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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934
For the quarterly period ended September 30, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14012
EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1605464
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
(Address of principal executive offices)
(206) 298-2909
(Registrant's telephone number, including area code)
____________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
As of October 31, 2002, there were 10,214,934 shares of the Registrant's Common
Stock, par value $.0001, outstanding.
EMERITUS CORPORATION
INDEX
Part I. Financial Information
Item 1. Financial Statements: . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page No.
--------
Condensed Consolidated Balance Sheets as of September 30, 2002, and
December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months ended September 30, 2002 and 2001 . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations . . . .. . . . . . . . . . . . .. . . . .. . . . . . . . . . . 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . 22
Item 4. Controls and Procedures . . . . . . . . . . . .. . . . .. . . . . . . . . . 22
Part II. Other Information
Note: Items 1 through 3, and Item 5 of Part II are omitted because they are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . 23
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 23
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Certifications . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . 26
EMERITUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except share data)
ASSETS
September 30, December 31,
2002 2001
--------------- --------------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,461 $ 9,811
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,396 1,376
Trade accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,484 1,172
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,272 2,859
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . 4,208 2,463
Property held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,028 2,242
--------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,849 19,923
--------------- --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,459 131,200
Property held for development. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,040 1,040
Notes receivable from and investments in affiliates. . . . . . . . . . . . . . . . . 3,828 3,675
Restricted deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,555 5,520
Lease acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,737 4,864
Other assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,476 2,206
--------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,944 $ 168,428
=============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,394 $ 4,523
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,871 2,105
Accrued employee compensation and benefits. . . . . . . . . . . . . . . . . . . . . 3,914 3,301
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,255 2,861
Accrued real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,808 1,415
Accrued dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . 11,955 7,429
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,221 8,690
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,453 -
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,335 1,699
--------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,206 32,023
--------------- --------------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . 77,409 131,070
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 32,000
Deferred gain on sale of communities . . . . . . . . . . . . . . . . . . . . . . . . 20,392 18,671
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,498 2,404
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 256
--------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,959 216,424
--------------- --------------
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 1,145
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
Commitments and contingencies
Shareholders' Deficit:
Preferred stock, $.0001 par value. Authorized 70,000 shares; issued and outstanding
33,142 and 30,609 at September 30, 2002, and December 31, 2001, respectively . . - -
Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and
outstanding 10,214,934 and 10,196,030 shares at September 30, 2002, and
December 31, 2001, respectively. . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,724 67,686
Accumulated other comprehensive gain (loss). . . . . . . . . . . . . . . . . . . . . 884 (136)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (155,136) (141,692)
--------------- --------------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85,527) (74,141)
--------------- --------------
Total liabilities and shareholders' deficit . . . . . . . . . . . . . . . . . . . . $ 156,944 $ 168,428
=============== ==============
See accompanying Notes to Condensed Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
1
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three Months ended Nine Months ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues:
Community revenue . . . . . . . . . . . $ 32,226 $ 32,211 $ 94,640 $ 97,558
Other service fees. . . . . . . . . . . 1,149 474 3,244 1,621
Management fees . . . . . . . . . . . . 2,662 2,279 8,313 5,743
------------- ------------- ------------- -------------
Total operating revenues. . . . 36,037 34,964 106,197 104,922
Expenses:
Community operations. . . . . . . . . . 21,474 20,327 63,120 60,874
General and administrative. . . . . . . 5,385 5,068 15,175 13,905
Depreciation and amortization . . . . . 1,653 1,861 5,179 5,533
Facility lease expense. . . . . . . . . 7,282 6,681 21,420 20,361
------------- ------------- ------------- -------------
Total operating expenses. . . . 35,794 33,937 104,894 100,673
------------- ------------- ------------- -------------
Income from operations. . . . . 243 1,027 1,303 4,249
Other income (expense):
Interest income . . . . . . . . . . . . 46 221 268 779
Interest expense. . . . . . . . . . . . (2,838) (3,306) (8,616) (10,374)
Other, net. . . . . . . . . . . . . . . (153) 1,212 (894) 960
------------- ------------- ------------- -------------
Net other expense . . . . . . . (2,945) (1,873) (9,242) (8,635)
------------- ------------- ------------- -------------
Net loss. . . . . . . . . . . . (2,702) (846) (7,939) (4,386)
Preferred stock dividends . . . . . . . . 1,777 1,565 5,506 4,796
------------- ------------- ------------- -------------
Net loss to common shareholders $ (4,479) $ (2,411) $ (13,445) $ (9,182)
============= ============= ============= =============
Loss per common share - basic and diluted $ (0.44) $ (0.24) $ (1.32) $ (0.90)
============= ============= ============= =============
Weighted average number of common shares
outstanding - basic and diluted . . . 10,215 10,181 10,204 10,151
============= ============= ============= =============
See accompanying Notes to Condensed Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
2
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
Nine Months ended September 30,
------------------------------------
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,939) $ (4,386)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Minority interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 74
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,179 5,533
Amortization of deferred gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . (244) (521)
Loss (gain) on sale of properties . . . . . . . . . . . . . . . . . . . . . . . . . . 515 (983)
Write down of lease acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 191 169
Write off of deferred gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 -
Changes in operating assets and liabilities . . . . . . . . . . . . . . . . . . . . . 850 2,294
----------------- -----------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . (1,064) 2,180
----------------- -----------------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . (11,763) (1,456)
Purchase of minority partner interest . . . . . . . . . . . . . . . . . . . . . . . . . (3,070) -
Proceeds from sale of property and equipment. . . . . . . . . . . . . . . . . . . . . . 25,010 2,350
Management and lease acquisition costs. . . . . . . . . . . . . . . . . . . . . . . . . (1,602) -
Repayments from (advances to) affiliates and other managed communities. . . . . . . . . (603) 2,798
Proceeds from sales of interest in affiliates . . . . . . . . . . . . . . . . . . . . . 750 -
Investment in affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (94) (30)
Distributions to minority partners. . . . . . . . . . . . . . . . . . . . . . . . . . . (500) -
----------------- -----------------
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . 8,128 3,662
----------------- -----------------
Cash flows from financing activities:
Proceeds from sale of stock under employee stock purchase plan. . . . . . . . . . . . . 57 -
Decrease in restricted deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35) 177
Repayment of short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,733) (1,650)
Debt issue and other financing costs. . . . . . . . . . . . . . . . . . . . . . . . . . (1,424) -
Proceeds from long-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 46,818 155
Repayment of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . (53,097) (2,406)
----------------- -----------------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . (9,414) (3,724)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . (2,350) 2,118
Cash and cash equivalents at the beginning of the period. . . . . . . . . . . . . . . . . 9,811 7,496
----------------- -----------------
Cash and cash equivalents at the end of the period. . . . . . . . . . . . . . . . . . . . $ 7,461 $ 9,614
================= =================
Supplemental disclosure of cash flow information cash paid during the period
for interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,220 $ 10,986
Noncash investing and financing activities:
Transfer of property held for development from property held for sale . . . . . . . . . $ - $ 730
Notes receivable from buyer in sale/leaseback . . . . . . . . . . . . . . . . . . . . . $ - $ 625
Assumption of debt by buyer in sale/leaseback . . . . . . . . . . . . . . . . . . . . . $ - $ 3,162
Unrealized holding gains in investment securities . . . . . . . . . . . . . . . . . . . $ 1,020 $ 746
Accrued and in-kind preferred stock dividends . . . . . . . . . . . . . . . . . . . . . $ 5,506 $ 4,796
See accompanying Notes to Condensed Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
3
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of condensed consolidated financial statements requires Emeritus
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, Emeritus evaluates its estimates,
including those related to resident programs and incentives, bad debts,
investments, intangible assets, income taxes, financing operations,
restructuring, long-term service contracts, contingencies, insurance
deductibles, health insurance, and litigation. Emeritus bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Emeritus believes the following critical accounting policies are most
significant to the judgments and estimates used in the preparation of its
condensed consolidated financial statements. Revisions in such estimates are
charged to income in the period in which the facts that give rise to the
revision become known. Emeritus utilizes third-party insurance for losses and
liabilities associated with general and professional liability insurance claims
subject to established self-insured retention levels on a per occurrence basis.
Losses up to these self-insured retention levels are accrued based upon
actuarially determined estimates of the aggregate liability for claims incurred.
For health insurance, Emeritus self-insures up to a certain level for each
occurrence above which a catastrophic insurance policy covers any additional
costs. Health insurance expense is accrued based upon historical experience of
the aggregate liability for claims incurred. If these estimates are
insufficient, additional charges may be required. Emeritus maintains allowances
for doubtful accounts for estimated losses resulting from the inability of its
residents to make required payments. If the financial condition of Emeritus's
residents were to deteriorate, resulting in an impairment of their ability to
make payments, additional charges may be required. Emeritus holds shares in ARV
Assisted Living, Inc. amounting to less than 5% of its shares. ARV is publicly
traded and has a volatile share price. Emeritus records an investment
impairment charge when it believes this investment has experienced a decline in
value that is other than temporary. Future adverse changes in market conditions
or poor operating results underlying this investment could result in losses or
an inability to recover the carrying value of the investment that may not be
reflected in this investment's current carrying value, thereby possibly
requiring an impairment charge in the future. Emeritus records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized, which at this time shows a net asset valuation of zero.
While Emeritus has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event Emeritus were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.
BASIS OF PRESENTATION
The unaudited interim financial information furnished herein, in the opinion of
the Company's management, reflects all adjustments, consisting of only normally
recurring adjustments, which are necessary to state fairly the condensed
consolidated financial position, results of operations, and cash flows of
Emeritus as of September 30, 2002, and for the three and nine months ended
September 30, 2002 and 2001. The Company presumes that those reading this
interim financial information have read or have access to its 2001 audited
consolidated financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations that are contained in the 2001
Form 10-K filed March 29, 2002, and amended on April 30, 2002. Therefore, the
Company has omitted footnotes and other disclosures herein, which are disclosed
in the Form 10-K.
4
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
(unaudited)
DEFERRED REVENUE
At September 30, 2002, deferred revenue of $2.5 million consists of the unearned
portion of the insurance surcharge and move-in fees as discussed below.
Due to dramatic increases in liability insurance premiums for the year 2002, the
Company decided to institute an insurance surcharge and billed approximately
$1.4 million to the residents of its communities in the first quarter of 2002.
The associated revenue is being recognized on a straight-line basis over the
life of the insurance policy.
In 2001 and prior years, the Company recognized nonrefundable move-in fees at
the time the resident occupied the unit and the related services were performed.
This treatment was not materially different than recognition of such fees over
the average period of occupancy. However, in 2002, the Company began charging
significantly higher fees for move-ins than were previously charged. Therefore,
the Company has instituted a policy consistent with SEC Staff Accounting
Bulletin 101 "Revenue Recognition", to defer such fees and recognize them over
the average period of occupancy, approximately 16 months. This resulted in
deferring approximately $2.1 million of revenue at September 30, 2002, of which
$1.7 million and $771,000 relate to fees charged in the nine-month and
three-month periods ended September 30, 2002, respectively. The Company has not
deferred any of the costs related to move-ins.
EMERITRUST TRANSACTIONS
The Company holds interest in 46 communities referred to as the Emeritrust
communities, including 25 Emeritrust I communities, 16 Emeritrust II Operating
communities, and 5 Emeritrust II Development communities, under management
agreements described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. The Company does not recognize management fees on the
Emeritrust communities as revenue in its condensed consolidated financial
statements to the extent that it is funding the cash operating losses that
include them, although the amounts of the funding obligation each year include
management fees earned by Emeritus under the management agreements.
Correspondingly, the Company recognizes the funding obligation under the
agreement, less the applicable management fees, as an expense in its condensed
consolidated financial statements under the category "Other, net". Conversely,
if the applicable management fees exceed the funding obligation, the Company
recognizes the management fees less the funding obligation as management fee
revenue in its condensed consolidated financial statements.
For the three months ended September 30, 2002 and 2001, total gross management
fees earned for the Emeritrust I communities were approximately $511,000 and
$1.4 million, respectively, of which $349,000 and $739,000, respectively, were
recognized as revenue. Approximately $450,000 of the decrease in gross
management fees is associated with changes in the computation of management fees
effective with the extension of the management agreement on January 1, 2002. In
addition, gross management fees for the third quarter of 2002 were reduced by
financing extension fees paid by the communities during the quarter and gross
management fees for the third quarter of 2001, including recognition of $576,000
in contingent management fees earned in prior periods. Fees recognized as
revenue for the third quarter of 2001 reflected a funding obligation consisting
of $647,000 on the underlying financing of Emeritrust I properties, a feature
that is not present in 2002. For the three months ended September 30, 2002 and
2001, total management fees earned for the Emeritrust II Development communities
were $183,000, and $160,000, respectively, of which $170,000 and $142,000,
respectively, were recognized as revenue after reflecting funding obligations of
$13,000 and $18,000, respectively. For the three months ended September 30,
2002 and 2001, management fees earned and recognized for the Emeritrust II
Operating communities, for which there is no funding obligation, were $486,000
and $500,000, respectively. Thus, the management fees recognized for all of the
Emeritrust communities decreased $376,000 for the third quarter of 2002 compared
to the comparable period in 2001.
5
For the nine months ended September 30, 2002 and 2001, total management fees
earned for the Emeritrust I communities were approximately $1.6 million and $2.5
million, respectively, of which $1.4 million and $1.6 million, respectively,
were recognized as revenue. These results were affected by the same factors
discussed for the third quarters of 2002 and 2001 and additional funding
obligations of $253,000 for the first six months of 2001. For the nine months
ended September 30, 2002 and 2001, total management fees earned for the
Emeritrust II Development communities were $579,000 and $400,000, respectively,
of which $529,000 and $326,000, respectively, were recognized as revenue after
reflecting funding obligations of $50,000 and $74,000, respectively. For the
nine months ended September 30, 2002 and 2001, management fees earned and
recognized for the Emeritrust II Operating communities, for which there is no
funding obligation, were $1.5 million and $1.4 million, respectively. Thus, the
management fees recognized for all of the Emeritrust communities increased
$69,000 for the first three quarters of 2002 compared to the comparable period
in 2001.
PROPERTY HELD FOR SALE
Emeritus currently has one property being held for sale. Assets to be disposed
of are reported at the lower of their carrying amount or fair market value less
costs to sell.
PROPERTY AND EQUIPMENT
In July of 2002, the Company terminated the operating lease on an 88-unit
building in Bedford, Virginia, and entered into a management agreement for that
facility for a period equal to the remainder of the lease term.
In August of 2002, the Company terminated the management agreement with Columbia
Pacific Management, an entity controlled by Daniel R. Baty, Emeritus's chief
executive officer, for a 214-unit facility in Cincinnati, Ohio. In the same
month, the Company exercised the purchase option to acquire a 108-unit facility
in Auburn, Massachusetts, from Hanseatic Corporation. The cost to exercise the
option was approximately $10.4 million, which consisted of the option price of
$10.2 million and approximately $200,000 in transaction costs. The Company
financed the transaction using $8.3 million in debt financing provided by GE
Healthcare Financial Services and approximately $2.1 million in cash. The debt
financing bears interest at LIBOR plus 3.85%, with a floor of 6.5%, and is
secured by the mortgage and the assignment of leases.
In September of 2002, the Company purchased the leasehold interest in a 111-unit
facility located in San Antonio, Texas, from Regent Assisted Living ("RAL").
RAL had a cash security deposit on this property of approximately $742,000,
which was replaced with a letter of credit from the Company. The Company also
paid $408,000 in additional consideration to purchase RAL's leasehold interest.
Total cash paid was approximately $1.2 million after transaction costs.
Healthcare Property Investors provided debt financing of $800,000 and the
Company paid cash of approximately $425,000. The note requires interest-only
payments and bears an effective rate of 15% per annum.
In October of 2002, the Company purchased $2.9 million of mezzanine debt secured
by interests in three communities leased by the Company; interest receivable on
the debt will partially offset lease payments as the Company's lease payments
are used to pay interest on the debt. Also in October of 2002, an entity
controlled by Daniel R. Baty acquired a 72-unit assisted living and dementia
care community in Austin, Texas, which Emeritus is managing. The management
agreement is effective until terminated by either party with written notice
according to a specified notice period. The management agreement consists of a
fee of 5% of revenue or $5,000 per month, whichever is greater.
6
TWENTY-FOUR BUILDING ACQUISITION
On October 1, 2002, the Company entered into a lease agreement with Fretus
Investors LLC ("Fretus"), for twenty-four assisted living communities (the
"Properties") in six states containing an aggregate of approximately 1,650
units. Fretus acquired the Properties from Marriott Senior Living Services, a
subsidiary of Marriott International (NYSE: MAR). Fretus is a private investment
joint venture between Fremont Realty Capital ("Fremont"), which holds a 65%
stake, and Columbia Pacific 2002 Pool LLC ("Baty entity"), which holds a 35%
minority stake. Daniel R. Baty, the Company's chairman and chief executive
officer, controls the Baty entity and owns, directly and indirectly, through
limited liability companies approximately 36% of the Baty entity. Mr. Baty is
guarantor of a portion of the debt and the administrative member of Fretus.
Fretus, in turn, leased the Properties to the Company. The Company has no
obligation with respect to the properties other than its responsibilities under
the lease, which includes the option to purchase solely at the discretion of the
Company.
The lease is for an initial 10-year period with two 5-year extensions and
includes an opportunity for the Company to acquire the Properties during the
third, fourth, or fifth year and the right under certain circumstances for the
lease to be cancelled as to one or more properties upon the payment of a
termination fee to Emeritus. The lease is a net lease, with base rental equal
to (i) the debt service on the outstanding senior mortgage granted by Fretus,
and (ii) an amount necessary to provide a 12% annual return on equity to Fretus.
The initial senior mortgage debt is for $45.0 million and interest is accrued at
LIBOR plus 3.5%, subject to a floor of 6.25%. The Fretus equity is
approximately $26.7 million but may increase as a result of additional capital
contributions for specified purposes and will decrease as a result of cash
distributions to investors. Based on the initial senior mortgage terms and
Fretus equity, current rental would be approximately $500,000 per month. In
addition to the base rental, the lease also provides for percentage rental equal
to a percentage (ranging from 7% to 8.5%) of gross revenues in excess of a
specified threshold. The Properties in this acquisition are all purpose-built
assisted living communities in which the Company plans to offer both assisted
and memory loss services in selected communities.
7
ACCRUED DIVIDENDS ON PREFERRED STOCK
Since the third quarter of 2000, the Company has accrued its obligation to pay
cash dividends to both the Series A and Series B preferred shareholders, which
amounted to approximately $12.0 million at September 30, 2002, including all
penalties for non-payment. Since dividends on the Series A shares were not paid
for six consecutive quarters, the Series A dividends were calculated on a
compounded cumulative basis, retroactively in the first quarter of 2002. This
caused the preferred stock dividends to be approximately $710,000 higher for the
first three quarters of 2002 as compared to the first three quarters of 2001.
In addition, since the Company had not paid these dividends for more than six
consecutive quarters, both the Series A and Series B shareholders became
entitled to appoint one additional director each to the Company's board of
directors. The holder of the Series A shares has requested that an additional
director of their choosing be appointed to the board; the holder of the Series B
shares has not made a request.
Series B dividends were to be paid in cash and in additional shares of Series B
preferred shares. For the paid-in-kind dividends for the first two quarters of
2000, 609 shares of Series B preferred shares were issued. Since then, no
additional shares had been issued until after the second quarter of 2002.
Effective July 1, 2002, 2,533 additional shares were issued as paid-in-kind
dividends to cover the period from July 1, 2000, through June 30, 2002.
Effective October 1, 2002, 331 additional shares were issued as paid-in-kind
dividends to cover the period from July 1, 2002, through September 30, 2002.
8
LONG-TERM DEBT
The current portion of long-term debt at September 30, 2002, has increased
approximately $45.9 million since December 31, 2001, primarily due to certain
debt instruments having maturity dates prior to September 30, 2003. Most
significantly, these debt instruments are a $6.8 million note to GMAC, which is
due February 1, 2003, and notes totaling $39.8 million to Deutsche Bank AG,
which are due May 31, 2003. Long-term debt is further discussed in the notes to
condensed consolidated financial statements under the category "Liquidity".
LOSS PER SHARE
Basic net loss per share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted net loss per share is
computed on the basis of the weighted average number of shares outstanding plus
dilutive potential common shares using the treasury stock method. The capital
structure of Emeritus includes convertible debentures, redeemable and
non-redeemable convertible preferred stock, common stock warrants, and stock
options. The assumed conversion and exercise of these securities have been
excluded from the calculation of diluted net loss per share since their effect
is anti-dilutive. The loss per common share was calculated on a dilutive basis
without consideration of 10,182,901 and 8,086,357 common shares at September 30,
2002 and 2001, respectively, related to outstanding options, warrants,
convertible debentures, and convertible preferred stock.
UNREALIZED HOLDING GAINS ON INVESTMENT SECURITIES
The change in unrealized holding gains on investment securities for the
nine-month period ended September 30, 2002, represents the change in value of
the Company's investment in ARV Assisted Living, Inc.
OTHER COMPREHENSIVE LOSS
Other comprehensive loss includes the following transactions for the three-month
and nine-month periods ended September 30, 2002 and 2001, respectively:
Three Months ended September 30, Nine Months ended September 30,
------------------------------------ ------------------------------------
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
(In thousands)
Net loss to common shareholders. . . . $ (4,479) $ (2,411) $ (13,445) $ (9,182)
Other comprehensive income:
Unrealized holding gains (losses)
on investment securities . . 771 (218) 1,020 747
----------------- ----------------- ----------------- -----------------
Comprehensive loss . . . . . . . . . . $ (3,708) $ (2,629) $ (12,425) $ (8,435)
================= ================= ================= =================
LIQUIDITY
The Company has incurred significant operating losses since its inception and
has a working capital deficit of $64.4 million, although $2.5 million represents
deferred revenues and $12.0 million of preferred cash dividends is only due if
declared by the Company's board of directors. To date, the Company has been
dependent upon third party financing or disposition of assets to fund
operations. Management intends to continue to refinance or restructure debt as
necessary. The Company cannot, however, guaranty that third party financing and
refinancing or dispositions of assets will be available timely or on terms
acceptable to
9
Emeritus. With respect to both the $6.8 million that matures on February 1,
2003, and the $39.8 million of mortgage debt that matures on May 31, 2003, the
Company is currently in discussions with the lenders and others regarding
restructuring or refinancing the debt and currently the Company believes the
issue will be resolved prior to the maturity of the debt. If the Company is
unable to restructure or refinance the debt, the lenders could declare the
entire amount immediately due and payable at maturity and could begin
foreclosure proceedings with respect to the eight assisted living properties
that secure this debt. In addition, this would result in defaults under other
leases and loan agreements. If the Company is able to refinance the
aforementioned mortgage debt, management believes Emeritus has sufficient funds
to sustain operations at least through September 30, 2003.
RECLASSIFICATIONS
Certain reclassifications of 2001 amounts have been made to conform to the 2002
presentation.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Emeritus is a Washington corporation organized by Daniel R. Baty and two other
founders in 1993. In November 1995, we completed our initial public offering
and began our expansion strategy.
Through 1998, we focused on rapidly expanding our operations in order to
assemble a portfolio of assisted living communities with a critical mass of
capacity. We pursued an aggressive acquisition and development strategy during
that time, acquiring 35 and developing 10 communities in 1996, acquiring 7 and
developing 20 communities in 1997, and developing 5 communities in 1998. During
1999 and continuing through 2001, we substantially reduced our pace of
acquisition and development activities. During 2002 we have resumed pursuing, on
a selective basis, management contract and acquisition opportunities, which we
believe will be beneficial to the Company.
In our consolidated portfolio, exclusive of insurance surcharges, but including
deferred move-in fees, our rate enhancement program brought about an increase in
average monthly revenue per occupied unit to $2,542 for the first three quarters
of 2002 from $2,387 for the first three quarters of 2001. This represents an
average revenue increase of $155 per month per occupied unit, or 6.5%. The
average occupancy rate decreased to 81.8% for the first three quarters of 2002
from 84.4% for the first three quarters of 2001.
In our total operated portfolio, which includes managed communities, exclusive
of insurance surcharges, but including deferred move-in fees, our rate
enhancement program brought about an increase in average monthly revenue per
occupied unit to $2,542 for the first three quarters of 2002 from $2,277 for the
first three quarters of 2001. This represents an average revenue increase of
$265 per month per occupied unit, or 11.6%. The larger increase in average
monthly revenue per occupied unit in our total portfolio as compared to that in
our consolidated portfolio is partially due to the addition of 16 communities
previously managed by Regent Assisted Living, Inc. A majority of the Regent
communities have Special Care (Alzheimer's) units, which have a significantly
higher rental rate than non-Special Care units. The average occupancy rate
decreased to 81.0% for the first three quarters of 2002 from 81.7% for the first
three quarters of 2001.
We intend to continue a selective growth strategy through acquiring and managing
new communities with operating characteristics consistent with our current
emphasis on stabilizing occupancy and enhancing our operating model and service
offerings. This change in emphasis is epitomized by the lease of the
twenty-four Marriott communities as discussed in the Notes to Condensed
Consolidated Financial Statements and in Management's Discussion and Analysis of
Financial Condition and Results of Operations in the "Twenty-Four Building
Acquisition" category.
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11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -CONTINUED
The following table sets forth a summary of our property interests:
As of September 30, As of December 31, As of September 30,
2002 2001 2001
---------------------- ---------------------- ----------------------
Buildings Units Buildings Units Buildings Units
---------- ---------- ---------- ---------- ---------- ----------
Owned (1) . . . . . . . . . . . . . . . 17 1,687 16 1,579 16 1,579
Leased (1). . . . . . . . . . . . . . . 43 3,628 42 3,444 43 3,527
Managed/Admin Services. . . . . . . . . 93 8,505 70 6,620 71 6,710
Joint Venture/Partnership . . . . . . . 3 333 5 605 5 605
---------- ---------- ---------- ---------- ---------- ----------
Operated Portfolio . . . . . . . . 156 14,153 133 12,248 135 12,421
Percentage increase (decrease) (2) 17.3% 15.6% (1.5%) (1.4%) 0% 0%
New Developments. . . . . . . . . . . . - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . 156 14,153 133 12,248 135 12,421
---------- ---------- ---------- ---------- ---------- ----------
17.3% 15.6% (1.5%) (1.4%) (1.5%) (1.6%)
- --------
(1) Included in our consolidated portfolio of communities.
(2) The percentage increase (decrease) indicates the change from the prior
period reported, or, in the case of September 30, 2001, from the end of the
prior year in which there were 2 additional buildings in development
representing 200 units.
We rely primarily on our residents' ability to pay our charges for services from
their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, we believe that generally
only seniors with income or assets meeting or exceeding the regional median can
afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business. All sources of
resident-related revenue other than residents' private resources constitute less
than 10% of our total revenues.
We have incurred net operating losses since our inception, and as of September
30, 2002, we had an accumulated deficit of approximately $155.1 million. These
losses resulted from a number of factors, including:
* occupancy levels at our communities that were lower for longer periods than
we originally anticipated and have declined in the last two years
consistent with industry patterns;
* financing costs that we incurred as a result of multiple financing and
refinancing transactions; and
* administrative and corporate expenses that we increased to facilitate our
growth and maintain operations.
During 1998, we decided to reduce acquisition and development activities and
dispose of select communities that had been operating at a loss. We believe
that slowing our acquisition and development activities has enabled us to use
our resources more efficiently and increase our focus on enhancing community
operations.
EMERITRUST TRANSACTIONS
We hold interests in 46 communities referred to as the Emeritrust communities,
including 25 Emeritrust I communities, 16 Emeritrust II Operating communities,
and 5 Emeritrust II Development communities, under management agreements
described in our Annual Report on Form 10-K for the year ended December 31,
2001. We do not recognize management fees on the Emeritrust communities as
revenue in our condensed consolidated financial statements to the extent that we
are funding the cash operating losses that include them, although the amounts of
the funding obligation each year include management fees earned by us under the
management agreements. Correspondingly, we recognize the funding obligation
under the agreement, less the applicable management fees, as an expense in our
condensed consolidated financial statements under the category "Other, net".
Conversely, if the applicable management fees exceed the funding obligation, we
recognize the management fees less the funding obligation as management fee
revenue in our condensed consolidated financial statements.
For the three months ended September 30, 2002 and 2001, total gross management
fees earned for the Emeritrust I communities were approximately $511,000 and
$1.4 million, respectively, of which $349,000 and $739,000, respectively, were
recognized as revenue. Approximately $450,000 of the decrease in gross
management fees is associated with changes in the computation of management fees
effective with the extension of the management agreement on January 1, 2002. In
addition, gross management fees for the third quarter of 2002 were reduced by
financing extension fees paid by the communities during the quarter and gross
management fees for the third quarter of 2001, including recognition of $576,000
in contingent management fees earned in prior periods. Fees recognized as
revenue for the third quarter of 2001 reflected a funding obligation consisting
of $647,000 on the underlying financing of Emeritrust I properties, a feature
that is not present in 2002. For the three months ended September 30, 2002 and
2001, total management fees earned for the Emeritrust II Development communities
were $183,000, and $160,000, respectively, of which $170,000 and $142,000,
respectively, were recognized as revenue after reflecting funding obligations of
$13,000 and $18,000, respectively. For the three months ended September 30,
2002 and 2001, management fees earned and recognized for the Emeritrust II
Operating communities, for which there is no funding obligation, were $486,000
and $500,000, respectively. Thus, the management fees recognized for all of the
Emeritrust communities decreased $376,000 for the third quarter of 2002 compared
to the comparable period in 2001.
For the nine months ended September 30, 2002 and 2001, total management fees
earned for the Emeritrust I communities were approximately $1.6 million and $2.5
million, respectively, of which $1.4 million and $1.6 million, respectively,
were recognized as revenue. These results were affected by the same factors
discussed for the third quarters of 2002 and 2001 and additional funding
obligations of $253,000 for the first six months of 2001. For the nine months
ended September 30, 2002 and 2001, total management fees earned for the
Emeritrust II Development communities were $579,000 and $400,000, respectively,
of which $529,000 and $326,000, respectively, were recognized as revenue after
reflecting funding obligations of $50,000 and $74,000, respectively. For the
nine months ended September 30, 2002 and 2001, management fees earned and
recognized for the Emeritrust II Operating communities, for which there is no
funding obligation, were $1.5 million and $1.4 million, respectively. Thus, the
management fees recognized for all of the Emeritrust communities increased
$69,000 for the first three quarters of 2002 compared to the comparable period
in 2001.
12
OTHER TRANSACTIONS
In July of 2002, we terminated the operating lease on an 88-unit building in
Bedford, Virginia, and entered into a management agreement for that facility.
In August of 2002, we terminated the management agreement with Columbia Pacific
Management, an entity controlled by Daniel R. Baty, our chief executive officer,
for a 214-unit facility in Cincinnati, Ohio. In the same month, we exercised
our purchase option to acquire a 108-unit facility in Auburn, Massachusetts,
from Hanseatic Corporation. The cost to exercise the option was approximately
$10.4 million, which consists of the option price of $10.2 million and
approximately $200,000 in transaction costs. We financed the transaction using
$8.3 million in debt financing provided by GE Healthcare Financial Services and
approximately $2.1 million in cash. The debt financing bears interest at LIBOR
plus 3.85%, with a floor of 6.5%, and is secured by the mortgage and the
assignment of leases.
In September of 2002, we purchased the leasehold interest in a 111-unit facility
located in San Antonio, Texas, from Regent Assisted Living ("RAL"). RAL had a
cash security deposit on this property of approximately $742,000, which was
replaced with a letter of credit from us. We also paid $408,000 in additional
consideration to purchase RAL's leasehold interest. Total cash paid was
approximately $1.2 million after transaction costs. Healthcare Property
Investors provided debt financing of $800,000 and we paid cash of approximately
$425,000. The note requires interest-only payments and bears an effective rate
of 15% per annum.
In October of 2002, we purchased $2.9 million of mezzanine debt secured by
interests in three communities leased by us; interest receivable on the debt
will partially offset lease payments as our lease payments are used to pay
interest on the debt. Also in October of 2002, an entity controlled by Daniel R.
Baty acquired a 72-unit assisted living and dementia care community in Austin,
Texas, which Emeritus is managing. The management agreement is effective until
terminated by either party with written notice according to a specified notice
period. The management agreement consists of a fee of 5% of revenue or $5,000
per month, whichever is greater.
TWENTY-FOUR BUILDING ACQUISITION
On October 1, 2002, we entered into a lease agreement with Fretus Investors LLC
("Fretus"), for twenty-four assisted living communities (the "Properties") in
six states containing an aggregate of approximately 1,650 units. Fretus
acquired the Properties from Marriott Senior Living Services, a subsidiary of
Marriott International (NYSE: MAR). Fretus is a private investment joint venture
between Fremont Realty Capital ("Fremont"), which holds a 65% stake, and
Columbia Pacific 2002 Pool LLC ("Baty entity"), which holds a 35% minority
stake. Daniel R. Baty, our chairman and chief executive officer, controls the
Baty entity and owns, directly and indirectly, through limited liability
companies, approximately 36% of the Baty entity. Mr. Baty is guarantor of a
portion of the debt and the administrative member of Fretus. Fretus, in turn,
leased the Properties to us. We have no obligation with respect to the
properties other than our responsibilities under the lease, which includes the
option to purchase solely at our discretion.
The lease is for an initial 10-year period with two 5-year extensions and
includes an opportunity for us to acquire the Properties during the third,
fourth, or fifth year and the right under certain circumstances for the lease to
be cancelled as to one or more properties upon the payment of a termination fee.
The lease is a net lease, with base rental equal to (i) the debt service on the
outstanding senior mortgage granted by Fretus, and (ii) an amount necessary to
provide a 12% annual return on equity to Fretus. The initial senior mortgage
debt is for $45.0 million and interest is accrued at LIBOR plus 3.5%, subject to
a floor of 6.25%. The Fretus equity is approximately $26.7 million but may
increase as a result of additional capital contributions for specified purposes
and will decrease as a result of cash distributions to investors. Based on the
initial senior mortgage terms and Fretus equity, current rental would be
approximately $500,000 per month. In addition to the base rental, the lease
also provides for percentage
13
rental equal to a percentage (ranging from 7% to 8.5%) of gross revenues in
excess of a specified threshold. The Properties in this acquisition are all
purpose-built assisted living communities in which we plan to offer both
assisted and memory loss services in selected communities.
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates.
Management's discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including
those related to resident programs and incentives, bad debts, investments,
intangible assets, income taxes, financing operations, restructuring, long-term
service contracts, contingencies, insurance deductibles, health insurance, and
litigation. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies are more significant to
the judgments and estimates used in the preparation of our condensed
consolidated financial statements. Revisions in such estimates are charged to
income in the period in which the facts that give rise to the revision become
known. We utilize third-party insurance for losses and liabilities associated
with general and professional liability insurance claims subject to established
self-insured retention levels on a per occurrence basis. Losses up to these
self-insured retention levels are accrued based upon actuarially determined
estimates of the aggregate liability for claims incurred. For health insurance,
we self-insure up to a certain level for each occurrence above which a
catastrophic insurance policy covers any additional costs. Health insurance
expense is accrued based upon historical experience of the aggregate liability
for claims incurred. If these estimates are insufficient, additional charges
may be required. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our residents to make required payments.
If the financial condition of our residents were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We hold shares in ARV Assisted Living, Inc. amounting to less than 5%
of its shares. ARV is publicly traded and has a volatile share price. We
record an investment impairment charge when we believe this investment has
experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results underlying this
investment could result in losses or an inability to recover the carrying value
of the investment that may not be reflected in this investment's current
carrying value, thereby possibly requiring an impairment charge in the future.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized, which at this time shows a net
asset valuation of zero. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a
valuation allowance, in the event we were to determine that we would be able to
realize our deferred tax assets in the future in excess of our net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period we made such determination
14
The following table sets forth, for the periods indicated, certain items from
our Condensed Consolidated Statements of Operations as a percentage of total
revenues and the percentage change of the dollar amounts from period to period.
Period-to-Period
Percentage
Increase
Percentage of Revenues (Decrease)
---------------------------------------------------------- ----------------------------
Three Months Nine Months Three Months Nine Months
ended ended ended ended
September 30, September 30, September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001 2001-2002 2001-2002
------------- ------------- ------------- ------------- ------------- -------------
Revenues. . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 2.9% 1.2%
Expenses:
Community operations . . . . . 59.6 58.1 59.4 58.0 5.6 3.7
General and administrative . . 14.9 14.5 14.3 13.3 6.3 9.1
Depreciation and amortization. 4.6 5.3 4.9 5.3 (11.2) (6.4)
Facility lease expense . . . . 20.2 19.1 20.2 19.4 9.0 5.2
------------- ------------- ------------- ------------- ------------- -------------
Total operating expenses . 99.3 97.0 98.8 96.0 5.5 4.2
------------- ------------- ------------- ------------- ------------- -------------
Income from operations. . . . . . . 0.7 3.0 1.2 4.0 (76.3) (69.3)
Other income (expense)
Interest income. . . . . . . . 0.1 0.6 0.3 0.7 (79.2) (65.6)
Interest expense . . . . . . . (7.9) (9.5) (8.2) (9.8) (14.2) (16.9)
Other, net . . . . . . . . . . (0.4) 3.5 (0.8) 0.9 (112.6) (193.1)
------------- ------------- ------------- ------------- ------------- -------------
Net other expense. . . . . (8.2) (5.4) (8.7) (8.2) 57.2 7.0
------------- ------------- ------------- ------------- ------------- -------------
Net loss . . . . . . . . . (7.5%) (2.4%) (7.5%) (4.2%) 219.4% 81.0%
============= ============= ============= ============= ============= =============
The following discussion for the three and nine months ended September 30, 2002,
is exclusive of insurance surcharges and the move-in fee deferral unless
otherwise noted.
Comparison of the three months ended September 30, 2002 and 2001
- --------------------------------------------------------------------------
Total Operating Revenues: Total operating revenues for the three months ended
September 30, 2002, increased by $1.0 million to $36.0 million from $35.0
million for the comparable period in 2001, or 2.9%.
Community revenue increased by approximately $15,000 in the three months ended
September 30, 2002, compared to the three months ended September 30, 2001. We
disposed of two communities in the three months ended September 30, 2001, and
transferred one community from leased to managed in July of 2002. These
communities, which represented revenue of approximately $1.2 million, were not
included in our consolidated portfolio in the third quarter of 2002, but were
included in the comparable quarter of 2001. The decrease in revenue attributed
to these changes was partially offset by the net effect of an increase in
average monthly revenue per unit and a decrease in the occupancy rate. Average
monthly revenue per unit was $2,577 for the third quarter of 2002 compared to
$2,414 for the comparable quarter of 2001, an increase of approximately 6.8%.
The occupancy rate decreased 1.3 percentage points to 82.3% for the third
quarter of 2002 from 83.6% for the third quarter of 2001.
Community revenue was enhanced by an increase in management fee revenue of
$383,000 and other service fees of $675,000. Management fee revenue increased
primarily due to the increased number of communities under management
agreements, accounting for $710,000 of the increase, for the three months ended
September 30, 2002. The increase in management fee revenue was partially
offset by a decrease of $390,000 related to Emeritrust I communities in the
three months ended September 30, 2002, as compared to
15
the same period in 2001. The majority of this decrease was due to a change in
the method of computing management fees effective with the extension of the
management agreement on January 1, 2002. Management fees and related funding
obligations are discussed in more detail above under "Emeritrust Transactions".
Other service fees increased primarily from additional ancillary programs
introduced during the past year and insurance surcharges of $342,000.
Community Operations: Community operating expenses for the three months ended
September 30, 2002, increased by $1.2 million to $21.5 million from $20.3
million in the third quarter of 2001, or 5.6%. The change was comprised of a
net decrease of approximately $690,000 from the disposition of two communities,
the conversion of one community from leased to managed, and an increase in total
operating expenses of approximately $1.9 million. The increase in operating
expenses was primarily due to increases in liability, workers' compensation,
health insurance, and benefits of $1.0 million and added personnel expenses
associated with our increasing emphasis on dementia care (Alzheimer's).
Community operating expenses as a percentage of total operating revenue
increased to 59.6% in the third quarter of 2002 from 58.1% in the third quarter
of 2001.
General and Administrative: General and administrative (G&A) expenses for the
three months ended September 30, 2002, increased $317,000 to $5.4 million from
$5.1 million for the comparable period in 2001, or 6.3%. As a percentage of
total operating revenues, G&A expenses increased to 14.9% for the three months
ended September 30, 2002, compared to 14.5% for the three months ended September
30, 2001. G&A expenses rose primarily due to increases in the number of
employees and normal increases in employee salaries. Recent growth in total
communities managed through additional contracts has led to some added
operational and administrative employees. Since more than half of the
communities we operate are managed rather than owned or leased, G&A expense as a
percentage of operating revenues for all communities, including managed
communities, may be more meaningful for industry-wide comparisons. These
percentages were 6.2% and 7.4% for the three months ended September 30, 2002 and
2001, respectively.
Depreciation and Amortization: Depreciation and amortization for the three
months ended September 30, 2002, was $1.7 million compared to $1.9 million for
the comparable period in 2001. This decrease is primarily due to decreased
depreciable assets because of sales/leaseback arrangements. In 2002,
depreciation and amortization represents 4.6% of total operating revenues,
compared to 5.3% for the comparable period in 2001.
Facility Lease Expense: Facility lease expense for the three months ended
September 30, 2002, was $7.3 million compared to $6.7 million for the comparable
period of 2001, representing an increase of $601,000, or 9.0%. While we leased
43 communities as of both September 30, 2002 and 2001, there were changes in the
composition of the leased communities during the periods by refinancing two
previously mortgaged communities with leases. Of the total increase in
operating lease expense, approximately three-fourths resulted from the
refinancing and the balance was attributable to rent escalation provisions in
existing leases. Facility lease expense as a percentage of revenues was 20.2%
for the three months ended September 30, 2002, and 19.1% for the three months
ended September 30, 2001.
Interest Income: Interest income for the three months ended September 30, 2002,
was $46,000 versus $221,000 for the comparable period of 2001. This decrease is
primarily attributable to declining interest rates.
Interest Expense: Interest expense for the three months ended September 30,
2002, was $2.8 million compared to $3.3 million for the comparable period of
2001. This decrease of $468,000, or 14.2%, is primarily attributable to lower
interest rates on our variable rate debt and to the sale/leaseback of two
communities in the second quarter which replaced mortgage interest with new
operating lease payments. As a percentage of total operating revenues, interest
expense decreased to 7.9% from 9.5% for the three
16
months ended September 30, 2002 and 2001, respectively, reflecting lower
interest rates and the two community sale/leaseback transactions.
Other, net: Other, net (expense) for the three months ended September 30, 2002,
was an expense of $153,000 compared to income of $1.2 million for the comparable
period in 2001. The change of $1.4 million is predominately the result of two
community transactions in the third quarter of 2001, one consisting of a gain of
$989,000 on the sale of a community, and the other consisting of an adjustment
related to a joint venture note receivable of $489,000 in connection with the
acquisition of the joint venture.
Preferred dividends: For the three months ended September 30, 2002 and 2001,
the preferred dividends were approximately $1.8 million and $1.6 million,
respectively. Since dividends on the Series A shares were not paid for six
consecutive quarters, the Series A dividends were calculated on a compounded
cumulative basis, retroactively to the first quarter of 2002. This caused the
preferred dividends to be approximately $212,000 higher in the third quarter of
2002 as compared to the third quarter of 2001. In addition, since we have not
paid these dividends for six consecutive quarters, both our Series A and Series
B shareholders became entitled to elect one additional director each to our
board of directors at each annual shareholders' meeting until such time as we
have paid the accrued dividends.
Comparison of the nine months ended September 30, 2002 and 2001
-------------------------------------------------------------------------
Total Operating Revenues: Total operating revenues for the nine months ended
September 30, 2002, increased by $1.3 million to $106.2 million from $104.9
million for the comparable period in 2001, or 1.2%.
A significant component of the change in revenue is comprised of a decrease in
community revenue of approximately $2.9 million and an increase in other service
fees of $1.6 million for the nine months ended September 30, 2002. We disposed
of three communities in the first three quarters of 2001, and transferred one
community from leased to managed in July of 2002. These communities, which
represented revenue of approximately $3.3 million, were not included in our
consolidated portfolio in the first three quarters of 2002, but were included in
the comparable quarters of 2001. In addition, we made a one-time adjustment to
defer recognition of move-in fees of approximately $1.8 million in the second
quarter of 2002. These decreases were partially offset by the net effect of an
increase in average monthly revenue per unit and a decrease in the occupancy
rate resulting in a $3.9 million increase in revenue from ongoing operations,
including the amortization of the insurance surcharge of approximately $1
million. Average monthly revenue per unit was $2,542 for the first three
quarters of 2002, compared to $2,387 for the comparable quarters of 2001, an
increase of approximately 6.5%. The occupancy rate decreased 2.6 percentage
points to 81.8% for the first three quarters of 2002, from 84.4% for the
comparable period in 2001.
Community revenue was enhanced by an increase in management fee revenue of $2.6
million for the first three quarters of 2002, as compared to the same period of
2001. Management fee revenue increased primarily due to the increased number of
communities under management agreements, accounting for approximately $1.7
million of the increase. In addition, contingent management fees increased by
$378,000, and management fees recognized from the Emeritrust communities
increased by $69,000. The remainder of the increase was a combination of
one-time performance-based revenue, and improved performance from communities we
have managed for more than nine months.
Community Operations: Community operating expenses for the nine months ended
September 30, 2002, increased by $2.2 million to $63.1 million from $60.9
million in the first three quarters of 2001, or 3.7%. The increase is primarily
the result of increases in liability, workers' compensation, health insurance,
and benefits of $2.7 million and added personnel expense associated with our
increasing emphasis on dementia care (Alzheimer's). These increases were offset
by a decrease of $2.1 million in operating expenses from the disposal of three
communities in 2001 and transfer of one community from leased to managed in July
17
of 2002. Community operating expenses as a percentage of total operating
revenue increased to 59.4% in the third quarter of 2002, from 58.0% in the third
quarter of 2001.
General and Administrative: General and administrative (G&A) expenses for the
nine months ended September 30, 2002, increased $1.3 million to $15.2 million
from $13.9 million for the comparable period in 2001, or 9.1%. As a percentage
of total operating revenues, G&A expenses increased to 14.3% for the nine months
ended September 30, 2002, compared to 13.3% for the nine months ended September
30, 2001. G&A expenses rose primarily due to increases in the number of
employees, normal increases in employee salaries, and costs related to various
employee benefit programs. Recent growth in total communities managed through
additional contracts has led to added operational and administrative employees.
Since more than half of the communities we operate are managed, G&A expense as a
percentage of operating revenues for all communities, including managed
communities, may be more meaningful for industry-wide comparisons. These
percentages were 5.9% and 6.8% for the nine months ended September 30, 2002 and
2001, respectively.
Depreciation and Amortization: Depreciation and amortization for the nine
months ended September 30, 2002, were approximately $5.2 million compared to
$5.5 million for the nine months ended September 30, 2001. This decrease is
primarily due to decreased depreciable assets because of sales/leaseback
arrangements. In 2002, depreciation and amortization represents 4.9% of total
operating revenues, compared to 5.3% for the comparable period in 2001. The
decrease as a percentage of revenues is due to decreased depreciable assets and
increased revenues.
Facility Lease Expense: Facility lease expense for the nine months ended
September 30, 2002, was $21.4 million compared to $20.4 million for the
comparable period of 2001, representing an increase of $1.1 million, or 5.2%.
While we leased 43 communities as of both September 30, 2002 and 2001, there
were changes in the composition of the leased communities during the periods.
The increase in expense was primarily due to lease escalator provisions in
existing leases and a sale/leaseback of two communities in the second quarter
which replaced mortgage interest with new operating lease payments. Facility
lease expense increases associated with the transaction discussed above were
offset through reduced costs from the disposal of three communities in the
first, third, and fourth quarters of 2001, and the transfer of one community
from leased to managed in the third quarter of 2002. Facility lease expense as
a percentage of revenues was 20.2% and 19.4% for the nine months ended September
30, 2002 and 2001.
Interest Income: Interest income for the nine months ended September 30, 2002,
was $268,000 versus $779,000 for the comparable period of 2001. This decrease
is primarily attributable to declining interest rates, and an adjustment in the
second quarter of 2001 of $122,000 increasing interest income.
Interest Expense: Interest expense for the nine months ended September 30,
2002, was $8.6 million compared to $10.4 million for the comparable period of
2001. This decrease of $1.8 million, or 16.9%, is primarily attributable to
lower interest rates on our variable rate debt and to the sale/leaseback of two
communities in the second quarter, which replaced mortgage interest with new
operating lease payments. As a percentage of total operating revenues, interest
expense decreased to 8.1% from 9.9% for the nine months ended September 30, 2002
and 2001, respectively, reflecting increased revenues in conjunction with lower
interest rates in the first three quarters of 2002.
Other, net: Other, net (expense) for the nine months ended September 30, 2002,
was an expense of $894,000 compared to income of $960,000 for the comparable
period of 2001. The net change of $1.9 million is predominately comprised of
the following items: during the first nine months of 2002, we purchased a
minority partner interest in two communities and subsequently entered into a
sale/leaseback transaction with two additional leased communities, resulting in
net transaction costs of $530,000. In July 2002, we transferred one community
from leased to managed, resulting in $171,000 in write-offs. In August 2001, we
finalized the sale of a single community, resulting in $1.4 million in gain, of
which $378,000 was amortized in the first two quarters of 2001. Additionally,
we recorded $432,000 of
18
additional income related to a previously fully reserved receivable on a
related-party joint venture. Our Emeritrust net funding obligation decreased by
$232,000 to $72,000 for the nine months ending September 30, 2002. Finally, we
recognized income related to our joint venture partnership in a pharmacy of
$59,000 compared to a net expense of $312,000 for the first nine months of 2001.
Preferred dividends: For the nine months ended September 30, 2002 and 2001, the
preferred dividends were approximately $5.5 million and $4.8 million,
respectively. Since dividends on the Series A shares were not paid for six
consecutive quarters, the Series A dividends were calculated on a compounded
cumulative basis, retroactively to the first quarter of 2002. This caused the
preferred dividends to be approximately $710,000 higher in the first three
quarters of 2002 as compared to the first three quarters of 2001. In addition,
since we have not paid these dividends for six consecutive quarters, both our
Series A and Series B shareholders became entitled to elect one additional
director each to our board of directors at each annual shareholders' meeting
until such time as we have paid the accrued dividends.
Same Community Comparison
We operated 59 communities on a comparable basis during both the three months
ended September 30, 2002 and 2001. The following table sets forth a comparison
of same community results of operations, excluding general and administrative
expenses, for the three months ended September 30, 2002 and 2001.
Three Months ended September 30,
(In thousands)
Dollar Percentage
2002 2001 Change Change
------------ ------------ -------- -----------
Revenue . . . . . . . . . . . $ 32,917 $ 31,441 $ 1,476 4.7%
Community operating expenses. (21,214) (19,289) (1,925) (10.0)
------------ ------------ -------- -----------
Community operating income. 11,703 12,152 (449) (3.7)
Depreciation & amortization . (1,462) (1,611) 149 9.2
Facility lease expense. . . . (7,028) (6,146) (882) (14.4)
------------ ------------ -------- -----------
Operating income. . . . . 3,213 4,395 (1,182) (26.9)
Interest expense, net . . . . (2,260) (2,869) 609 21.2
Other income (expense). . . . 47 62 (15) (24.2)
------------ ------------ -------- -----------
Net income. . . . . . . . $ 1,000 $ 1,588 $ (588) (37.0%)
============ ============ ======== ===========
The same communities represented $32.9 million or 91.3% of our total revenue of
$36.0 million for the third quarter of 2002. Same community revenues increased
by $1.5 million or 4.7% for the quarter ended September 30, 2002, from the
comparable period in 2001. This increase is due to insurance surcharges to
residents of approximately $332,000 recognized in the period and the combined
effects of declines in occupancy, and rate increases. Average occupancy
decreased to 82.5% in the third quarter of 2002 from 83.7% in the third quarter
of 2001. Average revenue per occupied unit increased by $131 per month or 5.4%.
Community operating expenses increased approximately $1.9 million due to a
combination of factors: the increase in operating expenses was primarily due to
increases in liability, workers' compensation, health insurance, and benefits of
$950,000 and added personnel expenses associated with our increasing emphasis on
dementia care (Alzheimer's), normal salary increases, and other employee costs,
as well as normal increases in other operating expense categories. Occupancy
expenses, consisting of facility lease expense, depreciation and amortization
and interest expense rose approximately $124,000 as a result of the net effect
of sale/leaseback transactions relating to two communities, rent escalation
related to other communities and new subordinated debt financing, partially
offset by lower interest rates. For the quarter ended September 30, 2002, net
income decreased to $1.0 million from $1.6 million for the comparable period of
2001.
19
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2002, net cash used in operating
activities was $1.1 million compared to $2.2 million provided by operating
activities for the comparable period in the prior year. The primary components
of operating cash used were the net loss of $7.9 million, partially offset by
depreciation and amortization of $5.2 million and the net decrease in other
operating assets and liabilities of $850,000. The primary components of
operating cash provided for the nine months ended September 30, 2001, were the
depreciation and amortization of $5.5 million and the net decrease in other
operating assets and liabilities of $2.3 million, partially offset by the net
loss of $4.4 million and amortization of deferred gain of $521,000.
Net cash provided by investing activities amounted to $8.1 million for the nine
months ended September 30, 2002, and was comprised primarily of funds from the
sale/leaseback transaction of two communities in the second quarter of 2002,
partially offset by the acquisition of one community in the third quarter and
investment in lease acquisition costs. Net cash provided by investing
activities amounted to $3.7 million for the nine months ended September 30,
2001, and was comprised primarily of repayment of advances by third parties and
affiliates of $2.8 million and proceeds from the sale/leaseback of one
community, which was partially offset by the acquisition of property and
equipment.
For the nine months ended September 30, 2002, net cash used in financing
activities was $9.4 million primarily from long-term debt repayments, which
include debt repayments related to the sale/leaseback transaction of two
communities in the second quarter of 2002, partially offset by the proceeds of
long-term borrowings. For the nine months ended September 30, 2001, net cash
used in financing activities was $3.7 million primarily from the repayment of
short-term and long-term borrowings.
The current portion of long-term debt at September 30, 2002, has increased
approximately $45.9 million since December 31, 2001, primarily due to certain
debt instruments having maturity dates prior to September 30, 2003. Most
significantly, these debt instruments are a $6.8 million note to GMAC, which is
due February 1, 2003, and notes totaling $39.8 million to Deutsche Bank AG,
which are due May 31, 2003.
We have incurred significant operating losses since our inception and have a
working capital deficit of $64.4 million, although $2.5 million represents
deferred revenues and $12.0 million of preferred cash dividends is only due if
declared by our board of directors. To date, we have been dependent upon third
party financing or disposition of assets to fund operations. Management intends
to continue to refinance or restructure debt as necessary with our current third
party lenders. We cannot, however, guaranty that third party financing and
refinancing or dispositions of assets will be available timely or on terms
acceptable to us. With respect to both the $6.8 million that matures on
February 1, 2003, and the $39.8 million of mortgage debt that matures on May 31,
2003, we are currently in discussions with the lenders and others regarding
restructuring or refinancing of the debt and currently we believe the issue will
be resolved prior to the maturity of the debt. If we are unable to restructure
or refinance the debt, the lenders could declare the entire amount immediately
due and payable at maturity and could begin foreclosure proceedings with respect
to the eight assisted living properties that secure the debt. In addition, this
default would result in defaults under other leases and loan agreements. Except
for the potential financial impact of being unable to refinance the
aforementioned mortgage debt, we believe we have sufficient funds to sustain
operations at least through September 30, 2003.
Many of our debt instruments and leases contain "cross-default" provisions
pursuant to which a default under one obligation can cause a default under one
or more other lease and loan obligations. Such cross-default provisions affect
14 owned assisted living properties and 36 operated under leases. Accordingly,
any event of default could cause a material adverse effect on our financial
condition if such debt or leases are cross-defaulted. At September 30, 2002, we
are in compliance with our debt and lease covenants.
20
IMPACT OF INFLATION
To date, inflation has not had a significant impact on Emeritus. Inflation
could, however, affect our future revenues and operating income due to our
dependence on the senior resident population, most of whom rely on relatively
fixed incomes to pay for our services. The monthly charges for a resident's
unit and assisted living services are influenced by the location of the
community and local competition. Our ability to increase revenues in proportion
to increased operating expenses may be limited. We typically do not rely to a
significant extent on governmental reimbursement programs. In pricing our
services, we attempt to anticipate inflation levels, but there can be no
assurance that we will be able to respond to inflationary pressures in the
future.
FORWARD-LOOKING STATEMENTS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: A number of the matters and subject areas discussed in this press release
that are not historical or current facts deal with the potential future
circumstances, operations, and prospects. The discussion of such matters and
subject areas is qualified by the inherent risks and uncertainties surrounding
future expectations generally, and also may materially differ from Emeritus's
actual future experience as a result of such factors as: the effects of
competition and economic conditions on the occupancy levels in Emeritus's
communities; Emeritus's ability under current market conditions to maintain and
increase its resident charges in accordance with rate enhancement programs
without adversely affecting occupancy levels; increases in interest rates that
would increase costs as a result of variable rate debt; ability of Emeritus to
control community operation expenses, including insurance and utility costs,
without adversely affecting the level of occupancy and the level of resident
charges; the ability of Emeritus to generate cash flow sufficient to service its
debt and other fixed payment requirements; Emeritus's ability to find sources
of financing and capital on satisfactory terms to meet its cash requirements to
the extent that they are not met by operations; and making satisfactory
arrangements for the continued operation of the Emeritrust communities beyond
June 30, 2003, when our management agreements for those communities expires.
Emeritus has attempted to identify, in context, certain of the factors that they
currently believe may cause actual future experience and results to differ from
Emeritus's current expectations regarding the relevant matter or subject area.
These and other risks and uncertainties are detailed in the Company's reports
filed with the Securities and Exchange Commission (SEC), including Emeritus's
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings are affected by changes in interest rates as a result of our
short-term and long-term borrowings. We manage this risk by obtaining fixed
rate borrowings when possible. At September 30, 2002, our variable rate
borrowings totaled approximately $85.3 million. If market interest rates were
to average 2% more, our annual interest expense and net loss would increase
approximately $1.7 million. This amount is determined by considering the impact
of hypothetical interest rates on our outstanding variable rate borrowings as of
September 30, 2002, and does not consider changes in the actual level of
borrowings that may occur subsequent to September 30, 2002. This analysis also
does not consider the effects of the reduced level of overall economic activity
that could exist in such an environment, or our current funding requirements for
the Emeritrust communities, nor does it consider actions that management might
be able to take with respect to our financial structure to mitigate the exposure
to such a change.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures and internal controls
designed to ensure that information required to be disclosed in our filings
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. Our principal executive and financial officers
have evaluated our disclosure controls and procedures within 90 days prior to
the filing of this Quarterly Report on Form 10-Q and have determined that such
disclosure controls and procedures are effective.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
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22
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 3, AND ITEM 5 ARE NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders was held on September 17, 2002.
(b) All director nominees listed in the proxy statement were elected at the
meeting.
(c) The following matters voted upon at the meeting received the number of
votes set forth below:
Election of Directors:
- ------------------------
Abstain or
Name For Against Broker Non-vote
- ----------------- --------- ------- ---------------
Daniel R. Baty 10,736,704 57,079
Charles P. Durkin, Jr. 10,777,580 16,203
Ratification of Independent Public Auditors:
- ------------------------------------------------
For Against Abstain Other Non-vote
---------- -------- -------- --------------
10,774,667 14,024 5,092
(d) Not applicable.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Footnote
Number Description Number
---------------- ------------------------------------------------------------------ -------------
10.9.3 Amended and Restated Master Lease Agreement dated September 18,
2002, between Health Care Property Investors, Inc., HCPI Trust,
Texas HCP Holding, L.P. ("Lessor") and Emeritus Corporation,
ESC III, L.P. ("Lessee"). . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.9.4 Promissory Note between Emeritus Corporation ("Maker")
Health Care Property Investors, Inc. ("Lender"),
dated September 18, 2002. . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.29.8 Real Estate Purchase and Sale Agreement under the purchase
option on the lease dated January 1, 2000, between Auburn
Land L.L.C. ("Seller") and Emeritus Properties XIV, L.L.C. ("Buyer")
dated August 26, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.29.9 Sublease Termination and Release Agreement between
Sage Assisted Living L.L.C. ("Landlord") and Emeritus
Properties XIV, L.L.C. ("Tenant") dated August 26, 2002. . . . . . . . . . (2)
10.69.8 Agreement and Consent of Assignment of Lease between
Texas HCP Holding, Inc. ("Lessor"), Regent Assisted Living ("Assignor"),
ESC III, L.P. ("Assignee") dated September 18, 2002.. . . . . . . . . . . (2)
10.69.9 Lease Assignment and Operations Transfer Agreement between
Regent Assisted Living ("Tenant") and ESC III, L.P. ("Assignee")
dated September 18, 2002. . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.71 Lodge at Eddy Pond, Massachusetts. The following agreements are
23
representative of those executed in connection with the property:
10.71.1 Loan Agreement between Heller Healthcare Finance, Inc. ("Lender")
and Emeritus Properties XIV, L.L.C. ("Borrower") dated August 26, 2002. . (2)
10.71.2 Promissory Note A between Heller Healthcare Finance, Inc. ("Holder")
and Emeritus Properties XIV, L.L.C. ("Maker") dated August 26, 2002.. . . (2)
10.71.3 Subordinate Promissory Note B between Heller Healthcare
Finance, Inc. ("Holder") and Emeritus Properties XIV, L.L.C.
("Maker") dated August 26, 2002.. . . . . . . . . . . . . . . . . . . . . (2)
10.71.4 Real Property Mortgage with Power of Sale and Security
Agreement (Massachusetts) dated August 21, 2002.. . . . . . . . . . . . . (2)
10.71.5 Collateral Assignment of Management Agreement and
Waiver of Property Management and Broker Liens
dated August 26, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.71.6 Guaranty by registrant ("Guarantor") to Heller Healthcare Finance,
Inc. ("Lender") dated August 26, 2002. . . . . . . . . . . . . . . . . . . (2)
10.71.7 Lease and Rent Assignment Agreement between Emeritus
Properties XIV, L.L.C. ("Assignor") to Heller Healthcare Finance,
Inc. ("Assignee") dated August 21, 2002. . . . . . . . . . . . . . . . . . (2)
10.71.8 Side Letter regarding Deutsche Bank Refinancing and the registrants
intent on refinancing with Heller Healthcare Finance, Inc. ("Lender")
dated August 26, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.71.9 Senior Housing Rider between Emeritus Properties XIV, L.L.C. ("Borrower"),
Emeritus Corporation ("Manager") and Heller Healthcare Finance,
Inc. ("Lender") dated August 26, 2002.. . . . . . . . . . . . . . . . . . (2)
10.71.10 Hazardous Materials Indemnity Agreement between Emeritus
Properties XIV, L.L.C. ("Borrower"), Emeritus Corporation ("Guarantor")
and Heller Healthcare Finance, Inc. ("Lender") dated August 26, 2002. . . (2)
10.72.1 Master Lease Agreement between various subsidiaries and
affiliates of Fretus Investors L.L.C. ("Landlord") and
Emeritus Properties-NGH, L.L.C. and ESC-NGH, L.P. ("Tenant")
dated October 1, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
99.1 Certification of Periodic Reports
99.1.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated
November 8, 2002. . . . . . . . . . . . . . . . .. . . . . . . . . . . .. (2)
99.1.4 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom
dated November 8, 2002. . . . . . . . . . . . . . . . . . . . . . . . . .. (2)
99.2 Press Releases
99.2.1 Press Release dated October 1, 2002, announcing the 24
Marriott community acquisition.. . . . . . . . . . . . . . . . . . . . . . (1)
(1) Incorporated by reference to the indicated exhibit filed with the
Company's Form 8-K (File No. 1-14012) on October 15, 2002.
(2) Filed herewith
24
(B) REPORTS ON FORM 8-K.
A report on Form 8-K dated October 1, 2002, was filed on October 15, 2002,
related to a lease agreement for twenty-four assisted living communities
previously owned by Marriott Senior Living Services, a subsidiary of Marriott
International (NYSE: MAR), more fully discussed in "Twenty-four Building
Acquisition" in the Notes to Condensed Financial Statements and in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Financial statements and pro forma financial statements will be filed as an
amendment to the Form 8-K within 60 days of the original filing.
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25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 8, 2002
EMERITUS CORPORATION
(Registrant)
/s/ Raymond R. Brandstrom
-----------------------------------------
Raymond R. Brandstrom, Vice President
of Finance, Chief Financial Officer,
and Secretary
CERTIFICATIONS
I, Daniel R. Baty, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emeritus Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which the quarterly report is being prepared;
b) evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this Quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
(a pre-existing term relating to internal controls regarding financial
reporting) which could adversely affect the issuer's ability to record, process,
summarize and report financial data and have identified for the issuer's
auditors any material weaknesses in internal controls; and
26
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/S/ Daniel R. Baty
--------------------------------
Daniel R. Baty
Chief Executive Officer
November 8, 2002
I, Raymond R. Brandstrom, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Emeritus Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which the quarterly report is being prepared;
b) evaluated the effectiveness of the issuer's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this Quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
(a pre-existing term relating to internal controls regarding financial
reporting) which could adversely affect the issuer's ability to record, process,
summarize and report financial data and have identified for the issuer's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly
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affect internal controls subsequent to the date of their evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/S/ Raymond R. Brandstrom
--------------------------------
Raymond R. Brandstrom
Chief Financial Officer
November 8, 2002
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