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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number 01-13031
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AMERICAN RETIREMENT CORPORATION
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(Exact name of Registrant as specified in its charter)
Tennessee 62-1674303
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
111 Westwood Place, Suite 200, Brentwood, TN 37027
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(Address of principal executive offices) (Zip Code)
(615) 221-2250
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(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 November 14, 2000, there were 17,035,944 shares of the Registrant's common
stock, $.01 par value, outstanding.
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INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
<S> <C> <C>
Condensed Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999..........................................3
Condensed Consolidated Statements of
Operations for the Three Months Ended
September 30, 2000 and September 30, 1999 ........................................4
Condensed Consolidated Statements of
Operations for the Nine Months Ended
September 30, 2000 and September 30, 1999 ........................................5
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
2000 and September 30, 1999 ......................................................6
Notes to Condensed Consolidated Financial Statements .............................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................... 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................ 25
Signatures ................................................................................ 26
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,631 $ 21,881
Assets limited as to use 8,094 15,571
Accounts receivable, net 13,436 12,746
Advances for development projects 5,016 3,762
Inventory 1,030 950
Prepaid expenses 3,788 1,790
Deferred income taxes 758 758
Other current assets 4,687 5,727
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Total current assets 62,440 63,185
Assets limited as to use, excluding amounts classified as current 75,543 60,855
Land, buildings and equipment, net 480,257 431,560
Notes receivable 95,789 97,236
Costs in excess of net assets acquired, net 37,755 38,524
Leasehold acquisition costs, net 11,608 978
Other assets 49,096 48,073
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Total assets $812,488 $740,411
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10,987 $ 10,173
Accounts payable 5,376 3,723
Accrued expenses 21,922 15,820
Other current liabilities 5,809 9,879
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Total current liabilities 44,094 39,595
Long-term debt, excluding current portion 358,167 287,835
Convertible subordinated debentures 137,980 137,980
Refundable portion of life estate fees 44,305 43,386
Deferred life estate income 53,091 51,606
Tenant deposits 7,449 6,913
Deferred gain on sale-leaseback transactions 2,828 3,168
Deferred income taxes 14,370 15,236
Other long-term liabilities 4,449 6,524
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Total liabilities 666,733 592,243
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.01 par value; 200,000,000 shares authorized,
17,035,944 and 17,145,343 shares issued and outstanding, respectively 170 171
Additional paid-in capital 144,806 145,444
Retained earnings 779 2,553
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Total shareholders' equity 145,755 148,168
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Total liabilities and shareholders' equity $812,488 $740,411
======== ========
</TABLE>
See accompany notes to condensed consolidated financial statements.
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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 September 30,
---------------------------------
2000 1999
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<S> <C> <C>
Revenues:
Resident and health care $ 52,359 $ 41,590
Management and development services 1,073 2,772
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Total revenues 53,432 44,362
Operating expenses:
Community operating expenses 36,936 26,871
Lease expense, net 4,979 3,364
General and administrative 4,722 3,686
Depreciation and amortization 4,547 3,288
-------- --------
Total operating expenses 51,184 37,209
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Operating income 2,248 7,153
Other income (expense):
Interest expense (9,768) (6,572)
Interest income 3,660 2,616
Other 552 (188)
-------- --------
Other expense, net (5,556) (4,144)
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Income (loss) before income taxes and minority interest (3,308) 3,009
Income tax (benefit) expense (1,098) 1,143
-------- --------
Income (loss) before minority interest (2,210) 1,866
Minority interest in losses of consolidated subsidiaries, net of tax 468 213
-------- --------
Net income (loss) $ (1,742) $ 2,079
======== ========
Basic earnings (loss) per share: $ (0.10) $ 0.12
======== ========
Diluted earnings (loss) per share: $ (0.10) $ 0.12
======== ========
Weighted average shares used for basic earnings (loss) per share data 17,024 17,138
Effect of dilutive common stock options -- --
-------- --------
Weighted average shares used for diluted earnings (loss) per share data 17,024 17,138
======== ========
</TABLE>
See accompany notes to condensed consolidated finanical statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
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<S> <C> <C>
Revenues:
Resident and health care $ 145,372 $ 122,213
Management and development services 3,599 10,197
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Total revenues 148,971 132,410
Operating expenses:
Community operating expenses 99,458 77,573
Lease expense, net 12,597 9,517
General and administrative 13,381 10,449
Depreciation and amortization 12,589 9,993
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Total operating expenses 138,025 107,532
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Operating income 10,946 24,878
Other income (expense):
Interest expense (26,473) (16,759)
Interest income 11,173 5,941
Other 403 (259)
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Other expense, net (14,897) (11,077)
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Income (loss) before income taxes, minority interest and extraordinary loss (3,951) 13,801
Income tax expense (1,334) 5,251
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Income (loss) before minority interest and extraordinary loss (2,617) 8,550
Minority interest in losses of consolidated subsidiaries, net of tax 967 348
--------- ---------
Income (loss) before extraordinary loss (1,650) 8,898
Extraordinary loss on extinguishment of debt, net of tax (124) --
--------- ---------
Net income (loss) $ (1,774) $ 8,898
========= =========
Basic earnings (loss) per share:
Basic earnings (loss) per share before extraordinary loss $ (0.10) $ 0.52
Extraordinary loss, net of tax (0.01) --
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Basic earnings (loss) per share $ (0.10) $ 0.52
========= =========
Diluted earnings (loss) per share:
Diluted earnings (loss) per share before extraordinary loss $ (0.10) $ 0.52
Extraordinary loss, net of tax (0.01) --
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Diluted earnings (loss) per share $ (0.10) $ 0.52
========= =========
Weighted average shares used for basic earnings (loss) per share data 17,102 17,126
Effect of dilutive common stock options -- 10
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Weighted average shares used for diluted earnings (loss) per share data 17,102 17,136
========= =========
</TABLE>
See accompany notes to condensed consolidated finanical statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,774) $ 8,898
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 12,589 9,993
Amortization of deferred entrance fee revenue (5,037) (5,683)
Amortization of deferred financing costs 1,542 991
Proceeds from terminated lifecare contracts 1,767 2,176
Deferred income tax (benefit) expense (866) 1,631
Amortization of deferred gain on sale-leaseback transactions (340) (339)
Minority interest in losses of consolidated subsidiaries (967) (348)
Losses from unconsolidated joint ventures 411 1,292
Gain on sale of land 259 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 846 (3,160)
Inventory 68 10
Prepaid expenses (1,678) (157)
Other assets (3,088) (2,095)
Accounts payable 14 (3,416)
Accrued expenses (949) 3,165
Tenant deposits 64 (195)
Other liabilities (1,658) (1,634)
-------- ---------
Net cash and cash equivalents provided by operating activities 1,203 11,129
Cash flows from investing activities:
Additions to land, buildings and equipment (34,592) (46,765)
Expenditures for acquisitions, net of cash received (6,082) --
Reimbursements from (advances for) development projects, net (1,254) 6,907
Investments in joint ventures (75) (430)
Receipts (payments) for purchase options 4,000 (7,516)
Other investing activities (426) 1,144
Changes in assets and liabilities, net of effects from acquisitions:
Expenditures for leasehold acquisitions, net (9,651) --
Purchase of assets limited as to use (8,311) (11,982)
Issuance of notes receivable (5,892) (57,269)
-------- ---------
Net cash used by investing activities (62,283) (115,911)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 86,935 113,012
Proceeds from life estate sales, net of refunds 5,864 8,261
Principal payments on long-term debt (23,714) (3,084)
Principal reductions in master trust liability (1,847) (3,338)
Expenditures for financing costs (1,769) (2,767)
Other financing activities (639) 1,859
-------- ---------
Net cash provided by financing activities 64,830 113,943
-------- ---------
Net increase in cash and cash equivalents 3,750 9,161
-------- ---------
Cash and cash equivalents at beginning of period 21,881 20,400
-------- ---------
Cash and cash equivalents at end of period $ 25,631 $ 29,561
======== =========
</TABLE>
See accompany notes to condensed consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
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<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $24,208 $15,423
======= =======
Income taxes paid $ 211 $ 5,004
======= =======
Supplemental disclosure of non-cash transactions:
During 2000, the Company acquired a senior living community and two assisted
living communities. In conjunction with the transaction, net assets and
liabilities were assumed as follows:
Current assets $ 939 $ --
Land, buildings and other assets 14,202 --
Current liabilities 1,108 --
Debt and other long-term liabilities 7,951 --
</TABLE>
See accompany notes to condensed consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
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 1999 amounts have been reclassified to conform to the 2000 presentation.
Operating results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2000. 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, 1999.
2. EARNINGS PER SHARE
Basic earnings or loss per share for the three and nine months ended September
30, 2000 and 1999 have been computed on the basis of the weighted average number
of shares outstanding. The weighted average number of shares outstanding for
diluted earnings per share includes dilutive common stock equivalents, which
consist of in-the-money stock options. During the three and nine months ended
September 30, 2000, there were 409,535 and 444,049 options to purchase shares of
common stock outstanding which had an exercise price below the average market
price of the common shares. Such options were anti-dilutive because the Company
incurred a loss from continuing operations for the quarter ended and
year-to-date periods September 30, 2000, and therefore were not included in the
computation of diluted earnings per share.
The Company's 5 3/4% Convertible Debentures outstanding during the periods
presented were not included in the computation of diluted earnings per share
because the conversion price ($24.00 per share) was greater than the average
market price of the common shares for the respective periods and, therefore, the
effect would be anti-dilutive.
The following options to purchase shares of common stock were outstanding during
each of the following periods, but were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares for the respective periods and,
therefore, the effect would be anti-dilutive.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Average number of options (in thousands) 313 1,959 1,272 1,229
Weighted-average exercise price $ 12.06 $ 16.02 $ 15.46 $ 16.77
</TABLE>
In December 1999, the Company announced plans to buy back up to $1.5 million of
its common stock to fund the Company's contributions to its employee benefit
plans for 2000 and 2001. As of September 30, 2000, the Company has purchased
$1,198,705 or 211,400 shares of common stock.
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3. LONG TERM DEBT
During the nine months ended September 30, 2000, the Company entered into
various financing commitments including a secured term loan from a mortgage
lender in the amount of $23.3 million, with interest payable at LIBOR plus 3%.
Interest and principal are payable monthly, based on a twenty-five year
amortization, with all remaining balances due in April 2003. The maturity date
of the note may be extended to April 2005 based upon certain conditions. The
Company also entered into a secured term loan with a finance company in the
amount of $2.5 million, with interest payable at LIBOR plus 3 3/4%. Interest and
principal are payable monthly, with interest only payments during the first
year. The remaining balance on the note is due in full in April 2002, but can be
extended to April 2003 based upon certain conditions.
The Company used a portion of the proceeds on the above loans to refinance a
term note to a bank, repaying the outstanding amount of $14.3 million. This note
had a maturity date of December 2001, with fixed interest at 8.2%. As part of
this transaction, the Company incurred a prepayment penalty of $124,000, net of
income taxes, which was recorded as an extraordinary loss on extinguishment of
debt during the first quarter of 2000.
The Company modified a mortgage payable to a bank as part of a new building
expansion. The original floating rate note had a maximum borrowing amount of
$6.8 million, which was increased to $11.4 million. Interest is payable monthly
at LIBOR plus 2 1/4%. As of September 30, 2000, $10.7 million was outstanding on
this note.
The Company also entered into a mortgage note with an investment company in the
amount of $12.0 million. Interest at 9.5% plus principal is payable monthly,
with the note maturing on June 2025. The note is secured by certain land and
buildings.
The Company assumed a mortgage note payable to a bank in the amount of $7.9
million as part of the dissolution of a joint venture in which the Company was a
member. The dissolution is described in Footnote 6. Interest and principal are
payable monthly, with the note maturing in March 2006. Interest is paid at a
base Treasury rate plus 2%. The note is secured by certain land and buildings.
During the three months ended September 30, 2000, the Company entered into a
construction loan from a mortgage lender in the amount of $10.3 million, which
may be increased to $12.0 million, with variable interest payable at EURO-LIBO
(Euro-Dollar rate request) plus 2 1/2%. Interest is payable monthly, with all
remaining balances due in September 2003. The maturity date of the note may be
extended to September 2005 based upon certain conditions. As of September 30,
2000, $7.2 million was outstanding on this note.
Additionally, $31.6 million of proceeds from issuance of long-term debt was from
additional borrowings under existing credit facilities, primarily from a $100.0
million revolving line of credit, of which $96.0 million was outstanding at
September 30, 2000. These funds were used primarily for construction or
expansion of retirement communities, and expenditures for acquisitions of
retirement communities and leasehold acquisitions.
The Company announced, during the quarter ended March 31, 2000, that the Board
of Directors had authorized the repurchase, from time to time, of up to $30.0
million of its 5 3/4% Convertible Debentures. The timing and amount of purchases
will depend upon prevailing market conditions, alternative uses of capital and
other factors. The program is expected to be completed during 2000 or 2001,
although no repurchases have occurred as of September 30, 2000.
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4. ASSET IMPAIRMENTS AND CONTRACTUAL LOSSES
During the quarter ended December 31, 1999, the Company announced that due to a
shift in its growth strategy from development to acquisitions of senior living
communities, it would be abandoning certain development projects and reviewing
others with respect to the senior living network strategy. As a result, the
Company recorded total asset impairments and contractual loss charges of
approximately $12.5 million during the quarter ended December 31, 1999. The
pretax costs of $12.5 million include $5.8 of asset write-offs and accruals of
$6.7 million for contractual losses and other costs. The Company made cash
payments of $423,000, $5.3 million and $70,000 in the quarters ended March 31,
June 30 and September 30, 2000, respectively, related to these costs. An accrual
of $927,000 remains at September 30, 2000. The Company will continue to evaluate
the adequacy of the remaining accrual. The Company has been marketing the land
parcels associated with certain of the abandoned projects, although no sales
occurred during the nine months ended September 30, 2000. The Company intends to
continue these marketing activities in the fourth quarter.
5. COMMITMENTS AND CONTINGENCIES
The Company has financed 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 $1.5 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 of approximately 5.0% of the total projected construction costs of
the communities. Such fees are recognized over the terms of the development
agreements using a method that approximates the percentage-of-completion method.
The Company recognized $63,000 and $965,000 of development fee revenue during
the three months ended September 30, 2000 and 1999, respectively, and $886,000
and $5.3 million of development fee revenue during the nine months ended
September 30, 2000 and 1999, 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 various management agreements with the SPEs to manage the
operations of the leased senior living communities. The agreements provide for
the payment of management fees to the Company based on a percentage of each
community's gross revenues and requires the Company to fund the SPEs' operating
deficits above specified amounts. The Company recorded no operating deficits and
$582,000 of operating deficits during the three and nine months ended September
30, 2000, versus no operating deficits during the three and nine months ended
September 30, 1999. The Company is required to pledge certificates of deposit or
other investment instruments to the lessors as part of these arrangements. At
September 30, 2000, the Company has pledged certificates of deposit and other
investments in the aggregate amount of $59.4 million, which are classified as
non-current assets limited as to use. The Company receives the interest income
earned on these investments.
The Company manages a senior living community in Peoria, Arizona under a
long-term management agreement with a third party owner. The Arizona Department
of Insurance ("Arizona DOI") has notified the owner of this community that it is
not currently in compliance with a net worth requirement imposed by Arizona law.
While compliance with this net worth requirement is technically the
responsibility of the owner, in order to facilitate discussions with the Arizona
DOI, the Company has provided the Arizona DOI with a limited guaranty relating
to the financial performance of the community, and has notified the Arizona DOI
of the Company's intention to enter into a lease or acquisition transaction
regarding the community on or before December 31, 2000, if the Company can reach
acceptable terms with the owner. While the Company and the owner believe that
the owner's noncompliance with the net worth requirement is only a technical
violation of law and that the community is in a strong financial position, there
can be no
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assurance that the State of Arizona will not enforce the law strictly. A
violation of this net worth requirement may, among other things, allow the
Arizona DOI to take steps to appoint a receiver for the community.
The Company has discovered that its property in Knoxville, Tennessee has several
significant construction or design deficiencies that result in, among other
things, inadequate water and condensation drainage and control. As a result of
these construction issues, the Company has moved certain residents and initiated
various inspections, air quality tests, and other procedures. The Company has
also involved its outside counsel and its insurance carrier in these issues, and
is in discussions with the construction contractors and the design participants
of the project. The Company is not able to determine to what extent these issues
will result in a negative impact on the results of this community or additional
liabilities and costs to the Company. The Company recorded certain impairment
charges related to this property, and others, during the quarter ended December
31, 1999, as discussed in Footnote 4.
6. ACQUISITIONS AND OTHER TRANSACTIONS
On January 1, 2000, the Company acquired a senior living community previously
managed by the Company for $4.5 million.
The Company had previously managed a retirement community located in Glenmore,
Pennsylvania, which was owned by a previously related party. In conjunction with
the management agreement, the Company had an option to purchase the community
upon specified terms. On May 26, 2000, the Company assigned its purchase option
to a third party, which exercised the option and purchased the property. The
Company subsequently entered into a series of agreements with this third party
to lease and operate the retirement community. As part of this transaction, the
Company acquired certain assets and liabilities from the previous owners of the
community for $1.0 million. In connection with this transaction, the Company is
required to maintain $17.6 million of assets limited as to use, on which the
Company receives the interest earned on these deposits.
The Company owned a 50% interest in a joint venture that was formed for the
purpose of owning and operating two assisted living communities in Knoxville,
Tennessee. The Company determined that this venture did not fit with the
Company's Senior Living Network strategy. As of June 1, 2000, the parties
dissolved the joint venture, with each party retaining one of the assisted
living communities, along with the liabilities associated with that community.
As a result of the dissolution, the Company recorded assets of $8.2 million,
consisting primarily of land and buildings. The Company also assumed $8.2
million of liabilities, consisting primarily of a $7.9 million mortgage note
payable. The Company has no further management responsibility for, or liability
with respect to, the community that was retained by the other party.
During the three months ended September 30, 2000, the Company entered into an
operating lease for an assisted living community that was purchased during the
three months ended June 30, 2000. The community is located in Marietta, Georgia
and was leased to a third party for a five-year term with a renewal option for
an additional five years.
During the nine months ended September 30, 2000, the Company acquired from
various SPEs the assets or leasehold interests and assumed certain liabilities
of eleven retirement communities in exchange for total payments of $9.7 million,
net of cash received, which was recorded as leasehold acquisition costs. One of
these communities is still under construction. The costs of acquiring the
leasehold interests are being amortized as lease expense on a straight-line
basis over the remaining terms of the respective leases. The assets and
liabilities were recorded at cost, which approximates fair value.
Three of the leasehold interests were acquired, for $5.6 million, from an
affiliate of John Morris, a director of the Company. In addition the Company has
advanced amounts for certain costs of affiliates of John Morris. At September
30, 2000, approximately $3.8 million was due to the Company from these
affiliates.
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Such amounts are expected to be reimbursed through the acquisition of the
leasehold interests of these affiliates.
The Company is in discussions with various SPEs to acquire some or all of the
leasehold interests in the assisted living communities that the Company
currently is developing or managing on behalf of third parties. At September 30,
2000, there were 15 assisted living communities owned by various SPEs. The
Company intends to acquire the leasehold interests in three communities during
the fourth quarter of 2000 for a combined price of approximately $5.1 million,
with any remaining community leasehold acquisitions likely to occur during 2001
through 2002. For completed leasehold acquisitions, the Company expects to incur
significant start-up and operating losses until the communities achieve
break-even occupancy levels.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts. Under SFAS No. 133, the Company would recognize all
derivatives as either assets or liabilities, measured at fair value, in the
consolidated balance sheet. In July 1999, SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of Effective Date of
FASB No. 133, An Amendment of FASB Statement No. 133" was issued deferring the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In
June 2000, SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of FASB Statement No. 133" was issued
clarifying the accounting for derivatives under the new standard. SFAS 133
standardizes the accounting for derivative instruments. The Company participates
in interest rate swap transactions, which would be considered derivatives under
SFAS 133. The Company has not entered into any other derivative transactions. To
date, the net effect of the interest rate swaps to the Company's results of
operations has not been material. Therefore, SFAS 133 is not anticipated to
significantly affect the results of operations or the financial position of the
Company. The Company is in the process of evaluating the impact these
pronouncements will have on its consolidated financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 (FIN 44) "Accounting for Certain Transactions Involving Stock
Compensation" which provides interpretive guidance on several implementation
issues related to Accounting Principles Board Opinion No. 25 (APB 25)
"Accounting for Stock Issued to Employees." FIN 44 clarifies the definition of
"employee" for purposes of applying APB 25, the criteria for determining whether
a plan qualifies as a noncompensatory plan, the accounting consequence of
various modifications to the terms of a previously fixed stock option or award,
and the accounting for an exchange of stock compensation awards in a business
combination. The provisions of FIN 44 are effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after December 15,
1998 or January 12, 2000. Under FIN 44, no adjustments are to be made upon
initial application of FIN 44 for periods prior to July 1, 2000. FIN 44 had no
impact on transactions of the Company subsequent to December 15, 1998 or January
12, 2000. The Company will comply with FIN 44 for any stock compensation
transactions entered into subsequent to July 1, 2000.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 establishes specific criterion for revenue recognition. In June 2000, the
Securities and Exchange Commission issued SAB 101B, which amends the transition
guidance for SAB 101. The Company must adopt the provisions of SAB 101 no later
than the fourth quarter of its fiscal year ending December 31, 2000. The Company
is in the process of evaluating what impact, if any, this SAB will have on the
Company's revenue recognition policies.
12
<PAGE> 13
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. As of September 30, 2000, the Company operated 60 senior living
communities in 15 states with an aggregate capacity for approximately 14,300
residents. The Company owned 22 communities, leased 16 communities pursuant to
long-term leases, and managed 22 communities pursuant to management agreements.
The Company is constructing or developing six senior living communities and
expanding two of its existing communities to add aggregate estimated capacity
for approximately 1,300 residents, including several joint venture projects with
third parties. As of September 30, 2000, the Company's owned communities had a
stabilized occupancy rate of 94%, its leased communities had a stabilized
occupancy rate of 93%, and its managed communities had a stabilized occupancy
rate of 89%. The Company considers a community or expansion thereof to be
stabilized if it has either been open and owned at least 12 months, or has
achieved 95% occupancy. Stabilized communities also include any managed
communities that have been open at least 12 months.
The Company's primary strategy is to develop Senior Living Networks in major
metropolitan regions. The Company has assembled a portfolio of large retirement
communities that provide some or all of independent living, assisted living and
skilled nursing care. In the same markets, the Company builds or acquires
freestanding assisted living, Alzheimer's or skilled nursing residences as
satellites to expand the continuum of housing and care into that market. The
Company believes that this hub and satellite approach produces management
efficiencies and market penetration by offering a range of senior living
arrangements at various price levels. The Company's methods to develop Senior
Living Networks include: (i) selective acquisitions of senior living
communities, including continuing care retirement communities 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
acquisition of other properties and businesses that are complementary to the
Company's operations and growth strategy.
During the quarter ended December 31, 1999, the Company announced that, as a
result of changes in the senior living industry environment, it would shift from
filling out its Senior Living Networks by development of new assisted living
residences to selective acquisitions of existing communities within those
networks. In conjunction with this decision, the Company abandoned several
planned and early-stage projects in its development pipeline and suspended all
new freestanding assisted living development. As a result, the Company recorded
asset impairment and contractual loss charges of approximately $12.5 million
during the quarter ended December 31, 1999. The pretax costs of $12.5 million
include $5.8 of asset write-offs and accruals of $6.7 million for contractual
losses and other costs. During the nine months ended September 30, 2000, the
Company settled the majority of these contractual loss obligations. The Company
has been marketing the land parcels associated with certain of the abandoned
projects, although no sales occurred during the nine months ended September 30,
2000. The Company intends to continue these marketing activities in the fourth
quarter.
The Company reported a net loss of $1.8 million, or ($0.10) diluted loss per
share, on total revenues of $149.0 million, as compared with net income of $8.9
million, or $0.52 diluted earnings per share, on revenues of $132.4 million for
the nine months ended September 30, 2000 and 1999, respectively.
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<PAGE> 14
RESULTS OF OPERATIONS
The Company's total revenues are comprised of (i) resident and health care
revenues and (ii) management and development services revenue. The Company's
resident and health care revenues are comprised primarily of (i) monthly service
fees and ancillary revenues from independent and assisted living residents,
which, as a percentage of total resident and health care revenues, were 76.7%
and 80.0% for the three months ended September 30, 2000 and 1999, respectively,
and 77.2% and 79.2% for the nine months ended September 30, 2000 and 1999,
respectively, (ii) per diem charges from residents receiving nursing care,
which, as a percentage of total resident and health care revenues, were 17.7%
and 14.1% for the three months ended September 30, 2000 and 1999, respectively,
and 17.5% and 14.2% for the nine months ended September 30, 2000 and 1999,
respectively, and (iii) the amortization of entrance fees, at certain life-care
communities, over each resident's actuarially determined life expectancy (or
building life for contingent refunds) which, as a percentage of total resident
and health care revenues, were 2.8% for the three months ended September 30,
2000 and 1999, respectively, and 2.2% and 3.3% for the nine months ended
September 30, 2000 and 1999, respectively. Management and development services
revenue as a percentage of total revenues was 2.0% and 6.2% for the three months
ended September 30, 2000 and 1999, respectively, and 2.4% and 7.7% for the nine
months ended September 30, 2000 and 1999, respectively. Over 95% of the
Company's total revenues for each of the three and nine month periods ended
September 30, 2000 and 1999 were attributable to private pay sources, with the
balance 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) lease expense; (iii) general and administrative expense, which
includes all corporate office overhead; and (iv) depreciation and amortization
expense.
The following table sets forth certain resident capacity and occupancy data for
the periods indicated:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
------------------ ------------------
Stable(1) Total Stable(1) Total
<S> <C> <C> <C> <C>
END OF PERIOD CAPACITY
Owned 5,313 5,777 5,042 5,284
Leased 2,936 3,467 2,475 2,475
Managed 3,811 5,033 4,046 5,476
----- ----- ----- -----
Total 12,060 14,277 11,563 13,235
====== ====== ====== ======
END OF PERIOD OCCUPANCY
Owned 94% 89% 95% 92%
Leased 93% 84% 93% 90%
Managed 89% 75% 93% 80%
Total 92% 83% 94% 87%
</TABLE>
-------------------
(1) Stable means communities or expansions thereof that have either
(i) been open and owned at least 12 months, or (ii) achieved 95% occupancy.
Includes managed communities that have been open at least 12 months.
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<PAGE> 15
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. Three communities, at
which significant expansions occurred during 1999 or 2000, have been excluded
from the comparative data and will return to the Same Community group upon
stabilization of the community following the expansions.
STATEMENT OF OPERATIONS DATA FOR SAME COMMUNITIES:
(DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -----------------
September 30, September 30,
------------- -------------
2000 1999 % change 2000 1999 % change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Resident and health care revenues $36,246 33,777 7.3% $104,066 97,192 7.1%
Community operating expense 23,318 21,392 9.0% 66,726 61,667 8.2%
------- ------- -------- -------
Resident income from operations 12,928 12,385 4.4% 37,340 35,525 5.1%
Resident income from operations margin(1) 35.7% 36.7% (1.0)% 35.9% 36.6% (0.7)%
Lease expense 3,407 3,298 3.3% 9,212 8,858 4.0%
Depreciation and amortization 2,594 2,256 14.9% 7,652 6,789 12.7%
------- ------- -------- -------
Income from operations 6,927 6,831 1.4% 20,476 19,878 3.0%
Other data:
Resident capacity 6,103 6,061 0.7% 5,908 5,866 0.7%
Number of communities 21 21 -- 20 20 --
Average occupancy rate(2) 94.6% 93.4% 1.2% 94.0% 92.3% 1.7%
Average monthly revenue
per occupied unit(3) $ 2,363 $ 2,244 5.3% $ 2,354 $ 2,247 4.7%
Average monthly expense
per occupied unit(4) $ 1,520 $ 1,421 7.0% $ 1,509 $ 1,426 5.8%
</TABLE>
(1) "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenues."
(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.
15
<PAGE> 16
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Revenues Total revenues were $53.4 million compared to $44.4 million for the
three months ended September 30, 2000 and 1999, respectively, representing an
increase of $9.1 million, or 20.4%. Resident and health care revenue increased
by $10.8 million while management and development services revenue decreased by
$1.7 million. The increase in resident and health care revenue was primarily
attributable to revenues derived from senior living communities acquired or
leased after September 30, 1999 and Same Community revenue increases. Management
and development services revenue decreased as a percentage of total revenue to
2.0% from 6.2% for the three months ended September 30, 2000 and 1999,
respectively. The decrease in management and development services revenue is
primarily related to a decrease in development fees, as well as decreased
management fees at certain properties as a result of lower sales of new units,
which reduces the formula-based management fees. The Company has shifted its
focus to a more acquisition-oriented method of creating its Senior Living
Networks and, therefore, has discontinued new development of freestanding
assisted living residences, for which the Company receives development fees. As
a result of this change, the Company expects that its development fee revenue
will be significantly lower than prior year levels throughout 2000.
The Company had a stabilized occupancy rate of 92% compared to 94% as of
September 30, 2000 and 1999, respectively, and had a total occupancy rate of 83%
compared to 87% as of September 30, 2000 and 1999, respectively. The decrease in
the total occupancy rate is a result of a large number of new communities and
expansions that have increased capacity, many of which are in the fill-up stage.
Resident and health care revenues attributable to Same Communities were $36.2
million compared to $33.8 million for the three months ended September 30, 2000
and 1999, respectively. This increase was derived from a 1.9% increase in
average occupied units and a 5.3% increase in average monthly revenue per
occupied unit. Excluding entry-fee communities, resident and health care
revenues increased 7.6% for these same periods, derived from a 2.1% increase in
occupied units and a 5.4% increase in average rates. Same Community average
occupancy rates increased to 94.6% compared to 93.4% for the three months ended
September 30, 2000 and 1999, respectively.
Community Operating Expenses Community operating expenses increased to $36.9
million compared to $26.9 million for the three months ended September 30, 2000
and 1999, respectively, representing an increase of $10.1 million, or 37.5%. The
increase in community operating expenses was primarily attributable to expenses
from expansions and from communities acquired or leased after September 30,
1999. Additionally, this increase is the result of increased labor, insurance,
facility and marketing costs at various new communities, as well as expansion of
services provided within all communities. Community operating expenses as a
percentage of resident and health care revenues increased to 70.5% from 64.6%
for the three months ended September 30, 2000 and 1999, respectively. The
increase in community operating expenses as a percentage of resident and health
care revenues is primarily attributable to the acquisition during the second
half of 1999 and during 2000 of various assisted living communities that are
currently managed by the Company or being developed by the Company on behalf of
third parties, which are in the fill-up stage. The Company anticipates that the
fill-up of these communities will occur over the next twelve to eighteen months.
The Company expects community operating expenses to remain at greater than
historical levels as a percentage of resident and health care revenues as the
Company continues to acquire assisted living communities that are managed or
being developed by the Company.
Same Community operating expenses increased to $23.3 million compared to $21.4
million for the three months ended September 30, 2000 and 1999, respectively.
This increase is primarily the result of increased insurance, premiums, reserves
and labor costs. Labor cost increases have resulted from a competitive labor
market, as well as an increase in nursing and assisted living services. Same
Community operating expenses as a percentage of Same Community revenues
increased to 64.3% from 63.3% for the three months ended September 30, 2000 and
1999, respectively. Excluding entry-fee communities, Same Community
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<PAGE> 17
operating expenses as a percentage of Same Community revenues increased to 63.3%
from 62.9% for the three months ended September 30, 2000 and 1999, respectively.
Lease Expense Lease expense increased to $5.0 million compared to $3.4 million
for the three months ended September 30, 2000 and 1999, respectively. The
increase was attributable to leases entered into after September 30, 1999,
including several acquisitions of leasehold interests. Same Community lease
expense increased to $3.4 million compared to $3.3 million for the three months
ended September 30, 2000 and 1999, respectively, representing an increase of
3.3%.
General and Administrative General and administrative expense increased to $4.7
million compared to $3.7 million for the three months ended September 30, 2000
and 1999, respectively, representing an increase of $1.0 million, or 28.1%. The
increase was primarily related to increases in salaries and benefits associated
with the operation of an increased number of communities, as well as the
overhead support costs associated with the Senior Living Networks in various
geographic areas. General and administrative expense as a percentage of total
revenues increased to 8.8% compared to 8.3% for the three months ended September
30, 2000 and 1999, respectively.
Depreciation and Amortization Depreciation and amortization expense increased to
$4.5 million compared to $3.3 million for the three months ended September 30,
2000 and 1999, respectively, representing an increase of $1.3 million, or 38.3%.
Same Community depreciation and amortization expense increased to $2.6 million
compared to $2.3 million for the three months ended September 30, 2000 and 1999,
respectively, representing an increase of $338,000, or 15.0%. The increases were
primarily related to the opening or acquisition of communities and expansion of
communities since September 30, 1999, as well as ongoing capital expenditures.
Other Income (Expense) Interest expense increased to $9.8 million, net of
capitalized interest of $456,000, compared to $6.6 million, net of capitalized
interest of $441,000, for the three months ended September 30, 2000 and 1999,
respectively, representing an increase of $3.2 million, or 48.6%. The increase
in interest expense was primarily attributable to indebtedness incurred in
connection with acquisitions and development activity, as well as increased
interest rates. Interest income increased to $3.7 million compared to $2.6
million for the three months ended September 30, 2000 and 1999, respectively,
primarily due to income generated from certificates of deposit and notes
receivable associated with certain leasing transactions and management
agreements.
Income Tax (Benefit) Expense The provision for income taxes was a $1,098,000
benefit compared to a $1,143,000 expense for the three months ended September
30, 2000 and 1999, respectively. The Company's effective tax rate was 33.0% and
38.0% for the three months ended September 30, 2000 and 1999, respectively.
Based on the estimated annual earnings, the Company reduced its effective tax
rate from 41% in the second quarter to 33% in the third quarter.
Minority Interest in Losses of Consolidated Subsidiaries, Net of Tax Minority
interest in losses of two consolidated subsidiaries, net of tax for the three
months ended September 30, 2000 was $468,000, representing an increase of
$255,000 from $213,000 for the comparable 1999 period. The increase was
primarily attributable to the losses of one of the communities which opened in
May 2000.
Net Income (Loss) The Company experienced a net loss for the quarter of $1.7
million or $.10 per share compared to net income of $2.1 million or $.12 per
share for the three months ended September 30, 2000 and 1999, respectively. The
primary cause of the loss was $2.7 million of pre-tax start-up losses at
pre-stable freestanding assisted living communities. The eleven managed assisted
living projects acquired during 2000, of which a number have or are about to be
opened, incurred $1.8 million of start-up losses. The Company expects to
continue to incur losses in the near term and until the newly acquired
communities complete the fill-up stage.
17
<PAGE> 18
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Revenues Total revenues were $149.0 million compared to $132.4 million for the
nine months ended September 30, 2000 and 1999, respectively, representing an
increase of $16.6 million, or 12.5%. Resident and health care revenue increased
by $23.2 million while management and development services revenue decreased by
$6.6 million. The increase in resident and health care revenue was primarily
attributable to Same Community revenue increases and revenues derived from
senior living communities acquired or leased after September 30, 1999.
Management and development services revenue decreased as a percentage of total
revenue to 2.4% from 7.7% for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in management and development services revenue is
primarily related to a decrease in development fees, as well as decreased
management fees at certain properties as a result of lower sales of new units,
which reduces the formula-based management fees. The Company has shifted its
focus to a more acquisition-oriented method of creating its Senior Living
Networks and, therefore, has discontinued new development of freestanding
assisted living residences, for which the Company receives development fees. As
a result of this change, the Company expects that its development fee revenue
will be significantly lower than prior year levels throughout 2000.
The Company had a stabilized occupancy rate of 92% compared to 94% as of
September 30, 2000 and 1999, respectively, and had a total occupancy rate of 83%
compared to 87% as of September 30, 2000 and 1999, respectively. The decrease in
the total occupancy rate is a result of a large number of new communities and
expansions that have increased capacity, many of which are in the fill-up stage.
Resident and health care revenues attributable to Same Communities were $104.1
million compared to $97.2 million for the nine months ended September 30, 2000
and 1999, respectively. This increase was derived from a 2.2% increase in
average occupied units and a 4.7% increase in average monthly revenue per
occupied unit. Excluding entry-fee communities, the resident and health care
revenues increased 7.5% for these same periods, derived from a 2.3% increase in
occupied units and a 5.1% increase in average rates. Same Community average
occupancy rates increased to 94.0% compared to 92.3% for the nine months ended
September 30, 2000 and 1999, respectively.
Community Operating Expenses Community operating expenses increased to $99.5
million compared to $77.6 million for the nine months ended September 30, 2000
and 1999, respectively, representing an increase of $21.9 million, or 28.2%. The
increase in community operating expenses was primarily attributable to expenses
from expansions and from communities acquired or leased after September 30,
1999. Additionally, this increase is the result of increased labor, insurance,
facility and marketing costs at various new communities, as well as expansion of
services provided in all communities. Community operating expenses as a
percentage of resident and health care revenues increased to 68.4% from 63.5%
for the nine months ended September 30, 2000 and 1999, respectively. The
increase in community operating expenses as a percentage of resident and health
care revenues is primarily attributable to the acquisition during the second
half of 1999 and during 2000 of various assisted living communities that are
currently managed by the Company or being developed by the Company on behalf of
third parties, that are in the fill-up stage. The Company anticipates that the
fill-up of these communities will occur over the next twelve to eighteen months.
The Company expects community operating expenses to remain at greater than
historical levels as a percentage of resident and health care revenues as the
Company continues to acquire assisted living communities that are managed or
being developed by the Company.
Same Community operating expenses increased to $66.7 million compared to $61.7
million for the nine months ended September 30, 2000 and 1999, respectively.
This increase is primarily the result of increased insurance, premiums, reserves
and labor costs. Labor cost increases have resulted from a competitive labor
market, as well as an increase in nursing and assisted living services. Same
Community operating expenses as a percentage of Same Community revenues
increased to 64.1% from 63.4% for the nine months ended September 30, 2000 and
1999, respectively. Excluding entry-fee communities, Same Community
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<PAGE> 19
operating expenses as a percentage of Same Community revenues remained unchanged
at 62.8% for the nine months ended September 30, 2000 and 1999, respectively.
Lease Expense Lease expense increased to $12.6 million compared to $9.5 million
for the nine months ended September 30, 2000 and 1999, respectively. The
increase was attributable to leases entered into after September 30, 1999,
including several acquisitions of leasehold interests. Same Community lease
expense increased to $9.2 million compared to $8.9 million for the nine months
ended September 30, 2000 and 1999, respectively, representing an increase of
4.0%.
General and Administrative General and administrative expense increased to $13.4
million compared to $10.4 million for the nine months ended September 30, 2000
and 1999, respectively, representing an increase of $2.9 million, or 28.1%. The
increase was primarily related to increases in salaries and benefits associated
with the operation of an increased number of communities, as well as the
overhead support costs associated with the Senior Living Networks in various
geographic areas. General and administrative expense as a percentage of total
revenues increased to 9.0% compared to 7.9 % for the nine months ended September
30, 2000 and 1999, respectively.
Depreciation and Amortization Depreciation and amortization expense increased to
$12.6 million compared to $10.0 million for the nine months ended September 30,
2000 and 1999, respectively, representing an increase of $2.6 million, or 26.0%.
Same Community depreciation and amortization expense increased to $7.7 million
compared to $6.8 million for the nine months ended September 30, 2000 and 1999,
respectively, representing an increase of $863,000, or 12.7%. The increases were
primarily related to the opening or acquisition of communities and expansion of
communities since September 30, 1999, as well as ongoing capital expenditures.
Other Income (Expense) Interest expense increased to $26.5 million, net of
capitalized interest of $1.2 million, compared to $16.8 million, net of
capitalized interest of $1.5 million, for the nine months ended September 30,
2000 and 1999, respectively, representing an increase of $9.7 million, or 58.0%.
The increase in interest expense was primarily attributable to indebtedness
incurred in connection with acquisitions and development activity, as well as
increased interest rates. Interest income increased to $11.2 million compared to
$5.9 million for the nine months ended September 30, 2000 and 1999,
respectively, primarily due to income generated from certificates of deposit and
notes receivable associated with certain leasing transactions and management
agreements.
Income Tax Expense The provision for income taxes was a $1,334,000 benefit
compared to a $5,251,000 expense for the nine months ended September 30, 2000
and 1999, respectively. The Company's effective tax rate was 34.0% and 38.0% for
the nine months ended September 30, 2000 and 1999, respectively. Based on the
estimated annual earnings, the Company increased its effective tax rate from 19%
in the second quarter to 34% in the third quarter.
Minority Interest in Losses of Consolidated Subsidiaries, Net of Tax Minority
interest in losses of two consolidated subsidiaries, net of tax, for the nine
months ended September 30, 2000 was $967,000, representing an increase of
$619,000 from $348,000 for the comparable 1999 period. The increase was
primarily attributable to the losses of one of the communities which opened in
May 2000.
Extraordinary Loss During the nine months ended September 30, 2000, the Company
repaid a term note to a bank. As part of this transaction, the Company incurred
a prepayment penalty of $124,000, net of income taxes, which was recorded as an
extraordinary loss on the extinguishment of debt.
Net Income (Loss) The Company experienced a net loss for the nine months ended
of $1.8 million or $.10 per share compared to net income of $8.9 million or $.52
per share for the period ended September 30, 2000 and 1999, respectively. The
primary cause of the loss was $5.4 million of pre-tax start-up losses at
pre-stable freestanding assisted living communities. The eleven managed assisted
living projects acquired during 2000, of which a number have or are about to be
opened, incurred $2.6
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<PAGE> 20
million of start-up losses. The Company expects to continue to incur losses in
the near term and until the newly acquired communities complete the fill-up
stage.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its activities with long-term mortgage
borrowings, the net proceeds from public offerings of debt and equity, and cash
flows from operations. At September 30, 2000, the Company had $507.1 million of
indebtedness outstanding, including $138.0 million of 5 3/4% convertible
subordinated debentures due in 2002 (the "5 3/4% Convertible Debentures"),
$103.2 million of indebtedness to a capital corporation, and $265.9 million of
indebtedness to a selection of banks or other lending institutions. The
indebtedness has maturities ranging from fourth quarter 2000 to April 2028. As
of September 30, 2000, approximately 54.9% of the Company's indebtedness bore
interest at fixed rates, with a weighted average interest rate of 6.9%. The
Company's variable rate indebtedness carried an average rate of 8.8% as of
September 30, 2000. As of September 30, 2000, the Company had working capital of
$18.3 million.
Net cash provided by operating activities was $1.2 million compared to $11.1
million for the nine months ended September 30, 2000 and 1999, respectively. The
Company's unrestricted cash balance was $25.6 million as of September 30, 2000.
Net cash used by investing activities was $62.3 million compared to $115.9
million for the nine months ended September 30, 2000 and 1999, respectively. Net
cash used during the nine months ended September 30, 2000 was primarily due to
additions to land, buildings and equipment of $34.6 million, purchases of assets
limited as to use of $8.3 million, advances under notes receivable of $5.9
million, expenditures for acquisitions of $6.1 million, expenditures for
leasehold acquisitions of $9.7 million, advances for development projects of
$1.3 million, offset by $4.0 million provided by purchase option receipts.
Net cash provided by financing activities was $64.8 million compared to $113.9
million for the nine months ended September 30, 2000 and 1999, respectively. Net
cash provided during the nine months ended September 30, 2000 was primarily due
to proceeds from the issuance of long-term debt of $86.9 million, and the sale
of life estate contracts, net of refunds, of $5.9 million, which was partially
offset by principal payments on long-term debt of $23.7 million (including a
debt repayment in the amount of $14.3 million as a result of a refinancing),
long-term debt financing costs of $1.8 million, and principal payments under
master trust agreements of $1.8 million.
During the nine months ended September 30, 2000, the Company entered into
various financing commitments including a secured term loan from a mortgage
lender in the amount of $23.3 million, with interest payable at LIBOR plus 3%.
Interest and principal are payable monthly, based on a twenty-five year
amortization, with all remaining balances due in April 2003. The maturity date
of the note may be extended to April 2005 upon satisfaction of certain
conditions. The Company also entered into a secured term loan with a finance
company in the amount of $2.5 million, with interest payable at LIBOR plus
3 3/4%. Interest and principal are payable monthly, with interest only payments
during the first year. The remaining balance on the note is due in full in April
2002, but can be extended to April 2003 based upon certain conditions. The
Company used a portion of the proceeds on the above loans to refinance a term
note to a bank, repaying the outstanding amount of $14.3 million. This note had
a maturity date of December 2001, with fixed interest at 8.2%. As part of this
transaction, the Company incurred a prepayment penalty of $124,000, net of
income taxes, which was recorded as an extraordinary loss on extinguishment of
debt during the first quarter of 2000.
The Company increased a mortgage note payable to a bank as part of a new
building expansion. The original floating rate note had a maximum borrowing
amount of $6.8 million, which was increased to $11.4 million. Interest is
payable monthly at LIBOR plus 2 1/4%. As of September 30, 2000, $10.7 million
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<PAGE> 21
was outstanding on this note. The Company also entered into a mortgage note with
an investment company in the amount of $12.0 million. Interest at 9.5% plus
principal is payable monthly, with the note maturing in June 2025. The note is
secured by certain land and buildings. In addition, the Company assumed a
mortgage note payable to a bank in the amount of $7.9 million as part of the
dissolution of a joint venture in which the Company was a member. Interest and
principal are payable monthly, with the note maturing in March 2006. Interest is
paid at a base Treasury rate plus 2%. The note is secured by certain land and
buildings.
During the three months ended September 30, 2000, the Company entered into a
construction loan from a mortgage lender in the amount of $10.3 million, with
variable interest payable at LIBO (Euro-based dollar rate) plus 2 1/2%. Interest
is payable monthly, with all remaining balances due in September 2003. The
maturity date of the note may be extended to September 2005 based upon certain
conditions. As of September 30, 2000, $7.2 million was outstanding on this note.
The remaining $31.6 million of proceeds from issuance of long-term debt was from
additional borrowings under existing credit facilities, primarily from a $100.0
million revolving line of credit, of which $96.0 million was outstanding at
September 30, 2000. These funds were used primarily for construction or
expansion of retirement communities, and expenditures for acquisitions of
retirement communities and leasehold acquisitions.
In December 1999, the Company announced plans to buy back up to $1.5 million of
its common stock to fund the Company's contributions to its employee benefit
plans for 2000 and 2001. The Company also announced, in March 2000, that the
Board of Directors had authorized the repurchase, from time to time, of up to
$30.0 million of the Company's 5 3/4% Convertible Debentures. The purchases are
anticipated to be made primarily in the open market over the next year. For both
plans the timing and amount of purchases will depend upon prevailing market
conditions, alternative uses of capital and other factors. The programs are
expected to be completed during 2000 or 2001. As of September 30, 2000, the
Company had not purchased any 5 3/4% Convertible Debentures, and had purchased
$1,198,705 or 211,400 shares of common stock.
The Company's various credit facilities, as amended, contain numerous financial
covenants that require the Company to maintain certain prescribed debt service
coverage, liquidity, net worth, capital expenditure reserves and occupancy
levels. Most of the Company's owned communities are subject to mortgages. 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 the covenants relating to the use, operation, and
disposition of its communities materially limit its operations. A significant
amount of the Company's indebtedness is cross-defaulted.
The Company has in recent quarters constructed and opened a significant number
of free-standing assisted living communities, three of which opened during the
three months ended September 30, 2000. As part of this expansion program, the
Company has one assisted living community under construction, which is expected
to open in early 2001. In addition, five assisted living communities were
recently substantially completed. The Company anticipates that these five
communities will open during the fourth quarter of 2000. While many of these
communities are currently leased by various SPEs and managed by the Company, it
is the intention of the Company to acquire the leasehold interests in some or
all of these properties during 2000 through 2002. As of September 30, 2000,
seven of these assisted living communities are leased by an affiliate of John
Morris, a director of the Company, and are managed by the Company.
The Company is currently expanding two of its existing senior living
communities. In addition, the Company is formulating plans to develop or expand
various senior living communities, but does not intend to initiate the
construction of these projects prior to finalizing acceptable financing
arrangements.
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During the second half of 1999 and during 2000, the Company opened or acquired
interests in various assisted living communities, that were previously managed
or developed by the Company for third parties. The Company anticipates that
these communities will continue to incur start-up losses over the next twelve to
eighteen months, or until the fill-up stage is completed. The Company expects to
continue to acquire assisted living communities that are currently managed or
being developed by the Company for third parties. The Company expects that as a
result of the addition of several newly opened assisted living properties and
the acquisition of additional assisted living communities, the Company will
continue to incur significant start-up losses in the near term and until those
communities complete the fill-up stage.
The Company expects that its current cash and cash equivalents, cash flow from
operations and borrowings available to it under existing credit arrangements,
will be sufficient to meet its operating requirements and to fund its start-up
losses and anticipated growth for at least the next twelve months. The Company
expects to use a wide variety of financing sources to fund its future growth,
including conventional mortgage financing, leasing, unsecured bank financing,
partnership and joint venture relationships, and public and private debt and
equity, 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. The current market price
of the Company's Common Stock makes offerings of Common Stock to the public
unlikely in the near term.
OTHER MATTERS
The Company manages a senior living community in Peoria, Arizona under a
long-term management agreement with a third party owner. The Arizona DOI has
notified the owner of this community that it is not currently in compliance with
a net worth requirement imposed by Arizona law. While compliance with this net
worth requirement is technically the responsibility of the owner, in order to
facilitate discussions with the Arizona DOI, the Company has provided the
Arizona DOI with a limited guaranty relating to the financial performance of the
community, and has notified it of the Company's intention to enter into a lease
or acquisition transaction regarding the community on or before December 31,
2000, if it can reach acceptable terms with the owner. While the Company and the
owner believe that the owner's noncompliance with the net worth requirement is
only a technical violation of law and that the community is in a strong
financial position, there can be no assurance that the State of Arizona will not
enforce the law strictly. A violation of this net worth requirement may, among
other things, allow the Arizona DOI to take steps to appoint a receiver for the
community.
The Company is in discussions with the various SPEs to acquire some or all of
the leasehold interests in the assisted living communities that the Company
currently is developing or managing. There are 15 assisted living communities
that are owned by various SPEs. The Company intends to acquire leasehold
interests in three communities during the fourth quarter of 2000 for a combined
price of approximately $5.1 million, with any remaining community leasehold
acquisitions likely to occur during 2001 through 2002. For completed leasehold
acquisitions, the Company expects to incur significant start-up and operating
losses until the communities achieve break-even occupancy levels.
The Company has discovered that its property in Knoxville, Tennessee has several
significant construction or design deficiencies that result in, among other
things, inadequate water and condensation drainage and control. As a result of
these construction issues, the Company has moved certain residents and initiated
various inspections, air quality tests, and other procedures. The Company has
also involved its outside counsel and its insurance carrier in these issues, and
is in discussions with the construction contractors and the design participants
of the project. The Company is not able to determine to what extent these issues
will result in a negative impact on the results of this community or additional
liabilities and costs to the Company. The Company previously recorded certain
impairment charges related to this property during the quarter ended December
31, 1999.
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During the nine months ended September 30, 2000, a number of the Company's
employees (including all of the executive officers of the Company) voluntarily
cancelled 1,660,793 of their options to purchase stock issued under the
Company's option plan. As a result, the Company currently has 749,734 options
outstanding under its option plan. The compensation committee of the Company's
Board of Directors anticipates granting a substantial number of new options to
such employees in future periods. Any new options would have exercise prices
equal to the then-prevailing market price for the Company's common stock, and
such other terms and provisions as the compensation committee shall then
determine. However, the Company has not committed or agreed to issue new options
to employees. The future issuances of options will be based upon a number of
factors, including the advice of the Company's compensation consultants, and
will be made only in light of then-existing facts and circumstances.
The Company maintains property, general liability and professional malpractice
insurance policies for the Company's owned and certain of its managed
communities under a master insurance program. Recently, the number of insurance
companies willing to provide general liability and professional malpractice
liability insurance for the nursing and assisted living industry has declined
dramatically. The Company's existing liability policies expired on July 1, 2000,
and, in order to renew its liability coverage, the Company was required to pay
significantly higher premiums. In addition, the Company's new liability policies
contain deductibles that are significantly larger than the deductibles that the
Company has historically maintained. As a result, effective in the third quarter
of 2000, the Company has incurred significantly higher costs and/or reserves
with respect to liability claims, as well as higher premiums. The Company
believes that this is a current market condition, and is exploring alternatives
to reduce its liability insurance costs and deductibles.
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 forward-looking statements include all statements
that are not historical statements of fact and those regarding the intent,
belief or expectations of the Company or its management including, but not
limited to, the discussions of the Company's operating and growth strategy
(including its development plans and possible acquisitions or dispositions),
financing needs, projections of revenue, income or loss, capital expenditures,
and future operations. 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, 1999 and the Company's other
filings with the Securities and Exchange Commission. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of these 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.
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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. The
Company has entered into two interest rate swap agreements with major financial
institutions in order to manage its exposure. The swaps involve the exchange of
fixed interest rate payments without exchanging the notional principal amount.
Receipts and payments under the agreements are recorded as reductions or
increases to interest expense.
At September 30, 2000, notional amounts of the Company's two existing swap
agreements were $17.8 million and $35.3 million maturing November 10, 2006 and
July 1, 2008, respectively. Under the agreements the Company receives fixed
rates of 7.19% and 6.87%, respectively, and pays floating rates based upon LIBOR
and a foreign currency basket with a maximum rate through July 1, 2002 of 6.87%
and 8.12% thereafter, respectively. The Company does not expect changes in
interest rates to have a material effect on income or cash flows during the next
twelve months, although there can be no assurances that interest rates will not
significantly change and materially affect the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Construction Loan Agreement, dated September 28, 2000 between
ARC Scottsdale, LLC and Guaranty Federal Bank, F.S.B.
10.2 First Amendment to Amended and Restated Financing and
Security Agreement
10.3 First Amendment to Amended and Restated Guaranty of Payment
Agreement
27 Financial Data Schedule for SEC use only (2000)
b. Reports on Form 8-K
None
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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: November 14, 2000 By: /s/ George T. Hicks
-------------------
George T. Hicks
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
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