<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 MARCH 31, 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 May 11, 1999 was 15,873,498.
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<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>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 13,099 $ 11,885
Fees receivable and other amounts due from affiliates .. 1,084 757
Prepaids and other current assets ...................... 5,022 5,857
Properties held for sale, net .......................... 13,952 35,211
--------- ---------
Total current assets ........................... 33,157 53,710
Property, furniture and equipment, net ................... 119,107 105,679
Goodwill, net ............................................ 22,996 23,165
Operating lease security deposits ........................ 11,834 5,219
Other non-current assets ................................. 18,714 17,586
--------- ---------
$ 205,808 $ 205,359
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 2,873 $ 5,142
Accrued liabilities .................................... 14,032 11,644
Notes payable, current portion ......................... 12,194 21,669
Accrued interest payable ............................... 366 1,677
Net current liabilities from discontinued operations ... 2,167 1,895
--------- ---------
Total current liabilities ...................... 31,632 42,027
Lease liabilities ........................................ 1,701 1,346
Deferred revenue, less current portion ................... 898 934
Notes payable, less current portion ...................... 102,515 88,175
--------- ---------
136,746 132,482
--------- ---------
Commitments and contingent liabilities
Minority interest in majority owned entities ............. 7,409 7,190
--------- ---------
Series A preferred stock, convertible and redeemable;
2,000 shares authorized, none issued or
outstanding at March 31, 1999 and
December 31, 1998 ...................................... -- --
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
15,873 shares at March 31, 1999
and December 31, 1998 ............................... 143,178 143,178
Accumulated deficit .................................... (81,526) (77,491)
--------- ---------
Total shareholders' equity ..................... 61,653 65,687
--------- ---------
$ 205,808 $ 205,359
========= =========
</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 ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue:
Assisted living community revenue:
Rental revenue ..................................... $ 28,623 $ 22,158
Assisted living and other services ................. 6,900 4,980
Management fees from others ........................ 47 --
Management fees from affiliates .................... 237 189
-------- --------
Total revenue ....................... 35,807 27,327
-------- --------
Operating expenses:
Assisted living community operating expense .......... 21,855 16,670
Assisted living community lease expense .............. 8,075 5,635
General and administrative ........................... 4,112 5,874
Depreciation and amortization ........................ 2,258 1,815
-------- --------
Total operating expenses ........... 36,300 29,994
-------- --------
Loss from operations ................................... (493) (2,667)
-------- --------
Other income (expense):
Interest income ...................................... 102 1,256
Other income, net .................................... 54 71
Interest expense ..................................... (2,023) (1,284)
-------- --------
Total other income (expense) ....... (1,867) 43
-------- --------
Loss before income taxes ............................... (2,360) (2,624)
Income tax expense ..................................... -- 5
-------- --------
Loss before minority interest in income of majority
owned entities and cumulative effect of change in
accounting principle .................................. (2,360) (2,629)
Minority interest in income of majority owned entities.. 415 385
-------- --------
Loss before cumulative effect of change in accounting
principle ............................................. (2,775) (3,014)
Cumulative effect of change in accounting principle .... (1,260) --
-------- --------
Net loss ....................................... $ (4,035) $ (3,014)
======== ========
Basic and diluted loss per common share:
Loss before cumulative effect of change in accounting
principle ............................................ $ (0.17) $ (0.19)
Cumulative effect of change in accounting principle ... (0.08) --
-------- --------
Net loss ....................................... $ (0.25) $ (0.19)
======== ========
Weighted average common shares outstanding ............. 15,873 15,855
======== ========
</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
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- ---------
<S> <C> <C>
Net cash used in operating activities of continuing
operations ................................................. $ (2,088) $ (3,527)
Net cash provided by (used in) operating activities of
discontinued operations .................................... 272 (1,928)
-------- ---------
Net cash used in operating activities ................. (1,816) (5,455)
-------- ---------
Cash flows used in investing activities:
Proceeds from the sale of communities, net of cost ......... 21,260 (85)
Purchase of previously leased communities .................. (14,636)
Additions to property, furniture and equipment ............. (2,205) (2,833)
Increase in leased property security deposits .............. (4,582) (10)
Escrow deposit for purchase of communities ................. -- (14,000)
Cash contributed to joint venture .......................... (1,248) --
Other ...................................................... (16) (568)
-------- ---------
Net cash used in investing activities ................. (1,427) (17,496)
-------- ---------
Cash flows provided by (used in) financing activities:
Borrowings under notes payable for purchase of previously
leased communities ........................................ 14,678 --
Repayments of notes payable ................................ (9,813) (141)
Distributions from majority owned entities ................. (195) --
Issuance of common stock, net of issuance costs ............ -- 52
Issuance costs in connection with conversion of subordinated
notes .................................................... -- (2,610)
Other ...................................................... (213) --
-------- ---------
Net cash provided by (used in) financing activities ... 4,457 (2,699)
-------- ---------
Net (decrease) increase in cash and cash equivalents .. 1,214 (25,650)
Cash and cash equivalents at beginning of period ............. 11,885 102,776
-------- ---------
Cash and cash equivalents at end of period ................... $ 13,099 $ 77,126
======== =========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ................................................... $ 3,429 $ 2,690
======== =========
Income taxes ............................................... $ -- $ 5
======== =========
Supplemental schedule of non-cash investing activities:
Accrual of operating lease security deposit obligations .... $ 2,033 $ --
======== =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE> 5
ARV ASSISTED LIVING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 those for the full year.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its 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.
RECENT ACCOUNTING DEVELOPMENTS
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") No. 98-5, "Reporting on the Costs of Start-up Activities,"
which is effective for fiscal years beginning after December 15, 1998. The SOP
provides guidance on the financial reporting of start-up activities and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed when incurred and, upon adoption, the
write-off as a cumulative effect of a change in accounting principle of any
previously capitalized start-up or organizational costs. We adopted the
provisions of SOP 98-5 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 community-by-community basis. Accordingly, each community is
considered an "operating segment" under SFAS 131. However,
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<PAGE> 6
SFAS 131 did not have an impact on the financial statements because the
communities have similar economic characteristics, as defined by SFAS 131, and
meet the criteria for aggregation into one "reportable segment."
LOSS PER SHARE
Basic earnings 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
3,883,693 and 4,525,699 shares of common stock for the three-month periods ended
March 31, 1999 and 1998, respectively.
(2) COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
We guarantee indebtedness of certain affiliated partnerships as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Notes secured by real estate $20,264
Construction loans associated with the
development and construction of
affordable housing apartments secured
by real estate $32,973
</TABLE>
The maximum aggregate amount of guaranteed indebtedness is $55.5 million at
March 31, 1999. 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 nor are any additional accruals anticipated.
In the past we provided standby letters of credit as security deposits with most
of our landlords. In December 1998, we provided cash 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 totaling approximately $1.8 million. As of March 31, 1999, we have
recorded as a liability for all obligations related to the temporarily reduced
security deposits. We anticipate funding the temporary reduction during 1999.
LITIGATION
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which we are the managing general partner and
a majority limited partner, filed lawsuits in the Superior Court for the State
of California, County of Santa Clara, seeking declaratory judgment 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 ("ALCs") 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 ALCs leased by
ARVP II, the Retirement Inn of Fremont and the Retirement Inn at Burlingame are
owned by entities, which are related to the entities that own the Campbell and
Sunnyvale ALCs. The parties have mutually negotiated the terms of a purchase
agreement involving the sale of the landlord's fee interest in the four ALCs to
ARVP II and settlement of all claims. On March 2, 1999, ARVP II obtained
financing and purchased, through its wholly owned subsidiary, ARVP II, LLC, the
landlords' interests in four ALCs for approximately $14.6 million, and the
litigation has been dismissed.
On April 24, 1998, we were served with a lawsuit by Emeritus Corporation
("Emeritus"), which was filed in the Superior Court of California, County of
Orange, alleging that share purchases on January 16, 1998 by Prometheus Assisted
Living LLC triggered our Shareholder Rights Agreement. Emeritus contends that
due to the alleged triggering event we are required to distribute one right per
share of outstanding Company stock and that each right is exercisable for
approximately 9.56 shares at a total purchase price of $70 (or approximately
$7.32 per share). We believe that Emeritus' claims are meritless and we are
contesting them vigorously.
6
<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 us if it allowed Kapson to proceed with the
acquisition without first offering us the right to be the acquiring party and
then, if we declined, obtaining our permission to consummate this acquisition.
The lawsuit also sought to enforce rights we obtained as part of a strategic
alliance with LFREI with respect to existing Kapson facilities. When we
previously consented to LFREI's acquisition of Kapson, the two companies signed
a letter agreement that was designed to make available to our shareholders some
of the potential benefits of the Kapson acquisition. Thus, under its agreement,
LFREI was obligated to negotiate in good faith with us to identify commercially
reasonable terms on which we would lease or manage the existing Kapson
facilities. However, since LFREI's acquisition of Kapson, we alleged, LFREI had
failed to negotiate in good faith. On July 30, 1998, our compliant was amended
to add Lazard Freres as a party and to include allegations of fraud against
Lazard, LFREI and Messrs. Kenneth M. Jacobs, Robert P. Freeman and Murry N.
Gunty.
On June 9, 1998, LFREI filed a cross-complaint against us, alleging that our
preliminary communications with several potential sources of capital to assist
us in financing the acquisition of Atria in the event that LFREI honored our
right of first offer or was ordered to do so by the court constituted an early
termination event under the Amended and Restated Stockholders Agreement dated as
of October 29, 1997, by and among LFREI, Prometheus and us (the "Amended
Stockholders Agreement"). LFREI also contended that certain standstill
provisions under the Amended Stockholders Agreement had terminated.
On August 14, 1998, the Judge in the trial ruled from the bench against us and
in favor of all defendants on LFREI's motion for judgment on all of our causes
of action.
On October 21, 1998, we announced that a "Termination Event", as defined in the
Amended Stockholders Agreement, occurred on October 12, 1998, when Prometheus no
longer beneficially owned our common stock having a market value of at least $25
million. As a result of the Termination Event, Prometheus' and LFREI's
standstill obligations would have terminated on January 11, 1999. However, on
December 7, 1998, the Superior Court of the State of California, County of
Orange issued an order in favor of LFREI concluding that their standstill
obligations terminated as of April 1998. Final judgement in the action was
entered on May 12, 1999.
On December 18, 1998, Prometheus filed a lawsuit in the Delaware Chancery Court
against the Company and two of our directors, Howard G. Phanstiel and John A.
Booty. The lawsuit seeks a determination that our annual meeting of stockholders
held in June 1998 was invalid because Prometheus alleges we failed to reach a
quorum and, accordingly, the election of the named individual directors was
allegedly invalid.
Since the nature of litigation is that results cannot be predicted with
certainty, there can be no assurance we will prevail in any of the foregoing
litigation actions.
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 taken as a whole.
(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
- --------- -------- ----- --------
<S> <C> <C> <C>
OWNED
Golden Creek Inn........................... Irvine, CA 123 April 16, 1998
Hillcrest Inn.............................. Thousand Oaks, CA 137 April 16, 1998
</TABLE>
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<TABLE>
<CAPTION>
DATE
COMMUNITY LOCATION UNITS ACQUIRED
- --------- -------- ----- --------
<S> <C> <C> <C>
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 Owned............................ 347
------
MANAGED
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 $71.7 million of the purchase prices from cash on hand
and assumed $15.25 million of existing mortgage financing.
The purchase price paid in excess of the fair value of identifiable assets for
the owned, leased and managed communities acquired aggregated approximately
$23.6 million and is being amortized over the life of the related assets of 35
years.
CASA AMIGO PROPERTIES
On March 2, 1999, ARVP II obtained financing and, through a wholly owned
subsidiary, ARVP II, LLC, acquired the landlords' interests in four previously
leased ALCs for approximately $14.6 million. The loan bears
interest at the greater of the bank's prime rate or 7.75 percent, requires
monthly interest payments and all unpaid principal and interest is due on July
31, 2000.
(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, with the
remaining two ALCs anticipated to close during the second and third quarters of
1999. As of December 31, 1998, these ALCs were included in assets held for sale
at their sales price, therefore no gain or loss was recorded on the sale during
1999.
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 the anticipated sale of two ALCs during the second and third quarters
of 1999;
o the level of future capital expenditures;
o the impact of inflation and changing prices;
o the outcome of certain litigation matters; and
o the impact of Year 2000 Issues.
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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
We are a leading national provider of assisted and independent living services
for the elderly. As of March 31, 1999, we operated 60 ALCs containing 7,495
units, including 35 Leased ALCs, 17 Owned ALCs and 8 Managed ALCs. Additionally,
we are in various stages of construction and development on 7 ALCs with an
anticipated total of 923 units.
Since commencing operation of ALCs for our own account in April 1994, we
embarked upon an expansion strategy and achieved significant growth in revenue
resulting primarily from the acquisition and long-term leasing of ALCs. We
focused our growth efforts on the acquisition and development of additional ALCs
and expansion of services to our residents as they "age in place." During 1998,
we acquired interests in 11 ALCs and one skilled nursing facility from Hillsdale
Group, LP and their affiliates, and opened five newly constructed ALCs. The
Hillsdale transaction substantially increased our presence in Northern and
Southern California.
As of March 31, 1999, a substantial portion of our business and operations are
conducted in California, where 40 of the 60 ALCs we operated are located. We
intend to continue to make California the primary focus of our clustering
strategy. However, we do not intend to continue our historic growth rate in
order to focus greater attention and resources on enhancing the profitability of
our existing core operations and on leasing up new developments at a faster
rate. In addition to acquiring and developing ALCs through direct ownership and
the use of long-term leases, we plan to divest ALCs that do not expand or
enhance one of our 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 18, 1999, we entered into purchase and
sale agreements for the sale of the five owned ALCs for approximately $32.3
million. On March 30, 1999, we completed the sale of three of five ALCs, with
the remaining two ALCs anticipated to close during the second and third quarters
of 1999.
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 12 - 18 months from 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 MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
The following table sets forth a comparison of the three months ended March 31,
1999 ("the 1999 Quarter") and the three months ended March 31, 1998 ("the 1998
Quarter").
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<PAGE> 10
<TABLE>
<CAPTION>
FOR THE THREE-MONTHS ENDED
MARCH 31,
----------------------------------
(DOLLARS IN MILLIONS) INCREASE/
1999 1998 (DECREASE)
------- ------- ----------
<S> <C> <C> <C>
Revenue:
Assisted living community revenue ....................... $ 35.5 $ 27.1 30.9 %
Management fees from affiliates and others .............. 0.3 0.2 50.0 %
------- ------- ------
Total revenue ................................... 35.8 27.3 31.0 %
------- ------- ------
Operating expenses:
Assisted living community operating expense ............. 21.8 16.6 32.0 %
Assisted living community lease expense ................. 8.1 5.6 43.3 %
General and administrative .............................. 4.1 6.0 (31.3)%
Depreciation and amortization ........................... 2.3 1.8 24.4 %
------- ------- ------
Total operating expenses ........................ 36.3 30.0 21.0 %
------- ------- ------
Loss from operations ...................................... (0.5) (2.7) (81.5)%
Other income (expense):
Interest income ......................................... 0.1 1.3 (91.9)%
Other income, net ....................................... -- 0.1 (23.8)%
Interest expense ........................................ (2.0) (1.3) 57.6 %
------- ------- ------
Total other income (expense) .................... (1.9) 0.1 (4428.0)%
------- ------- ------
Loss from operations before minority interest in income of
majority owned entities and cumulative effect of change in
accounting ............................................... (2.4) (2.6) (10.1)%
Minority interest in income of majority owned entities .... 0.4 0.4 7.8 %
------- ------- ------
Loss before cumulative effect of change in accounting ..... (2.8) (3.0) (8.0)%
Cumulative effect of change in accounting ............... (1.2) -- (100.0)%
------- ------- ------
Net loss ........................................ $ (4.0) $ (3.0) 33.8 %
======= ======= ======
</TABLE>
The increase in assisted living community revenue is attributable to the
following:
o the acquisition of seven ALCs during the second and third quarters of
1998;
o the opening of five leased ALCs during 1998 (only one during the 1998
Quarter);
o an increase in average occupancy for ALCs which we owned and leased in
both periods to 86.9% for the 1999 Quarter as compared to 85.7% for
the 1998 Quarter;
o an increase in assisted living penetration for ALCs which we owned and
leased in both periods to 44.4% for the 1999 Quarter as compared to
40.9% for the 1998 Quarter; and
o an increase in average rate per occupied unit for ALCs which we owned
and leased in both periods to $1,904 for the 1999 Quarter as compared
to $1,750 for the 1998 Quarter.
Management fees from affiliates and others increased due to the increase in the
number of management contracts to eight in 1999 from three in 1998.
Assisted living community operating expense increased due to:
o the acquisition of seven ALCs during the second and third quarters of
1998;
o the opening of five leased ALCs during 1998 (only one during the 1998
Quarter);
o staffing requirements related to increased assisted living services
provided; and
o increased wages of staff.
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 due to:
o proxy fight expenses incurred in the 1998 Quarter ($1.5 million); and
o efforts to reduce staff at our corporate office.
10
<PAGE> 11
Depreciation and amortization expenses increased due to the acquisition of seven
owned and leased ALCs and the opening of five Leased ALCs during 1998.
Interest income decreased due to lower average cash balances carried by us
during the 1999 Quarter as compared to the 1998 Quarter.
Other income remained constant for the 1999 Quarter as compared to the 1998
Quarter.
Interest expense increased due to additional debt assumed in connection with the
acquisition of two owned ALCs.
Minority interest remained constant for the 1999 Quarter as compared to the 1998
Quarter.
Cumulative effect of change in accounting principle is a result of the adoption
of SOP 98-5 which requires that costs of start-up activities and organizational
costs be expensed as incurred.
LIQUIDITY AND CAPITAL RESOURCES
Our unrestricted cash balances were $13.1 million and $11.9 million at March 31,
1999 and December 31, 1998, respectively.
Working capital decreased to $1.5 million as of March 31, 1999 compared to
working capital of $11.7 million at December 31, 1998. The decrease was due
primarily to increases in operating lease security deposits, cash used in
operating activities and capital expenditures.
Cash used in operating activities was $1.8 million for the 1999 Quarter,
compared to $5.5 million for the 1998 Quarter. The primary components of cash
used in operating activities for the 1999 Quarter were:
o a net loss of $4.0 million;
o a $2.7 million decrease in net liabilities; offset by:
o $0.3 million of cash provided by operations of discontinued
operations; and
o non-cash charges of $2.3 million for depreciation and amortization,
$1.3 million for cumulative effect of change in accounting and $0.8
million in other non-cash items.
Cash used in investing activities was $1.4 million for the 1999 Quarter,
compared to $17.5 million for 1998 Quarter. The primary components of cash used
in investing activities for the 1999 Quarter were:
o $14.6 for purchase of previously leased communities;
o $2.2 million of purchases of property, furniture and equipment;
o $4.6 million for increases in Leased ALCs security deposits;
o $1.2 million for cash contributed to a joint venture; offset by:
o $21.2 million of proceeds from the sale of three ALCs.
Net cash provided by financing activities was $4.5 million for the 1999 Quarter,
compared to net cash used in financing activities of $2.7 million for the 1998
Quarter. The primary components of cash provided by financing activities for
the 1999 Quarter were:
o $14.7 million of proceeds from bridge financing; offset by:
o $9.8 million for repayments of notes payable;
o $0.2 million for distributions paid from majority owned partnerships
to the minority unit holders; and
o $0.2 million for other financing activities.
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
March 31, 1999, we were not in compliance with the current ratio, debt service
coverage and facility coverage ratio under certain agreements. We have obtained
waivers for those covenants with which we were not in compliance. Had we not
obtained
11
<PAGE> 12
waivers, we would have been in default of $7.7 million of guaranteed debt and
the lease agreements for three ALCs.
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
adequate resources to meet our current operating and investing needs and support
our current growth plans for the next 12 months. We do not currently generate
sufficient cash from operations to fund recurring working capital requirements.
We will be required from time to time to incur additional indebtedness or issue
additional debt or equity securities to finance our growth strategy, including
the acquisition and development of ALCs as well as other capital expenditures
and additional funds to meet increased working capital requirements.
YEAR 2000 ISSUE
General
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 were to occur
with any of our 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.
Program
Our program is focused on the following three main projects:
o information technology infrastructure - all of our hardware and
software systems;
o community maintenance - community specific systems, including alarms
(security, fire and emergency call), elevator, phone, HVAC, and other
systems; and
o third party suppliers/vendors -
For each component, we are addressing the Year 2000 Issues in the following six
phases:
o taking inventory of systems with potential Year 2000 Issues;
o assigning priorities to systems identified with Year 2000 Issues;
o assessing items which may have a material effect on our operations;
o testing items assessed as material;
o replacing or repairing material non-compliant items; and
o 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 completed our evaluation of those
suppliers during the third quarter of 1998. 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.
Costs
We expect to successfully implement the 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 anticipate that the cost of assessing the Year 2000 Issue will
range from $100,000 to $360,000. We are currently unable to assess the costs to
remediate any Year 2000 Issues that may result from the assessment.
12
<PAGE> 13
Risks
We believe that our Year 2000 program will be completed by the end of the third
quarter of 1999. Our program's schedule is based on a number of factors and
assumptions, such as:
o the accuracy and completeness of responses to our inquiries; and
o the availability of skilled personnel to complete the program.
Our program's schedule could be adversely impacted if any of the factors and
assumptions is incorrect. The failure to correct a material Year 2000 Issue
could result in an interruption in our normal business operations. There can be
no assurance, however, that there will not be delays in, or increased costs
associated with, the implementation of such changes, and our inability to
implement such changes could have a material adverse effect on our business,
operating results, and financial condition.
We intend to determine if contingency plans are needed for any aspect of our
business with respect to Year 2000 Issues (including most reasonably likely
worst case Year 2000 scenarios), and to create those contingency plans by the
end of the third quarter of 1999.
IMPACT OF INFLATION AND CHANGING PRICES
Operating revenue from ALCs and management fees from apartment communities we
operate are our primary sources of revenue. These properties are affected by
rental rates that are highly dependent upon market conditions and the
competitive environments where the facilities are located. Employee compensation
is the principal cost element of property operations. Although there can be no
assurance 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. The implementation of price
increases is intended to lead to an increase in revenue; however, those
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 risks related to fluctuations in interest rates on our
notes payable. Currently, we do not utilize interest rate swaps. The purpose of
the following analysis is to provide a framework to understand our sensitivity
to hypothetical changes in interest rates as of March 31, 1999. You should be
aware that many of the statements contained in this section are forward looking
and should be read in conjunction with our disclosures under the heading
"Forward-Looking Statements."
For fixed rate debt, changes in interest rates generally affect the fair 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 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 $250,000.
The table below details the principal amount and the average interest rates of
notes payable in each category based upon the expected maturity dates. The fair
value estimates for notes payable are based upon future discounted cash flows of
similar type notes or quoted market prices for similar loans. The carrying value
of our variable rate debt approximates fair value due to the frequency of
re-pricing of this debt. Our fixed rate debt consists of convertible
subordinated notes payable and mortgage payables.
The fixed rate debt bears interest at rates that approximate current market
value.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE - MARCH 31,
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $11,532 $15,096 $ 169 $ 183 $ 198 $62,471 $89,649 $89,649
Average interest rate 9.31% 7.78% 7.86% 7.86% 7.86% 6.84%
Variable rate debt $ 562 $ 584 $ 608 $18,879 $ 234 $ 4,193 $25,060 $25,060
Average interest rate 8.40% 8.40% 8.39% 8.24% 8.50% 8.50%
</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.
On September 27, 1996, American Retirement Villas Partners II, a California
limited partnership ("ARVP II") of which we are the managing general partner and
a majority limited partner, filed lawsuits in the Superior Court for the State
of California, County of Santa Clara, seeking declaratory judgment 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 are
owned by entities, which are related to the entities that own the Campbell and
Sunnyvale communities. The parties have mutually negotiated the terms of a
purchase agreement involving the sale of the landlord's fee interest in the four
communities to ARVP II and settlement of all claims. On March 2, 1999, through a
wholly owned subsidiary, ARVP II obtained financing and purchased, through its
wholly owned subsidiary, ARVP II, LLC, the landlords' interests in four
communities for approximately $14.3 million, and the litigation has been
dismissed.
On April 24, 1998, we were served with a lawsuit by Emeritus Corporation
("Emeritus"), which was filed in the Superior Court of California, County of
Orange, alleging that share purchases on January 16, 1998 by Prometheus Assisted
Living LLC triggered our Shareholder Rights Agreement. Emeritus contends that
due to the alleged triggering event we are required to distribute one right per
share of outstanding Company stock and that each right is exercisable for
approximately 9.56 shares at a total purchase price of $70 (or approximately
$7.32 per share). We believe that Emeritus' claims are meritless and we are
contesting them vigorously. 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 us if it allowed Kapson
to proceed with the acquisition without first offering us the right to be the
acquiring party and then, if we declined, obtaining our permission to consummate
this acquisition.
13
<PAGE> 14
The lawsuit also sought to enforce rights we obtained as part of a strategic
alliance with LFREI with respect to existing Kapson facilities. When we
previously consented to LFREI's acquisition of Kapson, the two companies signed
a letter agreement that was designed to make available to our shareholders some
of the potential benefits of the Kapson acquisition. Thus, under its agreement,
LFREI was obligated to negotiate in good faith with us to identify commercially
reasonable terms on which we would lease or manage the existing Kapson
facilities. However, since LFREI's acquisition of Kapson, we alleged, LFREI had
failed to negotiate in good faith. On July 30, 1998, our compliant was amended
to add Lazard Freres as a party and to include allegations of fraud against
Lazard, LFREI and Messrs. Kenneth M. Jacobs, Robert P. Freeman and Murry N.
Gunty.
On June 9, 1998, LFREI filed a cross-complaint against us, alleging that our
preliminary communications with several potential sources of capital to assist
us in financing the acquisition of Atria in the event that LFREI honored our
right of first offer or was ordered to do so by the court constituted an early
termination event under the Amended and Restated Stockholders Agreement dated as
of October 29, 1997, by and among LFREI, Prometheus and us (the "Amended
Stockholders Agreement"). LFREI also contended that certain standstill
provisions under the Amended Stockholders Agreement had terminated.
On August 14, 1998, the Judge in the trial ruled from the bench against us and
in favor of all defendants on LFREI's motion for judgment on all of our causes
of action.
On October 21, 1998, we announced that a "Termination Event", as defined in the
Amended Stockholders Agreement, occurred on October 12, 1998, when Prometheus no
longer beneficially owned our common stock having a market value of at least $25
million. As a result of the Termination Event, Prometheus' and LFREI's
standstill obligations would have terminated on January 11, 1999. However, on
December 7, 1998, the Superior Court of the State of California, County of
Orange issued an order in favor of LFREI concluding that their standstill
obligations terminated as of April 1998. Final judgement in the action was
entered on May 12, 1999.
On December 18, 1998, Prometheus filed a lawsuit in the Delaware Chancery Court
against the Company and two of our directors, Howard G. Phanstiel and John A.
Booty. The lawsuit seeks a determination that our annual meeting of stockholders
held in June 1998 was invalid because Prometheus alleges we failed to reach a
quorum and, accordingly, the election of the named individual directors was
allegedly invalid.
Since the nature of litigation is that results cannot be predicted with
certainty, there can be no assurance we will prevail in any of the foregoing
litigation actions.
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 MATTER TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
14
<PAGE> 15
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1999.
15
<PAGE> 16
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.,
A Delaware Corporation
By: /s/ Douglas M. Pasquale
---------------------------------
Douglas M. Pasquale
President and Chief Executive Officer
(Duly authorized officer)
Date: May 14, 1999
By: /s/ Abdo H. Khoury
---------------------------------
Abdo H. Khoury
Senior Vice President and Chief Financial Officer
(Duly authorized officer)
Date: May 14, 1999
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
17
<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> MAR-31-1999
<CASH> 13,099
<SECURITIES> 0
<RECEIVABLES> 1,084
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,157
<PP&E> 131,129
<DEPRECIATION> 12,022
<TOTAL-ASSETS> 205,808
<CURRENT-LIABILITIES> 31,632
<BONDS> 102,515
0
0
<COMMON> 143,178
<OTHER-SE> (81,526)
<TOTAL-LIABILITY-AND-EQUITY> 205,808
<SALES> 0
<TOTAL-REVENUES> 35,807
<CGS> 0
<TOTAL-COSTS> 36,300
<OTHER-EXPENSES> 259
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,023
<INCOME-PRETAX> (2,775)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,775)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,260)
<NET-INCOME> (4,035)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
