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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
Commission file number 01-13031
American Retirement Corporation
(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1674303
(State or Other Jurisdiction of (I.R.S. Employer ID No.)
Incorporation or Organization)
111 Westwood Place, Suite 402, Brentwood, TN 37027
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (615) 221-2250
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, par value $.01 per share ........................ NYSE
5 -3/4% Convertible Subordinated Debentures due 2002 .......... NYSE
Series A Preferred Stock Purchase Rights ...................... NYSE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of March 2, 2000, 17,145,343 shares of the registrant's common stock
were outstanding and the aggregate market value of such common stock held by
non-affiliates was $82.1 million, based on the closing sale price of the common
stock of $8.125 on the New York Stock Exchange on that date. For purposes of
this calculation, shares held by non-affiliates excludes only those shares
beneficially owned by officers, directors, and shareholders owning 10% or more
of the outstanding common stock (and, in each case, their immediate family
members and affiliates).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for use in connection with
the Annual Meeting of Shareholders to be held on May 10, 2000 are incorporated
by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS
THE COMPANY
American Retirement Corporation is a national senior living and health
care services provider offering a broad range of care and services to seniors,
including independent living, assisted living, and skilled nursing services.
Established in 1978, the Company currently operates 54 senior living communities
in 15 states, consisting of 20 owned communities, ten leased communities, and 24
managed communities, with an aggregate capacity for approximately 13,600
residents.
The Company has experienced significant growth since the early 1990s
through the acquisition and development of senior living communities in major
metropolitan markets. The Company is developing these communities into Senior
Living Networks that provide a continuum of housing and care for seniors,
including independent living, assisted living, skilled nursing care and
specialized care such as Alzheimer's units. The strategy combines large
continuing care retirement communities ("CCRCs") with stand-alone assisted
living or skilled nursing residences as satellites to expand the continuum of
housing and care into the market. The Company believes that this hub and
satellite approach produces management efficiencies and market penetration by
offering a range of senior living arrangements at various price levels. The
Company intends to continue its growth by developing senior living networks
throughout the United States through a combination of (i) selective acquisitions
of senior living communities, including CCRCs and assisted living residences;
(ii) expansion of existing communities; and (iii) selective development and
acquisition of other properties and businesses that are complementary to the
Company's operations and growth strategy. The Company is currently developing 14
new senior living communities, with an estimated aggregate capacity for
approximately 1,400 residents, and plans to expand six of its existing
communities to add capacity to accommodate approximately 600 additional
residents.
Business History and Past Operations
The Company's operating philosophy was inspired by the vision of its
founders, Dr. Thomas F. Frist, Sr. and Jack C. Massey, to enhance the lives of
seniors by providing the highest quality of care and services in well-operated
communities designed to improve and protect the quality of life, independence,
personal freedom, privacy, spirit, and dignity of its residents.
The Company's predecessor, American Retirement Communities, L.P. (the
"Predecessor" or "ARCLP"), was formed in February 1995 in connection with a 1995
roll-up transaction of certain entities (the "Predecessor Entities") that owned,
operated, or managed various senior living communities. Each of the Predecessor
Entities was organized at the direction of the members of the Company's
management and certain shareholders. As a result of the roll-up, ARCLP issued
partnership interests to the partners and shareholders of the Predecessor
Entities in exchange for their limited partnership interests and stock,
respectively, and thereby became the owner, directly or indirectly, of all of
the assets of the Predecessor Entities.
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The Company was incorporated in February 1997 as a wholly-owned
subsidiary of ARCLP in anticipation of the Reorganization (defined below) and
the Company's initial public offering in May 1997 (the "IPO"). ARCLP was
reorganized (the "Reorganization") concurrent with the IPO such that all of its
assets and liabilities were contributed to the Company in exchange for 7,812,500
shares of the Company's Common Stock and a promissory note in the original
principal amount of approximately $21.9 million (the "Reorganization Note"). The
Company issued 3,593,750 shares of Common Stock in the IPO, resulting in net
proceeds of approximately $45.0 million. The Company used a portion of the net
proceeds from the IPO to repay the Reorganization Note.
CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living and health care
services to seniors at its communities, including independent living, assisted
living (with special programs and living units for residents with Alzheimer's
and other forms of dementia), and skilled nursing services. By offering a
variety of services and involving the active participation of the resident and
the resident's family and medical consultants, the Company is able to customize
its service plan to meet the specific needs and desires of each resident. As a
result, the Company believes that it is able to maximize customer satisfaction
and avoid the high cost of delivering all services to every resident without
regard to need, preference, or choice.
Independent Living Services
The Company provides independent living services to seniors who do not yet
need assistance or support with the activities of daily life ("ADLs"), but who
prefer the physical and psychological comfort of a residential community that
offers health care and other services. The Company currently owns 15
communities, leases eight communities, and manages an additional nine
communities that provide independent living services, with an aggregate capacity
for approximately 3,900 residents, 1,900 residents, and 2,700 residents,
respectively. In addition, the Company has communities under development or
expansion that will add estimated additional capacity for approximately 420
independent living residents.
Independent living services provided by the Company include daily meals,
transportation, social and recreational activities, laundry, housekeeping,
security, and health care monitoring. The Company also fosters the wellness of
its residents by offering health screenings such as blood pressure checks,
periodic special services (such as influenza inoculations), chronic disease
management (such as diabetes with its attendant blood glucose monitoring), and
dietary and similar programs, as well as ongoing exercise and fitness classes.
Classes are given by health care professionals to keep residents informed about
health and disease management. Subject to applicable government regulation,
personal care and medical services are available to independent living
residents. The Company's contracts with its independent living residents are
generally for a term of one year and are terminable by the resident upon 60
days' notice.
Certain of the Company's communities provide housing and health care
services through entrance fee agreements with residents. Under these agreements,
residents pay an entrance fee upon entering into a lifecare contract. The amount
of the entrance fee varies depending on the resident's health care benefit
election. These agreements obligate the Company to provide certain levels of
future health care services to the resident for life. The agreement terminates
when the unit is vacated. A portion of the fee is refundable to
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the resident or the resident's estate upon termination of the agreement. The
refundable amount is recorded by the Company as refundable portion of life
estate fees, a long-term liability, until termination of the agreement. The
remainder of the fee is recorded as deferred life estate income and is amortized
into revenue using the straight-line method over the estimated remaining life
expectancy of the resident, based upon annually adjusted actuarial projections.
Additionally, under these agreements the residents pay a monthly service fee
which entitles them to the use of certain amenities and services. They may also
elect to obtain additional services, which are paid for on a monthly basis or as
the services are received. The Company recognizes these additional fees as
revenue on a monthly basis when earned.
The Company also provides housing to residents at certain communities
under an entrance fee agreement whereby the entrance fee is fully refundable to
the resident or the resident's estate contingent upon the occupation of the unit
by the next resident. The resident also shares in a percentage, typically 50%,
of any appreciation in the entrance fee from the succeeding resident. The
entrance fee is recorded by the Company as refundable portion of life estate
fees and is amortized into revenue using the straight-line method over 40 years,
the life of the buildings. Additionally, under these agreements the residents
pay a monthly service fee, which entitles them to the use of certain amenities
and services. They may also elect to obtain additional services, which are paid
for on a monthly basis or as the services are received. The Company recognizes
these additional fees as revenue on a monthly basis when earned. If a resident
terminates the agreement, they are required to continue to pay their monthly
service fee for the lesser of one year or until the date of reoccupation of the
unit.
Assisted Living and Memory Impaired Services
The Company offers a wide range of assisted living care and services 24
hours per day, including personal care services, support services, and
supplemental services at 20 owned communities, seven leased communities, and 23
managed communities, with an aggregate capacity for approximately 1,000, 500,
and 1,950 residents, respectively. In addition, the Company has communities
under development or expansion that will add estimated additional capacity for
approximately 1,490 assisted living residents. The residents of the Company's
assisted living residences generally need help with some or all ADLs, but do not
require the more acute medical care traditionally given in nursing homes. Upon
admission to the Company's assisted living residences, and in consultation with
the resident and the resident's family and medical consultants, each resident is
assessed to determine his or her health status, including functional abilities,
and need for personal care services. Each resident also completes a lifestyles
assessment to determine the resident's preferences. From these assessments, a
care plan is developed for each resident to ensure that all staff members who
render care meet the specific needs and preferences of each resident when
possible. Each resident's care plan is reviewed periodically to determine when a
change in care is needed.
The Company has adopted a philosophy of assisted living care that allows a
resident to maintain a dignified, independent lifestyle. Residents and their
families are encouraged to be partners in their care and to take as much
responsibility for their well being as possible. The basic types of assisted
living services offered by the Company include the following:
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Personal Care Services These services include assistance with ADLs
such as ambulation, bathing, dressing, eating, grooming, personal hygiene,
monitoring or assistance with medications, and confusion management.
Support Services These services include meals, assistance with
social and recreational activities, laundry services, general
housekeeping, maintenance services and transportation services.
Supplemental Services These services include extra transportation
services, extra laundry services, non-routine care services and special
care services for residents with Alzheimer's and other forms of dementia.
The Company maintains programs and special units at its assisted living
residences for residents with Alzheimer's and other forms of dementia that
provide the attention, care, and services needed to help those residents
maintain a higher quality of life. Specialized services include assistance with
ADLs, behavior management, and a lifeskills-based activities program, the goal
of which is to provide a normalized environment that supports residents'
remaining functional abilities. Whenever possible, residents assist with meals,
laundry, and housekeeping. Special units for residents with Alzheimer's and
other forms of dementia are located in a separate area of the community and have
their own dining facilities, resident lounge areas, and specially trained staff.
The special care areas are designed to allow residents the freedom to ambulate
while keeping them safely contained within a secure area, with a minimum of
disruption to other residents. Special nutritional programs are used to help
ensure caloric intake is maintained in residents whose constant movement
increases their caloric expenditure. Resident fees for these special units are
dependent on the size of the unit, the design type, and the level of services
provided.
Skilled Nursing and Sub-Acute Services
The Company provides traditional skilled nursing services in eight
communities owned by the Company, two communities leased by the Company, and
seven communities managed by the Company, with an aggregate capacity for
approximately 600, 140, and 800 residents, respectively. In addition, the
Company has communities under development or expansion that will add estimated
additional capacity of approximately 90 skilled nursing beds. In its skilled
nursing facilities, the Company provides traditional long-term care through
24-hour a day skilled nursing care by registered nurses, licensed practical
nurses, and certified nursing aides. The Company also offers a range of
sub-acute care services in certain of its communities. Sub-acute care is
generally short-term, goal-oriented rehabilitation care intended for individuals
who have a specific illness, injury, or disease, but who do not require many of
the services provided in an acute care hospital. Sub-acute care is typically
rendered immediately after, or in lieu of, acute hospitalization in order to
treat such specific medical conditions.
GOVERNMENT REGULATION
The health care industry is subject to extensive regulation and frequent
regulatory change. At this time, no federal laws or regulations specifically
regulate assisted or independent living residences. While a number of states
have not yet enacted statutes on regulations specifically governing assisted
living facilities, the Company's communities are subject to regulation,
licensing, certificate of need ("CON") review, and permitting by state and
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local health and social service agencies and other regulatory authorities. While
such requirements vary from state to state, they typically relate to staffing,
physical design, required services, and resident characteristics. The Company
believes that such regulation will increase in the future. In addition, health
care providers are receiving increased scrutiny under anti-trust laws as
integration and consolidation of health care delivery increases and affects
competition. The Company's communities are also subject to various zoning
restrictions, local building codes, and other ordinances, such as fire safety
codes. Regulation of the assisted living industry is evolving and is likely to
become more burdensome on the Company; however, the Company is unable to predict
the content of new regulations or their effect on its business.
In the ordinary course of business, one or more of the Company's
communities could be cited for deficiencies. In such cases, the appropriate
corrective action would be taken.
The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and Medicaid, significantly reducing rates of
increase for payments to home health agencies and skilled nursing facilities.
Under the BBA, beginning in the year 2001, skilled nursing facilities will no
longer be reimbursed under a cost based system. A prospective payment system
("PPS") under which facilities are reimbursed on a per diem basis is being
phased in over a three-year period. The BBA, as revised, also requires the
Secretary of Health and Human Services to establish and implement a PPS for home
health care services for cost reporting periods beginning on and after October
1, 2000. The Health Care Financing Administration ("HCFA") issued a proposed
rule implementing a PPS for home health on October 28, 1999 and a final rule is
expected by July 2000. Approximately 4.4%, 4.7%, and 6.9% of the Company's total
revenues from continuing operations for the years ended December 31, 1999, 1998
and 1997, respectively, were attributable to Medicare, including
Medicare-related private co-insurance.
Federal and state anti-remuneration and anti-referral laws, such as
anti-kickback laws, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommending of, a particular provider of
health care items or services. Federal anti-kickback laws have been broadly
interpreted to apply to certain contractual relationships between health care
providers and sources of patient referrals. Similar state laws vary from federal
laws and are often vague and difficult to interpret with little or no guidance
from courts or regulatory agencies. In addition, there are various federal and
state laws prohibiting other types of fraud and abuse by health care providers,
including criminal and civil provisions that prohibit filing false claims or
making false statements to receive payment or certification under Medicare or
Medicaid and failing to refund overpayments or improper payments. Violation of
these laws can result in loss of licensure, civil and criminal penalties, and
exclusion of health care providers or suppliers from participation in Medicare,
Medicaid, and other state and federal reimbursement programs. There can be no
assurance that such laws will be interpreted in a manner consistent with current
or past practices of the Company.
The Arizona Department of Insurance has notified the owner of the
Company's managed community in Peoria, Arizona, that the owner is not currently
in compliance with a net worth requirement imposed by Arizona law. While the
compliance with this net worth requirement is technically the responsibility of
the owner, in order to facilitate discussions with the Arizona Department of
Insurance, the Company has provided the Department with a limited guaranty
relating to the financial performance of the community. The
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Company and the owner of the community are currently considering a number of
courses of action with respect to this net worth requirement, and are engaged in
discussions with the Arizona Department of Insurance. While the Company and
owner believe that the owner's noncompliance with the net worth requirement is
only a technical violation of law and that the community is in a strong
financial position, there can be no assurance that the State of Arizona will not
enforce the law strictly. A violation of this net worth requirement may, among
other things, allow the Arizona Department of Insurance to take steps to appoint
a receiver for the community.
Certain of the communities operated by the Company are currently operating
a number of skilled nursing beds as "shelter beds" under a Florida statutory
exemption from CON review which is generally limited to situations where beds
are used only for residents of the community. Such communities are not currently
in full compliance with these shelter bed CON. A violation of the shelter bed
CON may, among other things, subject the owner of the facility to fines of up to
$1,500 per day. Although the Company is evaluating a number of alternatives
relating to these shelter bed issues, the Company does not anticipate that the
communities will be in full compliance with the shelter bed requirements under
the CON statutes in the foreseeable future, if ever. There can be no assurance
that the State of Florida will not enforce the shelter bed requirements strictly
against the Company in the future or impose penalties for prior or continuing
violations.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
communities to permit access to the properties by disabled persons. While the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or are required to be made on a more
accelerated basis than anticipated, the Company will incur additional costs.
Further legislation may impose additional burdens or restrictions with respect
to access by disabled persons, the costs of compliance with which could be
substantial.
In addition, the Company is subject to various Federal, state, and local
environmental laws and regulations. Such laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible for,
the presence of hazardous or toxic substances. The costs of any required
remediation or removal of these substances could be substantial and the
liability of an owner or operator as to any property is generally not limited
under such laws and regulations and could exceed the property's value and the
aggregate assets of the owner or operator. The presence of these substances or
failure to remediate such contamination properly may also adversely affect the
owner's ability to sell or rent the property, or to borrow using the property as
collateral. Under these laws and regulations, an owner, operator, or an entity
that arranges for the disposal of hazardous or toxic substances, such as
asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties.
The Company believes that the structure and composition of government, and
specifically health care, regulations will continue to change and, as a result,
regularly monitors developments in the law. The Company expects to modify its
agreements and operations from time to time as the business and regulatory
environment
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changes. While the Company believes it will be able to structure its agreements
and operations in accordance with applicable law, there can be no assurance that
its arrangements will not be successfully challenged.
COMPETITION
The senior living and health care services industry is highly competitive
and the Company expects that all segments of the industry will become
increasingly competitive in the future. During the mid- to late-1990's, a large
number of assisted living units was developed and most will be opened by the end
of 2000. This could have the effect of increasing the time to fill certain
assisted living projects in certain markets. Although there are a number of
substantial companies active in the senior living and health care industry, the
industry continues to be very fragmented and characterized by numerous small
operators. Most of the industry participants are privately held or are
non-profit organizations. The Company believes that the primary competitive
factors in the senior living and health care services industry are (i)
reputation for and commitment to a high quality of care; (ii) quality of support
services offered; (iii) price of services; (iv) physical appearance and
amenities associated with the communities; and (v) location. The Company
competes with other companies providing independent living, assisted living
skilled nursing, and other similar service and care alternatives, some of whom
may have greater financial resources than the Company. Because seniors tend to
choose senior living communities near their homes or near their families, the
Company's principal competitors are other senior living and long-term care
communities in the same local geographic areas as the Company's communities. The
Company also competes with other health care businesses with respect to
attracting and retaining nurses, technicians, aides, and other high quality
professional and non-professional employees and managers.
INSURANCE AND LEGAL PROCEEDINGS
The provision of personal and health care services entails an inherent
risk of liability. In recent years, participants in the senior living and health
care services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve large
claims and result in the incurrence of significant defense costs. The Company
currently maintains property, liability, and professional medical malpractice
insurance policies for the Company's owned and certain of its managed
communities under a master insurance program in amounts and with such coverages
and deductibles that the Company believes are within normal industry standards
based upon the nature and risks of the Company's business. The Company also has
umbrella excess liability protection policies in the amount of at least $35.0
million per location. There can be no assurance that a claim in excess of the
Company's insurance will not arise. A claim against the Company not covered by,
or in excess of, the Company's insurance could have a material adverse effect
upon the Company. In addition, the Company's insurance policies must be renewed
annually. There can be no assurance that the Company will be able to obtain
liability insurance in the future or that, if such insurance is available, it
will be available on acceptable terms.
Under various federal, state, and local environmental laws, ordinances,
and regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property, and may be held liable to a governmental
entity or to third parties for property damage and for investigation and clean
up costs. The Company is not aware of any environmental liability with respect
to any of its owned, leased, or managed communities that it believes would have
a material adverse effect on the Company's business, financial condition, or
results of operations. The
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Company believes that its communities are in compliance in all material respects
with all federal, state, and local laws, ordinances, and regulations regarding
hazardous or toxic substances or petroleum products. The Company has not been
notified by any governmental authority, and is not otherwise aware of any
material non-compliance, liability, or claim relating to hazardous or toxic
substances or petroleum products in connection with any of the communities it
currently operates.
The Company currently is not a party to any legal proceeding that it
believes would have a material adverse effect on its business, financial
condition, or results of operations.
TRADEMARKS
The Company has registered its corporate logo with the United States
Patent and Trademark Office (the "USPTO"). The Company develops and markets
certain free-standing assisted living residences under the tradename "Homewood
Residence." The Company has filed an application with the USPTO to register the
"Homewood Residence" tradename and logo, but there can be no assurance that such
registration will be granted or that the Company will be able to use such
tradename.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of the Company.
NAME AGE POSITION
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W. E. Sheriff 57 Chief Executive Officer
Christopher J. Coates 49 President and Chief Operating Officer
George T. Hicks 42 Executive Vice President - Finance, Chief Financial Officer
H. Todd Kaestner 44 Executive Vice President - Corporate Development
James T. Money 52 Executive Vice President - Senior Living Network Development
Gregory B. Richard 46 Executive Vice President - Community Operations
W.E. SHERIFF has served as Chairman and Chief Executive Officer of the
Company and its predecessors since April 1984. From 1973 to 1984, Mr. Sheriff
served in various capacities for Ryder System, Inc., including as president and
chief executive officer of its Truckstops of America division. Mr. Sheriff also
serves on the boards of various educational and charitable organizations and in
varying capacities with several trade organizations, including as a member of
the board of the National Association for Senior Living Industries.
CHRISTOPHER J. COATES has served as President and Chief Operating Officer
of the Company and its predecessors since January 1993 and as a director of the
Company since January 1998. From 1988 to 1993, Mr. Coates served as chairman of
National Retirement Company, a senior living management company acquired by a
subsidiary of the Company in 1992. From 1985 to 1988, Mr. Coates was senior
director of the Retirement Housing Division of Radice Corporation, following
that company's purchase in 1985 of National
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Retirement Consultants, a company formed by Mr. Coates. Mr. Coates is a former
chairman of the board of directors of the American Senior Housing Association.
GEORGE T. HICKS has served as the Executive Vice President - Finance,
Chief Financial Officer, Treasurer, and Secretary since September 1993. Mr.
Hicks has served in various capacities for the Company's predecessors since
1985, including Vice President - Finance and Treasurer from November 1989 to
September 1993.
H. TODD KAESTNER has served as Executive Vice President - Corporate
Development since September 1993. Mr. Kaestner has served in various capacities
for the Company's predecessors since 1985, including Vice President -
Development from 1988 to 1993 and Chief Financial Officer from 1985 to 1988.
JAMES T. MONEY has served as Executive Vice President - Development
Services since September 1993. Mr. Money has served in various capacities for
the Company's predecessors since 1978, including Vice President - Development
from 1985 to 1993. Mr. Money is a member of the board of directors and the
executive committee of the National Association for Senior Living Industries.
GREGORY B. RICHARD has served as Executive Vice President - Community
Operations since January 2000. Mr. Richard was previously with a pediatric
practice management company from May 1997 to May 1999 serving as President and
Chief Executive Officer from October 1997 to May 1999. Prior to this Mr. Richard
was with Rehability Corporation, a publicly traded outpatient physical
rehabilitation service provider, from July 1986 to October 1996, serving as
Senior Vice President of Operations and Chief Operating Officer from September
1992 to October 1996.
EMPLOYEES
The Company employs approximately 6,800 persons. None of the Company's
employees is currently represented by a labor union and the Company is not aware
of any union organizing activity among its employees. The Company believes that
its relationship with its employees is good.
RISK FACTORS
Substantial Debt and Operating Lease Payment Obligations
At December 31, 1999, the Company had long-term debt, including current
portion, of $436.0 million and was obligated to pay rental obligations in 2000
of approximately $14.2 million under long-term operating leases. The Company
currently intends to finance its growth through a combination of bank
indebtedness, mortgage financing, transactions with real estate investment
trusts ("REITs"), and joint venture and other arrangements. As a result, a
substantial portion of the Company's cash flow will be devoted to debt service
and lease payments. Debt and annual rental obligations will increase as the
Company pursues its growth strategy. There can be no assurance that the Company
will generate sufficient cash flows from operations to meet required interest,
principal, and lease payments. Any payment or other default with respect to such
obligations could cause lenders to foreclose upon the communities securing such
indebtedness or, in the case
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of an operating lease, could terminate the lease, with a consequent loss of
income and asset value to the Company. Furthermore, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgages, debt
instruments, and leases, a default by the Company on one of its payment
obligations could result in acceleration of other obligations. Consequently,
such a default could adversely affect a significant number of the Company's
other properties and, in turn, the Company's business, results of operations,
and financial condition. See "-- Need for Additional Financing; Exposure to
Rising Interest Rates."
Need for Additional Financing; Exposure to Rising Interest Rates
The Company's ability to sustain any operating losses, complete
construction projects underway, and to otherwise meet its growth objectives will
depend, in part, on its ability to obtain additional financing on acceptable
terms from available financing sources. The Company's future debt instruments
may include covenants restricting the Company's ability to incur additional
debt. Moreover, raising additional funds through the issuance of equity
securities could dilute the ownership interests of existing shareholders and
adversely affect the market price of the Company's common stock. There can be no
assurance that the Company will be successful in securing additional financing
or that adequate financing will be available and, if available, will be on terms
that are acceptable to the Company. The Company's inability to obtain additional
financing on acceptable terms could delay or eliminate some or all of the
Company's growth plans.
Future indebtedness, from commercial banks or otherwise, and lease
obligations, including those related to REIT facilities, are also expected to be
based on interest rates prevailing at the time such debt and lease arrangements
are obtained. Therefore, increases in prevailing interest rates could increase
the Company's interest or lease payment obligations and could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Risks Associated With Lifecare Benefits
Certain communities owned or operated by the Company are lifecare CCRCs
that offer residents a limited lifecare benefit. Residents of these communities
pay an upfront entrance fee upon occupancy, which generally is partially
refundable, and a monthly service fee while living in the community. Residents
are generally entitled to a limited lifecare benefit, which is typically (a) a
certain number of free days in the community's health center during the
resident's lifetime, (b) a discounted rate for such services, or (c) a
combination of the two. The lifecare benefit varies based upon the extent to
which the resident's entrance fee is refundable. The pricing of entrance fees,
refundability provisions, monthly service fees, and lifecare benefits are
determined from actuarial projections of the expected morbidity and mortality of
the resident population. In the event the entrance fees and monthly service
payments established for the communities are not sufficient to cover the cost of
lifecare benefits granted to residents, the results of operations and financial
condition of the communities will be adversely affected.
Residents of the Company's lifecare CCRCs are guaranteed an independent
living unit and nursing care at the community during their lifetime, even if the
resident exhausts his or her financial resources and becomes unable to satisfy
his or her obligations to the community. In addition, in the event a resident
requires nursing care and there is insufficient capacity for the resident in the
nursing facility at the community where
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the resident lives, the community must contract with a third party to provide
such care. Although the Company screens potential residents to ensure that they
have adequate assets, income, and reimbursements from government programs and
third parties to pay their obligations to the communities during their lifetime,
there can be no assurance that such assets, income, and reimbursements will be
sufficient in all cases. To the extent that the financial resources of some of
the residents are not sufficient to pay for the cost of facilities and services
provided to them, or in the event that the communities must pay third parties to
provide nursing care to residents of the communities, the Company's results of
operations and financial condition would be adversely affected.
No Assurance as to Ability to Manage Growth
The success of the Company's growth strategy will depend, in large part,
on its ability to effectively operate any newly acquired or developed
communities, as to which there can be no assurance. The Company's growth plans
will also place significant demands on its management and operating personnel.
The Company's ability to manage its future growth effectively will require it to
continually improve its operational, financial, and management information
systems and to continue to attract, retain, train, motivate, and manage key
employees. If the Company is unable to manage its growth effectively, its
business, results of operations, and financial condition will be adversely
affected.
Difficulties of Acquiring and Integrating Communities and Complementary
Businesses
The Company plans to continue to make strategic acquisitions of senior
living communities and other properties or businesses that are complementary to
the Company's operations and growth strategy. The acquisition of existing
communities or other businesses involves a number of risks, including the
following:
- existing communities available for acquisition frequently serve or
target different markets than those presently served by the Company;
- renovations of acquired communities and changes in staff and
operating management personnel are necessary to successfully
integrate such communities or businesses into the Company's existing
operations;
- costs incurred to reposition or renovate newly acquired communities
may not be recovered; and
- the Company may be adversely impacted by unforeseen liabilities
attributable to the prior operators of such communities or
businesses, against whom the Company may have little or no recourse.
The success of the Company's acquisition strategy will be determined by numerous
factors, including:
- the Company's ability to identify suitable acquisition candidates;
- the competition for such acquisitions;
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- the purchase price;
- the requirement to make operational or structural changes and
improvements;
- the financial performance of the communities or businesses after
acquisition;
- the Company's ability to finance the acquisitions on reasonable
terms; and
- the Company's ability to integrate effectively any acquired
communities or businesses into the Company's management,
information, and operating systems.
There can be no assurance that the Company's acquisition of senior living
communities and complementary properties and businesses will be completed at the
rate currently expected, if at all, or, if completed, that any acquired
communities or businesses will be successfully integrated into the Company's
operations.
Losses from Newly Developed Residences and Acquisitions
In view of the Company's growth through development and acquisitions,
there can be no assurance that the Company will be profitable in any future
period. Newly developed senior living communities are expected to incur
operating losses during a substantial portion of their first 12 to 15 months of
operations, on average, until the communities achieve targeted occupancy levels.
Newly acquired communities may also incur losses pending their integration into
the Company's operations.
Risks of Development in Concentrated Geographic Areas
Part of the Company's growth strategy is to acquire and develop senior
living communities in concentrated geographic service areas. Accordingly, the
Company's occupancy rates in existing, developed, or acquired communities may be
adversely affected by a number of factors, including regional and local economic
conditions, competitive conditions, applicable local laws and regulations, and
general real estate market conditions, including the supply and proximity of
senior living communities.
Dependence on Attracting Residents with Sufficient Resources to Pay
Approximately 95.6% of the Company's total revenues for the year ended
December 31, 1999 were attributable to private pay sources. For the same period,
4.4% of the Company's revenues were attributable to reimbursement from
third-party payors, including Medicare and Medicaid. The Company expects to
continue to rely primarily on the ability of residents to pay for the Company's
services from their own or familial financial resources. Inflation or other
circumstances that adversely affect the ability of seniors to pay for the
Company's services could have a material adverse effect on the Company's
business, financial condition, and results of operations.
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Pricing Pressures
The health care services industry is currently experiencing market-driven
reforms from forces within and outside the industry that are exerting pressure
on health care and related companies to reduce health care costs. These
market-driven reforms are resulting in industry-wide consolidation that is
expected to increase the downward pressure on health care service providers'
margins, as larger buyer and supplier groups, including government programs such
as Medicare and Medicaid, exert pricing pressure on health care providers. The
Company cannot predict the ultimate timing or effect of market-driven reforms.
In addition, the Company cannot guarantee that any such reforms will not have a
material adverse effect on the Company's business, results of operations, or
financial condition.
Increasing Competition
The senior living and health care services industry is highly competitive,
and the Company expects that all segments of the industry will become
increasingly competitive in the future. The Company competes with other
companies providing independent living, assisted living, skilled nursing, and
other similar service and care alternatives. Although the Company believes there
is a need for senior living communities in the markets where the Company is
operating and developing communities, the Company expects that competition will
increase from existing competitors and new market entrants, some of whom may
have substantially greater financial resources than the Company. In addition,
some of the Company's competitors operate on a not-for-profit basis or as
charitable organizations and have the ability to finance capital expenditures on
a tax-exempt basis or through the receipt of charitable contributions, neither
of which are readily available to the Company. Furthermore, if the development
of new senior living communities outpaces the demand for such communities in the
markets in which the Company has or is developing senior living communities,
such markets may become saturated. An oversupply of such communities in the
Company's markets could cause the Company to experience decreased occupancy,
reduced operating margins, and lower profitability. Consequently, there can be
no assurance that the Company will not encounter increased competition that
would adversely affect its occupancy rates, pricing for services, and growth
prospects.
Community Management, Staffing, and Labor Costs
The Company competes with other providers of senior living and health care
services with respect to attracting and retaining qualified management personnel
responsible for the day-to-day operations of each of the Company's communities
and skilled technical personnel responsible for providing resident care. A
shortage of nurses or trained personnel may require the Company to enhance its
wage and benefits package in order to compete in the hiring and retention of
such personnel or to hire more expensive temporary personnel. The Company will
also be dependent on the available labor pool of semi-skilled and unskilled
employees in each of the markets in which it operates. The Company cannot be
sure its labor costs will not increase, or that, if they do increase, they can
be matched by corresponding increases in rates charged to residents. If the
Company is unable to attract and retain qualified management and staff
personnel, to control its labor costs, or to pass on any increased labor costs
to residents through rate increases, such failures could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
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Government Regulation and the Burdens of Compliance
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
operating policies and procedures, fire prevention measures, environmental
matters, compliance with building and safety codes, and staffing, including
professional licensing. Failure to comply with these laws and regulations could
result in the denial of reimbursement, the imposition of fines, temporary
suspension of admission of new patients, suspension or decertification from
Medicare, Medicaid, or other state or Federal reimbursement programs,
restrictions on the Company's ability to acquire new communities or expand
existing communities, and, in extreme cases, the revocation of a community's
license or closure of a community. While the Company endeavors to comply with
all applicable regulatory requirements, from time to time certain of the
Company's communities have been subject, like others in the industry, to various
penalties as a result of deficiencies alleged by state survey agencies. There
can be no assurance that the Company will not be subject to similar penalties in
the future, or that federal, state, or local governments will not impose
additional restrictions on the Company's activities that could materially
adversely affect the Company's business, financial condition, or results of
operations.
The Balanced Budget Act ("BBA") of 1997, Public Law 105-33, included
sweeping changes to Medicare and Medicaid, significantly reducing rates of
increase for payments to home health agencies and skilled nursing facilities.
Under the BBA, beginning in the year 2001, skilled nursing facilities will no
longer be reimbursed under a cost based system. A prospective payment system
under which facilities are reimbursed on a per diem basis is being phased in
over a three-year period. The BBA, as revised, also requires the Secretary of
Health and Human Services to establish and implement a prospective payment
system for home health care services for cost reporting periods beginning on and
after October 1, 2000. Approximately 4.4%, 4.7%, and 6.9% of the Company's total
revenues for the years ended December 31, 1999, 1998, and 1997, respectively,
were attributable to Medicare, including Medicare-related private co-insurance
and, thus, may be impacted by the changes under BBA.
The Arizona Department of Insurance has notified the owner of the
Company's managed community in Peoria, Arizona, that the owner is not currently
in compliance with a net worth requirement imposed by Arizona law. While the
compliance with this net worth requirement is technically the responsibility of
the owner, in order to facilitate discussions with the Arizona Department of
Insurance, the Company has provided the Department with a limited guaranty
relating to the financial performance of the community. The Company and the
owner of the community are currently considering a number of courses of action
with respect to this net worth requirement, and are engaged in discussions with
the Arizona Department of Insurance. While the Company and owner believe that
the owner's noncompliance with the net worth requirement is only a technical
violation of law and that the community is in a strong financial position, there
can be no assurance that the State of Arizona will not enforce the law strictly.
A violation of this net worth requirement may, among other things, allow the
Arizona Department of Insurance to take steps to appoint a receiver for the
community.
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Many states, including several of the states in which the Company
currently operates, control the supply of licensed skilled nursing beds and home
health care agencies through CON programs. Presently, state approval is required
for the construction of new health care communities, the addition of licensed
beds, and certain capital expenditures at such communities. To the extent that a
CON or other similar approval is required for the acquisition or construction of
new facilities or the expansion of the number of licensed beds, services, or
existing communities, the Company could be adversely affected by the failure or
inability to obtain such approval, changes in the standards applicable for such
approval, and possible delays and expenses associated with obtaining such
approval. In addition, in most states the reduction of the number of licensed
beds or the closure of a community requires the approval of the appropriate
state regulatory agency. If the Company were to seek to reduce the number of
licensed beds at, or to close, a community, the Company could be adversely
affected by a failure to obtain or a delay in obtaining such approval.
Certain of the communities operated by the Company are currently operating
a number of nursing beds as "shelter beds" under a Florida statute and CON that
generally limits the use of such beds to residents of the community. Such
communities are not currently in full compliance with these shelter bed CON
requirements. A violation of the shelter bed CON requirements may, among other
things, subject the owner of the facility to fines of up to $1,500 per day.
Although the Company is evaluating a number of alternatives relating to these
shelter bed issues, the Company does not anticipate that the communities will be
in full compliance with the shelter bed CON requirements in the foreseeable
future, if ever. There can be no assurance that the State of Florida will not
enforce the shelter bed CON requirements strictly against the Company in the
future or impose penalties for prior or continuing violations.
Federal and state anti-remuneration and anti-referral laws, such as
"anti-kickback" laws, govern certain financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
such providers. These laws prohibit, among other things, certain direct and
indirect payments that are intended to induce the referral of patients to, the
arranging for services by, or the recommendation of, a particular provider of
health care items or services. Federal anti-kickback laws have been broadly
interpreted to apply to certain contractual relationships between health care
providers and sources of patient referral. Similar state laws vary from federal
laws and are often vague and difficult to interpret with little or no guidance
by courts or regulatory agencies. In addition, there are various federal and
state laws prohibiting other types of fraud and abuse by health care providers,
including criminal and civil provisions that prohibit filing false claims or
making false statements to receive payment or certification under Medicare and
Medicaid and failing to refund overpayments or improper payments. Violation of
these laws can result in loss of licensure, civil and criminal penalties, and
exclusion of health care providers or suppliers from participation in the
Medicare, Medicaid, and other state and federal reimbursement programs. There
can be no assurance that such laws will be interpreted in a manner consistent
with the practices of the Company.
Under the Americans with Disabilities Act of 1990, all places of public
accommodation are required to meet certain federal requirements related to
access and use by disabled persons. A number of additional federal, state, and
local laws exist that also may require modifications to existing and planned
communities to create access to the properties by disabled persons. Although the
Company believes that its communities are substantially in compliance with
present requirements or are exempt therefrom, if required changes involve a
greater expenditure than anticipated or must be made on a more accelerated basis
than anticipated, the Company
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will incur additional costs. Further legislation may impose additional burdens
or restrictions with respect to access by disabled persons, the costs of
compliance with which could be substantial.
ITEM 2. PROPERTIES
The table below sets forth certain information with respect to the senior
living communities currently operated by the Company.
Resident Capacity(1)
-------------------- Commencement
Community Location IL AL SN Total of Operations(2)
- --------- -------- -- -- -- ----- ----------------
Owned(3):
- ---------
Broadway Plaza Ft. Worth, TX 252 40 122 414 Apr-92
Carriage Club of Charlotte Charlotte, NC 355 54 50 459 May-96
Carriage Club of Jacksonville Jacksonville, FL 292 60 -- 352 May-96
Freedom Plaza Florida Sun City Center, FL 542 30 42 614 Jul-98
Freedom Village Holland Holland, MI 450 56 72 578 Jul-98
The Hampton at Post Oak Houston, TX 162 39 56 257 Oct-94
Heritage Club Denver, CO 220 35 -- 255 Feb-95
Homewood at Corpus Christi Corpus Christi, TX 60 30 -- 90 May-97
Homewood at Deane Hill Knoxville, TN -- 108 -- 108 Oct-98
Homewood at Sun City Center(4) Sun City Center, FL -- 60 -- 60 Aug-99
Homewood at Tarpon Springs Tarpon Springs, FL -- 64 -- 64 Aug-97
Lake Seminole Square Seminole, FL 395 34 -- 429 Jul-98
Parklane West San Antonio, TX -- 17 124 141 Jan-00
Parkplace Denver, CO 195 48 -- 243 Oct-94
Richmond Place Lexington, KY 206 78 -- 284 Apr-95
Santa Catalina Villas Tucson, AZ 217 85 42 344 Jun-94
The Summit at Westlake Hills Austin, TX 167 30 89 286 Apr-92
Village of Homewood(5) Lady Lake, FL -- 50 -- 50 Apr-98
Westlake Village Cleveland, OH 246 54 -- 300 Oct-94
Wilora Lake Lodge Charlotte, NC 142 44 -- 186 Dec-97
----- ----- --- -----
Subtotal 3,901 1,016 597 5,514
Leased:
- -------
Bahia Oaks Lodge(6) Sarasota, FL -- 100 -- 100 Jun-98
Bay Pines(7) St Petersburg, FL -- 82 -- 82 Jul-99
Hampton at Pearland(8) Houston, TX 15 67 -- 82 Feb-00
Holley Court Terrace(9) Oak Park, IL 179 17 -- 196 Jul-93
Homewood at Victoria(10) Victoria, TX 60 30 -- 90 May-97
Imperial Plaza(11) Richmond, VA 850 152 -- 1,002 Oct-97
Oakhurst Towers(12) Denver, CO 195 -- -- 195 Feb-99
Park Regency(13) Chandler, AZ 154 -- 66 220 Sep-98
Rossmoor Regency(14) Laguna Hills, CA 210 -- -- 210 May-98
Trinity Towers(9) Corpus Christi, TX 220 84 76 380 Jan-90
----- ----- --- -----
Subtotal 1,883 532 142 2,557
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Resident Capacity(1)
-------------------- Commencement
Community Location IL AL SN Total of Operations(2)
- --------- -------- -- -- -- ----- ----------------
Managed(15):
- ------------
Burcham Hills East Lansing, MI 138 95 133 366 Nov-78
Freedom Plaza Arizona(16) Peoria, AZ 455 78 256 789 Jul-98
Freedom Square(17) Seminole, FL 497 177 192 866 Jul-98
Freedom Village Brandywine(18 Glenmore, PA 380 32 47 459 Jul-98
Glenview at Pelican Bay Naples, FL 150 10 25 185 Jul-98
Hampton at Cypress Station(20) Houston, TX -- 96 -- 96 Oct-99
Hampton at Willowbrook(20) Houston, TX -- 50 -- 50 Jun-99
Hampton at Pinegate(20) Houston, TX -- 95 -- 95 Jul-98
Hampton at Shadowlake(20) Houston, TX -- 94 -- 94 Apr-99
Hampton at Spring Shadows(20) Houston, TX -- 68 -- 68 May-99
Heritage Club at Aurora(19) Aurora, CO -- 94 -- 94 Jun-99
Heritage Club at Greenwood Village(19) Denver, CO 90 90 180 Nov-99
Homewood at Boynton Beach(19) Boynton Beach, FL -- 92 -- 92 Jan-00
Homewood at Coconut Creek(19) Coconut Creek, FL -- 96 -- 96 Feb-00
Homewood at Countryside(20) Safety Harbor, FL -- 76 -- 76 Oct-99
Homewood at Naples(19) Naples, FL -- 100 -- 100 May-99
Homewood at Richmond Heights(19) Cleveland, OH -- 95 -- 95 Feb-00
Homewood at Rockefeller Gardens(19) Cleveland, OH -- 139 -- 139 Dec-99
Homewood at West Cobb(19) Marietta, GA -- 60 -- 60 Apr-98
Somerby at Jones Farm(21) Huntsville, AL 110 48 -- 158 Apr-99
Somerby at University Park(21) Birmingham, AL 148 120 -- 268 Apr-99
Summit at Lakeway(19) Austin, TX -- 81 -- 81 Feb-99
USAA Towers San Antonio, TX 505 -- -- 505 Oct-94
Williamsburg Landing Williamsburg, VA 360 65 58 483 Sep-85
----- ----- ----- ------
Subtotal 2,743 1,951 801 5,495
----- ----- ----- ------
Grand Total 8,527 3,499 1,540 13,566
===== ===== ===== ======
- -----------------------
(1) Independent living residences (IL), assisted living residences (including
areas dedicated to residents with Alzheimer's and other forms of dementia)
(AL), and skilled nursing beds (SN).
(2) Indicates the date on which the Company acquired each of its owned and
leased communities, or commenced operating its managed communities. The
Company operated certain of its communities pursuant to management
agreements prior to acquiring the communities.
(3) The Company's owned communities are subject to mortgage liens or serve as
collateral for various financing arrangements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
(4) Owned by a joint venture in which the Company owns a 50% interest.
(5) Owned by a joint venture in which the Company owns a 61% interest.
(6) Leased pursuant to a five-year operating lease (with five one-year renewal
options) from an unaffiliated special purpose entity that acquired the
community from a general partnership of which Robert G. Roskamp, a
director of the Company, is a partner. The Company also acquired an option
to purchase the community at the expiration of the lease term.
(7) Leased pursuant to an operating lease expiring November 2007, with renewal
options for up to three additional ten year terms.
(8) Leased pursuant to an operating lease expiring June 2012, with renewal
options for up to four additional ten year terms.
(9) Leased pursuant to an operating lease with an initial term of ten years
expiring December 31, 2006.
(10) Leased pursuant to an operating lease expiring July 2011, with renewal
options for up to two additional ten year terms.
(11) Leased pursuant to an operating lease expiring October 2017, with a seven
year renewal option. The Company also has an option to purchase the
community at the expiration of the lease term.
(12) Leased pursuant to a 14 year operating lease expiring February 2013 from
an unaffiliated special purpose entity. The Company also has an option to
purchase the community at the expiration of the lease term.
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(13) Leased pursuant to a five year operating lease expiring September 2003,
with renewal options for up to two additional one-year terms, from an
unaffiliated special purpose entity. The Company also acquired an option
to purchase the community at the expiration of the lease term.
(14) Leased pursuant to a five-year operating lease expiring May 2003, with
renewal options for up to five additional one-year terms, from an
unaffiliated special purpose entity that acquired the community. The
Company also acquired an option to purchase the community at the
expiration of the lease term.
(15) Except as noted below, the Company's management agreements are generally
for terms of three to five years, but may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary
services, accounting and data processing reports, and other services for
these communities at the owner's expense and receives a monthly fee for
its services based either on a contractually fixed amount or percentage of
revenues or income. As noted below, certain of the communities managed by
the Company are owned by affiliates of the Company.
(16) Operated pursuant to a management agreement with a 20-year term, with two
renewal options for additional ten-year terms, that provides for a
management fee equal to all revenue of the community in excess of
operating expenses, refunds of entry fees, capital expenditure reserves,
debt service, and certain payments to the community's owners, including an
entity affiliated with Mr. Roskamp.
(17) Operated pursuant to a management agreement with a 20-year term, with two
renewal options for additional ten-year terms, that provides for a
management fee equal to all revenue of the community in excess of
operating expenses, refunds of entry fees, capital expenditure reserves,
debt service, and certain payments to the community's owners, Mr. Roskamp
and an entity affiliated with Mr. Roskamp. The Company has an option to
purchase the community at a predetermined price.
(18) Operated pursuant to a management agreement with a three-year term that
provides for a management fee equal to a fixed percentage of the
community's gross revenues. The Company has an option to purchase the
community in 2000 for a predetermined price. The community is owned by an
entity affiliated with Mr. Roskamp.
(19) The communities are owned by an unaffiliated third-party and leased by
John Morris, a director of the Company. The communities are operated
pursuant to management agreements that provide for the payment of
management fees based on a percentage of the gross revenues of each
community and require the Company to fund operating losses above a
specified amount.
(20) The communities are operated pursuant to management agreements that
provide for the payment of management fees based on a percentage of gross
revenues of each community and require the Company to fund operating
losses above a specified amount.
(21) The management agreements grant ARC options to purchase the communities
upon achievement of stabilized occupancy at formula-derived prices.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to any legal proceeding that it
believes would have a material adverse effect on its business, financial
condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on the New York Stock Exchange under the
symbol "ACR." The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock.
Year Ended December 31, 1999 High Low
----------------------------------------------------------
First Quarter $17.938 $13.500
Second Quarter 17.750 11.875
Third Quarter 13.750 9.438
Fourth Quarter 9.813 4.313
Year Ended December 31, 1998 High Low
----------------------------------------------------------
First Quarter $23.250 $20.000
Second Quarter 22.375 17.750
Third Quarter 19.625 14.063
Fourth Quarter 18.000 12.938
As of March 2, 2000, there were 549 shareholders of record and
approximately 1,470 persons or entities holding Common Stock in nominee name.
It is the current policy of the Company's Board of Directors to retain all
future earnings to finance the operation and expansion of the Company's
business. Accordingly, the Company does not anticipate declaring or paying cash
dividends on the Common Stock in the foreseeable future. The payment of cash
dividends in the future will be at the sole discretion of the Company's Board of
Directors and will depend on, among other things, the Company's earnings,
operations, capital requirements, financial condition, restrictions in then
existing financing agreements, and other factors deemed relevant by the Board of
Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated and combined financial data presented below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto included elsewhere in this report.
Consolidated Combined
-------------------------------------------------------- ----------------------------
Predecessor
Predecessor Entities
----------- --------
Year Nine Months Three Months
Years Ended December 31, Ended Ended Ended
---------------------------------------- December 31, December 31, March 31,
1999 1998 1997 1996 1995 1995
--------- --------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (in thousands)
Revenues:
Resident and health care $ 164,592 $ 130,036 $ 88,416 $ 71,409 $ 47,239 $ 11,761
Management and development services 10,678 12,321 1,765 1,739 1,524 595
--------- --------- -------- -------- -------- --------
Total revenues 175,270 142,357 90,181 73,148 48,763 12,356
Operating expenses:
Community operating expense 105,978 82,698 54,921 45,084 30,750 8,035
Lease expense, net 12,985 9,063 3,405 -- -- --
General and administrative 15,020 10,581 6,717 5,657 3,446 1,108
Depreciation and amortization 13,692 10,025 6,632 6,900 4,534 1,127
Asset impairments and
contractual losses 12,536 -- -- -- -- --
Merger related costs -- 994 -- -- -- --
--------- --------- -------- -------- -------- --------
Total operating expenses 160,211 113,361 71,675 57,641 38,730 10,270
--------- --------- -------- -------- -------- --------
Operating income 15,059 28,996 18,506 15,507 10,033 2,086
--------- --------- -------- -------- -------- --------
Other income (expense):
Interest expense (23,668) (17,924) (15,056) (12,160) (7,930) (2,370)
Interest income 9,123 4,092 2,675 434 329 49
Gain on sale of assets 3,036 80 35 874 -- --
Other (241) (242) (36) (86) 919 (1,013)
--------- --------- -------- -------- -------- --------
Other expense, net (11,750) (13,994) (12,382) (10,938) (6,682) (3,334)
--------- --------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative
effect of change in
accounting principle 3,309 15,002 6,124 4,569 3,351 (1,248)
Income taxes 1,257 5,652 4,435 (920) 55 20
--------- --------- -------- -------- -------- --------
Income (loss) from
continuing operations
before extraordinary item
and cumulative effect of
change in accounting principle 2,052 9,350 1,689 5,489 3,296 (1,268)
Discontinued operations, net of tax:
Income (loss) from home
health operations -- (1,244) (155) 44 -- --
Write-off of home health assets -- (902) -- -- -- --
--------- --------- -------- -------- -------- --------
Income (loss) before
extraordinary item and
cumulative effect of change
in accounting principle 2,052 7,204 1,534 5,533 3,296 (1,268)
Extraordinary item, net of tax -- -- (6,334) (2,335) -- --
Cumulative effect of change
in accounting for start-up
costs, net of tax -- (304) -- -- -- --
--------- --------- -------- -------- -------- --------
Net income (loss) 2,052 6,900 (4,800) 3,198 3,296 (1,268)
Preferred return on special
redeemable preferred
limited partnership interests -- -- -- (1,104) (1,125) --
--------- --------- -------- -------- -------- --------
Net income (loss) available
for distribution to
partners and shareholders $ 2,052 $ 6,900 $ (4,800) $ 2,094 $ 2,171 $ (1,268)
========= ========= ======== ======== ======== ========
Distribution to partners,
excluding preferred
distributions $ -- $ -- $ 2,500 $ 6,035 $ 4,064 $ 1,400
========= ========= ======== ======== ======== ========
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Consolidated
----------------------------------------------
Predecessor
Years Ended December 31,
----------------------------------------------
1999 1998 1997 1996
---------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
Pro forma earnings data:
Income from continuing operations before
income taxes and extraordinary item $ 6,124 $ 4,569
Pro forma income tax expense 2,210 1,644
-------- -------
Pro forma income from continuing
operations before extraordinary item 3,914 2,925
Income (loss) from home health
operations, net of pro forma tax (155) 27
-------- -------
Pro forma income before
extraordinary item 3,759 2,952
Preferred return on special redeemable
preferred limited partnership interests -- 1,104
-------- -------
Pro forma income before extraordinary item
available for distribution to partners
and shareholders $ 3,759 $ 1,848
======== =======
EARNINGS PER SHARE:
Basic earnings per share from continuing
operations before extraordinary item and
cumulative effect of change in accounting
principle $ 0.12 $ 0.67
======== ========
Basic earnings per share $ 0.12 $ 0.49
======== ========
Pro forma basic earnings per share before
extraordinary item available for
distribution to partners and shareholders $ 0.36 $ 0.20
======== =======
Weighted average basic shares outstanding 17,129 13,947 10,577 9,375
======== ======== ======== =======
Diluted earnings per share from continuing
operations before extraordinary item and
cumulative effect of change in accounting
principle $ 0.12 $ 0.66
======== ========
Diluted earnings per share $ 0.12 $ 0.49
======== ========
Pro forma diluted earnings per share before
extraordinary item available for
distribution to partners and shareholders $ 0.35 $ 0.20
======= =======
Weighted average diluted shares outstanding 17,177 14,074 10,675 9,375
======== ======== ======= =======
Consolidated Combined
-------------------------------------------------------------------
Predecessor
Predecessor Entities
At December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- --------- --------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 21,881 $ 20,400 $ 44,583 $ 3,222 $ 3,825
Working capital (deficit) 23,590 25,804 47,744 (1,048)
Land, buildings and equipment, net 431,560 388,404 229,898 213,124 149,082
Total assets 740,411 595,854 317,154 228,162 165,579
Long-term debt, including current 435,988 300,667 237,354 170,689 102,245
portion
Refundable portion of life estate 43,386 48,805 -- -- --
fees
Partners' and shareholders' equity 148,168 145,842 53,918 37,882 51,823
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is a national senior living and health care services
provider offering a broad range of care and services to seniors within a
residential setting. The Company currently operates 54 senior living communities
in 15 states with an aggregate capacity for approximately 13,600 residents. The
Company currently owns 20 communities, leases ten communities pursuant to
long-term leases, and manages 24 communities pursuant to management agreements.
At December 31, 1999, the Company's owned communities had a stabilized occupancy
rate of 94%, its leased communities had a stabilized occupancy rate of 93%, and
its managed communities had a stabilized occupancy rate of 91%. The Company
defines stabilized as a community or expansion thereof that has either achieved
95% occupancy or been open at least 12 months.
For the purposes of the following discussion, amounts for the year ended
December 31, 1997 represent the sum of the results of operations of ARCLP for
the period from January 1, 1997 through May 28, 1997 and the results of
operations of the Company for the period from May 29, 1997 through December 31,
1997.
The Company's strategy is to develop Senior Living Networks in major
metropolitan regions. We have put together a portfolio of large retirement
communities which provide some or all of independent living, assisted living and
skilled nursing care. Then, in the same markets, we have been building or
acquiring stand-alone assisted living or skilled nursing residences as
satellites to expand the continuum of housing and care into the market. The
Company believes that this hub and satellite approach produces management
efficiencies and market penetration by offering a range of senior living
arrangements at various price levels. The Company's methods to develop Senior
Living Networks include: (i) selective acquisitions of senior living
communities, including continuing care retirement communities and assisted
living residences; (ii) development of senior living communities, including
special living units and programs for residents with Alzheimer's and other forms
of dementia; (iii) expansion of existing communities; and (iv) selective
acquisition of other properties and businesses that are complementary to the
Company's operations and growth strategy.
The Company acquired privately-held Freedom Group Inc. ("FGI") and
certain entities affiliated with FGI and with its chairman in July 1998. The
acquisition resulted in the ownership of three CCRCs and management of four
additional CCRCs. The Company also acquired options to purchase two of the
managed CCRCs. Additionally, the Company entered into a development and
management contract for, and acquired an option to purchase, one additional CCRC
currently under development. The consideration paid at closing was approximately
$43.0 million, including $23.2 million of cash and 1,370,000 shares of the
Company's common stock valued at $19.8 million. The Company paid an additional
$4.0 million for the purchase options and $1.5 million as consideration for
entering into the two management contracts. The transaction was accounted for as
a purchase.
During the fourth quarter of 1999, the Company announced that, as a
result of changes in the senior living industry environment, it would shift from
filling out its Senior Living Networks through development of new assisted
living residences to selective acquisitions of existing communities within those
networks. The Company believes that increases in construction costs,
particularly in the high growth markets the Company has targeted, and an
expected increase in the number of existing properties available for acquisition
currently makes
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acquisitions of existing communities a more attractive alternative than new
development. As a result of this decision, the Company abandoned several planned
and early-stage projects currently in its development pipeline and suspended all
new free-standing assisted living development. The Company recorded asset
impairment and contractual loss charges of approximately $12.5 million during
the quarter ended December 31, 1999.
The Company anticipates that it may enter into discussions to acquire
the leasehold interests in up to ten assisted living communities that the
Company currently is developing or managing. These communities represent the
majority of the Company's assisted living residences that were not yet open for
business at the end of 1999. If successfully concluded, the acquisitions would
likely occur in the second quarter of 2000. Following completion of these
acquisitions, the Company will receive all of the revenues and incur all of the
expenses associated with the operations of these communities, effective as of
January 1, 2000. Since each of these communities is either in the last stage of
construction or recently opened, the Company expects to incur significant
start-up and operating losses until the communities achieve break-even occupancy
levels.
The Company is currently developing or constructing 14 senior living
communities with an aggregate capacity for approximately 1,400 residents with an
estimated cost to complete and lease-up of approximately $180.0 million to
$200.0 million. In addition, the Company plans to expand six of its communities
with an estimated cost to complete and lease-up of approximately $90.0 million.
The six current expansion projects will add capacity to accommodate
approximately 600 additional residents.
RESULTS OF CONTINUING OPERATIONS
The Company's total revenues from continuing operations are comprised of
(i) resident and health care revenues and (ii) management and development
services revenues, which include fees, net of reimbursements, for the
development, marketing, and management of communities owned by third parties.
The Company's resident and health care revenues are derived from four principal
sources: (i) monthly service fees and ancillary revenues from independent living
residents, representing 66.6%, 68.3%, and 67.8% of total resident and health
care revenues for the years ended December 31, 1999, 1998, and 1997,
respectively; (ii) monthly service fees and ancillary revenues from assisted
living residents, representing 16.2%, 15.4%, and 13.6% of total resident and
health care revenues for the years ended December 31, 1999, 1998, and 1997,
respectively; (iii) per diem charges from nursing patients, representing 14.3%,
14.2%, and 18.6% of total resident and health care revenues for the years ended
December 31, 1999, 1998, and 1997, respectively; and (iv) the amortization of
non-refundable entrance fees over each resident's actuarially determined life
expectancy (or building life for contingent refunds), representing 2.9% and 2.1%
of total resident and health care revenues for the years ended December 31, 1999
and 1998, respectively. The Company did not have entrance fee amortization in
1997. Approximately 95.6%, 95.3%, and 93.1% of the Company's total revenues for
the years ended December 31, 1999, 1998, and 1997, respectively, were
attributable to private pay sources, with the balance attributable to Medicare,
including Medicare-related private co-insurance.
The Company's management agreements are generally for terms of three to
20 years, but certain of such agreements may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owners' expense; and receives a monthly fee for its services
based either on a contractually fixed amount or a percentage of revenues or
income. Two of the
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25
Company's management agreements are for communities with aggregate resident
capacity for approximately 1,650 residents and terms of twenty-years, with two
ten-year renewals and include a purchase option for one of the communities. The
management fee for these two agreements is equal to all revenue from these two
communities in excess of operating expenses and certain cash payments. The
Company's existing management agreements expire at various times through June
2018.
The Company's operating expenses are comprised, in general, of (i)
community operating expense, which includes all operating expenses of the
Company's owned or leased communities; (ii) lease expense; (iii) general and
administrative expense, which includes all corporate office overhead; and (iv)
depreciation and amortization expense.
Certain communities provide housing and health care services through
entrance fee agreements with residents. Under these agreements, residents pay an
entrance fee upon entering into a lifecare contract. The amount of the entrance
fee varies depending on the resident's health care benefit election. These
agreements obligate the Company to provide certain levels of future health care
services to the resident for life. The agreement terminates when the unit is
vacated. A portion of the fee is refundable to the resident or the resident's
estate upon termination of the agreement. The refundable amount is recorded by
the Company as refundable portion of life estate fees, a long-term liability,
until termination of the agreement. The remainder of the fee is recorded as
deferred life estate income and is amortized into revenue using the
straight-line method over the estimated remaining life expectancy of the
resident, based upon annually adjusted actuarial projections. Additionally,
under these agreements the residents pay a monthly service fee which entitles
them to the use of certain amenities and services. They may also elect to obtain
additional services, which are paid for on a monthly basis or as the services
are received. The Company recognizes these additional fees as revenue on a
monthly basis when earned.
The Company also provides housing to residents at certain communities
under an entrance fee agreement whereby the entrance fee is fully refundable to
the resident or the resident's estate contingent upon the occupation of the unit
by the next resident. The resident also shares in a percentage, typically 50%,
of any appreciation in the entrance fee from the succeeding resident. The
entrance fee is recorded by the Company as refundable portion of life estate
fees and is amortized into revenue using the straight-line method over 40 years,
the life of the buildings. Additionally, under these agreements the residents
pay a monthly service fee, which entitles them to the use of certain amenities
and services. They may also elect to obtain additional services, which are paid
for on a monthly basis or as the services are received. The Company recognizes
these additional fees as revenue on a monthly basis when earned. If a resident
terminates the agreement, they are required to continue to pay their monthly
service fee for the lesser of one year or until the date of reoccupation of the
unit.
The Company provides development services to owners of senior living
communities. Fees for these services are based upon a percentage of the total
construction costs of the community. Development services revenue is recognized
under the percentage-of-completion method based upon the Company's costs of
providing such services.
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26
The following table sets forth, for the periods indicated, certain
resident capacity and occupancy data:
Years Ended December 31,
1999 1998 1997
------ ------ -----
OPERATING DATA:
End of period resident capacity:
Owned 5,382 5,150 3,210
Leased 2,475 2,173 1,531
Managed 5,780 4,572 2,159
------ ------ -----
Total 13,637 11,895 6,900
====== ====== =====
Average occupancy rate:
Owned 91% 90% 93%
Leased 90% 90% 90%
Managed 80% 87% 94%
------ ------ -----
Total 86% 89% 93%
====== ====== =====
End of period occupancy rate:
Owned 90% 91% 94%
Leased 90% 90% 93%
Managed 79% 87% 96%
------ ------ -----
Total 86% 89% 94%
====== ====== =====
Stabilized average occupancy
rate:
Owned 94% 94% 97%
Leased 92% 93% 96%
Managed 92% 94% 96%
------ ------ -----
Total 93% 94% 96%
====== ====== =====
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SAME COMMUNITY RESULTS
The following table sets forth certain selected financial and operating
data on a Same Community basis. For purposes of the following discussion, "Same
Community basis" refers to communities that were owned and/or leased by the
Company throughout each of the periods being compared. Same Community data for
the 1999 and 1998 comparative periods excludes three communities at which
significant expansions were opened and the 1998 and 1997 comparative periods
excludes two such communities. These communities will return to the Same
Community group upon the earlier of 12 months of operation or stabilization of
the expansions.
STATEMENT OF OPERATIONS DATA:
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 % CHG 1998 1997 % CHG
------- ------- ---- ------- ------- -----
(dollars in thousands, except other data)
Resident and health care revenue $93,389 $90,162 3.6% $75,682 $70,770 6.9%
Community operating expenses 55,218 54,248 1.8% 44,974 42,820 5.0%
------- ------- ------- -------
Resident income from operations $38,172 $35,914 6.3% $30,708 $27,950 9.9%
======= ======= ======= =======
Resident income from operations margin (1) 40.9% 39.8% 40.6% 39.5%
Lease expense 5,837 5,700 2.4% 1,037 $1,037 --
Depreciation and amortization 6,308 5,977 5.5 5,807 5,666 2.5%
------- ------- ------- -------
Income from operations $26,027 $24,238 7.4% $23,864 $21,247 12.3%
======= ======= ======= =======
Other data:
Number of communities 14 14 10 10
Resident capacity 4,103 4,103 3,397 3,397
Average occupied units 3,516 3,435 2,461 2,431
Average occupancy rate(2) 95% 93% 96% 95%
Average monthly revenue per occupied unit(3) $ 2,213 $ 2,187 1.2% $ 2,563 $ 2,426 5.6%
Average monthly expense per occupied unit(4) $ 1,309 $ 1,316 (0.6%) $ 1,523 $ 1,468 3.7%
- ---------------------
(1) "Resident income from operations margin" represents "Resident income from
operations" as a percentage of "Resident and health care revenue."
(2) "Average occupancy rate" is based on the ratio of occupied apartments to
available apartments expressed on a monthly basis for independent and assisted
living residences, and occupied beds to available beds on a per diem basis for
nursing beds.
(3) "Average monthly revenue per occupied unit" is total "Resident and health
care revenues" divided by "Average occupied units," expressed on a monthly
basis.
(4) "Average monthly expense per occupied unit" is total "Community operating
expenses" divided by "Average occupied units," expressed on a monthly basis.
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YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Revenues Total revenues were $175.3 million in 1999, compared to $142.4
million in 1998, representing an increase of $32.9 million, or 23.1%. Resident
and health care revenues increased by $34.6 million, and management and
development services revenue decreased by $1.6 million during the period. Of the
increase in resident and health care revenues, $3.2 million, or 9.3%, of such
increase was attributable to Same Community growth.
Approximately $28.0 million, or 80.9%, of the increase was attributable to
new senior living communities acquired, leased or developed in 1999 and 1998
(accordingly excluded from same community results), including $17.6 million from
the FGI communities acquired in July 1998. The remaining increase of $3.4
million, or 9.8%, was attributable to increases in resident and health care
revenues at the two communities with large expansions that opened in 1998 that
were excluded from the Same Community group.
Resident and health care revenues attributable to Same Communities were
$93.4 million in 1999, as compared to $90.2 million in 1998, representing an
increase of $3.2 million, or 3.6%. This increase was derived from a 1.2%
increase in average rates and a 2.4% increase in occupied units. The rate
increase was affected by a 31% reduction in per diem reimbursement from 1998 to
1999 related to the new prospective payment system in the Company's Medicare
nursing units. Same Community average occupancy rates increased to 95% for 1999
from 93% in 1998.
The decrease in management and development services revenue of $1.6
million, or 13.3%, was primarily related to the Company's decision to move to an
acquisitions-oriented method of building its Senior Living Networks and,
therefore, to discontinue new development of free-standing assisted living
residences, for which the Company receives development fees. The Company expects
that this change in its strategy for building its Senior Living Networks will
cause significantly lower levels of development fees in 2000.
Community Operating Expense Community operating expense increased to
$106.0 million in 1999, as compared to $82.7 million in 1998, representing an
increase of $23.3 million, or 28.2%. Of the increase in community operating
expense, $1.0 million, or 4.3%, of the increase was attributable to Same
Community operating expenses, which increased by 1.8% during the period.
Approximately $20.0 million, or 85.8%, of the increase was attributable to
expenses from new leased or acquired senior living communities, including $11.4
million from the FGI communities acquired in July 1998. The remaining increase
of $2.3 million, or 9.9%, was attributable to increases in operating expenses at
the two communities with large expansions that opened in 1998 that were excluded
from the Same Community group.
Community operating expense as a percentage of resident and health care
revenues increased to 64.4% for 1999 from 63.6% for 1998. This increase was
attributable to labor cost increases at certain operating communities and
startup losses at consolidating joint venture developments and recently opened
large expansions. Same Community operating expenses as a percentage of Same
Community resident and health care revenues decreased to 59.1% in 1999 from
60.2% in 1998.
General and Administrative General and administrative expense increased to
$15.0 million for 1999, as compared to $10.6 million for 1998, representing an
increase of $4.4 million, or 42.0%. The increase was
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29
primarily related to the July 1998 FGI acquisition and other increases in
corporate and regional staff to support increased operations. General and
administrative expense as a percentage of total revenues was 8.6% for 1999 in
comparison to 7.4% for 1998.
Lease Expense Lease expense increased to $13.0 million for 1999, as
compared to $9.1 million for 1998, representing an increase of $3.9 million
primarily related to leases entered into for new senior living communities and
increased lease costs at a community with an expansion that opened in late 1998.
Depreciation and Amortization Depreciation and amortization expense
increased to $13.7 million in 1999 from $10.0 million in 1998, representing an
increase of $3.7 million, or 36.6%. The increase is primarily related to
communities acquired during 1998 which had a full year of depreciation in 1999,
depreciation related to recently completed expansions, and amortization of costs
in excess of assets acquired in the July 1998 FGI transaction. Same Community
depreciation and amortization expense increased to $6.3 million for 1999, from
$6.0 million for 1998.
Asset impairment and contractual losses During the fourth quarter ended
December 31, 1999, the Company announced that due to a shift in its growth
strategy from development to acquisitions of senior living communities it would
be abandoning certain development projects and reviewing others with regard to
fit with its senior living network strategy. As a result, the Company recorded
asset impairment and contractual loss charges of approximately $12.5 million
during the quarter ended December 31, 1999.
Other Income (Expense) Interest expense increased to $23.7 million in 1999
from $17.9 million in 1998, representing an increase of $5.7 million, or 32.0%.
The increase in interest expense was primarily attributable to indebtedness
incurred in connection with development financing provided to third parties.
Interest expense, as a percentage of total revenues, increased to 13.5% for 1999
from 12.6% in 1998. Interest income increased to $9.1 million in 1999 from $4.1
million in 1998, representing an increase of $5.0 million, or 122.9%. The
increase in interest income was primarily attributable to income generated from
increased certificates of deposit and notes receivable balances associated with
certain leasing transactions and management agreements.
Income Tax Expense Income tax expense related to continuing operations in
1999 was $1.3 million, or an effective rate of 38.0%, as compared to $5.7
million, or an effective rate of 37.7%, in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
Revenues Total revenues were $142.4 million in 1998, compared to $90.2
million in 1997, representing an increase of $52.2 million, or 57.9%. Resident
and health care revenues increased by $41.6 million, and management and
development services revenue increased by $10.6 million during the period. Of
the increase in resident and health care revenues, $4.9 million, or 11.8%, of
such increase was attributable to Same Community growth. Approximately $35.1
million, or 84.4%, of the increase was attributable to new senior living
communities leased or acquired, including $16.6 million from FGI communities
acquired in July 1998. The remaining increase of $1.6 million, or 3.8%, was
attributable to increases in resident and health care revenues at the two
communities with large expansions that opened in 1998 that were excluded from
the Same Community group.
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30
Resident and health care revenues attributable to Same Communities were
$75.7 million in 1998, as compared to $70.8 million in 1997, representing an
increase of $4.9 million, or 6.9%. This increase was derived from a 5.6%
increase in average rates and a 1.2% increase in occupied units. Same Community
average occupancy rates increased to 96% for 1998 from 95% in 1997.
Of the $10.6 million increase in management and development services
revenue, $3.0 million, or 28.4%, was attributable to revenues from management
fees related to agreements entered into pursuant to the FGI acquisition, and
$7.6 million, or 71.6%, related to fees earned from development services
provided to third parties.
Community Operating Expense Community operating expense increased to $82.7
million in 1998, as compared to $54.9 million in 1997, representing an increase
of $27.8 million, or 50.6%. Of the increase in community operating expense, $2.2
million, or 7.9%, of the increase was attributable to Same Community operating
expenses, which increased by 5.0% during the period. Approximately $23.0
million, or 82.7%, was attributable to expenses from new leased or acquired
senior living communities, including $11.1 million from acquired FGI
communities. The remaining increase of $2.6 million, or 9.4%, was attributable
to increases in operating expenses at the two communities with large expansions
that opened in 1998 that were excluded from the Same Community group.
Community operating expense as a percentage of resident and health care
revenues increased to 63.6% for 1998 from 62.1% for 1997. This increase was
attributable to increased operating expenses at the two communities with 1998
expansion openings and lower operating margins from recently acquired FGI
lifecare communities. Because the FGI lifecare communities are in essence
financed interest-free by up-front resident entrance fees, their monthly service
fee revenues and operating margins are generally lower than those of comparable
rental communities. Same Community operating expenses as a percentage of Same
Community resident and health care revenues decreased to 59.4% in 1998 from
60.5% in 1997.
General and Administrative General and administrative expense increased to
$10.6 million for 1998, as compared to $6.7 million for 1997, representing an
increase of $3.9 million, or 58.2%. The increase was primarily related to
increases in salaries and benefits, including corporate personnel retained as a
result of the FGI acquisition and related integration costs. General and
administrative expense as a percentage of total revenues was 7.4% for 1998 and
1997.
Lease Expense Lease expense increased to $9.1 million for 1998, as
compared to $3.4 million for 1997, representing an increase of $5.7 million. Of
this increase, approximately $2.6 million of the increase related to leases
entered into during 1998 for three senior living communities and the completion
of an expansion at one community and approximately $3.1 million related to
Imperial Plaza, which was leased in October 1997.
Depreciation and Amortization Depreciation and amortization expense
increased to $10.0 million in 1998 from $6.6 million in 1997. The increase is
primarily related to communities acquired during 1998 and amortization of costs
in excess of assets acquired in the FGI transaction. Same Community depreciation
and amortization expense increased to $5.8 million for 1998, from $5.7 million
for 1997.
30
31
Merger Related Expenses On January 31, 1999, the Company terminated its
previously announced merger agreement with Assisted Living Concepts, Inc. and
recorded a charge to earnings of approximately $1.0 million during the fourth
quarter ended December 31, 1998 for merger related costs.
Other Income (Expense) Interest expense increased to $17.9 million in 1998
from $15.1 million in 1997, representing an increase of $2.8 million, or 19.0%.
The increase in interest expense was primarily attributable to the issuance in
September 1997 of the 5-3/4% fixed rate convertible subordinated debentures due
October 2002 (the "Convertible Debentures") and additional indebtedness incurred
in connection with acquisitions, partially offset by the repayment of certain
indebtedness in December 1997. Interest expense, as a percentage of total
revenues, decreased to 12.6% for 1998 from 16.7% in 1997. This decrease
primarily relates to the interest-free up-front resident entrance fee financing
on the FGI communities. Interest income increased to $4.1 million for 1998 from
$2.7 million for 1997, primarily due to income generated from the investment of
public offering proceeds and certificates of deposit associated with certain
leasing transactions and management agreements.
Income Tax Expense Income tax expense related to continuing operations in
1998 was $5.7 million, or an effective rate of 37.7%, as compared to $4.4
million in 1997 (including the $3.0 million charge recorded as a result of the
reorganization of ARCLP from a non-taxable limited partnership into the Company,
which is a taxable corporation). Excluding the effect of the $3.0 million
charge, on a pro forma basis assuming the Company was a taxable entity for all
of 1997, income taxes related to continuing operations would have been $2.2
million assuming the Company's effective tax rate of 36%.
Extraordinary Loss In December 1997, the Company recorded an extraordinary
loss of $6.3 million, net of taxes, related to costs associated with the
prepayment of $65.1 million of indebtedness. The 1997 amount expensed included
yield maintenance fees, the buy-out of the lender's participation interest in
two of the Company's communities, and the write-off of unamortized financing
costs. The Company did not incur any extraordinary losses in 1998.
Cumulative Effect of Change in Accounting Principle The Company elected
early adoption of the AICPA's Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (the "SOP"). The SOP requires that costs incurred during
start-up activities be expensed as incurred. Initial application of the SOP is
as of the beginning of the fiscal year in which the SOP is first adopted.
Accordingly, in 1998 the Company wrote off $304,000, net of tax, of unamortized
start-up and organizational costs as the cumulative effect of a change in
accounting principle effective January 1, 1998. The Company's unconsolidated
joint ventures also adopted the SOP effective January 1, 1998 and the effect of
such adoption is included in other expense for 1998. The impact of the adoption,
excluding the $304,000 write-off, was not material to 1998 operations.
ASSET IMPAIRMENTS AND CONTRACTUAL LOSSES
During the fourth quarter ended December 31, 1999, the Company announced
that due to a shift in its growth strategy from development to acquisitions of
senior living communities it would be abandoning certain development projects
and reviewing others with regard to fit with its senior living network strategy.
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32
The Company has two parcels of land upon which senior living communities
were to be developed. Each property was in the early stage of development, with
activity in process consisting primarily of securing the zoning permits,
completing architectural drawings and site testing. As a result, the carrying
values included capitalized costs for zoning, architect fees, and site testing
that will not be realized upon sale of the parcels. Management intends to
dispose of the land and has recorded an impairment charge of approximately
$800,000 related to the parcels and has classified the land as property held for
sale.
The Company also decided not to complete the development and
construction of three properties for which the Company provided development and
construction services to third party owners of senior living communities.
Pursuant to the terms of the construction agency agreements executed with the
owners of those projects, the Company was in default as a result of its decision
not to complete construction. The Company is obligated to purchase the
uncompleted property from the owners and forgive the construction financing to
the owners in exchange for the uncompleted property. The Company owned the land
for one of the projects and leased it to the owner. Management accrued an
impairment loss for this property. The land is classified as property held for
sale. The Company recorded a contractual loss of $6.2 million for its
obligations under the construction agency agreements during the fourth quarter
of 1999. The Company also provided construction financing on the projects and
recorded an impairment charge of $1.5 million against the notes receivable that
will not be collected.
The Company typically has various development activities ongoing to
locate future operating sites, research market demographics and competition,
secure proper zoning and negotiate the acquisition of land. Direct third party
costs for these activities are capitalized. Capitalized costs of approximately
$600,000 related to sites that will not be developed based upon the shift in the
Company's growth strategy toward acquisitions were written off during the fourth
quarter of 1999.
The Company owns a 50% interest in a joint venture that was formed for
the purpose of owning and operating two assisted living communities in
Knoxville, Tennessee. The communities experienced much lower than expected
occupancy levels, higher operating costs and increased competition.
Additionally, the two communities do not fit with the Company's senior living
network strategy. The Company has entered into an agreement with its partner to
dissolve the joint venture and the Company will receive one of the two
communities. The fair market value of the net assets to be received as compared
to the carrying amount of the Company's equity investment and advances to the
joint venture resulted in an impairment loss of $3.2 million which was
recognized in the fourth quarter of 1999. The transaction is anticipated to be
completed during the first half of 2000.
The Company abandoned a new software implementation project in the
fourth quarter of 1999 and accordingly wrote off the capitalized third party
costs incurred for licensing and consulting of approximately $200,000.
DISCONTINUED OPERATIONS
During 1998, the Company suspended operations of certain of its home
health care agencies pending either institution of a prospective pay system
acceptable to the Company, or major revisions to the United States interim
payment system now in effect. During the fourth quarter ended December 31, 1998,
the Company
32
33
determined that an acceptable reimbursement system will not be implemented in
the near term and discontinued its home health care operations. The operating
results and cash flows of the home health care division for the years ended
December 31, 1998 and 1997 have been reclassified to discontinued operations.
The Company recorded losses from home health care operations, net of tax, of
$1.2 million and $155,000 for the years ended December 31, 1998 and 1997,
respectively. During the fourth quarter ended December 31, 1998, the Company
also recorded an after tax charge of $902,000, or $0.06 per share, related
primarily to the impairment of unamortized costs in excess of net assets
acquired in home health care agency acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its activities with the net proceeds
from public offerings of debt and equity, long-term mortgage borrowings, and
cash flows from operations. At December 31, 1999, the Company had $436.0 million
of indebtedness outstanding, including $138.0 million of Convertible Debentures,
with fixed maturities ranging from October 2000 to April 2028. As of December
31, 1999, approximately 64.5% of the Company's indebtedness bore interest at
fixed rates, with a weighted average interest rate of 6.89%. The Company's
variable rate indebtedness carried an average rate of 7.86% as of December 31,
1999. As of December 31, 1999, the Company had working capital of $23.6 million.
Net cash provided by operating activities was $12.3 million for the year
ended December 31, 1999, as compared with $19.1 million and $11.1 million for
the years ended December 31, 1998 and 1997, respectively. The Company's
unrestricted cash balance was $21.8 million as of December 31, 1999, as compared
to $20.4 and $44.6 million as of December 31, 1998 and 1997, respectively.
Net cash used by investing activities was $152.2 million for the year
ended December 31, 1999, as compared with $151.1 million and $22.6 million,
respectively, for the years ended December 31, 1998 and 1997. During the year
ended December 31, 1999, the Company made additions to land, buildings, and
equipment, including construction activity, of $59.2 million, increased notes
receivable by $78.9 million due to increased funding to owners of senior living
communities that are being developed by the Company, and made purchases of
assets limited as to use of $13.7 million, primarily as a result of certain
management agreement and leasing transactions, received $7.4 million from
development project reimbursements, and received $3.1 million from the sale of
land. Additionally, the Company purchased other investments, primarily purchase
option payments on managed and leased communities, of $10.2 million.
Net cash provided by financing activities was $141.4 million for the year
ended December 31, 1999, as compared with $107.8 million and $52.8 million,
respectively, for the years ended December 31, 1998 and 1997. The Company had
borrowings of $143.2 million under long-term debt arrangements, made principal
payments on its indebtedness of $5.3 million, and had expenditures of $3.5
million for financing costs during the year ended December 31, 1999. The Company
also received $11.0 million from the sale of life estate contracts and made
principal payments and termination refunds under master trust agreements of $4.2
million.
During the year ended December 31, 1999, the Company entered into various
financing commitments including a $100.0 million three-year revolving credit
facility with an additional $50.0 million to be syndicated on a best efforts
basis. The line of credit is available to fund development, acquisitions or
expansions of senior living communities. At December 31, 1999, $64.4 million was
outstanding under the revolving credit facility.
33
34
Additionally, in 1999 the Company secured a $50.0 million line of credit
for the construction and/or expansion of senior living communities. At December
31, 1999, no borrowings were outstanding under the line. The Company has
committed $23.3 million of the $50.0 million line of credit for use in synthetic
leases for two assisted living communities being developed by the Company.
The Company also entered into a $6.0 million unsecured acquisition line
of credit and a $4.5 million secured term loan for the acquisition of land. At
December 31, 1999, $2.0 million was outstanding under the secured term loan and
$4.7 million was outstanding under the $6.0 million acquisition line of credit.
The maturity date for the secured term loan and acquisition line of credit is
June 30, 2000.
During the year ended December 31, 1999, the Company also received a
commitment from a REIT for a $50.0 million credit facility that is available for
the development and acquisition of senior living communities. No draws were
outstanding under the REIT commitment at December 31, 1999.
The Company's various credit facilities contain numerous financial
covenants that require the Company to maintain certain prescribed debt service
coverage, liquidity, net worth, capital expenditure reserves and occupancy
levels. The Company is currently in compliance with such covenants. All but one
of the Company's owned communities are subject to mortgages. Each of the
Company's debt agreements contains restrictive covenants that generally relate
to the use, operation, and disposition of the communities that serve as
collateral for the subject indebtedness, and prohibit the further encumbrance of
such community or communities without the consent of the applicable lender.
Substantially all of such indebtedness is cross-defaulted.
The aggregate estimated cost to complete and lease-up the 14 senior
living communities currently under construction or development is approximately
$180.0 million to $200.0 million. In addition, the Company plans to expand six
of its communities, which is expected to cost approximately $90.0 million to
complete and lease-up.
The Company finances the costs of certain senior living communities
owned by others which are being developed, leased or managed by the Company. The
Company is obligated to and anticipates providing approximately $52.2 million of
additional financing for these communities.
The Company expects that its current cash, together with cash flow from
operations and borrowings available to it under existing credit arrangements,
will be sufficient to meet its operating requirements and to fund its
anticipated growth for at least the next 12 months. The Company expects to use a
wide variety of financing sources to fund its future growth, including
conventional mortgage financing, leasing, unsecured bank financing, and public
and private debt and equity, among other sources. Recent declines in the market
price of the Company's Common Stock make offerings of Common Stock to the public
unlikely in the near term. There can be no assurance that financing from such
sources will be available in the future or, if available, that such financing
will be available on terms acceptable to the Company.
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35
RECENT ACCOUNTING PRONOUNCEMENT
In 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. FAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company must adopt SFAS No. 133 in 2001.
Management does not expect the adoption of SFAS No. 133 to have a significant
impact on the Company's financial statements.
IMPACT OF INFLATION
Inflation could affect the Company's future revenues and results of
operations because of, among other things, the Company's dependence on senior
residents, many of whom rely primarily on fixed incomes to pay for the Company's
services. As a result, during inflationary periods, the Company may not be able
to increase resident service fees to account fully for increased operating
expenses. In structuring its fees, the Company attempts to anticipate inflation
levels, but there can be no assurance that the Company will be able to
anticipate fully or otherwise respond to any future inflationary pressures.
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
the discussions of the Company's business and operating and growth strategies,
including its development, financing and acquisition plans. Investors are
cautioned that these forward-looking statements may be affected by certain risks
and uncertainties, including those described under the caption "Business -- Risk
Factors" herein and in the Company's other filings with the Securities and
Exchange Commission. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could prove to be inaccurate, and therefore, there can be no
assurance that the forward-looking statements included herein will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The Company
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure About Interest Rate Risk The Company is subject to market risk
from exposure to changes in interest rates based on its financing, investing,
and cash management activities. The Company utilizes a balanced mix of debt
maturities along with both fixed-rate and variable-rate debt to manage its
exposures to changes in interest rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources." The Company has entered into an interest rate swap agreement with a
major
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36
financial institution to manage its exposure. The swap involves the receipt of a
fixed interest rate payment in exchange for the payment of a variable rate
interest payment without exchanging the notional principal amount. Receipts on
the agreement are recorded as a reduction to interest expense. At December 31,
1999, the Company's outstanding principal under its existing swap agreement was
$35.6 million maturing July 1, 2008. Under the agreement the Company receives a
fixed rate of 6.87% and pays a floating rate based upon a foreign currency index
with a maximum rate through July 1, 2002 of 6.87% and 8.12% thereafter. During
the second half of 1999, interest rates have risen and are expected to rise
further in the first half of 2000. The Company does not expect changes in
interest rates to have a material effect on income or cash flows in 2000, since
the majority of the Company's debt has fixed rates. There can be no assurances,
however, that interest rates will not significantly change and materially affect
the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Independent Auditors' Report 37
Consolidated Balance Sheets --- December 31, 1999 and 1998 38
Consolidated Statements of Operations --- Years ended December 31, 1999,
1998 and 1997 39
Consolidated Statements of Changes in Partners'/Shareholders' Equity
--- Years ended December 31, 1999, 1998 and 1997 41
Consolidated Statements of Cash Flows --- Years ended December 31, 1999,
1998 and 1997 42
Notes to Consolidated Financial Statements 44
Financial Statement Schedules 73
Schedule II- Valuation and Qualifying Accounts
Schedule IV- Mortgage Loans on Real Estate
All other schedules omitted are not required, inapplicable or
the information required is furnished in the financial
statements or notes therein.
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37
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Retirement Corporation:
We have audited the accompanying consolidated balance sheets of American
Retirement Corporation and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, changes in
partners'/shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. In connection with our audits of the
consolidated financial statements, we have also audited the Financial Statement
Schedule II - Valuation and Qualifying Accounts and Financial Statement Schedule
IV - Mortgage Loans on Real Estate as of December 31, 1999 and for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Retirement
Corporation and subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Nashville, Tennessee
March 14, 2000
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38
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
December 31
----------------------
1999 1998
---------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 21,881 $ 20,400
Assets limited as to use 15,571 4,747
Accounts receivable, net 12,746 11,158
Advances for development projects 3,762 11,136
Inventory 950 826
Prepaid expenses 1,790 1,627
Deferred income taxes 758 1,580
Other current assets 5,727 2,972
-------- --------
Total current assets 63,185 54,446
Assets limited as to use, excluding amounts classified as current 60,855 58,035
Land, buildings and equipment, net 431,560 388,404
Notes receivable 97,236 19,731
Costs in excess of net assets acquired, net 38,524 36,817
Other assets 49,051 38,421
-------- --------
Total assets $740,411 $595,854
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10,173 $ 1,426
Accounts payable 3,723 6,543
Accrued interest 4,140 2,391
Accrued payroll and benefits 3,144 3,987
Accrued property taxes 3,638 3,269
Other accrued expenses 4,898 5,729
Reserve for contractual losses 6,200 --
Other current liabilities 3,679 5,297
-------- --------
Total current liabilities 39,595 28,642
Long-term debt, excluding current portion 287,835 161,261
Convertible subordinated debentures 137,980 137,980
Refundable portion of life estate fees 43,386 48,805
Deferred life estate income 51,606 43,715
Tenant deposits 6,913 6,865
Deferred gain on sale-leaseback transactions 3,168 3,620
Deferred income taxes 15,236 16,631
Other liabilities 6,524 2,493
-------- --------
Total liabilities 592,243 450,012
Commitments and contingencies (Notes 3, 9, 10, 13, 15 and 16)
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 17,145,343 and 17,118,385 shares issued
and outstanding, respectively 171 171
Additional paid-in capital 145,444 145,170
Retained earnings 2,553 501
-------- --------
Total shareholders' equity 148,168 145,842
-------- --------
Total liabilities and shareholders' equity $740,411 $595,854
======== ========
See accompanying notes to consolidated financial statements.
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39
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
----------------------------------------
1999 1998 1997
----------------------------------------
Revenues:
Resident and health care $ 164,592 $ 130,036 $ 88,416
Management and development services 10,678 12,321 1,765
----------------------------------------
Total revenues 175,270 142,357 90,181
Operating expenses:
Community operating expense 105,978 82,698 54,921
Lease expense, net 12,985 9,063 3,405
General and administrative 15,020 10,581 6,717
Depreciation and amortization 13,692 10,025 6,632
Asset impairments and contractual losses 12,536 -- --
Merger related costs -- 994 --
----------------------------------------
Total operating expenses 160,211 113,361 71,675
----------------------------------------
Operating income 15,059 28,996 18,506
Other income (expense):
Interest expense (23,668) (17,924) (15,056)
Interest income 9,123 4,092 2,675
Gain on sale of assets 3,036 80 35
Other (241) (242) (36)
----------------------------------------
Other expense, net (11,750) (13,994) (12,382)
Income from continuing operations before income taxes, extraordinary
item and cumulative effect of change in accounting principle 3,309 15,002 6,124
Income taxes 1,257 5,652 4,435
----------------------------------------
Income from continuing operations before extraordinary item and
cumulative effect of change in accounting principle 2,052 9,350 1,689
Discontinued operations:
Loss from home health operations, net of tax -- 1,244 155
Write-off of home health assets, net of tax -- 902 --
----------------------------------------
Income before extraordinary item and cumulative effect of change
in accounting principle 2,052 7,204 1,534
Extraordinary item - loss on extinguishment of debt, net of tax -- -- 6,334
Cumulative effect of change in accounting for start-up costs, net of tax -- (304) --
----------------------------------------
Net income (loss) $ 2,052 $ 6,900 $ (4,800)
========================================
Pro forma earnings data:
Income from continuing operations before income taxes and extraordinary item $ 6,124
Pro forma income tax expense 2,210
--------
Pro forma income from continuing operations before extraordinary item 3,914
Loss from discontinued operations, net of pro forma tax 155
--------
Pro forma income before extraordinary item $ 3,759
========
See accompanying notes to consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(in thousands, except per share data)
Years ended December 31,
---------------------------------------------
1999 1998 1997
---------------------------------------------
Basic earnings per share:
Basic earnings per share from continuing operations before
extraordinary item and cumulative effect of change in
accounting principle $ 0.12 $ 0.67
Loss from home health operations, net of tax -- (0.09)
Write-off of home health assets, net of tax -- (0.06)
Cumulative effect of change in accounting principle, net of tax -- (0.02)
----------------------------
Basic earnings per share $ 0.12 $ 0.49
============================
Diluted earnings per share:
Diluted earnings per share from continuing operations before
extraordinary item $ 0.12 $ 0.66
Loss from home health operations, net of tax -- (0.09)
Write-off of home health assets, net of tax -- (0.06)
Cumulative effect of change in accounting principle, net of tax -- (0.02)
----------------------------
Diluted earnings per share $ 0.12 $ 0.49
============================
Pro forma basic earnings per share:
Pro forma basic earnings per share from continuing operations
before extraordinary item $ 0.37
Loss from home health operations, net of tax (0.01)
---------
Pro forma basic earnings per share before extraordinary item $ 0.36
=========
Pro forma diluted earnings per share:
Pro forma diluted earnings per share from continuing operations
before extraordinary item $ 0.37
Loss from home health operations, net of tax (0.01)
---------
Pro forma diluted earnings per share before extraordinary item $ 0.35
=========
Weighted average shares used for basic earnings per share data 17,129 13,947 10,577
Effect of dilutive common stock options 48 127 98
-------------------------------------------
Weighted average shares used for diluted earnings per share data 17,177 14,074 10,675
===========================================
See accompanying notes to consolidated financial statements.
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41
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'/SHAREHOLDERS' EQUITY
(in thousands, except share data)
General
and Retained
Limited Common Stock Additional Earnings
Partners' --------------------- Paid-In (Accumulated
Interests Shares Amount Capital Deficit) Total
-----------------------------------------------------------------------------
Balance at December 31, 1996 $ 37,882 -- $ -- $ -- $ -- $ 37,882
Net income (loss) 1,599 (6,399) (4,800)
Distribution to partners (2,500) (2,500)
Reorganization Note (21,875) (21,875)
Transfer of partnership equity for shares of
common stock (15,106) 7,812,500 78 15,028 --
Net proceeds from initial public offering 3,593,750 36 44,954 44,990
Issuance of common stock pursuant to employee
stock purchase plan 14,610 221 221
-----------------------------------------------------------------------------
Balance at December 31, 1997 -- 11,420,860 114 60,203 (6,399) 53,918
Net income 6,900 6,900
Conversion of subordinated debentures 832 20 20
Issuance of common stock in FGI Transaction 1,370,000 14 19,765 19,779
Net proceeds from public offering 4,297,500 43 64,762 64,805
Issuance of common stock pursuant to employee
stock purchase plan 16,190 235 235
Issuance of common stock pursuant to stock options
exercised 13,003 185 185
-----------------------------------------------------------------------------
Balance at December 31, 1998 -- 17,118,385 171 145,170 501 145,842
Net income 2,052 2,052
Issuance of common stock pursuant to employee
stock purchase plan 21,624 199 199
Issuance of common stock pursuant to stock options
exercised 5,334 75 75
-----------------------------------------------------------------------------
Balance at December 31, 1999 $ -- 17,145,343 $ 171 $145,444 $ 2,553 $148,168
=============================================================================
See accompanying notes to consolidated financial statements.
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42
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
------------------------------------------
1999 1998 1997
------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 2,052 $ 6,900 $ (4,800)
Loss from discontinued operations, net of tax -- 1,244 155
Write-off of home health assets, net of tax -- 902 --
Cumulative effect of change in accounting principle, net of tax -- 304 --
Extraordinary loss on extinguishment of debt, net of tax -- -- 6,334
-----------------------------------------
Income from continuing operations 2,052 9,350 1,689
Adjustments to reconcile income from continuing operations to net cash and
cash equivalents provided by continuing operations:
Asset impairments and contractual losses 12,536 -- --
Depreciation and amortization 13,692 10,025 6,632
Amortization of deferred financing costs 1,342 754 193
Amortization of deferred entrance fees (6,945) (3,756) --
Proceeds from terminated lifecare contracts 2,756 1,616 --
Deferred income taxes (207) 3,923 4,162
Amortization of deferred gain on sale-leaseback transactions (452) (453) (341)
Gain on sale of assets (3,036) (80) (35)
Losses from unconsolidated joint ventures 2,005 608 --
Minority owners' share of losses (447) -- --
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable (1,588) (3,642) (2,831)
Increase in inventory (124) (95) (63)
Increase in prepaid expenses (163) (346) (584)
Increase in other assets (4,402) (2,195) (1,956)
Increase (decrease) in accounts payable (2,820) 2,907 (12)
Increase in accrued expenses and other current liabilities 40 2,135 3,322
Increase in tenant deposits 48 496 673
Increase (decrease) in other liabilities (2,009) (172) 371
-----------------------------------------
Net cash and cash equivalents provided by continuing operations 12,278 21,075 11,220
Net cash and cash equivalents used in discontinued operations -- (1,941) (125)
-----------------------------------------
Net cash and cash equivalents provided by operating activities 12,278 19,134 11,095
Cash flows from investing activities:
Additions to land, buildings and equipment (59,221) (31,888) (29,307)
Expenditures for acquisitions, net of cash received -- (37,358) (17,489)
Reimbursements from (advances to) development projects 7,374 (11,136) --
Investments in joint ventures (1,763) (3,143) (1,411)
Contributions from minority owners 1,630 -- --
Issuance of notes receivable (78,916) (19,731) --
Purchases of assets whose use is limited (13,643) (44,975) (3,916)
Purchases of other investments (10,177) (4,704) (859)
Proceeds from the maturity of marketable securities -- 132 --
Proceeds from the sale of assets 3,138 1,736 30,412
Other investing activities (664) -- --
-----------------------------------------
Net cash and cash equivalents used in investing activities (152,242) (151,067) (22,570)
See accompanying notes to consolidated financial statements.
42
43
Cash flows from financing activities:
Net proceeds from public offerings -- 64,805 44,990
Net proceeds from convertible debenture offering -- -- 134,220
Proceeds from issuance of stock through employee stock purchase plan 199 235 221
Proceeds from exercise of stock options 75 185 --
Repayment of reorganization note -- -- (21,875)
Payment of redeemable preferred interests -- -- (5,195)
Distribution to partners -- -- (4,132)
Expenditures for financing costs (3,453) (77) (333)
Costs paid in connection with extinguishment of debt -- -- (9,534)
Proceeds from life estate sales, net of refunds 11,028 4,262 --
Proceeds from the issuance of long-term debt 143,162 53,717 14,275
Principal reductions in master trust liability (4,225) (2,625) --
Principal payments on long-term debt (5,341) (12,752) (99,801)
-----------------------------------------
Net cash and cash equivalents provided by financing activities 141,445 107,750 52,836
Net increase (decrease) in cash and cash equivalents 1,481 (24,183) 41,361
-----------------------------------------
Cash and cash equivalents at beginning of year 20,400 44,583 3,222
-----------------------------------------
Cash and cash equivalents at end of year $ 21,881 $ 20,400 $ 44,583
=========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest (including capitalized interest) $ 24,591 $ 18,359 $ 13,130
=========================================
Income taxes paid $ 5,138 $ 249 $ 86
=========================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
During the respective years, the Company acquired certain communities and
entered into certain lease transactions. In conjunction with the transactions,
assets and liabilities were assumed as follows:
Current assets $ -- $ 7,378 $ 128
Costs in excess of net assets acquired -- 35,938 --
Other assets -- 151,875 12,869
Current liabilities -- 15,471 235
Long-term debt -- 22,368 14,191
Other liabilities -- 74,793 767
During the year ended December 31, 1999, the Company sold certain land for $3.1
million in cash and the payment on a related note payable of $2.5 million for
aggregate consideration of $5.6 million.
During the year ended December 31, 1998, 1,370,000 shares of common stock were
issued as partial consideration in the FGI transaction and 832 shares of common
stock were issued upon the conversion of $20 of convertible subordinated
debentures.
See accompanying notes to consolidated financial statements.
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44
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND PRESENTATION
The accompanying financial statements as of and for the years ended December 31,
1999, 1998 and 1997 include the consolidated financial statements of American
Retirement Corporation (the Corporation) and its wholly-owned and majority owned
subsidiaries (collectively referred to as the Company). All material
intercompany transactions and balances have been eliminated in consolidation.
In February 1997, the Corporation was incorporated for purposes of effecting a
reorganization of ARCLP and to complete an initial public offering (IPO). In the
reorganization, all of ARCLP's assets and liabilities were contributed to the
Corporation in exchange for 7,812,500 shares of common stock and a promissory
note to ARCLP in the original principal amount of $21.9 million. ARCLP's
historical carrying values for assets and liabilities were carried over to the
Corporation upon consummation of the reorganization. As a result of the
conversion from a limited partnership to a corporation, the Corporation recorded
a deferred income tax liability of approximately $3.0 million resulting from the
difference between the accounting and the tax bases of the assets and
liabilities carried over from ARCLP. Such amount is included in the Company's
1997 income tax expense. Immediately prior to the IPO, which was completed on
May 30, 1997, ARCLP distributed its common stock of the Corporation to its
partners. The Corporation sold an additional 3,593,750 shares of its common
stock in the IPO. Total proceeds to the Corporation from the IPO were
approximately $45.0 million, after underwriting and issuance costs. A portion of
the proceeds was utilized on June 4, 1997 to repay the $21.9 million promissory
note to ARCLP and ARCLP distributed such amount to its limited partners.
The income taxes on earnings of ARCLP were the responsibility of the partners.
The pro forma adjustments reflected on the consolidated statements of operations
for the year ended December 31, 1997 provides for income taxes, at an effective
tax rate of 36%, assuming ARCLP was subject to taxes and excludes the $3.0
million charge resulting from the difference between the accounting and tax
bases of ARCLP's assets and liabilities at the time of the conversion from a
limited partnership to a taxable corporation. Pro forma earnings per share is
based on the number of shares that would have been outstanding assuming the
partners had been shareholders and is based on the 7,812,500 shares received as
a result of the reorganization plus 1,562,500 shares representing the value of
the $21.9 million promissory note at the IPO price of $14.00 per share.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The Company principally provides housing, health care, and other related
services to residents through the operation and management of numerous senior
living communities located throughout the United States. The communities provide
a combination of independent living, assisted living and skilled nursing
services. The Company is subject to competition from other senior living
providers within its markets. The following is a summary of significant
accounting policies.
Use of Estimates and Assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial
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statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Recognition of Revenue: The Company provides residents with housing and health
care services through various types of agreements.
The majority of the communities provide housing and health care services through
annually renewable agreements with the residents. Under these agreements, the
residents pay a monthly housing fee, which entitles them to the use of certain
amenities and services. Residents may elect to obtain additional services, which
are paid for on a monthly basis or as the services are received. The Company
recognizes revenues under these agreements on a monthly basis when earned.
Certain communities provide housing and health care services through entrance
fee agreements with the residents. Under these agreements, residents pay a fee
upon entering into a lifecare contract. The fee obligates the Company to provide
certain levels of future health care services to the resident for life. The
agreement terminates when the unit is vacated. A portion of the fee is
refundable to the resident or the resident's estate upon termination of the
agreement. The refundable amount is recorded by the Company as refundable
portion of life estate fees, a long-term liability, until termination of the
agreement. The remainder of the fee is recorded as deferred life estate income
and is amortized into revenue using the straight-line method over the estimated
remaining life expectancy of the resident, based upon annually adjusted
actuarial projections. Additionally, under these agreements the residents pay a
monthly service fee, which entitles them to the use of certain amenities and
services. They may also elect to obtain additional services, which are paid for
on a monthly basis or as the services are received. The Company recognizes these
additional fees as revenue on a monthly basis when earned.
The Company also provides housing to residents at certain communities under an
entrance fee agreement whereby the fee is fully refundable to the resident or
the resident's estate upon the occupation of the unit by the next resident. The
resident also shares in a percentage, typically 50%, of the appreciation in the
entrance fee from the succeeding resident. The entrance fee is recorded by the
Company as refundable portion of life estate fees and is amortized into revenue
using the straight-line method over 40 years, the life of the buildings.
Additionally, under these agreements the residents pay a monthly service fee,
which entitles them to the use of certain amenities and services. They may also
elect to obtain additional services, which are paid for on a monthly basis or as
the services are received. The Company recognizes these additional fees as
revenue on a monthly basis when earned. If a resident terminates the agreement,
they are required to continue to pay their monthly service fee for the lesser of
one year or until the date of reoccupation of the unit.
Resident and health care revenues are reported at the estimated net realizable
amounts from residents, third-party payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements with
third-party payors. Retroactive adjustments are accrued on an estimated basis in
the period the related services are rendered and adjusted in future periods as
final settlements are determined. Resident and health care revenues, primarily
Medicare, subject to retroactive adjustments were 4.4%, 4.7%, and 6.9% of
resident and health care revenues in 1999, 1998, and 1997, respectively.
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Management services revenue is recorded monthly as earned and relates to
providing certain management and administrative support services under
management agreements with the owners and lessees of senior living communities.
Such fees are based on a percentage of revenues, income or cash flows of the
managed community, or a negotiated fee per the management agreement.
The Company provides development services to owners of senior living
communities. Fees are based upon a percentage of the total construction costs of
the community. Development services revenue is recognized under the
percentage-of-completion method based upon the Company's costs of providing such
services.
Cash and Cash Equivalents: The Company considers highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Assets Limited as to Use: Assets limited as to use include assets held by
lenders under loan agreements in escrow for property taxes and property
improvements, operating reserves required by certain state licensing
authorities, certificates of deposit held as collateral for letters of credit or
in conjunction with leasing activity or to support operating deficit agreements,
and resident deposits.
Inventory: Inventory consists of supplies and is stated at the lower of cost
(first-in, first-out) or market.
Land, Buildings, and Equipment: Land, buildings, and equipment are recorded at
cost and include interest capitalized on long-term construction projects during
the construction period, as well as other costs directly related to the
development and construction of the communities. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related assets. Buildings and improvements are depreciated over 15 to 40
years, and furniture, fixtures and equipment are depreciated over five to seven
years. Leasehold improvements are amortized over the shorter of their useful
life or remaining lease term. Construction in progress includes costs incurred
related to the development and construction of senior living communities. If a
project is abandoned, any costs previously capitalized and determined to be
unrecoverable are expensed.
Notes Receivable: Notes receivable are recorded at cost, less any related
allowance for impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the note agreement. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows discounted at the note's effective interest rate. Impairment
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such notes until the principal has been recovered
and are recognized as interest income, thereafter.
Costs in Excess of Net Assets Acquired: Costs in excess of net assets acquired,
is amortized on a straight-line basis over the expected periods to be benefited,
generally 40 years. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
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reflecting the Company's average cost of funds. The assessment of the
recoverability will be impacted if estimated future operating cash flows are not
achieved. Costs in excess of net assets acquired is net of accumulated
amortization of $1.5 million and $486,000 at December 31, 1999 and 1998,
respectively. Amortization expense was $1.0 million, $486,000, and $0, for the
years ended December 31, 1999, 1998 and 1997, respectively.
Other Assets: Other assets consists primarily of security deposits, purchase
options, deferred financing costs (including convertible debenture offering
costs), costs of acquiring lifecare contracts, deferred lifecare fee
receivables, and investments in joint ventures. Deferred financing costs are
being amortized using the straight-line method over the terms of the related
debt agreements. Costs of acquiring initial lifecare contracts are amortized
over the life expectancy of the initial residents of a lifecare community.
Purchase options to acquire property are recorded at their cost and are applied
to the cost of the property acquired. Nonrefundable purchase options are
expensed when they expire or management determines that the option will not be
exercised.
Investments in joint ventures includes the Company's investments in joint
ventures organized to develop senior living communities. The Company is
providing full development services related to, and has entered into management
agreements to manage, the related communities. The Company accounts for its
investments in 20-50% owned joint ventures under the equity method. At December
31, 1999 and 1998, the Company's investment in joint ventures was approximately
$1.1 million and $3.9 million, respectively.
Start-up Costs: On April 3, 1998, the AICPA Accounting Standards Executive
Committee issued Statement of Position (SOP) No. 98-5, Reporting on the Costs of
Start-up Activities. SOP No. 98-5 requires that costs incurred during start-up
activities, including organization costs, be expensed as incurred. SOP No. 98-5
defines start-up activities broadly to include those one-time activities related
to: opening a new facility; introducing a new product or service; conducting
business in a new territory; conducting business with a new class of customer or
beneficiary; initiating a new process in an existing facility; or commencing
some new operation. Start-up activities also include activities related to
organizing a new entity (costs of such activities are commonly referred to as
organization costs). SOP No. 98-5 is effective January 1, 1999, however early
application is permitted. Initial application of SOP No. 98-5 must be as of the
beginning of the fiscal year in which it is first adopted, and restatement of
previously issued financial statements is not permitted. Previously capitalized
start-up costs must be written-off upon adoption of SOP No. 98-5.
The Company elected to adopt the provisions of SOP No. 98-5 in 1998.
Accordingly, effective January 1, 1998, the Company recorded a cumulative effect
of the change in accounting for start-up costs of $304,000, net of tax, in the
consolidated statement of operations. Start-up costs subsequent to the adoption
of SOP No. 98-5 are expensed as incurred.
Obligation to Provide Future Services: Under the terms of certain lifecare
contracts, the Company is obligated to provide future services to its residents.
The Company calculates the present value of the net cost of future services and
use of facilities annually and compares that amount with the present value of
future resident cash inflows. If the present value of the net cost of future
services and use of facilities exceeds discounted future cash inflows, a
liability will be recorded with a corresponding charge to income. As of December
31, 1999, the Company did not have a liability associated with its obligation to
provide future services and use of facilities.
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Income Taxes: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are recorded using enacted tax rates expected to apply to taxable
income in the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Earnings per Share: Basic earnings per share ("EPS") is computed by dividing net
income (loss) (numerator) by the weighted average number of common shares
outstanding (denominator). The denominator used in computing diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. The effect from assumed conversion of the Company's convertible
debentures would have been anti-dilutive in 1999, 1998 and 1997 and was
therefore not included in the computation of diluted EPS. Antidilutive shares
which were excluded from the EPS calculation in 1999, 1998 and 1997 were 1,796,
235, and 35, respectively.
Stock-Based Compensation: The Company grants stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company follows the requirements of the Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for stock-based compensation, and accordingly
recognizes no compensation expense for stock option grants, but provides the pro
forma disclosures required by the Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation".
Fair Value of Financial Instruments: The carrying amount of cash and cash
equivalents approximates fair value because of the short-term nature of these
accounts and because amounts are invested in accounts earning market rates of
interest. The carrying value of assets limited as to use, accounts receivable,
advances for development projects, and tenant deposits, accounts payable, and
refundable portion of life estate fees approximate their fair values because of
the short-term nature of these accounts. The carrying value of notes receivable
approximate their fair value because the notes earn interest at a variable rate
based on LIBOR. The carrying value of debt approximates fair value as the
interest rates approximate the current rates available to the Company.
Derivative Instruments: In 1999, the Company entered into an interest rate swap
agreement as a hedge against certain debt liabilities in order to manage
interest rate risk. As of December 31, 1999, the Company had an interest rate
swap agreement in effect with a notional amount of $35.6 million with an
approximate market value of $1.5 million. Under the terms of the swap agreement,
the Company receives a fixed rate interest payment based on a fixed interest
rate of 6.87% and pays a floating rate based upon a foreign currency index with
a maximum rate through July 1, 2002 of 6.87% and 8.12% thereafter. The swap
agreement matures July 1, 2008.
Interest rate swap agreements are contracts that represent an exchange of
interest payments and the underlying principal balances of the assets or
liabilities are not affected. Net settlement amounts are reported as adjustments
to interest income or interest expense. Gains and losses from the termination of
interest rate swaps are deferred and amortized over the remaining lives of the
designated balance sheet assets or liabilities. If the
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balance of the liability falls below that notional amount of the derivative, the
excess portion of the derivative is marked-to-market with a corresponding effect
on current earnings.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of:
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Comprehensive Income: The Company adopted SFAS No. 130, "Reporting Comprehensive
Income" during the year ended December 31, 1998. The statement establishes
standards for the reporting and display of comprehensive income and its
components. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. During 1999, 1998 and 1997, the Company's only component of
comprehensive income was net income (loss).
Segment Disclosures: During 1998, SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information" became effective for the Company. SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. The Company operates in one
business segment.
Reclassifications: Certain 1998 and 1997 amounts have been reclassified to
conform with the 1999 presentation.
(3) ASSET IMPAIRMENTS AND CONTRACTUAL LOSSES
During the fourth quarter ended December 31, 1999, the Company announced that
due to a shift in its growth strategy from development to acquisitions of senior
living communities, it would be abandoning certain development projects and
reviewing others with regard to fit with its senior living network strategy.
The Company has two parcels of land upon which senior living communities were to
be developed. Each property was in the early stage of development, with activity
in process consisting primarily of securing the zoning permits, obtaining
architectural drawings and site testing. As a result, the carrying values
included capitalized costs for zoning, architect fees, and site testing that
will not be realized upon sale of the parcels.
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Management intends to dispose of the land and has recorded an impairment charge
of approximately $800,000 related to the parcels and has classified the land as
property held for sale.
The Company also decided not to complete the development and construction of
three properties for which the Company provided development and construction
services to third party owners of senior living communities. Pursuant to the
terms of the construction agency agreements executed with the owners, the
Company was in default for its decision not to complete construction. The
Company is obligated to purchase the uncompleted property from the owners and
forgive the construction financing to the owners in exchange for the uncompleted
property. The Company owned the land for one of the projects and leased it to
the owner. Management accrued an impairment loss for this property. The land was
classified as property held for sale. The Company recorded a contractual loss of
$6.2 million for its obligations under the construction agency agreements during
the fourth quarter of 1999. The Company also provided construction financing on
the projects and recorded an impairment charge of $1.5 million against the note
receivables that will not be collected.
The Company typically has various development activities ongoing to locate
future operating sites, research market demographics and competition, secure
proper zoning and negotiate the acquisition of land. Direct third party costs
for these activities are capitalized. Capitalized costs of approximately
$600,000 related to sites that will not be developed based upon the shift in the
Company's growth strategy toward acquisitions were written off during the fourth
quarter of 1999.
The Company owns a 50% interest in a joint venture that was formed for the
purpose of owning and operating two assisted living communities in Knoxville,
Tennessee. The communities experienced much lower than expected occupancy
absorption, higher operating costs and increased competition. Additionally, the
two communities did not fit with the Company's senior living network strategy.
The Company has entered into an agreement with its partner to dissolve the joint
venture and the Company will receive one of the two communities. The fair market
value of the net assets to be received as compared to the carrying amount of the
Company's equity investment and advances to the joint venture resulted in an
impairment loss of $3.2 million which was recognized in the fourth quarter of
1999. The transaction is anticipated to be completed during the first half of
2000.
The Company abandoned a new software implementation project in the fourth
quarter of 1999 and accordingly wrote off the capitalized third party costs
incurred for licensing and consulting of approximately $200,000.
As a result of the above, the Company recorded total asset impairments and
contractual loss charges of approximately $12.5 million during the quarter ended
December 31, 1999.
(4) DISCONTINUED OPERATIONS
During 1998, the Company suspended operations of certain of its home health care
agencies pending either institution of prospective pay or major revisions to the
United States interim payment system now in effect. During the fourth quarter
ended December 31, 1998, the Company determined that an acceptable reimbursement
system will not be implemented in the near term and discontinued its home health
care operations. The operating results and cash flows of the home health care
division for the years ended December 31, 1998 and 1997 have been reclassified
to discontinued operations. The Company recorded losses from home
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health operations, net of tax, of $1.2 million and $155,000 for the years ended
December 31, 1998 and 1997, respectively. Additionally, during the fourth
quarter ended December 31, 1998, the Company recognized an after tax charge of
$902,000, or $0.06 per share, related primarily to the impairment of unamortized
costs in excess of net assets acquired in home health care agency acquisitions.
(5) ACQUISITION
On July 14, 1998, the Company acquired privately-held Freedom Group, Inc.
("FGI") and certain entities affiliated with FGI and with Robert G. Roskamp,
FGI's Chairman. The acquisition resulted in the ownership of three continuing
care retirement communities ("CCRCs") and the management of four additional
CCRCs. The Company also acquired options to purchase two of the managed CCRCs.
Additionally, the Company entered into a development and management contract
for, and acquired an option to purchase, one additional CCRC currently under
development. The consideration paid at closing was approximately $43.0 million,
including $23.2 million of cash and 1,370,000 shares of the Company's common
stock valued at $19.8 million. The Company paid an additional $4.0 million for
the purchase options and $1.5 million to enter into two of the management
contracts. The transaction was accounted for as a purchase and the consolidated
financial statements include the operations of the acquired entities effective
July 1, 1998. The transaction resulted in costs in excess of net assets acquired
of approximately $35.9 million. During 1999, the Company paid an additional $1.7
million to the former owners of FGI under a contingent arrangement within the
1998 acquisition agreement. Such amount was recorded as additional costs in
excess of net assets acquired.
The following unaudited condensed consolidated pro forma results of continuing
operations assumes the above referenced acquisition had been consummated as of
the beginning of the periods presented. The 1997 data is before extraordinary
item and also includes the pro forma tax adjustment and pro forma shares
outstanding as described in Note 1.
Years ended December 31,
1998 1997
-------- --------
Total revenues $159,801 $127,150
Income from continuing operations
before extraordinary item
and cumulative effect of change
in accounting principle $ 6,873 $ 3,864
Diluted earnings per share $ 0.47 $ 0.32
Weighted average diluted shares 14,747 12,045
(6) NOTES RECEIVABLE
The Company finances the cost of certain retirement communities owned by others
that are being developed, leased or managed by the Company. The notes receivable
generally earn interest at variable rates based on 200 basis points in excess of
the 30 day LIBOR rate, which is recalculated monthly. Interest and principal are
due monthly based on a 25 year amortization. The notes receivable mature from
March 2005 through December 2005 and are secured by the related retirement
communities. As discussed in Note 3, the Company wrote off $1.5 million with a
corresponding charge to earnings for notes receivable that will not be collected
due to the
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default by the Company under certain construction agency agreements. No other
notes receivable were impaired at December 31, 1999 or 1998.
(7) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings, and equipment is as follows (in thousands):
1999 1998
-------- --------
Land and improvements $ 44,887 $ 43,603
Land leased to others 17,022 16,845
Land held for development 9,762 2,424
Buildings and improvements 351,529 317,435
Furniture, fixtures, and equipment 25,740 21,518
Leasehold improvements 3,091 515
-------- --------
452,031 402,340
Less accumulated depreciation and amortization 39,752 27,625
-------- --------
412,279 374,715
Construction in progress 19,281 13,689
-------- --------
Total $431,560 $388,404
======== ========
The Company capitalized $2.1 million, $1.5 million and $554,000 of interest
costs during 1999, 1998 and 1997, respectively.
Depreciation expense was $12.1 million, $9.1 million, and $6.3 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
(8) OTHER ASSETS
Other assets at December 31, 1999 and 1998 consist of the following (in
thousands):
1999 1998
------- -------
Security deposits $ 6,957 $ 6,306
Purchase options 21,126 11,600
Costs of acquiring lifecare contracts, net 3,326 3,466
Deferred lifecare fee receivable 4,002 3,467
Deferred financing costs, net of accumulated amortization 5,961 3,736
Investments in joint ventures 1,141 3,946
Property held for sale 2,900 3,064
Other 3,638 2,836
------- -------
Total $49,051 $38,421
======= =======
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(9) LONG-TERM DEBT
A summary of long-term debt is as follows (in thousands):
1999 1998
---- ----
Lexington-Fayette Urban County Government
Residential Facilities Revenue Bonds
refinanced May 1, 1987, collateralized by
mortgage liens on certain property and
equipment. The refinancing bond issue is
remarketed to set the coupon rate on April 1
of each year (4.2% for the year ended March
31, 2000) until the bonds mature on April 1,
2015. Interest is due semi-annually on April
1 and October 1. $ 8,010 $ 8,010
Mortgage note payable bearing interest at a
fixed rate of 8.2%. Interest is due monthly
with principal and unpaid interest due at
maturity on December 31, 2002. The loan is
secured by certain land, buildings,
equipment, and assignment of rents and
leases. 62,330 62,330
Mortgage note payable bearing interest at a
fixed rate of 8.2%. Interest is due monthly
with principal payments of $20,000 per month
with remaining principal and unpaid interest
due at maturity on December 31, 2001. The
loan is secured by certain land, buildings,
equipment, and assignment of rents and
leases. 14,300 14,540
Mortgage note payable bearing interest at a
fixed rate of 9.25%. Principal and interest
of $49,467 due monthly through April 1, 2028
The loan is secured by certain land,
buildings, equipment, and assignment of rents
and leases. 5,946 5,987
Mortgage note payable bearing interest at a
floating rate equal to two hundred
seventy-five basis points in excess of the
ninety- day LIBOR rate recalculated on the
third monthly payment date (8.26% at December
31, 1999). Principal and interest of $26,700
is due monthly with remaining principal and
unpaid interest due on May 9, 2002. The note
is secured by certain land, buildings,
equipment, and assignment of rents and
leases. 3,377 3,430
Mortgage note payable bearing interest at a
fixed rate of 9.95%. Interest is due monthly
with principal due at maturity on May 31,
2007. The loan is secured by certain land,
buildings, equipment, and assignment of rents
and leases. 4,700 4,700
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Mortgage note payable bearing interest at a
fixed rate of 6.87%. Principal and interest
of $262,747 is due monthly with remaining
principal and unpaid interest due on July 31,
2008. The note is secured by certain land,
buildings, equipment, and assignment of rents
and leases. 35,544 35,892
Revolving line of credit in the amount of
$50.0 million bearing interest at the rate of
LIBOR plus one hundred seventy-five basis
points (8.25% at December 31, 1999). Interest
only is paid monthly and the loan matures on
December 31, 2002. 47,659 15,000
Mortgage note payable bearing interest at a
fixed rate of 8.00%. -- 8,365
Mortgage note payable bearing interest at a
fixed rate of 8.65%. -- 1,638
Revolving line of credit in the amount of
$100.0 million bearing interest at the rate
of LIBOR plus two hundred twenty-five to two
hundred thirty-five basis points (7.86% at
December 31, 1999). Interest only is paid
monthly and the loan matures on May 1, 2002
The note is secured by certain land,
buildings, equipment, and assignment of rents
and leases. 64,390 --
Mortgage note payable bearing interest at a
fixed rate of 8.50%. Principal and interest
of $144,956 is due monthly with remaining
principal and unpaid interest due on December
10, 2024. The note is secured by certain
land, buildings, equipment, and assignment of
rents and leases. 18,000 --
Line of credit in the amount of $6.0 million
bearing interest at a floating rate per annum
equal to two hundred twenty-five basis points
in excess of LIBOR (7.71% at December 31,
1999). Interest is due monthly with remaining
principal and unpaid interest due on June 30,
2000. The note is unsecured. 4,653 --
Secured term loan in the amount of $4.5
million bearing interest at a floating rate
equal to two hundred twenty-five basis points
in excess of LIBOR (7.71% at December 31,
1999). Interest is due monthly with remaining
principal and unpaid interest due on June 30,
2000. The note is secured by certain land. 2,000 --
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Mortgage note payable bearing interest at a
floating rate equal to two hundred
twenty-five basis points in excess of the
LIBOR rate recalculated each month (8.73% at
December 31, 1999). Interest is due monthly
with principal due at maturity on December 2,
2002. The loan is secured by certain land and
buildings. 6,750 --
Construction note payable bearing interest at
a floating rate equal to two hundred basis
points in excess of the LIBOR rate (7.83% at
December 31, 1999). Interest only through May
10, 2000. Thereafter, an interest and
principal amount to be determined will be
payable monthly with remaining principal due
at maturity on May 21, 2004. The loan is
secured by certain land and buildings. 5,919 --
Mortgage note payable bearing interest at a
floating rate equal to 250 basis points in
excess of the 30 day LIBOR rate (8.48% at
December 31, 1999). Interest is due monthly
with remaining principal and unpaid interest
due May 29, 2005. The note is secured by
certain land, buildings, equipment, and
assignment of rents and leases. 6,498 --
Construction note payable bearing interest at
a floating rate equal to 250 basis points in
excess of the 30 day LIBOR rate (8.09% at
December 31, 1999). Interest is due monthly
with remaining principal and unpaid interest
due March 4, 2006. The note is secured by
certain land, buildings, equipment, and
assignment of rents and leases. 5,494 --
Convertible debentures bearing interest at a
fixed rate of 5.75%. Interest is due
semi-annually on April 1 and October 1
through October 1, 2002, at which time all
principle is due. 137,980 137,980
Other long-term debt, generally payable monthly 2,438 2,795
-------- --------
Total long-term debt 435,988 300,667
Less current portion of long-term debt 10,173 1,426
-------- --------
Long-term debt, excluding current portion $425,815 $299,241
======== ========
The aggregate scheduled maturities of long-term debt at December 31, 1999 were
as follows (in thousands):
2000 $ 10,173
2001 1,294
2002 336,940
2003 1,005
2004 6,021
Thereafter 80,555
----------
$ 435,988
==========
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During 1997, the Company issued $138.0 million of 5-3/4% fixed rate convertible
subordinated debentures due October 2002 in a public offering. The debentures
are non-callable for three years and are convertible at any time by the holders
into shares of the Company's common stock at a conversion price of $24.00 per
share. The Company received proceeds of $134.2 million, net of offering costs,
from the issuance of the debentures. The offering costs were capitalized as
deferred financing costs and are being amortized using the straight-line method
over the term of the debentures. During 1998, debentures totaling $20,000 were
converted into 832 shares of common stock.
During the fourth quarter of 1997, the Company refinanced its mortgage notes
with a capital corporation by prepaying a $65.1 million note and refinancing a
$62.3 million term loan. The notes were restructured with a $112.3 million
credit facility from the capital corporation, of which $62.3 million is a new
term loan bearing interest at a fixed rate of 8.2% and $50.0 million is a new
revolving line of credit bearing interest at a variable rate of 1.75% over the
lender's composite commercial paper rate, both maturing on December 31, 2002. In
conjunction with the prepayment, the Company was required to pay $9.5 million
for the buyout of the capital corporation's participation rights to future
earnings of two of the Company's senior living communities and a prepayment
penalty. The Company recognized an extraordinary after-tax charge of $6.3
million, or $.60 per share, for the prepayment penalty, participating rights
buyout, and the write-off of unamortized deferred financing costs related to the
previous notes.
The Company is required to comply with certain restrictive financial and other
covenants. Under the terms of various long-term debt agreements, the Company is
required to maintain certain deposits with trustees. Such deposits are included
in "assets limited as to use" in the financial statements.
(10) REFUNDABLE ENTRANCE FEES AND DEFERRED LIFE ESTATE INCOME
Under certain of the Company's residency and health care agreements for its
lifecare communities acquired pursuant to the FGI transaction, residents entered
into a Master Trust Agreement whereby amounts were paid by the resident into a
trust account. These funds were then made available to the related communities
in the form of a non-interest bearing loan to provide permanent financing for
the related communities and are collateralized by such land, buildings and
equipment. As of December 31, 1999, the remaining obligation under the Master
Trust Agreements is $50.1 million and is payable monthly based on a 40-year
amortization of each residents' balance. The current installment due in 2000,
and annually for the subsequent five-year period, is approximately $2.0 million.
The annual obligation is reduced as individual residency agreements terminate.
Upon termination of the resident's occupancy, the resident or the resident's
estate receives a payment of the remaining loan balance from the trust and pays
a lifecare fee to the community based on a formula in the residency and health
care agreement, not to exceed a specified percentage of the resident's original
amount paid to the trust. This lifecare fee is amortized by the Company into
revenue on a straight-line basis over the estimated life expectancy of the
resident beginning with the date of occupancy by the resident. The amortization
of the lifecare fees is included in resident and health care revenue in the
consolidated statement of operations. The Company reports the long-term
obligation under the Master Trust Agreements as a refundable portion of life
estate fees and deferred life estate income based on the applicable residency
agreements.
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The obligation to the Master Trust is classified as follows at December 31, 1999
and 1998, respectively.
Other Residency
Master Trust Agreements Total
------------ ---------- -------
At December 31, 1999:
Other current liabilities $ 1,980 $ -- $ 1,980
Refundable portion of life estate fees 18,792 24,594 43,386
Deferred life estate income 29,359 22,247 51,606
------- ------- -------
$50,131 $46,841 $96,972
======= ======= =======
At December 31, 1998:
Other current liabilities $ 1,479 $ -- $ 1,479
Refundable portion of life estate fees 24,307 24,498 48,805
Deferred life estate income 25,641 18,074 43,715
------- ------- -------
$51,427 $42,572 $93,999
======= ======= =======
(11) PARTNERS'/SHAREHOLDERS' EQUITY
In connection with a 1995 roll-up transaction, the shareholders of a predecessor
corporation and the partners in various partnerships exchanged their common
stock or partnership interests for limited partnership interests in ARCLP.
Additionally, holders of $10.0 million of notes payable from an affiliated
limited partnership exchanged these notes for special redeemable preferred
limited partnership interests in ARCLP. Such preferred interests were entitled
to a cumulative 15% preferred distribution. The preferred interests were
redeemable, in whole or in part, at the option of ARCLP. During 1996, ARCLP
redeemed $4.8 million of the preferred limited interests, and on December 4,
1996, ARCLP approved the redemption of the remaining $5.2 million. Accordingly,
the $5.2 million was removed from equity and recorded as redemption payable at
December 31, 1996. It was redeemed in January 1997. ARCLP distributed $2.5
million to the partners in 1997. ARCLP was reorganized concurrent with the IPO.
On August 4, 1998, the Company completed a public offering of 4,500,000 shares
of common stock, of which 4,297,500 were sold by the Company and 202,500 shares
were sold by certain selling shareholders. Net proceeds to the Company were
approximately $64.8 million, net of underwriting and issuance costs.
The Company is authorized to establish and issue, from time to time, up to 5
million shares of no par value preferred stock, in one or more series, with such
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, and liquidation preference as authorized by the Board of Directors. At
December 31, 1999, no preferred shares had been issued.
On November 18, 1998, the Board of Directors of the Company declared a
distribution of one stock purchase right (ARC Right) for each outstanding share
of the Company's common stock, to shareholders of record at the close of
business on December 7, 1998 and for each share of the Company's common stock
issued thereafter. Each ARC Right entitles the holder, subject to the terms of
the Rights Agreement, to purchase from the Company, one one-hundredth of a share
(Unit) of ARC Series A Preferred Stock at a purchase price of $86.25 per Unit,
subject to adjustment. The ARC Rights may cause substantial dilution to a person
or group that
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attempts to acquire the Company on terms not approved by a majority of the Board
of Directors. Thus, the ARC Rights are intended to encourage persons who may
seek to acquire control of the Company to initiate such an acquisition through
negotiations with the Company's Board of Directors.
The ARC Rights attach to all certificates representing outstanding shares of
Company common stock and no separate ARC Rights certificates will be
distributed. The ARC Rights will separate from the common stock, and will be
distributed, if certain persons acquire, obtain the right to acquire, or
otherwise obtain beneficial ownership of 15% or more of the outstanding shares
of the Company's common stock. If distributed, each holder of an ARC Right will
thereafter have the right to receive, upon exercise, shares of Company common
stock (or, in certain circumstances at the discretion of the Board of Directors,
assets of the Company) having a value equal to two times the exercise price of
the ARC Right.
The ARC Rights are not exercisable until distributed and will expire at the
close of business on November 18, 2008, unless earlier redeemed by the Company.
The Board of Directors may redeem the ARC Rights in whole, but not in part, at a
price of $.001 per ARC Right, payable, at the election of the Board of
Directors, in cash or shares of Company common stock. Until an ARC Right is
exercised, the holder will have no rights as a shareholder.
A total of 2,000,000 shares of ARC Series A Preferred Stock have been reserved
for issuance upon exercise of the ARC Rights, subject to adjustment. The Units
of ARC Series A Preferred Stock that may be acquired upon exercise of the ARC
Rights will be nonredeemable and subordinate to any other shares of preferred
stock that may be issued by the Company.
The Company has recently announced plans to buy back up to $1.5 million of its
common stock to fund the Company's contributions to its employee benefit plans
for 2000 and 2001. The purchases are anticipated to be made primarily in the
open market over the next year. The timing and actual number of shares purchased
will depend on future market conditions.
Additionally, the Company has announced that its board of directors has
authorized the repurchase from time to time of its 5-3/4% convertible
debentures. Purchases, up to $30 million in market value, may be made in the
open market or privately negotiated transactions. The timing and amount will
depend upon prevailing market conditions, alternative uses of capital and other
factors. The program is expected to be completed during 2000.
(12) STOCK-BASED COMPENSATION
Stock Option Plan
In 1997, the Company adopted a stock incentive plan (the "1997 Plan") providing
for the grant of stock options, stock appreciation rights, restricted stock,
and/or other stock-based awards. Pursuant to the 1997 Plan, as amended,
2,542,850 shares of common stock have been reserved and are available for
issuance. The option exercise price and vesting provisions of such options are
fixed when the option is granted. The options generally expire ten years from
the date of grant and vest over a three-year period. The option exercise price
is generally not less than the fair market value of a share of common stock on
the date the option is granted.
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A summary of the Company's stock option activity, and related information for
the years ended December 31, 1999, 1998 and 1997, respectively, is presented
below (shares in thousands):
Average
Exercise
Options Shares Price
- ---------------------------------------------------------------
Granted 801 $15.51
Forfeited (21) 14.00
- ---------------------------------------------------------------
Outstanding at December 31, 1997 780 $15.55
- ---------------------------------------------------------------
Granted 963 $16.93
Exercised (13) 14.00
Forfeited (240) 19.20
- ---------------------------------------------------------------
Outstanding at December 31, 1998 1,490 $15.86
- ---------------------------------------------------------------
Granted 1,018 $11.53
Exercised (5) 14.00
Forfeited (135) 16.47
- ---------------------------------------------------------------
Outstanding at December 31, 1999 2,368 $13.97
- ---------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1999 (shares in thousands):
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (Years) Price
- --------------------------------------------------------------
$ 5.000-13.188 458 9.81 $ 5.29
$14.000-14.000 496 7.42 $ 14.00
$15.125-16.875 992 8.82 $ 16.00
$17.375-23.000 422 8.93 $ 18.51
- --------------------------------------------------------------
$ 5.000-23.000 2,368 8.74 $ 13.97
- --------------------------------------------------------------
There were 623,000 options exercisable at an average exercise price of $15.35 as
of December 31, 1999.
As discussed in Note 2, the Company accounts for stock-based employee
compensation in accordance with APB No. 25 and related interpretations as
permitted by SFAS No. 123. Accordingly, no compensation expense has been
recognized for its stock option awards because the option grants are generally
for a fixed number of shares with an exercise price generally equal to the fair
value of the shares at the date of grant. In accordance with SFAS No. 123, pro
forma information regarding net income (loss) and earnings (loss) per share has
been determined by the Company using the "Black-Scholes" option pricing model
with the following weighted average assumptions for the years ended December 31,
1999, 1998 and 1997, respectively: 5.53%, 4.55% and 6.35% risk-free interest
rate, 0% dividend yield, 76.4%, 39.7% and 26.7% volatility rate, and an expected
life of the options equal to the remaining vesting period.
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The weighted average fair value of options granted during 1999, 1998 and 1997
was $6.08, $5.38, and $7.25, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period. The Company's pro forma information follows
(in thousands except per share amounts, 1997 earnings per share amounts are
based upon pro forma shares outstanding - see Note 1):
1999 1998 1997
---------------------- ----------------------- ----------------------
SFAS 123 SFAS 123 SFAS 123
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
Net income (loss) $ 2,052 ($ 419) $ 6,900 $ 5,559 ($4,800) ($5,450)
Basic earnings (loss) per share $ 0.12 ($0.02) $ 0.49 $ 0.40 ($ 0.45) ($ 0.52)
Diluted earnings (loss) per share $ 0.12 ($0.02) $ 0.49 $ 0.39 ($ 0.45) ($ 0.52)
Stock Purchase Plan
In 1997, the Company adopted an employee stock purchase plan ("ESPP") pursuant
to which an aggregate of 197,576 shares remain authorized and available for
issuance to employees at December 31, 1999. Under the ESPP, employees, including
executive officers, who have been employed by the Company continuously for at
least 90 days are eligible, subject to certain limitations, as of the first day
of any option period (January 1 through June 30, or July 1 through December 31)
(an "Option Period") to contribute on an after-tax basis up to 15% of their base
pay per pay period through payroll deductions and/or a single lump sum
contribution per Option Period to be used to purchase shares of common stock. On
the last trading day of each Option Period (the "Exercise Date"), the amount
contributed by each participant over the course of the Option Period will be
used to purchase shares of common stock at a purchase price per share equal to
the lesser of (a) 85% of the closing market price of the common stock on the
Exercise Date; or (b) 85% of the closing market price of the common stock on the
first trading date of such Option Period. The ESPP is intended to qualify for
favorable tax treatment under Section 423 of the Internal Revenue Code (Code).
During 1999, 1998 and 1997, respectively, 21,624, 16,190 and 14,610 shares were
issued pursuant to the ESPP at an average purchase price of $9.34, $14.52 and
$15.30 per share, respectively.
(13) RETIREMENT PLANS
401 (k) Plan
Employees of the Company participate in a savings plan (the "401(k) Plan") which
is qualified under Sections 401 (a) and 401(k) of the Code. To be eligible, an
employee must have been employed by the Company for at least three months. The
401(k) Plan permits employees to make voluntary contributions up to specified
limits. Additional contributions may be made by the Company at its discretion,
which contributions vest ratably over a five-year period. The Company
contributed $115,000, $521,000, and $269,000, for 1999, 1998, and 1997
respectively.
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Section 162 Plan
The Company maintains a non-qualified deferred compensation plan (the "162
Plan") which allows employees who are "highly compensated" under IRS guidelines
to make after-tax contributions to an investment account established in such
employees' name. Additional contributions may be made by the Company at its
discretion. All contributions to the 162 Plan are subject to the claims of the
Company's creditors. Approximately 52 employees are eligible to participate in
the 162 Plan. The Company contributed approximately $191,000, and $96,000, to
the 162 Plan in 1998 and 1997, respectively. No contributions were made to the
162 Plan in 1999.
(14) INCOME TAXES
Prior to the IPO, taxes on the Predecessor's income were the responsibility of
the individual partners. Pursuant to the reorganization, all assets of ARCLP
were transferred to the Company. Therefore, all income generated subsequent to
the IPO is subject to Federal and state income taxes. Income taxes for the
period prior to the IPO relate only to the income of a taxable entity within the
Predecessor.
Total income tax expense (benefit) for the years ended December 31, 1999, 1998,
and 1997 were attributable to the following (in thousands):
Years Ended December 31,
-------------------------------------
1999 1998 1997
------- ------- -------
Income from continuing operations $ 1,257 $ 5,652 $ 4,435
Loss from home health operations -- (762) (95)
Write-off of home health assets -- (553) --
Extraordinary item -- -- (3,883)
Cumulative effect of change in
accounting principle -- (186) --
------- ------- -------
Total income taxes $ 1,257 $ 4,151 $ 457
======= ======= =======
The income tax expense (benefit), attributable to income from continuing
operations before extraordinary item and cumulative effect of change in
accounting principle consists of the following (in thousands):
Years Ended December 31,
---------------------------------------
1999 1998 1997
-------- ------- -------
U.S. Federal
Current $ 1,375 $ 1,138 $ --
Deferred (28) 3,925 3,819
------- ------- -------
Total U.S. Federal 1,347 5,063 3,819
------- ------- -------
State:
Current 89 591 178
Deferred (179) (2) 438
------- ------- -------
Total State (90) 589 616
------- ------- -------
Total $ 1,257 $ 5,652 $ 4,435
======= ======= =======
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The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1999 and 1998 are
presented below (in thousands):
1999 1998
-------- --------
Deferred tax assets:
Federal and state operating loss carryforwards $ 3,734 $ 2,636
AMT credit carryforward 2,000 499
Charitable contributions carryforward 6,653 6,653
Deferred gains on sale/leaseback transactions 1,183 1,574
Accrued expenses not deductible for tax 932 392
Intangible assets 549 519
Asset impairment charges and contractual losses on development 3,387 --
Other 295 926
-------- --------
Total gross deferred tax assets 18,733 13,199
Less valuation allowance (7,554) (6,653)
-------- --------
Total deferred tax assets, net of valuation allowance 11,179 6,546
Deferred tax liabilities:
Buildings and equipment 23,207 20,617
Deferred life estate revenue 1,016 800
Other 1,434 180
-------- --------
Total gross deferred tax liabilities 25,657 21,597
-------- --------
Net deferred tax liability ($14,478) ($15,051)
======== ========
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes on income from continuing operations before income taxes,
extraordinary item and cumulative effect of change in accounting principle:
1999 1998 1997
----- ------ -----
Statutory tax rate 35% 35% 34%
Income attributable to non-taxable entities -- -- (9%)
Federal tax charge for conversion to taxable
entities -- -- 47%
Difference in book and tax goodwill amortization
expense 4% -- (4%)
State income taxes, net of Federal benefit (1.8%) 2.5% 7%
Change in beginning of the year valuation allowance -- -- (6%)
Non-deductible expenses and other items 0.8% 0.2% 3%
--- ---- --
Total 38% 37.7% 72%
=== ==== ==
At December 31, 1999, the Company had unused federal net operating loss (NOL)
carryforwards of approximately $7.1 million for regular tax purposes, which
expire beginning in 2011. The Company has no NOL carryforwards for alternative
minimum tax purposes. As of December 31, 1999 the Company had alternative
minimum tax credit carryforwards of approximately $2.0 million. The Company also
had an unused charitable contribution carryforward of approximately $19 million,
which carried over from the acquisition of FGI. The charitable contribution
carryover expires in 2002.
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As of December 31, 1999, the Company carried a valuation allowance against
deferred tax assets in the amount of $ 7.6 million. The net change in the total
valuation allowance for the years ended December 31, 1999 and 1998 was an
increase of $900,000. The increase in the valuation allowance during 1999
related to state net operating loss carryovers generated in 1999. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of projected future
taxable income over the period in which the Company can utilize the charitable
contribution carryforward, management believes that it is more likely than not
that the tax benefit of the charitable contribution carryforward will not be
fully realized prior to its expiration in 2002. Therefore, management has
determined that a valuation allowance in the amount of $6.7 million should be
applied against the charitable contribution carryforward. At such time as it
becomes more likely than not that the benefit of the charitable contribution
carryforward acquired will be realized, the cost in excess of net assets
acquired in the 1998 FGI acquisition will be reduced by an amount equal to the
related tax benefit. Furthermore, management has determined that a valuation
allowance in the amount of $900,000 should be applied against certain state net
operating loss carryovers. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
(15) COMMITMENTS AND CONTINGENCIES
The Company maintains commercial insurance on a claims-made basis for medical
malpractice liabilities. Management is unaware of any incidents which could
ultimately result in a loss in excess of the Company's insurance coverage.
In the normal course of business, the Company is a defendant in certain
litigation. However, management is unaware of any action that would have a
material adverse impact on the financial position or results of operations of
the Company.
The Company is self-insured for workers' compensation claims with excess loss
coverage of $250,000 per individual claim and $2.7 million for aggregate claims.
The Company utilizes a third party administrator to process and pay filed
claims. The Company has accrued $843,000 to cover open claims not yet settled
and incurred but not reported claims as of December 31, 1999. Management is of
the opinion that such amounts are adequate to cover any such claims.
At December 31, 1999, the Company had entered into operating leases for nine of
its senior living communities and its corporate offices. The remaining lease
terms vary from two to 18 years. Certain of the leases provide for renewal and
purchase options. Lease expense was $13.0 million, $9.1 million and $3.4 million
for 1999, 1998, and 1997, respectively.
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Future minimum lease payments under operating leases as of December 31, 1999
were as follows (in thousands):
2000 $ 14,183
2001 14,189
2002 13,737
2003 11,334
2004 10,131
Thereafter 109,875
--------
$173,449
========
The Company maintains a $100.0 million revolving credit facility and a $4.0
million secured line of credit which are available for general use. The Company
has also secured a $50.0 million line of credit for the construction and/or
expansion of senior living communities. As of December 31, 1999, $64.4 million
was outstanding under the $100.0 million revolving facility and approximately
$3.7 million of the $4.0 million line had been used to obtain letters of credit.
The Company has committed $23.3 million of the $50.0 million line of credit for
use in synthetic leases for two assisted living communities being developed by
the Company. No amounts were outstanding under the $50.0 million line at
December 31, 1999.
Additionally, during the year ended December 31, 1999, the Company received a
commitment from a REIT for a $50.0 million credit facility that is available for
the development and acquisition of senior living communities.
In 1999, the Company entered into an interest rate swap agreement as a hedge
against certain debt liabilities in order to manage interest rate risk. As of
December 31, 1999, the Company had an interest rate swap agreement in effect
with a notional amount of $35.6 million with an approximate market value of $1.5
million. Under the terms of the swap agreement, the Company receives a fixed
rate interest payment based on a fixed interest rate of 6.87% and pays a
floating rate based upon a foreign currency index with a maximum rate through
July 1, 2002 of 6.87% and 8.12% thereafter. The swap agreement matures July 1,
2008.
The Company's management agreements are generally for terms of three to 20
years, but certain of the agreements may be canceled by the owner of the
community, without cause, on three to six months' notice. Pursuant to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owner's expense and receives a monthly fee for its services
based on either a contractually fixed amount, a percentage of revenues or
income, or cash flows in excess of operating expenses and certain cash flows of
the community. The Company's existing management agreements expire at various
times through June 2018.
In connection with the execution of management contracts pursuant to the FGI
transaction, the Company assumed a debt guaranty on the mortgage debt of one of
the managed communities. At December 31, 1999, $19.1 million was outstanding
under the debt agreement.
The Company finances the costs of certain senior living communities owned by
others which are being developed, leased or managed by the Company. The Company
is obligated to and anticipates providing approximately $52.2 million of
additional financing for these communities.
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The Company is currently providing development services for senior living
communities owned by others. Under the terms of the development agreements, the
Company receives a fixed fee of approximately 3.75% to 5% of the total
construction costs of the communities. Such fees are recognized over the terms
of the development agreements using the percentage-of-completion method. The
Company recognized $5.9 million and $7.6 million of development fee revenue
during 1999 and 1998, respectively. Failure to perform under the development
agreements may require the Company to acquire the senior living communities. The
Company owns the land upon which 13 of these senior living communities are
located, and has leased the land for terms of 50 years.
Upon completion of the construction, the owners of the senior living communities
lease the properties to various special purpose entities (SPEs). The Company has
entered into management agreements with the SPEs to manage the operations of the
leased senior living communities. The management agreements provide for the
payment of management fees to the Company based on a percentage of each
communities' gross revenues and requires the Company to fund the SPEs' operating
deficits above specified amounts. During 1999 the Company funded operating
deficits of $374,000. The Company is required to pledge to the lessors
certificates of deposit as collateral to support the lessor's equity
contribution commitment. At December 31, 1999, the Company has pledged
certificates of deposit in the aggregate of $29.9 million which are classified
as non-current assets limited as to use. The Company receives the interest
income earned on these certificates of deposit. The management agreements also
provide the Company with a right of first refusal to assume the SPEs' interest
in the leases at a formula price. During 1999, the Company did not assume any of
the SPEs' lease interests.
Federal and state governments regulate various aspects of the Company's
business. The development and operation of health care facilities and the
provision of health care services are subject to federal, state, and local
licensure, certification, and inspection laws that regulate, among other
matters, the number of licensed beds, the provision of services, the
distribution of pharmaceuticals, billing practices and policies, equipment,
staffing (including professional licensing), operating policies and procedures,
fire prevention measures, environmental matters, and compliance with building
and safety codes. Failure to comply with these laws and regulations could result
in the denial of reimbursement, the imposition of fines, temporary suspension of
admission of new patients, suspension or decertification from the Medicare
programs, restrictions on the ability to acquire new facilities or expand
existing facilities, and, in extreme cases, the revocation of a community's
license or closure of a community. Except as noted below, management believes
the Company was in compliance with such federal and state regulations at
December 31, 1999.
The Arizona Department of Insurance has notified the owner of the Company's
managed community in Peoria, Arizona, that the owner is not currently in
compliance with a net worth requirement imposed by Arizona law. While the
compliance with this net worth requirement is technically the responsibility of
the owner, in order to facilitate discussions with the Arizona Department of
Insurance, the Company has provided the Department with a limited guaranty
relating to the financial performance of the community. The Company and the
owner of the community are currently considering a number of courses of action
with respect to this net worth requirement, and are engaged in discussions with
the Arizona Department of Insurance. While the Company and owner believe that
the owner's noncompliance with the net worth requirement is only a technical
violation of law and that the community is in a strong financial position, there
can be no assurance that the State of Arizona will not enforce the law strictly.
A violation of this net worth requirement may, among other things, allow the
Arizona Department of Insurance to take steps to appoint a receiver for the
community.
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Certain of the communities operated by the Company are currently operating a
number of skilled nursing beds as "shelter beds" under a Florida statute and
certificate of need that generally limits the use of such beds to residents of
the community. Such communities are not currently in full compliance with these
shelter bed certificate of need requirements. A violation of the shelter bed
statutes may, among other things, subject the owner of the facility to fines up
to $1,500 per day. Although management is evaluating a number of alternatives
relating to these shelter bed issues, management does not anticipate that the
communities will be in full compliance with the shelter bed requirements in the
foreseeable future. There can be no assurance that the State of Florida will not
enforce the shelter bed requirements strictly against the Company in the future
or impose penalties for prior or continuing violations.
(16) RELATED PARTY TRANSACTIONS
The Company has agreed to develop ten assisted living residences for an
unaffiliated third-party. Following the completion of construction, the
residences are leased to affiliates of John Morris, a director of the Company.
As of December 31, 1999, four of the residences were operational and six were
under construction. The Company has agreed to manage such residences pursuant to
management agreements that provide for the payment of management fees to the
Company based on a percentage of the gross revenues of each residence and
require the Company to fund operating losses above a specified amount. The
Company has agreements with similar terms with unaffiliated parties. During
1999, the Company did not make any payments for operating losses and recognized
$114,000 of management fees pursuant to the management agreements.
As part of the FGI Transaction, the Company entered into a 20-year management
agreement (with two ten-year renewal options) for a senior living community
located in Peoria, Arizona. Mr. Roskamp, a director of the Company, is a
director of a charitable foundation that owns an interest in the community.
Pursuant to the management agreement, the Company will receive a management fee
equal to all revenue from the community that is in excess of operating expenses,
refunds of entrance fees, capital expenditure reserves, debt service, and
certain payments to the community's owners. The Company recognized $1.5 million
and $1.2 million of management fees in 1999 and 1998, respectively, pursuant to
this agreement.
The Company also entered into a 20-year management agreement (with two ten-year
renewal options) for a senior living community located in Seminole, Florida. In
connection with the management agreement, the Company paid a $1.2 million fee to
the owner of the community, which is a general partnership in which Mr. Roskamp
owns a 98.0% interest, and assumed FGI's existing guaranty of approximately
$19.1 million of the mortgage debt associated with the community. Pursuant to
the management agreement, the Company will receive a management fee equal to all
revenue from the community that is in excess of operating expenses, refunds of
entrance fees, capital expenditure reserves, debt service, and certain payments
to the community's owner. As part of the FGI transaction, the Company also
acquired an option to purchase the community upon the occurrence of certain
events (including the expiration of the agreement) for a formula purchase price.
The Company recognized $368,000 and $1.7 million of management fees in 1999 and
1998, respectively, pursuant to this agreement.
The Company also entered into a three-year management agreement for a senior
living community located in Glenmore, Pennsylvania, that is owned by a
partnership in which Mr. Roskamp owns a 70.0% interest.
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Pursuant to the management agreement, the Company will receive a management fee
equal to 5.0% of the gross revenues of the community. The Company paid a
non-refundable deposit of $2.0 million to acquire an option to purchase the
community for a purchase price of $14.0 million, plus the assumption of certain
specified liabilities. The Company's deposit will be credited against the
purchase price if the Company exercises its purchase option. The Company also
assumed FGI's remaining development obligations relating to the community. In
return for its development services and costs associated therewith, the Company
received a fee of $200,000 in 1998. Additionally, the Company recognized
$383,000 and $82,000 in management fees in 1999 and 1998, respectively, pursuant
to this agreement.
Pursuant to the FGI Transaction, the Company also entered into an agreement to
provide development services related to the development and construction of a
proposed senior living community in Sarasota, Florida that is currently in the
development and planning phase. The community is owned by a limited liability
company in which Mr. Roskamp owns a 57.5% interest. In return for its
development services and costs associated therewith, the Company will receive a
development fee of $2.1 million. The Company will manage the community following
its completion pursuant to a five-year management agreement that provides for a
management fee equal to 5.0% of the gross revenues of the community. In
consideration of the Company's payment of a $2.0 million fully-refundable
deposit, the Company acquired an option to purchase the community for a price to
be negotiated. The Company will receive a credit against the purchase price in
the amount of its deposit if the purchase option is exercised. The Company
recognized $900,000 and $450,000 of development fees in 1999 and 1998,
respectively, from the agreement.
In connection with the FGI Transaction, Mr. Roskamp entered into a three-year
consulting agreement with the Company that provides for annual payments of
$150,000 to Mr. Roskamp. In addition, pursuant to a shareholder's agreement
entered into by the Company and Mr. Roskamp, the Company caused Mr. Roskamp to
be elected to the Board of Directors of the Company and its Executive Committee
and has agreed to use its best efforts to cause Mr. Roskamp, or a designee of
Mr. Roskamp, to be recommended to the Company's shareholders for election as a
director at each annual meeting of the Company's shareholders at which Mr.
Roskamp stands for election for so long as Mr. Roskamp, or permitted
transferees, owns greater than 411,000 shares of the Company's common stock and
the shares of common stock owned by Mr. Roskamp and his affiliates constitute 1%
or more of the Company's outstanding common stock.
In October 1999, the Company secured a management contract for an up-scale
private pay skilled nursing center with 128 beds in Phoenix, Arizona. The
health center will be operated under the name "Freedom Plaza Health Center," and
is fifty percent (50%) owned by the Company's chief executive officer, W.E.
Sheriff. The health center and is located adjacent to Freedom Plaza and Plaza
Del Rio Health Center, both currently managed by the Company. The Company has an
option to purchase the Freedom Plaza Health Center at a formula price beginning
in 2009. The Company recognized $200,000 of management fees in 1999 pursuant to
this agreement.
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(17) QUARTERLY DATA (UNAUDITED)
The following table presents unaudited quarterly operating results for each of
the Company's last eight fiscal quarters. The Company believes that all
necessary adjustments have been included in the amounts stated below to present
fairly the quarterly results when read in conjunction with the consolidated
financial statements. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive of
future periods.
1999 Quarter Ended 1998 Quarter Ended
------------------ ------------------
Dec 31 Sept 30 June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
------ ------- ------- ------ ------ ------- ------- ------
(dollar amounts in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenues $ 42,860 $ 44,362 $ 44,453 $ 43,595 $ 44,172 $ 41,325 $ 29,820 $ 27,040
Income (loss) from continuing
operations before cumulative effect of
change in accounting principle (6,853) 2,079 3,431 3,394 2,816 2,601 2,230 1,703
Net income (loss) (6,853) 2,079 3,431 3,394 1,797 2,311 1,638 1,155
EARNINGS PER SHARE:
Basic ($0.40) $ 0.12 $ 0.20 $ 0.20 $ 0.11 $ 0.15 $ 0.14 $ 0.10
Weighted average basic shares outstanding 17,138 17,138 17,122 17,118 17,109 15,603 11,422 11,421
Diluted ($0.40) $ 0.12 $ 0.20 $ 0.20 $ 0.10 $ 0.15 $ 0.14 $ 0.10
Weighted average diluted shares outstanding 17,138 17,138 17,161 17,177 17,149 15,695 11,587 11,633
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of
the Company is incorporated herein by reference to the Company's definitive
proxy statement for its Annual Meeting of Shareholders to be held May 10, 2000
to be filed with the Securities and Exchange Commission (the "SEC"). Pursuant to
General Instruction G(3), certain information concerning the executive officers
of the Company is included in Part I of this report under the caption "Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the section entitled "Executive Compensation" in the Company's
definitive proxy statement for its Annual Meeting of Shareholders to be held May
10, 2000 to be filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the section entitled "Security Ownership of Management and Certain
Beneficial Owners" in the Company's definitive proxy statement for its Annual
Meeting of Shareholders to be held May 10, 2000 to be filed with the SEC.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section entitled "Certain Transactions" in the Company's
definitive proxy statement for its Annual Meeting of Shareholders to be held May
10, 2000 to be filed with the SEC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Item 14. (a) (1) Financial Statements: See Item 8
(2) Financial Statement Schedules: See Item 8
(3) Exhibits required by item 601 of Regulation S-K are as follows:
Exhibit
Number Description
- ------ -----------
2.1 Limited Partnership Agreement of American Retirement Communities,
L.P. dated February 7, 1995, as amended April 1, 1995.(1)
2.2 Articles of Share Exchange between American Retirement Communities,
L.P., and American Retirement Corporation, dated March 31, 1995.(1)
2.3 Reorganization Agreement, dated February 28, 1997.(1)
2.4 Agreement and Plan of Merger, dated as of May 29, 1998, by and among
American Retirement Corporation, Freedom Group, Inc., and the
shareholders of Freedom Group, Inc.(2)
2.5 Supplemental Agreement, dated July 14, 1998, among American
Retirement Corporation, Freedom Group, Inc., Robert G. Roskamp, PHC,
L.L.C., and The Edgar and Elsa Prince Foundation(3)
2.6 Amendment to Agreement and Plan of Merger, dated October 12, 1998,
by and among American Retirement Corporation and each of the former
shareholders of Freedom Group, Inc. (3)
3.1 Charter of the Registrant(1)
3.2 Articles of Amendment to the Charter of the Registrant(3)
3.3 Articles of Amendment to the Charter of the Registrant, dated May
12, 1999
3.4 Bylaws of the Registrant, as amended(3)
4.1 Specimen Common Stock certificate(1)
4.2 Article 8 of the Registrant's Charter (included in Exhibit 3.1)
4.3 Form of Indenture between the Company and IBJ Schroder Bank and
Trust Company, as Trustee, relating to the 5-3/4 % Convertible
Subordinated Debentures due 2002 of the Company.(4)
4.4 Rights Agreement, dated November 18, 1998, between American
Retirement Corporation and American Stock Transfer and Trust
Company.(5)
10.1 American Retirement Corporation 1997 Stock Incentive Plan, as
amended(6)
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10.2 American Retirement Corporation Employee Stock Purchase Plan(1)
10.3 First Amendment to Employee Stock Purchase Plan(8)
10.4 American Retirement Corporation 401(k) Retirement Plan(1)
10.5 Officers' Incentive Compensation Plan(1)
10.6 Registration Rights Policy(1)
10.7 Registration Rights Agreement, dated July 14, 1998, by and between
American Retirement Corporation and Robert G. Roskamp, PHC, LLC, and
the Edgar and Elsa Prince Foundation(7)
10.8 Shareholder Agreement, dated July 14, 1998, by and between American
Retirement Corporation and Robert G. Roskamp(7)
10.9 Consulting Agreement, dated July 14, 1998, by and between American
Retirement Corporation and Robert G. Roskamp(7)
10.10 Lease and Security Agreement, dated January 2, 1997, by and between
Nationwide Health Properties, Inc. and American Retirement
Communities, L.P.(4)
10.11 Lease and Security Agreement, dated January 2, 1997, by and between
N.H. Texas Properties Limited Partnership and Trinity Towers Limited
Partnership(4)
10.12 Amended and Restated Loan Agreement, dated December 21, 1994,
between Carriage Club of Denver, L.P. and General Electric Capital
Corporation(1)
10.13 Amended and Restated Promissory Note, dated December 21, 1994,
between Carriage Club of Denver, L.P. and General Electric Capital
Corporation(1)
10.14 Assumption, Consent and Loan Modification Agreement, dated February
9, 1995, by and among Carriage Club of Denver, L.P. and General
Electric Capital Corporation(1)
10.15 Loan Agreement, dated October 31, 1995, by and between American
Retirement Communities, L.P. and First Union National Bank of
Tennessee, as amended.(1)
10.16 Amended and Restated Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. and First Union National Bank
of Tennessee, as amended.(1)
10.17 Revolving Credit Promissory Note, dated October 31, 1995, by
American Retirement Communities, L.P. and First Union National Bank
of Tennessee, as amended.(1)
10.18 Standby Note, dated October 31, 1995, by American Retirement
Communities, L.P. and First Union National Bank of North Carolina(1)
10.19 Reimbursement Agreement, dated October 31, 1995, by American
Retirement Communities, L.P. and First Union National Bank of North
Carolina(1)
10.20 Letter of Intent, dated April 3, 1997, by National Health Investors,
Inc. to American Retirement Corporation(1)
10.21 Master Loan Agreement, dated December 23, 1996 between First
American National Bank and American Retirement Communities, L.P.(1)
10.22 Letter of Intent, dated February 24, 1997, by National Health
Investors, Inc. to American Retirement Corporation(1)
10.23 Deed of Lease, dated as of October 23, 1997, between Daniel U.S.
Properties Limited Partnership, as Lessor, and ARC Imperial Plaza,
Inc. as Lessee(8)
10.24 Loan Agreement, dated as of December 31, 1997, between General
Electric Capital Corporation and Fort Austin Limited Partnership(8)
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10.25 Promissory Note, dated December 31, 1997, by Fort Austin Limited
Partnership to General Electric Capital Corporation in the original
principal amount of $62,330,000(8)
10.26 Promissory Note, dated December 31, 1997, by Fort Austin Limited
Partnership to General Electric Capital Corporation in the original
principal amount of $50,000,000(8)
10.27 Fixed Rate Program Promissory Note Secured by Mortgage, dated July
9, 1998, by ARCLP-Charlotte, LLC to Heller Financial, Inc. in the
original principal amount of $36,000,000(7)
10.28 Financing and Security Agreement, dated June 8, 1999, by and among
ARC Capital Corporation II and Bank United, as Agent(9)
10.29 Loan Commitment, dated July 30, 1999, among American Retirement
Corporation and Guaranty Federal Bank, F.S.B. (9)
10.30 Term Sheet, dated May 28, 1999, among Health Care REIT, Inc. and
American Retirement Corporation(9)
10.31 Amended and Restated Financing and Security Agreement, dated
February 11, 2000, by and among ARC Capital Corporation II and Bank
United, as Agent
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule for the year ended December 31, 1999 (For
SEC use only)
- --------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-23197).
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated May 29, 1998.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-34339).
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K,
dated November 24, 1998.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-94747)
(7) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
(8) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999:
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
AMERICAN RETIREMENT CORPORATION
By: /s/ W.E. Sheriff
-------------------------------
W.E. Sheriff
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ W.E. Sheriff Chairman and March 30, 2000
- ---------------------------- Chief Executive Officer
W.E. Sheriff (Principal Executive Officer)
/s/ George T. Hicks Executive Vice President - Finance, March 30, 2000
- ---------------------------- Chief Financial Officer (Principal
George T. Hicks Financial and Accounting Officer)
/s/ H. Lee Barfield II Director March 30, 2000
- ----------------------------
H. Lee Barfield II
/s/ Frank M. Bumstead Director March 30, 2000
- ----------------------------
Frank M. Bumstead
/s/ Christopher Coates Director March 30, 2000
- ----------------------------
Christopher J. Coates
/s/ Robin G. Costa Director March 30, 2000
- ----------------------------
Robin G. Costa
/s/ Clarence Edmonds Director March 30, 2000
- ----------------------------
Clarence Edmonds
/s/ John A. Morris, Jr., M.D . Director March 30, 2000
- ----------------------------
John A. Morris, Jr., M.D.
/s/ Daniel K. O'Connell Director March 30, 2000
- ----------------------------
Daniel K. O'Connell
/s/ Robert G. Roskamp Director March 30, 2000
- ----------------------------
Robert G. Roskamp
Director
- ----------------------------
Nadine C. Smith
/s/ Lawrence J. Steusser Director March 30, 2000
- ----------------------------
Lawrence J. Stuesser
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American Retirement Corporation
Schedule II - Valuation and Qualifying Accounts
Additions
------------------------------
Balance at Charged to Balance at
Beginning of Charged to other End of
Description Period costs and expenses accounts Deductions Period
- ---------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Year ended December 31, 1997 $ 108 $ 187 $ (47) $ 248
======================================================================
Year ended December 31, 1998 $ 248 $ 276 $(282) $ 242
======================================================================
Year ended December 31, 1999 $ 242 $ 118 $(123) $ 237
======================================================================
Deferred Tax Valuation Account
Year ended December 31, 1997 $ 339 $ (339) $ -- $ -- $ --
======================================================================
Year ended December 31, 1998 $ -- $ -- $6,653(1) $ -- $6,653
======================================================================
Year ended December 31, 1999 $6,653 $ 901 $ -- $ -- $7,554
======================================================================
Reserve for Contractual loss
Year ended December 31, 1997 $ -- $ -- $ -- $ -- $ --
======================================================================
Year ended December 31, 1998 $ -- $ -- $ -- $ -- $ --
======================================================================
Year ended December 31, 1999 $ -- $6,200 $ -- $ -- $6,200
======================================================================
(1) Tax asset acquired in Freedom Group transaction for which management does
not believe realization of the tax benefit is more likely than not.
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American Retirement Corporation
Schedule IV - Mortgage Loans on Real Estate
Principal amount
of loans subject
Final Periodic Carrying to delinquent
Interest Maturity Payment Face amount amount of principal
Description Rate Date Terms Prior liens of mortgages mortgages(3) or interest
- -----------------------------------------------------------------------------------------------------------------------------
First mortgage loan LIBOR+200 1-May-08 (1) $ -- $ 4,279 $ 4,279 $ --
First mortgage loan LIBOR+200 1-Oct-05 (1) -- 9,404 9,404 --
First mortgage loan LIBOR+200 1-Dec-09 (1) -- 17,069 17,069 --
First mortgage loan LIBOR+200 1-Jan-10 (1) -- 13,464 13,464 --
---------------------------------------------------------------
-- 44,216 44,216 --
---------------------------------------------------------------
Construction loans LIBOR+300 1-Jul-07 (2) -- 3,406 3,406 --
Construction loans LIBOR+300 1-Jul-07 (2) -- 3,601 3,601 --
Construction loans LIBOR+300 1-Jul-07 (2) -- 4,022 4,022 --
Construction loans LIBOR+300 1-Jul-07 (2) -- 4,699 4,699 --
Construction loans LIBOR+200 1-Jan-10 (2) -- 4,714 4,714 --
Construction loans LIBOR+200 1-Apr-07 (2) -- 4,782 4,782 --
Construction loans LIBOR+300 1-Dec-09 (2) -- 8,567 8,567 --
Construction loans LIBOR+200 1-Feb-10 (2) -- 7,500 7,500 --
Construction loans LIBOR+200 1-Jan-07 (2) -- 7,202 7,202 --
Other construction loans -- 4,527 4,527 --
---------------------------------------------------------------
-- 53,020 53,020 --
---------------------------------------------------------------
$ -- $97,236 $97,236 $ --
===============================================================
(1) Principal payment based upon a 25-year amortization schedule with
outstanding principle due at maturity.
(2) Interest only through completion of construction. Upon completion of
construction principle payments will be based upon a 25-year amortization
schedule with outstanding principle due at maturity.
(3) The aggregate cost for federal income tax purposes is $97,236.
Balance at December 31, 1996 $ --
========
Balance at December 31, 1997 $ --
========
Additions during the period:
New mortgage loans $ 19,759
Deductions during the period:
Collections of principal (28)
----------------------
Balance at December 31, 1998 $ 19,731
========
Additions during period:
New mortgage loans 79,028
Deductions during period:
Collections of principal (174)
Write offs of impaired loans (1,349)
----------------------
Balance at December 31, 1999 $ 97,236
========
See accompanying independent auditors' report.
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