneys, the Owners shall furnish monthly occupancy reports and shall give specific answers to questions upon which information is desired from time to time relative to - 7 - income, assets, liabilities, contracts, operation, and condition of the property and the status of the insured mortgage. (g) All rents and other receipts of the project shall be deposited in the name of the project in a financial institution, whose deposits are insured by an agency of the Federal Government. Such funds shall be withdrawn only in accordance with the provisions of this Agreement for expenses of the project or for distributions of surplus cash as permitted by paragraph 6(e) above. Any Owner receiving funds of the project other than by such distribution of surplus cash shall immediately deposit such funds in the project bank account and failing so to do in violation of this Agreement shall hold such funds in trust. Any Owner receiving property of the project in violation of this Agreement shall hold such funds in trust. At such time as the Owners shall have lost control and/or possession of the project, all funds held in trust shall be delivered to the mortgagee to the extent that the mortgage indebtedness has not been satisfied. (h) If the mortgage is insured under Section 232: 1. The Owners or lessees shall at all times maintain in full force and effect from the state or other licensing authority such license as may be required to operate the project as a nursing home and shall not lease all or part of the project except on terms approved by the Secretary. 2. The Owners shall suitably equip the project for nursing home operations. 3. The Owners shall execute a Security Agreement and Financing Statement (or other form of chattel lien) upon all items of equipment, except as the Secretary may exempt, which are not incorporated as security for the insured mortgage. The Security Agreement and Financing Statement shall constitute a first lien upon such equipment and shall run in favor of the mortgagee as additional security for the insured mortgage. (i) If the mortgage is insured under Section 231, Owners or lessees shall at all times maintain in full force and effect from the state or other licensing authority such license as may be required to operate the project as housing for the elderly. 9. Owners will comply with the provisions of any Federal, State, or local law prohibiting discrimination in housing on the grounds of race, color, religion or - 8 - creed, sex, or national origin, including Title VIII of the Civil Rights Act of 1968 (Public Law 90-284; 82 Stat. 73), as amended, Executive Order 11063, and all requirements imposed by or pursuant to the regulations of the Department of Housing and Urban Development implementing these authorities (including 24 CFR Parts 100, 107 and 110, and Subparts I and M of Part 200). 10. Upon a violation of any of the above provisions of this Agreement by Owners, the Secretary may give written notice thereof, to Owners, by registered or certified mail, addressed to the addresses stated in this Agreement, or such other addresses as may subsequently, upon appropriate written notice thereof to the Secretary, be designated by the Owners as their legal business address. If such violation is not corrected to the satisfaction of the Secretary within thirty (30) days after the date such notice is mailed or within such further time as the Secretary determines is necessary to correct the violation, without further notice the Secretary may declare a default under this Agreement effective on the date of such declaration of default and upon such default the Secretary may: (a) (i) If the Secretary holds the note - declare the whole of said indebtedness immediately due and payable and then proceed with the foreclosure of the mortgage; (ii) If said note is not held by the Secretary - notify the holder of the note of such default and request holder to declare a default under the note and mortgage, and holder after receiving such notice and request, but not otherwise, at its option, may declare the whole indebtedness due, and thereupon proceed with foreclosure of the mortgage, or assign the note and mortgage to the Secretary as provided in the Regulations; (b) Collect all rents and charges in connection with the operation of the project and use such collections to pay the Owners' obligations under this Agreement and under the note and mortgage and the necessary expenses of preserving the property and operating the project. (c) Take possession of the project, bring any action necessary to enforce any rights of the Owners growing out of the project operation, and operate the project in accordance with the terms of this Agreement until such time as the Secretary in his discretion determines that the Owners are again in a position to operate the project in accordance with the terms of this Agreement and in compliance with the requirements of the note and mortgage. - 9 - (d) Apply to any court, state or Federal, for specific performance of this Agreement, for an injunction against any violation of the Agreement, for the appointment of a receiver to take over and operate the project in accordance with the terms of the Agreement, or for such other relief as may be appropriate, since the injury to the Secretary arising from a default under any of the terms of this Agreement would be irreparable and the amount of damage would be difficult to ascertain. 11. As security for the payment due under this Agreement to the reserve fund for replacements, and to secure the Secretary because of his liability under the endorsement of the note for insurance, and as security for the other obligations under this Agreement, the Owners respectively assign, pledge and mortgage to the Secretary their rights to the rents, profits, income and charges of whatsoever sort which they may receive or be entitled to receive from the operation of the mortgaged property, subject, however, to any assignment of rents in the insured mortgage referred to herein. Until a default is declared under this Agreement, however, permission is granted to Owners to collect and retain under the provisions of this Agreement such rents, profits, income, and charges, but upon default this permission is terminated as to all rents due or collected thereafter. 12. As used in this Agreement the term: (a) "Mortgage" includes "Deed of Trust", "Chattel Mortgage", "Security Instrument", and any other security for the note identified herein, and endorsed for insurance or held by the Secretary; (b) "Mortgagee" refers to the holder of the mortgage identified herein, its successors and assigns; (c) "Owners" refers to the persons named in the first paragraph hereof and designated as Owners, their successors, heirs and assigns; (d) "Mortgaged Property" includes all property, real, personal or mixed, covered by the mortgage or mortgages securing the note endorsed for insurance or held by the Secretary; (e) "Project" includes the mortgaged property and all its other assets of whatsoever nature or wheresoever situate, used in or owned by the business conducted on said mortgaged property, which business is providing housing and other activities as are incidental thereto; - 10 - (f) "Surplus Cash" means any cash remaining after: (1) the payment of: (i) All sums due or currently required to be paid under the terms of any mortgage or note insured or held by the Secretary; (ii) All amounts required to be deposited in the reserve fund for replacements; (iii) All obligations of the project other than the insured mortgage unless funds for payment are set aside or deferment of payment has been approved by the Secretary; and (2) the segregation of: (i) An amount equal to the aggregate of all special funds required to be maintained by the project; and (ii) All tenant security deposits held. (g) "Distribution" means any withdrawal or taking of cash or any assets of the project, including the segregation of cash or assets for subsequent withdrawal within the limitations of Paragraph 6(e) hereof, and excluding payment for reasonable expenses incident to the operation and maintenance of the project. (h) "Default" means a default declared by the Secretary when a violation of this Agreement is not corrected to his satisfaction within the time allowed by this Agreement or such further time as may be allowed by the Secretary after written notice; (i) "Section" refers to a Section of the National Housing Act, as amended. (j) "Displaced persons or families" shall mean a family or families, or a person, displaced from an urban renewal area, or as the result of government action, or as a result of a major disaster as determined by the President pursuant to the Disaster Relief Act of 1970. - 11 - (k) "Elderly person" means any person, married or single, who is sixty-two years of age or over. 13. This instrument shall bind, and the benefits shall inure to, the respective Owners, their heirs, legal representatives, executors, administrators, successors in office or interest, and assigns, and to the Secretary and his successors so long as the contract of mortgage insurance continues in effect, and during such further time as the Secretary shall be the owner, holder, or reinsurer of the mortgage, or obligated to reinsure the mortgage. 14. Owners warrant that they have not, and will not, execute any other agreement with provisions contradictory of, or in opposition to, the provisions hereof, and that, in any event, the requirements of this Agreement are paramount and controlling as to the rights and obligations set forth and supersede any other requirements in conflict therewith. 15. The invalidity of any clause, part or provision of this Agreement shall not affect the validity or the remaining portions thereof. 16. The following Owners: ARV Fullerton, L.P., a California limited partnership, and all present and future limited and general partners thereof, do not assume personal liability for payments due under the note and mortgage, or for the payments to the reserve for replacements, or for matters not under their control, provided that said Owners shall remain liable under this Agreement only with respect to the matters hereinafter stated; namely: (a) for funds or property of the project coming into their hands which, by the provisions hereof, they are not entitled to retain; and (b) for their own acts and deeds or acts and deeds of others which they have authorized in violation of the provisions hereof. (To be executed with formalities for recording a deed to real estate) - 12 - All references herein to the terms "nursing home" or nursing homes" shall mean and include the terms "assisted living facility" and "assisted living facilities." See Rider I attached hereto and made a part hereof. IN WITNESS WHEREOF, the parties hereto have set their hands and seals on the date first hereinabove written. ARV FULLERTON, L.P. a California limited partnership By: American Retirement Villas Properties II a California limited partnership General Partner By: ARV Assisted Living, Inc. a Delaware corporation General Partner By: ---------------------------------- Douglas Armstrong Vice President December 1, 2001 SECRETARY OF HOUSING AND URBAN DEVELOPMENT ACTING BY AND THROUGH THE FEDERAL HOUSING COMMISSIONER By: ---------------------------------------- Authorized Agent December 1, 2001 EX-10.98 7 a80456ex10-98.txt EXHIBIT 10.98 EXHIBIT 10.98 REGULATORY AGREEMENT U.S. DEPARTMENT OF HOUSING NURSING HOMES AND URBAN DEVELOPMENT Office of Housing Federal Housing Commissioner - --------------------------------------------------------------------------------------- Project Number Mortgagee 143-22015 PM/ALF/REF Red Mortgage Capital, Inc., an Ohio corporation - --------------------------------------------------------------------------------------- Amount of Mortgage Note Date $2,207,400.00 December 1, 2001 - --------------------------------------------------------------------------------------- Mortgage Recorded (State) County Date California Orange December ___, 2001 - --------------------------------------------------------------------------------------- Book Page - ---------------------------------------------------------------------------------------
This Agreement entered into this 1st day of December, 2001 between RETIREMENT INNS II, LLC, a Delaware limited liability company whose address is 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626 (jointly and severally, hereinafter referred to as Lessee) and the undersigned FEDERAL HOUSING COMMISSIONER, (hereinafter called Commissioner). In consideration of the consent of the Commissioner to the leasing of the aforesaid project by ARV FULLERTON, L.P., a California limited partnership, Mortgagor, and in order to comply with the requirements of the National Housing Act and the Regulations adopted by the Commissioner pursuant thereto, Lessees agree for themselves, their successors, heirs and assigns, that in connection with the mortgaged property and the project operated thereon and so long as the Contract of Mortgage Insurance continues in effect, and during such further period of time as the Commissioner shall be the owner, holder or reinsurer of the mortgage, or during any time the Commissioner is obligated to insure a mortgage on the mortgaged property: (1) The lease shall be subject and subordinate to the mortgage securing the note or other obligation endorsed for insurance by the commissioner; (2) Lessee shall make payments under lease when due; (3) Payments by the lessee to the lessor shall be sufficient to pay all mortgage payments including payments to reserves for taxes, insurance, etc., payments to the Reserve for Replacements, and to take care of necessary maintenance. If at the end of any calendar year, or any fiscal year if the project operates on the basis of a fiscal year, payments under the lease have not been sufficient to take care of the above - -------------------------------------------------------------------------------- Page 1 of 6 items, the lessor and lessee upon request in writing from the Commissioner shall renegotiate the amounts due under the lease so that such amounts shall be sufficient to take care of such items; the Commissioner shall be furnished by the lessee, within thirty days after being called upon to do so, with a financial report in form satisfactory to the Commissioner covering the operations of the mortgaged property and of the project; (4) The lessee shall not sublease the project or any part thereof without the consent of the Commissioner; (5) The lessee shall at all times maintain in full force and effect a license from the State or other licensing authority to operate the project as a nursing home, but the owner shall not be required to maintain such a license; (6) Lessee shall maintain in good repair and condition any parts of the project for the maintenance of which lessee is responsible under the terms of the lease; (7) Lessee shall not remodel, reconstruct, add to, or demolish any part of the mortgaged property or subtract from any real or personal property of the project; (8) Lessee shall not use the project for any purpose except the operation of a nursing home; (9) If a default is declared by the Commissioner under the provisions of Paragraph 10 of the Regulatory Agreement entered into by the lessor-mortgagor and the Commissioner on the 1st day of December, 2001, a copy of notice of default having been given to the lessee, the lessee will thereafter make all future payments under the lease to the Commissioner; (10) The lease may be cancelled upon thirty days written notice by the Commissioner given to the lessor and the lessee for a violation of any of the above provisions unless the violation is corrected to the satisfaction of the Commissioner within said thirty day period. (11) The Commissioner must approve any change in or transfer of ownership of the lessee entity, and any change in or transfer of the management operation, or control of the project. (12) The lessee shall not reduce or expand, allow to be reduced or expanded, or cause the expansion or reduction of the bed capacity of the project without the consent of - -------------------------------------------------------------------------------- Page 2 of 6 the Commissioner. Any change in the bed capacity shall violate this Regulatory Agreement. (13) The lessee shall not enter into any management contract involving the project, unless such shall contain a provision that, in the event of default under the Regulatory Agreement as recited in paragraph 9 (above) of this Agreement, the management agreement shall be subject to termination without penalty upon written request of the Commissioner. Upon such request the lessee shall immediately arrange to terminate the contract within a period of not more than thirty (30) days and shall make arrangements satisfactory to the Commissioner for continuing proper management of the project. (14) The mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and other papers relating thereto shall at all times be maintained in reasonable condition for proper audit and subject to examination and inspection at any reasonable time by the Commissioner or his duly authorized agents. Lessee shall keep copies of all written contracts or other instruments which affect the mortgaged property, all or any of which may be subject to inspection and examination by the Commissioner or his/her duly authorized agents. (15) There shall be full compliance with the provisions of (1) any State or local laws prohibiting discrimination in housing on the basis of race, color, creed, or national origin; and (2) with the Regulations of the Federal Housing Administration providing for non-discrimination and equal opportunity in housing. It is understood and agreed that failure or refusal to comply with any such provisions shall be a proper basis for the Commissioner to take any corrective action he may deem necessary including, but not limited to, the refusal to consent to a further renewal of the lease between the mortgagor-lessor and the lessee, the rejection of applications for FHA mortgage insurance and the refusal to enter into future contracts of any kind with which the lessee is identified; and further, if the lessee is a corporation or any other type of business association or organization which may fail or refuse to comply with the aforementioned provisions, the Commissioner shall have a similar right of corrective action (1) with respect to any individuals who are officers, directors, trustees, managers, partners, associates or principal stockholders of the lessee; and (2) with respect to any other type of business association, or organization with which the officers, directors, trustees, managers, partners, associates or principal stockholders of the lessee may be identified. - -------------------------------------------------------------------------------- Page 3 of 6 IN WITNESS WHEREOF, the parties hereto have set their hands and seals on the date first hereinabove written. RETIREMENT INNS II, LLC a Delaware limited liability company By: ------------------------------------ Abdo H. Khoury Manager December 1, 2001 SECRETARY OF HOUSING AND URBAN DEVELOPMENT ACTING BY AND THROUGH THE FEDERAL HOUSING COMMISSIONER By: ------------------------------------ Authorized Agent December 1, 2001 - -------------------------------------------------------------------------------- Page 4 of 6 EX-10.99 8 a80456ex10-99.txt EXHIBIT 10.99 Exhibit 10.99 DEED OF TRUST NOTE $2,386,100.00 Los Angeles, California as of January 1, 2002 FOR VALUE RECEIVED, the undersigned, ARV ACACIA VILLA, L.P., a California limited partnership, promises to pay RED MORTGAGE CAPITAL, INC., an Ohio corporation, or order, at its principal office at 150 East Gay Street, 22nd Floor, Columbus, Ohio 43215 or at such other place as may be designated in writing by the holder of this Note, the principal sum of TWO MILLION THREE HUNDRED EIGHTY-SIX THOUSAND ONE HUNDRED AND NO/100THS DOLLARS ($2,386,100.00), with interest thereon from the date hereof at the rate of Seven and fifty-six hundredths per centum (7.56 %) per annum on the unpaid balance until paid. The principal and interest of this Note are to be paid in monthly installments as follows: Interest alone shall be due and payable on the first day of February, 2002. Thereafter, commencing on March 1, 2002, monthly installments of principal and interest at the rate of Seven and fifty-six hundredths per centum (7.56 %) per annum shall be due and payable in the sum of SIXTEEN THOUSAND ONE HUNDRED NINETY AND 46/100THS DOLLARS ($16,190.46) each, such payments to continue monthly thereafter on the first day of each succeeding month until the entire indebtedness has been paid in full. In any event, the balance of principal (if any) remaining unpaid, plus accrued interest, shall be due and payable on February 1, 2037. The installments of principal and interest shall be applied first to interest at the rate aforesaid upon the principal sum or so much thereof as shall from time to time remain unpaid, and the balance thereof shall be applied on account of principal. Both principal and interest under this Note, as well as the additional payments set forth in the Deed of Trust, shall be payable at the office of RED MORTGAGE CAPITAL, INC., at its principal office at 150 East Gay Street, 22nd Floor, Columbus, Ohio 43215 or such other place as the holder may designate in writing. Prepayment of this Note is subject to the terms and provisions set forth in Allonge #1 attached hereto and incorporated herein by this reference. Commencing on March 1, 2007, privilege is reserved to pay the debt in whole or in an amount equal to one or more monthly payments of principal next due, on the last day of any month prior to maturity upon at least thirty (30) days' prior written notice to holder upon the terms and conditions set forth in Paragraph 1 of said Allonge #1. If default be made in the payment of any installment under this Note, and if the default is not made good prior to the due date of the next such installment, the entire principal sum and accrued interest shall at once become due and payable without notice at the option of the holder of this Note. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default. The makers and endorsers severally waive diligence, presentment, protest, and demand, and also notice of protest, dishonor, and nonpayment of this Note, and expressly agree that this Note, or any payment thereunder, may be extended from time to time, and consent to the acceptance of further security for this Note, including other types of security, all without in any way affecting the liability of the makers and endorsers hereof. The right to plead any and all statutes of limitations as a defense to any demand on this Note, or any guaranty thereof, or to any agreement to pay the same, or to any demand secured by the Deed of Trust or other security, securing this Note, or any and all obligations or liabilities arising out of or in connection with said Note or Deed of Trust by any of the parties hereto, is expressly waived by each and every of the makers, endorsers, guarantors or sureties. Principal and interest are payable in lawful money of the United States. If action be instituted on this Note, the undersigned promise(s) to pay in addition to the costs and disbursements allowed by law such sum as the Court may adjudge reasonable as attorney's fees in said action. This Note is secured by a Deed of Trust, of even date herewith, to Fidelity National Title Insurance Company, as Trustee, on real estate situated in the City of Fullerton, County of Orange, California (the "Deed of Trust"). In the event any installment or part of any installment due hereunder becomes delinquent for more than fifteen (15) days, there shall be due, at the option of the holder, in addition to other sums due hereunder, a sum equal to two percent (2%) of the amount of such installment of principal and interest so delinquent. Whenever under the law of the jurisdiction where the --2-- property is located, the amount of any such late charge is considered to be additional interest, this provision shall not be effective if the rate of interest specified in this Note, together with the amount of the late charge, would aggregate an amount in excess of the maximum rate of interest permitted and would constitute usury. Notwithstanding any other provision contained in this Note, it is agreed that the execution of this Note shall impose no personal liability on the maker hereof for payment of the indebtedness evidenced hereby and in the event of a default, the holder of this Note shall look solely to the property described in the Deed of Trust and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced hereby and will not seek or obtain any deficiency or personal judgment against the maker hereof except such judgment or decree as may be necessary to foreclose and bar its interest in the property and all other property mortgaged, pledged, conveyed or assigned to secure payment of this Note, except as set out in the Deed of Trust of even date given to secure this indebtedness. Should this Note be signed by more than one person and/or firm and/or corporation, all of the obligations herein contained shall be considered joint and several obligations of each signer. Signed and sealed as of this 1st day of January, 2002. ARV ACACIA VILLA, L.P. a California limited partnership By: CASA BONITA FULLERTON, LTD. a California limited partnership General Partner By: ARV ASSISTED LIVING, INC. a Delaware corporation General Partner By: ------------------------------- Douglas Armstrong Vice President ================================================================================ I HEREBY CERTIFY that this is the Note described in and secured by the Deed of Trust of even date herewith, and in the same principal amount as herein stated, to Fidelity National Title Insurance Company, Trustee(s), on real estate in the City of Fullerton, Orange County, California. Dated this ____ day of January, 2002. [SEAL] ---------------------------------------- Notary Public My Commission Expires: -------------------------------- -- 3 -- STATE OF CALIFORNIA LOAN NO. 143-22014 PM/ALF/REF _____________________________ Deed of Trust Note _____________________________ ARV ACACIA VILLA, L.P. TO RED MORTGAGE CAPITAL, INC. No. 143-22014 PM/ALF/REF Insured under ss.232 pursuant to 223 (f) of the National Housing Act and Regulations published thereunder In effect on November 7, 2001, as amended A total sum of $________________ has been approved for insurance hereunder by the Secretary of Housing and Urban Development acting by and through the Federal Housing Commissioner By __________________________________ (Authorized Agent) Date January , 2002 --------------------- Reference is made to the Act and to the Regulations thereunder covering assignments of the insurance protections on this note. EX-10.100 9 a80456ex10-100.txt EXHIBIT 10.100 Exhibit 10.100 ALLONGE #1 TO DEED OF TRUST NOTE OF ARV ACACIA VILLA, L.P. TO RED MORTGAGE CAPTIAL, INC. IN THE ORIGINAL PRINCIPAL SUM OF $2,386,100.00 DATED AS OF JANUARY 1, 2002 ================================================================================ 1. Except as provided in Paragraphs 2, and 3 below, Maker may not prepay any sums due under the Mortgage Note (the "Note") prior to March 1, 2007. Commencing on March 1, 2007, upon thirty (30) days advance written notice to the Holder, Maker may prepay the indebtedness evidenced by this Note, in whole or in an amount equal to one or more monthly payments of principal next due, on the last day of any month, provided such prepayment is accompanied by the prepayment penalty (expressed as a percentage of the principal amount so prepaid) set forth below: PREPAYMENT PERIODS PREPAYMENT PENALTY ------------------ ------------------ March 1, 2007 through February 29, 2008 5% March 1, 2008 through February 28, 2009 4% March 1, 2009 through February 28, 2010 3% March 1, 2010 through February 28, 2011 2% March 1, 2011 through February 29, 2012 1% March 1, 2012 and thereafter None All such prepayments, including the principal sum and interest thereon to and including the date of such prepayment and any prepayment penalty due in connection therewith, shall be paid in immediately available Federal Funds. 2. Notwithstanding any prepayment prohibition imposed and/or penalty required by this Allonge #1 with respect to voluntary prepayments made prior to March 1, 2011, the indebtedness may be prepaid in whole or in part without the consent of the holder and without prepayment premium if the Commissioner determines that prepayment will avoid a mortgage insurance claim and is therefore in the best interest of the Federal Government. 3. The provisions of Paragraph 1 of this Allonge #1 shall not apply and no prepayment premium shall be collected by the holder with respect to any prepayment which is made by or on behalf of Maker from insurance proceeds as a result of damage to the property or condemnation awards which may, at the option of the holder, be applied to reduce the indebtedness evidenced by the Note pursuant to the terms of the Mortgage given of even date to secure the indebtedness evidenced by the Note. 4. A reduction in the principal amount of the Note required by the Commissioner at the time of Initial/Final Endorsement by the Commissioner as a result of the Commissioner's cost certification requirements shall not be construed as a prepayment hereunder. If a reduction is required by the Commissioner as aforesaid, or if any prepayment from any source (to the extent permitted herein) is made, the remaining payments due on the Note may, with the approval of the holder and the Commissioner, be recast such that the required monthly payments of principal and interest shall be in equal amounts sufficient to amortize the Note over the then remaining term thereof. ARV ACACIA VILLA, L.P. a California limited partnership By: CASA BONITA FULLERTON, LTD. a California limited partnership, General Partner By: ARV ASSISTED LIVING, INC. a Delaware corporation, General Partner By: ----------------------------------------- Douglas Armstrong Vice President END OF ALLONGE #1 EX-10.101 10 a80456ex10-101.txt EXHIBIT 10.101 Exhibit 10.101 DEED OF TRUST With Assignment of Rents THIS DEED OF TRUST, made into as of this 1st day of January, 2002, by and between ARV ACACIA VILLA, L.P., a California limited partnership, with offices at 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626, herein called Trustor, and FIDELITY NATIONAL TITLE INSURANCE COMPANY, a California corporation, Trustee(s), and RED MORTGAGE CAPITAL, INC., an Ohio corporation, with offices at 150 East Gay Street, 22nd Floor, Columbus, Ohio 53215, herein called Beneficiary. WITNESSETH: That Trustor grants, transfers, and assigns to Trustee in trust, upon the trusts, covenants, conditions and agreements and for the uses and purposes hereinafter contained, with power of sale, all that real property situate, lying and being in Orange County, State of California, described as follows: SEE EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF. Together with the rents, issues, and profits thereof, SUBJECT, HOWEVER, to the right, power, and authority hereinafter given to and conferred upon Beneficiary to collect and apply such rents, issues, and profits; and together with all buildings and improvements of every kind and description now or hereafter erected or placed thereon, and all fixtures, including but not limited to all gas and electric fixtures, engines and machinery, radiators, heaters, furnaces, heating equipment, laundry equipment, steam and hot-water boilers, stoves, ranges, elevators and motors, bath tubs, sinks, water closets, basins, pipes, faucets and other plumbing and heating fixtures, mantels, cabinets, refrigerating plant and refrigerators, whether mechanical or otherwise, cooking apparatus and appurtenances, and all shades, awnings, screens, blinds and other furnishings, it being hereby agreed that all such fixtures and furnishings shall to the extent permitted by law be deemed to be permanently affixed to and a part of the realty; and Together with all building materials and equipment now or hereafter delivered to said premises and intended to be installed therein; and Together with all articles of personal property now or hereafter attached to or used in and about the building or buildings now erected or hereafter to be erected on the lands described which are necessary to the complete and comfortable use and occupancy of such building or buildings for the purposes for which they were or are to be erected, including all other goods and chattels and personal property as are ever used or furnished in operating a building, or the activities conducted therein, similar to the one herein described and referred to, and all renewals --2-- or replacements thereof or articles in substitution therefor, whether or not the same are, or shall be attached to said building or buildings in any manner, and said Trustor agrees to execute a Security Agreement covering the aforesaid fixtures and articles of personal property, at the time of placing such personal property or any part thereof in the building or buildings to be erected on the lands herein described in the manner and form required by law, at its expense and satisfactory to the Beneficiary. To have and to hold the property hereinbefore described together with appurtenances to the Trustee, its or his successors and assigns forever. FOR THE PURPOSE of securing performance of each agreement of Trustor herein and payment of a just indebtedness of the Trustor to the Beneficiary in the principal sum of TWO MILLION THREE HUNDRED EIGHTY-SIX THOUSAND ONE HUNDRED AND NO/100THS DOLLARS ($2,386,100.00), evidenced by its Note of even date herewith, bearing interest from date on outstanding balances at Seven and fifty-six hundredths percent (7.56%) per annum, said principal and interest being payable in monthly installments as provided in said Note with a final maturity of February 1, 2037, which Note is identified as being secured hereby by a certificate thereon. Said Note and all of its terms are incorporated herein by reference and this conveyance shall secure any and all extensions thereof, however evidenced. AND TO PROTECT THE SECURITY OF THIS DEED OF TRUST, TRUSTOR COVENANTS AND AGREES: 1. That it will pay the Note at the times and in the manner provided therein; 2. That it will not permit or suffer the use of any of the property for any purpose other than the use for which the same was intended at the time this Deed of Trust was executed; 3. That the Regulatory Agreement, if any, executed by the Trustor and the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, which is being recorded simultaneously herewith, is incorporated in and made a part of this Deed of Trust. Upon default under the Regulatory Agreement and upon the request of the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner, the Beneficiary, at its option, may declare the whole of the indebtedness secured hereby to be due and payable; 4. That all rents, profits and income from the property covered by this Deed of Trust are hereby assigned to the Beneficiary for the purpose of discharging the debt hereby secured. Permission is hereby given to Trustor so long as no default exists hereunder, to collect such rents, profits and income for use in accordance with the provisions of the Regulatory Agreement; That the Trustor grants to the holder or holders of the Note secured hereby the right and power to appoint a substitute Trustee or Trustees hereunder for any reason whatsoever by instrument of appointment duly executed and acknowledged by the holder or holders of the Note and to be filed for record in the office wherein this Deed of Trust is recorded. Such power of appointment may be exercised as often as deemed necessary by the holder or holders of the Note. Upon such appointment, the substitute Trustee or Trustees shall be vested with all the rights, powers, authority and duties vested in the Trustee hereunder; 5. That upon default hereunder or under the aforementioned Regulatory Agreement, Beneficiary shall be entitled to the Appointment of a receiver by any court having jurisdiction, --3-- without notice, to take possession and protect the property described herein and operate same and collect the rents, profits and income therefrom; 6. That at the option of the Trustor the principal balance secured hereby may be reamortized on terms acceptable to the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner if a partial prepayment results from an award in condemnation in accordance with provisions of Paragraph 21 herein, or from an insurance payment made in accordance with provisions of Paragraph 7 herein, where there is a resulting loss of project income; 7. That the Trustor will keep the improvements now existing or hereafter erected on the deeded property insured against loss by fire and such other hazards, casualties, and contingencies, as may be stipulated by the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner upon the insurance of the Deed of Trust and other hazards as may be required from time to time by the Beneficiary, and all such insurance shall be evidenced by standard fire and extended coverage insurance policy or policies, in amounts not less than necessary to comply with the applicable Coinsurance Clause percentage, but in no event shall the amounts of coverage be less than 80 percent of the Insurable Values or not less than the unpaid balance of the insured Deed of Trust, whichever is the lesser, and in default thereof the Beneficiary shall have the right to effect insurance. Such policies shall be endorsed with standard Mortgagee clause with loss payable to the Beneficiary and the Secretary of Housing and Urban Development as their interests may appear, and shall be deposited with the Beneficiary. The insurance carrier providing the insurance shall be chosen by Trustor, subject to approval by Beneficiary, provided that such approval shall not be unreasonably withheld. That if the premises covered hereby, or any part thereof, shall be damaged by fire or other hazard against which insurance is held as hereinabove provided, the amounts paid by any insurance company in pursuance of the contract of insurance to the extent of the indebtedness then remaining unpaid, shall be paid to the Beneficiary, and, at its option, may be applied to the debt or released for the repairing or rebuilding of the premises. Any unexpired insurance shall inure to the benefit of, and pass to, the purchaser of the property covered thereby at any Trustee's sale held hereunder; 8. Together with and in addition to the monthly payments of interest or of principal and interest payable under the terms of said Note, to pay to Beneficiary monthly until said Note is fully paid, beginning on the first day of the first month after the date hereof, the following sums: (a) An amount sufficient to provide the Beneficiary with funds to pay the next mortgage insurance premium if this instrument and the Note secured hereby are insured, or a monthly service charge, if they are held by the Secretary of Housing and Urban Development, as follows: (I) If and so long as said Note of even date and this instrument are insured or are reinsured under the provisions of the National Housing Act, an amount sufficient to accumulate in the hands of the Beneficiary one month prior to its due date the annual mortgage insurance premium, in order to provide such Beneficiary with funds to pay such premium to the Secretary of Housing and Urban Development, pursuant to the National Housing Act, as amended, and applicable Regulations thereunder, or --4-- (II) Beginning with the first day of the month following an assignment of this instrument and the Note secured hereby to the Secretary of Housing and Urban Development, a monthly service charge which shall be an amount equal to one-twelfth of one-half percent (1/12 of 1/2%) of the average outstanding principal balance due on the Note computed for each successive year beginning with the first of the month following such assignment, without taking into account delinquencies or prepayments. (b) A sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other property insurance covering the premises covered hereby, plus water rates, taxes and assessments next due on the premises covered hereby (all as estimated by the Beneficiary) less all sums already paid therefor divided by the number of months to elapse before one month prior to the date when such ground rents, premiums, water rates, taxes and assessments will become delinquent, such sums to be held by Beneficiary in trust to pay said ground rents, premiums, water rates, taxes, and special assessments. (c) All payments mentioned in the two preceding subsections of this paragraph and all payments to be made under the Note secured hereby shall be added together and the aggregate amount thereof shall be paid each month in a single payment to be applied by Beneficiary to the following items in the order set forth: (I) premium charges under the Contract of Insurance with the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner or service charge; (II) ground rents, taxes, special assessments, water rates, fire and other property insurance premiums; (III) interest on the Note secured hereby; (IV) amortization of the principal of said Note. 9. Any excess funds accumulated under paragraph (b) above remaining after payment of the items therein mentioned, shall be credited to subsequent monthly payments of the same nature required thereunder; but if any such item shall exceed the estimate therefor, the Trustor shall without demand forthwith make good the deficiency. Failure to do so before the due date of such item shall be a default hereunder. In case of termination of the Contract of Mortgage Insurance by prepayment of the mortgage in full, or otherwise (except as hereinafter provided), accumulations under paragraph (a) above not required to meet payments due under the Contract of Mortgage Insurance, shall be credited to the Trustor. If the property is sold under foreclosure or is otherwise acquired by the Beneficiary after default, any remaining balance of the accumulations under paragraph (b) above shall be credited to the principal of the debt as of the date of commencement of foreclosure proceedings or as of the date the property is otherwise acquired; and accumulations under paragraph (a) above shall be similarly applied unless required to pay sums due to the Secretary of Housing and Urban Development, acting by and through the Federal Housing Commissioner under the Contract of Mortgage Insurance; --5-- 10. To keep said property in good condition and repair, not to remove or demolish any buildings thereon; to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged, or destroyed thereon and to pay when due all claims for labor performed and materials furnished therefor; to comply with all laws affecting said property or requiring any alterations or improvements to be made thereon; not to commit or permit waste thereof; not to commit, suffer or permit any act upon said property in violation of law and/or covenants, conditions and/or restrictions affecting said property; not to permit or suffer any alterations of or addition to the buildings or improvements hereafter constructed in or upon said property without the consent of the Beneficiary; 11. To appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee, and to pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any such action or proceeding in which Beneficiary or Trustee may appear; 12. Should Trustor fail to make any payment or do any act as herein provided, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon said property for such purposes; may commence, appear in and/or defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; may pay, purchase, contest, or compromise any encumbrance, charge, or lien which in the judgment of either appears to be prior or superior hereto; and, in exercising any such powers, may pay necessary expenses, employ counsel, and pay his reasonable fees; 13. The Beneficiary shall have the right to pay mortgage insurance premiums or fire and other property insurance premiums when due to the extent that monthly payments made hereunder for the purpose of meeting same are insufficient. All such payments made by the Beneficiary shall be added to the principal sum secured hereby; 14. To pay immediately and without demand all sums so expended by Beneficiary or Trustee, under permission given under this Deed of Trust, with interest from date of expenditure at the rate specified in said Note; 15. The Trustor further covenants that it will not voluntarily create, suffer, or permit to be created against the property subject to this Deed of Trust any lien or liens inferior or superior to the lien of this Deed of Trust and further that it will keep and maintain the same free --6-- from the claim of all persons supplying labor or materials which will enter into the construction of any and all buildings now being erected or to be erected on said premises; 16. That the improvements upon the premises, covered by the Deed of Trust, and all plans and specifications comply with all municipal ordinances and regulations and all of other regulations made or promulgated, now or hereafter, by lawful authority, and that the same will comply with all such municipal ordinances and regulations and with the rules of the applicable fire rating or inspection organization, bureau, association or office; 17. That so long as this Deed of Trust and the said Note secured hereby are insured under the provisions of the National Housing Act, or held by the Secretary of Housing and Urban Development, it will not execute or file for record any instrument which imposes a restriction upon the sale or occupancy of the mortgaged property on the basis of race, color, creed or national origin. ABOVE IT IS MUTUALLY AGREED THAT: 18. Trustor herein agrees to pay to Beneficiary or to the authorized loan servicing representative of the Beneficiary a charge not to exceed $15 for providing a statement regarding the obligation secured by this Deed of Trust as provided by Section 2954, Article 2, chapter 2, Title 14, Part 4, Division 3, of the Civil Code of the State of California. 19. Should the property or any part thereof be taken or damaged by reason of any public improvement or condemnation preceding, or damaged by fire, or earthquake, or in any other manner, the Beneficiary shall be entitled to all compensation, awards, and other payments or relief therefor, and shall be entitled at its option to commence, appear in and prosecute in its own name any action to proceedings, or to make any compromise or settlement in connection with such taking or damage. All awards of compensation in connection with condemnation for public use of or a taking of any of that property, shall be paid to the Beneficiary to be applied to the amount due under this Note secured hereby in (1) amounts equal to the next maturing installment or installments or principal and (2) with any balance to be credited to the next payment due under the Note. All awards of damages in connection with any condemnation for public use of or injury to any residue of that property shall be paid to the Beneficiary to be applied to a fund held for and on behalf of the Trustor which fund shall, at the option of the --7-- Beneficiary, and with the prior approval of the Secretary of Housing and Urban Development, either be applied to the amount due under the Note as specified in the preceding sentence, or be disturbed for the restoration or repair of the damage to the residue. No amount applied to the reduction of the principal amount due in accordance with (1) shall be considered an optional prepayment as the term is used in this Deed of Trust and the Note secured hereby, nor relieve the Trustor from making regular monthly payments commencing on the first day of the first month following the date of receipt of the award. The Beneficiary is hereby authorized in the name of the Trustor to execute and deliver valid acquittances for such awards and to appeal from such award; 20. Upon default by Trustor in making any monthly payment provided for herein or in the Note secured hereby, and if such default is not made good prior to the due date of the next such installment, or if Trustor shall fail to perform any covenant or agreement in this Deed of Trust, all sums secured hereby shall, at the option of the Beneficiary, be deemed to have become immediately due and payable, and shall thereupon be collectable by foreclosure of this Deed of Trust. In the event of default, Trustee hereunder shall be, and is authorized and empowered when given notice to do so by Beneficiary after such default, to cause the property to be sold, which notice Trustee shall cause to be duly filed for record. 21. After the lapse of such time as may then be required by law following the recordation of said notice of defaults, and notice of sale having been given as then required by law, Trustee, without demand on Trustor, shall sell said property at the time and place fixed by it in said notice of sale, either as a whole or in separate parcels, and in such order as it may determine at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale. Trustee may postpone sale of all or any portion of said property by public announcement at the time and place of sale, and from time to time thereafter may postpone the sale by public announcement at the time fixed by the preceding postponement. Trustee shall deliver to the purchaser its Deed conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in the Deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee, or Beneficiary, may purchase at the sale. The Trustee shall apply the proceeds of sale to payment of (1) the expenses of such sale, together with the reasonable expenses of this trust including therein reasonable Trustee's fees or attorney's fees for conducting the sale, and the actual cost of publishing, recording, mailing and posting notice of the sale; (2) the cost of any search and/or other evidence of title procured in connection with such sale and revenue stamps on Trustees' Deed; (3) all sums expended under the terms hereof, not then repaid, with accrued interest at the rate specified in said Note; (4) all other sums then secured hereby; and (5) the remainder, if any, to the person or persons legally entitled thereto; 22. Beneficiary may from time to time substitute a successor or successors to any Trustee named herein or acting hereunder to execute this Trust. Upon such appointment, and without conveyance to the successor trustee, the latter shall be vested with all title, powers, and duties conferred upon any Trustee herein named or acting hereunder. Each such appointment and substitution shall be made by written instrument executed by Beneficiary, containing reference to this Deed and its place of record which, when duly recorded in the proper office of the county or counties in which the property is situated, shall be conclusive proof of proper appointment of the successor trustee. In the event of default, Trustee hereunder shall be, and is authorized and empowered when given notice to do so by Beneficiary after such default to cause the property to be sold, which notice Trustee shall cause to be duly filed for record. --8-- 23. The pleading of any statute of limitations as a defense to any and all obligations secured by this Deed is hereby waived to the full extent permissible by law; 24. Upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed of Trust and said Note to Trustee for cancellation and retention and upon payment of its fees, Trustee shall reconvey, without warranty, the property then held hereunder. The recitals in such reconveyance of any matters or fact shall be conclusive proof of the truthfulness thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto;" 25. The trust created hereby is irrevocable by Trustor; 26. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors, and assigns. The term "Beneficiary" shall include not only the original Beneficiary hereunder but also any future owner and holder including pledgees, of the Note secured hereby. In this Deed, whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. All obligations of each Trustor hereunder are joint and several; 27. Trustee accepts this Trust when this Deed of Trust, duly executed and acknowledged, is made public record as provided by law. Except as otherwise provided by law the Trustee is not obligated to notify any party hereto of pending sale under this Deed of Trust or of any action of proceeding in which Trustor, Beneficiary, or Trustee shall be a party unless brought by Trustee; 28. The Undersigned TRUSTOR REQUESTS that a copy of any notice of default and of any notice of sale hereunder be mailed to him at the mailing address opposite his name hereto. Failure to insert such address shall be deemed a waiver of any request hereunder for a copy of such notices. Mailing Address for Notices --------------------------- 245 Fischer Avenue, Suite D-1 Costa Mesa, California 92626 29. Notwithstanding any other provision contained herein or in the Note, hereinabove referred to, it is agreed that the execution of the Note shall impose no personal liability upon the Trustor for payment of the indebtedness evidenced thereby and in the event of a default, the Beneficiary, as holder of the Note, shall look solely to the property subject to this Deed of Trust and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced by the Note and will not seek or obtain any deficiency or personal judgment against the Trustor except such judgment or decree as may be necessary to foreclose or bar its interest in the property subject to this Deed of Trust and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Note; provided, that nothing in this condition and no action so taken shall operate to impair any obligation of the Trustor under the Regulatory Agreement herein referred to and made a part hereof. 30. Notwithstanding any other provision contained herein or in the Note, hereinafter referred to, it is agreed that the execution of the Note shall impose no personal liability upon the Trustor (or any of its present or future limited and general partners) for payment of the --9-- indebtedness evidenced thereby and in the event of a default, the Beneficiary, as holder of the Note, shall look solely to the property subject to this Deed of Trust and to the rents, issues and profits thereof in satisfaction of the indebtedness evidenced by the Note and will not seek or obtain any deficiency or personal judgment against the Trustor (or any of its present or future limited and general partners) except such judgment or decree as may be necessary to foreclose or bar its interest in the property subject to this Deed of Trust and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Note; provided, that nothing in this condition and no action so taken shall operate to impair any obligation of the Trustor under the Regulatory Agreement herein referred to and made a part hereof. IN WITNESS WHEREOF the Trustor has caused its name to be hereunto subscribed by its duly authorized General Partner as of the day and year herein first above written. ARV ACACIA VILLA, L.P. a California limited partnership By: CASA BONITA FULLERTON, LTD. a California limited partnership General Partner By: ARV ASSISTED LIVING, INC. a Delaware corporation General Partner By: ------------------------------- Douglas Armstrong Vice President --10-- --11-- CALIFORNIA ============================= DEED OF TRUST ============================= Between ARV ACACIA VILLA, L.P. Trustor and FIDELITY NATIONAL TITLE INSURANCE COMPANY Trustee, and RED MORTGAGE CAPITAL, INC. Beneficiary. ================================================================================ Dated: as of January 1, 2002 Recorded: January __, 2002 at minutes past in Liber at page records of Orange County, California RECORDER'S INSTRUCTIONS Index this document as a Deed of Trust and as an Assignment of Rents. Escrow No. Order No. EX-10.102 11 a80456ex10-102.txt EXHIBIT 10.102 Exhibit 10.102 REGULATORY AGREEMENT FOR U.S. DEPARTMENT OF HOUSING MULTIFAMILY HOUSING PROJECTS AND URBAN DEVELOPMENT Office of Housing Federal Housing Commissioner Under Sections 207, 220, 221(d)(4), 231 and 232, Except Nonprofits Project No. 143-22014 PM/ALF/REF Mortgagee: RED MORTGAGE CAPITAL, INC. Amount of Mortgage Note: $2,386,100.00 Date: as of January 1, 2002 Mortgage: Recorded: State: California County: Orange Date: January ___, 2002 Concurrently Herewith Book __________ Page ____________
Originally endorsed for insurance under Section 232 pursuant to Section 223(f) of the National Housing Act, as amended. This Agreement entered into as of this 1st day of January, 2002, between ARV ACACIA VILLA, L.P., a California limited partnership whose address is 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626, their successors, heirs, and assigns (jointly and severally, hereinafter referred to as Owners) and the undersigned SECRETARY OF HOUSING AND URBAN DEVELOPMENT and his successors (hereinafter referred to as Secretary). In consideration of the endorsement for insurance by the Secretary of the above described note or in consideration of the consent of the Secretary to the transfer of the mortgaged property or the sale and conveyance of the mortgaged property by the Secretary, and in order to comply with the requirements of the National Housing Act, as amended, and the Regulations adopted by the Secretary pursuant thereto, Owners agree for themselves, their successors, heirs and assigns, that in connection with the mortgaged property and the project operated thereon and so long as the contract of mortgage insurance continues in effect, and during such further period of time as the Secretary shall be the owner, holder or reinsurer of the mortgage, or during any time the Secretary is obligated to insure a mortgage on the mortgage property: 1. Owners, except as limited by paragraph 17 hereof, assume and agree to make promptly all payments due under the note and mortgage. --2-- 2. (a) Owners shall establish or continue to maintain a reserve fund for replacements by the allocation to such reserve fund in a separate account with the mortgagee or in a safe and responsible depository designated by the mortgagee, concurrently with the beginning of payments towards amortization of the principal of the mortgage insured or held by the Secretary of an amount equal to $1,926.08 per month unless a different date or amount is approved in writing by the Secretary. Said monthly deposit consists of $1,499.33 for Realty and $426.75 for Non-Realty. In addition, the Owner has made an initial deposit to the fund of $190,559.00 ($5,662.00 to Realty and $184,897.00 to Non-Realty). Such fund, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America shall at all times be under the control of the mortgagee. Disbursements from such fund, whether for the purpose of effecting replacement of structural elements and mechanical equipment of the project or for any other purpose, may be made only after receiving the consent in writing of the Secretary. In the event that the owner is unable to make a mortgage note payment on the due date and that payment cannot be made prior to the due day of the next such installment or when the mortgagee has agreed to forgo making an election to assign the mortgage to the Secretary based on a monetary default, or to withdraw an election already made, the Secretary is authorized to instruct the mortgagee to withdraw funds from the reserve fund for replacements to be applied to the mortgage payment in order to prevent or cure the default. In addition, in the event of a default in the terms of the mortgage, pursuant to which the loan has been accelerated, the Secretary may apply or authorize the application of the balance in such fund to the amount due on the mortgage debt as accelerated. (b) Where Owners are acquiring a project already subject to an insured mortgage, the reserve fund for replacements to be established will be equal to the amount due to be in such fund under existing agreements or charter provisions at the time Owners acquire such project, and payments hereunder shall begin with the first payment due on the mortgage after acquisition, unless some other method of establishing and maintaining the fund is approved in writing by the Secretary. 3. Real property covered by the mortgage and this agreement is described in Exhibit A attached hereto. (This paragraph 4 is not applicable to cases insured under Section 232). 4. (a) If the mortgage is originally a Secretary-held purchase money mortgage, or is originally endorsed for insurance under any Section other than Sections 231 or 232 and is not designed primarily for occupancy by elderly persons, Owners shall not in selecting tenants discriminate against any person or persons by reason of the fact that there are children in the family. (b) If the mortgage is originally endorsed for insurance under Section 221, Owners shall in selecting tenants give to displaced persons or families an absolute preference or priority of occupancy which shall be accomplished as follows: --3-- (1) For a period of sixty (60) days from the date of original offering, unless a shorter period of time is approved in writing by the Secretary, all units shall be held for such preferred applicants, after which time any remaining unrented units may be rented to non-preferred applicants; (2) Thereafter, and on a continuing basis, such preferred applicants shall be given preference over non-preferred applicants in their placement on a waiting list to be maintained by the Owners; and (3) Through such further provisions agreed to in writing by the parties. (c) Without the prior written approval of the Secretary not more than 25% of the number of units in a project insured under Section 231 shall be occupied by persons other than elderly persons. (d) All advertising or efforts to rent a project insured under Section 231 shall reflect a bona fide effort of the Owners to obtain occupancy by elderly persons. 5. Owners shall not without the prior written approval of the Secretary: (a) Convey, transfer, or encumber any of the mortgaged property, or permit the conveyance, transfer or encumbrance of such property. (b) Assign, transfer, dispose of, or encumber any personal property of the project, including rents, or pay out any funds except from surplus cash, except for reasonable operating expenses and necessary repairs. (c) Convey, assign, or transfer any beneficial interest in any trust holding title to the property, or the interest of any general partner in a partnership owning the property, or any right to manage or receive the rents and profits from the mortgaged property. (d) Remodel, add to, reconstruct, or demolish any part of the mortgaged property or subtract from any real or personal property of the project. (e) Make, or receive and retain, any distribution of assets or any income of any kind of the project except surplus cash and except on the following conditions: --4-- (1) All distributions shall be made only as of and after the end of a semiannual or annual fiscal period, and only as permitted by the law of the applicable jurisdiction; (2) No distribution shall be made from borrowed funds, prior to the completion of the project or when there is any default under this Agreement or under the note or mortgage; (3) Any distribution of any funds of the project, which the party receiving such funds is not entitled to retain hereunder, shall be held in trust separate and apart from any other funds; and (4) There shall have been compliance with all outstanding notices of requirements for proper maintenance of the project. (f) Engage, except for natural persons, in any other business or activity, including the operation of any other rental project, or incur any liability or obligation not in connection with the project. (g) Require, as a condition of the occupancy or leasing of any unit in the project, any consideration or deposit other than the prepayment of the first month's rent plus a security deposit in an amount not in excess of one month's rent to guarantee the performance of the covenants of the lease. Any funds collected as security deposits shall be kept separate and apart from all other funds of the project in a trust account the amount of which shall at all times equal or exceed the aggregate of all outstanding obligations under said account. (h) Permit the use of the dwelling accommodations or nursing facilities of the project for any purpose except the use which was originally intended, or permit commercial use greater than that originally approved by the Secretary. 6. Owners shall maintain the mortgaged premises, accommodations and the grounds and equipment appurtenant thereto, in good repair and condition. In the event all or any of the buildings covered by the mortgage shall be destroyed or damaged by fire or other casualty, the money derived from any insurance on the property shall be applied in accordance with the terms of the mortgage. 7. Owners shall not file any petition in bankruptcy or for a receiver or in insolvency or for reorganization or composition, or make any assignment for the benefit of creditors or to a trustee for creditors, or permit an adjudication in bankruptcy or --5-- the taking possession of the mortgaged property or any part thereof by a receiver or the seizure and sale of the mortgaged property or any part hereof under judicial process or pursuant to any power of sale, and fail to have such adverse actions set aside within forty-five (45) days. 8. (a) Any management contract entered into by Owners or any of them involving the project shall contain a provision that, in the event of default hereunder, it shall be subject to termination without penalty upon written request by the Secretary. Upon such request Owners shall immediately arrange to terminate the contract within a period of not more than thirty (30) days and shall make arrangements satisfactory to the Secretary for continuing proper management of the project. (b) Payment for services, supplies, or materials shall not exceed the amount ordinarily paid for such services, supplies, or materials in the area where the services are rendered or the supplies or materials furnished. (c) The mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and other papers relating thereto shall at all times be maintained in reasonable condition for proper audit and subject to examination and inspection at any reasonable time by the Secretary or his duly authorized agents. Owners shall keep copies of all written contracts or other instruments which affect the mortgaged property, all or any of which may be subject to inspection and examination by the Secretary or his duly authorized agents. (d) The books and accounts of the operations of the mortgaged property and of the project shall be kept in accordance with the requirements of the Secretary. (e) Within sixty (60) days following the end of each fiscal year the Secretary shall be furnished with a complete annual financial report based upon an examination of the books and records of mortgagor prepared in accordance with the requirements of the Secretary, prepared and certified to by an officer or responsible Owner and, when required by the Secretary, prepared and certified by a Certified Public Accountant, or other person acceptable to the Secretary. (f) At the request of the Secretary, his agents, employees, or attorneys, the Owners shall furnish monthly occupancy reports and shall give specific answers to questions upon which information is desired from time to time relative to --6-- income, assets, liabilities, contracts, operation, and condition of the property and the status of the insured mortgage. (g) All rents and other receipts of the project shall be deposited in the name of the project in a financial institution, whose deposits are insured by an agency of the Federal Government. Such funds shall be withdrawn only in accordance with the provisions of this Agreement for expenses of the project or for distributions of surplus cash as permitted by paragraph 6(e) above. Any Owner receiving funds of the project other than by such distribution of surplus cash shall immediately deposit such funds in the project bank account and failing so to do in violation of this Agreement shall hold such funds in trust. Any Owner receiving property of the project in violation of this Agreement shall hold such funds in trust. At such time as the Owners shall have lost control and/or possession of the project, all funds held in trust shall be delivered to the mortgagee to the extent that the mortgage indebtedness has not been satisfied. (h) If the mortgage is insured under Section 232: 1. The Owners or lessees shall at all times maintain in full force and effect from the state or other licensing authority such license as may be required to operate the project as a nursing home and shall not lease all or part of the project except on terms approved by the Secretary. 2. The Owners shall suitably equip the project for nursing home operations. 3. The Owners shall execute a Security Agreement and Financing Statement (or other form of chattel lien) upon all items of equipment, except as the Secretary may exempt, which are not incorporated as security for the insured mortgage. The Security Agreement and Financing Statement shall constitute a first lien upon such equipment and shall run in favor of the mortgagee as additional security for the insured mortgage. (i) If the mortgage is insured under Section 231, Owners or lessees shall at all times maintain in full force and effect from the state or other licensing authority such license as may be required to operate the project as housing for the elderly. 9. Owners will comply with the provisions of any Federal, State, or local law prohibiting discrimination in housing on the grounds of race, color, religion or --7-- creed, sex, or national origin, including Title VIII of the Civil Rights Act of 1968 (Public Law 90-284; 82 Stat. 73), as amended, Executive Order 11063, and all requirements imposed by or pursuant to the regulations of the Department of Housing and Urban Development implementing these authorities (including 24 CFR Parts 100, 107 and 110, and Subparts I and M of Part 200). 10. Upon a violation of any of the above provisions of this Agreement by Owners, the Secretary may give written notice thereof, to Owners, by registered or certified mail, addressed to the addresses stated in this Agreement, or such other addresses as may subsequently, upon appropriate written notice thereof to the Secretary, be designated by the Owners as their legal business address. If such violation is not corrected to the satisfaction of the Secretary within thirty (30) days after the date such notice is mailed or within such further time as the Secretary determines is necessary to correct the violation, without further notice the Secretary may declare a default under this Agreement effective on the date of such declaration of default and upon such default the Secretary may: (a) (i) If the Secretary holds the note - declare the whole of said indebtedness immediately due and payable and then proceed with the foreclosure of the mortgage; (ii) If said note is not held by the Secretary - notify the holder of the note of such default and request holder to declare a default under the note and mortgage, and holder after receiving such notice and request, but not otherwise, at its option, may declare the whole indebtedness due, and thereupon proceed with foreclosure of the mortgage, or assign the note and mortgage to the Secretary as provided in the Regulations; (b) Collect all rents and charges in connection with the operation of the project and use such collections to pay the Owners' obligations under this Agreement and under the note and mortgage and the necessary expenses of preserving the property and operating the project. (c) Take possession of the project, bring any action necessary to enforce any rights of the Owners growing out of the project operation, and operate the project in accordance with the terms of this Agreement until such time as the Secretary in his discretion determines that the Owners are again in a position to operate the project in accordance with the terms of this Agreement and in compliance with the requirements of the note and mortgage. (d) Apply to any court, state or Federal, for specific performance of this Agreement, for an injunction against any violation of the Agreement, for the appointment of a receiver to take over and operate the project in accordance with the terms of the Agreement, or for such other relief as may be appropriate, since the injury to the Secretary arising from a default under any of the terms of this Agreement would be irreparable and the amount of damage would be difficult to ascertain. --8-- (d) Apply to any court, state or Federal, for specific performance of this Agreement, for an injunction against any violation of the Agreement, for the appointment of a receiver to take over and operate the project in accordance with the terms of the Agreement, or for such other relief as may be appropriate, since the injury to the Secretary arising from a default under any of the terms of this Agreement would be irreparable and the amount of damage would be difficult to ascertain. 11. As security for the payment due under this Agreement to the reserve fund for replacements, and to secure the Secretary because of his liability under the endorsement of the note for insurance, and as security for the other obligations under this Agreement, the Owners respectively assign, pledge and mortgage to the Secretary their rights to the rents, profits, income and charges of whatsoever sort which they may receive or be entitled to receive from the operation of the mortgaged property, subject, however, to any assignment of rents in the insured mortgage referred to herein. Until a default is declared under this Agreement, however, permission is granted to Owners to collect and retain under the provisions of this Agreement such rents, profits, income, and charges, but upon default this permission is terminated as to all rents due or collected thereafter. 12. As used in this Agreement the term: (a) "Mortgage" includes "Deed of Trust", "Chattel Mortgage", "Security Instrument", and any other security for the note identified herein, and endorsed for insurance or held by the Secretary; (b) "Mortgagee" refers to the holder of the mortgage identified herein, its successors and assigns; (c) "Owners" refers to the persons named in the first paragraph hereof and designated as Owners, their successors, heirs and assigns; (d) "Mortgaged Property" includes all property, real, personal or mixed, covered by the mortgage or mortgages securing the note endorsed for insurance or held by the Secretary; (e) "Project" includes the mortgaged property and all its other assets of whatsoever nature or wheresoever situate, used in or owned by the business conducted on said mortgaged property, which business is providing housing and other activities as are incidental thereto; --9-- (f) "Surplus Cash" means any cash remaining after: (1) the payment of: (i) All sums due or currently required to be paid under the terms of any mortgage or note insured or held by the Secretary; (ii) All amounts required to be deposited in the reserve fund for replacements; (iii) All obligations of the project other than the insured mortgage unless funds for payment are set aside or deferment of payment has been approved by the Secretary; and (2) the segregation of: (i) An amount equal to the aggregate of all special funds required to be maintained by the project; and (ii) All tenant security deposits held. (g) "Distribution" means any withdrawal or taking of cash or any assets of the project, including the segregation of cash or assets for subsequent withdrawal within the limitations of Paragraph 6(e) hereof, and excluding payment for reasonable expenses incident to the operation and maintenance of the project. (h) "Default" means a default declared by the Secretary when a violation of this Agreement is not corrected to his satisfaction within the time allowed by this Agreement or such further time as may be allowed by the Secretary after written notice; (i) "Section" refers to a Section of the National Housing Act, as amended. (j) "Displaced persons or families" shall mean a family or families, or a person, displaced from an urban renewal area, or as the result of government action, or as a result of a major disaster as determined by the President pursuant to the Disaster Relief Act of 1970. --10-- (k) "Elderly person" means any person, married or single, who is sixty-two years of age or over. 13. This instrument shall bind, and the benefits shall inure to, the respective Owners, their heirs, legal representatives, executors, administrators, successors in office or interest, and assigns, and to the Secretary and his successors so long as the contract of mortgage insurance continues in effect, and during such further time as the Secretary shall be the owner, holder, or reinsurer of the mortgage, or obligated to reinsure the mortgage. 14. Owners warrant that they have not, and will not, execute any other agreement with provisions contradictory of, or in opposition to, the provisions hereof, and that, in any event, the requirements of this Agreement are paramount and controlling as to the rights and obligations set forth and supersede any other requirements in conflict therewith. 15. The invalidity of any clause, part or provision of this Agreement shall not affect the validity or the remaining portions thereof. 16. The following Owners: ARV Acacia Villa, L.P., a California limited partnership, and all present and future limited and general partners thereof, do not assume personal liability for payments due under the note and mortgage, or for the payments to the reserve for replacements, or for matters not under their control, provided that said Owners shall remain liable under this Agreement only with respect to the matters hereinafter stated; namely: (a) for funds or property of the project coming into their hands which, by the provisions hereof, they are not entitled to retain; and (b) for their own acts and deeds or acts and deeds of others which they have authorized in violation of the provisions hereof. (To be executed with formalities for recording a deed to real estate) --11-- All references herein to the terms "nursing home" or nursing homes" shall mean and include the terms "assisted living facility" and "assisted living facilities." See Rider I attached hereto and made a part hereof. IN WITNESS WHEREOF, the parties hereto have set their hands and seals on the date first hereinabove written. ARV ACACIA VILLA, L.P. a California limited partnership By: CASA BONITA FULLERTON, LTD. ------------------------------------ a California limited partnership General Partner By: ARV ASSISTED LIVING, INC. a Delaware corporation General Partner By: ------------------------------------ Douglas Armstrong Vice President As of January 1, 2002 SECRETARY OF HOUSING AND URBAN DEVELOPMENT ACTING BY AND THROUGH THE FEDERAL HOUSING COMMISSIONER By: ------------------------------------ Authorized Agent As of January 1, 2002 EX-10.103 12 a80456ex10-103.txt EXHIBIT 10.103 EXHIBIT 10.103 REGULATORY AGREEMENT NURSING HOMES U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT Office of Housing Federal Housing Commissioner - ------------------------------------------------------------------------------------------------------ | Project Number | Mortgagee | | 143-22014 PM/ALF/REF | Red Mortgage Capital, Inc., an Ohio corporation | - ------------------------------------------------------------------------------------------------------ | Amount of Mortgage Note | Date | | $2,386,100.00 | As of January 1, 2002 | - ------------------------------------------------------------------------------------------------------ | Mortgage Recorded (State) | County | Date | | California | Orange | January __, 2002 | - ------------------------------------------------------------------------------------------------------ | Book | Page | | | | - ------------------------------------------------------------------------------------------------------
This Agreement entered into as of this 1st day of January, 2002, between ACACIA VILLA, LLC, a Delaware limited liability company whose address is 245 Fischer Avenue, Suite D-1, Costa Mesa, California 92626 (jointly and severally, hereinafter referred to as Lessee) and the undersigned FEDERAL HOUSING COMMISSIONER, (hereinafter called Commissioner). In consideration of the consent of the Commissioner to the leasing of the aforesaid project by ARV ACACIA VILLA, L.P., a California limited partnership, Mortgagor, and in order to comply with the requirements of the National Housing Act and the Regulations adopted by the Commissioner pursuant thereto, Lessees agree for themselves, their successors, heirs and assigns, that in connection with the mortgaged property and the project operated thereon and so long as the Contract of Mortgage Insurance continues in effect, and during such further period of time as the Commissioner shall be the owner, holder or reinsurer of the mortgage, or during any time the Commissioner is obligated to insure a mortgage on the mortgaged property: (1) The lease shall be subject and subordinate to the mortgage securing the note or other obligation endorsed for insurance by the commissioner; (2) Lessee shall make payments under lease when due; (3) Payments by the lessee to the lessor shall be sufficient to pay all mortgage payments including payments to reserves for taxes, insurance, etc., payments to the Reserve for Replacements, and to take care of necessary maintenance. If at the end of any calendar year, or any fiscal year if the project operates on the basis of a fiscal year, payments under the lease have not been sufficient to take care of the above ________________________________________________________________________________ Page 1 of 6 form HUD-92466-NHL (1/92) Ref Handbook 4600.1 items, the lessor and lessee upon request in writing from the Commissioner shall renegotiate the amounts due under the lease so that such amounts shall be sufficient to take care of such items; the Commissioner shall be furnished by the lessee, within thirty days after being called upon to do so, with a financial report in form satisfactory to the Commissioner covering the operations of the mortgaged property and of the project; (4) The lessee shall not sublease the project or any part thereof without the consent of the Commissioner; (5) The lessee shall at all times maintain in full force and effect a license from the State or other licensing authority to operate the project as a nursing home, but the owner shall not be required to maintain such a license; (6) Lessee shall maintain in good repair and condition any parts of the project for the maintenance of which lessee is responsible under the terms of the lease; (7) Lessee shall not remodel, reconstruct, add to, or demolish any part of the mortgaged property or subtract from any real or personal property of the project; (8) Lessee shall not use the project for any purpose except the operation of a nursing home; (9) If a default is declared by the Commissioner under the provisions of Paragraph 10 of the Regulatory Agreement entered into by the lessor-mortgagor and the Commissioner as of the 1st day of January, 2002, a copy of notice of default having been given to the lessee, the lessee will thereafter make all future payments under the lease to the Commissioner; (10) The lease may be cancelled upon thirty days written notice by the Commissioner given to the lessor and the lessee for a violation of any of the above provisions unless the violation is corrected to the satisfaction of the Commissioner within said thirty day period. (11) The Commissioner must approve any change in or transfer of ownership of the lessee entity, and any change in or transfer of the management operation, or control of the project. (12) The lessee shall not reduce or expand, allow to be reduced or expanded, or cause the expansion or reduction of the bed capacity of the project without the consent of ________________________________________________________________________________ Page 2 of 6 form HUD-92466-NHL (1/92) Ref Handbook 4600.1 the Commissioner. Any change in the bed capacity shall violate this Regulatory Agreement. (13) The lessee shall not enter into any management contract involving the project, unless such shall contain a provision that, in the event of default under the Regulatory Agreement as recited in paragraph 9 (above) of this Agreement, the management agreement shall be subject to termination without penalty upon written request of the Commissioner. Upon such request the lessee shall immediately arrange to terminate the contract within a period of not more than thirty (30) days and shall make arrangements satisfactory to the Commissioner for continuing proper management of the project. (14) The mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and other papers relating thereto shall at all times be maintained in reasonable condition for proper audit and subject to examination and inspection at any reasonable time by the Commissioner or his duly authorized agents. Lessee shall keep copies of all written contracts or other instruments which affect the mortgaged property, all or any of which may be subject to inspection and examination by the Commissioner or his/her duly authorized agents. (15) There shall be full compliance with the provisions of (1) any State or local laws prohibiting discrimination in housing on the basis of race, color, creed, or national origin; and (2) with the Regulations of the Federal Housing Administration providing for non-discrimination and equal opportunity in housing. It is understood and agreed that failure or refusal to comply with any such provisions shall be a proper basis for the Commissioner to take any corrective action he may deem necessary including, but not limited to, the refusal to consent to a further renewal of the lease between the mortgagor-lessor and the lessee, the rejection of applications for FHA mortgage insurance and the refusal to enter into future contracts of any kind with which the lessee is identified; and further, if the lessee is a corporation or any other type of business association or organization which may fail or refuse to comply with the aforementioned provisions, the Commissioner shall have a similar right of corrective action (1) with respect to any individuals who are officers, directors, trustees, managers, partners, associates or principal stockholders of the lessee; and (2) with respect to any other type of business association, or organization with which the officers, directors, trustees, managers, partners, associates or principal stockholders of the lessee may be identified. ________________________________________________________________________________ Page 3 of 6 form HUD-92466-NHL (1/92) Ref Handbook 4600.1 (16) The lease is evidenced by a Memorandum of Lease attached hereto and made a part hereof. IN WITNESS WHEREOF, the parties hereto have set their hands and seals on the date first hereinabove written. ACACIA VILLA, LLC a Delaware limited liability company By: ------------------------------------ Abdo H. Khoury Manager As of January 1, 2002 SECRETARY OF HOUSING AND URBAN DEVELOPMENT ACTING BY AND THROUGH THE FEDERAL HOUSING COMMISSIONER By: ------------------------------------ Authorized Agent As of January 1, 2002 ________________________________________________________________________________ Page 4 of 6 form HUD-92466-NHL (1/92) Ref Handbook 4600.1 EX-23.1 13 a80456ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors ARV Assisted Living, Inc.: We consent to incorporation by reference in the registration statement on Form S-8 of ARV Assisted Living, Inc. of our report dated March 15, 2002 relating to the consolidated balance sheets of ARV Assisted Living, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of ARV Assisted Living, Inc. /s/ KPMG LLP Orange County, California March 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----