UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- ---------------------------------------------------------------------------
FORM 10-Q
- ---------------------------------------------------------------------------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14012
EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
WASHINGTON 91-1605464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
(Address of principal executive offices)
(206) 298-2909
(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.
(X) Yes ( ) No
As of November 13, 1997, there were 11,000,250 shares of the Registrant's
Common Stock, par value $.0001, outstanding.
EMERITUS CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements: Page No.
--------
Condensed Consolidated Balance Sheets as of
December 31, 1996 and September 30,
1997............................................. 1
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30,
1996 and 1997.................................... 2
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1996 and
1997............................................. 3
Notes to Condensed Consolidated Financial
Statements....................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 7
Part II. Other Information
Item 2. Changes in Securities............................ 18
Item 5. Other Information................................ 18
Item 6. Exhibits and Reports on Form 8-K................. 19
Signatures....................................... 20
Note: Items 1 and 3-4 of Part II are omitted because
they are not applicable
EMERITUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1996 and September 30, 1997
(In thousands, except share data)
ASSETS
September 30,
December 31, 1997
1996 (unaudited)
------------- -------------
Current Assets:
Cash and cash equivalents..................... $ 23,039 $ 11,912
Current portion of restricted deposits........ 934 663
Trade accounts receivable..................... 1,713 2,168
Prepaid expenses and other current assets..... 4,561 8,067
Investment securities available for sale...... 2,152 3,509
------------- -------------
Total current assets.................. 32,399 26,319
------------- -------------
Property and equipment, net..................... 97,150 139,846
Property held for development................... 8,796 10,762
Notes receivable from and investments in
affiliates.................................... 2,464 5,948
Lease acquisition costs, net.................... 8,127 8,414
Other assets, net............................... 9,102 12,271
------------- -------------
Total assets.......................... $158,038 $203,560
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings......................... $ -- $ 5,000
Current portion of long-term debt............. 5,816 10,271
Trade accounts payable........................ 3,725 5,334
Construction advances - leased communities.... 6,387 --
Other current liabilities..................... 6,714 10,578
------------- -------------
Total current liabilities............. 22,642 31,183
------------- -------------
Security deposits............................... 1,014 1,067
Other long-term liabilities..................... 3,740 7,357
Deferred gain on sale of communities............ 9,433 12,623
Deferred income................................. 843 480
Convertible debentures.......................... 32,000 32,000
Long-term debt, less current portion............ 60,260 104,698
------------- -------------
Total liabilities..................... 129,932 189,408
------------- -------------
Minority interest............................... 1,918 1,405
Shareholders' Equity:
Preferred stock, $.0001 par value. Authorized
5,000,000 shares; no shares issued and
outstanding................................... -- --
Common stock, $.0001 par value. Authorized
40,000,000 shares; issued and outstanding
11,000,000 shares............................. 1 1
Additional paid-in capital..................... 44,787 44,787
Unrealized gain on investment securities....... 18 1,413
Foreign currency translation adjustment........ -- 1
Accumulated deficit............................ (18,618) (33,455)
------------- -------------
Total shareholders' equity............ 26,188 12,747
------------- -------------
Total liabilities and shareholders'
equity.............................. $158,038 $203,560
============= =============
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months and Nine Months Ended September 30, 1996 and 1997
(unaudited)
(In thousands, except per share data)
Three months ended September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
1996 1997 1996 1997
--------------- --------------- --------------- ---------------
Revenues:
Community revenue............... $17,197 $30,647 $45,037 $ 82,772
Other service fees.............. 376 878 1,109 2,196
--------------- --------------- --------------- ---------------
Total operating revenues..... 17,573 31,525 46,146 84,968
--------------- --------------- --------------- ---------------
Expenses:
Community operations............ 12,908 22,613 32,508 58,755
General and administrative...... 1,835 2,905 4,218 7,859
Depreciation and amortization... 664 1,891 1,969 4,458
Rent............................ 4,264 9,486 9,881 24,353
--------------- --------------- --------------- ---------------
Total operating expenses..... 19,671 36,895 48,576 95,425
--------------- --------------- --------------- ---------------
Loss from operations......... (2,098) (5,370) (2,430) (10,457)
--------------- --------------- --------------- ---------------
Other income (expense):
Interest expense, net........... (560) (2,162) (2,210) (4,616)
Other, net...................... 297 114 175 236
--------------- --------------- --------------- ---------------
Net other expense............ (263) (2,048) (2,035) (4,380)
--------------- --------------- --------------- ---------------
Net loss..................... $(2,361) $(7,418) $(4,465) $(14,837)
=============== =============== =============== ===============
Net loss per share................ $ (0.21) $ (0.67) $ (0.41) $ (1.35)
=============== =============== =============== ===============
Weighted average number of common
shares outstanding.............. 11,000 11,000 11,000 11,000
=============== =============== =============== ===============
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1997
(unaudited)
(In thousands)
1996 1997
--------- ---------
Net cash used in operating activities (including
changes in all operating assets and
liabilities).................................. $ (3,084) $ (5,492)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment......... (22,903) (15,420)
Acquisition of property held for development.. (947) (20,841)
Proceeds from sale of property and equipment.. 49,757 28,675
Purchase of investment securities............. -- (2,161)
Sale of investment securities................. 259 3,207
Leasehold improvement advances................ (1,824) --
Construction advances leased communities...... -- 18,930
Construction expenditures - leased
communities................................. -- (26,861)
Advances to affiliates........................ (3,027) (1,275)
Acquisition of interest in affiliates......... -- (2,412)
--------- ---------
Net cash provided by (used in) investing
activities.............................. 21,315 (18,158)
--------- ---------
Cash flows from financing activities:
Restricted deposits........................... (6,432) (2,207)
Proceeds from (repayment of) short-term
Borrowings, net............................. (269) 5,000
Debt issue and other financing costs.......... (6,344) (1,106)
Proceeds from long-term borrowings............ 14,531 38,161
Proceeds from issuance of convertible
Debentures.................................. 30,720 --
Repayment of long-term borrow................. (49,855) (27,325)
Other......................................... (122) --
--------- ---------
Net cash provided by (used in) financing
activities.............................. (17,771) 12,523
--------- ---------
Net increase (decrease) in cash........... 460 (11,127)
Cash at the beginning of the period............. 9,507 23,039
--------- ---------
Cash at the end of the period................... $ 9,967 $ 11,912
========= =========
Supplemental disclosure of cash flow information
- cash paid during the period for interest.... $ 1,702 $ 6,883
========= =========
Noncash investing and financing activities:
Acquisition of communities:
Assets acquired.............................. $ -- $ 37,347
Liabilities assumed.......................... -- 36,997
Transfer of property held for development to
property and equipment....................... -- 18,484
Transfer of property and equipment to property
held for sale................................ -- 26,735
Vehicle acquisitions through debt
financing.................................... -- 640
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited interim financial information furnished herein, in the
opinion of management, reflects all adjustments which are necessary to
state fairly the consolidated financial position, results of operations,
and cash flows of Emeritus Corporation, ("the Company") as of September
30, 1997 and for the three and nine months ended September 30, 1997 and
1996. The Company presumes that users of the interim financial information
herein have read or have access to the Company's 1996 audited consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the 1996 Form 10-K filed
March 31, 1997 by the Company under the Securities Act of 1934, and that
the adequacy of additional disclosure needed for a fair presentation,
except in regard to material contingencies, may be determined in that
context. Accordingly, footnote and other disclosures which would
substantially duplicate the disclosures contained in the Form 10-K have
been omitted. The financial information herein is not necessarily
representative of a full year's operations.
Certain reclassifications of the 1996 amounts have been made to
conform to the 1997 presentation.
2. CHANGE IN ACCOUNTING ESTIMATES
Effective January 1, 1997, the Company changed the period over which
pre-opening costs on newly opened developments are amortized from 18 months
to one-year. The change did not have a material effect on 1996 results of
operations as the majority of developments were opened late in 1996. The
impact for the three months ended and nine months ended September 30, 1997,
was $(221,000) and $(417,000) or $(0.02) and $(0.04) per share,
respectively.
Effective January 1, 1997, the Company also changed the estimate for
the useful life of acquired buildings. The impact for the three
months ended and nine months ended September 30, 1997, was $118,000 and
$284,000 or $0.01 and $0.03 per share, respectively. The impact for the
three months ended and nine months ended September 30, 1996 would have been
$65,000 and $176,000 or $0.01 and $0.02 per share, respectively, if the
Company had changed the estimate effective January 1, 1996.
3. ACQUISITIONS
During the year ended December 31, 1996 and the nine months ended
September 30, 1997, the Company completed several acquisitions of assisted-
living, independent-living and skilled nursing communities. These
acquisitions have been accounted for as purchases and, accordingly, the
assets and liabilities of the acquired communities were recorded at their
estimated fair values at the dates of acquisition. No goodwill or
identifiable intangibles were recorded with respect to any of the
acquisitions. The results of operations of the communities acquired have
been included in the Company's consolidated financial statements from the
dates of the acquisitions. Summary information concerning the acquisitions
is as follows:
4
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Total
Communities acquired Acquisition date purchase price Units
- ---------------------------------- --------- -------------- ---------
(in thousands)
Heritage Hills Retirement......... February 1, 1996 $ 4,338 100
Lakewood Inn (1).................. March 1, 1996 2,800 108
Laurel Place (formerly Golden
Park)................ .......... April 25, 1996 2,100 72
Madison Glen (formerly Sunshine
Manor).......................... May 15, 1996 3,842 140
The Hearthstone (2)............... November 1996 5,200 84
Concorde.......................... November 1996 8,400 116
Other 1996 Acquisitions........... Various 8,202 272
Villa Del Rey..................... March 19, 1997 4,252 84
La Casa Communities (3)........... May 1, 1997 33,062 473
-------------- ---------
$72,196 1,449
============== =========
(1) Refinanced through a sale/leaseback with a REIT.
Lease includes an initial term of 13 years with
four five-year renewal options and annual base
rent of approximately $686,000. The Company has
no continuing involvement outside of operating
the community.
(2) Refinanced through a sale/leaseback with a REIT.
Lease includes an initial term of 11 years 11
months with four five-year renewal options and
annual base rent of approximately $596,000. The
Company has no continuing involvement outside of
operating the community.
(3) Consists of three long-term-care communities
located in Florida.
The foregoing purchases have generally been financed through
borrowings.
During the year ended December 31, 1996 and the nine months ended
September 30, 1997, the Company completed several acquisitions of
communities through lease financing transactions with certain Real Estate
Investment Trusts' (REITs'), pursuant to which the REITs' leased such
communities to the Company under operating leases. The results of
operations of the communities acquired have been included in the Company's
consolidated financial statements from the dates the leases commenced for
those communities not previously owned.
Lease
Communities leased Acquisition Initial Renewal Annual
date Lease Term Options Rent Units
-------------- ------------- ---------------- ---------------- --------
Carolina Communities (1)..... February 1996 15 years Three five-year $ 4,145,607 648
Evergreen Lodge.............. April 1996 13 years Four five-year 572,569 98
Rosewood Court (2)........... April 1996 14 yrs/9 mos Three five-year 393,200 71
Barrington Place............. May 1996 11 yrs/11 mos Four five-year 413,601 80
Springtree................... May 1996 11 yrs/11 mos Four five-year 1,410,353 185
The Terrace (3).............. August 1996 11 yrs/8 mos Four five-year 416,887 88
Lodge at Mainlands........... August 1996 11 yrs/7 mos Four five-year 924,530 154
Colonial Park Club........... August 1996 11 yrs/7 mos Four five-year 770,862 90
Ridge Wind................... August 1996 11 yrs/8 mos Four five-year 458,061 80
Other 1996 Leases............ October 1996 11 years Four five-year 1,753,006 226
New York Communities (4)..... November 1996 15 years Two five-year 4,975,000 738
Texas Communities (5)........ April 1, 1997 15 years Three five-year 2,174,328 411
---------------- --------
$18,408,004 2,869
================ ========
(1) Consists of 10 long-term-care communities located
in North and South Carolina.
(2) Originally acquired in 1995, refinanced through a
sale/leaseback with a REIT. The Company has no
continuing involvement outside of operating the
community.
(3) Originally acquired in 1996, refinanced through a
sale/leaseback with a REIT. The Company has no
continuing involvement outside of operating the
community.
(4) Consists of 9 long-term-care communities located
in New York.
(5) Consists of 3 long-term-care communities located
in Texas.
5
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following summary, prepared on a pro forma basis, combines the
results of operations of the acquired businesses with those of the Company
as if the acquisitions, acquisitions through lease financings and
sale/leaseback financings had been consummated as of January 1, 1996, after
including the impact of certain adjustments such as depreciation on assets
acquired and interest expense on acquisition financing.
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
(In thousands, except per share data)
Revenue................. $27,419 $31,525 $81,306 $ 89,900
Net loss................ (2,754) (7,418) (6,940) (15,278)
Net loss per share...... $ (0.25) $ (0.67) $ (0.63) $ (1.39)
The unaudited pro forma results are not necessarily indicative of what
actually might have occurred if the acquisitions had been completed as of
the beginning of the periods presented. In addition, they are not intended
to be a projection of future results of operations and do not reflect any
of the synergies that might be achieved from combined operations.
4. SUBSEQUENT EVENTS
Subsequent to the third quarter 1997, in October 1997, The Company
announced an investment by NorthStar Capital Partners LLC ("NorthStar"), a
private investment group with financial backing from a Union Bank of
Switzerland Securities affiliate and Quantum Realty Partners, a fund
advised by Soros Fund Management LLC. NorthStar invested $25 million
in the Company through the purchase of preferred stock, representing
approximately 10% ownership in the Company. The preferred stock is
convertible into 1.37 million newly issued shares of the Company's common
stock at $18.20 per share and is exchangeable into convertible debt at the
option of the Company. NorthStar has also agreed to provide an additional
$50 million to the Company and its related entities for use in supporting
future growth initiatives. The Company expects to use the net proceeds to
repay indebtedness on owned assisted-living communities and for ongoing
development and acquisition activity.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since its organization in July 1993, the Company has achieved
significant growth in revenues, primarily due to the acquisition and
operation of residential communities. The Company believes that it is one
of the largest providers of assisted-living services in the United States.
The Company's revenues are derived primarily from rents and service fees
charged to its residents. For the nine months ended September 30, 1996 and
1997, the Company generated total operating revenues of $46.1 million and
$85.0 million, respectively, representing an 84% increase. For the three
months ended September 30, 1996 and 1997, the Company generated total
operating revenues of $17.6 million and $31.5 million, respectively,
representing a 79% increase. As of September 30, 1997, the Company's
accumulated deficit was $33.5 million and its total shareholders' equity
was $12.7 million. For the nine months ended September 30, 1996 and 1997,
the Company generated net losses of $4.5 million and $14.8 million,
respectively. For the three months ended September 30, 1996 and 1997, the
Company generated net losses of $2.4 million and $7.4 million,
respectively.
The Company's operating strategy is to increase operating margins at
each acquired or newly developed community, whether leased or owned,
primarily by increasing occupancy levels, encouraging residents to remain
at the Company's communities longer by offering them a range of service
options, increasing revenues through modifications in rate structures,
where appropriate, and identifying opportunities to create operating
efficiencies and reduce costs.
As of November 7, 1997, the Company holds ownership, leasehold or
management interests in 99 residential communities (the "Operating
Communities") consisting of approximately 8,600 units with a capacity of
over 10,000 residents, located in 25 states. Of the 99 Operating
Communities 19 newly developed communities were opened during 1997; five
commenced operations during the first quarter of 1997, six commenced
operations during the second and third quarters of 1997 and two commenced
operations during the fourth quarter of 1997. Additionally, the Company
completed construction on an expansion to an existing community during the
second quarter of 1997, and during the fourth quarter of 1997 entered into
an agreement with an affiliate to provide administrative services for an
independent-living community located in Washington. In addition, the
Company owns, has a leasehold interest in or has acquired an option to
purchase development sites for 30 new assisted-living communities (the "New
Development Communities"). Eleven of the New Development Communities are
currently under construction, one of which is scheduled to open during the
fourth quarter of 1997. The Company leases 72 of its Operating
Communities, typically from a financial institution such as a Real Estate
Investment Trust ("REIT"), owns 18 communities, manages four communities
and has a joint venture and partnership interest in five communities.
Additionally, the Company holds a 22.4% minority interest in Alert Care
Corporation ("Alert"), an Ontario, Canada based owner and operator of 17
assisted-living communities consisting of approximately 900 units with a
capacity of approximately 940 residents. Assuming completion of the New
Development Communities scheduled to open throughout 1997 and the minority
interest in Alert, the Company will own, lease or manage 117 properties in
25 states and Canada containing an aggregate of approximately 9,600 units
with a capacity of over 11,100 residents. There can be no assurance,
however, that the New Development Communities will be completed on
schedule and will not be affected by construction delays, the effects of
government regulation or other factors beyond the Company's control. The
Company's management of assisted-living communities owned or leased by
others has not been material to the Company's business or revenue.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table sets forth a summary of the Company's property
interests.
As of September 30,
-----------------------------------------------------------------------
1994 1995 1996 1997
----------------- ----------------- ----------------- -----------------
Buildings Units Buildings Units Buildings Units Buildings Units
--------- ------- --------- ------- --------- ------- --------- -------
Owned 6 494 17 1,733 13 1,285 17 1,916
Leased 1 91 2 140 37 3,047 72 5,804
Managed -- -- -- -- -- -- 3 227
Joint Venture/
Partnership -- -- 1 22 2 162 4 380
--------- ------- --------- ------- --------- ------- --------- -------
Sub Total 7 585 20 1,895 52 4,494 96 8,327
Annual Growth --% -- % 186% 224% 160% 137% 85% 85%
Pending 1 80 19 1,370 9 1,119 -- --
Acquisitions
New Developments 10 770 31 2,374 41 3,550 29 2,548
Minority Interest -- -- -- -- -- -- 17 940
--------- ------- --------- ------- --------- ------- --------- -------
Total 18 1,435 70 5,639 102 9,163 142 11,815
--------- ------- --------- ------- --------- ------- --------- -------
Annual Growth --% -- % 289% 293% 46% 63% 39% 29%
When used in this discussion, the words "believes," "anticipates,"
"intends" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those projected.
See "Factors Affecting Future Results and Regarding Forward-Looking
Statements" in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date
hereof. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be
made to reflect recent events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
items of the Company's Condensed Consolidated Statements of Operations as a
percentage of total revenues and the percentage change of the dollar
amounts from period to period.
Period to Period
Percentage Increase
(Decrease)
Percentage of Revenues Three Months Nine Months
Three Months Ended Nine Months Ended Ended Ended
September 30, September 30, September 30, September 30,
------------------ ------------------ ------------- -------------
1996 1997 1996 1997 1996-1997 1996-1997
-------- -------- -------- -------- ------------- -------------
Revenues.......................... 100 % 100 % 100 % 100 % 79 % 84 %
Expenses:
Community operations........... 73 72 70 69 75 81
General and administrative..... 10 9 9 9 58 86
Depreciation and amortization.. 4 6 4 5 185 126
Rent........................... 24 30 21 29 122 146
-------- -------- -------- -------- ------------- -------------
Total operating expenses.... 111 117 104 112 88 96
-------- -------- -------- -------- ------------- -------------
Loss from operations........ (11) (17) (4) (12) 156 330
-------- -------- -------- -------- ------------- -------------
Other income (expense):
Interest expense, net.......... (3) (7) (5) (5) 286 109
Other, net..................... 2 -- -- -- (62) 35
-------- -------- -------- -------- ------------- -------------
Net loss.................... (12)% (24)% (9)% (17)% 214 % 232 %
======== ======== ======== ======== ============= =============
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Total operating revenues for the nine months ended
September 30, 1997 were $85.0 million, representing a $38.8 million, or
84%, increase over operating revenues of $46.1 million for the comparable
period in 1996. The increase resulted from the opening of new developments
and the acquisition of communities between September 30, 1996 and 1997.
The Company ended with 52 and 96 communities representing approximately
4,500 and 8,300 units as of September 30, 1996 and 1997, respectively, an
increase of 85%. For the nine months ended September 30, 1997, there was a
decline in average occupancy to 70% from 75% for the comparable period in
1996, however, the impact on revenue from the decline in occupancy was
offset by a modification in rate structure at the communities.
COMMUNITY OPERATIONS. Expenses for community operations for the nine
months ended September 30, 1997 were $58.8 million, representing a $26.2
million, or 81% increase over $32.5 million for the comparable period in
1996, primarily due to the Company's opening of new developments and the
acquisition of communities between September 30, 1996 and 1997. The
Company ended with 52 and 96 communities as of September 30, 1996 and 1997,
respectively, an increase of 85%. As a percentage of total operating
revenues, expenses for community operations decreased to 69% for the nine
months ended September 30, 1997, from 70% for the comparable period in
1996. The Company expects community operations to continue to decline as a
percentage of revenue as it continues to fill-up newly developed
communities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the nine months ended September 30, 1997 were $7.9 million, representing an
increase of $3.6 million, or 86% from $4.2 million for the comparable
period in 1996. As a percentage of total operating revenues, general and
administrative expenses remained unchanged at 9% for the nine months ended
September 30, 1997 and 1996 while the number of employees located at the
corporate office was 194 and 122 for the nine months ended September 30,
1997 and 1996, respectively. The dollar increase in general and
administrative expenses was attributable to salaries and associated costs
relating to additional employment in conjunction with new business,
increased accounting costs and higher travel and other costs relating to
the Company's acquisition and development program. General and
administrative costs are expected to continue to increase in line with
revenues and community operations at least through 1997 as the Company
acquires additional existing communities and develops new communities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
nine months ended September 30, 1997 was $4.5 million, or 5% of total
operating revenues, compared to $2.0 million or 4% of total operating
revenues, for the comparable period in 1996. The increase was due to a
combination of an increase in pre-opening amortization expense and the
opening of new developments and the acquisition of eight communities owned
by the Company net of communities sold in sale/leaseback transactions
between September 30, 1996 and 1997. The Company owned 18%, or 17 of its
96 communities representing approximately 1,900 units at September 30, 1997
compared to 25%, or 13 of its 52 communities representing approximately
1,300 units at September 30, 1996.
RENT. Rent expense for the nine months ended September 30, 1997 was
$24.4 million, representing an increase of $14.5 million, or 146% from rent
expense of $9.9 million for the comparable period in 1996. As a percentage
of total operating revenues, rent expense increased to 29% for the nine
months ended September 30, 1997, from 21% for the comparable period in
1996. The dollar and percentage increases were due to the Company entering
into lease financing or sale/leaseback transactions with respect to 75%, or
72 out of 96 of its residential communities representing approximately
5,800 units as of September 30, 1997 compared to 71%, or 37 out of 52
communities representing approximately 3,100 units as of September 30,
1996. The increase in rent expense as a percentage of revenue can also be
attributed to the opening of newly developed communities operated by the
Company under lease agreements. The Company expects an occupancy fill-up
period of 12 to 24 months for a newly developed community. As the fill-up
of newly developed communities continues, rent expense as a percentage of
revenue is expected to decrease. Rent expense on a dollar basis is
expected to continue to increase as the Company refinances owned
communities through sale/leaseback transactions and acquires additional
communities through lease financing transactions.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
INTEREST EXPENSE, NET. Interest expense, net, for the nine months
ended September 30, 1997 was $4.6 million on long-term debt of $115.0
million compared to $2.2 million on long-term debt of $66.1 million for the
comparable period in 1996, remaining unchanged as a percentage of total
operating revenue at 5% for the nine months ended September 30, 1997 and
1996. The dollar increase was primarily due to the acquisition of four
communities through mortgage financing bearing interest at rates between 8%
and 18% and the opening of five developments owned by the Company. This
was offset by the repayment of $16.3 million existing mortgage debt having
interest rates between 9.3% and 13.2% with convertible debenture proceeds
having an interest rate of 6.25% in 1996.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Total operating revenues for the three months ended
September 30, 1997 were $31.5 million, representing a $14.0 million, or
79%, increase over operating revenues of $17.6 million for the comparable
period in 1996. The increase resulted from the opening of new
developments and the acquisition of communities between September 30, 1996
and 1997. The Company ended with 52 and 96 communities representing
approximately 4,500 and 8,300 units as of September 30, 1996 and 1997,
respectively, an increase of 85%. For the three months ended September 30,
1997, there was a decline in average occupancy to 71% from 79% for the
comparable period in 1996, however, the impact on revenue from the decline
in occupancy was offset by a modification in rate structure at the
communities.
COMMUNITY OPERATIONS. Expenses for community operations for the three
months ended September 30, 1997 were $22.6 million, representing a $9.7
million, or 75% increase over $12.9 million for the comparable period in
1996, primarily due to the Company's opening of new developments and the
acquisition of communities between September 30, 1996 and 1997. The
Company ended with 52 and 96 communities as of September 30, 1996 and 1997,
respectively, an increase of 85%. As a percentage of total operating
revenues, expenses for community operations decreased to 72% for the three
months ended September 30, 1997, form 73% for the comparable period in 1996.
The Company expects community operations to continue to decline as a
percentage of revenue as it continues to fill-up newly developed
communities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the three months ended September 30, 1997 were $2.9 million, representing
an increase of $1.1 million, or 58% from $1.8 million for the comparable
period in 1996. As a percentage of total operating revenues, general and
administrative expenses decreased to 9% for the three months ended
September 30, 1997, from 10% for the comparable period in 1996 while the
number of employees located at the corporate office was 194 and 122 for the
three months ended September 30, 1997 and 1996, respectively. The dollar
increase in general and administrative expenses was attributable to
salaries and associated costs relating to additional employment in
conjunction with new business, increased accounting costs and higher travel
and other costs relating to the Company's acquisition and development
program. General and administrative costs are expected to continue to
increase in line with revenues and community operations at least through
1997 as the Company acquires additional existing communities and develops
new communities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
three months ended September 30, 1997 was $1.9 million, or 6% of total
operating revenues, compared to $664,000 or 4% of total operating revenues,
for the comparable period in 1996. The dollar increase was due to a
combination of an increase in pre-opening amortization expense and the
opening of new developments and the acquisition of eight communities owned
by the Company net of communities sold in sale/leaseback transactions
between September 30, 1996 and 1997. The Company owned 18%, or 17 of its
96 communities representing approximately 1,900 units at September 30, 1997
compared to 25%, or 13 of its 52 communities representing approximately
1,300 units at September 30, 1996.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
RENT. Rent expense for the three months ended September 30, 1997 was
$9.5 million, representing an increase of $5.2 million, or 122% from rent
expense of $4.3 million for the comparable period in 1996. As a percentage
of total operating revenues, rent expense increased to 30% for the three
months ended September 30, 1997, from 24% for the comparable period in
1996. The dollar and percentage increases were due to the Company entering
into lease financing or sale/leaseback transactions with respect to 75%, or
72 out of 96 of its residential communities representing approximately
5,800 units as of September 30, 1997 compared to 71%, or 37 out of 52
communities representing approximately 3,100 units as of September 30,
1996. The increase in rent expense as a percentage of revenue can also be
attributed to the opening of newly developed communities operated by the
Company under lease agreements. The Company expects an occupancy fill-up
period of 12 to 24 months for a newly developed community. As the fill-up
of newly developed communities continues, rent expense as a percentage of
revenue is expected to decrease. Rent expense on a dollar basis is
expected to continue to increase as the Company refinances owned
communities through sale/leaseback transactions and acquires additional
communities through lease financing transactions.
INTEREST EXPENSE, NET. Interest expense, net, for the three months
ended September 30, 1997 was $2.2 million on long-term debt of $115.0
million compared to $560,000 on long-term debt of $66.1 million for the
comparable period in 1996, increasing as a percentage of total operating
revenues to 7% for the three months ended September 30, 1997 from 3% for
the comparable period in 1996. The dollar increase was primarily due to the
acquisition of four communities through mortgage financing bearing interest
at rates between 8% and 18% and the opening of five developments owned by
the Company.
SAME COMMUNITY COMPARISON
The Company operated 40 communities ("Same Community") on a comparable
basis during both the three months ended September 30, 1996 and 1997. The
Same Communities represented 54% of the Company's total revenue for the
quarter. Same Community average occupancy was unchanged at 82% for the
respective three month periods while net operating margins increased by
$902,000 to 32% on revenue of $17.0 million as compared to 28% on revenue
of $16.0 million for the three months ended September 30, 1996. The
increase in revenue can be attributed to monthly rate increases and greater
services offered at the communities. Same Community pre-tax income, before
corporate overhead, increased by $685,000 from $(289,000) to $396,000
compared to the comparable period last year. In addition, average revenue
per occupied unit increased approximately 7%, from $1,974 to $2,116, during
the third quarter 1996 and 1997, respectively.
The following table sets forth a comparison of Same Community results
of operations before corporate overhead for the three months ended
September 30, 1996 and 1997.
Three Months Ended September 30,
(In thousands)
Dollar Percentage
1996 1997 Change Change
--------- --------- -------- ----------
Revenue........................... $15,995 $16,986 $991 6 %
Community operating expense....... 11,474 11,563 89 1
--------- --------- -------- ----------
Community operating income... 4,521 5,423 902 20
--------- --------- -------- ----------
Depreciation and amortization..... 460 501 41 9
Rent.............................. 3,896 4,203 307 8
--------- --------- -------- ----------
Operating income............. 165 719 554 336
--------- --------- -------- ----------
Interest income (expense), net.... (572) (525) 47 (8)
Other income, net................. 118 202 84 71
--------- --------- -------- ----------
Pre-tax income (loss)........ $ (289) $ 396 $685 237 %
========= ========= ======== ==========
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Three months ended
September 30,
--------------------
1996 1997
--------- ---------
OTHER SAME COMMUNITY INFORMATION:
Communities.................... 40 40
Total units.................... 3,283 3,283
Average occupancy.............. 82% 82%
Revenue per occupied unit...... $1,974 $2,116
The 37 Same Communities as reported for the quarter ending June 30,
1997 had an average occupancy of 86% and 80%, reported revenue of 15.3
million and $15.2 million, community operating expenses of $9.8 million and
$10.1 million and pre-tax income of $1.0 million and $893,000 for the
three months ended June 30, 1997 and September 30, 1997, respectively.
STABILIZED (GROUP ONE) AND START-UP/REPOSITIONED (GROUP TWO) COMMUNITY
COMPARISON
For the three months ended September 30, 1997, the Company had 52
communities that had achieved average occupancy of at least 90% during one
quarter in the last 12 months ("Group One Communities") and 44 communities
that had average occupancy of less than 90%, which includes 34 newly opened
developments and/or communities with significant ongoing repositioning
and/or refurbishment activity ("Group Two Communities").
The following table sets forth a comparison of Group One and Group Two
Community results of operations for the three months ended September 30,
1997.
Three Months Ended September 30, 1997
(In thousands)
Start-Up/
Stabilized Repositioned
Communities Communities
(Group One) (Group Two) Overhead Total
----------- ------------- -------- ---------
Revenue........................... $22,352 $ 9,168 $ 5 $31,525
Community operating expense....... 14,170 8,443 -- 22,613
----------- ------------- -------- ---------
Community operating income... 8,182 725 5 8,912
----------- ------------- -------- ---------
General and administrative........ -- -- 2,905 2,905
Depreciation and amortization..... 379 1,401 111 1,891
Rent.............................. 5,926 3,451 109 9,486
----------- ------------- -------- ---------
Operating income (loss)...... 1,877 (4,127) (3,120) (5,370)
----------- ------------- -------- ---------
Interest income (expense), net.... (510) (1,608) (44) (2,162)
Other income (expense)............ 27 179 (92) 114
----------- ------------- -------- ---------
Net income (loss)............ $ 1,394 $(5,556) $(3,256) $(7,418)
=========== ============= ======== =========
OTHER GROUP ONE AND GROUP TWO INFORMATION:
Communities..................... 52 44 96
Total units..................... 4,176 4,151 8,327
Average Occupancy............... 90% 48% 70%
Revenue per occupied unit....... $ 1,987 $ 1,636 $ 1,871
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Group One Communities ended the third quarter with an average
occupancy of 90% compared to 94% for the three months ended September 30,
1996 while net operating margins increased by $4.2 million to 37% on
revenue of $22.4 million as compared to 31% on revenue of $12.6 million for
the three months ended September 30, 1996. Group One Community pre-tax
income, before corporate overhead, increased by 116% to $1.4 million
compared to the comparable period last year. The total number of Group One
Communities increased by 24 compared to the third quarter of 1996 due to a
combination of acquisitions and communities achieving an occupancy of at
least 90%.
Group Two Communities ended the third quarter with an average
occupancy of 48% compared to 56% for the three months ended September 30,
1996 while net operating margins increased by $16,000 to 8% on revenue of
$9.2 million as compared to 14% on revenue of $5.0 million for the three
months ended September 30, 1996. Group Two Community pre-tax loss, before
corporate overhead, increased by 285% to $5.6 million compared to the
comparable period last year. The total number of Group Two Communities had
a net increase of 20 compared to the third quarter of 1996 due primarily to
the opening of new developments.
The following tables set forth a comparison of Group One and Group Two
Community results of operations before corporate overhead for the three
months ended September 30, 1996 and 1997.
Stabilized Communities (Group One)
Three Months Ended September 30,
(In thousands)
Dollar Percentage
1996 1997 Change Change
--------- --------- -------- ----------
Revenue........................... $12,583 $ 22,352 $9,769 78 %
Community operating expense....... 8,627 14,170 5,543 64
--------- --------- -------- ----------
Community operating income...... 3,956 8,182 4,226 107
--------- --------- -------- ----------
Depreciation and amortization..... 228 379 151 66
Rent.............................. 2,819 5,926 3,107 110
--------- --------- -------- ----------
Operating income............... 909 1,877 968 106
--------- --------- -------- ----------
Interest income (expense), net.... (265) (510) (245) 92
Other income, net................. -- 27 27 --
--------- --------- -------- ----------
Pre-tax income............... $ 644 $ 1,394 $ 750 116 %
========= ========= ======== ==========
OTHER GROUP ONE INFORMATION:
Communities.................... 28 52
Total units.................... 2,189 4,176
Average occupancy.............. 94% 90%
Revenue per occupied unit...... $2,037 $1,987
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Start-Up/Repositioned Communities (Group Two)
Three Months Ended September 30,
(In thousands)
Dollar Percentage
1996 1997 Change Change
---------- ---------- --------- ------------
Revenue........................... $ 4,990 $ 9,168 $ 4,178 84 %
Community operating expense....... 4,281 8,443 4,162 97
---------- ---------- --------- ------------
Community operating income...... 709 725 16 2
---------- ---------- --------- ------------
Depreciation and amortization..... 356 1,401 1,045 294
Rent.............................. 1,360 3,451 2,091 154
---------- ---------- --------- ------------
Operating loss.................. (1,007) (4,127) (3,120) 310
---------- ---------- --------- ------------
Interest income (expense), net.... (510) (1,608) (1,098) 215
Other income, net................. 75 179 104 139
---------- ---------- --------- ------------
Pre-tax loss.................... $(1,442) $(5,556) $(4,114) 285 %
========== ========== ========= ============
OTHER GROUP TWO INFORMATION:
Communities.................... 24 44
Total units.................... 2,305 4,151
Average occupancy.............. 56% 48%
Revenue per occupied unit...... $1,387 $1,636
Group One Communities for the three months ended September 30, 1997 and
June 30, 1997, consisted of 52 communities and 48 communities,
respectively. Average Occupancy remained unchanged at 90% for both the
second and third quarter of 1997. Revenue increased $2.8 million, or 14%
to $22.4 million for the three months ended September 30, 1997 from $19.6
million for the three months ended June 30, 1997. Community operating
expenses for the third quarter 1997 were $14.2 million, representing an
increase of $2.2 million, or 19% over $11.9 million for the second quarter
1997. Pre-tax income decreased $354,000, or 20% to $1.4 million for the
three months ended September 30, 1997 from $1.7 million for the three
months ended June 30, 1997. The changes between second quarter 1997 and
third quarter 1997 are primarily a result of the increase in communities
between the two quarters contributing revenue of $2.5 million, operating
expenses of $1.9 million and a pre-tax loss of $118,000.
Group Two Communities for the three months ended September 30, 1997
and June 30, 1997, consisted of 44 communities and 42 communities,
respectively, representing 29 and 22 newly developed communities,
respectively. Average Occupancy decreased to 48% for the three months
ended September 30, 1997 from 53% for the three months ended June 30,
1997. Revenue decreased $204,000, or 2% to $9.2 million for the three
months ended September 30, 1997 from $9.4 million for the three months
ended June 30, 1997. Community operating expenses for the third quarter
1997 were $8.4 million, representing an increase of $1.1 million, or 15%
over $7.3 million for the second quarter 1997. Pre-tax loss increased $2.5
million, or 81% to $5.6 million for the three months ended September 30,
1997 from $3.1 million for the three months ended June 30, 1997.
The changes between second quarter 1997 and third quarter 1997 are
primarily a result of newly opened developments. The Company expects an
occupancy fill-up period of 12 to 24 months for a newly developed community
at which time the Company expects newly developed communities to begin
showing positive operating results. Among the 42 Group Two Communities, 22
were newly developed communities representing $3.6 million in revenue for
the three months ended September 30, 1997 compared to $2.4 million for the
three months ended June 30, 1997, $3.9 million in community operating
expenses for the third quarter 1997 compared to $2.5 million for the second
quarter 1997 and pre-tax loss of $3.9 million for the third quarter 1997
compared to pre-tax loss of $2.5 million for the second quarter 1997.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1996 and 1997, net cash used
in operating activities was $3.1 million and $5.5 million, respectively.
During the nine months ended September 30, 1997, the Company obtained $27.0
million in proceeds from the sale of communities in sale/leaseback
financing transactions and repaid related mortgage indebtedness of $12.3
million as well as $15.0 million of unrelated mortgage indebtedness
including refinancing $5.6 million in long-term debt on two assisted-living
communities and repaying $2.1 million in long-term debt on an assisted-
living community located in Arizona. The Company obtained $1.7 million
in proceeds from the sale of land in Maryland. The Company also incurred
additional long-term debt of $38.2 million and purchased additional property
and equipment and property held for development of $36.3 million. As a
result of these acquisition and financing transactions the Company decreased
its cash position by approximately $11.1 million. During the nine months
ended September 30, 1996, the Company obtained $49.8 million in proceeds
from the sale of communities in sale/leaseback financing transactions and
repaid related mortgage debt of $33.7 million as well as $16.2 million of
unrelated mortgage debt. The Company also incurred additional long-term debt
of $45.3 million, including $30.7 million, net proceeds from the private
placement of convertible subordinated debentures and purchased additional
property and equipment and property held for development of $23.9 million.
As of September 30, 1997, the Company had a working capital deficit of $4.9
million compared to working capital of $9.8 million as of December 31,
1996. The Company's working capital deficit is a result of $7.8 million
in long-term mortgages on two assisted-living communities which are due
within the next twelve months and are expected to be refinanced with
additional long-term borrowings. Excluding the $7.8 million of long-term
debt due, the Company would have working capital of $3.0 million.
In October 1997, the Company received an investment by NorthStar
Capital Partners LLC ("NorthStar"), of $25.0 million with an additional
$50.0 million to potentially be received in the future for use in supporting
future growth initiative. The Company expects to use the net proceeds to
repay indebtedness on owned assisted-living communities and for ongoing
development and acquisition activity. See "Recent Events".
In July 1997, the Company commenced operations on three newly
developed communities aggregating 222 units. Eastman Estates and
Meadowlands Terrace both located in Texas and Bellaire Place located in
South Carolina had completed construction during the second quarter of
1997. Bellaire Place is operated by the Company pursuant to an operating
lease agreement with a REIT. The lease consists of an initial term of
twelve years nine months with four five-year renewal options and annual
base rent of approximately $555,000. Eastman Estates and Meadowlands
Terrace were refinanced in September 1997 with a REIT. The transaction
consisted of $7.3 million in construction indebtedness refinanced through a
sale/leaseback and a mortgage financing transaction. Eastman Estates is
operated by the Company pursuant to a lease agreement consisting of an
initial term of 11 years seven months with four five-year renewal options
and annual base rent of approximately $510,000. Meadowlands Terrace is
owned and operated by the Company. The Company purchased an additional $1.6
million (Cdn) of preferred stock in Alert. This latest transaction has
resulted in the Company having now subscribed for a total of 6,888,466
preferred shares with a total investment of $3.7 million (US) representing
on an as-if-converted basis approximately 22.4% of the outstanding common
and Class A nonvoting shares taken together. This represents approximately
39.6% of the common shares (assuming no Class A nonvoting shares are
converted into common shares) and approximately 34.1% of the Class A
nonvoting shares (assuming no common shares are converted into Class
A nonvoting shares).
In August 1997, the Company commenced operations on two newly
developed communities aggregating 158 units, Lakeridge Place in Texas and
Ridgeland Court in Mississippi. Both communities are operated by the
Company pursuant to operating lease agreements with a REIT. The leases
consist of initial terms of thirteen years eight months and thirteen years
for Lakeridge Place and Ridgeland Court, respectively, each with four five-
year renewal options and annual base rent aggregating approximately $1.2
million. With respect to Ridgeland Court, the Company entered into an
agreement with Mississippi Baptist Health Systems, Inc. ("MBHS"), a non
profit corporation located in Mississippi. Under this agreement, the
Company has the right to use MBHS's name, tradename and certain trademarks
("Marks") and any copyrights ("Related Rights") relating to the Marks for
the purpose of developing, marketing, operating and maintaining Ridgeland
Court in exchange for a 50% economic interest in the community. The Company
intends to enter into additional agreements like this one with MBHS on
future developments in Mississippi.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
In September 1997, the Company completed $16.4 million in lease
financing on two to-be-constructed assisted-living communities located in
Ohio and Delaware aggregating 200 units. Construction on the developments
commenced during the third quarter 1997. The communities will be
constructed and operated by the Company pursuant to operating leases and
leasehold improvement agreements with a REIT. Additionally, the Company
entered into an agreement ("Management/Lease-Up Agreement") with an
independent third party on a to-be-constructed 101 unit assisted-living
community located in Illinois. Under the Management Lease-Up Agreement,
the Company will provide management services for a period of two years
commencing on the date that the first resident occupies one of the units in
the community. The Company will receive a management fee equal to 5% of
gross revenues payable monthly over the term of the agreement. Commencing
on the earlier date to occur (a) two years after commencement of the
management agreement or (b) the first month in which the community is cash
flow even, the Company will lease the community from the independent third
party under an operating lease agreement with an initial term of 10 years
and three five-year renewal options.
RECENT EVENTS
Subsequent to the third quarter 1997, in October 1997, The Company
announced an investment by NorthStar, a private investment group with
financial backing from a Union Bank of Switzerland Securities affiliate and
Quantum Realty Partners, a fund advised by Soros Fund Management LLC.
NorthStar invested $25 million in the Company through the purchase of
preferred stock, representing approximately 10% ownership in the
Company. The preferred stock is convertible into 1.37 million newly issued
shares of the Company's common stock at $18.20 per share and is
exchangeable into convertible debt at the option of the Company. NorthStar
has also agreed to provide an additional $50 million to the Company and its
related entities for use in supporting future growth initiatives. The
Company expects to use the net proceeds to repay indebtedness on owned
assisted-living communities and for ongoing development and acquisition
activity.
Additionally, subsequent to the third quarter of 1997, the Company
commenced operations on a 101 unit newly developed community located in
Washington and an 80 unit newly developed community located in
Massachusetts. The community located in Washington is owned and operated
by the Company and the community located in Massachusetts is operated by
the Company on a joint venture basis pursuant to an operating lease
agreement with a third party. The lease consists of an initial term of 20
years with two ten-year renewal options and annual base rent aggregating
approximately $798,000. The Company entered into an agreement with Columbia
House LLC, an affiliate of the Company to provide administrative and
accounting services for a 100 unit independent-living community located in
Washington. Under the agreement the Company shall receive an
administrative services fee of $3,000 payable monthly for the first year
and $4,000 payable monthly for the remaining three years.
The Company has been, and expects to continue to be, dependent on
third-party financing for its acquisition and development programs. There
can be no assurance that financing for the Company's acquisition and
development programs will be available to the Company on acceptable terms.
In part, the Company's future capital needs depend on arranging
sale/leaseback financing for existing assisted-living communities that have
achieved stabilized occupancy rates, resident mix and operating margins
after initial development or repositioning. There can be no assurance that
the Company will generate sufficient cash flow during such time to fund its
working capital, rent, debt service requirements or growth. In such event,
the Company would have to seek additional financing through debt or equity
offerings, bank borrowings or other sources.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
FINANCIAL ACCOUNTING STANDARDS NO. 128
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share. This statement establishes standards for computing and presenting
earnings per share (EPS), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex
capital structures, the statement requires that dual presentation of both
Basic EPS and Diluted EPS on the face of the statement of operations.
Under this new statement, Basic EPS is computed based on weighted average
shares outstanding and excludes any potential dilution. Diluted EPS
reflects potential dilution from the exercise or conversion of securities
into common stock or from other contracts to issue common stock and is
similar to the currently required fully diluted EPS. SFAS 128 is effective
for financial statements issued for earlier periods ending after December
15, 1997, including interim periods, and earlier application is not
permitted. When adopted, the Company will be required to restate its EPS
data for all prior periods presented. The Company does not expect the
impact of the adoption of this statement to be material to previously
reported EPS amounts.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and
operating income due to the Company's dependence on its senior resident
population, most of whom rely on relatively fixed incomes to pay for the
Company's services. As a result, the Company's ability to increase
revenues in proportion to increased operating expenses may be limited. The
Company typically does not rely to a significant extent on governmental
reimbursement programs. In pricing its services, the Company attempts to
anticipate inflation levels, but there can be no assurance that the Company
will be able to respond to inflationary pressures in the future.
17
PART II OTHER INFORMATION
Item 1 is not applicable.
Item 2: CHANGES IN SECURITIES
On October 24, 1997 the Company sold 25,000 shares of Series A
Convertible Exchangeable Redeemable Preferred Stock (the "Series A
Preferred Stock") to Merit Partners, LLC for an aggregate purchase price of
$25 million. There were no underwriters involved and no underwriting
commissions or discounts were paid. The Series A Preferred Stock was
offered and sold in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 and Regulation D Rule 504
thereunder. The purchaser is composed of sophisticated financial
institutions and their advisers.
Each share of Series A Preferred Stock is convertible into that number
of shares of the Company's Common Stock equal to the liquidation value of a
share of Series A Preferred Stock ($1,000) divided by the conversion price
of $18.20 per share. Currently the Series A Preferred Stock is convertible
into an aggregate of 1,373,626 shares of Common Stock. The conversion
price is subject to adjustment in the event of stock dividends, stock
subdivisions and combinations, and extraordinary distributions.
Items 3-4 are not applicable.
Item 5: OTHER INFORMATION
On October 13, 1997, the Company announced its proposed merger of the
Company with ARV Assisted Living, Inc. ("ARV"), an assisted-living company
located in Costa Mesa, California. The all-cash offer of $16.50 per share
for all the outstanding common stock of ARV, represents a 45% premium over
ARV's closing price of $11.38 on July 14, 1997, the day before ARV
announced its intention to sell 49.9% of its common stock to Prometheus
Assisted Living L.L.C. ("Prometheus"), an affiliate of Lazard Freres Real
Estate Investors LLC ("Lazard")for $14 per share.
On October 14, 1997, ARV announced that the company is not for sale
and that it intends to continue its commitment to its transaction with
Prometheus and not pursue negotiations with the Company. On October 15,
1997, ARV announced that Gary L. Davidson resigned from his offices as
Chairman, Chief Executive Officer and President of the company and as a
director of the company.
On October 31, 1997, ARV announced that it issued $60 million of 6.75%
Convertible Subordinated Notes (the "Notes") due 2007 to Prometheus. The
Notes are convertible into approximately 3.5 million shares of ARV's common
stock at $17.25 per share. This transaction, in conjunction with
Prometheus earlier purchase of 1.9 million common shares of $26.9 million,
replaces a previous agreement which called for Prometheus to purchase up to
$135 million of ARV common shares. Lazard currently owns 1.9 million
shares of common shares of ARV. The 1.9 million share position represents
approximately a 16.6% ownership in ARV. If the Notes were to be converted
in full, Lazard would have, on a fully diluted basis, a 28.2% ownership in
ARV.
The Company intends to continue to seek to negotiate with the ARV with
respect to the acquisition of ARV by the Company. If such negotiations
result in a definitive merger agreement between ARV and the Company, the
consideration to be received by holders of shares could include or consist
of securities, cash or any combination thereof. As of November 11, 1997,
the Company holds a 9.3% interest in ARV.
The Company and ARV are two of the leading companies in the senior
housing services business. The company currently holds interests in 116
communities representing capacity of 11,000 residents in 25 states and
Canada. ARV currently owns and/or operates 49 assisted-living facilities
with approximately 6,300 units in 11 states. Together, the strategic
business combination of our two companies would create a powerful critical
mass, positioning the combined enterprise well for its rapid growth both
internally and through acquisitions, providing the finest living facilities
for its thousands of senior citizen residents, and building value for its
employees, business partners, communities and, in turn, investors.
18
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
4.1 Preferred Stock Purchase Agreement (including Designation
of Rights and Preferences of Series A Convertible
Exchangeable Redeemable Preferred Stock of Emeritus
Corporation Agreement, Registration of Rights Agreement and
Shareholders Agreement) dated October 24, 1997 between the
registrant ("Seller") and Merit Partners, LLC
("Purchaser").
10.1 RIDGELAND COURT IN RIDGELAND, MISSISSIPPI
10.1.1 Master Agreement and Subordination Agreement dated
September 5, 1997 between the registrant, Emeritus
Properties I, Inc., and Mississippi Baptist health
Systems, Inc.
10.1.2 License Agreement dated September 5, 1997 between the
registrant and its subsidiary and affiliated
corporations and Mississippi Baptist health Systems,
Inc.
10.1.3 Economic Interest Assignment Agreement and
Subordination Agreement dated September 5, 1997
between the registrant, Emeritus Properties I, Inc.,
and Mississippi Baptist Health Systems, Inc.,
10.2 DEVELOPMENT PROPERTY IN URBANA, ILLINOIS.
10.2.1 Lease Agreement dated September 10, 1997 between ALCO
IV, L.L.C. ("Lessor") and the registrant ("Lessee").
10.2.2 Management Agreement dated September 10, 1997 between
the registrant ("Manager" and ALCO IV, L.L.C.
("Owner").
10.3 EASTMAN ESTATES IN LONGVIEW, TEXAS
10.3.1 Lease Agreement dated September 30, 1997 between
Meditrust Acquisition Corporation I ("Lessor") and ESC
I, L.P. ("Lessee").
10.4 MEADOWLANDS TERRACE IN WACO, TEXAS
10.4.1 Loan Agreement dated September 30, 1997 between
Meditrust Mortgage Investments, Inc. ("Lender") and
ESC I, L.P. ("Borrower").
10.4.2 Promissory Note dated September 30, 1997 in the amount
of $4,288,000 between Meditrust Mortgage Investments,
Inc. ("Lender") and ESC I, L.P. ("Borrower").
10.5 Development Properties in Middleburg Heights, Ohio and
Newark, Delaware. The following agreements are
representative of those executed in connection with these
properties.
10.5.1 Lease Agreement dated September, 1997 between Emeritus
Properties I, Inc., ("Lessee") and Meditrust
Acquisition Corporation I, ("Lessor").
10.5.2 Leasehold Improvement Agreement dated September, 1997
between Emeritus Properties I, Inc., ("Lessee") and
Meditrust Acquisition Corporation I, ("Lessor").
10.6 VAN VISTA IN VANCOUVER, WASHINGTON
10.6.1 Agreement to provide Accounting and Administrative
Services dated October 1, 1997 between Acorn Service
Corporation ("Administrator") and Vancouver Housing,
L.L.C., ("Manager")
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K/A Amendment No. 1 with the
Securities and Exchange Commission on July 14, 1997, which is incorporated
herein by reference, reported under Item 2, the Company's acquisition of
the La Casa Communities and Item 7, the Company's Financial Statements of
Business Acquired and Pro Forma Financial Information with respect to the
acquisition of the La Casa Communities.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1997
EMERITUS CORPORATION
(Registrant)
/s/ Kelly J. Price
-----------------------------------
Kelly J. Price, Vice President, Finance and
Chief Financial Officer
/s/ James S. Keller
-----------------------------------
James S. Keller, Controller (Principal Accounting Officer)
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