UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
_X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission file number 01-13031
American Retirement Corporation
(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1674303
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
111 Westwood Place, Suite 200, Brentwood, TN 37027
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 221-2250
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, par value $.01 per share ................ NYSE
5 3/4% Convertible Subordinated Debentures due
October 1, 2002 ..................................... NYSE
Series A Preferred Stock Purchase Rights............... NYSE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of March 22, 2002, 17,276,520 shares of the registrant's common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was $23.0 million, based on the closing sale price of the common
stock of $1.33 on the New York Stock Exchange on that date. For purposes of this
calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors, and shareholders owning 10% or more
of the outstanding common stock (and, in each case, their immediate family
members and affiliates).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection with the
Annual Meeting of Shareholders to be held on May 30, 2002 are incorporated by
reference into Part III, items 10, 11, 12 and 13 of this Form 10-K.
CONTENTS:
PAGE
PART I 3
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II 21
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 49
Item 8. Financial Statements and Supplementary Data 50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 85
PART III 85
Item 10. Directors and Executive Officers of the Registrant 85
Item 11. Executive Compensation 85
Item 12. Security Ownership of Certain Beneficial Owners and Management 86
Item 13. Certain Relationships and Related Transactions 86
PART IV 86
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 86
2
PART I
ITEM 1. BUSINESS
THE COMPANY
American Retirement Corporation (collectively with its wholly-owned and majority
owned subsidiaries, the "Company") is a national senior living and health care
services provider offering a broad range of care and services to seniors,
including independent living, assisted living, skilled nursing and therapy
services. Established in 1978, the Company believes that it is a leader in the
development and management of senior living communities, including independent
living communities, continuing care retirement communities ("CCRCs") and
free-standing assisted living communities ("Free-standing ALs"), and the
development of specialized care programs for residents with Alzheimer's and
other forms of dementia. The Company's operating philosophy was inspired by the
vision of its founders, Dr. Thomas F. Frist, Sr. and Jack C. Massey, to enhance
the lives of seniors by providing the highest quality of care and services in
well-operated communities designed to improve and protect the quality of life,
independence, personal freedom, privacy, spirit, and dignity of its residents.
The Company currently operates 65 senior living communities in 14 states, with
an aggregate capacity for approximately 14,300 residents. The Company owns 24
communities, leases 33 communities, and manages eight communities pursuant to
management agreements.
Since its inception, the Company has developed expertise in developing and
operating senior living communities throughout the United States. Historically,
the Company operated large CCRCs and independent living communities ("Retirement
Centers") that provide an array of services, including independent living,
assisted living and skilled nursing care in large, often campus style settings.
The Company's Retirement Centers are established communities with strong
reputations within their respective markets, and generally maintain high and
consistent occupancy levels, many with waiting lists of prospective residents.
The Company's Retirement Centers form the core segment of the Company's business
and comprise 31 of the 65 communities that the Company operates, representing
approximately 78% of the total resident capacity of the Company's communities.
The Company has also developed and acquired a number of Free-standing ALs, most
of which began operations during 1999 and 2000. Free-standing ALs are much
smaller than Retirement Centers and generally are stand-alone communities that
are not located on a Retirement Center campus. Most Free-standing ALs provide
specialized care such as Alzheimer's, memory enhancement and other dementia
programs. The Company currently operates 34 Free-standing ALs, representing
approximately 22% of the total resident capacity of the Company's communities.
In order to capitalize upon the strength and market position of its Retirement
Centers, the Company has developed a "Senior Living Network" strategy. Pursuant
to this strategy, the Company develops multiple communities within a single
market in order to provide a continuum of housing and care for seniors,
including independent living and assisted living residences, skilled nursing
care, specialized services such as Alzheimer's and memory enhancement programs,
and therapy services. This strategy combines large Retirement Center "hubs" with
smaller Free-standing AL "satellites" to expand the continuum of housing and
care into specific markets. The Company believes that this hub and satellite
approach produces management efficiencies and market penetration by offering a
range of senior living arrangements and services at various price and care
levels.
ORGANIZATION
The Company was established in 1978. American Retirement Communities, L.P.
("ARCLP") was formed in February 1995 through a combination of certain entities
(the "Predecessor Entities") that owned, operated, or managed various senior
living communities. Each of the Predecessor Entities was organized at the
direction the Company. As a result of the combination, ARCLP issued partnership
interests to the partners and shareholders of the Predecessor Entities in
exchange for their limited partnership interests and stock in the Predecessor
Entities, and thereby became the owner, directly or indirectly, of all of the
assets of the Predecessor Entities.
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In February 1997, American Retirement Corporation became a wholly-owned
subsidiary of ARCLP in anticipation of the Reorganization (defined below) and
the Company's initial public offering in May 1997 (the "IPO"). Simultaneously
with the IPO, ARCLP was reorganized (the "Reorganization") with the result that
all of its assets and liabilities were contributed to the Company in exchange
for 7,812,500 shares of the Company's Common Stock and a promissory note in the
original principal amount of approximately $21.9 million (the "Reorganization
Note"). The Company issued 3,593,750 shares of Common Stock in the IPO,
resulting in net proceeds of approximately $45.0 million. The Company used a
portion of the net proceeds from the IPO to repay the Reorganization Note.
REFINANCING PLAN
The Company has scheduled debt maturities during 2002 of $371.7 million, which
includes $238.8 million of mortgage debt and $132.9 million of its 5 3/4%
Convertible Subordinated Debentures due October 1, 2002 (the "Debentures"). As a
result of these current maturities, the Company had a net working capital
deficit of $375.8 million as of December 31, 2001.
In order to satisfy or extend these obligations and to address its net working
capital deficit, the Company has developed a refinancing plan in consultation
with its investment banking advisor and its legal counsel and through
discussions with its lenders (the "Refinancing Plan"). The Refinancing Plan
includes extensions of existing debt agreements, refinancings of existing
mortgage facilities, new mortgage financings, sale lease-back arrangements, and
a mezzanine financing arrangement. As part of its Refinancing Plan, the Company
intends to extend the maturity dates of substantially all of its remaining
credit facilities to January 2004 or later. In addition, the Company intends to
renegotiate its financial covenants to levels that the Company believes it can
satisfy for the foreseeable future and eliminate other financial covenants no
longer applicable to the Company. The Company believes that, if consummated as
currently planned, the Refinancing Plan will place the Company in position to
address the scheduled debt maturities during 2002, as well as its negative
working capital.
Pursuant to its Refinancing Plan, the Company has consummated, as of March 29,
2002, fourteen sale lease-back and other capital raising transactions since
November 1, 2001, raising gross proceeds of approximately $193.2 million, which
yielded net proceeds of approximately $27.3 million after payment of related
debt and transaction costs for use by the Company as working capital or to repay
its maturing debt obligations. See "--Acquisitions and Other Transactions,"
"--Sale Lease-back Transactions," "--Managed SPE Communities," "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" and note 19 to the Company's Consolidated
Financial Statements.
In addition to these recently completed transactions, the Company has either
executed definitive, binding agreements or is in advanced discussions with
several different parties relating to the refinancing or sale lease-back of up
to 11 additional communities. If completed on the terms being considered, these
proposed transactions would generate gross proceeds to the Company of
approximately $181.5 million prior to payment of related debt and transaction
costs of approximately $167.7 million. Furthermore, the Company is in advanced
discussions with certain of its existing lenders concerning the amendment or
removal of the Company's financial covenants following consummation of the
Refinancing Plan. These transactions and discussions are in various stages and
in certain instances are non-binding. All of these transactions will be subject
to conditions and approvals that must be satisfied. Some of these transactions
may be dilutive to current equity holders.
If the foregoing transactions are consummated as currently contemplated, the
Debentures will be the Company's primary remaining outstanding debt obligation
maturing in 2002. In order to address the maturity of the Debentures by or
before October 2002, the Company has entered into a non-binding letter of intent
with a third-party that will provide the Company with approximately $125.0
million of term mezzanine financing involving certain of its Retirement Centers.
The Company intends to use the net proceeds from this transaction, together with
the net proceeds generated by the transactions described above, to address final
resolution of the outstanding Debentures and to satisfy its working capital
requirements. The letter of intent regarding this transaction is preliminary and
non-binding, and is subject to conditions that must be satisfied prior to
closing including certain approvals and consents. If the Company is able to
reach a definitive agreement with respect to this proposed mezzanine financing,
the transaction is expected to close during the second or third quarter of 2002.
The Company currently anticipates completing the balance of its Refinancing Plan
prior to October of 2002. Nevertheless, the Refinancing Plan and its various
remaining components are subject to a number of contingencies, uncertainties and
conditions that are outside of the Company's control, and are dependent
4
upon the receipt of required approvals and consents. Accordingly, there can be
no assurance that the Company will be able to consummate its Refinancing Plan.
The failure to consummate the Refinancing Plan, or another plan to extend,
refinance or repay the Company's debts, will have a material adverse effect upon
the Company, will result in the Company having insufficient capital to satisfy
its maturing obligations and could make it necessary for the Company to seek
protection from its creditors. In the event that the Company successfully
consummates its Refinancing Plan, it will remain highly leveraged with a
substantial amount of debt and lease obligations, and will have increased
interest and lease expenses. The Company is also likely to incur certain costs,
including significant non-cash charges in connection with the consummation of
the Refinancing Plan. See "--Sale Lease-back Transactions," "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," and "--Risks Associated with Forward Looking
Statements."
CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living and health care services at
its communities, including independent living, assisted living and memory
enhanced services (with special programs and living units for residents with
Alzheimer's and other forms of dementia), skilled nursing services, and therapy
services. By offering a variety of services and involving the active
participation of the resident and the resident's family and medical consultants,
the Company is able to customize its service plans to meet the specific needs
and desires of each resident. As a result, the Company believes that it is able
to maximize customer satisfaction and avoid the high cost of delivering all
services to every resident without regard to need, preference, or choice.
Independent Living Services
The Company provides independent living services to seniors who do not yet need
assistance or support with the activities of daily life ("ADLs"), but who prefer
the physical and psychological comfort of a residential community that offers
health care and other services. Independent living services provided by the
Company include daily meals and dining programs, transportation, social and
recreational activities, laundry, housekeeping, security, and health care
monitoring. The Company also fosters the wellness of its residents by offering
health screenings such as blood pressure checks, periodic special services (such
as influenza inoculations), chronic disease management (such as diabetes with
its attendant blood glucose monitoring), and dietary and similar programs, as
well as ongoing exercise and fitness classes. Classes are given by health care
professionals to keep residents informed about health and disease management.
Subject to applicable government regulation, personal care and medical services
are available to independent living residents. The Company's contracts with its
independent living residents (other than Lifecare contracts) are generally for a
term of one year and are terminable by the resident upon 60 days notice.
Assisted Living and Memory Enhanced Services
The residents utilizing the Company's assisted living services generally need
assistance with some or all ADLs, but do not require the more acute medical care
traditionally given in nursing homes. Upon admission, in consultation with the
resident and the resident's family and medical consultants, each assisted living
resident is assessed to determine his or her health status, including functional
abilities and need for personal care services. Each resident also completes a
lifestyles assessment to determine the resident's preferences. From these
assessments, a care plan is developed for each resident to ensure that all staff
members who render care meet the specific needs and preferences of each resident
whenever possible. Each resident's care plan is reviewed periodically to
determine when a change in care is needed.
The Company has adopted a philosophy of assisted living care that allows a
resident to maintain a dignified, independent lifestyle. Residents and their
families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic types of assisted
living services offered by the Company include:
o Personal Care Services, which include assistance with ADLs such as
ambulation, bathing, dressing, eating, grooming, personal hygiene,
monitoring or assistance with medications, and confusion management,
o Support Services, such as meals, assistance with social and recreational
activities, laundry services, general housekeeping, maintenance services
and transportation services, and
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o Supplemental Services, which include transportation services and laundry
services in excess of the standard contractual allowance, non-routine care
services and special care services for residents with Alzheimer's and other
forms of dementia.
The Company maintains programs and special units at most of its assisted living
communities for residents with Alzheimer's and other forms of dementia that
provide the attention, care, and services needed to help those residents
maintain a higher quality of life. Specialized services include assistance with
ADLs, behavior management, and a lifeskills-based activities program, the goal
of which is to provide a normalized environment that supports residents'
remaining functional abilities. Special units for residents with Alzheimer's and
other forms of dementia are located in a separate area of the community and have
their own dining facilities, resident lounge areas, and specially trained staff.
These special care areas are designed to allow residents the freedom to ambulate
while safely keeping them within a secure area, with a minimum of disruption to
other residents. Resident fees for these special units are dependent on the size
of the unit, the design type, and the level of services provided. These assisted
living and memory enhanced services are provided to the residents for monthly
service fees. The Company recognizes these fees as revenue on a monthly basis
when earned. Generally, assisted living residents may terminate their occupancy
agreements upon 30 days written notice.
Skilled Nursing
The Company provides traditional skilled nursing care by registered nurses,
licensed practical nurses, and certified nursing aides. The Company also offers
a range of rehabilitation services in certain of its communities. This is
generally short-term, goal-oriented rehabilitation care intended for individuals
who have a specific illness, injury, or disease, but who do not require many of
the services provided in an acute care hospital. Rehabilitation services are
typically rendered immediately after, or in lieu of, acute hospitalization in
order to treat specific medical conditions. These skilled nursing and
rehabilitation services are provided to the individuals on a daily fee basis, as
needed, and revenues are recognized when earned.
Therapy Services
The Company historically contracted with independent third parties to provide
therapy services to its skilled nursing residents. Beginning in 2000, the
Company greatly expanded its in-house therapy programs and now provides a range
of therapy services to its independent living, assisted living, and skilled
nursing residents, as well as to persons who are not residents of one of the
Company's communities. The therapy services provided by the Company include
physical, occupational, and speech therapy services.
The Company typically begins providing in-house therapy services within a Senior
Living Network by opening a clinic at a Retirement Center. As the program grows,
additional satellite clinics are opened within the Senior Living Network in
nearby Retirement Centers or Free-standing ALs. The Company believes that by
providing these in-house therapy services, it is able to maintain a consistent,
high level of care to its residents, provide a closer relationship between the
therapist and the resident, and provide many continuing education opportunities
for residents and their families through health fairs, seminars, and other
consultative interactions. In addition, programs focused on wellness and
physical fitness allow residents to maintain maximum independence.
Lifecare and Entrance Fee Arrangements
Some of the Company's Retirement Centers provide housing and health care
services through limited lifecare contracts and entrance fee agreements with
residents. Under these agreements, residents pay an entrance fee upon entering
into a limited lifecare contract. The amount of the entrance fee varies
depending upon the type and size of the dwelling unit selected, the resident's
health care benefit election and other variables. These agreements obligate the
Company to provide certain levels of future health care services or limited
lifecare benefits to the resident for defined periods, in some cases for life,
even if the resident exhausts his or her financial resources and becomes unable
to satisfy his or her obligations to the community. Although the Company screens
potential residents to ensure that they have adequate assets, income, and
reimbursements from government programs and third parties to pay their
obligations to the communities during their lifetime, there can be no assurance
that such assets, income, and reimbursements will be sufficient in all cases. If
insufficient, the Company has rights of set-off against the refundable portions
of the residents deposits, and would also seek available reimbursement under
Medicaid or other available programs.
6
These limited lifecare benefits are typically (a) a certain number of free days
in the community's health center during the resident's lifetime, (b) a
discounted rate for such services, or (c) a combination of the two. The
agreements terminate when the resident leaves the community. A portion of the
entrance fee is refundable to the resident or the resident's estate upon
termination of the lifecare contract. The limited lifecare benefit varies based
upon the extent to which the resident's entrance fee is refundable.
The refundable amount of the entrance fee is a long-term liability and is
recorded by the Company as refundable portion of life estate fees, until
termination of the agreement. The remainder of the fee is recorded as deferred
life estate income and is amortized into revenue using the straight-line method
over the estimated remaining life expectancy of the resident, based upon
actuarial projections. At certain of its entrance fee communities, the Company
offers an entrance fee program that allows the resident to participate in the
appreciation in the value of the resident's unit (the "Partners Plan"). Under
the Partners Plan, the entrance fee is refundable to the resident or the
resident's estate only upon the sale of the unit to a succeeding resident unless
otherwise required by applicable state law. The resident shares in a specified
percentage, typically 50%, of any appreciation in the entrance fee paid by the
succeeding resident. The entrance fees payable under the Partners Plan are
recorded by the Company as refundable portion of life estate fees and are
amortized into revenue using the straight-line method over the remaining life of
the building.
Additionally, under these agreements the residents pay a monthly service fee
which entitles them to the use of certain amenities and certain services.
Residents may also elect to obtain additional services, which are billed on a
monthly basis or as the services are received. The Company recognizes these
additional fees as revenue on a monthly basis when earned. If a resident
terminates the agreement, they are required to continue to pay their monthly
service fee for the lesser of a specified time period (typically one year) or
until the unit is reoccupied. Six of the Company's Retirement Centers are
entrance fee communities providing services through lifecare contracts (four
owned or leased and two managed).
OPERATING SEGMENTS
As a result of the increase in the number of Free-standing ALs operated by the
Company, the Company separated its operations in 2000 into two business
segments: Retirement Centers and Free-standing ALs. The Retirement Centers are
generally comprised of the Company's CCRCs and lifecare communities and its
independent living communities, including those at which assisted living and/or
nursing services are provided. The Retirement Centers are established
communities with strong reputations within their respective markets and
generally maintain high and consistent occupancy levels, most with waiting lists
of prospective residents. Free-standing ALs are generally much smaller than
Retirement Centers and are comprised of stand-alone assisted living communities
that are not located on a Retirement Center campus. Most Free-standing ALs also
provide specialized care such as Alzheimer's and memory enhancement programs.
Most of the Company's Free-standing ALs began operations during 1999 and 2000
and are in the fill-up stage. Although the Company operates its Senior Living
Networks on a fully integrated basis, segregating the established Retirement
Centers from the newer Free-standing ALs is indicative of how management views
and analyzes the Company's operating activities and allows the Company to focus
on separate management techniques and operating strategies for its two lines of
business.
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The following table presents the number, total capacity and total occupancy of
the Company's communities at December 31, 2001 and 2000.
NUMBER OF COMMUNITIES TOTAL CAPACITY TOTAL OCCUPANCY
---------------------------- ---------------------------- ------------------------------
December 31, 2001 December 31, 2001 December 31, 2001
2001 2000 Avg(1) 2001 2000 Avg(1) 2001 2000 Avg(1)
------ ------ ------ ------ ------ ------ ------ ------ ------
Retirement Centers:
Owned 16 15 15 5,230 5,034 5,084 94% 92% 93%
Leased(2) 8 9 9 2,817 3,054 2,932 94% 96% 95%
Managed 7 8 7 3,078 3,616 3,343 90% 91% 90%
------ ------ ------ ------ ------ ------ ------ ------ ------
Total 31 32 31 11,125 11,704 11,359 93% 93% 93%
Free-standing ALs:
Owned 8 6 8 680 506 677 60% 52% 51%
Leased(2) 25 12 14 2,417 1,143 1,390 66% 55% 63%
Managed 1 12 12 82 1,153 1,088 83% 44% 60%
------ ------ ------ ------ ------ ------ ------ ------ ------
Total 34 30 34 3,179 2,802 3,155 65% 51% 59%
Owned and Leased:
Retirement Centers 24 24 24 8,047 8,088 8,016 94% 94% 94%
Free-standing ALs 33 18 22 3,097 1,649 2,067 65% 54% 59%
------ ------ ------ ------ ------ ------ ------ ------ ------
Total 57 42 46 11,144 9,737 10,083 85% 86% 86%
Owned, Leased and Managed:
Retirement Centers 31 32 31 11,125 11,704 11,359 93% 93% 93%
Free-standing ALs 34 30 34 3,179 2,802 3,155 65% 50% 59%
------ ------ ------ ------ ------ ------ ------ ------ ------
Total 65 62 65 14,304 14,506 14,514 86% 83% 85%
(1) Avg represents the 2001 quarterly weighted average of the number of
communities, total capacity and total occupancy.
(2) Fourteen of these leases (two Retirement centers and twelve
Free-standing ALs) are synthetic leases. See "Business - Synthetic
Lease Communities" below.
The Company's consolidated resident and healthcare revenues, and community
operating expenses include only the communities that the Company owns or leases.
Fees earned from managed communities are included in management and development
service revenues. On a consolidated basis, Retirement Centers comprise 24 of the
57 communities that the Company owns or leases, and generated 85% of the
Company's consolidated Resident and healthcare revenues in 2001. Although the
total number of Free-standing ALs owned and leased by the Company increased from
18 to 33 during 2001, ten of these became leased (versus managed) communities
effective December 31, 2001, and therefore did not impact 2001 consolidated
community results ( see "Business - Managed SPE Communities"). See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations" and note 16 of the Consolidated Financial
Statements.
MANAGED SPE COMMUNITIES
During 1998 and 1999, the Company entered into a number of agreements with
special purpose entities ("SPEs") for the development and management of 26
Free-standing ALs ("Managed SPE Communities"). Under the terms of these
agreements, following development and construction, the SPEs leased the
communities from third-party lessors. The Company leased 14 of the 26 Managed
SPE Communities from subsidiaries of financial institutions pursuant to
synthetic leases. The Company leased the remaining 12 Managed SPE Communities
from real estate investment trusts ("REITs"). The Company managed each of the
Managed SPE Communities pursuant to a management agreement that provided for the
payment of management fees to the Company based on a percentage of each
community's gross revenues, and required the SPEs to fund all costs associated
with the operations of the communities up to certain specified limits. The
Company was responsible for paying operating costs that exceeded the SPE funding
limits.
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The results of the operations of the Managed SPE Communities are not included in
the Consolidated Financial Statements. To the extent that the Company funded
costs above the SPE funding limits, the Company recorded these costs using a
modified equity method of accounting. During 2001 and 2000, the Company recorded
$5.0 million and $2.2 million, respectively, of these costs as Equity in Losses
of Managed SPE Communities.
The Company had options to purchase or rights of first refusal to acquire the
leasehold interests in the Managed SPE Communities from the SPEs, but was under
no obligation to do so. During 2000, the Company acquired 13 leasehold interests
in Managed SPE Communities and acquired fee simple title to one Managed SPE
Community. During 2001, the Company acquired the leasehold interests in the
remaining 12 Managed SPE Communities for an aggregate purchase price of $19.2
million. In connection with the 2001 acquisitions, the Company accrued $2.0
million for payments due in 2002, and issued approximately $17.2 million of
interest-only notes, due October 1, 2008, bearing interest at 9.625% per annum.
The notes are secured by the Company's interest in a Retirement Center located
in Richmond, Virginia. Six of these leasehold interests were acquired from an
SPE that is affiliated with John Morris, a director of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Related Party Transactions." and note 18 of the Consolidated
Financial Statements.
The Company acquired leasehold interests in ten of the Managed SPE Communities
effective December 31, 2001. The operating results of these communities will not
be reflected in the Company's revenues and community operating expenses until
2002. For the fourth quarter of 2001, these ten communities generated
approximately $4.8 million of revenue and $65,000 of Community EBITDAR (earnings
before interest, taxes, depreciation, amortization and rents). The Company
expects these results to continue to improve as occupancy increases. At December
31, 2001, the Company had no further Managed SPE Communities or operating
deficit agreements.
In addition, the Company recorded $472,000 of additional leasehold acquisition
cost amortization during the quarter ended December 31, 2001, related to the
expected termination of these synthetic lease agreements. The Company
anticipates that during the quarter ended March 31, 2002, approximately $7.0 to
$10.0 million of additional leasehold acquisition cost amortization will be
expensed due to the expected termination of the synthetic leases. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SYNTHETIC LEASE COMMUNITIES
As of December 31, 2001, the Company operated 14 of its communities (two
Retirement Centers and 12 Free-standing ALs) under an operating lease structure
commonly referred to herein as a synthetic lease (see Item 2. - Properties). The
Company's synthetic leases are legal structures under which an unrelated third
party lessor (a subsidiary of a bank or REIT) provides equity representing a
portion of the costs of the development or acquisition of a senior living
community. The Company's 14 synthetic leases are structured such that a third
party lessor agreed to acquire or construct the communities, investing
approximately 15% of the required capital, and the Company provided the balance
of funding through a combination of third party mortgage debt guaranteed by the
Company or cash in the form of notes owed to the Company by the lessor. Under
the synthetic lease arrangements, the lessor leased the communities to the
Company (the lessee). Monthly rental payments for each synthetic lease are based
on the total capitalization required to acquire or construct the community, and
the amount of those payments varies based upon a floating interest rate. The
lessor must meet certain minimum at risk equity funding levels and the Company
is required by the mortgage lenders to maintain certain pre-defined financial
ratios under these leases. The Company's synthetic leases are treated as
operating leases for accounting purposes and financing leases for income tax
purposes.
The Company has substantial investments in these communities in the form of
land, security deposits (certificates of deposit and treasury bills) and loans
to the lessor (notes receivable). The Company has pledged security deposits to
the lessors to secure its obligations under the synthetic lease agreements. As
of December 31, 2001, the Company had approximately $163.5 million of assets
related to these 14 communities operating under synthetic leases ($82.9 million
of notes receivable, $54.4 million of security deposits, $16.6 million of land
and $9.6 million of leasehold acquisition costs). The Company owns the land
under 11 of the synthetic lease communities, and leases such land to the lessors
under long-term operating leases.
As of December 31, 2001, of the third party mortgage debt secured by the
synthetic lease assets, the Company is the borrower of approximately $46.2
million of mortgage loans, which is debt recorded on the Company's Consolidated
Balance Sheet. In
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addition, there is another $64.7 million of third party mortgage debt associated
with these leases of which $61.1 million is guaranteed by the Company, but is
loaned directly to the lessor and therefore is not recorded on the Company's
consolidated balance sheet. This nonconsolidated debt is also secured by the
synthetic lease assets, with the Company contingently liable as guarantor, and
is cross-defaulted with a portion of the Company's consolidated debt.
The synthetic leases contain termination rights whereby the Company as lessee
has the right to terminate the leases and acquire the leased assets in exchange
for the assumption of related debt, forgiveness of note receivables, and the
repayment of lessor equity. Upon termination or expiration of the synthetic
leases, the Company may either purchase the property from the lessor at a
predetermined amount, sell the property to a third party, or request a renewal
of the lease agreement. If the property is sold to a third party for less than
the original cost, the Company is obligated, under residual value guarantees, to
pay the lessor an amount equal to any shortfall, not to exceed approximately 85%
of the original cost of the communities. At December 31, 2001, the residual
value guarantee represents an off-balance sheet contingent liability, for which
the Company does not believe it has any significant exposure. See note 17 to
Consolidated Financial Statements.
During the fourth quarter of 2001, the Company determined that in order to
simplify its financial structure, and as a condition of certain elements of its
Refinancing Plan, it will exercise its termination rights under these fourteen
synthetic leases during 2002. Upon the termination of these synthetic leases,
the Company will become the direct owner of each community for financial
reporting purposes. Upon completion of these transactions, the Company will not
have any remaining synthetic leases. The Company will not incur any cash outlay
other than transaction costs in connection with the termination of the synthetic
leases.
SALE LEASE-BACK TRANSACTIONS
During November 2001, as part of its Refinancing Plan, the Company completed
sale lease-back financing transactions on two of its Free-standing AL
communities. The Company sold Broadway Plaza at Pecan Park and The Homewood
Residence at Boca Raton for $10.6 million and $9.7 million, respectively, and
contemporaneously leased the properties back from the buyer under 15 year lease
agreements, which contain two five-year renewal options and rights of first
refusal to repurchase the communities. The leases also contain earn-out clauses
under which the Company may receive up to $2.1 million and $1.9 million,
respectively, based on the next three years of performance of the communities.
As a result of the contingent earn-out provisions, for financial reporting
purposes, these transactions were recorded as financing transactions. The
Company used a portion of the sale proceeds to retire $9.3 million of debt
associated with the properties. The Company recognized a $641,000 loss on the
Broadway Plaza at Pecan Park transaction and a $277,000 loss on the Homewood
Residence at Boca Raton transaction, net of estimated contingent earn-outs of
$1.1 million and $967,000, respectively. Given the long-term nature of the lease
arrangements, the Company views these transactions as long term financings. As
such, the Company believes that although sale lease-back accounting requires the
recognition of a loss in the amount of the difference between the sales prices
and the Company's cost basis in the assets, the Company believes it will
continue to derive economic benefits from the assets in the form of future
payments under the earn-out provisions in excess of the amounts currently
considered, as well as from any improvement in operating results as the
communities increase occupancy and performance.
In conjunction with the Refinancing Plan, the Company intends to terminate the
synthetic leases and subsequently enter into sale lease-back transactions with
respect to eight of the fourteen synthetic lease communities during the first
and second quarters of 2002. These transactions are anticipated to raise gross
proceeds of approximately $76.2 million, and result in gains (which are
recognized over the term of the lease), and losses (which are recognized
immediately). In connection with the termination of the synthetic leases and
sale lease-back of these eight communities, the Company anticipates recognizing
a loss of approximately $33.7 million, which will be recorded as lease expense
due to residual guarantees. Of the $33.7 million of lease expense, the Company
recorded $7.9 million during the quarter ended December 31, 2001, and
anticipates that it will complete the sale lease-back transactions and record
the balance of approximately $25.8 million of additional lease expense during
the first and second quarters of 2002. In connection with these transactions,
the Company will not incur any cash outlay other than transaction costs.
10
BUSINESS STRATEGY
The Company intends to consummate its Refinancing Plan in order to address its
liquidity and capital constraints. The Company is focused on several steps
designed to increase cash flows and improve its operations. These steps are
intended to build upon the strong, established EBITDAR in its core Retirement
Centers. With the Free-standing AL communities now above breakeven EBITDAR
(during the fourth quarter of 2001), the focus is on accelerating incremental
revenues and EBITDAR as fill up of these communities is completed. Set forth
below are the key elements of the Company's business strategy.
Increase Retirement Center Profitability
The Company intends to increase its operating income at its Retirement Center
communities by increasing occupancy at certain communities, selectively
increasing rates, expanding service offerings, emphasizing sales and marketing
efforts and controlling expenses. Although the Company's Retirement Centers
maintain high occupancy levels (the average for the year-ended 2001 was 93%),
the Company continues to focus on improving occupancy levels at certain
communities. The Company intends to selectively increase rates to prospective
residents based on market conditions and to increase rates to current residents
in most markets to recoup cost increases at its Retirement Centers. The Company
continually assesses contractual rate increase allowances, competitors' rates,
market conditions, wait list activity, and cost inflations in order to improve
profitability.
Increase Free-standing AL Revenues
As a result of over-capacity in certain markets, the Company's Free-standing AL
communities (most of which opened during 1999 and 2000) are taking longer than
originally anticipated to reach projected occupancy levels. During 2001, the
occupancy percentage of the Free-standing ALs (owned, leased or managed by the
Company as of December 31, 2001) increased from 51% to 65% (including the effect
of new capacity at three communities opened during 2001). During the fourth
quarter of 2001, the Company's of Free-standing ALs achieved a positive
community EBITDAR during the fourth quarter of 2001. The Company expects that
additional occupancy increases above this level will result in incremental
community EBITDAR. As occupancy levels reach approximately 80%, the Company
anticipates that the community EBITDAR from the Free-standing ALs would exceed
the ongoing interest and lease expense associated with the communities.
The Company has taken several actions to continue this increase in occupancy
levels. The Company increased the size of its sales staff and increased its
marketing efforts beginning in 2001, in order to increase the rate at which the
Company identifies prospective residents, takes them through the consultative
selling process and finalizes a contract. Beyond marketing the high quality of
its communities, the Company has also selectively offered certain incentive
programs in order to attract new residents. These incentive programs generally
provide a discounted rate for a specified time period or move-in incentives,
such as discounts on rates during the first, sixth and twelfth month of the
first year of residency. In addition, the Company has been successful at
implementing selective rate increases at most of its Free-standing AL
communities during 2001. The Company intends to selectively increase rates at
most Free-standing AL communities during 2002, but at varying amounts based on
levels of demand, occupancy, and competition in a particular market.
The Company has also developed and implemented a new information system for the
Free-standing AL division. The system provides information on occupancy trends,
pricing, unit availability, and other important information. Management believes
this system, which was implemented in all Free-standing AL communities by the
end of 2001, provides more timely information for all managers of the division
to more effectively market and price the inventory of units.
Management believes that the Company's reputation for and commitment to a high
quality of care, quality of support services offered, price of services,
physical appearance, amenities associated with the communities, and location
will continue to attract new Free-standing AL residents and increase occupancy.
In addition, the Company believes that combining services through the Senior
Living Networks offering a range of care levels and services will also assist in
filling available capacity.
11
Increase In-house Therapy Programs
The Company historically contracted with independent third parties to provide
therapy services to its skilled nursing residents. Beginning in 2000, the
Company greatly expanded its in-house therapy programs and now provides a range
of therapy services to its independent living, assisted living, and skilled
nursing residents, as well as persons who are not residents of one of the
Company's communities. The therapy services provided by the Company include
physical, occupational, and speech therapy services.
The Company typically begins providing in-house therapy services within a Senior
Living Network by opening a clinic at a Retirement Center. As the program grows,
additional satellite clinics are opened within the Senior Living Network, in
nearby Retirement Centers or Free-standing ALs. The Company believes that by
providing these in-house therapy services, it is able to maintain a consistent,
high level of care to its residents, provide a closer relationship between the
therapist and the resident, and provide many continuing education opportunities
for residents and their families through health fairs, seminars, and other
consultative interactions. In addition, programs focused on the wellness and
physical fitness allow the residents to maintain maximum independence.
The Company's in-house therapy programs have expanded from 43 clinics in nine
Senior Living Networks as of December 31, 2000 to 74 clinics in 13 Senior Living
Networks as of December 31, 2001. Total therapy revenue grew from $4.1 million
in 2000 to $9.8 million in 2001. The Company's goal is to continue to grow
therapy services revenues by adding additional clinics.
Quality Goals and Cost Management
Maintaining the Company's high quality of care and services is an important
component of the Company's strategy. The Company dedicates significant resources
to monitoring and enhancing the quality care provided in all of its communities.
The Company's quality and compliance staff monitors compliance with the
Company's on-going adherence to the highest standards through frequent resident
satisfaction surveys and an anonymous call line for residents, families and
employees to report any problems or concerns.
In order to provide competitively priced services and enhance the Company's
financial performance, the Company must contain costs. The Company analyzes
staffing and cost control issues, and carefully tracks each community on a
monthly basis to determine whether financial results are within budgeted and
forecasted ranges. Because of the substantial performance-based components of
their compensation, managers are continuously motivated to maintain high levels
of resident satisfaction and meet other key quality goals, while managing cost
levels and achieving profitable growth.
Improve Operating Efficiencies
The Company's size has allowed it to centralize certain administrative and
support functions that give its decentralized managerial operations
cost-efficient support. The Company is one of the largest companies in a very
fragmented senior living health care industry. Because the Company's business is
dependent, to some extent, on personal relationships, the Company provides its
managers with a significant degree of autonomy in order to encourage prompt and
effective responses to local market and resident needs. In conjunction with this
local operational authority, the Company provides, through its corporate office,
services and support that may not be readily available to competing independent
operators. These services include management support, national purchasing
programs, marketing and business expertise, information technology, training,
risk management, financial and administrative support, and human resource and
legal expertise. The Company is currently or has recently implemented improved
processes such as quality measurement indicators, new or improved information
systems, and expanded employee training programs. The Company continues to seek
ways to improve margins through increased cost efficiencies. The Company
believes it has in place the platform required to provide these services without
incurring added resources.
ACQUISITIONS AND OTHER TRANSACTIONS
During 2001, the Company acquired the leasehold interests in its remaining 12
Managed SPE Communities. See "Business - Managed SPE Communities".
12
On September 30, 2001, the Company acquired the interest of its joint venture
partner in a Free-standing AL in Nashville, Tennessee for $300,000. The
community has 96 units, of which 62 are assisted living and 34 are memory
enhanced.
As part of its Refinancing Plan, on September 26, 2001, the Company acquired for
$13.3 million a Retirement Center in Oak Park, Illinois, that the Company had
previously leased. The community has 193 units, of which 179 are independent
living and 14 are assisted living. The Company financed this acquisition by
entering into a $13.0 million mortgage note. The Company entered into a sale
lease-back transaction for this community during February 2002, see note 19 to
Consolidated Financial Statements.
W.E. Sheriff, the Company's chairman and chief executive officer, owns 50% of
Maybrook Realty, Inc., which owns a 128-bed nursing center, Freedom Plaza Care
Center (FPCC), in Peoria, Arizona. Effective July 1, 2001, the Company entered
into a long-term operating lease for FPCC in substitution of the prior
management arrangement. The lease term expires in December 2015, and provides
the Company one five-year renewal option and an option to acquire FPCC at an
agreed upon amount. As part of this transaction, the Company acquired certain
assets and liabilities from the previous lessee of the community. The assets
acquired exceeded the liabilities assumed by $903,000, which was recorded as
deferred lease costs and will be amortized over the life of the lease. The
Company anticipates that the terms of the lease will enable the Company to
achieve positive net cash flow and net income from FPCC earlier than it would
under the previous management arrangement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Related Party
Transactions."
During 2001, the Company completed two like-kind exchange transactions that
deferred the taxable gain resulting from the sale in 2000 of a community located
in Westlake, Ohio. In connection with the first like-kind exchange, the Company
purchased land in Virginia and assumed a $12.1 million non-recourse mortgage
loan. 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 improved parcels of real property,
and assumed a $15.2 million non-recourse mortgage loan. The various parcels of
property are subject to leases that provide annual rental payments of $1.3
million through March 7, 2022.
During June 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 Company's Senior Living Network strategy. During
1999, however, the Company discontinued its assisted living development and
acquisition program prior to acquiring or developing communities complementary
to Rossmoor Regency. The Company sold its leasehold interest in the community
for $21.5 million. The Company used a majority of the sale proceeds to repay
$15.6 million of debt associated with the property, resulting in an early
payment penalty of $837,000, net of tax, which is recorded as an extraordinary
item. The Company also recognized a $694,000 loss on the sale of assets.
GOVERNMENT REGULATION
The senior living and health care industries are subject to extensive regulation
and frequent regulatory change. At this time, no federal laws or regulations
specifically regulate assisted or independent living residences. The Company's
skilled nursing facilities and home health agencies are subject to federal
certification requirements in order to participate in the Medicare and Medicaid
programs. While a number of states have not yet enacted statutes or regulations
specifically governing assisted living facilities, the Company's communities are
subject to regulation, licensing, certificate of need ("CON") review, and
permitting by state and local health and social service agencies and other
regulatory authorities. While such requirements vary by state, they typically
relate to staffing, physical design, required services, and resident
characteristics. The Company's communities are also subject to various zoning
restrictions, local building codes, and other ordinances, such as fire safety
codes. The Company believes that such regulation will increase in the future,
and that regulation of the assisted living industry is evolving and is likely to
become more burdensome, although the Company is unable to predict the content of
new regulations or their effect on its business. In the ordinary course of
business, one or more of the Company's communities will be cited for operating
or other deficiencies by regulatory authorities. In such cases, the appropriate
corrective action will be taken.
There are currently numerous legislative and regulatory initiatives at the state
and Federal levels addressing patient privacy concerns. In particular, the
Department of Health and Human Services ("DHHS") has released final privacy
regulations implementing portions of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). These regulations, which were effective
April 14, 2001, and have a compliance date of April 14, 2003, restrict how
health care providers use
13
and disclose individually identifiable health information. Under HIPAA, DHHS
also has proposed regulations governing electronically maintained or transmitted
health-related information. Further, as required by HIPAA, DHHS has adopted
final regulations establishing electronic data transmission standards that all
health care providers must use when submitting or receiving certain health care
transactions electronically. A plan for compliance with these regulations must
be submitted by October 16, 2002 and compliance with the submitted plan is
required by April 14, 2003. Failure to comply with regulations enacted under
HIPAA could result in civil and criminal penalties. The Company will continue to
remain subject to any Federal or state laws that are more restrictive than the
privacy regulations issued under HIPAA. These statutes vary and could impose
additional penalties. The Company's management believes that the Company should
be able to replace or modify its systems and procedures to ensure compliance
with HIPAA and such other legislation or regulations. Management does not expect
costs incurred with relation to HIPAA to have a material impact on the Company's
operating results.
Approximately 8.5%, 5.0%, and 4.4% of the Company's total revenues from
continuing operations for the years ended December 31, 2001, 2000, and 1999,
respectively, were attributable to Medicare, including Medicare-related private
co-insurance and Medicaid. These reimbursement programs are subject to extensive
regulation and frequent change, which may be beneficial or detrimental to the
Company.
Federal and state anti-remuneration and self-referral laws, such as
anti-kickback laws, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services, and have often been broadly interpreted to apply
to certain contractual relationships between health care providers and sources
of patient referrals. In addition, there are various Federal and state laws
prohibiting other types of fraud and abuse by health care providers, including
criminal and civil provisions that prohibit filing false claims or making false
statements to receive payment or certification under Medicare or Medicaid and
failing to refund overpayments or improper payments. Violation of these laws can
result in loss of licensure, civil and criminal penalties, and exclusion of
health care providers or suppliers from participation in Medicare, Medicaid, and
other state and Federal reimbursement programs. There can be no assurance that
such laws will be interpreted in a manner consistent with current or past
practices of the Company.
The Arizona Department of Insurance has notified the owner, Freedom Plaza
Limited Partnership (FPLP), of the Company's managed community in Peoria,
Arizona, that the owner is not currently in compliance with a net worth
requirement imposed by Arizona law. While the 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 guaranty relating to the financial performance of
the community. Furthermore, the owner of the community has agreed to terminate
the existing management agreement and to enter into a long-term lease with the
Company upon the Department's approval of the Company as the "provider" at the
community. The Company has submitted to the Arizona DOI an application for the
Company to enter into the lease and become the provider for the community. The
Department has preliminarily indicated that the proposed lease will result in
the community's compliance with the applicable Arizona statute. The Company
expects that the Department will issue its final approval during the first or
second quarter of 2002. While the Company and owner believe that the owner's
noncompliance with the net worth requirement is only a technical violation of
law and that the community is in a strong financial position, there can be no
assurance that the State of Arizona will approve the Company's application or
that it will not enforce the law strictly or that the Company can successfully
negotiate a lease with the owner of the community that is acceptable to both the
Company and the Arizona DOI. 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.
In addition, the Company is subject to various Federal, state, and local
environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator, or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of
14
its properties, the Company could be liable for these costs, as well as certain
other costs, including governmental fines and injuries to persons or properties.
COMPETITION
The senior living and health care services industry is highly competitive and
the Company expects that providers within the industry will continue to be
competitive in the future. During the mid- to late-1990's, a large number of
assisted living units were developed. This additional capacity has had the
effect of increasing the time required to fill assisted living units in most
markets and has resulted in significant pricing pressures in those markets. The
Company believes that the primary competitive factors in the senior living and
health care services industry are (i) reputation for and commitment to a high
quality of care; (ii) quality of support services offered; (iii) price of
services; (iv) physical appearance and amenities associated with the
communities; and (v) location. The Company competes with other companies
providing independent living, assisted living, skilled nursing, and other
similar service and care alternatives, many of whom may have greater financial
resources than the Company. In addition, the Company competes with many assisted
living companies that are currently insolvent or that are experiencing financial
difficulties. These competitors may gain a competitive advantage over the
Company as a result of the effect of bankruptcy, reorganization or other
insolvency proceedings.
The Company believes it has a reputation as a leader in the industry and as a
provider of high quality services. Because seniors tend to choose senior living
communities near their homes or their families, the Company's principal
competitors are other senior living and long-term care communities in the same
local geographic areas as the Company's communities. The Company is one of the
largest companies in the senior living health care industry and is not limited
to a single geographic region. The Company's size has also allowed it to
centralize administrative functions that give the decentralized managerial
operations cost-efficient support. The Company also competes with other health
care businesses with respect to attracting and retaining nurses, technicians,
aides, and other high quality professional and non-professional employees and
managers. The market for these professionals has become very competitive, with
resulting pressure on salaries and compensation levels. However, the Company
believes it is able to attract and retain quality managers through its
reputation, and through its incentive compensation system that directly rewards
successful efforts and places a premium on profitable growth.
INSURANCE
The provision of personal and health care services entails an inherent risk of
liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs and significant
exposure. The Company currently maintains property, liability, and professional
medical malpractice insurance policies for the Company's owned and certain of
its managed communities under a master insurance program. The number of
insurance companies willing to provide general liability and professional
malpractice liability insurance for the nursing and assisted living industry has
declined dramatically and the costs of obtaining such insurance has risen
substantially in recent years.
With the Company's renewal of its liability insurance program effective July 1,
2001, the Company obtained coverage under a program with significantly lower
deductibles. During the third quarter of 2001, as a result of several
irregularities and unresolved issues related to this lower deductible liability
insurance program, the Company was unable to confirm the integrity and viability
of the new program. Consequently, the Company obtained replacement coverage from
its previous provider, Lloyds of London. The Company believes that the
irregularities relating to the lower deductible liability program are the result
of the improper activities of various parties, and has commenced litigation
against an insurance broker related to these issues. The Company has recovered
most of the premiums that it paid in connection with the new program, and is
vigorously pursuing recovery of costs related to certain excluded claims and
other damages.
The Company's replacement liability insurance policy for the period from July 1,
2001 to December 31, 2001 contained significantly higher deductibles than in
prior periods. Deductibles increased from $200,000 to $750,000 (depending on the
type of claim) under the prior Lloyds of London policy, to deductibles of
$200,000 to $3,000,000 (depending on the type of claim) under the new Lloyds of
London policy. As a result of these increased deductibles, beginning in the
third quarter of 2001, the Company incurred significantly higher insurance
accruals for potential liability claims. Furthermore, as part of the renewal of
the Company's insurance policies with Lloyds of London, four incidents were
excluded from policy coverage. To
15
date, the Company believes one of these incidents may result in liability and
has reserved for the anticipated costs of the claim.
Effective January 1, 2002, the Company renewed its liability insurance program
with its existing insurance carrier through December 31, 2002. The new policy
contains the same deductibles as the Company's policy for the six months ended
December 31, 2001, but requires increased premiums. In addition to its standard
liability insurance, the Company also maintains underlying and umbrella excess
liability protection policies (in the amount of up to $15.0 million in the
aggregate for 2001 and up to $25.0 million in the aggregate for 2002). There can
be no assurance that a claim in excess of the Company's insurance will not
arise. A claim against the Company not covered by, or in excess of, the
Company's insurance could have a material adverse effect upon the Company.
Furthermore, there can be no assurance that the Company will be able to obtain
liability insurance in the future or that, if such insurance is available, it
will be available on acceptable terms.
EMPLOYEES
The Company employs approximately 8,100 persons. As of December 31, 2001,
approximately 40 employees at a Free-standing AL in Cleveland, Ohio were
represented by a labor union. In addition, during January 2002, approximately 40
employees at a Free-standing AL in Flint, Michigan voted to unionize. The
Company is currently in collective bargaining negotiations with these employees.
The Company believes that its relationship with its employees is good.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of the Company.
NAME AGE POSITION
---- --- --------
W. E. Sheriff 59 Chairman and Chief Executive Officer
Christopher J. Coates 51 President and Chief Operating Officer
George T. Hicks 44 Executive Vice President - Finance, Chief
Financial Officer, Secretary and Treasurer
H. Todd Kaestner 46 Executive Vice President - Corporate Development
James T. Money 54 Executive Vice President - Sales and Marketing
Gregory B. Richard 48 Executive Vice President - Community Operations
Terry L. Frisby 51 Senior Vice President - Human Resources/
Corporate Culture and Compliance
Bryan D. Richardson 43 Senior Vice President - Finance
Ross C. Roadman 52 Senior Vice President - Strategic Planning and
Investor Relations
W.E. SHERIFF has served as Chairman and Chief Executive Officer of the Company
and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff served in
various capacities for Ryder System, Inc., including as President and Chief
Executive Officer of its Truckstops of America division. Mr. Sheriff also serves
on the boards of various educational and charitable organizations and in varying
capacities with several trade organizations.
CHRISTOPHER J. COATES has served as President and Chief Operating Officer of the
Company and its predecessors since January 1993 and as a director of the Company
since January 1998. From 1988 to 1993, Mr. Coates served as Chairman of National
Retirement Company, a senior living management company acquired by a subsidiary
of the Company in 1992. From 1985 to 1988, Mr. Coates was senior director of the
Retirement Housing Division of Radice Corporation, following that company's
purchase in 1985 of National Retirement Consultants, a company formed by Mr.
Coates. Mr. Coates is the current Chairman of the Assisted Living Federation of
America, and a former Chairman of the Board of Directors of the American Senior
Housing Association.
16
GEORGE T. HICKS has served as Executive Vice President - Finance, Chief
Financial Officer, Secretary and Treasurer since September 1993. Mr. Hicks has
served in various capacities for the Company's predecessors since 1985,
including Vice President - Finance and Treasurer from November 1989 to September
1993.
H. TODD KAESTNER has served as Executive Vice President - Corporate Development
since September 1993. Mr. Kaestner has served in various capacities for the
Company's predecessors since 1985, including Vice President - Development from
1988 to 1993 and Chief Financial Officer from 1985 to 1988.
JAMES T. MONEY has served as Executive Vice President - Sales and Marketing
since September 1993. Mr. Money has served in various capacities for the
Company's predecessors since 1978, including Vice President - Development from
1985 to 1993.
GREGORY B. RICHARD has served as Executive Vice President - Community Operations
since January 2000. Mr. Richard was previously with a pediatric practice
management company from May 1997 to May 1999, serving as President and Chief
Executive Officer from October 1997 to May 1999. Prior to this Mr. Richard was
with Rehability Corporation, a publicly traded outpatient physical
rehabilitation service provider, from July 1986 to October 1996, serving as
Senior Vice President of Operations and Chief Operating Officer from September
1992 to October 1996.
TERRY L. FRISBY has served as Senior Vice President - Human Resources/Corporate
Culture and Compliance since January 1999. Mr. Frisby served as Vice President -
Corporate Culture and Compliance from July 1998 to January 1999. Prior to this
Mr. Frisby was principal of a healthcare consulting business located in
Nashville, Tennessee, from 1988 to 1998. Mr. Frisby serves on the Executive
Council for Human Resources with the Assisted Living Federation of America.
BRYAN D. RICHARDSON has served as Senior Vice President - Finance since April
2000. Mr. Richardson was previously with a graphic arts company from 1984 to
1999 serving in various capacities, including Senior Vice President of Finance
of a digital prepress division from May 1994 to October 1999, and Senior Vice
President of Finance and Chief Financial Officer from 1989 to 1994.
ROSS C. ROADMAN has served as Senior Vice President - Strategic Planning and
Investor Relations since May 1999. Previously, Mr. Roadman served in various
capacities, since 1980, at Ryder System, Inc., including as Group Director of
Investor and Community Relations, Assistant Treasurer, Division Controller, and
Director of Planning. Before joining Ryder, he held positions with Ernst & Young
and the International Monetary Fund. He serves on the boards of several
educational and charitable organizations as well as being active in various
professional organizations.
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ITEM 2. PROPERTIES
The table below sets forth certain information with respect to the senior living
communities currently operated by the Company.
RETIREMENT CENTER
Resident Capacity(1)
------------------------------------------------------
Commencement
Community Location IL AL ME SN Total of Operations(2)
--------- -------- ------- ------- ------- ------- ------- ----------------
OWNED(3):
Broadway Plaza Ft. Worth, TX 252 40 - 122 414 Apr-92
Carriage Club of Charlotte Charlotte, NC 355 63 34 42 494 May-96
Carriage Club of Jacksonville Jacksonville, FL 292 60 - - 352 May-96
Freedom Plaza Sun City Center Sun City Center, FL 542 22 4 113 681 Jul-98
Freedom Village Holland Holland, MI 450 22 29 67 568 Jul-98
The Hampton at Post Oak Houston, TX 162 39 - 56 257 Oct-94
Heritage Club Denver, CO 220 34 - - 254 Feb-95
Holley Court Terrace Oak Park, IL 179 14 - 193 Jul-93
Homewood at Corpus Christi Corpus Christi, TX 60 29 - - 89 May-97
Lake Seminole Square Seminole, FL 395 34 - - 429 Jul-98
Parklane West San Antonio, TX - 17 - 124 141 Jan-00
Parkplace Denver, CO 195 43 17 - 255 Oct-94
Richmond Place Lexington, KY 206 60 20 - 286 Apr-95
Santa Catalina Villas Tucson, AZ 217 70 15 42 344 Jun-94
The Summit at Westlake Hills Austin, TX 167 30 - 90 287 Apr-92
Wilora Lake Lodge Charlotte, NC 142 44 - - 186 Dec-97
------- ------- ------- ------- -------
Subtotal 3,834 621 119 656 5,230
LEASED:
Freedom Plaza Care Center(4) Peoria, AZ - - 45 128 173 Jul-01
Freedom Village Brandywine(5) Glenmore, PA 380 15 18 47 460 Jun-00
Homewood at Victoria(6) Victoria, TX 60 30 - 90 May-97
Imperial Plaza(7) Richmond, VA 850 152 - - 1,002 Oct-97
Oakhurst Towers(8) Denver, CO 195 - - - 195 Feb-99
Park Regency(9) Chandler, AZ 154 - - 66 220 Sep-98
Trinity Towers(10) Corpus Christi, TX 220 62 20 75 377 Jan-90
Westlake Village (11) Cleveland, OH 246 54 - - 300 Oct-94
------- ------- ------- ------- -------
Subtotal 2,105 313 83 316 2,817
MANAGED(12):
Burcham Hills East Lansing, MI 138 49 55 133 375 Nov-78
Freedom Plaza Arizona(13) Peoria, AZ 455 36 42 128 661 Jul-98
Freedom Square(14) Seminole, FL 497 107 69 192 865 Jul-98
Glenview at Pelican Bay Naples, FL 150 - - 35 185 Jul-98
Somerby at Jones Farm(15) Huntsville, AL 172 48 - - 220 Apr-99
Somerby at University Park(15) Birmingham, AL 148 91 28 - 267 Apr-99
The Towers San Antonio, TX 505 - - - 505 Oct-94
------- ------- ------- ------- -------
Subtotal 2,065 331 194 488 3,078
------- ------- ------- ------- -------
Total Retirement Centers 8,004 1,265 396 1,460 11,125
======= ======= ======= ======= =======
18
FREE-STANDING ASSISTED LIVING
Resident Capacity(1)
------------------------------------------------------
Commencement
Community Location IL AL ME SN Total of Operations(2)
--------- -------- ------- ------- ------- ------- ------- ----------------
OWNED(3):
Freedom Inn at Scottsdale Scottsdale, AZ - 94 24 - 118 Mar-01
Homewood at Air Force Village San Antonio, TX - 39 - - 39 Nov-00
Homewood at Brookmont Terrace Nashville, TN - 62 34 - 96 May-00
Homewood at Deane Hill Knoxville, TN - 78 29 - 107 Oct-98
Homewood at Sun City Center(16) Sun City Center, FL - 60 28 - 88 Aug-99
Homewood at Tarpon Springs Tarpon Springs, FL - 64 - - 64 Aug-97
McLaren Homewood Village(17) Flint, MI - 81 41 - 122 Apr-00
Village of Homewood(18) Lady Lake, FL - 32 14 - 46 Apr-98
------- ------- ------- ------- -------
Subtotal - 510 170 - 680
LEASED:
Bahia Oaks Lodge(19) Sarasota, FL 18 85 - - 103 Jun-98
Broadway Plaza at Westover
Hills(20) Ft. Worth, TX - 74 16 - 90 Feb-01
Hampton at Willowbrook(21) Houston, TX - 53 16 - 69 Jun-99
Hampton at Shadowlake(21) Houston, TX - 78 16 - 94 Apr-99
Heritage Club at Aurora(21) Aurora, CO - 80 17 - 97 Jun-99
Heritage Club at Greenwood
Village(22) Denver, CO - 75 15 90 180 Nov-99
Heritage Club at Lakewood(21) Lakewood, CO - 78 16 - 94 Apr-00
Homewood at Bay Pines(10) St Petersburg, FL - 80 - - 80 Jul-99
Homewood at Boca Raton(23) Boca Raton, FL - 60 18 - 78 Oct-00
Homewood at Boynton Beach(24) Boynton Beach, FL - 78 18 - 96 Jan-00
Homewood at Castle Hills(25) San Antonio, TX - 80 17 - 97 Feb-01
Homewood at Cleveland Park(24) Greenville, SC - 75 17 - 92 Aug-00
Homewood at Coconut Creek(24) Coconut Creek, FL - 81 18 - 99 Feb-00
Homewood at Delray Beach (24) Delray Beach, FL - 54 32 - 86 Oct-00
Homewood at Lakeway(26) Austin, TX - 67 15 - 82 Sep-00
Homewood at Naples(26) Naples, FL - 76 24 - 100 Sep-00
Homewood at Pecan Park(23) Fort Worth, TX - 80 16 - 96 Aug-00
Homewood at Richmond Heights(24) Cleveland, OH - 78 17 - 95 Feb-00
Homewood at Rockefeller Gardens(24) Cleveland, OH - 105 34 - 139 Dec-99
Homewood at Shavano Park(25) San Antonio, TX - 62 16 - 78 Jun-00
Hampton at Cypress Station(27) Houston, TX - 80 19 - 99 Feb-99
Hampton at Pearland(28) Houston, TX 15 53 16 - 84 Feb-00
Hampton at Pinegate(28) Houston, TX - 81 16 - 97 May-00
Hampton at Spring Shadows(28) Houston, TX - 54 16 - 70 May-99
Summit at Northwest Hills(20) Austin, TX - 106 16 - 122 Aug-00
------- ------- ------- ------- -------
Subtotal 33 1,873 421 90 2,417
MANAGED(12):
Homewood at Countryside(29) Safety Harbor, FL - 57 25 - 82 Oct-99
------- ------- ------- ------- -------
Total Free-standing
Assisted Living 33 2,440 616 90 3,179
======= ======= ======= ======= =======
Grand Total 8,037 3,705 1,012 1,550 14,304
======= ======= ======= ======= =======
19
-----------------------
(1) Current resident capacity by care level and type: independent living
residences (IL), assisted living residences (including areas dedicated to
residents with Alzheimer's and other forms of dementia) (AL), memory
enhanced (ME), and skilled nursing beds (SN).
(2) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The
Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities.
(3) The Company's owned communities are subject to mortgage liens or serve as
collateral for various financing arrangements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources."
(4) The Company entered into a lease for the community in 2001. The community
is owned by Maybrook Realty, Inc., of which W.E. Sheriff, the Company's
chairman and chief executive officer owns 50%. Leased pursuant to a term of
nine years and six months, expiring December 31, 2010, with a renewal
option of ten years. The Company also has an option to purchase the
community at a predetermined price.
(5) The Company entered into a synthetic lease for the community in 2000.
Leased pursuant to an operating lease with an initial term of five years
expiring September 30, 2005, with a renewal option of one year.
(6) Leased pursuant to an operating lease expiring July 2011, with renewal
options for up to two additional ten-year terms.
(7) Leased pursuant to an operating lease expiring October 2017, with a
seven-year renewal option. The Company also has an option to purchase the
community at the expiration of the lease term.
(8) Leased pursuant to a 14-year operating lease expiring February 2013 from a
managed entity. The Company also has an option to purchase the community at
the expiration of the lease term.
(9) Synthetic leased, pursuant to a five year operating agreement expiring
September 2003, with renewal options for up to two additional one-year
terms. The Company has an option to purchase the community at the
expiration of the lease term.
(10) Leased pursuant to an operating lease expiring November 2007, with renewal
options for up to three additional ten-year terms. The Company has a right
of first refusal to purchase the community.
(11) During 2000, the Company sold the property and subsequently leased the
property back from the buyer. Leased pursuant to a seven-year operating
lease expiring December 31, 2007, with two renewal options of 13 and ten
years. The sale lease-back agreement also includes a right of first refusal
for the Company.
(12) Except as noted below, the Company's management agreements are generally
for terms of five to ten years, but may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary
services, accounting and data processing reports, and other services for
these communities at the owner's expense and receives a monthly fee for its
services based either on a contractually fixed amount or percentage of
revenues or income. As noted below, certain of the communities managed by
the Company are owned by affiliates of the Company.
(13) Operated pursuant to a management agreement with a 20-year term, with two
renewal options for additional ten-year terms, that provides for a
management fee equal to all cash received by the community in excess of
operating expenses, refunds of entry fees, capital expenditure reserves,
debt service, and certain payments to the community's owners, including an
entity affiliated with Mr. Roskamp, a former director of the Company. The
Company is currently negotiating with the owner of this Community to
convert its existing management agreement into a long-term operating lease.
See note 21 to the Consolidated Financial Statements.
(14) Operated pursuant to a management agreement with a 20-year term, with two
renewal options for additional ten-year terms, that provides for a
management fee equal to all cash received by the community in excess of
operating expenses, refunds of entry fees, capital expenditure reserves,
debt service, and certain payments to the community's owner, Mr. Roskamp, a
former director of the Company, and an entity affiliated with Mr. Roskamp.
The Company has an option to purchase the community at a predetermined
price.
(15) The management agreements grant ARC options to purchase the communities
upon achievement of stabilized occupancy at formula-derived prices.
(16) Owned by a joint venture in which the Company owns a 50% interest.
(17) Owned by a joint venture in which the Company owns a 37.5% interest.
(18) Owned by a joint venture in which the Company owns a 50% interest.
(19) Synthetic leased, pursuant to a five-year operating agreement expiring June
30, 2003, with renewal options for up to five additional one-year terms,
from an unaffiliated SPE that acquired the community from a general
partnership of which Robert G. Roskamp, a former director of the Company,
is a partner. The Company also acquired an option to purchase the community
at the expiration of the lease term.
(20) During 2001, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from a managed SPE. Synthetic leased, pursuant
to operating lease agreements expiring April 1, 2007 through January 1,
2010, with renewal options for up to five additional one-year terms.
(21) During 2001, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from a managed SPE. Leased pursuant to
operating leases expiring April 1, 2007 through January 1, 2010, with
renewal options for up to five additional one-year terms.
(22) During 2000, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from an SPE affiliated with John Morris, a
director of the Company. Synthetic leased pursuant to an operating lease
expiring April 30, 2013, with renewal options for up to four additional
ten-year terms.
(23) During 2000, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from a managed SPE. Leased pursuant to an
operating lease expiring July 1, 2007, with renewal options for up to two
additional one-year terms. The Company also has an option to purchase the
community at the expiration of the lease term.
(24) During 2001, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from an SPE affiliated with John Morris, a
director of the Company. Synthetic leased pursuant to operating leases
expiring April 1, 2007 through December 31, 2017, with renewal options for
up to five additional one-year terms.
(25) During 2000, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from a managed SPE. Synthetic leased pursuant
to an operating lease expiring July 1, 2007, with renewal options for up to
two additional one-year terms. The Company also has an option to purchase
the community at the expiration of the lease term.
(26) During 2000, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from an SPE affiliated with John Morris, a
director of the Company. Leased pursuant to an operating lease expiring
April 30, 2013, with renewal options for up to four additional ten-year
terms.
(27) During 2000, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from a managed SPE. Leased pursuant to an
operating lease expiring April 1, 2012, with renewal options for up to
three additional five-year terms.
(28) During 2000, the Company acquired the assets and/or leasehold interests and
assumed certain liabilities from a managed SPE. Leased pursuant to an
operating lease expiring June 24, 2012, with renewal options for up to four
additional ten-year terms.
(29) The community is managed pursuant to a management agreement that provides
for the payment of a management fee based on a percentage of gross revenues
of the community.
20
ITEM 3. LEGAL PROCEEDINGS
The ownership of property and provision of services related to the retirement
industry entails an inherent risk of liability. Although the Company is engaged
in routine litigation incidental to its business, there is no legal proceeding
to which the Company is a party, which, in the opinion of management, will have
a material adverse effect upon the Company's financial condition, results of
operations, or liquidity. The Company carries liability insurance against
certain types of claims that management believes meets industry standards. In
conjunction with its July 1, 2001 renewal, four incidents were excluded from
policy coverage. To date, the Company believes one of these incidents may result
in liability, which has been accrued for as of December 31, 2001. See "Business
- Insurance." There can be no assurance that the Company will continue to
maintain such insurance, or that any future legal proceedings (including any
related judgments, settlements or costs) will not have a material adverse effect
on the Company's financial condition, liquidity, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "ACR." The following table sets forth, for the periods indicated, the
high and low sales prices for the Company Common Stock as reported on the NYSE.
Year Ended December 31, 2001 High Low
---------------------------- ---- ---
First Quarter $ 5.400 $ 2.900
Second Quarter 3.950 3.000
Third Quarter 4.150 3.310
Fourth Quarter 3.600 1.780
Year Ended December 31, 2000 High Low
---------------------------- ---- ---
First Quarter $ 8.750 $ 5.875
Second Quarter 8.625 5.125
Third Quarter 6.250 4.625
Fourth Quarter 7.000 3.010
As of March 21, 2002, there were 476 shareholders of record and approximately
1,950 persons or entities holding Common Stock in nominee name.
It is the current policy of the Company's Board of Directors to retain all
future earnings to repay debt obligations. Accordingly, the Company does not
anticipate declaring or paying cash dividends on the Common Stock in the
foreseeable future. The payment of cash dividends in the future will be at the
sole discretion of the Company's Board of Directors and will depend on, among
other things, the Company's earnings, operations, capital requirements,
financial condition, restrictions in then existing financing agreements, and
other factors deemed relevant by the Board of Directors.
The Company did not sell any securities during the year ended December 31, 2001
without registration under the Securities Act of 1933, as amended.
21
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and notes thereto included
elsewhere in this report.
The Company's completed its IPO was in May 1997. Simultaneously with the IPO,
certain predecessor entities were reorganized with the result that all of its
assets and liabilities were contributed to the Company, and therefore certain
information is presented on a pro-forma basis. Also, on July 14, 1998, the
Company acquired privately-held Freedom Group, Inc. ("FGI") and certain entities
affiliated with FGI and Robert G. Roskamp, FGI's Chairman. The acquisition
resulted in seven additional Retirement Centers (three owned and four managed).
22
Years Ended December 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
Revenues:
Resident and health care $ 253,920 $ 200,805 $ 164,592 $ 130,036 $ 88,416
Management and development services 2,296 5,309 10,678 12,321 1,765
--------- --------- --------- --------- ---------
Total revenues 256,216 206,114 175,270 142,357 90,181
Operating expenses:
Community operating expense 179,718 138,670 105,978 82,698 54,921
General and administrative 29,297 19,420 15,020 10,581 6,717
Lease expense(1) 35,367 18,267 12,985 9,063 3,405
Depreciation and amortization 19,737 16,587 13,501 10,025 6,632
Amortization of leasehold acquisition 1,980 555 191 -- --
costs
Asset impairments and other losses 6,343 -- 12,536 -- --
Merger related costs -- -- -- 994 --
--------- --------- --------- --------- ---------
Total operating expenses 272,442 193,499 160,211 113,361 71,675
--------- --------- --------- --------- ---------
Operating (loss) income (16,226) 12,615 15,059 28,996 18,506
--------- --------- --------- --------- ---------
Other income (expense):
Interest expense (38,135) (36,517) (23,668) (17,924) (15,056)
Interest income 10,540 14,791 9,123 4,092 2,675
Gain (loss) on sale of assets (1,005) 267 3,036 80 35
Equity in loss of managed SPE
communities (5,029) (2,234) (374) -- --
Lease income 2,852 1,348 -- -- --
Other 623 (476) (314) (242) (36)
--------- --------- --------- --------- ---------
Other expense, net (30,154) (22,821) (12,197) (13,994) (12,382)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes,
minority interest extraordinary
item and cumulative effect of change
in accounting principle (46,380) (10,206) 2,862 15,002 6,124
Income tax expense (benefit) (11,837) (3,523) 1,087 5,652 4,435
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before minority interest, extraordinary
item and cumulative effect of change in
accounting principle (34,543) (6,683) 1,775 9,350 1,689
Minority interest, net of tax (92) 961 277 -- --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle (34,635) (5,722) 2,052 9,350 1,689
Discontinued operations, net of tax:
Income (loss) from home health -- -- -- (1,244) (155)
operations
Write-off of home health assets -- -- -- (902) --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle (34,635) (5,722) 2,052 7,204 1,534
Extraordinary loss on extinguishment of
debt, net of tax (287) (124) -- -- (6,334)
Cumulative effect of change in accounting
for start-up costs, net of tax -- -- -- (304) --
--------- --------- --------- --------- ---------
Net income (loss) available for
distribution to partners and
shareholders $ (34,922) $ (5,846) $ 2,052 $ 6,900 $ (4,800)
========= ========= ========= ========= =========
Distribution to partners, excluding
preferred distributions $ -- $ -- $ -- $ -- $ 2,500
========= ========= ========= ========= =========
(1) For the year ended December 31, 2001, lease expense includes $7.9 million
of lease expense related to residual value guarantees. See "Business - Sale
Lease-back Transactions."
23
Years Ended December 31,
------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- --------- -------- --------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Pro forma earnings data:
Income from continuing operations before
income taxes and extraordinary item $ 6,124
Pro forma income tax expense
2,210
--------
Pro forma income from continuing
operations before extraordinary item 3,914
Loss from home health operations, net of
pro forma tax (155)
--------
Pro forma income before extraordinary
item available for distribution to
partners and shareholders $ 3,759
========
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share from
continuing operations before
extraordinary item and cumulative
effect of change in accounting
principle $ (2.03) $ (0.34) $ 0.12 $ 0.67
========== ========= ========= ========
Basic earnings (loss) per share $ (2.03) $ (0.34) $ 0.12 $ 0.49
========== ========= ========= ========
Pro forma basic earnings per share before
extraordinary item available for
distribution to partners and
shareholders $ 0.36
========
Weighted average basic shares outstanding 17,206 17,086 17,129 13,947 10,577
========== ========= ========= ======== ========
Diluted earnings (loss) per share from
continuing operations before
extraordinary item and cumulative
effect of change in accounting
principle $ (2.03) $ (0.34) $ 0.12 $ 0.66
========== ========= ========= ========
Diluted earnings (loss) per share $ (2.03) $ (0.34) $ 0.12 $ 0.49
========== ========= ========= ========
Pro forma diluted earnings per share
before extraordinary item available
for distribution to partners and
shareholders $ 0.35
========
Weighted average diluted shares
outstanding 17,206 17,086 17,177 14,074 10,675
========== ========= ========= ======== ========
Cash earnings per common share(2) $ 0.14 $ 0.65 $ 1.47 $ 1.21 $ 0.17
========== ========= ========= ========= =========
(2) Income (loss) before extraordinary item and cumulative effect of change in
accounting principle, plus the $7.9 million of synthetic lease expense
related to residual value guarantees (see (1) above), depreciation and
amortization, asset impairment and other loss, and gain(loss) on sale of
assets per diluted share. While cash earnings per common share is not a
GAAP measurement, the Company believes it is relevant in analyzing its
operating results.
At December 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 19,334 $ 19,850 $ 21,881 $ 20,400 $ 44,583
Working capital (deficit)(3) (375,831) 14,280 23,590 25,804 47,744
Land, buildings and equipment, net 525,174 473,062 431,560 388,404 229,898
Total assets 850,191 792,480 740,411 595,854 317,154
Long-term debt, including current portion (3) 562,125 483,690 435,988 300,667 237,354
Refundable portion of life estate fees 46,309 44,739 43,386 48,805 --
Shareholders' equity 107,548 141,957 148,168 145,842 53,918
(3) The working capital deficit at December 31, 2001 includes the current
portion of long-term debt of $371.7 million.
24
QUARTERLY RESULTS
The following table presents certain quarterly operating results for each of the
Company's last eight fiscal quarters, derived from the Company's unaudited
financial statements. The Company believes that all necessary adjustments have
been included in the amounts stated below to present fairly the quarterly
results when read in conjunction with the Consolidated Financial Statements.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or predictive of future periods.
2001 Quarter Ended
--------------------------------------------------------- Year Ended
Mar 31 June 30 Sept 30 Dec 31(1) Dec 31, 2001
--------- --------- --------- --------- ------------
(dollar amounts in thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Total revenues $ 60,381 $ 63,369 $ 66,051 $ 66,415 $ 256,216
Net loss (2,818) (4,606) (4,441) (23,057) (34,922)
LOSS PER SHARE:
Basic ($ 0.16) ($ 0.27) ($ 0.26) ($ 1.34) ($ 2.03)
Weighted average basic shares outstanding 17,135 17,200 17,239 17,248 17,206
Diluted ($ 0.16) ($ 0.27) ($ 0.26) ($ 1.34) ($ 2.03)
Weighted average diluted shares
outstanding 17,135 17,200 17,239 17,248 17,206
(1) During the quarter ended December 31, 2001, the Company recorded $6.3
million in losses related to four properties due to development delays. The
Company also recorded costs to increase its self-insurance liability
reserves and recognized a $2.5 million charge related to an assessment on
Medicaid reimbursement. In addition, during the quarter ended December 31,
2001, the Company recorded $7.9 million of lease expense related to the
determination of residual value guaranty losses for six communities at
which the Company intends to terminate the leases. See "Business - Sale
Lease-back Transactions."
2000 Quarter Ended
------------------------------------------------------- Year Ended
Mar 31 June 30 Sept 30 Dec 31 Dec 31, 2000
--------- --------- --------- --------- ------------
(dollar amounts in thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Total revenues $ 46,777 $ 48,762 $ 53,432 $ 57,143 $ 206,114
Net income (loss) 620 (652) (1,742) (4,072) (5,846)
EARNINGS (LOSS) PER SHARE:
Basic $ 0.04 ($ 0.04) ($ 0.10) ($ 0.24) ($ 0.34)
Weighted average basic shares outstanding 17,138 17,146 17,024 17,037 17,086
Diluted $ 0.04 ($ 0.04) ($ 0.10) ($ 0.24) ($ 0.34)
Weighted average diluted shares
outstanding 17,249 17,146 17,024 17,037 17,086
25
ITEM 7. 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. The Company currently operates 65 senior living communities in 14
states with an aggregate capacity for approximately 14,300 residents. The
Company currently owns 24 communities, leases 33 communities pursuant to
long-term leases (including 14 synthetic leases), and manages eight communities.
CRITICAL ACCOUNTING POLICIES
Certain critical accounting policies are complex and involve significant
judgments by management, including the use of estimates and assumptions, which
affect the reported amounts of assets, liabilities, revenues and expenses. As a
result, changes in these estimates and assumptions could significantly affect
the Company's financial position or results of operations. The Company bases its
estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. The significant accounting policies used in the preparation of our
financial statements are more fully described in note 2 to the Consolidated
Financial Statements.
Revenue Recognition and Assumptions of Lifecare Communities
Certain of the Company's Retirement Centers provide housing and health care
services through lifecare contracts and entrance fee agreements with residents.
Under these agreements, residents pay an entrance fee upon entering into a
lifecare contract. The recognition of lifecare revenue requires the use of
various actuarial estimates. The Company recognizes revenue by recording the
nonrefundable portion of the residents' entrance fee as deferred life estate
income and amortizing it into revenue using the straight-line method over the
estimated remaining life expectancy of each resident or couple. The Company
periodically assesses the reasonableness of its mortality tables and other
actuarial assumptions.
Adequacy of Allowance for Doubtful Accounts
The Company reports accounts receivable, net of an allowance for doubtful
accounts, to represent its estimate of the amount that ultimately will be
realized in cash. The Company reviews the adequacy of its allowance for doubtful
accounts on an ongoing basis, using historical payment trends, analyses of
receivable portfolios by payor source and aging of receivables, as well as
review of specific accounts, and makes adjustments in the allowance as
necessary. Changes in legislation or economic conditions could have an impact on
the collection of existing receivable balances or future allowance
considerations.
During 2001, 8.5% of the Company's resident and health care revenues were
derived from services covered by various third-party payor programs, including
Medicare and Medicaid. Billings for services under third-party payor programs
are recorded net of estimated retroactive adjustments under reimbursement
programs. Retroactive adjustments are accrued on an estimated basis in the
period the related services are rendered and adjusted in future periods or as
final settlements are determined. The Company accrues contractual or cost
related adjustments from Medicare or Medicaid when assessed (without regard to
when the assessment is paid or withheld), even if the Company has not agreed to
or is appealing the assessment. Based upon final settlements with third party
payor programs, subsequent positive or negative adjustments to these accrued
amounts are recorded in net revenues upon final settlement during the year of
service, or in general and administrative expense upon final settlement
subsequent to the year of service.
Liability Accruals
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of its business. The Company maintains property, general
liability and professional malpractice insurance policies for the Company's
owned, leased and certain of its managed communities under a master insurance
program. The Company reviews the adequacy of its accruals related to general and
professional liability and workers' compensation claims on an ongoing basis,
using historical
26
claims, third party administrator estimates, advice from legal counsel and
industry loss development factors, and adjusts accruals periodically. Changes in
fact patterns or industry development factors could have a significant impact on
the required accrual levels. On January 1, 2002, the Company became self-insured
for medical coverage. Estimated costs related to these self-insurance programs
will be accrued based on known claims and projected claims incurred but not
reported.
Leasehold Acquisition Costs
At December 31, 2001 and 2000, the Company had $33.5 million and $16.1 million,
respectively, of leasehold acquisition costs. During 2001 and 2000, the Company
acquired leasehold interests in 26 Free-standing ALs, that previously were
Managed SPE Communities. These acquisitions resulted in $19.3 million and $15.7
million of leasehold acquisition costs in 2001 and 2000, respectively. The terms
of the leasehold interests acquired range from July 2005 to April 2013.
Leasehold acquisition costs are amortized principally on a straight-line basis
over the remaining contractual or expected life of the related lease agreements.
Accumulated amortization and amortization expense for the years ended December
31, 2001 and 2000 were $2.7 million and $2.0 million and $750,000 and $555,000,
respectively. The Company assesses the leasehold acquisition costs for
impairment based upon the amount of estimated undiscounted future cash flows
over the remaining lease terms. During the fourth quarter of 2001, the Company
determined that in order to simplify its financial structure, and as a condition
of certain elements of its Refinancing Plan, it intends to exercise its
termination rights under its fourteen synthetic leases, during the first and
second quarters of 2002. Accordingly, the Company has accelerated the
amortization of the leasehold acquisition costs for these communities over an
expected lease term ending March 31, 2002. See "-- Sale Lease-back Transactions"
and "Business - Synthetic Lease Communities."
Sale Lease-back Transactions
The Company's synthetic leases (See "Business - Synthetic Lease Communities")
contain termination rights whereby the Company as lessee has the right to
terminate the leases and acquire the leased assets in exchange for the
assumption of related debt balances, forgiveness of notes receivable, and the
repayment of the lessor's equity. Upon termination or expiration of the
synthetic leases, the Company may either purchase the property from the lessor
at a predetermined amount, sell the property to a third party, or request
renewal of the lease agreement. If the property is sold to a third party for
less than the original cost, net of debt amortization, the Company is obligated,
under residual value guarantees, to pay the lessor an amount equal to any
shortfall, not to exceed approximately 85% of the original cost of the
communities. See note 17 to the Consolidated Financial Statements.
During the fourth quarter of 2001, the Company determined that in order to
simplify its financial structure, and as a condition of certain elements of its
Refinancing Plan, it will exercise its termination rights under these fourteen
synthetic leases during 2002. As a result of the termination of these synthetic
leases, the Company will become the direct owner of each community for financial
reporting purposes. Upon completion of these transactions, the Company will not
have any remaining synthetic leases. The Company does not expect to incur any
significant losses in connection with the termination of the synthetic leases.
In conjunction with the Refinancing Plan, the Company intends to terminate the
synthetic lease and subsequently enter into sale lease-back transactions with
respect to eight of the fourteen synthetic lease communities during the first
and second quarters of 2002. These transactions are expected to raise gross
proceeds of approximately $76.2 million. In connection with the termination and
sale lease-back of these eight communities, the Company will recognize a loss of
approximately $33.7 million, which will be recorded as lease expense due to
residual value guarantees. Of the $33.7 million of lease expense, the Company
recorded $7.9 million during the quarter ended December 31, 2001, and
anticipates that it will complete the sale lease-back transactions and record
the balance of approximately $25.8 million of additional lease expense during
the first and second quarters of 2002. See "Business - Synthetic Lease
Communities" and "--Sale Lease-back Transactions."
Lease Classification
As of December 31, 2001, the Company operates many of its senior living
communities under long-term leases. Certain of these leases provide for various
additional lease payments, as well as renewal options. The Company, as the
lessee, makes a determination with respect to each of these leases, whether they
should be accounted for as operating leases or capital leases. The Company bases
its classification criteria on estimates regarding the fair value of the leased
community, minimum lease payments, the Company's effective cost of funds, and on
the economic life of the community.
27
Goodwill
Goodwill is amortized on a straight-line basis over the expected periods to be
benefited, generally 40 years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired operation. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the risk of the acquired operations. The assessment of the
recoverability will be impacted if estimated future operating cash flows are not
achieved.
The Company has $36.5 million of unamortized goodwill as of December 31, 2001,
which will be subject to the transition provisions of FASB Statement No. 142,
"Goodwill and Other Intangible Assets". The Company will evaluate the existence
of impairment under SFAS No. 142 by the end of the second fiscal quarter of
2002. Inherent in the policies regarding goodwill are the significant management
judgments regarding the ongoing cash flow potential of the acquired communities
which generated the goodwill. At this time, because it has not finished its
analysis regarding implementation of SFAS No. 142, the Company cannot reasonably
estimate the ultimate effect that this new statement will have on its
consolidated financial statements. See Notes 2(h) and 2(u) to the Consolidated
Financial Statements.
Purchase Options
Purchase options to acquire property are recorded at their cost and, upon
exercise, are applied to the cost of the property at the time of acquisition.
Nonrefundable purchase options are expensed when they expire or the Company
determines it is no longer probable that the property will be acquired. The
Company currently has purchase options related to four communities amounting to
$17.4 million. The Company estimates that an option with a recorded value of
$6.0 million will expire in April 2004, based upon variable termination clauses
dependent upon occupancy, an option with a recorded value of $1.0 million will
expire in December 2012 and an option with a recorded value of $10.4 million
will expire in October 2017. The Company intends to exercise these purchase
options.
Recognition of Contingent Earn-outs
During 2001, as part of two sale lease-back transactions with a third party
buyer, the Company recognized losses on sale of assets of $918,000, net of
estimated contingent earn-outs of $2.1 million (out of a maximum of $4.0
million). The earn-out provisions of the lease agreements specify certain
criteria that must be met to earn the earn-out consideration. Based upon its
reviews of the earn-out criteria, the Company believes that these estimated
amounts are realizable, however, actual results may differ from these estimates
under different assumptions or conditions.
RESULTS OF OPERATIONS
The Company's revenues from continuing operations are comprised of Resident and
health care revenues, which includes revenues from the Company's owned and
leased communities and Management and development services revenues, which
include fees, net of reimbursements, for the development, marketing, and
management of communities owned by third parties. The following table sets forth
each of the components of the Company's revenues and show each as a percentage
of the total revenues for the years 2001, 2000 and 1999:
28
2001 2000 1999
---- ---- ----
Resident and health care revenues:
Monthly service fees and ancillary revenues from
independent and assisted living residents 74.9% 77.5% 76.3%
Per diem charges from skilled nursing and therapy 21.6% 17.6% 14.3%
services
Amortization of non-refundable entrance fees(1) 2.5% 2.4% 2.9%
Management and development services 1.0% 2.5% 6.5%
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
===== ===== =====
(1) Amortized over each resident's actuarially determined life
expectancy (or building life for contingent refunds).
Certain of the Company's Retirement Centers provide housing and health care
services through limited lifecare contracts and entrance fee agreements with
residents. See "Business - Care and Services Programs - Lifecare and Entrance
Fee Arrangements".
The Company's management agreements are generally for terms of three to 20
years, but certain of such agreements may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owners' expense, and receives a monthly fee for its services
based either on a contractually fixed amount or a percentage of revenues or
income. Two of the Company's management agreements are for communities with
aggregate resident capacity for approximately 1,500 residents and have terms of
twenty years, with two ten year renewals and include a purchase option for one
of the communities. The management fee for these two agreements is equal to all
cash received from these two communities in excess of operating and financing
expenses and certain cash payments to the owner of the community. The Company's
existing management agreements expire at various times through June 2018.
SEGMENT RESULTS
The Company's operations are divided into two segments: (1) Retirement Centers
and (2) Free-standing ALs.
The Retirement Centers are generally comprised of the Company's CCRCs and
lifecare communities and its independent living communities, including those at
which assisted living and/or nursing services are provided. The Retirement
Centers are established communities with strong reputations within their
respective markets, and generally maintain high and consistent occupancy levels,
most with waiting lists of prospective residents. The Company's Retirement
Centers form the core segment of the Company's business and comprise 31 of 65
communities that the Company operates, with capacity for approximately 11,100
residents, representing approximately 78% of the total resident capacity of the
Company's communities. At December 31, 2001, 2000 and 1999 the Company's
Retirement Centers had occupancy rates of 93%, 93% and 91%, respectively.
The Company has also developed and acquired a number of Free-standing ALs, most
of which began operations during 1999 and 2000. Free-standing ALs are much
smaller than Retirement Centers and generally are stand-alone communities that
are not located on a Retirement Center campus. Most Free-standing ALs provide
specialized care such as Alzheimer's, memory enhancement and other dementia
programs. During the last several years and continuing through 2001, the
Free-standing AL market has suffered from adverse market conditions, including
significant overcapacity in most markets, longer than anticipated fill-up
periods, price discounting and price pressures. The Company expects these
conditions to continue for the intermediate term. Although the Company ceased
development of any additional Free-standing ALs in late 1999, many that were
already in development were opened during 2000 and early 2001. The Company's
community operating results include only the Free-standing ALs that the Company
owns or leases. The number of Free-standing ALs included in the Company's
consolidated operations grew as a result of acquisitions of Free-standing ALs
and leasehold interests of Managed SPE Communities, including leasehold
interests in ten Managed SPE Communities acquired as of December 31, 2001. See
also
29
"Business - Operating Segments" and "Item 2 - Properties" for additional
information on the Company's Free-standing AL communities.
The Company operates 34 Free-standing ALs, with capacity for approximately 3,200
residents, representing approximately 22% of the total resident capacity of the
Company's communities. Many of these Free-standing ALs are in the fill-up stage.
At December 31, 2001, 2000 and 1999 the Company's Free-standing ALs had
occupancy rates of 65%, 51% and 49%, respectively. As of the fourth quarter of
2001, the occupancy of these Free-standing ALs has improved to the point that
they generated positive community EBITDAR. On an operating income basis, they
are still generating losses after lease, amortization and depreciation expense.
The following table sets forth certain selected financial and operating data on
an operating segment basis(1) (in thousands).
2001 2000 1999
--------- --------- ---------
Revenues:
Retirement Centers $ 216,570 $ 188,956 $ 159,531
Free-standing ALs(2) 37,350 12,099 4,959
Corporate/Other (4) 2,296 5,059 10,780
--------- --------- ---------
Total 256,216 206,114 175,270
========= ========= =========
NOI / Community EBITDAR:(3)
Retirement Centers 76,374 65,241 58,722
Free-standing ALs (690) (2,851) 6
Corporate/Other (28,483) (14,366) (4,456)
--------- --------- ---------
Total 47,201 48,024 54,272
========= ========= =========
Total Assets:
Retirement Centers 509,732 523,113 515,083
Free-standing ALs 241,069 214,660 160,661
Corporate/Other 99,390 54,707 64,667
--------- --------- ---------
Total 850,191 792,480 740,411
========= ========= =========
(1) Selected financial and operating data does not include any
inter-segment transactions or allocated costs.
(2) Free-standing AL revenues represent the Company's consolidated revenues
for the period throughout the year the communities were owned or
leased. The Company acquired leasehold interests of 12 Managed SPE
Communities during 2001, including leasehold interests in ten Managed
SPE Communities that were acquired as of December 31, 2001. The results
of these communities are reflected in the Company's income statement
from the date of acquisition and, therefore, do not reflect a full year
of operations.
(3) Net Operating Income ("NOI"), or Community EBITDAR is defined as
earnings before net interest expense, income tax expense (benefit),
depreciation, amortization, rent, and other special charges related to
asset write-offs and write-downs, equity in loss of Managed SPE
Communities, other income (expense), minority interest, and
extraordinary items.
(4) Corporate/Other Revenues represent the Company's development and
management fee revenues. Corporate/Other NOI includes operating
expenses related to corporate operations, including human resources,
financial services, and information systems, as well as senior living
network and assisted living management costs.
The following table presents, on a pro forma basis, quarterly community results
on a segment basis for each of the Company's last eight fiscal quarters (2001
and 2000), assuming that all communities currently owned or leased were
consolidated for the entire period. As a result, the operating results for 24
Retirement Centers and 31 Free-standing ALs owned or leased as of December 31,
2001, plus one Free-standing AL that became owned as of January 1, 2002 (for a
total of 32 Free-standing ALs) are included for all quarters shown. This
information is presented in order to show the historical results of the
communities that currently make up each segment (many of which were not
consolidated in some or all quarters shown). Communities managed as of December
31, 2001, communities sold during the period and unconsolidated joint ventures
are excluded from all quarters shown. While this pro forma information is not
presented in accordance with generally accepted accounting principles, the
Company believes such information is useful in evaluating the Company's
performance. The pro forma results of any particular quarter are not necessarily
indicative of results of operations for a full year or predictive of future
periods. All dollar amounts are in thousands.
30
Pro forma segment results:
2001 Quarter Ended
--------------------------------------------------------------- Year Ended
March 31 June 30 Sept 30 Dec 31 Dec 31, 2001
--------- --------- --------- --------- ------------
Retirement Centers
Revenues $ 52,143 $ 54,105 $ 54,893 $ 55,928 $ 217,069
Community EBITDAR 18,978 18,852 18,318 19,738 75,886
Free-standing ALs
Revenues 11,927 13,716 15,160 16,465 57,268
Community EBITDAR (1,769) (473) (86) 648 (1,680)
2000 Quarter Ended
--------------------------------------------------------------- Year Ended
March 31 June 30 Sept 30 Dec 31 Dec 31, 2000
--------- --------- --------- --------- ------------
Retirement Centers
Revenues $ 46,620 $ 47,565 $ 48,930 $ 50,878 $ 193,993
Community EBITDAR 15,828 16,242 16,249 17,200 65,519
Free-standing ALs
Revenues 5,920 7,438 8,217 10,107 31,682
Community EBITDAR (2,633) (2,940) (2,817) (2,191) (10,581)
This pro forma table shows the significant trends in each of the two business
segments. Retirement Center revenues have shown consistent grown as a result of
price increases for new residents, increasing occupancy and filling expansions
at certain communities, growth of therapy services and expanding other service
offerings. These revenue increases, as well as control of expenses and
recoupment of expense increases through rate increases to current residents,
have resulted in proportionally larger increases in community EBITDAR from
Retirement Centers.
During 1999 and 2000, many new Free-standing AL communities were opened and
added significant unit capacity to that portfolio. The trend above shows the
Free-standing AL revenue increase resulting primarily from increased occupancy
as communities fill. Selective price increases and growth of ancillary revenues
are also beginning to increase revenue. While more prolonged than expected, the
portfolio has experienced decreasing EBITDAR losses from the increasing
occupancy. For the first time, the Free-standing AL's recorded a positive
EBITDAR for the fourth quarter of 2001 as result primarily of reaching a census
level able to sustain current operating expenses. As the communities continue to
fill, the Company expects this EBITDAR to increase.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2000
Revenues. Total revenues were $256.2 million in 2001, compared to $206.1 million
in 2000, representing an increase of $50.1 million, or 24.3%. Resident and
health care revenues increased by $53.1 million, and management and development
services revenue decreased by $3.0 million during the period. The increases in
resident and health care revenues resulted primarily from an increase of: (a)
approximately $25.1 million as a result of the increase in the number of
Free-standing ALs included in the Company's consolidated operations during 2000
and 2001, as well as the continued fill-up of these communities, (b) $5.2
million and $3.2 million, respectively, attributable to the full year of the May
2000 long-term lease of Freedom Village Brandywine and the six months related to
the July 2001 long-term lease of Freedom Plaza Care Center, (c) an increase of
$5.6 million in revenue from therapy services, and (d) $6.9 million attributable
to increased capacity as a result of Retirement Center expansions. The remaining
increase relates primarily to increased average occupancy and additional
entrance fee revenues.
31
Management and development services revenue decreased by $3.0 million and
decreased as a percentage of total revenue to 0.9% in 2001 from 2.6% in 2000.
The decrease is primarily related to the decrease in the number of managed
communities from 20 at December 31, 2000 to eight at December 31, 2001, 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, resulting in a decrease in development fees of
$854,000 during 2001.
For all of its communities, the Company had an occupancy rate of 86% as of
December 31, 2001, compared to 83% as of December 31, 2000. The increase in the
total occupancy rate is a result of increased occupancy at the Free-standing ALs
and expansions that opened during 2001 and 2000.
Retirement Center resident and health care revenues were $216.6 million in 2001,
compared to $189.0 million in 2000, representing an increase of $27.6 million,
or 14.6%. This increase resulted primarily from additional revenues as a result
of the long-term lease of Freedom Village Brandywine and Freedom Plaza Care
Center, increased capacity related to expansions and increased therapy services
provided by the Company during 2001. Retirement Center resident and health care
revenues were also positively affected by increased average occupancy and
additional entrance fee revenues.
Free-standing AL resident and health care revenues increased from $12.1 million
in 2000 to $37.4 million in 2001. This increase is largely related to the
increase in the number of Free-standing ALs included in the Company's
consolidated operations from 18 to 33 communities (twelve leasehold interests
were acquired during 2001, but ten of the twelve were acquired on December 31,
2001 and as such were not included in 2001 operations), as well as increased
occupancy at these communities during the year.
Community Operating Expense. Community operating expense increased to $179.7
million in 2001, as compared to $138.7 million in 2000, representing an increase
of $41.0 million, or 29.6%. The increase in community operating expense was
primarily attributable to expansions and communities acquired or leased during
2000 and 2001. Additionally, the increase was the result of increased labor,
insurance, utility, property and marketing costs at various new communities, as
well as costs associated with the expansion of therapy services to 13
communities during 2001. Community operating expense as a percentage of resident
and health care revenues increased to 70.8% from 69.1% for 2001 and 2000,
respectively, primarily attributable to the acquisition of leasehold interests
in various Managed SPE Communities during the second half of 2000, the majority
of which are in the fill-up stage. The Company expects community operating
expense to remain at greater than historical levels as a percentage of resident
and health care revenues as the Free-standing ALs acquired during 2000 and 2001
complete the fill-up stage.
Retirement Center operating expenses were $140.2 million in 2001, compared to
$123.7 million in 2000, representing an increase of $16.5 million, or 13.3%.
Approximately $4.0 million of this increase was attributable to the full year of
the May 2000 long-term lease of Freedom Village Brandywine. Approximately $3.4
million of this increase was attributable to the July 1, 2001 (six months) of
long-term lease of FPCC. In addition, the expansions at several Retirement
Centers increased operating expenses by $4.1 million. Finally, $2.7 million of
the increase related to expenses associated with increased therapy services
during 2001. The remaining increase relates primarily to increased average
occupancies resulting in increased Retirement Center operating expenses.
Free-standing AL operating expenses increased from $16.3 million in 2000 to
$38.0 million in 2001. This increase is largely related to the increase in the
number of Free-standing ALs included in the Company's consolidated operations
from 18 to 33 communities (twelve leasehold interests were acquired during 2001,
but ten of the twelve were acquired on December 31, 2001 and as such were not
included in 2001 operations), as well as increased occupancy at these
communities during the year.
General and Administrative. General and administrative expense increased to
$29.3 million for 2001, as compared to $19.4 million for 2000, representing an
increase of $9.9 million, or 50.9%. Over $3.9 million of this increase relates
to additional accruals for general and professional liability claims, workers'
compensation, and other insurance related accruals, primarily as a result of
changes in our insurance program and general conditions in the insurance
markets. In addition, approximately $2.5 million of the increase relates to an
assessment on 1998 Medicare reimbursements at a community managed by the Company
and $1.1 million relates to bad debt provisions for
32
various assessments received on prior year home health reimbursements. The home
health assessments are the result of cost report denials related to the period
1996 through 1999, which the Company is vigorously contesting. The remaining
increase reflects increases in overhead support costs associated with additional
Free-standing ALs in various geographic areas, as well as 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 11.4%
compared to 9.4% for 2001 and 2000, respectively.
EBITDAR (Community NOI). EBITDAR decreased $823,000 from $48.0 million in 2000
to $47.2 million in 2001 as further described below.
Retirement Center EBITDAR increased $11.1 million, or 17.1%, from $65.2 million
for 2000 to $76.4 million for 2001. This increase primarily relates to the May
2000 and July 2001 additions of the long-term leases of Freedom Village
Brandywine and Freedom Plaza Care Center, 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.
Free-standing AL EBITDAR losses decreased by $2.2 million, to a $690,000 loss in
2001 from a $2.9 million loss in 2000 as a result of the improved occupancy. As
a result of occupancy gains throughout 2001, EBITDAR from Free-standing ALs
reached breakeven for the fourth quarter of 2001, netting a positive EBITDAR for
the first time since the opening of a large number of new communities during
1999 through 2001.
Other EBITDAR losses increased by $14.1 million to $28.5 million in 2001
resulting from: (a) a $3.0 million reduction in management and development fees,
(b) approximately $3.9 million related to general liability and workers'
compensation claim provisions, (c) $2.5 million related to an assessment on 1998
Medicare reimbursement of a community the Company manages (see note 17 of the
Consolidated Financial Statements) and (d) $1.1 million related to bad debt
provisions for trade receivables and assessments received during 2001 related to
prior year home health reimbursements. The remaining decrease relates to
additional costs associated with therapy services, marketing, corporate
operations, human resources, financial services and overhead, and increased
senior living network and assisted living management costs.
Lease Expense. Lease expense increased $17.1 million from $18.3 million for 2000
to $35.4 million for 2001. Lease expense (excluding synthetic leases) increased
to $17.4 million for 2001, as compared to $12.0 million for 2000, representing
an increase of $5.3 million, or 44.3%. This increase was attributable to ten
additional leases entered into by the Company during 2000 and 2001, consisting
of two Retirement Center leases (Freedom Plaza Care Center and Westlake
Village), which increased lease expense $1.0 million and $369,000, respectively,
and the acquisition during 2000 of leasehold interests in six Free-standing AL
communities, which increased lease expense $3.7 million. As of December 31,
2001, the Company had operating leases for 19 of its communities, including six
Retirement Centers and 13 Free-standing ALs. Accordingly, of the total $17.4
million community lease expense for 2001, $11.0 million related to Retirement
Centers and $6.4 million related to Free-standing ALs.
As of December 31, 2001, the Company operated 14 of its communities, including
two Retirement Centers and 12 Free-standing ALs under operating lease structures
referred to as synthetic leases. Accordingly, of the total $17.9 million
synthetic lease expense for 2001, $3.1 million related to Retirement Centers and
$14.8 million related to Free-standing ALs. Synthetic lease expense increased to
$17.9 million for 2001, as compared to $6.2 million for 2000, representing an
increase of $11.8 million. This increase was attributable to seven Free-standing
AL leases acquired after December 31, 2000 that resulted in lease expense of
$6.3 million. The Company has determined that in order to simplify its financial
structure, and as a condition of certain elements of its Refinancing Plan, it
will exercise its termination rights under its 14 existing synthetic leases
during 2002. The Company would then have no remaining synthetic leases. As part
of its Refinancing Plan, the Company has identified eight Free-standing AL
communities at which it expects to finance the terminations of the synthetic
leases through sale lease-back transactions during 2002 at expected losses from
the residual guarantees. During the fourth quarter of 2001, the Company
recognized $7.9 million of these expected losses from the residual guarantees as
additional synthetic lease expense. These increases are offset by the June 2001
sale of a Retirement Center (Rossmoor Regency), which resulted in a $1.2 million
reduction in synthetic lease expense.
33
Depreciation and Amortization. Depreciation and amortization expense increased
to $19.7 million in 2001 from $16.6 million in 2000, representing an increase of
$3.2 million, or 19.0%. The increase was primarily related to the increase in
depreciable assets of approximately $65.5 million during the year. These assets
relate primarily to the opening or acquisition of communities, including
leasehold interests, and expansion of communities since December 31, 2000, as
well as ongoing capital expenditures.
Amortization of Leasehold Acquisition Costs. Amortization of leasehold
acquisition costs increased from $555,000 in 2000 to $2.0 million in 2001. This
increase relates to the acquisition of two (twelve were acquired during 2001,
but ten of the twelve were acquired on December 31, 2001 and as such had no
leasehold acquisition amortization in 2001) leasehold interests in Free-standing
ALs during 2001, as well as the acquisition of 13 Free-standing AL leasehold
interests during 2000. These acquisitions resulted in $19.3 million and $15.7
million of leasehold acquisition costs in 2001 and 2000, respectively, which is
being amortized over the expected life of the leases. The lease terms related to
the leasehold interests recently acquired range from July 2005 to April 2013.
However, during the fourth quarter of 2001, the Company determined that in order
to simplify its financial structure, and as a condition of certain elements of
its Refinancing Plan, it will exercise its termination rights under its 14
synthetic leases during the first quarter of 2002. As a result, the Company has
accelerated the amortization of the leasehold acquisition costs for these
communities over an expected lease term ending March 31, 2002. The Company
anticipates that during the quarter ended March 31, 2002, approximately $7.0 to
$10.0 million of additional leasehold acquisition cost amortization will be
expensed due to the expected termination of the synthetic leases.
Asset Impairment and Other Losses. During the quarter ended December 31, 2001,
the Company recorded $6.3 million in charges related to properties held for
development. These projects are in various stages of development, with activity
consisting primarily of zoning permits, completing architectural drawings and
site testing. Consummation of these projects has been subject to various delays,
and as a result of events during the fourth quarter, are likely to be
significantly further delayed. The Company expects to continue development of
these projects as circumstances merit and in order to protect its interests. See
note 4 to the Consolidated Financial Statements.
Other Income (Expense). Interest expense increased to $38.1 million in 2001 from
$36.5 million in 2000, representing an increase of $1.6 million, or 4.4%. This
increase was primarily attributable to additional indebtedness of $78.4 million
incurred in connection with acquisitions and other capital investments. This
increase was offset by the fact that over 35% of the Company's debt bears
interest at variable rates, and the weighted average interest rate of the
Company's variable rate debt decreased from 7.8% in 2000 to 5.7% in 2001.
Interest expense, as a percentage of total revenues, decreased to 14.9% for 2001
from 17.7% in 2000. Interest income decreased to $10.5 million in 2001 from
$14.8 million in 2000, representing a decrease of $4.3 million, or 28.7%. The
decrease in interest income was primarily attributable to lower income generated
from the reduced amount of certificates of deposit and notes receivable balances
associated with certain leasing transactions and management agreements. Equity
in loss of managed SPE communities increased from $2.2 million in 2000 to $5.0
million in 2001, representing the losses that the Company funded when operating
deficits at the Managed SPE Communities exceeded specified limits. Lease income
increased from $1.3 million in 2000 to $2.9 million in 2001 related to land
parcels purchased in connection with two like-kind sale lease-back transactions
entered into during 2001.
Income Tax Benefit. The provision for income taxes was a $11.8 million benefit
compared to a $3.5 million benefit for 2001 and 2000, respectively. The
Company's effective tax rate was 25.5% and 34.5% for 2001 and 2000,
respectively.
Minority Interest in (Earnings) Losses of Consolidated Subsidiaries, Net of Tax.
Minority interest in losses (earnings) of one consolidated subsidiary, net of
tax, for 2001 and 2000, respectively, was $92,000 of income and $961,000 of
losses, representing a decrease of $1.1 million. The decrease was primarily
attributable to a negotiated revised partner loss allocation system for a
subsidiary in which the Company agreed to consolidate all losses until the
contribution percentages were reflective of the partner's capital account
balances. The Company acquired this partnership interest on September 30, 2001
for $300,000.
Extraordinary Loss. During 2001, the Company purchased $5.1 million of its
Debentures 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
$664,000, or a $0.04 gain per dilutive share. Offsetting this gain, during 2001
the Company repaid a term note to a bank in connection with the sale of its
Rossmoor Regency community. As part of this transaction, the Company incurred a
prepayment penalty of $837,000, or a
34
$0.05 loss per dilutive share, net of income taxes, which was recorded as an
extraordinary loss on the extinguishment of debt. In addition, during the
quarter ended December 31, 2001, the Company refinanced a term note to a
mortgage company, resulting in a prepayment penalty of $114,000. The purchase of
the Debentures and repayment of the term notes resulted in an aggregate
extraordinary loss of $287,000, net of tax.
Net Loss. Based upon the factors noted above, the Company experienced a net loss
of $34.9 million, or $2.03 loss per dilutive share, compared to a net loss of
$5.8 million, or $0.34 loss per dilutive share, for 2001 and 2000, respectively.
The $2.03 loss per dilutive share for 2001 was comprised of a $2.01 loss from
operations and a $0.02 loss from the Company's extinguishment of debt. The loss
of $0.34 per dilutive share for 2000 was comprised of a $0.33 loss from
operations and a $0.01 loss from the extinguishment of debt.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Revenues. Total revenues were $206.1 million in 2000, compared to $175.3 million
in 1999, representing an increase of $30.8 million, or 17.6%. Resident and
health care revenues increased by $36.2 million, and management and development
services revenue decreased by $5.4 million during the period. The increase in
resident and health care revenue was primarily attributable to revenues derived
from senior living communities acquired or leased after December 31, 1999.
Management and development services revenue decreased as a percentage of total
revenue to 2.6% in 2000 from 6.1% in 1999. 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 freestanding assisted
living residences, for which the Company received development fees.
The Company had an occupancy rate of 83% compared to 86% as of December 31, 2000
and 1999, respectively. The decrease in the total occupancy rate is a result of
new communities and expansions that have increased capacity from 13,600 as of
December 31, 1999 to 14,500 as of December 31, 2000, many of which were in the
fill-up stage.
Retirement Center resident and health care revenues were $187.6 million in 2000,
compared to $159.5 million in 1999, representing an increase of $28.1 million,
or 17.6%. This increase was primarily attributable to increased average
occupancies, as well as rate increases. Free-standing AL resident and health
care revenues increased from $5.0 million in 1999 to $13.5 million in 2000. This
increase is largely related to the increase from seven to 18 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 $138.7
million in 2000, as compared to $106.0 million in 1999, representing an increase
of $32.7 million, or 30.8%. The increase in community operating expense was
primarily attributable to expenses from expansions and communities acquired or
leased during 1999 and 2000. Additionally, this increase is the result of
increased labor, insurance, facility and marketing costs at various new
communities, as well as expansion of services provided within all communities.
Community operating expense as a percentage of resident and health care revenues
increased to 69.1% from 64.4% for 2000 and 1999, 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 1999 and during 2000 of various Free-standing ALs that were
Managed SPE Communities, the majority of 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 as the Free-standing AL communities acquired during 2000 and 2001
complete the fill-up stage.
Retirement Center operating expenses were $122.4 million in 2000, compared to
$100.8 million in 1999, representing an increase of $21.6 million, or 21.4%.
This increase was primarily attributable to increased average occupancies, and
reflects a slight reduction in gross margin from the prior year due to
expansions. Free-standing AL operating expenses increased from $5.0 million in
1999 to $16.3 million in 2000. This increase is largely related to the increase
from seven to 18 consolidated Free-standing AL communities, as well as the
fill-up and increased occupancy of these communities during the year.
35
General and Administrative. General and administrative expense increased to
$19.4 million for 2000, as compared to $15.0 million for 1999, representing an
increase of $4.4 million, or 29.3%. The increase was primarily related to
salaries and benefits associated with the operation of an increased number of
communities, as well as the overhead support costs associated with the Senior
Living Networks in various geographic areas. In addition, over $968,000 of the
increase relates to severance costs incurred in December 2000, as a result of
the elimination of twelve positions. General and administrative expense as a
percentage of total revenues increased to 9.4% compared to 8.6% for 2000 and
1999, respectively.
EBITDAR (Community NOI). Retirement Center EBITDAR increased $6.5 million, or
11.1%, from $58.7 million for 1999 to $65.2 million for 2000. This increase
relates to continued improvement throughout the Retirement Centers, resulting
from stabilized occupancy and increased capacity through expansions, rate
increases, and improved control of overhead expense. Consolidated Free-standing
AL EBITDAR decreased $2.9 million, from a positive $6,000 in 1999 to a $2.9
million loss in 2000. The 2000 loss resulted from the 13 leasehold interests and
one community acquired during 2000. Two of the 13 leasehold interests and the
one community acquired during 2000 opened during the first quarter of 2001, and
one of the communities was subsequently leased to a third party during 2000. As
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 $9.9 million from a $4.5 million loss in 1999 to a $14.3 million loss
in 2000. This decrease in Corporate and Other EBITDAR resulted from the
reduction in development and management fee revenues of $5.4 million, additional
Corporate costs associated with corporate operations, human resources, financial
services and overhead, assisted living management costs of $937,000, as well as
severance costs of $968,000 related to terminated employees.
Lease Expense. Lease expense increased to $18.3 million for 2000, as compared to
$13.0 million for 1999, representing an increase of $5.3 million, or 40.7%.
Lease expense (excluding synthetic leases) increased to $12.0 million for 2000,
as compared to $9.3 million for 1999, representing an increase of $2.7 million,
or 29.5%. This increase was attributable to leases entered into after December
31, 1999, including several acquisitions of leasehold interests.
Lease expense associated with synthetic leases increased to $6.2 million for
2000, as compared to $3.7 million for 1999, representing an increase of $2.5
million, or 68.8%. This increase was attributable to four Free-standing AL
leases entered into after December 31, 1999 that resulted in lease expense of
$2.2 million. As of December 31, 2000, the Company had synthetic leases for 11
of its communities, including three Retirement Centers and eight Free-standing
ALs. Accordingly, of the total $6.2 million community lease expense for 2000,
$1.2 million related to Retirement Centers and $5.0 million related to
Free-standing ALs.
Depreciation and Amortization. Depreciation and amortization expense increased
to $16.6 million in 2000 from $13.5 million in 1999, representing an increase of
$3.1 million, or 22.9%. The increases were primarily related to the increase in
depreciable assets of approximately $47.5 million during the year. These assets
relate primarily to the opening or acquisition of communities, including
leasehold interests, and expansion of communities since December 31, 1999, as
well as ongoing capital expenditures.
Amortization of Leasehold Acquisition Costs. Amortization of Leasehold
Acquisition Costs increased from $191,000 in 1999 to $555,000 in 2000. This
increase relates to the 2000 acquisitions of 13 leasehold interests, as well as
the 1999 acquisitions of a leasehold interest. These acquisitions resulted in
$15.7 million and $1.1 million of leasehold acquisition costs in 2000 and 1999,
respectively, which is being amortized over the expected life of the lease.
Asset Impairment and Contractual Losses. During the fourth quarter ended
December 31, 1999, the Company announced that, due to a shift in its growth
strategy from development to acquisitions of senior living communities, it would
be abandoning certain development projects and reviewing others with regard to
fit with its senior living network strategy. As a result, the Company recorded
asset impairment and contractual loss charges of approximately $12.5 million
during the quarter ended December 31, 1999.
Other Income (Expense). Interest expense increased to $36.5 million in 2000 from
$23.7 million in 1999, representing an increase of $12.8 million, or 54.3%. The
increase in interest expense was primarily attributable to indebtedness incurred
in connection with acquisitions and development activity, as well as increased
interest rates. Interest expense, as a percentage of total revenues, increased
to 17.7% for 2000 from 13.5% in 1999. Interest income increased to $14.8 million
in 2000 from $9.1
36
million in 1999, representing an increase of $5.7 million, or 62.1%. The
increase in interest income was primarily attributable to income generated from
larger certificates of deposit and notes receivable balances associated with
certain leasing transactions and management agreements. Equity in loss of
Managed SPE Communities increased from $374,000 in 1999 to $2.2 million in 2000,
representing an increase of $1.8 million. The increase in equity in loss of
Managed SPE Communities relates to the significant fill-up losses that the
Company is obligated to fund when operating deficits exceed specified limits.
Income Tax Expense. The provision for income taxes was a $3.5 million benefit
compared to a $1.1 million expense for the 2000 and 1999, respectively. The
Company's effective tax rate was 34.0% and 38.0% for 2000 and 1999,
respectively.
Minority Interest in Losses of Consolidated Subsidiaries, Net of Tax. Minority
interest in losses of two consolidated subsidiaries, net of tax, for 2000 was
$961,000, representing an increase of $684,000 from $277,000 for 1999. The
increase was primarily attributable to the losses of one of the communities
which opened in May 2000.
Extraordinary Loss. During the period ended December 31, 2000, the Company
repaid a term note to a bank. As part of this transaction, the Company incurred
a prepayment penalty of $124,000, net of income taxes, which was recorded as an
extraordinary loss on the extinguishment of debt.
Net Income (Loss). Based upon the factors noted above, the Company experienced a
net loss of $5.8 million, or $0.34 per dilutive share, compared to net income of
$2.1 million, or $0.12 per dilutive share, for 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Refinancing Plan
The Company has scheduled debt maturities during 2002 of $371.7 million, which
includes $238.8 million of mortgage debt and $132.9 million of its Debentures.
As a result of these current maturities, the Company had a net working capital
deficit of $375.8 million as of December 31, 2001.
In order to satisfy or extend these obligations and to address its net working
capital deficit, the Company has developed the Refinancing Plan in consultation
with its investment banking advisor and its legal counsel and through
discussions with its lenders. The Refinancing Plan includes extensions of
existing debt agreements, refinancings of existing mortgage facilities, new
mortgage financings, sale lease-back arrangements, and a mezzanine financing
arrangement. As part of its Refinancing Plan, the Company intends to extend the
maturity dates of substantially all of its remaining credit facilities to
January 2004 or later. In addition, the Company intends to renegotiate its
financial covenants to levels that the Company believes it can satisfy for the
foreseeable future and eliminate other financial covenants no longer applicable
to the Company. The Company believes that, if consummated as currently planned,
the Refinancing Plan will place the Company in position to address the scheduled
debt maturities during 2002, as well as its negative working capital.
Pursuant to its Refinancing Plan, the Company has consummated as of March 29,
2002, fourteen sale lease-back and other capital raising transactions since
November 1, 2001 and through the first quarter of 2002, raising gross proceeds
of approximately $193.2 million, which yielded net proceeds of approximately
$27.3 million after payment of related debt and transaction costs for use by the
Company as working capital or to repay its maturing debt obligations. See
"Business - Acquisitions and Other Transactions," " - Managed SPE Communities"
"- Sale Lease-back Transactions," "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources," and note 19 to the Company's Consolidated Financial Statements.
In addition to these recently completed transactions, the Company has either
executed definitive, binding agreements or is in advanced discussions with
several different parties relating to the refinancing or sale lease-back of up
to 11 additional communities. If completed on the terms being considered, these
proposed transactions would generate gross proceeds to the Company of
approximately $181.5 million prior to payment of related debt and transaction
costs of approximately $167.7 million. Furthermore, the Company is in advanced
discussions with certain of its existing lenders concerning the amendment or
removal of the Company's financial covenants following consummation of the
Refinancing Plan. These transactions and
37
discussions are in various stages and in certain instances are non-binding. All
of these transactions will be subject to conditions and approvals that must be
satisfied. Some of these transactions may be dilutive to current equity holders.
If the foregoing transactions are consummated as currently contemplated, the
Debentures will be the Company's primary remaining outstanding debt obligation
maturing in 2002. In order to address the maturity of the Debentures by or
before October 2002, the Company has entered into a non-binding letter of intent
with a third-party that will provide the Company with approximately $125.0
million of term mezzanine financing involving certain of its Retirement Centers.
The Company intends to use the net proceeds from this transaction, together with
the net proceeds generated by the transactions described above, to address final
resolution of the outstanding Debentures and to satisfy its working capital
requirements. The letter of intent regarding this transaction is preliminary and
non-binding, and is subject to conditions that must be satisfied prior to
closing including certain approvals and consents. If the Company is able to
reach a definitive agreement with respect to this proposed mezzanine financing,
the transaction is expected to close during the second or third quarter of 2002.
The Company currently anticipates completing the balance of its Refinancing Plan
prior to October of 2002. Nevertheless, the Refinancing Plan and its various
remaining components are subject to a number of contingencies, uncertainties and
conditions that are outside of the Company's control, and are dependent upon the
receipt of required approvals and consents. Accordingly, there can be no
assurance that the Company will be able to consummate its Refinancing Plan. The
failure to consummate the Refinancing Plan, or another plan to extend, refinance
or repay the Company's debts, will have a material adverse effect upon the
Company, will result in the Company having insufficient capital to satisfy its
maturing obligations and could make it necessary for the Company to seek
protection from its creditors. In the event that the Company successfully
consummates its Refinancing Plan, it will remain highly leveraged with a
substantial amount of debt and lease obligations, and will have increased
interest and lease expenses. The Company is also likely to incur certain costs,
including significant non-cash charges in connection with the consummation of
the Refinancing Plan. See "-- Risks Associated with Forward Looking Statements."
Cashflow
During 2001, the Company experienced a negative net cashflow of $516,000. Net
cash provided by operating activities was $7.2 million for 2001, net cash used
by investing activities was $24.1 million and net cash provided by financing
activities was $16.4 million. The Company's unrestricted cash balance was $19.3
million as of December 31, 2001, as compared to $19.8 as of December 31, 2000.
Primarily, cash was provided from the positive cashflow from the Retirement
Centers, refinancing activities and sales of assets, while cash was used to
complete construction of the Company's Free-standing ALs that were still under
development in 2001 and to fund the start-up losses of the Company's recently
opened Free-standing ALs during the fill-up stage.
During 2000, the Company experienced a negative net cashflow of $2.1 million.
Net cash provided by operating activities was $6.4 million for 2000, net cash
used by investing activities was $40.1 million and net cash provided by
financing activities was $31.7 million. The Company's unrestricted cash balance
was $19.8 million as of December 31, 2000, as compared to $21.9 million as of
December 31, 1999. Primarily, cash was provided by the issuance of long term
debt, positive cashflow from the Retirement Centers, and refinancing
transactions, while cash was used primarily to continue the construction and
development of the Free-standing ALs.
During 1999, the Company experienced a positive net cashflow of $1.5 million.
Net cash provided by operating activities was $23.3 million for 1999, net cash
used by investing activities was $152.2 million and net cash provided by
financing activities was $130.4 million. The Company's unrestricted cash balance
was $21.9 million as of December 31, 1999, as compared to $20.4 million as of
December 31, 1998. Primarily, cash was provided by the issuance of long term
debt and positive cashflow from the Retirement Centers, while cash was used
primarily to continue the construction and development of the Free-standing ALs.
38
Liquidity
The Company is highly leveraged and has a substantial amount of debt and lease
obligations. The Company has historically financed its activities with long-term
mortgage borrowings, revolving credit facilities, sale lease-back arrangements,
cash flows from operations, and prior to 1999, net proceeds from public
offerings of debt and equity. At December 31, 2001, the Company had $562.1
million of indebtedness outstanding with fixed maturities ranging from April
2002 to January 2037. As of December 31, 2001, approximately 64.6% of the
Company's indebtedness bore interest at fixed rates, with a weighted average
interest rate of 7.22%. The Company's variable rate indebtedness carried a
weighted average rate of 5.69% as of December 31, 2001.
At December 31, 2001, the Company's scheduled debt maturities during the twelve
months ended December 31, 2002 totaled $371.7 million, including $238.8 million
of mortgage debt and $132.9 million of Debentures. In addition, the Company has
minimum rental obligations of $36.1 million under long-term operating leases due
in 2002. As of December 31, 2001, the Company had approximately $19.3 million in
unrestricted cash and cash equivalents, and had negative working capital of
$375.8 million, related mainly to the debt maturing in 2002.
The Company expects that its current cash and cash equivalents, expected cash
flow from operations, and the proceeds from certain recently completed
financings will be sufficient to fund its operating requirements, its capital
expenditure requirements and its periodic debt service requirements during 2002.
However, the Company's internally generated cash will not be sufficient to
satisfy its scheduled debt maturities in 2002. Accordingly, the Company's
ability to satisfy its maturing obligations will depend primarily upon its
ability to execute and implement its Refinancing Plan. The terms of the
transactions and agreements comprising the Refinancing Plan will likely impose
significant burdens on the Company and may be dilutive to the Company's existing
shareholders. See "-- Refinancing Plan".
Many of the Company's credit and other 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. In addition, certain of these agreements require that the
Company raise a prescribed amount of capital and provide evidence of sufficient
capacity to pay off its Debentures by July 1, 2002. Effective as of December 31,
2001, the Company and certain of its lenders and lessors agreed to amendments or
waivers relating to many of these financial covenants and agreements in order to
allow the Company to remain in compliance. The Company is unlikely to be able to
comply with many of its financial covenants in the future absent further
concessions or waivers from certain of its creditors. There can be no assurances
that the Company's creditors will grant further amendments or waivers 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 result
in a default under a substantial majority of the Company's indebtedness and
other obligations, and could result in an acceleration of the maturity of those
obligations.
A significant amount of the Company's indebtedness and lease agreements 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 declare defaults, accelerate payment obligations or foreclose upon
the communities securing such indebtedness or exercise their remedies with
respect to such communities. 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
or lease agreements is likely to result in a default or acceleration of
substantially all of the Company's other obligations, which would have a
material adverse effect on the Company.
The Company has engaged in, and anticipates continuing, discussions with its
existing lenders and other lenders, lessors and third-parties in order to
implement the Refinancing Plan. While the Company anticipates completing the
Refinancing Plan prior to October 2002, there can be no assurances that the
Company will be able to do so or that the Company will be able to satisfy its
maturing obligations. In addition, the terms of the transactions comprising the
Refinancing Plan may not be as expected. The Company's ability to consummate the
Refinancing Plan depends upon a number of factors, many of which are beyond the
Company's control. These factors include the satisfaction of conditions relating
to various components of the Refinancing Plan, the Company's financial condition
and operating performance, the financial strength of the assets to be sold or
leveraged, the requirement for regulatory approvals, as well as certain
approvals and consents, 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
39
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 and the fact that
the Company is highly leveraged.
The Company's financial condition, resulting in the "going concern" opinion in
its 2001 Consolidated Financial Statements, could adversely effect the Company's
ability to retain existing residents, attract prospective residents, maintain
customary terms of payment from its vendors, which could have a material adverse
effect on the Company's operating results and liquidity. The Company believes
that, if consummated as currently planned, the Refinancing Plan will satisfy the
scheduled debt maturities during 2002, as well as the Company's negative working
capital.
In the event that the Company successfully consummates its Refinancing Plan, it
will continue to be highly leveraged, and will have substantial debt and lease
obligations, and will have increased interest and lease expenses. The Company is
also likely to incur certain costs, including significant non-cash charges in
connection with the consummation of the Refinancing Plan. See "Risk Factors -
Substantial Debt and Operating Lease Payment Obligations" and "Business - Sale
Lease-back Transactions."
Financing Activity
During 2001, the Company entered into various financing transactions. On
December 3, 2001, as part of its Refinancing Plan, the Company refinanced a
Retirement Center note payable by prepaying an existing $5.9 million note on the
property and refinancing it with a new $10.7 million note payable bearing
interest at a fixed rate of 6.5%, with principal and interest of $64,524 due
monthly through January 1, 2037. The prepaid note had interest at a fixed rate
of 9.25%, with principal and interest of $49,467 due monthly through April 1,
2028. The loan is secured by certain land, buildings, equipment, and assignment
of rents and leases.
During December 2001, the Company entered into a capital lease agreement to sale
lease-back all vehicles, which were less than two years old, at its owned and
leased communities, netting proceeds of $794,000, which is being amortized over
the life of the lease.
On November 9, 2001, as part of its Refinancing Plan, the Company sold Broadway
Plaza at Pecan Park and The Homewood Residence at Boca Raton, two Free-standing
ALs, for $10.6 million and $9.7 million, respectively. The Company
contemporaneously leased the properties back from the buyer under 15 year lease
agreements with two five-year renewal options, and has rights of first refusal
to repurchase the communities. For financial reporting purposes, these
transactions were recorded as financing transactions. The Company also entered
into contingent earn-out agreements with respect to these communities pursuant
to which the Company may receive up to $2.1 million and $1.9 million,
respectively, depending upon the future performance of the communities. The
Company used a portion of the sale proceeds to retire $9.3 million of debt
associated with the properties. The Company recognized a $641,000 loss on the
sale of Broadway Plaza at Pecan Park and a $277,000 loss on the sale of The
Homewood Residence at Boca Raton, net of projected contingent earn-outs of $1.1
million and $967,000, respectively. The Company views these transactions as long
term financings. As such, the Company has recorded debt of $10.5 million and
$9.6 million related to Broadway Plaza at Pecan Park and The Homewood Residence
at Boca Raton. As such, the Company believes that while losses are recorded
based on sales price, this is not indicative of the ultimate value of the
leaseholds. Additional value may be created through the earn-out provisions of
the agreements, as well as the Company continuing to benefit from any
improvement in operating results as the communities increase occupancy and
performance.
On September 26, 2001, as part of its Refinancing Plan, the Company acquired a
community located in Oakpark, Illinois that it previously leased. The Company
entered into a mortgage note with a commercial mortgage lender in the amount of
$13.0 million, with interest payable at a grid-based pricing of LIBOR plus 2.6%
to 3.5%, and with a maturity date of October 1, 2003. In 2002, the Company
entered into a sale lease-back arrangement with respect to this community and
repaid this note. See note 19 of the Company's financial statements.
On March 30, 2001, the Company obtained 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
40
schedule, with all remaining balances due in July 2002. The Company used $3.5
million of the proceeds from this loan to refinance a portion of a term note to
a capital corporation.
During 2001, the Company acquired the leasehold interests in its remaining 12
Managed SPE Communities for an aggregate purchase price of $19.2 million. In
connection with these acquisitions, the Company accrued $2.0 million for
payments due in 2002, and issued approximately $17.2 million of interest-only
notes, due October 1, 2008, bearing interest at 9.625% per annum. The notes are
secured by the Company's interest in a Retirement Center located in Richmond,
Virginia. Six of these leasehold interests were acquired from an SPE that is
affiliated with John Morris, a director of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Related Party Transactions" and note 18 to the Consolidated Financial
Statements.
On December 18, 2000, the Company sold a community located in Westlake, Ohio for
$25.4 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 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 and assumed 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 improved parcels
of real property, and effectively assumed 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 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 2001, the Company
purchased $5.1 million of the Debentures, resulting in an extraordinary gain on
extinguishment of debt, net of tax, of $664,000. Additional purchases of the
Debentures, if any, are likely to be made primarily in the open market.
FUTURE CASH COMMITMENTS
The following tables summarize the Company's total contractual obligations and
commercial commitments as of December 31, 2001 (amounts in thousands). This
information only reflects the effect of those elements of the Company's
Refinancing Plan that have been completed as of December 31, 2001, and does not
include the impact of remaining transactions contemplated in the Refinancing
Plan that were not yet completed as of that date:
Payments Due by Period
-------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 year years years years
--------- --------- --------- --------- ---------
Long-term debt $ 561,331 $ 371,020 $ 44,160 $ 18,677 $ 127,474
Capital lease obligations 794 647 147 -- --
Operating leases 385,542 36,075 72,708 71,109 205,650
Lease payments that apply to debt (46,213) (46,213) -- -- --
Interest income on notes receivable
and security deposits(1) (33,196) (4,362) (13,073) (7,192) (8,569)
========= ========= ========= ========= =========
Total contractual cash obligations(2) $ 868,258 $ 357,167 $ 103,942 $ 82,594 $ 324,555
========= ========= ========= ========= =========
(1) A portion of the lease payments noted in the above table are repaid to the
Company as interest income on notes receivable from lessors.
(2) See "Business - Refinancing Plan" for the Company's plans regarding the
2002 obligations. These amounts do not include the impact of the remaining
transactions contemplated in the Refinancing Plan that were not yet
completed as of December 31, 2001.
41
Amount of Commitment Expiration Per Period
------------------------------------------------------------------------
Total
Amounts Less than 1 - 3 4 - 5 After 5
Committed 1 year years years Years
--------- --------- ------ ------ -------
Guaranties(2) $91,470 31,292 19,436 14,689 26,053
------- ------- ------- ------- -------
Total commercial commitments $91,470 $31,292 $19,436 $14,689 $26,053
======= ======= ======= ======= =======
(2) Guaranties include mortgage debt related to 10 communities (three
Retirement Centers, five Free-standing ALs, and two joint ventures).
Approximately $61.1 million of the $91.5 million is associated with seven
of the 14 synthetic leases the Company determined during the fourth quarter
of 2001 to terminate. See "Business - Synthetic Lease Communities." The
remaining mortgage debt guaranteed by the Company relates to a Retirement
Center under a long-term management agreement and the Company's two joint
ventures. These amounts do not include the Company's residual value
guarantees under 14 synthetic leases which were $212.8 million as of
December 31, 2001. See note 17 to Consolidated Financial Statements.
The Company routinely makes capital expenditures to maintain or enhance
communities under its control. The Company's capital expenditure budget for
fiscal 2002 is approximately $14.7 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued Statement 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). The
Company is required to adopt SFAS 144 no later than the year beginning after
December 15, 2001, and plans to adopt its provisions for the quarter ending
March 31, 2002. Management does not expect the adoption of SFAS 144 for
long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under SFAS 144 is largely
unchanged from FASB Statement 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). The provisions
of the SFAS 144 for assets held for sale or other disposals generally are
required to be applied prospectively after the adoption date to newly initiated
disposal activities. Therefore, management cannot determine the potential
effects that adoption of SFAS 144 will have on the Company's financial
statements.
In July 2001, the FASB issued Statement 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. The standard is effective for fiscal years beginning after June 15,
2002, with earlier adoption permitted. The Company has yet to determine the
impact, if any, from the adoption of SFAS 143.
In July 2001, the FASB issued Statement 141, "Business Combinations" (SFAS 141),
and Statement 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS 141 also specifies
criteria for intangible assets acquired in a business combination must meet to
be recognized and reported separately from goodwill. SFAS 142 will require that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 is effective January 1, 2002 and will
require that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives, and that reviews for impairment be
conducted in accordance with SFAS 121, and subsequently after its adoption.
Upon adoption of SFAS No. 142, the Company is required to evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition separate
from goodwill. The Company will be required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. If an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Impairment is measured as the excess of carrying value over the fair
value of an intangible
42
asset with an indefinite life. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of January 1, 2002. The Company will then have up to six months from January
1, 2002 to determine the fair value of each reporting unit and compare it to the
carrying amount of the reporting unit. To the extent the carrying amount of a
reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the Company must
perform the second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. In the second step, the Company must compare the implied fair
value of the reporting unit goodwill with the carrying amount of the reporting
unit goodwill, both of which would be measured as of the date of adoption. The
implied fair value of goodwill is determined by allocating the fair value of the
reporting unit to all of the assets (recognized and unrecognized) and
liabilities of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No. 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of opreation.
The Company has $36.5 million of unamortized goodwill as of January 1, 2002,
which will be subject to the transition provisions of SFAS 141 and 142.
Amortization expense related to goodwill was approximately $1.0 million for both
years ended December 31, 2001 and 2000. Because of the extensive effort needed
to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Consolidated
Financial Statements at the date of this report, including whether it will be
required to recognize any transitional impairment losses as the cumulative
effect of a change in accounting principle.
RELATED PARTY TRANSACTIONS
The Company places an emphasis on identifying material transactions with parties
known to be related to ensure that terms of any transactions are such that
clearly independent third parties would be able to negotiate similar
transactions. Management believes that each of the related party transactions
were consummated on terms no more favorable to those that prevail in arm's
length transactions.
The Company agreed to develop for an unaffiliated third party, ten Free-standing
ALs. Following completion of construction, the communities were leased to SPE
affiliates of John Morris, a director of the Company. The Company agreed to
manage these Managed SPE Communities pursuant to management agreements that
provided for the payment of management fees to the Company based on a percentage
of the gross revenues of each residence and required the Company to fund
operating losses above a specified amount. The Company's agreements relating to
the Managed SPE Communities owned by affiliates of Dr. Morris had terms that
were substantially the same as those associated with Managed SPE Communities
owned by unaffiliated parties. During 2001, the Company acquired leasehold
interests in the remaining six of these communities for $8.4 million. The
Company accrued $842,000 for cash payments to be made in 2002 and issued a $7.6
million, 9.625% fixed interest only note, due October 1, 2008. This note, and
certain similar notes, are secured by the Company's interest in a Retirement
Center located in Richmond, Virginia. The terms of this note and its related
security instruments are identical to those issued to certain unaffiliated
entities in connection with the simultaneous acquisition of certain other
Managed SPE Communities. During 2000, the Company acquired leasehold interests
in four Managed SPE Communities for $6.2 million (see note 18 to the
Consolidated Financial Statements). During 2001 and 2000, the Company recognized
$720,000 and $984,000, respectively, in operating losses related to the leases
acquired, and recognized $233,000 and $562,000 of management fees in 2001 and
2000, respectively, pursuant to the management agreements. During 2001, the
Company terminated all of these arrangements with affiliates of Dr. Morris.
As part of the FGI Transaction, the Company entered into a 20-year management
agreement (with two ten-year renewal options) for a senior living community
located in Peoria, Arizona, with FPLP. Robert G. Roskamp, a previous director of
the Company, is a director of a charitable foundation that owns an interest in
the community. Pursuant to the management agreement, the Company receives a
management fee equal to all cash receipts from the community that is in excess
of
43
operating expenses, refunds of entrance fees, capital expenditure reserves, debt
service, and certain payments to the community's owners. The Company recognized
$235,000, $972,000, and $1.5 million of management fees in 2001, 2000, and 1999
respectively, pursuant to this agreement. At December 31, 2001 and 2000, the
Company has advances of $1.9 million and $2.3 million, respectively from FPLP.
Such amounts are non-interest bearing.
W.E. Sheriff, the Company's chairman and chief executive officer, owns 50% of
Maybrook Realty, Inc., which owns a 128-bed nursing center, Freedom Plaza Care
Center (FPCC), in Peoria, Arizona. From October 1999 until June 2001, the
Company managed FPCC pursuant to its management agreement for the Freedom Plaza
CCRC in Peoria, Arizona. The Company also served as the developer of an
expansion of FPCC, which was completed in July 2001. Pursuant to the terms of
its development agreement with Maybrook, the Company received a development fee
of $125,000. The Company recognized $46,875 and $78,125 of the development fee
in 2001 and 2000, respectively.
Effective July 1, 2001, the Company entered into a long-term operating lease for
FPCC in substitution of the prior management arrangement. The lease term expires
in December 2015, and provides the Company one five-year renewal option and an
option to acquire FPCC at an agreed upon amount. As part of this transaction,
the Company acquired certain assets and liabilities from the previous lessee of
the community. The assets acquired exceeded the liabilities assumed by $903,000,
which was recorded as deferred lease costs and will be amortized over the life
of the lease. The Company anticipates that the terms of the lease will enable
the Company to achieve positive net cash flow and net income from FPCC earlier
than it would under the previous management arrangement.
In July 1998, the Company entered into a 20-year management agreement (with two
ten-year renewal options) for a senior living community located in Seminole,
Florida. In connection with the management agreement, the Company paid a $1.2
million fee to the owner of the community, which is a general partnership in
which Mr. Roskamp, a previous director of the Company, owns a 98.0% interest,
and assumed FGI's existing guaranty of approximately $18.6 million ($18.0
million as of December 31, 2001) of the mortgage debt associated with the
community. Pursuant to the management agreement, the Company will receive a
management fee equal to all cash receipts from the community that is in excess
of operating expenses, refunds of entrance fees, capital expenditure reserves,
debt service, and certain payments to the community's owner. As part of the FGI
transaction, the Company also acquired an option to purchase the community upon
the occurrence of certain events (including the expiration of the agreement) for
a formula purchase price. The Company recognized negative management fees of
$334,000 in 2001 and $519,000 and $368,000 of management fee income in 2000 and
1999 respectively, pursuant to this agreement. At December 31, 2001 and 2000,
the Company has advances of $2.3 million and $2.5 million, respectively from
this community. Such amounts are non-interest bearing.
In July 1998, the Company entered into a three-year management agreement for a
senior living community located in West Brandywine, Pennsylvania, that was owned
by a partnership in which Mr. Roskamp, a previous director of the Company, owned
a 70.0% interest. Pursuant to the management agreement, the Company received a
management fee equal to 5.0% of the gross revenues of the community. The Company
paid a non-refundable deposit of $2.0 million to acquire an option to purchase
the community for a purchase price of $14.0 million, plus the assumption of
certain specified liabilities. On May 26, 2000, the Company assigned its
purchase option to a third party, which exercised the option and purchased the
property. The Company subsequently entered into a series of agreements with this
third party to lease and operate the retirement community. In connection with
this transaction, the Company is required to maintain $17.6 million of assets
limited as to use, on which the Company receives the interest. The Company also
assumed FGI's remaining development obligations relating to the community. The
Company recognized $3.7 million and $1.9 million of life estate income in 2001
and 2000 respectively, pursuant to this management agreement. At December 31,
2001 and 2000, the Company has receivables from the lessor of $971,000 and a
note payable of $888,000 to the lessor, respectively. Such amounts are
non-interest bearing.
Pursuant to the FGI transaction, the Company also entered into an agreement to
provide development services related to the development and construction of a
senior living community in Sarasota, Florida that opened during 2000. The
community is owned by a limited liability company in which Mr. Roskamp owns a
57.5% interest. The Company managed the community following its completion
pursuant to a five-year management agreement that provides for a management fee
equal to 5.0% of the gross revenues of the community. In consideration of the
Company's payment of a $2.0 million fully-refundable deposit, the Company
acquired an option to purchase the community for a price to be negotiated.
During the third quarter of 2000, the Company chose to cancel the purchase
option, the full $2.0 million deposit was refunded. The management agreement for
44
this community was mutually terminated on December 31, 2000. The Company
recognized $750,000 and $900,000, of development fees in 2000 and 1999,
respectively and $65,300 in management fees in 2000, from the agreement.
In connection with the FGI Transaction, Mr. Roskamp entered into a three-year
consulting agreement with the Company that provided for annual payments of
$150,000 to Mr. Roskamp through June 2001.
IMPACT OF INFLATION
Inflation could affect the Company's future revenues and results of operations
because of, among other things, the Company's dependence on senior residents,
many of whom rely primarily on fixed incomes to pay for the Company's services.
As a result, during inflationary periods, the Company may not be able to
increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Form 10-K 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, all statements concerning the Company's Refinancing Plan and the
transactions, sale lease-backs, financings, and refinancings anticipated in
connection with the Refinancing Plan; the Company's anticipated or expected
cashflow; 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 and the
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, the risks and
uncertainties set forth below and in the Company's other filings with the
Securities and Exchange Commission. Should one or more of these risks
materialize, actual results could 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-K 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.
RISK FACTORS
Inability to Consummate the Refinancing Plan
The Company has scheduled debt maturities during 2002 of $371.7 million, which
includes $238.8 million of mortgage debt and $132.9 of Debentures. The Company
must repay or refinance these debt instruments before they come due. Any
non-payment or other default with respect to the Company's debt obligations
could cause lenders to cease funding and to accelerate payment obligations or to
foreclose upon the communities securing the Company's 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 payment obligations is likely to result in default or acceleration
of a majority of the Company's other obligations.
The Company's current cash and cash equivalents and expected cash flow from
operations will not be sufficient to pay its 2002 debt maturities. The Company
has developed the Refinancing Plan in order to address its 2002 debt maturities
and its net working capital deficit. The Refinancing Plan and its various
remaining components are subject to a number of contingencies, including the
Company's financial condition and operating performance, uncertainties and
conditions that are outside the Company's control, the financial strength of the
Company's assets, general economic conditions, general conditions in the credit
markets, mortgage interest rates and other factors.
45
The Company's efforts to consummate the Refinancing Plan may also 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 and the fact that the Company is highly leveraged. Accordingly, there
can be no assurance that the Company will be able to consummate the Refinancing
Plan. The Company's failure to consummate the Refinancing Plan, or another plan
to extend, refinance or repay the Company's debts, would have a material adverse
effect upon the Company, will result in the Company having insufficient capital
to satisfy its maturing debt obligations and could make it necessary for the
Company to seek protection from its creditors.
Current Financial Condition
The Company's current cash and cash equivalents and expected cash flow from
operations will not be sufficient to pay its 2002 debt maturities. The Company
has developed the Refinancing Plan in order to address its 2002 debt maturities
and its net working capital deficit, however, there can be no assurance that the
Company will be able to consummate the Refinancing Plan. In addition, in
connection with the audit of the Company's financial statements for 2001, the
Company's independent auditors stated in their report that the Company's 2002
debt maturities and resulting net working capital deficit at December 31, 2001,
raise substantial doubt about the Company's ability to continue as a going
concern. The Company's current financial condition may have a detrimental effect
on the Company's ability to retain existing residents, attract prospective
residents, and attract and retain key employees. In addition, it could have a
material adverse effect on the Company's payment terms from its vendors,
negotiations with its various lenders and insurance carriers, ability to obtain
necessary permits and licenses, or have other negative impact on its business
operations.
Substantial Debt and Operating Lease Payment Obligations
At December 31, 2001, the Company had long-term debt, including current portion,
of $562.1 million and was obligated to pay minimum rental obligations in 2002 of
approximately $36.1 million under long-term operating leases. The Company has
developed its Refinancing Plan in order to satisfy or extend its scheduled debt
maturities during 2002. If the Company is able to consummate the Refinancing
Plan, a substantial portion of the Company's scheduled debt maturities will be
extended to maturities after January 2004. The Company will incur certain costs,
including significant non-cash losses as a result of certain Refinancing Plan
transactions, which will reduce shareholders' equity. As a result, even if the
Company consummates the Refinancing Plan, it will have significant debt and
operating lease obligations in future periods, and a substantial portion of the
Company's cash flow will be devoted to debt service and lease payments. There
can be no assurance that the Company will be able to consummate the Refinancing
Plan or, if the Refinancing Plan is consummated, that the Company will be able
to generate sufficient cash flows from operations to meet required interest,
principal, and lease payments in future periods. In addition, the Company's
interest and lease payments will increase significantly if the Refinancing Plan
is consummated.
Many of the Company's current debt agreements and leases contain various
financial and other restrictive covenants, which may restrict the Company's
flexibility in operating its business. The Company is negotiating with its
existing lenders to remove these restrictive covenants or to amend these
covenants to levels that the Company believes it can satisfy for the foreseeable
future, but there can be no assurance that the Company will be able to remove or
amend these covenants. Any payment or other default with respect to such
obligations could cause lenders to cease funding and accelerate payment
obligations or to foreclose upon the communities securing such indebtedness or,
in the case of an operating lease, could terminate the lease, with a consequent
loss of income and asset value to the Company. 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
payment obligations is likely to result in default or acceleration of a majority
of the Company's other obligations. Consequently, such a default would adversely
affect a significant number of the Company's other properties and, in turn, the
Company's business, results of operations, and financial condition.
Fill Up of Free-standing ALs
Over the past several years, the Company has experienced significant losses
associated with the fill-up of a large number of Free-standing ALs, most of
which began operations during 1999 and 2000. In addition, the Free-standing AL
segment of the senior living industry is experiencing significant competition,
overcapacity and price competition. The Company acquired 12 leasehold interests
in Managed SPE Communities during 2001, ten of which were acquired on December
31, 2001, and acquired 13 leasehold interests in Managed SPE Communities during
2000. There can be no assurance that these Free-
46
standing ALs will increase occupancy percentages or increase operating margins
in future periods, which may have a material adverse effect on the Company's
financial condition, liquidity, or results of operations.
Highly Competitive Industry
The senior living and health care services industry is highly competitive, and
the Company expects that all providers within the industry will continue to be
competitive in the future. The Company competes with other companies providing
independent living, assisted living, skilled nursing, and other similar service
and care alternatives. Although the Company believes there is a need for senior
living communities in the markets where the Company is operating and developing
communities, the Company expects that competition will continue from existing
competitors and new market entrants, some of whom may have substantially greater
financial resources than the Company. In addition, some of the Company's
competitors operate on a not-for-profit basis or as charitable organizations and
have the ability to finance capital expenditures on a tax-exempt basis or
through the receipt of charitable contributions, neither of which are readily
available to the Company. The Company also competes with many assisted living
companies that are currently insolvent or that could become insolvent in the
future. These competitors may gain a competitive advantage over the Company as a
result of the effect of bankruptcy reorganization or other insolvency
proceedings.
Furthermore, the development of new Free-standing AL communities has exceeded
the demand for such communities in certain of the markets in which the Company
has Free-standing AL communities. An oversupply of such communities in certain
of the Company's markets has caused the Company to experience slower fill-up
than projected, competitive pricing pressures and price discounting. There can
be no assurance that the Company will not continue to encounter these conditions
or that competitive conditions will not adversely affect its financial
condition, liquidity, or results of operations.
Liability Insurance and Risks of Liability Claims
The provision of personal and health care services entails an inherent risk of
liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs and significant
exposure. The Company currently maintains property, liability, and professional
medical malpractice insurance policies for the Company's owned and certain of
its managed communities under a master insurance program. The number of
insurance companies willing to provide general liability and professional
malpractice liability insurance for the nursing and assisted living industry has
declined dramatically and the premiums and deductibles associated with such
insurance has risen substantially in recent years.
The Company's liability insurance policies since July 1, 2001 have contained
significantly higher deductibles than in prior periods. Deductibles now range
from $200,000 to $3,000,000, depending on the type of claim. As a result of
these increased deductibles, the Company is incurring significantly higher
insurance accruals for potential liability claims, as well as increased
premiums. Furthermore, as part of the renewal of the Company's insurance
policies in July 2001, four incidents were excluded from policy coverage. To
date, the Company believes one of these incidents may result in liability and
has accrued for the estimated costs of the claim. There can be no assurance that
a claim in excess of the Company's insurance will not arise. A claim against the
Company not covered by, or in excess of, the Company's insurance (including any
related judgments, settlements or costs) could have a material adverse effect
upon the Company. Furthermore, there can be no assurance that the Company will
be able to obtain liability insurance in the future or that, if such insurance
is available, it will be available on acceptable terms.
Community Management, Staffing, and Labor Costs
The Company competes with other providers of senior living and health care
services with respect to attracting and retaining qualified management personnel
responsible for the day-to-day operations of each of the Company's communities
and skilled technical personnel responsible for providing resident care. In
certain markets, a shortage of nurses or trained personnel has required the
Company to enhance its wage and benefits package in order to compete in the
hiring and retention of such personnel or to hire more expensive temporary
personnel. The Company will also be heavily dependent on the available labor
pool of semi-skilled and unskilled employees in each of the markets in which it
operates. The Company has experienced a competitive labor market, periodic
shortages of qualified workers in certain markets, and increasing wage rates for
many of
47
these employees during the past year. The Company cannot be sure its labor costs
will not increase, or that, if they do increase, they can be matched by
corresponding increases in rates charged to residents. If the Company is unable
to attract and retain qualified management and staff personnel, control its
labor costs, or pass on increased labor costs to residents through rate
increases, the Company's business, financial condition, and results of
operations would be adversely affected.
Exposure to Rising Interest Rates
Future indebtedness, from commercial banks or otherwise, and lease obligations,
including those related to REIT facilities, are expected to be based on interest
rates prevailing at the time such debt and lease arrangements are obtained. As
of December 31, 2001, the Company had $199.1 million of variable rate debt
outstanding. Increases in prevailing interest rates would increase the Company's
interest or lease payment obligations and could have a material adverse effect
on the Company's business, financial condition, and results of operations.
Risks Associated With Lifecare Benefits
Six of the communities operated by the Company are lifecare CCRCs that offer
residents a limited lifecare benefit. Residents of these communities pay an
upfront entrance fee upon occupancy, of which a portion is generally refundable,
with an additional monthly service fee while living in the community. This
limited lifecare benefit, is typically (a) a certain number of free days in the
community's health center during the resident's lifetime, (b) a discounted rate
for such services, or (c) a combination of the two. The lifecare benefit varies
based upon the extent to which the resident's entrance fee is refundable. The
pricing of entrance fees, refundability provisions, monthly service fees, and
lifecare benefits are determined from actuarial projections of the expected
morbidity and mortality of the resident population. In the event the entrance
fees and monthly service payments established for the communities are not
sufficient to cover the cost of lifecare benefits granted to residents, the
results of operations and financial condition of the communities would be
adversely affected.
Residents of the Company's lifecare CCRCs are guaranteed an independent living
unit and nursing care at the community during their lifetime, even if the
resident exhausts his or her financial resources and becomes unable to satisfy
his or her obligations to the community. In addition, in the event a resident
requires nursing care and there is insufficient capacity for the resident in the
nursing facility at the community where the resident lives, the community must
contract with a third party to provide such care. Although the Company screens
potential residents to ensure that they have adequate assets, income, and
reimbursements from government programs and third parties to pay their
obligations to the communities during their lifetime, there can be no assurance
that such assets, income, and reimbursements will be sufficient in all cases. If
insufficient, the Company has rights of set-off against the refundable portions
of the residents deposits, and would also seek available reimbursement under
Medicaid or other available programs. To the extent that the financial resources
of some of the residents are not sufficient to pay for the cost of facilities
and services provided to them, or in the event that the communities must pay
third parties to provide nursing care to residents of the communities, the
Company's results of operations and financial condition would be adversely
affected.
Risks of Operations in Concentrated Geographic Areas
Part of the Company's business strategy is to own, lease or manage senior living
communities in concentrated geographic service areas. The Company has a large
concentration of communities in Florida, Texas, and Colorado, among other areas.
Accordingly, the Company's occupancy rates and operating results in certain of
its communities may be adversely affected by a number of factors, including
regional and local economic conditions, competitive conditions, applicable local
laws and regulations, and general real estate market conditions, including the
supply and proximity of other senior living communities.
Dependence on Attracting Residents with Sufficient Resources to Pay
Approximately 91.5% of the Company's total revenues for 2001 were attributable
to private pay sources. The Company expects to continue to rely primarily on the
ability of residents to pay for the Company's services from their own or
familial financial resources. Inflation, a change in general economic conditions
or other circumstances that adversely affect the ability of seniors to pay for
the Company's services could have a material adverse effect on the Company's
business, financial condition, and results of operations.
48
Government Regulation and the Burdens of Compliance
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, staffing
levels, professional licensing, the distribution of pharmaceuticals, billing
practices and policies, equipment, operating policies and procedures, fire
prevention measures, environmental matters, and compliance with building and
safety codes. Failure to comply with these laws and regulations could result in
the denial of reimbursement, the imposition of fines, temporary suspension of
admission of new patients, suspension or decertification from Medicare,
Medicaid, or other state or Federal reimbursement programs, restrictions on the
Company's ability to acquire new communities or expand existing communities,
and, in extreme cases, the revocation of a community's license or closure of a
community. While the Company endeavors to comply with all applicable regulatory
requirements, there can be no assurance that the Company will not be subject to
penalties in the future, or that federal, state, or local governments will not
impose restrictions on the Company's activities that could materially adversely
affect the Company's business, financial condition, or results of operations.
ITEM 7A. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." The Company has entered into an interest rate swap agreement
with a major financial institution to manage its exposure. The swap involves 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
December 31, 2001, the Company's outstanding principal under its existing swap
agreement was $34.8 million maturing July 1, 2008. Under the agreement the
Company receives fixed rate of 6.87% and pays floating rates based upon LIBOR
and a foreign currency index with a maximum rate through July 1, 2002 of 8.12%.
The Company does not expect changes in interest rates to have a material effect
on income or cash flows in 2002, since 64.6% 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 2002,
which, if consummated, would 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.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Independent Auditors' Report 51
Consolidated Balance Sheets -- December 31, 2001 and 2000 52
Consolidated Statements of Operations -- Years ended December 31, 2001, 2000 and 1999 53
Consolidated Statements of Shareholders' Equity -- Years ended December 31, 2001, 2000 and 1999 54
Consolidated Statements of Cash Flows -- Years ended December 31, 2001, 2000 and 1999 55
Notes to Consolidated Financial Statements 56
Financial Statement Schedules 90
Schedule II - Valuation and Qualifying Accounts
Schedule IV - Mortgage Loans on Real Estate
All other schedules omitted are not required, inapplicable or the
information required is furnished in the financial statements or notes
therein.
50
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Retirement Corporation:
We have audited the accompanying consolidated balance sheets of American
Retirement Corporation and subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2001. In
connection with our audits of the consolidated financial statements, we have
also audited financial statement Schedule II - Valuation and Qualifying Accounts
and financial statement Schedule IV - Mortgage Loans on Real Estate as of
December 31, 2001 and for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Retirement
Corporation and subsidiaries as of December 31, 2001 and 2000 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying financial statements and financial statement schedules have
been prepared assuming that American Retirement Corporation will continue as a
going concern. As discussed in Note 3 to the consolidated financial statements,
the Company has $371.7 million of scheduled debt maturities during the twelve
months ended December 31, 2002, has a net working capital deficit of $375.8
million at December 31, 2001 and has significant lease obligations. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ KPMG LLP
----------------------------
Nashville, Tennessee
March 22, 2002
except for Note 19, which is
dated March 29, 2002
51
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31
----------------------
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 19,334 $ 19,850
Assets limited as to use 5,407 5,181
Accounts receivable, net of allowance for doubtful accounts 11,447 15,772
Inventory 1,249 1,079
Prepaid expenses 3,016 2,906
Deferred income taxes 1,285 332
Other current assets 5,799 5,608
--------- ---------
Total current assets 47,537 50,728
Assets limited as to use, excluding amounts classified as current 73,333 73,785
Land, buildings and equipment, net 525,174 473,062
Notes receivable 84,537 90,707
Goodwill, net 36,463 37,503
Leasehold acquisition costs, net 33,484 16,103
Other assets 49,663 50,592
--------- ---------
Total assets $ 850,191 $ 792,480
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 371,667 $ 7,449
Accounts payable 7,919 7,502
Accrued interest 3,584 3,980
Accrued payroll and benefits 4,838 3,916
Accrued property taxes 7,998 3,379
Other accrued expenses 9,926 4,981
Other current liabilities 17,436 5,241
--------- ---------
Total current liabilities 423,368 36,448
Long-term debt, excluding current portion 190,458 338,261
Convertible subordinated debentures -- 137,980
Refundable portion of life estate fees 46,309 44,739
Deferred life estate income 51,211 52,765
Tenant deposits 6,016 6,612
Deferred gain on sale-leaseback transactions 13,055 16,122
Deferred income taxes 2,055 13,079
Other long-term liabilities 10,171 4,517
--------- ---------
Total liabilities 742,643 650,523
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,
17,276,520 and 17,065,395 shares issued and outstanding,
respectively 173 171
Additional paid-in capital 145,590 145,079
Accumulated deficit (38,215) (3,293)
--------- ---------
Total shareholders' equity 107,548 141,957
--------- ---------
Total liabilities and shareholders' equity $ 850,191 $ 792,480
========= =========
52
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Revenues:
Resident and health care $ 253,920 $ 200,805 $ 164,592
Management and development services 2,296 5,309 10,678
--------- --------- ---------
Total revenues 256,216 206,114 175,270
Operating expenses:
Community operating expenses 179,718 138,670 105,978
General and administrative 29,297 19,420 15,020
Lease expense 35,367 18,267 12,985
Depreciation and amortization 19,737 16,587 13,501
Amortization of leasehold acquisition costs 1,980 555 191
Asset impairments and other losses 6,343 -- 12,536
--------- --------- ---------
Total operating expenses 272,442 193,499 160,211
--------- --------- ---------
Operating (loss) income (16,226) 12,615 15,059
Other income (expense):
Interest expense (38,135) (36,517) (23,668)
Interest income 10,540 14,791 9,123
(Loss) gain on sale of assets (1,005) 267 3,036
Equity in losses of managed special purpose entity communities (5,029) (2,234) (374)
Lease income 2,852 1,348 --
Other 623 (476) (314)
--------- --------- ---------
Other expense, net (30,154) (22,821) (12,197)
--------- --------- ---------
(Loss) income from continuing operations before income taxes,
minority interest, and extraordinary item (46,380) (10,206) 2,862
Income tax (benefit) expense (11,837) (3,523) 1,087
--------- --------- ---------
(Loss) income from continuing operations before minority
interest and extraordinary item (34,543) (6,683) 1,775
Minority interest in (earnings) losses of consolidated subsidiaries,
net of tax (92) 961 277
--------- --------- ---------
(Loss) income from continuing operations before
extraordinary item (34,635) (5,722) 2,052
Extraordinary loss on extinguishment of debt, net of tax (287) (124) --
--------- --------- ---------
Net (loss) income $ (34,922) $ (5,846) $ 2,052
========= ========= =========
53
Years ended December 31,
-------------------------------
2001 2000 1999
------- ------- -------
Basic earnings (loss) per share:
Basic earnings (loss) per share from continuing
operations before extraordinary item $ (2.01) $ (0.33) $ 0.12
Extraordinary loss, net of tax (0.02) (0.01) --
------- ------- -------
Basic earnings (loss) per share $ (2.03) $ (0.34) $ 0.12
======= ======= =======
Diluted earnings (loss) per share:
Diluted earnings (loss) per share from continuing
operations before extraordinary item $ (2.01) $ (0.33) $ 0.12
Extraordinary loss, net of tax (0.02) (0.01) --
------- ------- -------
Diluted earnings (loss) per share $ (2.03) $ (0.34) $ 0.12
======= ======= =======
Weighted average shares used for basic earnings (loss)
per share data 17,206 17,086 17,129
Effect of dilutive common stock options -- -- 48
------- ------- -------
Weighted average shares used for diluted earnings (loss)
per share data 17,206 17,086 17,177
======= ======= =======
54
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Retained
Common Stock Additional Earnings
------------------------- Paid-In (Accumulated
Shares Amount Capital Deficit) Total
---------- ----------- ----------- ------------ -----------
Balance at December 31, 1998 17,118,385 $ 171 $ 145,170 $ 501 $ 145,842
Net income -- -- -- 2,052 2,052
Issuance of common stock pursuant to employee
stock purchase plan 14,516 -- 199 -- 199
Issuance of common stock pursuant to stock options
exercised 5,334 -- 75 -- 75
---------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 17,138,235 $ 171 $ 145,444 $ 2,553 $ 148,168
========== =========== =========== =========== ===========
Net loss -- -- -- (5,846) (5,846)
Issuance of common stock pursuant to employee
stock purchase plan 66,067 -- 238 -- 238
Issuance of common stock pursuant to funding of
employer 401k contribution 72,493 -- 595 -- 595
Repurchase of common stock pursuant to stock
repurchase program (211,400) -- (1,198) -- (1,198)
---------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 17,065,395 $ 171 $ 145,079 $ (3,293) $ 141,957
========== =========== =========== =========== ===========
Net loss -- -- -- (34,922) (34,922)
Issuance of common stock pursuant to employee
stock purchase plan 60,718 1 143 -- 144
Issuance of common stock pursuant to funding of
employer 401k contribution 138,907 1 333 -- 334
Issuance of common stock pursuant to stock
options exercised 11,500 -- 35 -- 35
---------- ----------- ----------- ----------- -----------
Balance at December 31, 2001 17,276,520 $ 173 $ 145,590 $ (38,215) $ 107,548
========== =========== =========== =========== ===========
55
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net (loss) income $ (34,922) $ (5,846) $ 2,052
Extraordinary loss on extinguishment of debt, net of tax 287 124 --
--------- --------- ---------
(Loss) income from continuing operations (34,635) (5,722) 2,052
Adjustments to reconcile (loss) income from continuing operations to net
cash and cash equivalents provided by operating activities:
Asset impairments and other losses 6,343 -- 12,536
Depreciation and amortization 21,717 17,142 13,692
Amortization of deferred entrance fee revenue (10,598) (7,581) (6,945)
Amortization of deferred financing costs 2,683 2,174 1,342
Proceeds from life estate sales, net of refunds 8,994 8,664 11,028
Deferred income tax benefit (11,773) (1,731) (207)
Amortization of deferred gain on sale-leaseback transactions (2,367) (452) (452)
Minority interest in earnings (losses) of consolidated subsidiaries 92 (961) (277)
(Income) losses from unconsolidated joint ventures (14) 263 2,005
Loss (gain) on sale of assets 1,005 (267) (3,036)
Issuance of stock to employee 401k plan 334 595 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable 5,797 (548) (1,588)
Inventory (57) 45 (124)
Prepaid expenses 80 (758) (163)
Other assets 6,921 3,597 (1,646)
Accounts payable (442) 1,960 (2,820)
Accrued expenses and other current liabilities 10,820 (7,591) 40
Tenant deposits (659) (803) 48
Other liabilities 2,972 (1,593) (2,179)
--------- --------- ---------
Net cash and cash equivalents provided by operating activities 7,213 6,433 23,306
Cash flows from investing activities:
Additions to land, buildings and equipment (56,282) (49,073) (59,221)
Expenditures for acquisitions, net of cash received -- (6,422) --
Reimbursements from (advances for) development projects, net -- 3,667 7,374
Investments in joint ventures -- (357) (1,763)
Contributions from minority owners -- 522 1,630
Receipts for purchase options -- 3,750 --
Purchases of other investments -- -- (10,177)
Proceeds from the sale of assets 28,526 26,483 3,138
Other investing activities (1,231) (338) (664)
Changes in assets and liabilities, net of effects from acquisitions:
Expenditures for leasehold acquisitions, net of cash received -- (14,972) --
(Purchase) sale of assets limited as to use (4,229) (3,641) (13,643)
Receipts from (issuance of) notes receivable 9,081 244 (78,916)
--------- --------- ---------
Net cash used by investing activities (24,135) (40,137) (152,242)
56
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
Years ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to employee
stock purchase plan 144 238 199
Payments for common stock through stock repurchase program -- (1,198) --
Proceeds from exercise of stock options 35 -- 75
Proceeds from the issuance of long-term debt 54,024 89,549 143,162
Principal payments on long-term debt (30,029) (49,896) (5,341)
Principal reductions in master trust liability (5,146) (3,727) (4,225)
Expenditures for financing costs (2,622) (3,293) (3,453)
--------- --------- ---------
Net cash provided by financing activities 16,406 31,673 130,417
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (516) (2,031) 1,481
--------- --------- ---------
Cash and cash equivalents at beginning of year 19,850 21,881 20,400
--------- --------- ---------
Cash and cash equivalents at end of year $ 19,334 $ 19,850 $ 21,881
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
(including capitalized interest) $ 35,829 $ 35,969 $ 24,591
========= ========= =========
Income taxes paid $ 65 $ 211 $ 5,138
========= ========= =========
Supplemental disclosure of non-cash transactions:
During the respective years, the Company acquired certain communities and entered into certain lease
transactions. In conjunction with the transactions, assets and liabilites were assumed as follows:
Current assets $ 9,532 $ 939 $ --
Leasehold acquisition costs 19,329 -- --
Land, buildings and other assets 1,430 14,202 --
Current liabilities 12,918 768 --
Long-term debt 17,373 7,951 --
During the years ended December 31, 2001 and 2000, the Company funded its 401(k)
contribution with 138,907 and 72,493 shares of its common stock at a fair market
value of $334,000 and $595,000, respectively.
During the year ended December 31, 2001, the Company acquired the leasehold
interests of 12 communities the Company had previously managed. The liabilities
assumed exceeded the assets acquired by $19.2 million, which was recorded as
leasehold acquistion costs and is being amortized over the life of the lease or
the expected life of the lease, whichever is shorter.
During the year ended December 31, 2001, the Company entered into a long-term
operating lease and acquired certain assets and liabilities from the previous
lessee. The assets acquired exceeded the liabilities assumed by $903,000, which
is being amortized over the life of the lease.
During the year ended December 31, 1999, the Company sold certain land for $3.1
million in cash and the payment on a related note payable of $2.5 million for
aggregate consideration of $5.6 million.
57
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND PRESENTATION
The accompanying financial statements as of and for the years ended December 31,
2001, 2000 and 1999 include the consolidated financial statements of American
Retirement Corporation and its wholly-owned and majority owned subsidiaries
(collectively referred to as the "Company"). All material intercompany
transactions and balances have been eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The Company principally provides housing, health care, and other related
services to senior residents through the operation and management of numerous
senior living communities located throughout the United States. The communities
provide a combination of independent living, assisted living and skilled nursing
services. The Company is subject to competition from other senior living
providers within its markets. The following is a summary of significant
accounting policies.
(a) Use of Estimates and Assumptions: The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(b) Recognition of Revenue: The Company provides residents with housing and
health care services through various types of agreements. The Company also
receives fees for managing and developing senior living communities owned
by others.
The majority of the communities provide housing and health care services
through annually renewable agreements with the residents. Under these
agreements, the residents pay a monthly housing fee, which entitles them to
the use of certain amenities and services. Residents may elect to obtain
additional services, which are billed on a monthly basis or as the services
are received. The Company recognizes revenues under these agreements on a
monthly basis when earned.
Certain communities provide housing and health care services through
lifecare contracts and entrance fee agreements with residents. Under these
agreements, residents pay an entrance fee upon entering into a lifecare
contract. The lifecare contract obligates the Company to provide certain
levels of future health care services or lifecare benefits to the resident
for life. The agreement terminates when the unit is vacated. A portion of
the fee is refundable to the resident or the resident's estate upon
termination of the agreement. The refundable amount is recorded by the
Company as refundable portion of life estate fees, a long-term liability,
until termination of the agreement. The remainder of the fee is recorded as
deferred life estate income and is amortized into revenue using the
straight-line method over the estimated remaining life expectancy of the
resident, based upon actuarial projections. Additionally, under these
agreements the residents pay a monthly service fee, which entitles them to
the use of certain amenities and certain services. Residents may also elect
to obtain additional services, which are billed on a monthly basis or as
the services are received. The Company recognizes these additional fees as
revenue on a monthly basis when earned.
The Company also provides housing to residents at certain communities under
an entrance fee agreement whereby the entrance fee is fully refundable to
the resident or the resident's estate contingent upon the occupation of the
unit by the next resident, unless otherwise required by applicable state
law. The resident also shares in a percentage, typically 50%, of any
appreciation in the entrance fee from the succeeding resident. The entrance
fee is recorded by the Company as refundable portion of life estate fees
and is amortized into revenue using the straight-line method over the
remaining life of the buildings. Additionally, under these agreements the
58
residents pay a monthly service fee, which entitles them to the use of
certain amenities and certain services. They may also elect to obtain
additional services, which are billed on a monthly basis or as the services
are received. The Company recognizes these additional fees as revenue on a
monthly basis when earned. If a resident terminates the agreement, they are
required to continue to pay their monthly service fee for the lesser of a
specified time period (typically one year) or until the unit is reoccupied.
Resident and health care revenues are reported at the estimated net
realizable amounts from residents, third-party payors, and others for
services rendered, including estimated retroactive adjustments under
reimbursement agreements with third-party payors. Retroactive adjustments
are accrued on an estimated basis in the period the related services are
rendered and adjusted in future periods as final settlements are
determined. The Prospective Payment System (PPS), effective for the Company
beginning January 1, 1999, eliminates the cost based reimbursement system,
and communities are reimbursed on a per diem basis.
Management services revenue is recorded monthly as earned and relates to
providing certain management and administrative support services under
management agreements with the owners and lessees of senior living
communities. Such fees are based on a percentage of revenues, income or
cash flows of the managed community, or a negotiated fee per the management
agreement.
The Company provides development services to owners of senior living
communities. Fees are based upon a percentage of the total construction
costs of the community. Development services revenue is recognized under
the percentage-of-completion method based upon the Company's costs of
providing such services.
(c) Cash and Cash Equivalents: For purposes of the Consolidated Statements of
Cash Flows, the Company considers highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
(d) Assets Limited as to Use: Assets limited as to use include assets held by
lenders under loan agreements in escrow for property taxes and property
improvements, operating reserves required by certain state licensing
authorities, certificates of deposit, and U.S. Treasury obligations held as
collateral for letters of credit or in conjunction with leasing activity or
to support operating deficit agreements, and resident deposits.
The Company classifies its U.S. Treasury obligations as held-to-maturity.
Held-to-maturity securities are those securities in which the Company has
the ability and the intent to hold the security until maturity.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts.
A decline in the fair value of any held-to-maturity security below cost
that is deemed to be other than temporary results in an impairment in
carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. Premiums and discounts are
amortized or accreted over the life of the related held-to-maturity
security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned.
(e) Accounts Receivable: The Company reports accounts receivable, net of an
allowance for doubtful accounts, to represent its estimate of the amount
that ultimately will be realized in cash. The Company reviews the adequacy
of its allowance for doubtful accounts on an ongoing basis, using
historical payment trends, analyses of receivable portfolios by payor
source and aging of receivables, as well as review of specific accounts,
and makes adjustments in the allowance as necessary.
(f) Inventory: Inventory consists of supplies and is stated at the lower of
cost (first-in, first-out) or market.
(g) Land, Buildings, and Equipment: Land, buildings, and equipment are recorded
at cost and include interest capitalized on long-term construction projects
during the construction period, as well as other costs directly related to
the acquisition, development, and construction of the communities.
Depreciation and amortization are
59
computed using the straight-line method over the estimated useful lives of
the related assets. Buildings and improvements are depreciated over 15 to
40 years, and furniture, fixtures and equipment are depreciated over five
to seven years. Leasehold improvements are amortized over the shorter of
their useful life or remaining base lease term. Construction in progress
includes costs incurred related to the development and construction of
senior living communities. If a project is abandoned or delayed, any costs
previously capitalized and determined to be unrecoverable are expensed.
(h) Notes Receivable: Notes receivable are recorded at cost, less any related
allowance for impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the
contractual terms of the note agreement. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present
value of expected future cash flows discounted at the note's effective
interest rate. Impairment losses are included in the allowance for doubtful
accounts through a charge to bad debt expense. Cash receipts on impaired
notes receivable are applied to reduce the principal amount of such notes
until the principal has been recovered and are recognized as interest
income, thereafter.
(i) Goodwill: Goodwill is amortized on a straight-line basis over the expected
periods to be benefited, generally 40 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired
operations. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the risk of the acquired operations. The assessment of the
recoverability will be impacted if estimated future operating cash flows
are not achieved. Goodwill is net of accumulated amortization of $3.5
million and $2.5 million at December 31, 2001 and 2000, respectively.
Amortization expense was $1.0 million, for each of the years in the three
year period ended December 31, 2001.
(j) Leasehold Acquisition Costs: Leasehold acquisition costs consist primarily
of costs incurred in conjunction with the acquisition of lease rights from
previously managed special purpose entity communities. These payments
provide the Company the opportunity to lease the community. Leasehold
acquisition costs are amortized principally on a straight-line basis over
the remaining contractual or expected life of the related lease agreements
if shorter.
(k) Other Assets: Other assets consist primarily of security deposits,
unexercised purchase options, deferred financing costs (including
convertible debenture offering costs), costs of acquiring lifecare
contracts, deferred lifecare fee receivables, property held for sale,
advances to managed entities, and investments in joint ventures. Deferred
financing costs are being amortized using the straight-line method over the
terms of the related debt agreements. Costs of acquiring initial lifecare
contracts are amortized over the life expectancy of the initial residents
of a lifecare community. Purchase options to acquire property are recorded
at their cost and, upon exercise, are applied to the cost of the property
acquired. Nonrefundable purchase options are expensed when they expire or
earlier, if management determines it is no longer probable that the
property will be acquired. Property held for sale is recorded at the lower
of cost or fair value less costs to sell.
(l) Investments In Joint Ventures: Investments in joint ventures includes the
Company's investments 37% and 50% in two Free Standing ALs, which the
Company accounts for under the equity method. At December 31, 2001 and
2000, the Company's investment in and advances to joint ventures was
approximately $2.7 million and $1.2 million, respectively.
(m) Advances to Managed Communities: Advances to Managed Communities includes
the Company's working capital advances to two Retirement Centers managed by
the Company. At December 31, 2001 and 2000, the Company's advances to
managed entities was approximately $4.2 million and $3.0 million,
respectively. The amounts are non-interest bearing and due on demand. The
Company does not intend to demand repayment, unless sufficient operating
cash exists at the two Retirement Centers.
60
(n) Other Liabilities: The Company is subject to various legal proceedings and
claims that arise in the ordinary course of its business. The Company
maintains property, general liability and professional malpractice
insurance policies for the Company's owned, leased and certain of its
managed communities under a master insurance program. The Company reviews
the adequacy of its accruals related to general and professional liability
and workers' compensation claims on an ongoing basis, using historical
claims, third party administrator estimates, advice from legal counsel and
industry loss development factors and adjusts accruals periodically.
(o) Obligation to Provide Future Services: Under the terms of certain lifecare
contracts, the Company is obligated to provide future services to its
residents. The Company calculates the present value of the net cost of
future services and use of facilities annually and compares that amount
with the present value of future resident cash inflows. If the present
value of the net cost of future services and use of facilities exceeds
discounted future cash inflows, a liability will be recorded with a
corresponding charge to income. As of December 31, 2001 and 2000, the
Company did not have a liability associated with its obligation to provide
future services and use of facilities.
(p) Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are recorded using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. A valuation allowance
is recorded to adjust net deferred tax assets to the amount which
management believes will more likely than not be recoverable. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
(q) Earnings per Share: Basic earnings per share ("EPS") is computed by
dividing net income (loss) (numerator) by the weighted average number of
common shares outstanding (denominator). The denominator used in computing
diluted EPS reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. The effect from assumed conversion of the 5
3/4% Convertible Subordinated Debentures due October 1, 2002 (the
"Debentures") would have been anti-dilutive in 2001, 2000 and 1999 and was
therefore not included in the computation of diluted EPS. Due to the net
losses in 2001 and 2000, no shares were considered in the computation of
diluted EPS. Antidilutive shares which were excluded from the diluted EPS
calculation in 1999 were 1,796,000.
(r) Stock-Based Compensation: The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair
value of the shares at the date of grant. The Company follows the
requirements of the Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation, an
Interpretation of APB Opinion No. 25" in accounting for stock-based
compensation, and accordingly recognizes no compensation expense for stock
option grants, but provides the pro forma disclosures required by Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation".
(s) Fair Value of Financial Instruments: The carrying amount of cash and cash
equivalents approximates fair value because of the short-term nature of
these accounts and because amounts are invested in accounts earning market
rates of interest. The carrying value of assets limited as to use, accounts
receivable, advances for development projects, tenant deposits, accounts
payable, and refundable portion of life estate fees approximate their fair
values because of the short-term nature of these accounts. Management has
determined that it is not practicable to determine the fair value of debt.
The carrying value of debt approximates fair value as the interest rates
approximate the current rates available to the Company. The carrying amount
of the interest rate swap approximates fair value.
(t) Derivative Instruments: On January 1, 2001, the Company adopted Statement
of Financial Standards (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 established reporting
61
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. Any changes in gains or losses on
derivative instruments that are not hedges are reported in earnings
immediately. Changes in the fair value of a derivative that is highly
effective and that is designated and qualifies as a fair value hedge, along
with the loss or gain on the hedged asset or liability are recorded in
earnings. Any amounts excluded from the assessment of hedge effectiveness
as well as the ineffective portion of the hedge is recorded as a gain or
loss in earnings immediately.
During 2000 and 1999, the Company entered into two interest rate swap
agreements as a hedge against changes in the fair value of certain debt
liabilities. Upon the adoption of SFAS No. 133, the existing interest rate
swaps were designated as speculative derivative instruments. In applying
the transition rules as described in SFAS No. 133, the Company recorded
$266,000 of derivative instrument assets, $1.9 million of derivative
instrument liabilities, and a $1.6 million reduction in long-term debt. The
$1.6 million reduction in long-term debt is being amortized over the life
of specified debt instruments as a yield adjustment. Subsequent changes in
the fair values of the interest rate swaps are recorded in earnings.
During 2001, the Company sold one of these instruments for $552,000. The
notional amount of the remaining swap agreement is $34.8 million and
matures on July 1, 2008. Under the terms of the agreement, the Company
receives a fixed rate payment of 6.87% and pays a floating rate based on
LIBOR and a foreign currency index, with a maximum rate through July 31,
2002 of 8.12%. The fair value of the remaining interest rate swap as of
December 31, 2001 was a loss of $1.7 million.
(u) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets held for sale are
reported at the lower of the carrying amount or the fair value less the
costs to sell.
(v) Comprehensive Income: During 2001, 2000 and 1999, the Company's only
component of comprehensive income (loss) was net income (loss).
(w) Segment Disclosures: SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision-maker in deciding how to allocate resources
and in assessing performance. During 2000, the Company revised its staffing
and internal reporting to manage and operate in two business segments,
Retirement Centers and Free-standing ALs. Prior to fiscal 2000, the Company
operated as one business segment. See further disclosure in note 16.
(x) Reclassifications: Certain 2000 and 1999 amounts have been reclassified to
conform with the 2001 presentation.
62
(y) Recent Accounting Pronouncements:
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). The Company is
required to adopt SFAS No. 144 no later than the year beginning after
December 15, 2001, and plans to adopt its provisions for the quarter ending
March 31, 2002. Management does not expect the initial adoption of SFAS No.
144 for long-lived assets held for use to have a material impact on the
Company's financial statements because the impairment assessment under SFAS
No. 144 is largely unchanged from SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" (SFAS No. 121). The provisions of the SFAS No. 144 for assets held for
sale or other disposals generally are required to be applied prospectively
after the adoption date to newly initiated disposal activities. Therefore,
management cannot determine the potential effects that adoption of SFAS No.
144 will have on the Company's financial statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 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. 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 financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS
No. 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS
No. 142). SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 as well as
all purchase method business combinations completed after June 30, 2001.
SFAS No. 141 also specifies criteria for intangible assets acquired in a
business combination must meet to be recognized and reported separately
from goodwill. SFAS No. 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the provisions
of SFAS No. 142. SFAS No. 142 is effective January 1, 2002 and will require
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives, and that reviews for impairment be
conducted in accordance with SFAS No. 121, and subsequently SFAS No. 144
after its adoption.
Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in order
to conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company will be required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. If an intangible asset is
identified as having an indefinite useful life, the Company will be
required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Impairment is
measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the SFAS No. 142 requires the Company to perform an assessment
of whether there is an indication that goodwill is impaired as of the date
of adoption. To accomplish this, the Company must identify its reporting
units and determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of January 1, 2002. The Company will
then have up to six months from January 1, 2002 to determine the fair value
of each reporting unit and compare it to the carrying amount of the
reporting unit. To the extent the carrying amount of a reporting unit
exceeds the fair value of the reporting unit, an indication exists that the
reporting unit goodwill may be impaired and the Company must perform the
second step of the transitional impairment test. The second step is
required to be completed as soon as possible, but no later than the end of
the year of adoption. In the second step, the Company must compare the
implied fair value of the reporting unit goodwill with the carrying amount
of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets
(recognized and unrecognized) and liabilities of the reporting unit
63
in a manner similar to a purchase price allocation, in accordance with SFAS
No. 141. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. Any transitional impairment loss will
be recognized as the cumulative effect of a change in accounting principle
in the Company's statement of operations.
The Company has $36.5 million of unamortized goodwill as of January 1,
2002, which will be subject to the transition provisions of SFAS No. 141
and 142. Amortization expense related to goodwill was approximately $1.0
million each of the years in for the three year period ended December 31,
2001. Because of the extensive effort needed to comply with adopting
Statements No. 141 and 142, the Company has not determined the impact of
adopting these Statements on the Company's financial statements at the date
of this report, including whether it will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle.
(3) LIQUIDITY AND REFINANCING PLAN
The Company has a substantial amount of debt and lease obligations for 2002.
The Company has scheduled debt maturities during 2002 of $371.7 million, which
includes $238.8 million of mortgage debt and $132.9 million of its 5 3/4%
Convertible Subordinated Debentures due October 1, 2002 (the "Debentures"). The
Company also has minimum rental obligations of $36.1 million under long-term
operating leases due in 2002. In addition, the Company and certain of its
lenders and lessors agreed to amendments or waivers of various financial
covenants as of December 31, 2001, and will likely need to negotiate further
amendments or waivers in order to remain in compliance in future periods. As a
result of these current maturities, the Company had a net working capital
deficit of $375.8 million as of December 31, 2001. As of December 31, 2001, the
Company had approximately $19.3 million in unrestricted cash and cash
equivalents. The Company's current cash balances and internally generated cash
will not be sufficient to satisfy its scheduled debt maturities in 2002.
In order to satisfy or extend these obligations and to address its net working
capital deficit, the Company has developed a refinancing plan in consultation
with its investment banking advisor and its legal counsel and through
discussions with its lenders (the "Refinancing Plan"). The Refinancing Plan
includes extensions of existing debt agreements, refinancings of existing
mortgage facilities, new mortgage financings, sale lease-back arrangements, and
a mezzanine financing arrangement. As part of its Refinancing Plan, the Company
intends to extend the maturity dates of substantially all of its remaining
credit facilities to January 2004 or later. In addition, the Company intends to
renegotiate its financial covenants to levels that the Company believes it can
satisfy for the foreseeable future and eliminate other financial covenants no
longer applicable to the Company. The Company believes that, if consummated as
currently planned, the Refinancing Plan will place the Company in position to
address the scheduled debt maturities during 2002, as well as its negative
working capital.
Pursuant to its Refinancing Plan, the Company has consummated, as of March 29,
2002, fourteen sale lease-back and other capital raising transactions since
November 1, 2001, raising gross proceeds of approximately $193.2 million, which
yielded net proceeds of approximately $27.3 million after payment of related
debt and transaction costs for use by the Company as working capital or to repay
its maturing debt obligations. See note 19.
In addition to these recently completed transactions, the Company has either
executed definitive, binding agreements or is in advanced discussions with
several different parties relating to the refinancing or sale lease-back of up
to 11 additional communities. If completed on the terms being considered, these
proposed transactions would generate gross proceeds to the Company of
approximately $181.5 million prior to payment of related debt and transaction
costs of approximately $167.7 million. Furthermore, the Company is in advanced
discussions with certain of its existing lenders concerning the amendment or
removal of the Company's financial covenants following consummation of the
Refinancing Plan. These transactions and discussions are in various stages and
in certain instances are non-binding. All of these transactions will be subject
to conditions and approvals that must be satisfied. Some of these transactions
may be dilutive to current equity holders.
If the foregoing transactions are consummated as currently contemplated, the
Debentures will be the Company's primary remaining outstanding debt obligation
maturing in 2002. In order to address the maturity of the Debentures by or
before October 2002, the Company has entered into a non-binding letter of intent
with a third-party that will provide the Company with approximately $125.0
million of term mezzanine financing involving certain of its Retirement Centers.
The Company intends to use the net proceeds from this transaction, together with
the net proceeds generated by the transactions described above, to address final
resolution of the outstanding Debentures and to satisfy its working capital
requirements. The letter of intent regarding this transaction is preliminary and
non-binding, and is subject to conditions that must be satisfied prior to
closing including certain approvals and consents.
64
If the Company is able to reach a definitive agreement with respect to this
proposed mezzanine and sale lease-back financing, the transaction is expected to
close during the second or third quarter of 2002.
The Company currently anticipates completing the balance of its Refinancing Plan
prior to October of 2002. Nevertheless, the Refinancing Plan and its various
remaining components are subject to a number of contingencies, uncertainties and
conditions that are outside of the Company's control, and are dependent upon the
receipt of required approvals and consents. Accordingly, there can be no
assurance that the Company will be able to consummate its Refinancing Plan. 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 and lessors to
declare defaults, accelerate payment obligations or foreclose upon the
communities securing such indebtedness or exercise their remedies with respect
to such communities (see note 9 and note 17). The failure to consummate the
Refinancing Plan, or another plan to extend, refinance or repay the Company's
debts, will have a material adverse effect upon the Company, will result in the
Company having insufficient capital to satisfy its maturing obligations and
could make it necessary for the Company to seek protection from its creditors.
In the event that the Company successfully consummates its Refinancing Plan, it
will remain highly leveraged with a substantial amount of debt and lease
obligations, and will have increased interest and lease expenses. The Company is
also likely to incur certain costs, including significant charges in connection
with the consummation of the Refinancing Plan. The terms of the transactions and
agreements comprising the Refinancing Plan will likely impose significant
burdens on the Company.
(4) ASSET IMPAIRMENTS AND OTHER LOSSES
During 1999, the Company entered into a land purchase agreement for a parcel of
land for $14.5 million, to be used for the development of a senior living
community. In connection with the development of this project, the Company has
agreed to enter into a joint venture relationship with an unaffiliated entity.
The Company incurred and capitalized architectural, engineering, legal, and
other costs to date amounting to $3.1 million as part of the development of this
project. Although zoning for the project has been approved, the project has been
delayed while the Company appeals certain restrictions contained in the zoning
approval. The Company intends to pursue these appeals vigorously and believes it
will ultimately be successful in amending the zoning restrictions and securing
financing (through joint venture or other arrangements) to acquire and develop
the property, but there can be no assurance in that regard.
The Company has two parcels of land upon which senior living communities were to
be expanded and one land parcel which was to be developed. Each property was in
the early stage of development, with activity in process consisting primarily of
zoning permits, completing architectural drawings and site testing. To date,
each of these projects has been subject to various delays due to a lack of
available financing. During the fourth quarter of 2001, the Company has further
delayed the development and completion of each of these projects until it can
secure necessary financing.
As a result of these additional delays related to the various projects, the
Company has recorded a charge of approximately $5.9 million during the quarter
ended December 31, 2001, related to various development costs
65
previously incurred on these three projects, resulting in a reduction in their
net carrying value from $14.7 million to $8.8 million.
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 $467,000 in 2001 related to these costs. During 2001, the
Company recorded an additional charge of $443,000 to reflect decreases in the
estimated fair value of the remaining properties. An accrual of $787,000 remains
at December 31, 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 2002. The remaining three land parcels are classified
as held for sale and are included in other assets. The net carrying amount of
these assets was $3.2 million at December 31, 2001.
(5) ASSETS LIMITED AS TO USE
The composition of assets limited as to use at December 31, 2001 and 2000 is as
follows (in thousands):
2001 2000
------- -------
Held by trustee under agreement:
U.S. Treasury obligations $17,630 $17,630
Certificates of deposit 38,563 42,691
Cash and other short-term investments 22,547 18,645
------- -------
78,740 78,966
Less long-term investments 73,333 73,785
------- -------
Short-term investments $ 5,407 $ 5,181
======= =======
The $17.6 million of U.S. Treasury obligations, represented by treasury bills,
relate to a community leased on May 26, 2000. These treasury bills yield 3.08%,
and mature on August 21, 2002. Due to the short maturity of these investments,
their cost approaches fair value.
The certificates of deposit are pledged to the lessors of certain senior living
communities as collateral to support the Company's lease obligations. The
Company receives and recognizes the interest income earned on these certificates
of deposit.
(6) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings, and equipment is as follows (in thousands):
2001 2000
-------- --------
Land and improvements $ 56,730 $ 46,534
Land leased to others 36,078 15,406
Land held for development 8,236 9,762
Buildings and improvements 445,978 392,312
Furniture, fixtures, and equipment 35,659 30,677
Leasehold improvements 6,387 4,893
-------- --------
589,068 499,584
Less accumulated depreciation and amortization (69,704) (52,090)
Construction in progress 5,810 25,568
-------- --------
Total $525,174 $473,062
======== ========
During November 2001, as part of its Refinancing Plan, the Company completed
sale lease-back financing transactions on two of its Free-standing AL
communities. The Company sold Broadway Plaza at Pecan Park and The Homewood
Residence at Boca Raton for $10.6 million and $9.7 million, respectively, and
contemporaneously leased the properties back from the buyer under 15 year lease
agreements, which contain two five-year renewal options and rights of first
66
refusal to repurchase the communities. The leases also contain earn-out clauses
under which the Company may receive up to $2.1 million and $1.9 million,
respectively, based on the next three years of performance of the communities.
As a result of the contingent earn-out provisions, for financial reporting
purposes, these transactions were recorded as financing transactions. The
Company used a portion of the sale proceeds to retire $9.3 million of debt
associated with the properties. The Company recognized a $641,000 loss on the
sale of Broadway Plaza at Pecan Park and a $277,000 loss on the sale of The
Homewood Residence at Boca Raton, net of estimated contingent earn-outs of $1.1
million and $967,000, respectively. For financial reporting purposes, as a
result of the contingent earn-out agreements, these transactions were recorded
as financing transactions and increased land, buildings, and equipment $9.5
million and $8.8 million, respectively.
On September 26, 2001, the Company acquired for $13.3 million a Retirement
Center in Oak Park, Illinois that the Company had previously leased. The
community has 193 independent living units. The Company financed this
acquisition by entering into a $13.0 million mortgage note. In connection with
these acquisitions, land, buildings and equipment increased $12.4 million. As
part of its Refinancing Plan, the Company entered in to a sale lease-back
transaction for this community during February 2002. See note 19.
During June 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 Company's Senior Living Network strategy. During
1999, however, the Company discontinued its assisted living development and
acquisition program prior to acquiring or developing communities complementary
to Rossmoor Regency. The Company sold its leasehold interest in the community
for $21.5 million. The Company used a majority of the sale proceeds to repay
$15.6 million of debt associated with the property, resulting in an early
payment penalty of $837,000, net of tax, which is recorded as an extraordinary
item. The Company recognized a $694,000 loss on the sale of assets.
On December 18, 2000 the Company sold a community located in Westlake, Ohio and
subsequently leased the property back from the buyer. At the transaction date,
the community had a net book basis of $13.2 million and was sold for $25.4
million. The gain has been deferred and will be recognized into income over the
life of the lease, ending July 2007. Pursuant to the sale, the Company repaid
the mortgage financing of $17.0 million relating to the community. During the
twelve months ended December 31, 2001, the Company completed two like-kind
exchange transactions which deferred the taxable gain resulting from the sale in
2000 of the community. In connection with the first like-kind exchange, the
Company purchased land in Virginia and assumed a $12.1 million non-recourse
mortgage loan. 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 improved parcels of
real property and assumed a $15.2 million non-recourse mortgage loan. The
various parcels of property are subject to leases that provide annual rental
payments of $1.3 million through March 7, 2022. In conjunction with the lease,
the Company has the right of first refusal to purchase the community.
Depreciation expense was $17.7 million, $15.0 million, and $12.1 million for the
years ended December 31, 2001, 2000, and 1999, respectively. The Company
capitalized $861,000, $1.4 million, and $2.1 million of interest costs during
2001, 2000 and 1999, respectively.
(7) NOTES RECEIVABLE
These are primarily loans to lessors of retirement communities that are being
leased by the Company and represent advances for a significant portion of the
cost of construction of these communities. The notes receivable generally earn
interest at variable rates based on 200 basis points in excess of the 30 day
LIBOR rate, which is recalculated monthly. Interest and principal are due
monthly based on a 25 year amortization. The notes receivable mature from March
2005 through December 2005 and are secured by the related communities.
67
(8) OTHER ASSETS
Other assets at December 31, 2001 and 2000 consist of the following (in
thousands):
2001 2000
------- -------
Security deposits $ 7,498 $ 7,663
Purchase options 17,376 17,376
Costs of acquiring lifecare contracts, net 2,749 3,080
Deferred lifecare fee receivables 4,535 4,303
Deferred financing costs, net of accumulated amortization 3,715 5,274
Advances to managed entities 4,198 2,991
Investments in and advances to joint ventures 2,693 1,235
Property held for sale 3,240 5,616
Other 3,659 3,054
------- -------
Total $49,663 $50,592
======= =======
Summary unaudited financial information of the Company's joint venture companies
as of and for the years ended December 31, 2001 and 2000 follows:
2001 2000
------- -------
Current assets $ 928 $ 665
Land, buildings and equipment, net 13,934 14,275
Other assets 473 474
------- -------
Total assets $15,335 $15,414
======= =======
Current liabilities $ 2,484 $ 2,259
Long-term liabilities 12,120 12,281
------- -------
Total liabilities 14,604 14,540
------- -------
Partners' equity 731 874
------- -------
Total liabilities and partners' equity $15,335 $15,414
======= =======
Revenues $ 2,982 $ 1,759
------- -------
Net loss (1,917) (1,707)
======= =======
(9) LONG-TERM DEBT
A summary of long-term debt is as follows:
DECEMBER 31,
----------------------
2001 2000
-------- --------
(in thousands)
Convertible debentures bearing interest at a fixed rate of 5.75%. Interest is
due semi-annually on April 1 and October 1 through October 1, 2002,
at which time all principal is due. $132,930 $137,980
Revolving line of credit in the amount of $50.0 million bearing interest at the
rate of LIBOR plus one hundred seventy-five basis points (4.19% at December 31,
2001). Interest only is paid monthly and the loan matures on December 31, 2002.
The loan is secured by certain land and buildings. 20,409 23,909
68
DECEMBER 31,
----------------------------
2001 2000
----------- -----------
(in thousands)
Mortgage note payable bearing interest at a floating rate equal to
three hundred twenty-five basis points in excess of LIBOR rate
(5.12% at December 31, 2001). Interest and principal, amortized over
25 years, is due monthly with balloon maturity on July 1, 2002. The
loan is secured by certain land buildings, equipment. 17,078 --
Term loan bearing interest at the rate of LIBOR plus three hundred basis points
(6.75% at December 31, 2001). Interest only is paid monthly and the loan matures
on November 2, 2002. The note is secured by certain land, buildings, equipment,
and assignment of rents and leases. 81,645 91,090
Mortgage note payable bearing interest at a floating rate equal to two hundred
twenty-five basis points in excess of the LIBOR rate recalculated each month
(4.17% at December 31, 2001). Interest is due monthly with principal due at
maturity on December 2, 2002. The loan is secured by certain land and buildings. 11,037 11,138
Mortgage note payable bearing interest at a fixed rate of 8.2%. Interest is due
monthly with principal and unpaid interest due at maturity on December 31, 2002.
The loan is secured by certain land, buildings, equipment, and
assignment of rents and leases. 62,330 62,330
Mortgage note payable bearing interest at a floating rate equal to three hundred
basis points in excess of the LIBOR rate (5.28% at December 31, 2001). Interest
and principal, amortized over 25 years, is due monthly with balloon maturity on
April 1, 2003. The loan is secured by certain land, buildings, equipment, and
assignment of rents and leases. 22,752 23,086
Mortgage note payable bearing interest at floating rate equal to
three hundred fifty basis points in excess of the LIBOR rate (6.27%
at December 31, 2001). Interest and principal is due monthly with
remaining principal and unpaid interest due October 1, 2003. The
note is secured by certain land, buildings, and equipment. 12,965 --
Mortgage note payable bearing interest at a fixed rate of 8.41%. Principal and
interest of $110,223 is due monthly with remaining principal and unpaid interest
due on September 7, 2005. The note is secured by certain land, buildings,
equipment, and assignment of rents and leases. 15,160 --
Note payable bearing interest at fixed rate of 9.625%, interest is due monthly
with principal and unpaid interest due on October 1, 2008. The note is secured
by the Company's interest in a Retirement Center located in Richmond, Virginia. 17,239 --
Mortgage note payable bearing interest at fixed rate of 7.93%. Interest and
principal of $90,360 is due monthly with remaining principal and unpaid interest
due November 1, 2006. The note is secured by certain land, buildings,
and equipment. 10,537 --
69
DECEMBER 31,
----------------------------
2001 2000
----------- -----------
(in thousands)
Mortgage note payable bearing interest at fixed rate of 7.93%. Interest and
principal of $82,615 is due monthly with remaining principal and unpaid interest
due November 1, 2006. The note is secured by certain land, buildings, and equipment. 9,634 --
Mortgage note payable bearing interest at a fixed rate of 6.87%. Principal and
interest of $262,747 is due monthly with remaining principal and unpaid interest
due on July 31, 2008. The note is secured by certain land, buildings, equipment,
and assignment of rents and leases. 33,061 35,179
Mortgage note payable bearing interest at a fixed rate of 7.43%. Principal and
interest of $80,864 is due monthly with remaining principal and unpaid interest
due on January 10, 2024. The note is secured by certain land, buildings,
equipment, and assignment of rents and leases. 11,993 --
Mortgage note payable bearing interest at a fixed rate of 8.50%. Principal and
interest of $144,956 is due monthly with remaining principal and unpaid interest
due on December 10, 2024. The note is secured by certain land, buildings,
equipment, and assignment of rents and leases. 17,550 17,787
Mortgage note payable bearing interest at a fixed rate of 9.50%. Principal and
interest of $104,844 is due monthly with remaining principal and unpaid interest
due on June 10, 2025. The note is secured by certain land, buildings, equipment,
and assignment of rents and leases. 11,810 11,940
Mortgage note payable bearing interest at a fixed rate of 6.50%. Principal and
interest of $64,524 is due monthly with remaining principal and unpaid interest
due on January 1, 2037. The note is secured by certain land, buildings,
equipment, and assignment of rents and leases. 10,680 5,900
Mortgage notes payable, generally payable monthly with interest
rates ranging from 4.66% to 10.25% 41,206 40,147
Other long-term debt, generally payable monthly with
interest rates ranging from 3.25% to 8.12% 21,315 23,204
Capital lease 794 --
-------- --------
Total long-term debt 562,125 483,690
-------- --------
Less current portion of long-term debt 371,667 7,449
-------- --------
Long-term debt, excluding current portion $190,458 $476,241
======== ========
70
The aggregate scheduled maturities of long-term debt at December 31, 2001 were
as follows (in thousands):
2002 $371,667
2003 36,770
2004 7,537
2005 16,739
2006 1,938
Thereafter 127,474
--------
$562,125
========
The Company is highly leveraged and has a substantial amount of debt and lease
obligations. As of December 31, 2001, the Company had approximately $19.3
million in unrestricted cash and cash equivalents. In addition, the Company has
minimum rental obligations of $36.1 million under long-term operating leases due
in 2002. The Company's internally generated cash will not be sufficient to
satisfy its scheduled debt maturities in 2002. Accordingly, the Company's
ability to satisfy its maturing obligations will depend primarily upon its
ability to execute and implement its Refinancing Plan.
Many of the Company's credit and other 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. In addition, certain of these agreements require that the
Company raise a prescribed amount of capital and provide evidence of sufficient
capacity to pay off its Debentures by July 1, 2002. Effective as of December 31,
2001, the Company and certain of its lenders and lessors agreed to amendments or
waivers relating to many of these financial covenants and agreements in order to
allow the Company to remain in compliance. The Company is unlikely to be able to
comply with many of its financial covenants in the future absent further
concessions or waivers from certain of its creditors. There can be no assurances
that the Company's creditors will grant further amendments or waivers 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 result
in a default under a substantial majority of the Company's indebtedness and
other obligations, and could result in an acceleration of the maturity of those
obligations.
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 declare
defaults, accelerate payment obligations or foreclose upon the communities
securing such indebtedness or exercise their remedies with respect to such
communities. 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 a
default or acceleration of substantially all of the Company's other obligations,
which would have a material adverse effect on the Company.
During 1997, the Company issued $138.0 million of Debentures in a public
offering. The Debentures are non-callable for three years and are convertible at
any time by the holders into shares of the Company's common stock at a
conversion price of $24.00 per share. The Company received proceeds of $134.2
million, net of offering costs, from the issuance of the Debentures. The
offering costs were capitalized as deferred financing costs and are being
amortized using the straight-line method over the term of the debentures. During
1998, debentures totaling $20,000 were converted into 832 shares of common
stock. In March 2000, the Board of Directors authorized the repurchase of up to
$30.0 million of the Debentures. During 2001, the Company purchased $5.1 million
of the Debentures, resulting in an extraordinary gain on extinguishment of debt,
net of tax, of $664,000. Additional purchases of the Debentures, if any, are
likely to be made primarily in the open market.
(10) REFUNDABLE ENTRANCE FEES AND DEFERRED LIFE ESTATE INCOME
Under certain of the Company's residency and health care agreements for its
lifecare communities acquired pursuant to the FGI transaction, residents entered
into a Master Trust Agreement whereby amounts were paid by the resident into a
trust account. These funds were then made available to the related communities
in the form of a non-interest bearing loan to provide permanent financing for
the related communities and are collateralized by such land, buildings and
equipment. As of December 31, 2001, the remaining obligation under the Master
Trust Agreements is $42.2 million and is payable monthly based on a 40-year
amortization of each residents' balance. The current installment due in 2002,
and annually for the subsequent five-year period, is approximately $1.3 million.
The annual obligation is reduced as individual residency agreements terminate.
Upon termination of the resident's occupancy, the resident or the resident's
estate receives a payment of the remaining loan balance from the trust and pays
a lifecare fee to the community based on a formula in the residency
71
and health care agreement, not to exceed a specified percentage of the
resident's original amount paid to the trust. This lifecare fee is amortized by
the Company into revenue on a straight-line basis over the estimated life
expectancy of the resident beginning with the date of occupancy by the resident.
The amortization of the lifecare fees is included in resident and health care
revenue in the consolidated statement of operations. At December 31, 2001 and
2000, the Company had accrued $4.5 million and $4.3 million, respectively, as
deferred lifecare fee receivables which is included as a component of other
assets. The Company reports the long-term obligation under the Master Trust
Agreements as a refundable portion of life estate fees and deferred life estate
income based on the applicable residency agreements.
The obligation to the Master Trust is classified as follows at December 31, 2001
and 2000, respectively (in thousands):
Other Residency
Master Trust Agreements Total
------------ ---------- ----------
At December 31, 2001:
Other current liabilities $ 1,354 $ -- $ 1,354
Refundable portion of life estate fees 16,389 29,920 46,309
Deferred life estate income 24,461 26,750 51,211
------------ ---------- ----------
$ 42,204 $ 56,670 $ 98,874
============ ========== ==========
Other Residency
Master Trust Agreements Total
------------ ---------- ----------
At December 31, 2000:
Other current liabilities $ 1,452 $ -- $ 1,452
Refundable portion of life estate fees 18,008 26,731 44,739
Deferred life estate income 27,791 24,974 52,765
------------ ---------- ----------
$ 47,251 $ 51,705 $ 98,956
============ ========== ==========
(11) SHAREHOLDERS' EQUITY
The Company is authorized to establish and issue, from time to time, up to 5
million shares of no par value preferred stock, in one or more series, with such
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, and liquidation preference as authorized by the Board of Directors. At
December 31, 2001 and 2000, no preferred shares had been issued.
On November 18, 1998, the Board of Directors of the Company declared a
distribution of one stock purchase right (ARC Right) for each outstanding share
of the Company's common stock, to shareholders of record at the close of
business on December 7, 1998 and for each share of the Company's common stock
issued thereafter. Each ARC Right entitles the holder, subject to the terms of
the Rights Agreement, to purchase from the Company, one one-hundredth of a share
(Unit) of ARC Series A Preferred Stock at a purchase price of $86.25 per Unit,
subject to adjustment. The ARC Rights may cause substantial dilution to a person
or group that attempts to acquire the Company on terms not approved by a
majority of the Board of Directors. Thus, the ARC Rights are intended to
encourage persons who may seek to acquire control of the Company to initiate
such an acquisition through negotiations with the Company's Board of Directors.
The ARC Rights attach to all certificates representing outstanding shares of
Company common stock and no separate ARC Rights certificates will be
distributed. The ARC Rights will separate from the common stock, and will be
distributed, if certain persons acquire, obtain the right to acquire, or
otherwise obtain beneficial ownership of 15% or more of the outstanding shares
of the Company's common stock. If distributed, each holder of an ARC Right will
thereafter have the right to receive, upon exercise, shares of Company common
stock (or, in certain circumstances at the discretion of the Board of Directors,
assets of the Company) having a value equal to two times the exercise price of
the ARC Right.
72
The ARC Rights are not exercisable until distributed and will expire at the
close of business on November 18, 2008, unless earlier redeemed by the Company.
The Board of Directors may redeem the ARC Rights in whole, but not in part, at a
price of $.001 per ARC Right, payable, at the election of the Board of
Directors, in cash or shares of Company common stock. Until an ARC Right is
exercised, the holder will have no rights as a shareholder.
A total of 2,000,000 shares of ARC Series A Preferred Stock have been reserved
for issuance upon exercise of the ARC Rights, subject to adjustment. The Units
of ARC Series A Preferred Stock that may be acquired upon exercise of the ARC
Rights will be non-redeemable and subordinate to any other shares of preferred
stock that may be issued by the Company.
In December 1999, the Company announced plans to buy back up to $1.5 million of
its common stock to fund the Company's contributions to its employee benefit
plans for 2001 and 2000. As of December 31, 2000, the Company had purchased
shares worth $1,198,000, or 211,400 shares of common stock, and considers this
buy back complete.
(12) STOCK-BASED COMPENSATION
Stock Option Plan
In 1997, the Company adopted a stock incentive plan (the "1997 Plan") providing
for the grant of stock options, stock appreciation rights, restricted stock,
and/or other stock-based awards. Pursuant to the 1997 Plan, as amended, 15% of
the outstanding common stock, or 2,591,478 shares of common stock have been
reserved and are available for issuance. The option exercise price and vesting
provisions of such options are fixed when the option is granted. The options
generally expire ten years from the date of grant and vest over a three-year
period.
A summary of the Company's stock option activity, and related information for
the years ended December 31, 2001, 2000 and 1999, respectively, is presented
below (shares in thousands):
Average Exercise
Options Shares Price
-----------------------------------------------------------------
Outstanding at December 31, 1998 1,490 $ 15.86
-----------------------------------------------------------------
Granted 1,018 11.53
Exercised (5) 14.00
Forfeited (135) 16.47
-----------------------------------------------------------------
Outstanding at December 31, 1999 2,368 $ 13.97
-----------------------------------------------------------------
Granted 183 6.10
Exercised -- --
Forfeited (1,791) 15.81
-----------------------------------------------------------------
Outstanding at December 31, 2000 760 $ 7.52
-----------------------------------------------------------------
Granted 1,602 3.16
Exercised (12) 3.10
Forfeited (191) 7.07
-----------------------------------------------------------------
Outstanding at December 31, 2001 2,159 $ 4.83
-----------------------------------------------------------------
73
The following table summarizes information about stock options outstanding at
December 31, 2001 (shares in thousands):
Range of Exercise Number Weighted Average Exercise
Prices Outstanding Contractual Life (Years) Price
-----------------------------------------------------------------------------
$ 2.970 - 3.050 63 9.03 $ 2.98
$ 3.100 - 3.100 1,042 9.01 3.10
$ 3.140 - 4.950 365 9.66 3.38
$ 5.000 - 5.000 357 3.10 5.00
$ 5.010 - 18.813 332 5.40 11.99
-----------------------------------------------------------------------------
$ 2.970 - 18.813 2,159 7.59 $ 4.83
-----------------------------------------------------------------------------
There were 819,000 options exercisable at an average exercise price of $6.70 as
of December 31, 2001.
The following table summarizes information about stock options outstanding at
December 31, 2000 (shares in thousands):
Range of Exercise Number Weighted Average Exercise
Prices Outstanding Contractual Life (Years) Price
-----------------------------------------------------------------------------
$ 3.150 - 4.950 11 4.87 $ 4.46
$ 5.000 - 5.000 406 3.82 5.00
$ 5.010 - 14.000 285 5.59 9.32
$15.125 - 18.813 58 7.70 16.99
-----------------------------------------------------------------------------
$ 3.150 - 18.813 760 5.08 $ 7.52
-----------------------------------------------------------------------------
There were 296,000 options exercisable at an average exercise price of $9.85 as
of December 31, 2000.
In accordance with SFAS No. 123, pro forma information regarding net income
(loss) and earnings (loss) per share has been determined by the Company using
the "Black-Scholes" option pricing model with the following weighted average
assumptions for the years ended December 31, 2001, 2000 and 1999, respectively:
5.20%, 6.16% and 5.53% risk-free interest rate, 0% dividend yield, 59.9%, 60.6%
and 76.4% volatility rate, and an expected life of the options equal to the
remaining vesting period.
The weighted average fair value of options granted during 2001, 2000 and 1999
was $1.15, $2.77, and $6.08, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. The Company's pro forma information follows
(in thousands except per share amounts):
2001 2000 1999
------------------------- ------------------------ ------------------------
As SFAS 123 As SFAS 123 As SFAS 123
Reported Pro Forma Reported Pro Forma Reported Pro Forma
-------- --------- -------- --------- -------- ---------
Net income (loss) ($34,922) ($36,691) ($5,846) ($6,665) $2,052 ($419)
Basic earnings (loss)per
share ($2.03) ($2.12) ($0.34) ($0.39) $0.12 ($0.02)
Diluted earnings (loss)
per share ($2.03) ($2.12) ($0.34) ($0.39) $0.12 ($0.02)
Stock Purchase Plan
In 1997, the Company adopted an employee stock purchase plan ("ESPP") pursuant
to which an aggregate of 77,246 shares remain authorized and available for
issuance to employees at December 31, 2001. Under the ESPP, employees, including
executive officers, who have been employed by the Company continuously for at
least 90 days are eligible, subject to certain limitations, as of the first day
of any option period (January 1 through June 30, or July 1 through December 31)
(an "Option Period") to contribute on an after-tax basis up to 15% of their base
pay per pay
74
period through payroll deductions and/or a single lump sum contribution per
Option Period to be used to purchase shares of common stock. On the last trading
day of each Option Period (the "Exercise Date"), the amount contributed by each
participant over the course of the Option Period will be used to purchase shares
of common stock at a purchase price per share equal to the lesser of (a) 85% of
the closing market price of the common stock on the Exercise Date; or (b) 85% of
the closing market price of the common stock on the first trading date of such
Option Period. The ESPP is intended to qualify for favorable tax treatment under
Section 423 of the Internal Revenue Code (Code). During 2001, 2000 and 1999,
respectively, 60,718, 66,067 and 14,516 shares were issued pursuant to the ESPP
at an average purchase price of $2.37, $3.60 and $13.71 per share, respectively.
(13) RETIREMENT PLANS
401 (k) Plan
Employees of the Company participate in a savings plan (the "401(k) Plan") which
is qualified under Sections 401 (a) and 401(k) of the Code. To be eligible, an
employee must have been employed by the Company for at least three months. The
401(k) Plan permits employees to make voluntary contributions up to specified
limits. Additional contributions may be made by the Company at its discretion,
which contributions vest ratably over a five-year period. Beginning in 2000, the
Company began funding its discretionary contributions with the issuance of
common stock. The Company contributed 72,493 shares in 2000 with a fair value of
$595,000. In 2001, the Company contributed 138,907 shares with a fair value of
$334,000. The 1999 contribution of $115,000 was made in cash.
Section 162 Plan
The Company maintains a non-qualified deferred compensation plan (the "162
Plan") which allows employees who are "highly compensated" under IRS guidelines
to make after-tax contributions to an investment account established in such
employees' name. Additional contributions may be made by the Company at its
discretion. All contributions to the 162 Plan are subject to the claims of the
Company's creditors. Approximately 56 employees are eligible to participate in
the 162 Plan. The Company contributed approximately $24,000 to the 162 Plan in
1999. No contributions were made to the 162 Plan in 2001 or 2000.
(14) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 2001, 2000,
and 1999 were attributable to the following (in thousands):
Years Ended December 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
Income (loss) from continuing operations ($11,837) ($ 3,523) $ 1,087
Minority interest in losses of consolidated
subsidiaries (49) 589 170
Extraordinary item (155) (77) --
-------- -------- --------
Total income taxes (benefit) ($12,041) ($ 3,011) $ 1,257
======== ======== ========
75
The income tax expense (benefit), attributable to income (loss) from continuing
operations before minority interest and extraordinary item consists of the
following (in thousands):
Years Ended December 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
U.S. Federal:
Current ($ 327) ($ 1,554) $ 1,375
Deferred (11,310) (1,525) (28)
-------- -------- --------
Total U.S. Federal (11,637) (3,079) 1,347
-------- -------- --------
Years Ended December 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
State:
Current 263 274 89
Deferred (463) (718) (179)
-------- -------- --------
Total State (200) (444) (90)
-------- -------- --------
Total ($11,837) $ 3,523 $ 1,257
-------- -------- --------
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 2001 and 2000 are
presented below (in thousands):
2001 2000
-------- --------
Deferred tax assets:
Federal and state operating loss carryforwards $ 27,347 $ 10,988
AMT credit carryforward 149 478
Charitable contributions carryforward 6,653 6,653
Deferred gains on sale lease-back transactions 4,815 5,337
Accrued expenses not deductible for tax 4,964 1,120
Intangible assets 1,261 700
Asset impairment charges and other losses 5,364 361
Deferred life estate revenue 4,253 4,220
Other 281 308
-------- --------
Total gross deferred tax assets 55,087 30,165
Less valuation allowance (16,228) (8,717)
-------- --------
Total deferred tax assets, net of valuation allowance 38,859 21,448
Deferred tax liabilities:
Buildings and equipment 38,250 31,509
Other 1,380 2,686
-------- --------
Total gross deferred tax liabilities 39,630 34,195
-------- --------
Net deferred tax liability ($ 771) ($ 12,747)
======== ========
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes on income (loss) from continuing operations before income
taxes, minority interest and extraordinary item:
2001 2000 1999
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
Difference in book and tax goodwill amortization expense (0.3%) (1.4%) 4.0%
State income taxes, net of Federal benefit 0.3% 1.3% (1.8%)
Non-deductible expenses and other items (0.1%) (0.4%) 0.8%
Change in valuation allowance (9.4%) -- --
---- ---- ----
Total 25.5% 34.5% 38.0%
==== ==== ====
76
At December 31, 2001, the Company had unused federal net operating loss (NOL)
carryforwards of approximately $65 million for regular tax purposes and $41
million for alternative minimum tax, which expire in 2011 through 2021. As of
December 31, 2001 the Company had alternative minimum tax credit carryforwards
of approximately $149,000. The Company also had an unused charitable
contribution carryforward of approximately $19 million, which carried over from
the acquisition of FGI. The charitable contribution carryover expires in 2002.
As of December 31, 2001, the Company carried a valuation allowance against
deferred tax assets in the amount of $16.2 million. The net change in the total
valuation allowance for the years ended December 31, 2001 and 2000 was an
increase of $7.5 million and $2.0, respectively. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets related to deductible temporary
differences is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. The ultimate
realization of deferred tax assets related to net operating loss carryforwards
and tax credit carryforwards is dependent upon the generation of future taxable
income prior to the expiration of the carryforwards. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
projected future taxable income over the period in which the Company can utilize
the charitable contribution carryforward, management believes that it is more
likely than not that the tax benefit of the charitable contribution carryforward
will not be fully realized prior to its expiration in 2002. Therefore,
management has determined that a valuation allowance in the amount of $6.7
million should be applied against the charitable contribution carryforward.
Furthermore, management has determined that a valuation allowance in the amount
of $9.5 million should be applied against federal and state net operating loss
carryovers, and other deferred tax assets due to the cumulative and expected
taxable losses.
(15) LEASEHOLD ACQUISITIONS AND MANAGED SPECIAL PURPOSE ENTITIES (SPE)
The Company had entered into various transactions with third parties for the
development of certain Free-standing ALs. The Company generally has owned the
land used for development purposes. The Company entered into long-term ground
leases with a special purpose entities, generally subsidiaries of a bank or REIT
(the Owner). The Owner entered into a construction loan agreement with a lender
or the Company provided the funding.
Upon completion of the various development projects, the Owners of these senior
living communities leased the properties to various other SPEs (the Lessee)
under operating leases. The Company then entered into management agreements with
the Lessee's to manage the operations of the leased senior living communities
(Managed SPE Communities). The management agreements provided for the payment of
management fees to the Company based on a percentage of each community's gross
revenues and required the Company to fund the Lessee's operating deficits above
specified amounts. The Company was required to pledge to the Lessees
certificates of deposit as collateral to support the Company's operating deficit
obligations. Such certificates of deposit were pledged by the lessee's to the
Owner as collateral to support the lessees' lease obligations. At December 31,
2001, the Company had pledged certificates of deposit in the aggregate of $35.4
million, which are classified as non-current assets limited as to use. The
Company receives the interest income earned on these certificates of deposit.
During 2001, 2000 and 1999, the Company funded operating deficits of $5.0
million, $2.2 million and $374,000, respectively. Such amounts are recorded as
equity in losses of managed special purpose entity communities on the
accompanying Statements of Operations.
The management agreements also provided the Company with purchase options or
rights of first refusal to assume the Lessee's leasehold interests in the leases
at a formula price, but the Company was under no obligation to exercise these
options or rights of first refusal. During 2000, Company acquired leasehold
interests in 13 Managed SPE Communities and acquired a fee simple title to one
Managed SPE Community. During 2001, the Company exercised its rights of first
refusals and assumed all of the remaining leasehold interests in 12 Managed SPE
Communities for an aggregate purchase price of $19.2 million. In connection with
the 2001 acquisitions, the Company accrued $2.0 million for payments due in
2002, and issued approximately $17.2 million of interest-only notes, due October
1, 2008, bearing interest at 9.625% per annum. The notes are secured by the
Company's interest in a Retirement Center located in Richmond, Virginia. Ten of
the 26 Managed SPE Communities were originally leased to affiliates of John
77
Morris, a director of the Company. The Company accrued $842,000 for cash
payments to be made in 2002 and issued a $7.6 million, 9.625% fixed interest
only note, due October 1, 2008 to acquire these leasehold interests of the
affiliates of John Morris. The terms of this note and its related security
instruments are identical to those issued to unaffiliated SPE entities in
connection with the other leasehold acquisitions during the fourth quarter of
2001.
The leasehold interest acquisitions resulted in leasehold acquisition costs of
$19.3 million during 2001 and $15.7 million during 2000, which are amortized
over the remaining base term of the leases (generally ten to 15 years, or, if
shorter, the expected life of the lease). Amortization expense and accumulated
amortization was $2.0 million and $2.7 million, and $555,000 and $750,000 as of
and for the years ended December 31, 2001 and 2000, respectively.
As of December 31, 2001, the Company leases 25 of the former Managed SPE
Communities and the Company owns one former Managed SPE community. The working
capital assets and liabilities of these communities are presented in the
Consolidated Balance Sheet at December 31, 2001. The Company acquired the
leasehold interests in 10 of these former Managed SPE Communities on December
31, 2001. As a result, the operations of these 10 communities are not included
in the Company's 2001 operating results.
(16) INDUSTRY SEGMENT INFORMATION
The Company has significant operations principally in two industry segments: (1)
Retirement Centers and (2) Free-Standing ALs. Retirement Centers represent 31 of
the senior living communities 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. During
fiscal year 2000, the Company realigned its management consistent with these
segments. Prior to fiscal 2000, the Company operated in one segment.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance on
EBITDAR, which is defined as earnings before net interest expense, income tax
expense, depreciation, amortization, rent, and other special charges related to
asset impairment and other losses, equity in loss of special purpose entities,
other income (expense), minority interest, and extraordinary items. Fiscal year
1999 data was reclassified to conform to the segment alignment(1). The following
is a summary of total revenues, EBITDAR, and total assets by segment for the
years ended December 31, 2001, 2000 and 1999 (in thousands).(1)
78
FREE-STANDING
RETIREMENT ASSISTED CORPORATE/
CENTERS Living(3) OTHER(4) TOTAL
---------- ------------- ---------- ---------
FOR THE YEAR ENDED DECEMBER 31, 2001
Revenues $ 216,570 $ 37,350 $ 2,296 $ 256,216
NOI/Community EBITDAR(2) 76,374 (690) (28,483) 47,201
Lease expense 35,367
Depreciation and amortization 21,717
Asset impairments and other losses 6,343
Operating income (loss) (16,226
Total assets 509,732 241,069 99,390 850,191
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenues $ 188,956 $ 12,099 $ 5,059 $ 206,114
NOI/Community EBITDAR(2) 65,241 (2,851) (14,366) 48,024
Lease expense 18,267
Depreciation and amortization 17,142
Operating income (loss) 12,615
Total assets 523,113 214,660 54,707 792,480
FOR THE YEAR ENDED DECEMBER 31, 1999
Revenues $ 159,531 $ 4,959 $ 10,780 $ 175,270
NOI/Community EBITDAR(2) 58,722 6 (4,456) 54,272
Lease expense 12,985
Depreciation and amortization 13,692
Asset impairments and other losses 12,536
Operating income (loss) 15,059
Total assets 515,083 160,661 64,667 740,411
(1) Segment data does not include any inter-segment transactions or allocated
costs.
(2) EBITDAR is defined as earnings before net interest expense, income tax
expense, depreciation, amortization, rent, and other charges related to
asset impairments and other losses, equity in loss of Managed SPE
Communities, other income (expense), minority interest, and extraordinary
items. EBITDAR is commonly referred to by the Company as Net Operating
Income or NOI.
(3) Free Standing AL Revenues represent the Company's consolidated revenues for
the period throughout the year the communities were owned or leased. During
2001, 12 of the 34 Free Standing AL leasehold interests were acquired and
therefore results are not indicative of 34 communities for the twelve
months ended.
(4) Corporate/Other Revenues represent the Company's development and management
fee revenues. Corporate/Other NOI includes operating expenses related to
corporate operations, including human resources, financial services, and
information systems, as well as senior living network and assisted living
management costs.
(17) COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to various legal proceedings and claims that 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 maintains commercial insurance on a claims-made basis for medical
malpractice liabilities.
79
Insurance
The Company is self-insured for workers' compensation claims with excess loss
coverage of $250,000 per individual claim and $1 million for aggregate claims.
The Company utilizes a third party administrator to process and pay filed
claims. The Company has accrued $3.3 million to cover open claims not yet
settled and incurred but not reported claims as of December 31, 2001. Management
is of the opinion that such amounts are adequate to cover development of any
open claims and any such claims incurred but not reported as of December 31,
2001.
The delivery of personal and health care services entails an inherent risk of
liability. In recent years, participants in the senior living and health care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs and significant
exposure. The Company currently maintains property, liability, and professional
medical malpractice insurance policies for the Company's owned and certain of
its managed communities under a master insurance program. The number of
insurance companies willing to provide general liability and professional
malpractice liability insurance for the nursing and assisted living industry has
declined dramatically and the premiums and deductibles associated with such
insurance has risen substantially.
The Company's previous liability policies expired on July 1, 2001, and the
Company was able to obtain an extended policy through December 2001 only by
paying significantly higher premiums and higher deductibles. As a result,
beginning in the third quarter of 2001, the Company began incurring
significantly higher costs for premiums and accruals for potential liability
claims. As part of this renewal, four incidents were excluded from policy
coverage. To date, the Company believes one of these incidents may result in
liability, which has been accrued for as of December 31, 2001.
The Company renewed this liability policy effective January 1, 2002, expiring
December 31, 2002, and was required to pay significantly higher premiums and
continue the foregoing deductible program. The Company also has underlying and
umbrella excess liability protection policies in the amount of up to $25.0
million in the aggregate.
Leases
As of December 31, 2001, the Company operates 33 of its senior living
communities under long-term operating leases. The Company also leases its
corporate offices and has a ground lease for a senior living community purchased
during 2001. The remaining base lease terms vary from two to 16 years. Certain
of the leases provide for renewal and purchase options.
At December 31, 2001, fourteen of the leased senior living communities were
operated under leasing structures which are treated as operating leases for
financial reporting purposes and financing leases for income tax purposes. The
lessors are subsidiaries of banks or a REIT and are required to maintain certain
at-risk funding levels. The remainder of the lessor's funding came from third
party debt guaranteed by the Company, or borrowings from the Company in the form
of notes receivable. At December 31, 2001, the Company was a guarantor on $61.1
million of the $64.7 million third party lessors debt and had $82.9 million of
notes receivable from the lessors. These leases provide the Company with
termination rights whereby the Company can terminate the leases and acquire the
property at predetermined amounts in exchange for assuming the lessors' debt,
forgiving the notes receivable from the lessor, and repaying the lessors'
equity. The Company may elect to terminate the lease and remarket the property
on behalf of the lessors. If the net sales proceeds are an amount higher than
the lessors' costs, such excess is paid to the Company. If the net sales
proceeds are less than the lessors' costs, the Company is obligated, under
residual value guarantees, to pay to the lessors any shortfall in sales
proceeds, not to exceed approximately 85% of the lessors' original cost of the
properties. At December 31, 2001, the Company's residual value guarantees under
these fourteen leases aggregated $212.8 million. These residual value guarantee
represents an off-balance sheet contingent liability, for which the Company does
not believe it has any significant exposure. However, as a result of anticipated
transactions as part of the Refinancing Plan, the Company expects to record
approximately $33.7 million of loss from sale lease-back transactions. For
financial reporting purposes, these losses are considered residual value
guarantee amounts which are being recognized as lease expense.
80
During the fourth quarter of 2001, the Company determined that it would exercise
its lease termination rights and purchase the property under each of these
fourteen leases and, as part of its Refinancing Plan, the Company would
simultaneously enter into sale lease-back transactions with respect to eight of
these properties. The lease termination and sale lease-back transactions are
expected to occur in the first and second quarters of 2002. The lease
termination and sale lease-back transactions are expected to result in aggregate
losses of approximately $33.7 million. As currently contemplated, these
transactions would be accounted for as financings. For financial reporting
purposes, these losses are considered residual value guarantee amounts which
would be recognized as lease expense on a straight-line basis over the remaining
terms of the leases, beginning in the fourth quarter of 2001. As of December 31,
2001, the Company recognized $7.9 million of the $33.7 million losses as lease
expense. In addition, due to the shorter expected remaining life of these
leases, the Company accelerated the amortization of leasehold acquisition costs
beginning in the fourth quarter of 2001. The Company recorded additional
amortization costs of $472,000 as a result of this acceleration. In connection
with the termination of the synthetic leases and the sale lease-backs, the
Company will not incur any cash outlay other than transaction costs in
connection with these transactions.
Total lease expense was $35.4 million, $18.3 million and $13.0 million for 2001,
2000, and 1999, respectively.
Future minimum lease payments excluding residual value guarantees under
operating leases as of December 31, 2001 were as follows (in thousands):
2002 $ 36,075
2003 36,321
2004 36,387
2005 36,032
2006 35,077
Thereafter 205,650
---------
$ 385,542
=========
Management and Development Agreements
The Company's management agreements are generally for terms of three to 20
years, but certain of the agreements may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owner's expense and receives a monthly fee for its services
based on either a contractually fixed amount, a percentage of revenues or
income, or cash flows in excess of operating expenses and certain cash flows of
the community. The Company's existing management agreements expire at various
times through June 2018.
In connection with the execution of certain management contracts, the Company
assumed a debt guaranty on the mortgage debt of one of the managed communities.
At December 31, 2001, $18.0 million was outstanding under the debt agreement. In
addition, the Company has additional guaranteed mortgage debt of approximately
$73.4 million of which $12.8 million relates to two leased Retirement Centers,
$48.3 million relates to leased Free-standing ALs, and $12.3 million relates to
two joint ventures which the Company manages.
The Company is currently not providing development services for senior living
communities owned by others. Under the terms of the past development or
management agreements, the Company received a fixed fee of approximately 3.75%
to 5% of the total construction costs of the communities. Such fees are
recognized over the terms of the development agreements using the
percentage-of-completion method. The Company recognized $47,000, $901,000 and
$5.9 million of development fee revenue during 2001, 2000 and 1999,
respectively.
Regulatory Requirements
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of
81
services, the distribution of pharmaceuticals, billing practices and policies,
equipment, staffing (including professional licensing), operating policies and
procedures, fire prevention measures, environmental matters, and compliance with
building and safety codes. Failure to comply with these laws and regulations
could result in the denial of reimbursement, the imposition of fines, temporary
suspension of admission of new patients, suspension or decertification from the
Medicare programs, restrictions on the ability to acquire new facilities or
expand existing facilities, and, in extreme cases, the revocation of a
community's license or closure of a community. Except as noted below, management
believes the Company was in compliance with such federal and state regulations
at December 31, 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 has notified the owner of the Company's managed community in
Peoria, Arizona, that the owner is not currently in compliance with a net worth
requirement imposed by Arizona law. While the 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. Furthermore, the owner of the community has agreed
to terminate the existing management agreement and to enter into a long-term
lease with the Company upon the Department's approval of the Company as the
"provider" at the Community. The Company has submitted to the Arizona DOI an
application for the Company to enter into the lease and become the provider for
the community. The Department is currently reviewing the application. The
Company expects that the Department will issue its final approval during the
first or second quarter of 2002. There can be no assurance that the State of
Arizona will approve the Company's application or that it will not enforce the
law strictly or that the Company can successfully negotiate a lease with the
owner of the community that is acceptable to both the Company and the Arizona
DOI. 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.
(18) RELATED PARTY TRANSACTIONS
The Company agreed to develop for an unaffiliated third party, ten Free-standing
ALs. Following completion of construction, the communities were leased to SPE
affiliates of John Morris, a director of the Company. The Company agreed to
manage these Managed SPE Communities pursuant to management agreements that
provided for the payment of management fees to the Company based on a percentage
of the gross revenues of each residence and required the Company to fund
operating losses above a specified amount. During 2001, the Company acquired
from affiliates of John Morris, leasehold interests in six Managed SPE
Communities for $8.4 million. The Company accrued $842,000 for cash payments to
be made in 2002 and issued a $7.6 million, 9.625% interest only note, due
October 2008. This note, and certain similar notes, are secured by the Company's
interest in a Retirement Center located in Richmond, Virginia. The terms of this
note and its related security instruments are identical to those issued to
certain unaffiliated entities in connection with the simultaneous acquisition of
certain other Managed SPE Communities. During 2000, the Company acquired from
the affiliates of John Morris leasehold interests in four Managed SPE
Communities for $6.2 million. During 2001 and 2000, the Company recognized
$720,000 and $984,000, respectively, in operating losses related to the leases
acquired, and recognized $233,000 and $562,000 of management fees in 2001 and
2000, respectively, pursuant to the management agreements. At December 31, 2001,
the Company had no further Managed SPE Communities or operating deficit
agreements.
In July 1998, the Company entered into a 20-year management agreement (with two
ten-year renewal options) for a senior living community located in Peoria,
Arizona, Freedom Plaza Limited Partnership (FPLP). Mr. Roskamp, a previous
director of the Company, is a director of a charitable foundation that owns an
interest in the community. Pursuant to the management agreement, the Company
receives a management fee equal to all cash receipts from the community that is
in excess of operating expenses, refunds of entrance fees, capital expenditure
reserves, debt service, and certain payments to the community's owners. The
Company recognized $235,000, $972,000, and $1.5 million of management fees in
2001, 2000, and 1999 respectively, pursuant to this agreement. At December 31,
82
2001 and 2000, the Company has advances of $1.9 million and $2.3 million,
respectively from FPLP. Such amounts are non-interest bearing and due on demand.
W.E. Sheriff, the Company's chairman and chief executive officer, owns 50% of
Maybrook Realty, Inc., which owns a 128-bed nursing center, Freedom Plaza Care
Center (FPCC), in Peoria, Arizona. FPCC was previously leased by FPLP. From
October 1999 until June 2001, the Company managed FPCC pursuant to its
management agreement for FPLP. The Company also served as the developer of an
expansion of FPCC, which was completed July 2001. Pursuant to the terms of its
development agreement with Maybrook, the Company received a development fee of
$125,000. The Company recognized $46,875 and $78,125 of the development fee in
2001 and 2000, respectively.
Effective July 1, 2001, the Company entered into a long-term operating lease for
FPCC in substitution of the prior management arrangement. The lease term expires
in December 2015, and provides the Company one five-year renewal option and an
option to acquire FPCC at an agreed upon amount. As part of this transaction,
the Company acquired certain assets and liabilities from FPLP. The assets
acquired exceeded the liabilities assumed by $903,000, which was recorded as
deferred lease costs and will be amortized over the life of the lease.
In July 1998, the Company entered into a 20-year management agreement (with two
ten-year renewal options) for a senior living community located in Seminole,
Florida. In connection with the management agreement, the Company paid a $1.2
million fee to the owner of the community, which is a general partnership in
which Mr. Roskamp, owns a 98.0% interest, and assumed an existing guaranty of
approximately $18.6 million ($18.0 million as of December 31, 2001) of the
mortgage debt associated with the community. Pursuant to the management
agreement, the Company receives a management fee equal to all cash receipts from
the community that is in excess of operating expenses, refunds of entrance fees,
capital expenditure reserves, debt service, and certain payments to the
community's owner. The Company also acquired an option to purchase the community
upon the occurrence of certain events (including the expiration of the
agreement) for a formula purchase price. The Company recognized negative
management fees of $334,000 in 2001, and $519,000 and $368,000 of management fee
income in 2000 and 1999 respectively, pursuant to this agreement. At December
31, 2001 and 2000, the Company had advances of $2.3 million and $2.5 million,
respectively from this community. Such amounts are non-interest bearing and due
on demand.
In July 1998, the Company entered into a three-year management agreement for a
senior living community located in West Brandywine, Pennsylvania, that was owned
by a partnership in which Mr. Roskamp, owned a 70.0% interest. Pursuant to the
management agreement, the Company received a management fee equal to 5.0% of the
gross revenues of the community. The Company paid a non-refundable deposit of
$2.0 million to acquire an option to purchase the community for a purchase price
of $14.0 million, plus the assumption of certain specified liabilities. On May
26, 2000, the Company assigned its purchase option to a third party, which
exercised the option and purchased the property. The Company subsequently
entered into a series of agreements with this third party to lease and operate
the retirement community. In connection with this transaction, the Company is
required to maintain $17.6 million of assets limited as to use, on which the
Company receives the interest. The Company recognized $3.7 million and $1.9
million of life estate income in 2001 and 2000 respectively, pursuant to this
management agreement. At December 31, 2001 and 2000, the Company has receivables
from the lessor of $971,000 and a note payable of $888,000 to the lessor,
respectively. Such amounts are non-interest bearing.
In 1998, the Company entered into an agreement to provide development services
related to the development and construction of a senior living community in
Sarasota, Florida that opened during 2000. The community is owned by a limited
liability company in which Mr. Roskamp owns a 57.5% interest. The Company
managed the community following its completion pursuant to a five-year
management agreement that provides for a management fee equal to 5.0% of the
gross revenues of the community. In consideration of the Company's payment of a
$2.0 million fully-refundable deposit, the Company acquired an option to
purchase the community for a price to be negotiated. During the third quarter of
2000, the Company chose to cancel the purchase option, and the full $2.0 million
deposit was refunded. The management agreement for this community was mutually
terminated on December 31, 2000. The Company recognized $750,000 and $900,000,
of development fees in 2000 and 1999, respectively and $65,300 in management
fees in 2000, from the agreement.
83
In connection with the 1998 purchase business combination, Mr. Roskamp entered
into a three-year consulting agreement with the Company that provided for annual
payments of $150,000 to Mr. Roskamp through June 2001.
(19) SUBSEQUENT EVENTS
Refinancing Plan Events
On January 1, 2002, the Company acquired for $7.1 million a Free-standing AL
community in Clearwater, Florida. The Company funded this acquisition by
assuming a $4.7 million mortgage note. The community has 83 units, of which 57
are assisted living and 26 are memory enhanced.
On January 1, 2002, the Company sold for $45.0 million a retirement center in
Charlotte, North Carolina. The Company used a majority of the sale proceeds to
pay $34.8 million of debt associated with the property. The Company
contemporaneously leased the property back from the buyer under a 15-year lease
agreement with two five-year renewal options, and has the right of first refusal
to repurchase the community.
On January 25, 2002, the Company amended two loan agreements totaling $7.2
million. The amendment extends the due dates of the agreements to December 31,
2002, requires additional monthly principal payments of $60,000, and required a
$1.0 million cash collateral deposit. In connection with the amendment, the
Company agreed to, among other things, (1) retire or refinance approximately
$92.3 million of indebtedness on or before July 1, 2002, so as to mature no
earlier than December 1, 2003 and (2) retire or refinance the outstanding
principal amount of $132.9 of its Debentures on or before September 1, 2002 so
as to mature no earlier than October 1, 2004 (see note 3 to the Company's
Consolidated Financial Statements).
On February 12, 2002, the Company sold Holley Court Terrace, a Retirement Center
in Oakpark, Illinois, for $18.5 million. The Company used a portion of the sale
proceeds to pay $12.9 million of debt associated with the property. The Company
contemporaneously leased the property back from the buyer under a 15-year lease
agreement with two five-year renewal options, and has the right of first refusal
to repurchase the community.
On February 12, 2002, the Company sold The Homewood at Coconut Creek, a
Free-standing AL in Coconut Creek, Florida, for $9.7 million. The sale agreement
contains certain formula-based earnout provisions which may provide additional
sales proceeds to the Company based on future performance. The Company used a
portion of the sale proceeds to pay $8.6 million of debt associated with the
property. The Company contemporaneously leased the property back from the buyer
under a 15-year lease agreement with two five-year renewal options, and has the
right of first refusal to repurchase the community.
On February 7, 2002, the Company amended a master lease agreement to include
four Free-standing AL communities which were previously leased under individual
leases from this same lessor.
On March 22, 2002, the Company sold The Heritage Club at Greenwood Village, a
Free-standing AL in Denver, Colorado, for $17.9 million. The sale agreement
contains certain formula-based earnout provisions which may provide additional
sales proceeds to the Company based on future performance. The Company used a
portion of the sale proceeds to pay $16.3 million of debt associated with the
property. The Company contemporaneously leased the property back from the buyer
under a 15-year lease agreement with two five-year renewal options, and has the
right of first refusal to repurchase the community.
On March 29, 2002, the Company sold two Retirement Centers and three
Free-standing ALs for $73.2 million. The sale agreement contains certain
formula-based earnout provisions which may provide additional sales proceeds to
the Company based on future performance. The Company used a portion of the
proceeds to repay $54.9 million of debt. The Company contemporaneously leased
the properties back from the buyer under a 15-year lease agreement with two
ten-year renewal options. The Company has an option to acquire one of the
Retirement Centers after March 28, 2006, subject to certain conditions.
84
Other Subsequent Events
On January 1, 2002, the Company became self-insured for employee medical
coverage. Estimated costs related to these self-insurance programs will be
accrued based on known claims and projected settlements of unasserted claims.
Subsequent changes in, among others, assumed claims, claim costs, claim
frequency, as well as changes in actual experience, could cause these estimates
to change. Medical insurance is provided to the communities under a blanket
commercial policy purchased by the Company. Premiums will be allocated to each
community based upon factors similar to those used by the insurance provider to
compute the aggregate group policy premium.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of the
Company is incorporated herein by reference to the Company's definitive proxy
statement for its Annual Meeting of Shareholders to be held May 30, 2002 to be
filed with the Securities and Exchange Commission (the "SEC"). Pursuant to
General Instruction G(3), certain information concerning the executive officers
of the Company is included in Part I of this report under the caption "Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the
section entitled "Executive Compensation" in the Company's definitive proxy
statement for its Annual Meeting of Shareholders to be held May 30, 2002 to be
filed with the SEC.
85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
section entitled "Security Ownership of Management and Certain Beneficial
Owners" in the Company's definitive proxy statement for its Annual Meeting of
Shareholders to be held May 30, 2002 to be filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
section entitled "Certain Transactions" in the Company's definitive proxy
statement for its Annual Meeting of Shareholders to be held May 30, 2002 to be
filed with the SEC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14. (a) (1) Financial Statements: See Item 8
(2) Financial Statement Schedules: See Item 8
(3) Exhibits required by item 601 of Regulation S-K are as
follows:
Exhibit
Number Description
------ -----------
2.1 Limited Partnership Agreement of American Retirement Communities,
L.P. dated February 7, 1995, as amended April 1, 1995.(1)
2.2 Articles of Share Exchange between American Retirement Communities,
L.P., and American Retirement Corporation, dated March 31, 1995.(1)
2.3 Reorganization Agreement, dated February 28, 1997.(1)
2.4 Agreement and Plan of Merger, dated as of May 29, 1998, by and among
American Retirement Corporation, Freedom Group, Inc., and the
shareholders of Freedom Group, Inc.(2)
2.5 Supplemental Agreement, dated July 14, 1998, among American
Retirement Corporation, Freedom Group, Inc., Robert G. Roskamp, PHC,
L.L.C., and The Edgar and Elsa Prince Foundation(3)
2.6 Amendment to Agreement and Plan of Merger, dated October 12, 1998,
by and among American Retirement Corporation and each of the former
shareholders of Freedom Group, Inc. (3)
3.1 Charter of the Registrant(1)
3.2 Articles of Amendment to the Charter of the Registrant(3)
3.3 Articles of Amendment to the Charter of the Registrant, dated May
12, 1999 (10)
3.4 Bylaws of the Registrant, as amended(3)
4.1 Specimen Common Stock certificate(1)
4.2 Article 8 of the Registrant's Charter (included in Exhibit 3.1)
4.3 Form of Indenture between the Company and IBJ Schroder Bank and
Trust Company, as Trustee, relating to the 5 3/4 % Convertible
Subordinated Debentures due October 1, 2002 of the Company.(4)
4.4 Rights Agreement, dated November 18, 1998, between American
Retirement Corporation and American Stock Transfer and Trust
Company.(5)
10.1 American Retirement Corporation 1997 Stock Incentive Plan, as
amended(6)
10.2 American Retirement Corporation Employee Stock Purchase Plan(1)
10.3 First Amendment to Employee Stock Purchase Plan(8)
10.4 American Retirement Corporation 401(k) Retirement Plan(1)
10.5 Officers' Incentive Compensation Plan(1)
10.6 Registration Rights Policy(1)
10.7 Registration Rights Agreement, dated July 14, 1998, by and between
American Retirement Corporation and Robert G. Roskamp, PHC, LLC, and
the Edgar and Elsa Prince Foundation(7)
86
10.8 Shareholder Agreement, dated July 14, 1998, by and between American
Retirement Corporation and Robert G. Roskamp(7)
10.9 Consulting Agreement, dated July 14, 1998, by and between American
Retirement Corporation and Robert G. Roskamp(7(1))
10.10 Lease and Security Agreement, dated January 2, 1997, by and between
Nationwide Health Properties, Inc. and American Retirement
Communities, L.P.(4)
10.11 Lease and Security Agreement, dated January 2, 1997, by and between
N.H. Texas Properties Limited Partnership and Trinity Towers Limited
Partnership(4)
10.12 Amended and Restated Loan Agreement, dated December 21, 1994,
between Carriage Club of Denver, L.P. and General Electric Capital
Corporation(1)
10.13 Amended and Restated Promissory Note, dated December 21, 1994,
between Carriage Club of Denver, L.P. and General Electric Capital
Corporation(1)
10.14 Assumption, Consent and Loan Modification Agreement, dated February
9, 1995, by and among Carriage Club of Denver, L.P. and General
Electric Capital Corporation(1)
10.15 Loan Agreement, dated October 31, 1995, by and between American
Retirement Communities, L.P. and First Union National Bank of
Tennessee, as amended.(1)
10.16 Amended and Restated Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. and First Union National Bank
of Tennessee, as amended.(1)
10.17 Revolving Credit Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. and First Union National Bank
of Tennessee, as amended.(1)
10.18 Standby Note, dated October 31, 1995, by American Retirement
Communities, L.P. and First Union National Bank of North Carolina(1)
10.19 Reimbursement Agreement, dated October 31, 1995, by American
Retirement Communities, L.P. and First Union National Bank of North
Carolina(1)
10.20 Letter of Intent, dated April 3, 1997, by National Health Investors,
Inc. to American Retirement Corporation(1)
10.21 Master Loan Agreement, dated December 23, 1996 between First
American National Bank and American Retirement Communities, L.P.(1)
10.22 Letter of Intent, dated February 24, 1997, by National Health
Investors, Inc. to American Retirement Corporation(1)
10.23 Deed of Lease, dated as of October 23, 1997, between Daniel U.S.
Properties Limited Partnership, as Lessor, and ARC Imperial Plaza,
Inc. as Lessee(8)
10.24 Loan Agreement, dated as of December 31, 1997, between General
Electric Capital Corporation and Fort Austin Limited Partnership(8)
10.25 Promissory Note, dated December 31, 1997, by Fort Austin Limited
Partnership to General Electric Capital Corporation in the original
principal amount of $62,330,000(8)
10.26 Promissory Note, dated December 31, 1997, by Fort Austin Limited
Partnership to General Electric Capital Corporation in the original
principal amount of $50,000,000(8)
10.27 Fixed Rate Program Promissory Note Secured by Mortgage, dated July
9, 1998, by ARCLP-Charlotte, LLC to Heller Financial, Inc. in the
original principal amount of $36,000,000(7)
10.28 Financing and Security Agreement, dated June 8, 1999, by and among
ARC Capital Corporation II and Bank United, as Agent(9)
10.29 Loan Commitment, dated July 30, 1999, among American Retirement
Corporation and Guaranty Federal Bank, F.S.B. (9)
10.30 Term Sheet, dated May 28, 1999, among Health Care REIT, Inc. and
American Retirement Corporation(9)
10.31 Amended and Restated Financing and Security Agreement, dated
February 11, 2000, by and among ARC Capital Corporation II and Bank
United, as Agent(10)
10.32 Loan Agreement, dated March 23, 2000, by and between ARC Heritage
Club, Inc. and GMAC Commercial Mortgage Corporation(11)
10.33 Construction Loan Agreement, dated March 17, 2000 between Freedom
Village of Sun City Center, Ltd. and Suntrust Bank, Tampa Bay(12)
10.34 Real Estate Mortgage and Security Agreement, dated May 8, 2000,
between Lake Seminole Square Management Company, Inc., Freedom
Group-Lake Seminole Square, Inc. and Aid Association for
Lutherans(12)
87
10.35 Construction Loan Agreement, dated September 28, 2000 between ARC
Scottsdale, LLC and Guaranty Federal Bank, F.S.B.(1)
10.36 First Amendment to Amended and Restated Financing and Security
Agreement(13)
10.37 First Amendment to Amended and Restated Guaranty of Payment
Agreement(13)
10.38 Lease Agreement by and between Cleveland Retirement Properties, LLC,
and ARC Westlake Village, Inc., dated December 18, 2000(14)
10.39 Promissory Note, dated December 30, 1998, between CI Newport News
Limited Partnership and GMAC Commercial Mortgage Corporation (which
has been assumed by the Company) (14)
10.40 Loan Agreement, dated March 30, 2001, between ARC Post Oak, L.P. and
GMAC Commercial Mortgage Corporation(14)
10.41 Second Amendment to Amended and Restated Financing and Security
Agreement, dated June 30, 2001 between Washington Mutual Bank, FA
and ARC Capital Corporation II(15)
10.42 Purchase and Sale Agreement dated June 13, 2001 between Fort Austin
Limited Partnership and Corporate Realty Investment Company LLC(15)
10.43 Executive Change in Control Severance Benefits Plan(15)
10.44 American Retirement Corporation 401(k) Plan and Trust and Adoption
Agreement(16)
10.45 1997 Stock Incentive Plan, as amended(16)
10.46 Third Amendment to Amended and Restated Financing and Security
Agreement, dated September 30, 2001 between Washington Mutual Bank,
FA and ARC Capital Corporation II(16)
10.47 Loan Agreement, dated September 26, 2001, between ARC Holley Court
Terrace, LLC and GMAC Commercial Mortgage Corporation(16)
10.48 Operating Lease, dated July 1, 2001, between Maybrook Realty, Inc.
and ARC HDV, LLC.(16)
10.49 Master Lease and Security Agreement, dated July 31, 2001, between
ARC Pinegate, L.P., ARC Pearland, L.P., American Retirement
Corporation, Trinity Towers, L.P., ARC Lakeway, L.P., ARC Spring
Shadow, L.P., Nationwide Health Properties, Inc. and NH Texas
Properties, L.P.(16)
10.50 Real Estate Purchase and Sale Contract, dated November 9, 2001,
between CNL Retirement Corp and American Retirement Corporation
10.51 Deed of Trust Note, dated December 3, 2001, between Highland
Mortgage Company and ARC Wilora Lake, Inc.
10.52 Promissory Note, dated January 1, 2002, between SIRROM Partners and
C/M Corporation
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
----------
1 Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-23197).
2 Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated May 29, 1998.
3 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
4 Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-34339).
5 Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated November 24, 1998.
6 Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-94747)
7 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
8 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
9 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.
10 Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.
11 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
12 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000.
13 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.
14 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
15 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001.
16 Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.
(b) Reports on Form 8-K filed during the quarter ended December 31, 2001:
On November 14, 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 third quarter ended September 30,
2001.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 29, 2002 By: /s/ W.E. Sheriff
---------------------------------------
W.E. Sheriff
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ W.E. Sheriff Chairman and March 29, 2002
----------------------------- Chief Executive Officer
W.E. Sheriff (Principal Executive Officer)
/s/ George T. Hicks Executive Vice President - Finance, March 29, 2002
----------------------------- Chief Financial Officer, Secretary and
George T. Hicks Treasurer (Principal Financial and
Accounting Officer)
/s/ Frank M. Bumstead Director March 29, 2002
-----------------------------
Frank M. Bumstead
/s/ Christopher Coates Director March 29, 2002
-----------------------------
Christopher J. Coates
/s/ Clarence Edmonds Director March 29, 2002
-----------------------------
Clarence Edmonds
/s/ John A. Morris, Jr., M.D. Director March 29, 2002
-----------------------------
John A. Morris, Jr., M.D.
/s/ Daniel K. O'Connell Director March 29, 2002
-----------------------------
Daniel K. O'Connell
/s/ Nadine C. Smith Director March 29, 2002
-----------------------------
Nadine C. Smith
/s/ Lawrence J. Stuesser Director March 29, 2002
-----------------------------
Lawrence J. Stuesser
89
American Retirement Corporation
Schedule II - Valuation and Qualifying Accounts
Additions
-------------------------
Balance at Charged to Charged to Balance at
Beginning of costs and other End of
Description Period expenses accounts Deductions Period
---------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
====================================================================
Year ended December 31, 1999 $ 242 $ 149 $ - $ (123) $ 268
====================================================================
Year ended December 31, 2000 $ 268 $ 1,266 $ - $ (182) $ 1,352
====================================================================
Year ended December 31, 2001 $ 1,352 $ 3,960 $ - $ (127) $ 5,185
====================================================================
Deferred Tax Valuation Account
====================================================================
Year ended December 31, 1999 $ 6,653 $ 901 $ - $- $ 7,554
====================================================================
Year ended December 31, 2000 $ 7,554 $ 1,163 $ - $- $ 8,717
====================================================================
Year ended December 31, 2001 $ 8,717 $ 7,511 $ - $- $16,228
====================================================================
Reserve for Contractual loss
====================================================================
Year ended December 31, 1999 $ - $ 6,200 $ - $- $ 6,200
====================================================================
Year ended December 31, 2000 $ 6,200 $ - $ - $(5,389) $ 811
====================================================================
Year ended December 31, 2001 $ 811 $ 443 $ - $ (467) $ 787
====================================================================
90
American Retirement Corporation
Schedule IV - Mortgage Loans on Real Estate
Principal amount
Final Periodic Carrying of loans subject
Interest Maturity Payment Face amount amount of to delinquent
Description Rate Date Terms Prior liens of mortgages mortgages(2) principal or interest
------------------------------------------------------------------------------------------------------------------------------------
First mortgage loan LIBOR+200 01-Oct-05 (1) - 1,533 1,533 -
First mortgage loan LIBOR+200 01-Jan-07 (1) - 12,127 12,127 -
First mortgage loan LIBOR+200 01-Apr-07 (1) - 9,644 9,644 -
First mortgage loan LIBOR+300 01-Jul-07 (1) - 7,766 7,766 -
First mortgage loan LIBOR+300 01-Jul-07 (1) - 1,378 1,378 -
First mortgage loan LIBOR+200 01-Dec-09 (1) - 17,513 17,513 -
First mortgage loan LIBOR+300 01-Dec-09 (1) - 9,778 9,778 -
First mortgage loan LIBOR+200 01-Jan-10 (1) - 8,221 8,221 -
First mortgage loan LIBOR+200 01-Feb-10 (1) - 8,559 8,559 -
Other first mortgage loans - 3,186 3,186 -
---------------------------------------------------------------------
$ - $ 79,705 $ 79,705 $ -
=====================================================================
(1) Principal payment based upon a 25-year amortization schedule with
outstanding principal due at maturity.
(2) The carrying amount of the mortgage aggregate cost for federal income tax
purposes is $79,705.
--------
Balance at December 31, 1998 $ 19,731
========
Additions during period:
New mortgage loans 79,028
Deductions during period:
Collections of principal (174)
Write offs of impaired loans (1,349)
------- --------
Balance at December 31, 1999 $ 97,236
========
Additions during period:
New mortgage loans 23,084
Deductions during period:
Collections of principal (31,815)
------- --------
Balance at December 31, 2000 $ 88,505
========
Additions during period:
New mortgage loans 6,285
Deductions during period:
Collections of principal (14,633)
Write offs of impaired loans (652)
------- --------
Balance at December 31, 2001 $ 79,505
========
91