-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DluVZybQdsz3rFXc6MD+r3UaKyyVTvUBLyvCbfM4ZPphKgIxfgHrRYVFo0cq7cHY N0Q3o7gKlsop5meRSHD/kg== /in/edgar/work/0001095811-00-004785/0001095811-00-004785.txt : 20001115 0001095811-00-004785.hdr.sgml : 20001115 ACCESSION NUMBER: 0001095811-00-004785 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARV ASSISTED LIVING INC CENTRAL INDEX KEY: 0000949322 STANDARD INDUSTRIAL CLASSIFICATION: [8050 ] IRS NUMBER: 330160968 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26980 FILM NUMBER: 766885 BUSINESS ADDRESS: STREET 1: 245 FISCHER AVE STREET 2: SUITE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7147517400 MAIL ADDRESS: STREET 1: 245 FISCHER AVENUE STREET 2: SUITE D-1 CITY: COSTA MESA STATE: CA ZIP: 92626 10-Q 1 a67231e10-q.txt FORM 10-Q PERIOD ENDED 9/30/00 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q --------------- (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________ COMMISSION FILE NUMBER: 0-26980 ARV ASSISTED LIVING, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0160968 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 245 FISCHER AVENUE, D-1 COSTA MESA, CA 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 751-7400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of outstanding shares of the Registrant's Common Stock, no par value, as of November 8, 2000 was 17,459,689. ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) ASSETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ Current assets: Cash and cash equivalents $ 13,049 $ 14,570 Accounts receivable and amounts due from affiliates 1,253 2,165 Prepaids and other current assets 4,228 2,772 Properties held for sale, net 5,420 4,301 --------- --------- Total current assets 23,950 23,808 Property, furniture and equipment, net 100,714 102,185 Goodwill, net 18,992 19,430 Operating lease security deposits 9,951 12,164 Other non-current assets 16,626 16,704 --------- --------- $ 170,233 $ 174,291 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,849 $ 1,503 Accrued liabilities 9,176 10,270 Notes payable, current portion 42,035 1,363 Accrued interest payable 1,102 1,292 Net current liabilities from discontinued operations 2,865 2,510 --------- --------- Total current liabilities 57,027 16,938 Notes payable, less current portion 54,706 114,369 Lease liabilities 1,754 1,922 Other non-current liabilities 825 934 --------- --------- 114,312 134,163 --------- --------- Minority interest in majority owned entities 1,101 1,004 Shareholders' equity: Preferred stock, no par value. Authorized 8,000 shares, none issued and outstanding -- -- Common stock, no par value. Authorized 100,000 shares; issued and outstanding 17,460 and 16,679 shares at September 30, 2000 and December 31, 1999, respectively 145,512 144,280 Accumulated deficit (90,692) (105,156) --------- --------- Total shareholders' equity 54,820 39,124 --------- --------- Commitments and contingent liabilities $ 170,233 $ 174,291 ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 2 3 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------- 2000 1999 2000 1999 -------- -------- --------- --------- Revenue: Assisted living community revenue: Rental revenue $ 27,658 $ 27,474 $ 83,954 $ 83,368 Assisted living and other services 5,878 6,362 18,467 19,938 Management fees from others and affiliates 207 120 600 767 -------- -------- --------- --------- Total revenue 33,743 33,956 103,021 104,073 -------- -------- --------- --------- Operating expenses: Assisted living community operating expense 21,210 21,193 65,810 64,355 Assisted living community lease expense 7,432 7,815 23,482 23,350 General and administrative 2,638 3,576 8,374 11,056 Impairment of long lived assets -- -- -- 7,722 Depreciation and amortization 2,144 2,409 6,398 6,766 -------- -------- --------- --------- Total operating expenses 33,424 34,993 104,064 113,249 -------- -------- --------- --------- Income (loss) from operations 319 (1,037) (1,043) (9,176) Other income(expense): Interest income 373 242 1,131 636 Other income(expense), net (50) (282) (596) (538) Interest expense (2,157) (2,483) (6,037) (6,569) Litigation judgment -- 1,232 -- (4,368) -------- -------- --------- --------- Total other expense (1,834) (1,291) (5,502) (10,839) -------- -------- --------- --------- Loss from operations before income tax expense, minority interest in income of majority owned entities, extraordinary item and change in accounting principle (1,515) (2,328) (6,545) (20,015) Income tax expense 3 -- 28 -- -------- -------- --------- --------- Loss from operations before minority interest in income of majority owned entities, extraordinary item and change in accounting principle (1,518) (2,328) (6,573) (20,015) Minority interest in income of majority owned entities (44) (105) (132) (836) -------- -------- --------- --------- Loss from operations before extraordinary item and change in accounting principle (1,562) (2,433) (6,705) (20,851) Extraordinary gain from early extinguishment of debt, net of income tax 9 -- 21,168 -- -------- -------- --------- --------- Income (loss) before change in accounting principle (1,553) (2,433) 14,463 (20,851) Cumulative effect of change in accounting principle, net of tax -- -- -- (1,260) -------- -------- --------- --------- Net income (loss) $ (1,553) $ (2,433) $ 14,463 $ (22,111) ======== ======== ========= ========= Basic and diluted income(loss) per common share: Loss from operations before extraordinary item and change in accounting principle $ (.09) $ (.15) $ (.38) $ (1.31) Extraordinary gain from early extinguishment of debt, net of income tax -- -- 1.22 -- Cumulative effect of change in accounting principle, net of tax -- -- -- (.08) -------- -------- --------- --------- Net income (loss) $ (.09) $ (.15) $ .84 $ (1.39) ======== ======== ========= ========= Weighted average common shares outstanding 17,460 15,873 17,323 15,873 ======== ======== ========= =========
See accompanying notes to unaudited condensed consolidated financial statements. 3 4 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------- 2000 1999 -------- -------- Net cash used in operating activities of continuing operations $ (1,628) $ (7,491) Net cash provided by operating activities of discontinued operations 355 874 -------- -------- Net cash used in operating activities (1,273) (6,617) -------- -------- Cash flows used in investing activities: Proceeds from the sale of communities, net of cost 455 23,094 Purchase of previously leased communities -- (14,693) Additions to property, furniture and equipment (3,634) (6,315) (Increase) decrease in leased property security deposits 613 (6,563) Cash contributed to joint venture -- (1,345) -------- -------- Net cash used in investing activities (2,566) (5,822) -------- -------- Cash flows provided by financing activities: Borrowings under notes payable for purchase of previously leased communities -- 14,677 Borrowing under refinancing for owned communities -- 41,819 Borrowing under non-secured credit line 7,000 -- Proceeds from note payable 11,209 2,496 Repayments of notes payable (5,797) (35,866) Repayments of subordinated debt (9,013) -- Distributions from majority owned entities (204) (8,153) Loan fees (877) (1,722) -------- -------- Net cash provided by financing activities 2,318 13,251 -------- -------- Net (decrease) increase in cash and cash equivalents (1,521) 812 Cash and cash equivalents at beginning of period 14,570 11,885 -------- -------- Cash and cash equivalents at end of period $ 13,049 $ 12,697 ======== ======== Supplemental schedule of cash flow information: Cash paid during the period for: Interest $ 6,227 $ 7,742 ======== ======== Income taxes $ -- $ -- ======== ======== Supplemental schedule of non-cash: Investing activities: Conversion of subordinated notes to common stock $ 1,232 Additional cost of private placement $ 372 Financing activities: Conversion of current liability to long-term debt $ 1,000
See accompanying notes to unaudited condensed consolidated financial statements. 4 5 ARV ASSISTED LIVING, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION We prepared the accompanying condensed consolidated financial statements of ARV Assisted Living, Inc. and subsidiaries ("the Company" or "ARV") following the requirements of the Securities and Exchange Commission ("SEC") for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles ("GAAP") can be condensed or omitted. We have reclassified certain prior year data to conform to the 2000 presentation. The financial statements include all normal and recurring adjustments that we consider necessary for the fair presentation of our financial position and operating results. These are condensed financial statements. To obtain a more detailed understanding of our results, you should also read the financial statements and notes in our Form 10-K for 1999, which is on file with the SEC. The results of operations can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of the Company and our subsidiaries. Subsidiaries, which include limited partnerships in which we have controlling interests, have been consolidated into the financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES In preparing the financial statements conforming with GAAP, we have made estimates and assumptions that affect the following: o reported amounts of assets and liabilities at the date of the financial statements; o disclosure of contingent assets and liabilities at the date of the financial statements; and o reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS We have reclassified certain prior period amounts to conform to the September 30, 2000 presentation. GAIN (LOSS) PER SHARE Basic earnings (loss) per share ("EPS") excludes all dilution and is based upon the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised, or converted into common stock. The effect of potentially dilutive securities was not included for any of the periods presented as the effect was antidilutive. Potentially dilutive securities include convertible notes and stock options, which convert to 18,574,000 and 12,778,000 shares of common stock for the nine-month period ended September 30, 2000 and 1999, respectively. 5 6 (2) COMMITMENTS AND CONTINGENT LIABILITIES COMMITMENTS The Company has guaranteed indebtedness of certain affiliated partnerships as follows: (IN THOUSANDS) Notes secured by real estate $75,228 Construction loans associated with the development and construction of affordable housing apartments $14,651 The Company has guaranteed $89.9 million of loans in the event of fraud, material misrepresentations, environmental impairment and certain loan covenants. The Company has guaranteed tax credits for certain partnerships in the aggregate amount of $65.3 million, excluding interest, penalties or other charges which might be assessed against the partners. We have provided development and operating deficit guarantees for certain affiliated partnerships. In our opinion, no claims may be currently asserted under any of the aforementioned guarantees based on the terms of the respective agreements other than those accrued nor are any additional accruals anticipated. LITIGATION We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity. (3) SALES OF ASSISTED LIVING COMMUNITIES On May 26, 2000, we entered into a leasehold interest purchase and sale agreement for the sale of three ALCs located outside of California for $10.00. In addition we received a non-interest bearing note for $500,000 in exchange for security deposits on one of those properties. The note is due on April 1, 2010 and has been discounted at a 7% rate to a value of $262,000. On June 1, 2000, we completed the sale of these three ALCs. As of December 31, 1999, these ALCs were included in assets held for sale at their sales price. The resulting gain or loss was insignificant during 2000. (4) RELATED PARTY TRANSACTIONS On April 24, 2000, the company entered into a Term Loan Agreement with LFSRI II Assisted Living LLC ("LFSRI"), an affiliate of Prometheus. As of April 27, 2000, Prometheus beneficially owned approximately 43.5% of the company's outstanding Common Stock. Pursuant to the Term Loan Agreement, the company may borrow up to $10,000,000 from LFSRI with a maturity date of April 24, 2002, which, subject to certain conditions, may be extended by one year if no default has occurred. The outstanding amount under the loan will bear interest at the annual rate equal to the LIBOR rate for each interest period plus a 10% margin. At September 30, 2000, there was $7,000,000 outstanding. In connection with the Term Loan Agreement, the company issued to LFSRI a warrant to purchase up to 750,000 shares of the company's Common Stock at a price of $3.00 per share, subject to various adjustments exercisable until April 24, 2005. The company also amended its stockholder rights agreement to prevent shares that Prometheus may be deemed to beneficially own by reason of LFSRI's rights under the warrant from causing Prometheus to become an "Acquiring Person" and thus causing a triggering event under the rights agreement. As a part of the Term Loan Agreement the company had until August 24, 2000 to borrow the remaining $3,000,000. On August 4, 2000, the company extended this option to November 22, 2000 for a 0.5% fee on the unutilized portion. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS This 10-Q report contains forward-looking statements, including statements regarding, among other items: o our business strategy; o our liquidity requirements and ability to obtain financing; o the impact of future acquisitions and developments; o we have 9 ALCs and other properties held for sale; o the level of future capital expenditures; o the impact of inflation and changing prices; and o the outcome of certain litigation matters. These forward-looking statements are based on our expectations and are subject to a number of risks and uncertainties, some of which are beyond our control. These risks and uncertainties include, but are not limited to: o access to capital necessary for acquisitions and development; o our ability to manage growth; o the successful integration of ALCs into our portfolio; o governmental regulations; o competition; and o other risks associated with the assisted living industry. Although we believe we have the resources required to achieve our objectives, actual results could differ materially from those anticipated by these forward-looking statements. There can be no assurances that events anticipated by these forward-looking statements will in fact transpire as expected. OVERVIEW As of September 30, 2000, we operated 55 assisted living communities ("ALCs") containing 6,623 units, including 33 ALCs that are leased pursuant to long-term operating leases ("Leased ALCs"); 15 communities that we own for our own account ("Owned ALCs"); and 7 communities that are managed for related parties ("Managed ALCs"). The three ALCs opened in 2000 were developed under a joint venture agreement. Lynnbrooke, a 140-unit ALC in Irvine, CA, opened in April 2000 is ARV's first community in Southern California to offer a distinct unit for the treatment of Alzheimer's disease and other memory disorders. In June 2000 we opened Bay Spring Village, a 127-unit facility in Barrington, RI. This facility was started before the decision was made to focus our growth efforts in the western United States. As of September 30, 2000, we were in construction on a remaining 137-unit ALC in Colorado, this facility opened on October, 24 2000. Since commencing operation of ALCs for our own account in April 1994, we have focused our growth efforts on the acquisition and development of additional ALCs and expansion of services to our residents as they "age in place." As of September 30, 2000, a substantial portion of our business and operations was conducted in California, where 38 of the 55 ALCs we operate are located. We intend to continue to make California the primary focus of our geographic clustering strategy. However, we intend to reduce our prior growth rate in order to focus greater attention on enhancing the profitability of our existing core operations and on leasing up new developments at an increased rate. In addition, we plan to divest ALCs that do not expand or enhance one of our geographic clusters or do not meet our financial objectives. In June 1999 we recorded a $7.7 million impairment charge for ALC's located outside the western United States. In December 1999 we decided to sell twelve ALCs outside of the western United States; to date we have sold three of these. This decision was in keeping with our strategy to focus our efforts on occupancy gains and to lease up ALCs faster. Newly opened ALCs are expected to incur operating losses until sufficient occupancy levels and operating efficiencies are achieved. Based upon historical experience, we believe that a typical community will achieve its targeted occupancy levels 18 - 24 months from 7 8 the commencement of operations. Accordingly, we will require substantial amounts of liquidity to maintain the operations of newly opened ALCs. If sufficient occupancy levels are not achieved within reasonable periods, our results of operations, financial position and liquidity could be materially and adversely impacted. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1999 The following table sets forth a comparison of the three months ended September 30, 2000 and the three months ended September 30, 1999. Operating Results before Impairment For the Three Months Ended September 30, 2000 and 1999 (Unaudited) (In millions)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, -------------------- INCREASE/ 2000 1999 (DECREASE) ------ ------ --------- (DOLLARS IN MILLIONS) Revenue: Assisted living community revenue ........... $33.54 $33.84 (0.9)% Management fees from affiliates and others .. 0.20 0.12 72.5% ------ ------ ----- Total revenue ....................... 33.74 33.96 (0.6)% ------ ------ ----- Operating expenses: Assisted living community operating expense . 21.21 21.19 0.1% Assisted living community lease expense ..... 7.43 7.82 (4.9)% General and administrative .................. 2.64 3.58 (26.2)% Depreciation and amortization ............... 2.14 2.40 (11.0)% ------ ------ ----- Total operating expenses ............ 33.42 34.99 (4.5)% ------ ------ ----- Income (loss) from operations before impairment $ 0.32 $(1.03) 130.8% ====== ====== =====
Total revenue for the three months ended September 30, 2000 decreased $0.3 million to $33.7 million from $34.0 million for the three months ended September 30, 1999. This decrease was primarily due to a decrease in assisted living community revenue as described below: o the sale of ALCs which were determined to be non-strategic. As of September 30, 2000, we owned and leased 48 ALCs for our own account consisting of 33 Leased ALCs and 15 Owned ALCs. As of September 30, 1999, we owned and leased a total of 51 ALCs for our own account consisting of 35 leased ALCs and 16 Owned ALCs; offset by o an increase in average rate per occupied unit for ALCs, which we owned and leased in both periods to $2,183 for the 2000 quarter as compared to $2,096 for the 1999 quarter; and o an increase in occupancy from 83.2% third quarter of 1999 to 86.7% the third quarter of 2000. Management fees from affiliates and others for the 2000 quarter increased by $0.1 million due to the opening of two new communities in the second quarter of 2000. Assisted living community operating expenses remained relatively constant at $21.2 million for the three months ended September 30, 2000 and for the three months ended September 30, 1999. Changes between the periods consisted of the following: o decrease in expenses due to the sale of three ALCs during the second quarter of 2000, offset by o increase in overtime due to labor shortages and additional personnel needed to support the assisted living operations; o increase in worker's compensation insurance expense; and o increases in marketing expense to update collateral advertising materials and support. 8 9 Assisted living community lease expenses decreased $0.4 million to $7.4 million for the three months ended September 30, 2000 from $7.8 million for the three months ended September 30, 1999. The decrease is due to the reduction in the number of facilities leased for the three months ended September 30, 2000. General and administrative expenses decreased $1.0 million to $2.6 million for the three months ended September 30, 2000 from $3.6 million for the three months ended September 30, 1999, as a result of: o decrease in legal fees for lawsuits and proxy fight expenses in 1999; and o management's continued efforts to reduce staff at our corporate offices. Depreciation and amortization expenses decreased $0.2 million to $2.2 million for the three months ended September 30, 2000 from $2.4 million for the three months ended September 30, 1999, as a result of the sale of communities. Interest income increased $0.1 million due to the higher average cash invested during the three months ended September 30, 2000. Interest expense decreased $0.3 million to $2.2 million for the three months ended September 30, 2000 compared with $2.5 million for the three months ended September 30, 1999 due to our debt retirement program. This was offset by increases due to the refinancing in 2000. Interest expense consisted primarily of interest incurred on our remaining $16.8 million of 6-3/4%, convertible subordinated notes due 2006, a $7.0 million note due 2002 and mortgage interest on owned ALCs. Other income and expense increased $0.2 million primarily due to an operating loss generated by a skilled nursing facility. We do not consider the skilled nursing facility part of our operations, hence its loss is recorded in other income and expense. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1999 The following information concerning the operating results of the Company for the nine month period ended September 30, 2000 is presented in order to provide the reader with additional information concerning the Company's operations. Operating Results before Impairment For the Nine Months Ended September 30, 2000 and 1999 (Unaudited) (In millions)
SEPTEMBER 30, --------------------- INCREASE/ 2000 1999 (DECREASE) ------- ------- ---------- Revenue: Assisted living community revenue ......... $102.42 $103.30 (0.9)% Management fees from affiliates and others 0.60 0.77 (21.8)% ------- ------- ----- Total revenue ..................... 103.02 104.07 (1.0)% ------- ------- ----- Operating expenses: Assisted living community operating expense 65.81 64.35 2.3% Assisted living community lease expense ... 23.48 23.35 0.6% General and administrative ................ 8.37 11.06 (24.3)% Depreciation and amortization ............. 6.40 6.76 (5.4)% ------- ------- ----- Total operating expenses .......... 104.06 105.52 (1.4)% ------- ------- ----- Loss from operations before impairment ...... $ (1.04) $ (1.45) (28.3)% ======= ======= =====
Total revenue for the nine months ended September 30, 2000 decreased $1.1 million to $103.0 million from $104.1 million for the nine months ended September 30, 1999. This decrease was primarily due to: o a decrease in management fees from affiliates and others of $0.2 million from 1999 levels due to a decrease in management contracts; and o the sales of ALCs which were determined to be non-strategic; offset by 9 10 o increases in the average rate per occupied unit which went from $2,060 for the nine months ended September 30, 1999 to $2,149 for the nine months ended September 30, 2000; and o Higher occupancy rates of 85.7% for 2000 compared to 83.0% for 1999; and o an increase in assisted living penetration rate from 46.0% in 1999 to 46.3% for 2000. Assisted living expenses increased $1.4 million to $65.8 million for the nine months ended September 30, 2000, from $64.4 million for the nine months ended September 30, 1999. This increase was attributable to: o increase in payroll and food costs due to tighter labor markets and higher food prices; and o increases in marketing expense to update collateral advertising materials and support; and o the increase in assisted living community lease expense is primarily due to the opening of one leased ALC; offset by, o the sale of four and three communities in 1999 and 2000 respectively. General and administrative expenses decreased $2.7 million due to: o continuing efforts to reduce staff at our corporate office; and o reduction in legal expenses, recruiting, large severance and consulting costs; and o recovery from insurance of cost of proxy fight in the amount of $0.5 million. Depreciation and amortization expenses decreased $0.4 million to $6.4 million from $6.8 million for the nine months ended September 30, 2000 compared with September 30, 1999 due to the sale of ALCs. Interest income increased $0.5 million to $1.1 million for the nine months ended September 30, 2000 from $.6 million for the nine months ended September 30, 1999 due to larger average invested cash balances. Interest expense decreased $0.5 million to $6.0 million for the nine months ended September 30, 2000 compared with $6.6 million for the nine months ended September 30, 1999 due to the bond retirement offset by; the refinancing that was completed in June 1999 and, the new unsecured line of credit. Interest expense consisted primarily of interest incurred on our remaining $16.8 million of 6-3/4%, convertible subordinated notes due 2006, the unsecured line of credit interest as well as mortgage interest on Owned ALCs. LIQUIDITY AND CAPITAL RESOURCES Our unrestricted cash balances were $13.0 million and $14.6 million at September 30, 2000 and December 31, 1999, respectively. The small decrease was due primarily to cash used in operations. Working capital at September 30, 2000 was a negative $33.1 million due to the reclassification to current liabilities of loans due June 2001 which we are in the process of refinancing with 35-year loans. We have received commitments for two out of the nine loans. We are waiting on the approvals necessary to ensure the loans will be available on seven other communities. Since the company has not received final approvals on all communities, $41.3 million of loans have been reclassified as current liabilities. Without this classification the working capital would be $8.2 million compared to $6.9 million at December 31, 1999. Cash used by operating activities was $1.3 million for the nine months ended September 30, 2000, compared to $6.6 million used for the nine month period ended September 30, 1999. The primary components of cash used by operating activities for the nine-months ended September 30, 2000 were: o Net loss before extraordinary items for the nine months ended September 30, 2000 of $6.7 million; o Net increase in assets of $0.3 million; and o Net decrease of $1.1 million in liabilities; offset by o Discontinued operations generating $0.4 million in cash; and o Non-cash charges of $6.4 million for depreciation and amortization. 10 11 Cash used in investing activities was $2.6 million for the nine months ended September 30, 2000, compared to net cash used in investing activities of $5.8 million for the nine months ended September 30, 1999. The primary components of cash used in investing activities for the nine months ended September 30, 2000 were: o $3.6 million used for purchases of property, furniture and equipment; offset by o $0.5 million of proceeds from the sale of our interest in a partnership, and o $0.6 million for decreases in Leased ALCs security deposits. Net cash provided by financing activities was $2.3 million for the nine months ended September 30, 2000, compared to net cash provided by financing activities of $13.2 million for the nine months ended September 30, 1999. The primary components of cash provided by financing activities for the period ended September 30, 2000 were: o Debt proceeds of $11.2 million for the June 28, 2000 refinancing of an owned ALC; and o Debt proceeds of $7.0 million on the line of credit; offset by o $5.8 million for repayments of notes payable; and o $9.0 million for repayment of subordinated debt; and o $0.9 million for payment of loan fees on refinancings and new debt. The various debt and lease agreements contain restrictive covenants requiring us to maintain certain financial ratios, including current ratio, working capital, minimum net worth, and debt service coverage, among others. At June 30, 2000, we were not in compliance with the current ratio and debt service coverage ratio under certain debt and lease agreements. We have obtained waivers for those covenants with which we were not in compliance. Had we not obtained waivers we would have been in default on certain debt and lease agreements. We believe that our existing liquidity, our ability to sell ALCs and land sites which do not meet our financial objectives or geographic clustering strategy and our ability to refinance certain owned ALCs and investments will provide us with adequate resources to meet our current operating and investing needs. We do not currently generate sufficient cash from operations to fund recurring working capital requirements. And, we will be required from time to time to incur additional indebtedness or issue additional debt or equity securities to finance our strategy, including the development and rehabilitation of ALCs as well as other capital expenditures. We anticipate that we will be able to obtain the additional financing; however, we cannot assure you that we will be able to obtain financing on favorable terms. Pursuant to the terms of our development and property management agreements for certain tax credit partnerships, we have provided certain guarantees for the benefit of these partnerships. Among these guarantees are operating deficit, tax credit and financing guarantees. To the extent that the operations of certain tax credit partnerships do not improve prior to the maturity of the existing construction financing, we may be required to fund additional amounts under the terms of our financing guarantees. Management has established a provision for the estimated funding of obligations under our financing guarantees. Actual funding could differ from those estimates. IMPACT OF INFLATION AND CHANGING PRICES Operating revenue from ALCs we operate is the primary source of our revenue. These ALCs are affected by rental rates which are highly dependent upon market conditions and the competitive environments where the communities are located. Employee compensation is the principal cost element of property operations. Although we cannot assure you that we will be able to continue to do so, we have been able historically to offset the effects of inflation on salaries and other operating expenses by increasing rental and assisted living rates. However, the labor markets in which we operate communities are generally tight and we expect continued pressure on wage rates. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk related to fluctuations in interest rates on our notes payable. Currently, we do not utilize interest rate swaps. The purpose of the following analysis is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of September 30, 2000. You should be aware that many of the statements contained in this section are forward looking and should be read in conjunction with our disclosures under the heading "Factors Affecting Future Results and Forward-Looking Statements." For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not impact fair market value of the debt instrument, but 11 12 do affect our future earnings and cash flows. We do not have an obligation to prepay fixed-rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on the fixed-rate debt until we would be required to refinance such debt. Holding the variable rate debt balance constant, each one percentage point increase in interest rates would result in an increase in variable rate interest incurred for the coming year of approximately $273,000. The table below details the principal amount and the average interest rates of notes payable in each category based upon the maturity dates. The fair value estimates for notes payable are based upon future discounted cash flows of similar type notes or quoted market prices for similar loans. The carrying value of our variable rate debt approximates fair value due to the frequency of re-pricing of this debt. Our fixed-rate debt consists of convertible subordinated notes payable and mortgage payables. The fixed rate-debt bears interest at rates that approximate current market rates. MATURITY DATE - SEPTEMBER 30,
FAIR 2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE -------- ------- ------- ---- ---- ---------- ------- ------- (DOLLARS IN THOUSANDS) Fixed rate debt $41,648 $ 149 $ 162 $177 $192 $27,123 $69,451 $69,451 Average interest rate 8.5% 7.5% 7.5% 7.5% 7.4% 8.5% Variable rate debt $ 387 $7,755 $19,148 $ -- $ -- $ -- $27,290 $27,290 Average interest rate 11.0% 11.0% 11.9%
We do not believe that the future market rate risks related to the above securities will have a material adverse impact on our financial position, results of operations or liquidity. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. We are from time to time subject to lawsuits and other matters in the normal course of business. While we cannot predict the results with certainty, we do not believe that any liability from any such lawsuits or other matters will have a material effect on our financial position, results of operations, or liquidity. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None 12 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS 27 -- Financial Data Schedule (b) REPORTS ON FORM 8-K None 13 14 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARV ASSISTED LIVING, INC. By: /s/ Douglas M. Pasquale ---------------------------------- Douglas M. Pasquale President and Chief Executive Officer (Duly authorized officer) Date: November 14, 2000 By: /s/ Abdo H. Khoury ---------------------------------- Abdo H. Khoury Senior Vice President and Chief Financial Officer (Duly authorized officer) Date: November 14, 2000 14 15 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 27 Financial Data Schedule EX-27 2 a67231ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 13,049 0 0 0 0 23,950 121,931 11,217 170,233 57,027 54,706 0 0 145,512 (90,692) 170,233 0 103,021 0 104,064 (535) 0 6,037 (6,677) 28 (6,705) 0 21,168 0 14,463 (.84) (.84)
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