UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, for the Quarterly Period ended March 31, 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 0-22253
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BROOKDALE LIVING COMMUNITIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4103821
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
330 North Wabash Avenue, Suite 1400
Chicago, IL 60611
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(Address of principal (Zip Code)
executive offices)
(312) 977-3700
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address, or former
fiscal year, if changed since last report)
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 12, 2000, 9,850,749 shares (not including 1,724,800 shares held in the
Company's treasury) of the registrant's Common Stock, $0.01 par value per share,
were outstanding.
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
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PART I: FINANCIAL INFORMATION PAGE
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED). 3
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 4
Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 14
PART II: OTHER INFORMATION 16
ITEM 1. LEGAL PROCEEDINGS. 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 16
ITEM 5. OTHER INFORMATION. 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 16
SIGNATURES 18
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
The information furnished in the accompanying unaudited consolidated
balance sheets, statements of operations, and statements of cash flows reflects
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the aforementioned financial statements for the interim period.
Brookdale Living Communities, Inc. was incorporated on September 4,
1996 and commenced operations upon the completion of its initial public offering
on May 7, 1997. The consolidated financial statements of Brookdale Living
Communities, Inc. and its subsidiaries (the "Company") represent the results of
operations of 24 facilities the Company operated during the period ended March
31, 2000.
The aforementioned financial statements should be read in conjunction
with the notes to the consolidated financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements for the year ended December 31, 1999 included
in the Company's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 30, 2000.
3
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
March 31, 2000 December 31, 1999
-------------- -----------------
(unaudited) (audited)
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ASSETS
Cash and cash equivalents.............................................. $ 6,949 $ 638
Short-term investments................................................. - 12,505
Accounts receivable.................................................... 1,534 1,188
Notes receivable....................................................... 5,147 5,147
Reimbursable development costs......................................... 19,904 10,958
Prepaid expenses and other............................................. 5,423 4,456
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Total current assets............................................. 38,957 34,892
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Property, plant and equipment.......................................... 142,356 139,323
Accumulated depreciation............................................... (11,383) (10,472)
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Property, plant and equipment, net............................... 130,973 128,851
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Property under development............................................. 21,269 13,401
Cash and investments - restricted...................................... 7,648 9,835
Investment certificates - restricted................................... 30,131 35,637
Lease security deposits................................................ 89,323 92,735
Other, net............................................................. 26,390 24,854
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Total assets..................................................... $ 344,691 $ 340,205
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current portion of long-term debt...................................... $ 120 $ 118
Current portion of deferred gain on sale of property................... 806 805
Accrued interest payable............................................... 1,760 413
Accounts payable and accrued expenses.................................. 17,252 12,251
Tenant refundable entrance fees and security deposits.................. 7,612 7,648
Other.................................................................. 505 574
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Total current liabilities........................................ 28,055 21,809
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Long-term debt, less current portion................................... 98,916 98,947
Convertible subordinated notes......................................... 100,000 100,000
Deferred lease liability............................................... 2,599 2,885
Deferred gain on sale of property, less current portion................ 15,109 15,311
Deferred income taxes.................................................. 6,795 4,927
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Total liabilities................................................ 251,474 243,879
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STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 20,000 shares authorized, none issued. - -
Common stock, $.01 par value, 75,000 shares authorized, 11,576 and
11,575 shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively.................................... 116 116
Additional paid-in-capital............................................. 94,144 94,134
Accumulated earnings................................................... 21,312 18,224
Treasury stock, 1,725 and 1,266 common shares, respectively, at cost... (22,355) (16,148)
------------- -------------
Total stockholders' equity....................................... 93,217 96,326
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Total liabilities and stockholders' equity....................... $ 344,691 $ 340,205
============= =============
See accompanying notes to consolidated financial statements.
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended March 31,
--------------------------------
2000 1999
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REVENUE
Resident fees............................................. $ 27,435 $ 23,778
Development fees.......................................... 1,646 1,666
Management fees........................................... 207 73
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Total revenue...................................... 29,288 25,517
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EXPENSES
Facility operating........................................ 14,890 12,792
General and administrative................................ 1,495 1,158
Lease expense............................................. 6,812 6,288
Depreciation and amortization............................. 1,689 1,362
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Total operating expenses........................... 24,886 21,600
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Income from operations............................. 4,402 3,917
Interest income........................................... 2,685 1,546
Interest expense.......................................... (2,217) (1,127)
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Income before income tax expense................... 4,870 4,336
Income tax expense........................................ (1,782) (1,579)
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Net income......................................... $ 3,088 $ 2,757
=========== =========
Basic earnings per common share........................... $ 0.31 $ 0.24
=========== =========
Weighted average shares used for computing basic
earnings per common share............................. 9,984 11,572
=========== =========
Diluted earnings per common share......................... $ 0.26 $ 0.24
=========== =========
Weighted average shares used for computing diluted
earnings per common share............................. 15,504 11,720
=========== =========
See accompanying notes to consolidated financial statements.
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended March 31,
------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................... $ 3,088 $ 2,757
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization..................................... 1,689 1,362
Deferred income taxes............................................. 1,782 1,477
Change in deferred lease liability................................ (286) 107
Deferred gain on sale of property................................. (202) (201)
Changes in:
Accounts receivable............................................ (346) (241)
Prepaid expenses and other..................................... (2,392) (2,223)
Accrued interest payable....................................... 1,347 (25)
Accounts payable and accrued expenses and other................ 4,932 1,904
Tenant refundable entrance fees and security deposits.......... (36) 30
-------------- --------------
Net cash provided by operating activities.................. 9,576 4,947
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in lease security deposits and acquisitions...... 3,412 (9,942)
Decrease in cash and investments - restricted........................ 2,187 130
Decrease (increase) in investment certificates - restricted.......... 5,506 (7,191)
Proceeds from sale of property under development, net................ - 140
Property under development, net of related payables ................. (7,868) (730)
Payments received on notes receivable................................ - 1,903
Purchases of short-term investments.................................. (14,005) -
Sales of short-term investments...................................... 26,510 -
Additions to property, plant and equipment and reimbursable
development costs, net of related accounts payable................ (12,543) (1,878)
-------------- --------------
Net cash provided by (used in) investing activities........ 3,199 (17,568)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt.......................................... (29) (75)
Proceeds from unsecured lines of credit.............................. 4,000 27,700
Repayment of unsecured lines of credit............................... (4,000) (14,600)
Increase in letter of credit deposits, net........................... - (158)
Payment of financing costs........................................... (238) (409)
Proceeds from issuance of common stock............................... 10 -
Purchases of treasury stock.......................................... (6,207) -
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Net cash (used in) provided by financing activities........ (6,464) 12,458
-------------- --------------
Net increase (decrease) in cash and cash equivalents....... 6,311 (163)
Cash and cash equivalents at beginning of period........... 638 1,065
-------------- -------------
Cash and cash equivalents at end of period................. $ 6,949 $ 902
============== ==============
See accompanying notes to consolidated financial statements.
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three months ended March 31,
------------------------------
2000 1999
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Supplemental Disclosure of Cash Flow Information:
Interest paid, net of amounts capitalized............................. $ 870 $ 1,152
============= ===============
Income taxes paid..................................................... $ 67 $ 3
============= ===============
Supplemental Schedule of Noncash Investing and Financing
Activities:
In connection with property acquisitions and net lease transactions,
assets acquired and liabilities assumed were as follows:
Fair value of assets acquired.................................... $ - $ 11,404
Less - cash consideration paid................................... - 10,911
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Liabilities assumed.............................................. $ - $ 493
============= ===============
See accompanying notes to consolidated financial statements.
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, UNITS AND SQUARE FOOT AMOUNTS)
(UNAUDITED)
1. ORGANIZATION
Brookdale Living Communities, Inc. was incorporated in Delaware on
September 4, 1996 and commenced operations upon the completion of the initial
public offering of its common stock on May 7, 1997.
The consolidated financial statements of Brookdale Living Communities, Inc.
and its subsidiaries (the "Company") include the properties owned or leased by
the Company. The Company operates in the senior independent and assisted living
segment. The properties owned, leased or managed by the Company or under
construction as of March 31, 2000 (collectively, the "Properties") are located
throughout the United States as indicated on the following table:
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Property Name Date Owned or Leased Location
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Owned Facilities:
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The Heritage of Des Plaines May 7, 1997 Des Plaines, IL
The Devonshire May 7, 1997 Lisle, IL
Hawthorn Lakes (1) May 7, 1997 Vernon Hills, IL
Edina Park Plaza May 7, 1997 Edina, MN
Leased Facilities:
- ------------------
The Hallmark May 7, 1997 Chicago, IL
The Springs of East Mesa May 7, 1997 Mesa, AZ
The Gables at Brighton May 7, 1997 Rochester, NY
The Park Place May 7, 1997 Spokane, WA
The Gables at Farmington November 24, 1997 Farmington, CT
The Classic at West Palm Beach December 18, 1997 West Palm Beach, FL
The Brendenwood Retirement Community December 22, 1997 Voorhees, NJ
Kenwood of Lake View (formerly Harbor Village) March 6, 1998 Chicago, IL
The Atrium of San Jose May 12, 1998 San Jose, CA
Chatfield July 2, 1998 West Hartford, CT
Ponce de Leon October 21, 1998 Santa Fe, NM
Woodside Terrace December 22, 1998 Redwood City, CA
River Bay Club January 19, 1999 Quincy, MA
Berkshire of Castleton (formerly Oakleaf Village) September 14, 1999 Indianapolis, IN
Devonshire (formerly Benchmark) of Hoffman Estates December 22, 1999 Hoffman Estates, IL
Managed Facilities:
- -------------------
The Island on Lake Travis Lago Vista, TX
The Kenwood Minneapolis, MN
Heritage at Gaines Ranch (2) Austin, TX
Heritage at Southfield (2) Southfield, MI
The Meadows of Glen Ellyn (2) Glen Ellyn, IL
Development Projects Under Construction (3):
- --------------------------------------------
Raleigh, North Carolina
New York (Battery Park City), New York
Pittsburgh (Mount Lebanon), Pennsylvania
(1) The Willows, a 54-unit assisted living addition to the Hawthorn Lakes facility, commenced operations in July 1999.
(2) These projects were developed by the Company and are being managed by the Company for third party owners.
(3) The Company is developing these projects for third party owners.
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for such interim
periods are not necessarily indicative of the results that may be expected for a
full fiscal year. For further information regarding significant accounting
policies, please refer to the financial statements and footnotes thereto for the
period ended December 31, 1999 included in the Company's Annual Report on Form
10-K, as filed with the Securities and Exchange Commission on March 30, 2000.
Principles of Consolidation
The consolidated financial statements include the financial statements of
Brookdale Living Communities, Inc. ("Company") and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
Development Fees
Development fees related to development activities for projects owned by
third parties are earned over the term of the development. Such fees are
recognized as revenues as the development services are provided to the owner
during the pre-construction and construction periods.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
current financial statement presentation.
3. RECENT DEVELOPMENTS
During March 2000, the Company opened the 234-unit Meadows of Glen Ellyn
located in Glen Ellyn, Illinois, which was developed by the Company and is now
being managed by the Company for a third party owner.
On September 8, 1999, the Company's Board of Directors authorized the
Company to purchase up to 2,000 shares of its common stock. During the three
months ended March 31, 2000, the Company purchased 459 shares at an aggregate
purchase price of $6,207. Total shares repurchased by the Company as of March
31, 2000, were 1,725 shares of which 1,600 shares were repurchased pursuant to
the Board authorized program.
The Company has entered into interest rate lock agreements on behalf of
third party owners of development projects with respect to interest rates on
floating rate construction debt. The agreements are designed to limit the
exposure to movements in floating interest rates on the development construction
project loans, and the Company is to be reimbursed by the third party for any
payments made pursuant to the agreements. The notional amount of the
construction loans being hedged is $53,500, and the approximate fair value of
such hedging contracts was $1,379 at March 31, 2000.
In connection with the replacement credit enhancements obtained to secure
the payment of principal and interest on the $65,000 of tax-exempt bonds secured
by The Devonshire and The Heritage of Des Plaines and the $15,040 of tax exempt
bonds secured by Edina Park Plaza, the Company purchased $65,000 and $15,040 of
interest rate caps, with a strike price of 6.35% and 6.58%, a fair value of $188
and $48 at March 31, 2000 and an expiration date of June 1, 2004 and December 1,
2004, respectively. The Company's reimbursement obligations are non-recourse
obligations secured by mortgages on the facilities; provided, however, Brookdale
Living Communities, Inc. has a guaranteed reimbursement obligation for The
Devonshire and The Heritage of Des Plaines facilities which is limited to
$4,000.
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
4. INCOME TAXES
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34% to income before income tax expense principally
as a result of non-taxable amortization of the deferred gain on sale of a
property and state income taxes.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 2000 and 1999:
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Three months ended March 31,
------------------------------
2000 1999
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Numerator:
Numerator for basic earnings per common share $ 3,088 $ 2,757
Interest expense on convertible
subordinated notes, net of tax 941 -
--------- ---------
Numerator for diluted earnings per share $ 4,029 $ 2,757
========= =========
Denominator:
Denominator for basic earnings per common share -
weighted-average shares 9,984 11,572
Effect of dilutive securities:
Employee stock options 41 148
Warrants - -
Convertible subordinated notes 5,479 -
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Denominator for diluted earnings per common share-adjusted
weighted-average shares and assumed conversions 15,504 11,720
========= =========
Basic earnings per common share $ 0.31 $ 0.24
========= =========
Diluted earnings per common share $ 0.26 $ 0.24
========= =========
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6. PRO FORMA INFORMATION
The following unaudited pro forma condensed and consolidated statements of
operations are not necessarily indicative of what the actual results of
operations of the Company would have been assuming the Company had leased all of
the Leased Facilities, issued 11,575 shares, purchased 1,725 shares of treasury
stock and issued $100,000 of 5.5% convertible subordinated notes at the
beginning of each period presented, nor do they purport to represent the results
of operations of the Company for future periods.
Three months ended March 31,
------------------------------
2000 1999
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Revenue $ 29,288 $ 28,148
Net income 3,088 2,699
Basic earnings per share 0.31 0.27
Diluted earnings per share 0.26 0.24
The pro forma information does not include interest income on available cash
from the proceeds of the 5.5% convertible subordinated notes.
7. SUBSEQUENT EVENTS
On April 20, 2000, The Prime Group, Inc. ("Prime") and certain of its
affiliates agreed to sell 3,929 shares of the Company's common stock,
representing approximately 39.9% of the Company's outstanding shares, in a
privately negotiated transaction to an affiliate of Fortress Investment Fund
("Fortress"), for an aggregate purchase price of $58,940, or $15 per share. In
addition, Fortress has agreed to purchase from Michael W. Reschke, the Company's
Chairman and the principal shareholder of Prime, an additional 75 shares of the
Company's common stock which Mr. Reschke has the option to purchase, for an
aggregate purchase price of $1,125, or $15 per share. Completion of the sale is
subject to certain customary closing conditions including satisfaction of the
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act.
Upon completion of the sale, Mr. Reschke will resign from the Company's board of
directors, and two of Fortress' designees will be elected to the Company's board
to fill the vacancy created by Mr. Reschke's resignation and to fill the
currently existing vacancy on the Board.
The transaction was approved by an independent committee of the Company's
board based on, among other things, the execution of a standstill agreement by
Fortress. The standstill agreement provides that Fortress may not acquire during
its term
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
additional Company common stock or engage in other activity designed to acquire
control of the Company, except in the context of a cash tender offer for all of
the Company's shares at a price not less than $15 per share, which cannot occur
without the Board's consent prior to July 5, 2000. The standstill agreement
terminates on May 14, 2002, but may terminate earlier if, Fortress acquires a
majority of the Company's common stock pursuant to a cash tender offer for all
of the Company's shares at a price not less than $15 per share, which tender
offer may not be commenced prior to July 5, 2000 without the Board's consent.
On April 24, 2000, the Company obtained a $9,000 construction loan secured
by the 82-unit skilled nursing addition to The Devonshire facility located in
Lisle, Illinois. The loan bears interest at a variable rate minus one-half
percent, payable in monthly installments of interest only, and matures March 31,
2003. Brookdale Living Communities, Inc., has a guaranteed reimbursement
obligation under the loan until the facility meets certain performance
requirements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (DOLLARS AND SHARE AMOUNTS IN THOUSANDS).
The following discussion is based on and should be read in conjunction with
the Consolidated Financial Statements of the Company as of March 31, 2000 and
December 31, 1999 and for the three months ended March 31, 2000 and 1999,
including the related notes, and other information appearing elsewhere in this
Form 10-Q. Historical results and any apparent percentage relationships with
respect thereto are not necessarily indicative of future operations.
CAUTIONARY STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this report, the words "believes," "expects," "anticipates," "estimates"
and similar words and expressions are generally intended to identify
forward-looking statements. Statements that describe the Company's future
strategic plans, goals or objectives are also forward-looking statements.
Readers of this report are cautioned that any forward-looking statements,
including those regarding the intent, belief or current expectations of the
Company or management, are not guarantees of future performance, results or
events and involve risks and uncertainties and that actual results and events
may differ materially from those in the forward-looking statements as a result
of various factors, including, but not limited to:
- general economic conditions in the markets in which the Company
operates;
- competitive pressures within the industry or the markets in which the
Company operates;
- the successful completion of the acquisition of facilities by the
Company, the successful completion of development activities, the
successful integration of newly acquired, leased or developed
facilities with the operations of the Company's existing facilities,
fluctuations in operating results or occupancy levels in the markets
in which the Company competes, or unanticipated changes in expenses or
capital expenditures;
- the effect of future legislation or regulatory changes on the
Company's operations; and
- other factors described from time to time in the Company's filings
with the Securities and Exchange Commission, including this Form 10-Q
and the Company's 1999 Annual Report on Form 10-K.
The forward-looking statements included in this report are made only as of the
date hereof. Except as required by law, the Company undertakes no obligation to
update such forward-looking statements to reflect subsequent events or
circumstances.
OVERVIEW
Brookdale provides independent and assisted living services to seniors
through its owned, leased or managed facilities. As of March 31, 2000, the
Company operated 24 senior independent and assisted living facilities containing
a total of approximately 5,328 units. Four facilities are owned by the Company,
15 facilities are leased by the Company and five facilities (one of which is
owned by an affiliate of The Prime Group, Inc. ("PGI")) are managed by the
Company pursuant to management contracts. The Company's senior independent and
assisted living facilities offer residents a supportive, "home-like" setting as
well as assistance with activities of daily living. By providing residents a
range of service options as their needs change, the Company seeks to achieve
greater continuity of care, enabling senior residents to age-in-place and
thereby maintain their stay for a longer time period. The ability to allow
residents to age-in-place is beneficial to the Company's residents as well as
their families who are burdened with care decisions for their elderly relatives.
The Company derives its revenues from resident fees, development fees and
management fees. Resident fees consist of charges for leasing units, providing
basic care services and, in certain instances, providing supplemental care
services to residents. Basic care services generally include meals, housekeeping
services within the resident units, social and recreational activities,
scheduled transportation to medical centers and shopping, security, emergency
call response, and access to on-site medical education and wellness programs. In
addition to basic care services, the Company offers custom tailored supplemental
care services for residents who desire or need such services. Optional
supplemental care services include check-in services and escort and companion
services, and, depending on the particular facility and as dictated by state
licensing requirements, the Company also provides assistance with activities of
daily living, such as dressing, bathing, eating and medication administration or
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BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
reminders. The Company may expand its supplemental service offerings, as
permitted by applicable state licensing requirements, in order to capture
incremental revenue and enable its residents to remain in its facilities longer.
Resident fees typically are paid monthly by residents, their families or other
responsible parties. As of March 31, 2000, over 99% of the Company's revenue was
derived from private pay sources.
The Company derives additional revenue from development fees associated
with developing senior independent and assisted living facilities for
unaffiliated third parties and management fees for managing senior independent
and assisted living facilities pursuant to management contracts. Management fees
typically range from 3.0% to 5.0% of a managed facility's total gross revenues.
Fees are recognized as revenues when services are rendered.
The Company classifies its operating expenses into the following
categories: (i) facility operating expenses, which include facility personnel
payroll and related costs, food, marketing, other direct facility expenses and
real estate taxes; (ii) general and administrative expenses, which primarily
include corporate and other overhead costs; (iii) lease expenses; and (iv)
depreciation and amortization.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 TO THREE MONTHS ENDED MARCH 31,
1999
For the three months ended March 31, 2000, results reflect the operations
of the Company's 24 facilities. For the three months ended March 31, 1999,
results reflect the operations of 19 facilities.
Revenue. Total revenue increased by $3,771, or 14.8%, to $29,288 for the
three months ended March 31, 2000 when compared to the three months ended March
31, 1999. Resident fees increased by $3,657, or 15.4%, to $27,435. Of the
increase in total revenue, $993 (or a "same store" increase of 4.4%) reflects an
increase in resident fees at the facilities that have been operated during both
periods, which resulted primarily from increases in monthly charges under
residency agreements. $2,664 of such increase reflects revenue from facilities
first leased after March 31, 1999. The remaining $114 of the total revenue
increase reflects increased revenue from management fees for facilities being
managed by the Company for third-party owners offset by a decrease in revenue
from development fees.
Operating Expenses. Total operating expenses increased by $3,286, or 15.2%,
to $24,886 for the three months ended March 31, 2000 when compared to the three
months ended March 31, 1999. Facility operating expenses increased by $2,098, or
16.4%, to $14,890 primarily due to the expenses associated with the facilities
first leased after March 31, 1999.
General and administrative expense increased by $337, or 29.1%, to $1,495
for the three months ended March 31, 2000 when compared to the three months
ended March 31, 1999 due to increased personnel at the corporate office and
increased costs associated with the Company's branding and marketing efforts.
Lease expense increased by $524, or 8.3%, to $6,812 for the three months
ended March 31, 2000 when compared to the three months ended March 31, 1999 due
primarily to the lease expense associated with the facilities first leased after
March 31, 1999. Depreciation and amortization increased by $327, or 24.0%, to
$1,689 for the three months ended March 31, 2000 when compared to the three
months ended March 31, 1999. This increase primarily reflects the depreciation
of additional furniture, fixtures and equipment at the corporate office and
improvements at the facilities.
Interest income increased by $1,139, or 73.7%, to $2,685 for the three
months ended March 31, 2000 when compared to the three months ended March 31,
1999 due to the investment of the net proceeds from the issuance, in May 1999,
of $100,000 of 5.5% convertible subordinated notes due 2009, and an increase in
various lease security deposits and investment certificates-restricted.
Interest expense increased by $1,090, or 96.7%, to $2,217 for the three
months ended March 31, 2000 when compared to the three months ended March 31,
1999 due to the issuance, in May 1999, of $100,000 of 5.5% convertible
subordinated notes due 2009 partially offset by a decrease in borrowings under
the lines of credit.
Net Income. For the three months ended March 31, 2000, the Company
generated net income of $3,088, as compared to a net income of $2,757 for the
three months ended March 31, 1999, due to the changes in revenue and expenses
described above.
LIQUIDITY AND CAPITAL RESOURCES
Since the formation of the Company on May 7, 1997, the Company has financed
its growth from issuance of common stock, borrowings under lines of credit,
issuance of convertible subordinated notes, entering into operating leases with
third parties and cash generated from the operation of the facilities.
At March 31, 2000, the Company had $6,949 in cash and cash equivalents.
12
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
Cash and cash equivalents (which does not include cash and investments -
restricted of $7,648, investment certificates - restricted of $30,131 and lease
security deposits of $89,323) increased by $6,311 to $6,949 at March 31, 2000 as
compared to December 31, 1999 primarily due to cash generated from operating
activities, decreases in lease security deposits, investment certificates -
restricted, restricted cash and investments, and short-term investments, offset
by an increase in property under development, reimbursable development costs and
purchase of treasury stock.
Net cash provided by operating activities for the three months ended March
31, 2000 totaled $9,576 as a result of increased facility operations before
depreciation and amortization and the commencement of the lease of the
Devonshire of Hoffman Estates facility leased December 22, 1999.
Net cash provided by investing activities totaled $3,199 for the three
months ended March 31, 2000. Investing activities included cash received from
decreased lease security deposits of $3,412, investment certificates -
restricted of $5,506, and cash and investments - restricted of $2,187, and the
net sale of short term investments of $12,505, offset by cash paid for property
under development of $7,868 and an increase in additions to property, plant and
equipment and reimbursable development costs of $12,543.
Net cash used in financing activities was $6,464 for the three months ended
March 31, 2000 of which $6,207 was used to purchase 459 shares of treasury
stock.
COMPANY INDEBTEDNESS
As of March 31, 2000 and December 31, 1999 the Company's debt was $199,036
and $199,065, respectively. The decrease is primarily attributable to the
payments for a mortgage note payable. As of March 31, 2000 and December 31,
1999, the Company had $86,040 of variable rate long-term indebtedness of which
$80,040 was in the form of variable rate tax-exempt bonds. The interest rates
(exclusive of credit enhancement and other fees) on the variable rate tax-exempt
bonds were 3.8% and 5.5% at March 31, 2000 and December 31, 1999, respectively
(the average interest rate was 3.7% and 3.4%, for the period ended March 31,
2000 and the year ended December 31, 1999, respectively), and are subject to
interest rate caps. The tax-exempt bonds contain covenants requiring the
facilities to maintain a minimum number of units for income qualified residents.
The Company established a new line of credit in the amount of $35,000 on
August 1, 1999 and has an effective "shelf" registration statement pursuant to
which the Company may issue up to $200,000 of equity or debt securities. In
November 1998, the Company issued $33,000 of common stock leaving a balance of
$167,000 that the Company may issue in the future. In order to achieve its
growth plans, the Company will be required to obtain a substantial amount of
additional financing. The Company anticipates that it may use a combination of
additional equity and debt financing, lease transactions and cash generated from
operations to fund its acquisition and development activities.
ACQUISITION AND DEVELOPMENT ACTIVITIES
The Company currently plans to commence development of 3 to 4 new
facilities per year on behalf of third party owners containing approximately 220
units each and focus its future acquisition/lease strategy to larger portfolio
transactions. However, the Company may acquire or lease individual facilities.
The Company anticipates that new developments will require 8 to 10 months for
pre-construction development, 12 to 14 months for construction and approximately
12 to 18 months after opening to achieve a stabilized occupancy rate of
approximately 95%. The total construction costs, including construction period
financing costs and operating deficits during the lease-up period, for the
220-unit prototype are estimated to be approximately $35,000, or approximately
$159 per unit. At March 31, 2000, the Company had 7 sites under development for
third parties for senior independent and assisted living facilities, 3 of which
were under construction. The Company's estimated capital expenditures related to
sites under development is approximately $12,000 to $14,000. Capital
expenditures related to the Company's existing facilities, including the 82-unit
skilled nursing center adjacent to The Devonshire facility located in Lisle,
Illinois, currently under construction, are estimated to be approximately $4,000
to $6,000 for the remainder of 2000.
In 1998, the Company established a $100,000 credit facility with The
Capital Company of America LLC (successor-in-interest to Nomura Asset Capital
Corporation) ("Lender") pursuant to which the Lender agreed to provide financing
of up to an aggregate of $100,000 for projects, developed by the Company for
third parties. In 1998, an aggregate $51,000 of the credit facility was
committed to the Austin, Texas and Southfield, Michigan development projects,
both of which opened in August 1999. During 2000, the Company and the Lender
commenced discussions to amend the credit facility and the loans made
thereunder. In general, the amendment would provide for the funding of the
Pittsburgh, Pennsylvania development project being developed for a third party,
no further obligation of the Lender to fund under the $100,000 commitment,
elimination of the Lender's obligation to fund the permanent loans under the
credit facility and elimination of the Company's loan resizing obligation on the
Austin, Texas and Southfield, Michigan loans. There can be no assurance that the
Company will be able to execute the amendment or obtain the financing necessary
for its acquisition and development programs.
13
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
The Company's growth plan includes the acquisition or lease of existing
independent and assisted living facilities. The success of the Company's
acquisitions will be determined by numerous factors, including the Company's
ability to identify suitable acquisition candidates, competition for such
acquisitions, the purchase price, lease terms and conditions, the financial
performance of the facilities after acquisition and the ability of the Company
to integrate and operate acquired facilities effectively. Any failure to do so
may have a material adverse effect on the Company's business, financial
condition, revenues and earnings.
The Company's development programs are dependent on a variety of factors,
including the ability to identify and purchase suitable development sites, the
ability to obtain suitable third-party financing, the ability to locate suitable
contractors to construct the facilities, the ability to obtain required zoning
and permits, and the ability to complete and lease-up the facilities on schedule
and within budget.
Some financing obtained in the future is expected to contain terms and
conditions and representations and warranties that are customary for such loans
and may contain financing covenants and other restrictions that (i) require the
Company to meet certain financial tests and maintain certain amounts of funds in
escrow, (ii) limit, among other things, the ability of the Company to borrow
additional funds, dispose of assets and engage in mergers or other business
combinations and (iii) restrict the ability of the Company to operate competing
facilities within certain distances from mortgaged facilities. There can be no
assurance that financing for the Company's acquisition and development programs
will be available to the Company on acceptable terms or at all. A lack of funds
may require the Company to delay or eliminate all or some of its development
projects and acquisition plans and could therefore have a material adverse
effect on the ability of the Company to meet its growth plans and its business
plan and on the Company's financial condition and result of operations.
To date, the Company's ability to increase cash flow to meet rising costs
has not been adversely affected in any material way by existing, or proposed,
rent control ordinances. Rent control ordinances may not be applicable to the
Company's facilities due to the services provided for the monthly fees charged
to its residents. If the Company's facilities were subject to rent control
ordinances, an imposed limitation on the resident fees that the Company may
charge at any such facility could impair the Company's ability to meet any
rising costs of operating the facility.
COMPETITION
The long-term care industry is highly competitive and the independent and
assisted living segment is becoming increasingly competitive. The Company
competes with many other providers of long-term care alternatives, such as
not-for-profit organizations, home health care agencies, facility-based service
programs, retirement communities, convalescent centers and other independent and
assisted living providers. In pursuing the Company's development and operations
strategies, the Company has experienced and expects to continue to experience
increased competition in its efforts to develop and acquire and lease
independent and assisted living facilities. Consequently, the Company can give
no assurance that it will not encounter increased competition that could limit
its ability to attract residents or expand its business, which could have a
material adverse effect on its revenues and earnings.
IMPACT OF INFLATION
Resident fees from senior independent and assisted living facilities owned
or leased by the Company, management fees from facilities managed by the Company
for third parties and development fees from facilities developed by the Company
for third parties are the Company's primary sources of revenue. These revenues
are affected by monthly resident fee rates and facility occupancy rates. The
rates charged for senior independent and assisted living services are highly
dependent upon local market conditions and the competitive environment in which
the facilities operate. Substantially all of the Company's residency agreements
allow for adjustments in the monthly fees payable thereunder not less frequently
than every 12 or 13 months, thereby enabling the Company to seek increases in
monthly fees due to inflation, demand or other factors. Any such increase would
be subject to market and competitive conditions. The Company believes, however,
that the ability to adjust the monthly fees payable under the residency
agreements on an annual basis serves to reduce the risk to the Company of the
adverse effect of inflation. In addition, employee compensation expense is a
principal cost element of facility operations and is also dependent upon local
market conditions. There can be no assurance that resident fees will increase or
that costs will not increase due to inflation or other causes. In addition, at
March 31, 2000, approximately $86,040 in principal amount of the Company's
indebtedness bore interest at a floating rate. The Company's exposure to rising
interest rates is mitigated by using interest rate caps on $80,040 of its
floating rate debt. Inflation, and its impact on floating interest rates, could
affect the amount of interest payments due on such indebtedness.
YEAR 2000
The Company implemented a program to assess, remediate and mitigate the
potential impact of the Year 2000 Issue throughout the Company. The Company's
program was structured to address its internal computer systems and
applications, network services operations, facilities operations and third-party
vendors and suppliers. As a result of the planning and
14
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
implementation efforts, the Company did not experience any disruption due to the
Year 2000 Issue. During 2000, the Company is continuing to upgrade its
accounting, human resources, property management and marketing systems to meet
its internal and external needs. Through March 31, 2000, the Company had
capitalized approximately $5,084 upgrading such systems. The Company will
continue to monitor its computer systems and applications, network services
operations, facilities operations and third-party vendors and suppliers to
ensure that any Year 2000 Issues are addressed promptly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate risk primarily through its
borrowing and leasing activities. The Company's interest rate risk management
objective is to limit the impact of interest rate changes on earnings and cash
flows and to lower its overall costs. To achieve its objectives, the Company
borrows and leases at fixed rates and may enter into swaps, caps and treasury
locks to mitigate its interest rate risk on a related financial instrument.
There is inherent risk from borrowings and leasing as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's future financing requirements. The Company does not enter into
financial instruments transactions for trading or other speculative purposes.
The Company's long-term debt and related contracts to limit interest rate
risk at March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Interest Rate Cap
-------------------------------------------
Rate at Fixed Approximate Fair Value
Amount March 31, 2000 Maturity Rate Maturity at March 31, 2000
------ -------------- -------- ---- -------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate debt:
Convertible subordinated
notes...................$ 100,000 5.5% 2009 - - $ -
Mortgage Loan............. 12,996 8.525% 2027 - - -
---------
112,996
Variable rate debt:
LIBOR plus 1.625%......... 6,000 7.721% 2002 - - -
Tax-exempt................ 65,000 3.96% 2019-2025 6.35% 6/1/04 188
Tax-exempt................ 15,040 3.85% 2029 6.58% 12/1/04 48
--------- ======= ==== ===== ======= -------
86,040
---------
Total.........................$ 199,036 $ 236
========== =========
</TABLE>
If interest rates on the Company's variable rate debt, including tax-exempt
bonds, increased by 1 percentage point as of December 31, 1999, the annual
interest expense would increase by approximately $860.
Lease expense - The Company has entered into operating leases which have
fixed terms and are subject to renewal at the option of the Company. The Company
has an option to purchase the properties prior to or at the end of the lease.
The lease for four of the facilities requires the payment of additional rent of
10% of the amount by which the revenue generated from the facilities during the
applicable year exceeds the revenues generated from the facilities during 1998.
15
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 1. Legal Proceedings.
No material developments with respect to legal proceedings
occurred during the period covered by this quarterly report.
ITEM 2. Changes in Securities and Use of Proceeds.
None
ITEM 3. Defaults Upon Senior Securities.
None
ITEM 4. Submission of Matters to a Vote of Security Holders.
None
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) EXHIBITS:
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Certificate of Incorporation of Brookdale Living
Communities, Inc., as filed with the Securities and Exchange
Commission on June 16, 1997 as Exhibit 3.1 to the Company's
Form 10-Q for the period ended March 31, 1997 (File No.
0-22253) and incorporated herein by reference.
3.2 Amended and Restated By-laws of Brookdale Living
communities, Inc., as filed with the Securities and Exchange
Commission on June 16, 1997 as Exhibit 3.2 to the Company's
Form 10-Q for the period ended March 31, 1997 (File No.
0-22253) and incorporated herein by reference.
4.1 Form of certificate representing Common Stock of Brookdale
Living Communities, Inc., as filed with the Securities and
Exchange Commission on March 17, 1997 as Exhibit 10.14 to
the Company's Registration Statement on Form S-1
(Registration No. 333-12259) and incorporated herein by
reference.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
16
<PAGE>
BROOKDALE LIVING COMMUNITIES, INC. AND SUBSIDIARIES
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the period covered by this
quarterly report.
17
<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.
BROOKDALE LIVING COMMUNITIES, INC.
Registrant
Date: May 15, 2000 /s/ Mark J. Schulte
------------------ ------------------------------------
Mark J. Schulte
President and
Chief Executive Officer
Date: May 15, 2000 /s/ R. Stanley Young
------------------ ------------------------------------
R. Stanley Young
Executive Vice President,
Chief Financial Officer and Treasurer
18
EXHIBIT 12
BROOKDALE LIVING COMMUNITIES, INC.
STATEMENTS REGARDING COMPUTATION OF RATIOS
OF EARNINGS TO FIXED CHARGES
(IN 000'S, EXCEPT RATIOS)
Three months ended March 31,
----------------------------
2000 1999
---- ----
EARNINGS
- --------
Income before income tax expense
per consolidated financial statements........... $ 4,870 $ 4,336
Interest cost (1)................................. 8,960 7,486
Interest cost (capitalized)....................... (314) (400)
Amortization of debt expense...................... 405 383
--------- ---------
Earnings.......................................... $ 13,921 $ 11,805
========= =========
FIXED CHARGES
- -------------
Interest cost (1)................................. $ 8,960 $ 7,486
Amortization of debt expense...................... 405 383
--------- ---------
Total fixed charges............................... $ 9,365 $ 7,869
========= =========
Ratio of earnings to fixed charges................ 1.49 1.50
========= =========
Excess of earnings to fixed charges............... $ 4,556 $ 3,936
========= =========
(1) Includes portion of rent expense representative of interest expense.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,949
<SECURITIES> 0
<RECEIVABLES> 6,681
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,957
<PP&E> 142,356
<DEPRECIATION> 11,383
<TOTAL-ASSETS> 344,691
<CURRENT-LIABILITIES> 28,055
<BONDS> 198,916
0
0
<COMMON> 116
<OTHER-SE> 93,101
<TOTAL-LIABILITY-AND-EQUITY> 344,691
<SALES> 27,435
<TOTAL-REVENUES> 29,288
<CGS> 14,890
<TOTAL-COSTS> 24,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,217
<INCOME-PRETAX> 4,870
<INCOME-TAX> (1,782)
<INCOME-CONTINUING> 3,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,088
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.26
</TABLE>
