<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
------ Exchange Act of 1934
For the quarterly period ended March 31, 1998
( ) 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 01-13031
AMERICAN RETIREMENT CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Tennessee 62-1674303
--------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
111 Westwood Place, Suite 402, Brentwood, TN 37027
- -------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(615) 221-2250
--------------
(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.
Yes X No
--- ----
As of May 12, 1998 there were 11,420,860 shares of the Registrant's common
stock, $.01 par value, outstanding.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements (unaudited) Page
<S> <C> <C>
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 .................................3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 1998 and March 31, 1997 ....................................4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31, 1998
and March 31, 1997 ...................................................5
Notes to Condensed Consolidated
Financial Statements .................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 16
Signatures .................................................................... 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except share data) March 31, 1998 December 31, 1997
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,050 $ 44,583
Assets limited as to use 3,032 2,654
Accounts receivable, net 6,681 6,178
Inventory 615 483
Prepaid expenses 1,714 1,052
Deferred income taxes 3,521 4,332
Other current assets 824 1,003
--------- ---------
Total current assets 45,437 60,285
Assets limited as to use, excluding amounts classified as current 11,009 7,332
Land, buildings and equipment, net 240,643 229,898
Marketable securities 52 52
Other assets 20,036 19,587
--------- ---------
Total assets $ 317,177 $ 317,154
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 318 $ 316
Accounts payable 2,112 2,429
Accrued expenses 6,281 9,796
--------- ---------
Total current liabilities 8,711 12,541
Tenant deposits 5,248 5,290
Long-term debt, excluding current portion 101,516 99,038
Convertible subordinated debentures 138,000 138,000
Deferred gain on sale-leaseback transactions 3,959 4,073
Deferred income taxes 3,567 3,689
Other long-term liabilities 739 605
--------- ---------
Total liabilities 261,740 263,236
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.01 par value; 50,000,000 shares authorized,
11,420,860 shares issued and outstanding 114 114
Additional paid-in capital 60,205 60,203
Accumulated deficit (4,882) (6,399)
--------- ---------
Total shareholders' equity 55,437 53,918
--------- ---------
Total liabilities and shareholders' equity $ 317,177 $ 317,154
========= =========
</TABLE>
See accompanying notes to financial statements.
3
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AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 31, 1998 March 31, 1997
-------------- ---------------
<S> <C> <C>
Revenues:
Resident and health care revenue $ 26,398 $ 20,982
Management services and other revenue 1,679 528
-------- --------
Total revenues 28,077 21,510
Expenses:
Community operating expenses 17,018 13,399
Lease expense (net) 1,685 528
General and administrative 2,053 1,886
Depreciation and amortization 1,974 1,585
-------- --------
Total operating expenses 22,730 17,398
-------- --------
Income from operations 5,347 4,112
Other income (expense):
Interest expense (3,578) (3,257)
Interest income 627 150
Other (26) (30)
-------- --------
Other income (expense), net (2,977) (3,137)
-------- --------
Income before income taxes 2,370 975
Income tax expense 853 --
-------- --------
Net income $ 1,517 $ 975
======== ========
Basic earnings per share $ 0.13
========
Diluted earnings per share $ 0.13
========
Pro forma earnings data:
Income before income taxes, as reported $ 975
Pro forma income tax expense 381
--------
Pro forma net income $ 594
========
Pro forma basic earnings per share $ 0.06
========
Pro forma diluted earnings per share $ 0.06
========
Weighted average shares used:
Basic earnings per share 11,421 9,375
Common stock equivalents 212 --
-------- --------
Diluted earnings per share 11,633 9,375
======== ========
</TABLE>
See accompanying notes to financial statements.
4
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AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,517 $ 975
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,974 1,585
Amortization of deferred gain (113) (111)
Increase (decrease), net of acquisitions, in cash
due to changes in:
Accounts receivable (363) (757)
Inventory (32) 15
Prepaid expenses (657) (661)
Other assets 49 (115)
Deferred income taxes 689 --
Accounts payable (383) 1,111
Accrued expenses (3,513) (819)
Tenant deposits (43) 426
Other long-term liabilities 132 (3)
-------- --------
Net cash (used in) provided by operating activities (743) 1,646
Cash flows from investing activities:
Additions to land, buildings and equipment (12,400) (3,317)
Proceeds from (purchases of) assets limited as to use (4,055) 139
Proceeds from the sale of assets 5 27,144
Other investing activities (822) --
-------- --------
Net cash (used in) provided by investing activities (17,272) 23,966
Cash flows from financing activities:
Distributions to partners -- (1,632)
Payment of redeemable preferred interests -- (5,195)
Proceeds from the issuance of long-term debt 2,570 2,423
Principal payments on long-term debt (90) (15,544)
Other financing activities 2 (32)
-------- --------
Net cash provided by (used in) financing activities 2,482 (19,980)
Net (decrease) increase in cash and cash equivalents (15,533) 5,632
-------- --------
Cash and cash equivalents at beginning of period 44,583 3,222
-------- --------
Cash and cash equivalents at end of period $ 29,050 $ 8,854
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 5,934 $ 2,037
======== ========
Income taxes paid $ 270 --
======== ========
</TABLE>
See accompanying notes to financial statements.
5
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AMERICAN RETIREMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
American Retirement Corporation (the "Company") 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 (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Certain 1997 amounts have been reclassified to conform with the 1998
presentation. Operating results for the quarter ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1998. These financial statements should be read in
conjunction with the combined and consolidated financial statements and the
notes thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1997.
Prior to its initial public offering in May 1997 (the "IPO"), the Company's
communities were owned, managed and/or operated by one or more limited
partnerships affiliated with the Company's predecessor, American Retirement
Communities, LP (the "Partnership" or "Predecessor"). References to the Company
in connection with historical financial data or otherwise include the
Predecessor.
2. FORMATION OF AMERICAN RETIREMENT CORPORATION, REORGANIZATION AND PRO FORMA
ADJUSTMENTS
The Partnership was reorganized concurrent with the IPO such that all of its
assets and liabilities were contributed to the Company in exchange for 7,812,500
shares of common stock and a promissory note in the original principal amount of
approximately $21.9 million (the "Reorganization"). The promissory note was
subsequently paid with net proceeds from the IPO.
(a) Pro Forma Earnings Data: The pro forma adjustment reflected on the
statement of operations for the quarter ended March 31, 1997 provides for
income taxes assuming the Partnership was subject to taxes.
(b) Pro Forma Earnings per Share: Pro forma earnings per share for the quarter
ended March 31, 1997 is based on the number of shares which would have been
outstanding assuming the partners had been shareholders and is based on the
7,812,500 shares received as a result of the Reorganization plus 1,562,500
shares representing the value of the $21.9 million promissory note.
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3. EARNINGS PER SHARE
Basic earnings per share for the quarter ended March 31, 1998 has been computed
on the basis of the weighted average number of shares outstanding. Diluted
earnings per share also includes common stock equivalents, which consist of
stock options. Pro forma earnings per share data for the quarter ended March 31,
1997 is based upon the number of shares which would have been outstanding
assuming the partners had been shareholders prior to the Reorganization as
discussed in Note 2.
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements and requires
that all components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise, during a period, associated with transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. During the three month periods ended March 31, 1998 and 1997, the
Company had no components of comprehensive income. Accordingly, comprehensive
income for each of the periods was the same as net income.
5. COMMITMENTS
During the three month period ended March 31, 1998, the Company entered into a
lease agreement whereby it will lease a parcel of land to a third party (the
"Developer") for the purpose of constructing an assisted living residence. The
lease is for a term of 50 years. Concurrent with the land lease, the Company
entered into a construction management and guaranty agreement with the Developer
to manage the construction of the residence for a fee of 3.75% of development
costs, one half of which was recognized during the three month period ended
March 31, 1998. The Company also entered into a loan agreement with the
Developer to provide up to 85% of the funding for the construction of the
residence. The loan will bear interest at 200 basis points over 30 day LIBOR,
and will amortize over a 25 year schedule beginning at the completion of
construction.
The Developer entered into an operating lease on the facility with an affiliate
of a director of the Company ("the Lessee"). The lease is for a five year
initial term and has six one year renewal options, as well as an option to
acquire the residence for agreed-upon terms and conditions. The Company entered
into a contract with the Lessee to manage the residence for a fee of 6% of its
revenues. The Company did not recognize any management fees for the three month
period ended March 31, 1998. In conjunction with the management agreement, the
Company entered into an operating deficits agreement whereby the Company will
make payments under the operating lease in the event that the Lessee sustains
operating deficits in excess of its initial and ongoing investment in the
7
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residence. The Company pledged a certificate of deposit in the amount of $3.3
million as collateral for the operating deficits agreement. The Company also
entered into an assumption agreement with the Lessee which provides the Company
with an option to assume the leasehold interest.
6. RECENT ACCOUNTING PRONOUNCEMENT
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP
98-5). The SOP requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 defines start-up
activities broadly to include those one-time activities related to: opening a
new facility; introducing a new product or service; conducting business in a new
territory; conducting business with a new class of customer or beneficiary;
initiating a new process in an existing facility; or commencing some new
operation. Start-up activities also include activities related to organizing a
new entity (costs of such activities are commonly referred to as organization
costs).
SOP 98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. Earlier application is encouraged in fiscal years for which
annual financial statements have not been issued. Initial application of the SOP
should be as of the beginning of the fiscal year in which the SOP is first
adopted. Restatement of previously issued financial statements is not permitted.
Entities that previously capitalized start-up costs, such as the types of costs
described above, or organization costs, are required to write-off the
unamortized portion of such capitalized costs as the cumulative effect of a
change in accounting principle upon adoption of SOP 98-5. Subsequent to adoption
of the SOP, these types of costs must be expensed as incurred. The Company has
not yet determined when it will adopt SOP 98-5. At March 31, 1998, the
unamortized portion of capitalized start-up costs totaled $609,000.
8
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services provider
offering a broad range of care and services to the elderly within a residential
setting. The Company currently operates 25 senior living communities in 12
states with an aggregate capacity for approximately 7,200 residents. The Company
currently owns 14 communities, leases 4 communities pursuant to long-term
leases, and manages 7 communities pursuant to management agreements. The Company
is currently constructing or developing 36 assisted living residences with an
estimated aggregate capacity for 3,500 residents and expanding five of its
communities, including one community leased by the Company, which will add
capacity for approximately 400 residents. Additionally, the Company currently
operates eleven home health agencies based in or near its owned or leased
communities, and manages four home health agencies for third parties.
The Company completed the IPO and related Reorganization during the second
quarter of 1997. Prior to the IPO, the Company's accounting predecessor operated
as a limited partnership.
The Company reported net income of $1.5 million, or $0.13 diluted earnings per
share, on revenues of $28.1 million for the quarter ended March 31, 1998, as
compared with pro forma net income of $594,000, or $0.06 pro forma diluted
earnings per share, on revenues of $21.5 million for the comparable prior year
period.
The Company's growth strategy includes: (i) the selective acquisition of senior
living communities, including continuing care retirement communities ("CCRCs")
and assisted living residences; (ii) development of assisted living residences,
including special living units and programs for residents with Alzheimer's and
other forms of dementia; (iii) expansion of existing communities; and (iv)
selective development and acquisition of home health care agencies and other
properties or businesses that are complementary to the Company's operations and
growth strategy.
RESULTS OF OPERATIONS
The Company's total revenues are comprised of (i) resident and health care
revenues, which include all resident and home health care agency fees, and (ii)
management services and other revenue, which include fees, net of
reimbursements, for the development, marketing and management of retirement
communities and home health care agencies. The Company's resident and health
care revenues are derived from three principal sources: (i) monthly service fees
from independent and assisted living residents representing 74.0% and 75.0% of
total revenues for the quarter ended March 31, 1998 and 1997, respectively; (ii)
per visit billings from home health care patients and companion services clients
representing 8.1% and 9.4% of total revenues for the quarter ended March 31,
1998 and 1997, respectively; and (iii) per diem charges from residents receiving
nursing care representing 11.9% and 13.1% of total revenues for the
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quarter ended March 31, 1998 and 1997, respectively. Management services and
other revenue represented 6.0% and 2.5% of total revenues for the quarter ended
March 31, 1998 and 1997, respectively. Approximately 92.3% and 91.1% of the
Company's total revenues for the quarter ended March 31, 1998 and 1997,
respectively, were attributable to private pay sources, with the balance
attributable to Medicare, including Medicare-related private pay co-insurance.
The Company's operating expenses are comprised of (i) community operating
expense, which includes all operating expenses of the Company's owned or leased
communities, including the expenses of its home health care agencies; (ii)
general and administrative expense, which includes all corporate office
overhead; (iii) lease expense; and (iv) depreciation and amortization expense.
The following table sets forth, for the periods indicated, certain resident
capacity and occupancy data for the periods indicated:
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
END OF PERIOD CAPACITY STABLE(1) TOTAL STABLE(1) TOTAL
------- ----- ------- -----
<S> <C> <C> <C> <C>
Owned 3,056 3,342 2,763 2,912
Leased 1,473 1,563 483 483
Managed 2,084 2,084 2,159 2,159
----- ----- ----- -----
Total 6,613 6,989 5,405 5,554
===== ===== ===== =====
END OF PERIOD OCCUPANCY
Owned 93% (2) 88% 95% 94%
Leased 93% (2) 90% 95% 95%
Managed 96% 96% 94% 94%
--- --- --- ---
Total 94% 91% 95% 94%
</TABLE>
- --------------------
(1) Includes communities or expansions thereof that have (i) achieved 95%
occupancy or (ii) have been open at least 12 months.
(2) Includes the dilutive effect of transfers from existing units to expansions
that opened during the quarter ended March 31, 1998 (thus excluded from
stabilized results). Excluding the effect of these transfers, end of period
occupancy for stabilized owned communities would have been 94% and stabilized
leased communities would have been 95%.
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SAME COMMUNITY RESULTS
The following table sets forth certain selected financial and operating data on
a Same Community basis. For purposes of the following discussion, "Same
Community basis" refers to communities that were owned and/or leased by the
Company throughout each of the periods being compared. Revenues on a Same
Community basis do not include any management services revenues.
STATEMENT OF OPERATIONS DATA FOR SAME COMMUNITIES:
(DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
<TABLE>
<CAPTION>
Quarter ended March 31,
-----------------------
1998 1997 % chg
---- ---- -----
<S> <C> <C> <C>
Monthly/per diem service fees $20,114 $18,963 6.1%
Home health and companion services revenue 1,928 2,019 (4.5%)
------- -------
Resident and health care revenue 22,042 20,982 5.0%
Community operating expenses 14,131 13,399 5.5%
------ ------
Resident income from operations 7,911 7,583 4.3%
Resident income from operations margin(1) 35.9% 36.1%
Lease expense 559 528 5.9%
Depreciation and amortization 1,565 1,522 2.8%
----- -----
Income from operations $5,787 $5,534 4.6%
Other data:
Number of communities 12 12
Resident capacity 3,529 3,397
Average occupied units 2,859 2,812
Average occupancy rate(2) 94% 94%
Average monthly revenue per occupied unit(3) $2,345 $2,248 4.3%
Average monthly expense per occupied unit(4) $1,436 $1,394 3.0%
</TABLE>
(1) "Resident income from operations" margin represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
(2) "Average occupancy rate" is based on the ratio of occupied apartments to
available apartments expressed on a monthly basis for independent and assisted
living residences, and occupied beds to available beds on a per diem basis for
nursing beds.
(3) "Average monthly revenue per occupied unit" is total resident and health
care revenues, excluding home health care agency and companion services fees,
divided by total occupied apartments and nursing beds expressed on a monthly
basis.
(4) "Average monthly expense per occupied unit" is total community operating
expenses, excluding home health care agency and companion services expenses,
divided by total occupied apartments and nursing beds, expressed on a monthly
basis.
11
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QUARTER ENDED MARCH 31, 1998 COMPARED TO THE QUARTER ENDED MARCH 31, 1997
Revenues. Total revenues were $28.1 million for the quarter ended March 31,
1998 compared to $21.5 million for the three months ended March 31, 1997,
representing an increase of $6.6 million, or 30.5%. Resident and health care
revenue increased by $5.4 million and management services and other revenue
increased by $1.2 million. Of the increase in resident and health care revenue,
$4.3 million, or 80.4%, was attributable to revenues derived from senior living
communities, assisted living residences, and home health agencies acquired or
leased after March 31, 1997. The remaining $1.1 million, or 19.6%, of such
increase was attributable to Same Community growth. Management services and
other revenue increased as a percentage of total revenue to 6.0% from 2.5% and
includes development fees which increased to $1.1 million from $210,000 and
management fees which increased to $550,000 from $318,000 for the quarter ended
March 31, 1998 as compared to the prior year period.
Revenues attributable to Same Communities were $22.0 million for the quarter
ended March 31, 1998, representing an increase of $1.1 million, or 5.0%, over
the same period in 1997. Home health care agency and companion service fees on a
Same Community basis were down slightly during the period resulting from the
significant reduction in reimbursement rates for home health care agencies and
the elimination of certain qualifying services. Monthly/per diem service fee
revenue on a Same Community basis increased $1.2 million, or 6.1%, over the
quarter ended March 31, 1997. Of this increase, 4.4% was due primarily to
increases in average rates (including adjustments to Medicare rates) and 1.7%
was due to higher occupancy. Same Community average occupancy rates were 94% for
the first quarter of 1998 and 1997 including the dilutive effect in 1998 of the
opening of a 127-unit expansion at an owned community.
Home health care agency and companion services fees on a Same Community basis
decreased by $91,000, or 4.5%, over the prior period. The Balanced Budget Act of
1997, Public Law 105-33 (the "BBA"), included sweeping changes to Medicare and
Medicaid, significantly reducing rates of reimbursement for home health
agencies. The BBA includes disqualification of certain services such as
venipuncture resulting in reduced visit counts, enactment of, and subsequent
further reduction to, per beneficiary limits, and significant reductions to
other cost limits. The combination of these changes impacted the Company's home
health operations during the three months ended March 31, 1998. Several of the
Company's home health agencies were initiated in 1997. As these agencies
approach stabilized operating levels during 1998, their operational efficiency
(cost per visit) are expected to improve, facilitating the adjustment to the new
guidelines. Approximately 7.7% and 8.9% of the Company's revenues for the
quarters ended March 31, 1998 and 1997, respectively were attributable to
Medicare, including Medicare-related private co-insurance.
Community Operating Expenses. Community operating expenses increased to $17.0
million for the quarter ended March 31, 1998, as compared to $13.4 million for
the quarter ended March 31, 1997, representing an increase of $3.6 million, or
27.0%. Of the increase in community operating expenses, $2.9 million, or 79.8%,
was attributable to expenses from senior living communities, assisted living
residences, and home health agencies acquired or leased after March 31, 1997.
Approximately 20.2% of the increase was attributable to Same Community operating
expenses, which increased by $732,000 over the comparable period of the prior
year. Same Community operating expenses, exclusive of home health care agency
and companion services expenses, increased 4.7% for the quarter ended March 31,
1998, as compared to the comparable period in the prior year. Community
operating expense as a percentage of resident and health care revenues increased
to 64.5% for the quarter ended March 31, 1998, from 63.9% for the quarter ended
March 31, 1997. Same Community operating expense as a percentage of Same
Community resident and health care revenues increased to 64.1% for the quarter
ended March 31, 1998 from 63.9% in the comparable period in the prior year. Same
Community operating expenses exclusive of home health agency and companion
services expenses as a percentage of Same Community revenues exclusive of home
health and companion services revenue decreased to 61.2% for the quarter ended
March 31, 1998 from 62.0% for the comparable period in 1997, primarily as a
result of a higher number of occupied units.
General and Administrative. General and administrative expense increased to $2.1
million for the quarter ended March 31, 1998, as compared to $1.9 million for
the quarter ended March 31, 1997, representing an increase of $167,000, or 8.9%.
The increase was primarily related to
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increases in salaries and benefits. General and administrative expense as a
percentage of total revenues decreased to 7.3% for the quarter ended March 31,
1998, from 8.8% for the comparable period in the previous year.
Lease Expense. Lease expense increased to $1.7 million for the quarter ended
March 31, 1998, from $528,000 for the quarter ended March 31, 1997. The increase
of $1.2 million was primarily attributable to leases entered into for an
assisted living residence in May 1997 and a large senior living community in
October 1997. Same Community lease expense remained largely unchanged.
Depreciation and Amortization. Depreciation and amortization expense increased
to $2.0 million for the quarter ended March 31, 1998, from $1.6 million for the
quarter ended March 31, 1997, representing an increase of $389,000, or 24.5%.
The increase was primarily attributable to senior living communities and
assisted living residences acquired or leased after March 31, 1997. Same
Community depreciation and amortization expense remained largely unchanged.
Income from Operations. Income from operations increased to $5.3 million for the
quarter ended March 31, 1998, from $4.1 million for the quarter ended March 31,
1997, representing an increase of $1.2 million or 30.0%. Same Community
resident income from operations increased 4.3% to $7.9 million for the first
quarter of 1998 as compared to $7.6 million for the same period of 1997. Same
Community resident income from operations excluding home health and companion
services increased 8.3% to $7.8 million for the quarter ended March 31, 1998 as
compared to $7.2 million for the quarter ended March 31, 1997.
Other Income (Expense). Interest expense increased to $3.6 million, net of
capitalized interest of $452,000 for the quarter ended March 31, 1998, from $3.3
million for the quarter ended March 31, 1997, representing an increase of
$321,000, or 9.9%. The increase in interest expense was primarily attributable
to the issuance in 1997 of $138.0 million of the Company's 5 3/4% Convertible
Debentures Due 2002 (the "Convertible Debentures") and additional indebtedness
incurred in connection with acquisitions made in 1997, partially offset by the
early extinguishment of $65.1 million of fixed rate indebtedness at December 31,
1997. Interest income increased to $627,000 in the quarter ended March 31, 1998
from $150,000 for the comparable period in the previous year, primarily due to
income generated from the investment of the net proceeds of the convertible debt
offering.
Income Tax Expense. From inception through May 30, 1997, the Company was a
partnership and accordingly incurred no federal or state income tax liability. A
pro forma adjustment has been reflected to provide for income taxes as though
the Company had been subject to corporate income taxes for the quarter ended
March 31, 1997.
Net Income. As a result of the foregoing factors, the Company reported net
income of $1.5 million for the quarter ended March 31, 1998. For the quarter
ended March 31, 1997, the Company reported pro forma net income of $594,000.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its activities with the net proceeds from
its IPO, its public offering of Convertible Debentures in September 1997,
private placements of equity interests, long-term mortgage borrowings, and cash
flows from operations. At March 31, 1998, the Company had $239.8 million of
indebtedness outstanding, including $138.0 million of Convertible Debentures and
$77.0 million of indebtedness to a capital corporation, with fixed maturities
ranging from December 2001 to April 2028. As of March 31, 1998, approximately
95.2% of the Company's indebtedness bore interest at fixed rates, with a
weighted average interest rate of 6.8%. The Company's variable rate indebtedness
carried an average rate of 6.2% as of March 31, 1998. As of March 31, 1998, the
Company had working capital of $36.7 million.
Net cash used in operating activities was $743,000 for the quarter ended March
31, 1998 as compared to $1.6 million provided by operating activities for the
quarter ended March 31, 1997. The Company's unrestricted cash balance was $29.1
million as of March 31, 1998 primarily as a result of the remaining proceeds
from the Convertible Debenture offering.
Net cash used in investing activities was $17.3 million for the quarter ended
March 31, 1998, as compared with $24.0 million provided by investing activities
for the quarter ended March 31, 1997. During the quarter ended March 31, 1998,
the Company made additions to land, buildings and equipment of $12.4 million,
including construction activity, and purchased $4.1 million of assets limited as
to use.
Net cash provided by financing activities was $2.5 million for the quarter ended
March 31, 1998, as compared with $20.0 million used in financing activities for
the quarter ended March 31, 1997. The Company had borrowings of $2.6 million and
made principal payments on its long-term debt of $90,000 during the quarter
ended March 31, 1998.
The Company maintains a $50.0 million revolving credit facility that is
available for acquisitions, a $5.0 million secured line of credit with a bank
that is available for land acquisitions, and a $4.0 million secured line of
credit with a bank that is available for working capital and to secure various
debt instruments, of which approximately $2.2 million had been used at March 31,
1998 to obtain letters of credit. No borrowings were outstanding under the $50.0
million revolving credit facility and the $5.0 million line of credit at March
31, 1998.
The $50.0 million revolving credit facility contains financial covenants that
require the Company to maintain certain prescribed debt service coverage,
liquidity, net worth, and capital expenditure reserve levels. With the exception
of the Company's Carriage Club of Charlotte community, all of the Company's
owned communities are subject to mortgages. Seven of the Company's fourteen
owned communities serve as blanket collateral for the indebtedness payable to
the capital corporation described above. Each of the Company's debt agreements
contains restrictive covenants that generally relate to the use, operation, and
disposition of the communities that serve as collateral for the subject
indebtedness, and prohibit the further encumbrance of such community or
communities without the consent of the applicable lender. Additionally,
substantially all of such indebtedness is cross-
14
<PAGE> 15
defaulted. The Company does not believe such restrictions are material to its
business because the Company does not intend to further encumber its owned
properties and does not believe the covenants relating to the use, operation,
and disposition of its communities materially limit its operations.
The Company has entered into non-binding letters of intent (the "REIT
Facilities") pursuant to which two real estate investment trusts, at the
Company's request and upon satisfaction of certain conditions, would develop,
construct, or acquire up to $110.0 million and $74.7 million, respectively, of
senior living communities and lease the communities to the Company. Currently,
the Company has been allocated $41.6 million and $4.7 million, respectively, in
commitments under the REIT Facilities.
The aggregate estimated cost to complete and lease-up the 36 free-standing
assisted living residences currently under development is approximately $350.0
million to $390.0 million. In addition, the Company plans to expand four of its
owned communities, which are expected to cost approximately $31.0 million to
complete and lease-up.
During the quarter ended March 31, 1998, the Company entered into a letter of
intent to acquire privately held Freedom Group, Inc. ("FGI") and certain
entities affiliated with FGI and/or its Chairman. If consummated, the
acquisition would result in the ownership of three lifecare continuing care
retirement communities ("CCRCs") and the management of three lifecare CCRCs with
aggregate capacity for approximately 3,300 residents. Additionally, ARC would
enter into development and management contracts for, and will acquire options to
purchase, two other CCRCs currently under development with aggregate capacity
for approximately 800 residents. The consideration to be paid is approximately
$55.4 million, including $33.1 million of cash and $22.3 million of the
Company's common stock. The letter of intent is non-binding and is subject to
the completion of definitive agreements and satisfaction of customary closing
conditions. The transaction is expected to be completed in the third quarter of
1998 and to be accounted for as a purchase.
The Company expects that its current cash, together with cash flow from
operations, the $50.0 million revolving credit facility, the REIT Facilities,
and borrowings available to it under other existing credit arrangements, will be
sufficient to meet its operating requirements and to fund its anticipated growth
for at least the next 12 months. The Company expects to use a wide variety of
financing sources to fund its future growth, including public and private debt
and equity, conventional mortgage financing, and unsecured bank financing, among
other sources. There can be no assurance that financing from such sources will
be available in the future or, if available, that such financing will be
available on terms acceptable to the Company.
15
<PAGE> 16
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
the federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
the discussions of the Company's operating and growth strategy, including its
development plans and possible acquisitions. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, those set forth under the caption "Risk Factors" in the Company's
Registration Statements on Form S-1 (No. 333-23197 and No. 333-34339). Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could prove
to be inaccurate, and therefore, there can be no assurance that the
forward-looking statements included in this Form 10-Q will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved. The Company undertakes no
obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Part II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 -- Financial Data Schedule for SEC use only.
b. Reports on Form 8-K
None
16
<PAGE> 17
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.
American Retirement Corporation
Date: May 15, 1998 By: /s/ George T. Hicks
----------------------------
George T. Hicks
Executive Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<SECURITIES> 0
<RECEIVABLES> 6,681
<ALLOWANCES> 0
<INVENTORY> 615
<CURRENT-ASSETS> 45,437
<PP&E> 261,044
<DEPRECIATION> 20,401
<TOTAL-ASSETS> 317,177
<CURRENT-LIABILITIES> 8,711
<BONDS> 239,516
0
0
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<TOTAL-LIABILITY-AND-EQUITY> 317,177
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