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UNITED STATES
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, 2000
Commission file number 01-13031
American Retirement Corporation
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(Exact Name of Registrant as Specified in its Charter)
Tennessee 62-1674303
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
111 Westwood Place, Suite 200, Brentwood, TN 37027
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(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
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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 19, 2001, 17,166,209 shares of the registrant's common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was $43.4 million, based on the closing sale price of the common
stock of $4.05 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 3, 2001 are incorporated by
reference into Part III, items 10, 11, 12 and 13 of this Form 10-K.
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CONTENTS:
PAGE
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PART I 3
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II 18
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68
PART III 68
Item 10. Directors and Executive Officers of the Registrant 68
Item 11. Executive Compensation 68
Item 12. Security Ownership of Certain Beneficial Owners and Management 68
Item 13. Certain Relationships and Related Transactions 68
PART IV 68
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 68
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PART I
ITEM 1. BUSINESS
THE COMPANY
American Retirement Corporation, and its wholly-owned and majority owned
subsidiaries (collectively referred to as the "Company"), 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 62 senior
living communities in 15 states, with an aggregate capacity for approximately
14,500 residents. The Company owns 21 communities, leases 21 communities, and
manages 20 communities pursuant to management agreements.
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 and memory enhancement programs. The Company's 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 and care levels.
Although the Company operates its Senior Living Networks on a fully integrated
basis, the Company's operations are divided into two business segments: (1)
Retirement Centers and (2) Free-standing Assisted Living Communities
("Free-standing ALs"). The Retirement Centers are generally comprised of the
Company's CCRCs and its independent living communities including those at which
assisted living and/or nursing services are provided. Free-standing ALs are
generally comprised of stand-alone assisted living communities that are not
located on a Retirement Center campus, some of which also provide some skilled
nursing and/or specialized care such as Alzheimer's and memory enhancement
programs. Free-standing ALs are generally much smaller than Retirement Centers.
Retirement Centers comprise 32 of the Company's 62 senior living communities,
with capacity for approximately 11,700 residents, and generated 94% of the
Company's total resident fees in 2000.
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 through a combination 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 the Company. As a result of the combination, ARCLP
issued partnership interests to the partners and shareholders of the Predecessor
Entities in exchange for their limited partnership interests and stock in the
Predecessor Entities, and thereby became the owner, directly or indirectly, of
all of the assets of the Predecessor Entities.
American Retirement Corporation 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").
Simultaneously with the IPO, ARCLP was reorganized (the "Reorganization") with
the result 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.
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The Company acquired privately held Freedom Group Inc. ("FGI") and certain
entities affiliated with FGI and its chairman, Mr. Robert Roskamp, in July 1998.
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. As a result of the acquisition, the Company acquired three
CCRCs and assumed the management of four additional CCRCs. The Company also
acquired, for $4.0 million, options to purchase two of the managed CCRCs. The
Company also entered into a development and management contract for, and
acquired an option to purchase, one additional CCRC then under development. The
transaction was accounted for as a purchase. On May 26, 2000, the Company
assigned to an unrelated third party its option to acquire one of the managed
properties. The third-party purchased the property and the Company
simultaneously entered into a series of agreements with the third-party pursuant
to which the Company leases and operates the retirement community. The Company
chose to cancel one of the other purchase options, and received a full refund of
its $2.0 million option payment during the third quarter of 2000. The parties to
the management agreement for that community mutually agreed to terminate the
management agreement in December 2000.
CARE AND SERVICES PROGRAMS
The Company provides a wide array of senior living and health care services at
its communities, including independent living, assisted living and memory
enhanced services (with special programs and living units for residents with
Alzheimer's and other forms of dementia), and skilled nursing and sub-acute
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 plans 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. 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 defined periods of care, in some
cases for life. The agreements terminate when the resident leaves the community.
A portion of the fee is refundable to the resident or the resident's estate upon
termination of the agreement. The refundable amount is a long-term liability and
is recorded by the Company as refundable portion of life estate fees, 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. Residents 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 providing that the entrance fee is refundable to the
resident or the resident's estate contingent upon the occupancy of the unit by a
succeeding
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resident. The resident also shares in a specified percentage, typically 50%, of
any appreciation in the entrance fee paid by 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 the
remaining life of the building. 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 unit is reoccupied.
Assisted Living and Memory Enhanced 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. The residents utilizing the Company's assisted living services
generally need assistance with some or all ADLs, but do not require the more
acute medical care traditionally given in nursing homes. Upon admission, in
consultation with the resident and the resident's family and medical
consultants, each assisted living 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 whenever 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: Personal Care Services which
provide assistance with ADLs such as ambulation, bathing, dressing, eating,
grooming, personal hygiene, monitoring or assistance with medications, and
confusion management, Support Services such as meals, assistance with social and
recreational activities, laundry services, general housekeeping, maintenance
services and transportation services and Supplemental Services which 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
communities 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.
These special care areas are designed to allow residents the freedom to ambulate
while safely keeping them within a secure area, with a minimum of disruption to
other residents. Special nutritional programs are used to help ensure caloric
intake is maintained by 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.
These assisted living and memory enhanced services are provided to the residents
for monthly service fees. The Company recognizes these 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 thirty-day period
for which they give notice.
Skilled Nursing and Sub-Acute Services
The Company provides traditional 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. These skilled nursing and
sub-acute services are provided to the individuals on a daily basis, as needed,
and revenues are recognized when earned.
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OPERATING SEGMENTS
Although the Company operates its Senior Living Networks on a fully integrated
basis, the Company's operations are divided into two operating segments,
Retirement Centers and Free-standing ALs. The Retirement Centers are generally
comprised of the Company's CCRCs and its independent living communities
including those at which assisted living and/or nursing services are provided.
Free-standing ALs are generally comprised of stand-alone assisted living
communities that are not located on a Retirement Center campus, some of which
also provide some skilled nursing and/or specialized care such as Alzheimer's
and memory enhancement programs. Free-standing ALs are generally much smaller
than Retirement Centers. Retirement Centers comprise 32 of the Company's 62
senior living communities, representing approximately 11,700 of the Company's
14,500 resident capacity, and generated 93% of the Company's total resident fees
in 2000. During 2000, the portfolio of Free-standing ALs operated by the Company
grew from 20 (four owned, three leased, and 13 Managed SPE Communities) to 30
(six owned, 12 leased, and 12 Managed SPE Communities); therefore the
consolidated number of Free-standing ALs increased from seven to 18. A
substantial majority of these Free-standing ALs have recently opened, and are
unstabilized and are in the fill-up stage.
As a result of the Company's substantial increase in Free-standing ALs, the
Company determined to separate its operations in order to focus on separate
management techniques and operating strategies for its two business-lines.
Segregating the mature Retirement Centers from the unstabilized Free-standing
ALs is indicative of how management views and analyzes the Company's operating
activities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations" and Note 18 of the Company's
consolidated financial statements.
MANAGED SPE COMMUNITIES
During the late 1990s, the Company entered into a number of agreements with
special purpose entities (SPEs) for the development and management of certain
Free-standing ALs, ("Managed SPE Communities"). Under the terms of these
agreements, the SPE's lease the assisted living communities from third-party
lessors, which are primarily subsidiaries of financial institutions. The Company
enters into agreements to manage the communities for the SPEs. Currently the
Company manages 12 communities for those SPEs, six of which are affiliates of
John Morris, a director of the Company. The agreements provide for the payment
of management fees to the Company based on a percentage of each communities'
gross revenues, and require the SPEs to fund all costs associated with the
operations of the communities up to certain specified limits. The Company is
responsible for paying operating costs that exceed the SPE funding limits and
has guaranteed approximately $26.0 million of the mortgage financing for these
communities. In the event that the Company funds any costs above the specified
limits, the Company records these costs using a modified equity method of
accounting. In 2000 and 1999, respectively, the Company recorded $2.2 million
and $374,000 of funding costs as Equity in Losses of Managed SPE Communities.
The Company has options to purchase or has rights of first refusal to acquire
the leasehold interests in these Managed SPE Communities, but is under no
obligation to do so. The Company acquired 13 of these leasehold interests and
acquired one community during 2000. Two of the 13 leasehold interests and the
one community acquired during 2000 opened during the first quarter of 2001, and
one of the communities was subsequently leased to a third party during 2000. The
Company is in discussions with the various SPEs to assume some or all of the
remaining 12 communities that are currently managed by the Company. The
aggregate development costs of the 12 communities was approximately $152
million, excluding the working capital to fund operations during their
respective fill-up periods. Of the $152 million of total development costs,
$41.5 million was provided by REIT lessors, $66 million was provided by first
mortgage debt (guaranteed by the Company), and the balance of $44.5 million was
provided by the Company in the form of notes receivable. If offered and
accepted, the Company anticipates acquiring certain, and perhaps all, of those
leasehold interests in Managed SPE Communities during 2001 and 2002. If all were
acquired, the combined purchase price would be approximately $20.0 to $25.0
million. The timing of these leasehold acquisitions will depend on a variety of
factors, including prevailing market conditions, the Company's financing plans,
the availability of capital, alternative uses of capital, and general economic
conditions. If the Company does not acquire these leasehold interests, the
Company is still responsible for funding future operating losses which exceed
specified limits.
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During 2001, the Company expects to incur significant operating losses in
connection with the stabilization of the recent 13 leasehold acquisitions. In
addition, the Company anticipates incurring costs greater than those incurred
during 2000 relating to its obligation to fund the Managed SPE Communities as a
result of operating losses in excess of the limits for which the SPE's are
responsible. These losses and funding obligations are likely to continue until
these communities reach break-even occupancy.
BUSINESS STRATEGY
Since the early 1990's, the Company has grown significantly, primarily through
acquisitions of Retirement Centers, expansions of existing communities, and
development of Free-standing ALs. As a result of oversupply, significant pricing
pressures and other adverse conditions affecting the assisted living industry,
the Company has ceased developing new Free-standing ALs in order to focus on
increasing the Company's revenues and cashflows, strengthening its balance sheet
and improving the Company's operations. Set forth below are the key elements of
the Company's current business strategy:
Increase Revenues
The Company intends to increase its revenues by improving occupancy levels at
its communities, selective rate increases, expanding service offerings, and
emphasizing sales and marketing efforts.
The Company anticipates continued high-levels of occupancy at its Retirement
Centers, which, as a whole, have maintained strong occupancy levels. The Company
anticipates improving occupancy at its Retirement Centers, and intends to take
advantage of the high occupancy trends through selective expansions. During
2000, the Company completed large expansions of two Retirement Centers, which
are currently in the fill-up stages. Management continues to focus on
maintaining and improving occupancy within these Retirement Centers.
The Company's Free-standing ALs are largely unstablized and in the fill-up
stage. Management believes that the Company's reputation for and commitment to a
high quality of care, quality of support services offered, price of services,
physical appearance, amenities associated with the communities, and location
will attract new residents and increase occupancy. In addition, the Company
believes that combining these services through the Senior Living Networks offers
a range of senior living services, improving demand and thus improving
occupancy.
The Company anticipates the implementation of rate increases at its Retirement
Centers in many markets. Some Retirement Center contracts stipulate a maximum
allowable annual rate increase. Due to competitive pressures, the Company has
less pricing flexibility at its Free-standing ALs and offers various discount
programs as move-in incentives to facilitate the fill-up process. These
incentive programs generally provide a certain discounted rate for a specified
time period, typically six months, with the rate increasing to the standard rate
subsequent to the discount period. The Company continually assesses contractual
rate increase allowances, each communities' competitors' rates, areas of high
demand, and cost inflations in order to improve profitability.
The Company provides services that are complementary to senior living and health
care services, including Alzheimer and memory enhanced services, as well as
various types of therapy. These ancillary services do not constitute a
significant portion of the Company's revenues, but management believes that the
provision of ancillary services can be important in attracting new residents and
preparing the Company for future changes in the senior living and health care
industry. Management also anticipates that certain of these ancillary services,
particularly therapy services, are likely to grow in the future and provide the
Company with additional opportunities to increase revenues, as well as margins.
The Company is actively involved in developing and maintaining business
relationships and in exploring opportunities for improving occupancy and
increasing margin. A cornerstone of the Company's culture is its incentive
compensation system, which rewards managers who are able to meet budget, improve
profitability and develop improved processes. The Company's marketing efforts
are designed to expand its operations by developing lasting relationships with
physicians, hospitals, and pharmacies, real estate developers and asset
managers, and other sources of referrals. The Company encourages its managers
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to pursue new opportunities at the local level while simultaneously selectively
targeting key clients and projects at a regional level.
Maintain Strict Cost Management and Achieve Operating Efficiencies
In order to provide competitively priced services and enhance the Company's
financial performance, the Company must contain costs. Managers are trained to
analyze staffing and cost control issues, and each community is carefully
tracked on a monthly basis to determine whether financial results are within
budgeted and forecasted ranges. Because of the substantial performance-based
components of their compensation, managers are continuously motivated to contain
the costs of their operations. Because the Company's business is dependent, to
some extent, on personal relationships, the Company provides its managers with a
significant degree of autonomy in order to encourage prompt and effective
responses to local market demands. In conjunction with this local operational
authority, the Company provides, through its corporate office, services that
typically are not readily available to independent operators such as management
support, marketing and business expertise, training, and financial and
information systems. The Company continues to seek ways to reduce costs and
improve margins through efficiencies in management and marketing programs,
strategic alliances, integration, and synergies. Consistent with past practices,
the Company will continue to evaluate strategic alternatives that will provide
efficiencies.
Selective Dispositions
The Company intends to selectively pursue dispositions of certain of its assets
that are not located within its Senior Living Networks in an effort to reduce
operating losses, control costs and raise capital. In addition, the Company will
continue to identify and explore opportunities to expand its Retirement Centers
and to provide the Company with additional capital through strategic joint
ventures or alliances.
ACQUISITIONS AND OTHER TRANSACTIONS
On January 1, 2000, the Company acquired a health center at a CCRC in San
Antonio, Texas for $4.5 million. The Company managed the health center prior to
the acquisition. The health center has 141 total units, of which 124 are skilled
nursing and 24 are assisted living. The health center is attached to a large
independent living retirement center currently managed by the Company.
On May 26, 2000, the Company entered into a long-term lease for a senior living
community located in West Brandywine, Pennsylvania, which the Company had been
managing pursuant to a management agreement entered into in conjunction with the
FGI acquisition. In conjunction with the FGI acquisition, the Company acquired
an option to purchase the community upon specified terms. On May 26, 2000, the
Company assigned its purchase option to an unrelated third party, which
exercised the option and purchased the property. The Company simultaneously
entered into a series of agreements with this new owner to lease and operate the
retirement community. As part of this transaction, the Company acquired for $1.0
million certain assets and liabilities from the previous owner of the community.
In connection with this transaction, the Company is required to maintain $17.6
million of assets limited as to use, on which the Company receives the interest
earned.
The Company owned 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 Company subsequently determined that this venture did not fit
with the Company's Senior Living Network strategy. As of June 1, 2000, the
parties dissolved the joint venture, with each party retaining one of the
assisted living communities, along with the liabilities associated with that
community. As a result of the dissolution, the Company recorded assets of $8.2
million, consisting primarily of land and buildings. The Company also assumed
$8.2 million of liabilities, consisting primarily of a $7.9 million mortgage
note payable. The Company has no further management responsibility for, or
liability with respect to, the community that was retained by the other party.
On July 24, 2000, the Company ceased operating an assisted living community
located in Marietta, Georgia that the Company determined did not fit within the
Company's Senior Living Network strategy. The Company leased the community to a
third party, which assumed responsibility for the community's operations. The
lease has a five-year term with a renewal option for an additional five years.
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On December 18, 2000, the Company sold a community located in Westlake, Ohio and
simultaneously leased the property back from the buyer. The community was
originally acquired by the Company in October 1994 and has 302 units consisting
of 246 independent living and 56 assisted living units. At the transaction date,
the community had a net book basis of $13.2 million and was sold for
approximately $26.0 million. The gain has been deferred and will be recognized
into income over the life of the lease. The Company anticipates that a portion
of the taxable gain from the transaction will be deferred by like-kind exchanges
that the Company anticipates consummating in 2001. In conjunction with the
lease, the Company has a right of first refusal to purchase the community.
During the year, the Company acquired from various SPEs the assets and leasehold
interests of 13 Managed SPE Communities and acquired one Managed SPE Community
that the Company previously managed, in exchange for total payments of $14.3
million, net of cash received, which was recorded as leasehold acquisition
costs. Two of the 13 leasehold interests and the one community acquired during
2000 opened during the first quarter of 2001, and one of the communities was
subsequently leased to a third party during 2000. The Company also assumed
certain liabilities in connection with these acquisitions. The costs of
acquiring the leasehold interests are being amortized as lease expense on a
straight-line basis over the remaining base terms of the respective leases. The
assets and liabilities were recorded at cost, which approximates fair value.
Four of these leasehold interests were acquired, for $6.2 million, from a SPE
that is affiliated with John Morris, a director of the Company. One of the
communities was subsequently leased to a third party during 2000. The Company
manages six additional Free-standing ALs leased by affiliates of John Morris. In
addition, the Company has advanced amounts for certain costs of these Managed
SPE communities affiliated with Dr. Morris. At December 31, 2000, approximately
$1.2 million was due to the Company from these affiliates. Such amounts are
expected to be reimbursed through the future acquisition of the leasehold
interests of these affiliates.
GOVERNMENT REGULATION
The senior living and health care industries are subject to extensive regulation
and frequent regulatory change. At this time, no federal laws or regulations
specifically regulate assisted or independent living residences. The Company's
skilled nursing facilities and home health agencies are subject to federal
certification requirements in order to participate in the Medicare and Medicaid
programs. While a number of states have not yet enacted statutes or 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 local health and social service agencies and other
regulatory authorities. While such requirements vary by state, they typically
relate to staffing, physical design, required services, and resident
characteristics. The Company's communities are also subject to various zoning
restrictions, local building codes, and other ordinances, such as fire safety
codes. The Company believes that such regulation will increase in the future,
and that regulation of the assisted living industry is evolving and is likely to
become more burdensome, although 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 operating
or other deficiencies by regulatory authorities. In such cases, the appropriate
corrective action would be taken.
There are currently numerous legislative and regulatory initiatives at the state
and Federal levels addressing patient privacy concerns. In particular, the
Department of Health and Human Services ("DHHS") has released final privacy
regulations implementing portions of the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"). These regulations, which have an effective
date of April 14, 2001, and a compliance date of April 14, 2003, restrict how
health care providers use and disclose individually identifiable health
information. Under HIPAA, DHHS also has proposed regulations governing
electronically maintained or transmitted health-related information. Further, as
required by HIPAA, DHHS has adopted final regulations establishing electronic
data transmission standards that all health care providers must use when
submitting or receiving certain health care transactions electronically.
Compliance with these regulations is required by October 16, 2002. Failure to
comply with regulations enacted under HIPAA could result in civil and criminal
penalties. The Company will continue to remain subject to any Federal or state
laws that are more restrictive than the privacy regulations issued under HIPAA.
These statutes vary and could impose additional penalties. Management believes
that the Company should be able
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to replace or modify its systems and procedures to ensure compliance with HIPAA
and other legislation or regulations. Management does not expect costs incurred
with relation to HIPAA to have a material impact on the Company's operating
results.
The Balanced Budget Act ("BBA") of 1997 included sweeping changes to Medicare
and Medicaid, significantly reducing rates of increase for payments to home
health agencies and skilled nursing facilities. In 1999 and 2000, Congress
enacted legislation that lessened the impact of the BBA. Under the BBA,
beginning in the cost reporting years following January 10, 2001, skilled
nursing facilities are no longer reimbursed under a cost based system, but will
utilize a prospective payment system ("PPS") under which facilities are
reimbursed on a per diem basis. Also, as required by the BBA, the DHHS
implemented a PPS for home health care services for cost reporting periods
beginning on and after October 1, 2000. Approximately 5.0%, 4.4%, and 4.7% of
the Company's total revenues from continuing operations for the years ended
December 31, 2000, 1999, and 1998, respectively, were attributable to Medicare,
including Medicare-related private co-insurance and Medicaid.
Federal and state anti-remuneration and self-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, and have often been broadly interpreted to apply
to certain contractual relationships between health care providers and sources
of patient referrals. 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, and has notified the
Arizona DOI of the Company's intention to enter into a lease of the community,
if the Company can reach acceptable terms with the owner. The Department has
tentatively indicated that the proposed lease will result in the community's
compliance with the applicable Arizona statute. 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 or that the Company can successfully negotiate a lease with the
owner of the community that is acceptable to both the Company and the Arizona
DOI. 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.
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.
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COMPETITION
The senior living and health care services industry is highly competitive and
the Company expects that all providers within the industry will become
increasingly competitive in the future. During the mid- to late-1990's, a large
number of assisted living units were developed and most have opened by 2000.
This additional capacity has had the effect of increasing the time required to
fill assisted living units in most markets and has resulted in significant
pricing pressures in those markets. 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, many of whom
may have greater financial resources than the Company. In addition, the Company
competes with many assisted living companies that are currently insolvent or
that are likely to be insolvent in the future. These competitors may gain a
competitive advantage over the Company as a result of the effect of bankruptcy
or other insolvency proceedings.
The Company believes it has a reputation as a leader in the industry and as a
provider of high quality services. Because seniors tend to choose senior living
communities near their homes or 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 is one of the
largest companies in the senior living health care industry and is not limited
to a single geographic region. The Company's size has also allowed it to
centralize administrative functions that give the decentralized managerial
operations cost-efficient support. 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. The market for these professionals has become very competitive, with
resulting pressure on salaries and compensation levels. However, the Company
believes it is able to attract and retain quality managers through its
reputation, and through its incentive compensation that directly rewards
successful efforts and places a premium on profitable growth.
INSURANCE
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. Recently, the number of insurance
companies willing to provide general liability and professional malpractice
liability insurance for the nursing and assisted living industry has declined
dramatically. The Company's previous liability policies expired on July 1, 2000,
and, in order to renew its liability coverage, the Company was required to pay
significantly higher premiums. In addition, the Company's new liability policies
contain deductibles that are significantly higher than those the Company has
historically maintained. As a result, beginning in the third quarter of 2000,
the Company began to pay higher premiums and to establish higher reserves for
potential liability claims. The Company believes this market condition is
temporary, but is likely to persist for the foreseeable future. As a result, the
Company is exploring alternatives to reduce its liability insurance costs and
deductibles. The Company also has underlying and umbrella excess liability
protection policies in the amount of at least $25.0 million in the aggregate.
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.
ENVIRONMENTAL MATTERS
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,
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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 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.
EMPLOYEES
The Company employs approximately 7,600 persons. As of December 31, 2000, none
of the Company's employees were represented by a labor union. However,
subsequent to year-end, approximately 28 of 52 total employees at a
Free-standing AL in Cleveland, Ohio voted to unionize. The Company believes that
its relationship with its employees is good.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of the Company.
NAME AGE POSITION
- ---- --- --------
W. E. Sheriff 58 Chief Executive Officer
Christopher J. Coates 50 President and Chief Operating Officer
George T. Hicks 43 Executive Vice President - Finance, Chief Financial Officer
H. Todd Kaestner 45 Executive Vice President - Corporate Development
James T. Money 53 Executive Vice President - Senior Living Network Development
Gregory B. Richard 47 Executive Vice President - Operations
Ross C. Roadman 51 Senior Vice President - Strategic Planning and Investor Relations
Terry Frisby 50 Senior Vice President - Human Resources
Bryan D. Richardson 42 Vice President - Finance
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 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.
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JAMES T. MONEY has served as Executive Vice President - Senior Living Network
Development 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 - 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.
ROSS C. ROADMAN has served as Senior Vice President - Strategic Planning and
Investor Relations since May 1999. Previously, Mr. Roadman served in various
capacities, since 1980, at Ryder System, Inc., including as Group Director of
Investor and Community Relations, Assistant Treasurer, Division Controller, and
Director of Planning. Before joining Ryder, he held positions with Ernst & Young
and the International Monetary Fund. He serves on the boards of several
educational and charitable organizations as well as being active in various
professional organizations.
TERRY L. FRISBY has served as Senior Vice President - Human Resources since
January 1999. Mr Frisby served as Vice President - Corporate Culture and
Compliance from July 1998 to January 1999. Prior to this Mr. Frisby was
principal of a healthcare consulting business located in Nashville, Tennessee,
from 1988 to 1998. Mr. Frisby serves on the Executive Council for Human
Resources with the Assisted Living Federation of America.
BRYAN D. RICHARDSON has served as Vice President - Finance since April 2000. Mr.
Richardson was previously with a graphic arts company from 1984 to 1999 serving
in various capacities, including Senior Vice President of Finance of a digital
prepress division from May 1994 to October 1999, and Senior Vice President of
Finance and Chief Financial Officer from 1989 to 1994.
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ITEM 2. PROPERTIES
The table below sets forth certain information with respect to the senior living
communities currently operated by the Company.
RETIREMENT CENTER
Resident Capacity(1)
-------------------------------------------------
Commencement
Community Location IL AL ME 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 62 34 42 493 May-96
Carriage Club of Jacksonville Jacksonville, FL 292 60 -- -- 352 May-96
Freedom Plaza Sun City Center Sun City Center, FL 542 22 4 113 681 Jul-98
Freedom Village Holland Holland, MI 450 22 29 67 568 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
Lake Seminole Square Seminole, FL 395 34 -- -- 429 Jul-98
Parklane West San Antonio, TX -- 17 -- 124 141 Jan-00
Parkplace Denver, CO 195 43 17 -- 255 Oct-94
Richmond Place Lexington, KY 206 60 17 -- 283 Apr-95
Santa Catalina Villas Tucson, AZ 217 70 15 42 344 Jun-94
The Summit at Westlake Hills Austin, TX 167 30 -- 90 287 Apr-92
Wilora Lake Lodge Charlotte, NC 142 43 -- -- 185 Dec-97
----- ----- --- ----- ------
Subtotal 3,655 607 116 656 5,034
LEASED:
Freedom Village Brandywine(4) Glenmore, PA 380 17 17 47 461 Jun-00
Holley Court Terrace(5) Oak Park, IL 179 17 -- -- 196 Jul-93
Homewood at Victoria(6) Victoria, TX 60 30 -- -- 90 May-97
Imperial Plaza(7) Richmond, VA 850 152 -- -- 1,002 Oct-97
Oakhurst Towers(8) Denver, CO 195 -- -- -- 195 Feb-99
Park Regency(9) Chandler, AZ 154 -- -- 66 220 Sep-98
Rossmoor Regency(10) Laguna Hills, CA 210 -- -- -- 210 May-98
Trinity Towers(11) Corpus Christi, TX 220 62 20 76 378 Jan-90
Westlake Village (12) Cleveland, OH 246 56 -- -- 302 Oct-94
----- ----- --- ----- ------
Subtotal 2,494 334 37 189 3,054
MANAGED(13):
Burcham Hills East Lansing, MI 138 99 -- 133 370 Nov-78
Freedom Plaza Arizona(14) Peoria, AZ 455 34 42 256 787 Jul-98
Freedom Square(15) Seminole, FL 497 107 69 192 865 Jul-98
Glenview at Pelican Bay Naples, FL 150 -- -- 35 185 Jul-98
Somerby at Jones Farm(16) Huntsville, AL 110 48 -- -- 158 Apr-99
Somerby at University Park(16) Birmingham, AL 148 105 15 -- 268 Apr-99
The Towers San Antonio, TX 505 -- -- -- 505 Oct-94
Williamsburg Landing Williamsburg, VA 360 45 15 58 478 Sep-85
----- ----- --- ----- ------
Subtotal 2,363 438 141 674 3,616
----- ----- --- ----- ------
Total Retirement Centers 8,512 1,379 294 1,519 11,704
===== ===== === ===== ======
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FREE-STANDING ASSISTED LIVING
Resident Capacity(1)
-------------------------------------------
Commencement
Community Location IL AL ME SN Total of Operations(2)
--------- -------- -------------------------------------------- ----------------
OWNED(3):
Homewood at Brookmont Terrace (17) Nashville, TN -- 57 34 -- 91 May-00
Homewood at Deane Hill Knoxville, TN -- 78 26 -- 104 Oct-98
Homewood at Flint (McLaren)(18) Flint, MI -- 80 34 -- 114 Apr-00
Homewood at Sun City Center(19) Sun City Center, FL -- 60 28 -- 88 Aug-99
Homewood at Tarpon Springs Tarpon Springs, FL -- 64 -- -- 64 Aug-97
Village of Homewood(20) Lady Lake, FL -- 32 13 -- 45 Apr-98
----- ----- --- ----- ------
Subtotal -- 371 135 -- 506
LEASED:
Bahia Oaks Lodge(21) Sarasota, FL 18 82 -- -- 100 Jun-98
Heritage Club at Greenwood Village(22) Denver, CO -- 75 15 90 180 Nov-99
Homewood at Bay Pines(11) St Petersburg, FL -- 80 -- -- 80 Jul-99
Homewood at Boca Raton(23) Boca Raton, FL -- 60 18 -- 78 Oct-00
Homewood at Lakeway(22) Austin, TX -- 66 15 -- 81 Sep-00
Homewood at Naples(22) Naples, FL -- 76 24 -- 100 Sep-00
Homewood at Pecan Park(23) Fort Worth, TX -- 80 17 -- 97 Aug-00
Homewood at Shavano Park(23) San Antonio, TX -- 62 17 -- 79 Jun-00
Hampton at Cypress Station(24) Houston, TX -- 81 19 -- 100 Feb-99
Hampton at Pearland(25) Houston, TX 15 52 15 -- 82 Feb-00
Hampton at Pinegate(25) Houston, TX -- 81 15 -- 96 May-00
Hampton at Spring Shadows(25) Houston, TX -- 54 16 -- 70 May-99
----- ----- --- ----- ------
Subtotal 33 849 171 90 1,143
MANAGED(13):
Hampton at Willowbrook(26) Houston, TX -- 66 -- -- 66 Jun-99
Hampton at Shadowlake(26) Houston, TX -- 78 17 -- 95 Apr-99
Heritage Club at Aurora(26) Aurora, CO -- 80 16 -- 96 Jun-99
Heritage Club at Lakewood(26) Lakewood, CO -- 78 14 -- 92 Apr-00
Homewood at Boynton Beach(27) Boynton Beach, FL -- 80 17 -- 97 Jan-00
Homewood at Cleveland Park(27) Greenville, SC -- 75 15 -- 90 Aug-00
Homewood at Coconut Creek(27) Coconut Creek, FL -- 80 18 -- 98 Feb-00
Homewood at Countryside(26) Safety Harbor, FL -- 57 26 -- 83 Oct-99
Homewood at Delray Beach(27) Delray Beach, FL -- 52 28 -- 80 Oct-00
Homewood at Richmond Heights(27) Cleveland, OH -- 78 17 -- 95 Feb-00
Homewood at Rockefeller Gardens(27) Cleveland, OH -- 105 34 -- 139 Dec-99
Summit at Northwest Hills(26) Austin, TX -- 106 16 -- 122 Aug-00
----- ----- --- ----- ------
Subtotal -- 935 218 -- 1,153
----- ----- --- ----- ------
Total Free-standing Assisted Living 33 2,155 524 90 2,802
===== ===== === ===== ======
Grand Total 8,545 3,534 818 1,609 14,506
===== ===== === ===== ======
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- -----------------------
(1) Current resident capacity by care level and type: independent living
residences (IL), assisted living residences (including areas dedicated to
residents with Alzheimer's and other forms of dementia) (AL), memory
enhanced (ME), 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) The Company entered into a lease for the community in 2000. The community
was owned by an entity affiliated with Mr. Roskamp, a former director of
the Company. Leased pursuant to an operating lease with an initial term of
five years expiring September 30, 2005, with a renewal option of one year.
(5) Leased pursuant to an operating lease with an initial term of ten years
expiring December 31, 2006. The Company has a right of first refusal to
purchase the community.
(6) Leased pursuant to an operating lease expiring July 2011, with renewal
options for up to two additional ten-year terms.
(7) 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.
(8) Leased pursuant to a 14-year operating lease expiring February 2013 from a
managed entity. The Company also has an option to purchase the community at
the expiration of the lease term.
(9) Leased pursuant to a five year operating lease expiring September 2003,
with renewal options for up to two additional one-year terms. The Company
also acquired an option to purchase the community at the expiration of the
lease term.
(10) Leased pursuant to a five-year operating lease expiring May 2003, with
renewal options for up to five additional one-year terms. The Company also
acquired an option to purchase the community at the expiration of the lease
term.
(11) Leased pursuant to an operating lease expiring November 2007, with renewal
options for up to three additional ten-year terms. The Company has a right
of first refusal to purchase the community.
(12) During 2000, the Company sold the property and subsequently leased the
property back from the buyer. Leased pursuant to a seven-year operating
lease expiring December 31, 2007, with two renewal options of 13 and ten
years. The sale-leaseback agreement also includes a right of first refusal
for the Company.
(13) 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.
(14) 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 cash received by 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, a former director of the Company. The
Company is currently negotiating with the owner of this Community to
convert its existing management agreement into a long-term operating lease.
(15) 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 cash received by the community in excess of
operating expenses, refunds of entry fees, capital expenditure reserves,
debt service, and certain payments to the community's owner, Mr. Roskamp, a
former director of the Company, and an entity affiliated with Mr. Roskamp.
The Company has an option to purchase the community at a predetermined
price.
(16) The management agreements grant ARC options to purchase the communities
upon achievement of stabilized occupancy at formula-derived prices.
(17) Owned by a joint venture in which the Company owns a 51% interest.
(18) Owned by a joint venture in which the Company owns a 37.5% interest.
(19) Owned by a joint venture in which the Company owns a 50% interest.
(20) Owned by a joint venture in which the Company owns a 61% interest.
(21) Leased pursuant to a five-year operating lease (with five one-year renewal
options) from an unaffiliated SPE that acquired the community from a
general partnership of which Robert G. Roskamp, a former director of the
Company, is a partner. The Company also acquired an option to purchase the
community at the expiration of the lease term.
(22) During the year, the Company acquired the assets and/or leasehold interests
and assumed certain liabilities from an SPE affiliated with John Morris, a
director of the Company. Leased pursuant to an operating lease expiring
April 30, 2013, with renewal options for up to four additional ten-year
terms.
(23) During the year, the Company acquired the assets and/or leasehold interests
and assumed certain liabilities from a managed SPE. Leased pursuant to an
operating lease expiring July 1, 2007, with renewal options for up to two
additional one-year terms. The Company also has an option to purchase the
community at the expiration of the lease term.
(24) During the year, the Company acquired the assets and/or leasehold interests
and assumed certain liabilities from a managed SPE. Leased pursuant to an
operating lease expiring April 1, 2012, with renewal options for up to
three additional five-year terms.
(25) During the year, the Company acquired the assets and/or leasehold interests
and assumed certain liabilities from a managed SPE. Leased pursuant to an
operating lease expiring June 24, 2012, with renewal options for up to four
additional ten-year terms.
(26) The communities are managed 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.
(27) The communities are owned by an unaffiliated third-party and leased by SPEs
affiliated with John Morris, a director of the Company. The communities are
managed 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.
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ITEM 3. LEGAL PROCEEDINGS
The ownership of property and provision of services related to the retirement
industry entails an inherent risk of liability. Although the Company is engaged
in routine litigation incidental to its business, there is no legal proceeding
to which the Company is a party, which, in the opinion of management, will have
a material adverse effect upon the Company's financial condition, results of
operations, or liquidity. The Company carries liability insurance against
certain types of claims that management believes meets industry standards;
however, there can be no assurance that the Company will continue to maintain
such insurance, or that any future legal proceedings (including any related
judgments, settlements or costs) will not have a material adverse effect on the
Company's financial condition, liquidity, 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 Company Common Stock as reported on the NYSE.
Year Ended December 31, 2000 High Low
----------------------------------------------------------------------
First Quarter $ 8.750 $ 5.875
Second Quarter 8.625 5.125
Third Quarter 6.250 4.625
Fourth Quarter 7.000 3.010
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
As of March 19, 2001, there were 534 shareholders of record and approximately
1,860 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
and repay debt obligations. 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.
The Company did not sell any securities during the year ended December 31, 2000
without registration under the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
The selected 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.
In February 1997, American Retirement Corporation was incorporated for purposes
of effecting a reorganization of ARCLP and to complete an initial public
offering (IPO). Pro forma earnings per share presented for the year ended
December 31, 1997 and 1996 are 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. The pro forma adjustments reflected on the
consolidated statements of operations for the year ended December 31, 1997 and
1996 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.
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Predecessor
-----------
Years Ended December 31,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- ------- --------
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
Revenues:
Resident and health care $200,805 $164,592 $130,036 $ 88,416 $ 71,409
Management and development services 5,309 10,678 12,321 1,765 1,739
-------- -------- -------- -------- --------
Total revenues 206,114 175,270 142,357 90,181 73,148
Operating expenses:
Community operating expense 138,670 105,978 82,698 54,921 45,084
General and administrative 19,420 15,020 10,581 6,717 5,657
Lease expense, net 18,267 12,985 9,063 3,405 --
Depreciation and amortization 17,142 13,692 10,025 6,632 6,900
Asset impairments and contractual -- 12,536 -- -- --
losses
Merger related costs -- -- 994 -- --
-------- -------- -------- -------- --------
Total operating expenses 193,499 160,211 113,361 71,675 57,641
-------- -------- -------- -------- --------
Operating income 12,615 15,059 28,996 18,506 15,507
-------- -------- -------- -------- --------
Other income (expense):
Interest expense (36,517) (23,668) (17,924) (15,056) (12,160)
Interest income 14,791 9,123 4,092 2,675 434
Gain on sale of assets 267 3,036 80 35 874
Equity in loss of managed SPE communities (2,234) (374) -- -- --
Other 872 (314) (242) (36) (86)
-------- -------- -------- -------- --------
Other expense, net (22,821) (12,197) (13,994) (12,382) (10,938)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes,
minority interest extraordinary
item and cumulative effect
of change in accounting principle (10,206) 2,862 15,002 6,124 4,569
Income tax expense (benefit) (3,523) 1,087 5,652 4,435 (920)
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
minority interest, extraordinary item and
cumulative effect of change in accounting
principle (6,683) 1,775 9,350 1,689 5,489
Minority interest, net of tax 961 277 -- -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle (5,722) 2,052 9,350 1,689 5,489
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 (5,722) 2,052 7,204 1,534 5,533
Extraordinary item, net of tax (124) -- -- (6,334) (2,335)
Cumulative effect of change in accounting
for start-up costs, net of tax -- -- (304) -- --
-------- -------- -------- -------- --------
Net income (loss) (5,846) 2,052 6,900 (4,800) 3,198
Preferred return on special redeemable
preferred limited partnership interests -- -- -- -- (1,104)
-------- -------- -------- -------- --------
Net income (loss) available for
distribution to partners and shareholders $ (5,846) $ 2,052 $ 6,900 $ (4,800) $ 2,094
======== ======== ======== ======== ========
Distribution to partners, excluding
preferred distributions $ -- $ -- $ -- $ 2,500 $ 6,035
======== ======== ======== ======== ========
Cash earnings per common share(1) $ 0.67 $ 0.92 $ 1.21 $ 0.17 $ 0.96
======== ======== ======== ======== ========
(1) Income (loss) before extraordinary item and cumulative effect of change in
accounting principle, plus depreciation and amortization and asset
impairment and contractual loss per diluted share.
19
20
Predecessor
-----------
Years Ended December 31,
-----------------------------------------------------------------------
2000 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 $ 3,759 $ 1,848
partners and shareholders ======= =======
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share from
continuing operations before
extraordinary item and cumulative
effect of change in accounting
principle $ (0.34) $ 0.12 $ 0.67
======= ======= =======
Basic earnings (loss) per share $ (0.34) $ 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 17,086 17,129 13,947 10,577 9,375
======= ======= ======= ======= =======
Diluted earnings (loss) per share from
continuing operations before
extraordinary item and cumulative
effect of change in accounting
principle $ (0.34) $ 0.12 $ 0.66
======= ======= =======
Diluted earnings (loss) per share $ (0.34) $ 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 17,086 17,177 14,074 10,675 9,375
======= ======= ======= ======= =======
Predecessor
-----------
At December 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- ---------
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents $ 19,850 $ 21,881 $ 20,400 $ 44,583 $ 3,222
Working capital (deficit) 14,280 23,590 25,804 47,744 (14,289)
Land, buildings and equipment, net 473,062 431,560 388,404 229,898 213,124
Total assets 792,480 740,411 595,854 317,154 228,162
Long-term debt, including current portion 483,690 435,988 300,667 237,354 170,689
Refundable portion of life estate fees 44,739 43,386 48,805 -- --
Partners' and shareholders' equity 141,957 148,168 145,842 53,918 37,882
20
21
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 62 senior living communities in 15
states with an aggregate capacity for approximately 14,500 residents. The
Company currently owns 21 communities, leases 21 communities pursuant to
long-term leases, and manages 20 communities pursuant to management agreements.
At December 31, 2000, the Company's owned communities had a stabilized occupancy
rate of 93%, its leased communities had a stabilized occupancy rate of 95%, and
its managed communities had a stabilized occupancy rate of 89%. The Company
defines a community or expansion thereof to be stabilized when that community or
expansion has either achieved 95% occupancy or been open at least 12 months.
The Company's long-term strategy is to develop and operate Senior Living
Networks in major metropolitan regions. The Company portfolio of communities
includes 32 large Retirement Centers and 30 Free-standing ALs, with capacity for
approximately 11,700 and 2,800 residents, respectively. During 2000, the
Company's Retirement Centers and Free-standing ALs generated 93% and 7% of total
resident fees, respectively. Many of the Free-standing ALs are located within
the same major metropolitan regions as the Retirement Centers and function as
satellites to those Retirement Center hubs in order to form Senior Living
Networks and 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.
During the late 1990s and 2000, the assisted living market has suffered from
adverse market conditions including significant overcapacity in most markets,
longer fill-up periods, price discounting and price pressures, and increasing
labor and insurance costs. As a result, the Company ceased its development of
Free-standing ALs in late 1999 in order to focus on improving the performance of
its existing Retirement Centers, filling its Free-standing ALs, increasing the
Company's cashflow and strengthening the Company's balance sheet. Although the
Company abandoned its development program late in 1999, during 2000 the number
of Free-standing ALs operated by the Company, or the Free-standing AL Portfolio,
grew from 20 (four owned, three leased, and 13 Managed SPE Communities) to 30
(six owned, 12 leased, and 12 Managed SPE communities); therefore the
consolidated Free-standing AL communities grew from seven to 18. Substantially
all of these Free-standing ALs are in the fill-up stage and are generating
losses. Management expects these losses to continue until the Free-standing ALs
reach stabilized occupancy, which is estimated to be approximately 15 to 24
months after opening.
The Company has recently completed the expansion of two of its existing
Retirement Centers. In addition, the Company is formulating plans to develop or
expand certain senior living communities, but does not intend to initiate the
construction of these projects prior to finalizing acceptable financing
arrangements or obtaining satisfactory equity financing through joint ventures
or similar arrangements.
RESULTS OF 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 and assisted living
residents, representing 80.0%, 82.8%, and 83.7% of total resident and health
care revenues for the years ended December 31, 2000, 1999, and 1998,
respectively; (ii) per diem charges from nursing patients, representing 17.6%,
14.3%, and 14.2% of total resident and health care revenues for the years ended
December 31, 2000, 1999, and 1998, respectively; and (iii) the amortization of
non-refundable entrance fees over each resident's actuarially determined life
expectancy (or building life for contingent refunds), representing 2.4%, 2.9%,
and 2.1% of total resident and health care revenues for the years ended December
31, 2000, 1999, and 1998, respectively. Approximately 95.0%, 95.6%, and 95.3% of
the Company's total revenues
21
22
for the years ended December 31, 2000, 1999, and 1998, respectively, were
attributable to private pay sources, with the balance attributable to Medicare,
including Medicare-related private co-insurance and Medicaid.
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 defined periods of care, in some cases 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 the remaining 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 unit is reoccupied.
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 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
cash received from these two communities in excess of operating and financing
expenses and certain cash payments to the owner of the community. The Company's
existing management agreements expire at various times through June 2018.
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.
The Company's operating expenses are comprised, in general, of (i) community
operating expenses, 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.
22
23
SEGMENT RESULTS
The Company's operations are divided into two segments: (1) Retirement Centers
and (2) Free-standing ALs. The 32 Retirement Centers represent the large
retirement communities that provide some or all of independent living, assisted
living and skilled nursing care. A majority of the Retirement Centers are
stabilized, including recent expansions, and averaged 94% occupancy during
2000. The portfolio of Free-standing ALs operated by the Company has increased
from 20 (four owned, three leased, and 13 Managed SPE Communities) at December
31, 1999 to 30 (six owned, 12 leased, and 12 Managed SPE Communities) at
December 31, 2000; therefore the consolidated number of Free-standing AL
Communities increased from seven to 18. Substantially all of these are
unstabilized and in the fill-up stage. The Company has been and continues to be
focused on increasing and maintaining occupancy and controlling operating
margin in all communities.
The following table sets forth certain selected financial and operating data on
an operating segment basis(1) (in thousands).
Total Total $ %
Q1 Q2 Q3 Q4 2000 1999 Variance Variance
-- -- -- -- ----- ----- -------- --------
Revenues:
Retirement Centers $ 43,161 $ 45,172 $ 48,700 $ 50,572 $ 187,605 $ 159,531 28,074 17.6%
Free-standing ALs 1,988 2,692 3,660 5,110 13,450 4,959 8,491 171.2%
Corporate/Other 1,628 898 1,072 1,461 5,059 10,780 (5,721) (53.1)%
------------------------------------------------------------------------------------------------
Total $ 46,777 $ 48,762 $ 53,432 $ 57,143 $ 206,114 $ 175,270 30,844 17.6%
================================================================================================
NOI / Community EBITDAR:(2)
Retirement Centers $ 15,254 $ 15,855 $ 16,547 $ 17,585 $ 65,241 $ 58,722 6,519 11.1%
Free-standing ALs (64) (539) (1,132) (1,116) (2,851) 6 (2,857) n/a
Corporate/Other (2,671) (3,476) (3,643) (4,576) (14,366) (4,456) (9,910) 222.4%
------------------------------------------------------------------------------------------------
Total $ 12,519 $ 11,840 $ 11,772 $ 11,893 $ 48,024 $ 54,272 (6,248) (11.5)%
================================================================================================
Total Assets:
Retirement Centers $ 429,876 $ 451,106 $ 456,550 $ 445,020 $ 445,020 $ 426,331 18,689 4.4%
Free-standing ALs 36,027 60,559 69,450 68,266 68,266 22,047 46,219 209.6%
Corporate/Other 304,427 285,888 286,488 279,194 279,194 292,033 (12,639) (4.3)%
------------------------------------------------------------------------------------------------
Total $ 770,330 $ 797,553 $ 812,488 $ 792,480 $ 792,480 $ 740,411 52,269 7.1%
================================================================================================
(1) Selected financial and operating data does not include any
inter-segment transactions or allocated costs.
(2) Net Operating Income ("NOI"), or Community EBITDAR is defined as
earnings before net interest expense, income tax expense (benefit),
depreciation, amortization, rent, and other special charges related to
asset write-offs and write-downs, equity in loss of Managed SPE
Communities, other income (expense), minority interest, and
extraordinary items.
23
24
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
Revenues Total revenues were $206.1 million in 2000, compared to $175.3 million
in 1999, representing an increase of $30.8 million, or 17.6%. Resident and
health care revenues increased by $36.2 million, and management and development
services revenue decreased by $5.4 million during the period. The increase in
resident and health care revenue was primarily attributable to revenues derived
from senior living communities acquired or leased after December 31, 1999.
Management and development services revenue decreased as a percentage of total
revenue to 2.6% from 6.1%, respectively. The decrease in management and
development services revenue is primarily related to a decrease in development
fees, as well as decreased management fees at certain properties as a result of
lower sales of new units, which reduces the formula-based management fees. In
late 1999, the Company discontinued new development of freestanding assisted
living residences, for which the Company received development fees.
The Company had a stabilized occupancy rate of 92% compared to 93% as of
December 31, 2000 and 1999, respectively, and had a total occupancy rate of 83%
compared to 86% as of December 31, 2000 and 1999, respectively. The decrease in
the total occupancy rate is a result of new communities and expansions that
have increased capacity from 13,600 as of December 31, 1999 to 14,500 as of
December 31, 2000, many of which are in the fill-up stage.
Retirement Center resident and health care revenues were $187.6 million in
2000, compared to $159.5 million in 1999, representing an increase of $28.1
million, or 17.6%. This increase was primarily attributable to increased
average occupancies, as well as rate increases. Free-standing AL community
resident and health care revenues increased from $5.0 million in 1999 to $13.5
million in 2000. This increase is largely related to the increase from seven to
18 consolidated Free-standing AL communities, as well as the fill-up and
increased occupancy of these communities during the year. The $5.7 million
reduction in Corporate and Other Revenues relates to the decreased management
and development services revenues noted above.
Community Operating Expense Community operating expense increased to $138.7
million in 2000, as compared to $106.0 million in 1999, representing an
increase of $32.7 million, or 30.8%. The increase in community operating
expenses was primarily attributable to expenses from expansions and communities
acquired or leased after December 31, 1999. Additionally, this increase is the
result of increased labor, insurance, facility and marketing costs at various
new communities, as well as expansion of services provided within all
communities. Community operating expense as a percentage of resident and health
care revenues increased to 69.1% from 64.4% for the twelve months ended
December 31, 2000 and 1999, respectively. The increase in community operating
expense as a percentage of resident and health care revenues is primarily
attributable to the acquisition of leasehold interests during the second half
of 1999 and during 2000 of various Free-standing ALs that were Managed SPE
Communities, which are in the fill-up stage. The Company anticipates that the
fill-up of these communities will occur over the next 15 to 24 months. The
Company expects community operating expense to remain at greater than
historical levels as a percentage of resident and health care revenues as the
Company anticipates additional acquisitions of leasehold interests of Managed
SPE Communities.
Retirement Center operating expenses were $122.4 million in 2000, compared to
$100.8 million in 1999, representing an increase of $21.6 million, or 21.4%.
This increase was primarily attributable to increased average occupancies, and
reflects a slight reduction in gross margin from the prior year due to
expansions. Free-standing ALs operating expenses increased from $5.0 million in
1999 to $16.3 million in 2000. This increase is largely related to the increase
from seven to 18 consolidated free-standing AL communities, as well as the
fill-up and increased occupancy of these communities during the year.
General and Administrative General and administrative expense increased to
$19.4 million for 2000, as compared to $15.0 million for 1999, representing an
increase of $4.4 million, or 29.3%. The increase was primarily related to
increases in salaries and benefits associated with the operation of an
increased number of communities, as well as the overhead support costs
associated with the Senior Living Networks in various geographic areas. In
addition, over $968,000 of the increase relates to severance costs incurred in
December 2000, as a result of the elimination of twelve positions. The Company
anticipates that the elimination of these positions will result in annual
savings of approximately $1.0 million. General and administrative expense as a
percentage of total revenues increased to 9.4% compared to 8.6% for the twelve
months ended December 31, 2000 and 1999, respectively.
24
25
EBITDAR (Community NOI) Retirement Center EBITDAR increased $6.5 million or
11.1%, from $58.7 million for 1999 to $65.2 million for 2000. This increase
relates to continued improvement throughout the Retirement Centers, resulting
from stabilized occupancy and increased capacity through expansions, rate
increases, and improved control of overhead expense. Consolidated Free-standing
AL EBITDAR decreased $2.9 million, from a positive $6,000 in 1999 to a $2.9
million loss in 2000. The 2000 loss resulted from the 13 leasehold interests
and one community acquired during 2000. Two of the 13 leasehold interests and
the one community acquired during 2000 opened during the first quarter of 2001,
and one of the communities was subsequently leased to a third party during
2000. As the majority of these communities are unstabilized, the Company
expects to continue to incur losses during this fill-up stage. Corporate and
Other EBITDAR decreased $9.9 million from a $4.5 million loss in 1999 to a
$14.3 million loss in 2000. This decrease in Corporate and Other EBITDAR
resulted from the reduction in development and management fee revenues of $5.4
million, additional Corporate costs associated with corporate operations, human
resources, financial services and overhead, assisted living management costs of
$937,000, as well as severance costs of $968,000 related to terminated
employees.
Lease Expense Lease expense increased to $18.3 million for 2000, as compared to
$13.0 million for 1999, representing an increase of $5.3 million, or 40.7%.
This increase was attributable to leases entered into after December 31, 1999,
including several acquisitions of leasehold interests.
Depreciation and Amortization Depreciation and amortization expense increased
to $17.1 million in 2000 from $13.7 million in 1999, representing an increase
of $3.4 million, or 25.2%. The increases were primarily related to the increase
in depreciable assets of approximately $47.5 million during the year. These
assets relate primarily to the opening or acquisition of communities, including
leasehold interests, and expansion of communities since December 31, 1999, as
well as ongoing capital expenditures.
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 $36.5 million in 2000 from
$23.7 million in 1999, representing an increase of $12.8 million, or 54.3%. The
increase in interest expense was primarily attributable to indebtedness
incurred in connection with acquisitions and development activity, as well as
increased interest rates. Interest expense, as a percentage of total revenues,
increased to 17.7% for 2000 from 13.5% in 1999. Interest income increased to
$14.8 million in 2000 from $9.1 million in 1999, representing an increase of
$5.7 million, or 62.1%. The increase in interest income was primarily
attributable to income generated from larger certificates of deposit and notes
receivable balances associated with certain leasing transactions and management
agreements. Equity in loss of Managed SPE Communities increased from $374,000
in 1999 to $2.2 million in 2000, representing an increase of $1.8 million. The
increase in equity in loss of Managed SPE Communities relates to the
significant fill-up losses that the Company is obligated to fund when operating
deficits exceed specified limits.
Income Tax Expense The provision for income taxes was a $3.5 million benefit
compared to a $1.1 million expense for the twelve months ended December 31,
2000 and 1999, respectively. The Company's effective tax rate was 34.0% and
38.0% for the twelve months ended December 31, 2000 and 1999, respectively.
Minority Interest in Losses of Consolidated Subsidiaries, Net of Tax Minority
interest in losses of two consolidated subsidiaries, net of tax, for the twelve
months ended December 31, 2000 was $961,000, representing an increase of
$684,000 from $277,000 for 1999. The increase was primarily attributable to the
losses of one of the communities which opened in May 2000.
25
26
Extraordinary Loss During the period ended December 31, 2000, the Company
repaid a term note to a bank. As part of this transaction, the Company incurred
a prepayment penalty of $124,000, net of income taxes, which was recorded as an
extraordinary loss on the extinguishment of debt.
Net Income (Loss) Based upon the factors noted above, the Company experienced a
net loss of $5.8 million, or $.34 per dilutive share, compared to net income of
$2.1 million, or $.12 per dilutive share, for the twelve months ended December
31, 2000 and 1999, respectively.
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.
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,
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.
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 ALs, for which the
Company receives development fees.
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%. 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 expansions that
opened in 1998.
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 community
expansions.
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 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 compared to 7.4% for 1998.
Lease Expense Lease expense increased $3.9 million to $13.0 million for 1999,
as compared to $9.1 million for 1998, primarily as a result of 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.
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.
26
27
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 $1.1 million, or an effective rate of 38.0%, as compared to $5.7 million,
or an effective rate of 37.7%, in 1998.
Minority Interest in Losses of Consolidated Subsidiaries, Net of Tax Minority
interest in losses of two consolidated subsidiaries, net of tax for the twelve
months ended December 31, 1999 was $277,000. The loss was primarily
attributable to communities in the fill-up stage.
Net Income The Company experienced net income of $2.1 million, or $.12 per
diluted share, compared to net income of $6.9 million, or $.49 per diluted
share, for the period ended December 31, 1999 and 1998, respectively. The
primary cause of the decrease was due to the shift in the Company's growth
strategy away from development of senior living communities, resulting in the
abandonment of certain development projects, and the consequent recording of
asset impairment and contractual loss charges of approximately $12.5 million
during the quarter ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cashflow
Net cash provided by operating activities was $6.4 million for the year ended
December 31, 2000, as compared with $23.3 million and $23.4 million for the
years ended December 31, 1999 and 1998, respectively. The Company's
unrestricted cash balance was $19.8 million as of December 31, 2000, as
compared to $21.9 and $20.4 million as of December 31, 1999 and 1998,
respectively.
Net cash used by investing activities was $40.1 million for the year ended
December 31, 2000, as compared with $152.2 million and $151.1 million,
respectively, for the years ended December 31, 1999 and 1998. During the year
ended December 31, 2000, the Company made additions to land, buildings, and
equipment, including construction activity, of $49.0 million, acquisitions of
$6.4 million and leasehold acquisitions of $15.0 million, and purchased $3.6
million of assets limited as to use, received $26.5 million from sales of fixed
assets, received reimbursement for advances to development projects of $3.7
million, and received refunds of deposits of $3.75 million from purchase
options.
Net cash provided by financing activities was $31.7 million for the year ended
December 31, 2000, as compared with $130.4 million and $103.5 million,
respectively, for the years ended December 31, 1999 and 1998, respectively.
During 2000, the Company borrowed $89.5 million under long-term debt
arrangements, made principal payments on its indebtedness of $49.9 million, and
incurred $3.3 million of financing costs. In connection with certain lifecare
communities, the Company also made principal payments and refunds under master
trust agreements of $3.7 million.
Financing Activity
During the year ended December 31, 2000, the Company entered into various
financing commitments including a secured term loan from a mortgage lender in
the amount of $23.3 million, with interest payable at LIBOR plus 3%. Interest
and principal are payable monthly, based on a twenty-five year amortization,
with all remaining balances due in April 2003. The maturity date of the note
may be extended to April 2005 upon satisfaction of certain conditions.
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The Company also entered into a secured term loan with a finance company in the
amount of $2.5 million, with interest payable at LIBOR plus 3 3/4%. Interest
and principal are payable monthly, with interest only payments during the first
year. The remaining balance on the note is due in full in April 2002, but can
be extended to April 2003 based upon the satisfaction of certain conditions.
The Company used a portion of the proceeds from these two loans to prepay a
$14.3 million term note to a bank. As part of this transaction, the Company
incurred a prepayment penalty of $124,000, net of income taxes, which was
recorded as an extraordinary loss on extinguishment of debt during the first
quarter of 2000.
In connection with the expansion of a Retirement Center, the Company increased
a mortgage note payable to a bank from $6.8 million to $11.4 million. Interest
is payable monthly at LIBOR plus 2 1/4%, and the loan matures December 2, 2002.
As of December 31, 2000, $11.1 million was outstanding on this note.
The Company also entered into a mortgage note with an investment company in the
amount of $12.0 million, which bears interest at 9.5%. Payments of principal
and interest are payable monthly, with the note maturing in June 2025. The note
is secured by certain land and buildings. As of December 31, 2000, $11.9
million was outstanding on this note.
The Company assumed a mortgage note payable to a bank in the amount of $7.9
million as part of the dissolution of a joint venture in which the Company was
a member. Interest and principal are payable monthly, with the note maturing in
March 2006. Interest is paid at a fixed rate of the June 10, 1999 Treasury rate
plus 2%, or 7.89%. The note is secured by certain land and buildings. As of
December 31, 2000, $7.9 million was outstanding on this note.
The Company entered into a construction loan with a mortgage lender in the
amount of $10.3 million, with variable interest payable at LIBO plus 2%.
Interest is payable monthly, with the principal maturing in September 2003. The
maturity date of the note may be extended to September 2005 upon satisfaction
of certain conditions. As of December 31, 2000, $9.3 million was outstanding on
this note.
The remaining $23.5 million of proceeds from issuance of long-term debt was
from additional borrowings under existing credit facilities, primarily from a
$100.0 million revolving line of credit, of which $91.1 million was outstanding
at December 31, 2000. These funds were used primarily for construction or
expansion of retirement communities, and expenditures for acquisitions of
retirement communities and leasehold acquisitions.
On December 18, 2000, the Company sold a community located in Westlake, Ohio
for $25.4 million and subsequently leased the property back from the buyer. The
Company used a portion of the proceeds from the sale to repay $17.0 million of
a $50.0 million revolving line of credit. The Company expects that a portion of
the taxable gain from the transaction will be deferred by like-kind exchanges,
that the Company anticipates consummating during 2001. The Company expects
that, upon completion of all like-kind exchanges, the transaction will result
in net proceeds of approximately $5.7 million.
In December 1999, the Company 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. At December 31, 2000, the Company had purchased
$1,198,000, or 211,400 shares of common stock, and considers the stock buy back
program to be complete. The Company also announced, in March 2000, that the
Board of Directors had authorized the repurchase, from time to time, of up to
$30.0 million of the Company's 5 3/4% Convertible Debentures. The timing and
amount of purchases of these debentures will depend upon prevailing market
conditions, availability of capital, alternative uses of capital and other
factors. As of December 31, 2000, the Company had not purchased any 5 3/4%
Convertible Debentures. Purchases, if any, would be made primarily in the open
market during 2001.
Free-standing ALs and Managed SPE Communities
The Company has a total of 30 Free-standing AL's. Since January 1, 1999, the
Company has constructed and opened 22 Free-standing ALs, 12 of which opened
during 2000. The Company has ceased development of new Free-standing ALs, and
has only one free-standing assisted living community that is not in operation.
The remaining Free-standing AL opened in the first
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quarter of 2001. At December 31, 2000, the Company managed 12 of these
Free-standing ALs for SPEs, including six SPEs which are affiliated with John
Morris, a director of the Company. The Company is responsible for cumulative
operating costs above specified limits for each of these Managed SPE
Communities, which costs are recorded as equity in losses of Managed SPE
Communities.
Substantially all of the Company's Free-standing ALs, including Managed SPE
Communities, are in the pre-stabilized fill-up stage. As a result, the Company
expects its Free-standing AL portfolio (both consolidated Free-standing ALs and
Managed SPE Communities) to continue to incur substantial losses throughout
2001. The Company believes that the losses to be incurred will decrease each
successive quarter, primarily as a result of increased occupancy at these
communities.
The Company's consolidated results will include increased losses from
Free-standing ALs in 2001 versus 2000, as a result of a full year of activity
in 2001 for these communities opened during 2000, an increased number of
Free-standing ALs which are included in consolidated results (as a result of
acquiring various communities and leasehold interests during 2000 and 2001),
and increased equity in losses of Managed SPE Communities (as cumulative
operating costs exceed the limits for which the SPEs are responsible).
The Company has options to purchase or has rights of first refusal to acquire
the leasehold interests in these Managed SPE Communities, but is under no
obligation to do so. The Company acquired 13 of these leasehold interests and
acquired one community during 2000. Two of the 13 leasehold interests and the
one community acquired during 2000 opened during the first quarter of 2001, and
one of the communities was subsequently leased to a third party during 2000.
The Company is in discussions with the various SPEs to assume some or all of
the remaining 12 communities that are currently managed by the Company. The
aggregate development costs of the 12 communities was approximately $152
million, excluding the working capital to fund operations during their
respective fill-up periods. Of the $152 million of total development costs,
$41.5 million was provided by REIT lessors, $66 million was provided by first
mortgage debt (guaranteed by the Company), and the balance of $44.5 million was
provided by the Company in the form of notes receivable. If offered and
accepted, the Company anticipates acquiring certain, and perhaps all, of those
leasehold interests in Managed SPE Communities during 2001 and 2002. If all
were acquired, the combined purchase price would be approximately $20.0 to
$25.0 million. The timing of these leasehold acquisitions will depend on a
variety of factors, including prevailing market conditions, the Company's
financing plans, the availability of capital, alternative uses of capital, and
general economic conditions. If the Company does not acquire these leasehold
interests, the Company is still responsible for funding future operating losses
which exceed specified limits.
Liquidity
The Company has historically financed its activities with the net proceeds from
public offerings of debt and equity, long-term mortgage borrowings, term and
revolving credit facilities and cash flows from operations. At December 31,
2000, the Company had $483.7 million of indebtedness outstanding, including
$138.0 million of Convertible Debentures, with fixed maturities ranging from
May 2001 to April 2028 and was obligated to pay minimum rental obligations in
2001 of approximately $28.2 million under long-term operating leases. As of
December 31, 2000, approximately 57.0% of the Company's indebtedness bore
interest at fixed rates, with a weighted average interest rate of 6.94%. The
Company's variable rate indebtedness carried an average rate of 7.76% as of
December 31, 2000. As of December 31, 2000, the Company had working capital of
$14.5 million.
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.
Effective as of September 30, 2000, the Company amended several of these
financial covenants in order to remain in compliance therewith. Compliance with
these covenants is dependent, among other things, upon improvements in the
operations of the Company's Free-standing ALs. There can be no assurances that
the Company will remain in compliance with those financial covenants or that
its lenders will grant further amendments in the event of such non-compliance.
Failure to maintain compliance with the financial covenants would have a
significant adverse impact on the Company.
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Most 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.
The Company does not believe the covenants relating to the use, operation, and
disposition of its communities materially limit its operations. A significant
amount of the Company's indebtedness is cross-defaulted. Any non-payment or
other default with respect to such obligations (including non-compliance with a
financial covenant) could cause lenders to cease funding and accelerate payment
obligations or to foreclose upon the communities securing such indebtedness.
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 is likely to result in default or
acceleration of a majority of the Company's other obligations.
As part of its financing activities, the Company intends to consider selective
dispositions of communities that do not fit within its senior living network
strategy. The Company's ability to sell any such properties depends upon the
market demand for property, the equity in the mortgaged property, and the
general economic conditions of the senior living industry.
The Company has several significant debt obligations which will mature in the
next two years, including a $100.0 million revolving line-of-credit that
matures on May 1, 2002 (of which $91.1 million is outstanding as of December
31, 2000), and $138.0 million of Convertible Debentures that mature on October
1, 2002. The Company must repay or refinance these debt instruments as they
mature.
The Company expects that its current cash and cash equivalents, 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 start-up
losses, and capital expenditure and debt service requirements during 2001. The
Company's internally generated cash will not be sufficient to meet the
obligations of debt instruments maturing in 2002. Due to adverse market
conditions, the Company believes that it is unlikely that it will be able to
raise capital in the public equity markets for the foreseeable future.
Accordingly, the Company's ability to repay or refinance its maturing
obligations will depend, in large part, upon its ability to renew existing
credit facilities and arrangements or to obtain new credit facilities or
arrangements on acceptable terms. The Company is also focusing on generating
additional cash from incremental leverage, including possible combinations of
senior and mezzanine financing. At the same time, the Company is examining
other alternatives for raising capital, including the monetization of
investments in certain of the stabilized communities. The Company has engaged
in preliminary discussions with its existing lenders regarding the extension of
certain of the Company's maturing credit facilities.
The Company's ability to obtain new credit facilities and to repay or refinance
its existing indebtednesses depends upon a number of factors, including the
Company's financial condition and operating performance, the financial strength
of the assets to be encumbered, general economic conditions, general conditions
in the credit markets, mortgage interest rates and other factors. The Company's
efforts to obtain new or replacement financing will be adversely affected by
the condition of the assisted living market in general, the insolvency or
weakened financial conditions of many assisted living competitors, a reduced
number of lenders willing to finance assisted living or retirement companies
and the fact that the Company is highly leveraged. However, based upon
preliminary discussions with certain of the Company's existing and new lenders,
coupled with banking relationships that the Company believes are positive, the
Company believes it will be able to obtain new credit facilities and/or
extensions of existing credit facilities necessary to allow it to meet all of
its financial obligations and requirements for indebtedness that matures during
2001. There can be no assurances, however, that the Company will successfully
negotiate and obtain adequate new credit facilities or extensions of its
existing credit facilities, and if such financing is available, that the terms
of any such financing will not impose significant burdens on the Company or be
dilutive to the Company's existing shareholders.
The Company's 5 3/4% Convertible Debentures in the principal amount of $138
million mature on October 1, 2002. It is unlikely that any of those debentures
will be converted into the Company's common stock. Accordingly, the Company
must repay or refinance those convertible debentures when they come due. The
Company announced, in March 2000, that the Board of Directors had authorized
the repurchase, from time to time, of up to $30.0 million of the Company's 5
3/4% Convertible Debentures. The timing and amount of purchases of these
debentures will depend upon prevailing market conditions, availability of
capital, alternative uses of capital and other factors. As of December 31,
2000, the Company had
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not purchased any 5 3/4% Convertible Debentures. Purchases, if any, would be
made primarily in the open market during 2001. In addition, the Company has
engaged an investment advisor and is considering various capital raising and
other alternatives to satisfy the Company's obligations in connection with the
Convertible Debentures. There can be no assurance, however, that the Company
will be able to refinance, extend or otherwise satisfy its obligations with
respect to the Convertible Debentures prior to their maturity or classification
as a current liability.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts. Under SFAS No. 133, the Company would recognize
all derivatives as either assets or liabilities, measured at fair value, in the
consolidated balance sheet. In July 1999, SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective Date of
FASB No. 133, An Amendment of FASB Statement No. 133" was issued deferring the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In
June 2000, SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, an Amendment of FASB Statement No. 133" was issued
clarifying the accounting for derivatives under the new standard. SFAS 133
standardizes the accounting for derivative instruments.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies
as part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss is reported in earnings
immediately. During 1999 and 2000, the Company entered into two interest rate
swap agreements as a hedge against certain long-term debt in order to manage
interest rate risk. These swap agreements are designated and qualify as cash
flow hedges under SFAS No. 133.
The Company adopted SFAS No. 133 effective January 1, 2001. It is estimated
that adoption of SFAS No. 133 will result in the Company recording a net
transition adjustment loss of $1.1 million (net of related income tax of
$570,000) in accumulated other comprehensive income at January 1, 2001.
Further, the adoption of the Statement will result in the Company recognizing
$266,000 of derivative instrument assets and $1.9 million of derivative
instrument liabilities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 establishes specific criterion for revenue recognition. In June
2000, the Securities and Exchange Commission issued SAB 101B, which amends the
transition guidance for SAB 101. The SEC delayed the required implementation
date of SAB 101 by issuing Staff Accounting Bulletins No. 101A, "Amendment:
Revenue Recognition in Financial Statements" and 101B, "Second Amendment:
Revenue Recognition in Financial Statements" in March and June 2000,
respectively. As a result, SAB 101 was adopted by the Company in the fourth
quarter of 2000, effective as of January 1, 2000. The Company's accounting
policies are consistent with the requirements of SAB 101, so the implementation
of SAB 101 did not have an impact on the Company's operating results.
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.
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RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Form 10-K 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 forward-looking statements include all
statements that are not historical statements of fact and those regarding the
intent, belief or expectations of the Company or its management including, but
not limited to, the discussions of the Company's operating and growth strategy
(including its development plans and possible acquisitions or dispositions),
financing needs, projections of revenue, income or loss, capital expenditures,
and future operations. Investors are cautioned that all forward-looking
statements involve risks and uncertainties, including, without limitation,
those set forth under the caption "Risk Factors" below and 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 these assumptions could prove to be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included in this Form 10-K 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.
RISK FACTORS
Need to Refinance Certain Debt Instruments
The Company has several significant debt obligations which will become due in
the near future. These include, among others, a $100.0 million revolving
line-of-credit which matures on May 1, 2002 (of which $91.1 million is
outstanding as of December 31, 2000) and $138.0 million of convertible
debentures which mature on October 1, 2002. The Company must repay or refinance
these debt instruments as they become due. The Company's internally generated
cash flow will not be sufficient to meet these obligations. Any non-payment or
other default with respect to such obligations could cause lenders to cease
funding and to accelerate payment obligations or to foreclose upon the
communities securing such indebtedness. The Company may be forced to sell
certain properties in order to satisfy these obligations. 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 is likely to result in default or acceleration
of a majority of the Company's other obligations. The Company's ability to
refinance these instruments depends upon a number of factors, including the
Company's financial condition and operating performance, the financial strength
of the assets to be encumbered, general economic conditions, general conditions
in the credit markets, mortgage interest rates and other factors. The Company's
efforts to obtain new or replacement financing may be adversely affected by the
condition of the assisted living market in general, the insolvency or weakened
financial conditions of many assisted living competitors, a reduced number of
lenders willing to finance assisted living or retirement companies and the fact
that the Company is highly leveraged. The Company's ability to sell the
mortgaged property depends upon the level of mortgage interest rates, the
equity in the mortgage property, market demand for property, general economic
conditions and the availability of credit. There is no assurance that the
Company will be able to refinance these obligations on a timely basis, and if
such refinancing is available, whether the terms will be acceptable to the
Company. This inability to repay or refinance these and other obligations would
likely materially adversely affect the Company's business, results of
operations, and financial condition.
Losses from Free-standing ALs
The Company has experienced significant losses and expects to continue to
experience losses, associated with the fill-up of a large number of
Free-standing ALs which were recently developed or acquired. Newly opened
Free-standing ALs are expected to incur operating losses during a substantial
portion of their first 15 to 24 months of operations, on average, until the
communities achieve targeted occupancy levels. The Company expects to acquire
additional leasehold interest of Managed SPE Communities during 2001 and 2002
which will result in additional losses. In addition to its consolidated
Free-standing AL losses, the Company is responsible for funding operating costs
for various Managed SPE Communities which exceed certain specified limits. In
addition, the industry is experiencing significant competition and overcapacity
in the Free-standing AL segment. There can be no assurance that these
Free-standing ALs will be profitable in any future period, which may have a
material adverse effect on the Company's financial condition, liquidity, or
results of operations.
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Substantial Debt and Operating Lease Payment Obligations
At December 31, 2000, the Company had long-term debt, including current
portion, of $483.7 million and was obligated to pay minimum rental obligations
in 2001 of approximately $28.2 million under long-term operating leases. As a
result, a substantial portion of the Company's cash flow will be devoted to
debt service and lease payments. There can be no assurance that the Company
will generate sufficient cash flows from operations to meet required interest,
principal, and lease payments. Many of the Company's debt agreements and leases
contain various financial and other restrictive covenants, which may restrict
the Company's flexibility in operating its business. Any payment or other
default with respect to such obligations could cause lenders to cease funding
and accelerate payment obligations or to foreclose upon the communities
securing such indebtedness or, in the case 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 is likely to result
in default or acceleration of a majority of the Company's other obligations.
Consequently, such a default would adversely affect a significant number of the
Company's other properties and, in turn, the Company's business, results of
operations, and financial condition.
Need for Additional Financing
The Company's ability to sustain operating losses, maintain adequate levels of
capital spending for its properties, and to otherwise meet its operating
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, or otherwise restrict its operating flexibility. Moreover,
raising additional funds through the issuance of equity securities would likely
be dilutive to 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, that the terms
of any such financing will not impose significant burdens on the Company or be
dilutive to the Company's existing shareholders.
Highly Competitive Industry
The senior living and health care services industry is highly competitive, and
the Company expects that all providers within 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. The
Company also competes with many assisted living companies that are currently
insolvent or that are likely to be insolvent in the future. These competitors
may gain a competitive advantage over the Company as a result of the effect of
bankruptcy or other insolvency proceedings.
Furthermore, the development of new senior living communities has exceeded the
demand for such communities in certain of the markets in which the Company has
or is developing senior living communities. An oversupply of such communities
in certain of the Company's markets has caused the Company to experience
decreased occupancy, significant downward pricing pressures and discounting,
reduced operating margins, and lower profitability. There can be no assurance
that the Company will not continue to encounter these conditions or that
increased competition will not adversely affect its financial condition,
liquidity, or results of operations.
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Liability Insurance and Risks of Liability Claims
The Company is subject to various legal proceedings and claims, which arise in
the ordinary course of its business. The Company maintains property, general
liability and professional malpractice insurance policies for the Company's
owned and certain of its managed communities under a master insurance program.
Recently, the number of insurance companies willing to provide general
liability and professional malpractice liability insurance for the nursing and
assisted living industry has declined dramatically. As a result, effective in
the third quarter of 2000, the Company has incurred significantly higher
liability costs and premiums. This change may impact the Company's ability to
obtain and maintain insurance at a cost acceptable to the Company. A continued
material increase in insurance costs due to industry trends could also adversely
affect the operating earnings of the Company. The Company carries liability
insurance against certain types of claims that management believes meets
industry standards; however, there can be no assurance that the Company will
continue to maintain such insurance, or that any future legal proceedings
(including any related judgments, settlements or costs) will not have a material
adverse effect on the Company's financial condition, liquidity, or results of
operations.
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. In certain markets, a shortage of nurses or trained personnel has
required 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 heavily dependent on the
available labor pool of semi-skilled and unskilled employees in each of the
markets in which it operates. The Company has experienced a competitive labor
market, periodic shortages of qualified workers in certain markets, and
increasing wage rates for many of these employees during the past year. 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, control its labor costs, or pass on increased labor costs
to residents through rate increases, the Company's business, financial
condition, and results of operations would be adversely affected.
Exposure to Rising Interest Rates
Future indebtedness, from commercial banks or otherwise, and lease obligations,
including those related to REIT facilities, are expected to be based on
interest rates prevailing at the time such debt and lease arrangements are
obtained. As of December 31, 2000, the Company had $207.8 million of variable
rate debt outstanding. The Company has entered into interest rate swap
agreements with a major financial institution to manage its exposure of $53.0
million of debt. The swaps involve 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. See "--Item 7A - Disclosure About
Interest Rate Risk" for further description of the hedge transactions entered
into by the Company. 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, of which a portion is generally
refundable, with an additional monthly service fee while living in the
community. This limited lifecare benefit, 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 would be adversely affected.
34
35
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 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.
Risks of Operations in Concentrated Geographic Areas
Part of the Company's business strategy is to own, lease or manage senior
living communities in concentrated geographic service areas. The Company has a
large concentration of communities in Florida, Texas, and Colorado, among other
areas. Accordingly, the Company's occupancy rates and operating results in
certain of its 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 other senior living
communities.
Dependence on Attracting Residents with Sufficient Resources to Pay
Approximately 95.0% of the Company's total revenues for the year ended December
31, 2000 were attributable to private pay sources. For the same period, 5.0% 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, a change in general
economic conditions 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.
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, staffing
levels, professional licensing, the distribution of pharmaceuticals, billing
practices and policies, equipment, 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 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 (see also - Item 1.
Business - Government Regulation).
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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 two interest rate swap
agreements with a major financial institution to manage its exposure. The swaps
involve 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, 2000, the Company's outstanding principal
under its existing swap agreements was $17.6 million and $35.2 million maturing
December 10, 2024 and July 1, 2008, respectively. Under the agreements the
Company receives fixed rates of 7.19% and 6.87%, respectively, and pays
floating rates based upon LIBOR and a foreign currency index with a maximum
rate through July 1, 2002 of 6.87% and 8.12% thereafter. During 2000, interest
rates had risen. Interest rates have fallen in early 2001 and are expected to
fall further in the first half of 2001. The Company does not expect changes in
interest rates to have a material effect on income or cash flows in 2001, 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. Additionally, the Company anticipates refinancing and/or
renegotiating certain debt in 2001, which could result in higher interest rates
in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
- -----------------------------
Independent Auditors' Report 37
Consolidated Balance Sheets --- December 31, 2000 and 1999 38
Consolidated Statements of Operations --- Years ended December 31, 2000, 1999 and 1998 39
Consolidated Statements of Shareholders' Equity --- Years ended December 31, 2000, 1999 and 1998 41
Consolidated Statements of Cash Flows --- Years ended December 31, 2000, 1999 and 1998 42
Notes to Consolidated Financial Statements 44
Financial Statement Schedules 72
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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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
American Retirement Corporation:
We have audited the accompanying consolidated balance sheets of
American Retirement Corporation and subsidiaries as of December 31,
2000 and 1999 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2000. 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, 2000 and for each of the years in the
three-year period ended December 31, 2000. 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 and
financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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,
2000 and 1999 and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31,
2000, in conformity with accounting principles generally accepted in
the United States of America. 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
February 21, 2001
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38
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31
----------------------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 19,850 $ 21,881
Assets limited as to use 5,181 15,571
Accounts receivable, net 15,772 12,746
Advances for development projects 95 3,762
Inventory 1,079 950
Prepaid expenses 2,906 1,790
Deferred income taxes 332 758
Other current assets 5,513 5,727
-------- --------
Total current assets 50,728 63,185
Assets limited as to use, excluding amounts classified as current 73,785 60,855
Land, buildings and equipment, net 473,062 431,560
Notes receivable 90,707 97,236
Goodwill, net 37,503 38,524
Leasehold acquisition costs, net 16,103 978
Other assets 50,592 48,073
-------- --------
Total assets $792,480 $740,411
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,449 $ 10,173
Accounts payable 7,502 3,723
Accrued interest 3,980 4,140
Accrued payroll and benefits 3,916 3,144
Accrued property taxes 3,379 3,638
Other accrued expenses 4,981 4,898
Reserve for contractual losses -- 6,200
Other current liabilities 5,241 3,679
-------- --------
Total current liabilities 36,448 39,595
Long-term debt, excluding current portion 338,261 287,835
Convertible subordinated debentures 137,980 137,980
Refundable portion of life estate fees 44,739 43,386
Deferred life estate income 52,765 51,606
Tenant deposits 6,612 6,913
Deferred gain on sale-leaseback transactions 16,122 3,168
Deferred income taxes 13,079 15,236
Other long-term liabilities 4,517 6,524
-------- --------
Total liabilities 650,523 592,243
Commitments and contingencies (see notes)
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.01 par value; 200,000,000 shares authorized,
17,065,395 and 17,138,235 shares issued and outstanding, respectively 171 171
Additional paid-in capital 145,079 145,444
Retained earnings (accumulated deficit) (3,293) 2,553
-------- --------
Total shareholders' equity 141,957 148,168
-------- --------
Total liabilities and shareholders' equity $792,480 $740,411
======== ========
See accompanying notes to consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Years ended December 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Resident and health care $200,805 $164,592 $130,036
Management and development services 5,309 10,678 12,321
-------- -------- --------
Total revenues 206,114 175,270 142,357
Operating expenses:
Community operating expenses 138,670 105,978 82,698
General and administrative 19,420 15,020 10,581
Lease expense, net 18,267 12,985 9,063
Depreciation and amortization 17,142 13,692 10,025
Asset impairments and contractual losses -- 12,536 --
Merger related costs -- -- 994
-------- -------- --------
Total operating expenses 193,499 160,211 113,361
-------- -------- --------
Operating income 12,615 15,059 28,996
Other income (expense):
Interest expense (36,517) (23,668) (17,924)
Interest income 14,791 9,123 4,092
Gain on sale of assets 267 3,036 80
Equity in losses of managed special purpose entity communities (2,234) (374) --
Other 872 (314) (242)
-------- -------- --------
Other expense, net (22,821) (12,197) (13,994)
-------- -------- --------
Income (loss) from continuing operations before income taxes, minority
interest, extraordinary item and cumulative effect
of change in accounting principle (10,206) 2,862 15,002
Income tax (benefit) expense (3,523) 1,087 5,652
-------- -------- --------
Income (loss) from continuing operations before minority interest,
extraordinary item and cumulative effect of change
in accounting principle (6,683) 1,775 9,350
Minority interest in losses of consolidated subsidiaries, net of tax 961 277 --
-------- -------- --------
Income (loss) from continuing operations before extraordinary item and
cumulative effect of change in accounting principle (5,722) 2,052 9,350
Discontinued operations:
Loss from home health operations, net of tax -- -- (1,244)
Write-off of home health assets, net of tax -- -- (902)
-------- -------- --------
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle (5,722) 2,052 7,204
Extraordinary loss on extinguishment of debt, net of tax (124) -- --
-------- -------- --------
Income (loss) before cumulative effect of change in accounting principle (5,846) 2,052 7,204
Cumulative effect of change in accounting for start-up costs, net of tax -- -- (304)
-------- -------- --------
Net income (loss) $ (5,846) $ 2,052 $ 6,900
======== ======== ========
See accompanying notes to consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(in thousands, except share data)
Years ended December 31,
--------------------------------
2000 1999 1998
------- -------- --------
Basic earnings (loss) per share:
Basic earnings (loss) per share from continuing operations before
extraordinary item and cumulative effect of change
in accounting principle $ (0.34) $ 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)
Extraordinary loss, net of tax (0.01) -- --
Cumulative effect of change in accounting principle, net of tax -- -- (0.02)
------- -------- --------
Basic earnings (loss) per share $ (0.34) $ 0.12 $ 0.49
======= ======== ========
Diluted earnings (loss) per share:
Diluted earnings (loss) per share from continuing operations before
extraordinary item $ (0.34) $ 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)
Extraordinary loss, net of tax (0.01) -- --
Cumulative effect of change in accounting principle, net of tax -- -- (0.02)
------- -------- --------
Diluted earnings (loss) per share $ (0.34) $ 0.12 $ 0.49
======= ======== ========
Weighted average shares used for basic earnings (loss) per share data 17,086 17,129 13,947
Effect of dilutive common stock options -- 48 127
------- -------- --------
Weighted average shares used for diluted earnings (loss) per share data 17,086 17,177 14,074
======= ======== ========
See accompanying notes to consolidated financial statements.
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41
AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
Retained
Common Stock Additional Earnings
----------------------- Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------------------------------------------------------------------
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 14,516 -- 199 -- 199
Issuance of common stock pursuant to stock options
exercised 5,334 -- 75 -- 75
------------------------------------------------------------------
Balance at December 31, 1999 17,138,235 $171 $ 145,444 $ 2,553 $ 148,168
------------------------------------------------------------------
Net loss -- -- -- (5,846) (5,846)
Issuance of common stock pursuant to employee
stock purchase plan 66,067 -- 238 -- 238
Issuance of common stock pursuant to funding of
employer 401k contribution 72,493 -- 595 -- 595
Repurchase of common stock pursuant to stock
repurchase program (211,400) -- (1,198) -- (1,198)
------------------------------------------------------------------
Balance at December 31, 2000 17,065,395 $171 $ 145,079 $(3,293) $ 141,957
==================================================================
See accompanying notes to consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
-------------------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ (5,846) $ 2,052 $ 6,900
Loss from discontinued operations, net of tax -- -- 1,244
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 124 -- --
-------- -------- --------
Income (loss) from continuing operations (5,722) 2,052 9,350
Adjustments to reconcile income (loss) from continuing operations
to net cash and cash equivalents provided by continuing operations:
Asset impairments and contractual losses -- 12,536 --
Depreciation and amortization 17,142 13,692 10,025
Amortization of deferred entrance fee revenue (7,581) (6,945) (3,756)
Amortization of deferred financing costs 2,174 1,342 754
Proceeds from terminated lifecare contracts 2,432 2,756 1,616
Proceeds from life estate sales, net of refunds 8,664 11,028 4,262
Deferred income tax (benefit) expense (1,731) (207) 3,923
Proceeds from (amortization of) deferred-gain on sale-leaseback
transactions (452) (452) (453)
Minority interest in losses of consolidated subsidiaries (961) (277) --
Losses from unconsolidated joint ventures 263 2,005 608
Gain on sale of assets (267) (3,036) (80)
Proceeds from issuance of stock through employee 401k plan 595 -- --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (548) (1,588) (3,642)
Inventory 45 (124) (95)
Prepaid expenses (758) (163) (346)
Other assets 1,165 (4,402) (2,195)
Accounts payable 1,960 (2,820) 2,907
Accrued expenses and other current liabilities (7,591) 40 2,135
Tenant deposits (803) 48 496
Other liabilities (1,593) (2,179) (172)
-------- -------- --------
Net cash and cash equivalents provided by continuing operations 6,433 23,306 25,337
Net cash and cash equivalents used in discontinued operations -- -- (1,941)
-------- -------- --------
Net cash and cash equivalents provided by operating activities 6,433 23,306 23,396
Cash flows from investing activities:
Additions to land, buildings and equipment (49,073) (59,221) (31,888)
Expenditures for acquisitions, net of cash received (6,422) -- (37,358)
Reimbursements from (advances for) development projects, net 3,667 7,374 (11,136)
Investments in joint ventures (357) (1,763) (3,143)
Contributions from minority owners 522 1,630 --
Receipts for purchase options 3,750 -- --
Purchases of other investments -- (10,177) (4,704)
Proceeds from the maturity of marketable securities -- -- 132
Proceeds from the sale of assets 26,483 3,138 1,736
Other investing activities (338) (664) --
Changes in assets and liabilities, net of effects from acquisitions:
Expenditures for leasehold acquisitions, net of cash received (14,972) -- --
Purchase of assets limited as to use (3,641) (13,643) (44,975)
Receipts from (issuance of) notes receivable 244 (78,916) (19,731)
-------- -------- --------
Net cash used by investing activities (40,137) (152,242) (151,067)
See accompanying notes to consolidated financial statements.
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AMERICAN RETIREMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(in thousands)
Years ended December 31,
-------------------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from financing activities:
Net proceeds from public offerings -- -- 64,805
Proceeds from issuance of stock through employee stock purchase plan 238 199 235
Payments for common stock through stock repurchase program (1,198) -- --
Proceeds from exercise of stock options -- 75 185
Proceeds from the issuance of long-term debt 89,549 143,162 53,717
Principal payments on long-term debt (49,896) (5,341) (12,752)
Principal reductions in master trust liability (3,727) (4,225) (2,625)
Expenditures for financing costs (3,293) (3,453) (77)
-------- -------- --------
Net cash provided by financing activities 31,673 130,417 103,488
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,031) 1,481 (24,183)
-------- -------- --------
Cash and cash equivalents at beginning of period 21,881 20,400 44,583
-------- -------- --------
Cash and cash equivalents at end of period $ 19,850 $ 21,881 $ 20,400
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest (including capitalized interest) $35,969 $24,591 $18,359
======= ======= =======
Income taxes paid $ 211 $ 5,138 $ 249
======= ======= =======
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 $ 939 $ -- $ 7,378
Costs in excess of net assets acquired -- -- 35,938
Land, buildings and other assets 14,202 -- 151,875
Current liabilities 768 -- 15,471
Long-term debt 7,951 -- 22,368
Other liabilities -- -- 74,793
During the year ended December 31, 2000, the Company funded its 401(k)
contribution with 72,493 shares of its common stock at a fair market value of
$595,000.
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.
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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, 2000, 1999 and 1998 include the consolidated financial statements of
American Retirement 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The Company principally provides housing, health care, and other related
services to senior 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.
(a) Use of Estimates and Assumptions: The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States of America 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
statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(b) Recognition of Revenue: The Company provides residents with housing and
health care services through various types of agreements. The Company also
receives fees for managing and developing senior living communities owned
by others.
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 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 the
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45
remaining 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 unit is reoccupied.
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. The Prospective Payment System (PPS), effective for the
Company beginning January 1, 2000, eliminates the cost based reimbursement
system, and communities are reimbursed on a per diem basis. Resident and
health care revenues, primarily Medicare, subject to retroactive
adjustments were 4.4%, and 4.7% of resident and health care revenues in
1999 and 1998, respectively.
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.
(c) Cash and Cash Equivalents: For purposes of the Statements of Cash Flows,
the Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
(d) 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, and U.S. Treasury obligations held
as collateral for letters of credit or in conjunction with leasing
activity or to support operating deficit agreements, and resident
deposits.
The Company classifies its U.S. Treasury obligations as held-to-maturity.
Held-to-maturity securities are those securities in which the Company has
the ability and the intent to hold the security until maturity.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Realized gains and
losses from the sale of held-to-maturity securities are determined on a
specific identification basis.
A decline in the market value of any held-to-maturity security below cost
that is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. Premiums and discounts are
amortized or accreted over the life of the related held-to-maturity
security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned.
(e) Inventory: Inventory consists of supplies and is stated at the lower of
cost (first-in, first-out) or market.
(f) 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 acquisition, 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
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base 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.
(g) 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.
(h) Goodwill: Goodwill 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
reflecting the risk of the acquired operations. The assessment of the
recoverability will be impacted if estimated future operating cash flows
are not achieved. Goodwill is net of accumulated amortization of $2.5
million and $1.5 million at December 31, 2000 and 1999, respectively.
Amortization expense was $1.0 million, $1.0 million, and $486,000, for the
years ended December 31, 2000, 1999, and 1998, respectively.
(i) Other Assets: Other assets consist primarily of security deposits,
unexercised purchase options, deferred financing costs (including
convertible debenture offering costs), costs of acquiring lifecare
contracts, deferred lifecare fee receivables, property held for sale, 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.
(j) Investments in Joint Ventures: Investments in joint ventures includes the
Company's investments 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, 2000 and 1999, the Company's investment and
advances in joint ventures was approximately $3.1 million and $1.1
million, respectively. See Note 10.
(k) 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 was effective January 1, 1999,
however early application was permitted. Initial application of SOP No.
98-5 was required 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 were required to
be written-off upon adoption of SOP No. 98-5.
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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.
(l) 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, 2000 and 1999, the
Company did not have a liability associated with its obligation to provide
future services and use of facilities.
(m) 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.
(n) 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 2000,
1999 and 1998 and was therefore not included in the computation of diluted
EPS. Antidilutive shares which were excluded from the diluted EPS
calculation in 2000, 1999 and 1998 were 1,034,000, 1,796,000, and 235,000,
respectively. See Note 21.
(o) 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" and related interpretations
including Financial Accounting Standards Board ("FASB") Interpretation No.
44, "Accounting for Certain Transactions involving Stock Compensation, an
Interpretation of APB Opinion No. 25" 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".
(p) 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, 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. The fair value of the interest rate swaps is
disclosed at Note 1(v).
(q) Derivative Instruments: During 2000 and 1999, the Company entered into two
interest rate swap agreements as a hedge against certain debt liabilities
in order to reduce its exposure to market risks from changing interest
rates. Notional amounts of the Company's two existing swap agreements were
$17.8 million and $35.2 million maturing December 10, 2024 and July 31,
2008, respectively. Under the agreements the Company receives
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fixed rates of 7.19% and 6.87%, respectively, and pays floating rates based
upon LIBOR and a foreign currency index with a maximum rate through July
31, 2002 of 6.87% and 8.12% thereafter, respectively.
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, or
immediately, if the item hedged does not remain outstanding. If the 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.
(r) 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 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 the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets held for sale are reported at the
lower of the carrying amount or the fair value less the costs to sell.
(s) 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 2000, 1999 and
1998, the Company's only component of comprehensive income (loss) was net
income (loss).
(t) 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. During
2000, the Company revised its staffing and internal reporting to manage and
operate in two business segments. Prior to fiscal 2000, the Company
operated as one business segment. See further disclosure in Note 18.
(u) Reclassifications: Certain 1999 and 1998 amounts have been reclassified to
conform with the 2000 presentation.
(v) Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts. Under SFAS No. 133, the Company
would recognize all derivatives as either assets or liabilities, measured
at fair value, in the consolidated balance sheet. In July 1999, SFAS No.
137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB No. 133, An Amendment of FASB Statement
No. 133" was issued deferring the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. In June 2000, SFAS No. 138 "Accounting
for Certain Derivative Instruments and Certain
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Hedging Activities, an Amendment of FASB Statement No. 133" was issued
clarifying the accounting for derivatives under the new standard. SFAS 133
standardizes the accounting for derivative instruments.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reason for
holding it. If certain conditions are met, entities may elect to designate
a derivative instrument as a hedge of exposures to changes in fair values,
cash flows, or foreign currencies. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive
income (outside earnings) and subsequently reclassified into earnings when
the forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness as well as the ineffective portion of the
gain or loss is reported in earnings immediately. During 1999 and 2000, the
Company entered into two interest rate swap agreements as a hedge against
certain long-term debt in order to manage interest rate risk. These swap
agreements are designated and qualify as cash flow hedges under SFAS No.
133.
The Company will adopt SFAS No. 133 on January 1, 2001. On adoption, the
provisions of the Statement must be applied prospectively. It is estimated
that adoption of SFAS No. 133 will result in the Company recording a net
transition adjustment loss of $1.1 million (net of related income tax of
$570,000 in accumulated other comprehensive income at January 1, 2001).
Further, the adoption of the Statement will result in the Company
recognizing $266,000 of derivative instrument assets and $1.9 million of
derivative instrument liabilities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 establishes specific criterion for revenue
recognition. In June 2000, the Securities and Exchange Commission issued
SAB 101B, which amends the transition guidance for SAB 101. The SEC delayed
the required implementation date of SAB 101 by issuing Staff Accounting
Bulletins No. 101A, "Amendment: Revenue Recognition in Financial
Statements" and 101B, "Second Amendment: Revenue Recognition in Financial
Statements" in March and June 2000, respectively. As a result, SAB 101 was
adopted by the Company in the fourth quarter of fiscal 2000, effective as
of January 1, 2000. The Company's accounting policies are consistent with
the requirements of SAB 101, so the implementation of SAB 101 did not have
an impact on the Company's operating results in 2000.
(3) LIQUIDITY
The Company's credit agreements contain restrictive covenants which include the
maintenance of minimum tangible net worth, prescribed debt service coverage,
liquidity, capital expenditure reserves and occupancy levels. Effective as of
September 30, 2000, the Company amended several of these financial covenants in
order to remain in compliance therewith. The Company is in compliance with its
required financial covenants at December 31, 2000, as amended. Accordingly, the
related debt is classified in accordance with the contractual maturity
schedules. Future compliance with the financial covenants is largely dependent
upon improvements in the operations of the Company's Free-standing ALs.
Improvements in the Company's operations is also subject to various factors such
as economic conditions, interest rate levels, competition for residents,
increases in operating costs and various other factors, some of which are beyond
the Company's control. Consequently, there can be no assurances that the Company
will remain in compliance with those financial covenants. If the Company fails
to meet the covenants, unless amended or waived, the lenders will have the right
to cease funding and accelerate repayment of the debt, which would have a
material adverse effect on the Company.
The Company is highly leveraged and has a substantial amount of debt and lease
obligations. At December 31, 2000, the debt maturities and minimum lease
obligations in 2002 total $362 million. Internally generated cash will not be
sufficient to meet the 2002 debt and minimum lease obligations. Furthermore, due
to adverse market conditions and the market price of the Company's stock, the
Company believes that it is unlikely that it will be able to raise capital in
the public equity markets for the foreseeable future. Accordingly, the Company's
ability to refinance its maturing obligations will depend, in large part, upon
its ability to obtain new or replacement financing on acceptable terms. The
Company is focusing on generating additional proceeds from incremental leverage.
At the same time, the
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Company is also examining other alternatives to obtain funding, including the
monetization of certain stabilized communities. The Company has had preliminary
discussions with its existing lenders regarding the extension of much of the
Company's maturing indebtedness. There can be no assurances that the Company
will be able to refinance, extend and obtain new financing.
A significant amount of the Company's indebtedness is cross-defaulted. Any
non-payment, other default with respect to such obligations, or failure to
comply with the covenants of the debt agreements could cause lenders to cease
funding, accelerate payment obligations or to foreclose upon the communities
securing the indebtedness. Further, because of the 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 default or acceleration of other obligations, which
would have a material adverse effect on the Company.
(4) 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. In 1999, 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 1999
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 recorded an impairment charge of approximately
$800,000 in 1999 related to the parcels and classified the land as property held
for sale. In December 2000, the Company sold one of these parcels. The Company
continues marketing the other parcel.
In 1999, 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 purchased the uncompleted property
from the owners and forgave 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, which were paid in 2000.
The Company also provided construction financing on the projects and recorded an
impairment charge of $1.5 million in 1999 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.
In 1999 the Company owned 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 Company determined that this venture did not fit with
the Company's Senior Living Network strategy. The Company had entered into an
agreement in 1999 to dissolve the joint venture. The Company recorded an
impairment charge of $3.2 million related to this joint venture, during the
quarter ended December 31, 1999, as the fair market value of the net assets to
be received upon dissolution were less than the carrying amount of the Company's
equity investment and advances to the joint venture. As of June 1, 2000, the
parties dissolved the joint venture, with each party retaining one of the
assisted living communities, along with the liabilities associated with that
community. As a result of the dissolution, the
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Company recorded assets of $8.2 million, consisting primarily of land and
buildings. The Company also assumed $8.2 million of liabilities, consisting
primarily of a $7.9 million mortgage note payable. The Company has no further
management responsibility for, or liability with respect to, the community that
was retained by the other party. The Company has discovered that this property
has several significant construction or design deficiencies that result in,
among other things, inadequate water and condensation drainage and control. As a
result of these construction issues, the Company has moved certain residents and
initiated various inspections, air quality tests, and other procedures. The
Company has also involved its outside counsel and its insurance carrier in these
issues, and is in discussions with the construction contractors and the design
participants of the project. The Company is not able to determine to what extent
these issues will result in a negative impact on the results of this community
or additional liabilities and costs to the Company.
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 decisions noted above, the Company recorded total asset
impairments and contractual loss charges of approximately $12.5 million during
the quarter ended December 31, 1999. The pretax costs of $12.5 million include
$5.8 million of asset write-offs and accruals of $6.7 million for contractual
losses and other costs. The Company made cash payments of $5.9 million during
2000 related to these costs. An accrual of $811,000 remains at December 31,
2000. The Company anticipates expending the balance of these costs during 2001.
(5) 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. During the 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
year ended December 31, 1998 have been reclassified to discontinued operations.
The Company recorded losses from home health operations, net of tax, of $1.2
million for the year ended December 31, 1998. Additionally, during the quarter
ended December 31, 1998, the Company recognized an after tax charge of $902,000,
related primarily to the impairment of unamortized costs in excess of net assets
acquired in home health care agency acquisitions.
(6) 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 goodwill 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 goodwill, which completed the FGI
transaction.
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The following unaudited condensed consolidated pro forma results of continuing
operations assumes the above referenced acquisition had been consummated as of
January 1, 1998.
(in thousands except share data):
-----------------------------------------------------------------
Total revenues $159,801
Income from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle $6,873
Diluted earnings per share $0.47
Weighted average diluted shares 14,747
(7) ASSETS LIMITED AS TO USE
The composition of assets limited as to use at December 31, 2000 and 1999 is as
follows (in thousands):
2000 1999
-------- --------
Held by trustee under agreement:
U.S. Treasury obligations $ 17,630 $ --
Certificates of deposit 42,691 53,314
Cash and other short-term investments 18,645 23,112
-------- --------
78,966 76,426
Less long-term investments 73,785 60,855
-------- --------
Short-term investments $ 5,181 $ 15,571
======== ========
The $17.6 million of U.S. Treasury obligations related to a community leased on
May 26, 2000. The Company receives and recognizes the interest income on these
assets limited as to use.
The certificates of deposit are pledged to the lessors of certain senior living
communities as collateral to support the lessor's equity contributions. The
Company receives and recognizes the interest income earned on these certificates
of deposit.
(8) LAND, BUILDINGS, AND EQUIPMENT
A summary of land, buildings, and equipment is as follows (in thousands):
2000 1999
--------- ---------
Land and improvements $ 46,534 $ 44,887
Land leased to others 15,406 17,022
Land held for development 9,762 9,762
Buildings and improvements 392,312 351,529
Furniture, fixtures, and equipment 30,677 25,740
Leasehold improvements 4,893 3,091
--------- ---------
499,584 452,031
Less accumulated depreciation and amortization (52,090) (39,752)
Construction in progress 25,568 19,281
--------- ---------
Total $ 473,062 $ 431,560
========= =========
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On December 18, 2000 the Company sold a community located in Westlake, Ohio and
subsequently leased the property back from the buyer. At the transaction date,
the community had a net book basis of $13.2 million and was sold for
approximately $26.0 million. The gain has been deferred and will be recognized
into income over the life of the lease, ending July 2007. Pursuant to the sale,
the Company repaid the mortgage financing, $17.0 million, and has deposited the
remaining proceeds with an escrow agent. The Company anticipates that a portion
of the taxable gain from the transaction will be deferred by like-kind exchanges
that the Company anticipates consummating during 2001, thus deferring a
significant portion the taxable gain. In conjunction with the lease, the Company
has the right of first refusal to purchase the community. The deferred gain
recorded for financial reporting purposes could be subsequently reduced if a
portion of the sales proceeds are used to purchase similar operating property.
Depreciation expense was $15.0 million, $12.1 million, and $9.1 million for the
years ended December 31, 2000, 1999, and 1998, respectively. The Company
capitalized $1.4 million, $2.1 million, and $1.5 million of interest costs
during 2000, 1999 and 1998, respectively.
(9) 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 4, in 1999 the Company wrote off $1.5 million
with a corresponding charge to earnings for notes receivable that will not be
collected due to the default by the Company under certain construction agency
agreements. No other notes receivable were impaired at December 31, 2000 or
1999.
(10) OTHER ASSETS
Other assets at December 31, 2000 and 1999 consist of the following (in
thousands):
2000 1999
-------- --------
Security deposits $ 7,663 $ 6,957
Purchase options 17,376 21,126
Costs of acquiring lifecare contracts, net 3,080 3,326
Deferred lifecare fee receivables 4,303 4,002
Deferred financing costs, net of accumulated amortization 5,467 5,961
Investments and advances in unconsolidated entities 3,124 1,141
Property held for sale 5,423 2,900
Other 4,156 2,660
-------- --------
Total $ 50,592 $ 48,073
======== ========
(11) LONG-TERM DEBT
A summary of long-term debt is as follows:
2000 1999
---------- ----------
(in thousands)
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 principal is due $ 137,980 $ 137,980
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2000 1999
---------- ----------
(in thousands)
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 (8.63% - LIBOR index monthly at December 31, 2000). Interest
only is paid monthly and the loan matures on December 31, 2002. The loan is
secured by certain land and buildings 23,909 47,659
Revolving line of credit in the amount of $100.0 million bearing interest at the
rate of LIBOR plus two hundred sixty basis points (9.22% at December 31, 2000).
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 91,090 64,390
Mortgage note payable bearing interest at a fixed rate of 8.2%. Interest and
principal is due monthly and the remaining principal and unpaid interest due at
maturity on December 31, 2001. The loan was
repaid in 2000 -- 14,300
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
(8.95% at December 31, 2000). Interest is due monthly with principal due at
maturity on December 2, 2002
The loan is secured by certain land and buildings 11,138 6,750
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 floating rate equal to three hundred
basis points in excess of the LIBOR rate (9.80% at December 31, 2000). Interest
and principal, amortized over 25 years, is due monthly with balloon maturity on
April 1, 2003. The loan is secured by certain land, buildings, equipment, and
assignment of rents and leases 23,086 --
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 35,179 35,544
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 17,787 18,000
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2000 1999
---------- ----------
(in thousands)
Mortgage note payable bearing interest at a fixed rate of 9.50%
Principal and interest of $104,844 is due monthly with remaining
principal and unpaid interest due on June 10, 2025. The note
is secured by certain land, buildings, equipment, and assignment
of rents and leases 11,940 --
Mortgage notes payable, generally payable monthly with interest
rates ranging from 8.80% to 9.95% 28,910 20,521
Construction notes payable, generally payable monthly with
interest rates ranging from 7.69% to 8.98% 24,184 11,413
Other long-term debt, generally payable monthly with
interest rates ranging from 4.2% to 10.49% 16,157 17,101
---------- ----------
Total long-term debt 483,690 435,988
Less current portion of long-term debt 7,449 10,173
---------- ----------
Long-term debt, excluding current portion $ 476,241 $ 425,815
========== ==========
The aggregate scheduled maturities of long-term debt at December 31, 2000 were
as follows (in thousands):
2001 $ 7,449
2002 333,265
2003 33,019
2004 7,418
2005 7,461
Thereafter 95,078
--------
$483,690
========
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.
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.
Effective as of September 30, 2000, the Company amended several of these
financial covenants in order to remain in compliance therewith, resulting in a
cost of $125,000 and an increase of twenty five basis points on the floating
interest rate. Failure to maintain compliance with the financial covenants would
have a significant adverse impact on the Company. 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.
The Company's internally generated cash will not be sufficient to meet the
obligations of maturing 2002 debt instruments. Furthermore, due to adverse
market conditions and the market price of the Company's stock, the Company
believes that it is unlikely that it will be able to raise capital in the public
equity markets for the foreseeable future. Accordingly, the Company's ability to
refinance its maturing obligations will depend, in large part, upon its ability
to obtain new or replacement mortgage financing on acceptable terms. The Company
is focusing on generating additional proceeds from incremental leverage,
including possible combinations of senior and mezzanine financing. At the same
time, the Company is also examining other alternatives for raising capital,
including the opportunistic monetization of investments in certain of the
stabilized communities. The Company has engaged in preliminary discussions with
its existing lenders regarding the extension of much of the Company's
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maturing indebtedness. Failure to meet the debt service requirements or debt
covenants would have a significant adverse impact on the Company.
(12) 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, 2000, the remaining obligation under the Master
Trust Agreements is $47.3 million and is payable monthly based on a 40-year
amortization of each residents' balance. The current installment due in 2001,
and annually for the subsequent five-year period, is approximately $1.5 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.
The obligation to the Master Trust is classified as follows at December 31, 2000
and 1999, respectively (in thousands):
Other Residency
Master Trust Agreements Total
------------ --------------- ----------
At December 31, 2000:
Other current liabilities $ 1,452 $ -- $ 1,452
Refundable portion of life estate fees 18,008 26,731 44,739
Deferred life estate income 27,791 24,974 52,765
------------ --------------- ----------
$ 47,251 $ 51,705 $ 98,956
============ =============== ==========
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
============ =============== ==========
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(13) SHAREHOLDERS' EQUITY
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, 2000, 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 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.
In December 1999, the Company 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. As of December 31, 2000, the Company had purchased
$1,198,000 or 211,400 shares of common stock and considers this buy back
complete. The Company also announced, in March 2000, that the Board of Directors
had authorized the repurchase, from time to time, of up to $30.0 million of the
Company's 5 3/4% Convertible Debentures. The timing and amount of purchases of
these debentures will depend upon prevailing market conditions, availability of
capital, alternative uses of capital and other factors. As of December 31, 2000,
the Company had not purchased any 5 3/4% Convertible Debentures. Purchases, if
any, would be made primarily in the open market during 2001.
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(14) 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, 15% of
the outstanding common stock, or 2,559,800 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.
A summary of the Company's stock option activity, and related information for
the years ended December 31, 2000, 1999 and 1998, respectively, is presented
below (shares in thousands):
Average
Exercise
Options Shares Price
-------------------------------------------------------------------------
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
-------------------------------------------------------------------------
Granted 183 $ 6.10
Exercised -- --
Forfeited (1,791) 15.81
-------------------------------------------------------------------------
Outstanding at December 31, 2000 760 $ 7.52
=========================================================================
The following table summarizes information about stock options outstanding at
December 31, 2000 (shares in thousands):
Weighted
Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life (Years) Price
---------------------------------------------------------------
$ 3.150 - 4.950 11 4.87 $ 4.46
$ 5.000 - 5.000 406 3.82 5.00
$ 5.010 - 14.000 285 5.59 9.32
$15.125 - 18.813 58 7.70 16.99
---------------------------------------------------------------
$ 3.150 - 18.813 760 5.08 $ 7.52
---------------------------------------------------------------
There were 296,000 options exercisable at an average exercise price of $9.85 as
of December 31, 2000. See Note 21.
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The following table summarizes information about stock options outstanding at
December 31, 1999 (shares in thousands):
Weighted
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 including
Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation, an Interpretation of 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 for a fixed number of shares with an exercise price 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, 2000, 1999 and 1998, respectively: 6.16%, 5.53% and 4.55%
risk-free interest rate, 0% dividend yield, 60.6%, 76.4% and 39.7% volatility
rate, and an expected life of the options equal to the remaining vesting period.
The weighted average fair value of options granted during 2000, 1999 and 1998
was $2.77, $6.08, and $5.38, 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):
2000 1999 1998
------------------------ ------------------------ -----------------------
As SFAS 123 As SFAS 123 As SFAS 123
Reported Pro Forma Reported Pro Forma Reported Pro Forma
--------- --------- --------- --------- -------- ---------
Net income (loss) $(5,846) $(6,665) $2,052 $ (419) $6,900 $5,559
Basic earnings (loss)
per share $ (0.34) $ (0.39) $ 0.12 $(0.02) $ 0.49 $ 0.40
Diluted earnings (loss)
per share $ (0.34) $ (0.39) $ 0.12 $(0.02) $ 0.49 $ 0.39
Stock Purchase Plan
In 1997, the Company adopted an employee stock purchase plan ("ESPP") pursuant
to which an aggregate of 138,792 shares remain authorized and available for
issuance to employees at December 31, 2000. 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
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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 2000, 1999 and 1998, respectively, 66,067, 14,516 and 16,190
shares were issued pursuant to the ESPP at an average purchase price of $3.60,
$9.34 and $14.52 per share, respectively.
(15) 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 $595,000, $115,000, and $521,000, for 2000, 1999, and 1998
respectively.
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 56 employees are eligible to participate in
the 162 Plan. The Company contributed approximately $24,000 and $191,000 to the
162 Plan in 1999 and 1998, respectively. No contributions were made to the 162
Plan in 2000.
(16) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 2000, 1999,
and 1998 were attributable to the following (in thousands):
Years Ended December 31,
---------------------------------
2000 1999 1998
------- ------ -------
Income (loss) from continuing operations $(3,523) $1,087 $ 5,652
Minority interest in losses of consolidated
subsidiaries 589 170 --
Loss from home health operations -- -- (762)
Write-off of home health assets -- -- (553)
Extraordinary item (77) -- --
Cumulative effect of change in accounting
principle -- -- (186)
------- ------ -------
Total income taxes (benefit) $(3,011) $1,257 $ 4,151
======= ====== =======
The income tax expense (benefit), attributable to income (loss) from continuing
operations before minority interest, extraordinary item and cumulative effect of
change in accounting principle consists of the following (in thousands):
Years Ended December 31,
-----------------------------------
2000 1999 1998
------- ------- -------
U.S. Federal:
Current $(1,554) $ 1,375 $ 1,138
Deferred (1,525) (28) 3,925
------- ------- -------
Total U.S. Federal (3,079) 1,347 5,063
------- ------- -------
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Years Ended December 31,
-----------------------------------
2000 1999 1998
------- ------- -------
State:
Current 274 89 591
Deferred (718) (179) (2)
------- ------- -------
Total State (444) (90) 589
------- ------- -------
Total ($3,523) $ 1,257 $ 5,652
======= ======= =======
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 2000 and 1999 are
presented below (in thousands):
2000 1999
-------- --------
Deferred tax assets:
Federal and state operating loss carryforwards $ 10,988 $ 3,734
AMT credit carryforward 478 2,000
Charitable contributions carryforward 6,653 6,653
Deferred gains on sale/leaseback transactions 5,337 1,183
Accrued expenses not deductible for tax 1,120 932
Intangible assets 700 549
Asset impairment charges and contractual losses on development 361 3,387
Other 308 295
-------- --------
Total gross deferred tax assets 25,945 18,733
Less valuation allowance (8,717) (7,554)
-------- --------
Total deferred tax assets, net of valuation allowance 17,228 11,179
Deferred tax liabilities:
Buildings and equipment 25,886 23,207
Deferred life estate revenue 1,403 1,016
Other 2,686 1,434
-------- --------
Total gross deferred tax liabilities 29,975 25,657
-------- --------
Net deferred tax liability $(12,747) $(14,478)
======== ========
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 (loss) from continuing operations before income
taxes, minority interest, extraordinary item and cumulative effect of change in
accounting principle:
2000 1999 1998
------- ------- -------
Statutory tax rate 35.0% 35.0% 35.0%
Difference in book and tax goodwill amortization expense (1.4%) 4.0% --
State income taxes, net of Federal benefit 1.3% (1.8%) 2.5%
Non-deductible expenses and other items (0.4%) 0.8% 0.2%
----- ----- -----
Total 34.5% 38.0% 37.7%
===== ===== =====
At December 31, 2000, the Company had unused federal net operating loss (NOL)
carryforwards of approximately $20 million for regular tax purposes and $3
million for alternative minimum tax, which expire in 2011 through 2020. As of
December 31, 2000 the Company had alternative minimum tax credit carryforwards
of approximately $478,000. 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, 2000, the Company carried a valuation allowance against
deferred tax assets in the amount of $8.7 million. The net change in the total
valuation allowance for the years ended December 31, 2000 and 1999 was an
increase of $1.1 million. The increase in the valuation allowance during 2000
related to state net operating loss carryovers generated in 2000. 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 related to deductible
temporary differences is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. The
ultimate realization of deferred tax assets related to tax credit carryforwards
is dependent upon the generation of future taxable income prior to the
expiration of the carryforwards. 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 goodwill recorded 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 $2 million 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.
(17) LEASEHOLD ACQUISITIONS AND SPECIAL PURPOSE ENTITIES (SPE)
The Company has entered into various transactions with third parties for the
development of certain Free-standing ALs. The Company generally has owned the
land used for development purposes. The Company enters into a long-term ground
lease with a special purpose entity, generally a subsidiary of a bank (the
Owner). The Owner enters into a construction agreement with a lender. The
Company is required to pledge to the Owners certificates of deposit as
collateral to support the lessor's equity contribution commitment. At December
31, 2000, the Company has pledged certificates of deposit in the aggregate of
$27.8 million, which are classified as non-current assets limited as to use. The
Company receives the interest income earned on these certificates of deposit.
Upon completion of the various development projects, the Owners of these senior
living communities lease the properties to various other SPEs (the Lessee) under
operating leases. The Company then enters into management agreements with the
lessee's 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 lessee's operating deficits above specified amounts. During
2000 and 1999, the Company funded operating deficits of $2.2 million and
$374,000, respectively. Such amounts are recorded as equity in losses of managed
SPE communities on the accompanying Statements of Operation. The management
agreements also provide the Company with purchase options or rights of first
refusal to assume the lessee's leasehold interests in the leases at a formula
price. During 2000, the Company assumed the leasehold interests of thirteen
communities and acquired a community. Certain of these acquisitions were from a
related party. This resulted in leasehold acquisition costs of $15.7 million
during 2000, which are amortized over the remaining base term of the leases
(generally ten to 15 years). Accumulated amortization was $547,000 as of
December 31, 2000. See Note 20.
At December 31, 2000, there were 12 assisted living communities leased by
various lessee's. If offered and accepted, the Company anticipates acquiring
certain, and perhaps all, of the leasehold interests, under its purchase options
or rights of first refusal, in these 12 communities during 2001 and 2002. The
combined purchase price would be approximately $20.0 to $25.0 million. Due to
these leasehold acquisitions, the Company expects to incur significant operating
losses until the communities achieve break-even occupancy levels. If the Company
does not acquire these leasehold interest, it is still responsible for funding
future operating losses which exceed specified limits.
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(18) INDUSTRY SEGMENT INFORMATION
The Company has significant operations principally in two industry segments: (1)
Retirement Centers and (2) Free-Standing Assisted Living. Retirement Centers
represent 32 of the senior living communities which provide a continuum of care
services such as, independent living, assisted living and skilled nursing care.
The Company currently operates 30 Free-Standing ALs. Free-standing ALs are
generally comprised of stand-alone assisted living communities that are not
located on a Retirement Center campus, some of which also provide some skilled
nursing and/or specialized care such as Alzheimer's and memory enhancement
programs. Free-standing ALs are generally much smaller than Retirement Centers.
During fiscal year 2000, the Company realigned its management consistent with
these segments. Prior to fiscal 2000, the Company operated in one segment.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance on
EBITDAR, which is defined as earnings before net interest expense, income tax
expense, depreciation, amortization, rent, and other special charges related to
asset write-offs and write-downs, equity in loss of special purpose entities,
other income (expense), minority interest, and extraordinary items. All prior
year data has been reclassified to conform to the new segment alignment(1). The
following is a summary of total revenues, EBITDAR, and total assets by segment
for the years ended December 31, 2000 and 1999 (in thousands). It is impractical
for the Company to report such segment information for fiscal 1998 as there was
a limited number of Free-standing ALs in that period.
RETIREMENT FREE-STANDING CORPORATE /
CENTERS ASSISTED LIVING OTHER TOTAL
---------- --------------- ----------- --------
FOR THE YEAR ENDED DECEMBER 31, 2000
Revenues $187,605 $ 13,450 $ 5,059 $206,114
NOI / Community EBITDAR(2) 65,241 (2,851) (14,366) 48,024
Lease Expense 18,267
Depreciation and Amortization 17,142
Operating Income (loss) 12,615
Total Assets 445,020 68,266 279,194 792,480
FOR THE YEAR ENDED DECEMBER 31, 1999
Revenues $159,531 $ 4,959 $ 10,780 $175,270
NOI / Community EBITDAR(2) 58,722 6 (4,456) 54,272
Lease Expense 12,985
Depreciation and Amortization 13,692
Asset Impairments and Contractual Losses 12,536
Operating Income (loss) 15,059
Total Assets 426,331 22,047 292,033 740,411
(1) Segment data does not include any inter-segment transactions or
allocated costs.
(2) EBITDAR is defined as earnings before net interest expense, income tax
expense, depreciation, amortization, rent, and other special charges
related to asset write-offs and write-downs, equity in loss of special
purpose entities, other income (expense), minority interest, and
extraordinary items. EBITDAR is commonly referred to by the Company as
Net Operating Income or NOI.
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(19) COMMITMENTS AND CONTINGENCIES
The Company is subject to various legal proceedings and claims, which arise in
the ordinary course of its business. In the opinion of management, the ultimate
liability with respect to those proceedings and claims will not materially
affect the financial position, operations, or liquidity of the Company. The
Company maintains commercial insurance on a claims-made basis for medical
malpractice liabilities. Management is unaware of any incidents which would
result in a loss in excess of the Company's insurance coverage.
The Company is self-insured for workers' compensation claims with excess loss
coverage of $425,000 per individual claim and $1 million for aggregate claims.
The Company utilizes a third party administrator to process and pay filed
claims. The Company has accrued $547,000 to cover open claims not yet settled
and incurred but not reported claims as of December 31, 2000. Management is of
the opinion that such amounts are adequate to cover any such claims incurred but
not reported as of December 31, 2000.
At December 31, 2000, the Company had entered into operating leases for 21 of
its senior living communities, its corporate offices, and a ground lease for a
senior living community purchased during the year. The remaining base lease
terms vary from two to 59 years. Certain of the leases provide for renewal and
purchase options. Lease expense was $18.3 million, $13.0 million and $9.1
million for 2000, 1999, and 1998, respectively.
Future minimum lease payments excluding residual guarantees under operating
leases as of December 31, 2000 were as follows (in thousands):
2001 $ 28,249
2002 28,714
2003 26,308
2004 25,102
2005 29,400
Thereafter 181,109
--------
$318,882
========
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, 2000, $18.6 million was outstanding
under the debt agreement.
In addition, the Company has guaranteed mortgage debt of approximately $65.0
million of which $13.0 million relates to two leased Retirement Centers, $28.2
million relates to three of the Managed SPE Communities, $16.2 million relates
to two of the acquired leasehold interests during 2000, one of which opened
during the first quarter of 2001, and $7.6 million relates to a non-consolidated
Managed SPE Community.
The Company is currently providing development services for senior living
communities owned by others. Under the terms of the development or management
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 $901,000 and $5.9 million of development fee revenue
during 2000 and 1999, respectively. 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.
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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, 2000.
The Company manages a senior living community in Peoria, Arizona under a
long-term management agreement with a third party owner. 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, and has notified the Arizona DOI of the Company's
intention to enter into a lease of the community, if the Company can reach
acceptable terms with the owner. The Department has tentatively indicated that
the proposed lease will result in the community's compliance with the applicable
Arizona statute. 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.
(20) RELATED PARTY TRANSACTIONS
The Company agreed to develop ten assisted living residences for an unaffiliated
third-party. Following completion of construction, the residences were leased to
affiliates of John Morris, a director of the Company. During 2000, leasehold
interests for four of these communities have been acquired by the Company for
$6.2 million (see Note 17). One of the leasehold interests acquired was
subsequently leased to a third party during 2000. The Company 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 2000 and 1999, the Company recognized $984,000 and
$0 in operating losses related to the four leases acquired, and recognized
$562,000 and $114,000 in 2000 and 1999, respectively, of management fees
pursuant to the management agreements. In addition, the Company has advanced
amounts for certain costs of these SPE affiliates of John Morris. At December
31, 2000, approximately $1.2 million was due to the Company from these
affiliates. Such amounts are expected to be reimbursed through the future
acquisition of the leasehold interests of these affiliates.
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, Freedom Plaza Limited Partnership (FPLP). Mr.
Roskamp, a previous 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 receives a management fee equal to all cash receipts 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 $972,000, $1.5 million, and $1.2
million of management fees in 2000, 1999, and 1998 respectively, pursuant to
this agreement. At December 31, 2000 and 1999, the Company has receivables of
$2.3 million and $1.5 million, respectively from FPLP. Such amounts are
non-interest bearing.
W.E. Sheriff, the Company's chairman and chief executive officer, owns 50% of
Maybrook Realty, Inc., which in October 1999 acquired a 128-bed nursing center,
Freedom Plaza Care Center (FPCC) in Peoria, Arizona. Maybrook
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simultaneously leased the nursing center to FPLP, which, in turn, operates the
nursing center as part of the Freedom Plaza retirement campus under the name
FPCC. As described above, FPLP (including FPCC after October 1999) is managed by
the Company pursuant to a management agreement providing the Company with a net
cash flow management fee. The Company has guaranteed the payment and performance
of FPLP's obligations under its lease with Maybrook. Mr. Sheriff has also agreed
to indemnify the Company from any loss or liability that the Company incurs
under the guaranty of such lease.
The Company is serving as the developer of an expansion of the FPCC, which is
nearing completion. Pursuant to the terms of its development agreement with
Maybrook, the Company is to receive a development fee of $125,000. The Company
recognized $78,125 of the development fee in 2000. Maybrook has also granted the
Company an option to acquire the health center at a formula purchase price
beginning in October 2009.
In July 1998, the Company 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, a previous director of the Company, owns a 98.0% interest,
and assumed FGI's existing guaranty of approximately $18.6 million of the
mortgage debt associated with the community. Pursuant to the management
agreement, the Company will receive a management fee equal to all cash receipts
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 $519,000, $368,000, and $1.7 million of management fees in
2000, 1999, and 1998 respectively, pursuant to this agreement. At December 31,
2000 and 1999, the Company has receivables of $2.5 million and $1.2 million,
respectively from this community. Such amounts are non-interest bearing.
In July 1998, the Company entered into a three-year management agreement for a
senior living community located in West Brandywine, Pennsylvania, that was owned
by a partnership in which Mr. Roskamp, a previous director of the Company, owned
a 70.0% interest. Pursuant to the management agreement, the Company received 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. On May 26, 2000, the Company assigned its
purchase option to a third party, which exercised the option and purchased the
property. The Company subsequently entered into a series of agreements with this
third party to lease and operate the retirement community. In connection with
this transaction, the Company is required to maintain $17.4 million of assets
limited as to use, on which the Company receives the interest. 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
$212,000, $383,000, and $82,000 in management fees in 2000, 1999, and 1998
respectively, pursuant to this agreement. At December 31, 2000, the Company had
a note payable of $888,000 to the lessor.
Pursuant to the FGI Transaction, the Company also entered into an agreement to
provide development services related to the development and construction of a
senior living community in Sarasota, Florida that opened during 2000. The
community is owned by a limited liability company in which Mr. Roskamp owns a
57.5% interest. The Company managed 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.
During the third quarter of 2000, the Company chose to cancel the purchase
option, the full $2.0 million deposit was refunded. The management agreement for
this community was mutually terminated on December 31, 2000. The Company
recognized $750,000, $900,000, and $450,000 of development fees in 2000, 1999,
and 1998, respectively and $65,300 in management fees in 2000, from the
agreement.
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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 through June 2001.
(21) SUBSEQUENT EVENTS
On January 4, 2001, the Company granted 1,120,000 incentive stock options,
236,700 of which were non-qualified. These options were granted with an exercise
price of $3.10, the fair value of the shares at the date of grant. These grants
are one-third vesting upon six months, 12 months and 15 months, and have an
expiration of ten years.
(22) 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.
Year
2000 Quarter Ended Ended
---------------------------------------------------- Dec 31,
Mar 31 June 30 Sept 30 Dec 31 2000
-------- -------- -------- -------- ---------
(dollar amounts in thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Total revenues $46,777 $ 48,762 $ 53,432 $ 57,143 $ 206,114
Net income (loss) 620 (652) (1,742) (4,072) (5,846)
EARNINGS (LOSS) PER SHARE:
Basic $ 0.04 $( 0.04) $( 0.10) $( 0.24) $( 0.34)
Weighted average basic shares outstanding 17,138 17,146 17,024 17,037 17,086
Diluted $ 0.04 $( 0.04) $( 0.10) $( 0.24) $( 0.34)
Weighted average diluted shares
outstanding 17,249 17,146 17,024 17,037 17,086
Year
1999 Quarter Ended Ended
---------------------------------------------------- Dec 31,
Mar 31 June 30 Sept 30 Dec 31 1999
-------- -------- -------- -------- ---------
(dollar amounts in thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Total revenues $43,595 $44,453 $44,362 $ 42,860 $175,270
Net income (loss) 3,395 3,431 2,079 (6,853) 2,052
EARNINGS (LOSS) PER SHARE:
Basic $ 0.20 $ 0.20 $ 0.12 $( 0.40) $ 0.12
Weighted average basic shares outstanding 17,118 17,122 17,138 17,138 17,129
Diluted $ 0.20 $ 0.20 $ 0.12 $( 0.40) $ 0.12
Weighted average diluted shares
outstanding 17,177 17,161 17,138 17,138 17,177
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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 3, 2001 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 3, 2001 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 3, 2001 to be filed with the SEC.
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 3, 2001 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)
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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(10)
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)
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)
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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)
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(10)
10.32 Loan Agreement, dated March 23, 2000, by and between ARC Heritage Club,
Inc. and GMAC Commercial Mortgage Corporation.(11)
10.33 Construction Loan Agreement, dated March 17, 2000 between Freedom
Village of Sun City Center, Ltd. and Suntrust Bank, Tampa Bay(12)
10.34 Real Estate Mortgage and Security Agreement, dated May 8, 2000, between
Lake Seminole Square Management Company, Inc., Freedom Group-Lake
Seminole Square, Inc. and Aid Association for Lutherans(12)
10.35 Construction Loan Agreement, dated September 28, 2000 between ARC
Scottsdale, LLC and Guaranty Federal Bank, F.S.B.(13)
10.36 First Amendment to Amended and Restated Financing and Security
Agreement(13)
10.37 First Amendment to Amended and Restated Guaranty of Payment
Agreement(13)
10.38 Lease Agreement by and between Cleveland Retirement Properties, LLC,
and ARC Westlake Village, Inc., dated December 18, 2000
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
- --------------
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.
10 Incorporated by reference to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
11 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2000.
12 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.
13 Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000.
(b) Reports on Form 8-K filed during the quarter ended December 31, 2000:
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
March 30, 2001 By: /s/ W.E. Sheriff
-------------------------------------------
W.E. Sheriff
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange 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, 2001
- -----------------------------------------
W.E. Sheriff Chief Executive Officer
(Principal Executive Officer)
/s/ George T. Hicks Executive Vice President - Finance, March 30, 2001
- -----------------------------------------
George T. Hicks Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ H. Lee Barfield II Director March 30, 2001
- -----------------------------------------
H. Lee Barfield II
/s/ Frank M. Bumstead Director March 30, 2001
- -----------------------------------------
Frank M. Bumstead
/s/ Christopher Coates Director March 30, 2001
- -----------------------------------------
Christopher J. Coates
/s/ Robin G. Costa Director March 30, 2001
- -----------------------------------------
Robin G. Costa
/s/ Clarence Edmonds Director March 30, 2001
- -----------------------------------------
Clarence Edmonds
/s/ John A. Morris, Jr., M.D. Director March 30, 2001
- -----------------------------------------
John A. Morris, Jr., M.D.
/s/ Daniel K. O'Connell Director March 30, 2001
- -----------------------------------------
Daniel K. O'Connell
/s/ Nadine C. Smith Director March 30, 2001
- -----------------------------------------
Nadine C. Smith
/s/ Lawrence J. Steusser Director March 30, 2001
- -----------------------------------------
Lawrence J. Stuesser
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American Retirement Corporation
Schedule II - Valuation and Qualifying Accounts
Additions
----------------------
Balance at Charged to Charged to Balance at
Beginning of costs and other End of
Description Period expenses accounts Deductions Period
- ------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Year ended December 31, 1998 $ 248 $ 276 $ -- $ (282) $ 242
=========================================================
Year ended December 31, 1999 $ 242 $ 118 $ -- $ (123) $ 237
=========================================================
Year ended December 31, 2000 $ 237 $ 367 $ -- $ (182) $ 422
=========================================================
Deferred Tax Valuation Account
Year ended December 31, 1998 $ -- $6,653(1) $ -- $ 6,653
=========================================================
Year ended December 31, 1999 $6,653 $ 901 $ -- $ -- $ 7,554
=========================================================
Year ended December 31, 2000 $7,554 $1,163 $ -- $ -- $ 8,717
=========================================================
Reserve for Contractual loss
Year ended December 31, 1998 $ -- $ -- $ -- $ -- $ --
=========================================================
Year ended December 31, 1999 $ -- $6,200 $ -- $ -- $ 6,200
=========================================================
Year ended December 31, 2000 $6,200 $ -- $ -- $(5,389) $ 811
=========================================================
(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
Final Periodic Carrying of loans subject
Interest Maturity Payment Face amount amount of to delinquent
Description Rate Date Terms Prior liens of mortgages mortgages(3) principal or interest
- ------------------------------------------------------------------------------------------------------------------------------------
First mortgage loan LIBOR+200 1-Oct-05 (1) -- 1,533 1,533 --
First mortgage loan LIBOR+200 1-Dec-09 (1) -- 18,235 18,235 --
First mortgage loan LIBOR+200 1-Jan-10 (1) -- 4,235 4,235 --
======================================================================
-- 24,003 24,003 --
----------------------------------------------------------------------
Construction loans LIBOR+300 1-Jul-07 (2) -- 9,128 9,128 --
Construction loans LIBOR+300 1-Jul-07 (2) -- 7,737 7,737 --
Construction loans LIBOR+300 1-Jul-07 (2) -- 1,588 1,588 --
Construction loans LIBOR+200 1-Apr-07 (2) -- 9,961 9,961 --
Construction loans LIBOR+300 1-Dec-09 (2) -- 9,764 9,764 --
Construction loans LIBOR+200 1-Feb-10 (2) -- 8,606 8,606 --
Construction loans LIBOR+200 1-Jan-07 (2) -- 10,264 10,264 --
Other construction loans -- 7,454 7,454 --
----------------------------------------------------------------------
-- 64,502 64,502 --
----------------------------------------------------------------------
$-- $ 88,505 $ 88,505 $--
======================================================================
(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 carrying amount of the mortgage aggregate cost for federal income
tax purposes is $88,505.
===========
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
===========
Additions during period:
New mortgage loans 23,084
Deductions during period:
Collections of principal (31,815)
-----------------------
Balance at December 31, 2000 $ 88,505
===========
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