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, 1999.
|_| 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, 1999
WASHINGTON 91-1605464
(State or other jurisdiction of (I.R.S Employer Identification No.)
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 May 3, 1999, there were 10,487,500 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, 1998 and
March 31, 1999 ............................................................ 1
Condensed Consolidated Statements of Operations for the Three Months
ended March 31, 1998 and 1999 ............................................. 2
Condensed Consolidated Statements of Comprehensive Operations for the
Three Months ended March 31, 1998 and 1999 ................................ 3
Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1998 and 1999 ............................................. 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 .................................................................. 12
Signature ................................................................. 13
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, 1998 and March 31, 1999
(In thousands, except share data)
ASSETS
March 31,
December 31, 1999
1998 (unaudited)
------------ ------------
Current Assets:
Cash and cash equivalents ................................ $ 11,442 $ 6,075
Short-term investments ................................... 4,491 3,037
Trade accounts receivable, net ........................... 2,235 2,166
Prepaid expenses and other current assets ................ 13,823 10,782
Property held for sale ................................... 3,661 2,327
------------ ------------
Total current assets ............................. 35,652 24,387
------------ ------------
Property and equipment, net ................................ 128,659 127,425
Property held for development .............................. 1,855 2,021
Notes receivable from and investments in affiliates ........ 10,247 10,286
Restricted deposits, less current portion .................. 6,271 6,380
Other assets, net .......................................... 10,186 9,791
------------ ------------
Total assets ..................................... $ 192,870 $ 180,290
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term borrowings .................................... $ 5,000 $ 5,000
Current portion of long-term debt ........................ 7,591 7,591
Margin loan on short-term investments .................... 2,324 2,038
Trade accounts payable ................................... 7,115 5,150
Accrued employee compensation and benefits ............... 3,386 3,256
Other current liabilities ................................ 11,213 7,945
------------ ------------
Total current liabilities ........................ 36,629 30,980
------------ ------------
Deferred rent .............................................. 4,352 2,683
Deferred gain on sale of communities ....................... 19,483 20,042
Deferred income ............................................ 216 160
Convertible debentures ..................................... 32,000 32,000
Long-term debt, less current portion ....................... 119,674 119,336
Security deposits and other long-term liabilities .......... 570 222
------------ ------------
Total liabilities ................................ 212,924 205,423
------------ ------------
Minority interests ......................................... 910 804
Redeemable preferred stock ................................. 25,000 25,000
Shareholders' Deficit:
Common stock, $.0001 par value. Authorized 40,000,000
shares; issued and outstanding 10,484,050 and
10,487,050 shares at December 31, 1998 and
March 31, 1999, respectively ........................... 1 1
Additional paid-in capital ................................ 38,995 38,995
Accumulated other comprehensive loss ...................... (4,420) (5,882)
Accumulated deficit ....................................... (80,540) (84,051)
------------ ------------
Total shareholders' deficit ...................... (45,964) (50,937)
------------ ------------
Total liabilities and shareholders' deficit ...... $ 192,870 $ 180,290
============ ============
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, 1998 and 1999
(unaudited)
(In thousands, except per share data)
1998 1999
------------ ------------
Revenues:
Community revenue ........................................ $ 34,143 $ 33,054
Other service fees ....................................... 598 426
Management fees .......................................... 61 699
------------ ------------
Total operating revenues ......................... 34,802 34,179
------------ ------------
Expenses:
Community operations ..................................... 25,709 21,652
General and administrative ............................... 3,201 3,512
Depreciation and amortization ............................ 1,568 1,465
Rent ..................................................... 10,299 7,585
------------ ------------
Total operating expenses ......................... 40,777 34,214
------------ ------------
Loss from operations ............................. (5,975) (35)
------------ ------------
Other income (expense):
Interest expense, net .................................... (2,778) (3,225)
Other, net ............................................... 329 304
------------ ------------
Net other expense ................................ (2,449) (2,921)
------------ ------------
Loss before cumulative effect of change in
accounting principle ........................ $ (8,424) $ (2,956)
Cumulative effect of change in accounting principle ........ (1,320) --
------------ ------------
Net loss ......................................... $ (9,744) $ (2,956)
------------ ------------
Preferred stock dividends .................................. 555 555
------------ ------------
Net loss to common shareholders .................. $ (10,299) $ (3,511)
============ ============
Loss per common share - basic and diluted:
Loss before cumulative effect of change in accounting
principle ............................................. $ (0.84) $ (0.33)
Cumulative effect of change in accounting principle ...... $ (0.13) --
------------ ------------
Loss per common share ...................................... $ (0.97) $ (0.33)
============ ============
Weighted average number of common shares outstanding -
basic and diluted ..................................... 10,633 10,485
============ ============
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, 1998 and 1999
(unaudited)
(In thousands)
1998 1999
------------ ------------
Net loss .................................................... $ (9,744) $ (2,956)
Other comprehensive income (loss):
Foreign currency translation adjustments ............... 2 6
Unrealized losses on investment securities:
Unrealized holding losses arising during the period . (2,355) (1,468)
Reclassification adjustment for gains included in
net loss .......................................... (450) --
------------ ------------
Total other comprehensive loss ................. (2,803) (1,462)
------------ ------------
Comprehensive loss ......................................... $ (12,547) $ (4,418)
============ ============
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, 1998 and 1999
(unaudited)
(In thousands)
1998 1999
------------ ------------
Net cash used in operating activities (including changes
in all operating assets and liabilities ............... $ (8,664) $ (5,989)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment .................... (4,145) (972)
Acquisition of property held for development ............. (442) (165)
Proceeds from sale of property and equipment ............. 3,985 3,444
Purchase of investment securities ........................ -- (12)
Sale of investment securities ............................ 5,530 --
Construction advances - leased communities ............... 4,624 5,264
Construction expenditures - leased communities ........... (4,754) (5,893)
Advances to affiliates ................................... (87) (39)
Acquisition of interest in affiliates .................... (1,312) --
------------ ------------
Net cash provided by investing activities ........ 3,399 1,627
------------ ------------
Cash flows from financing activities:
Increase in restricted deposits .......................... (449) (269)
Proceeds from short-term borrowings ...................... 5,149 --
Repayment of short-term borrowings ....................... (5,532) (286)
Debt issue and other financing costs ..................... 538 (118)
Proceeds from long-term borrowings ....................... 4,894 --
Repayment of long-term borrowings ........................ (1,004) (338)
Repurchase of common stock ............................... (5,406) --
------------ ------------
Net cash used in financing activities ............ (1,810) (1,011)
------------ ------------
Effect of exchange rate changes on cash .......... 2 6
Net decrease in cash and cash equivalents ........ (7,073) (5,367)
Cash and cash equivalents at the beginning of the period ... 17,537 11,442
------------ ------------
Cash and cash equivalents at the end of the period ......... $ 10,464 $ 6,075
============ ============
Supplemental disclosure of cash flow information -- cash
paid during the period for interest ................... $ 2,101 $ 3,206
============ ============
Noncash investing and financing activities:
Transfer of property and equipment to property held for
sale .................................................. $ 32,188 $ 99
Vehicle acquisitions through debt financing .............. 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
(Unaudited)
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, comprehensive
operations, and cash flows of Emeritus Corporation, (the "Company") as of
March 31, 1999 and for the three months ended March 31, 1998 and 1999. The
Company presumes that users of the interim financial information herein have
read or have access to the Company's 1998 audited consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the 1998 Form 10-K filed March 31, 1999 by
the Company under the Securities Act of 1934. Accordingly, footnotes and other
disclosures which would substantially duplicate the disclosures in Form 10-K
have been omitted. The financial information herein is not necessarily
representative of a full year's operations.
Property Held For Sale
The Company currently has three communities being held for sale.
Loss Per Share
Loss per common share on a dilutive basis has been calculated without
consideration of 3,918,822 and 4,251,788 common shares at March 31, 1998 and
1999, 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 of Communities
In March 1999, the Company completed the disposition of its leasehold interests
in 15 communities, consisting of 14 currently operational communities previously
leased by the Company from Meditrust Corporation, a health care REIT,
("Meditrust") as well as one development community to a related entity.
Additionally, the Company will dispose of its leasehold interests in four
development communities (together with the 15 communities above known as the
"Emeritrust II communities") to the related entity, upon completion of their
development. The combined purchase price for the Emeritrust II comunities will
approximate $123 million. As of March 31, 1999, Emeritus has received net
proceeds of $3.7 million. The Company will continue to operate the Emeritrust
II communities pursuant to a three year management contract and will receive
management fees of 5% of revenues currently payable as well as 2% of revenues
which is contingent upon the communities achieving positive cash flows. The
management agreement provides the Company an option to purchase the 19
communities at a formula price. The management agreement further stipulates a
cash shortfall funding requirement by the Company to the extent that the five
development communities generate cash deficiencies in excess of individually
specified amounts per community, ranging from $400,000 to $500,000. Previously
deferred gains on this transaction collectively totaling approximately $5.7
million are still being deferred given the continuing financial involvement of
the Company stipulated in the management agreement.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company is a nationally integrated senior housing services organization
focused on operating residential-style assisted-living communities. The Company
is one of the largest and most experienced providers of assisted-living
communities in the United States. These communities provide a residential
housing alternative for senior citizens who need help with the activities of
daily living, with an emphasis on assisted-living and personal care services.
To date, the Company's revenues have primarily been derived from rents and
service fees charged to its residents. With the consummation of Emeritrust II
and with the previous repositioning of 25 communities which closed on December
31, 1998 ("Emeritrust I"), the Company expects to generate approximately $4.3
million in management fee income during 1999. For the three months ended March
31, 1998 and 1999, the Company generated total operating revenues of $34.8
million and $34.2 million, respectively, including $699,000 in management fees
for the three months ended March 31, 1999. For the three months ended March
31, 1998 and 1999, the Company incurred losses of $8.4 million and $3.0
million (excluding a charge related to the cumulative effect of a change in
accounting principle in 1998), respectively. Loss before cumulative effect of
change in accounting principle decreased $3.0 million from $6.0 million for
the three months ended December 31, 1998 to $3.0 million for the three months
ended March 31, 1999.
During 1998 the Company adopted an operating strategy focused on: 1) increasing
occupancy throughout the Company's portfolio, 2) reducing acquisition and
development activities and 3) repositioning communities operating at a loss.
Occupancy across the Company's total portfolio at March 31, 1999 increased by
5% to 77% compared to 72% at March 31, 1998. In addition, average first
quarter occupancy increased by 6% to 77% for 1999 compared to 71% for 1998.
The Company has significantly reduced its acquisition and development
activities, only acquiring two communities during 1998 compared to 10 during
1997. In addition, the Company opened two and four development communities
during the three months ended March 31, 1998 and 1999, respectively. Slowing
its acquisition and development activities has enabled the Company to utilize
its resources more efficiently and increase its focus on community operations.
The Company disposed of no communities during the three months ended March 31,
1998 and disposed of 15 communities during the three months ended March 31,
1999 in the Emeritrust II transaction. The Company retains a management
interest in the repositioned facilities through three year management
contracts.
For 1999, the Company will stay primarily focused on increasing occupancy
throughout the Company's portfolio, consistent with 1998. In addition, the
Company will also devote attention to 1) generating alternative sources of
resident fee revenue and 2) containing operating costs to continue improving
its margins.
The Company's losses to date result from a number of factors. These factors
include, but are not limited to: the development of 48 and acquisition of 69
assisted living communities since inception that incurred operating losses
during the initial 12 to 24 month rent-up phase; initially lower levels of
occupancy at the Company's communities than originally anticipated; financing
costs arising from sale/leaseback transactions and mortgage financing;
refinancing transactions at proportionately higher levels of debt; and increased
administrative and corporate expenses to facilitate the Company's growth.
6
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 December 31, As of December 31, As of March 31,
1997 1998 1999
------------------------ ---------------------- ---------------------------
Buildings Units Buildings Units Buildings Units
------------------------ ---------------------- ---------------------------
Owned 19 2,099 15 1,492 15 1,492
Leased 76 6,124 52 3,937 38 2,816
Managed/Admin Services 4 327 38 3,734 56 5,237
Joint Venture/Partnership 1 140 8 809 8 809
------------------------ ---------------------- ---------------------------
Sub Total 100 8,690 113 9,972 117 10,354
Percentage Increase (2) 41% 47% 13% 15% 4% 4%
Pending Acquisitions -- -- -- -- -- --
Development Communities (1) 26 2,483 21 2,029 17 1,647
Minority Interest (Alert Care) 22 1,248 21 1,203 21 1,203
------------------------ ---------------------- ---------------------------
Total 148 12,421 155 13,204 155 13,204
------------------------ ---------------------- ---------------------------
Percentage Increase (2) 20% 22% 5% 6% --% --%
(1) Of these 17 development communities, four are being developed by
Emeritus but are expected to be sold upon completion and managed by
Emeritus pursuant to management contracts with the purchaser, two are
owned and being developed by Emeritus, three are being developed by
Emeritus joint ventures with third parties, and the remainder are being
developed by third parties but will be managed by Emeritus upon
completion.
(2) The percentage increase indicates the change from the preceding December
31.
As of May 3, 1999, the Company held ownership, leasehold or management interests
in 117 communities (the "Operating Communities") consisting of approximately
10,400 units with the capacity of approximately 12,000 residents, located in 29
states. The Company leases 38 of the Operating Communities, typically from a
financial institution such as a Real Estate Investment Trust ("REIT"), owns 15
communities, manages or provides administrative services for 56 communities
and has a partnership interest or joint venture in 8 communities.
Additionally, the Company holds a minority interest of 31.3% in Alert Care, 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. Including its interest in Alert Care, the Company holds an interest
in 138 communities consisting of approximately 11,600 units with a capacity of
approximately 13,200 residents.
Of the 117 Operating Communities, five newly developed communities were opened
during 1998 and four opened in the first quarter of 1999. As of May 3, 1999, the
Company owned, had a leasehold interest in, management interest in or had
acquired an option to purchase development sites for 17 new assisted-living
communities (the "Development Communities"). Thirteen of these communities are
scheduled to open during 1999 and the remaining are scheduled to begin operating
in 2000.
Assuming completion of the Development Communities scheduled to open in 1999 and
including the minority interest in Alert Care, by the end of 1999, the Company
will own, lease, have an ownership interest in or manage 151 properties in 29
states, Canada and Japan, containing an aggregate of approximately 12,900
units with capacity of approximately 14,500 residents. There can be no
assurance, however, that the Development Communities will be completed on
schedule. Construction delays, the effects of government regulation or other
factors beyond the Company's control could delay the opening of these
communities.
The Company is exploring international development and acquisition possibilities
in Canada and Japan. The Company's investment in Alert Care in Ontario, Canada
represents a significant initial investment in the assisted-living industry in
Canada. The Company has also entered into a joint venture with Sayno Electric
Company, Ltd. of Osaka, Japan to provide assisted-living services in Japan. The
Company's first assisted-living community in Japan is under construction and is
anticipated to open by the end of 1999. The community will be among the first
assisted living communities in Japan to offer private apartments on a
month-to-month rental.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Results of Operations
The following table presents certain items of the Company's Condensed
Consolidated Statements of Operations as a percentage of total revenues and the
percentage change of the underlying 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,
---------------------------------- --------------------------
1998 1999 1998-1999
--------------- ----------------- --------------------------
Revenues .......................................... 100.0% 100.0% (1.8)%
Expenses:
Community operations ......................... 73.9 63.3 (15.8)
General and administrative ................... 9.2 10.3 9.7
Depreciation and amortization ................ 4.5 4.3 (6.6)
Rent ......................................... 29.6 22.2 (26.4)
--------------- -----------------
Total operating expenses ................. 117.2 100.1 (16.0)
--------------- -----------------
Loss from operations ..................... (17.2) (0.1) (99.4)
--------------- -----------------
Other income (expense):
Interest expense, net ........................ (8.0) (9.4) 16.1
Other, net ................................... 1.0 0.9 (7.6)
--------------- -----------------
Net other expense ........................ (7.0) (8.5) 19.3
--------------- -----------------
Loss before cumulative effect of change
in accounting principle ............... (24.2) (8.6) (64.9)
Cumulative effect of change in accounting
principle ..................................... 3.8 N/A (100.0)
--------------- -----------------
Net loss ................................ (28.0)% (8.6)% (69.7)%
=============== ================= ==========================
Three months ended March 31, 1999 compared to three months ended March 31, 1998
Revenues: Total operating revenues for the three months ended March 31, 1999
decreased 1.8% or $623,000 from the comparable period in 1998. The change in
revenue is a result of the repositioning of 28 communities subsequent to the
first quarter of 1998 from leased/owned communities to managed. The repositioned
communities generated $6.2 million in revenue during the first quarter 1998.
This decrease in revenue is offset by: 1) generally increasing levels of
occupancy throughout the Company's portfolio, including a 17% increase in
average occupancy in the Company's owned/leased portfolio to 86% in the first
quarter of 1999 compared to 69% for the first quarter of 1998; and 2) the
increase in management fee revenue of $630,000 during the first quarter of
1999 compared to the first quarter of 1998 as the Company retains a management
interest in the repositioned communities.
Community Operations: Community operating expenses for the three months ended
March 31, 1999 decreased 15.8% or $4.1 million from the comparable period in
1998 to $21.7 million. The overall decrease in community operating expenses is
a result of the community repositionings that occurred subsequent to the first
quarter of 1998. These repositioned communities had incurred $6.6 million of
community operating expenses during the first quarter of 1998. The decrease is
offset by: 1) increased variable costs resulting from the significant
occupancy gains; and 2) increased sales and marketing costs. Community
operating margins (community revenues less community operating expenses) have
increased to 35.3% for the three months ended March 31, 1999 compared to 26.0%
for the three months ended March 31, 1998 due to the repositioning of lower
margin communities to managed communities and to the effect of cost control
measures.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
General and Administrative: As a percentage of total operating revenues general
and administrative (G&A) expenses increased to 10.3% for the three months ended
March 31, 1999 as compared to the 9.2% recorded in the quarter ended March 31,
1998. The increase in G&A costs as percentage of revenue is due, in part, to
the shift from community revenue to management fees in the repositioning of
the Emeritrust I communities. Overall, G&A costs increased approximately
$310,000 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, 1999 were $1.5 million, or 4.3% of total operating
revenues, compared to $1.6 million, or 4.5% of total operating revenues for the
comparable period in 1998. The decrease is principally the result of
repositioning six owned communities to managed communities.
Rent: Rent expense for the three months ended March 31, 1999 was $7.6 million,
representing a decrease of $2.7 million, or 26.4% from the comparable period in
1998. The decrease is primarily attributable to the repositioning of 22 leased
communities to managed communities on December 31, 1998, accounting for $2.6
million in rent expense for the three months ended March 31, 1998. The Company
leased an average of 52 communities for the three months ended March 31, 1999,
compared to an average of 78 for the three months ended March 31, 1998. Rent
as a percentage of revenue was 29.6% and 22.2% for the three months ended
March 31, 1998 and 1999, respectively.
Interest Expense, Net: Interest expense, net for the three months ended March
31, 1999 increased $447,000 from the comparable period in 1998. This increase is
primarily related to the increase of average quarterly total debt from $157.4
million at March 31, 1998 to $164.1 million at March 31, 1999. In addition,
the amount of interest cost capitalized as part of the Company's development
activities declined in 1999 from 1998 levels.
Cumulative Effect of Change in Accounting Principle: During the three month
period ended March 31, 1998, 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. No such charge was incurred for the three months
ended March 31, 1999.
Same Community Comparison
The Company operated 54 of its communities, excluding the Emeritrust I and
Emeritrust II communities, ("Same Community") during both three months periods
ended March 31, 1998 and 1999. The following table sets forth a comparison of
Same Community results of operations for the three months ended March 31, 1998
and 1999.
Three months Ended March 31,
(In thousands)
Dollar Percentage
1998 1999 Change Change
----------------- -------------- ---------------- ----------------
Revenue ............................. $ 22,491 $25,462 $ 2,971 13%
Community operating expenses ........ 15,423 16,260 837 5
----------------- -------------- ---------------- ----------------
Community operating income ....... 7,068 9,202 2,134 30
----------------- -------------- ---------------- ----------------
Depreciation and amortization ....... 1,161 1,317 156 13
Rent ................................ 5,598 5,344 (254) (5)
----------------- -------------- ---------------- ----------------
Operating income ............... 309 2,541 2,232 722
----------------- -------------- ---------------- ----------------
Interest expense, net ............... 1,764 1,950 186 11
Other income ........................ (60) -- 60 (100)
----------------- -------------- ---------------- ----------------
Net income (loss) .............. $ (1,395) $ 591 $ 1,986 (142)%
================= ============== ================ ================
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The Same Communities represented $25.5 million or 75% of the Company's total
revenue for the first quarter of 1999. Same Community revenues increased by $3.0
million or 13% for the quarter ended March 31, 1999 from the comparable period
in 1998. 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, 1999, average occupancy
increased by 8% to 87% compared to the quarter ended March 31, 1998 average
occupancy of 79%. In addition, Same Community average revenue per unit
increased from $2,071 per month for the quarter ended March 31, 1998 to $2,140
per month for the quarter ended March 31, 1999. During the three months ended
March 31, 1999, the Company recorded net income of $591,000 compared to net
loss of $1.4 million for the three months ended March 31, 1998.
Liquidity and Capital Resources
For the three months ended March 31, 1999, net cash used in operating activities
was $6.0 million compared to $8.7 million for the comparable period in the prior
year. The primary component of this operating use of cash was the net loss of
$3.5 million and $10.3 million recorded in the three months ended March 31, 1999
and 1998, respectively.
Net cash provided by investing activities amounted to $1.6 million for the three
months ended March 31, 1999, stemming primarily from proceeds from Emeritrust II
of $3.7 million. This inflow of cash was offset in part by acquisitions of
property and equipment of $972,000 as well as an excess of $600,000 of
construction expenditures on leased communities over construction advances for
the same three month period. Net cash provided by investing activities for the
three months ended March 31, 1998 was $3.4 million, primarily from the sale of
investment securities offset by an investment in an affiliate.
For the three months ended March 31, 1999, net cash used in financing activities
was $1.0 million primarily the result of debt repayment. For the three months
ended March 31, 1998, net cash used in financing activities was $1.8 million,
primarily the result of the refinancing of existing assisted-living communities
and the repurchase the Company's common stock.
The Company has been, and expects to continue to be, dependent on third-party
financing for its cash needs in connection with operating losses as well as with
its acquisition and development of communities. There can be no assurance that
financing for these requirements will be available to the Company on acceptable
terms. Moreover, to the extent the Company acquires communities that do not
generate positive cash flow, the Company may have to seek additional capital or
borrowings for working capital and liquidity purposes.
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. The monthly charges
for the resident's unit and assisted living services are influenced by the
location of the community and local competition. 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.
Impact of Year 2000
General
The Company has developed a plan (the "Plan") to modify its information
technology to address "Year 2000" problems. The concerns surrounding the Year
2000 are the result of computer programs being written using two digits rather
than four to define the applicable year. Programs that employ time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could cause system errors or failures.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Plan
The Plan is comprised of three components including assessment of: a) the IT
infrastructure (hardware and systems software other than application software);
b) application software; and c) third party suppliers/vendors. The Company
commenced work on the Plan in the fourth quarter of 1998 by taking inventory of
Year 2000 problems in the areas of IT infrastructure as well as application
software. In addition, the Company has determined the priority of the items
based on their materiality to the Company's operations. No material items have
been noted to date. The Company intends to contact its third party
suppliers/vendors during the second quarter of 1999 to determine the status of
their Year 2000 compliance. For each component, the Company will address Year
2000 problems in six phases: 1) taking inventory of Year 2000 problems; 2)
assigning priorities to identified items; 3) assessing materiality of items to
the Company's operations; 4) replacing/repairing material non-compliant items;
5) testing material items; and 6) designing and implementing business
continuation plans. Material items are those believed by the Company to have a
risk that may affect revenue or may cause a discontinuation of operations. The
Company estimates a completion date of June 30, 1999.
Costs
The project is not expected to be material to the Company's operations or
financial position. The total cost is not expected to exceed $50,000 of which
approximately $10,000 have been incurred to date.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, normal business activities or operations. Such
failures could materially affect the Company's results of operations, liquidity,
and financial condition. The Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on its
results of operations, liquidity or financial condition due, in part, to
uncertainty regarding compliance by third parties. The Plan is expected to
significantly reduce the Company's level of uncertainty regarding the Year 2000
problem, however, particularly compliance and readiness of its third-party
suppliers/vendors. The Company believes that, with the completion of the Plan as
scheduled, the possibility of significant interruptions of normal operations
will be reduced and, therefore, a contingency plan has not been deemed necessary
to date.
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 current facts deal with potential future circumstances,
operations, and prospects. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from the Company's actual
future experience involving any one or more of such 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 the Company's
portfolio, and the ability of the Company to continue managing its costs while
maintaining high occupancy rates and market rate assisted living charges in its
assisted living communities. The Company has attempted to identify, in context,
certain of the factors that they currently believe may cause actual future
experience and results to differ from the Company's current expectations
regarding the relevant matter or subject area. These and other risks and
uncertainties are detailed in the Company's reports filed with the Securities
and Exchange Commission, including the Company's Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings are affected by changes in interest rates as a result of
its short- and long-term borrowings. The Company manages this risk by obtaining
fixed rate borrowings when possible. At March 31, 1999, the Company's variable
rate borrowings totaled $97.3 million. If market interest rates average 2% more
in 1999 than they did in 1998, the Company's interest expense would increase and
income before taxes would decrease by $1.9 million. These amounts are determined
by considering the impact of hypothetical interest rates on the Company's
outstanding variable rate borrowings as of March 31, 1999 and does not consider
changes in the actual level of borrowings which may occur subsequent to March
31, 1999. 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 the Company's
financial structure to mitigate the exposure to such a change.
11
The Company is exposed to equity price risk on its short-term investments.
These investments are generally in companies in the healthcare sector. The
Company typically does not attempt to reduce or eliminate its market exposure
on these securities. The decrease in the fair value of the Company's
short-term available-for-sale securities compared to the December 31, 1998
value reflects the decrease in the dollar value of the Company's securities,
the majority of which represents unrealized market depreciation.
PART II OTHER INFORMATION
Items 1-5 are not applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
10.1 Emeritrust II Communities
10.1.1 Supplemental Purchase Agreement in Connection with Purchase of
Facilities (AL II - 14 Operating Facilities) dated March 26,
1999 between the registrant, Emeritus Properties I, Inc. ESC
G.G. I, Inc., ESC I, L.P. and AL Investors II LLC.
10.1.2 Management Agreement with Option to Purchase (AL II - 14
Operating Facilities) dated March 26, 1999 between the
registrant, Emeritus Management I LP, Emeritus Properties I,
Inc, ESC G.P. I, Inc., ESC I, L.P., Emeritus Management LLC and
AL Investors II LLC.
10.1.3 Guaranty of Management Agreement (AL II - 14 Operating
Facilities) dated March 26, 1999 between the registrant and AL
Investors II LLC.
10.1.4 Supplemental Purchase Agreement in Connection with Purchase of
Facilities (AL II - 5 Development Facilities) dated March 26,
1999 between the registrant, Emeritus Properties I, Inc. and AL
Investors Development LLC.
10.1.5 Management Agreement with Option to Purchase (AL II - 5
Development Facilities) dated March 26, 1999 between the
registrant, Emeritus Properties I, Inc, Emeritus Management LLC
and AL Investors Development LLC.
10.1.6 Guaranty of Management Agreement and Shortfall Funding Agreement
(AL II - 5 Development Facilities) dated March 26, 1999 between
the registrant and AL Investors Development LLC.
10.1.7 Put and Purchase Agreement (AL II Holdings - 14 Operating
Facilities and 5 Development Facilities) dated March 26, 1999
between Daniel R. Baty and AL II Holdings LLC, AL Investors II
LLC and AL Investors Development LLC.
27.1 Financial Data Schedule
(a) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months
ended March 31, 1999.
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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 7, 1999
EMERITUS CORPORATION
(Registrant)
/s/: Kelly J. Price
-------------------
Kelly J. Price, Vice President, Finance, Chief
Financial Officer and Principal Accounting Officer
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