1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2001
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ___________
Commission file number 01-13031
--------
AMERICAN RETIREMENT CORPORATION
-------------------------------
(Exact name of Registrant as specified in its charter)
Tennessee 62-1674303
--------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
111 Westwood Place, Suite 200, Brentwood, TN 37027
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(615) 221-2250
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 11, 2001, there were 17,203,474 shares of the Registrant's common
stock, $.01 par value, outstanding.
2
INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2001 and December 31, 2000..............................................3
Condensed Consolidated Statements of
Operations for the Three Months Ended
March 31, 2001 and 2000 ..........................................................4
Condensed Consolidated Statements of Cash
Flows for the Three Months Ended March 31,
2001 and 2000 ....................................................................5
Notes to Condensed Consolidated Financial Statements .............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......................20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................20
Signatures .................................................................................21
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
March 31, 2001 December 31, 2000
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,813 $ 19,850
Assets limited as to use 8,409 5,181
Accounts receivable, net 16,180 15,772
Inventory 1,100 1,079
Prepaid expenses 2,403 2,906
Deferred income taxes 332 332
Other current assets 4,938 5,608
---------- ----------
Total current assets 59,175 50,728
Assets limited as to use, excluding amounts classified as current 75,369 73,785
Land, buildings and equipment, net 487,735 473,062
Notes receivable 90,989 90,707
Goodwill, net 37,251 37,503
Leasehold acquisition costs, net 15,705 16,103
Other assets 47,131 50,592
---------- ----------
Total assets $ 813,355 $ 792,480
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,009 $ 7,449
Accounts payable 4,050 7,502
Accrued expenses 21,918 16,256
Other current liabilities 3,861 5,241
---------- ----------
Total current liabilities 37,838 36,448
Long-term debt, excluding current portion 367,292 338,261
Convertible subordinated debentures 134,680 137,980
Refundable portion of life estate fees 42,881 44,739
Deferred life estate income 52,975 52,765
Tenant deposits 6,599 6,612
Deferred gain on sale-leaseback transactions 15,510 16,122
Deferred income taxes 11,276 13,079
Other long-term liabilities 6,006 4,517
---------- ----------
Total liabilities 675,057 650,523
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,
17,166,209 and 17,065,395 shares issued and outstanding, respectively 171 171
Additional paid-in capital 145,268 145,079
Accumulated other comprehensive loss, net (1,030) --
Accumulated deficit (6,111) (3,293)
---------- ----------
Total shareholders' equity 138,298 141,957
---------- ----------
Total liabilities and shareholders' equity $ 813,355 $ 792,480
========== ==========
See accompanying notes to condensed financial statements.
3
4
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Three Months Ended March 31,
----------------------------
2001 2000
-------- --------
Revenues:
Resident and health care $ 59,672 $ 45,148
Management and development services 709 1,629
-------- --------
Total revenues 60,381 46,777
Operating expenses:
Community operating expenses 41,789 29,956
General and administrative 4,994 4,302
Lease expense, net 6,751 3,528
Depreciation and amortization 5,092 3,893
-------- --------
Total operating expenses 58,626 41,679
-------- --------
Operating income 1,755 5,098
Other income (expense):
Interest expense (9,226) (7,894)
Interest income 3,184 3,553
Gain on sale of assets 181 265
Equity in losses of managed special purpose entity communities (966) --
Other 513 (42)
-------- --------
Other expense, net (6,314) (4,118)
-------- --------
Income (loss) from continuing operations before income taxes,
minority interest, and extraordinary item (4,559) 980
Income tax (benefit) expense (1,446) 384
-------- --------
Income (loss) from continuing operations before minority
interest and extraordinary item (3,113) 596
Minority interest in losses (earnings) of consolidated subsidiaries, net of tax (100) 148
-------- --------
Income (loss) from continuing operations before extraordinary item (3,213) 744
Extraordinary gain (loss) on extinguishment of debt, net of tax 395 (124)
-------- --------
Net income (loss) $ (2,818) $ 620
======== ========
Basic earnings (loss) per share:
Basic earnings (loss) per share before extraordinary item $ (0.19) $ 0.04
Extraordinary gain (loss), net of tax 0.02 (0.01)
-------- --------
Basic earnings (loss) per share $ (0.16) $ 0.04
======== ========
Diluted earnings (loss) per share:
Diluted earnings (loss) per share before extraordinary item $ (0.19) $ 0.04
Extraordinary gain (loss), net of tax 0.02 (0.01)
-------- --------
Diluted earnings (loss) per share $ (0.16) $ 0.04
======== ========
Weighted average shares used for basic earnings (loss) per share data 17,135 17,152
Effect of dilutive common stock options -- 97
-------- --------
Weighted average shares used for diluted earnings (loss) per share data 17,135 17,249
======== ========
See accompanying notes to condensed financial statements.
4
5
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended March 31,
----------------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ (2,818) $ 620
Extraordinary (gain) loss on extinguishment of debt, net of tax (395) 124
-------- --------
Income (loss) from continuing operations (3,213) 744
Adjustments to reconcile income (loss) from continuing operations to net
cash and cash equivalents provided by operating activities:
Depreciation and amortization 5,092 3,893
Amortization of deferred entrance fee revenue (2,625) (1,418)
Amortization of deferred financing costs 595 75
Provision for uncollectible account receivables 500 --
Advances to joint ventures (1,512) --
Proceeds from terminated lifecare contracts 891 784
Proceeds from life estate sales, net of refunds 985 1,509
Deferred income tax benefit (1,467) 424
Amortization of deferred gain on sale-leaseback transactions (612) (113)
Minority interest in losses (earnings) of consolidated subsidiaries 100 (239)
Losses from unconsolidated joint ventures -- 232
Gain on sale of assets (181) (265)
Proceeds from issuance of stock through employee 401k plan 189 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (827) (405)
Inventory (8) 67
Prepaid expenses 511 (18)
Other assets 2,814 4,215
Accounts payable (3,720) (2,119)
Accrued expenses and other current liabilities 3,756 994
Tenant deposits (16) 2
Other liabilities (620) 404
-------- --------
Net cash and cash equivalents provided by operating activities 632 8,766
Cash flows from investing activities:
Additions to land, buildings and equipment (6,808) (14,003)
Expenditures for acquisitions, net of cash received -- (4,960)
Advances for development projects, net -- (3,269)
Investments in joint ventures -- (365)
Contributions from minority owners -- 372
Proceeds from the sale of assets 2,853 294
Other investing activities 48 (57)
Changes in assets and liabilities, net of effects from acquisitions:
Expenditures for leasehold acquisitions, net of cash received -- (1,925)
(Purchase) sale of assets limited as to use (4,812) 2,099
Receipts from (issuance of) notes receivable 1,172 (11,731)
-------- --------
Net cash used by investing activities (7,547) (33,545)
See accompanying notes to condensed financial statements.
5
6
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(in thousands)
Three Months Ended March 31,
----------------------------
2001 2000
-------- --------
Cash flows from financing activities:
Proceeds from issuance of stock through employee stock purchase plan -- 48
Proceeds from the issuance of long-term debt 21,563 45,482
Principal payments on long-term debt (4,028) (16,411)
Purchase of convertible debentures (2,625) --
Principal reductions in master trust liability (1,640) (1,174)
Expenditures for financing costs (392) (1,315)
-------- --------
Net cash provided by financing activities 12,878 26,630
-------- --------
Net increase in cash and cash equivalents 5,963 1,851
-------- --------
Cash and cash equivalents at beginning of period 19,850 21,881
-------- --------
Cash and cash equivalents at end of period $ 25,813 $ 23,732
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest (including capitalized interest) $ 7,236 $ 5,757
======== ========
Income taxes paid $ -- $ 58
======== ========
Supplemental disclosure of non-cash transactions:
During the respective periods, the Company acquired certain communities and
entered into certain lease transactions. In conjunction with the
transactions, assets and liabilities were assumed as follows:
Current assets $ -- $ 837
Land, buildings and other assets -- 4,432
Current liabilities -- 288
Long-term debt -- 21
Other liabilities -- -
During the quarter ended March 31, 2001, the Company funded its 401(k)
contribution with 44,260 shares of its common stock at a fair market value of
approximately $189,000.
During the quarter ended March 31, 2001, the Company contributed net advances of
$1,512,000 to the capital of two joint ventures.
Other Comprehensive Loss, resulting from two interest rate swap agreements, was
$1.0 million, net of deferred tax provision of $555,000 for the quarter ended
March 31, 2001.
During the quarter ended March 31, 2001, the Company assumed $12.1 million term
loan from a mortgage lender in conjunction with the purchase of land.
See accompanying notes to condensed financial statements.
6
7
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
American Retirement Corporation (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Certain 2000
amounts have been reclassified to conform to the 2001 presentation. Operating
results for the three months ended March 31, 2001 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
2001. These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
2. LIQUIDITY
The Company's credit agreements contain restrictive covenants that include the
maintenance of minimum tangible net worth, prescribed debt service coverage,
liquidity, capital expenditure reserves and occupancy levels. Effective as of
September 30, 2000, the Company amended several of these financial covenants in
order to remain in compliance therewith. The Company has received a waiver of or
is in compliance with its required financial covenants at March 31, 2001.
Accordingly, the related debt is classified in accordance with the contractual
maturity schedules. Future compliance with the financial covenants is largely
dependent upon improvements in the operations of the Company's Free-standing
Assisted Living Communities ("Free-standing ALs"). Improvements in the Company's
operations are also subject to various factors such as economic conditions,
interest rate levels, competition for residents, increases in operating costs
and various other factors, some of which are beyond the Company's control.
Consequently, there can be no assurances that the Company will remain in
compliance with those financial covenants. If the Company fails to meet the
covenants, unless amended or waived, the lenders will have the right to cease
funding and accelerate repayment of the debt, which would have a material
adverse effect on the Company.
The Company is highly leveraged and has a substantial amount of debt and lease
obligations. At March 31, 2001, the scheduled debt maturities during the twenty
one months ended December 31, 2002 total $372.3 million. Internally generated
cash will not be sufficient to meet all of these debt obligations. Furthermore,
due to adverse market conditions and the market price of the Company's stock,
the Company believes that it is unlikely that it will be able to raise capital
in the public equity or debt markets for the foreseeable future. Accordingly,
the Company's ability to refinance its maturing obligations will depend, in
large part, upon its ability to obtain new or replacement financing on
acceptable terms. The Company is also focusing on generating additional proceeds
from incremental leverage including possible combinations of senior and
mezzanine financing. At the same time, the Company is also examining other
alternatives to obtain funding, including the monetization of certain stabilized
communities. The Company has engaged in preliminary discussions with its
existing lenders regarding the extension of certain of the Company's maturing
indebtedness. There can be no assurances that the Company will be able to
refinance, extend or obtain new financing. Failure to meet the debt service
requirements will have a material adverse effect on the Company.
A significant amount of the Company's indebtedness is cross-defaulted. Any
non-payment, other default with respect to such obligations, or failure to
comply with the covenants of the debt agreements could cause lenders to cease
funding, accelerate payment obligations or to foreclose upon the communities
securing the indebtedness. Further, because of the cross-default and cross
collateralization provisions in
7
8
certain of the Company's mortgages, debt instruments and leases, a default by
the Company on one of its payment obligations could result in default or
acceleration of other obligations, which would have a material adverse effect on
the Company.
3. EARNINGS PER SHARE
Basic earnings or loss per share for the three months ended March 31, 2001 and
2000 have been computed on the basis of the weighted average number of shares
outstanding. The weighted average number of shares outstanding for diluted
earnings per share includes dilutive common stock equivalents, which consist of
in-the-money stock options. During the three months ended March 31, 2001, there
were 1,182,731 options to purchase shares of common stock outstanding which had
an exercise price below the average market price of the common shares. Such
options were anti-dilutive because the Company incurred a loss from continuing
operations for the quarter ended March 31, 2001, and therefore were not included
in the computation of diluted earnings per share.
The Company's 5 3/4% Convertible Debentures outstanding during the periods
presented were not included in the computation of diluted earnings per share
because the conversion price ($24.00 per share) was greater than the average
market price of the common shares for the respective periods and, therefore, the
effect would be anti-dilutive.
On January 4, 2001, the Company granted options to purchase approximately
1,120,000 shares of common stock. These options were granted with an exercise
price of $3.10, the fair value of the shares at the date of grant. These grants
are one-third vested after six months, 12 months and 24 months, and have a ten
year term.
The following options to purchase shares of common stock were outstanding during
each of the following periods, but were not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares for the respective periods and,
therefore, the effect would be anti-dilutive.
Three Months
Ended March 31,
2001 2000
------ -------
Average number of options (in thousands) 778 1,930
Weighted-average exercise price $ 8.45 $ 16.00
4. LONG TERM DEBT
During the three months ended March 31, 2001, the Company entered into various
financing commitments including a secured term loan from a mortgage lender in
the amount of $17.3 million, with interest payable at LIBOR plus 3%. Interest
and principal are payable monthly, based on a twenty-five year amortization,
with all remaining balances due in March 2026. The Company used a portion of the
proceeds on the above loan to refinance a portion of a term note to a capital
corporation, repaying the outstanding amount of $3.5 million.
On December 18, 2000, the Company sold a community located in Westlake, Ohio for
$26.0 million and subsequently 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. The Company expects that a portion of
the taxable gain from the transaction will be deferred by like-kind exchanges,
which the Company anticipates consummating during 2001. During the three months
ended March 31, 2001, the Company completed the purchase of land in Newport
News, Virginia, which qualifies as a partial like-kind exchange for the
Westlake, Ohio property. In connection with that acquisition, the Company
assumed a $12.1 million term loan from a mortgage lender, secured by the land,
with interest at 7.43% and principle due monthly, with all remaining balances
due in January 2024.
8
9
The Company announced, during the quarter ended March 31, 2000, that the Board
of Directors had authorized the repurchase, from time to time, of up to $30.0
million of its 5 3/4% Convertible Debentures. The timing and amount of purchases
of these debentures will depend upon prevailing market conditions, availability
of capital, alternative uses of capital and other factors. During the quarter
ended March 31, 2001, the Company purchased $3.3 million of the 5 3/4%
Convertible Debentures, resulting in an extraordinary gain on extinguishment of
debt, net of tax, of $395,000. Additional purchases of the 5 3/4% Convertible
Debentures, if any, are likely to be made primarily in the open market.
5. ASSET IMPAIRMENTS AND CONTRACTUAL LOSSES
During the quarter ended December 31, 1999, the Company abandoned certain
development projects and recorded charges of approximately $6.7 million for
contractual losses and other costs. The Company made cash payments of $5.9
million in 2000 and $328,000 during the quarter ended March 31, 2001 related to
these costs. An accrual of $699,000 remains at March 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 certain of the abandoned projects
as of March 31, 2001. The Company intends to continue these marketing activities
for the remaining three land parcels during 2001.
6. LEASEHOLD ACQUISITIONS AND SPECIAL PURPOSE ENTITIES (SPE)
The Company has previously 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 has entered into
long-term ground leases with special purpose entities, generally a subsidiary of
a bank (the Owner). The Owner has entered into a construction agreement with a
lender. The Company is required to pledge to the Owners certificates of deposit
as collateral to support the lessor's equity contribution commitment. At March
31, 2001 and December 31, 2000, the Company has pledged certificates of deposit
and other investments in the aggregate of $45.6 million and $45.4 million,
respectively, which are classified as non-current assets limited as to use. The
Company receives the interest income earned on these certificates of deposit.
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 lessees to manage the operations of the leased senior living communities
("Managed SPE Communities"). The management agreements provide for the payment
of management fees to the Company based on a percentage of each communities'
gross revenues and requires the Company to fund the lessee's operating deficits
above specified amounts. The Company recorded $966,000 of operating deficits
during the three months ended March 31, 2001 and no operating deficits during
the three months ended March 31, 2000. Such amounts are recorded as equity in
losses of managed SPE communities on the accompanying Statements of Operations.
The Company expects that it will incur additional operating deficit costs during
the remainder of 2001. The management agreements also provide the Company with
purchase options or rights of first refusal to assume the lessee's leasehold
interests in the leases at a formula price.
During the three months ended March 31, 2001, the Company entered into a lease
for a Free-standing AL community formerly leased by an SPE which is an affiliate
of John Morris, a director of the Company. In conjunction with the lease, the
Company acquired certain assets and assumed certain liabilities from this SPE.
The assets and liabilities were recorded at cost, which approximates fair value.
At March 31, 2001, approximately $1.7 million was due to the Company from these
other SPE affiliates of John Morris. Such amounts are expected to be reimbursed
through the future acquisition of the leasehold interests of these affiliates.
9
10
At March 31, 2001, there were 11 Managed SPE communities leased by various
lessees, five of which are leased by an affiliate of John Morris. If offered and
accepted, the Company anticipates acquiring certain, and perhaps all, of the
leasehold interests, under its purchase options or rights of first refusal, in
these 11 communities during 2001 and 2002. If all were acquired, the Company
estimates the combined purchase price would be approximately $18.0 to $22.0
million. Due to the leasehold acquisitions consumated and potential future
acquisitions consumated and potential future acquisitions, the Company expects
to incur significant operating losses until the communities achieve break-even
occupancy levels. If the Company does not acquire these leasehold interests, it
remains responsible for funding future operating losses which exceed specified
limits.
7. SEGMENT INFORMATION
The Company has significant operations principally in two segments: (1)
Retirement Centers and (2) Free-Standing ALs. Retirement Centers represent 32 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.
The Company evaluates performance on EBITDAR, which is defined as earnings
before net interest expense, income tax expense, depreciation, amortization,
rent, equity in loss of special purpose entities, other income (expense),
minority interest, and extraordinary items. The following is a summary of total
revenues, EBITDAR, and total assets by segment for the quarters ended March 31,
2001 and 2000 (in thousands). (1)(2)
THREE MONTHS ENDED
MARCH 31, MARCH 31, $ %
2001 2000 VARIANCE VARIANCE
--------- --------- -------- --------
Revenues:
Retirement Centers $ 52,238 $ 43,160 $ 9,078 21.0%
Free-standing ALs 7,434 1,988 5,446 273.9%
Corporate/Other 709 1,629 (920) (56.5)%
-------- -------- -------- ------
Total $ 60,381 $ 46,777 $ 13,604 29.1%
======== ======== ======== ======
THREE MONTHS ENDED
MARCH 31, MARCH 31, $ %
2001 2000 VARIANCE VARIANCE
--------- --------- -------- --------
NOI / Community EBITDAR:
Retirement Centers $ 18,679 $ 15,254 $ 3,425 22.5%
Free-standing ALs (800) (64) (736) n/a
Corporate/Other (4,281) (2,671) (1,610) (60.3)%
-------- -------- -------- -----
Net Operating income 13,598 12,519 1,079 8.6%
Lease expense 6,751 3,528 3,223 91.4%
Depreciation and Amortization 5,092 3,893 1,199 30.8%
-------- -------- -------- -----
Operating income $ 1,755 $ 5,098 $ (3,343) (65.6)%
======== ======== ======== =====
10
11
MARCH 31, DECEMBER 31, $ %
2001 2000 VARIANCE VARIANCE
-------- ------------ -------- --------
Total Assets:
Retirement Centers $439,168 $445,020 $ (5,852) (1.3%)
Free-standing ALs 69,402 68,266 1,136 0.2%
Corporate/Other 304,785 279,194 25,591 9.2%
-------- -------- -------- ----
Total $813,355 $792,480 $ 20,875 2.6%
======== ======== ======== ====
(1) Segment data does not include any inter-segment transactions or
allocated costs.
(2) All prior period data has been reclassified to conform to the new
segment alignment.
8. COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims which arise in
the ordinary course of its business. In the opinion of management, the ultimate
liability with respect to those proceedings and claims will not materially
affect the financial position, operations, or liquidity of the Company. The
Company maintains commercial insurance on a claims-made basis for medical
malpractice liabilities. Management is unaware of any incidents which would
result in a loss in excess of the Company's insurance coverage.
The Company manages a senior living community in Peoria, Arizona under a
long-term management agreement with a third party owner. The Arizona Department
of Insurance ("Arizona DOI") has notified the owner that the owner is not
currently in compliance with a net worth requirement imposed by Arizona law.
While compliance with this net worth requirement is technically the
responsibility of the owner, in order to facilitate discussions with the Arizona
Department of Insurance, the Company has provided the Department with a limited
guaranty relating to the financial performance of the community, and has
notified the Arizona DOI of the Company's intention to enter into a lease of the
community, if the Company can reach acceptable terms with the owner. The
Department has tentatively indicated that the proposed lease will result in the
community's compliance with the applicable Arizona statute. There can be no
assurance that the State of Arizona will not enforce the law strictly. A
violation of this net worth requirement may, among other things, allow the
Arizona Department of Insurance to take steps to appoint a receiver for the
community.
The Company discovered during 1999 that its property in Knoxville, Tennessee had
several significant construction or design deficiencies that resulted in, among
other things, inadequate water and condensation drainage and control. As a
result of these construction issues, the Company moved certain residents and
initiated various inspections, air quality tests, and other procedures. The
Company also involved its outside counsel and its insurance carrier in these
issues. The Company recorded certain impairment charges related to this
property, and others, during the quarter ended December 31, 1999. During the
quarter ended March 31, 2001, the Company received net settlement proceeds of
$1,000,000 for repairs and improvements necessary to correct the deficiencies in
the property. The Company is not able to determine to what extent these issues
will result in a negative impact on the results of this community or additional
liabilities and costs to the Company. As of March 31, 2001, the Company has made
cash payments of $305,000 related to improvements, and has a remaining accrual
of $695,000 for future costs associated with the deficiencies.
9. NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 established reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under SFAS No. 133, the Company recognizes all derivatives as either
assets or liabilities, measured at fair value, in the consolidated balance
sheet.
11
12
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. During 1999 and 2000, the Company entered into two interest rate
swap agreements as a hedge against certain long-term debt in order to manage
interest rate risk. These swap agreements are designated and qualify as cash
flow hedges under SFAS No. 133.
The adoption of SFAS No. 133 resulted in the Company recording a net transition
adjustment loss of $1.1 million (net of related deferred income tax of $570,000
in accumulated other comprehensive income at January 1, 2001). Further, the
adoption of the Statement resulted in the Company recognizing $266,000 of
derivative instrument assets and $1.9 million of derivative instrument
liabilities at January 1, 2001. At March 31, 2001, the net transition adjustment
loss was reduced to $1.0 million (net of related deferred income tax of $555,000
in accumulated other comprehensive income) and derivative instrument assets and
derivative instrument liabilities were $363,000 and $1.9 million, respectively.
10. SUBSEQUENT EVENT
Subsequent to the quarter ended March 31, 2001, the Company has purchased $1.75
million of its 5 3/4% Convertible Debenture Bonds at 78% of their face value,
resulting in an extraordinary gain on extinguishment of debt, net of tax, of
$239,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services provider
offering a broad range of care and services to seniors within a residential
setting. As of March 31, 2001, the Company operated 66 senior living
communities, consisting of 32 Retirement Centers and 34 Free-standing ALs, in 15
states with an aggregate capacity for approximately 14,800 residents. The
Company owned 23 communities, leased 23 communities pursuant to long-term
leases, and managed 20 communities pursuant to management agreements. Of the
owned, leased, and managed communities, the Retirement Centers comprise 15, 9,
and 8, and the Free-standing ALs comprise 8, 14, and 12, respectively. As of
March 31, 2001, the Company's owned communities had a stabilized occupancy rate
of 93%, its leased communities had a stabilized occupancy rate of 94%, and its
managed communities had a stabilized occupancy rate of 84%. The Company
considers a community or expansion thereof to be stabilized if it has either
been open and owned at least 12 months, or has achieved 95% occupancy.
Stabilized communities also include any managed communities that have been open
at least 12 months.
The Company's long-term strategy is to develop and operate Senior Living
Networks in major metropolitan regions. The Company's portfolio of communities
includes 32 Retirement Centers and 34 Free-standing ALs, with capacity for
approximately 11,700 and 3,100 residents, respectively. During the quarters
ended March 31, 2001 and 2000, the Company's Retirement Centers and
Free-standing ALs generated 87.5% and 12.5% and 96% and 4% of total revenues,
respectively. Many of the Free-standing ALs are located within the same major
metropolitan regions as the Retirement Centers and function as satellites to
those Retirement Center hubs in order to form Senior Living Networks and expand
the continuum of housing and care into the market. The Company believes that
this hub and satellite approach produces management efficiencies and market
penetration by offering a range of senior living arrangements at various price
levels.
12
13
During the late 1990s and 2000, the assisted living market has suffered from
adverse market conditions including significant overcapacity in most markets,
longer fill-up periods, price discounting and price pressures, and increasing
labor and insurance costs. As a result, the Company ceased its development of
new Free-standing ALs in late 1999 in order to focus on improving the
performance of its existing Retirement Centers, filling its Free-standing ALs,
increasing the Company's cashflow and strengthening the Company's balance sheet.
The Company reported a net loss of $2.8 million, or ($0.16) loss per diluted
share, on total revenues of $60.4 million, as compared with net income of
$620,000, or $0.04 earnings per diluted share, on revenues of $46.8 million for
the three months ended March 31, 2001 and 2000, respectively. The three months
ended March 31, 2001 loss of ($0.16) per dilutive share was comprised of an
($0.18) loss from operations, offset by a $0.02 gain from the extinguishment of
debt.
RESULTS OF OPERATIONS
The Company's total revenues from continuing operations are comprised of (i)
resident and health care revenues and (ii) management and development services
revenues, which include fees, net of reimbursements, for the development,
marketing, and management of communities owned by third parties. The Company's
resident and health care revenues are derived from three principal sources: (i)
monthly service fees and ancillary revenues from independent and assisted living
residents, representing 76.7% and 80.7% of total resident and health care
revenues for the three months ended March 31, 2001 and 2000, respectively; (ii)
per diem charges from nursing patients, representing 20.2% and 17.4% of total
resident and health care revenues for the three months ended March 31, 2001 and
2000, respectively; and (iii) the amortization of non-refundable entrance fees
over each resident's actuarially determined life expectancy (or building life
for contingent refunds), representing 3.1% and 1.9% of total resident and health
care revenues for the three months ended March 31, 2001 and 2000, respectively.
Approximately 92.7% and 95.4% of the Company's total revenues for the three
months ended March 31, 2001 and 2000, respectively, were attributable to private
pay sources, with the balance attributable to Medicare, including
Medicare-related private co-insurance and Medicaid.
The Company's operating expenses are comprised, in general, of (i) community
operating expenses, which includes all operating expenses of the Company's owned
or leased communities; (ii) lease expense; (iii) general and administrative
expense, which includes all corporate office overhead; and (iv) depreciation and
amortization expense.
The Company's operations are divided into two segments: (1) Retirement Centers
and (2) Free-standing ALs. The 32 Retirement Centers are large retirement
communities that provide some or all of independent living, assisted living and
skilled nursing care. A majority of the Retirement Centers are stabilized,
including recent expansions, and averaged 93% occupancy during the three months
ended March 31, 2001. The portfolio of Free-standing ALs operated by the Company
has increased to 34 (8 owned, 14 leased, and 12 managed communities, 11 of which
are Managed SPE Communities) at March 31, 2001. The operations of the Managed
SPE Communities are not included in the Company's financial statements. The
consolidated number of Free-standing AL Communities is 22. Substantially all of
the consolidated Free-standing ALs and the Managed SPE Communities are
unstabilized and in the fill-up stage. The Company has been and continues to be
focused on increasing and maintaining occupancy and controlling operating
margins in all communities.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenues Total revenues were $60.4 million compared to $46.8 million for the
three months ended March 31, 2001 and 2000, respectively, representing an
increase of $13.6 million, or 29.1%. Resident and health care revenues increased
by $14.5 million, and management and development services revenue decreased
13
14
by $920,000 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 March 31, 2000, as well as increased therapy services
provided by the Company. Management and development services revenue decreased
as a percentage of total revenue to 1.2% from 3.5%, respectively. The decrease
in management and development services revenue is primarily related to a
decrease in development fees, as well as decreased management fees at certain
properties as a result of lower sales of new units, which reduces the
formula-based management fees. In late 1999, the Company discontinued new
development of Free-standing ALs, for which the Company received development
fees.
For all of its communities, the Company had a stabilized occupancy rate of 93%
compared to 92% as of March 31, 2001 and 2000, respectively, and had a total
occupancy rate of 83% as of March 31, 2001 and 2000. The unchanged total
occupancy rate is a result of new communities and expansions that have increased
capacity from approximately 13,700 as of March 31, 2000 to approximately 14,800
as of March 31, 2001, many of which are in the fill-up stage.
Retirement Center resident and health care revenues were $52.2 million, compared
to $43.2 million for the three months ended March 31, 2001 and 2000,
respectively, representing an increase of $9.1 million, or 21.0%. This increase
was primarily attributable to the May 26, 2000 long-term lease of Freedom
Village Brandywine, resulting in increased resident and health care revenues of
$3.6 million. In addition, $1.0 million of the increase in Retirement Center
revenues resulted from increased therapy services provided by the Company. The
remaining increase was primarily attributable to increased average occupancy.
Free-standing AL community resident and health care revenues increased from $2.0
million to $7.4 million for the three months ended March 31, 2001 and 2000,
respectively. This increase is largely related to the increase from eight to 22
consolidated Free-standing AL communities, as well as the fill-up and increased
occupancy of these communities during the year.
Community Operating Expense Community operating expense increased to $41.8
million compared to $30.0 million for the three months ended March 31, 2001 and
2000, respectively, representing an increase of $11.8 million, or 39.5%. The
increase in community operating expenses was primarily attributable to expenses
from expansions and communities acquired or leased after March 31, 2000.
Additionally, this increase is the result of higher labor, insurance, utility,
facility and marketing costs at new communities, as well as costs associated
with the expansion of therapy services now provided at 12 communities. Community
operating expense as a percentage of resident and health care revenues increased
to 70.0% from 66.4% for the three months ended March 31, 2001 and 2000,
respectively. The increase in community operating expense as a percentage of
resident and health care revenues is primarily attributable to the acquisition
of leasehold interests during the second half of 2000 of various Free-standing
ALs that were Managed SPE Communities, which are in the fill-up stage. The
Company anticipates that the fill-up of these communities will occur over the
next 12 to 21 months. The Company expects community operating expense to remain
at greater than historical levels as a percentage of resident and health care
revenues because the Company anticipates acquiring additional leasehold
interests of Managed SPE Communities.
Retirement Center operating expenses were $33.6 million, compared to $27.9
million for the three months ended March 31, 2001 and 2000, respectively,
representing an increase of $5.7 million, or 20.3%. This increase was primarily
attributable to the May 26, 2000 long-term lease of Freedom Village Brandywine,
resulting in increased operating expenses of $2.2 million. In addition, $409,000
of the increase in Retirement Center operating expenses related to increased
therapy services. The remaining increase relates primarily to increased average
occupancies resulting in increased Retirement Center operating expenses;
however, in spite of increased operating expenses, the Retirement Centers showed
a slight increase in gross margin from the prior year due to expansions.
Free-standing AL operating expenses increased from $2.1 million to $8.2 million
for the three months ended March 31, 2000 and 2001, respectively. This increase
is largely related to the increase from eight to 22 consolidated free-standing
AL communities, of which a majority are in the fill-up stage.
14
15
General and Administrative General and administrative expense increased to $5.0
million compared to $4.3 million for the three months ended March 31, 2001 and
2000, respectively, representing an increase of $692,000, or 16.1%. The increase
was primarily related to increases in overhead support costs associated with the
Free-standing ALs in various geographic areas, as well as increases in salaries
and benefits associated with the operation of an increased number of
communities. General and administrative expense as a percentage of total
revenues increased to 8.3% compared to 9.2% for the three months ended March 31,
2001 and 2000, respectively.
EBITDAR (Community NOI) Retirement Center EBITDAR increased $3.4 million, or
22.5%, from $15.3 million to $18.7 million for the three months ended March 31,
2001 and 2000, respectively. This increase primarily relates to the May 26, 2000
long-term lease of Freedom Village Brandywine, as well as continued operational
improvement throughout the Retirement Centers, resulting from stabilized
occupancy and increased capacity through expansions, rate increases, and
improved control of community-level overhead expense. Consolidated Free-standing
AL EBITDAR decreased by $736,000, from a $64,000 loss to a $800,000 loss for the
three months ended March 31, 2000 and 2001, respectively. The 2001 loss resulted
from the increase in consolidated Free-standing ALs from eight to 22. Since the
majority of these communities are unstabilized, the Company expects to continue
to incur losses during this fill-up stage. Corporate and Other EBITDAR decreased
by $1.6 million from a $2.7 million loss to a $4.3 million loss for the three
months ended March 31, 2000 and 2001, respectively. This decrease in Corporate
and Other EBITDAR resulted from the reduction in development and management fee
revenues of $920,000, additional costs associated with corporate operations,
human resources, financial services and overhead, as well as increased senior
living network and assisted living management costs.
Lease Expense Lease expense increased to $6.7 million compared to $3.5 million
for the three months ended March 31, 2001 and 2000, respectively, representing
an increase of $3.2 million, or 91.4%. This increase was attributable to
thirteen leases entered into after March 31, 2000, consisting of two Retirement
Center leases and eleven Free-standing ALs.
Depreciation and Amortization Depreciation and amortization expense increased to
$5.1 million from $3.9 million for the three months ended March 31, 2001 and
2000, respectively, representing an increase of $1.2 million, or 30.8%. The
increase was primarily related to the increase in depreciable assets of
approximately $42.8 million during the year. These assets relate primarily to
the opening or acquisition of communities, including leasehold interests, and
expansion of communities since March 31, 2000, as well as ongoing capital
expenditures.
Other Income (Expense) Interest expense increased to $9.2 million from $7.9
million for the three months ended March 31, 2001 and 2000, respectively,
representing an increase of $1.3 million, or 16.9%. The increase in interest
expense was primarily attributable to indebtedness incurred in connection with
acquisitions and development activity. Interest expense, as a percentage of
total revenues, decreased to 15.3% from 16.9% for the three months ended March
31, 2001 and 2000, respectively. Interest income decreased to $3.2 million from
$3.6 million for the three months ended March 31, 2001 and 2000, respectively,
representing a decrease of $369,000, or 10.4%. The decrease in interest income
was primarily attributable to lower income generated from a reduced amount of
certificates of deposit and notes receivable balances associated with certain
leasing transactions and management agreements. Equity in Losses of Managed SPE
Communities increased to $966,000 from $0 for the three months ended March 31,
2001 and 2000, respectively. The increase in Equity in Losses of Managed SPE
Communities relates to the significant fill-up losses that the Company is
obligated to fund when operating deficits at Managed SPE Communities exceed
specified limits.
Income Tax Expense The provision for income taxes was a $1.4 million benefit
compared to a $384,000 expense for the three months ended March 31, 2001 and
2000, respectively. The Company's effective tax rate was 31.0% and 39.0% for the
three months ended March 31, 2001 and 2000, respectively.
15
16
Minority Interest in Losses (Earnings) of Consolidated Subsidiaries, Net of Tax
Minority interest in losses (earnings) of two consolidated subsidiaries, net of
tax, for the three months ended March 31, 2001 and 2000, respectively, was
$100,000 in income, and $148,000 of losses, representing an decrease of
$248,000. The decrease was primarily attributable to a revised partner loss
allocation for one of the communities.
Extraordinary Gain (Loss) on Extinguishment of Debt, Net of Tax During the
period ended March 31, 2001, the Company purchased $3.3 million of its 5 3/4%
Convertible Debenture Bonds at 78% of their face value, for a total cost of $2.6
million, resulting in an extraordinary gain on extinguishment of debt, net of
tax, of $395,000 or $0.02 gain per dilutive share. During the period ended March
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 $2.8 million, or ($0.16) per dilutive share, compared to net income
of $620,000, or $0.04 per dilutive share, for the three months ended March 31,
2001 and 2000, respectively. The three months ended March 31, 2001 loss of
($0.16) per dilutive share was comprised of an ($0.18) loss from operations,
offset by a $0.02 gain from the extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
Cashflow
Net cash provided by operating activities was $632,000 for the three months
ended March 31, 2001, as compared with $8.8 million for the three months ended
March 31, 2000. The Company's cash and cash equivalents totaled $25.8 million
as of March 31, 2001, as compared to $23.7 million as of March 31, 2000.
Net cash used by investing activities was $7.5 million for the three months
ended March 31, 2001, as compared with $33.5 million for the three months ended
March 31, 2000. During the three months ended March 31, 2001, the Company made
additions to land, buildings, and equipment, including construction activity, of
$6.9 million and purchased $4.8 million of assets limited as to use. The
Company also received $2.9 million from sales of assets and received
reimbursement for notes receivable of $1.2 million.
Net cash provided by financing activities was $12.9 million compared with $26.6
million for the three months ended March 31, 2001 and 2000, respectively. During
the three months ended March 31, 2001, the Company borrowed $21.6 million under
long-term debt arrangements, made principal payments on its indebtedness of $4.0
million, purchased debentures totaling $2.6 million, and paid $392,000 of
financing costs. In connection with certain lifecare communities, the Company
also made principal payments and refunds under master trust agreements of $1.6
million.
Financing Activity
During the three months ended March 31, 2001, the Company entered into various
financing commitments including a secured term loan from a mortgage lender in
the amount of $17.3 million, with interest payable at LIBOR plus 3%. Interest
and principal are payable monthly, based on a twenty-five year amortization,
with all remaining balances due in March 2026. The Company used a portion of the
proceeds on the above loan to refinance a portion of a term note to a capital
corporation, repaying the outstanding amount of $3.5 million.
On December 18, 2000, the Company sold a community located in Westlake, Ohio for
$26.0 million and subsequently 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 in December 2000. The Company expects
that a portion of the taxable gain from the transaction will be deferred by
like-kind exchanges, which the Company anticipates consummating during 2001.
During the three months ended March 31, 2001, the Company completed the purchase
of land, which qualifies as a partial like-kind exchange for the Westlake,
16
17
Ohio property. In connection with that acquisition, the Company assumed a $12.1
million term loan from a mortgage lender, secured by the land, with interest at
7.43% and principle due monthly, with all remaining balances due in January
2024.
The Company announced, during the quarter ended March 31, 2000, that the Board
of Directors had authorized the repurchase, from time to time, of up to $30.0
million of its 5 3/4% Convertible Debentures. The timing and amount of purchases
of these debentures will depend upon prevailing market conditions, availability
of capital, alternative uses of capital and other factors. During the quarter
ended March 31, 2001, the Company had purchased $3.3 million of the 5 3/4%
Convertible Debentures, resulting in an extraordinary gain on extinguishment of
debt, net of tax, of $395,000. Additional purchases of the 5 3/4% Convertible
Debentures, if any, are likely to be made primarily in the open market. See
Note 10.
Free-standing ALs and Managed SPE Communities
The Company owns, leases, or manages a total of 34 Free-standing ALs.
Substantially all of the Company's Free-standing ALs, including Managed SPE
Communities, are in the pre-stabilized fill-up stage. As a result, the Company
expects its Free-standing AL portfolio (both consolidated Free-standing ALs and
Managed SPE Communities) to continue to incur substantial losses throughout
2001. The Company believes that the losses to be incurred will decrease each
successive quarter, primarily as a result of increased occupancy at these
communities.
The Company's consolidated results will include increased losses from
Free-standing ALs in 2001 versus 2000, as a result of a full year of activity in
2001 for these communities opened during 2000, an increased number of
Free-standing ALs which are included in consolidated results (as a result of
acquiring various communities and leasehold interests during 2000 and 2001), and
increased Equity in Losses of Managed SPE Communities (as cumulative operating
costs exceed the limits for which the SPEs are responsible).
The Company has options to purchase or has rights of first refusal to acquire
the leasehold interests in eleven Managed SPE Communities, but is under no
obligation to do so. The Company acquired one leasehold interest during the
quarter ended March 31, 2001. The Company is in discussions with the various
SPEs to acquire some or all of the remaining 11 Managed SPE Communities that are
currently managed by the Company. If offered and accepted, the Company
anticipates acquiring certain, and perhaps all, of those leasehold interests in
Managed SPE Communities during 2001 and 2002. If all were acquired, the Company
estimates that the combined purchase price would be approximately $18.0 to $22.0
million. The timing of these leasehold acquisitions will depend on a variety of
factors, including prevailing market conditions, the Company's financing plans,
the availability of capital, alternative uses of capital, and general economic
conditions. If the Company does not acquire these leasehold interests, the
Company remains responsible for funding future operating losses which exceed
specified limits. The Company expects that it will be required to fund Managed
SPE operating deficits during the remainder of 2001.
Liquidity
The Company has historically financed its activities with the net proceeds from
public offerings of debt and equity, long-term mortgage borrowings, term and
revolving credit facilities and cash flows from operations. At March 31, 2001,
the Company had $510.0 million of indebtedness outstanding, including $134.7
million of Convertible Debentures, with fixed maturities ranging from July 2001
to April 2028. As of March 31, 2001, approximately 55.8% of the Company's
indebtedness bore interest at fixed rates, with a weighted average interest rate
of 6.97%. The Company's variable rate indebtedness carried an average rate of
7.78% as of March 31, 2001. As of March 31, 2001, the Company had working
capital of $21.3 million.
The Company's various credit facilities contain numerous financial covenants
that require the Company to maintain certain prescribed debt service coverage,
liquidity, net worth, capital expenditure reserves and occupancy levels.
Effective as of September 30, 2000, the Company amended several of these
financial
17
18
covenants in order to remain in compliance therewith. Compliance with these
covenants is dependent, among other things, upon improvements in the operations
of the Company's Free-standing ALs. There can be no assurances that the Company
will remain in compliance with those financial covenants or that its lenders
will grant further amendments in the event of such non-compliance. Failure to
maintain compliance with the financial covenants would have a material adverse
impact on the Company.
Most of the Company's owned communities are subject to mortgages. Each of the
Company's debt agreements contains restrictive covenants that generally relate
to the use, operation, and disposition of the communities that serve as
collateral for the subject indebtedness, and prohibit the further encumbrance of
such community or communities without the consent of the applicable lender. The
Company does not believe the covenants relating to the use, operation, and
disposition of its communities materially limit its operations. A significant
amount of the Company's indebtedness is cross-defaulted. Any non-payment or
other default with respect to such obligations (including non-compliance with a
financial covenant) could cause lenders to cease funding and accelerate payment
obligations or to foreclose upon the communities securing such indebtedness.
Furthermore, because of cross-default and cross-collateralization provisions in
certain of the Company's mortgages, debt instruments, and leases, a default by
the Company on one of its payment obligations is likely to result in default or
acceleration of a majority of the Company's other obligations.
As part of its financing activities, the Company intends to consider selective
dispositions of communities that do not fit within its senior living network
strategy. The Company's ability to sell any such properties depends upon the
market demand for property, the equity in the mortgaged property, and the
general economic conditions of the senior living industry.
The Company has several significant debt obligations which will mature in the
next two years, including a $100.0 million revolving line-of-credit that matures
on May 1, 2002 (of which $94.0 million was outstanding as of March 31, 2001),
and $134.7 million of Convertible Debentures that mature on October 1, 2002. The
Company must repay or refinance these debt instruments as they mature.
The Company expects that its current cash and cash equivalents, cash flow from
operations and borrowings available to it under existing credit arrangements
will be sufficient to meet its operating requirements and to fund its
pre-stabilization losses, and capital expenditure and debt service requirements
during 2001. The Company's internally generated cash will not be sufficient to
meet the obligations of debt instruments maturing in 2002. Due to adverse market
conditions, the Company believes that it is unlikely that it will be able to
raise capital in the public equity or debt markets for the foreseeable future.
Accordingly, the Company's ability to repay or refinance its maturing
obligations will depend, in large part, upon its ability to renew existing
credit facilities and arrangements or to obtain new credit facilities or
arrangements on acceptable terms. The Company is also focusing on generating
additional cash from incremental leverage, including possible combinations of
senior and mezzanine financing. At the same time, the Company is examining other
alternatives for raising capital, including the monetization of investments in
certain of its stabilized communities. The Company has engaged in preliminary
discussions with its existing lenders regarding the extension of certain of the
Company's maturing credit facilities.
The Company's ability to obtain new credit facilities and to repay or refinance
its existing indebtednesses depends upon a number of factors, including the
Company's financial condition and operating performance, the financial strength
of the assets to be encumbered, general economic conditions, general conditions
in the credit markets, mortgage interest rates and other factors. The Company's
efforts to obtain new or replacement financing 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 and the fact
that the Company is highly leveraged. However, based upon preliminary
discussions with certain of the Company's existing and new lenders, coupled with
banking relationships that the Company believes are positive, the Company
believes it will be able to obtain new credit facilities and/or extensions of
existing credit facilities necessary to allow it to meet all of its financial
obligations and requirements for indebtedness that matures during
18
19
2002. There can be no assurances, however, that the Company will successfully
negotiate and obtain adequate new credit facilities or extensions of its
existing credit facilities, and if such financing is available, that the terms
of any such financing will not impose significant burdens on the Company or be
dilutive to the Company's existing shareholders. If the Company has not
successfully extended or renewed the $100 million line of credit, of which $94.0
million was outstanding as of March 31, 2001, prior to the end of its second
fiscal quarter, this amount will be classified as a current liability.
The Company's 5 3/4% Convertible Debentures in the principal amount of $134.7
million mature on October 1, 2002. It is unlikely that any of those debentures
will be converted into the Company's common stock. Accordingly, the Company must
repay or refinance those convertible debentures when they come due. The Company
announced, in March 2000, that the Board of Directors had authorized the
repurchase, from time to time, of up to $30.0 million of the Company's 5 3/4%
Convertible Debentures. The timing and amount of purchases of these debentures
will depend upon prevailing market conditions, availability of capital,
alternative uses of capital and other factors. As of March 31, 2001, the Company
had purchased $3.3 million of the 5 3/4% Convertible Debentures, resulting in an
extraordinary gain on extinguishment of debt, net of tax, of $395,000.
Additional purchases of the 5 3/4% Convertible Debentures, if any, are likely to
be made primarily in the open market. In addition, the Company has engaged an
investment advisor and is considering various capital raising and other
alternatives to satisfy the Company's obligations in connection with the
Convertible Debentures. There can be no assurance, however, that the Company
will be able to refinance, extend or otherwise satisfy its obligations with
respect to the Convertible Debentures prior to their maturity or classification
as a current liability.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
the federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those forward-looking statements include all statements
that are not historical statements of fact and those regarding the intent,
belief or expectations of the Company or its management including, but not
limited to, the discussions of the Company's operating and growth strategy
(including its development plans and possible acquisitions or dispositions), our
liquidity and financing needs, projections of revenue, income or loss, capital
expenditures, and future operations. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, those set forth under the caption "Risk Factors" in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and the
Company's other filings with the Securities and Exchange Commission. Although
the Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of these assumptions could prove
to be inaccurate, and therefore, there can be no assurance that the
forward-looking statements included in this Form 10-Q will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved. The Company undertakes no
obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
19
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure About Interest Rate Risk The Company is subject to market risk from
exposure to changes in interest rates based on its financing, investing, and
cash management activities. The Company utilizes a balanced mix of debt
maturities along with both fixed-rate and variable-rate debt to manage its
exposures to changes in interest rates. The Company has entered into two
interest rate swap agreements with a major financial institution to manage its
exposure. The swaps involve the receipt of a fixed interest rate payment in
exchange for the payment of a variable rate interest payment without exchanging
the notional principal amount. Receipts on the agreement are recorded as a
reduction to interest expense. At March 31, 2001, the Company's outstanding
principal under its existing swap agreements was $17.7 million and $35.1 million
maturing December 10, 2024 and July 1, 2008, respectively. Under the agreements
the Company receives fixed rates of 7.19% and 6.87%, respectively, and pays
floating rates based upon LIBOR and a foreign currency index with a maximum rate
through July 1, 2002 of 6.87% and 8.12% thereafter. The Company does not expect
changes in interest rates to have a material effect on income or cash flows in
2001, since the majority of the Company's debt has fixed rates. There can be no
assurances, however, that interest rates will not significantly change and
materially affect the Company. Additionally, the Company anticipates refinancing
and/or renegotiating certain debt in 2001, which could result in higher interest
rates in the future. There can be no assurance, however, that the Company will
be able to refinance and/or renegotiate any of its indebtedness.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.1 Promissory Note, dated December 30, 1998, between CI Newport
News Limited Partnership and GMAC Commercial Mortgage
Corporation (which has been assumed by the Company).
10.2 Loan Agreement, dated March 30, 2001, between ARC Post Oak,
L.P. and GMAC Commercial Mortgage Corporation.
b. Reports on Form 8-K
On February 16, 2001, the Company furnished to the SEC a Form 8-K
disclosing for purposes of Regulation FD a letter delivered by the
Company to DNMC Public Holdings, LLC.
On February 20, 2001, the Company furnished to the SEC a Form 8-K
disclosing for purposes of Regulation FD the issuance by the Company of
a press release announcing the broadcast of the Company's fourth
quarter 2000 conference call via live WebCast on Thursday, February 22
at 11:00 a.m. EST.
On February 21, 2001, the Company furnished to the SEC a Form 8-K
disclosing for purposes of Regulation FD supplemental information
relating to the Company's fourth quarter and fiscal year ended December
31, 2000.
20
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Retirement Corporation
Date: May 15, 2001 By: /s/ George T. Hicks
--------------------------------
George T. Hicks
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
21