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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 MARCH 31, 1996
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, Suite D-1, Costa Mesa, California 92626
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 751-7400
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, no par value NASDAQ National Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of June 25, 1996, the aggregate market value of the voting stock held by
non-affiliates of registrant was $77,744,264 (for purposes of calculating the
preceding amount only, all directors, executive officers and shareholders
holding 5% or greater of the registrant's Common Stock are assumed to be
affiliates). The number of shares of Common Stock of the registrant outstanding
as of June 25, 1996 was 8,941,093.
Part III incorporates by reference the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on August 13, 1996. The registrant
intends to file such Proxy Statement no later than 120 days after the end of the
fiscal year covered by this form 10-K.
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ARV ASSISTED LIVING, INC.
Index to Annual Report on Form 10-K For
the fiscal year ended March 31, 1996
PAGE
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PART I
Item 1: Business 2
Item 2: Properties 13
Item 3: Legal Proceedings 14
Item 4: Submission of Matters to a Vote of Security Holders 14
PART II
Item 5: Market for Registrant's Common Equity and
Related Shareholder Matters 14
Item 6: Selected Financial Data
Item 7: Managements Discussion and Analysis of Financial 16
Condition and Results of Operations 17
Item 8: Financial Statements and Supplementary Data 25
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10: Directors and Executive Officers of the Registrant 25
Item 11: Executive Compensation 25
Item 12: Security Ownership of Certain Beneficial Owners and Management 25
Item 13: Certain Relationships and Related Transactions 26
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K 26
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PART I
ITEM 1. BUSINESS
GENERAL
ARV Assisted Living, Inc. ("ARV" or the "Company") is one of the
largest operators of licensed assisted living facilities in the United States.
The Company is a fully integrated provider of assisted living accommodations and
services that operates, acquires and develops assisted living facilities. The
Company's operating objective is to provide high quality, personalized assisted
living services to senior elderly residents in a cost effective manner, while
maintaining residents' independence, dignity and quality of life. Assisted
living facilities comprise a combination of housing, personalized support
services and health care in a non-institutional setting designed to respond to
the individual needs of the senior elderly who need assistance with certain
activities of daily living, but who do not need the level of health care
provided in a skilled nursing facility.
Since the Company's initial public offering of its Common Stock
completed in October 1995 (the "IPO Offering"), the Company has implemented its
plan to expand its operations through the acquisition and development of new
assisted living facilities. At the time of the IPO Offering, the Company
operated or was developing facilities in Arizona, California, Colorado,
Michigan, New Mexico, Ohio and Texas. Consistent with the Company's growth
strategy, the Company has expanded its presence in California, Colorado, Ohio
and Texas and entered the market in Florida, Massachusetts, Nevada, New Jersey
and New York. At March 31, 1996, the Company operated 36 assisted living
facilities containing 4,516 units. The Company currently operates 38 assisted
living facilities containing 4,823 units, including 1,364 units, or 28.3% of its
total units, added since the IPO Offering. Of the 38 assisted living facilities,
the Company operates 25 assisted living facilities either directly for its own
account or under long-term operating leases and manages 13 assisted living
facilities which are owned by affiliated limited partnerships for which the
Company serves as managing general partner and facility manager. In addition,
the Company has 14 assisted living facilities expected to contain 1,899 units
under development, including four facilities currently under construction that
are expected to contain 515 units.
The Company has utilized financing with health care real estate
investment trusts ("Health Care REITs") to help facilitate its growth strategy.
To date, the Company has entered into long-term operating leases with Nationwide
Health Properties, Inc. ("Nationwide Health Properties") and Health Care
Property Investors, Inc. ("Health Care Property Investors") and arranged
financing for a facility owned by the Company as well as properties owned by
affiliated limited partnerships with Health and Retirement Properties Trust,
Inc. ("Health and Retirement Properties Trust") and Health Care REIT, Inc.
The Company intends to continue to expand its existing portfolio
through the acquisition and development of directly owned assisted living
facilities as well as through the operation of facilities under long-term
operating leases. This blend of ownership structures is anticipated by
management to allow the Company to fund its growth in a balanced and efficient
manner.
The Company intends to continue to focus on "private-pay" residents,
who pay for the Company's services from their own funds or through private
insurance, rather than relying on potential residents who live in the few states
that have enacted legislation enabling assisted living facilities to receive
Medicaid funding similar to funding generally provided to skilled nursing
facilities. Currently, approximately 93% of the Company's assisted living
facilities revenue comes from private-pay residents, while the remaining 7% of
such revenue comes from residents in the Supplemental Security Income ("SSI")
program.
The Company's assisted living facilities provide residents with a
combination of living accommodations, basic care services and assisted living
services. The residents of the Company's assisted living facilities average 84
years of age and often require assistance with certain activities of daily
living. The Company provides its assisted living residents with private or
semi-private rooms or suites, meals in a communal setting, housekeeping,
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linen and laundry services, activities programs, security, utilities, and
transportation in a Company van or minibus. The Company also provides a
three-tier assisted living service structure to which residents can subscribe as
they require assistance with other activities of daily living, including
personal care, assistance with bathing, grooming, dressing, personal hygiene and
escort services to meals and activities. Further, the Company has implemented a
Wellness Program at 32 of its 38 facilities, pursuant to which the Company
arranges for the provision of certain health care services to its residents. The
Company is in the process of implementing the Wellness Program at the balance of
its facilities, the majority of which have been recently acquired.
In addition to operating and managing assisted living facilities, the
Company has also acquired or developed market rate senior apartments, as well as
affordable senior and multifamily apartment communities using the sale of tax
credits under a federal low income housing tax credit program (the "Federal Tax
Credit Program") to generate the equity funding for development. The Company
does not intend to expand its apartment portfolio and will not grow this segment
of the business in the future.
Gary L. Davidson, the Company's Chairman of the Board, and John A.
Booty, the Company's President, have each been continuously involved in the
acquisition, development and operation of senior housing facilities for more
than 20 years. In 1980, Mr. Davidson and Mr. Booty, with two other individuals
who have since retired, formed the predecessor to the Company. Since that time,
the Company has built an executive management team and assisted living operation
with experience and expertise in the management, financing, acquisition,
development and operation of assisted living facilities.
THE ASSISTED LIVING MARKET
Assisted Living. Assisted living can be viewed as falling near the
middle of the elder care continuum, between home-based care at one end and
long-term skilled nursing facilities and acute care hospitals at the other.
Assisted living represents a combination of housing, personalized support
services, and health care designed to respond to the individual needs of the
senior elderly who need help in activities of daily living, but do not need the
medical care provided in a skilled nursing facility.
The Company believes its assisted living business benefits from
significant trends affecting the long-term care industry. The first is an
increase in the demand for elder care resulting from the continued aging of the
U.S. population, with the average age of the Company's assisted living residents
falling within the fastest growing segments of the U.S. population. While
increasing numbers of Americans are living longer and healthier lives, many
gradually require increasing assistance with activities of daily living, and are
not able to continue to age in place at home. The second is the effort to
contain health care costs by the government, private insurers and managed care
organizations by limiting lengths of stay, services, and reimbursement amounts
to persons in acute care hospitals and skilled nursing facilities. Assisted
living offers a cost effective long-term care alternative while preserving a
more independent lifestyle for those senior elderly who do not require the
broader array of medical services that acute care hospitals and skilled nursing
facilities are required to provide. As of March 31, 1996, monthly revenue from
the Company's assisted living facilities on a "same store basis" (defined as
those facilities which the Company owned, managed or leased for a period of 12
months or more as of March 31, 1996) averaged $1,400 per unit for residents on
the basic service plan and $1,900 per unit for residents on the Company's
assisted living plans, compared to averages of $1,370 and $1,870, respectively
as of March 31, 1995. Other trends benefiting the Company include the increased
financial net worth of the elderly population, the increase in the population of
individuals living alone and the increasing number of women who work outside the
home and are therefore less able to care for their elderly relatives. The
Company believes that these trends will result in an increasing demand for
assisted living services and facilities to fill the gap between aging at home
and aging in more expensive skilled nursing facilities.
Aging Population. The primary consumers of long-term health care
services are persons over the age of 65. This group represents one of the
fastest growing segments of the population. According to U.S. Bureau of the
Census data, the number of people in the U.S. age 65 and older increased by more
than 27% from 1981 to 1994,
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growing from 26.2 million to 33.2 million. The segment of the population over 85
years of age, which comprises the largest percentage of residents at long-term
care facilities, is projected to increase by more than 40% between the years
1990 and 2000.
Other trends benefiting the Company include the increased financial net
worth of the elderly population, the increasing number of women who work outside
the home and are therefore unable to care for their elderly relatives and the
increase in the population of individuals living alone. As the ratio of senior
elderly in need of assistance has increased, so too has the number of senior
elderly able to afford assisted living. According to U.S. Bureau of the Census
data, the median net worth of householders age 75 or older increased from
$55,178 in 1984 and $61,491 in 1988 to $76,541 in 1991. Furthermore, according
to the same source, the percentage of people 65 years and older below the
poverty line decreased from 27.3% in 1970 to 14.8% in 1980 to 12.8% in 1990. The
increased number of women in the labor force has reduced the supply of care
givers. Historically, unpaid women (mostly daughters or daughters-in-law)
represented a large portion of the care givers of the non-institutionalized
senior elderly. Since 1960, the population of individuals living alone has
increased significantly as a percentage of the total elderly population. This
increase has been the result of an aging population in which women outlive men
by an average of 6.8 years, rising divorce rates, and an increase in the number
of unmarried individuals.
Limitation on the Supply of Long-Term Care Facilities. The majority of
states in the U.S. have enacted Certificates of Need or similar legislation,
which generally limits the construction of skilled nursing facilities and the
addition of beds or services in existing skilled nursing facilities. High
construction costs, limitations on government reimbursement for the full cost of
construction, and start-up expenses also act to constrain growth in the supply
of such facilities. Such legislation benefits the assisted living industry by
limiting the supply of skilled nursing beds for the senior elderly. Cost factors
are placing pressure on skilled nursing facilities to shift their focus toward
higher acuity care which enables them to charge higher fees, thus creating a
shortage of lower acuity care availability, and thereby increasing the pool of
potential assisted living residents.
While Certificates of Need generally are not required for assisted
living facilities, except in a few states, most states do require assisted
living providers to license their facilities and comply with various regulations
regarding building requirements and operating procedures and regulations. States
typically impose additional requirements on assisted living facilities over and
above the standard congregate care requirements. Further, the limited pool of
experienced assisted living staff and management, as well as the costs and
start-up expenses to construct an assisted living facility, provide an
additional barrier of entry to the assisted living business.
Cost Containment Pressures of Health Reform. In response to rapidly
rising health care costs, both government and private pay sources have adopted
cost containment measures that have encouraged reduced length of stay in
hospitals and skilled nursing facilities. The federal government has acted to
curtail increases in health care costs under Medicare by limiting acute care
hospital reimbursement for specific services to preestablished fixed amounts.
Private insurers have also begun to limit reimbursement for medical services in
general to predetermined "reasonable" charges. Managed care organizations, such
as health maintenance organizations ("HMOs") and preferred provider
organizations ("PPOs") are reducing hospitalization costs by negotiating for
discounted rates for hospital services and by monitoring and decreasing
hospitalization. The Company anticipates that both HMOs and PPOs increasingly
may direct patients away from the more expensive nursing care facilities into
less expensive assisted living facilities.
These cost containment measures have produced a "push-down" effect. As
the number of patients being "pushed down" from acute care hospitals to skilled
nursing facilities increases, the demand for residential options such as
assisted living facilities to serve patients who historically have been served
by skilled nursing facilities will also increase. In addition, skilled nursing
facility operators are continuing to focus on improving occupancy and expanding
services (and fees) to subacute patients requiring very high levels of nursing
care. As the level of skilled nursing facility patients increases, the supply of
nursing facility space will be filled by patients with higher acuity needs
paying higher fees, which again will provide opportunities for assisted living
facilities to increase their occupancy and services to residents requiring
lesser levels of care than generally can be expected for patients in
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skilled nursing facilities.
Cost Effectiveness of Assisted Living. Although there is a great
similarity between the custodial services provided by a skilled nursing facility
and the services available at an assisted living facility, according to the
Marion Merrill Dow, Inc. Managed Care Digest Services, Institutional Digest
1995, the annual cost per patient for skilled nursing facility care throughout
the U.S. during 1993 averaged approximately $35,000 while the annual cost of
care per resident in the Company's assisted living facilities averaged less than
$23,000 per resident.
GROWTH STRATEGIES
Overview. The Company's growth strategy focuses on acquisition and
development of assisted living facilities, expansion of the level and depth of
assisted living services, and continued intensive facilities management.
The Company will seek to grow by increasing its portfolio of assisted
living facilities through acquisition and development. The Company's strategic
plan calls for the acquisition and development of assisted living facilities
through direct ownership and the use of long-term operating leases with
institutional investors such as Nationwide Health Properties, Health Care
Property Investors and other Health Care REITs, as well as through direct
ownership financed with secured debt from Health Care REITs or other lenders.
The Company believes that this blend of ownership structures allows the Company
to fund its growth in a balanced and cost effective manner.
The Company and its predecessors have acquired and developed assisted
living and senior housing facilities over the past 16 years. During this period,
the Company and its predecessors have acquired 31 assisted living facilities,
including one portfolio of eight facilities, and developed seven assisted living
facilities. In addition, the Company's recent or current development of 18
apartment communities it operates throughout the U.S. has further increased its
development experience. As the Company continues its expansion, it may become
more difficult to manage geographically dispersed operations. Management
believes the Company has developed and expanded its operational, financial and
management information systems and procedures and has established an
infrastructure to support development on a national basis.
The Company's strategy is to expand by targeting areas where there is a
need for assisted living facilities based on demographics and market studies.
The Company intends to continue to expand its assisted living operations
throughout the U.S., locating its facilities in clusters, that is, areas where
it has other existing facilities or geographic areas where it intends to acquire
or develop other assisted living facilities. In this way, the Company seeks to
increase the efficiency of its management resources and to achieve broader
economies of scale.
A substantial portion of the business and operations of the Company are
conducted in California, where 30 of the 52 assisted living facilities operated,
managed or in development by the Company are located. Other regional
concentrations of assisted living facilities are planned for Florida, Texas,
Ohio and the Northeast. The market value of these properties and the income
generated from properties managed or leased by the Company could be negatively
affected by changes in local and regional economic conditions and by acts of
nature. In particular, since 1990, the California economy has been influenced by
the limited economic growth experienced by most of the United States. A
continuation or worsening of current economic conditions in California, or a
downturn in the economic conditions in its other regions, could have a negative
effect on the Company's business.
Acquisitions. The Company believes that the assisted living industry's
fragmentation and ongoing consolidation provide attractive acquisition
opportunities. Through its internal acquisition team, its network of real estate
broker contacts and its regional partners and allies, the Company seeks to
acquire groups of assisted living facilities from smaller owners and operators
in its targeted markets. In evaluating possible acquisitions, the Company
considers (i) the location, construction quality, condition and design of the
facility, (ii) the current and projected cash flow of the facility and the
anticipated ability to increase revenue through rent and occupancy increases,
additional assisted living services and management and (iii) the ability to
acquire the facility below
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replacement cost. However, there can be no assurance that the Company will be
able to find additional suitable facilities to continue its current growth rate.
By developing and operating assisted living facilities and senior and
multifamily apartment communities in 14 states, the Company has generated
numerous contacts through which it is able to identify possible acquisitions in
the early stage of the sale process. The Company's sources for prospective
acquisitions range from limited partnerships for which the Company serves as
managing general partner and facility manager ("Affiliated Partnerships") to
management's contacts with potential assisted living facility sellers to the
Company's local and regional personnel who monitor the assisted living market in
their area. Management intends to pursue both individual and portfolio
acquisitions and believes the Company will be able to achieve greater value from
its acquisitions as the facilities manager.
In certain instances, the Company may target existing assisted living
facilities which may be redeveloped or repositioned as management believes a
number of acquisition opportunities may reflect situations where existing owners
are not operating, maintaining or leasing such facilities efficiently. Although
the Company will focus its efforts primarily on the acquisition, directly or
through long-term operating leases, of additional assisted living facilities, it
may in certain cases also target additional third party management contracts as
an interim step to facilities acquisition.
The Company has acquired certain existing assisted living facilities
from affiliated entities as well as third parties and is actively considering
acquiring additional existing assisted living facilities from other Affiliated
Partnerships. In addition, the Company may seek to acquire existing assisted
living facilities or interests therein, by making offers, including tender
offers, for the limited partnership units of unaffiliated partnerships that own
assisted living properties. There can be no assurance that the Company will
pursue any such transactions or that, if pursued, such transactions will be
completed successfully by the Company.
The Company's acquisitions of existing assisted living facilities are
anticipated to be financed through long-term operating lease transactions with
institutional investors such as Nationwide Health Properties, Health Care
Property Investors and other Health Care REITs, as well as direct ownership
acquisitions using equity and secured debt. In long-term operating lease
transactions, the Company typically arranges the sale of the prospective
assisted living facility to a Health Care REIT or other institutional investor
while concurrently entering into a long-term operating lease for the facility.
The Company's initial cost generally is limited to a security deposit.
Thereafter, the Company is obligated to make certain rental payments (which may
include an additional amount related to revenue of the facility) for the term of
the lease. While the Company believes that it has been and will continue to be
conservative in projecting lease-up costs and expenses as well as the
achievement of rent stabilization, the failure of the Company to generate
sufficient revenue could result in an inability to meet minimum rent obligations
under the Company's long-term operating leases.
Development. The Company also will seek to grow through the development
of new assisted living facilities in its targeted markets. The Company's primary
development strategy is to conduct its development activities in conjunction
with developers and builders in clustered geographic areas throughout the U.S.
Typically, the Company's regional developers receive development or construction
fees in connection with the construction of the project and a profit
participation as a further incentive. In all cases, the Company has the right to
approve acquisitions and all aspects of development including site selection,
design, plans and specifications, development budgets, choice of general
contractor and major subcontractors, and other significant criteria.
In long-term operating lease transactions, when the subject property is
ready for construction, it typically is acquired by the Health Care REIT
financing the project, with the development performed by the Company, or in
conjunction with regional developers in certain cases, under a contractual
arrangement with the Health Care REIT. Concurrently, the Company enters into a
long-term operating lease which becomes effective when the facility is
completed. The Health Care REIT typically bears 100% of the development costs
which may also include
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development or construction supervision fees for the Company. The Company
typically incurs up-front development costs in connection with the due diligence
and entitlement process and architectural and engineering fees incurred in
connection with preparing the property for purchase by the Health Care REIT at
the beginning of construction. The Company currently leases facilities from only
two Health Care REITs. A third REIT has committed to provide financing, but has
not yet done so. The lease agreements with each of the Health Care REITs are
interconnected in that the Company will not be entitled to exercise its right to
renew one lease with a particular Health Care REIT without exercising its right
to renew all other leases with that Health Care REIT and that leases with each
Health Care REIT contain certain cross default provisions. Therefore, in order
to exercise all lease renewal terms, the Company will be required to maintain
and rehabilitate the leased facilities on a long-term basis.
As part of its growth strategy, the Company plans to develop new
assisted living facilities. The Company's ability to achieve its development
plans will depend upon a variety of factors, many of which are beyond the
Company's control. The successful development of additional assisted living
facilities would involve a number of risks, including the possibility that the
Company may be unable to locate suitable sites at acceptable prices or may be
unable to obtain, or may experience delays in obtaining, necessary zoning, land
use, building, occupancy, licensing and other required governmental permits and
authorizations. Certain construction risks are beyond the Company's control,
including strikes, adverse weather, natural disasters, supply of materials and
labor, and other unknown contingencies which could cause the cost of
construction and the time required to complete construction to exceed estimates.
In order to keep its internal costs to a minimum, the Company relies, and will
continue to rely, on third party general contractors to construct its new
assisted living facilities. If construction is not commenced or completed, or if
there are unpaid subcontractors or suppliers, or if required occupancy permits
are not issued in a timely manner, cash flow could be significantly reduced. In
addition, any property in construction is subject to risks including
construction defects, cost overruns, adverse weather conditions, the discovery
of geological or environmental hazards on the property and changes in zoning
restrictions or the method of applying such zoning restrictions. The nature of
licenses and approvals necessary for development and construction, and the
timing and likelihood for obtaining them vary widely from state to state, and
from community to community within a state.
Intensive Management. The Company's growth strategy also emphasizes
continued intensive management at its existing assisted living facilities. This
includes: marketing the Company's facilities to local hospitals, physicians,
skilled nursing facilities and senior associations and groups; balancing
increases in rental rates and assisted living fees with occupancy rates; and
attracting and retaining administrators and staff who the Company seeks to
motivate through financial and career enhancing incentives. A shortage of
qualified personnel may require the Company to enhance its wage and benefits
package in order to compete with other providers of assisted living and senior
housing. No assurance can be given that the Company's labor costs will not
increase, or that if they do increase, they can be matched by corresponding
increases in rental or management revenue. The Company also seeks to control
operating expenses by clustering its facilities in order to take advantage of
volume purchases of supplies from vendors with whom it has an established
relationship, and maintaining the facilities to attract and retain residents and
to avoid more costly replacements and repairs.
Increase Sales of Additional Assisted Living Services. The Company
believes that many custodial services provided in skilled nursing facilities are
available at approximately two-thirds of the cost in the Company's assisted
living facilities. The Company believes that this differential will enable the
Company to attract additional residents. By increasing the usage of these
services by its residents, the Company believes it should enable residents to
stay at the Company's assisted living facilities longer, rather than having to
transfer to more expensive skilled nursing facilities. The Company has been a
pioneer in providing these services, which allow its senior elderly residents to
age in place at the facility without having to move to a more expensive
alternative until that move becomes absolutely necessary.
The Company seeks to enhance and increase the amount and diversity of
assisted living services it provides through (i) the continued education of the
senior community, and particularly the residents and their families, concerning
the cost effectiveness of receiving additional services in an assisted living
facility, (ii) the continued development and refinement of assisted living
programs designed to meet the needs of its residents as they age in
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place and (iii) the consistent delivery of quality services for residents.
Government Regulation. Health care is an area subject to extensive
regulation and frequent regulatory change. Currently, no federal rules
explicitly define or regulate assisted living. While a number of states have not
yet enacted specific assisted living regulation, the Company is and will
continue to be subject to varying degrees of regulation and licensing by health
or social service agencies and other regulatory authorities in the various
states and localities in which it operates or intends to operate. Changes in, or
the adoption of, such laws and regulations, or new interpretations of existing
laws and regulations, could have a significant effect on methods of doing
business, costs of doing business and amounts of reimbursement from governmental
and other payors. In addition, the President and Congress have in the past, and
may in future, propose health care reforms which could impose additional
regulations on the Company or limit the amounts that the Company may charge for
its services. The Company cannot make any assessment as to the ultimate timing
and impact that any pending or future health care reform proposals may have on
the assisted living, nursing facility and rehabilitation care industries, or on
the health care industry in general. No assurance can be given that any such
reform will not have a material adverse effect on the business, financial
condition or results of operations of the Company.
Additionally, a portion of the Company's revenue (approximately 7% of
the Company's assisted living revenue) is derived from residents who are
recipients of SSI payments. Revenue derived from these residents is generally
lower than that received from the Company's other residents and could be subject
to payment delay. There can be no assurance that the Company's proportionate
percentage of revenue received from SSI receipts will not increase, or that the
amounts paid under SSI programs will not be further limited. In addition, if the
Company were to become a provider of services under the Medicaid program, the
Company would be subject to Medicaid regulations designed to limit fraud and
abuse, violations of which could result in civil and criminal penalties and
exclusion from participation in the Medicaid program.
Competition. The health care industry is highly competitive and the
Company expects that the assisted living business in particular will become more
competitive in the future. The Company continues to face competition from
numerous local, regional and national providers of assisted living and long-term
care whose facilities and services are on either end of the senior care
continuum from skilled nursing facilities and acute care hospitals to companies
providing home based health care, and even family members. In addition, the
Company expects that as assisted living receives increased attention among the
public and insurance companies, competition from new market entrants, including
companies focused on assisted living, will grow. Some of the Company's
competitors operate on a not-for-profit basis or as charitable organizations,
while others have, or may obtain, greater financial resources than those of the
Company.
Moreover, in the implementation of the Company's growth program, the
Company expects to face competition for the acquisition and development of
assisted living facilities. Some of the Company's present and potential
competitors are significantly larger or have, or may obtain, greater financial
resources than those of the Company. Consequently, there can be no assurance
that the Company will not encounter increased competition in the future which
could limit its ability to attract residents or expand its business, or could
increase the cost of future acquisitions, each of which could have a material
adverse effect on the Company's financial condition, results of operations and
prospects.
THE COMPANY'S ASSISTED LIVING SERVICES
The Company provides services and care which are designed to meet the
individual needs of its residents. The services provided by the Company are
designed to enhance both the physical and mental well-being of the
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senior elderly in each of its facilities by promoting their independence and
dignity in a homelike setting. The Company's assisted living program includes
the following:
Personalized Care Plan. A primary element of the Company's strategy is
the concept of "personalized" care to meet each resident's specific needs. This
concept of customizing services to meet the needs of the residents begins with
the resident admissions process, where the facility's management staff, the
resident, the resident's family, and the resident's physician discuss the
resident's needs and develop a plan for the resident's care. If recommended by
the resident's physician, additional health care or medical services may be
provided at the facility by a third party home health care agency or other
medical provider. The care plan is reviewed and modified on a regular basis.
Basic Service and Care Package. The basic service and care package at
the Company's assisted living facilities generally includes the following: meals
in a communal, "home-like" setting, housekeeping, linen and laundry service,
social and recreational programs, security, utilities and transportation in a
Company van or minibus. Other care services can be provided under the basic
package based upon the individual's personalized health care plan. While the
amount of the fee for the basic service package varies from facility to
facility, on a "same store basis" (defined as those facilities which the Company
owned, managed or leased for a period of 12 months or more as of March 31, 1996)
the average basic monthly rate per unit was approximately $1,400 per month as of
March 31, 1995, compared to an average of $1,370 as of March 31, 1995.
Additional Services. The Company has designed its additional assisted
living services in a three-tier program available to residents on a personalized
basis.
Level One: Assistance to residents in the self-administration of medication.
Where necessary, the assisted living staff will consult with the family, the
physician or the insurance company of a resident to designate a home health care
agency to administer the appropriate medication.
Level Two: In addition to the services provided under Level One, assistance with
bathing, dressing and grooming, escorting to and from meals and activities,
reading mail, writing letters, shopping and other specialized activities. These
services are provided on an as-needed basis and at the convenience of the
resident within the overall operation of the facility.
Level Three: All of the services provided under Level One and Level Two, and, in
addition, provision of those services on a 24-hour basis. Further, this level
provides appropriate services for individuals who need help with incontinence.
As of March 31, 1996, approximately 60% of the Company's residents were
on the basic plan, 22% on Level One, 14% on Level Two and 4% on Level Three. In
addition to the base rent, the Company typically charges a $350 per month fee
for Level One assisted living services, $675 per month for Level Two assisted
living services and $1,050 per month for Level Three assisted living services,
but the fee levels vary from facility to facility. At some facilities, the
Company may charge additional fees for other specialized assisted living
services. As the Company's residents age at the facilities, the Company expects
that an increasing number of residents will utilize Level Two and Level Three
services. The Company's internal growth plan is focused on increasing revenue by
continuing to expand the number and diversity of its tiered additional assisted
living services and the number of residents using these services. There can be
no assurance that, at any time, any assisted living facility will be
substantially occupied at assumed rents. In addition, lease-up and full
occupancy may be achievable only at rental rates below those assumed. If
operating expenses increase, local rental market conditions may limit the extent
to which rents may be increased. Because rent increases generally can only be
implemented at the time of expiration of leases, rental increases may lag behind
increases in operating expenses.
Wellness Program. The Company has implemented a Wellness Program for
the residents of its facilities designed to identify and respond to changes in a
resident's health or condition and then, together with the resident
9
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and the resident's family and physician, as appropriate, design a solution to
fit that resident's particular needs. The Company monitors the physical and
mental well-being of its residents. This monitoring activity takes place at
meals and other scheduled activities, and informally as the staff performs its
services around the facility. Under the Wellness Program, the Company works with
home health care agencies to provide services the facility cannot provide, with
physical and occupational therapists to provide these services to residents in
need of such therapy, and with a long-term care pharmacy to facilitate cost
effective and reliable ordering and distribution of medication. The Company
arranges for these services to be provided to residents as needed in
consultation with their physicians and families. At the present time, 32 of
Company's assisted living facilities have a comprehensive Wellness Program. The
Company is in the process of implementing the Wellness Program at the balance of
its facilities, the majority of which have been recently acquired.
CAPITAL REQUIREMENTS
In implementing its growth strategy by acquiring existing facilities
and properties for development, and in funding development of acquired
properties, as of March 31, 1996, the Company had expended, or was committed to
expend, all of the $42.7 million net proceeds received from the IPO Offering. In
April 1996, the Company closed a $57.5 million offering of 6 3/4% Convertible
Subordinated Notes Due 2006 (the "2006 Convertible Notes") which netted
approximately $55 million (the "Note Offering"). Recently, the Company entered
into an agreement with Health Care REIT, Inc. for a $60 million credit facility
to be used for the development of new assisted living facilities. The Company
has also received commitments for a $35 million line of credit to be used for
acquisition and development of assisted living facilities from Bank United of
Texas, and a $10 million revolving credit facility for acquisition, development
and general corporate purposes from Imperial Bank. The Company will be required
from time to time to incur additional indebtedness or issue additional debt or
equity securities to finance its growth strategy, including the acquisition and
development of facilities as well as other capital expenditures and additional
funds to meet increased working capital requirements. The Company may finance
future acquisitions and development through a combination of its cash reserves,
including the net proceeds of the Note Offering, its cash flows from operations,
utilization of its current lines of credit, and additional indebtedness or
public or private sales of debt securities or capital stock. There can be no
assurance, however, that funds will be available on terms favorable to the
Company, that such funds will be available when needed, or that the Company will
have adequate cash flows from operations for such requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Indebtedness, Lease and Other Obligations of the Company. The Company
has financed, and will continue to finance, the acquisition and development of
assisted living facilities through a combination of loans, leases and other
obligations. As of March 31, 1996, the Company had outstanding consolidated
indebtedness of $28.1 million, including approximately $15.0 million of the
Company's 10% Convertible Subordinated Notes due 1999 (the " 1999 Convertible
Notes"), the holders of which have the right to convert such notes into the
common stock of the Company on or before June 30, 1996. Following completion of
the Note Offering in April 1996, the Company's outstanding consolidated
indebtedness includes $57.5 million of the 2006 Convertible Notes. In addition,
at March 31, 1996, the Company had $7.2 million in notes maturing within two
years. Since March 31, 1996, the Company had incurred or committed to incur,
subject to the completion of pending acquisitions, approximately $6.4 million
of additional long-term debt in connection with the purchase of three assisted
living facilities, the acquisition of land and for general corporate purposes.
As a result, a portion of the Company's cash flow will be devoted to debt
service. There is a risk that the Company will not be able to generate
sufficient cash flow from operations to cover required interest and principal
payments.
At March 31, 1996, approximately $382,000 of the Company's indebtedness
bore interest at floating rates. Indebtedness that the Company has incurred
since that date and may incur in the future may also bear interest at a floating
rate or be fixed at some time in the future. Therefore, increases in prevailing
interest rates could increase the Company's interest payment obligations and
could have an adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company has guaranteed mortgage and
construction debt as well
10
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as credit lines for the benefit of Affiliated Partnerships of up to
approximately $45.1 million, including $30.4 million outstanding as of March 31,
1996, of which $18.6 million will become due and payable within the next two
years. This effectively subjects the Company to risks normally associated with
leverage, including the risk that Affiliated Partnerships will not be able to
refinance this debt with permanent financing, an increased risk of partnership
cash flow deficits, and the risk that if economic performance of any mortgaged
asset declines, the obligation to make payments on the mortgage debt may be
borne by the Company, which could adversely affect the Company's results of
operations and financial condition. Because certain of the indebtedness which
the Company has guaranteed bears interest at rates which fluctuate with certain
prevailing interest rates, increases in such prevailing interest rates could
increase the Company's interest payment obligations and could have an adverse
effect on the Company's results of operations and financial condition.
In addition, as of March 31, 1996, the Company is a party to long-term
operating leases for certain of its assisted living facilities, which leases
require minimum annual lease payments aggregating $10.9 million for fiscal year
1997, and intends to enter into additional long-term operating leases in the
future. These leases typically have an initial term of 10 to 15 years, and in
general are not cancelable by the Company. See notes 9 and 10 to the Company's
consolidated financial statements included elsewhere in this document. The
Company also has entered into guarantees (the "Tax Credit Guarantees"), which
extend 15 years after project completion, relating to certain developments
financed under the Federal Tax Credit Program with respect to (i) lien free
construction, (ii) operating deficits and (iii) maintenance of tax credit
benefits to certain corporate investors, the obligations under which, excluding
potential penalties and interest factors, could amount to an approximate limit
of $78.4 million as of March 31, 1996. There can be no assurance that the
Company will be able to generate sufficient cash flow from operations to cover
required interest, principal and lease payments, or to perform its obligations
under the guaranties to which it is party were it called on to do so.
The Company, directly or through its subsidiaries, is a general partner
in 24 partnerships. As a general partner, it is liable for partnership
obligations such as partnership indebtedness, which at March 31, 1996, was
approximately $67.4 million, potential liability for construction defects,
including those presently unknown or unobserved, and unknown or future
environmental liabilities. The cost of any such obligations or claims, if
partially or wholly borne by the Company, could materially adversely affect the
Company's results of operations and financial condition.
Each partnership property is managed by the Company pursuant to a
written management contract, some of which are cancelable on 30 or 60 days
notice at the election of the managing general partner of the partnership.
Action can be taken in each partnership by a majority in interest of limited
partners on such matters as the removal of the general partners, the request for
or approval or disapproval of a sale of a property owned by a partnership, or
other actions affecting the properties or the partnership. Where the Company is
the general partner of the partnership, termination of the contracts generally
would require removal of the Company as general partner by the vote of a
majority of the holders of limited partner interests and would result in loss of
the management fee income under those contracts.
If the Company were unable to meet interest, principal, lease or
guarantee payments in the future, there can be no assurance that sufficient
financing would be available to cover the insufficiency or, if available, the
financing would be on terms acceptable to the Company. In the absence of
financing, the Company's ability to make scheduled principal and interest
payments on its indebtedness to meet required minimum lease payments, to meet
its obligations under the guaranties, if any, to respond to changing business
and economic conditions, to fund scheduled investments, cash contributions and
capital expenditures, to make future acquisitions and to absorb adverse
operating results would be adversely affected. In addition, the terms of certain
of the Company's indebtedness have imposed, and may in the future impose,
constraints on the Company's operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Bond Financing. The Company has entered into a long-term lease of a
facility the acquisition and construction of which are being financed by bonds.
In order to meet the lease obligations and to allow the landlord to continue to
qualify for favorable tax treatment of the interest payable on the bonds, the
facility must comply with
11
13
certain federal income tax requirements, principally pertaining to the maximum
income level of a specified portion of the residents.
Insurance. The Company currently maintains insurance policies in
amounts and with such coverage and deductibles as it believes are adequate,
based on the nature and risks of its business, historical experience and
industry standards. The Company's business entails an inherent risk of
liability. In recent years, participants in the assisted living industry,
including the Company, have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which may involve large
claims and significant legal costs. The Company is from time to time subject to
such suits as a result of the nature of its business. There can be no assurance
that claims will not arise which are in excess of the Company's insurance
coverage or are not covered by the Company's insurance coverage. A successful
claim against the Company not covered by, or in excess of, the Company's
insurance, could have a material adverse effect on the Company's financial
condition and results of operations. The Company's insurance policies must be
renewed annually and there can be no assurance that the Company will be able to
continue to obtain liability insurance coverage in the future or, if available,
that such coverage will be available on acceptable terms.
CONFLICTS OF INTEREST
Certain of the Company's executive officers and Directors may, by
virtue of their investment in or involvement with entities providing services,
office space or guaranties to the Company or to Company-sponsored partnerships,
have an actual or potential conflict of interest with the interests of the
Company. See "Item 13: Certain Relationships and Related Transactions."
In addition, the Company is the managing general partner and facilities
manager for partnerships owning 13 assisted living facilities and various
apartment communities. By serving in both capacities, the Company has conflicts
of interest in that it has both a duty to act in the best interests of the
limited partners of those partnerships and the desire to maximize earnings for
the Company's shareholders in the operation of those assisted living facilities
and apartment communities.
TAX CREDIT PROPERTIES
The Company's tax credit partnerships obtain equity capital to build
apartments through the sale of tax credits under the Federal Tax Credit Program.
In order to qualify for the Federal Tax Credit Program, the owner of the project
must agree to restrict the use of the property for moderate-to low-income
purposes for a period of 15 years. Some tax credit financed partnerships for
which the Company serves as general partner have entered into agreements
restricting use of their respective properties for moderate to low-income
housing purposes for periods of up to 40 years beyond the base 15-year
compliance period. All tax credit projects must be placed in service by the end
of the second calendar year after the year in which the initial allocation of
tax credits was made. Failure to do so is likely to cause the forfeiture of the
tax credits allocated and would trigger the Company's obligations under the Tax
Credit Guarantees. See "-- Capital Requirements --Indebtedness, Lease and Other
Obligations of the Company." In addition, projects financed under the Federal
Tax Credit Program are subject to detailed regulations concerning tenant income
and other requirements. The Internal Revenue Service has identified these
regulations as being the subject of increased scrutiny regarding compliance of
applicable regulations under the Internal Revenue Code of 1986 (the "Code").
While the Company believes that it is currently in compliance with applicable
regulations, no assurance can be given that the Company will not be challenged
in this regard. These restrictions may limit the Company's management of and
ability to sell properties developed under the Federal Tax Credit Program.
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ITEM 2. PROPERTIES
The following chart sets forth, as of June 25, 1996, the location, number of
units, ownership, occupancy and date on which operations commenced or are
expected to commence for the Company's facilities:
AVERAGE OCCUPANCY AVERAGE MONTHLY RENTAL *
MONTH FOR THE YEAR ENDED MARCH 31, FOR THE YEAR ENDED MARCH 31,
FACILITY STATE # UNITS ACQUIRED 1996 1995 1996 1995
- -------- ----- ------- -------- ---- ---- ---- ----
Owned Facilities:
- -----------------
Villa at Palm Desert CA 77 Nov. 1995 87.99% --- 1,765 ---
Acacia Villas CA 66 Dec. 1995 88.64% --- 1,288 ---
Amber Park OH 127 Jan. 1996 83.33% --- 1,324 ---
Collwood Knolls CA 117 Jan. 1996 73.43% --- 1,373 ---
Woodside Village Bedford OH 217 Jan. 1996 70.74% --- 1,136 ---
Wyndham Lakes FL 248 Mar. 1996 81.05% --- 1,232 ---
Bella Vita FL 120 Apr. 1996 --- --- --- ---
Amber Wood FL 187 Jun. 1996 --- --- --- ---
-----
Subtotal Owned Facilities 1,159
-----
Leased Facilities:
Hacienda de Monterey CA 180 Apr. 1994 94.68% 88.10% 1,759 1,792
Kinghaven Manor MI 144 Feb. 1995 97.40% 73.24% 1,035 818
Mallard Cove OH 121 Feb. 1995 83.88% 76.03% 1,057 1,018
Villa de Palma CA 111 May 1995 91.97% --- 1,363 ---
Villa del Opisbo CA 96 May 1995 94.18% --- 1,513 ---
Villa del Sol CA 91 Jun. 1995 94.05% --- 1,539 ---
Villa Encinitas CA 117 Jun. 1995 96.65% --- 1,464 ---
El Camino Gardens CA 282 Jun. 1995 71.47% --- 838 ---
Villa del Rey CA 103 Jun. 1995 92.15% --- 1,426 ---
Tamalpais Creek CA 120 Oct. 1995 97.43% --- 1,403 ---
Villa Bonita CA 130 Oct. 1995 90.71% --- 1,403 ---
Maria del Sol CA 124 Oct. 1995 88.71% --- 1,117 ---
Rancho Park CA 163 Oct. 1995 75.15% --- 1,258 ---
Chateau San Juan CA 114 Dec. 1995 91.45% --- 1,504 ---
Woodside Village Columbus OH 156 Feb. 1996 97.12% --- 1,380 ---
Buena Vista Knolls CA 91 Feb. 1996 91.85% --- 1,373 ---
Baypoint Village FL 232 Mar. 1996 89.66% --- 1,234 ---
-----
Subtotal Leased Facilities 2,375
-----
Total Owned and Leased Facilities 3,534
=====
Managed Facilities:
Willow Glen CA 84
Villa Colima CA 94
Valley View Lodge CA 125
Retirement Inn of Sunnyvale CA 123
Montego Heights Lodge CA 170
Retirement Inn of Fullerton CA 68
Retirement Inn of Fremont CA 70
Retirement Inn of Daly City CA 95
Covina Villas CA 64
Retirement Inn of Campbell CA 72
Retirement Inn of Burlingame CA 68
Bradford Square CA 92
Chandler Villas AZ 164
-----
Total Managed Facilities 1,289
-----
Total Operating Facilities 4,823
=====
* Average monthly rental is calculated on the base monthly rental per occupied
unit.
Prior to its fiscal year ended March 31, 1995, the Company did not own for its
own account, or operate subject to long-term operating leases, assisted living
facilities. Prior to that time, the company managed facilities for Affiliated
Partnerships.
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At March 31, 1996, the Company had the following projects under development or
construction:
ANTICIPATED
ANTICIPATED CONSTRUCTION ANTICIPATED
FACILITIES UNDER CONSTRUCTION LOCATION # OF UNITS COMMENCEMENT * OPENING *
- ----------------------------- -------- ---------- -------------- -----------
Collier Park Beaumont, TX 162 Under construction 4th Quarter 1996
Inn at Summit Ridge Reno, NV 76 Under construction 1st Quarter 1997
Vista del Rio Albuquerque, NM 150 Under construction 2nd Quarter 1997
Prospect Park Brooklyn, NY 127 Under construction 1st Quarter 1997
------
Total Facilities Under Construction 515
------
FACILITIES UNDER DEVELOPMENT
Bay Hill Park Plano, TX 147 3rd Quarter 1996 3rd Quarter 1997
Los Posas Camarillo, CA 123 3rd Quarter 1996 3rd Quarter 1997
Waterside Villas Jamesburg, NJ 138 3rd Quarter 1996 3rd Quarter 1997
Tiffany Park Houston, TX 165 3rd Quarter 1996 3rd Quarter 1997
The Lakes Ft. Myers, FL 136 3rd Quarter 1996 3rd Quarter 1997
The Inn at Attleboro Attleboro, MA 132 3rd Quarter 1996 3rd Quarter 1997
Lakewood Denver, CO 123 4th Quarter 1996 4th Quarter 1997
Park at Great Hills Austin, TX 160 4th Quarter 1996 4th Quarter 1997
Woodbridge II Irvine, CA 140 1st Quarter 1997 1st Quarter 1998
University Villas Highlands Ranch, CO 120 1st Quarter 1997 1st Quarter 1998
------
Total Facilities Under Development 1,384
------
Total Facilities Under Construction
and Development 1,899
======
* Denotes calendar quarters.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its security
holders during the fourth quarter of its fiscal year ended March 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed and traded on the NASDAQ National
Market ("NASDAQ") under the symbol "ARVI." The Common Stock has been listed on
the NASDAQ since October 17, 1995, the date of the Company's initial public
offering.
The following table sets forth, for the periods indicated, the high and
low closing prices for the Common Stock as reported on NASDAQ.
HIGH LOW
------ ------
FISCAL YEAR 1996
Third Quarter (Commencing October 17, 1995) $15.25 $ 9.50
Fourth Quarter $17.75 $10.50
FISCAL YEAR 1997
First Quarter (Through June 25, 1996) $20.25 $15.25
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The Company does not currently pay dividends on its Common Stock and
does not anticipate paying dividends in the foreseeable future. It is the
present policy of the Company's Board of Directors to retain earnings, if any,
to finance the expansion of the Company's business.
Shares Eligible for Future Sale
As of March 31, 1996, the Company had outstanding 8,308,142 shares of
Common Stock, assuming no conversion of the Company's convertible securities or
exercise of outstanding warrants and options. Of these shares, 3,565,000 shares
of Common Stock sold in the IPO Offering are tradeable without restriction or
limitation under the Securities Act, except for 180,922 shares purchased by
"affiliates" of the Company which are subject to the resale limitations under
Rule 144 of the Securities Act. The remaining 4,743,142 outstanding shares of
Common Stock are "restricted securities" within the meaning of Rule 144 (the
"Restricted Shares"). The Restricted Shares may not be sold except in compliance
with the registration requirements of the Securities Act or pursuant to an
exemption, including that provided by Rule 144.
On February 7, 1996, the Company exercised its right to redeem all
outstanding shares of Series A Preferred Stock effective May 9, 1996. All of the
holders of Series A Preferred Stock elected to exercise their option to convert
their shares of Series A Preferred Stock into Common Stock rather than have
their shares redeemed. As a result, the Company issued 657,895 new shares of
Common Stock, of which 209,539 and 368,838 shares will be tradeable without
registration by December 31, 1996 and 1997, respectively. On April 10, 1996, the
Company exercised its right to redeem the 1999 Convertible Notes, and
noteholders have until June 30, 1996 to exercise their option to convert their
notes to Common Stock. Up to 1,222,286 shares of restricted Common Stock are
issuable upon conversion of the 1999 Convertible Notes, of which approximately
57,000 and 1,165,000 shares of Common Stock issuable upon conversion of the 1999
Convertible Notes will become freely tradeable in 1996 and 1997, respectively.
Options to purchase a total of 767,627 shares of Common Stock and warrants to
purchase a total of 169,501 shares of Common Stock were outstanding as of March
31, 1996. As of June 25, 1996, warrants to purchase 3,143 shares of Common
Stock have been exercised, all of which will be tradeable without registration
by December 31, 1998.
The Securities and Exchange Commission has proposed to amend the holding period
required by Rule 144 to permit sales of "restricted securities" after one year
rather than the current two years (and two years rather than three years for
"non-affiliates" who desire to trade free of other Rule 144 restrictions). If
such proposed amendment were enacted, the "restricted securities" described
above would become freely tradeable (subject to any applicable contractual
restrictions) at correspondingly earlier dates.
Volatility of Stock Price
Sales of substantial amounts of shares of Common Stock in the public
market or the perception that those sales could occur could adversely affect the
market price of the Common Stock and the Company's ability to raise additional
funds in the future in the capital markets. The market price of the Common Stock
could be subject to significant fluctuations in response to various factors and
events, including the liquidity of the market for the shares of the Common
Stock, variations in the Company's operating results, changes in earnings
estimates by securities analysts, publicity regarding the industry or the
Company and the adoption of new statutes or regulations (or changes int he
interpretation of existing statutes or regulations) affecting the health care
industry in general or the assisted living industry in particular. In addition,
the stock market in recent years has experienced broad price and volume
fluctuations that often have been unrelated to the operating performance of
particular companies. These market fluctuations may adversely affect the market
price of the shares of Common Stock.
Control by Directors and Executive Officers; Anti-Takeover Measures
As of March 31, 1996, the Company's Directors and executive officers
and their affiliates beneficially own approximately 29.9% of the Company's
outstanding shares of Common Stock. See "Security Ownership of Directors
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and Named Executive Officers" in the Company's definitive Proxy Statement
related to its 1996 annual meeting of Shareholders. As a result, these
stockholders, acting together, would be able to significantly influence many
matters requiring approval by the stockholders of the Company, including the
election of Directors. The Company's articles of incorporation provides for
authorized but unissued preferred stock, the terms of which may be fixed by the
Board of Directors, and provides, among other things, that upon the satisfaction
of certain conditions specified in the California General Corporation Law (the
"CGCL") relating to the number of holders of Common Stock, the Board of
Directors will be classified and the holders of Common Stock will not be
permitted to cumulate votes. Such provisions could have the effect of delaying,
deferring or preventing a change of control of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
consolidated financial statements of the Company and its subsidiaries as of and
for each of the five fiscal years ended March 31, 1996. The data set forth below
should be read in conjunction with the consolidated financial statements and
related notes thereto included in Section 14 of this 10-K along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" presented in Section 7 of this same 10-K.
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Assisted living facility revenue (1)......... $ 25,479 $ 4,838 --- --- ---
Management fees.............................. 2,822 3,463 $ 3,492 $ 3,110 $ 2,778
Development fees............................. 1,500 702 --- --- ---
Other income................................. 2,192 476 904 606 653
------------ ----------- ----------- ------------ -----------
Total revenue................................... 31,993 9,479 4,396 3,716 3,431
------------ ----------- ----------- ------------ -----------
Expenses:
Assisted living facility operating
expense (1)............................. 16,395 3,201 --- --- ---
Assisted living facility lease expense....... 6,644 814 --- --- ---
General and administrative................... 7,644 8,264 5,765 3,470 3,541
Depreciation and amortization................ 1,031 320 92 69 67
Discontinued projects and accounts
receivable written off................. 395 1,465 441 345 ---
Interest, net................................ 474 143 (1) (34) 70
------------ ----------- ----------- ------------ -----------
Total expenses.................................. 32,583 14,207 6,297 3,850 3,678
------------ ----------- ----------- ------------ -----------
Loss before income tax expense (benefit)........ (590) (4,728) (1,901) (134) (247)
Income tax expense (benefit).................... 375 (1,729) (248) 2 (78)
------------ ----------- ----------- ------------ -----------
Net loss........................................ $ (965) $ (2,999) $ (1,653) $ (136) $ (169)
============ =========== =========== ============ ===========
Preferred dividends declared.................... $ 351 $ 398 $ 40 --- ---
------------ ----------- ----------- ------------ -----------
Net loss available for common shares (1)........ $ (1,316) $ (3,397) $ (1,693) $ (136) $ (169)
============ =========== =========== ============ ===========
Net loss per common share....................... $ (.21) $ (.69) $ (.34) $ (.03) $ (.11)
============ =========== =========== ============ ===========
Weighted average common shares
outstanding (1).............................. 6,246 4,903 5,113 5,059 1,496
============ =========== =========== ============ ===========
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YEAR ENDED MARCH 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ----------- ------------ -----------
(IN THOUSANDS, EXCEPT UNIT AND OCCUPANCY DATA)
SELECTED OPERATING DATA:
Assisted living units owned or leased (end
of period) (2).......................... 3,277 445 --- --- ---
Assisted living units managed (end of
period)................................ 1,289 2,803 3,042 3,042 2,935
Weighted average occupancy of assisted
living units (end of period)........... 90.0% 91.5% 88.4% 87.1% 83.5%
BALANCE SHEET DATA:
Working capital (deficit) (3)................ $ 10,014 $ (4,660) $ 1,363 --- ---
Total assets................................. 77,403 15,399 8,054 $ 3,046 $ 2,009
Long-term notes payable, excluding
current portion.............................. 24,814 3,213 --- 16 ---
Series A Preferred Stock, convertible and
redeemable.............................. 2,358 4,586 3,969 --- ---
Total shareholders' equity (deficit)......... 39,947 (3,536) (1,316) (70) 587
(1) Net loss available for common shares reflects the effect of preferred
stock dividends. Weighted average common shares outstanding give effect
to the 1 for 3.04 reverse stock split which occurred upon the completion
of the IPO Offering.
(2) The Company began operating assisted living facilities under long-term
operating leases during fiscal 1995. Prior to that year, the Company
managed those facilities for affiliated partnerships for which it acted
as the managing general partner and recognized management fees and other
income with respect to those assisted living facilities but did not
receive assisted living revenue from and did not incur assisted living
facility operating or lease expenses in connection with its operations.
(3) Prior to fiscal 1994, the Company did not classify its balance sheet. As
a result, no working capital data is available at March 31, 1993 and
1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW
Historically, a substantial majority of the assisted living facilities
operated by the Company were owned or leased by Affiliated Partnerships. Other
Affiliated Partnerships also have acquired or developed senior and affordable
senior and multifamily apartments primarily utilizing the sale of tax credits
under the Federal Tax Credit Program for the equity funding of the development.
Beginning in April 1994, the Company commenced operation for its own
account of assisted living facilities that were sold by certain Affiliated
Partnerships or third parties to the Company or an affiliate of the Company or
to publicly-traded Health Care REITs such as Nationwide Health Properties and
Health Care Property Investors, Inc., and simultaneously leased to the Company
under long-term operating leases. As of March 31, 1996, the Company operated 36
assisted living facilities. Of these 36 assisted living facilities, the Company
owned 6 facilities directly for its own account, operated 17 under long-term
operating leases and managed 13 for Affiliated Partnerships for which the
Company serves as managing general partner and facility manager.
On October 23, 1995, the Company successfully completed the IPO
Offering of its common stock and effected a 1-for-3.04 reverse common stock
split. The effect of this stock split has been reflected in the consolidated
financial statements.
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EVENTS SUBSEQUENT TO MARCH 31, 1996
On April 2, 1996, the Company, through a wholly owned subsidiary,
purchased Bella Vita, a 120 unit assisted living facility located in Venice,
Florida for $10,200,000. A portion of the purchase price was financed by the
Company's assumption of a HUD insured loan, secured by a first mortgage recorded
against the property, with an outstanding principal balance of $6,345,709 at the
time of purchase.
On April 3, 1996, the Company successfully completed a $57.5 million
private placement offering of the 2006 Convertible Notes. The 2006 Convertible
Notes, which are non-callable by the Company for a period of three years, allow
note holders to convert their 2006 Convertible Notes into common stock of the
Company at a price equal to $18.57 per share.
On April 10, 1996, the Company called for redemption all of its
outstanding 1999 Convertible Notes. The Company will redeem all of the
outstanding 1999 Convertible Notes as of 5:00 p.m. Pacific Daylight Time on July
10, 1996, unless the Notes are converted on or prior to June 30, 1996. The price
to be paid for each $1,000 principal amount of 1999 Convertible Notes will be
$1,067 plus accrued interest to the date of redemption. 1999 Convertible Note
holders are given the alternative to convert their Notes into shares of common
stock of the Company at any time up to and including June 30, 1996. Converting
holders will receive one share of common stock for every $12.16 in principal
amount of 1999 Convertible Notes surrendered for conversion. For those 1999
Convertible Notes surrendered for conversion into common stock, unpaid interest
will be disregarded and note holders will not be entitled to interest accrued to
the date of conversion. For those Notes converted to common stock, the Company
will issue restricted stock pursuant to Rule 144 of the Securities Act of 1933.
If all Notes are converted, the Company will issue up to 1,233,552 shares of
common stock. As of June 25, 1996, holders of $8.1 million principal amount of
the 1999 Convertible Notes had exercised their right to convert their notes
into approximately 665,800 shares of common stock.
On April 16, 1996, the Company obtained a $10 million commitment from
Imperial Bank ("Imperial") to provide a revolving credit facility to be used for
the issuance of letters of credit, acquisition, development and general
corporate purposes. The commitment provides for interest on borrowings at rates
between Imperial's prime lending rate plus 0.0% to 0.5% or LIBOR plus 2.0% to
2.5% based upon the achievement of certain financial ratios. The Company is
currently negotiating documentation of the loan.
As of April 26, 1996, all holders of the Company's 8% Convertible
Redeemable Series A Preferred Stock ("Preferred Stock") had exercised their
right to convert their Preferred Stock to Common Stock of the Company resulting
in the issuance of an additional 338,141 shares of the Common Stock since March
31, 1996.
On May 16, 1996, the Company initiated a tender offer (the "Offer") to
purchase any and all of the 34,886 outstanding limited partnership units of
American Retirement Villas Properties II, a California limited partnership, not
owned by the Company at a net cash price of $720.00 per unit from unitholders
who validly tendered their units prior to June 14, 1996 at 10:00 p.m. Central
Daylight Time. Subsequently, the Company extended the Offer until June 21, 1996
at 10:00 p.m. Central Daylight Time. Upon expiration of the Offer, 1,426
unitholders validly tendered 15,488 units (approximately 44.6% of the
outstanding limited partnership units) which the Company will purchase at a
cost of $11.2 million.
On June 6, 1996, the Company obtained a $60 million commitment from
Health Care REIT, Inc. for financing the construction of new assisted living
facilities. Pursuant to the terms of the commitment, Health Care REIT, Inc.
will finance up to 100% of the approved costs, as defined, for the
construction of new assisted living facilities. Upon completion of
construction, the Company will lease the facilities from Health Care REIT, Inc.
on an initial lease term of 15 years, with three options to renew, at the
Company's option, for periods of ten years each. The initial lease rate will
be based upon the yield of comparable term U.S. Treasury Notes plus 3.75%.
On June 18, 1996, the Company purchased Amber Wood, a 187 unit assisted
living facility located in Newport Richey, Florida for $6.0 million. The total
purchase price was paid from available cash on hand.
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On June 24, 1996, the Company obtained a $35 million commitment from
Bank United of Texas, FSB ("Bank United") for the construction or acquisition of
assisted living facilities. The terms of the commitment provide for interest at
2.75% over the thirty day LIBOR rate. Of the commitment, a $20 million sub-limit
has been established for the construction of assisted living facilities. The
Company is currently negotiating documentation of the loan.
RESULTS OF OPERATIONS
Revenue for the year ended March 31, 1996 increased to $33.1 million
from $9.7 million for the year ended March 31, 1995 due primarily to an increase
in assisted living facility revenue. Similarly, expenses increased to $33.7
million for the year ended March 31, 1996 from $14.4 million for the year ended
March 31, 1995 primarily due to additional assisted living facility operating
and lease expenses. For the year ended March 31, 1996, the Company reported a
loss of ($965,000) compared to a loss of ($3.0 million) for the year ended March
31, 1995. The Company reported profits of $104,000 for its third fiscal quarter
ended December 31, 1995 followed by a profit of $302,000 in the fourth fiscal
quarter ended March 31, 1996.
YEAR ENDED MARCH 31, 1996 COMPARED WITH YEAR ENDED MARCH 31, 1995.
Consistent with the Company's growth strategy, revenue for the year
ended March 31, 1996 increased to $33.1 million from $9.7 million for the year
ended March 31, 1995 due primarily to an increase in assisted living facility
revenue and other income as described below. During the year ended March 31,
1996, the Company purchased six Assisted Living Facilities (four from
third-party owners and two in which the Company purchased controlling interests
in Affiliated Partnerships) which contributed three months of revenue. In
addition, the Company as operator, entered into long-term operating leases for
14 facilities, 12 of which the Company previously managed for Affiliated
Partnerships. These leases, when averaged, contributed six months of revenue.
Assisted living facility revenue increased to $25.5 million for the
year ended March 31, 1996 from $4.8 million for the year ended March 31, 1995.
Assisted living facility revenue increased due to an increase in the number of
assisted living facilities owned and operated by the Company as well as
facilities operated by the Company under long-term operating leases. As of March
31, 1996, the Company owned and operated six assisted living facilities for its
own account while operating 17 assisted living facilities pursuant to long-term
operating leases with Health Care REITs. For the year ended March 31, 1995, the
Company operated three assisted living facilities pursuant to a long-term
operating lease with Nationwide Health Properties.
During the year ended March 31, 1996, management fees decreased by
$641,000 from the year ended March 31, 1995. Management fees decreased due to
the fact that the Company no longer provides management services to Affiliated
Partnerships with respect to the 12 assisted living facilities sold by the
Affiliated Partnerships to Health Care REITs. Instead, the Company now receives
assisted living facility revenue from these 12 facilities operated under
long-term operating leases. This decrease in management fee income derived from
management services provided to Affiliated Partnerships is consistent with the
Company's strategy of growth through leasing and operating assets it
previously managed.
Development fees earned in connection with properties which the Company
developed on behalf of a Health Care REIT as well as those owned and operated by
Affiliated Partnerships under the Federal Tax Credit Program increased to $1.5
million for the year ended March 31, 1996 from $702,000 for the year ended March
31, 1995. This increase is the result of a greater number of apartment projects
completed during the year compared with the prior year along with provision of
development services to the Health Care REIT.
Other income increased to $2.2 million for the year ended March 31,
1996 from $476,000 for the year ended March 31, 1995. The primary reason for the
increase was income earned as a result of the sale of assisted living facilities
owned by Affiliated Partnerships.
As a result of the growth experienced by the Company, expenses
increased to $33.7 million for the year
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ended March 31, 1996 from $14.4 million for the year ended March 31, 1995. The
principal components of the increased expenses, higher assisted living facility
operating and lease expenses, were incurred as additional properties were leased
or purchased by the Company in the execution of its growth strategy.
Assisted living facility operating and lease expenses increased to
$16.4 million and $6.6 million, respectively, for the year ended March 31, 1996
from $3.2 million and $814,000 respectively, for the year ended March 31, 1995.
The increases reflect the purchase of six assisted living facilities and the
addition of sixteen long-term operating leases executed by the Company between
February 1995 and March 1996. During the year ended March 31, 1995, the Company
leased three assisted living facilities pursuant to a long-term operating
leases, two of which were executed in February 1995, and owned one facility for
its own account.
General and administrative expenses increased to $7.6 million for the
year ended March 31, 1996 from $7.5 million for the year ended March 31, 1995.
The modest increase was primarily the result of inflationary increases offset by
the Company's reduced emphasis on the development of apartment projects under
the Federal Tax Credit Program.
During the year ended March 31, 1996, the Company did not make an
employee benefit plan contribution, whereas in the year ended March 31, 1995,
the Company made a contribution of $811,000 to the ARV Housing Group, Inc.
Employee Stock Option Plan (the "ESOP").
Depreciation and amortization expenses increased to $1.0 million for
the year ended March 31, 1996 from $320,000 for the prior year ended March 31,
1995 due to an increase in depreciation expenses incurred as a result of the
Company's ownership of assisted living facilities. The Company also incurred
amortization of 1999 Convertible Notes issuance costs totaling $342,000 for the
year ended March 31, 1996. Since nearly $12.0 million of the approximately $15.0
million principal amount of the 1999 Convertible Notes were issued subsequent to
March 31, 1995, a comparable expense was not incurred during the year ended
March 31, 1995.
Discontinued project costs and receivables written-off decreased to
$395,000 for the year ended March 31, 1996 from $1.5 million for the year ended
March 31, 1995. Discontinued project costs were incurred during each of these
years in connection with direct and indirect development costs related to the
discontinuance of projects that did not meet the Company's criteria for
continued development. The majority of these costs were associated with projects
considered for inclusion in the Federal Tax Credit Program.
Interest expense increased to $1.5 million for the year ended March 31,
1996 from $354,000 for the year ended March 31, 1995 due primarily to additional
interest incurred on the 1999 Convertible Notes.
Income tax expense for the year ended March 31, 1996 was $375,000
compared to an income tax benefit of $1.7 million for the year ended March 31,
1995. The $2.1 million increase in the income tax expense is primarily the
result of development fees recognized for federal income tax purposes in
conjunction with projects developed under the Federal Tax Credit Program.
Primarily as a result of the foregoing, the net loss decreased to
($965,000) for the year ended March 31, 1996 from a net loss of ($3.0 million)
for the year ended March 31, 1995.
YEAR ENDED MARCH 31, 1995 COMPARED WITH YEAR ENDED MARCH 31, 1994.
Revenue for the year ended March 31, 1995 increased to $9.7 million
from $4.5 million for the year ended March 31, 1994 due primarily to an increase
in assisted living facility revenue as described below.
In the year ended March 31, 1995 the Company as operator, entered into
long-term operating leases with Nationwide Health Properties to operate three
assisted living facilities, and also acquired a 51% controlling interest in the
Affiliated Partnership that owned the Villa de Palma assisted living facility
(the "Villa de Palma Partnership"). One lease commenced in April 1994 and
contributed to 11 months of revenue; two others commenced in February
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1995 and contributed to less than two months of revenue. The 51% interest in the
Villa de Palma Partnership was acquired in September 1994, thereby contributing
to six months of revenue. No facilities were leased or owned by the Company in
the year ended March 31, 1994.
Management fees decreased by $29,000 for the year ended March 31, 1995
from the year ended March 31, 1994. The decrease in management fees was due to
the discontinuation of the management of two facilities pursuant to the sale of
one facility to Nationwide Health Properties in April 1994 and the Company's
acquisition of a controlling interest in the Villa de Palma Partnership. The
Company now receives assisted living facility revenue from these two facilities
under long-term operating leases. This decrease was offset in part by the
increase in management fees from affordable senior and multifamily apartments
due to an increase in the number of units managed by the Company.
The Company recognized development fees of $702,000 for the year ended
March 31, 1995 earned in connection with properties owned and operated by
Affiliated Partnerships under the Federal Tax Credit Program. The Company did
not recognize development fees for the year ended March 31, 1994 because a
majority of the partnerships under the Federal Tax Credit Program were in their
start-up phase. The Company expects development fees to increase as amounts
previously deferred are recognized.
Other income decreased to $476,000 for the year ended March 31, 1995
from $904,000 for the year ended March 31, 1994. The primary reason for the
decrease was that the Company did not receive any rent-up and staff training
fees, wholesaling commissions, or real estate and consulting fees for the year
ended March 31, 1995. Rent-up and staff training fees are earned by the Company
for services performed in connection with preparing the facility and employees
for the opening of facilities owned by Affiliated Partnerships. The Company does
not anticipate receiving significant income from these fees or commissions in
the future.
Expenses increased to $14.4 million for the year ended March 31, 1995
from $6.4 million for the year ended March 31, 1994 due to the addition of
assisted living facility operating expenses and lease expenses and an increase
in general and administrative expenses.
Assisted living facility operating expenses and lease expenses were
$3.2 million and $814,000, respectively, for the year ended March 31, 1995 and
are due to the three long-term operating leases entered by the Company in April
1994 and February 1995, and the acquisition of a 51% interest in the Villa de
Palma Partnership in October 1994. The Company did not lease or own any assisted
living facilities prior to fiscal 1995.
General and administrative expenses increased to $7.5 million for the
year ended March 31, 1995 from $5.7 million for the year ended March 31, 1994
primarily due to increased acquisition and development activity of apartment
projects financed under the Federal Tax Credit Program. As a result of this
increase, the Company has established the staffing and infrastructure in place
to build both assisted living facilities and its remaining apartment projects on
a national basis. Additionally, employee benefit plan contributions increased to
$811,000 for the year ended March 31, 1995 from $76,000 for the year ended March
31, 1994 due to a contribution to the ESOP which reduced the Company's taxable
income.
Depreciation and amortization expenses increased to $320,000 for the
year ended March 31, 1995 from $92,000 for the year ended March 31, 1994
primarily due to an increase in depreciation of fixed assets and depreciation of
the assets of the Villa de Palma Partnership which the Company purchased during
the period.
Discontinued project costs increased to $652,000 for the year ended
March 31, 1995. No similar costs were recorded for the year ended March 31,
1994. These costs were incurred in connection with direct and indirect
development costs related to the discontinuance of projects that did not meet
the Company's criteria for continued development. Provision for doubtful
receivables written-off increased to $813,000 for the year ended March 31, 1995
from $441,000 for the year ended March 31, 1994 primarily due to a significant
increase in partnership administrative fees and tax credit offering expenses
deemed uncollectible. Partnership administrative fee receivables of
approximately
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$350,000 from an Affiliated Partnership were expected to be repaid from
operations. The collectibility of recorded amounts were assessed in relation to
operating results and the estimated value of the partnership's properties and
whether these values would be sufficient to provide adequate proceeds to satisfy
this obligation. Management's assessment made during the year ended March 31,
1995 was that the estimated proceeds would not be sufficient to recover these
receivables and as a result they were written off.
Interest expense for the year ended March 31, 1995 increased by
$252,000 due to interest incurred on the 1999 Convertible Notes.
The provision for income tax expense (benefit) consists of current tax
expense of $47,000 and $9,000 for the years ended March 31, 1995 and 1994,
respectively, and deferred tax benefit (net of valuation reserves) of $1.8
million and $257,000 as of March 31, 1995 and March 31, 1994, respectively. The
increase in deferred tax benefit (net of valuation reserves) for the year ended
March 31, 1995 is primarily a result of an increase in development and
construction services fee income recognizable for federal income tax purposes
but which is not yet recognizable for financial reporting purposes in the
statement of operations. Such development and construction services fee income
is generated in connection with the development of senior and multifamily
apartment communities by Affiliated Partnerships under the Federal Tax Credit
Program.
Primarily as a result of the foregoing, the net loss increased to $3.0
million for the year ended March 31, 1995 from a net loss of $1.7 million for
the year ended March 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents balances were
$7.5 million and $775,000 at March 31, 1996 and March 31, 1995, respectively.
On February 7, 1996, the Company exercised its right to redeem all
outstanding shares of Series A Preferred Stock on May 9, 1996. Preferred
shareholders have the option of converting their Series A Preferred Stock into
Common Stock at any time prior to April 29, 1996. If all shares are fully
converted, the Company will issue up to 657,805 new shares of Common Stock
(after giving effect to the 1 for 3.04 reverse stock split of the Common Stock
in connection with the IPO Offering). As of March 31, 1996, holders of 971,905
shares of the Series A Preferred Stock exercised their right to convert their
Preferred Stock into 319,664 shares of Common Stock. Subsequent to March 31,
1996, the balance of the Series A Preferred Stock was converted into an
additional 338,141 shares of Common Stock.
In July 1995, the Company completed a private placement of
approximately $15.0 million of 1999 Convertible Notes. The private placement
generated net proceeds to the Company of $13.5 million, which were used to
retire bank debt, acquire land, fund preconstruction development activities,
finance expenditures in connection with the Federal Tax Credit Program, reduce
short-term liabilities, purchase interests in Affiliated Partnerships or related
companies, make security deposits on leased assisted living facilities, and
provide for working capital. Each $1,000 principal amount of 1999 Convertible
Notes outstanding is: (i) convertible at any time prior to maturity, unless
previously redeemed, into approximately 82 shares of Common Stock (a conversion
ratio equal to $12.16 per share), subject to adjustment, (ii) accrues interest
from the date of issuance at 10% per annum, payable in arrears on the first
business day of each month, (iii) is unsecured and subordinated to certain
present and future Senior Indebtedness (as defined in the 1999 Convertible
Notes) of the Company and is effectively subordinated to all indebtedness of
subsidiaries of the Company, and (iv) is redeemable for cash at the option of
the Company upon 90 days notice at premiums declining ratably from 110% prior to
December 31, 1995 to 100% on and after January 1, 1998 plus accrued and unpaid
interest, if any, to the date of redemption by the Company. The 1999 Convertible
Notes are currently redeemable at the option of the Company at 106.7% of their
principal amount, plus accrued and unpaid interest. Subsequent to March 31,
1996, the Company called for redemption all of the approximately $15.0 million
of 1999 Convertible Notes.
On October 23, 1995, the Company successfully completed the IPO
Offering. The net proceeds to the
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Company from the IPO Offering, after deducting underwriting discount and
offering expenses payable by the Company, were approximately $42.7 million,
which were used to acquire five existing assisted living facilities, to purchase
and fund a portion of the costs for development of 14 assisted living facilities
currently under development, to provide escrow deposits on assisted living
facilities which the Company has entered into contracts to acquire, and to
provide security deposits on assisted living facilities the Company leases
pursuant to long-term operating leases.
Working capital increased to $10.0 million as of March 31, 1996,
compared to a working capital deficit $4.7 million at March 31, 1995 resulting
primarily from the net proceeds from the sale of common stock in the IPO
Offering.
For the years ended March 31, 1996 and 1995, the Company used cash in
operating activities of $544,000 and $2.5 million, respectively. The Company
used cash in operating activities primarily because it incurred net losses of
($965,000) and ($3.0 million) for the years ended March 31, 1996 and 1995,
respectively. The Company incurred non-cash charges of $936,000 and $491,000,
consisting primarily of depreciation and amortization for the years ended March
31, 1996 and 1995, respectively. In addition, the Company received development
fees from, and was required to make equity contributions to Affiliated
Partnerships. The Company received development fees of $1.4 million and $4.4
million for the years ended March 31, 1996 and 1995. The Company made owner
equity contributions of $1.7 million and $3.9 million during the years ended
March 31, 1996 and 1995.
Cash used in investing activities was $53.9 million for the year ended
March 31, 1996. Purchases of facilities, fixtures and equipment totaling $45.7
million, investments in real estate of $6.8 million, increases in restricted
cash of $4.9 million as collateral for letters of credit pledged as security
deposits for leased facilities, increases in leased property security deposits
of $559,000 and acquisition of limited partnership interests of $1.6 million
were partially offset by proceeds of $5.1 million from the sale of the Villa de
Palma to Nationwide Health Properties. For the year ended March 31, 1995, $2.3
million was used in investing activities consisting of primarily of a $1.3
million increase in leased property security deposits, an $806,000 increase in
notes receivable, a $537,000 increase in furniture, fixtures and improvements
offset by a $496,000 decrease in deferred project costs.
Net cash provided by financing activities was $61.1 million and $3.5
million for the years ended March 31, 1996 and 1995, respectively. During the
year ended March 31, 1996, $42.7 million (net of issuance cost) was provided by
the issuance of common stock in the IPO Offering, $10.8 million (net of issuance
costs) was provided from the issuance of the 1999 Convertible Notes, and $14.5
million was provided from mortgage and loan borrowings. These proceeds were
offset by $6.1 million of debt repayments, $400,000 of preferred stock dividends
paid and $351,000 paid to repurchase common stock. During the year ended March
31, 1995, the following amounts were provided by financing activities: $2.7
million from the issuance of the 1999 Convertible Notes, $1.2 million from the
sale of common stock to the ESOP, $750,000 from increases in amounts owed to
affiliates and $738,000 from bank borrowings. These amounts were offset by $1.6
million of debt repayment, $595,000 of amounts repaid to affiliates and $337,000
of preferred stock dividends paid.
The Company used cash in operating activities of $2.6 million for the
year ended March 31, 1995, as compared to cash provided by operating activities
of $310,000 for 1994. The Company used cash in operating activities primarily
because it has incurred net losses. The Company incurred net losses of $3.0
million and $1.7 million for the years ended March 31, 1995 and 1994,
respectively. In addition, the Company received significant development fees and
was required to make owner equity contributions to Affiliated Partnerships. The
Company received development fees from Affiliated Partnerships of $4.4 million
and $2.7 million for the years ended March 31, 1995 and 1994. The Company made
owner equity contributions of $3.9 million and $215,000 during the years ended
March 31, 1995 and 1994.
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During the year ended March 31, 1995, the Company used net cash in
investing activities of $2.3 million compared to $3.5 million for the year
ending March 31, 1994. The Company's investing activities for the year ended
March 31, 1995 included $1.3 million of lease security deposits made in
connection with assisted living facility leases, an increase in notes receivable
from affiliates of $806,000 and $537,000 in fixed asset additions. During the
year ended March 31, 1994 the Company invested $2.8 million in deferred project
costs related to certain Affiliated Partnerships financed under the Federal Tax
Credit Program, advanced $439,000 in notes receivable from Affiliated
Partnerships and invested $330,000 for fixed asset additions. The deferred
project costs typically are reimbursed to the Company by the Affiliated
Partnerships when the partnership has been funded by investor limited partners.
The Company does not intend to focus on the development of these partnerships
and, therefore, expects related capital requirements to be less in the future.
During the year ended March 31, 1995, the Company's financing
activities provided net cash of $3.5 million, compared to $5.1 million provided
in the year ended March 31, 1994. The Company received net proceeds from the
sale of Series A Preferred Stock of $617,000 and $4.0 million in 1995 and 1994,
respectively. In fiscal 1995 the Company commenced the offering of $15.0 million
principal amount of its 1999 Convertible Notes and had received net proceeds of
$2.7 million by March 31, 1995. The Company's ESOP purchased $1.2 million and
$446,000 in Common Stock in fiscal 1995and 1994, respectively. In fiscal 1995
and fiscal 1994 certain of the Company's shareholders made net advances to the
Company of $155,000 and $588,000, respectively. The Company reduced its bank
borrowings by $823,000 in fiscal 1995.
The Company's capital requirements include acquisition and
rehabilitation costs of assisted living facilities, escrow deposits on acquired
properties, security deposits on leased properties, assisted living facility
pre-development costs, and initial operating costs of newly developed assisted
living facilities, payment of interest, preferred stock dividends, owner's
equity contributions in connection with certain Affiliated Partnerships financed
under the Federal Tax Credit Program, and working capital. The Company does not
intend to focus on tax credit partnership developments and, accordingly, expects
that its future outlays for these 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. Although the Company currently generates sufficient cash from
operations to fund its working capital requirements, there can be no assurances
that the Company will not need to obtain financing in the future in order to
meet its working capital requirements.
On April 16, 1996, the Company obtained a $10 million commitment from
Imperial to provide a revolving credit facility to be used for the issuance of
letters of credit, acquisition, development and general corporate purposes. The
commitment provides for interest on borrowings at rates between Imperial's
prime lending rate plus 0.0% to 0.5% or LIBOR plus 2.0% to 2.5% based upon the
achievement of certain financial ratios. The Company is currently negotiating
documentation of the loan.
In April 1996, the Company successfully completed a $57.5 million
private placement offering of the 2006 Convertible Notes. The 2006 Convertible
Notes, which are non-callable by the Company for a period of three years, allow
note holders to convert their 2006 Convertible Notes into common stock of the
Company at a price equal to $18.57 per share.
On June 6, 1996, the Company obtained a $60 million commitment from
Health Care REIT, Inc. for financing the construction of new assisted living
facilities. Pursuant to the terms of the commitment, Health Care REIT, Inc. will
finance up to 100% of the approved costs, as defined, for the construction of
new assisted living facilities. Upon completion of construction, the Company
will lease the facilities from Health Care REIT, Inc. on an initial
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lease term of 15 years, with three options to renew, at the Company's option,
for periods of ten years each. The initial lease rate will be based upon the
yield of comparable term U.S. Treasury Notes plus 3.75%.
On June 24, 1996, the Company obtained a $35 million commitment from
Bank United for the construction or acquisition of assisted living facilities.
The terms of the commitment provide for interest at 2.75% over the thirty day
LIBOR rate. Of the commitment, a $20 million sub-limit has been established for
the construction of assisted living facilities. The Company is currently
negotiating documentation of the loan.
The Company believes that funds from the net proceeds of the 2006
Notes, its financing commitments and existing liquidity will provide adequate
resources to meet its current operating and investing needs and support its
current growth plans. The Company's plans for acquisition and development of
assisted living facilities are likely to require substantial amounts of
additional capital. The Company will be required to obtain additional capital
through debt or equity financings. There can be no assurance that such capital
will be available to the Company or, if available, such capital would be
available on favorable terms.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from assisted living facilities operated by the
Company is 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the Independent Auditors' Report are
listed at Item 14 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this Item 10 is contained under the captions
"Election of Directors" and "Management" in the Company's definitive Proxy
Statement relating to its 1996 annual meeting of Shareholders and is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is contained under the captions
"Compensation of Executive Officers" and "Further Information Concerning the
Board of Directors -- Compensation of Directors" and "Compensation Committee
Report on Executive Compensation" in the Company's definitive Proxy Statement
relating to its 1996 annual meeting of Shareholders and is hereby incorporated
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is contained under the caption
"Security Ownership of Directors,
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Executive Officers and Certain Beneficial Owners" in the Company's definitive
Proxy Statement relating to its 1996 annual meeting of Shareholders and is
hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is contained under the caption
"Certain Transactions" in the Company's definitive Proxy Statement relating to
its 1996 annual meeting of Shareholders and is hereby incorporated by reference.
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
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Independent Auditors' Report............................... F-2
Consolidated Balance Sheets................................ F-3
Consolidated Statements of Operations...................... F-4
Consolidated Statements of Shareholders' Equity (Deficit).. F-5
Consolidated Statements of Cash Flows...................... F-6
Notes to Consolidated Financial Statements................. F-8
(2) FINANCIAL STATEMENT SCHEDULES. 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. The Registrant filed the following reports with
the Securities and Exchange Commission on Form 8-K during the quarter
ended March 31, 1996:
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on January 15, 1996 reported under Item 2,
concerning the acquisition of controlling interests in two
partnerships, Casa Bonita Fullerton - LTD (dba Acacia Villa), a
California limited partnership and Collwood Knolls, a California
limited partnership.
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on January 22, 1996 reported under Item 2,
concerning the acquisition of Amber Park.
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on February 8, 1996 reported under Items 5 and 7,
concerning the Company's call for redemption of all of the $5 million
outstanding Series A Convertible Redeemable Preferred Stock and
exhibits thereto.
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on February 14, 1996 reported under Item 2,
concerning the acquisition of Cardinal Retirement Village of Bedford.
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on February 20, 1996 reported under Item 2,
concerning the lease of Cardinal Retirement Village of Columbus.
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on
26
28
February 22, 1996 reported under Item 2, concerning the lease of Buena
Vista Knolls.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on March 1, 1996 reported under Item 7,
concerning the Historical Summary of Gross Income and Direct Operating
Expenses of Chateau San Juan for the years ended December 31, 1995,
1994 and 1993.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on March 14, 1996 reported under Item 7,
concerning the Audited balance sheets of Collwood Knolls, a California
limited partnership, as of December 31, 1995 and 1994 and the related
statements of operations, partners' deficit and cash flows for each of
the years in the three year period ended December 31, 1995; the Audited
balance sheets of Casa Bonita - Fullerton, LTD. (dba Acacia Villa), a
California limited partnership, as of December 31, 1995 and 1994 and
the related statements of operations, partners' deficit and cash flows
for each of the years in the three year period ended December 31, 1995:
and the Unaudited Proforma Combined Financial Statements of ARV
Assisted Living, Inc. As of March 31, 1995 and the Unaudited Pro Forma
Combined Statement of Operations for the year ended March 31, 1995 and
the Unaudited Proforma Combined Statement of Operations for the nine
months ended December 31, 1995 and the related notes thereon.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on March 20, 1996 reported under Item 7,
correcting the report filed on March 14, 1996 concerning the Audited
balance sheets of Collwood Knolls, a California limited partnership, as
of December 31, 1995 and 1994 and the related statements of operations,
partners' deficit and cash flows for each of the years in the three
year period ended December 31, 1995; the Audited balance sheets of Casa
Bonita - Fullerton, LTD. (dba Acacia Villa), a California limited
partnership, as of December 31, 1995 and 1994 and the related
statements of operations, partners' deficit and cash flows for each of
the years in the three year period ended December31, 1995: and the
Unaudited Proforma Combined Financial Statements of ARV Assisted
Living, Inc. as of March 31, 1995 and the Unaudited Pro Forma Combined
Statement of Operations for the year ended March 31, 1995 and the
Unaudited Proforma Combined Statement of Operations for the nine months
ended December 31, 1995 and the related notes thereon.
The Company's current report on Form 8-K/A filed with the Securities
and Exchange Commission on March 20, 1996 reported under Item 7,
concerning the Audited historical summary of gross income and direct
operating expenses of Amber Park Retirement Community for the year
ended December 31, 1995, a statement showing the estimated taxable
operating results for Amber Park Retirement Community based on its most
recent 12-month period and the Unaudited Pro Forma Combined Balance
Sheet of ARV Assisted Living, Inc. as of December 31, 1995 Unaudited
Pro Forma Combined Statement of Operations for the year ended March 31,
1995 and the Unaudited Proforma Combined Statement of Operations for
the nine months ended December 31, 1995 and the related notes thereon.
The Company's current report on Form 8-K filed with the Securities and
Exchange Commission on March 20, 1996 reported under Items 2, 5 and 7,
concerning the acquisition of Wyndham Lakes, the lease of Baypoint
Village and the Company's announcement of its private placement
offering of $50 million in Convertible Subordinated Notes due 2006.
Exhibits to the report included an Audited historical summary of gross
income and direct operating expenses of Wyndham Lakes for the year
ended December 31, 1995, Audited historical summary of gross income and
direct operating expenses of Baypoint Village for the year ended
December 31, 1995, a statement showing the estimated taxable operating
results for Wyndham Lakes and Baypoint Village based on their most
recent 12-month period, the Unaudited Pro Forma Combined Balance Sheet
of ARV Assisted Living, Inc. as of December 31, 1995 and the Unaudited
Pro Forma Combined Statement of Operations for the year ended March 31,
1995 and the Unaudited Proforma Combined Statement of Operations for
the nine months ended December 31, 1995 and the related notes thereon
and a press release which discussed the Company's $50 million
Convertible Subordinated Note Offering.
27
29
(C) EXHIBITS: The following exhibits are filed as a part of, or
incorporated by reference into this report on Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Articles of Incorporation of the Company,
incorporated by reference to Exhibit 3.3 of the Company's
Registration Statement on Form S-1(No. 33- 95712)
3.2 Restated Bylaws of the Company, incorporated by reference to
Exhibit 3.4 of the Company's Registration Statement on Form
S-1(No. 33-95712)
4.1.1+ Form of Subscription and Note Purchase Agreement between ARV
Housing Group, Inc. and the holders of Notes pursuant to which
the Notes were subscribed
4.1.2+ Form of Standby Trust Agreement between ARV between ARV
Housing Group and the holders of Notes and such Trustee or
Trustees as may be appointed by the holders of Notes pursuant
to the terms thereof
4.1.3+ Form of Continuing Guarantee individually executed by each of
Messrs. Davidson, Booty and Collins, relating to the rights of
the holders of Notes
4.2 Form of Indenture Agreement between ARV Assisted Living, Inc.
and the initial purchaser of the Company's $57.5 million, 6
3/4% Convertible Subordinated Notes due 2006
10.1* Employment Agreement between the Company and Gary L. Davidson
dated October 1, 1995
10.2* Employment Agreement between the Company and John A. Booty
dated October 1, 1995
10.3* Employment Agreement between the Company and David P. Collins
dated October 1, 1995
10.4* Intentionally omitted
10.5* Employment Agreement between the Company and Graham P.
Espley-Jones dated October 1, 1995
10.6* Indemnification Agreement between the Company and James M.
Peters dated November 30, 1995
10.7* Indemnification Agreement between the Company and R. Bruce
Andrews dated November 30, 1995
10.8* Indemnification Agreement between the Company and Maurice J.
DeWald dated November 30, 1995
10.9* Indemnification Agreement between the Company and John J.
Rydzewski dated November 30, 1995
10.10* Intentionally omitted
10.11* Indemnification Agreement between the Company and Graham P.
Espley-Jones dated October 17, 1995
30
10.12* Indemnification Agreement between the Company and David P.
Collins dated October 17, 1995
10.13* Indemnification Agreement between the Company and Gary L.
Davidson dated October 17, 1995
10.14* Indemnification Agreement between the Company and John A.
Booty dated October 17, 1995
10.15* Non-Qualified Stock Option Agreement between the Company and
James M. Peters dated November 30, 1995
10.16* Non-Qualified Stock Option Agreement between the Company and
R. Bruce Andrews dated November 30, 1995
10.17* Non-Qualified Stock Option Agreement between the Company and
Maurice J. DeWald dated November 30, 1995
10.18* Non-Qualified Stock Option Agreement between the Company and
John J. Rydzewski dated November 30, 1995
10.19* Standard Industrial/Commercial Single-Tenant Lease dated
December 1, 1993 between the Company and 245 A-2 Partnership,
L.P, incorporated by reference to Exhibit 10.7 of the
Company's Registration Statement on Form S-1(No. 33- 95712)
10.20 Office Lease dated December 21, 1989 between the Company and
C.F.G. Development Company, incorporated by reference to
Exhibit 10.8 of the Company's Registration Statement on Form
S-1(No. 33-95712)
10.21 Office Lease dated November 1, 1988 between the Company and
Fischer Avenue Properties, incorporated by reference to
Exhibit 10.9 of the Company's Registration Statement on Form
S-1(No. 33-95712)
10.22 Agreement of Purchase and Sale and Joint Escrow Instructions
between Fischer Avenue Properties and ARV Housing Group, Inc.
dated April 6, 1995, incorporated by reference to Exhibit
10.10 of the Company's Registration Statement on Form S-1(No.
33-95712)
10.23 Agreement of Purchase and Sale of Stock of LVP Services, Inc.,
dated June 30, 1995, incorporated by reference to Exhibit
10.11 of the Company's Registration Statement on Form S-1(No.
33-95712)
10.24 Agreement of Purchase and Sale of Stock of ARV Mortgage, Inc.
To Red Hill Hunter Associates, Inc., incorporated by reference
to Exhibit 10.12 of the Company's Registration Statement on
Form S-1(No. 33-95712)
10.25 Agreement of Purchase and Sale of Stock of Pacific
Demographics Corporation dated July 19, 1995 between the
Company and the Shareholders of Pacific Demographics
Corporation, incorporated by reference to Exhibit 10.13 of the
Company's Registration Statement on Form S-1(No. 33-95712)
10.26 Limited Partnership Agreement of 245 A-2 Partnership L.P.,
dated November 29, 1993, incorporated by reference to Exhibit
10.28 of the Company's Registration Statement on Form S-1(No.
33-95712)
10.27 ARV Assisted Living, 1995 Incentive Stock Option Plan,
effective October 15, 1995, incorporated by reference to
Exhibit 10.114 of the Company's Registration Statement on Form
S-1(No. 33-95712)
31
10.28 Form of Common Stock Purchase Warrant (Series A Preferred
Stock Offering), incorporated by reference to Exhibit 10.115
of the Company's Registration Statement on Form S-1(No.
33-95712)
10.29 Form of Common Stock Purchase Warrant (1999 Convertible
Subordinated Notes Offering), incorporated by reference to
Exhibit 10.116 of the Company's Registration Statement on Form
S-1(No. 33-95712)
10.30 La Veranda Promissory Note dated October 20, 1995 for $2
million secured by deed of trust. On March 5, 1996, promissory
note was assigned to Gary L. Davidson, John A. Booty, David P.
Collins and Graham P. Espley-Jones
10.31 Operating agreement of Villas at the Ponds LLC dated August 8,
1995
10.32 Operating agreement of Prospect Park Residence LLC dated
February 1996
10.33 Imperial Bank commitment letter dated March 19, 1996 for $10
million
10.34 Health Care REIT commitment letter dated June 6, 1996 for $60
million
10.35 Bank United of Texas commitment letter dated June 24, 1996 for
$35 million
11.1 Statement of the Company regarding computation of per share
earnings
21 Subsidiaries of the Company as of June 25, 1996
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
+ Included as an exhibit by the same number in the Company's Registration
Statement on Form S-1 (No. 33-95712) declared effective on October 17,
1995 and incorporated herein by reference.
* Included as an exhibit by the same number in the Company's Form 10-Q
filed with the Securities and Exchange Commission for the quarter ended
December 31, 1995 and incorporated herein by reference.
32
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets of ARV Assisted Living, Inc. and subsidiaries as of March 31,
1996 and 1995 F-3
Consolidated Statements of Operations of ARV Assisted Living, Inc. and subsidiaries for the
years ended March 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Shareholders' Equity (Deficit) of ARV Assisted Living, Inc. and
subsidiaries for the three years ended March 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows of ARV Assisted Living, Inc. and subsidiaries for the
years ended March 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements of ARV Assisted Living, Inc. and subsidiaries F-8
33
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ARV Assisted Living, Inc.:
We have audited the accompanying consolidated balance sheets of ARV Assisted
Living, Inc. and subsidiaries as of March 31, 1996 and 1995 and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the years in the three-year period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ARV Assisted Living,
Inc. and subsidiaries as of March 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Orange County, California
May 25, 1996
F-2
34
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1996 and 1995
MARCH 31
---------------------------
ASSETS 1996 1995
------------ -----------
Cash and cash equivalents $ 7,454,238 774,568
Fees receivable and other amounts due from affiliates (note 6) 922,125 810,791
Deferred project costs 1,007,780 2,280,632
Investments in real estate held for sale (note 1) 6,807,141 --
Other assets 1,496,821 310,979
------------ -----------
Total current assets 17,688,105 4,176,970
------------ -----------
Restricted cash (note 1) 4,914,764 --
Property, furniture and equipment (note 1) 47,233,885 5,845,101
Notes receivable from affiliates, less allowance for doubtful accounts of $65,000 and $550,000
at March 31, 1996 and 1995, respectively (note 6) 274,566 1,290,911
Deferred tax asset (note 5) 2,043,521 2,044,088
Other noncurrent assets (notes 1, 2 and 9) 5,247,690 2,041,894
------------ -----------
$ 77,402,531 15,398,964
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued liabilities $ 4,199,780 2,087,759
Deferred revenue, current portion (note 11) 45,752 41,585
Owner equity contributions payable (note 11) 10,000 767,000
Notes payable, current portion (note 3) 3,306,592 4,863,216
Notes payable and other amounts due to affiliates (note 6) 111,809 1,076,970
------------ -----------
Total current liabilities 7,673,933 8,836,530
------------ -----------
Deferred revenue, less current portion (note 11) 1,327,288 2,102,937
Notes payable, less current portion (note 3) 24,813,661 3,212,700
Losses in excess of investments in partnerships (note 2) -- 197,233
------------ -----------
33,814,882 14,349,400
------------ -----------
Minority interest in joint venture (note 1) 1,283,017 --
Series A Preferred stock, convertible and redeemable. Stated and liquidation value $2.50;
authorized and outstanding 1,028,095 and 2,000,000 shares at March 31, 1996 and 1995,
respectively (notes 8 and 14) 2,357,475 4,585,537
Shareholders' equity (deficit) (notes 7, 13 and 14):
Common stock, no par value. Authorized 100,000,000 shares; issued and outstanding
8,308,142 and 5,097,892 shares at March 31, 1996 and 1995, respectively 47,547,798 3,009,384
Less receivable from ESOP -- (261,605)
Accumulated deficit (7,600,641) (6,283,752)
------------ -----------
Total shareholders' equity (deficit) 39,947,157 (3,535,973)
------------ -----------
Commitments and contingent liabilities (notes 6, 9 and 10)
Subsequent events (notes 8 and 14)
------------ -----------
$ 77,402,531 15,398,964
============ ===========
See accompanying notes to consolidated financial statements.
F-3
35
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 1996, 1995 and 1994
YEARS ENDED MARCH 31
-------------------------------------------------
1996 1995 1994
------------ ------------ -----------
Revenue (note 6):
Assisted living facility revenue $ 25,478,750 4,837,535 --
Management fees 2,822,275 3,463,226 3,491,671
Development fees 1,499,761 701,503 --
Interest income 1,070,384 211,330 103,897
Other income 2,191,780 476,443 904,310
------------ ----------- ----------
Total revenue 33,062,950 9,690,037 4,499,878
Expenses:
Assisted living facility operating expense 16,394,646 3,200,555 --
Assisted living facility lease expense 6,643,759 814,062 --
Employee benefit plan contributions -- 811,254 75,900
General and administrative 7,644,611 7,453,061 5,689,040
Depreciation and amortization 1,031,270 319,952 92,372
Discontinued project costs and accounts
receivable written-off 394,627 1,464,685 441,012
Interest (notes 3 and 6) 1,544,308 354,135 102,856
------------ ----------- ----------
Total expenses 33,653,221 14,417,704 6,401,180
------------ ----------- ----------
Loss before income tax expense (590,271) (4,727,667) (1,901,302)
Income tax expense (benefit) (note 5) 375,207 (1,729,139) (248,226)
------------ ----------- ----------
Net loss $ (965,478) (2,998,528) (1,653,076)
============ =========== ==========
Net loss per common share (note 13) $ (.21) (.69) (.34)
============ =========== ==========
See accompanying notes to consolidated financial statements.
F-4
36
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)
March 31, 1996, 1995 and 1994
COMMON STOCK RECEIVABLE
------------------------------- FROM (ACCUMULATED)
SHARES AMOUNT ESOP (DEFICIT) TOTAL
----------- ------------ -------------- ------------- -----------
Balance at March 31, 1993 10,251,555 $ 1,409,384 (284,362) (1,194,966) (69,944)
Reverse stock split, 1 for 2 (5,125,778) -- -- -- --
Retirement of stock (note 7) (328,947) -- -- -- --
Preferred stock dividends declared -- -- -- (39,613) (39,613)
Common stock issued to ESOP 41,118 250,000 (88,105) -- 161,895
Collection of ESOP receivable -- -- 284,362 -- 284,362
Net loss -- -- -- (1,653,076) (1,653,076)
----------- ------------ -------- ---------- -----------
Balance at March 31, 1994 4,837,948 1,659,384 (88,105) (2,887,655) (1,316,376)
Collection of ESOP receivable -- -- 88,105 -- 88,105
Preferred stock dividends declared -- -- -- (397,569) (397,569)
Common stock issued to ESOP 259,944 1,350,000 (261,605) -- 1,088,395
Net loss -- -- -- (2,998,528) (2,998,528)
----------- ------------ -------- ---------- -----------
Balance at March 31, 1995 5,097,892 3,009,384 (261,605) (6,283,752) (3,535,973)
Issuance of Common Stock (IPO),
net of issuance costs of $4,893,061 3,384,078 42,661,335 -- -- 42,661,335
Collection of ESOP receivable -- -- 261,605 -- 261,605
Preferred stock dividends declared -- -- -- (351,411) (351,411)
Repurchase and retirement of
common stock (493,492) (350,983) -- -- (350,983)
Preferred stock conversion (note 8) 319,664 2,228,062 -- -- 2,228,062
Net loss -- -- -- (965,478) (965,478)
----------- ------------ -------- ---------- -----------
Balance at March 31, 1996 8,308,142 $ 47,547,798 -- (7,600,641) 39,947,157
=========== ============ ======== ========== ===========
See accompanying notes to consolidated financial statements.
F-5
37
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1996, 1995 and 1994
YEARS ENDED MARCH 31
-------------------------------------------------
1996 1995 1994
-------------- -------------- ------------
Cash flows provided by (used in) operating activities:
Net loss $ (965,478) (2,998,528) (1,653,076)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,031,270 319,952 92,372
Provision for doubtful accounts -- 200,000 200,000
Other (95,056) (28,474) --
Changes in assets and liabilities:
(Increase) decrease in:
Fees receivable and other amounts due from affiliates 904,855 (118,631) 822,006
Deferred tax asset 567 (1,776,517) (364,203)
Other assets (1,087,439) 192,618 (451,469)
Increase (decrease) in:
Accounts payable and accrued liabilities 2,160,610 1,363,033 (17,829)
Deferred revenue (771,482) 1,522,982 135,419
Owner equity contributions payable (757,000) (1,194,893) 1,961,893
Due to affiliates (965,161) (19,812) (415,491)
------------ ---------- ----------
Net cash provided by (used in)
operating activities (544,314) (2,538,270) 309,622
------------ ---------- ----------
Cash flows provided by (used in) investing activities:
Increase in notes receivable -- (806,421) (439,109)
(Increase) decrease in deferred project costs 1,272,852 495,895 (2,776,527)
Increase in investments in real estate held for sale (6,807,141) -- --
Additions to property, furniture and equipment (45,746,500) (537,116) (330,336)
Increase in leased property security deposits (559,396) (1,346,096) --
Increase in restricted cash (4,914,764) -- --
Purchase of California Retirement Inn - Placentia limited partnership
interests, net of cash acquired -- (69,912) --
Proceeds from sale of California Retirement Inn - Placentia 5,082,795 -- --
Purchase of subsidiaries (155,728) -- --
Purchase of limited partnership interests (1,638,339) (26,918) --
Other (442,234) 21,654 8,603
------------ ---------- ----------
Net cash provided by (used in)
investing activities (53,908,455) (2,268,914) (3,537,369)
------------ ---------- ----------
(Continued)
F-6
38
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
YEARS ENDED MARCH 31
--------------------------------------------------
1996 1995 1994
------------ ------------ -----------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs $ 42,661,335 -- --
Common stock purchased by ESOP 261,605 1,176,500 446,257
Issuance of preferred stock, net of issuance costs -- 616,993 3,968,544
Borrowings under notes payable 14,475,167 737,888 655,000
Repayments of notes payable (6,139,830) (1,560,833) (606,745)
Borrowings under notes payable to affiliates -- 750,000 648,000
Repayments of notes payable to affiliates -- (595,000) (60,000)
Issuance of convertible subordinated notes, net of issuance costs 10,762,145 2,677,289 --
Repurchase of convertible subordinated notes (137,000) -- --
Repurchase of common stock (350,983) -- --
Preferred stock dividends paid (400,000) (337,183) --
------------ ----------- ----------
Net cash provided by (used in)
financing activities 61,132,439 3,465,654 5,051,056
------------ ----------- ----------
Net increase (decrease) in cash and cash equivalents 6,679,670 (1,341,530) 1,823,309
Cash and cash equivalents at beginning of period 774,568 2,116,098 292,789
------------ ----------- ----------
Cash and cash equivalents at end of period $ 7,454,238 774,568 2,116,098
============ =========== ==========
Supplemental schedule of cash flow information: Cash paid during the year for:
Interest $ 1,183,203 314,135 91,275
Income taxes 128,223 68,312 6,500
============ =========== ==========
Supplemental schedule of noncash investing and financing activities:
Minority interests in joint venture $ 1,283,017 -- --
Purchase of building 9,350,000 14,450,000 --
Sale of building, net of closing costs 9,400,000 14,945,000 --
Debt assumed in conjunction with purchase of building 350,000 -- --
Note receivable from ESOP for purchase of common stock -- 261,605 88,105
Preferred stock dividends declared 51,411 100,000 39,613
Conversion of preferred stock to common stock 2,228,062 -- --
Fair value of assets acquired in the purchase of California Retirement Inn
- Placentia -- 5,100,000 --
Liabilities assumed in acquisitions -- 5,026,333 --
============ =========== ==========
See accompanying notes to consolidated financial statements.
F-7
39
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
ARV Assisted Living, Inc. (the Company) owns, operates, acquires and
develops assisted living facilities that provide housing to senior
citizens, some of whom require assistance with the activities of daily
living such as bathing, dressing and grooming. The Company is also
involved in the development and management of senior apartment
communities and affordable senior and multifamily apartment communities
that qualify for low income housing tax credits in its capacity as
general partner in limited partnerships which operate such facilities.
At March 31, 1996, the Company operated 36 assisted living facilities
including six which are owned by the Company, 17 which the Company
operates pursuant to long-term operating leases and 13 in which the
Company serves as the general partner of the owner partnership (see note
6). The Company also managed 17 senior apartment communities and
affordable senior and multifamily apartment communities and is developing
five additional multifamily apartment communities for limited
partnerships in which the Company serves as the general partner.
F-8
40
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Entities 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 September 30, 1994, the Company acquired a 51% controlling interest in
California Retirement Inn - Placentia, a California limited partnership, which
owns and operates an assisted living facility. This acquisition was accounted
for under the purchase method. The Company acquired its interest in the
Partnership for its estimated fair market value of approximately $86,000 and
recorded the assets and liabilities acquired at their fair market value. No
goodwill was recognized. No income or loss was allocated to the minority
partners because they had no obligation to fund accumulated losses. During May
1995, the Partnership sold its assisted living facility to a health care real
estate investment trust and the Company then leased back the facility.
On December 29, 1995, the Company acquired an 89.5% controlling interest in Casa
Bonita Fullerton, a California limited partnership, which owns and operates an
assisted living facility. This acquisition was accounted for under the purchase
method. The Company acquired its interest in the Partnership in exchange for
contributing $1,500,000 to the Partnership, of which $667,651 was paid at March
31, 1996. Furthermore, the Company committed to loan the Partnership additional
sums up to $1,000,000 as necessary to restructure existing financing, to be
repaid with interest at a rate of 9% per annum. The Company recorded the
acquisition at cost and recorded the assets and liabilities of the Partnership
at their fair market value. No goodwill was recognized. No loss is allocated
to the minority partners because they had no obligation to fund accumulated
losses.
As of March 31, 1996, the Company owned 80.2% of the limited partnership
interests of Collwood Knolls, a California Limited Partnership. This acquisition
was accounted for under the purchase method. The Company recorded the
acquisition at cost of $2,306,422 and recorded the assets and liabilities of the
Partnership at their fair market value. No goodwill was recognized. No loss is
allocated to the minority partners because they have no obligation to fund
accumulated losses.
During the year ended March 31, 1996, the company acquired 50% ownership
interests in two limited liability companies known as Waterside Villas, LLC
(formerly known as Villas at the Ponds, LLC) and Prospect Park Residences, LLC
and these acquisitions were accounted for under the purchase method. Due to its
control of these entities, the Company accounts for its investment in each of
these entities on a consolidated basis and reflects that portion of the entities
not owned by the Company as a minority interest.
Pro forma results of operations have not been presented because the effects of
the aforementioned acquisitions were not significant.
F-9
41
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
INVESTMENT IN REAL ESTATE HELD FOR SALE
Investment in real estate held for sale includes costs related to projects
expected to be sold within one year, at the lower of cost or market.
PROPERTY, FURNITURE AND EQUIPMENT
Property, furniture and equipment are stated at cost less accumulated
depreciation which is charged to expense on a straight-line basis over the
estimated useful lives of the assets as follows:
Buildings and improvements 27.5-35 years
Furniture, fixtures and equipment 3-7 years
Property, furniture and equipment consisted of the following:
MARCH 31 MARCH 31
1996 1995
-------------- -----------
Land $ 9,913,216 1,137,120
Construction in progress 243,186 --
Buildings and improvements 34,211,550 4,061,512
Furniture, fixtures and equipment 4,001,505 1,285,979
------------ ----------
48,369,457 6,484,611
Accumulated depreciation (1,135,572) (639,510)
------------ ----------
$ 47,233,885 5,485,101
============ ==========
EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share is calculated using the weighted average
number of common shares outstanding during the period, including the
effect of common share equivalents unless antidilutive. Common share
equivalents are comprised of the dilutive effect of outstanding stock
options.
The loss per common share is based upon the following weighted average
shares outstanding, as adjusted for the authorized reverse stock split:
6,245,903, 4,903,065 and 5,113,273 for the years ending March 31, 1996,
1995 and 1994, respectively. The computation of loss per common share
gives effect to the preferred stock dividends in the fiscal years ended
March 31, 1996, 1995 and 1994.
F-10
42
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
REVENUE RECOGNITION
The Company recognizes rental and assisted living services revenue from owned
and leased facilities. The Company receives fees for property management and
partnership administration services from managed facilities. The Company also
receives wholesaling commissions for the sale of limited partnership interests,
acquisition fees for the selection, development and purchase of partnership
properties, commissions on the sale of partnership properties and certain other
fees as specified in the partnership agreements. Fees are recognized when
earned.
REVENUE RECOGNITION - TAX CREDIT PROGRAM PARTNERSHIPS
The Company is the general partner in various tax credit partnerships. These
partnerships are generally in the start-up phase and the Company provides
services related to the purchase, development, construction and, later,
management of the projects. Fees earned for services provided are reduced by
amounts that the general partner is required to advance to the tax credit
partnerships, such as Owner Equity Contributions (OEC), as defined in the
partnership agreements, plus any presumed operating support requirements. Fees
are recognized when there is reasonable assurance that future rent receipts will
cover operating expenses and debt service, including payments due the Company
under the terms of the transaction.
ASSISTED LIVING FACILITY SALE-LEASEBACK TRANSACTIONS
Gains are deferred and amortized into income over the life of the lease.
DEFERRED PROJECT COSTS
Deferred project costs include land acquisition, legal and architectural fees,
feasibility study costs and other direct costs associated with new assisted
living facility development or acquisition or formation of the tax credit
partnerships. Deferred project costs are capitalized upon the successful
acquisition of an assisted living facility or site. If a project is
discontinued, any deferred project costs are expensed. Deferred project costs
at March 31, 1996 are expected to be recovered by March 31, 1997 as the related
projects are expected to be completed by then.
OTHER NONCURRENT ASSETS
Other noncurrent assets consist primarily of lease security deposits ($1,905,000
and $1,346,000 at March 31, 1996 and 1995, respectively) pursuant to assisted
living facility leases and convertible subordinated notes issuance costs
($1,338,000 and $502,000 at March 31, 1996 and 1995, respectively). Convertible
subordinated notes issuance costs are amortized over the life of the notes.
INVESTMENTS IN PARTNERSHIPS
The Company accounts for its investments in partnerships using the equity
method.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109 (Statement No. 109) , "Accounting for
Income Taxes," effective for years beginning after December 15, 1992. Under the
asset and liability method of Statement No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
F-11
43
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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. Under Statement 109, 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. The Company adopted Statement No. 109 as of April
1, 1993 on a prospective basis.
RESTRICTED CASH
Restricted cash represents cash held as collateral for letters of credit issued
to the lessor in lieu of security deposits.
NOTES RECEIVABLE VALUATION ALLOWANCE
The Company has established a valuation allowance for three notes receivable
from affiliates. In each case the property owned by each affiliate has
sufficient value, based on appraisals, to satisfy all obligations of the
affiliate including amounts owed to the Company. The valuation allowance
reflects the uncertainty inherent in the appraisal process, the timing and
amount of future principal payments and the related property's inability to
generate sufficient cash flow to meet current operating needs and service the
notes.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS No. 121 requires the Company to adopt the provisions of the new statement
no later that fiscal 1997. SFAS 121 requires an impairment loss to be recorded
as a reduction to operating income if the sum of the expected undiscounted cash
flows derived from an asset is less that the asset's carrying value. The Company
plans to adopt SFAS 121 in fiscal 1997 without any material impact on the
consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation." This pronouncement establishes
the accounting and reporting standards for stock-based employee compensation
plans, including stock purchase plans, stock options and stock appreciation
rights. This new standard defines a fair value-based method of accounting for
these equity instruments. This method measures compensation cost based on the
value of the award and recognizes that cost over the service period. Companies
may elect to adopt this standard or to continue accounting for these types of
equity instruments under current guidance, APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Companies which elect to continue using the rules of
APB Opinion No. 25 must make pro forma disclosures of net income and earnings
per share as if this new statement had been applied. This new standard is
required for fiscal years beginning after December 15, 1995. The Company
anticipates that it will continue to use the rules of APB Opinion No. 25 and
make the pro forma disclosures required under the new standard.
RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform to 1996
presentation.
F-12
44
(2) INVESTMENTS IN PARTNERSHIPS
The Company is general partner in five limited partnerships which operate
assisted living facilities (ownership interests range from less than 1%
to 89.5% and in 17 tax credit partnerships that operate apartment
facilities (ownership interests range up to 1%). The Company is also the
general partner in five tax credit partnerships that are in various
stages of development (ownership interests range up to 1%). Under the
terms of the limited partnership agreements, profits and losses are
allocated to the general and limited partners in specified ratios, and
the Company generally has unlimited liability for obligations of
partnerships in which it is the general partner.
(3) NOTES PAYABLE
MARCH 31
-------------------------
1996 1995
----------- ---------
Convertible subordinated notes due December
31, 1999 with interest at 10%. The notes
require monthly payments of interest and
are convertible to common stock at $12.16
per share (subsequent to the 3.04 to 1
reverse stock split) The notes, offered
in a maximum amount of $15,000,000, may
be called by the Company at declining
premiums starting at 110% of the
principal amount; and are guaranteed by
certain majority shareholders of the
Company (see note 14) $14,888,000 3,179,000
$375,000, non-revolving line of credit,
unsecured, bearing interest at the bank's
prime rate plus 2.5%; all unpaid interest
and principal due March 31, 1997;
guaranteed by certain majority
shareholders of the Company; repaid
October 1995 -- 342,539
Note payable to bank, bearing interest at the
11th district cost of funds plus 2.75%,
adjusted in February and August, with the
rate never less than 9.5% nor greater
than 14.75%; repaid May 26, 1995 -- 4,219,351
Note payable to bank, bearing interest at the
bank's prime rate plus 2.25%; repaid
May 26, 1995 -- 243,000
Notes payable, bearing interest at fixed
rates between 9.5% and 12%, payable in
monthly installments of principal and
interest totaling $95,056, secured by
property, maturities ranging from October
1996 through March 2006 11,824,125 --
F-13
45
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
MARCH 31
----------------------
1996 1995
----------- ---------
Notes payable, bearing interest at floating rates between
prime (8.25% at March 31, 1996) plus 1.5% and prime plus
2.25%, payable in monthly installments of principal and
interest totaling $11,608, secured by an assisted living
facility and the Company's corporate headquarters,
maturities range from September 1996 to March 1997 $ 381,502 --
Note payable, bearing interest at fixed and floating rates
between 8% and prime (8.25% at March 31, 1996) plus 1.5%,
payable in monthly interest installments of $5,510, secured
by assisted living facility sites, maturities in August and
September 1996 735,197 --
Other-primarily capitalized equipment leases 291,429 92,026
----------- ---------
28,120,253 8,075,916
Less amounts currently payable 3,306,592 4,863,216
----------- ---------
$24,813,661 3,212,700
=========== =========
The future annual principal payments of the notes payable at March 31,
1996 are as follows:
1997 $ 3,306,592
1998 3,935,514
1999 15,788,134
2000 72,943
2001 17,070
Thereafter 5,000,000
-----------
$28,120,253
===========
(4) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan (ESOP) which covers all
employees of the Company. Contributions to the ESOP are made at the
discretion of the Company's Board of Directors.
ESOP contributions of $1,350,000 and $250,000 during the years ended March
31, 1995 and 1994 respectively, were utilized by the ESOP to purchase
790,229 and 125,000 shares, respectively, of the Company's common stock.
For the year ended March 31, 1996, no contributions were made to the ESOP
by the Company. The Company's compensation expense related to these
contributions for the years ended March 31, 1995 and 1994 amounted to
$811,254 and $75,900, respectively. Retirement expense paid by affiliated
partnerships for the years ended March 31, 1995 and 1994 were $471,000 and
$202,500, respectively.
F-14
46
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) INCOME TAXES
The provision for income tax expense (benefit) consists of the following
for the years ended March 31, 1996, 1995 and 1994:
YEARS ENDED MARCH 31
--------------------------------
1996 1995 1994
--------------------------------
Current:
Federal $293,453 36,401 6,882
State 81,187 10,978 2,150
-------- ---------- --------
Total 374,640 47,379 9,032
-------- ---------- --------
Deferred:
Federal 553 (1,396,522) (195,104)
State 14 (379,996) (62,154)
-------- ---------- --------
567 (1,776,518) (257,258)
-------- ---------- --------
Total $375,207 (1,729,139) (248,226)
======== ========== ========
F-15
47
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
A reconciliation of income tax expense (benefit) at the federal statutory rate
of 34% to the Company's provision for income taxes is as follows:
YEARS ENDED MARCH 31
-----------------------------------
1996 1995 1994
-------- --------- ---------
Income tax benefit at statutory rate $(200,692) (1,607,407) (646,443)
State income tax expense (benefit), net
of Federal income tax benefit 53,583 (438,751) (103,849)
Elimination of pre-acquisition losses of
acquired companies 25,729 -- 283,151
Change in valuation allowance 422,944 300,000 187,452
Other 73,643 17,019 31,463
--------- ---------- --------
Total income tax
expense (benefit) $ 375,207 (1,729,139) (248,226)
========= ========== ========
Temporary differences giving rise to a significant amount of deferred tax assets
and liabilities at March 31, 1996 and 1995 are as follows:
MARCH 31
------------------------
1996 1995
----------- ----------
Deferred tax assets:
Unamortized cumulative adjustment for change in tax
accounting method $ -- 68,707
Deferred gain on sale 169,007 189,990
Allowance for doubtful accounts -- 233,200
Deferred tax credit partnership fees 1,145,031 1,066,330
Owner equity contributions 2,012,984 1,453,810
Other partnership income 164,094 --
Other 372,800 419,827
----------- ----------
Gross deferred tax asset 3,863,916 3,431,864
Less valuation allowance (1,685,014) (1,262,070)
Deferred tax liabilities--
Other (135,381) (125,706)
----------- ----------
Net deferred tax asset $ 2,043,521 2,044,088
=========== ==========
Based on the Company's current and expected pre-tax earnings, management
believes it is more likely than not that the Company will realize certain of the
benefits of the existing deferred tax assets as of March 31, 1996 and 1995.
Approximately $2,000,000 and $1,500,000 of the
F-16
48
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
deferred tax assets at March 31, 1996 and 1995, respectively, result from
income that has been recognized for federal income tax purposes in advance
of recognition for financial reporting purposes.
Recognition of the remaining balances will require generation of future
taxable income. There can be no assurance that the Company will generate
any earnings or any specific level of earnings in future years. Certain
tax planning or other strategies could be implemented, if necessary, to
supplement income from operations to fully realize recorded net tax
benefits.
(6) RELATED PARTY TRANSACTIONS
The results of the Company and its subsidiaries are substantially affected
by transactions and agreements with related parties.
Fees receivable from affiliates of $361,506 and $286,546 at March 31,1996
and 1995, respectively, consists of receivables related to management
services rendered by the Company. Related management fees received from
affiliates total $2,766,444, $3,273,202, and $3,012,718 during the periods
ended March 31, 1996, 1995, and 1994, respectively.
Notes receivable from affiliates of $339,566 and $1,840,911 at March 31,
1996 and 1995, respectively, bear interest at 10% and are due on demand.
Amounts have been advanced to two partnerships, one for which the Company
serves as the general partner and one for which the Company's principal
shareholders serve as the general partner. Advances to partnerships
include amounts to fund operating cash deficiencies.
Other amounts due from affiliates of $560,619 and $524,245 at March 31,
1996 and 1995, respectively, consist of non-interest bearing expense
advances and working capital loans made to various partnerships. Amounts
due from affiliates are generally expected to be repaid in subsequent
years with cash from operations or from bank financing obtained by the
affiliates.
At March 31, 1996, and 1995, the Company had demand notes payable bearing
interest at 10% to various shareholders and their affiliates aggregating
$0 and $743,000, respectively. Other amounts due to affiliates are
non-interest bearing.
During the years ended March 31, 1996, 1995 and 1994, $0, $621,000 and
$655,000 in consulting fees, respectively were earned by certain
shareholders of the Company, who are also general partners in several
limited partnerships. Additionally, approximately $0, $53,000 and $90,000
of legal fees incurred during the periods ending March 31, 1996, 1995 and
1994, respectively, were paid to certain shareholders of the Company.
The Company pays certain expenses such as repair and maintenance,
supplies, payroll and retirement benefit expenses on behalf of affiliated
Partnerships and is subsequently reimbursed by the Partnerships. During
the periods ended March 31, 1996, 1995 and 1994, respectively, the
expenses incurred on behalf of affiliates and the related reimbursements
from these affiliates amounted to approximately $19,994,000, $16,129,000
and $14,595,000, respectively. The Company accounts for these
reimbursements as a reduction of the related expenses.
The Company leases office space under operating leases from affiliated
entities. During the year ended March 31, 1996, the leases were amended to
provide for a three year term. Previously, the leases were on a
month-to-month basis. Total rental expense for the years ended March 31,
1996, 1995 and 1994 was $161,000, $215,000 and $209,000, respectively.
F-17
49
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In May 1995, the Company purchased from an affiliated entity one of the
offices that it occupies for $610,545. Debt assumed in the transaction was
$530,545, prior to a principal payment of $180,545. The balance of the
purchase price was paid in cash. The remaining $350,000 obligation is due
in two years and requires monthly principal and interest payments based on
a ten year amortization schedule.
In June 1995, the Company's principal shareholders sold LVP Inc. to the
Company for $54,720. LVP, formed in 1993, provides laundry and vending
equipment leasing services to apartment projects.
In July 1995, the Company's principal shareholders sold Pacific
Demographics Inc. to the Company for $100,000 in cash and 20% of deferred
development fees to the extent received by Pacific Demographics up to a
maximum amount of $850,000. Pacific Demographics provided, since its
formation in August 1994, certain development services for tax credit
partnerships. As a result of its acquisition of Pacific Demographics, the
Company recognized approximately $9 million of development fees for
federal and state income tax purposes in its current fiscal year which
would have otherwise been taxable in future years. Although the Company
will receive cash payments for some of these fees, a substantial portion
of the fees will not be received until future years. Consistent with the
Company's strategy to de-emphasize the federal tax credit program, and in
order to mitigate the tax and cash flow implications of the foregoing, the
Company has developed and implemented certain tax planning strategies to
reduce the current year tax liability to a minimal amount. The current tax
provision reflects the effective implementation of these strategies. These
strategies included the disposition of the future receivables which
resulted from the income recognized. The receivables were sold for a
combination of cash and a participation in future collections, if any, of
the receivables being sold. These strategies will result in revenue being
recognized in future years when and if cash payments are received. During
March 1996, $5.2 million of future receivables, were sold to former
employees of the Company, at their estimated future realizable value in
exchange for $191,000 in cash and notes receivable of $1.4 million.
In June 1995, the Company purchased an aggregate 18.6% limited partner
interests in a limited partnership for which it serves as the general
partner for $469,000. Subsequently, the Company purchased an additional
19.0% for $953,833.
In September 1995, a partnership, for which the Company is the General
Partner, obtained the limited partners' approval to sell its assisted
living facilities to an unrelated third party. The sales were consummated
on October 15, 1995, and the Company simultaneously entered into leases
for these facilities.
In December 1995, a partnership, for which the Company is the General
Partner, obtained the limited partners' approval to sell is assisted
living facility to an unrelated third party. The sale was consummated on
December 18, 1995, and the Company simultaneously entered into a lease for
the facility.
In February 1996, a partnership, for which the Company is the General
Partner, obtained the limited partners' approval to sell is assisted
living facility to an unrelated third party. The sale was consummated on
February 8, 1996, and the Company simultaneously entered into a lease for
the facility.
F-18
50
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The Company is the general partner of Fullerton Equities, Limited, a
California limited partnership (Fullerton). The Company had loaned
Fullerton in excess of $1.1 million, $1.0 million of which was secured by
a deed of trust. On January 3, 1996, Fullerton sold its sole physical
asset, an assisted living and Alzheimer facility, to an unrelated third
party and took back a $2.0 million note secured by a deed of trust which
wrapped the Company's deed of trust. Gary L. Davidson, John A. Booty,
David P. Collins and Graham P. Espley-Jones (Executive Officers of the
Company), as tenants-in-common, purchased the $2.0 million note from
Fullerton for full value on March 6, 1996, which enabled Fullerton to pay
off all of its secured indebtedness and a portion of the unsecured debt to
the Company. It is anticipated that Fullerton will be dissolved in
calendar 1996.
(7) SHAREHOLDERS' EQUITY
COMMON STOCK
In February 1994, the Company entered into a separation agreement with an
employee shareholder whereby he relinquished any and all rights to the
328,947 shares of the Company's common stock he owned. The Company paid no
money to the former employee for the common stock and retired the shares.
During the year ended March 31, 1996, the Company repurchased and retired
493,492 shares of its common stock from certain shareholders and three
former employee shareholders for approximately $351,000.
WARRANTS
At March 31, 1996 and 1995, the Company had outstanding warrants issued in
connection with its Series A Preferred Stock which give the holders the
option to purchase approximately 54,197 shares of common stock at $7.60
per share. These warrants are exercisable at any time at the option of the
holder within three years of the date of issuance, the latest of which was
August 1, 1994. At March 31, 1996, the Company had outstanding warrants
issued to selling brokerage firms in connection with its convertible
subordinated notes which give the holders the option to purchase an
aggregate maximum of 115,304 shares of common stock at $12.16 per share.
These warrants are exercisable at any time at the option of the holder
within three years of the date of issuance, the latest of which was July
31, 1995. None of the warrants have been exercised.
STOCK OPTIONS
Effective October 1, 1995, the Company adopted the 1995 Stock Option and
Incentive Plan of ARV Assisted Living, Inc. (the Plan) for the benefit of
its eligible employees, consultants and directors. The Plan consists of
two plans, one for the benefit of key employees and consultants and one
for the benefit of non-employee directors. The Company has reserved
1,155,666 shares for issuance under the Plan. As of March 31, 1996, a
total of 847,245 options had been granted by the Company with exercise
prices ranging from $10.00 to $15.40 per share. Options granted under the
Plan vest over periods ranging from three to five years from the date of
the grant. During the year ended March 31, 1996, none of the options were
eligible for exercise.
A summary of stock options at March 31, 1996 is as follows:
SHARES SHARES UNDER
AVAILABLE FOR OUTSTANDING PRICE PER
GRANT OPTIONS SHARE
------------- ----------- ---------
Authorization of shares 1,155,666 -- --
Options granted (790,782) 790,782 $10.00-15.40
Options canceled 78,618 (78,618) 14.00
--------- -------- ------------
Balances at March 31, 1996 443,503 712,164 $10.00-15.40
========= ======== ============
(8) REDEEMABLE PREFERRED STOCK
The Series A 8% cumulative, convertible and redeemable preferred stock is:
convertible at any time, unless previously redeemed, at the option of the
holder, in whole or in part, into one share of common stock; redeemable,
at the option of the holder, any time after December 31, 1998 for $7.60
per share, as adjusted for the 3.04 to 1 reverse stock split (see note
13) plus accrued dividends.
As of February 7, 1996, the Company exercised its right to redeem all
outstanding shares of the Series A 8% Convertible Redeemable Preferred
Stock on May 9, 1996. Preferred shareholders have the option of converting
their Preferred Stock into Common Stock at any time prior to
F-19
51
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
April 29, 1996. At March 31, 1996, approximately 48.6% of the shareholders
converted their Preferred Stock into 319,664 shares of Common Stock.
Subsequent to March 31, 1996, the balance of the shareholders converted
their Preferred Stock into 338,141 shares of Common Stock.
(9) ASSISTED LIVING FACILITY LEASES
At March 31, 1996 the Company leased 17 assisted living facilities. On
February 23, 1995, the Company acquired the leasehold interest to an
assisted living facility. The initial lease term ends February 28, 2007
and has three renewal options of ten years each.
The Company purchased, sold and leased-back two assisted living
facilities during the year ended March 31, 1995. The sales agreement for
one of these facilities permits the Company to receive additional sales
proceeds of $750,000 on or before April 27, 2001 if that facility's net
income meets certain specified levels for two consecutive years. If the
Company receives additional proceeds, annual rents for the initial lease
term will increase by an additional $74,064. The initial lease term of
each these leases is 12 years and have three renewal options of 10 years
each. Renewal of each lease is dependent on renewal of all other leases
between the Company and the lessor.
During the year ended March 31, 1996 the Company entered into 14 leases to
operate assisted living facilities. Twelve of the facilities were
purchased by the lessor from partnerships for which the Company served as
general partner. The other two facilities were purchased by the lessors
and subsequently leased back to the Company following the Company's
negotiation of the purchase of the facilities from the sellers. Each of
these leases has an initial term ranging from 12 to 15 years and contains
three renewal options of 10 years each. Renewal of each lease is dependent
on renewal of all other leases between the Company and the individual
lessors.
Minimum lease payments required under assisted living facility operating
leases in effect at March 31, 1996 are as follows:
Year ended March 31:
1997 $ 10,859,414
1998 10,859,414
1999 10,859,414
2000 10,859,414
2001 10,859,414
Thereafter 71,503,492
------------
$125,800,562
============
The leases require the payment of additional rent based on a percentage of
gross revenues. No percentage rents were earned by the lessors.
F-20
52
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its majority shareholders have guaranteed indebtedness of
certain affiliated partnerships as follows:
MAJORITY
COMPANY SHAREHOLDERS
----------- ------------
Notes secured by real estate $ 9,539,740 122,000
Land and construction loans associated
with the development and construction
of affordable housing apartments 20,690,927 9,715,331
The maximum aggregate amounts of guaranteed land and construction loans is
$34,852,000 at March 31, 1996.
The maximum aggregate amounts of guaranteed unsecured revolving lines of
credit was $400,000 at March 31, 1996.
The Company has guaranteed tax credits for certain partnerships in the
aggregate amount of $78,387,056, excluding interest, penalties or other
charges which might be assessed against the partners.
In management's opinion, no claims may be currently asserted under any of
the aforementioned guarantees based on the terms of the respective
agreements.
Noncancelable operating lease commitments for office space at March 31,
1996 are:
Year ended March 31:
1997 $ 150,550
1998 155,067
1999 159,719
2000 164,511
2001 169,446
Thereafter 492,131
----------
Total $1,291,424
==========
F-21
53
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) DEFERRED REVENUE AND OWNER EQUITY CONTRIBUTIONS PAYABLE
An analysis of tax credit program deferred revenues and owner equity
contributions payable activity follows:
TAX CREDIT
PROGRAM OWNER EQUITY
DEFERRED CONTRIBUTIONS
REVENUE PAYABLE
----------- -------------
Development fees received $ 2,669,747 --
Owner Equity Contribution Accrued (2,177,001) 2,177,001
Owner Equity Contribution Paid -- (215,108)
----------- ----------
Balance at March 31, 1994 492,746 1,961,893
Development fees received 4,418,821 --
Owner Equity Contribution Accrued (2,680,480) 2,680,480
Owner Equity Contribution Paid -- (3,875,373)
Fees recognized (701,503) --
----------- ----------
Balance at March 31, 1995 1,529,584 767,000
Development fees received 1,476,607 --
Owner Equity Contribution Accrued (915,735) 915,735
Owner Equity Contribution Paid -- (1,672,735)
Fees recognized (1,499,761) --
----------- ----------
Balance at March 31, 1996 $ 590,695 10,000
=========== ==========
Deferred revenues also include amounts unrelated to the tax credit
programs. These amounts result from deferred fees related to a proposed
facility to be developed by a partnership for which the Company is the
general partner and include the gain deferred on the sale-leaseback of an
assisted living facility.
(12) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair
Value of Financial Instruments," which was adopted by the Company in 1995.
The estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be
realized in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material impact on the
estimated fair value amounts.
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, management fees, deferred project costs, investments
in real estate held for sale, other assets, accounts payable and accrued
liabilities and owner equity contributions payable approximate fair value
F-22
54
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
due to the short-term nature of these instruments. The notes receivable
from affiliates, notes payable and other amounts due to affiliates and
notes payable bear interest at rates which approximate current market
rates.
(13) INITIAL PUBLIC OFFERING
In July 1995 the Board of Directors authorized, contingent upon the
completion of the Company's IPO offering, a 1-for-3.04 reverse stock
split. The public offering was completed on October 23, 1995 (see below).
The results of the reverse common stock split, therefore, have been
reflected in the financial statements.
On October 23, 1995, the Company successfully completed an initial public
offering (the Offering) of its stock. The net proceeds to the Company from
the Offering, after deducting the underwriting discount and offering
expenses payable by the Company, were approximately $42.7 million. A total
of 3,384,078 new shares were sold at a price of $14.00 per share. Of the
shares subject to over-allotment, 156,922 were sold by the officers and
inside directors of the Company.
(14) SUBSEQUENT EVENTS
On April 2, 1996, the Company acquired Bella Vita, a 120-unit assisted
living facility located in Venice, Florida for $10.2 million. A portion of
the purchase price was financed through the Company's assumption of a HUD
insured loan secured by a first mortgage recorded against the property,
with an outstanding balance of $6,345,709 at the time of purchase.
On April 3, 1996, the Company successfully completed a $50 million private
placement offering of 6.75% Convertible Subordinated Notes due 2006 (the
2006 Notes). Subsequently, on April 12, 1996, the initial purchaser of the
2006 Notes exercised its over allotment right to purchase an additional
$7.5 million of the 2006 Notes. The 2006 Notes, which are non-callable by
the Company for a period of three years, allow noteholders to convert
their 2006 Notes into common stock of the Company at a rate of $18.57 per
share.
On April 10, 1996, the Company called for redemption all of its
outstanding 1999 Convertible Notes. The Company will redeem all of the
outstanding 1999 Convertible Notes as of 5:00 p.m. Pacific Daylight Time
on July 10, 1996, unless the Notes are converted on or prior to June 30,
1996. The price to be paid for each $1,000 principal amount of 1999
Convertible Notes will be $1,067 plus accrued interest to the date of
redemption. 1999 Convertible Note holders are given the alternative to
convert their Notes into shares of common stock of the Company at any time
up to and including June 30, 1996. Converting holders will receive one
share of common stock for every $12.16 in principal amount of 1999
Convertible Notes surrendered for conversion. For those 1999 Convertible
Notes surrendered for conversion into common stock, unpaid interest will
be disregarded and note holders will not be entitled to interest accrued
to the date of conversion. For those Notes converted to common stock, the
Company will issue restricted stock pursuant to Rule 144 of the Securities
Act of 1933. If all Notes are converted, the Company will issue up to
1,233,552 shares of common stock. As of June 25, 1996, holders of $8.1
million principal amount of the 1999 Convertible Notes had exercised their
right to convert their notes into approximately 665,800 shares of common
stock.
On April 16, 1996, the Company obtained a $10 million commitment from
Imperial Bank (Imperial) to provide a revolving credit facility to be used
for the issuance of letters of credit, acquisition, development and
general corporate purposes. The commitment provides for interest on
borrowings at rates between Imperial's prime lending rate plus 0.0% to
0.5% or LIBOR plus 2.0% to 2.5% based upon the achievement of certain
financial ratios. The Company is currently negotiating documentation of
the loan.
On May 16, 1996, the Company initiated a tender offer (the "Offer") to
purchase any and all of the 34,886 outstanding limited partnership units
of American Retirement Villas Properties II, a California limited
partnership, not owned by the Company at a net cash price of $720.00 per
unit from unitholders who validly tendered their units prior to June 14,
1996 at 10:00 p.m. Central Daylight Time. Subsequently, the Company
extended the Offer until June 21, 1996 at 10:00 p.m. Central Daylight
Time. Upon expiration of the Offer, 1,426 unitholders validly tendered
15,488 units (approximately 44.6% of the outstanding limited partnership
units) which the Company will purchase at a cost of $11.2 million.
On June 6, 1996, the Company obtained a $60 million commitment from Health
Care REIT, Inc. for financing the construction of new assisted living
facilities. Pursuant to the terms of the commitment, Health Care will
finance up to 100% of the approved costs, as defined, for the
construction of new assisted living facilities. Upon completion of
construction, the Company will lease the facilities from Health Care on an
initial lease term of 15 years, with three options to renew, at the
Company's option, for periods of 10 years each. The initial lease rate
will be based upon the yield of comparable term U.S. Treasury Notes plus
3.75%.
F-23
55
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On June 24, 1996, the Company obtained a $35 million commitment from Bank
United of Texas, FSB ("Bank United") for the construction or acquisition
of assisted living facilities. The terms of the commitment provide for
interest at 2.75% over the 30-day LIBOR rate. Of the commitment, a $20
million sub-limit has been established for the construction of assisted
living facilities. The Company is currently negotiating documentation of
the loan.
On June 18, 1996 the Company purchased Amber Wood, a 187-unit assisted
living facility located in Newport Richey, Florida for $6.0 million.
F-24
56
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/ Gary L. Davidson
-------------------------
Gary L. Davidson
Chairman of the Board
Date: June 27, 1996
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
/s/ Gary L. Davidson Chairman of the Board
- -----------------------------
Gary L. Davidson
Date: June 27, 1996
/s/ John A. Booty President
- ----------------------------- and Director
John A. Booty
Date: June 27, 1996
/s/ David P. Collins Senior Executive Vice President
- ----------------------------- and Director
David P. Collins
Date: June 27, 1996
/s/ Graham P. Espley-Jones Chief Financial Officer
- ----------------------------- and Secretary
Graham P. Espley-Jones
Date: June 27, 1996
/s/ James M. Peters Director
- -----------------------------
James M. Peters
Date: June 27, 1996
/s/ R. Bruce Andrews Director
- -----------------------------
R. Bruce Andrews
Date: June 27, 1996
/s/ Maurice J. DeWald Director
- -----------------------------
Maurice J. DeWald
Date: June 27, 1996
/s/ John J. Rydzewski Director
- -----------------------------
John J. Rydzewski
Date: June 27, 1996
37