<PAGE> 1
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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, 1999
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 October 22, 1999, was 15,873,498.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 12,697 $ 11,885
Fees and rent receivables ................................ 1,587 1,469
Prepaids and other current assets ........................ 4,647 5,231
Properties held for sale, net ............................ 17,040 35,211
--------- ---------
Total current assets ............................. 35,971 53,796
Property, furniture and equipment, net ..................... 110,755 105,636
Goodwill, net .............................................. 19,577 23,169
Operating lease security deposits .......................... 12,326 5,764
Other non-current assets ................................... 20,076 17,092
--------- ---------
$ 198,705 $ 205,457
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 4,197 $ 5,220
Accrued liabilities ..................................... 10,767 11,644
Notes payable, current portion .......................... 7,401 21,669
Accrued interest payable ................................ 504 1,677
Net current liabilities from discontinued operations .... 2,769 1,895
--------- ---------
Total current liabilities ....................... 25,638 42,105
Notes payable, less current portion ........................ 126,941 88,175
Lease liabilities .......................................... 1,951 1,326
Other non-current liabilities .............................. 971 974
--------- ---------
155,501 132,580
--------- ---------
Commitments and contingent liabilities
Minority interest in majority owned entities ............... -- 7,190
--------- ---------
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized
10,000 shares, none issued and outstanding ............. -- --
Common stock, $0.01 par value. Authorized
100,000 shares; issued and outstanding
15,873 shares at September 30, 1999
and December 31, 1998 ................................. 142,806 143,178
Accumulated deficit ...................................... (99,602) (77,491)
--------- ---------
Total shareholders' equity ....................... 43,204 65,687
--------- ---------
$ 198,705 $ 205,457
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE> 3
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Assisted living community revenue:
Rental revenue $ 27,473 $ 28,029 $ 83,368 $ 75,104
Assisted living and other services 6,430 6,621 20,064 17,282
Management fees from others and affiliates 121 402 767 938
--------- --------- --------- ---------
Total revenue 34,024 35,052 104,199 93,324
--------- --------- --------- ---------
Operating expenses:
Assisted living community operating expense 21,488 22,387 64,650 58,572
Assisted living community lease expense 8,046 7,351 24,043 19,042
General and administrative 3,282 6,550 10,762 18,670
Impairment of long lived assets -- -- 7,722 --
Depreciation and amortization 2,411 2,635 6,769 6,689
--------- --------- --------- ---------
Total operating expenses 35,227 38,923 113,946 102,973
--------- --------- --------- ---------
Loss from operations (1,203) (3,871) (9,747) (9,649)
--------- --------- --------- ---------
Other income (expense):
Interest income 173 182 509 1,965
Other income (expense), net (48) 47 159 325
Interest expense (2,482) (1,654) (6,569) (4,563)
Litigation judgment 1,232 -- (4,368) --
--------- --------- --------- ---------
Total other expense (1,125) (1,425) (10,269) (2,273)
--------- --------- --------- ---------
Loss from continuing operations
before income taxes (2,328) (5,296) (20,016) (11,922)
Income tax expense -- 10 -- 52
--------- --------- --------- ---------
Loss before minority interest in
income of majority owned entities
and cumulative effect of change
in accounting principle (2,328) (5,306) (20,016) (11,974)
Minority interest in income of
majority owned entities (105) (301) (835) (1,094)
--------- --------- --------- ---------
Loss before cumulative effect of change in
accounting principle (2,433) (5,607) (20,851) (13,068)
Cumulative effect of change in accounting
principle, net of tax -- -- (1,260) --
--------- --------- --------- ---------
Net loss $ (2,433) $ (5,607) $ (22,111) $ (13,068)
========= ========= ========= =========
Basic loss per common share:
Loss before cumulative effect of change
in accounting principle $ (.15) $ (.35) $ (1.31) $ (.82)
Cumulative effect of change in accounting
principle, net of tax -- -- (.08) --
--------- --------- --------- ---------
Net loss $ (.15) $ (.35) $ (1.39) $ (.82)
========= ========= ========= =========
Weighted average common shares outstanding 15,873 15,881 15,873 15,871
========= ========= ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE> 4
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Net cash used in operating activities of continuing operations ....................... $ (7,491) $ (8,240)
Net cash provided by (used in) operating activities of discontinued operations ....... 874 (3,153)
--------- ---------
Net cash used in operating activities .................................... (6,617) (11,393)
--------- ---------
Cash flows used in investing activities:
Acquisition of Hillsdale Communities .............................................. -- (70,738)
Escrow deposits ................................................................... -- (4,400)
Increase in deferred project costs and other assets ............................... -- (604)
Proceeds from the sale of communities, net of cost ................................ 23,094 --
Purchase of previously leased communities ......................................... (14,693) --
Additions to property, furniture and equipment .................................... (6,315) (8,404)
Increase in leased property security deposits ..................................... (6,563) (522)
Cash contributed to joint venture ................................................. (1,345) --
Other ............................................................................. -- (1,063)
--------- ---------
Net cash used in investing activities .................................... (5,822) (85,731)
--------- ---------
Cash flows provided by (used in) financing activities:
Borrowings under notes payable for purchase of previously leased communities ...... 14,677 --
Interest rate lock fees paid in connection with refinancing ....................... -- (1,330)
Borrowing under refinancing for owned communities ................................. 41,819 --
Borrowings under notes payable .................................................... 2,496 4,350
Repayments of notes payable ....................................................... (35,866) (481)
Loan fees ......................................................................... (1,722) --
Distributions from majority owned entities ........................................ (8,153) (589)
Issuance of common stock, net of issuance costs ................................... -- 232
Issuance costs in connection with conversion of subordinated notes ................ -- (2,610)
--------- ---------
Net cash provided by (used in) financing activities ...................... 13,251 (428)
--------- ---------
Net (decrease) increase in cash and cash equivalents ..................... 812 (97,552)
Cash and cash equivalents at beginning of period ..................................... 11,885 102,776
--------- ---------
Cash and cash equivalents at end of period ........................................... $ 12,697 $ 5,224
========= =========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest .......................................................................... $ 7,742 $ 6,506
========= =========
Income taxes ...................................................................... $ -- $ 52
========= =========
Supplemental schedule of non-cash investing activities:
Assumption of debt in connection with Hillsdale acquisition ....................... $ -- $ 15,250
========= =========
Issuance of common stock .......................................................... $ -- $ 108
========= =========
Conversion of current liability to long-term debt ................................. $ 1,000 $ --
========= =========
Additional costs of private placement ............................................. $ 372 $ --
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE> 5
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(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 1999 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 1998, which is on file with the SEC.
The results of operation can vary during each quarter of the year. Therefore,
the results and trends in these interim financial statements may not be the same
as the results to be expected 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 to GAAP, we have made estimates
and assumptions that affect the following:
Reported amounts of assets and liabilities at the date of the financial
statements;
Disclosure of contingent assets and liabilities at the date of the
financial statement; and
Reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NEW PRONOUNCEMENTS
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities,"
which is effective for fiscal years beginning after December 15, 1998. The SOP
provides guidance on the financial reporting of start-up activities and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed when incurred and, upon adoption, the write
off as a cumulative effect of a change in accounting principle any previously
capitalized start-up or organizational costs. We adopted the provision of SOP
98-5 on January 1, 1999 and reported a charge of approximately $1.3 million for
the cumulative effect of this change in accounting principle. There was no
effect on income taxes related to the write-off.
The Financial Accounting Standards Board has also issued Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("SFAS 131"). This standard requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is regularly evaluated by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. We evaluate performance and make resource allocation
decisions on a
5
<PAGE> 6
community-by-community basis. Accordingly, each community is considered an
"operating segment" under SFAS 131. However, SFAS No. 131 did not have an impact
on the financial statements because the communities do not meet any of the
quantitative thresholds as described in SFAS 131 and therefore, are not required
to be disclosed as reportable segments.
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.
(2) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company has guaranteed indebtedness of certain affiliated partnerships as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Notes secured by real estate $73,474
Construction loans associated with the
development and construction of
affordable housing apartments $20,265
</TABLE>
We have guaranteed $93.7 million of loans in the event of fraud, material
misrepresentations, environmental impairment and certain loan covenants. We have
guaranteed tax credits for certain partnerships in the aggregate amount of $78.4
million, excluding interest, penalties or other charges which might be assessed
against the partners. 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 and we do not anticipate
any additional accruals.
In the past we provided standby letters of credit as security deposits with most
of our landlords. In December 1998, we provided cash security deposits in
exchange for the release of the standby letters of credit to our largest
landlord, Nationwide Health Properties, Inc. ("NHP"). For a period of time that
is extended on a month to month basis, NHP has granted a temporary reduction in
some of the security deposits. As of September 30, 1999 approximately $0.3
million remains of the temporarily reduced security deposit payable to NHP,
which we funded in the fourth quarter of 1999.
LITIGATION
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which the Company is the managing general
partner and a majority limited partner, filed actions in the Superior Court for
the State of California, County of Santa Clara, seeking declaratory judgments
against the landlords of the Retirement Inn of Campbell ("Campbell") and the
Retirement Inn of Sunnyvale ("Sunnyvale"). ARVP II leased the Campbell and
Sunnyvale assisted living communities under long-term leases. A dispute arose as
to the amount of rent due during the 10-year lease renewal periods, which
commenced in August 1995 for Campbell and March 1996 for Sunnyvale. Two other
communities leased by ARVP II, the Retirement Inn of Fremont and the Retirement
Inn at Burlingame, were owned by entities related to the entities that own the
Campbell and Sunnyvale communities. The parties mutually negotiated the terms of
a purchase agreement involving the sale of the landlord's fee interest in the
four communities to ARVPII and settlement of all claims. On March 2, 1999, ARVP
II obtained financing and purchased, through ARVPII, LLC, its wholly-owned
subsidiary, the landlord's interests in the four communities for approximately
$14.6 million, and the litigation was dismissed.
On April 24, 1998, Emeritus Corporation ("Emeritus") filed an action in the
Superior Court for the state of California, County of Orange, alleging that
share purchases on January 16, 1998 by Prometheus Assisted Living LLC
("Prometheus") triggered the Company's Shareholder Rights Agreement. On June 30,
1999, a trial judge issued a statement of decision against ARV and in favor of
Emeritus in the amount of $5.4 million. The $5.4 million in damages that were
awarded by the court and an estimate of appeal costs for $0.2 million was
recorded in other expense in the second quarter of 1999. On September 30, 1999,
ARV and Emeritus agreed to settle the action, providing for a cash payment of
$1.5 million and a note for $3.5 million as payment in full. The $3.5 million
note is secured by real property held for sale. Furthermore, the note carries an
incentive for early payment on a sliding scale providing that if the note is
paid by February 2000, Emeritus will accept a total of $4.3 million as the total
settlement payment. Because the note payable is non-interest bearing, a 12%
imputed interest discount was booked in litigation judgment expense in the
amount $0.6 million. No final judgment was entered and the lawsuit is expected
to be dismissed by the parties.
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<PAGE> 7
On May 12, 1998, we filed a lawsuit in the Superior Court for the State of
California, County of Orange, seeking to enjoin Kapson Senior Quarters Corp.
("Kapson"), a controlled affiliate of Lazard Freres Real Estate Investors LLC
("LFREI,") from acquiring Atria Communities ("Atria"), a then unaffiliated
competitor. Atria was also named as a defendant in the suit, as were three LFREI
representatives on our Board of Directors, Messrs. Kenneth M. Jacobs, Robert P.
Freeman and Murry N. Gunty. We alleged that LFREI was violating both its
contractual and fiduciary duties to ARV if it allowed Kapson to proceed with the
acquisition without first offering ARV the right to acquire Atria and then, if
we declined, obtaining our permission to consummate the acquisition of Atria. On
August 14, 1998, the Judge in the trial ruled from the bench against ARV and in
favor of all defendants on LFREI's motion for judgment on all of our causes of
action. And, on December 7, 1998, the Superior Court of the State of California,
County of Orange issued an order in favor of LFREI on LFREI's cross-complaint
against us, concluding that LFREI's standstill obligations under its
stockholders agreement with ARV terminated as of April 1998. Final judgment in
the action was entered on May 12, 1999. We filed a notice of appeal in July 1999
with the Superior Court for the State of California, County of Orange.
On December 18, 1998, Prometheus filed a lawsuit in the Delaware Chancery Court
against us and two of our former directors, Howard G. Phanstiel and John A.
Booty. The lawsuit sought a determination that our annual meeting of
stockholders held in June 1998 was in invalid because of an alleged failure to
reach a quorum and, accordingly, that the actions taken at that meeting were
invalid.
On September 29, 1999 LFREI agreed to settle these actions and accept a
promissory note for $1.5 million as full satisfaction of it's claims, $0.4
million of which has been reflected as additional private placement costs. This
note will bear interest beginning on April 1, 2001 at a rate equal to the 30 day
Treasury bill rate quoted by the Wall Street Journal. Interest payments will be
made on the first day of each month beginning on May 1, 2001 and continue until
maturity of the note on April 1, 2002. In the event of default, the note is
immediately due and payable and interest shall accrue at a rate that is 4% above
the interest rate otherwise in effect. Because the note payable is non-interest
bearing, a 12% imputed interest discount was booked in general and
administrative expense in the amount of $0.3 million. We have the right at any
time to prepay the Note in whole or in part. Any time prior to November 1, 1999
the prepayment price is equal to 91% of the aggregate principal balance. Such
prepayment price shall increase by 0.5% of the aggregate principal amount of the
Note on the 10th day of each month thereafter until April 1, 2002.
We are from time to time subject to claims and disputes for legal and other
matters in the normal course of business. While the results of such matters
cannot be predicted with certainty, management does not believe that the final
outcome of any pending matters will have a material effect on the Company's
consolidated financial position, results of operations, or liquidity.
(3) ACQUISITIONS
HILLSDALE COMMUNITIES
In 1998 we purchased interests in 11 ALCs, including a skilled nursing component
in one community, all located in California, for $83.5 million. The communities
acquired are as follows:
<TABLE>
<CAPTION>
DATE
COMMUNITY LOCATION UNITS ACQUIRED
- --------- -------- ----- --------------
OWNED
<S> <C> <C> <C>
Golden Creek Inn............................ Irvine, CA 123 April 16, 1998
Hillcrest Inn............................... Thousand Oaks, CA 137 April 16, 1998
Rossmore House.............................. Los Angeles, CA 157 May 4, 1998
The Berkshire............................... Berkley, CA 81 May 12, 1998
Encino Hills Terrace........................ Encino, CA 76 July 7, 1998
-----
Total owned............................. 574
-----
LEASED
Willow Glen Villa........................... San Jose, CA 188 May 18, 1998
Hillsdale Manor Retirement Center(a) ....... San Mateo, CA 159 July 2, 1998
-----
Total leased .......................... 347
-----
MANAGED
</TABLE>
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<PAGE> 8
<TABLE>
<CAPTION>
DATE
COMMUNITY LOCATION UNITS ACQUIRED
- --------- -------- ----- --------------
OWNED
<S> <C> <C> <C>
Sterling Court(b)........................... San Mateo, CA 149 April 16, 1998
Palo Alto Commons........................... Palo Alto, CA 143 April 16, 1998
San Carlos Retirement Center................ San Carlos, CA 85 April 16, 1998
The Altenheim............................... Oakland, CA 138 April 16, 1998
-----
Total managed........................... 515
-----
Total................................... 1,436
=====
</TABLE>
(a) Includes a skilled nursing center.
(b) In addition, we acquired a twenty percent (20%) general partnership
interest in WHW Associates, the fifty percent (50%) general partner of
Fifty Peninsula Partners, a California limited partnership, which owns
Sterling Court.
We accounted for the above transactions using the purchase method of accounting
and paid approximately $68.3 million of the purchase price from cash on hand and
assumed $15.25 million of existing mortgage financing.
The purchase price paid in excess of the fair market value of identifiable
assets for the acquired owned, leased and managed communities aggregated
approximately $23.6 million and is being amortized over the 35 year life of the
related assets. We sold the Rossmore House in June 1999 resulting in an
impairment loss of $5.7 million of which $3.1 million is related to the
associated goodwill.
CASA AMIGO PROPERTIES
On March 2, 1999, ARVP II obtained financing and, through ARVPII, LLC, its
wholly owned subsidiary, acquired the landlords' interests in four previously
leased ALCs for approximately $14.6 million. As a result of the refinancing of
11 owned properties in June 1999, this loan was paid in full.
(4) SALES OF ASSISTED LIVING COMMUNITIES
On March 18, 1999, we entered into purchase and sale agreements for the sale of
five owned ALCs located outside of California for approximately $32.3 million.
On March 30, 1999, we completed the sale of three of these five ALCs; of the
remaining facilities one sale was completed on June 3, 1999 and the remaining
ALC closed on October 1, 1999. As of December 31, 1998, these ALCs were included
in assets held for sale at their sales price, the resulting gain or loss was
insignificant during 1999.
(5) RELATED PARTY TRANSACTIONS
During the third quarter of 1999, we entered into a settlement agreement with
Prometheus Assisted Living LLC, an affiliate of Lazard Freres Real Estate
Investors LLC ("Lazard"), who hold 47.8% of the common stock of ARV. On
September 29, 1999, Prometheus agreed to accept a promissory note in the amount
of $1.5 million as settlement in full of all outstanding legal actions between
the parties. If ARV defaults on the promissory note, Lazard is entitled to $3.6
million under the terms of the settlement agreement for expenses and costs
related to the litigation and Prometheus' initial investment.
(6) SUBSEQUENT EVENTS
On October 25, 1999, we issued 467,875 shares of the Company's common stock to a
single bondholder in exchange for $3,743,000 principal amount of the Company's
6 3/4% convertible subordinated notes due 2006 that were held by that
stockholder. The shares issued in this transaction represented 125 shares for
each $1,000 principal amount of the notes that were exchanged, and constituted
less than 3% of the Company's outstanding shares of common stock as of September
30, 1999.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
Our business, results of operations and financial condition are subject to many
risks, including those set forth below. Certain statements contained in this
report, including without limitation statements containing the words "believes,"
"anticipates," "expects," and words of similar import constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance, or industry results, to be materially different from any
future results, performance, achievements or industry results expressed or
implied by such forward-looking statements. This 10-Q report contains
forward-looking statements, including statements regarding, among other items:
- - Our business strategy;
- - Our liquidity requirements and ability to obtain financing;
- - The impact of future acquisitions and developments;
- - The anticipated sale of one ALC during the forth quarter of 1999;
- - The level of future capital expenditures;
- - The impact of inflation and changing interest rates;
- - The outcome of certain litigation matters; and
- - The impact of Year 2000 issues.
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:
- - Access to capital necessary for acquisitions and development;
- - Our ability to manage growth and divestitures;
- - Governmental regulations; (including Medicare and Medicaid payment
levels) and
- - Competition and 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 assurance that events anticipated by
forward-looking statements will transpire as expected.
OVERVIEW
As of September 30, 1999, we operated 58 assisted living communities ("ALCs")
containing 7,167 units, including 35 ALCs that we leased by us pursuant to
long-term operating leases ("Leased ALCs"); 16 communities that we own for our
own account ("Owned ALCs"); and, 7 communities that are managed for unrelated
parties ("Managed ALCs"). As of September 30, 1999, we were in various stages of
construction on 4 ALCs with an anticipated total of 528 units. During 1998, we
acquired interests in 11 ALCs and one skilled nursing facility from Hillsdale
Group, LP and its affiliates, and opened 7 newly constructed ALCs. The Hillsdale
transaction substantially increased our presence in Northern and Southern
California.
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, 1999, a substantial portion of our business and operations was
conducted in California, where 40 of the 58 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 December 1998, our Board of
Directors decided to sell five owned ALCs and five land sites located outside of
California. On March 30, 1999 we completed the sales of three of the five ALCs,
on June 3, 1999 we completed the sale of an additional ALC and on October 1,
1999, we completed the sale of the remaining ALC. In October 1999 we also
completed the sale of two of the land sites.
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<PAGE> 10
On June 28, 1999, we refinanced 11 properties held by various partnerships that
had under-leveraged assets through Banc One. As the general partner of the
partnerships we distributed most of the contributed capital from the refinancing
to the limited partners and enhanced our liquidity position in the partnerships.
The term of the loans is two years with a lender optional 10 year extension and
a 25 year amortization schedule for repayment of principal, fixed interest rate
of 9.15% and a 2% structuring fee for Banc One that is amortized over two years.
Proceeds from this refinancing were distributed to the limited partners in early
July 1999. Management intends to use the Company's portion of the cash to fund
ongoing operations.
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 the commencement of operations. Accordingly,
we will require a substantial amount 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, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998
The following information concerning the operating results for the three-month
period ended September 30, 1999 and September 30, 1998 is presented in order to
provide the reader with additional information concerning the Company's
operations.
Operating Results
For the Three Months Ended September 30, 1999 and 1998
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Revenue:
Assisted living community revenue:
Rental revenue $ 27.5 $ 28.0
Assisted living and other services 6.5 7.0
------- -------
Total revenue 34.0 35.0
------- -------
Operating expenses:
Assisted living community operating expense 21.5 22.4
Assisted living community lease expense 8.1 7.3
General and administrative expenses 3.2 6.6
Depreciation and amortization 2.4 2.6
------- -------
Total operating expenses 35.2 38.9
------- -------
Loss from operations $ (1.2) $ (3.9)
======= =======
</TABLE>
Total revenue for the three months ended September 30, 1999 decreased $1.0
million to $34 million from $35 million for the three months ended September 30,
1998. This decrease was primarily due to the sales of ALCs throughout 1999 as
described in the "overview" above and in the following paragraph regarding ALC
rental revenue.
Assisted living community rental revenue decreased $0.5 million to $27.5 million
for the three months ended September 30, 1999 from $28.0 million for the three
months ended September 30, 1998.
The decrease in assisted living community revenue is attributable to the
following:
- - The sale during 1999 of four ALCs which were determined to be
non-strategic. As of September 30, 1999, we operated 51 ALCs for our own
account consisting of 35 Leased ALCs and 16 Owned ALCs. For the three
months ended September 30, 1998, we operated a total of 56 ALCs for our
own account consisting of 37 Leased ALCs and 19 Owned ALCs. This
reduction was in ALC's revenue was partially offset by:
- - An increase in average rate per occupied unit for ALCs, which we owned
and leased in both periods, to $2,241 for the third quarter of 1999 as
compared to $2,148 for the third quarter of 1998.
10
<PAGE> 11
Management fees from affiliates and others decreased $0.3 million from the third
quarter of 1998 due to the loss of management contracts during 1999.
Assisted living community operating expenses decreased $0.9 million to $21.5
million for the three months ended September 30, 1999 from $22.4 million for the
three months ended September 30, 1998. The majority of the decrease is due to
the sales of the ALCs offset somewhat by higher operating expenses for
personnel. The increase in the assisted living lease expense is related to the
additional leased ALCs we operated during the three months ended September 30,
1999 when compared to September 30, 1998.
General and administrative expenses decreased $3.4 million to $3.2 million for
the three months ended September 30, 1999 from $6.6 million for the three months
ended September 30, 1998. The decrease in general and administrative expense is
a result of a decrease in legal fees, a discount of $0.3 million for the
settlement of a law suit and management's continued efforts to reduce staff at
our corporate offices.
Depreciation and amortization expenses decreased $0.2 million to $2.4 million
for the three months ended September 30, 1999 from $2.6 million for the three
months ended September 30, 1998. The decrease represents the sale of four ALCs
offset somewhat by the purchase of four previously leased communities and the
amortization of lost management contracts.
Interest income remained at $0.2 million for September 30, 1998 and 1999.
Interest expense increased $0.8 million to $2.5 million for the three months
ended September 30, 1999 compared with $1.7 million for the three months ended
September 30, 1998. due primarily to additional debt incurred in connection with
acquiring four ALCs and refinancing 11 owned properties. Interest expense
consisted primarily of interest incurred on our $57.5 million of 6-3/4%;
convertible subordinated notes due 2006, as well as mortgage interest on owned
ALCs.
On April 24, 1998, Emeritus Corporation ("Emeritus") filed an action in the
Superior Court for the state of California, County of Orange, alleging that
share purchases on January 16, 1998 by Prometheus Assisted Living LLC
("Prometheus") triggered the Company's Shareholder Rights Agreement. On June 30,
1999, a trial judge issued a statement of decision against ARV and in favor of
Emeritus. The court awarded damages in the amount of $5.4 million and an
estimate of appeal costs for $0.2 million was recorded in other expense in the
second quarter of 1999. On September 30, 1999, ARV and Emeritus agreed to settle
the action, providing for a cash payment of $1.5 million and a note for $3.5
million as payment in full. The $3.5 million note is secured by real property
held for sale. Furthermore, the note carries an incentive for early payment on a
sliding scale providing that if the note is paid by February 2000, Emeritus will
accept a total of $4.3 million as the total settlement payment. Because the note
payable is non-interest bearing a 12% imputed interest discount was booked in
litigation judgement expense in the amount $0.6 million. No final judgement was
entered and the lawsuit is expected to be dismissed by the parties.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
The following information concerning the operating results before impairment of
the Company for the nine-month period ended September 30, 1999 is presented in
order to provide the reader with additional information concerning the Company's
operations.
11
<PAGE> 12
Operating Results before Impairment
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
------- -------
<S> <C> <C>
Revenue:
Assisted living community revenue:
Rental revenue $ 83.4 $ 75.1
Assisted living and other services 20.8 18.2
------- -------
Total revenue 104.2 93.3
------- -------
Operating expenses:
Assisted living community operating expense 64.7 58.6
Assisted living community lease expense 24.0 19.0
General and administrative expenses 10.8 18.7
Depreciation and amortization 6.8 6.7
------- -------
Total operating expenses 106.3 103.0
------- -------
Loss from operations before impairment $ (2.1) $ (9.7)
======= =======
</TABLE>
Total revenue for the nine months ended September 30, 1999 increased $10.9
million to $104.2 million from $93.3 million for the nine months ended September
30, 1998. This increase was primarily due to an increase in assisted living
community revenue from:
- - The acquisition of seven ALCs during the second and third quarters of
1998 and opening of five leased ALCs during 1998;
- - Increases in the average rate per occupied unit went from $1,848 for
1998 to $2,081 for 1999;
- - Offset somewhat by slightly lower occupancy rate of 83.8% for 1999
compared to 87.4% for 1998; and
- - Management fees from affiliates and others decreased ($0.1 million) from
1998 levels due to a decrease in the number of management contracts.
Assisted living expenses increased $11.1 million to $88.7 million for the nine
months ended September 30, 1999, from $77.6 million for the nine months ended
September 30, 1998. Of these increases, $6.1 million of ALC operating expense
and $5.0 million of lease expense relate to the additional number of owned and
leased ALCs we operated during the nine months ended September 30, 1999, as
follows:
- - The acquisition of seven ALCs during the second and third quarters of
1998, offset somewhat by the sale of three communities in March 1999
and, the sale of one ALC in June 1999;
- - Four ALCs are in the "lease up" stage generating $4.4 million in
additional operating expenses with occupancies in the 50% range;
- - Additional staffing was added to support the additional assisted living
services and salaries for the professional assisted living staff were
increased; and
- - The increase in assisted living community lease expense is primarily due
to the acquisition of two leased ALCs and the opening of five leased
ALCs.
General and administrative expenses decreased $7.9 million due to:
- - Continuing efforts to reduce staff at our corporate office;
- - A discount of $0.3 million in the settlement of a lawsuit; and
- - The decrease in proxy fight, legal expenses, recruiting, severance and
consulting costs incurred through September 30, 1998.
Depreciation and amortization expenses increased $0.1 million to $6.8 million
for the nine months ended September 30, 1999 from $6.7 million for the nine
months ended September 30, 1998. The increase was due to the acquisition of four
previously leased ALCs and additional capital expenditures offset by the sale of
four ALCs during various quarters of 1999.
Interest income decreased $1.5 million to $0.5 million for the nine months ended
September 30, 1999 from $2.0 million for the nine months ended September 30,
1998 due to the use of cash to purchase eleven ALCs from the Hillsdale Group in
1998.
Interest expense increased $2.0 million to $6.6 million for the nine months
ended September 30, 1999 compared with $4.6 million for the nine months ended
September 30, 1998 due to the acquisition of two ALC's, and acquisition of four
other ALCs previously leased
12
<PAGE> 13
by the company in the first quarter of 1999 and the refinancing of 9 ALCs in
the second quarter of 1999. Interest expense consisted primarily of interest
incurred on our $57.5 million of 6-3/4%; convertible subordinated notes due 2006
as well as mortgage interest on Owned ALCs.
LIQUIDITY AND CAPITAL RESOURCES
Our unrestricted cash balances were $12.7 million and $11.9 million at September
30, 1999 and December 31, 1998, respectively. The increase was due to cash
provided by financing activities of $13.2 million; reduced by, cash used in
investing activities of $5.8 million and cash used in operating activities of
$6.7 million.
Working capital decreased $1.4 million to $10.3 million as of September 30, 1999
compared to working capital of $11.7 million at December 31, 1998.
Cash used by operating activities was $6.7 million for the nine months ended
September 30, 1999, compared to $11.4 million used for the nine month period
ended September 30, 1998. The primary components of cash used by operating
activities for the nine months ended September 30, 1999 were:
- - Net loss for the nine months ended September 30, 1999 of $22.1 million;
offset by
- - Discontinued operations with the sale of six apartment partnership
interests generating $1.1 million in cash; offset by $0.2 million used
in operations;
- - Non-cash charges of $6.8 million for depreciation and amortization; $1.3
million for cumulative effect of change in accounting principal; $7.7
million for impairment losses;
- - Payment of interest on convertible subordinated notes of $1.9 million;
and
- - Net decrease of $0.7 million in liabilities.
Cash used in investing activities was $5.8 million for the nine months ended
September 30, 1999, compared to net cash used in investing activities of $85.7
million for the nine months ended September 30, 1998. The primary components of
cash used in investing activities for the nine months ended September 30, 1999
were:
- - $23.1 million of proceeds from the sale of four ALCs in 1999; offset by
- - $14.7 million used for purchase of previously leased communities in
first quarter 1999;
- - $6.3 million used for purchases of property, furniture and equipment;
- - $6.6 million for increases in Leased ALCs security deposits; and
- - $1.3 million for cash contributed to a joint venture in first quarter
1999.
Net cash provided by financing activities was $13.3 million for the nine months
ended September 30, 1999, compared to net cash used by financing activities of
$0.4 million for the nine months ended September 30, 1998. The primary
components of cash provided by financing activities for the period ended
September 30, 1999 were:
- - Debt proceeds of $ 41.8 million for the June 28, 1999 Banc One
refinancing on 9 owned ALCs;
- - Note payable to Emeritus of $2.9 million as part of the settlement;
- - Debt proceeds of $14.7 million on the bridge financing for the
acquisition of three ALCs in the first quarter of 1999 offset by;
- - Repayment of notes of $35.9 million;
- - Loan fees and closing costs of $1.7 million;
- - Distribution to limited partners for $8.2 million;
- - Additional private placement costs of $0.4 million for the Lazard
settlement.
The various debt and lease agreements contain restrictive covenants requiring us
to maintain certain financial ratios, including current ratio, working capital,
minimum net worth, debt-to-equity and debt service coverage, among others. At
September 30, 1999, we were not in compliance with the current ratio, tangible
net worth, debt service coverage and facility coverage ratio under certain lease
agreements. We have obtained waivers for those covenants with which we were not
in compliance through September 30, 1999. If the waivers for non-compliance had
not been obtained, then we would be in default under certain lease agreements.
13
<PAGE> 14
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. Currently,
we do not generate sufficient cash from operations to fund recurring working
capital requirements. In addition, we anticipate that 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. The Company anticipates that we
will be able to obtain the additional financing; however, there can be no
assurances that the Company will be able to obtain such financing on favorable
terms.
Pursuant to the terms of the Company's 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 its financing guarantees. Management has
established a provision for the estimated funding of obligations under its
financing guarantees. Actual funding could differ from those estimates.
YEAR 2000 ISSUE
We use certain computer programs that were written using two digits rather than
four to define the year. As a result, those programs may recognize a date using
"00" as the year 1900 rather than the year 2000. In the event this occurs with
any of the Company's computer programs, a system failure or miscalculation
causing disruptions of operations could occur. Such a failure could cause the
temporary inability to process transactions, send invoices or engage in similar
normal business activities. We have developed a comprehensive program to test
and modify our information technology to address the Year 2000 issue. We believe
that our program is on schedule for completion by the end of 1999, and that
there will be no material impact on our business, results of operations,
financial position or liquidity as a result of Year 2000 issues.
Our program is focused on the following three main projects:
- - Information technology infrastructure; all hardware and software systems
- - Community maintenance; community specific systems, including alarms
(security, fire and emergency call), elevator, phone, HVAC, and other
systems; and
- - Third-party supplier/vendors.
For each of the above components, we have addressed or are addressing the Year
2000 issues in the following six phases:
- - Conducted inventory of systems with potential Year 2000 issues;
- - Assigned priorities to systems identified with Year 2000 issues;
- - Assessed items which may have a material effect on our operations;
- - Testing items assessed as material;
- - Replacing or repairing material non-compliant items, and;
- - Designing and implementing business continuation plans.
We have received communications from third-party providers of our administrative
services, as well as our significant suppliers of services and products to
determine the extent to which we are vulnerable to those parties' failures to
remediate their own Year 2000 issues. We do not presently believe that
third-party Year 2000 issues will have a material adverse effect on us. However,
there can be no guarantee that the systems of other companies on which our
operations or systems rely will be remedied on a timely basis or that a failure
by another company to remediate its systems in a timely manner would not have a
material adverse effect on us.
We have completed our conversion to an accounting system that is Year 2000
compliant. In addition, we have completed an assessment of our computer systems
and software and have substantially completed necessary modifications or
replacements to existing hardware and software and believe Year 2000 issues
should not have a material adverse effect on our operations. Testing and live
use has taken place and will continue throughout the remainder of 1999. Any
additional modifications found necessary will be made during the fourth quarter
of 1999.
We have developed the following contingency plans to cover potential business
disruptions:
14
<PAGE> 15
- - check processing - manual processing procedures have been set up and
manual checks are on hand at our offices.
- - food supplies for communities - in addition to the normal food supplies
typically at the communities we will have an additional week of
non-perishable food at the communities.
- - water supplies - supplies will be increased to include an extra 72 hours
of water over and above the state licensing requirements.
- - medication supplies - for those clients whose medications are managed by
the Company, we will attempt to have a 30-day supply of prescriptions at
the communities. In addition, we will also have a second pharmacy
available as a backup.
- - cold weather contingency - in the event of a heat outage, supplies of
blankets have been increased.
- - waste disposal - alternate means of disposal have been arranged.
In addition to the above contingency plans we have completed Year 2000 awareness
classes at all communities for both the residents and employees. Emergency plans
have been updated to include Year 2000 issues and we are holding drills and
training for all employees. The total cost our Year 2000 plan is difficult to
estimate due to the use of employees to perform additional tasks but we estimate
the direct cost to be in the $0.5-$1.0 million range. Many of the costs are in
replacement of computer systems that have been capitalized in fixed assets.
Facilities, including fire and life safety, phone systems, air conditioning and
heating, elevators and other building systems are in the process of being tested
per the manufacturers' instructions. If the manufacturer is unable to provide
testing instructions, we are in the process of seeking a letter of Year 2000
compliance from the manufacturer.
We expect to successfully implement any other additional changes necessary to
address our Year 2000 issues, and do not believe that the cost of such actions
will have a material adverse effect on our financial position, results of
operations or liquidity.
We believe that our Year 2000 program has been substantially completed. Our
program is based on a number of factors and assumptions including the accuracy
and completeness of responses to our inquiries. Our Year 2000 plan could be
adversely impacted if any of the factors and assumptions are incorrect. The
failure to correct a material Year 2000 issue could result in an interruption in
our normal business operations.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALCs and management fees from apartment communities we
operated are the primary sources of our revenue. The financial performance of
these properties is affected by rental rates, which are highly dependent upon
market conditions and the competitive environment where the facilities are
located. Employee compensation is the principal cost element of property
operations. Historically, we have offset the effects of inflation on salaries
and other operating expenses by increasing rental and assisted living rates,
although there can be no assurance that this trend will continue. The
implementation of price increases is intended to lead to an increase in revenue;
however, rental rate increases may result in an initial decline in occupancy
and/or a delay in increasing occupancy. If this occurs, revenues may remain
constant or even decline.
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, 1999. Many of the
statements contained in this section are forward looking and should be read in
conjunction with our disclosures under the heading "Forward-Looking Statements."
For fixed rate debt, changes in interest rates generally affect the fair 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 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 finance 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 $260,000.
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
15
<PAGE> 16
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,
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
------- ------- ------ ------- ------ ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 6,794 45,008 $ -- $ -- -- $57,500 $109,302 $109,302
Average interest rate 9.1% 9.2% 6.75%
Variable rate debt $ 608 $ 620 $2,147 $18,393 $4,291 $ -- $ 26,059 $ 26,059
Average interest rate 8.3% 8.3% 8.3% 8.3% 8.1%
</TABLE>
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.
A lawsuit was filed on April 24, 1998, in the Superior Court of California,
County of Orange, alleging that share purchases on January 16, 1998, by
Prometheus Assisted Living LLC, triggered the Company's Shareholder Rights
Agreement. On June 30, 1999, the trial judge issued a statement of decision
against ARV and in favor of Emeritus in the amount of $5.4 million. This lawsuit
accrual was recorded in other expense. On September 29, 1999, Emeritus agreed to
settle the action providing for a cash payment of $1.5 million and a note for
$3.5 million as payment in full. Furthermore, if the note is paid by February
2000, Emeritus has agreed to accept a total of $4.3 million as the total
settlement payment. Since the note payable is non-interest bearing a 12% imputed
interest discount was booked in litigation judgement expense for $0.6 million.
No final judgment was entered and the lawsuit is expected to be dismissed.
On May 12, 1998, we filed a lawsuit in the Superior Court for the State of
California, County of Orange, seeking to enjoin Kapson Senior Quarters Corp.
("Kapson"), a controlled affiliate of Lazard Freres Real Estate Investors LLC
("LFREI,") from acquiring Atria Communities ("Atria"), a then unaffiliated
competitor. Atria was also named as a defendant in the suit, as were three LFREI
representatives on our Board of Directors, Messrs. Kenneth M. Jacobs, Robert P.
Freeman and Murry N. Gunty. We alleged that LFREI was violating both its
contractual and fiduciary duties to ARV if it allowed Kapson to proceed with the
acquisition without first offering ARV the right to acquire Atria and then, if
we declined, obtaining our permission to consummate the acquisition of Atria. On
August 14, 1998, the Judge in the trial ruled from the bench against ARV and in
favor of all defendants on LFREI's motion for judgment on all of our causes of
action. And, on December 7, 1998, the Superior Court of the State of California,
County of Orange issued an order in favor of LFREI on LFREI's cross-complaint
against us, concluding that LFREI's standstill obligations under its
stockholders agreement with ARV terminated as of April 1998. Final judgment in
the action was entered on May 12, 1999. We filed a notice of appeal in July 1999
with the Superior Court for the State of California, County of Orange.
On December 18, 1998, Prometheus filed a lawsuit in the Delaware Chancery Court
against us and two of our former directors, Howard G. Phanstiel and John A.
Booty. The lawsuit sought a determination that our annual meeting of
stockholders held in June 1998 was in invalid because of an alleged failure to
reach a quorum and, accordingly, that the actions taken at that meeting were
invalid.
On September 29, 1999 LFREI agreed to settle these actions and accept a
promissory note for $1.5 million as full satisfaction of its claims, $0.4
million of which has been reflected as additional private placement costs. This
note will bear interest beginning on April 1, 2001 at a rate equal to the 30 day
Treasury bill rate quoted by the Wall Street Journal. Interest payments will be
made on the first day of each month beginning on May 1, 2001 and continue until
maturity of the note on April 1, 2002. In the event of default, the note is
immediately due and payable and interest shall accrue at a rate that is 4% above
the interest rate otherwise in effect. Because the note payable is non-interest
bearing, a 12% imputed interest discount was booked in general and
administrative expense in the amount of $0.3 million. We have the right at any
time to prepay the Note in whole or in part. Any time prior to November 1, 1999
the prepayment price is equal to 91% of the aggregate principal balance. Such
16
<PAGE> 17
prepayment price shall increase by 0.5% of the aggregate principal amount of the
Note on the 10th day of each month thereafter until April 1, 2002.
The agreement settled all outstanding litigation between us and LFREI and
provided mutual release of certain claims that we and Prometheus may have had
against each other. Pursuant to the settlement agreement, we withdrew our appeal
of the decision issued on May 12, 1999 by the Superior Court of the State of
California, County of Orange. Prometheus dismissed the lawsuit it filed against
us and two of our former directors in the Delaware Chancery Court. As part of
the settlement agreement, the board of directors was reduced to five persons.
Murry N. Gunty, John A. Booty and Robert P. Freeman resigned from the board.
The Company is from time to time subject to claims and disputes for legal and
other matters in the normal course of business. While the results of such
matters cannot be predicted with certainty, management does not believe that the
final outcome of any pending matters will have a material effect on the
Company's consolidated financial position, results of operations, or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
Report on form 8-K issued on September 30, 1999 relating to the settlement
between ARV Assisted Living, Inc. and Prometheus Assisted Living LLC, an
affiliate of Lazard Freres Real Estate Investors LLC.
Report on form 8-K issued on September 30, 1999 relating to the settlement
between ARV Assisted Living, Inc. and Emeritus Corporation.
17
<PAGE> 18
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 12, 1999
By: /s/ Abdo H. Khoury
----------------------------------------
Abdo H. Khoury
Senior Vice President and Chief
Financial Officer
(Principle Financial Officer)
Date: November 12, 1999
18
<PAGE> 19
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,697
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,971
<PP&E> 126,319
<DEPRECIATION> 15,564
<TOTAL-ASSETS> 198,705
<CURRENT-LIABILITIES> 25,638
<BONDS> 126,941
0
0
<COMMON> 142,806
<OTHER-SE> (99,602)
<TOTAL-LIABILITY-AND-EQUITY> 198,705
<SALES> 0
<TOTAL-REVENUES> 34,024
<CGS> 0
<TOTAL-COSTS> 35,227
<OTHER-EXPENSES> (1,125)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,482
<INCOME-PRETAX> (2,433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,433)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
