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, 2000.
[ ] 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, 2000
WASHINGTON 91-1605464
(State or other jurisdiction (I.R.S Identification No.)
of incorporation or organization)
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 April 30, 2000 there were 10,079,012 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, 1999 and
March 31, 2000............................................................. 1
Condensed Consolidated Statements of Operations for the Three Months ended
March 31, 1999 and 2000.................................................... 2
Condensed Consolidated Statements of Comprehensive Operations for the
Three Months ended March 31, 1999 and 2000................................. 3
Condensed Consolidated Statements of Cash Flows for the Three Months ended
March 31, 1999 and 2000.................................................... 4
Notes to Condensed Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 11
Part II. Other Information
Item 6. Exhibits................................................................... 11
Signature.................................................................. 12
Note: Items 1, 2, 3, 4, and 5 of Part II are omitted because they are not
applicable
EMERITUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 and March 31, 2000
(unaudited)
(In thousands, except share data)
ASSETS
December 31, March 31,
1999 2000
------------- --------------
Current Assets:
Cash and cash equivalents................................................... $ 12,860 $ 15,736
Short-term investments...................................................... 1,134 1,087
Current portion of restricted deposits...................................... 381 382
Trade accounts receivable, net.............................................. 1,895 1,777
Other receivables........................................................... 9,309 8,196
Prepaid expenses and other current assets................................... 2,714 3,490
Property held for sale...................................................... 7,531 7,132
------------- --------------
Total current assets................................................ 35,824 37,800
------------- --------------
Property and equipment, net................................................... 128,828 136,718
Property held for development................................................. 2,204 1,745
Notes receivable from and investments in affiliates........................... 2,915 3,474
Restricted cash............................................................... 13,500 -
Restricted deposits, less current portion..................................... 6,148 6,155
Lease acquisition costs, net.................................................. 5,907 5,552
Other assets, net............................................................. 3,044 2,913
------------- --------------
Total assets........................................................ $198,370 $194,357
============= ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term borrowings....................................................... $ 1,000 $ -
Current portion of long-term debt........................................... 8,601 8,601
Trade accounts payable...................................................... 3,634 2,896
Accrued employee compensation and benefits.................................. 3,507 4,014
Accrued interest............................................................ 2,797 2,280
Accrued real estate taxes................................................... 2,034 1,179
Other accrued expenses...................................................... 6,899 6,355
Other current liabilities................................................... 524 908
------------- --------------
Total current liabilities........................................... 28,996 26,233
------------- --------------
Deferred rent................................................................. 1,887 1,952
Deferred gain on sale of communities.......................................... 18,590 18,535
Deferred income............................................................... 153 100
Convertible debentures........................................................ 32,000 32,000
Long-term debt, less current portion.......................................... 128,319 135,024
Security deposits and other long-term liabilities............................. 132 118
------------- --------------
Total liabilities................................................... 210,077 213,962
------------- --------------
Minority interests............................................................ 583 550
Redeemable preferred stock.................................................... 25,000 25,000
Shareholders' Deficit:
Preferred stock, $.0001 par value. Authorized 70,000 shares; issued and
outstanding 30,000 and 30,000 at December 31, 1999 and March 31, 2000,
respectively................................................................ - -
Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and
outstanding 10,323,950 and 10,065,550 shares at December 31, 1999 and
March 31, 2000, respectively.............................................. 1 1
Additional paid-in capital................................................... 66,916 65,458
Accumulated other comprehensive loss......................................... (380) (414)
Accumulated deficit.......................................................... (103,827) (110,200)
------------- --------------
Total shareholders' deficit......................................... (37,290) (45,155)
------------- --------------
Total liabilities and shareholders' deficit......................... $ 198,370 $ 194,357
============= ==============
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 1
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 2000
(unaudited)
(In thousands, except per share data)
1999 2000
---------------- ----------------
Revenues:
Community revenue............................................................ $33,054 $29,081
Other service fees........................................................... 426 397
Management fees.............................................................. 699 1,088
---------------- ----------------
Total operating revenues............................................. 34,179 30,566
---------------- ----------------
Expenses:
Community operations......................................................... 21,652 19,955
General and administrative................................................... 3,512 3,756
Depreciation and amortization................................................ 1,465 1,658
Rent......................................................................... 7,585 5,945
---------------- ----------------
Total operating expenses............................................. 34,214 31,314
---------------- ----------------
Loss from operations................................................. (35) (748)
---------------- ----------------
Other income (expense):
Interest expense, net........................................................ (3,225) (3,273)
Other, net................................................................... 304 (1,277)
---------------- ----------------
Net other expense.................................................... (2,921) (4,550)
---------------- ----------------
Net loss............................................................. $(2,956) $(5,298)
---------------- ----------------
Preferred stock dividends...................................................... 555 1,075
---------------- ----------------
Net loss to common shareholders...................................... $(3,511) $(6,373)
================ ================
Loss per common share - basic and diluted:
Loss before preferred stock dividends..................................... $ (0.28) $ (0.52)
Preferred stock dividends................................................. (0.05) (0.11)
---------------- ----------------
Loss per common share.......................................................... $ (0.33) $ (0.63)
================ ================
Weighted average number of common shares outstanding - basic
and diluted............................................................... 10,485 10,190
================ ================
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 2
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
Three Months Ended March 31, 1999 and 2000
(unaudited)
(In thousands)
1999 2000
------------------- -------------------
Net loss.............................................................. $(2,956) $(5,298)
Other comprehensive income (loss):
Foreign currency translation adjustments......................... 6 (3)
Unrealized holding losses on investment securities............... (1,468) (31)
------------------- -------------------
Total other comprehensive loss............................ (1,462) (34)
------------------- -------------------
Comprehensive loss.................................................... $(4,418) $(5,332)
=================== ===================
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 3
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 2000
(unaudited)
(In thousands)
1999 2000
------------------- -------------------
Net cash used in operating activities (including changes in all operating
assets and liabilities)...................................................... $(5,989) $(5,323)
------------------- -------------------
Cash flows from investing activities:
Acquisition of property and equipment....................................... (972) (8,459)
Acquisition of property held for development................................ (165) (532)
Proceeds from sale of property and equipment................................ 3,444 609
Purchase of investment securities........................................... (12) -
Construction advances - leased communities.................................. 5,264 -
Construction expenditures - leased communities.............................. (5,893) (185)
Advances to affiliates...................................................... (39) (9)
Investment in Senior Med.................................................... - (550)
------------------- -------------------
Net cash provided by (used in) investing activities................. 1,627 (9,126)
------------------- -------------------
Cash flows from financing activities:
Increase in restricted deposits............................................. (269) (7)
Decrease in restricted cash................................................. - 13,500
Payments related to the sale of preferred stock............................. - (447)
Repayment of short-term borrowings.......................................... (286) (1,000)
Debt issue and other financing costs........................................ (118) (49)
Proceeds from long-term borrowings.......................................... - 7,800
Repayment of long-term borrowings........................................... (338) (1,094)
Repurchase of common stock.................................................. - (1,375)
------------------- -------------------
Net cash provided by (used in) financing activities................. (1,011) 17,328
------------------- -------------------
Effect of exchange rate changes on cash............................. 6 (3)
Net increase (decrease) in cash and cash equivalents................ (5,367) 2,876
Cash and cash equivalents at the beginning of the period...................... 11,442 12,860
------------------- -------------------
Cash and cash equivalents at the end of the period............................ $ 6,075 $15,736
=================== ===================
Supplemental disclosure of cash flow information -- cash paid during the
period for interest.......................................................... $ 3,206 $ 3,972
=================== ===================
Noncash investing and financing activities:
Transfer of property and equipment to property held for sale................ $ 99 $ 52
See accompanying Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Page 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
The unaudited interim financial information furnished below, in the opinion of
our management, reflects all adjustments which are necessary to state fairly the
consolidated financial position, results of operations, comprehensive
operations, and cash flows of Emeritus as of March 31, 2000 and for the three
months ended March 31, 1999 and 2000. We presume that those reading this interim
financial information have read or have access to our 1999 audited consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations that are contained in the 1999 Form 10-K
filed March 30, 2000 and amended on May 1, 2000. Therefore, we have omitted
footnotes and other disclosures in the Form 10-K. This financial information
does not necessarily represent a full year's operations.
Property Held For Sale
Emeritus currently has six properties being held for sale.
Loss Per Share
Basic net income (loss) per share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted net income (loss) per
share is computed on the basis of the weighted average number of shares
outstanding plus dilutive potential common shares using the treasury stock
method. The capital structure of Emeritus includes convertible debentures,
redeemable and non-redeemable convertible preferred stock, as well as stock
options. The assumed conversion and exercise of these securities have been
excluded from the calculation of diluted net loss per share as their effect is
anti-dilutive.
We have calculated loss per common share on a dilutive basis without
consideration of 4,251,788 and 10,128,212 common shares at March 31, 1999 and
2000, respectively, related to outstanding options, warrants, convertible
debentures and convertible preferred stock because the inclusion of such common
stock equivalents would be anti-dilutive.
Sales and Acquisitions
In December 1998 we disposed of our leasehold interest in 22 leased communities
and three owned communities (the "Emeritrust I communities"). The Emeritrust
communities were sold to an entity in which a principal shareholder and a Board
member of Emeritus are investors. Pursuant to the transaction, we manage all 25
communities under a three-year management contract and receive management fees
of 5% of revenues, as well as an additional 2% of revenues if the communities
achieve positive cash flows.
The management gives us an option to purchase the 22 previously leased
communities at a formula price and a right of first refusal on the three
previously owned communities. The contract also requires cash shortfall funding
by us if the Emeritrust I communities generate cash deficiencies in excess of
$4.5 million. At March 31, 2000, we have accrued cash shortfall funding
requirements of $3.3 million. Previously deferred gains and the gain on this
transaction collectively totaling approximately $13 million have been deferred
because of our continuing financial involvement.
In March 1999, we completed a disposition of our leasehold interests in 21
additional communities, consisting of 16 currently operational communities and
five development communities (the "Emeritrust II communities"). The Emeritrust
II communities were sold to an entity in which a principal shareholder and a
Board member of Emeritus are investors. Pursuant to the transaction, we manage
all 21 communities under a three-year management contract and receive management
fees of 5% of revenues as well as an additional 2% of revenues if the
communities achieve positive cash flows. We earned management fees of $0 and
$465,000 for the quarters ended March 31, 1999 and 2000, respectively. The
contract also provides us an option to purchase the 19 previously leased
communities at a formula price.
The management contract requires cash shortfall funding by us if the development
communities generate cash deficiencies in excess of $2.4 million. At March 31,
2000, we had not incurred a cash shortfall-funding requirement.
New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement is effective as of the beginning of the
first quarter of the fiscal year beginning after June 15, 2000. We do not
anticipate a material impact on the financial portion or results of operations
from the future adoption of this standard.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation".
Interpretation No. 44 clarifies the application of Accounting Principles Board
Opinion No. 25 ("APB 25") and is effective July 1, 2000. Interpretation No. 44
clarifies the definition of "employee" for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. We do not expect the adoption of
Interpretation No. 44 to have a material impact on our consolidated financial
statements.
Subsequent Event
On May 15, 2000, we modified our preferred stock agreements with Saratoga to (i)
cancel the sale of the remaining 10,000 shares of Series B Stock, (ii) remove
all restrictions, including cash, and other requirements relating to the use of
proceeds received from the sale of the original 30,000 shares and (iii) on or
before August 8, 2000, to issue to Saratoga a seven-year warrant to purchase 1.0
million shares of Emeritus Common Stock at an exercise price of $4.30 per share
(with such shares approved for listing on the American Stock Exchange) or, in
the alternative, to pay Saratoga in cash the sum of $5.0 million plus any profit
that exists in the warrant at August 8, 2000.
Page 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Emeritus is a Washington corporation organized by Daniel R. Baty and two other
founders in 1993. In November 1995, we held our initial public offering and
began our expansion strategy.
Until 1998, we focused on rapidly expanding our operations in order to assemble
a portfolio of assisted living communities with a critical mass of capacity. We
pursued an aggressive acquisition and development strategy during that time,
acquiring 35 and developing 10 communities in 1996, acquiring 7 and developing
20 communities in 1997, and developing 5 communities in 1998. Having achieved
our growth objective, in 1999 and continuing in 2000, we have substantially
reduced our pace of acquisition and development activities to concentrate on
increasing occupancy, which had been a secondary focus during the period of
rapid expansion. Our focus on occupancy yielded an approximate 300 unit increase
in occupied units between March 31, 1999 and March 31, 2000 to an average
occupancy of 87% (excluding the Emeritrust II communities for March 31, 1999),
across our consolidated portfolio. Our total operated portfolio experienced
stronger growth for average occupancy, increasing approximately 1,700 occupied
units between March 31, 1999 and March 31, 2000 to 81%. We intend to continue
our growth strategy by selectively acquiring and developing new communities with
operating characteristics consistent with our current emphasis on maintaining
high occupancy and enhancing our operating model and service offerings.
The following table sets forth a summary of the Company's property interests.
As of December 31, As of December 31, As of March 31,
1998 1999 2000
--------------------------- --------------------------- -------------------------------
Buildings Units Buildings Units Buildings Units
--------------------------- --------------------------- -------------------------------
Owned (4) 15 1,492 16 1,572 17 1,670
Leased (4) 52 3,937 40 3,302 40 3,344
Managed/Admin Services 38 3,734 68 6,247 68 6,247
Joint Venture/Partnership 8 809 5 605 6 719
--------------------------- --------------------------- ----------------------------
Operated Portfolio 113 9,972 129 11,726 131 11,980
Percentage Increase (1) 13% 15% 14% 18% 2% 2%
Pending Acquisitions - - 2 206 1 111
New Developments (2) 21 2,029 6 604 6 575
Minority Interest (Alert) (3) 21 1,203 - - - -
--------------------------- --------------------------- ----------------------------
Total 155 13,204 137 12,536 138 12,666
--------------------------- --------------------------- ----------------------------
Percentage Increase
(decrease) (1) 5% 6% (12%) (5%) 1% 1%
- --------
(1) The percentage increase (decrease) indicates the change from the prior
period.
(2) The six communities under development at March 31, 2000 are being developed
by third parties, but will be managed by us upon completion.
(3) In November 1999, we sold all our minority interest in Alert Care.
(4) Included in our consolidated portfolio of communities.
We rely primarily on our residents' ability to pay our charges for services from
their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, we believe generally that
only seniors with income or assets meeting or exceeding the regional median can
afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business. All sources of revenue other
than residents' private resources constitute less than 10% of our total
revenues.
We have incurred net operating losses and negative cash flows from operating
activities since our inception. As of March 31, 2000 we had an accumulated
deficit of approximately $110.2 million. These losses resulted from a number of
factors, including:
Page 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
. the development of 60 and acquisition of 71 assisted living communities that
incurred operating losses during the 12 to 24 month period after
acquisition or development;
. occupancy levels at our communities that were lower for longer periods than
we originally anticipated;
. financing costs that we incurred as a result of multiple financing and
refinancing transactions;
. administrative and corporate expenses that we increased to facilitate our
growth.
During 1998, we decided to reduce acquisition and development activities and
dispose of select communities that had been operating at a loss. We believe that
slowing our acquisition and development activities has enabled us to use our
resources more efficiently and increase our focus on enhancing community
operations.
On December 10, 1999, we entered into an agreement to sell 40,000 shares of our
Series B Stock to Saratoga Partners IV, L.P. ("Saratoga") and certain investors
related to Saratoga for a purchase price of $1,000 per share. On December 30,
1999, we completed the sale of 30,000 shares of Series B Stock, and we agreed to
complete the sale of the remaining 10,000 shares during the first half of 2000.
The net proceeds to be received by us from the sale of all 40,000 shares of the
Series B Stock were to be approximately $38.6 million, after fees and expenses
of the transaction estimated at $1.4 million. The purchase agreement and
related documents provided that if we did not use at least $23 million of the
proceeds to acquire 24 assisted living communities currently managed or leased
by us by June 27, 2000, then the use of approximately $35 million of the
proceeds (less amounts paid for such communities) would be subject to Saratoga's
approval. On May 15, 2000, we modified our agreements with Saratoga to (i)
cancel the sale of the remaining 10,000 shares of Series B Stock, (ii) remove
all restrictions and requirements relating to the use of proceeds received from
the sale of the original 30,000 shares and (iii) on or before August 8, 2000, to
issue to Saratoga a seven-year warrant to purchase 1.0 million shares of
Emeritus Common Stock at an exercise price of $4.30 per share (with such shares
approved for listing on the American Stock Exchange) or, in the alternative, to
pay Saratoga in cash the sum of $5.0 million plus any profit that exists in the
warrant at August 8, 2000. We intend to pursue the acquisitions on a different
schedule and different terms and conditions than originally contemplated.
Page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
Results of Operations
The following table sets forth, for the periods indicated, certain items from
our 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
Three Months Ended Ended
March 31, March 31,
------------------------------------- -----------------------
1999 2000 1999-2000
----------------- ---------------- -----------------------
Revenues.................................................. 100.0% 100.0% (10.6)%
Expenses:
Community operations.................................... 63.3 65.3 (7.8)
General and administrative.............................. 10.3 12.3 6.9
Depreciation and amortization........................... 4.3 5.4 13.2
Rent.................................................... 22.2 19.4 (21.6)
----------------- ----------------
Total operating expenses.............................. 100.1 102.4 (8.5)
----------------- ----------------
Loss from operations.................................. (0.1) (2.4) 2037.1
----------------- ----------------
Other income (expense):
Interest expense, net................................... (9.4) (10.7) 1.5
Other, net................................................ 0.9 (4.2) (520.1)
----------------- ----------------
Net other expense .................................... (8.5) (14.9) 55.8
----------------- ----------------
Net loss.............................................. (8.6)% (17.3)% 79.2%
================= ================ ======================
Three months ended March 31, 2000 compared to three months ended March 31, 1999
Revenues: Total operating revenues for the three months ended March 31, 2000
decreased 10.6% or $3.6 million from the comparable period in 1999. The change
in revenue is a result of the repositioning of 17 communities subsequent to the
first quarter of 1999 from leased/owned communities to managed. The repositioned
communities generated $6.4 million in revenue during the first quarter of 1999.
This decrease in revenue was offset by: 1) generally increasing levels of
occupancy throughout our consolidated portfolio, including a three percentage
point increase in average occupancy to 87% for the first quarter of 2000
compared to 84% for the first quarter of 1999 (excluding the Emeritrust II
communities); and 2) an increase in management fee revenue of $389,000 during
the first quarter of 2000 compared to the first quarter of 1999 as we retain a
management interest in the repositioned communities.
Community Operations: Community operating expenses for the three months ended
March 31, 2000 decreased 7.8% or $1.7 million from the comparable period in 1999
to $20.0 million. The overall decrease in community operating expenses is a
result of the community repositionings that occurred after the first quarter of
1999. These repositioned communities had incurred $3.7 million of community
operating expenses during the first quarter of 1999. The decrease is offset by:
1) increased variable costs resulting from occupancy gains; and 2) increased
sales and marketing costs.
General and Administrative: As a percentage of total operating revenues, general
and administrative (G&A) expenses increased to 12.3% for the three months ended
March 31, 2000 as compared to 10.3% recorded for the quarter ended March 31,
1999. The increase of G&A costs as a percentage of revenues is due, in part, to
the shift from community revenues to management fees in the repositioning of the
Emeritrust I and II communities. Overall, G&A costs increased approximately
$244,000 primarily due to greater personnel costs to support the increasing
number of communities.
Depreciation and Amortization: Depreciation and amortization for the three
months ended March 31, 2000 were $1.7 million, or 5.4% of total operating
revenues, compared to $1.5 million, or 4.3% of total operating revenues for the
comparable period in 1999. The increase is principally the result of acquiring
two communities in late 1999.
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
Rent: Rent expense for the three months ended March 31, 2000 was $5.9 million,
representing a decrease of $1.6 million, or 21.6% from the comparable period in
1999. The decrease is primarily attributable to the repositioning of 17 leased
communities to managed communities on March 31, 1999, accounting for $1.9
million in rent expense for the three months ended March 31, 1999. We leased an
average of 40 communities for the three months ended March 31, 2000, compared to
an average of 52 for the three months ended March 31, 1999. Rent as a
percentage of revenues was 22.2% and 19.4% for the three months ended March 31,
1999 and 2000, respectively.
Interest Expense, Net: Interest expense, net, for the three months ended March
31, 2000 increased $48,000 from the comparable period in 1999. As a percentage
of revenue, interest expense amounted to 9.4% and 10.7% for the three months
ended March 31, 1999 and 2000, respectively.
Same Community Comparison
We operated 56 communities on a comparable basis during both the three months
ended March 31, 1999 and 2000. The following table sets forth a comparison of
same community results of operations, excluding general and administrative
expenses, for the three months ended March 31, 1999 and 2000.
Three months Ended March 31,
(In thousands)
Dollar Percentage
1999 2000 Change Change
------------------- ------------------- ----------------- -------------------
Revenue................................... $25,395 $27,019 $1,624 6%
Community operating expenses.............. 15,782 17,376 1,594 10
------------------- ------------------- ----------------- -------------------
Community operating income............. 9,613 9,643 30 -
------------------- ------------------- ----------------- -------------------
Depreciation and amortization............. 1,178 1,280 102 9
Rent...................................... 5,453 5,497 44 1
------------------- ------------------- ----------------- -------------------
Operating income....................... 2,982 2,866 (116) (4)
------------------- ------------------- ----------------- -------------------
Interest expense, net.................... 2,464 2,517 53 2
Other income............................. (9) 28 37 411
------------------- ------------------- ----------------- -------------------
Income (loss)..................... $ 527 $ 321 $ (206) (142)%
=================== =================== ================= ===================
The same communities represented $27.0 million or 88.3% of our total revenue for
the first quarter of 2000. Same community revenues increased by $1.6 million or
6% for the quarter ended March 31, 2000 from the comparable period in 1999. The
increase in revenue is attributable to increased occupancy and monthly rate
increases due to an expanded range of services offered at the communities.
During the quarter ended March 31, 2000, occupied units increased by
approximately 200 units to an average occupancy of 89%. In addition, same
community average revenue per unit increased from $2,083 per month for the
quarter ended March 31, 1999 to $2,115 per month for the quarter ended March 31,
2000. During the three months ended March 31, 2000, we recorded income of
$321,000 compared to income of $527,000 for the three months ended March 31,
1999, primarily relating to the effects of local market conditions on three
communities in this portfolio.
Liquidity and Capital Resources
For the three months ended March 31, 2000, net cash used in operating activities
was $5.3 million compared to $6.0 million for the comparable period in the prior
year. The primary component of this operating use of cash was the net loss of
$6.4 million and $3.5 million recorded in the three months ended March 31, 2000
and 1999, respectively.
Net cash used in investing activities amounted to $9.1 million for the three
months ended March 31, 2000, primarily due to the acquisition of property and
equipment of $8.5 million. Net cash provided by investing activities for the
three months ended March 31, 1999 was $1.6 million, which included the proceeds
from the sale of the Emeritrust II properties offset by construction
expenditures at leased communities.
For the three months ended March 31, 2000, net cash provided by financing
activities was $17.3 million primarily from the agreement with Saratoga Partners
which removed the restriction of $13.5 million in cash and the financing of one
new community offset by debt repayment. For the three months ended March 31,
1999, net cash used in financing activities was $1.0 million, primarily the
result of debt repayment.
Page 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--CONTINUED
We have been, and expect to continue, to be dependent on third-party financing
for our cash needs in connection with operating losses as well as with our
acquisition and development of communities. There can be no assurance that
financing for these requirements will be available to us on acceptable terms.
Moreover, to the extent we acquire communities that do not generate positive
cash flow, we may have to seek additional capital or borrowings for working
capital and liquidity purposes.
Impact of Year 2000
We completed our Year 2000 remediation plans by the end of 1999, and have not
experienced any significant disruptions to our financial or operating activities
caused by failure of our computerized systems resulting from Year 2000 issues.
Further, we have no information that indicates a significant vendor or service
provider has experienced any significant disruptions to their financial or
operating activities such that they would be unable to provide us goods or
services. Furthermore, we have not received any notification from lenders or
regulatory agencies indicating that a lender considers or may consider us to be
in violation of a loan agreement, or significant regulatory action is being or
may be taken against us as a result of Year 2000 issues.
Impact of Inflation
To date, inflation has not had a significant impact on Emeritus. Inflation
could, however, affect our future revenues and operating income due to our
dependence on the senior resident population, most of whom rely on relatively
fixed incomes to pay for our services. The monthly charges for the resident's
unit and assisted living services are influenced by the location of the
community and local competition. Our ability to increase revenues in proportion
to increased operating expenses may be limited. We typically do not rely to a
significant extent on governmental reimbursement programs. In pricing our
services, we attempt to anticipate inflation levels, but there can be no
assurance that we will be able to respond to inflationary pressures in the
future.
Forward-Looking Statements
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: A number of the matters and subject areas discussed in this report that
are not historical or contain current facts deal with potential future
circumstances, operations, and prospects. The discussion of these matters and
subject areas is qualified by the inherent risks and uncertainties surrounding
future expectations generally, and also may materially differ from Emeritus's
actual future experience involving any one or more of the matters and subject
areas relating to demand, pricing, competition, construction, licensing,
permitting, construction delays on new developments contractual and licensure,
and other delays on the disposition of assisted living communities in our
portfolio, and our ability to continue managing costs while maintaining high
occupancy rates and market rate assisted living charges in our assisted living
communities. We have attempted to identify, in context, certain of the factors
that we currently believe may cause actual future experience and results to
differ from our current expectations regarding the matter or subject area
discussed in this statement. These and other risks and uncertainties are
detailed in our reports filed with the Securities and Exchange Commission,
including our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our earnings are affected by changes in interest rates as a result of our short-
and long-term borrowings. We manage this risk by obtaining fixed rate borrowings
when possible. At March 31, 2000, our variable rate borrowings totaled $85.3
million. If market interest rates average 2% more in 2000 than they did in 1999,
our interest expense and net loss would increase $1.7 million. This amount is
determined by considering the impact of hypothetical interest rates on our
outstanding variable rate borrowings as of March 31, 2000 and does not consider
changes in the actual level of borrowings that may occur subsequent to March 31,
2000. This analysis also does not consider the effects of the reduced level of
overall economic activity that could exist in such an environment nor does it
consider likely actions that management could take with respect to our financial
structure to mitigate the exposure to such a change.
PART II OTHER INFORMATION
Items 1-5 are not applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule
(a) Reports on Form 8-K.
We filed a form 8-K on January 14, 2000 to report under Item 5,
the sale on December 30,1999 of shares of our Series B
Convertible Preferred Stock to Saratoga Partners IV, L.P. and a
related investor.
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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: May 15, 2000
EMERITUS CORPORATION
(Registrant)
/s/ Raymond R. Brandstrom
--------------------------------------
Raymond R. Brandstrom,
Interim Chief Financial Officer and
Vice Chairman of the Board
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