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 March 31, 1998.
( ) 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 MARCH 31, 1998
WASHINGTON 91-1605464
(State or other jurisdiction (I.R.S. Employer
of 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 May 11, 1998, there were 10,483,050 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, 1997 and March 31, 1998
unaudited)....................................... 1
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and
1998(unaudited).................................. 2
Condensed Consolidated Statements of
Comprehensive Operations for the Three Months
Ended March 31, 1997 and 1998 (unaudited)........ 3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997 and
1998(unaudited).................................. 4
Notes to Condensed Consolidated Financial
Statements (unaudited) .......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 8
Part II. Other Information
Item 1. Legal Proceedings................................ 17
Item 6. Exhibits......................................... 18
Signatures....................................... 19
Note: Items 2-5 of Part II are omitted because they are
not applicable
EMERITUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 31, 1998
(In thousands, except share data)
ASSETS
March 31,
December 31, 1998
1997 (unaudited)
------------ -----------
Current Assets:
Cash and cash equivalents..................... $ 17,537 $ 10,464
Short-term investments........................ 17,235 9,800
Trade accounts receivable, net................ 2,338 2,761
Prepaid expenses and other current assets..... 5,481 4,662
Property held for sale........................ 8,202 37,463
------------ -----------
Total current assets.................. 50,793 65,150
------------ -----------
Property and equipment, net..................... 145,831 116,390
Property held for development................... 2,754 3,414
Notes receivable from and investments in
Affiliates.................................... 6,422 7,610
Restricted deposits, less current portion....... 10,273 10,904
Other assets, net............................... 12,500 11,553
------------ -----------
Total assets.......................... $228,573 $215,021
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term borrowings......................... $ - $ 5,000
Current portion of long-term debt............. 12,815 36,764
Margin loan on short-term investments......... 9,165 4,232
Trade accounts payable........................ 2,541 3,072
Accrued employee compensation and benefits.... 3,713 3,766
Other current liabilities..................... 10,485 10,556
------------ -----------
Total current liabilities............. 38,719 63,390
------------ -----------
Deferred rent................................... 8,474 8,885
Deferred gain on sale of communities............ 12,314 13,072
Deferred income................................. 114 123
Convertible debentures.......................... 32,000 32,000
Long-term debt, less current portion............ 108,117 88,149
Security deposits and other long-term
Liabilities................................... 1,452 708
------------ -----------
Total liabilities..................... 201,190 206,327
------------ -----------
Minority interests.............................. 1,176 994
Redeemable preferred stock...................... 25,000 25,000
Shareholders' Equity (Deficit):
Common stock, $.0001 par value. Authorized
40,000,000 shares; issued and outstanding
10,974,650 and 10,483,050 shares at December
31, 1997 and March 31, 1998, respectively.... 1 1
Additional paid-in capital..................... 44,449 39,044
Accumulated other comprehensive income......... 4,011 1,208
Accumulated deficit............................ (47,254) (57,553)
------------ -----------
Total shareholders' equity (deficit).. 1,207 (17,300)
------------ -----------
Total liabilities and shareholders' $228,573 $215,021
equity (deficit)...................
============ ===========
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 Ended March 31, 1997 and 1998
(unaudited)
(In thousands, except per share data)
1997 1998
--------- ---------
Revenues:
Community revenue......................... $20,983 $ 34,143
Other service fees........................ 3,506 598
Management fees........................... 13 61
--------- ---------
Total operating revenues.......... 24,502 34,802
--------- ---------
Expenses:
Community operations...................... 16,947 25,709
General and administrative................ 2,207 3,201
Depreciation and amortization............. 1,075 1,568
Rent...................................... 6,863 10,299
--------- ---------
Total operating expenses.......... 27,092 40,777
--------- ---------
Loss from operations.............. (2,590) (5,975)
--------- ---------
Other income (expense):
Interest expense, net..................... (822) (2,778)
Other, net................................ (160) 329
--------- ---------
Net other expense................. (982) (2,449)
--------- ---------
Loss before cumulative effect of
change in accounting principle.. (3,572) (8,424)
Cumulative effect of change in accounting
principle................................. - (1,320)
--------- ---------
Net loss ......................... $(3,572) $ (9,744)
========= =========
Preferred stock dividends................... - 555
--------- ---------
Net loss to common shareholders... $(3,572) $(10,299)
========= =========
Loss per common share - basic and diluted:
Loss before cumulative effect of change in
accounting principle.................... $ (0.32) $ (0.84)
Cumulative effect of change in accounting
principle............................... $ - $ (0.13)
--------- ---------
Loss per common share..................... $ (0.32) $ (0.97)
========= =========
Weighted average number of common shares
outstanding -
basic and diluted....................... 11,000 10,633
========= =========
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 COMPREHENSIVE
OPERATIONS
Three Months Ended March 31, 1997 and 1998
(unaudited)
(In thousands)
1997 1998
--------- ---------
Net loss...................................... $(3,572) $ (9,744)
Other comprehensive income (loss):
Foreign currency translation adjustments... - 2
Unrealized gains (losses) on investment
securities:
Unrealized holding gains (losses)
arising during the period........... 102 (2,355)
Reclassification adjustment for gains
included in net loss................ - (450)
--------- ---------
Total other comprehensive income
(loss)........................... 102 (2,803)
--------- ---------
Comprehensive loss............................ $(3,470) $(12,547)
========= =========
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
3
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1998
(unaudited)
(In thousands)
1997 1998
--------- ---------
Net cash used in operating activities (including
changes in all operating assets and
liabilities).................................. $ (1,427) $ (8,664)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment......... (7,692) (4,145)
Acquisition of property held for development.. (2,321) (442)
Proceeds from sale of property and equipment.. - 3,985
Purchase of investment securities............. (344) -
Sale of investment securities................. 75 5,530
Construction advances - leased communities.... 5,092 4,624
Construction expenditures - leased
communities................................. (12,043) (4,754)
Advances to and investments in affiliates..... (1,228) (87)
Acquisition of business and partnership
interests................................... (678) (1,312)
--------- ---------
Net cash provided by (used in)
Investing activities................ (19,139) 3,399
--------- ---------
Cash flows from financing activities:
Increase in restricted deposits............... (298) (449)
Proceeds from short-term borrowings........... 1,957 5,149
Repayment of short-term borrowings............ - (5,532)
Proceeds from long-term borrowings............ 7,386 4,894
Repayment of long-term borrowings............. (4,244) (1,004)
Increase in lease acquisition and deferred
financing costs............................. - 538
Repurchase of common stock.................... - (5,406)
--------- ---------
Net cash provided by (used in)
financing activities................ 4,801 (1,810)
--------- ---------
Effect of exchange rate changes on cash......... - 2
--------- ---------
Net decrease in cash.................. (15,765) (7,073)
Cash at the beginning of the period............. 23,039 17,537
--------- ---------
Cash at the end of the period................... $ 7,274 $ 10,464
========= =========
Supplemental disclosure of cash flow information
-- cash paid during the period for interest... $ 1,372 $ 2,101
========= =========
Noncash investing and financing activities
-- acquisition of a community:
Assets acquired............................... $ 4,200 $ -
Liabilities assumed........................... 3,850 -
Transfer of property held for development to
property and equipment........................ 6,998 -
Transfer of property and equipment to property
held for sale................................. 25,249 32,188
Vehicle acquisitions through debt financing..... 323 90
Land acquisition through forgiveness of note
receivable.................................... - 218
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
4
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
March 31, 1998 and for the three months ended March 31, 1997
and 1998. The Company presumes that users of the interim
financial information herein have read or have access to the
Company's 1997 audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the 1997 Form 10-K
filed March 30, 1998 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 Form 10-
K have been omitted. The financial information herein is
not necessarily representative of a full year's operations.
Certain reclassifications of the 1997 amounts have been
made to conform to the 1998 presentation.
2. ACQUISITIONS
During the year ended December 31, 1997, the Company
completed four acquisitions of assisted-living and
independent-living 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:
Total
Communities acquired Acquisition date purchase price Units
- -------------------------- ----------------- -------------- ---------
(in thousands)
Villa Del Rey............. March 1997 $ 4,252 84
La Casa Communities (1)... May 1997 33,062 473
-------------- ---------
$37,314 557
============== =========
(1) 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, 1997, the Company
completed an acquisition of three communities through lease
financing transactions with a Real Estate Investment Trust
(REIT), pursuant to which the REIT 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 Initial Renewal Annual
Communities leased Acquisition date Lease Term Options Rent Units
- ----------------------- ----------------- ----------- --------------- ---------- -----
Texas Communities (1).. April 1997 15 years Three five-year $2,174,328 411
(1) Consists of 3 long-term-care communities located
in Texas.
5
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The Company has a letter of intent with a REIT relating
to sale/leaseback financing of $100 million for newly
purchased facilities and a similar arrangement with the REIT
for an additional $100 million financing for newly purchased
facilities. At March 31, 1998, approximately $54.3 million
of such financing remains available to the Company.
In February 1998, the Company completed a $4.0 million
sale/leaseback transaction with a REIT pursuant to which the
REIT acquired the community and leased it back to the
Company under an operating lease agreement. The lease has
an initial term of 11 years with four five-year renewal
options and annual rent of approximately $354,000.
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, 1997, after
including the impact of certain adjustments such as
depreciation on assets acquired and interest expense on
acquisition financing.
Three months ended March 31, 1997
--------------------------------------
(In thousands, except per share data)
Revenue........................... $28,584
Net loss to common shareholders... (4,090)
Pro forma net loss per common
share - basic and diluted....... $ (0.38)
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.
3. PROPERTY HELD FOR SALE
At March 31, 1998, the Company has commitments to sell
six existing communities and an office park to an
independent third party and two existing communities to a
related party ("Properties Held for Sale" or "Properties").
Of the $37.5 million in Properties Held for Sale, $10.1
million, securing $8.5 million of related long-term debt,
are scheduled to be sold to an independent third party with
no continuing involvement by the Company. The remaining
$27.4 million in Properties, securing $20.5 million of
related long-term debt, are scheduled to be sold to a
related party with the Company retaining a 20% interest in
one community and providing management services for both
communities.
6
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
4. NEW ACCOUNTING STANDARDS
In April 1997, the Accounting Standards Executive
Committee issued SOP 98-5, Reporting on the Costs of Start-
Up Activities. This statement provides guidance on
financial reporting for start-up costs and organization
costs and requires such costs to be expensed as incurred.
The Company elected early adoption of this statement
effective January 1, 1998 and has reported a charge of
$1,320,000 for the cumulative effect of this change in
accounting principle.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS
130), Reporting Comprehensive Income. This statement
establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The purpose of
reporting comprehensive income is to report a measure of all
changes in equity of an enterprise that result from
recognized transactions and other economic events of the
period other than transactions with owners in their capacity
as owners. The Company adopted SFAS 130 effective January 1,
1998.
5. LOSS PER SHARE
Loss per common share on a dilutive basis has been
calculated without consideration of 1,991,445 and 3,918,822
common shares at March 31, 1997 and 1998, respectively, related
to outstanding options, warrants, convertible debentures and
convertible preferred stock because the inclusion of such
common stock equivalents would be anti-dilutive.
7
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 development 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 three months
ended March 31, 1997 and 1998, the Company generated total
operating revenues of $24.5 million and $34.8 million,
respectively. As of March 31, 1998, the Company's
accumulated deficit was $57.6 million and its total
shareholders' deficit was $17.3 million. For the three
months ended March 31, 1997 and 1998, the Company generated
losses of $3.6 million and $8.4 million (excluding a charge
related to the cumulative effect of a change in accounting
principle in 1998), respectively. As discussed below, the
Company's losses result from a number of factors, including
the opening in 1997 of a number of newly developed and
acquired communities that incur operating losses during an
initial 12 to 24 months rent-up phase, occupancy percentages
in the Company's stabilized communities that have not risen
as quickly as the Company had anticipated and that in some
cases have declined, financing costs arising from
sale/leaseback transactions and mortgage financing and
refinancing transactions at proportionately higher levels of
debt, and increased administrative and corporate expenses
resulting from a restructuring of the Company's operations
and marketing required by rapid growth.
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 May 11, 1998, the Company held ownership,
leasehold or management interests in 104 residential
communities (the "Operating Communities") consisting of
approximately 9,100 units with the capacity for 10,600
residents, located in 27 states. Of the 104 Operating
Communities, 20 and three newly developed communities were
opened during 1997 and 1998, respectively. The Company
owns, has a leasehold interest in, management interest in or
has acquired an option to purchase development sites for 22
new assisted-living communities (the "Development
Communities"). Thirteen of the Development Communities are
currently under construction, 11 of which are scheduled to
open during 1998. The Company leases 78 of its residential
communities, typically from a financial institution such as
a Real Estate Investment Trust ("REIT"), owns 18
communities, manages or provides administrative services for
five communities and has a partnership interest in three
communities. Additionally, the Company holds a minority
interest in Alert Care Corporation ("Alert"), an Ontario,
Canada based owner and operator of 21 assisted-living
communities consisting of approximately 1,200 units with a
capacity of approximately 1,300 residents. Assuming
completion of the Development Communities scheduled to open
throughout 1998 and including the minority interest in
Alert, the Company will own, lease, have an ownership
interest in or manage 136 properties in 28 states and
Canada, containing an aggregate of approximately 11,400
units with capacity of over 12,900 residents. There can be
no assurance, however, that the 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.
8
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 March 31,
------------------------------------------------------------------------
1995 1996 1997 1998
---------------- ---------------- ----------------- -----------------
Buildings Units Buildings Units Buildings Units Buildings Units
--------- ------ --------- ------ --------- ------- --------- -------
Owned 8 652 12 1,067 16 1,569 18 2,028
Leased 1 91 28 2,171 58 4,563 78 6,278
Managed - - - - 1 83 5 419
Joint Venture/Partnership - - 1 22 2 162 3 412
--------- ------ --------- ------ --------- ------- --------- -------
Sub Total 9 743 41 3,260 77 6,377 104 9,137
Annual Growth - % - % 356% 339% 88% 96% 35% 43%
Pending Acquisitions 16 1,531 28 2,194 14 1,406 - -
New Developments 25 2,038 30 2,436 34 3,060 22 2,082
Minority Interest - - - - 17 959 21 1,163
--------- ------ --------- ------ --------- ------- --------- -------
Total 50 4,312 99 7,890 142 11,802 147 12,382
--------- ------ --------- ------ --------- ------- --------- -------
Annual Growth - % - % 98% 83% 43% 50% 4% 5%
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 year ended December 31,
1997. 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.
Percentage of Revenues Period to Period
March 31, Percentage
---------------------- Increase (Decrease)
1997 1998 1997-1998
---------- ---------- -------------------
Revenues........................... 100 % 100 % 42 %
Expenses:
Community operations............ 69 74 52
General and administrative...... 9 9 45
Depreciation and amortization... 4 5 46
Rent............................ 28 30 50
---------- ----------
Total operating expenses..... 110 118 51
---------- ----------
Loss from operations......... (10) (18) 131
---------- ----------
Other expense:
Interest expense, net........... 3 8 238
Other, net...................... 1 (1) (306)
---------- ----------
Net loss before cumulative
effect of change in
accounting principle....... (14) (25) 136
Cumulative effect of change in
accounting principle............. - 4 N/A
---------- ----------
Net loss..................... (14)% (29)% 173 %
========== ==========
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1997
REVENUES. Total operating revenues for the three
months ended March 31, 1998 were $34.8 million, representing
a $10.3 million, or 42%, increase over operating revenues of
$24.5 million for the comparable period in 1997. The
increase resulted from the opening of new developments and
the related fill-up of units and the acquisition of
communities subsequent to the first quarter 1997. The
Company ended with 77 and 103 communities representing
approximately 6,400 and 9,000 units as of March 31, 1997 and
1998, respectively, an increase of 34%. For 1998, there was
a decline in average occupancy to 69% from 73% for 1997,
primarily attributable to the opening of 18 newly developed
communities after March 31, 1997. The impact on revenue
from the decline in occupancy was offset by an increase in
the rate per occupied unit.
COMMUNITY OPERATIONS. Expenses for community
operations for the three months ended March 31, 1998 were
$25.7 million, representing an $8.8 million, or 52% increase
over $16.9 million for the comparable period in 1997,
primarily due to the Company's opening of new developments
and the acquisition of communities subsequent to the first
quarter 1997. The increase can also be attributed to an
increase in the allowance for doubtful accounts and the
adoption of Statement of Position (SOP) 98-5 which requires
that costs of start-up activities and organization costs be
expensed as incurred. The adoption of SOP 98-5 on January
1, 1998, resulted in the Company expensing approximately
$291,000 in start-up costs incurred in the first quarter of
1998 on new developments and are included in community
expenses. All future costs associated with newly developed
communities will be expensed as incurred and included in
community operations rather than capitalized and amortized
over a period of one-year. As a percentage of total
operating revenues, expenses for community operations
increased to 74% for the three months ended March 31, 1998,
from 69% for the comparable period in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative
expenses for the three months ended March 31, 1998 were $3.2
million, representing an increase of $994,000, or 45% from
$2.2 million for the comparable period in 1997. As a
percentage of total operating revenues, general and
administrative expenses remained unchanged at 9% for the
three months ended March 31, 1998 and 1997 while the number
of employees located at the corporate office was 96 and 98
at March 31, 1997 and 1998, respectively. The 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 larger number of communities. General and
administrative costs are expected to continue to increase in
line with revenues and community operations at least through
1998 as the Company continues to develop new communities.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization for the three months ended March 31, 1998 was
$1.6 million, or 5% of total operating revenues, compared to
$1.1 million or 4% of total operating revenues, for the
comparable period in 1997. The increase was primarily due
to the Company's opening of new developments and the
acquisition of communities owned by the Company, net of
communities sold in sale/leaseback transactions subsequent
to the first quarter 1997. The Company owned 17%, or 18 of
its 103 communities representing approximately 2,000 units
at March 31, 1 998 compared to 21%, or 16 of its 77
communities representing approximately 1,600 units at March
31, 1997.
RENT. Rent expense for the three months ended March
31, 1998 was $10.3 million, representing an increase of $3.4
million, or 50% from rent expense of $6.9 million for the
comparable period in 1997. As a percentage of total
operating revenues, rent expense increased to 30% for the
three months ended March 31, 1998, from 28% for the
comparable period in 1997. The dollar increases were due to
additional lease financing or sale/leaseback transactions.
The Company leased 76%, or 78 of its 103 of its residential
communities representing approximately 6,300 units as of
March 31, 1998 compared to 75%, or 58 of its 77 communities
representing approximately 4,600 units as of March 31, 1997.
The increase in rent expense as a percentage of revenue is
attributable to the opening of newly developed communities,
in their fill-up stage, 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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
INTEREST EXPENSE, NET. Interest expense, net, for the
three months ended March 31, 1998 was $2.8 million compared
to $822,000 for the comparable period in 1997, increasing as
a percentage of total operating revenues to 8% for the three
months ended March 31, 1998 from 3% for the comparable
period in 1997. The increase was primarily due to the
acquisition of communities through mortgage financing
bearing interest at rates between 8.4% and 18% subsequent to
the first quarter 1997 and the opening of developments owned
by the Company, all partially offset by sale/leaseback
refinancings.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.
The Company incurred a cumulative effect of a change in
accounting principle of $1.3 million relating to the early
adoption of SOP 98-5 which requires that costs of start-up
activities and organization costs be expensed as incurred.
The Company does not expect this statement to materially
impact total operating expenses. However, previously
capitalized and amortized start-up costs will be expensed to
community operations as incurred.
SAME COMMUNITY COMPARISON
The Company operated 59 communities ("Same Community")
on a comparable basis during both the three months ended
March 31, 1997 and 1998. The Same Communities represented
67% of the Company's total revenue for the first quarter of
1998. Net operating margins increased by $875,000 to 35% on
revenue of $23.2 million as compared to 33% on revenue of
$21.8 million for the three months ended March 31, 1997.
The increase in revenue can be attributed to monthly rate
increases and greater services offered at the communities,
partially offset by a decline in average occupancy. Same
Community reported a pre-tax income, before corporate
overhead, of $760,000, representing an increase of $1.1
million from a pre-tax loss, before corporate overhead, of
$294,000 to the comparable period last year. In addition,
average revenue per occupied unit increased approximately
7%, from $1,938 to $2,077, during the first quarter 1997 and
1998, respectively, while Same Community average occupancy
declined slightly to 82% during the three months ended March
31, 1998 compared to 83% for the comparable period last
year. Included among the 59 Same Communities, were 11
communities newly developed in 1996. These communities
reported an average occupancy of 40% and 64%, net operating
margin of 6% and 26% on revenue of $1.9 million and $3.0
million and pre-tax net loss, before corporate overhead, of
$1.4 million and $603,000 for the three months ended March
31, 1997 and 1998, respectively.
The following table sets forth a comparison of Same
Community results of operations before corporate overhead
for the three months ended March 31, 1997 and 1998.
Three Months Ended March 31,
(In thousands)
Dollar Percentage
1997 1998 Change Change
--------- --------- -------- ----------
Revenue........................... $21,798 $23,193 $1,395 6 %
Community operating expense....... 14,612 15,132 520 4
--------- --------- -------- ----------
Community operating income... 7,186 8,061 875 12
--------- --------- -------- ----------
Depreciation and amortization..... 752 524 (228) (30)
Rent.............................. 5,917 6,244 327 6
--------- --------- -------- ----------
Operating income............. 517 1,293 776 (150)
--------- --------- -------- ----------
Interest expense, net............. (811) (533) (278) (34)
--------- --------- -------- ----------
Pre-tax income (loss)........ $ (294) $ 760 $1,054 359 %
========= ========= ======== ==========
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Three months ended
March 31,
--------------------
1997 1998
--------- ---------
OTHER SAME COMMUNITY INFORMATION:
Communities......................... 59 59
Total units......................... 4,528 4,528
Average occupancy................... 83% 82%
Revenue per average occupied unit... $1,938 $2,077
The 50 Same Communities included in the quarters ending
December 31, 1997 and March 31, 1998 reported revenue of
$20.0 million and $20.2 million, community operating
expenses of $13.7 million and $13.8 million and pre-tax
loss, before corporate overhead, of $15,000 and $7,000 for
such quarters, respectively, while average occupancy
increased to 80% in the first quarter of 1998 compared to
79% in the fourth quarter of 1997.
STABILIZED (GROUP ONE) AND START-UP/REPOSITIONED (GROUP TWO)
COMMUNITY COMPARISON
For the three months ended March 31, 1998, the Company
had 55 communities that had achieved average occupancy of at
least 90% during one quarter ("Group One Communities") and
48 communities that had average occupancy of less than 90%,
which includes 40 newly opened developments and/or
communities with significant ongoing repositioning and/or
refurbishment activity ("Group Two Communities").
The following tables set forth a comparison of Group
One and Group Two Community results of operations for the
three months ended March 31, 1998.
Three Months Ended March 31, 1998
(In thousands)
Start-Up/
Stabilized Repositioned
Communities Communities
(Group One) (Group Two) Overhead Total
------------ ------------- -------- -----------
Revenue........................... $23,924 $10,853 $ 25 $34,802
Community operating expense....... 15,510 10,199 - 25,709
------------ ------------- -------- -----------
Community operating income..... 8,414 654 25 9,093
------------ ------------- -------- -----------
General and administrative........ - - 3,201 3,201
Depreciation and amortization..... 534 880 154 1,568
Rent.............................. 6,047 4,132 120 10,299
------------ ------------- -------- -----------
Operating income (loss)........ 1,833 (4,358) (3,450) (5,975)
------------ ------------- -------- -----------
Interest income (expense), net.... (884) (1,544) (350) (2,778)
Other income (expense)............ (1) 66 264 329
------------ ------------- -------- -----------
Pre-tax income (loss) before
cumulative effect of change
in accounting principle...... $ 948 $(5,836) $(3,536) $(8,424)
============ ============= ======== ===========
Other Group One and Group Two
Information:
Communities..................... 55 48 103
Total units..................... 4,538 4,427 8,965
Average Occupancy............... 88% 49% 69%
Revenue per average occupied
unit.......................... $ 1,993 $ 1,772 $ 1,920
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Group One Communities ended the first quarter of 1998
with an average occupancy of 88% compared to 93% for the
first quarter of 1997 while net operating margins increased
by $1.4 million to 35% on revenue of $23.9 million for the
three months ended March 31, 1998 as compared to 37% on
revenue of $19.0 million for the three months ended March
31, 1997. Group One Community pre-tax income, before
corporate overhead and before cumulative effect of change in
accounting principle, decreased by 29% to $948,000 compared
to the comparable period last year. The total number of
Group One Communities increased by 10 in the first quarter
of 1998 compared to the first quarter of 1997 due to a
combination of acquisitions and communities achieving an
occupancy of at least 90% during one quarter.
Group Two Communities ended the first quarter of 1998
with an average occupancy of 49% compared to 47% for the
first quarter of 1997 while net operating margins increased
by $109,000 to 6% on revenue of $10.9 million compared to
10% on revenue of $5.5 million for the three months ended
March 31, 1997. Group Two Community pre-tax loss, before
corporate overhead, increased by 127% to $5.8 million
compared to the comparable period last year. The total
number of Group Two Communities had a net increase of 17
compared to the first quarter of 1997 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 March 31, 1997
and 1998.
Stabilized Communities (Group One)
Three Months Ended March 31,
(In thousands)
Dollar Percentage
1997 1998 Change Change
--------- --------- -------- ----------
Revenue........................... $18,954 $23,924 $4,970 26 %
Community operating expense....... 11,949 15,510 3,561 30
--------- --------- -------- ----------
Community operating income..... 7,005 8,414 1,409 20
--------- --------- -------- ----------
Depreciation and amortization..... 430 534 104 24
Rent.............................. 4,796 6,047 1,251 26
--------- --------- -------- ----------
Operating income............... 1,779 1,833 54 3
--------- --------- -------- ----------
Interest expense, net............. (501) (884) 383 76
Other income, net................. 53 (1) (54) (102)
--------- --------- -------- ----------
Pre-tax income (loss) before
cumulative effect of change
in accounting principle...... $ 1,331 $ 948 $ (383) (29)%
========= ========= ======== ==========
OTHER GROUP ONE INFORMATION:
Communities.................... 45 55
Total units.................... 3,414 4,538
Average occupancy.............. 93% 88%
Revenue per occupied unit.. ... $ 1,984 $ 1,993
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Start-Up/Repositioned Communities (Group
Two)
Three Months Ended March 31,
(In thousands)
Dollar Percentage
1997 1998 Change Change
--------- --------- -------- ----------
Revenue........................... $ 5,543 $10,853 $ 5,310 96 %
Community operating expense....... 4,998 10,199 5,201 104
--------- --------- -------- ----------
Community operating income..... 545 654 109 20
--------- --------- -------- ----------
Depreciation and amortization..... 574 880 306 53
Rent.............................. 1,961 4,132 2,171 111
--------- --------- -------- ----------
Operating loss................. (1,990) (4,358) (2,368) (119)
--------- --------- -------- ----------
Interest expense, net............. (597) (1,544) (947) (159)
Other income (expense), net....... 15 66 51 340
--------- --------- -------- ----------
Pre-tax loss before
cumulative effect of change
in accounting principle...... $(2,572) $(5,836) $(3,264) (127)%
========= ========= ======== ==========
OTHER GROUP TWO INFORMATION:
Communities.................... 31 48
Total units.................... 2,879 4,427
Average occupancy.............. 47% 49%
Revenue per occupied unit.. ... $ 1,504 $ 1,772
Group One Communities for the three months ended March
31, 1998 and December 31, 1997, consisted of 55 and 54
communities, respectively. Average Occupancy declined
slightly to 88% for the first quarter 1998 compared to 89%
for the fourth quarter 1997. Revenue increased $686,000, or
3%, to $23.9 million for the three months ended March 31,
1998 from $23.2 million for the three months ended December
31, 1997. Community operating expenses for the first
quarter 1998 increased $474,000, or 3%, to $15.5 million for
the three months ended March 31, 1998 from $15.0 million for
the three months ended December 31, 1997. Pre-tax income
before corporate overhead and before cumulative effect of
change in accounting principle decreased $15,000, or 2% to
$948,000 for the three months ended March 31, 1998 from
$963,000 million for the three months ended December 31,
1997.
Group Two Communities for the three months ended March
31, 1998 and December 31, 1997, consisted of 48 communities
and 46 communities, respectively, representing 34 and 32
newly developed communities, respectively. Average
Occupancy increased to 49% for the first quarter 1998
compared to 45% for the fourth quarter 1997. Revenue
increased $1.3 million, or 14%, to $10.9 million for the
three months ended March 31, 1998 from $9.5 million for the
three months ended December 31, 1997. Community operating
expenses for the first quarter 1998 were $10.2 million,
representing an increase of $1.4 million, or 15%, over $8.8
million for the fourth quarter 1997. Pre-tax loss before
corporate overhead and before cumulative effect of change in
accounting principle decreased $1.1 million, or 16%, to $5.8
million for the three months ended March 31, 1998 from $7.0
million for the three months ended December 31, 1997.
The changes between fourth quarter 1997 and first
quarter 1998 Group Two Communities 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 to show positive operating results. Newly
developed communities generated $6.7 million in revenue for
the three months ended March 31, 1998 compared to $5.5
million for the three months ended December 31, 1997, $6.5
million in community operating expenses for the first
quarter 1998 compared to $5.6 million for the fourth quarter
1997 and pre-tax loss before corporate overhead and before
cumulative effect of change in accounting principle of $4.9
million for the first quarter 1998 compared to pre-tax loss
before corporate overhead and before cumulative effect of
change in accounting principle of $6.1 million for the
fourth quarter 1997.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998.
For the three months ended March 31, 1998, net cash used in
operating activities was $8.7 million, primarily due to
losses incurred on newly developed communities. The Company
obtained $4.0 million in proceeds from the sale of a
community in a sale/leaseback financing transaction and
used $4.6 million to acquire property and equipment and
property held for development. The Company obtained $5.5
million from the sale of investment securities, which was
used to repay short-term borrowings. The Company obtained
$4.9 million and repaid $1.0 million in long-term debt and
obtained $5.1 million in short-term borrowings. As a result
of these transactions during the first quarter of 1998, the
Company decreased its cash position by approximately $7.1
million. As of March 31, 1998, the Company had working
capital of $1.8 million compared to a working capital of
$12.1 million as of December 31, 1997.
At March 31, 1998, the Company has commitments to sell
six existing communities and an office park to an
independent third party and two existing communities to a
related party ("Properties Held for Sale" or "Properties").
Of the $37.5 million in Properties Held for Sale, $10.1
million securing $8.5 million of related long-term debt are
scheduled to be sold to an independent third party with no
continuing involvement by the Company. The remaining $27.4
million in Properties securing $20.5 million of related long-
term debt are scheduled to be sold to a related party with
the Company retaining a 20% interest in one community and
providing management services for both communities.
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997.
For the three months ended March 31, 1997, net cash used in
operating activities was $1.4 million, primarily due to
losses incurred on newly acquired and developed communities.
The Company obtained $7.4 million and repaid $4.2 million in
long-term debt, including refinancing $1.8 million and
repaying $2.1 million in long-term debt on two assisted-
living communities located in Arizona and obtained $2.0
million in short-term borrowings. The Company purchased
additional property and equipment and property held for
development of $10.0 million.
On April 29, 1998, the Company finalized a $74.5
million refinancing of ten existing assisted-living
communities with Deutsche Bank North America ("Deutsche").
The initial closing totaled $56.3 million relating to eight
of the communities. The final $18.2 million closing is
expected to occur during the second quarter 1998. The three
year loan at the LIBOR rate plus 2.95% (8.6% at April 29,
1998) is secured by the individual properties.
In December 1997, the Company purchased 25,600 shares
of its common stock at an aggregate cost of $341,000. In
January 1998, the Company's Board of Directors authorized a
treasury stock purchase program to acquire up to an
additional 500,000 shares of the Company's common stock from
time to time in the open market. In April 1998, the
Company's Board of Directors authorized an additional
500,000 shares of the Company's common stock to be purchased
from time to time in the open market. As of May 8, 1998,
the Company has purchased and retired 517,200 shares of its
common stock at an aggregate cost of $5.7 million.
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.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
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.
16
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 24, 1998, the Company commenced a lawsuit
against ARV Assisted Living Inc. ("ARV") in Superior Court
of the State of California for the County of Orange alleging
that share purchases on January 16, 1998 by Prometheus
Assisted Living LLC ("Prometheus") triggered the so-called
flip-in feature of ARV's poison pill.
The effect of the flip-in feature having been triggered
by Prometheus is to require ARV to distribute to all
shareholders (other than Prometheus) as of that date
certificates for one Right per share. The Company believes
that each Right would be exercisable for approximately 9.56
shares at a purchase price of $7.32 per share. The Rights
are exercisable until August 8, 2007 and are transferable
separate from the ARV common stock.
In connection with Prometheus' initial investment in
ARV in July 1997, ARV adopted a Rights Agreement (commonly
referred to as a poison pill) which provides that the flip-
in feature is triggered if Prometheus acquires "beneficial
ownership" of 50% or more of ARV's outstanding common stock.
The flip-in is a defensive feature intended to discourage
accumulation of control of stock in excess of a specified
level by allowing all shareholders other than the acquiror
to purchase additional common stock at a 50% discount to the
average closing market price of ARV's stock for the 30
trading days prior to the flip-in being triggered.
In a Schedule 13D filing on January 20, 1998,
Prometheus disclosed that on January 16th it had acquired
additional shares of ARV common stock, increasing
Prometheus' direct share ownership to 45% of the outstanding
ARV common stock. Previous Schedule 13D filings by
Prometheus disclose that Prometheus also then beneficially
owned another 9% of ARV's common stock as a result of the
Stockholders' Voting Agreement dated October 29, 1997,
between Prometheus and certain management stockholders of
ARV (collectively, the "Management Stockholders"). Under
the Stockholders' Voting Agreement, each Management
Stockholder agreed with Prometheus to vote its shares of ARV
common stock in support of Prometheus' nominees to ARV's
Board of Directors.
The Company' complaint alleges that the Stockholders'
Voting Agreement increases Prometheus' beneficial ownership
from its 45% direct ownership to 54%, thereby triggering the
flip-in feature of the poison pill. For purposes of
determining Prometheus' beneficial ownership, the Rights
Agreement treats Prometheus as beneficially owning shares
held by "any other person with which Prometheus has any
agreement, arrangement or understanding whether or not in
writing, for the purpose of acquiring, holding, voting or
disposing of any securities of ARV."
The Company' complaint seeks the following injunctive
and declaratory relief: (i) an order directing ARV to
distribute Right Certificates to all holders of common stock
of ARV (other than Prometheus) as of January 16, 1998; and
(ii) an order declaring that a "Trigger Event" (as defined
in the Rights Agreement) occurred on January 16, 1998 when
Prometheus acquired beneficial ownership of more than 50% of
ARV's common stock.
Prometheus is an investment vehicle controlled by
Lazard Freres Real Estate Investors L.L.C. ("Lazard").
Lazard's activities consist principally of acting as general
partner of several real estate investment partnerships
affiliated with Lazard Freres & Co. LLC.
17
Items 2-5 are not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
10.1 Aurora Bay Agreements
10.1 Lubbock Group, Ltd. Amended and Restated Limited
.1 Partnership Agreement
10.1 Operating Agreement of Aurora Bay Investments, L.L.C.
.2 dated January 6, 1998 between Craig W. Spaulding,
Erwin Investors I, L.L.C. and Thilo Best.
10.2 La Villita in Scottsdale Arizona, Madison Glen in
Clearwater Florida, Barrington Place in Lecanto, Florida,
Lodge at Mainlands in Pinnellas Park, Florida, Elm Grove
Estates in Hutchinson, Kansas, Springtree in Sunrise,
Florida and Mainlands Office Park. The following agreement
is representative of that executed in connection with these
properties.
10.2 Purchase and Sale Agreement dated April 16, 1998
.1 between Emeritus Properties I, Inc. and Bayside Health
Group LLC.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 1998.
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.
Dated: May 15, 1998
EMERITUS CORPORATION
(Registrant)
/s/ Kelly J. Price
--------------------------
Kelly J. Price, Vice President, Finance, Chief
Financial Officer and Principal Accounting Officer
19