<PAGE>
================================================================================
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 1934
For the quarterly period ended June 30, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14012
EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)
FOR THE QUARTER ENDED JUNE 30, 2000
WASHINGTON 91-1605464
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
(Address of principal executive offices)
(206) 298-2909
(Registrant's telephone number, including area code)
---------------------
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. [X] Yes [ ] No
As of July 20, 2000 there were 10,088,673 shares of the Registrant's Common
Stock, par value $.0001, outstanding.
<PAGE>
EMERITUS CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements: Page No.
--------
Condensed Consolidated Balance Sheets as of December
31, 1999 and June 30, 2000 (unaudited)..................... 1
Condensed Consolidated Statements of Operations for
the Three Months and Six Months Ended June 30, 1999
and 2000 (unaudited)....................................... 2
Condensed Consolidated Statements of Comprehensive
Operations for the Three Months and Six Months ended
June 30, 1999 and 2000 (unaudited)......................... 3
Condensed Consolidated Statements of Cash Flows for
the Six Months ended June 30, 1999 and 2000 (unaudited).... 4
Notes to Condensed Consolidated Financial
Statements (unaudited)..................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................ 13
Part II. Other Information
Item 6. Exhibits................................................... 14
Signatures................................................. 15
Note: Items 1, 2, 3, 4, and 5 of Part II are omitted because they are not
applicable.
<PAGE>
EMERITUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 and June 30, 2000
(unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------------- -------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................... $ 12,860 $ 10,098
Short-term investments...................................................... 1,134 752
Current portion of restricted deposits...................................... 381 387
Trade accounts receivable, net.............................................. 1,895 1,706
Other receivables........................................................... 9,309 8,305
Prepaid expenses and other current assets................................... 2,714 3,222
Property held for sale...................................................... 7,531 7,050
------------------- -------------------
Total current assets.................................................... 35,824 31,520
------------------- -------------------
Property and equipment, net................................................... 128,828 136,197
Property held for development................................................. 2,204 1,744
Notes receivable from and investments in affiliates........................... 2,915 4,114
Restricted cash............................................................... 13,500 -
Restricted deposits, less current portion..................................... 6,148 6,935
Lease acquisition costs, net.................................................. 5,907 5,451
Other assets, net............................................................. 3,044 2,618
------------------- -------------------
Total assets............................................................ $ 198,370 $ 188,579
=================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term borrowings....................................................... $ 1,000 $ -
Current portion of long-term debt........................................... 8,601 82,310
Trade accounts payable...................................................... 3,634 3,246
Accrued employee compensation and benefits.................................. 3,507 3,323
Accrued interest............................................................ 2,797 2,848
Accrued real estate taxes................................................... 2,034 1,381
Other accrued expenses...................................................... 6,899 5,654
Other current liabilities................................................... 524 1,113
------------------- -------------------
Total current liabilities............................................... 28,996 99,875
------------------- -------------------
Deferred rent................................................................. 1,887 2,016
Deferred gain on sale of communities.......................................... 18,590 18,449
Deferred income............................................................... 153 136
Convertible debentures........................................................ 32,000 32,000
Long-term debt, less current portion.......................................... 128,319 60,291
Security deposits and other long-term liabilities............................. 132 103
------------------- -------------------
Total liabilities....................................................... 210,077 212,870
------------------- -------------------
Minority interests............................................................ 583 568
Redeemable preferred stock.................................................... 25,000 25,000
Shareholders' Deficit:
Preferred stock, $.0001 par value. Authorized 70,000 shares; issued and
outstanding 30,000 and 30,305 at December 31, 1999 and June 30, 2000, - -
respectively...............................................................
Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and
Outstanding 10,323,950 and 10,088,673 shares at December 31, 1999 and
June 30, 2000, respectively................................................ 1 1
Additional paid-in capital.................................................. 66,916 65,776
Accumulated other comprehensive loss........................................ (380) (765)
Accumulated deficit......................................................... (103,827) (114,871)
------------------- -------------------
Total shareholders' deficit............................................. (37,290) (49,859)
------------------- -------------------
Total liabilities and shareholders' deficit............................. $ 198,370 $ 188,579
=================== ===================
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 1
<PAGE>
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Six Months Ended June 30, 1999 and 2000
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Community revenue....................... $27,191 $28,842 $60,671 $ 57,923
Other service fees...................... - 363 - 760
Management fees......................... 1,693 1,145 2,392 2,233
---------------- ----------------- ----------------- -----------------
Total operating revenues............ 28,884 30,350 63,063 60,916
Expenses:
Community operations.................... 17,688 18,345 39,340 38,300
General and administrative.............. 3,527 3,696 7,039 7,452
Depreciation and amortization........... 1,403 1,709 2,868 3,367
Rent.................................... 5,733 5,978 13,318 11,923
---------------- ----------------- ----------------- -----------------
Total operating expenses............ 28,351 29,728 62,565 61,042
---------------- ----------------- ----------------- -----------------
Income (loss) from operations....... 533 622 498 (126)
Other income (expense):
Interest expense, net................... (3,163) (3,424) (6,388) (6,697)
Other, net.............................. 622 (780) 926 (2,057)
---------------- ----------------- ----------------- -----------------
Net other expense................... (2,541) (4,204) (5,462) (8,754)
---------------- ----------------- ----------------- -----------------
Net loss............................ $(2,008) $(3,582) (4,964) $ (8,880)
Preferred stock dividends................. 561 1,089 1,116 2,164
---------------- ----------------- ----------------- -----------------
Net loss to common shareholders..... $(2,569) $(4,671) $(6,080) $(11,044)
================ ================= ================= =================
Loss per common share - basic and diluted:
Loss before preferred stock
dividends............................ $ (0.19) $ (0.35) $ (0.47) $ (0.88)
Preferred stock dividends............. (0.05) (0.11) (0.11) (0.21)
Loss per common share..................... $ (0.24) $ (0.46) $ (0.58) $ (1.09)
================ ================= ================= =================
Weighted average number of common
shares outstanding - basic and
diluted................................ 10,488 10,079 10,486 10,138
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 2
<PAGE>
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
Three and Six Months Ended June 30, 1999 and 2000
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 2000 1999 2000
---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Net loss........................................... $(2,008) $(3,582) $(4,964) $(8,880)
Other comprehensive income (loss):
Foreign currency translation adjustments....... 15 - 20 (3)
Unrealized holding losses on investment
securities.................................... (181) (351) (1,648) (382)
---------------- ---------------- ----------------- ---------------
Total other comprehensive loss............. (166) (351) (1,628) (385)
---------------- ---------------- ----------------- ---------------
Comprehensive loss................................. $(2,174) $(3,933) $(6,592) $(9,265)
================ ================ ================= ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 3
<PAGE>
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 and 2000
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
1999 2000
------------------- -------------------
<S> <C> <C>
Net cash used in operating activities (including changes in
all operating assets and liabilities)................................ $ (8,230) $ (3,963)
------------------- -------------------
Cash flows from investing activities:
Acquisition of property and equipment............................... (1,655) (9,494)
Acquisition of property held for development........................ (146) (564)
Proceeds from sale of property and equipment........................ 3,767 609
Purchase of investment securities................................... (50) -
Construction advances - leased communities.......................... 10,801 -
Construction expenditures - leased communities...................... (11,643) (197)
Advances to affiliates.............................................. (254) (94)
Increase in other assets............................................ - (1,303)
------------------- -------------------
Net cash provided by (used in) investing activities............. 820 (11,043)
------------------- -------------------
Cash flows from financing activities:
Increase in restricted deposits..................................... (269) (793)
Decrease in restricted cash......................................... - 13,500
Payments related to the sale of preferred stock..................... - (503)
Proceeds from short-term borrowings................................. 3,500 -
Repayment of short-term borrowings.................................. (677) (1,000)
Debt issue and other financing costs................................ (79) (86)
Proceeds from long-term borrowings.................................. - 7,800
Repayment of long-term borrowings................................... (450) (2,118)
Payment of dividends................................................ - (3,308)
Repurchase of common stock.......................................... - (1,245)
------------------- -------------------
Net cash provided by financing activities....................... 2,025 12,247
------------------- -------------------
Effect of exchange rate changes on cash............................. 20 (3)
Net decrease in cash and cash equivalents....................... (5,365) (2,762)
Cash and cash equivalents at the beginning of the period.............. 11,442 12,860
------------------- -------------------
Cash and cash equivalents at the end of the period.................... $ 6,077 $ 10,098
=================== ===================
Supplemental disclosure of cash flow information -- cash
paid during the period for interest.................................. $ 6,195 $ 6,971
=================== ===================
</TABLE>
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 4
<PAGE>
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation
This unaudited interim financial information, in the opinion of our management,
reflects all adjustments which are necessary to state fairly the consolidated
financial position, results of operations, comprehensive operations, and cash
flows of Emeritus as of June 30, 2000 and for the three and six months ended
June 30, 1999 and 2000. We presume that those reading this interim financial
information have read or have access to our 1999 audited consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations that are contained in the 1999 Form 10-K filed March 30,
2000 and amended on May 1, 2000. Therefore, we have omitted herein, certain
footnotes and other disclosures included in the Form 10-K. This financial
information does not necessarily represent a full year's operations.
Restricted Cash
On December 10, 1999, we entered into an agreement to sell 40,000 shares of our
Series B Stock to Saratoga Partners IV, L.P. ("Saratoga") and certain investors
related to Saratoga for a purchase price of $1,000 per share. On December 30,
1999, we completed the sale of 30,000 shares of Series B Stock, and we agreed to
complete the sale of the remaining 10,000 shares during the first half of 2000.
The net proceeds to be received by us from the sale of all 40,000 shares of the
Series B Stock were to be approximately $38.6 million, after fees and expenses
of the transaction estimated at $1.4 million. The purchase agreement and related
documents provided that if we did not use at least $23 million of the proceeds
to acquire 24 assisted living communities currently managed or leased by us by
June 27, 2000, then the use of approximately $35 million of the proceeds (less
amounts paid for such communities) would be subject to Saratoga's approval.
Under a letter dated May 15, 2000, as amended by a subsequent letter agreement,
we modified our agreements with Saratoga to (i) cancel the sale of the remaining
10,000 shares of Series B Stock, (ii) remove all restrictions and requirements
relating to the use of proceeds received from the sale of the original 30,000
shares and (iii) provide that, within seven days following shareholder approval,
which we have agreed to obtain by August 29, 2000, we will issue to Saratoga a
seven-year warrant to purchase one million shares of Emeritus Common Stock at an
exercise price of $4.30 per share (with such shares approved for listing on the
American Stock Exchange) or, in the alternative, to pay Saratoga in cash the sum
of $5.0 million plus any profit that exists in the warrant on the final due date
for our issuance of the warrant. We intend to pursue the acquisitions on a
different schedule and different terms and conditions than originally
contemplated.
Property Held For Sale
Emeritus currently has six properties being held for sale.
Long-term Debt
Our current portion of long-term debt includes all principal balances due within
one year following the June 30, 2000 balance sheet. As of June 30, 2000, we had
mortgage debt of $140.8 million, with minimum principal payments of $3.8 million
due on this debt by June 30, 2001. In addition, approximately $5.3 million of
this debt will reach maturity on December 31, 2000 and $73.2 million of this
debt will reach maturity on April 29, 2001. We anticipate and will actively
pursue obtaining funding sufficient to replace or extend this debt, through
either refinancing or restructuring said debt, or obtaining additional equity or
debt financing, within a reasonable time prior to the maturity date.
Loss Per Share
Basic net income (loss) per share is computed based on the weighted average
shares outstanding during the period and excludes any potential dilution.
Diluted net income (loss) per share is computed on the basis of the weighted
average number of shares outstanding plus dilutive potential common shares using
the treasury stock method. The capital structure of Emeritus includes
convertible debentures, redeemable and non-redeemable convertible preferred
stock, as well as stock options. The assumed conversion and exercise of these
securities have been excluded from the calculation of diluted net loss per
share, as their effect is anti-dilutive.
Page 5
<PAGE>
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(unaudited)
Loss Per Share - continued
We have calculated loss per common share on a dilutive basis without
consideration of 4,254,122 and 10,176,456 common shares at June 30, 1999 and
2000, respectively, related to outstanding options, convertible debentures and
convertible preferred stock because the inclusion of such common stock
equivalents would be anti-dilutive.
Sales and Acquisitions
In December 1998 we disposed of our leasehold interest in 22 leased communities
and three owned communities (the "Emeritrust I communities"). The Emeritrust I
communities were sold to an entity in which a principal shareholder and a former
Board member of Emeritus are investors. Pursuant to the transaction, we manage
all 25 communities under a three-year management contract and receive management
fees of 5% of revenues, as well as an additional 2% of revenues if the
communities achieve positive cash flows.
The management contract gives us an option to purchase the 22 previously leased
communities at a formula price and a right of first refusal on the three
previously owned communities. The contract also requires cash shortfall funding
by us if the Emeritrust I communities generate cash deficiencies in excess of
$4.5 million. At June 30, 2000, we have accrued cash shortfall funding
requirements of $4.2 million. Previously deferred gains and the gain on this
transaction collectively totaling approximately $13 million have been deferred
because of our continuing financial involvement.
In March 1999, we completed a disposition of our leasehold interests in 21
additional communities, consisting of 16 currently operational communities and
five development communities (the "Emeritrust II communities"). The Emeritrust
II communities were sold to an entity in which a principal shareholder and a
former Board member of Emeritus are investors. Pursuant to the transaction, we
manage all 21 communities under a three-year management contract and receive
management fees of 5% of revenues as well as an additional 2% of revenues if the
communities achieve positive cash flows. We earned management fees of $317,000
and $666,000 for the quarters ended June 30, 1999 and 2000, respectively. The
contract also provides us an option to purchase all 21 communities at a formula
price.
The management contract requires cash shortfall funding by us if the operating
communities generate cash deficiencies in excess of $2.4 million. At June 30,
2000, we had not incurred a cash shortfall-funding requirement. Development
communities additionally require cash shortfall funding if the communities
generate cash deficiencies in excess of $500,000 per community. As of June 30,
2000, we had not incurred a cash shortfall-funding requirement for the
development communities.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, as amended by SFAS Nos. 137 and
138, Accounting for Derivative Instruments and Hedging Activities. This
Statement is effective as of the beginning of the first quarter of the fiscal
year beginning after June 15, 2000. We do not anticipate a material impact on
our financial portion or results of operations from the future adoption of this
standard.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation".
Interpretation No. 44 clarifies the application of Accounting Principles Board
Opinion No. 25 ("APB 25") and is effective July 1, 2000. Interpretation No. 44
clarifies the definition of "employee" for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. We do not expect the adoption of
Interpretation No. 44 to have a material impact on our consolidated financial
statements.
Page 6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Emeritus is a Washington corporation organized by Daniel R. Baty and two other
founders in 1993. In November 1995, we held our initial public offering and
began our expansion strategy.
Through 1998, we focused on rapidly expanding our operations in order to
assemble a portfolio of assisted living communities with a critical mass of
capacity. We pursued an aggressive acquisition and development strategy during
that time, acquiring 35 and developing 10 communities in 1996, acquiring 7 and
developing 20 communities in 1997, and developing 5 communities in 1998. Having
achieved our growth objective, in 1999 and continuing in 2000, we have
substantially reduced our pace of acquisition and development activities to
concentrate on improving community performance, through both occupancy and
revenue per occupied unit. During the past 2 years, we increased occupied
capacity by approximately 500 units in our consolidated operations (excluding
Emeritrust I and Emeritrust II communities). Occupied capacity growth was
stronger in our total operated portfolio, increasing 2,750 units from June of
1998 to June of 2000. Also, in late 1999 and early 2000, we began to focus on
improving our revenue per occupied unit as our communities stabilized. For
consolidated communities with average occupancy over 90% in January 2000, our
rates increased $156 per unit or 7.7% between June 30, 1999 and June 30, 2000.
While our focus has shifted to improving operational performance, we do intend
to continue our growth strategy. Our continued growth strategy is to selectively
acquire and develop new communities with operating characteristics consistent
with our current emphasis on maintaining high occupancy and enhancing our
operating model and service offerings. We acquired two such communities in the
first six months of 2000 with a total of 206 units of capacity.
The following table sets forth a summary of our property interests.
<TABLE>
<CAPTION>
As of December 31, As of December 31, As of June 30,
1998 1999 2000
---------------------- ---------------------- ----------------------
Buildings Units Buildings Units Buildings Units
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Owned (4) 15 1,492 16 1,572 17 1,681
Leased (4) 52 3,937 40 3,302 40 3,252
Managed/Admin Services 38 3,734 68 6,247 73 6,879
Joint Venture/Partnership 8 809 5 605 5 605
---------------------- ---------------------- ----------------------
Operated Portfolio 113 9,972 129 11,726 135 12,417
Percentage Increase (1) 13% 15% 14% 18% 5% 6%
Pending Acquisitions - - 2 206 - -
New Developments (2) 21 2,029 6 604 7 772
Minority Interest (Alert) (3) 21 1,203 - - - -
---------------------- ---------------------- ----------------------
Total 155 13,204 137 12,536 142 13,189
---------------------- ---------------------- ----------------------
Percentage Increase
(Decrease) (1) 5% 6% (12%) (5%) 4% 5%
</TABLE>
--------
(1) The percentage increase (decrease) indicates the change from the prior
period, with December 31, 1998 reflecting the increase from December 31,
1997.
(2) Out of the seven communities under development at June 30, 2000 five are
being developed by third parties, but will be managed by us upon
completion. One community is being developed as a joint venture between us
and a third party and the final development is an expansion of a current
leased community.
(3) In November 1999, we sold all our minority interest in Alert Care.
(4) Included in our consolidated portfolio of communities.
We rely primarily on our residents' ability to pay our charges for services from
their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, we believe generally that
only seniors with income or assets meeting or exceeding the regional median can
afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business. All sources of revenue other
than residents' private resources constitute less than 10% of our total
revenues.
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
We have incurred net operating losses and negative cash flows from operating
activities since our inception. As of June 30, 2000, we had an accumulated
deficit of approximately $114.9 million. These losses resulted from a number of
factors, including:
. occupancy levels at our communities that were lower for longer periods
than we originally anticipated;
. financing costs that we incurred as a result of multiple financing and
refinancing transactions;
. administrative and corporate expenses that we increased to facilitate
our growth.
On December 10, 1999, we entered into an agreement to sell 40,000 shares of our
Series B Stock to Saratoga Partners IV, L.P. ("Saratoga") and certain investors
related to Saratoga for a purchase price of $1,000 per share. On December 30,
1999, we completed the sale of 30,000 shares of Series B Stock, and we agreed to
complete the sale of the remaining 10,000 shares during the first half of 2000.
The net proceeds to be received by us from the sale of all 40,000 shares of the
Series B Stock were to be approximately $38.6 million, after fees and expenses
of the transaction estimated at $1.4 million. The purchase agreement and related
documents provided that if we did not use at least $23 million of the proceeds
to acquire 24 assisted living communities currently managed or leased by us by
June 27, 2000, then the use of approximately $35 million of the proceeds (less
amounts paid for such communities) would be subject to Saratoga's approval.
Under a letter dated May 15, 2000, as amended by a subsequent letter agreement,
we modified our agreements with Saratoga to (i) cancel the sale of the remaining
10,000 shares of Series B Stock, (ii) remove all restrictions and requirements
relating to the use of proceeds received from the sale of the original 30,000
shares and (iii) provide that, within seven days following shareholder approval,
which we have agreed to obtain by August 29, 2000, we will issue to Saratoga a
seven-year warrant to purchase one million shares of Emeritus Common Stock at an
exercise price of $4.30 per share (with such shares approved for listing on the
American Stock Exchange) or, in the alternative, to pay Saratoga in cash the sum
of $5.0 million plus any profit that exists in the warrant on the final due date
for our issuance of the warrant. We intend to pursue the acquisitions on a
different schedule and different terms and conditions than originally
contemplated.
Page 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
Results of Operations
The following table sets forth, for the periods indicated, certain items from
our Condensed Consolidated Statements of Operations as a percentage of total
revenues and the percentage change of the dollar amounts from period to period.
<TABLE>
<CAPTION>
Period to Period
Percentage Increase (Decrease)
Percentage of Revenues Three Months Six Months
Three Months Ended Six Months Ended Ended Ended
June 30, June 30, June 30, June 30,
------------------------- ------------------------ --------------- --------------
1999 2000 1999 2000 1999-2000 1999-2000
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ 100.0 % 100.0 % 100.0 % 100.0 % 5.1 % (3.4)%
Expenses:
Community operations.................. 61.3 60.5 62.4 62.9 3.7 (2.6)
General and administrative............ 12.2 12.2 11.2 12.2 4.8 5.9
Depreciation and amortization......... 4.9 5.6 4.5 5.5 21.8 17.4
Rent.................................. 19.8 19.7 21.1 19.6 4.3 (10.5)
Total operating expenses............ 98.2 98.0 99.2 100.2 4.9 (2.4)
Profit (Loss) from operations........... 1.8 2.0 0.8 (0.2) 16.7 (125.3)
Other income (expense):
Interest expense, net................. (11.0) (11.3) (10.1) (11.0) 8.3 4.8
Other, net............................ 2.2 (2.6) 1.5 (3.4) (225.4) (322.1)
----------- ------------ ----------- ----------- --------------- -------------
Net other expense................... (8.8) (13.9) (8.6) (14.4) 65.4 60.3
----------- ------------ ----------- ----------- -------------- -------------
Net loss............................ (7.0)% (11.9)% (7.8)% (14.6)% 78.4 % 78.9 %
=========== ============ =========== =========== =============== =============
</TABLE>
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Total Operating Revenues: Total operating revenues for the six months ended June
30, 2000 decreased 3.4% or $2.1 million to $60.9 million, from the comparable
period in 1999. The change in revenue is primarily the result of our transferred
interests in 21 leased communities (16 existing communities and five development
communities) to others. We continue to manage these communities under three-year
management agreements with rights of first refusal or options to acquire them in
the future. Consequently, we now receive management fees from these communities
rather than revenues arising from their operations. For the first six months of
1999, these communities were responsible for $6.4 million in revenue while
generating $0.9 million in management fees for the same period in 2000. The
offsetting increase in revenues of $3.9 million is attributable to generally
increasing levels of occupancy throughout our consolidated portfolio and
increasing management fee revenue from our growing portfolio of operated
communities.
Community Operations: Community operating expenses for the six months ended June
30, 2000 decreased 2.6% or $1.0 million to $38.3 million, from the comparable
period in 1999. The decrease is primarily the result of transferring our
interest in 21 leased communities to others, as discussed in "Total Operating
Revenues" above. Cost reductions from previously leased communities account for
$4.1 million in reduced expenses. During the first six months of 2000, we
acquired two additional communities which added an additional $1.3 million in
expenses.
General and Administrative: As a percentage of total operating revenues, general
and administrative (G&A) expenses increased to 12.2% for the six months ended
June 30, 2000 as compared to 11.2% recorded for the six months ended June 30,
1999. The increase in G&A as a percentage of revenue is primarily the result of
transferring our interest, and corresponding revenue, in 21 leased communities
to others, as discussed in "Total Operating Revenues" above.
Depreciation and Amortization: Depreciation and amortization for the six months
ended June 30, 2000 were $3.4 million, or 5.5% of total operating revenues,
compared to $2.9 million, or 4.5% of total operating revenues for the comparable
period in 1999. The increase is principally the result of acquiring two
communities in late 1999.
Page 9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
Rent: Rent expense for the six months ended June 30, 2000 was $11.9 million,
representing a decrease of $1.4 million, or 10.5% from the comparable period in
1999. The decrease is primarily the result of transferring our interest in 21
leased communities to others, as discussed in "Total Operating Revenues" above
which accounted for $1.9 million in rent expense for the six months ended June
30, 1999. Rent as a percentage of revenues was 21.1% and 19.6% for the six
months ended June 30, 1999 and 2000, respectively.
Interest Expense, Net: Interest expense, net, for the six months ended June 30,
2000 increased $309,000 to $6.7 million from the comparable period in 1999. As a
percentage of revenue, interest expense amounted to 10.1% and 11.0% for the six
months ended June 30, 1999 and 2000, respectively. The increase is primarily
attributable to increasing interest expense for communities with variable rate
debt.
Other, Net: Other, net decreased to a net expense of $2.1 million for the six
months ended June 30, 2000. The decrease is attributable to our recognized cash
shortfall funding requirements for Emeritrust I communities of $1.2 million and
our portion of losses resulting from our investment in the Sanyo Emeritus joint
venture project in Japan which totaled $0.2 million, as well as several
individually insignificant items.
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Total Operating Revenues: Total operating revenues for the three months ended
June 30, 2000 increased 5.1% or $1.5 million from the comparable period in 1999.
Revenue increased primarily due to our persistent emphasis on improving rate
growth in our stabilized buildings. Correspondingly, revenue per occupied unit
for our consolidated portfolio of communities increased $94 per occupied unit to
a quarterly average of $2,164 for the quarter ended June 30, 2000 from $2,070
per unit for the comparable period last year. Additionally, average occupancy
for our consolidated portfolio of communities has increased almost one
percentage point to 85.6% for quarter ended June 30, 2000 compared to 84.9% for
the comparable period last year.
Community Operations: Community operating expenses for the three months ended
June 30, 2000 increased 3.7% or $0.7 million from the comparable period in 1999
to $18.3 million. The overall increase in community operating expenses is a
result of increased variable costs resulting from occupancy gains and
operational efforts to increase our revenue per unit in stabilized buildings.
General and Administrative: As a percentage of total operating revenues, general
and administrative (G&A) expenses remained constant at 12.2% for the three
months ended June 30, 2000 and for the three months ended June 30, 1999.
Depreciation and Amortization: Depreciation and amortization for the three
months ended June 30, 2000 was $1.7 million, or 5.6% of total operating
revenues, compared to $1.4 million, or 4.9% of total operating revenues for the
comparable period in 1999. The increase is principally the result of acquiring
two communities in late 1999.
Rent: Rent expense for the three months ended June 30, 2000 was $6.0 million,
representing an increase of $0.2 million, or 4.3% from the comparable period in
1999. Rent as a percentage of revenues was 19.8% and 19.7% for the three months
ended June 30, 1999 and 2000, respectively.
Interest Expense, Net: Interest expense, net, for the three months ended June
30, 2000 increased $0.3 million from the comparable period in 1999. As a
percentage of revenue, interest expense amounted to 11.0% and 11.3% for the
three months ended June 30, 1999 and 2000, respectively. The increase is
primarily attributable to increasing variable interest expense for communities
with variable rate debt.
Other, Net: Other, net decreased to a net expense of $0.8 million for the three
months ended June 30, 2000. The decrease is attributable to our recognized cash
shortfall funding requirements for Emeritrust I communities of $0.3 million and
our portion of losses resulting from our investment in the Sanyo Emeritus joint
venture project in Japan which totaled $0.2 million, as well as several
individually insignificant items.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
Same Community Comparison
We operated 56 consolidated communities on a comparable basis during both the
three months ended June 30, 1999 and 2000. The following table sets forth a
comparison of same community results of operations, excluding general and
administrative expenses, for the three months ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
Three months Ended June 30,
(In thousands)
Dollar Percentage
1999 2000 Change Change
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue.................................... $25,742 $27,326 $1,584 6 %
Community operating expenses............... 16,188 17,024 836 5
--------------- --------------- -------------- --------------
Community operating income............... 9,554 10,302 748 8
--------------- --------------- -------------- --------------
Depreciation and amortization.............. 1,202 1,306 104 9
Rent....................................... 5,454 5,564 110 2
--------------- --------------- -------------- --------------
Operating income......................... 2,898 3,432 534 18
--------------- --------------- -------------- --------------
Interest expense, net...................... 2,415 2,609 194 8
Other (income) loss........................ (20) 89 (109) (545)
--------------- --------------- -------------- --------------
Net income............................... $ 503 $ 734 $ 231 46 %
=============== =============== ============== ==============
</TABLE>
The same communities represented 90% of our total revenue for the three months
ended June 30, 2000. Same community revenues increased by $1.6 million or 6% for
the quarter ended June 30, 2000 from the comparable period in 1999. The increase
in revenue is attributable to our shift from acquisitions to improving community
performance, through both occupancy and revenue per occupied unit. During the
quarter ended June 30, 2000, occupied units increased 77 units to an average
occupancy of 88%. In addition, same community average revenue per unit increased
$88 per month from $2,089 per month for the quarter ended June 30, 1999 to
$2,177 per month for the quarter ended June 30, 2000. During the three months
ended June 30, 2000, we recorded income of $734,000 compared to income of
$503,000 for the comparable period in 1999, representing an increase of
approximately 46%.
Liquidity and Capital Resources
For the six months ended June 30, 2000, net cash used in operating activities
was $4.0 million compared to $8.2 million for the comparable period in the prior
year. The primary component of this operating use of cash was the net loss of
$8.9 million and $5.0 million recorded in the six months ended June 30, 2000 and
1999, respectively, as well as other changes to current asset and liability
balances for the periods indicated.
Net cash used in investing activities amounted to $11.0 million for the six
months ended June 30, 2000, primarily due to the acquisition of property and
equipment of $9.5 million and additional funding to SeniorMed, an institutional
pharmaceutical company we hold a 30% interest in, of $1.3 million. Net cash
provided by investing activities amounted to $0.8 million for the six months
ended June 30, 1999, stemming primarily from proceeds from our March 31, 1999
transfer of 16 leased communities of $3.2 million, as well as proceeds on the
sale of our office park of $0.5 million. This inflow of cash was offset in part
by acquisitions of property and equipment of $1.7 million as well as an excess
of $0.8 million of construction expenditures on leased communities over
construction advances for the same six-month period.
For the six months ended June 30, 2000, net cash provided by financing
activities was $12.2 million. The net change primarily results from an amendment
of our agreement with Saratoga Partners that removed certain restrictions on our
use of $13.5 million in cash and the financing of one new community which
totaled $7.8 million; this was offset by debt repayment of $2.1 million,
additional repayment of short term borrowings of $1.0 million, repurchases of
$1.2 million of our common stock, and payments of $3.3 million for preferred
dividends. For the six months ended June 30, 1999, net cash provided by
financing activities was $2.0 million, primarily from short-term borrowings.
We have been, and expect to continue, to be dependent on third-party financing
for our cash needs in connection with operating losses as well as with our
acquisition and development of communities. There can be no assurance that
financing for these requirements will be available to us on acceptable terms.
Moreover, to the extent we acquire communities that do not generate positive
cash flow, we may have to seek additional capital or borrowings for working
capital and liquidity purposes.
Page 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
Our management believes we will generate sufficient cash flow to cover required
interest and lease payments in the 12-month period following June 30, 2000. At
June 30, 2000, we were obligated under long-term operating leases requiring
minimum annual lease payments of $22.5 million through June 30, 2001 and we had
mortgage debt of $140.8 million. In addition to minimum principal payments of
$3.8 million due on this debt by June 30, 2001, approximately $73.2 million of
this debt reaches maturity on April 29, 2001 and $5.3 million of this debt
reaches maturity on December 31, 2000. Because a substantial portion of our debt
reaches maturity in the next 12 month period and our operating cash flow will be
insufficient to cover such maturity payments, we intend to renegotiate payments,
refinance the debt or obtain additional equity or debt financing. We may not be
successful or timely in doing so, and the terms of any financing or refinancing
may not be favorable. If we are unable to refinance this mortgage debt, the
lender could exercise various remedies under the lending documents, including
possible foreclosure on facilities secured by the debt, with the resulting loss
of income and asset value. In addition, because of cross-default and cross-
collateralization provisions typical in our mortgage financing agreements, and
common in the industry, default in payment of this debt could create defaults
with respect to our other debt obligations.
Impact of Year 2000
We completed our Year 2000 remediation plans by the end of 1999, and have not
experienced any significant disruptions to our financial or operating activities
caused by failure of our computerized systems resulting from Year 2000 issues.
Further, we have no information that indicates a significant vendor or service
provider has experienced any significant disruptions to their financial or
operating activities such that they would be unable to provide us goods or
services. Furthermore, we have not received any notification from lenders or
regulatory agencies indicating that a lender considers or may consider us to be
in violation of a loan agreement, or significant regulatory action is being or
may be taken against us as a result of Year 2000 issues.
Impact of Inflation
To date, inflation has not had a significant impact on Emeritus. Inflation
could, however, affect our future revenues and operating income due to our
dependence on the senior resident population, most of whom rely on relatively
fixed incomes to pay for our services. The monthly charges for the resident's
unit and assisted living services are influenced by the location of the
community and local competition. Our ability to increase revenues in proportion
to increased operating expenses may be limited. We typically do not rely to a
significant extent on governmental reimbursement programs. In pricing our
services, we attempt to anticipate inflation levels, but there can be no
assurance that we will be able to respond to inflationary pressures in the
future.
Forward-Looking Statements
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: A number of the matters and subject areas discussed in this report that
are not historical or contain current facts deal with potential future
circumstances, operations, and prospects. The discussion of these matters and
subject areas is qualified by the inherent risks and uncertainties surrounding
future expectations generally, and also may materially differ from Emeritus's
actual future experience involving any one or more of the matters and subject
areas relating to demand, pricing, competition, construction, licensing,
permitting, construction delays on new developments contractual and licensure,
and other delays on the disposition of assisted living communities in our
portfolio, and our ability to continue managing costs while maintaining high
occupancy rates and market rate assisted living charges in our assisted living
communities. We have attempted to identify, in context, certain of the factors
that we currently believe may cause actual future experience and results to
differ from our current expectations regarding the matter or subject area
discussed in this statement. These and other risks and uncertainties are
detailed in our reports filed with the Securities and Exchange Commission,
including our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
Page 12
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our result of operations are affected by changes in interest rates as a result
of our short and long-term borrowings. We manage this risk by obtaining fixed
rate borrowings when possible. At June 30, 2000, our variable rate borrowings
totaled $85.3 million. If market interest rates average 2% more in 2000 than
they did in 1999, our interest expense and net loss would increase $1.7 million.
This amount is determined by considering the impact of hypothetical interest
rates on our outstanding variable rate borrowings as of June 30, 2000 and does
not consider changes in the actual level of borrowings that may occur subsequent
to June 30, 2000. This analysis also does not consider the effects of the
reduced level of overall economic activity that could exist in such an
environment nor does it consider actions that management could take with respect
to our financial structure to mitigate the exposure to such a change.
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<PAGE>
PART II OTHER INFORMATION
Items 1-5 are not applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
We filed a form 8-K on January 14, 2000 to report under Item 5, the sale on
December 30,1999 of shares of our Series B Convertible Preferred Stock to
Saratoga Partners IV, L.P. and a related investor.
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<PAGE>
SIGNATURES
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.
Dated: August 9, 2000
EMERITUS CORPORATION
(Registrant)
/s/ Raymond R. Brandstrom
-------------------------------
Raymond R. Brandstrom,
Interim Chief Financial Officer and
Vice Chairman of the Board
Page 15
