<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period ended March 31, 1999
( ) 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, 1999 there were 17,119,385 shares of the Registrant's common
stock, $.01 par value, outstanding.
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited) Page
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 ...........................3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 1999 and March 31, 1998 ..............................4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31,
1999 and March 31, 1998 ........................................5
Notes to Condensed Consolidated Financial Statements ...........6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................9
Item 3. Quantitative and Qualitative Disclosure About Market Risk .....17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................17
Signatures ...............................................................18
2
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AMERICAN RETIREMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,967 $ 20,400
Assets limited as to use 3,210 4,747
Accounts receivable, net 11,695 11,158
Advances for development projects 6,920 11,136
Inventory 767 826
Prepaid expenses 1,338 1,627
Deferred income taxes 1,559 1,580
Other current assets 1,035 2,972
-------- --------
Total current assets 43,491 54,446
Assets limited as to use, excluding amounts classified as current 66,918 58,035
Land, buildings and equipment, net 412,936 391,468
Notes receivable 31,699 19,731
Costs in excess of net assets acquired, net 39,501 37,790
Other assets 36,209 34,384
-------- --------
Total assets $630,754 $595,854
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,942 $ 1,426
Accounts payable 3,143 6,543
Accrued expenses 11,745 15,376
Other current liabilities 2,701 5,297
-------- --------
Total current liabilities 23,531 28,642
Long-term debt, excluding current portion 191,482 161,261
Convertible subordinated debentures 137,980 137,980
Refundable portion of life estate fees 49,461 48,805
Deferred life estate income 45,322 43,715
Tenant deposits 6,451 6,865
Deferred gain on sale-leaseback transactions 3,507 3,620
Deferred income taxes 17,340 16,631
Other long-term liabilities 6,444 2,493
-------- --------
Total liabilities 481,518 450,012
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,
17,118,385 shares issued and outstanding 171 171
Additional paid-in capital 145,170 145,170
Retained earnings 3,895 501
-------- --------
Total shareholders' equity 149,236 145,842
-------- --------
Total liabilities and shareholders' equity $630,754 $595,854
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Revenues:
Resident and health care revenue $ 39,981 $ 25,444
Management services revenue 1,410 350
Development fees 2,204 1,246
-------- --------
Total revenues 43,595 27,040
Expenses:
Community operating expense 25,226 16,044
Lease expense 2,980 1,685
General and administrative 3,262 1,727
Depreciation and amortization 3,312 1,728
-------- --------
Total operating expenses 34,780 21,184
-------- --------
Operating income 8,815 5,856
Other income (expense):
Interest expense (4,744) (3,765)
Interest income 1,449 627
Other (52) (48)
-------- --------
Other expense, net (3,347) (3,186)
Income from continuing operations before income taxes and cumulative
effect of accounting change 5,468 2,670
Income tax expense 2,074 967
-------- --------
Income from continuing operations before cumulative effect of
accounting change 3,394 1,703
Discontinued operations, net of tax -- (244)
-------- --------
Income before cumulative effect of change in accounting principle 3,394 1,459
Cumulative effect of change in accounting for start-up costs, net of tax -- (304)
-------- --------
Net income $ 3,394 $ 1,155
======== ========
Basic earnings per share:
Basic earnings per share from continuing operations before cumulative
effect of accounting change $ 0.20 $ 0.15
Discontinued operations, net of tax -- (0.02)
Cumulative effect of change in accounting principle, net of tax -- (0.03)
-------- --------
Basic earnings per share $ 0.20 $ 0.10
======== ========
Diluted earnings per share:
Diluted earnings per share from continuing operations before cumulative
effect of accounting change $ 0.20 $ 0.15
Discontinued operations, net of tax -- (0.02)
Cumulative effect of change in accounting principle, net of tax -- (0.03)
-------- --------
Diluted earnings per share $ 0.20 $ 0.10
======== ========
Weighted average shares used for basic earnings per share data 17,118 11,421
Effect of dilutive common stock options 59 212
-------- --------
Weighted average shares used for diluted earnings per share data 17,177 11,633
======== ========
</TABLE>
See accompanying notes to consolidated 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, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,394 $ 1,155
Loss from discontinued operations, net of tax -- 244
Cumulative effect of change in accounting principle, net of tax -- 304
-------- --------
Income from continuing operations 3,394 1,703
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 3,312 1,728
Amortization of deferred entrance fee revenue (2,050) --
Deferred income taxes 2,074 689
Amortization of deferred gain on sale-leaseback transactions (113) (113)
Minority owners' allocation of losses (78) --
Losses from unconsolidated joint ventures 469 --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable (537) (363)
(Increase) decrease in inventory 59 (32)
(Increase) decrease in prepaid expenses 288 (657)
Decrease in other assets 1,457 339
Decrease in accounts payable (3,400) (383)
Decrease in accrued expenses (3,631) (3,513)
Increase (decrease) in tenant deposits 373 (43)
Increase in other liabilities 916 132
-------- --------
Net cash and cash equivalents provided by (used in) continuing operations 2,533 (513)
Net cash and cash equivalents used in discontinued operations -- (230)
-------- --------
Net cash and cash equivalents provided by (used in) operating activities 2,533 (743)
Cash flows from investing activities:
Net additions to land, buildings and equipment (24,345) (12,400)
Reimbursements of development advances, net 4,216 --
Investments in joint ventures (711) --
Purchases of assets limited as to use (7,344) (4,055)
Increase in notes receivable (11,968) --
Proceeds from the sale of assets -- 5
Other investing activities (3,150) (822)
-------- --------
Net cash used by investing activities (43,302) (17,272)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 34,981 2,570
Proceeds from life estate sales 2,754 --
Principal payments on indebtedness (244) (90)
Principal reductions in master trust liability (785) --
Contributions from minority owners 630 --
Other financing activities -- 2
-------- --------
Net cash provided by financing activities 37,336 2,482
Net decrease in cash and cash equivalents (3,433) (15,533)
-------- --------
Cash and cash equivalents at beginning of period 20,400 44,583
-------- --------
Cash and cash equivalents at end of period $ 16,967 $ 29,050
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest (net of capitalized interest of
$702,000 and $452,000, respectively) $ 7,081 $ 5,934
======== ========
Income taxes paid $ 842 $ 270
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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AMERICAN RETIREMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 1998 amounts have been reclassified to conform with the 1999
presentation. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 1999. These financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
2. EARNINGS PER SHARE
Basic earnings per share for the three months ended March 31, 1999 and 1998 has
been computed on the basis of the weighted average number of shares outstanding.
Diluted earnings per share also includes dilutive common stock equivalents,
which consist of stock options. The inclusion of the effect of the Company's
convertible debentures would have been anti-dilutive for the periods presented.
3. LIFECARE AND MASTER TRUST ACCOUNTING
Certain of the Company's communities provide housing and healthcare services
through entrance fee agreements with the residents. Under these agreements,
residents pay an entrance fee upon entering into a lifecare contract and the
Company provides certain levels of future health care services to the resident
for life.
Refundable Portion of Life Estate Purchase Price and Deferred Life Estate
Income: The refundable portion of life estate purchase price represents the
amount that is due and refundable to the resident or the resident's estate upon
contract termination. The portion of the purchase price that is not refundable
is recorded as deferred life estate income at the time of purchase and amortized
into income over the resident's estimated life expectancy, estimated annually
based upon actuarial projections. Lifecare income related to residency
agreements that are fully refundable and contingent upon resale is recognized
using the average life of the related buildings and improvements.
Master Trust Agreements: Under certain of the Company's residency and care
agreements, each resident entered into a master trust agreement whereby amounts
were
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paid by the resident into a trust account ("Trust"). These funds were then
available to the communities in the form of a non-interest bearing loan. The
loans provided permanent financing and are collateralized by the land, buildings
and equipment of the related communities.
Upon termination of the resident's occupancy, the resident or the resident's
estate receives payment of the remaining loan balance from the Trust and agrees
to pay a lifecare fee based on a formula in the residency and care agreement,
not to exceed a specified percentage of the resident's original deposit to the
Trust. This lifecare fee is recognized ratably over the estimated life
expectancy of the resident. The amortization of the lifecare fees is included in
resident and health care revenue in the statement of operations and deferred
lifecare fee receivable (included in other noncurrent assets) on the balance
sheet. The Company reports the obligation under the master trust agreements as
refundable portion of life estate purchase price and deferred life estate income
based on the applicable residency agreements.
4. LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings, and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Land $ 43,028 42,498
Land improvements 2,684 2,674
Land held for development 13,004 5,487
Land leased to others 16,845 15,277
Buildings and improvements 318,786 317,435
Furniture, fixtures, and equipment 22,341 21,518
Leasehold improvements 583 515
-------- --------
417,271 405,404
Less accumulated depreciation and amortization 30,502 27,625
-------- --------
386,769 377,779
Construction in progress 26,167 13,689
-------- --------
Total $412,936 $391,468
======== ========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Company finances the costs of certain senior living communities owned by
others that are leased or managed by the Company. The Company is obligated to
and anticipates providing approximately $145.1 million of additional financing
for these communities.
The Company provides development services to senior living communities owned by
others. Under the terms of the development agreements, the Company receives
fixed fees ranging from approximately 3.75% to 5% of the total construction
costs of the
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communities. Such fees are recognized over the terms of the development
agreements using the percentage-of-completion method. The Company recognized
$2.2 million and $1.2 million of development fee revenue during the three month
periods ended March 31, 1999 and 1998, respectively. The Company owns the land
upon which 14 of these senior living communities are located, and has leased the
land for terms of 50 years.
Upon completion of the construction, the owners of the senior living communities
lease the properties to various special purpose entities (SPEs). The Company has
entered into management agreements with the SPEs to manage the operations of the
leased senior living communities. The management agreements provide for the
payment of management fees to the Company based on a percentage of each
communities' gross revenues and requires the Company to fund the SPEs' operating
deficits above specified amounts. The Company is required to pledge certificates
of deposit to the lessors as collateral to support the Company's agreements to
fund operating deficits of the SPEs. At March 31, 1999, the Company has pledged
certificates of deposit in the aggregate of $35.6 million that are classified as
non-current assets limited as to use. The Company receives the interest income
earned on these certificates of deposit. The Company has not funded any
operating deficits as of March 31, 1999. The management agreements also provide
the Company with a right of first refusal to assume the SPEs' interest in the
leases at a formula price. As of March 31, 1999, the Company has not assumed any
of the SPEs' lease interests.
In connection with the execution of management contracts pursuant to the FGI
transaction, the Company assumed debt guaranties on mortgage debt of two managed
communities. At March 31, 1999, $27.8 million was outstanding under the related
debt agreements.
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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 company
providing a broad range of care and services to seniors within a residential
setting. The Company currently operates 44 senior living communities in 16
states with an aggregate capacity for approximately 12,700 residents. The
Company currently owns 19 communities, leases eight communities pursuant to
long-term leases, and manages 17 communities pursuant to management agreements.
The Company is currently constructing or developing 30 senior living communities
and expanding nine of its existing communities to add aggregate estimated
capacity for approximately 4,000 residents.
The Company's growth strategy includes: (i) selective acquisitions of senior
living communities, including continuing care retirement communities ("CCRCs")
and assisted living residences; (ii) development of senior living communities,
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 other properties and businesses that
are complementary to the Company's operations and growth strategy.
The Company reported net income of $3.4 million, or $0.20 diluted earnings per
share, on revenues of $43.6 million for the quarter ended March 31, 1999, as
compared with income from continuing operations before cumulative effect of
change in accounting for start-up costs of $1.7 million, or $0.15 diluted
earnings per share from continuing operations, on revenues of $27.0 million for
the comparable prior year period.
RESULTS OF OPERATIONS
The Company's total revenues are comprised of (i) resident and health care
revenues, (ii) management services revenue and (iii) development fees. The
Company's resident and health care revenues are comprised of (i) monthly service
fees and ancillary revenues from independent and assisted living residents
representing 73.5% and 81.8% of total revenues for the three months ended March
31, 1999 and 1998, respectively, (ii) per diem charges from residents receiving
nursing care representing 13.1% and 12.3% of total revenues for the three months
ended March 31, 1999 and 1998, respectively, and (iii) the amortization of
entrance fees over each resident's actuarially determined life expectancy
representing 5.1% for the three months ended March 31, 1999 (the Company did not
own entrance fee communities prior to July 1, 1998). Management services revenue
represented 3.2% and 1.3% of total revenues for the three months ended March 31,
1999 and 1998, respectively. Development fees represented 5.1% and 4.6% of total
revenues for the three months ended March 31, 1999 and 1998, respectively.
Approximately 95.4% and 95.5% of the Company's total revenues for the three
months ended March 31, 1999 and 1998, respectively, were attributable to private
pay sources, with the balance
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attributable to Medicare, including Medicare-related private pay co-insurance
and, to a lesser extent, Medicaid.
The Company's operating expenses are comprised of (i) community operating
expenses, which includes all operating expenses of the Company's owned or leased
communities; (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, 1999 MARCH 31, 1998
-------------- --------------
END OF PERIOD CAPACITY STABLE(1) TOTAL STABLE(1) TOTAL
--------- ------ --------- -----
<S> <C> <C> <C> <C>
Owned 4,857 5,150 3,056 3,342
Leased 2,300 2,368 1,473 1,563
Managed 3,797 4,668 2,084 2,084
------ ------ ----- -----
Total 10,954 12,186 6,613 6,989
====== ====== ===== =====
END OF PERIOD OCCUPANCY
Owned 94% 91% 93% 88%
Leased 92% 89% 93% 90%
Managed 93% 87% 96% 96%
--- --- --- ---
Total 93% 89% 94% 91%
=== === === ===
</TABLE>
- --------------------
(1) Includes communities or expansions thereof that have (i) achieved 95%
occupancy or (ii) have been open at least 12 months.
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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. Two communities at which
significant expansions were opened during 1998 have been excluded from the
comparative data and will return to the Same Community group upon stabilization
of the expansions. Home health operations have also been excluded for the
periods presented.
STATEMENT OF OPERATIONS DATA FOR SAME COMMUNITIES:
(DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998 % change
---- ---- --------
<S> <C> <C> <C>
Resident and health care revenues $24,404 $22,838 6.9%
Community operating expense 14,578 13,997 4.2%
------- ------- ----
Resident income from operations 9,826 8,841 11.1%
Resident income from operations margin(1) 40.3% 38.7%
Lease expense 1,437 1,415 1.6%
Depreciation and amortization 1,702 1,542 10.4%
------- ------- -----
Income from operations 6,687 5,885 13.6%
Other data:
Resident capacity 4,254 4,254
Number of communities 15 15
Average occupancy rate(2) 95% 91%
Average monthly revenue per occupied unit(3) $2,219 $2,153
Average monthly expense per occupied unit(4) $1,240 $1,217
</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 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 divided by total occupied apartments and nursing beds, expressed on a
monthly basis.
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THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues Total revenues were $43.6 million for the three months ended March 31,
1999 compared to $27.0 million for the three months ended March 31, 1998,
representing an increase of $16.6 million, or 61.2%. Resident and health care
revenue increased by $14.5 million, management services revenue increased by
$1.1 million, and development fees increased by $1.0 million. The increase in
resident and health care revenue was attributable to revenues derived from
senior living communities acquired or leased after March 31, 1998, including
$8.8 million from acquired FGI communities. Management services revenue
increased as a percentage of total revenue to 3.2% for the three months ended
March 31, 1999 from 1.3% in the comparable period in 1998. Development fees
increased as a percentage of total revenues to 5.1% for the three months ended
March 31, 1999 from 4.6% in the comparable 1998 period. The increase in
management services revenue is related to new management agreements entered into
in the FGI transaction. The increase in development fees is a result of the
increase in development services being provided to others.
Resident and health care revenues attributable to Same Communities were $24.4
million for the three months ended March 31, 1999, as compared to $22.8 million
for the three months ended March 31, 1998. This increase was derived from a 3.1%
increase in average rates and a 3.7% increase in occupied units. Same Community
average occupancy rates increased to 95% for the three months ended March 31,
1999 as compared to 91% for the comparable 1998 period.
Community Operating Expenses Community operating expenses increased to $25.2
million for the three months ended March 31, 1999, as compared to $16.0 million
for the three months ended March 31, 1998, representing an increase of $9.2
million, or 57.2%. The increase in community operating expenses was primarily
attributable to expenses from senior living communities acquired or leased after
March 31, 1998, including $5.6 million from acquired FGI communities. Community
operating expenses as a percentage of resident and health care revenues was
63.1% for the three months ended March 31, 1999 and for the three months ended
March 31, 1998.
Same Community operating expenses increased to $14.6 million for the three
months ended March 31, 1999, as compared to $14.0 million for the three months
ended March 31, 1998, representing an increase of $581,000, or 4.2%. Same
Community operating expense as a percentage of Same Community revenues decreased
to 59.7% for the three months ended March 31, 1999 from 61.3% in the comparable
period in the prior year primarily as a result of a higher number of occupied
units.
General and Administrative General and administrative expense increased to $3.3
million for the three months ended March 31, 1999, as compared to $1.7 million
for the three months ended March 31, 1998, representing an increase of $1.5
million, or 89%. The increase was primarily related to increases in salaries and
benefits including corporate personnel retained as a result of the FGI
acquisition. General and
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administrative expense as a percentage of total revenues increased to 7.5% for
the three months ended March 31, 1999 as compared to 6.4% for the three months
ended March 31, 1998.
Lease Expense Lease expense increased to $3.0 million for the three months
ended March 31, 1999, from $1.7 million for the three months ended March 31,
1998. The increase was attributable to leases entered into after March 31, 1998
for Rossmoor Regency, Bahia Oaks, and Park Regency. Same Community lease expense
was unchanged at $1.4 million for the comparative periods.
Depreciation and Amortization Depreciation and amortization expense increased
to $3.3 million for the three months ended March 31, 1999, from $1.7 million for
the three months ended March 31, 1998, representing an increase of $1.6 million,
or 92%. The increase was primarily attributable to senior living communities
acquired after March 31, 1998 and the amortization of the costs in excess of net
assets acquired resulting from the FGI acquisition. Same Community depreciation
and amortization expense increased to $1.7 million for the three months ended
March 31, 1999, from $1.5 million for the three months ended March 31, 1998,
representing an increase of $160,000, or 10.4%, primarily related to capital
expenditures at the related communities.
Other Income (Expense) Interest expense increased to $4.8 million, net of
capitalized interest of $702,000, for the three months ended March 31, 1999,
from $3.8 million, net of capitalized interest of $452,000, for the three months
ended March 31, 1998, representing an increase of $1.0 million, or 26%. The
increase in interest expense was primarily attributable to indebtedness incurred
in connection with acquisitions. Interest income increased to $1.4 million in
the three months ended March 31, 1999 from $627,000 for the comparable period of
the prior year, primarily due to income generated from certificates of deposit
associated with certain leasing transactions and management agreements.
Income Tax Expense The provision for income taxes was $2.1 million for the
three months ended March 31, 1999 as compared to $967,000 for the three months
ended March 31, 1998. The Company's effective tax rate was 38% and 36% for the
three months ended March 31, 1999 and 1998, respectively.
Discontinued Operations During 1998, the Company suspended operations of
certain of its home health care agencies pending either institution of a
prospective pay system acceptable to the Company, or major revisions to the
United States interim payment system now in effect. During the fourth quarter of
1998, the Company determined that an acceptable reimbursement system would not
be implemented in the near term and discontinued its home health care
operations. The operating results and cash flows of the home health care
division for the three months ended March 31, 1998 have been reclassified to
discontinued operations. The Company recorded losses from home health care
operations, net of tax, of $244,000 in the three months ended March 31, 1998.
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Cumulative Effect of Change in Accounting Principle The Company elected early
adoption of the AICPA's Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities (the "SOP"). The SOP requires that costs incurred during
start-up activities be expensed as incurred. Initial application of the SOP is
as of the beginning of the fiscal year in which the SOP is first adopted.
Accordingly, effective January 1, 1998 the Company wrote off $304,000, net of
tax, of unamortized start-up and organizational costs as the cumulative effect
of a change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its activities with the net proceeds from
public offerings of debt and equity, long-term mortgage borrowings, and cash
flows from operations. At March 31, 1999, the Company had $335.4 million of
indebtedness outstanding, including $138.0 million of 5 3/4% Convertible
Subordinated Debentures due 2002, and $111.8 million of indebtedness to a
capital corporation, with fixed maturities ranging from December 1999 to April
2028. As of March 31, 1999, approximately 81.7% 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 6.7% as of March
31, 1999. As of March 31, 1999, the Company had working capital of $20.0
million.
Net cash provided by operating activities was $2.5 million for the three months
ended March 31, 1999 as compared to $743,000 used in operating activities for
the three months ended March 31, 1998. The Company's unrestricted cash balance
was $17.0 million as of March 31, 1999.
Net cash used in investing activities was $43.3 million for the three months
ended March 31, 1999, as compared with $17.3 million for the three months ended
March 31, 1998. During the three months ended March 31, 1999, the Company made
additions to land, buildings and equipment including construction activity of
$24.3 million, increased notes receivable by $12.0 million, and purchased $7.3
million of assets limited as to use pursuant to certain leasing transactions.
Net cash provided by financing activities was $37.3 million for the three months
ended March 31, 1999, as compared with $2.4 million for the three months ended
March 31, 1998. The Company had borrowings of $35.0 million under long-term debt
arrangements, received $2.8 million from the sale of life estate contracts and
made principal payments under master trust agreements of $785,000 during the
three months ended March 31, 1999.
During the three months ended March 31, 1999, the Company entered into a $4.5
million secured term loan and a $6.0 million unsecured acquisition line of
credit with a bank. The current balance under the acquisition line is $4.7
million and matures December 31, 1999 and is secured by land. The line of credit
matures May 1, 2001. The $4.5 million
14
<PAGE> 15
and $6.0 million credit facilities contain certain restrictive covenants
respecting the Company.
The Company also maintains a $50.0 million revolving credit facility and a $4.0
million secured line of credit which are available for general use. As of March
31, 1999, $35.0 million was outstanding under the $50.0 million facility and
approximately $3.8 million of the $4.0 million line had been used to obtain
letters of credit. The Company has also received a commitment for an additional
$50.0 million acquisition and development line of credit.
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. All of the
Company's owned communities are subject to mortgages. Seven of the Company's
owned communities serve as blanket collateral for the indebtedness payable to a
capital corporation and as collateral for the $50.0 million revolving credit
facility. 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. 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.
Additionally, substantially all of such indebtedness is cross-defaulted.
The aggregate estimated cost to complete and lease-up the 30 senior living
communities currently under construction or development is approximately $400.0
million to $425.0 million. In addition, the Company plans to expand nine of its
communities, which is expected to cost approximately $70.0 million to complete
and lease-up.
The Company expects that its current cash, together with cash flow from
operations and borrowings available to it under existing and pending 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, leasing,
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.
YEAR 2000 COMPLIANCE
The Company has assessed the impact of Year 2000 issues on the Company's
business, results of operations, and financial condition. The majority of the
Company's critical information systems were purchased from outside vendors who
have upgraded their applications to be Year 2000 compliant. The Company is also
evaluating other Year 2000 implications associated with its community
operations, such as elevators, security
15
<PAGE> 16
systems, HVAC systems, utilities and other major services or supplies. The
Company anticipates substantially completing the remediation of such systems and
services and the development of contingency plans by the third quarter of 1999.
The potential impact of Year 2000 issues is also dependent upon corrective
measures taken by the businesses and other entities that the Company deems
critical to its operations. Communication with significant third parties has
been initiated to determine the status of their Year 2000 compliance; however,
it is not possible, at present, to determine the effect on the Company if third
party remediation efforts are not completed in a timely manner.
While the Company expects to adequately resolve all Year 2000 issues, a
"reasonably likely worst case" scenario could include supplier disruption and
potential delay in reimbursement from certain agencies. The Company intends to
address the possible consequences of these issues through community-specific
supplier contingency plans and a prudent level of liquidity.
The Company is unable to quantify the potential effect of Year 2000 issues on
its results of operations, liquidity, and financial position. The total cost of
compliance measures is not estimated to be material and is being funded through
operating cash flows and expensed as incurred.
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
Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 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.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk from exposure to changes in interest rates
based on its financing, investing, and cash management activities. The Company
utilizes a balanced mix of debt maturities along with both fixed-rate and
variable-rate debt to manage its exposures to changes in interest rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." The Company does not expect
changes in interest rates to have a material effect on income or cash flows in
fiscal 1999, although there can be no assurances that interest rates will not
significantly change and materially effect the Company.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27 - Financial Data Schedule for SEC use only
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated February 1, 1999, to
report the termination of its previously announced merger with Assisted
Living Concepts, Inc.
17
<PAGE> 18
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 17, 1999 By: /s/ George T. Hicks
-------------------
George T. Hicks
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
18
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED MARCH 31, 1999 BALANCE SHEET AND STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
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<FISCAL-YEAR-END> DEC-31-1999
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