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