<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 June 30, 2000
( ) 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 200, Brentwood, TN 37027
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(615) 221-2250
--------------
(Registrant's telephone number, including area code)
111 Westwood Place, Suite 402, Brentwood, TN 37027
--------------------------------------------------
(Former address)
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 August 14, 2000, there were 16,910,995 shares of the Registrant's common
stock, $.01 par value, outstanding.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C>
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999................................3
Condensed Consolidated Statements of
Operations for the Three Months Ended
June 30, 2000 and June 30, 1999 ...................................4
Condensed Consolidated Statements of
Operations for the Six Months Ended
June 30, 2000 and June 30, 1999 ...................................5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended June 30,
2000 and June 30, 1999 ............................................6
Notes to Condensed Consolidated Financial Statements ..............8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.............. 24
Item 6. Exhibits and Reports on Form 8-K................................. 24
Signatures ................................................................. 25
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,001 $ 21,881
Assets limited as to use 7,245 15,571
Accounts receivable, net 12,658 12,746
Advances for development projects 7,263 3,762
Inventory 1,009 950
Prepaid expenses 1,359 1,790
Deferred income taxes 758 758
Other current assets 6,649 5,727
-------- --------
Total current assets 57,942 63,185
Assets limited as to use, excluding amounts classified
as current 79,128 60,855
Land, buildings and equipment, net 474,323 431,560
Notes receivable 96,431 97,236
Costs in excess of net assets acquired, net 38,007 38,524
Leasehold acquisition costs, net 7,394 978
Other assets 44,327 48,073
-------- --------
Total assets $797,552 $740,411
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10,457 $ 10,173
Accounts payable 3,019 3,723
Accrued expenses 19,909 15,820
Other current liabilities 3,649 9,879
-------- --------
Total current liabilities 37,034 39,595
Long-term debt, excluding current portion 347,308 287,835
Convertible subordinated debentures 137,980 137,980
Refundable portion of life estate fees 43,921 43,386
Deferred life estate income 51,733 51,606
Tenant deposits 7,149 6,913
Deferred gain on sale-leaseback transactions 2,941 3,168
Deferred income taxes 15,009 15,236
Other long-term liabilities 6,373 6,524
-------- --------
Total liabilities 649,448 592,243
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, 17,036,695 and 17,145,343 shares
issued and outstanding, respectively 170 171
Additional paid-in capital 145,413 145,444
Retained earnings 2,521 2,553
-------- --------
Total shareholders' equity 148,104 148,168
-------- --------
Total liabilities and shareholders' equity $797,552 $740,411
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Resident and health care $ 47,865 $ 40,642
Management and development services 897 3,811
-------- --------
Total revenues 48,762 44,453
Operating expenses:
Community operating expenses 32,566 25,476
Lease expense, net 4,090 3,173
General and administrative 4,357 3,501
Depreciation and amortization 4,149 3,393
-------- --------
Total operating expenses 45,162 35,543
-------- --------
Operating income 3,600 8,910
Other income (expense):
Interest expense (8,811) (5,443)
Interest income 3,960 1,876
Other 145 199
-------- --------
Other expense, net (4,706) (3,368)
-------- --------
Income (loss) before income taxes (1,106) 5,542
Income tax (benefit) expense (454) 2,111
-------- --------
Net income (loss) $ (652) $ 3,431
======== ========
Basic earnings (loss) per share: $ (0.04) $ 0.20
======== ========
Diluted earnings (loss) per share: $ (0.04) $ 0.20
======== ========
Weighted average shares used for basic earnings
(loss) per share data 17,141 17,122
Effect of dilutive common stock options -- 39
-------- --------
Weighted average shares used for diluted earnings
(loss) per share data 17,141 17,161
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues:
Resident and health care $ 93,013 $ 80,623
Management and development services 2,526 7,425
-------- --------
Total revenues 95,539 88,048
Operating expenses:
Community operating expenses 62,522 50,702
Lease expense, net 7,618 6,153
General and administrative 8,659 6,763
Depreciation and amortization 8,042 6,705
-------- --------
Total operating expenses 86,841 70,323
-------- --------
Operating income 8,698 17,725
Other income (expense):
Interest expense (16,705) (10,187)
Interest income 7,513 3,325
Other 607 147
-------- --------
Other expense, net (8,585) (6,715)
-------- --------
Income before income taxes and extraordinary loss 113 11,010
Income tax expense 21 4,185
-------- --------
Income before extraordinary loss 92 6,825
Extraordinary loss on extinguishment of debt, net of tax 124 --
-------- --------
Net income (loss) $ (32) $ 6,825
======== ========
Basic earnings (loss) per share:
Basic earnings per share before extraordinary loss $ 0.01 $ 0.40
Extraordinary loss, net of tax (0.01) --
-------- --------
Basic earnings (loss) per share $ (0.00) $ 0.40
======== ========
Diluted earnings (loss) per share:
Diluted earnings per share before extraordinary loss $ 0.01 $ 0.40
Extraordinary loss, net of tax (0.01) --
-------- --------
Diluted earnings (loss) per share $ (0.00) $ 0.40
======== ========
Weighted average shares used for basic earnings (loss)
per share data 17,147 17,120
Effect of dilutive common stock options 82 45
-------- --------
Weighted average shares used for diluted earnings (loss)
per share data 17,229 17,165
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
2000 1999
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (32) $ 6,825
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,042 6,705
Amortization of deferred entrance fee revenue (2,678) (3,952)
Proceeds from terminated lifecare contracts 1,231 1,493
Deferred income taxes -- 2,764
Amortization of deferred gain on sale-leaseback
transactions (226) (226)
Minority owners' allocation of losses (756) (219)
Losses from unconsolidated joint ventures 388 608
Gain on sale of land (265) --
Changes in assets and liabilities, net of effects
from acquisitions:
Accounts receivable 1,312 (1,263)
Inventory 76 71
Prepaid expenses 727 415
Other assets 2,822 95
Accounts payable (2,340) (3,596)
Accrued expenses (4,664) (2,553)
Tenant deposits (201) (201)
Other liabilities 206 (2,664)
-------- --------
Net cash and cash equivalents provided by operating
activities 3,642 4,302
Cash flows from investing activities:
Additions to land, buildings and equipment (24,374) (32,960)
Expenditures for acquisitions, net of cash received (6,082) --
Expenditures for leasehold acquisitions, net (5,438) --
Reimbursements from (advances for) development
projects, net (4,451) 5,240
Investments in joint ventures (263) (2,578)
Purchase of assets limited as to use (11,048) (12,960)
Issuance of notes receivable (7,375) (28,122)
Purchase option payments -- (7,026)
Other investing activities 2,011 904
-------- --------
Net cash used by investing activities (57,020) (77,502)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt 75,151 71,341
Proceeds from life estate sales, net of refunds 3,687 6,089
Principal payments on long-term debt (23,318) (483)
Principal reductions in master trust liability (1,676) (2,317)
Expenditures for financing costs (1,315) (1,868)
Other financing activities (31) 859
-------- --------
Net cash provided by financing activities 52,498 73,621
-------- --------
Net increase (decrease) in cash and cash equivalents (880) 421
Cash and cash equivalents at beginning of period 21,881 20,400
-------- --------
Cash and cash equivalents at end of period $ 21,001 $ 20,821
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 16,394 $ 10,682
========= =========
Income taxes paid $ 211 $ 2,092
========= =========
</TABLE>
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
liabilites were assumed as follows:
<TABLE>
<S> <C> <C>
Current assets $ 939 $ --
Land, buildings and other assets 14,202 --
Current liabilities 1,108 --
Debt and other long-term liabilities 7,951 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7
<PAGE> 8
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 with the 2000
presentation. Operating results for the three and six months ended June 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 six months ended June 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 or loss per share includes dilutive common stock equivalents,
which consist of in-the-money stock options. During the three months ended June
30, 2000, there were 462,686 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 June 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 or loss 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 or loss 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 Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------------------- ------------------
<S> <C> <C> <C> <C>
Average number of options (in thousands) 1,718 1,202 1,814 1,067
Weighted-average exercise price $ 15.88 $ 21.47 $ 16.00 $ 16.86
</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. The purchases are anticipated to be made primarily in
the open market over the next year. As of June 30, 2000, the Company has
purchased $484,000 of common stock.
3. LONG TERM DEBT
During the six months ended June 30, 2000, the Company entered into various
financing commitments
8
<PAGE> 9
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.
During the three months ended June 30, 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 will be
increased to $11.4 million. Interest is payable monthly at LIBOR plus 2 1/4%. As
of June 30, 2000, $7.6 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 on March 2006. Interest is paid at a
base Treasury rate plus 2%. The note is secured by certain land and buildings.
The remaining $28.7 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 $94.5 million was outstanding at June
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 June 30, 2000.
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 $400,000 and $5.3 million in the quarters ended March 31 and June
30, 2000, respectively, related to these costs, leaving remaining accruals of
$1.0 million. The Company will continue to evaluate the adequacy of the
remaining accruals. The Company has been marketing the land parcels associated
with certain of the abandoned projects, although no sales occurred during the
six months ended June 30, 2000.
9
<PAGE> 10
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 $3.5 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 which approximates the percentage-of-completion
method. The Company recognized no development fee revenue and $2.2 million of
development fee revenue during the three months ended June 30, 2000 and 1999,
respectively, and $823,000 and $4.4 million of development fee revenue during
the six months ended June 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
communities' gross revenues and requires the Company to fund the SPEs' operating
deficits above specified amounts. The Company recorded $582,000 of operating
deficits during the three and six months ended June 30, 2000, versus no
operating deficits during the three and six months ended June 30, 1999. The
Company is required to pledge certificates of deposit or other investment
instruments to the lessors as part of these arrangements. At June 30, 2000, the
Company has pledged certificates of deposit and other investments in the
aggregate amount of $62.9 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 acquire 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 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 previously recorded certain
impairment charges related to this property during the quarter ended December
31, 1999.
10
<PAGE> 11
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 related party. In conjunction with the
management agreement, the Company had an option to purchase the community upon
specified terms. On June 1, 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 was
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 which was retained by the other party.
During the six months ended June 30, 2000, the Company acquired from various
SPEs the assets or leasehold interests and assumed certain liabilities of nine
retirement communities in exchange for total payments of $5.4 million, net of
cash received, which was recorded as leasehold acquisition costs. Two of these
communities are still under construction. The costs of acquiring the leasehold
interests is being amortized as lease expense on a straight-line basis over the
remaining term of the respective leases. The assets and liabilities were
recorded at cost which approximates fair market value. One of the leasehold
interests was acquired, for $1.5 million, from an affiliate of John Morris, a
director of the Company. The Company has advanced amounts for certain costs of
affiliates of John Morris. At June 30, 2000, approximately $3.0 million was due
to the Company from these affiliates. Such amounts will be reimbursed through
the acquisition of 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 June 30,
2000, there were 17 assisted living communities owned by various SPEs. The
Company intends to acquire from an affiliate of John Morris, a director of the
Company, leasehold interests in two communities during the third quarter of 2000
for a combined price of approximately $3.8 million, with any remaining community
leasehold acquisitions likely to occur during 2000 through 2002. For completed
leasehold acquisitions, the Company may incur significant start-up and operating
losses until the communities achieve break-even occupancy levels.
11
<PAGE> 12
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 June 30, 2000, the Company operated 58 senior living communities
in 15 states with an aggregate capacity for approximately 14,000 residents. The
Company owned 22 communities, leased 14 communities pursuant to long-term
leases, and managed 22 communities pursuant to management agreements. The
Company is constructing or developing ten senior living communities and
expanding five of its existing communities to add aggregate estimated capacity
for approximately 1,600 residents, including several joint venture projects with
third parties. As of June 30, 2000, the Company's owned communities had a
stabilized occupancy rate of 95%, its leased communities had a stabilized
occupancy rate of 92%, and its managed communities had a stabilized occupancy
rate of 85%. 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 which provide some or all of independent living, assisted living and
skilled nursing care. Then, in the same markets, the Company builds or acquires
free-standing assisted living 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 fourth quarter of 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. As a
result of this decision, the Company abandoned several planned and early-stage
projects in its development pipeline and suspended all new free-standing
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. During the six months ended June 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 six months ended June 30, 2000. The
Company intends to continue these marketing activities in the third quarter.
The Company reported a net loss of $32,000, or $0.00 diluted earnings per share,
on total revenues of $95.5 million, as compared with net income of $6.8 million,
or $0.40 diluted earnings per share, on revenues of $88.0 million for the six
months ended June 30, 2000 and 1999, respectively.
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 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 80.6% and 82.7% for
the three months ended June 30, 2000 and 1999, respectively, and 80.7% and 82.1%
for the six months ended June 30, 2000 and 1999, respectively, (ii) per diem
charges from residents receiving nursing care which, as a percentage of
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total resident and health care revenues, were 17.5% and 14.3% for the three
months ended June 30, 2000 and 1999, respectively, and 17.4% and 14.3% for the
six months ended June 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 1.9% and 3.0% for the three months ended June 30, 2000 and 1999,
respectively, and 1.9% and 3.6% for the six months ended June 30, 2000 and 1999,
respectively. Management and development services revenue as a percentage of
total revenues was 1.8% and 8.6% for the three months ended June 30, 2000 and
1999, respectively, and 2.6% and 8.4% for the six months ended June 30, 2000 and
1999, respectively. Approximately 95.4% of the Company's total revenues for each
of the three and six month periods ended June 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.
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The following table sets forth certain resident capacity and occupancy data for
the periods indicated:
<TABLE>
<CAPTION>
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
STABLE(1) TOTAL STABLE(1) TOTAL
--------- ----- --------- -----
<S> <C> <C> <C> <C>
END OF PERIOD CAPACITY
Owned 5,148 5,743 4,989 5,150
Leased 2,852 3,249 2,368 2,368
Managed 4,001 5,018 3,857 5,516
------ ------ ------ ------
Total 12,011 14,010 11,214 13,034
====== ====== ====== ======
END OF PERIOD OCCUPANCY
Owned 95% 88% 94% 92%
Leased 92% 87% 92% 90%
Managed 85% 73% 93% 75%
Total 91% 83% 93% 85%
</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. One community, at which a
significant expansion was opened during 1999, has been excluded from the
comparative data and will return to the Same Community group upon stabilization
of the expansion.
STATEMENT OF OPERATIONS DATA FOR SAME COMMUNITIES:
(DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 % change 2000 1999 % change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Resident and health care revenues $41,416 39,135 5.8% $80,844 76,539 5.6%
Community operating expense 26,480 24,278 9.1% 51,675 47,728 8.3%
------- ------- ------- -------
Resident income from operations 14,936 14,857 0.5% 29,169 28,811 1.2%
Resident income from operations margin(1) 36.1% 38.0% (1.9)% 36.1% 37.6% (1.6)%
Lease expense 3,366 3,173 6.1% 6,098 5,816 4.9%
Depreciation and amortization 3,122 2,902 7.6% 6,290 5,765 9.1%
------- ------- ------- -------
Income from operations 8,448 8,782 (3.8)% 16,781 17,230 (2.6)%
Other data:
Resident capacity 7,170 7,107 0.9% 6,975 6,912 0.9%
Number of communities 23 23 -- 22 22 --
Average occupancy rate(2) 93.9% 92.5% 1.5% 93.8% 92.1% 1.8%
Average monthly revenue
per occupied unit(3) $ 2,345 $ 2,262 3.7% $ 2,357 $ 2,283 3.2%
Average monthly expense
per occupied unit(4) $ 1,499 $ 1,403 6.9% $ 1,506 $ 1,424 5.8%
</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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<PAGE> 16
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues were $48.8 million compared to $44.5 million for the
three months ended June 30, 2000 and 1999, respectively, representing an
increase of $4.3 million, or 9.7%. Resident and health care revenue increased by
$7.2 million while management and development services revenue decreased by $2.9
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 June 30, 1999. Management and
development services revenue decreased as a percentage of total revenue to 1.8 %
from 8.6% for the three months ended June 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 free-standing 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 91% compared to 93% as of June
30, 2000 and 1999, respectively, and had a total occupancy rate of 83% compared
to 85% as of June 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 $41.4
million compared to $39.1 million for the three months ended June 30, 2000 and
1999, respectively. This increase was derived from a 2.1% increase in average
occupied units and a 3.7% increase in average monthly revenue per occupied unit.
Excluding entry-fee communities, the resident and health care revenues increased
6.8% for these same periods, derived from a 2.2% increase in occupied units and
a 4.5% increase in average rates. Same Community average occupancy rates
increased to 93.9% compared to 92.5% for the three months ended June 30, 2000
and 1999, respectively.
Community Operating Expenses. Community operating expenses increased to $32.6
million compared to $25.5 million for the three months ended June 30, 2000 and
1999, respectively, representing an increase of $7.1 million, or 27.8%. The
increase in community operating expenses was primarily attributable to expenses
from expansions and from communities acquired or leased after June 30, 1999.
Community operating expenses as a percentage of resident and health care
revenues increased to 68.0 % from 62.7% for the three months ended June 30, 2000
and 1999, respectively. This increase is primarily the result of increased
labor, facility and marketing costs at various new communities. The increase in
community operating expenses as a percentage of resident and health care
revenues is primarily attributable to the acquisition of various assisted living
communities during the second half of 1999 and during 2000, that are in the
fill-up stage. The Company anticipates that the fill-up of these communities
will occur over the next eighteen to twenty-four months.
Same Community operating expenses increased to $26.5 million compared to $24.3
million for the three months ended June 30, 2000 and 1999, respectively. This
increase is primarily the result of increased labor costs resulting from a
competitive labor market, as well as increased labor costs as a result of an
increase in nursing and assisted living services. Same Community operating
expenses as a percentage of Same Community revenues increased to 63.9% from
62.0% for the three months ended June 30, 2000 and 1999, respectively. Excluding
entry-fee communities, Same Community operating expenses as a percentage of Same
Community revenues increased to 62.1% from 61.5% for the three months ended June
30, 2000 and 1999, respectively.
Lease Expense. Lease expense increased to $4.1 million compared to $3.2 million
for the three months ended June 30, 2000 and 1999, respectively. The increase
was attributable to leases entered into after June
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<PAGE> 17
30, 1999, including several acquisitions of leasehold interests. Same Community
lease expense increased to $3.4 million compared to $3.2 million for the for the
three months ended June 30, 2000 and 1999, respectively, representing an
increase of 6.1%.
General and Administrative. General and administrative expense increased to $4.4
million compared to $3.5 million for the three months ended June 30, 2000 and
1999, respectively, representing an increase of $856,000, or 24.5%. 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 8.9% compared to 7.9% for the three months ended June 30, 2000 and 1999,
respectively.
Depreciation and Amortization. Depreciation and amortization expense increased
to $4.1 million compared to $3.4 million for the three months ended June 30,
2000 and 1999, respectively, representing an increase of $756,000, or 22.3%.
Same Community depreciation and amortization expense increased to $3.1 million
compared to $2.9 million for the three months ended June 30, 2000 and 1999,
respectively, representing an increase of $222,000, or 7.6%. The increases were
primarily related to the opening or acquisition of communities and expansion of
communities since June 30, 1999, as well as ongoing capital expenditures.
Other Income (Expense). Interest expense increased to $8.8 million, net of
capitalized interest of $338,000, compared to $5.4 million, net of capitalized
interest of $345,000, for the three months ended June 30, 2000 and 1999,
respectively, representing an increase of $3.4 million, or 61.9%. The increase
in interest expense was primarily attributable to indebtedness incurred in
connection with acquisitions and development activity. Interest income increased
to $4.0 million compared to $1.9 million for the three months ended June 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 $454,000
benefit compared to a $2.1 million expense for the three months ended June 30,
2000 and 1999, respectively. The Company's effective tax rate was 41.0% and
38.1% for the three months ended June 30, 2000 and 1999, respectively.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues. Total revenues were $95.5 million compared to $88.0 million for the
six months ended June 30, 2000 and 1999, respectively, representing an increase
of $7.5 million, or 8.5%. Resident and health care revenue increased by $12.4
million while management and development services revenue decreased by $4.9
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 June 30, 1999. Management and
development services revenue decreased as a percentage of total revenue to 2.6%
from 8.4% for the six months ended June 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 free-standing 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 91% compared to 93% as of June
30, 2000 and 1999, respectively, and had a total occupancy rate of 83% compared
to 85% as of June 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.
17
<PAGE> 18
Resident and health care revenues attributable to Same Communities were $80.8
million compared to $76.5 million for the six months ended June 30, 2000 and
1999, respectively. This increase was derived from a 2.3% increase in average
occupied units and a 3.2% increase in average monthly revenue per occupied unit.
Excluding entry-fee communities, the resident and health care revenues increased
7.2% for these same periods, derived from a 2.4% increase in occupied units and
a 4.7% increase in average rates. Same Community average occupancy rates
increased to 93.8% compared to 92.1% for the six months ended June 30, 2000 and
1999, respectively.
Community Operating Expenses. Community operating expenses increased to $62.5
million compared to $50.7 million for the six months ended June 30, 2000 and
1999, respectively, representing an increase of $11.8 million, or 23.3%. The
increase in community operating expenses was primarily attributable to expenses
from expansions and from communities acquired or leased after June 30, 1999.
Community operating expenses as a percentage of resident and health care
revenues increased to 67.2% from 62.9% for the six months ended June 30, 2000
and 1999, respectively. This increase is primarily the result of increased
labor, facility and marketing costs at various new communities. The increase in
community operating expenses as a percentage of resident and health care
revenues is primarily attributable to the acquisition of various assisted living
communities during the second half of 1999 and during 2000, that are in the
fill-up stage. The Company anticipates that the fill-up of these communities
will occur over the next eighteen to twenty-four months.
Same Community operating expenses increased to $51.7 million compared to $47.7
million for the six months ended June 30, 2000 and 1999, respectively. This
increase is primarily the result of increased labor costs resulting from a
competitive labor market, as well as increased labor costs as a result of an
increase in nursing and assisted living services. Same Community operating
expenses as a percentage of Same Community revenues increased to 63.9% from
62.4% for the six months ended June 30, 2000 and 1999, respectively. Excluding
entry-fee communities, Same Community operating expenses as a percentage of Same
Community revenues increased to 62.2% from 62.0% for the six months ended June
30, 2000 and 1999, respectively.
Lease Expense. Lease expense increased to $7.6 million compared to $6.2 million
for the six months ended June 30, 2000 and 1999, respectively. The increase was
attributable to leases entered into after June 30, 1999, including several
acquisitions of leasehold interests. Same Community lease expense increased to
$6.1 million compared to $5.8 million for the for the six months ended June 30,
2000 and 1999, respectively, representing an increase of 4.8%.
General and Administrative. General and administrative expense increased to $8.7
million compared to $6.8 million for the six months ended June, 2000 and 1999,
respectively, representing an increase of $1.9 million, or 28.0%. 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 9.1% compared to 7.7 % for the six months ended June 30, 2000 and 1999,
respectively.
Depreciation and Amortization. Depreciation and amortization expense increased
to $8.0 million compared to $6.7 million for the six months ended June 30, 2000
and 1999, respectively, representing an increase of $1.3 million, or 19.9%. Same
Community depreciation and amortization expense increased to $6.3 million
compared to $5.8 million for the six months ended June 30, 2000 and 1999,
respectively, representing an increase of $525,000, or 9.1%. The increases were
primarily related to the opening or acquisition of communities and expansion of
communities since June 30, 1999, as well as ongoing capital expenditures.
Other Income (Expense). Interest expense increased to $16.7 million, net of
capitalized interest of $685,000, compared to $10.2 million, net of capitalized
interest of $1.0 million, for the six months ended
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<PAGE> 19
June 30, 2000 and 1999, respectively, representing an increase of $6.5 million,
or 64.0%. The increase in interest expense was primarily attributable to
indebtedness incurred in connection with acquisitions and development activity.
Interest income increased to $7.5 million compared to $3.3 million for the six
months ended June 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 $21,000 compared to $4.2
million for the six months ended June 30, 2000 and 1999, respectively. The
Company's effective tax rate was 19.0% and 38.0% for the six months ended June
30, 2000 and 1999, respectively.
Extraordinary Loss. During the six months ended June 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.
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 June 30, 2000, the Company had $495.7 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 $94.5 of
indebtedness to a group of banks. The indebtedness has maturities ranging from
September 2000 to April 2028. As of June 30, 2000, approximately 56.2% 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 8.7% as of June 30, 2000. As of June 30, 2000, the Company had
working capital of $20.9 million.
Net cash provided by operating activities was $3.6 million compared to $4.3
million for the six months ended June 30, 2000 and 1999, respectively. The
Company's unrestricted cash balance was $21.0 million as of June 30, 2000.
Net cash used by investing activities was $57.0 million compared to $77.5
million for the six months ended June 30, 2000 and 1999, respectively. The net
cash used during the six months ended June 30, 2000 was primarily due to
additions to land, buildings and equipment of $24.4 million, net purchases of
assets limited as to use of $11.0 million, advances under notes receivable of
$7.4 million, expenditures for acquisitions of $6.1 million, expenditures for
leasehold acquisitions of $5.4 million, and advances for development projects of
$4.5 million.
Net cash provided by financing activities was $52.5 million compared to $73.6
million for the six months ended June 30, 2000 and 1999, respectively. The net
cash provided during the six months ended June 30, 2000 was primarily due to
proceeds from the issuance of long-term debt of $75.2 million, and the sale of
life estate contracts, net of refunds, of $3.7 million, which was partially
offset by principal payments on long-term debt of $23.3 million (including a
debt repayment in the amount of $14.3 million as a result of a refinancing),
long-term debt financing costs of $1.3 million, and principal payments under
master trust agreements of $1.7 million.
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.
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<PAGE> 20
During the three months ended June 30, 2000, the Company modified 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 June 30, 2000, $7.6 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 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
on March 2006. Interest is paid at a base Treasury rate plus 2%. The note is
secured by certain land and buildings. The remaining $28.7 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 $94.5 million was outstanding at June 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 June 30, 2000, the Company
had not purchased any 5 3/4% Convertible Debentures, and had purchased $484,000
of common stock.
The Company's various credit facilities 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. As part of this expansion program,
the Company has three remaining assisted living communities under construction,
two of which will open during the remainder of 2000, and the other will open in
early 2001. In addition, six assisted living communities were recently
substantially completed, and are awaiting final licensure. The Company
anticipates that these six communities will open during the third 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 June 30, 2000, nine of these assisted living communities are leased to an
affiliate of John Morris, a director of the Company, and are managed by the
Company.
The Company is formulating plans to develop one new senior living community, and
expand two of its existing communities, but does not intend to initiate the
construction of these three projects prior to finalizing acceptable joint
venture arrangements. The Company is also engaged in a number of different
development activities relating to other proposed projects. The Company does not
intend to initiate construction of such projects unless acceptable joint venture
and/or financing arrangements are put into place.
The Company expects that its current cash, together with 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
anticipated growth for at least the next 12 months. The Company expects to use a
wide variety
20
<PAGE> 21
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. The
current market price of the Company's Common Stock make offerings of Common
Stock to the public unlikely in the near term. 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.
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 acquire 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 17 assisted living communities
that are owned by various SPEs. The Company intends to acquire leasehold
interests in two communities during the third quarter of 2000 for a combined
price of approximately $3.8 million, with any remaining community leasehold
acquisitions likely to occur during the remainder of 2000 through 2002. For
completed leasehold acquisitions, the Company may 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.
During the three months ended June 30, 2000, a number of the Company's employees
(including all of the executive officers of the Company) voluntarily cancelled
1,628,750 of their options to purchase stock issued under the Company's option
plan. As a result, the Company currently has 780,776 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
2001. 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
21
<PAGE> 22
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, beginning in the third quarter
of 2000, the Company anticipates incurring significantly higher costs and/or
reserves with respect to liability claims, as well as higher premiums. The
Company believes that this is a temporary 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.
22
<PAGE> 23
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 June 30, 2000, notional amounts of the Company's two existing swap agreements
were $17.9 million and $35.4 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 in the remainder of
fiscal 2000, 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."
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 10, 2000 (the "Annual
Meeting"). At the Annual Meeting, the shareholders of the Company voted to elect
four Class III directors for a term of three years, and until their successors
are duly elected and qualified.
The following table sets forth the number of votes cast for and against/withheld
with respect to each of the director nominees:
<TABLE>
<CAPTION>
Director Nominee For Against/Withheld
---------------- ---- ----------------
<S> <C> <C>
W.E. Sheriff 14,681,459 15,015
H. Lee Barfield II 14,681,459 15,015
Robin G. Costa 14,681,383 15,091
John A. Morris, Jr., M.D. 14,681,335 15,139
</TABLE>
In addition to the foregoing directors, the following table sets forth the other
members of the Board of Directors whose term of office continued after the
meeting and the year in which his or her term expires:
<TABLE>
<CAPTION>
Name Term Expires
---- ------------
<S> <C>
Christopher J. Coates 2001
Daniel K. O'Connell 2001
Lawrence J. Steusser 2001
Frank M. Bumstead 2002
Clarence Edmonds 2002
Robert G. Roskamp 2002
Nadine C. Smith 2002
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
10.1 Construction Loan Agreement, dated March 17, 2000 between Freedom
Village of Sun City Center, Ltd. and Suntrust Bank, Tampa Bay
10.2 Real Estate Mortgage and Security Agreement, dated May 8, 2000,
between Lake Seminole Square Management Company, Inc., Freedom
Group-Lake Seminole Square, Inc. and Aid Association for Lutherans
27 Financial Data Schedule for SEC use only (2000)
b. Reports on Form 8-K
-------------------
None
24
<PAGE> 25
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: August 14, 2000 By: /s/ George T. Hicks
--------------------------
George T. Hicks
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
25
