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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
June 30, 2001
( ) 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
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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 August 14, 2001, there were 17,236,076 shares of the Registrant's common
stock, $.01 par value, outstanding.
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INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000...............................3
Condensed Consolidated Statements of
Operations for the Three Months Ended
June 30, 2001 and 2000 ...........................................4
Condensed Consolidated Statements of
Operations for the Six Months Ended
June 30, 2001 and 2000 ...........................................5
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended June 30,
2001 and 2000 ....................................................6
Notes to Condensed Consolidated Financial Statements .............8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..... 26
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ............ 27
Item 6. Exhibits and Reports on Form 8-K................................ 28
Signatures ................................................................ 29
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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)
June 30, 2001 December 31, 2000
------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 22,350 $ 19,850
Assets limited as to use 6,936 5,181
Accounts receivable, net 15,812 15,772
Inventory 1,132 1,079
Prepaid expenses 1,623 2,906
Deferred income taxes 332 332
Other current assets 3,224 5,608
--------- ---------
Total current assets 51,409 50,728
Assets limited as to use, excluding amounts classified as current 70,439 73,785
Land, buildings and equipment, net 502,472 473,062
Notes receivable 90,500 90,707
Goodwill, net 36,967 37,503
Leasehold acquisition costs, net 15,526 16,103
Other assets 45,885 50,592
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Total assets $ 813,198 $ 792,480
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 22,066 $ 7,449
Accounts payable 3,038 7,502
Accrued expenses 18,564 16,256
Other current liabilities 5,031 5,241
--------- ---------
Total current liabilities 48,699 36,448
Long-term debt, excluding current portion 365,183 338,261
Convertible subordinated debentures 132,930 137,980
Refundable portion of life estate fees 42,972 44,739
Deferred life estate income 53,128 52,765
Tenant deposits 6,269 6,612
Deferred gain on sale-leaseback transactions 14,812 16,122
Deferred income taxes 9,263 13,079
Other long-term liabilities 6,081 4,517
--------- ---------
Total liabilities 679,337 650,523
Commitments and contingencies (See notes)
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,
17,236,076 and 17,036,695 shares issued and outstanding, respectively 172 170
Additional paid-in capital 145,496 145,080
Accumulated deficit (10,711) (3,293)
Accumulated other comprehensive loss, net (1,096) --
--------- ---------
Total shareholders' equity 133,861 141,957
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Total liabilities and shareholders' equity $ 813,198 $ 792,480
========= =========
See accompanying 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)
Three Months Ended June 30,
---------------------------
2001 2000
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Revenues:
Resident and health care $ 62,405 $ 47,865
Management and development services 964 897
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Total revenues 63,369 48,762
Operating expenses:
Community operating expenses 43,615 32,566
General and administrative 6,756 4,357
Lease expense, net 6,700 4,090
Depreciation and amortization 5,195 4,149
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Total operating expenses 62,266 45,162
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Operating income 1,103 3,600
Other income (expense):
Interest expense (9,293) (8,811)
Interest income 2,969 3,960
Loss on sale of assets (303) (5)
Equity in losses of managed special purpose entity communities (972) (582)
Other 510 214
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Other expense, net (7,089) (5,224)
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Loss from continuing operations before income taxes,
minority interest, and extraordinary item (5,986) (1,624)
Income tax benefit (1,952) (651)
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Loss from continuing operations before minority
interest and extraordinary item (4,034) (973)
Minority interest in losses of consolidated subsidiaries, net of tax 4 321
-------- --------
Loss from continuing operations before extraordinary item (4,030) (652)
Extraordinary loss on extinguishment of debt, net of tax (576) --
-------- --------
Net loss $ (4,606) $ (652)
======== ========
Basic loss per share:
Basic loss per share before extraordinary item $ (0.23) $ (0.04)
Extraordinary loss, net of tax (0.03) --
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Basic loss per share $ (0.27) $ (0.04)
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Diluted loss per share:
Diluted loss per share before extraordinary item $ (0.23) $ (0.04)
Extraordinary loss, net of tax (0.03) --
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Diluted loss per share $ (0.27) $ (0.04)
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Weighted average shares used for basic loss per share data 17,200 17,141
Effect of dilutive common stock options -- --
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Weighted average shares used for diluted loss per share data 17,200 17,141
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See accompanying 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)
Six Months Ended June 30,
-------------------------
2001 2000
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Revenues:
Resident and health care $ 122,077 $ 93,013
Management and development services 1,673 2,526
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Total revenues 123,750 95,539
Operating expenses:
Community operating expenses 85,404 62,522
General and administrative 11,750 8,659
Lease expense, net 13,451 7,618
Depreciation and amortization 10,287 8,042
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Total operating expenses 120,892 86,841
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Operating income 2,858 8,698
Other income (expense):
Interest expense (18,519) (16,705)
Interest income 6,153 7,513
(Loss) gain on sale of assets (122) 260
Equity in losses of managed special purpose entity communities (1,938) (582)
Other 1,023 173
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Other expense, net (13,403) (9,341)
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Loss from continuing operations before income taxes,
minority interest, and extraordinary item (10,545) (643)
Income tax benefit (3,398) (266)
--------- --------
Loss from continuing operations before minority
interest and extraordinary item (7,147) (377)
Minority interest in (earnings) losses of consolidated subsidiaries, net of tax (96) 469
--------- --------
(Loss) income from continuing operations before extraordinary item (7,243) 92
Extraordinary loss on extinguishment of debt, net of tax (181) (124)
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Net loss $ (7,424) $ (32)
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Basic (loss) earnings per share:
Basic (loss) earnings per share before extraordinary item $ (0.42) $ 0.01
Extraordinary loss, net of tax (0.01) (0.01)
--------- --------
Basic (loss) earnings per share $ (0.43) $ 0.00
========= ========
Diluted (loss) earnings per share:
Diluted (loss) earnings per share before extraordinary item $ (0.42) $ 0.01
Extraordinary loss, net of tax (0.01) (0.01)
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Diluted (loss) earnings per share $ (0.43) $ 0.00
========= ========
Weighted average shares used for basic earnings (loss) per share data 17,167 17,147
Effect of dilutive common stock options -- 82
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Weighted average shares used for diluted earnings (loss) per share data 17,167 17,229
========= ========
See accompanying notes to condensed consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended June 30,
-------------------------
2001 2000
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Cash flows from operating activities:
Net loss $ (7,424) $ (32)
Extraordinary loss on extinguishment of debt, net of tax 181 124
-------- --------
(Loss) income from continuing operations (7,243) 92
Adjustments to reconcile income (loss) from continuing operations to net
cash and cash equivalents provided by operating activities:
Depreciation and amortization 10,287 8,042
Amortization of deferred entrance fee revenue (5,206) (2,678)
Amortization of deferred financing costs 1,262 1,018
Advances to joint ventures (1,512) --
Proceeds from terminated lifecare contracts 1,780 1,231
Proceeds from life estate sales, net of refunds 3,592 3,687
Deferred income tax benefit (3,091) (287)
Amortization of deferred gain on sale-leaseback transactions (1,310) (226)
Minority interest in earnings (losses) of consolidated subsidiaries 96 (469)
(Income) losses from unconsolidated joint ventures (14) 388
(Loss) gain on sale of assets 122 (260)
Issuance of stock to employee 401k plan 333 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 41 1,312
Inventory (60) 76
Prepaid expenses 1,291 727
Other assets 3,860 1,658
Accounts payable (4,732) (2,340)
Accrued expenses and other current liabilities 1,407 (4,664)
Tenant deposits (346) (201)
Other liabilities (588) 206
-------- --------
Net cash and cash equivalents provided by operating activities (31) 7,312
Cash flows from investing activities:
Additions to land, buildings and equipment (11,408) (24,639)
Expenditures for acquisitions, net of cash received -- (6,082)
Advances for development projects, net -- (4,451)
Investments in joint ventures -- (263)
Contributions from minority owners -- 372
Proceeds from the sale of assets 7,708 265
Other investing activities 313 1,780
Expenditures for leasehold acquisitions, net of cash received (5) (5,438)
Purchase of assets limited as to use, net (2,864) (11,048)
Receipts from (issuance of) notes receivable 2,090 (7,375)
-------- --------
Net cash used by investing activities (4,166) (56,879)
See accompanying notes to condensed consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(in thousands)
Six Months Ended June 30,
-------------------------
2001 2000
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Cash flows from financing activities:
Proceeds from issuance of stock through employee stock purchase plan 84 134
Proceeds from the issuance of long-term debt 21,745 75,151
Principal payments on long-term debt (7,444) (23,442)
Purchase of convertible debentures (4,029) --
Principal reductions in master trust liability (3,092) (1,676)
Expenditures for financing costs (567) (1,315)
Other financing costs -- (165)
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Net cash provided by financing activities 6,697 48,687
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Net increase in cash and cash equivalents 2,500 (880)
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Cash and cash equivalents at beginning of period 19,850 21,881
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Cash and cash equivalents at end of period $ 22,350 $ 21,001
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest (including capitalized interest) $ 18,400 $ 16,394
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Income taxes (refunded) paid $ (1,533) $ 211
======== ========
Supplemental disclosure of non-cash transactions:
During the respective periods, the Company acquired certain communities and
entered into certain lease transactions. In conjunction with the
transactions, assets and liabilities were assumed as follows:
Current assets $ -- $ 939
Land, buildings and other assets -- 14,202
Current liabilities -- 1,108
Long-term debt -- 7,925
Other liabilities -- 26
During the six months ended June 30, 2001, the Company funded its 401(k)
contribution with 81,788 shares of its common stock at a fair market value of
approximately $333,000.
Accumulated Other Comprehensive Loss, resulting from two interest rate swap
agreements, was $1.1 million, net of deferred tax provision of $590,000 for the
six months ended June 30, 2001.
See accompanying 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 accounting principles generally accepted in the United States of America
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 accounting principles generally accepted
in the United States of America 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 fiscal
year 2000 amounts have been reclassified to conform to the fiscal year 2001
presentation. Operating results for the three and six months ended June 30, 2001
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 2001. 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, 2000.
2. LIQUIDITY
The Company is highly leveraged and has a substantial amount of debt and lease
obligations. At June 30, 2001, the scheduled debt maturities during the eighteen
months ended December 31, 2002 total $349.4 million, including $216.5 million of
mortgage debt and $132.9 million of 5 3/4% Convertible Subordinated Debentures.
The Company expects that its current cash and cash equivalents, and cash flow
from operations will be sufficient to fund its operating requirements including
its pre-stabilization losses, its capital expenditure requirements and its
ordinary course, periodic debt service requirements, during 2001. The Company's
internally generated cash will not be sufficient to satisfy all of its
obligations that mature in 2002 or its scheduled principal reductions in 2002.
Due to adverse market conditions and the market price of the Company's stock,
the Company believes that it is unlikely that it will be able to raise capital
in the public equity or debt markets for the foreseeable future. Accordingly,
the Company's ability to satisfy its maturing obligations will depend, in large
part, upon its ability to obtain new financing and to issue privately placed
equity or equity linked capital. The Company is also examining other
alternatives for raising capital, including the selective disposition or sale of
certain communities, the sale-leaseback, or monetization of certain communities,
and the exchange of its 5 3/4% Convertible Subordinated Debentures for other
securities of the Company. The Company has engaged in and anticipates continuing
discussions with its existing lenders and other third parties regarding these
alternatives. The terms of any such transactions may impose significant burdens
on the Company and are likely to be substantially dilutive to the Company's
existing shareholders. There can be no assurances that the Company will be able
to consummate any of these transactions or that it will be able to refinance,
extend or obtain new financing necessary to satisfy its maturing obligations.
Failure to satisfy these maturing obligations or to meet the debt service
requirements would have a material adverse effect on the Company.
Certain of the Company's credit agreements contain restrictive covenants that
include, among other things, the maintenance of minimum tangible net worth,
prescribed debt service coverage, liquidity, capital expenditure reserves and
occupancy levels. Effective as of June 30, 2001, the Company and certain of its
lenders and lessors agreed to amendments or waivers relating to several of these
financial covenants in order to allow the Company to remain in compliance
therewith. In addition, the Company extended the maturity date of its $100.0
million mortgage loan facility from May 1, 2002 to August 1, 2002. At June 30,
2001, $92.3 million was outstanding under this credit facility. In connection
with this extension, the Company agreed to, among other things, (i) convert the
facility to a term loan from a revolving line-of-credit, (ii) make a $10.0
million principal reduction by May 1, 2002, (iii) increase the interest rate
margin of the facility, (iv) provide a capital formation plan requiring that the
Company raise $30.0 million of capital by January 31, 2002, (v) evidence of
sufficient capacity to payoff its 5 3/4% Convertible Subordinated Debentures by
July 1, 2002 and (vi) include certain new and amended financial covenants.
Accordingly, the related debt is classified as long-term in accordance with its
stated maturity schedules, but if not further amended and its maturity
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extended beyond August 1, 2002, this debt will be classified as a current
liability in the third quarter of 2001, which will have an adverse effect on the
Company's working capital position.
Future compliance with the Company's financial covenants is largely dependent
upon improvements in the operations of the Company's Free-standing Assisted
Living Communities ("Free-standing ALs") and upon the Company's ability to raise
capital to meet covenants requiring debt reductions. Improvements in the
Company's operations and the ability to raise capital are subject to various
factors such as the Company's financial position, general economic conditions,
credit market conditions, interest rate levels, competition for residents,
increases in operating costs and various other factors, some of which are beyond
the Company's control. There can be no assurances that the Company will remain
in compliance with its financial covenants. If the Company fails to meet its
financial covenants, unless amended or waived, the Company's lenders will have
the right to cease funding and accelerate repayment of the debt, which would
have a material adverse effect on the Company. There can be no assurance that
the Company's lenders will grant waivers or amendments in the future.
A significant amount of the Company's indebtedness is cross-defaulted. Any
non-payment, other default with respect to such obligations, or failure to
comply with the financial or other covenants of the debt agreements could cause
lenders to cease funding, accelerate payment obligations or to foreclose upon
the communities securing the indebtedness. Further, because of the cross-default
and cross collateralization provisions in certain of the Company's mortgages,
debt instruments and leases, a default by the Company on one of its payment
obligations is likely to result in default or acceleration of substantially all
of the Company's other obligations, which would have a material adverse effect
on the Company.
3. EARNINGS PER SHARE
Basic loss or earnings per share for the three and six months ended June 30,
2001 and 2000 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 six months ended
June 30, 2001, there were 1,194,038 and 1,182,687 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 three and six months ended
June 30, 2001, and therefore were not included in the computation of diluted
earnings per share.
The Company's 5 3/4% Convertible Subordinated Debentures outstanding during the
periods presented were not included in the computation of diluted earnings per
share because the conversion price of $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.
On January 4, 2001, the Company granted options to purchase approximately
1,120,000 shares of common stock. These options were granted with an exercise
price of $3.10, the fair value of the shares at the date of grant. These grants
are one-third vested after six months, 12 months and 24 months, and have a ten
year term.
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.
Three Months Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
--------------------------- ---------------------------
Average number of options (in thousands) 829 1,718 809 1,067
Weighted-average exercise price $ 7.86 $ 15.88 $ 8.11 $ 16.86
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4. LONG TERM DEBT
During the six months ended June 30, 2001, the Company entered into various
financing commitments including a secured term loan from a mortgage lender in
the amount of $17.3 million, with interest payable at LIBOR plus 3%. Interest
and principal are payable monthly, based on a twenty-five year amortization
schedule, with all remaining balances due in July 2002. The Company used a
portion of the proceeds on the above loan to refinance a portion of a term note
to a capital corporation, repaying the outstanding amount of $3.5 million.
Effective as of June 30, 2001, the Company has amended various financing
agreements in order to, among other things, maintain compliance with its debt
covenants, including its $100.0 million mortgage loan facility. This amendment
resulted in the extension of the May 1, 2002 maturity to August 1, 2002 and
requires $10.0 million in principal reduction by May 1, 2002. See Note 2 to the
Condensed Consolidated Financial Statements.
On December 18, 2000, the Company sold a community located in Westlake, Ohio for
$26.0 million and contemporaneously leased the property back from the buyer. The
Company used a portion of the proceeds from the sale to repay $17.0 million of a
$50.0 million revolving line of credit. During the six months ended June 30,
2001, the Company completed two like-kind exchange transactions which deferred
the taxable gain resulting from the Westlake transaction. In connection with the
first like-kind exchange, the Company purchased land in Virginia, assuming a
$12.1 million non-recourse mortgage loan bearing interest at 7.43% with
principal due monthly, and a maturity date of January 2024. The Company acquired
the land subject to a lease that provides annual rental payments of $980,000
through February 23, 2023. In the second like-kind exchange, the Company
purchased all of the equity interests in a single member limited liability
company that owned various parcels of land, as well as buildings valued at $2.3
million and building improvements valued at $4.8 million, assuming a $15.2
million non-recourse mortgage loan, with interest at 8.41% and principal and
interest due monthly, and a maturity date of September 2005. The various land
parcels are subject to leases that provide annual rental payments of $1.3
million through March 7, 2022.
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 Subordinated Debentures. The timing and amount
of purchases of these debentures will depend upon prevailing market conditions,
availability of capital, alternative uses of capital and other factors. During
the six months ended June 30, 2001, the Company purchased $5.1 million of the 5
3/4% Convertible Subordinated Debentures, resulting in an extraordinary gain on
extinguishment of debt, net of tax, of $694,000. Additional purchases of the 5
3/4% Convertible Subordinated Debentures, if any, are likely to be made
primarily in the open market.
5. ASSET IMPAIRMENTS AND CONTRACTUAL LOSSES
During the quarter ended December 31, 1999, the Company abandoned certain
development projects and recorded charges of approximately $6.7 million for
contractual losses and other costs. The Company made cash payments of $5.9
million in 2000 and $461,000 during the six months ended June 30, 2001 related
to these costs. An accrual of $350,000 remains at June 30, 2001. The Company
will continue to evaluate the adequacy of the remaining accrual. The Company has
sold two of the five land parcels associated with the abandoned projects, and
intends to continue marketing the remaining three land parcels during 2001.
6. LEASEHOLD ACQUISITIONS AND SPECIAL PURPOSE ENTITIES (SPE)
The Company has entered into various transactions with third parties for the
development and operation of certain Free-standing ALs. The Company generally
has owned the land to be developed and entered into long-term ground leases with
special purpose entities, typically a subsidiary of a bank (the Owner). The
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Owner has entered into a construction agreement with a lender. These
construction loans have been guaranteed by the Company. The Company is required
to pledge to the Owners certificates of deposit as collateral to support the
lessor's equity contribution commitment. At June 30, 2001 and December 31, 2000,
the Company has pledged certificates of deposit and other investments in the
aggregate of $46.0 million and $45.4 million, respectively, which are classified
as non-current assets limited as to use. The Company receives the interest
income earned on these certificates of deposit.
The Owners of these Free-standing ALs leased the properties to various unrelated
SPEs (the Lessee) under operating leases. The Company contemporaneously entered
into management agreements with the lessees to manage the operations of the
communities ("Managed SPE Communities"). The management agreements provide for
the payment of management fees to the Company based on a percentage of each
communities' gross revenues and certain related agreements require the Company
to fund the lessee's operating deficits above specified amounts. In certain
instances these thresholds have been exceeded and as a result, the Company
recorded $1,938,000 of operating deficits during the six months ended June 30,
2001 and $582,000 of operating deficits during the six months ended June 30,
2000 as Equity in Losses of Managed Special Purpose Entity Communities on the
accompanying Statements of Operations. The Company expects that it will continue
to incur additional operating deficit costs during the remainder of 2001 and
2002 and these amounts may increase as deficits exceed specified amounts at
certain Free-standing ALs. The management agreements also provide the Company
with purchase options or rights of first refusal to assume the lessee's
leasehold interests in the leases at a formula price.
During the six months ended June 30, 2001, the Company acquired a leasehold
interest in a Managed SPE Community from an affiliate of John Morris, a director
of the Company. In conjunction with this transaction, the Company acquired
certain assets and assumed certain liabilities from this SPE. The assets and
liabilities were recorded at cost, which approximates fair value. At June 30,
2001, approximately $3.1 million was due to the Company from other SPE
affiliates of John Morris in connection with other Managed SPE Communities.
Subsequent to June 30, 2001, these amounts were reimbursed through the Company's
acquisition of one of the leasehold interests of these Managed SPE Communities.
At June 30, 2001, there were 11 Managed SPE Communities leased by various
lessees, five of which are leased by an affiliate of John Morris. If offered and
accepted, the Company anticipates acquiring certain, and perhaps all, of the
leasehold interests, under its purchase options or rights of first refusal, in
these 11 Managed SPE Communities during 2001 and 2002. If all were acquired, the
Company estimates the combined purchase price would be approximately $18.0 to
$22.0 million. Due to the leasehold acquisitions consummated and potential
future acquisitions, the Company expects to incur significant operating losses
until the communities achieve break-even occupancy levels. If the Company does
not acquire these leasehold interests, it remains responsible for funding future
operating losses which exceed specified limits.
7. SALE OF COMMUNITY
During the six months ended June 30, 2001, the Company sold its leasehold
interest in its only California community, Rossmoor Regency. This leasehold
interest was acquired by the Company in May 1998 as part of the Senior Living
Network strategy. However, during the year ended December 31, 1999 management
discontinued the expansive assisted living development prior to acquiring
complementary communities. The Company's leasehold interest in the community was
sold for an aggregate price of $21.5 million. The Company used a majority of the
sale proceeds to repay the owner debt outstanding of $15.6 million, resulting in
an early payment penalty of $875,000, net of tax. In addition, the Company
recognized a $697,000 loss on sale of assets.
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8. SEGMENT INFORMATION
The Company has significant operations in two segments: (1) Retirement Centers
and (2) Free-Standing ALs. The Company has 31 Retirement Centers which provide a
continuum of care services such as independent living, assisted living and
skilled nursing care. The Company currently operates 34 Free-Standing ALs.
Free-standing ALs are generally comprised of stand-alone assisted living
communities that are not located on a Retirement Center campus, some of which
also provide some skilled nursing and/or specialized care such as Alzheimer's
and memory enhancement programs. Free-standing ALs are generally much smaller
than Retirement Centers.
The Company evaluates its performance on the basis of EBITDAR, which is defined
as earnings before net interest expense, income tax expense, depreciation,
amortization, rent, equity in loss of special purpose entities, other income
(expense), minority interest, and extraordinary items. The following is a
summary of total revenues, EBITDAR, and total assets by segment for the three
and six months ended June 30, 2001 and 2000 (in thousands).(1)(2)
THREE MONTHS ENDED
JUNE 30, JUNE 30, $ %
2001 2000 CHANGE CHANGE
---- ---- ------ ------
Revenues:
Retirement Centers $ 53,511 45,172 $ 8,339 18.46%
Free-standing ALs 8,894 2,692 6,202 230.39%
Corporate/Other 964 898 66 7.35%
---------------------------------------------------------
Total $ 63,369 $ 48,762 $ 14,607 29.96%
=========================================================
NOI/Community EBITDAR:
Retirement Centers $ 18,956 $ 15,855 $ 3,101 19.56%
Free-standing ALs (162) (539) 377 -69.94%
Corporate/Other (5,796) (3,476) (2,320) 66.74%
---------------------------------------------------------
Net Operating Income 12,998 11,840 1,158 9.78%
Lease expense 6,700 4,091 2,609 63.77%
Depreciation and Amortization 5,195 4,149 1,046 25.21%
---------------------------------------------------------
Operating income $ 1,103 $ 3,600 $ (2,497) -69.36%
=========================================================
SIX MONTHS ENDED
JUNE 30, JUNE 30, $ %
2001 2000 CHANGE CHANGE
---- ---- ------ ------
Revenues:
Retirement Centers $ 105,749 88,332 $ 17,417 19.72%
Free-standing ALs 16,328 4,680 11,648 248.89%
Corporate/Other 1,673 2,527 (854) -33.80%
---------------------------------------------------------
Total $ 123,750 $ 95,539 $ 28,211 29.53%
=========================================================
NOI/Community EBITDAR:
Retirement Centers $ 38,327 $ 31,109 $ 7,218 23.20%
Free-standing ALs (962) $ (603) (359) 59.54%
Corporate/Other (10,769) $ (6,147) (4,622) 75.19%
---------------------------------------------------------
Net Operating Income 26,596 24,359 2,237 9.18%
Lease expense 13,451 7,619 5,832 76.55%
Depreciation and Amortization 10,287 8,042 2,245 27.92%
---------------------------------------------------------
Operating income $ 2,858 $ 8,698 $ (5,840) -67.14%
=========================================================
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JUNE 30, DECEMBER 31, $ %
2001 2000 CHANGE CHANGE
---- ---- ------ ------
Total Assets:
Retirement Centers $ 438,266 $ 445,020 $ (6,754) -1.52%
Free-standing ALs 66,566 68,266 (1,700) -2.49%
Corporate/Other 308,366 279,194 29,172 10.45%
---------------------------------------------------------
Total $ 813,198 $ 792,480 $ 20,718 2.61%
=========================================================
(1) Segment data does not include any inter-segment transactions or
allocated costs.
(2) All prior period data has been reclassified to conform to the new
segment alignment.
9. COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the ultimate
liability with respect to those proceedings and claims will not materially
affect the financial position, operations, or liquidity of the Company. The
Company previously maintained commercial insurance for various risks including
medical malpractice liabilities on a claims-made basis. On July 1, 2001, the
Company renewed its commercial insurance for various risks including medical
malpractice liabilities on a claims-incurred basis. The change from a
claims-made to claims-incurred policy resulted in an additional premium of $1.2
million to cover the claims incurred but not reported in the previous insurance
year under claims-made, which would also not be covered under the renewal policy
under claims-incurred. Management is unaware of any incidents which would result
in a loss in excess of the Company's insurance coverage.
As a result of flooding in the Houston area during June 2001, the Company
sustained significant flood and water damage at one of its Free-standing AL
communities, and minor damage at several others. Approximately 60 residents from
this community have been temporarily relocated to several of the other
communities operated by the Company in the Houston area. Repair work is expected
to take six months or more, at which time residents will be able to move back
into the community. The Company expects that its insurance coverage for these
leased facilities will cover substantially all costs incurred in connection with
the property damage, business interruption and extra expenses incurred. The
Company has recorded a charge of $100,000 during the quarter ended June 30, 2001
for its insurance deductible cost, and recorded $125,000 as an insurance claim
receivable as of June 30, 2001.
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 that the owner 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
Department of Insurance, the Company has provided the Department with a limited
guaranty relating to the financial performance of the community, and has
submitted to the Arizona DOI for approval for the Company to enter into a lease
of the community. The Department has tentatively indicated that the proposed
lease will result in the community's compliance with the applicable Arizona
statute. 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 Department of Insurance to take steps to appoint a
receiver for the community.
During 1999, the Company entered into a land purchase agreement for a parcel of
land in Boston, Massachusetts for $14.5 million, to be used for the development
of a senior living community. Closing of this purchase agreement is dependent
upon various zoning and other approvals. The Company has incurred and
capitalized architectural, engineering, legal, and other costs to date amounting
to $2.2 million as part of the development of this project. If satisfactory
zoning approvals are not received or the Company is not able to secure financing
to acquire and develop the property, the Company would have to consider various
options, including sale or assignment of its rights, modification of the project
scope, or abandonment of the
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project which could result in a write-off of these costs. The Company believes
it will be successful in receiving these approvals and securing financing to
acquire and develop the property, but there can be no assurance that these
delays will not adversely effect the feasibility of or the Company's willingness
to complete the project.
The Company discovered during 1999 that its property in Knoxville, Tennessee had
several significant construction or design deficiencies that resulted in, among
other things, inadequate water and condensation drainage and control. As a
result of these construction issues, the Company moved certain residents and
initiated various inspections, air quality tests, and other procedures. The
Company also involved its outside counsel and its insurance carrier in these
issues. The Company recorded certain impairment charges related to this
property, and others, during the quarter ended December 31, 1999. During the six
months ended June 30, 2001, the Company received net settlement proceeds of
$1,000,000 for repairs and improvements necessary to correct the deficiencies in
the property. 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. As of June 30, 2001, the Company has made
cash payments of $623,000 related to improvements, and has a remaining accrual
of $377,000 for future costs associated with the deficiencies.
10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). The Company is required to adopt the provisions of SFAS No.
142 effective January 1, 2002. SFAS No. 142 will result in modifications
relative to the Company's accounting for goodwill and other intangible assets.
Specifically, the Company will cease goodwill and certain intangible asset
amortization beginning January 1, 2002. Additionally, intangible assets,
including goodwill, will be subjected to new impairment testing criteria. Based
on current goodwill balances, the Company will have approximately $36.5 million
of unamortized goodwill as of January 1, 2002, which will be subject to the
transition provisions of SFAS No. 142. Amortization expense related to goodwill
was approximately $1.0 million and $505,000 for the year ended December 31, 2000
and the six months ended June 30, 2001, respectively.
Also in July 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). The Company is required to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the Company will
capitalize a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, the Company either will settle the
obligation for its recorded amount or will incur a gain or loss upon settlement.
The standard is effective for fiscal years beginning after June 15, 2002, with
earlier adoption permitted. The Company does not expect the adoption of this
standard to have a material effect on the Company's revenue, operating results
or liquidity.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS 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 recognizes all derivatives as either
assets or liabilities, measured at fair value, in the consolidated balance
sheet.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. During 1999 and 2000, the Company entered into two interest rate
swap agreements as a hedge against
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certain long-term debt in order to manage interest rate risk. These swap
agreements are designated and qualify as cash flow hedges under SFAS No. 133.
The adoption of SFAS No. 133 resulted in the Company recording a net transition
adjustment loss of $1.1 million (net of related deferred income tax of $570,000
in accumulated other comprehensive income at January 1, 2001). Further, the
adoption of the SFAS No. 133 resulted in the Company recognizing $266,000 of
derivative instrument assets and $1.9 million of derivative instrument
liabilities at January 1, 2001. At June 30, 2001, the net transition adjustment
loss was $1.1 million (net of related deferred income tax of $590,000 in
accumulated other comprehensive income), and derivative instrument assets and
derivative instrument liabilities were $328,000 and $2.0 million, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services provider
offering a broad range of care and services to seniors within a residential
setting. As of June 30, 2001, the Company operated 65 senior living communities,
consisting of 31 Retirement Centers and 34 Free-standing ALs, in 14 states with
an aggregate capacity for approximately 11,500 and 3,200 residents,
respectively. The Company owns 23 communities, leases 22 communities pursuant to
long-term leases, and manages 20 communities pursuant to management agreements.
Of the owned, leased, and managed communities, the Retirement Centers comprise
15, 8, and 8, and the Free-standing ALs comprise 8, 14, and 12, respectively. As
of June 30, 2001, the Company's owned communities had a stabilized occupancy
rate of 90%, its leased communities had a stabilized occupancy rate of 93%, and
its managed communities had a stabilized occupancy rate of 84%. 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 long-term strategy is to develop and operate Senior Living
Networks in major metropolitan regions. During the six months ended June 30,
2001 and 2000, the Company's Retirement Centers and Free-standing ALs generated
86.6% and 13.4% and 95.0% and 5.0% of resident and healthcare revenues,
respectively. Many of the Free-standing ALs are located within the same major
metropolitan regions as the Retirement Centers and function as satellites to
those Retirement Center hubs in order to form Senior Living Networks and expand
the continuum of housing and care into the 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.
During the late 1990s and in 2000, the assisted living market suffered from
adverse market conditions including significant overcapacity in most markets,
longer fill-up periods, price discounting and price pressures, and increasing
labor and insurance costs. The Company expects these trends and conditions to
continue for the intermediate term. As a result, the Company ceased its
development of new Free-standing ALs in late 1999 in order to focus on improving
the performance of its existing Retirement Centers, filling its Free-standing
ALs, increasing the Company's cashflow and strengthening the Company's balance
sheet.
The Company reported a net loss of $7.4 million, or $0.43 loss per diluted
share, on total revenues of $123.8 million, as compared with net loss of
$32,000, or $0.00 earnings per diluted share, on revenues of $95.5 million for
the six months ended June 30, 2001 and 2000, respectively. The six months ended
June 30, 2001 loss of $0.43 per dilutive share was comprised of a $0.42 loss
from operations, plus a $0.01 loss from the extinguishment of debt.
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RESULTS OF OPERATIONS
The Company's total revenues from continuing operations are comprised of (i)
resident and health care revenues and (ii) management and development services
revenues, which include fees, net of reimbursements, for the development,
marketing, and management of communities owned by third parties. The Company's
resident and health care revenues are derived from three principal sources: (i)
monthly service fees and ancillary revenues from independent and assisted living
residents, representing 77.5% and 80.3% of total resident and health care
revenues for the three months ended June 30, 2001 and 2000, respectively, and
77.1% and 80.5% of total resident and health care revenues for the six months
ended June 30, 2001 and 2000, respectively; (ii) per diem charges from nursing
patients, representing 19.8% and 17.8% of total resident and health care
revenues for the three months ended June 30, 2001 and 2000, respectively, and
20.0% and 17.6% of total resident and health care revenues for the six months
ended June 30, 2001 and 2000, respectively; and (iii) the amortization of
non-refundable entrance fees over each resident's actuarially determined life
expectancy (or building life for contingent refunds), representing 2.7% and 1.9%
of total resident and health care revenues for the three months ended June 30,
2001 and 2000, respectively, and 2.9% and 1.9% of total resident and health care
revenues for the six months ended June 30, 2001 and 2000, respectively.
Approximately 92% and 95% of the Company's total revenues for both the three and
six months ended June 30, 2001 and 2000, respectively, were attributable to
private pay sources, with the balance attributable to Medicare, including
Medicare-related private co-insurance and Medicaid.
The Company's operating expenses are comprised, in general, 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 Company's operations are divided into two segments: (1) Retirement Centers
and (2) Free-standing ALs. The 31 Retirement Centers are large retirement
communities that provide some or all of independent living, assisted living and
skilled nursing care. A substantial majority of the Retirement Centers are
stabilized, including recent expansions, and averaged 93% occupancy during the
three and six months ended June 30, 2001. The portfolio of Free-standing ALs
operated by the Company has increased to 34 (8 owned, 14 leased, and 12 managed
communities, 11 of which are Managed SPE Communities) at June 30, 2001. The
operations of the managed communities are not included in the Company's
financial statements, although losses that exceed specified levels are included
in Equity in Losses of Managed Special Purpose Entity Communities. The
consolidated number of Free-standing AL Communities is 22. Substantially all of
the consolidated Free-standing ALs and the managed communities are unstabilized
and in the fill-up stage. The Company has been and continues to be focused on
increasing and maintaining occupancy and controlling operating margins in all
communities.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Revenues Total revenues were $63.4 million compared to $48.8 million for the
three months ended June 30, 2001 and 2000, respectively, representing an
increase of $14.6 million, or 30.0%. Resident and health care revenues increased
by $14.5 million, and management and development services revenue increased by
$67,000 during the period. Approximately $6.2 million of the increase in
resident and health care revenue was attributable to revenues derived from
Free-standing AL leasehold interests acquired after June 30, 2000. The May 26,
2000 long-term lease of Freedom Village Brandywine increased resident and health
care revenues by $2.6 million. In addition, growth in therapy services provided
by the Company increased revenues by $903,000. The remaining increase relates to
increased average occupancy and additional entrance fee revenues. Management and
development services revenue increased slightly, but decreased as a percentage
of total revenue to 1.5% from 1.8%. The increase in management and development
services results from higher sales of newer units, which increases the
formula-based management fees, while the decrease in management and development
services as a percentage of total revenue is primarily related to the
substantial growth in resident and health care revenues.
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For all of its communities, the Company had a stabilized occupancy rate of 89%
compared to 91% as of June 30, 2001 and 2000, respectively, and had a total
occupancy rate of 84% and 83% as of June 30, 2001 and 2000. A community or
expansion is defined as stabilized if it has either been open and owned at least
12 months, or has achieved 95% occupancy. The reduction in stabilized occupancy
rate results from eight additional Free-standing ALs being defined as stable
during the period. The Company anticipates that the fill-up of these
Free-standing ALs will occur over the next 12 to 24 months. The decrease in
total occupancy rate is primarily a result of new communities and expansions
that have increased capacity from approximately 14,000 as of June 30, 2000 to
approximately 14,700 as of June 30, 2001, many of which are in the fill-up
stage.
Retirement Center resident and health care revenues for the three months ended
June 30, 2001 were $53.5 million, compared to $45.2 million for the three months
ended June 30, 2000, representing an increase of $8.3 million, or 18.5%. This
increase was primarily attributable to the May 26, 2000 long-term lease of
Freedom Village Brandywine, resulting in increased resident and health care
revenues of $2.6 million. In addition, $903,000 of the increase in Retirement
Center revenues resulted from increased therapy services provided by the
Company. The remaining increase was primarily attributable to increased average
occupancy. Free-standing AL community resident and health care revenues
increased from $2.7 million to $8.9 million for the three months ended June 30,
2000 and 2001, respectively. This increase is largely related to the increase
from 16 to 22 consolidated Free-standing AL communities, as well as the fill-up
and increased occupancy of these communities during the year.
Community Operating Expense Community operating expense increased to $43.6
million compared to $32.6 million for the three months ended June 30, 2001 and
2000, respectively, representing an increase of $11.0 million, or 33.9%. The
increase in community operating expenses was primarily attributable to expenses
from expansions and communities acquired or leased after June 30, 2000.
Additionally, this increase is the result of higher labor, insurance, utility,
facility and marketing costs at new communities, as well as costs associated
with the expansion of therapy services now provided at 12 communities. Community
operating expense as a percentage of resident and health care revenues increased
to 69.9% from 68.0% for the three months ended June 30, 2001 and 2000,
respectively. The increase in community operating expense as a percentage of
resident and health care revenues is primarily attributable to the acquisition
of leasehold interests during the second half of 2000 of various Free-standing
ALs that were Managed SPE Communities, which are in the fill-up stage. The
Company anticipates that the fill-up of these communities will occur over the
next 12 to 24 months. The Company expects community operating expense to remain
at greater than historical levels as a percentage of resident and health care
revenues because the Company anticipates acquiring additional leasehold
interests of Managed SPE Communities.
Retirement Center operating expenses were $34.6 million, compared to $29.3
million for the three months ended June 30, 2001 and 2000, respectively,
representing an increase of $5.3 million, or 18.1%. This increase was primarily
attributable to the May 26, 2000 long-term lease of Freedom Village Brandywine,
resulting in increased operating expenses of $1.5 million. In addition, $423,000
of the increase in Retirement Center operating expenses related to increased
therapy services. The remaining increase relates primarily to increased average
occupancies resulting in increased Retirement Center operating expenses.
Free-standing AL operating expenses increased to $9.1 million from $3.2 million
for the three months ended June 30, 2001 and 2000, respectively. This increase
is largely related to the increase from 16 to 22 consolidated free-standing AL
communities, of which a majority are in the fill-up stage.
General and Administrative General and administrative expense increased to $6.8
million compared to $4.4 million for the three months ended June 30, 2001 and
2000, respectively, representing an increase of $2.4 million, or 55.1%.
Approximately $1.2 million of this increase resulted from additional general
liability insurance premiums related to the Company's change from a claims-made
to a claims-incurred policy effective July 1, 2001. In addition, the increase
reflects increases in overhead support costs associated with the Free-standing
ALs in various geographic areas, as well as increases in salaries and benefits
associated with the operation of an increased number of communities. General and
administrative
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expense as a percentage of total revenues increased to 10.7% compared to 8.9%
for the three months ended June 30, 2001 and 2000, respectively.
EBITDAR (Community NOI) Retirement Center EBITDAR increased $3.1 million, or
19.5%, to $19.0 million from $15.9 million for the three months ended June 30,
2001 and 2000, respectively. This increase primarily relates to the May 26, 2000
long-term lease of Freedom Village Brandywine, as well as continued operational
improvement throughout the Retirement Centers, resulting from stabilized
occupancy and increased capacity through expansions, rate increases, and
improved control of community-level overhead expense. Consolidated Free-standing
AL EBITDAR increased by $377,000, to a $162,000 loss from a $539,000 loss loss
for the three months ended June 30, 2001 and 2000, respectively. The 2001 loss
resulted from the majority of these Free-standing ALs communities being
unstabilized. The Company expects to continue to incur losses during this
fill-up stage. Corporate and Other EBITDAR decreased by $2.3 million to a $5.8
million loss from a $3.5 million loss for the three months ended June 30, 2001
and 2000, respectively. This decrease in Corporate and Other EBITDAR resulted
from the additional general liability premiums of $1.2 million, additional costs
associated with corporate operations, human resources, financial services and
overhead, as well as increased senior living network and assisted living
management costs.
Lease Expense Lease expense increased to $6.7 million compared to $4.1 million
for the three months ended June 30, 2001 and 2000, respectively, representing an
increase of $2.6 million, or 63.8%. This increase was attributable to twelve
leases entered into after June 30, 2000, consisting of two Retirement Center
leases and ten Free-standing ALs. As of June 30, 2001, the Company leased 22 of
its communities, including eight Retirement Centers and 14 Free-standing ALs.
Accordingly, of the total $6.7 million lease expense for the three months ended
June 30, 2001, $3.4 million related to Retirement Centers and $3.3 million
related to Free-standing ALs.
Depreciation and Amortization Depreciation and amortization expense increased to
$5.2 million from $4.1 million for the three months ended June 30, 2001 and
2000, respectively, representing an increase of $1.1 million, or 25.2%. The
increase was primarily related to the increase in depreciable assets of
approximately $35.3 million since July 1, 2000. These assets relate primarily to
the opening or acquisition of communities, including leasehold interests, the
properties acquired as part of a series of like-kind exchanges associated with
the sale-leaseback of one of the Company's communities in Ohio, and expansion of
communities since June 30, 2000, as well as ongoing capital expenditures. For
the current quarter, $3.9 million of the $5.2 million depreciation and
amortization resulted from Retirement Centers.
Other Income (Expense) Interest expense increased to $9.3 million from $8.8
million for the three months ended June 30, 2001 and 2000, respectively,
representing an increase of $482,000, or 5.5%. The increase in interest expense
was primarily attributable to indebtedness incurred in connection with
acquisitions. Interest expense, as a percentage of total revenues, decreased to
14.7% from 18.1% for the three months ended June 30, 2001 and 2000,
respectively. Interest income decreased to $3.0 million from $4.0 million for
the three months ended June 30, 2001 and 2000, respectively, representing a
decrease of $1.0 million, or 25.0%. The decrease in interest income was
primarily attributable to lower income generated from a reduced amount of
certificates of deposit and notes receivable balances associated with certain
leasing transactions and management agreements. Equity in Losses of Managed SPE
Communities increased to $972,000 from $582,000 for the three months ended June
30, 2001 and 2000, respectively. The increase in Equity in Losses of Managed SPE
Communities relates to the significant fill-up losses that the Company is
obligated to fund when operating deficits at Managed SPE Communities exceed
specified limits.
Income Tax Benefit The provision for income taxes was a $2.0 million benefit
compared to a $651,000 benefit for the three months ended June 30, 2001 and
2000, respectively. The Company's effective tax rate was 32.2% and 41.0% for the
three months ended June 30, 2001 and 2000, respectively.
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 June 30, 2001 and 2000, respectively, was
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$4,000 and $321,000, representing an decrease of $317,000. The decrease was
primarily attributable to a revised partner loss allocation formula for one of
the communities.
Extraordinary Loss on Extinguishment of Debt, Net of Tax During the three months
ended June 30, 2001, the Company purchased $1.75 million of its 5 3/4%
Convertible Debenture Bonds at 78% of their face value, for a total cost of $1.4
million, resulting in an extraordinary gain on extinguishment of debt, net of
tax, of $235,000 or $0.02 gain per dilutive share. Offsetting this gain, during
the quarter ended June 30, 2001, the Company repaid a term note to a bank in
connection with the sale of its community in California. As part of this
transaction, the Company incurred a prepayment penalty of $875,000 or $0.05 loss
per dilutive share, net of income taxes, which was recorded as an extraordinary
loss on the extinguishment of debt. The purchase of bonds and repayment of the
term note resulted in a net extraordinary loss of $576,000 or $0.03 loss per
dilutive share.
Net Loss Based upon the factors noted above, the Company experienced a net loss
of $4.6 million, or $0.27 loss per dilutive share, compared to a net loss of
$652,000, or $0.04 loss per dilutive share, for the three months ended June 30,
2001 and 2000, respectively. The three months ended June 30, 2001 loss of $0.27
per dilutive share was comprised of a $0.23 loss from operations, as well as a
$0.03 loss from the extinguishment of debt.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Revenues Total revenues were $123.8 million compared to $95.5 million for the
six months ended June 30, 2001 and 2000, respectively, representing an increase
of $28.2 million, or 29.5%. Resident and health care revenues increased by $29.1
million, and management and development services revenue decreased by $853,000
during the period. Approximately $11.6 million of the increase in resident and
health care revenue was attributable to revenues derived from Free-standing AL
leasehold interests acquired after June 30, 2000. The May 26, 2000 long-term
lease of Freedom Village Brandywine increased resident and health care revenues
by $6.5 million. In addition, growth in therapy services provided by the Company
increased revenues by $1.9 million. The remaining increase relates to increased
average occupancy and additional entrance fee revenues. Management and
development services revenue decreased as a percentage of total revenue to 1.4%
from 2.6%, as of June 30, 2001 and 2000, 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. In late 1999, the Company discontinued new development of
Free-standing ALs, for which the Company received development fees.
For all of its communities, the Company had a stabilized occupancy rate of 89%
compared to 91% as of June 30, 2001 and 2000, respectively, and had a total
occupancy rate of 84% and 83% as of June 30, 2001 and 2000. A community or
expansion is defined as stabilized if it has either been open and owned at least
12 months, or has achieved 95% occupancy. The reduction in stabilized occupancy
rate results from eight additional Free-standing ALs being defined as stable
during the period. The Company anticipates that the fill-up of these
Free-standing ALs occur over the next 12 to 24 months. The increase in total
occupancy rate appears minimal. However, the occupancy rate improvement is
substantial considering that capacity has increased from approximately 14,000 as
of June 30, 2000 to approximately 14,700 as of June 30, 2001, as well as that
the increased capacity is related to expansions and new communities, many of
which are in the fill-up stage.
Retirement Center resident and health care revenues were $105.7 million,
compared to $88.3 million for the six months ended June 30, 2001 and 2000,
respectively, representing an increase of $17.4 million, or 19.7%. Approximately
$4.5 million of this increase was attributable to four expansions which were
completed during the period. The May 26, 2000 long-term lease of Freedom Village
Brandywine resulted in increased resident and health care revenues of $6.5
million. In addition, $1.9 million of the increase in Retirement Center revenues
resulted from increased therapy services provided by the Company. The
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remaining increase relates to increased average occupancy and additional
entrance fee revenues. Free-standing AL community resident and health care
revenues increased from $4.7 million to $16.3 million for the six months ended
June 30, 2000 and 2001, respectively. This increase is largely related to the
increase from 16 to 22 consolidated Free-standing AL communities, as well as the
fill-up and increased occupancy of these communities during the year.
Community Operating Expense Community operating expense increased to $85.4
million compared to $62.5 million for the six months ended June 30, 2001 and
2000, respectively, representing an increase of $22.9 million, or 36.6%. The
increase in community operating expenses was primarily attributable to expenses
from expansions and communities acquired or leased after June 30, 2000.
Additionally, this increase is the result of higher labor, insurance, utility,
facility and marketing costs at new communities, as well as costs associated
with the expansion of therapy services now provided at 12 communities. Community
operating expense as a percentage of resident and health care revenues increased
to 70.0% from 67.2% for the six months ended June 30, 2001 and 2000,
respectively. The increase in community operating expense as a percentage of
resident and health care revenues is primarily attributable to the acquisition
of leasehold interests during the second half of 2000 of various Free-standing
ALs that were Managed SPE Communities, which are in the fill-up stage. The
Company anticipates that the fill-up of these communities will occur over the
next 12 to 24 months. The Company expects community operating expense to remain
at greater than historical levels as a percentage of resident and health care
revenues because the Company anticipates acquiring additional leasehold
interests of Managed SPE Communities.
Retirement Center operating expenses were $67.4 million, compared to $57.2
million for the six months ended June 30, 2001 and 2000, respectively,
representing an increase of $10.2 million, or 17.8%. Approximately $3.7 million
of this increase was attributable to the May 26, 2000 long-term lease of Freedom
Village Brandywine. In addition, $1.7 million of the increase in Retirement
Center operating expenses related to increased therapy services. The remaining
increase relates primarily to increased average occupancies resulting in
increased Retirement Center operating expenses. Free-standing AL operating
expenses increased to $17.3 million from $5.3 million for the six months ended
June 30, 2001 and 2000, respectively. This increase is largely related to the
increase from 16 to 22 consolidated free-standing AL communities, of which a
majority are in the fill-up stage.
General and Administrative General and administrative expense increased to $11.8
million compared to $8.7 million for the six months ended June 30, 2001 and
2000, respectively, representing an increase of $3.1 million, or 35.7%.
Approximately $1.2 million of this increase resulted from additional general
liability insurance premiums related to the Company's change from a claims-made
to a claims-incurred policy effective July 1, 2001. In addition, the increase
reflects increases in overhead support costs associated with the Free-standing
ALs in various geographic areas, as well as increases in salaries and benefits
associated with the operation of an increased number of communities. General and
administrative expense as a percentage of total revenues increased to 9.5%
compared to 9.1% for the six months ended June 30, 2001 and 2000, respectively.
EBITDAR (Community NOI) Retirement Center EBITDAR increased $7.2 million, or
23.2%, to $38.3 million from $31.1 million for the six months ended June 30,
2001 and 2000, respectively. This increase primarily relates to the May 26, 2000
long-term lease of Freedom Village Brandywine, as well as continued operational
improvement throughout the Retirement Centers, resulting from stabilized
occupancy and increased capacity through expansions, rate increases, and
improved control of community-level overhead expense. Consolidated Free-standing
AL EBITDAR decreased by $359,000, to a $962,000 loss from a $603,000 loss for
the six months ended June 30, 2001 and 2000, respectively. The 2001 loss
resulted from the increase in consolidated Free-standing ALs from 16 to 22.
Since the majority of these communities are unstabilized, the Company expects to
continue to incur losses during this fill-up stage. Corporate and Other EBITDAR
decreased by $4.6 million to a $10.8 million loss from a $6.1 million loss for
the six months ended June 30, 2001 and 2000, respectively. This decrease in
Corporate and Other EBITDAR resulted from the $1.2 million increase in general
liability insurance premiums related to the Company's shift from a claims-made
to a claims-incurred insurance policy, the reduction in development and
management fee revenues of
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$853,000, additional costs associated with corporate operations, human
resources, financial services and overhead, as well as increased senior living
network and assisted living management costs.
Lease Expense Lease expense increased to $13.5 million compared to $7.6 million
for the six months ended June 30, 2001 and 2000, respectively, representing an
increase of $5.9 million, or 76.6%. This increase was attributable to twelve
leases entered into after June 30, 2000, consisting of two Retirement Center
leases and ten Free-standing ALs. As of June 30, 2001, the Company leased 22 of
its communities, including eight Retirement Centers and 14 Free-standing ALs.
Accordingly, of the total $13.5 million lease expense for the six months ended
June 30, 2001, $7.1 million related to Retirement Centers and $6.4 million
related to Free-standing ALs.
Depreciation and Amortization Depreciation and amortization expense increased to
$10.3 million from $8.0 million for the six months ended June 30, 2001 and 2000,
respectively, representing an increase of $2.2 million, or 27.9%. The increase
was primarily related to the increase in depreciable assets of approximately
$35.3 million since July 1, 2000. These assets relate primarily to the opening
or acquisition of communities, including leasehold interests, the properties
acquired as part of a series of like-kind exchanges associated with the
sale-leaseback of one of the Company's communities in Ohio, and expansion of
communities since June 30, 2000, as well as ongoing capital expenditures. For
the six months ended June 30, 2001, $7.7 million of the $10.3 million
depreciation and amortization resulted from Retirement Centers.
Other Income (Expense) Interest expense increased to $18.5 million from $16.7
million for the six months ended June 30, 2001 and 2000, respectively,
representing an increase of $1.8 million, or 10.9%. The increase in interest
expense was primarily attributable to indebtedness incurred in connection with
acquisitions and development activity. Interest expense, as a percentage of
total revenues, decreased to 15.0% from 17.5% for the six months ended June 30,
2001 and 2000, respectively. Interest income decreased to $6.2 million from $7.5
million for the six months ended June 30, 2001 and 2000, respectively,
representing a decrease of $1.4 million, or 18.1%. The decrease in interest
income was primarily attributable to lower income generated from a reduced
amount of certificates of deposit and notes receivable balances associated with
certain leasing transactions and management agreements. Equity in Losses of
Managed SPE Communities increased to $1.9 million from $582,000 for the six
months ended June 30, 2001 and 2000, respectively. The increase in Equity in
Losses of Managed SPE Communities relates to the significant fill-up losses that
the Company is obligated to fund when operating deficits at Managed SPE
Communities exceed specified limits.
Income Tax Benefit The provision for income taxes was a $3.4 million benefit
compared to a $266,000 benefit for the six months ended June 30, 2001 and 2000,
respectively. The Company's effective tax rate was 32.0% and 19.0% for the six
months ended June 30, 2001 and 2000, respectively.
Minority Interest in Losses (Earnings) of Consolidated Subsidiaries, Net of Tax
Minority interest in losses (earnings) of two consolidated subsidiaries, net of
tax, for the six months ended June 30, 2001 and 2000, respectively, was $96,000
in income, and $469,000 of losses, representing an decrease of $565,000. The
decrease was primarily attributable to a negotiated revised partner loss
allocation system for one of the communities.
Extraordinary Loss on Extinguishment of Debt, Net of Tax During the period ended
June 30, 2001, the Company purchased $5.1 million of its 5 3/4% Convertible
Debenture Bonds at 78% of their face value, for a total cost of $4.0 million,
resulting in an extraordinary gain on extinguishment of debt, net of tax, of
$694,000 or $0.04 gain per dilutive share. Offsetting this gain, during the
period ended June 30, 2001, the Company repaid a term note to a bank in
connection with the sale of its community in California. As part of this
transaction, the Company incurred a prepayment penalty of $875,000 or $0.05 loss
per dilutive share, net of income taxes, which was recorded as an extraordinary
loss on the extinguishment of debt. The purchase of bonds and repayment of the
term note resulted in a net extraordinary loss of $181,000 or $0.01 loss per
dilutive share.
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Net Loss Based upon the factors noted above, the Company experienced a net loss
of $7.4 million, or $0.43 loss per dilutive share, compared to a net loss of
$32,000, or $0.00 per dilutive share, for the six months ended June 30, 2001 and
2000, respectively. The six months ended June 30, 2001 loss of $0.43 loss per
dilutive share was comprised of a $0.42 loss from operations, as well as a $0.01
loss from the extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
Cashflow
Net cash used by operating activities was $31,000 for the six months ended June
30, 2001, as compared with $7.3 million provided for the six months ended June
30, 2000. The Company's cash and cash equivalents totaled $22.4 million as of
June 30, 2001, as compared to $21.0 million as of June 30, 2000.
Net cash used by investing activities was $4.1 million for the six months ended
June 30, 2001, as compared with $56.9 million for the six months ended June 30,
2000. During the six months ended June 30, 2001, the Company made additions to
land, buildings, and equipment, including construction activity, of $11.4
million. The Company has received $7.7 million from sales of assets, received
reimbursement for notes receivable of $2.1 million, and also purchased assets
limited as to use amounting to $2.9 million.
Net cash provided by financing activities was $6.7 million compared with $48.8
million for the six months ended June 30, 2001 and 2000, respectively. During
the six months ended June 30, 2001, the Company borrowed $21.7 million under
long-term debt arrangements, made principal payments on its indebtedness of $7.4
million, purchased debentures totaling $4.0 million and paid $567,000 of
financing costs. In connection with certain lifecare communities, the Company
also made principal payments and refunds under master trust agreements of $3.1
million.
Financing Activity
During the six months ended June 30, 2001, the Company entered into various
financing commitments including a secured term loan from a mortgage lender in
the amount of $17.3 million, with interest payable at LIBOR plus 3%. Interest
and principal are payable monthly, based on a twenty-five year amortization
schedule, with all remaining balances due in July 2002. The Company used a
portion of the proceeds on the above loan to refinance a portion of a term note
to a capital corporation, repaying $3.5 million of such term note.
Effective as of June 30, 2001, the Company amended various financing agreements
in order to, among other things, maintain compliance with its debt covenants,
including its $100.0 million mortgage loan facility. This amendment resulted in
the extension of the May 1, 2002 maturity to August 1, 2002 and requires a $10.0
million in principal reduction by May 1, 2002. See Note 2 to the Condensed
Consolidated Financial Statements.
On December 18, 2000, the Company sold a community located in Westlake, Ohio for
$26.0 million and contemporaneously leased the property back from the buyer. The
Company used a portion of the proceeds from the sale to repay $17.0 million of a
$50.0 million revolving line of credit. During the six months ended June 30,
2001, the Company completed two like-kind exchange transactions which deferred
the taxable gain resulting from the Westlake transaction. In connection with the
first like-kind exchange, the Company purchased land in Virginia, assuming a
$12.1 million non-recourse mortgage loan bearing interest at 7.43% with
principal due monthly, and a maturity date of January 2024. The Company acquired
the land subject to a lease that provides annual rental payments of $980,000
through February 23, 2023. In the second like-kind exchange, the Company
purchased all of the equity interests in a single member limited liability
company that owned various parcels of land, as well as buildings valued at $2.3
million
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and building improvements valued at $4.8 million, assuming a $15.2 million
non-recourse mortgage loan, with interest at 8.41% and principal and interest
due monthly, and a maturity date of September 2005. The various land parcels are
subject to leases that provide annual rental payments of $1.3 million through
March 7, 2022.
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 Subordinated Debentures. The timing and amount
of purchases of these debentures will depend upon prevailing market conditions,
availability of capital, alternative uses of capital and other factors. During
the six months ended June 30, 2001, the Company purchased $5.1 million of the
5 3/4% Convertible Subordinated Debentures, resulting in an extraordinary gain
on extinguishment of debt, net of tax, of $694,000. Additional purchases of the
5 3/4% Convertible Subordinated Debentures, if any, are likely to be made
primarily in the open market. See Note 4 to the Condensed Consolidated Financial
Statements.
Free-standing ALs and Managed SPE Communities
The Company owns, leases, or manages a total of 34 Free-standing ALs.
Substantially all of the Company's Free-standing ALs, including all of the
Managed SPE Communities, are in the pre-stabilized fill-up stage. As a result,
the Company expects its Free-standing AL portfolio (both consolidated
Free-standing ALs and Managed SPE Communities) to continue to incur substantial
losses throughout 2001 and 2002. For the three months ended December 31, 2000,
March 31, 2001, and June 30, 2001, Free-standing AL Pre-tax Losses (defined as
Free-standing AL operating income, including Equity in Losses of Managed Special
Purpose Entity Communities, plus lease and interest costs directly allocable to
Free-standing ALs, but excluding general and administrative costs) were $5.1
million, $5.6 million and $5.2 million.
The Company's consolidated results include and will continue to include
increased losses from Free-standing ALs in 2001 versus 2000, as a result of a
full year of activity in 2001 for these communities opened during 2000, an
increased number of Free-standing ALs which are included in consolidated results
(as a result of acquiring various communities and leasehold interests during
2000 and 2001), and increased Equity in Losses of Managed SPE Communities (as
cumulative operating costs exceed the limits for which the SPEs are
responsible). However, the Company believes that the losses incurred in
connection with its Free-standing AL portfolio will decrease each successive
quarter, primarily as a result of increased occupancy at these communities.
The Company has options to purchase or has rights of first refusal to acquire
the leasehold interests in eleven Managed SPE Communities, but is under no
obligation to purchase these communities. The Company acquired one leasehold
interest during the six months ended June 30, 2001. The Company is in
discussions with the various SPEs to acquire some or all of the remaining 11
Managed SPE Communities that are currently managed by the Company. If offered
and accepted, the Company anticipates acquiring certain, and perhaps all, of
those leasehold interests in Managed SPE Communities during 2001 and 2002. If
all were acquired, the Company estimates that the combined purchase price would
be approximately $18.0 to $22.0 million. The timing of these leasehold
acquisitions will depend on a variety of factors, including prevailing market
conditions, the Company's financing plans, the availability of capital,
alternative uses of capital, general economic conditions and the results of
negotiations with the SPEs. If the Company does not acquire these leasehold
interests, the Company remains responsible for funding future operating losses
to the extent that such losses exceed specified limits. The Company expects that
it will be required to fund significant Managed SPE operating deficits during
the remainder of 2001 and 2002.
Liquidity
The Company has historically financed its activities with long-term mortgage
borrowings, term and revolving credit facilities, net proceeds from public
offerings of debt and equity, and cash flows from operations. At June 30, 2001,
the Company had $520.2 million of indebtedness outstanding, including $132.9
million of 5 3/4% Convertible Subordinated Debentures, with fixed maturities
ranging from July
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2001 to April 2028. As of June 30, 2001, approximately 57.2% of the Company's
indebtedness bore interest at fixed rates, with a weighted average interest rate
of 7.05%. The Company's variable rate indebtedness carried a weighted average
rate of 6.64% as of June 30, 2001. As of June 30, 2001, the Company had working
capital of $2.7 million.
Certain of the Company's credit agreements contain restrictive covenants that
include, among other things, the maintenance of minimum tangible net worth,
prescribed debt service coverage, liquidity, capital expenditure reserves and
occupancy levels. Effective as of June 30, 2001, the Company and certain of its
lenders and lessors agreed to amendments or waivers relating to several of these
financial covenants in order to allow the Company to remain in compliance
therewith. In addition, the Company extended the maturity date of its $100.0
million mortgage loan facility from May 1, 2002 to August 1, 2002. At June 30,
2001, $92.3 million was outstanding under this credit facility. In connection
with this extension, the Company agreed to, among other things, (i) convert the
facility to a term loan from a revolving line-of-credit, (ii) make a $10.0
million principal reduction by May 1, 2002, (iii) increase the interest rate
margin of the facility, (iv) provide a capital formation plan requiring that the
Company raise $30.0 million of capital by January 31, 2002, (v) evidence of
sufficient capacity to payoff its 5 3/4% Convertible Subordinated Debentures by
July 1, 2002 and (vi) include certain new and amended financial covenants.
The Company's compliance with its financial covenants is dependent, among other
things, upon improvements in the operations of the Company's Free-standing ALs
and the Company's ability to raise capital to meet covenants requiring debt
reductions. There can be no assurances that the Company will remain in
compliance with those financial covenants or that its lenders will grant further
amendments in the event of such non-compliance. Failure to remain in compliance
with its financial covenants would have a material adverse impact on the
Company, and would likely result in a default or an acceleration of a
substantial majority of the Company's indebtedness and other obligations.
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. Any
non-payment or other default with respect to such obligations (including
non-compliance with a financial covenant) could cause lenders to cease funding
and accelerate payment obligations or to foreclose upon the communities securing
such indebtedness. Furthermore, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgages, debt
instruments, and leases, a default by the Company on one of its debt instruments
is likely to result in default or acceleration of a substantial majority of the
Company's other obligations.
The Company is highly leveraged and has a substantial amount of debt and lease
obligations. At June 30, 2001, the scheduled debt maturities during the eighteen
months ended December 31, 2002 total $349.4 million, including $216.5 million of
mortgage debt and $132.9 million of 5 3/4% Convertible Subordinated Debentures.
The maturing mortgage debt includes the Company's amended senior mortgage
facility, of which $92.3 million was outstanding as of June 30, 2001, $10.0
million of which is due on May 1, 2002 with the balance being due on August 1,
2002. The $132.9 million of 5 3/4% Convertible Subordinated Debentures matures
on October 1, 2002. The Company must repay or refinance all of these obligations
as they mature in order to avoid being in default thereunder.
The Company expects that its current cash and cash equivalents, and cash flow
from operations will be sufficient to fund its operating requirements, including
its pre-stabilization losses, its capital expenditure requirements and its
periodic debt service requirements, during 2001 and 2002. The Company's
internally generated cash will not be sufficient satisfy the mortgage debt that
matures in 2002 or its scheduled principal reductions in 2002. The Company does
not believe that it will be able to raise capital in the public
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equity or debt markets to satisfy those obligations. Accordingly, the Company's
ability to refinance its maturing mortgage debt obligations and to make its
scheduled principal reductions will depend, in large part, upon its ability to
renew existing credit facilities and arrangements or to obtain new credit
facilities or arrangements. The Company has engaged in, and anticipates
continuing, discussions with its existing lenders and other third parties
regarding the refinancing of the Company's maturing indebtedness. There can be
no assurances, however, that the Company will successfully negotiate and obtain
adequate new credit facilities or extensions of its existing credit facilities,
and if such financing is available, that the terms of any such financing will
not impose significant burdens on the Company or be dilutive to the Company's
existing shareholders. If the Company has not successfully extended or renewed
the $92.3 million senior mortgage facility beyond the current maturity of August
1, 2002, this amount will be classified as a current liability in the third
quarter of 2001, which will have a material adverse effect upon its working
capital position.
The Company's internally generated cash flow will also not be sufficient to
satisfy the Convertible Subordinated Debentures at their maturity in 2002. The
Company has engaged an investment advisor and is considering various capital
raising and other alternatives to satisfy the Company's obligations in
connection with the 5 3/4% Convertible Subordinated Debentures and its maturing
mortgage debt. These alternatives include generating cash from incremental
leverage on the Company's stabilized assets, the selective disposition or sale
of certain communities, the sale-leaseback or monetization of certain
communities, the issuance of equity or equity linked securities, the exchange of
the 5 3/4% Convertible Subordinated Debentures for other securities of the
Company, and combinations of all of these alternatives. The terms of any such
transactions may impose significant burdens on the Company and are likely to be
substantially dilutive to the Company's existing shareholders. There can be no
assurance that any of these alternatives will be available to the Company, or
that any available terms will be acceptable to the Company. Consequently, there
can be no assurance that the Company will be able to refinance, extend, exchange
or otherwise satisfy its obligations with respect to the 5 3/4% Convertible
Subordinated Debentures prior to their maturity or classification as a current
liability. The failure to satisfy the 5 3/4% Convertible Subordinated Debentures
will have a material adverse effect upon the Company.
The Company's ability to obtain new credit facilities, to sell communities, or
to consummate any of the debt or equity financing alternatives being considered
depends upon a number of factors (most of which are outside of the Company's
control). These factors include the Company's financial condition and operating
performance, the financial strength of the assets to be sold or leveraged,
general economic conditions, general conditions in the credit markets, the
condition of the senior living industry, mortgage interest rates, the Company's
equity in any particular community and other factors. The Company's efforts will
be adversely affected by the condition of the assisted living market in general,
the insolvency or weakened financial conditions of many assisted living
competitors, a reduced number of lenders willing to finance assisted living or
retirement companies, the substantial fill-up costs associated with the
Company's Free-standing ALs, the Company's financial condition and the fact that
the Company is highly leveraged.
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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 dispositions), the Company's
liquidity and financing needs, the alternatives that the Company is considering
for raising additional capital and satisfying its maturing obligations,
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, (i) the possibility of
future defaults under the Company's debt and lease agreements (including the
Company's inability to meet financial covenants or satisfy these obligations at
their maturity), (ii) the risks associated with the Company's financial
condition and the fact that the Company is highly leveraged, (iii) the risk that
the Company will be unable to obtain new credit facilities, raise additional
capital or consummate any of the capital raising alternatives that the Company
is contemplating, (iv) the risk that the Company will be unable to reduce the
operating losses at its Free-standing ALs, (v) the risks associated with the
adverse market conditions for the senior living industry, (vi) the risk that the
Company will be unable to obtain liability insurance in the future or that the
costs associated with such insurance (including the costs of deductibles) will
be prohibitive, (vii) the likelihood of further and tighter governmental
regulation, and (viii) the risks and uncertainties set forth under the caption
"Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 and the Company's other filings with the Securities and
Exchange Commission. Should one or more of these risks materialize, actual
results will differ materially from those forecasted or expected. 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 forecasts,
expectations, objectives or plans of the Company will be achieved. The Company
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure About Interest Rate 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 a major financial institution to manage its
exposure. The swaps involve the receipt of a fixed interest rate payment in
exchange for the payment of a variable rate interest payment without exchanging
the notional principal amount. Receipts on the agreement are recorded as a
reduction to interest expense. At June 30, 2001, the Company's outstanding
principal under its existing swap agreements was $17.7 million and $35.0 million
maturing December 10, 2024 and July 1, 2008, respectively. Under the agreements
the Company receives fixed rates of 6.31% and 6.87%, respectively, and pays
floating rates based upon LIBOR and a foreign currency index with a maximum rate
through July 1, 2002 of 6.87% and 8.12% thereafter. The Company does not expect
changes in interest rates to have a material effect on income or cash flows in
2001, since the majority of the Company's debt has fixed rates. There can be no
assurances, however, that interest rates will not significantly change and
materially affect the Company. Additionally, the Company anticipates refinancing
and/or renegotiating certain debt in 2001, which could result in higher interest
rates in the future. There can be no assurance, however, that the Company will
be able to refinance and/or renegotiate any of its indebtedness.
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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 3, 2001 (the "Annual
Meeting"). At the Annual Meeting, the shareholders of the Company voted to elect
three Class I 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:
Director Nominee For Abstain/Withheld
---------------- ---------- ----------------
Christopher J. Coates 11,094,023 3,322,510
Daniel K. O'Connell 11,094,049 3,322,484
Lawrence J. Steusser 11,094,049 3,322,484
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:
Name Term Expires
---- ------------
Frank M. Bumstead 2002
Clarence Edmonds 2002
Nadine C. Smith 2002
W.E. Sheriff 2003
H. Lee Barfield II 2003
Robin G. Costa 2003
John A. Morris, Jr., M.D. 2003
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Second Amendment to Amended and Restated Financing and Security
Agreement, dated June 30, 2001 between Washington Mutual Bank, FA and
ARC Capital Corporation II
10.2 Purchase and Sale Agreement dated June 13, 2001 between Fort Austin
Limited Partnership and Corporate Realty Investment Company LLC.
10.3 Executive Change in Control Severance Benefits Plan
b. Reports on Form 8-K
On May 4, 2001, the Company furnished to the SEC a Form 8-K disclosing for
purposes of Regulation FD a response to the letter delivered by the Company
to DNMC Public Holdings, LLC.
On May 7, 2001, the Company furnished to the SEC a Form 8-K disclosing for
purposes of Regulation FD the issuance by the Company of a press release
announcing the broadcast of the Company's first quarter 2001 conference
call via live WebCast on Wednesday, May 9 at 11:00 a.m. EST.
On May 9, 2001, the Company furnished to the SEC a Form 8-K disclosing for
purposes of Regulation FD supplemental financial information relating to
the Company's first quarter ended March 31, 2001.
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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: August 14, 2001 By: /s/ George T. Hicks
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George T. Hicks
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
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