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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 JUNE 30, 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 AUGUST 10, 1998
--------------------- ------------------------------
Common stock, $.10 par value 23,386,612 shares
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1 of 19
ATRIA COMMUNITIES, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements:
Condensed Consolidated Statement of Income for the quarter and
six months ended June 30, 1998 and 1997........................... 3
Condensed Consolidated Balance Sheet June 30, 1998 and
December 31, 1997................................................. 4
Condensed Consolidated Statement of Cash Flows for the six months
ended June 30, 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............................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders................ 17
Item 5. Other Information.................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................... 18
2
ATRIA COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER SIX MONTHS
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues.............................................. $28,906 $16,982 $54,354 $31,199
------- ------- ------- -------
Salaries, wages and benefits.......................... 11,792 6,846 22,816 12,506
Supplies.............................................. 2,649 1,518 5,085 2,808
Rent.................................................. 1,077 163 1,843 202
Depreciation and amortization......................... 2,862 1,735 5,480 3,123
Non-recurring transactions............................ 1,992 - 1,992 -
Other operating expenses.............................. 5,148 3,383 9,662 6,169
------- ------- ------- -------
25,520 13,645 46,878 24,808
------- ------- ------- -------
Operating income...................................... 3,386 3,337 7,476 6,391
Interest expense...................................... 2,381 1,228 4,649 2,410
Investment income..................................... (1,745) (353) (4,024) (1,106)
------- ------- ------- -------
Income from operations before income taxes............ 2,750 2,462 6,851 5,087
Provision for income taxes............................ 1,001 983 2,535 2,030
------- ------- ------- -------
Income from operations................................ 1,749 1,479 4,316 3,057
Extraordinary loss on extinguishment of debt, net of
income tax benefit.................................. - (199) - (199)
------- ------- ------- -------
Net income........................................ $ 1,749 $ 1,280 $ 4,316 $ 2,858
======= ======= ======= =======
Earnings per common share:
Basic:
Income from operations............................. $ 0.07 $ 0.09 $ 0.18 $ 0.19
Extraordinary loss on extinguishment of debt....... - (0.01) - (0.01)
------- ------- ------- -------
Net income........................................ $ 0.07 $ 0.08 $ 0.18 $ 0.18
======= ======= ======= =======
Diluted:
Income from operations............................. $ 0.07 $ 0.09 $ 0.18 $ 0.19
Extraordinary loss on extinguishment of debt....... - (0.01) - (0.01)
------- ------- ------- -------
Net income........................................ $ 0.07 $ 0.08 $ 0.18 $ 0.18
======= ======= ======= =======
Shares used in computing earnings per common share:
Basic.............................................. 23,384 16,466 23,381 16,150
Diluted............................................ 23,952 16,660 23,979 16,322
See accompanying notes.
3
ATRIA COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
1998 1997
--------- -------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents.................................................... $ 57,653 $152,724
Short-term investments....................................................... 53,679 35,570
Resident accounts receivable less allowance for doubtful accounts
of $216--June 30 and $239--December 31................................... 1,403 743
Nursing center accounts receivable........................................... 1,509 -
Income taxes................................................................. 3,669 2,846
Other........................................................................ 4,326 2,878
-------- --------
122,239 194,761
Property and equipment, at cost............................................... 351,901 282,017
Accumulated depreciation...................................................... (37,849) (33,754)
-------- --------
314,052 248,263
Intangible assets less accumulated amortization of $3,569--June 30
and $2,531--December 31...................................................... 13,439 14,190
Notes receivable.............................................................. 20,930 7,273
Other......................................................................... 10,525 10,976
-------- --------
$481,185 $475,463
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 5,724 $ 6,121
Salaries, wages and other compensation....................................... 2,043 2,095
Accrued interest............................................................. 2,886 2,545
Other accrued liabilities.................................................... 2,218 2,347
Long-term debt due within one year........................................... 964 992
-------- --------
13,835 14,100
Long-term debt................................................................ 258,834 255,855
Deferred credits and other liabilities........................................ 11,059 12,669
Stockholders' equity:
Common stock, $.10 par value; authorized 50,000 shares;
issued and outstanding 23,385 shares at June 30 and 23,375 at December 31.. 2,339 2,338
Capital in excess of par value............................................... 181,911 181,610
Retained earnings............................................................ 13,207 8,891
-------- --------
197,457 192,839
-------- --------
$481,185 $475,463
======== ========
See accompanying notes.
4
ATRIA COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
1998 1997
--------- ---------
Cash flows from operating activities:
Net income......................................................................... $ 4,316 $ 2,858
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 5,480 3,123
Extraordinary loss on extinguishment of debt...................................... - 332
Other............................................................................. - (103)
Changes in operating assets and liabilities:
Accounts receivable.............................................................. (2,167) (120)
Other assets..................................................................... (1,447) 316
Accounts payable................................................................. (397) (1,546)
Income taxes..................................................................... (823) (180)
Other accrued liabilities........................................................ 140 1,407
-------- --------
Net cash provided by operating activities....................................... 5,102 6,087
-------- --------
Cash flows from investing activities:
Purchase of property and equipment................................................ (39,240) (22,648)
Acquisition of new businesses..................................................... (24,818) (8,000)
Acquisition of American ElderServe Corporation.................................... - (8,720)
Investments in joint ventures..................................................... (13,657) -
Purchase of investments........................................................... (92,539) -
Sale of investments............................................................... 74,430 -
Other............................................................................. (1,503) (476)
-------- --------
Net cash used in investing activities........................................... (97,327) (39,844)
-------- --------
Cash flows from financing activities:
Issuance of long-term debt........................................................ 3,509 2,530
Repayment of long-term debt....................................................... (6,540) (17,841)
Payment of deferred financing costs............................................... (117) -
Issuance of common stock.......................................................... 302 -
Other............................................................................. - (89)
-------- --------
Net cash used in financing activities........................................... (2,846) (15,400)
-------- --------
Change in cash and cash equivalents................................................. (95,071) (49,157)
Cash and cash equivalents at beginning of period.................................... 152,724 65,238
-------- --------
Cash and cash equivalents at end of period.......................................... $ 57,653 $ 16,081
======== ========
Supplemental information:
Interest payments................................................................. $ 5,953 $ 2,673
Income tax payments............................................................... 3,358 2,047
Fair value of common stock issued in connection with the acquisition of
American ElderServe Corporation.................................................. - 5,195
Assumption of long-term debt through business and community acquisitions.......... 5,982 23,429
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
June 30, 1998, Atria operated 56 communities located in 21 states with a total
of 5,492 units, including 3,028 assisted living units and 2,132 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 June 30, 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
$1.2 million at June 30, 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 primarily 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 quarter and
six months ended June 30, 1998 and 1997 follows (dollars in thousands):
QUARTER SIX MONTHS
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Owned and leased communities..... $26,067 $16,693 $49,636 $30,831
Managed communities.............. 48 289 124 368
Nursing centers.................. 2,791 - 4,594 -
------- ------- ------- -------
$28,906 $16,982 $54,354 $31,199
======= ======= ======= =======
NOTE 4--NON-RECURRING TRANSACTIONS
In June 1998, Atria recorded a non-recurring pre-tax charge of $2.0 million
related to costs incurred through June 30, 1998 in connection with the proposed
merger (the "Merger") with Kapson Senior Quarters Corp. See Note 10 for further
discussion regarding the Merger.
NOTE 5--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, 1997 and restated all prior periods. The impact of the
restatement was not significant.
NOTE 6--ACQUISITION OF AMERICAN ELDERSERVE CORPORATION
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, two of which opened in the first quarter of 1998 and the remaining
community of which is scheduled to open in the third quarter of 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 6--AMERICAN ELDERSERVE ACQUISITION (CONTINUED)
The pro forma effect of the American ElderServe acquisition for the six months
ended June 30, 1997 is as follows (dollars in thousands, except per share
amounts):
1997
----
Revenues........................................ $ 33,021
Income before extraordinary loss................ (375)
Net loss........................................ (574)
Earnings per common share:
Basic:
Income before extraordinary loss........... $ (0.02)
Net loss................................... $ (0.03)
Dilutive:
Income before extraordinary loss........... $ (0.02)
Net loss................................... $ (0.03)
Pro forma loss from operations for the six months ended June 30, 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 $0.13 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 7--RELATED PARTY TRANSACTIONS
Atria has made advances to Elder HealthCare Developers, included in notes
receivable, totaling $16.2 million at June 30, 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 of $1.8
million and $2.9 million for the quarter and six months ended June 30, 1998 were
included in operating revenue of the Company.
8
ATRIA COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--SHAREHOLDER PROTECTION RIGHTS AGREEMENT
On February 15, 1998, a dividend of one preferred stock purchase right (a
"Right") was declared 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, and amended as of
February 24 and April 19, 1998, between the Company and National City Bank, as
Rights Agent.
NOTE 9--ACQUISITIONS
In February 1998, the Company acquired five facilities located in Texas. The
Company financed the acquisitions with an operating 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 as of June 30, 1998 and 1997,
assuming that the transactions occurred on January 1, 1997, follows (dollars in
thousands, except per share amounts):
QUARTER SIX MONTHS
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
Revenues............................. $29,237 $23,687 $55,602 $41,433
Income before extraordinary loss..... 1,372 1,608 3,928 3,328
Net income........................... 1,372 1,409 3,928 3,129
Earnings per share:
Basic:
Income before extraordinary loss.. $ 0.06 $ 0.10 $ 0.17 $ 0.21
Net income........................ 0.06 0.09 0.17 0.19
Diluted:
Income before extraordinary loss.. $ 0.06 $ 0.10 $ 0.16 $ 0.20
Net income........................ 0.06 0.08 0.16 0.19
9
ATRIA COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--PROPOSED MERGER
On April 19, 1998, the Company entered into an agreement and plan of merger
(as amended the "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 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.
On May 12, 1998, ARV Assisted Living, Inc. ("ARV") commenced litigation
against Kapson Senior Quarters Corp., Lazard Freres Real Estate Investors L.L.C.
("LFREI") and the Company seeking, among other things, to enjoin LFREI from
acquiring the Company through Kapson. ARV alleges that pursuant to certain
contractual arrangements between ARV and LFREI, ARV has certain rights with
respect to the acquisition of Atria by LFREI and Kapson, including the right to
consent to the Merger. The Complaint alleges that Atria is named "solely
because it is arguably a necessary party to any action seeking to enjoin the
consummation of agreements to which it is a party." After expedited discovery,
the Superior Court of Orange County, California, on June 25, 1998, ruled that
pending the outcome of a trial that commenced on August 3, 1998, Kapson and
LFREI should be preliminarily enjoined from closing the Merger. The Court,
however, specifically declined to enjoin the parties from taking all other steps
necessary in preparation for consummation of the Merger. Therefore, pending the
outcome of the trial on the merits, the parties intend to proceed toward
satisfying the various conditions to closing the Merger, including holding a
special meeting of Stockholders to approve the Merger Agreement and the Merger
(the "Special Meeting"), which is scheduled to occur on September 8, 1998. The
Company believes that the allegations contained in the Complaint are without
merit and intends to defend vigorously against them. However, the lawsuit is
ongoing and there can be no assurance that this litigation will ultimately be
resolved on terms that will permit the parties to close the Merger.
10
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 June 30, 1998, 56 communities
comprising 5,492 units, including two nursing centers totaling 332 beds, located
in 21 states. At June 30, 1998, Atria had 38 assisted living communities
comprising approximately 2,892 units under development, including 19 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 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. See Part II, Item 1 of this Report for a discussion of
litigation related to the proposed Merger.
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 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. In connection with the Merger, the Company is
negotiating a new credit facility. See "Liquidity."
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.
11
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
-----------------------------------
SECOND QUARTER SIX MONTHS
-------------- ---------------
1998 1997 1998 1997
----- ----- ----- -----
Revenues............................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Salaries, wages and benefits......... 40.8 40.3 42.0 40.1
Supplies............................. 9.2 8.9 9.4 9.0
Rent................................. 3.7 1.0 3.4 0.6
Depreciation and amortization........ 9.9 10.2 10.1 10.0
Non-recurring transactions........... 6.9 - 3.7 -
Other operating expenses............. 17.8 19.9 17.6 19.8
----- ----- ----- -----
88.3 80.3 86.2 79.5
----- ----- ----- -----
Operating income..................... 11.7 19.7 13.8 20.5
Interest expense..................... 8.1 7.2 8.6 7.7
Investment income.................... (6.0) (2.0) (7.4) (3.5)
----- ----- ----- -----
Income from operations before
income taxes....................... 9.6 14.5 12.6 16.3
Provision for income taxes........... 3.5 5.8 4.7 6.5
----- ----- ----- -----
Income from operations............... 6.1% 8.7% 7.9% 9.8%
===== ===== ===== =====
Revenues increased 70.2% in the second quarter of 1998 to $28.9 million from
$17.0 million in the second quarter of 1997, and increased 74.2% for the six
month period of 1998 to $54.4 million from $31.2 million in the same period a
year ago. The increase in both the second quarter and six months ended June 30,
1998 was primarily attributable to the acquisition of new communities and the
opening of newly constructed communities. Occupancy for all of the Company's
communities was 82.9% and 87.9% for the second quarter of 1998 and 1997,
respectively. For the six months ended June 30, 1998 and 1997, occupancy for
all of the Company's communities was 83.3% and 90.8%, respectively. The decline
in occupancy was primarily attributable to the opening of new communities for
both the quarter and six months ended June 30, 1998. Same community revenue (31
communities) increased 8.4% for the second quarter of 1998 to $18.0 million as
compared to $16.6 million in the second quarter of 1997. Same community revenue
(21 communities) increased 3.5% for the first six months of 1998 to $29.5
million as compared to $28.5 million for the same period last year. The
increase in same community revenues for the second quarter of 1998 was primarily
attributable to price increases ($900,000) and an increase in census ($500,000).
For the first six months of 1998 the increase in same community revenues was
primarily attributable to price increases ($1.2 million) offset by a slight
decline in census ($200,000). Same community occupancy for the second quarter
of 1998 and 1997 was 89.8% and 87.9%, respectively. For the six months ended
June 30, 1998 and 1997, same community occupancy was 93.1% and 94.3%,
respectively.
Compensation costs as a percentage of revenues increased in both the second
quarter and six month periods of 1998 compared to the same periods 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 $1.1 million in the second quarter of 1998 as
compared to $163,000 in the same period last year. For the six months ended
June 30, 1998 rent expense increased to $1.8 million from $202,000 in the same
period last year. The increase in the second quarter of 1998 is due to the
acquisition of five facilities acquired in February 1998 that were financed
through the use of an operating lease with an unaffiliated party. The increase
for the first six months of 1998 was due to the acquisition of two communities
leased from a third party real estate investment trust ("REIT") as part of the
American ElderServe acquisition as well as the five aforementioned facilities
acquired through an operating lease.
In June 1998, Atria recorded a non-recurring pre-tax charge of $2.0 million
related to costs incurred through June 30, 1998 in connection with the Merger.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Operating income increased 1.5% to $3.4 million in the second quarter of 1998
compared to $3.3 million in the same period of 1997. For the six month period,
operating income grew 17.0% to $7.5 million in 1998 compared to $6.4 million in
1997. Excluding the effect of non-recurring transactions, operating income
increased 61.2% in the second quarter of 1998 and increased 48.1% for the six
month period. In both the second quarter and six month periods, operating
income excluding non-recurring transactions increased 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
second quarter of 1998 to 3.5% from 5.8% in the same period last year. For the
six month period of 1998, the provision for income taxes also decreased as a
percentage of revenues to 4.7% from 6.5% in the same period last year. This
decrease was primarily attributable to an increase in investment in tax-exempt
government securities.
Income from operations increased 18.3% to $1.7 million in the second quarter
of 1998 compared to $1.5 million in the same period last year. For the six
month period income from operations increased 41.2% to $4.3 million in 1998
compared to $3.1 million in 1997. Excluding the effect of non-recurring
transactions, income from operations increased 103.1% for the second quarter of
1998 and 82.2% for the six month period of 1998. The improvement was primarily
attributable to growth in operating income and a reduction in net interest
expense as a result of the Secondary Offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations totaled $5.1 million and $6.1 million for the
six months ended June 30, 1998 and 1997, respectively. The decrease in cash
flows from operations was primarily due to an increase in accounts receivable
attributable to the opening of new communities and the acquisition of the two
nursing centers in Texas.
Net cash used in investing activities totaled $97.3 million and $39.8 million
for the six months ended June 30, 1998 and 1997, respectively. Atria's
investing activities included capital expenditures related to the development of
new communities and the expansion of existing operations totaling $39.2 million
and $22.6 million for the respective periods. In addition, Atria acquired five
communities for $24.8 million during the first six months of 1998 and acquired
two communities and American ElderServe for $16.7 million in the same period
last year. The Company also made advances to joint ventures of $13.7 million
primarily for the funding of construction, as well as net purchases of short-
term investments of $18.1 million during the six month period of 1998.
Net cash used in financing activities totaled $2.8 million and $15.4 million
for the six months ended June 30, 1998 and 1997, respectively. Repayments on
long-term debt totaled $6.5 million and $17.8 million in 1998 and 1997,
respectively. The 1997 amount includes the payment of $14.4 million of long-
term debt assumed in the American ElderServe acquisition, resulting in the
extraordinary loss on extinguishment of debt, net of income taxes, of $199,000.
The Company's working capital totaled $108.4 million at June 30, 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 June 30,
1998, available borrowings under the Credit Facility approximated $15.7 million.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 $147.5 million private offering of
5% Convertible Subordinated Notes due 2002 (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 38 sites for new assisted living communities, 19 of which are
under construction. At June 30, 1998, the estimated additional cost to complete
and equip the 19 communities under construction approximated $70.1 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 June 30, 1998. On April 24, 1998 the Credit Facility
was amended, resulting in the release of Vencor's guarantee.
If the Merger is consummated, the Company will terminate the Credit Facility.
In connection with the Merger, the Company is negotiating a new credit facility
Upon consummation of the Merger, each of the Convertible Notes (aggregate
principal amount of $143.8 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF THE YEAR 2000 ISSUE (CONTINUED)
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.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICAL DATA)
1997 QUARTERS 1998 QUARTERS
-------------------------------------- ------------------
FIRST SECOND THIRD FOURTH FIRST SECOND
-------- -------- -------- -------- -------- --------
Revenues................................. $14,217 $16,982 $17,731 $19,948 $25,448 $28,906
------- ------- ------- ------- ------- -------
Salaries, wages and benefits............. 5,660 6,846 7,368 8,278 11,024 11,792
Supplies................................. 1,290 1,518 1,679 1,845 2,436 2,649
Rent..................................... 39 163 156 257 766 1,077
Depreciation and amortization............ 1,388 1,735 1,840 2,436 2,618 2,862
Non-recurring transactions............... - - - - - 1,992
Other operating expenses................. 2,786 3,383 3,526 4,057 4,514 5,148
------- ------- ------- ------- ------- -------
11,163 13,645 14,569 16,873 21,358 25,520
------- ------- ------- ------- ------- -------
Operating income......................... 3,054 3,337 3,162 3,075 4,090 3,386
Interest expense......................... 1,182 1,228 862 2,137 2,268 2,381
Investment income........................ (753) (353) (1,108) (2,365) (2,279) (1,745)
------- ------- ------- ------- ------- -------
Income from operations before income
taxes................................... 2,625 2,462 3,408 3,303 4,101 2,750
Provision for income taxes............... 1,047 983 1,360 1,023 1,534 1,001
------- ------- ------- ------- ------- -------
Income from operations................... 1,578 1,479 2,048 2,280 2,567 1,749
Extraordinary loss on extinguishment of
debt, net of income tax benefit......... - (199) - - - -
------- ------- ------- ------- ------- -------
Net income........................... $ 1,578 $ 1,280 $ 2,048 $ 2,280 $ 2,567 $ 1,749
======= ======= ======= ======= ======= =======
Earnings per common share:
Basic:
Excluding non-recurring transactions
and extraordinary loss............... $ 0.10 $ 0.09 $ 0.09 $ 0.10 $ 0.11 $ 0.13
Non-recurring transactions............ - - - - - (0.06)
Extraordinary loss on
extinguishment of debt............... - (0.01) - - - -
------- ------- ------- ------- ------- -------
Net income........................... $ 0.10 $ 0.08 $ 0.09 $ 0.10 $ 0.11 $ 0.07
======= ======= ======= ======= ======= =======
Diluted:
Excluding non-recurring transactions
and extraordinary loss............... $ 0.10 $ 0.09 $ 0.09 $ 0.10 $ 0.11 $ 0.13
Non-recurring transactions............ - - - - - (0.06)
Extraordinary loss on
extinguishment of debt............... - (0.01) - - - -
------- ------- ------- ------- ------- -------
Net income........................... $ 0.10 $ 0.08 $ 0.09 $ 0.10 $ 0.11 $ 0.07
======= ======= ======= ======= ======= =======
Shares used in computing earnings per
common share:
Basic.................................. 15,830 16,466 23,209 23,374 23,378 23,384
Diluted................................ 15,987 16,660 23,667 23,817 23,934 23,952
Average occupancy........................ 94.6 % 87.9% 88.7% 88.0% 83.8% 82.9%
Number of communities at end of period... 25 40 37 41 53 56
Number of units at end of period......... 3,226 3,977 3,890 4,170 5,247 5,492
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 12, 1998, ARV Assisted Living, Inc. ("ARV") commenced litigation
against Kapson Senior Quarters Corp.("Kapson"), Lazard Freres Real Estate
Investors L.L.C. ("LFREI") and the Company seeking, among other things, to
enjoin LFREI from acquiring the Company through Kapson. ARV alleges that
pursuant to certain contractual arrangements between ARV and LFREI, ARV has
certain rights with respect to the acquisition of Atria by LFREI and Kapson,
including the right to consent to the Merger. The Complaint alleges that Atria
is named "solely because it is arguably a necessary party to any action seeking
to enjoin the consummation of agreements to which it is a party." After
expedited discovery, the Superior Court of Orange County, California, on June
25, 1998, ruled that pending the outcome of a trial that commenced on August 3,
1998, Kapson and LFREI should be preliminarily enjoined from closing the Merger.
The Court, however, specifically declined to enjoin the parties from taking all
other steps necessary in preparation for consummation of the Merger. Therefore,
pending the outcome of the trial on the merits, the parties intend to proceed
toward satisfying the various conditions to closing the Merger, including
holding a special meeting of Stockholders to approve the Merger Agreement and
the Merger (the "Special Meeting"), which is scheduled to occur on September 8,
1998. The Company believes that the allegations contained in the Complaint are
without merit and intends to defend vigorously against them. However, the
lawsuit is ongoing and there can be no assurance that this litigation will
ultimately be resolved on terms that will permit the parties to close the
Merger.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 26, 1998,
in Louisville, Kentucky. At the meeting, Stockholders elected two persons to
serve as directors for a three-year term ending in 2001 pursuant to the
following vote:
VOTES IN FAVOR VOTES WITHHELD
-------------- --------------
William C. Ballard Jr. 21,217,304 68,150
Peter J. Grua 21,218,124 67,330
At the meeting, Stockholders also approved an amendment to the Company's
1996 Stock Ownership Plan to increase the number of shares issuable thereunder
pursuant to the following vote: 16,316,119 votes in favor; 1,221,192 votes
against; 23,474 votes abstained. Stockholders also approved an amendment to the
Non-Employee Directors 1996 Stock Incentive Plan to increase the annual option
grant and the number of shares available for issuance thereunder pursuant to the
following vote: 16,631,389 votes in favor; 703,784 votes against; 25,612 votes
abstained.
ITEM 5. OTHER INFORMATION
Any stockholder proposal submitted with respect to the Company's 1999
Annual Meeting of Stockholders, which proposal is submitted outside the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934, will be
considered untimely for purposes of Rule 14a-4 and Rule 14a-5 if notice thereof
is received by the Company after March 20, 1999. A Stockholder who wishes to
introduce a proposal at an Annual Meeting of Stockholders , regardless of the
Stockholder's desire to include or exclude as amended the proposal included in
the Company's proxy statement, must comply with certain requirements set forth
in the Company's By-Laws, as amended. A copy of the amended By-Laws may be
obtained from the General Counsel of the Company by written request to the
Company's executive office.
17
PART II. OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NO. DESCRIPTION
10.1 Amendment to Atria Communities, Inc. 1996 Stock Ownership
Incentive Plan
10.2 Amendment to Atria Communities, Inc. Non-Employee
Directors 1996 Stock Ownership Incentive Plan
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 June 30, 1998.
(1) Current Report on Form 8-K was filed on April 27, 1998, relating
to the execution of the Agreement and Plan of Merger by and among
the Company, Kapson Senior Quarters Corp. and KA Acquisition
Corp.
(2) Amendment No. 1 to a Current Report on Form 8-K was filed on May
29, 1998, relating to the amendment of certain terms of the
Agreement and Plan of Merger by and among the Company, Kapson
Senior Quarters Corp. and KA Acquisition Corp.
18
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: August 14, 1998 /s/ W. PATRICK MULLOY, II
- ----------------------- ------------------------------------------
W. Patrick Mulloy, II
President, Chief Executive Officer
and Director
Date: August 14, 1998 /s/ J. TIMOTHY WESLEY
- ----------------------- ------------------------------------------
J. Timothy Wesley
Chief Financial Officer, Vice President of
Development and Secretary
(Principal Financial Officer)