-----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, LgyMj99/9mCqJmtciritFMhpzkGCp8UrWFXfGktMPCKkN4ExQW0LoSzUDGqXEnvT 34AhpGBlApvaJR6yUhfsQA== 0000892569-97-002293.txt : 19970815 0000892569-97-002293.hdr.sgml : 19970815 ACCESSION NUMBER: 0000892569-97-002293 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD 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: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26980 FILM NUMBER: 97662471 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-Q 1 FORM 10-Q FOR PERIOD ENDED JUNE 30,1997 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q --------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ___________ COMMISSION FILE NUMBER: 0-26980 ARV ASSISTED LIVING, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 33-0160968 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of outstanding shares of the Registrant's Common Stock, no par value, as of August 8, 1997 was 11,584,272. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
JUNE 30, MARCH 31, 1997 1997 ------------------------ ASSETS Cash and cash equivalents $ 7,779 $ 15,964 Accounts receivable, net 3,052 2,410 Fees receivable from affiliates 1,681 1,105 Deferred project costs 1,582 1,072 Investments in real estate held for sale 2,062 1,984 Other assets 9,404 5,965 --------- --------- Total current assets 25,560 28,500 --------- --------- Restricted cash 313 1,912 Property, furniture and equipment, net 128,067 122,199 Notes receivable from affiliates, net 234 234 Deferred tax asset 2,004 2,004 Other noncurrent assets 10,992 9,382 --------- --------- $ 167,170 $ 164,231 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued liabilities $ 13,686 $ 8,566 Accrued interest payable 976 1,941 Notes payable, current portion 1,715 2,027 Notes payable and other amounts due to affiliates 44 40 Liabilities related to Tax Credit Properties 826 1,219 --------- --------- Total current liabilities 17,247 13,793 --------- --------- Deferred revenue, less current portion 847 576 Notes payable, less current portion 90,613 90,481 --------- --------- 108,707 104,850 --------- --------- Minority interest in majority owned entities 7,827 8,007 Series B Preferred stock, convertible and redeemable. Stated and liquidation value $2.50; authorized 2,000 shares, none issued and outstanding -- -- Shareholders' equity Common stock, no par value. Authorized 100,000 shares; issued and outstanding 9,663 and 9,613 shares at June 30 and March 31, 1997, respectively 60,812 60,749 Accumulated deficit (10,176) (9,375) --------- --------- Total shareholders' equity 50,636 51,374 --------- --------- $ 167,170 $ 164,231 ========= =========
See accompanying notes to the unaudited condensed consolidated financial statements. 3 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30, 1997 1996 ---- ---- REVENUE: Assisted living facility revenue $ 24,665 $ 13,446 Therapy and other services 2,283 945 Interest income 239 817 Other income 169 137 -------- -------- Total revenue 27,356 15,345 -------- -------- EXPENSES: Assisted living facility operating expense 15,736 8,462 Assisted living facility lease expense 4,970 2,747 General and administrative 2,524 1,606 Therapy and other 1,898 61 Depreciation and amortization 1,477 667 Interest 1,403 1,401 -------- -------- Total expenses 28,008 14,944 -------- -------- Income (loss) before income tax expense (benefit), minority interest in income of majority owned entities and extraordinary item (652) 401 Income tax expense (benefit) (259) 150 -------- -------- Income (loss) before minority interest in income of majority owned entities and extraordinary item (393) 251 Minority interest in income of majority owned entities 408 -- -------- -------- Income (loss) before extraordinary item (801) 251 Extraordinary item, loss from early extinguishment of debt, net of income tax benefit of $231 -- 386 -------- -------- Net loss $ (801) $ (135) ======== ======== EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item $ (0.08) $ 0.03 Extraordinary loss, early extinguishment of debt -- (0.04) -------- -------- Net loss $ (0.08) $ (0.01) ======== ======== Weighted average number of common shares outstanding 9,621 8,805 ======== ========
See accompanying notes to the unaudited condensed consolidated financial statements 4 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, ---------------------- 1997 1996 -------- -------- -------- -------- Net cash provided by (used in) operating activities (including changes in all operating assets and liabilities) (654) 1,243 -------- -------- Cash flows provided by (used in) investing activities: Increase in notes receivable (1) (102) Collections of notes and other amounts due from affiliates 1 100 Increase in deferred project costs (542) (155) Increase in investments in real estate held for sale (78) (1,844) Additions to property, furniture and equipment (7,102) (19,138) Increase in leased property security deposits (289) (245) Release of security deposits 7 491 Increase (decrease) in restricted cash 1,599 (452) Equity investment in affiliated partnerships (156) -- Purchase of limited partnership interests -- (649) -------- -------- Net cash used in investing activities (6,561) (21,994) -------- --------
See accompanying notes to unaudited condensed consolidated financial statements. 5 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS)
1997 1996 -------- --------- Cash flows from financing activities: Issuance of common stock, net of issuance costs $ 64 31 Extraordinary loss from the early extinguishment of debt -- (386) Minority interest (588) -- Borrowings under notes payable -- 6,341 Repayments of notes payable (446) (4,083) Issuance of convertible subordinated notes, net of issuance costs -- 55,194 Repurchase of convertible subordinated notes -- (1,692) -------- -------- Net cash provided by (used in) financing activities (970) 55,405 -------- -------- Net increase (decrease) in cash (8,185) 34,654 Cash at beginning of period 15,964 7,454 -------- -------- Cash at end of period $ 7,779 42,108 ======== ======== Supplemental schedule of cash flow information: Cash paid during the period for: Interest $ 2,736 732 Income taxes 4 368 ======== ======== Supplemental schedule of noncash investing and financing activities: Minority interests in joint venture $ 588 $ -- Conversion of preferred stock to common stock -- 2,357 Conversion of 10% convertible subordinated notes to common stock -- 10,106
See accompanying notes to unaudited condensed consolidated financial statements. 6 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying interim unaudited condensed consolidated financial statements of ARV Assisted Living, Inc. and subsidiaries (the "Company") have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations. The condensed consolidated financial statements reflect all adjustments and disclosures which are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to prior period amounts in order to conform to the presentation at June 30, 1997. The interim consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K/A for the fiscal year ended March 31, 1997. The results of operations for the three month period ended June 30, 1997 are not necessarily indicative of the results which may be expected for the full fiscal year. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Joint ventures and limited partnerships in which the Company has controlling interests have been consolidated into the financial statements including presentation of the minority interest not controlled by the Company. All significant intercompany balances and transactions have been eliminated in consolidation. On August 22, 1996, ARV Health Care, Inc. ("ARV Health Care"), a wholly owned subsidiary of the Company, acquired all of the outstanding stock of SynCare, Inc. in a stock for stock merger valued at approximately $1.2 million. On August 23, 1996, the Company acquired a 51% controlling interest in American Retirement Villas Properties II, a California limited partnership, which owns five assisted living facilities and operates another five assisted living facilities pursuant to long-term operating leases. The Company acquired its interest in the partnership for its estimated fair market value and recorded the assets and liabilities acquired at their fair market value. No goodwill was recognized. On December 13, 1996, a wholly-owned subsidiary of the Company, LAVRA, Inc., a Delaware corporation ("LAVRA"), completed its first tender offer (the "First Tender Offer") for limited partnership units (the "Units") of Senior Income Fund, L.P., a Delaware limited partnership ("Senior Income Fund"), at a net cash price of $5.90 per unit. LAVRA has purchased approximately 620,000 units or approximately 12.8% of the outstanding units of Senior Income Fund. The Company's investment in Senior Income Fund has been recorded on the equity method. LOSS PER SHARE Net loss per share is computed by dividing net loss, by the weighted average number of common shares outstanding. Loss per common share is based upon the following weighted average shares outstanding: 9,621,000 and 8,805,000 for the three months ending June 30, 1997 and 1996, respectively. (2) COMMITMENTS AND CONTINGENT LIABILITIES The Company and its majority shareholders have guaranteed indebtedness of certain affiliated partnerships as follows: 7
MAJORITY COMPANY SHAREHOLDERS ------- ------------ (IN THOUSANDS) Notes secured by real estate $13,080 $13,426 Construction loans associated with the development and construction of affordable housing apartments $35,341 $31,052
The maximum aggregate amounts of guaranteed land and construction loans is $42.3 million at June 30, 1997. The Company has guaranteed tax credits for certain partnerships in the aggregate amount of $78.4 million, excluding interest, penalties or other charges which might be assessed against the partners. In management's opinion, no material claims may be currently asserted under any of the aforementioned guarantees based on the terms of the respective agreements. (3) SUBSEQUENT EVENTS On July 14, 1997, the Company entered into a definitive agreement with Prometheus Assisted Living LLC ("Prometheus"), an affiliate of Lazard Freres Real Estate Investors LLC ("LFREI") pursuant to which Prometheus has committed to invest $135 million to acquire approximately 9.6 million shares of newly-issued shares of the Company at $14 per share. Under the terms of the agreement, Prometheus agreed to purchase approximately 1.9 million newly-issued restricted shares of common stock (approximately 19.9% of the Company's outstanding stock following issuance)upon completion of its due diligence. On July 23, 1997, Prometheus completed its due diligence and acquired 1.92 million newly-issued restricted common shares for approximately $26.9 million. Approximately 3.1 million shares of common stock will be purchased by Prometheus following shareholder approval of the transaction which is expected to be sought in October 1997. The remaining approximately 4.6 million shares will be purchased by Prometheus as additional capital is needed by the Company at any time through June 30, 1999. Upon shareholder approval of the transaction, the Company's Board of Directors will be expanded from seven to eleven members. The four additional directors will be appointed by LFREI. In addition, an Executive Committee of the Board of Directors, initially consisting of five members, two of whom will be appointed by LFREI will be delegated authority to approve certain Board actions by the affirmative vote of four of the five members. LFREI has also been granted certain participation rights to purchase securities from the Company to maintain its percentage ownership. On July 14, 1997, the Company adopted a shareholders rights plan under which it declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of its common stock. Subject to limited exceptions, the Rights will be exercisable if a person or group acquires 10% or more of the Company's stock or announces a tender offer for 10% of the common stock. When exercisable, each Right (except the Rights held by the acquiring person) will entitle its holder to purchase, at the Right's then-current exercise price, a number of common shares of the Company having a market value of twice the Right's exercisable price. If the Company is acquired in a merger or other business combination transaction which has not been approved by the Company's Board of Directors, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value at that time of twice the Right's exercise price. The shares purchased by Prometheus will be exempt from the provisions of the rights plan as will the shares owned by Gary L. Davidson, the Company's Chief Executive Officer and President, who beneficially owned approximately 10% of the Company's common stock at the time of adoption of the shareholders rights plan. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. OVERVIEW As of June 30, 1997, the Company operated 48 assisted living facilities ("ALFs") containing 6,150 units, including 2 owned by a limited partnership for which the Company serves as the managing general partner and facility manager ("Affiliated Partnership"). Of the remaining facilities, 32 are leased by the Company pursuant to long-term operating leases ("Leased ALFs") and 14 facilities are owned ("Owned ALFs") by the Company for its own account. Additionally, the Company was in various stages of development on 8 ALFs with an anticipated total of 908 units at June 30, 1997. From 1980 until 1994 when the Company began operating ALFs for its own account, all of the ALFs operated by the Company were owned or leased by Affiliated Partnerships. From 1991 until 1994, other Affiliated Partnerships also acquired or began development of senior, affordable senior and multifamily apartments primarily utilizing the sale of tax credits under a low income housing tax credit program (the "Federal Tax Credit Program") for the equity funding of the development. Since commencing operation of ALFs for its own account in April 1994, the Company has embarked upon an expansion strategy and achieved significant growth in revenue resulting primarily from the acquisition of ALFs. The Company has focused its growth efforts on the acquisition and development of additional ALFs and expansion of services to its residents as they "age in place." Growth has been achieved through the acquisition of ALFs which the Company owns for its own account or leases pursuant to long-term operating leases with Health Care REITs. Since April 1994 when the Company entered into its first long-term operating lease with a Health Care REIT, the Company has developed, acquired for its own account or entered into long-term operating leases with Health Care REITs or other lessors, 46 ALFs totaling 5,894 units (95.8% of its portfolio of 6,150 units at June 30, 1997). Of these ALFs, 24 facilities (2,476 units) were previously owned or leased by Affiliated Partnerships inclusive of 10 facilities (940 units) owned by American Retirement Villas Properties II, a California limited partnership in which a controlling interest was acquired, as described below. Of the remaining facilities, 15 facilities (2,429 units) were acquired from unrelated third-party owners. In December 1996, the Company opened a 162 unit facility in Beaumont, Texas, the first facility developed by the Company since its initial public offering of stock in October 1995. Two additional development projects, Eastlake Terrace, a 69 unit facility and Inn at Summit Ridge, a 76 unit facility, were opened in April and May 1997, respectively. A fourth development project, Vista del Rio, a 150 unit facility in Alburquerque, New Mexico was opened in June 1997. On August 23, 1996, the Company acquired a 51% controlling interest in American Retirement Villas Properties II, a California limited partnership, which has five Owned ALFs and five Leased ALFs totaling 940 units. The acquisition was completed pursuant to a tender offer for limited partnership units not already owned by the Company. In addition to its acquisition of ALFs, the Company, through ARV Health Care, Inc., a wholly-owned subsidiary ("ARV Health Care"), acquired all of the outstanding stock of SynCare, Inc., a California corporation ("SynCare"), and its three wholly owned subsidiaries, ProMotion Rehab, a California corporation ("ProMotion"), ProMotive Rehabilitation Services, a California corporation ("ProMotive") and BayCare Rehabilitative Services, Inc., a California corporation, ("BayCare") on August 22, 1996. SynCare, through its ProMotive and BayCare subsidiaries, provides physical, occupational and speech therapies primarily to residents of assisted living facilities in Southern and Northern California. 9 At June 30, 1997, the Company had the following projects under development or construction and anticipates that the schedule set forth below can be met, although there can be no assurance in this regard. Development and construction is subject to numerous risks which could cause delays or the abandonment of a project or projects.
ANTICIPATED ANTICIPATED FACILITIES # OF CONSTRUCTION ANTICIPATED UNDER CONSTRUCTION LOCATION UNITS COMMENCEMENT* OPENING* - ------------------ -------- ----- ------------- -------- Prospect Park Brooklyn, NY 128 Under construction 3rd Quarter 1997 Eastlake - Phase II Elkhart, IN 24 Under construction 4th Quarter 1997 Las Posas Camarillo, CA 123 Under construction 4th Quarter 1997 Sun Lake Terrace Las Vegas, NV 129 Under construction 1st Quarter 1998 Canterbury Woods Attleboro, MA 132 Under construction 2nd Quarter 1998 ----- Total Units Under Construction 536 ----- FACILITIES UNDER DEVELOPMENT - ---------------------------- Flamingo Road Las Vegas, NV 142 3rd Quarter 1997 2nd Quarter 1998 The Lakes Ft. Myers, FL 154 3rd Quarter 1997 3rd Quarter 1998 Inn at Brookside Stockton, CA 76 3rd Quarter 1997 3rd Quarter 1998 -- Total Units Under Development 372 --- Total Units Under Construction and Development 908 ---
* Denotes calendar quarters. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1996 As a result of the Company's continued growth through the acquisition and development of assisted living facilities, revenue for the three months ended June 30, 1997 increased to $27.4 million from $15.3 million for the three months ended June 30, 1996 primarily due to an increase in assisted living facility revenue as described below. Assisted living facility revenue increased to $24.7 million for the three months ended June 30, 1997 from $13.4 million for the three months ended June 30, 1996. Assisted living revenue increased due to an increase in the number of Owned ALFs and Leased ALFs operated by the Company. As of June 30, 1997, the Company operated 46 ALFs for its own account consisting of 32 Leased ALFs and 14 Owned ALFs. For the three months ended June 30, 1996, the Company operated a total of 26 ALFs for its own account consisting of 17 Leased ALFs pursuant to long-term operating leases with Health Care REITs and 9 Owned ALFs. Therapy and services revenue increased to $2.3 million for the three months ended June 30, 1997 from $945,000 for the three months ended June 30, 1996. ARV Health Care, a wholly-owned subsidiary of the Company, contributed $1.8 million to service revenue from physical, occupational and speech rehabilitation therapies. Management fees decreased from $612,000 for the three months ended June 30, 1996 to $377,000 for the three months ended June 30, 1997 primarily due to the Company's purchases of controlling interests in certain Affiliated Partnerships. As a result of such controlling interests, the Company now recognizes management fees only to the extent such fee income is not eliminated in consolidation. Development fees decreased to $145,000 for the three months ended June 30, 1997 from $333,000 for the three months ended June 30, 1996. Interest income decreased to $239,000 for the three months ended June 30, 1997 from $817,000 for the three months ended June 30, 1996 primarily due to lower cash balances in the current three month period. Cash balances available for investment during the three 10 months ended June 30, 1996 were larger than normal following the completion of the Company's subordinated debt offering in April 1996. Expenses increased to $28.0 million for the three months ended June 30, 1997 from $14.9 million for the three months ended June 30, 1996 primarily due to additional assisted living facility operating and lease expenses. Assisted living facility operating and lease expenses increased to $15.7 million and $5.0 million, respectively, for the three months ended June 30, 1997 from $8.5 million and $2.7 million, respectively, for the three months ended June 30, 1996. These increases were due to the additional number of Owned and Leased ALFs operated by the Company during the three months ended June 30, 1997. As of June 30, 1997, the Company operated 46 ALFs for its own account consisting of 32 Leased ALFs and 14 Owned ALFs. During the three months ended June 30, 1996, the Company operated a total of 26 ALFs for its own account consisting of 17 Leased ALFs pursuant to long-term operating leases with Health Care REITs and 9 Owned ALFs. General and administrative expenses increased to $2.5 million for the three months ended June 30, 1997 from $1.6 million for the three months ended June 30, 1996. The increase was primarily a result of additional staffing to accommodate the increased operations of the Company. Depreciation and amortization expenses increased to $1.5 million for the three months ended June 30, 1997 from $667,000 for the three months ended June 30, 1996. The increased depreciation and amortization expense incurred during the three months ended June 30, 1997 is primarily due to depreciation and amortization charges associated with the Company's Owned ALFs. Therapy and other expenses increased to $1.9 million for the three months ended June 30, 1997 from $61,000 for the three months ended June 30, 1996 as a result of expenses incurred in the operation of ARV Health Care following the acquisition of SynCare. Interest expense remained constant at $1.4 million for the three months ended June 30, 1997 and 1996, respectively. Interest expense consisted primarily of interest incurred on the Company's $57.5 million of 6 3/4%, convertible subordinated notes due 2006 (the "2006 Notes") as well as mortgage interest on Owned ALFs. Income tax expense decreased by $409,000 from $150,000 for the three months ended June 30, 1996 to an income tax benefit of $259,000 for the three months ended June 30, 1997. During the three months ended June 30, 1997, the Company recorded an income tax benefit as a result of operating losses incurred which will offset future taxable income. Minority interest in earnings of majority owned partnerships is the result of consolidation of partnerships in which the Company purchased a controlling interest during August, 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's unrestricted cash balances were $7.8 million and $16.0 million at June 30, 1997 and March 31, 1997, respectively. 11 In September 1996, the Company obtained a $10 million line of credit from Imperial Bank (the "Imperial Bank Line") to be used for acquisition, development and general corporate purposes. As of June 30, 1997, the Company had used the Imperial Bank Line to provide $8.4 million of letters of credit as security deposits for Leased ALFs. At June 30, 1997, the Company had borrowed $8.8 million under its $35 million credit line with Bank United of Texas (the "Bank United Line"). These borrowings, which are cross-defaulted and cross-collateralized, were secured by mortgages recorded against two of the Company's Owned ALFs. In addition, the Company had guaranteed a $7.7 million loan borrowed from the Bank United Line by an Affiliated Partnership for the construction of an ALF. Working capital decreased to $8.6 million as of June 30, 1997, compared to working capital of $46.4 million at June 30, 1996. At June 30, 1996 the Company's working capital was in excess of normal levels following issuance of the 2006 Notes. For the three months ended June 30, 1997, cash used by operating activities was $654,000, while cash provided by operating activities was $1.2 million for the three months ended June 30, 1996. For the three months ended June 30, 1997, the primary components of cash used by operating activities were increases in accounts receivable and other assets combined with decreases in deferred revenue which were offset primarily by increases in accounts payable and accrued liabilities. For the three months ended June 30, 1996, the $1.2 million of cash provided by operating activities was principally the result of net income before extraordinary item increased by non-cash charges for deprecation and amortization along with increases in accrued liabilities offset by increases in amounts receivable from affiliates. Cash used in investing activities was $6.6 million for the three months ended June 30, 1997, compared to $22 million for the three months ended June 30, 1996. For the three months ended June 30, 1997 additions to property, furniture and equipment used $7.1 million while increases in deferred project costs, leased facility security deposits and additional equity investments in affiliated partnerships used $1 million. These amounts were offset by a $1.6 million decrease in restricted cash. For the three months ended June 30, 1996, the primary components of the $22 million used by investing activities were $19.8 million used to purchase fixed assets and limited partnership interests, and a $1.8 million increase in real estate investments. Net cash used by financing activities during the three months ended June 30, 1997 was $970,000 compared to $55.4 million provided by financing activities for the three months ended June 30, 1996. During the three months ended June 30, 1997, the primary uses of cash by financing activities were principal reductions of debt totaling $446,000 and an increase of $588,000 in the minority interest in consolidated subsidiaries offset by $64,000 received from the issuance of common stock. For the three months ended June 30, 1996, the Company received $55.2 million, after issuance costs, from the issuance of the 2006 Notes and $6.3 million from the borrowing under notes payable to banks. These amounts were offset by expenditures of $4.1 million to repay debt, $386,000 from the extraordinary loss from the early extinguishment of debt and $1.7 million paid for the repurchase of convertible subordinated notes. 12 The Company's capital requirements include acquisition and rehabilitation costs of ALFs, security deposits on Leased ALFs, ALF pre-development costs, initial operating costs of newly developed ALFs, payment of interest, owner's equity contributions in connection with certain Affiliated Partnerships financed under the Federal Tax Credit Program, and working capital. The Company is discontinuing its future activities with respect to developments under the Federal Tax Credit Program and, accordingly, expects that its future outlays for existing developments will diminish. The Company is contingently liable for (i) certain secured and unsecured indebtedness of affiliates which it has guaranteed and (ii) tax credit guaranties. While the Company currently generates sufficient cash from operations to fund its recurring working capital requirements, the Company anticipates that it will be necessary to obtain additional financing in order to continue its aggressive growth strategy. Moreover, there can be no assurances that the Company will be able to obtain financing on favorable terms. IMPACT OF INFLATION AND CHANGING PRICES Operating revenue from ALFs and management fees from apartment communities operated by the Company are the primary sources of revenue earned by the Company. These properties are affected by rental rates which are highly dependent upon market conditions and the competitive environments where the facilities are located. Employee compensation is the principal cost element of property operations. Although there can be no assurance it will be able to continue to do so, the Company has been able historically to offset the effects of inflation on salaries and other operating expenses by increasing rental and assisted living rates. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On December 10, 1996, a Texas developer filed a complaint in Texas naming the Company and certain of its officers as defendants. The main contention of the developer's complaint was the Company's alleged breach of an acquisition and development agreement. Among the causes of action alleged in the complaint were: fraud, negligent misrepresentation, breach of fiduciary duty, breach of contract, a suit for an accounting and declaratory relief. The developer alleged actual damages ranging from $5 million to $15 million and punitive damages of $10 million. A cross-complaint was filed on December 23, 1996. On April 10, 1997, the litigation with the developer was settled pursuant to a release and settlement agreement (the "Release and Settlement") between the Company and the developer. Contemporaneously with the execution of the Release and Settlement, the pending action filed by the developer and the cross complaint filed by the Company were dismissed with prejudice. On September 27, 1996, American Retirement Villas Partners II, a California limited partnership ("ARVP II") of which the Company is the managing general partner and a majority limited partner, filed actions seeking declaratory judgments against the landlords of the Retirement Inn of Campbell (Campbell) and the Retirement Inn of Sunnyvale (Sunnyvale). ARVP II leases the Campbell and Sunnyvale assisted living facilities under long-term leases. A dispute has arisen as to the amount of rent due during the 10-year lease renewal periods which commenced in August 1995 for Campbell and March 1996 for Sunnyvale. The Partnership seeks a determination that the Partnership is not required to pay any higher rent during the 10-year renewal periods than during the original 20-year lease terms. In the event that the court finds against ARVP II, rent for the Campbell and Sunnyvale facilities could increase significantly, which will reduce distributions to unit holders in the future. These rent increases would be retroactive to the commencement of the lease renewal periods. Management is of the opinion, based in part upon opinions of legal counsel, that an adverse outcome is unlikely. Two other facilities leased by ARVP II, the Retirement Inn of Fremont (Fremont) and the Retirement Inn at Burlingame (Burlingame) are owned by entities which are related to the entities that own the Campbell and Sunnyvale facilities. It is not known whether the landlords of those facilities will dispute the amount of rent due during the renewal periods which began January 1997 for Fremont 13 and beginning August 1997 for Burlingame. If so, the Partnership may be required to file litigation to determine the rights under those leases. ITEM 2. CHANGES IN SECURITIES. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS 15 Independent Accountants' Review Report dated August 11, 1997 27 Financial Data Schedule (b) REPORTS ON FORM 8-K None. 14 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARV ASSISTED LIVING, INC. By: /s/ Graham P. Espley-Jones -------------------------- Graham P. Espley-Jones Chief Financial Officer (Duly authorized and principal financial officer) Date: August 14, 1997 By: /s/ Patrick M. Donovan ---------------------- Patrick M. Donovan Vice President Finance (Duly authorized officer) Date: August 14, 1997 EX-15 2 INDEPENDENT ACCOUNTANTS' REVIEW REPORT 1 EXHIBIT 15 INDEPENDENT ACCOUNTANTS' REVIEW REPORT -------------------------------------- The Stockholders and Board of Directors ARV Assisted Living, Inc.: We have reviewed the condensed consolidated balance sheet of ARV Assisted Living, Inc. and subsidiaries as of June 30, 1997, and the related condensed consolidated statements of earnings and cash flows for the three-month period ended June 30, 1997 and 1996. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of ARV Assisted Living, Inc. and subsidiaries as of March 31, 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated June 20, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG PEAT MARWICK LLP - --------------------------- Orange County, California August 11, 1997 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1997 APR-01-1997 JUN-30-1997 7,779 0 3,052 0 0 25,560 134,179 6,112 167,170 17,247 96,613 0 0 60,812 0 167,170 0 27,356 0 26,605 0 0 1,403 (652) (259) (393) 0 0 0 (801) (.08) (.08)
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