================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] 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 0-21159
ATRIA COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 61-1303738
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 SOUTH FOURTH AVENUE
SUITE 140
LOUISVILLE, KY 40202
(Address of principal executive offices) (Zip Code)
(502) 719-1600
(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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT MAY 11, 1998
--------------------- ---------------------------
Common stock, $.10 par value 23,384,862 shares
================================================================================
1 of 17
ATRIA COMMUNITIES, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Income - for the
three months ended March 31, 1998 and 1997................... 3
Condensed Consolidated Balance Sheet - March 31, 1998
and December 31, 1997........................................ 4
Condensed Consolidated Statement of Cash Flows - for
the three months ended March 31, 1998 and 1997............... 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 15
2
ATRIA COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997
---- ----
Revenues............................................. $25,448 $14,217
------- -------
Salaries, wages and benefits......................... 11,024 5,660
Supplies............................................. 2,436 1,290
Rent................................................. 766 39
Depreciation and amortization........................ 2,618 1,388
Other operating expenses............................. 4,514 2,786
------- -------
21,358 11,163
------- -------
Operating income..................................... 4,090 3,054
Interest expense..................................... 2,268 1,182
Investment income.................................... (2,279) (753)
------- -------
Income before income taxes........................... 4,101 2,625
Provision for income taxes........................... 1,534 1,047
------- -------
Net income........................................ $ 2,567 $ 1,578
======= =======
Earnings per common share:
Basic............................................. $ 0.11 $ 0.10
======= =======
Diluted........................................... $ 0.11 $ 0.10
======= =======
Shares used in computing earnings per common share:
Basic............................................. 23,378 15,830
Diluted........................................... 23,934 15,987
See accompanying notes.
3
ATRIA COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
MARCH 31, DECEMBER 31,
1998 1997
---------- -------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents..................................................... $ 76,508 $152,724
Short-term investments........................................................ 68,707 35,570
Resident accounts receivable less allowance for doubtful accounts
of $216 - March 31 and $239 - December 31................................. 1,132 743
Nursing center accounts receivable............................................ 1,070 -
Income taxes.................................................................. 1,312 2,846
Other......................................................................... 6,523 2,878
-------- --------
155,252 194,761
Property and equipment, at cost................................................ 328,992 282,017
Accumulated depreciation....................................................... (35,688) (33,754)
-------- --------
293,304 248,263
Intangible assets less accumulated amortization of $2,713 - March 31
and $2,531 - December 31...................................................... 13,912 14,190
Notes receivable............................................................... 10,275 7,273
Other.......................................................................... 10,966 10,976
-------- --------
$483,709 $475,463
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 4,925 $ 6,121
Salaries, wages and other compensation........................................ 1,646 2,095
Accrued interest.............................................................. 4,351 2,545
Other accrued liabilities..................................................... 5,084 2,347
Long-term debt due within one year............................................ 994 992
-------- --------
17,000 14,100
Long-term debt................................................................. 259,082 255,855
Deferred credits and other liabilities......................................... 12,055 12,669
Stockholders' equity:
Common stock, $.10 par value; authorized 50,000 shares;
issued and outstanding 23,381 shares at March 31 and 23,375 at December 31... 2,338 2,338
Capital in excess of par value................................................ 181,776 181,610
Retained earnings............................................................. 11,458 8,891
-------- --------
195,572 192,839
-------- --------
$483,709 $475,463
======== ========
See accompanying notes.
4
ATRIA COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
1998 1997
--------- ---------
Cash flows from operating activities:
Net income......................................................................... $ 2,567 $ 1,578
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 2,618 1,388
Other............................................................................. 48 (42)
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (1,459) (167)
Other assets..................................................................... (3,645) 95
Accounts payable................................................................. (1,196) 374
Income taxes..................................................................... 1,534 916
Other accrued liabilities........................................................ 4,075 834
-------- --------
Net cash provided by operating activities....................................... 4,542 4,976
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................................................ (16,331) (11,293)
Acquisition of new businesses..................................................... (24,818) (8,000)
Investments in joint ventures..................................................... (3,180) -
Purchase of investments........................................................... (70,639) -
Sale of investments............................................................... 37,502 -
Other............................................................................. 75 (695)
-------- --------
Net cash used in investing activities........................................... (77,391) (19,988)
-------- --------
Cash flows from financing activities:
Issuance of long-term debt........................................................ 1,721 868
Repayment of long-term debt....................................................... (4,474) (1,001)
Payment of deferred financing costs............................................... (231) -
Issuance of common stock.......................................................... 166 -
Other............................................................................. (549) (89)
-------- --------
Net cash used in financing activities........................................... (3,367) (222)
-------- --------
Change in cash and cash equivalents................................................. (76,216) (15,234)
Cash and cash equivalents at beginning of period.................................... 152,724 65,238
-------- --------
Cash and cash equivalents at end of period.......................................... $ 76,508 $ 50,004
======== ========
Supplemental information:
Interest payments................................................................. $ 462 $ 1,352
Income tax payments............................................................... - 761
Assumption of long-term debt through business and community acquisitions.......... 5,982 3,800
See accompanying notes.
5
ATRIA COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - REPORTING ENTITY
Atria Communities, Inc. ("Atria" or the "Company") is a leading national
provider of assisted and independent living communities for the elderly. At
March 31, 1998, Atria operated 53 communities located in 19 states with a total
of 4,915 units, including 2,754 assisted living units and 2,161 independent
living units, as well as two nursing centers with a total of 332 beds.
In May 1996, the Board of Directors of Vencor, Inc. ("Vencor") authorized
management to establish Atria as a wholly owned subsidiary to operate Vencor's
assisted and independent living business. As part of that transaction,
management consummated an initial public offering (the "IPO") of 5,750,000
shares of Atria's Common Stock (including 750,000 shares in connection with the
exercise of the underwriters' overallotment option) in the third quarter of
1996. In July 1997, the Company completed a public offering of 6.9 million
shares of Common Stock (the "Secondary Offering"). At March 31, 1998, Vencor
owned 10,000,000 shares, or 42.8%, of Atria's outstanding Common Stock.
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which will become
effective in December 1998 and requires interim disclosures beginning in 1999.
SFAS 131 requires public companies to report certain information about operating
segments, products and services, the geographic areas in which they operate and
major customers. The operating segments are to be based on the structure of the
enterprise's internal organization whose operating results are regularly
reviewed by senior management. Management has not yet determined the effect, if
any, of SFAS 131 on the consolidated financial statement disclosures.
During 1998, Accounting Standards Executive Committee (AcSEC) issued SOP 98-5,
Reporting on the Costs of Start-Up Activities, which requires entities to charge
start-up costs, including organizational costs, as incurred. The SOP requires
most entities upon adoption to write off as a cumulative effect of a change in
accounting principle any previously capitalized start-up or organizational
costs. The SOP is effective for most entities for fiscal years beginning after
December 15, 1998. The Company plans to adopt the provisions of SOP 98-5 in the
first quarter of 1999. The carrying amount of such costs were approximately
$900,000 at March 31, 1998.
NOTE 2 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements do not include
all of the disclosures normally required by generally accepted accounting
principles or those normally made in Atria's annual audited financial
statements. Accordingly, these financial statements should be read in
conjunction with Atria's audited consolidated financial statements for the year
ended December 31, 1997, which were filed with the Securities and Exchange
Commission pursuant to Atria's Annual Report on Form 10-K.
The accompanying condensed consolidated financial statements have been
prepared in accordance with Atria's customary accounting practices and have not
been audited. Management believes that the financial information included
herein reflects all adjustments necessary for a fair presentation of interim
results and all such adjustments are of a normal and recurring nature.
Prior year amounts have been reclassified to conform with current year
presentation.
NOTE 3 - REVENUES
Revenues are recognized when services are rendered and consist of resident
fees and fees for other ancillary services. Agreements with residents are
generally on a month to month basis. Revenues from management contracts are
recognized in the period earned in accordance with the terms of the management
agreements.
6
ATRIA COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE 3 - REVENUES (CONTINUED)
Substantially all revenues (excluding revenues from the two nursing centers)
are derived from private pay sources. A summary of revenues for the quarters
ended March 31, 1998 and 1997 follows (dollars in thousands):
1998 1997
------- -------
Owned and leased communities.. $23,569 $14,138
Managed communities........... 76 79
Nursing centers............... 1,803 -
------- -------
$25,448 $14,217
======= =======
NOTE 4 - EARNINGS PER COMMON SHARE
The computation of earnings per common share is based upon the weighted
average number of common shares outstanding adjusted for dilutive effect of
common stock equivalents consisting primarily of stock options.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 "Earnings Per Share" ("SFAS 128"), replacing the calculation of primary
and fully-diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Atria adopted SFAS 128
on December 31, 1998 and restated all prior periods. The impact of the
restatement was not significant.
NOTE 5 - AMERICAN ELDERSERVE ACQUISITION
On April 1, 1997, Atria acquired American ElderServe Corporation ("American
ElderServe"), an operator of assisted living communities, for a combination of
Atria's Common Stock, cash and assumption of debt valued at approximately $30.7
million. At the time of the acquisition, American ElderServe operated 12
assisted living communities consisting of 503 units and also had six additional
communities under construction containing 345 units, three of which opened in
1997, and the remainder of which are scheduled to open in 1998. A summary of
the American ElderServe acquisition follows (dollars in thousands):
Fair value of assets acquired....... $36,812
Fair value of liabilities assumed... 22,873
-------
Net assets acquired.............. 13,939
Fair value of common stock issued... (5,195)
Cash received from acquired entity.. (24)
-------
Net cash paid.................... $ 8,720
=======
The purchase price paid in excess of the fair value of identifiable net assets
acquired (to be amortized over 30 years by the straight-line method) aggregated
$5.7 million.
7
ATRIA COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE 5 - AMERICAN ELDERSERVE ACQUISITION (CONTINUED)
The pro forma effect of the American ElderServe acquisition for the quarter
ended March 31, 1997 is as follows (dollars in thousands, except per share
amounts):
1997
----
Revenues......................................................... $16,039
Net income (loss)................................................ (1,855)
Earnings per common and common equivalent share:
Basic....................................................... $ (0.11)
Diluted..................................................... $ (0.11)
Pro forma income for the three months ended March 31, 1997 includes
non-recurring compensation expense incurred by American ElderServe in connection
with accelerated vesting of certain stock options exercised in conjunction with
the American ElderServe acquisition, the effect of which reduced pro forma net
income by $2.2 million or $0.14 per common share.
In connection with the American ElderServe acquisition, the Company entered
into an agreement with Elder HealthCare Developers, L.L.C. ("Elder HealthCare
Developers"), a limited liability company owned 10.0% by Atria and 90.0% by
Assisted Care Developers, L.L.C. ("Assisted Care Developers"), to develop at
least 25 assisted living communities for the Company in the southeastern United
States over the next three years. Assisted Care Developers is wholly-owned by
George A. Schoepf, former Executive Vice President of American ElderServe and
the brother of Andy L. Schoepf, the Company's Chief Operating Officer.
NOTE 6 - RELATED PARTY TRANSACTIONS
Atria has made advances to Elder HealthCare Developers, included in notes
receivable, totaling $8.2 million at March 31, 1998 and $5.0 million at December
31, 1997 to finance the development of certain assisted living communities. The
Company has accrued interest on these notes receivable at a rate approximating
8.0% which represents the Company's borrowing cost under the Company's $125.0
million bank credit facility (the "Credit Facility"). Elder HealthCare
Developers will fund future development, construction and working capital needs
of its communities by the use of third party financing. If such financing is
unavailable or insufficient to cover all of the construction and start-up costs
associated with any of such communities, Atria will extend the necessary funds
or guarantees to Elder HealthCare Developers. Assisted Care Developers has
agreed to indemnify the Company for up to 90.0% of any loss suffered by the
Company as a result of any default by Elder HealthCare Developers that may occur
on any loan either extended or guaranteed by the Company.
During the first quarter of 1998 the Company entered into an agreement with
Elder HealthCare Developers to provide certain management and development
services including architectural services, construction consulting, legal and
financial services, staffing services and pre-marketing. Such fees were included
in operating revenue of the Company in the amount of $1.1 million for the
quarter ended March 31, 1998.
NOTE 7 - SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On February 15, 1998, the Board of Directors of the Company declared a
dividend of one preferred stock purchase right (a "Right") for each outstanding
share of Common Stock. Each Right entitles the registered holder to purchase
from the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $1.00 per share (the "Preferred Shares"), of the
Company, at a price of $100 per one one-hundredth of a Preferred Share (the
"Exercise Price"), subject to adjustment. The description and terms of the
Rights are set forth in the Shareholder Protection Rights Agreement, dated as of
February 15, 1998, between the Company and National City Bank, as Rights Agent.
8
ATRIA COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
NOTE 8 - ACQUISITIONS
In February 1998, the Company acquired five facilities located in Texas. The
Company financed the acquisitions with a synthetic lease entered into with an
unaffiliated party. The facilities included two assisted living communities
with 134 units, a 100-unit independent living center and a 242-bed nursing
center, all of which are located in Tyler, Texas. The transaction also included
a 90-bed nursing center located in nearby Chandler, Texas. The prior owners
will continue to manage both nursing centers.
The Company also acquired in the first quarter of 1998, a 99-unit assisted
living community located in Falmouth, Massachusetts, 14 independent living
cottages located at its Auburn, Alabama community, a 38-unit assisted living
community located in St. George, Utah, a 137-unit assisted and independent
living community located in Ft. Wright, Kentucky and a 56-unit assisted and
independent living community located in Lubbock, Texas. A summary of these
acquisitions follows (dollars in thousands):
Fair value of assets acquired................. $31,228
Fair value of liabilities assumed............. 6,410
-------
Net cash paid $24,818
=======
The pro forma effect of these acquisitions, assuming that the transactions
occurred on January 1, 1997, follows (dollars in thousands, except per share
amounts):
Quarter ended
March 31,
-----------------
1998 1997
---- ----
Revenues.......................................... $26,365 $17,746
Net income........................................ 2,556 1,720
Earnings per common and common equivalent share:
Basic........................................ $ 0.11 $ 0.11
Diluted...................................... $ 0.11 $ 0.11
NOTE 9 - SUBSEQUENT EVENTS
On April 19, 1998, the Company entered into an agreement and plan of merger
("Merger Agreement") with Kapson Senior Quarters Corp. ("Kapson") and KA
Acquisition Corp., a subsidiary of Kapson ("Merger Subsidiary"), whereby Merger
Subsidiary would merge (the "Merger") into the Company with the Company as the
surviving corporation. Pursuant to the terms and conditions of the Merger
Agreement, upon consummation of the Merger the public stockholders of the
Company would have the right to receive $20.25 in cash per share of Common
Stock. Vencor, which holds 42.8% of the Company's Common Stock, would also
receive $20.25 in cash for approximately 88% of its Common Stock and would
retain its remaining shares of Common Stock as recapitalized common stock of the
surviving corporation upon the consummation of the Merger. The Merger is
subject to certain customary conditions, including stockholder approval and
certain regulatory approvals.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Atria is a leading national provider of assisted and independent living
communities for the elderly, operating at March 31, 1998, 53 communities
comprising 4,915 units and two nursing centers totaling 332 beds located in 19
states. At March 31, 1998, Atria had 41 assisted living communities comprising
approximately 3,039 units under development, including 22 communities under
construction.
On April 19, 1998, the Company entered into a Merger Agreement with Kapson
Senior Quarters Corp. and KA Acquisition Corp., a subsidiary of Kapson, whereby
KA Acquisition Corp. would merge into the Company with the Company as the
surviving corporation. Pursuant to the terms and conditions of the Merger
Agreement, upon consummation of the Merger the public stockholders of the
Company would have the right to receive $20.25 in cash per share of Common
Stock. Vencor, which holds 42.8% of the Company's Common Stock, would also
receive $20.25 in cash for approximately 88% of its Common Stock and would
retain its remaining shares of Common Stock as recapitalized common stock of the
surviving corporation upon the consummation of the Merger. The Merger is
subject to certain customary conditions, including stockholder approval and
certain regulatory approvals.
PLANNED EXPANSION AND DEVELOPMENT
Atria intends to expand its business by developing or acquiring 60 to 85
additional assisted living communities consisting of approximately 5,400 to
7,650 units by the year 2000 (including the communities currently being
developed and the communities developed and acquired since the IPO) and
converting a portion of its existing independent living units to assisted living
units by the year 2000. The Company will pursue acquisitions in conjunction with
its development efforts in order to cluster assisted living communities in
targeted markets. The estimated cost to construct, equip or otherwise acquire
such communities could approximate $375.0 to $550.0 million, which is
substantially in excess of the Company's present capital resources.
The Company currently estimates that the net proceeds from the Secondary
Offering and the Company's private placement (the "Convertible Notes Offering")
of 5.0% Convertible Subordinated Notes Due 2002 (the "Convertible Notes") of
July 1997 and October 1997, respectively, together with existing capital
resources and financing commitments under its Credit Facility, will be
sufficient to fund its development and acquisition program through the first
quarter of 1999. Available sources of future capital may include, among other
things, equity, public or private debt and additional bank revolving credits.
However, there can be no assurance that such financing will be available on
terms acceptable to Atria, nor can there be any assurance that additional
financing will not be required prior to 1999.
Newly opened communities are expected to incur operating losses until
sufficient occupancy levels and operating efficiencies are achieved. Based upon
historical experience, management believes that a typical community will achieve
its targeted occupancy levels approximately 12 months from commencement of
operations. Accordingly, Atria will require substantial amounts of liquidity to
maintain the operations of newly opened communities. In addition, if sufficient
occupancy levels related to newly opened communities are not achieved within a
reasonable period, the results of operations, financial position and liquidity
of Atria could be materially and adversely impacted.
The statements contained under "Planned Expansion and Development" are
"forward looking statements" within the meaning of the Private Securities
Litigation Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things: (i) the
successful and timely implementation of the Company's acquisition and
development strategy; (ii) the Company's ability to obtain financing on
acceptable terms to finance its growth strategy and to operate within the
limitations imposed by financing arrangements; (iii) the cost of completing the
Company's acquisition and development plans; and (iv) other factors referenced
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997, filed with the Securities and Exchange Commission. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by, or on behalf, of the Company.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
A summary of operations follows:
PERCENTAGE OF REVENUES
----------------------
FIRST QUARTER
-------------
1998 1997
---- ----
Revenues......................... 100.0% 100.0%
----- -----
Salaries, wages and benefits..... 43.1 39.8
Supplies......................... 9.6 9.1
Rent............................. 3.0 0.3
Depreciation and amortization.... 10.3 9.8
Other operating expenses......... 17.8 19.5
----- -----
................................. 83.8 78.5
----- -----
Operating income................. 16.2 21.5
Interest expense................. 9.0 8.3
Investment income................ (9.0) (5.3)
----- -----
Income before income taxes...... 16.2 18.5
Provision for income taxes....... 6.1 7.4
----- -----
Net income..................... 10.1% 11.1%
===== =====
Revenues increased 79.0% in the first quarter of 1998 to $25.4 million from
$14.2 million in the first quarter of 1997. The increase was primarily
attributable to the acquisition of communities and the opening of newly
constructed communities. Occupancy for all of the Company's communities was
83.8% for the first quarter of 1998 compared to 94.6% for the same period last
year, primarily due to the opening of new communities. Same community revenue
(21 facilities) increased by 4.3% in the first quarter of 1998 to $14.7 million
from $14.1 million in the first quarter of 1997. The increase was attributable
to price increases and growth in ancillary services ($800,000) offset by a
decrease in census ($200,000). Same community occupancy was 93.4% and 94.8% for
the first quarter of 1998 and 1997, respectively.
Compensation costs as a percentage of revenues increased in the first quarter
of 1998 compared to the same period a year ago. Increases in such costs
resulted primarily from newly opened communities and growth in corporate
overhead expenses associated with Atria's expansion and development.
Rent expense increased to $766,000 in the first quarter of 1998 as compared to
$39,000 in the same period last year. The increase in the first quarter of 1998
is due to the acquisition of three communities leased from a third party real
estate investment trust ("REIT") as part of the American ElderServe acquisition,
as well as the five facilities acquired in February 1998 that were financed
through the use of a synthetic lease with an unaffiliated party.
Operating income increased 33.9% to $4.1 million in the first quarter of 1998
compared to $3.1 million in the same period of 1997. Operating income increased
in the first quarter of 1998 due to the acquisition of communities and
management and development services revenue from Elder HealthCare Developers.
The increase was partially offset by operating losses on newly constructed
communities and overhead expenses associated with Atria's expansion and
development.
The provision for income taxes decreased as a percentage of revenues for the
first quarter of 1998 to 6.1% from 7.4% in the same period last year. This
decrease is primarily attributable to an increase in investment in tax-exempt
government securities.
Net income increased 62.7% to $2.6 million in the first quarter of 1998
compared to $1.6 million in the same period last year. The improvement was
primarily attributable to growth in operating income and a reduction in net
interest expense as a result of the Secondary Offering in July 1997.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations totaled $4.5 million and $5.0 million for the
three months ended March 31, 1998 and 1997, respectively. Cash flows from
operations decreased as a result of increases in accounts receivable (primarily
the two nursing centers) and other assets partially offset by increases in other
accrued liabilities.
Net cash used in investing activities totaled $77.4 million and $20.0 million
for the three months ended March 31, 1998 and 1997, respectively. Atria's
investing activities included capital expenditures related to the development of
new communities and expansion of existing operations totaling $16.3 million and
$11.3 million for the respective periods. In addition, Atria acquired five
communities for $24.8 million during the first quarter of 1998 and acquired two
communities for $8.0 million in the same period last year. The Company also had
net purchases of short-term investments of $33.1 million during the first
quarter of 1998.
Net cash used in financing activities totaled $3.4 million and $222,000 for
the three months ended March 31, 1998 and 1997, respectively. Repayments of
long-term debt totaled $4.5 million and $1.0 million for the three months ended
March 31, 1998 and 1997, respectively.
The Company's working capital totaled $138.3 million at March 31, 1998,
compared to $180.7 million at December 31, 1997. The decrease in working
capital resulted primarily from a decrease in operating cash. The decrease was
attributable to the acquisition of five communities in 1998 and the repayment of
long-term debt, as well as capital expenditures related to the development of
new communities and expansion of existing operations. In addition to the
working capital available for expansion and development the Company has funds
available through the Credit Facility. In January 1998 the Company elected to
reduce the Credit Facility from $200.0 million to $125.0 million. At March 31,
1998, available borrowings under the Credit Facility approximated $37.0 million.
The Company estimates that capital expenditures related to acquisitions of
existing communities, construction of new communities and expansion and
improvement of existing communities could approximate $175.0 to $200.0 million
in 1998. Although management believes that cash flows from operations, the
proceeds from the Secondary Offering and the Convertible Notes Offering and
available borrowings under the Credit Facility are sufficient to meet these
capital needs, Atria will require substantial additional financing to continue
its growth plans beyond the first quarter of 1999. The Company currently has
under development 41 sites for new assisted living communities, 22 of which are
under construction. At March 31, 1998, the estimated additional cost to
complete and equip the 22 communities under construction approximated $91.3
million.
Atria plans to retain future earnings to finance the growth of its business
rather than to pay cash dividends. Payment of cash dividends in the future will
depend on the financial condition, results of operations and capital
requirements of Atria as well as other factors deemed relevant by the Board of
Directors. The Credit Facility also prohibits Atria from paying cash dividends.
The Credit Facility contains financial covenants and other restrictions that:
(i) require Atria to meet certain financial tests; (ii) require that there be no
change of control of Atria; (iii) limit, among other things, the ability of
Atria and certain of its subsidiaries to borrow additional funds, dispose of
certain assets and engage in mergers and other business combinations; (iv)
prohibit distributions to Atria's stockholders; and (v) require that Vencor own
at least 30.0% of Atria's Common Stock.
Vencor guaranteed for four years certain borrowings by the Company under the
Credit Facility in amounts up to $75.0 million at December 31, 1997, declining
to $50.0 million in 1998 and $25.0 million in 1999. Atria was in compliance
with all debt covenants at March 31, 1998. On April 24, 1998 the Credit
Facility was amended whereby Vencor's guarantee was released.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
If the transactions contemplated by the Agreement and Plan of Merger dated
April 19, 1998, among Atria, Kapson Senior Quarters Corp. and KA Acquisition
Corp. are consummated, the Company will not be in compliance with certain
covenants of the Credit Facility. Although management is considering a plan to
renegotiate the terms of the Credit Facility, and obtain additional financing
prior to the effective time of the Merger, there can be no assurance that any
renegotiation will be successful or that the Company will be able to obtain
financing on terms acceptable to the Company.
Upon consummation of the transactions contemplated by the Merger Agreement,
each of the Convertible Notes (aggregate principal amount of $143.75 million)
will cease to be convertible into shares of Common Stock but will be convertible
solely into an amount of cash, without interest, equal to the product of the
number of shares of Common Stock into which such Convertible Note was
convertible immediately prior to the effective time of the Merger and $20.25.
Moreover, if the Merger is consummated, a "Change in Control" as defined in
the Indenture dated as of October 16, 1997, between the Company and PNC Bank,
Kentucky, Inc., as Trustee (the "Indenture"), relating to the Convertible Notes
will occur. In the event of a Change in Control, each holder of the Convertible
Notes shall have the right to require (pursuant to the terms of the Indenture)
the Company to repurchase all or a portion of such holder's Convertible Notes at
100% of the principal amount thereof, together with accrued interest to the
repurchase date.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" refers to the result of computer programs having been
written using two digits rather than four to define the applicable year.
Computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This recognition could result
in a system failure or miscalculations causing disruptions of operations. Among
other things, this problem could lead to a temporary inability to process
transactions, send invoices or engage in similar normal business transactions.
The Company replaced substantially all of its information systems software in
the first quarter of 1998. The Company believes that with the conversion to the
new information systems software, the Year 2000 Issue will not pose significant
business or operating issues.
The Company has engaged in communications with the third-party providers of
certain of its administrative services (primarily the Company's payroll
function), as well as its significant suppliers of services and products to
determine the extent to which the Company is vulnerable to those parties'
failures to remediate their own Year 2000 Issues. The Company does not
presently believe that third-party Year 2000 Issues will have a material adverse
effect on the Company. However, there can be no guarantee that the systems of
other companies on which the Company's operations or systems rely will be timely
remediated or that a failure by another company to remediate its systems in a
timely manner would not have a material adverse effect on the Company.
The Company's assessment of the Year 2000 Issue is based on management's best
estimate, which was derived utilizing numerous assumptions of future events
including third party modification plans and other factors. However, actual
results could differ materially from management's expectations. Specific
factors that might cause material differences include, but are not limited to,
the availability and costs of personnel trained in this area, the ability to
locate and collect all relevant code, compatibility of third-party interfaces
and similar uncertainties.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Condensed Consolidated Statement of Income
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICAL DATA)
(UNAUDITED) (UNAUDITED)
1997 QUARTERS FIRST
------------------------------------ QUARTER
FIRST SECOND THIRD FOURTH YEAR 1998
----- ------ ----- ------ ---- ----
Revenues............................... $14,217 $16,982 $17,731 $19,948 $68,878 $25,448
------- ------- ------- ------- ------- -------
Salaries, wages and benefits........... 5,660 6,846 7,368 8,278 28,152 11,024
Supplies............................... 1,290 1,518 1,679 1,845 6,332 2,436
Rent................................... 39 163 156 257 615 766
Depreciation and amortization.......... 1,388 1,735 1,840 2,436 7,399 2,618
Other operating expenses............... 2,786 3,383 3,526 4,057 13,752 4,514
------- ------- ------- ------- ------- -------
11,163 13,645 14,569 16,873 56,250 21,358
------- ------- ------- ------- ------- -------
Operating income....................... 3,054 3,337 3,162 3,075 12,628 4,090
Interest expense....................... 1,182 1,228 862 2,137 5,409 2,268
Investment income...................... (753) (353) (1,108) (2,365) (4,579) (2,279)
------- ------- ------- ------- ------- -------
Income before income taxes............. 2,625 2,462 3,408 3,303 11,798 4,101
Provision for income taxes............. 1,047 983 1,360 1,023 4,413 1,534
------- ------- ------- ------- ------- -------
Net income before extraordinary
loss on extinguishment of debt....... 1,578 1,479 2,048 2,280 7,385 2,567
Extraordinary loss on extinguishment
of debt.............................. - (199) - - (199) -
------- ------- ------- ------- ------- -------
Net income............................. $ 1,578 $ 1,280 $ 2,048 $ 2,280 $ 7,186 $ 2,567
======= ======= ======= ======= ======= =======
Earnings per common share:
Basic:
Excluding extraordinary loss on
extinguishment of debt............. $ 0.10 $ 0.09 $ 0.09 $ 0.10 $ 0.37 $ 0.11
Extraordinary loss on
extinguishment of debt............. - (0.01) - - (0.01) -
------- ------- ------- ------- ------- -------
Net income......................... $ 0.10 $ 0.08 $ 0.09 $ 0.10 $ 0.36 $ 0.11
======= ======= ======= ======= ======= =======
Diluted:
Excluding extraordinary loss on
extinguishment of debt............. $ 0.10 $ 0.09 $ 0.09 $ 0.10 $ 0.37 $ 0.11
Extraordinary loss on
extinguishment of debt............. - (0.01) - - (0.01) -
------- ------- ------- ------- ------- -------
Net income......................... $ 0.10 $ 0.08 $ 0.09 $ 0.10 $ 0.36 $ 0.11
======= ======= ======= ======= ======= =======
Shares used in computing earnings per
common share:
Basic................................ 15,830 16,466 23,209 23,374 19,720 23,378
Diluted.............................. 15,987 16,660 23,667 23,817 20,054 23,934
Average occupancy...................... 94.6% 87.9% 88.7% 88.0% 89.5% 83.8%
Number of communities.................. 25 40 37 41 41 53
Number of units........................ 3,226 3,977 3,890 4,170 4,170 5,247
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NO. DESCRIPTION
4.1 Shareholder Protection Rights Agreement, dated as of February
15, 1998, between Atria Communities, Inc. and National City
Bank, as Rights Agent. Exhibit 99.1 to the Company's Current
Report on Form 8-K dated February 17, 1998 (Comm. File No.
0-21159) is hereby incorporated by reference.
4.2 First Amendment to Shareholder Protection Rights Agreement,
dated as of February 24, 1998, between Atria Communities, Inc.
and National City Bank, as Rights Agent. Exhibit 99.3 to the
Company's Current Report on Form 8-K/A dated February 17, 1998
(Comm. File No. 0-21159) is hereby incorporated by reference.
11 Computation of Earnings per Common Share
27 Financial Data Schedule (included only in filings submitted
under the Electronic Data Gathering Analysis Retrieval
system).
(b) REPORTS ON FORM 8-K:
The Company filed the following Current Reports on Form 8-K during the
quarter ended March 31, 1998.
(1) Amendment No. 1 to a Current Report on Form 8-K dated February 1,
1998, was filed on March 23, 1998, relating to the acquisition of
five healthcare facilities in Texas.
(2) Current Report on Form 8-K dated February 1, 1998, was filed on
February 17, 1998, relating to the acquisition of five healthcare
facilities in Texas.
15
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
(b) REPORTS ON FORM 8-K (CONTINUED):
(3) Amendment No. 1 to a Current Report on Form 8-K dated February 15,
1998, was filed on February 25, 1998, relating to the Shareholder
Protection Rights Agreement.
(4) Current Report on Form 8-K dated February 15, 1998, was filed on
February 17, 1998, relating to the Shareholder Protection Rights
Agreement.
16
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.
ATRIA COMMUNITIES, INC.
Date: May 13, 1998 /s/ W. PATRICK MULLOY, II
- -------------------- ----------------------------------------
W. Patrick Mulloy, II
President, Chief Executive Officer
and Director
Date: May 13, 1998 /s/ J. TIMOTHY WESLEY
- -------------------- -----------------------------------------
J. Timothy Wesley
Chief Financial Officer, Vice President of
Development and Secretary
(Principal Financial Officer)
17