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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14012
EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
WASHINGTON 91-1605464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
(Address of principal executive offices)
(206) 298-2909
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.0001 par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), (2) and has been subject to such filing
requirements for the past 90 days. Yes () No ( )
Indicate by check mark that there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ( )
Aggregate market value of voting stock held by non-affiliates of the registrant
as of March 23, 1999 was $72,089,716.
As of March 23, 1999, 10,487,050 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III of
Form 10-K (items 10-13) is incorporated herein by reference to the Registrant's
definitive Proxy Statement relating to its 1999 Annual Meeting of Stockholders
to be held on May 19, 1999.
EMERITUS CORPORATION
Index
Part I
PAGE NO.
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Item 1. Description of Business................................................................................... 1
Item 2. Description of Property................................................................................... 13
Item 3. Legal Proceedings......................................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................................................... 18
Executive Officers of the Registrant...................................................................... 18
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 20
Item 6. Selected Financial Data.............................................................................. 21
Item 7. Management's Discussion and Analysis of Financial condition and Results of Operations................ 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................... 29
Item 8. Financial Statements and Supplementary Data.......................................................... 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 29
Part III
Item 10. Directors and Executive Officers of the Registrant.................................................... 30
Item 11. Executive Compensation................................................................................ 30
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 30
Item 13. Certain Relationships and Related Transactions........................................................ 30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 30
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW AND BACKGROUND
Emeritus Assisted Living - Emeritus Corporation ("Emeritus" or the "Company") is
a nationally integrated assisted living organization focused on operating
residential style communities. Emeritus is one of the largest and most
experienced providers of assisted living communities. Assisted living
communities provide a residential housing alternative for senior citizens who
need help with the activities of daily living, with an emphasis on assisted
living and personal care services.
The Company was founded in July 1993 to become a nationwide operator of assisted
living communities. During the 16 years prior to 1987, Daniel R. Baty, the
Company's Chairman of the Board and Chief Executive Officer, served as the chief
executive officer of The Hillhaven Corporation ("Hillhaven"), one of the largest
operators of skilled nursing facilities in the United States. Mr. Baty left
Hillhaven to pursue opportunities in the independent living market. In 1987, he
became the chairman of the board and a principal shareholder of Holiday
Retirement Corp. ("Holiday"), one of the largest operators of independent living
communities in the United States, and served as its chief executive officer from
1991 through September 1997.
As of March 23, 1999 the Company held ownership, leasehold or management
interests in 117 assisted living communities (the "Operating Communities")
consisting of approximately 10,400 units with a capacity for 12,000 residents,
located in 29 states. As of March 23, 1999, the Company leased 53 of its
assisted living communities, owned 15 communities, managed or provided
administrative services for 41 communities and had a partnership interest or
joint venture in eight communities. Additionally, the Company holds a 31.3%
minority interest in Alert Care Corporation ("Alert"), an Ontario, Canada based
owner and operator of 21 assisted living communities consisting of approximately
1,200 units with a capacity for approximately 1,300 residents. See "Strategic
Relationships --Alert Relationship".
Of the 117 current Operating Communities, the Company has developed 48 and
acquired 69 since its inception in 1993. Of the newly developed communities,
20 and 11 (six of which are managed) were opened during 1997 and 1998,
respectively. As of March 23, 1999 the Company completed development on four
additional communities and owned, had a leasehold interest in, management
interest in or had acquired an option to purchase development sites for 17
new assisted living communities (the "Development Communities"). Of the
Development Communities, 13 and four are scheduled to open during the
remainder of 1999 and in 2000, respectively. The Development Communities
contain capacity for 1,800 additional residents. After completion of the 1999
Development Communities and including Alert, the Company will have an
interest in 151 communities with a total capacity for over 14,500 residents.
Effective December 31, 1998, the Company completed a transaction whereby a
related entity acquired 22 assisted living communities previously leased by
the Company from Meditrust and three communities previously owned by the
Company for a combined purchase price of approximately $168 million (the
"Emeritrust transaction"). The Company is continuing to operate all 25
communities pursuant to a three year management agreement and will receive
management fees equal to 5% of revenues, as well as an additional 2% of
revenues contingent on such communities achieving positive cash flows. In
addition, the Company has an option and a right of first refusal to purchase
the 22 previously leased communities and the three previously owned
communities, respectively, during the three year period at a purchase price
equal to the original cost to the entity plus an amount calculated to provide
the entity with a specified rate of return on its invested capital. The
combined transaction will accomplish several strategic objectives for the
Company including: (i) expected management fee income of $2.5 million in 1999
versus 1998 losses from operations from these communities of $11.0 million
and (ii) an immediate improvement of approximately $800,000 in monthly cash
flow from operations. Daniel R. Baty, the Company's Chairman and Chief
Executive Officer, and William E. Colson, a director, have financial
interests in the entity that is a party to this arrangement.
THE ASSISTED LIVING INDUSTRY
The Company believes the assisted living industry is steadily becoming a
preferred alternative for meeting the growing needs of senior citizens who do
not require the intensive medical attention provided by a skilled nursing
facility, but cannot live independently due to physical and/or cognitive
frailties. The assisted living industry is one of the fastest growing niche
markets in the United States, projected to grow 150 percent by the year 2005,
according to the U.S. Small Business Administration. The Company believes an
assisted living environment is:
- a residential setting that provides or coordinates personal
services, 24-hour supervision and personalized assistance
(scheduled and unscheduled), health-related services and
activities in a professionally managed group environment;
- designed to accommodate individual residents' changing needs
and preferences;
- intended to maximize resident's dignity, quality of life,
autonomy, privacy, independence, choice and safety;
- designed to minimize the need to move by providing a
comprehensive range of assisted living services, including
Alzheimer's care and other services allowing residents to "age
in place" within the facility as they develop further physical
and cognitive frailties; and
- designed to encourage family and community involvement.
The Company believes that assisted living has become the preferred approach to
long-term care for seniors due to: (i) increased emphasis by both federal and
state governments to contain long-term care costs; (ii) limitations imposed in
many states on construction of additional skilled nursing facilities; and (iii)
the relative affluence of the elderly segment of the population and the
decreasing availability of family care. The Company believes that its
communities are attractive to those seniors who do not require 24-hour skilled
nursing care but do desire supervision and assistance with the activities of
daily living. Also, the limited availability of governmental payment programs
has created a strong and growing market demand for non-institutional long-term
care services designed to fill the gap between independent living facilities and
skilled nursing facilities.
OPERATING PHILOSOPHY
The Company's operating philosophy is to provide a wide variety of assisted
living services in a professionally managed environment while allowing its
residents to maintain their dignity and independence. In addition, the Company
continuously seeks to refine and improve the care and services it offers.
Residents of the Company's communities are typically unable to live alone, but
do not require the intensive care provided in skilled nursing facilities. Under
the Company's operating approach, seniors reside in a private or semi-private
residential unit for a monthly fee based on each resident's individual service
needs. The Company believes its focus on residential assisted living communities
allows seniors to maintain a more independent lifestyle than is possible in the
institutionalized environment of skilled nursing facilities. In addition, the
Company believes its services, such as assisting residents with their activities
of daily living (including medication management, bathing, dressing, personal
hygiene, and grooming) are attractive to seniors who are inadequately served by
independent living facilities.
RESIDENT SERVICES
The Company's assisted living communities offer residents a full range of
services based upon individual resident needs in a supportive "home-like"
environment. By offering a full range of services, including FlexAssist programs
and Alzheimer's Care, the Company can accommodate residents with a broad range
of service needs and therefore enable residents to "age in place". Services
provided by the Company to its residents are designed to respond to their
individual needs and to improve their quality of life.
BASIC CARE
The Company's basic care program is provided to all residents and includes:
three meals per day served in a common dining room; social and recreational
activities; weekly housekeeping and linen service; building maintenance and
grounds keeping; 24-hour emergency response and security; licensed nurses on
staff to monitor and coordinate care needs; and transportation to appointments,
etc.
FLEXASSIST
The Company's FlexAssist programs allow residents who require more frequent or
intensive assistance or increased care or supervision to receive additional
services. The FlexAssist program allows the Company, through consultation with
the resident, the resident's physician and the resident's family, to create an
individualized care program for residents who might otherwise be forced to move
to a more medically-intensive facility. An individual resident's level of care
is determined by the degree of assistance he/she requires in each of several
categories. The categories of care include, but are not limited to: medication
management and supervision; reminders for dining and recreational activities;
assistance with bathing, dressing and grooming; incontinence; behavior
management; dietary assistance; and miscellaneous (which consists of diabetic
management, PRN medication, transfer, simple treatment, oxygen set
up/maintenance and prosthesis). The Company charges an additional fee for these
services based on the level of care provided.
ALZHEIMER'S CARE
Alzheimer's is a debilitating disease and persons afflicted with it require
special care. The Company believes its Alzheimer's Care program distinguishes it
from other assisted living providers who do not provide such specialized care.
SERVICE REVENUE SOURCES
The Company currently and for the foreseeable future expects to rely primarily
on its residents' ability to pay the Company's charges from their own or
familial resources. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, the Company believes
generally only seniors with income or assets meeting or exceeding the regional
median can afford to reside in the Company's communities. Inflation or other
circumstances that adversely affect seniors' ability to pay for services such as
those provided by the Company could have an adverse effect on the Company's
business or operations. For example, if the Company were unable to attract
residents able to pay for its services, it would have to modify its business
strategy of relying primarily on the private-pay market and be forced to rely
more on the limited number of governmental reimbursement programs. Furthermore,
the federal government provides limited reimbursement for the type of assisted
living services provided by the Company.
The Company currently serves a limited number of residents who receive aid from
various states' (Washington, Florida, Texas and Massachusetts) financial
assistance programs, some of which are an extension of federal recipient
assistance programs, as well as from alternate sources, such as private
insurance. Qualifications are generally similar to those of Medicaid, and the
Company is subject to various regulatory and governmental reimbursement
policies. Net revenues from state reimbursement programs for the years 1997 and
1998 accounted for less than 10% of the Company's operating revenues for such
years. Payments to the Company under state reimbursement programs in which the
Company participates are currently sufficient to cover virtually all the
operating (but not financing) costs allocable to the Company's participating
residents. As third party reimbursement programs and other alternative forms of
payment continue to grow, the Company will pursue reimbursement from the third
party, if appropriate, given the level of care provided to its residents.
However, there can be no assurance that the Company will continue to improve its
private-pay mix or that it will not in the future become more dependent on
governmental or other reimbursement programs.
COMPANY OPERATIONS
OPERATING STRATEGY
The Company believes there is a significant demand for alternative long-term
care services that are well-positioned between the limited services offered by
independent living facilities and the more medical and institutional care
offered by skilled nursing facilities. The Company seeks to provide high-quality
services in its assisted living communities while increasing operating margins
primarily by: (i) increasing its focus on occupancy levels throughout the
Company's portfolio; (ii) maintaining residents longer by providing programs
that offer residents a full range of service options, enabling residents to "age
in place" as their needs change; (iii) increasing revenues through modifications
in rate structures; and (iv) identifying opportunities to create operating
efficiencies and reduce costs. The Company believes its emphasis on quality and
continuity of service will enable it to increase its communities' occupancy
levels, thereby enhancing revenues. The Company also believes that the physical
configuration of its facilities, combined with its diversified levels of
service, contributes to resident satisfaction and allows seniors residing at the
Company's communities to maintain their dignity and independence.
During 1998 the Company: (i) increased its focus on community operations; (ii)
slowed its development and acquisition activities in order to shift its focus
from growth to operations; and (iii) disposed of select communities previously
operated at a loss. The Company's increased focus on community operations is
primarily the result of continued losses throughout the Company's portfolio
and initially lower levels of occupancy than expected at the Company's
communities. Since the focus shift to operations, the Company has generated
substantial occupancy gains in its communities. Occupancy at December 31,
1998 was 81% compared to 72% at December 31, 1997. In addition, average
occupancy for 1998 was 77% compared to 73% for 1997.
The Company's slowed development and acquisition activities in 1998 decreased
the Company's financial obligations thereby releasing its resources for other
purposes. These additional resources enabled the Company to refine and improve
community operations. The Company opened five newly developed communities in
1998 compared to 20 in 1997 and 11 in 1996. In addition, the Company acquired
only two communities in 1998, compared to seven in 1997 and 35 in 1996.
In an effort to reduce the impact of start-up losses from acquired and newly
developed communities on its current portfolio, the Company began a major
restructuring of its portfolio during 1998. This restructuring included an
evaluation by the Company of the financial performance of its communities. For
those communities with significant losses, the Company negotiated their sale of
with buyers focused on the real estate component while the Company retained its
focus on the operations through management agreements.
To that end, in 1998 the Company disposed of interests in three assisted
living communities to related parties, but has retained management agreements
with respect to each community. These dispositions will generate expected
management fees of $450,000 in 1999 versus 1998 net losses of $5.0 million.
The Company retains a 20% interest in one community and holds notes that are
convertible into a 20% interest in one other community.
In addition, effective December 31, 1998, the Company completed a transaction
whereby a related entity acquired 22 assisted living communities previously
leased by the Company from Meditrust and three communities previously owned
by the Company for a combined purchase price of approximately $168 million
(the "Emeritrust transaction"). The Company is continuing to operate all 25
communities pursuant to a three year management agreement and will receive
management fees equal to 5% of revenues, as well as an additional 2% of
revenues contingent on such communities achieving positive cash flows. In
addition, the Company has an option and a right of first refusal to purchase
the 22 previously leased communities and the three previously owned
communities, respectively, during the three year period at a purchase price
equal to the original cost to the entity plus an amount calculated to provide
the entity with a specified rate of return on its invested capital. The
combined transaction will accomplish several strategic objectives for the
Company including: (i) expected management fee income of $2.5 million in 1999
versus 1998 losses from operations from these communities of $11.0 million
and (ii) an immediate improvement of approximately $800,000 in monthly cash
flow from operations. Daniel R. Baty, the Company's Chairman and Chief
Executive Officer, and William E. Colson, a director, have financial
interests in the entity that is a party to this arrangement.
In March 1999, the Company also completed the disposition of its leasehold
interest in an additional 19 communities, consisting of 14 currently
operational communities and five development communities (the "Emeritrust II
communities") to a related entity in a similar transaction. The Company will
continue to operate the Emeritrust II communities pursuant to a three year
management contract and will receive management fees equal to 5% of revenues,
as well as an additional 2% of revenues contingent on such communities
achieving positive cash flows. In addition, the Company has an option to
purchase the 19 communities during the three year period at a purchase price
equal to the original cost to the entity plus an amount calculated to provide
the entity with a specified rate of return on its invested capital.
Management fee income of $1.8 million is expected to be generated from the 19
Emeritrust II communities in 1999 compared to 1998 net losses from these
communities of approximately $300,000.
ACQUISITIONS
The Company has previously acquired, and will consider acquiring, if attractive
opportunities are made available, existing assisted living communities. In
evaluating possible acquisitions, the Company considers, among other factors:
(i) location, construction quality, condition and design of the facility, (ii)
the ability to generate revenue and cash flow and increase occupancy; (iii)
costs of repositioning the community; and (iv) the extent to which the
acquisition will complement the Company's existing portfolio of communities.
In certain circumstances the Company has acquired, and may continue to acquire,
independent living and skilled nursing facilities that, for various reasons, it
does not reposition as assisted living communities. The Company leases one
Medicare Certified skilled nursing facility (Heritage Health) pursuant to a
multi-facility acquisition completed in February 1996. Due to the nature of
sub-acute care services required in this skilled nursing facility, the Company
has engaged third party managers who have the expertise and systems to operate
a facility in this line of business. These acquisitions will, however,
generally be incidental to the Company's overall focus on assisted living
communities, and the Company will typically seek over time to divest itself of
the ownership or operation of properties that are inconsistent with its
assisted living focus. There can be no assurance however, that the Company
will successfully operate such independent living or skilled nursing
facilities in the interim, that it will be able to locate qualified purchasers
or operators of such facilities or that the terms on which it transfers
ownership or operation of such facilities will be advantageous to the Company.
DEVELOPMENT
In 1998, the Company slowed its development activities in order to increase its
focus on operations. In 1998 and 1997, the Company began operating five and 20
newly developed communities in which it has leasehold or ownership interests,
respectively. The Company currently anticipates opening five additional
developments in 1999, all of which will be disposed as part of the Emeritrust
II transaction . See "Factors Affecting Future Results and Regarding
Forward-Looking Statements --Ability to Develop Additional Assisted living
Communities" and "--Need for Additional Capital" for a description of factors
that could affect the Company's rate of development.
MANAGEMENT AGREEMENTS
The Company has entered into agreements whereby it manages or provides
administrative services for assisted living communities and independent living
communities owned or leased by others. The Company currently provides management
services for a total of 42 communities, representing 1999 annualized income of
approximately $2.8 million. Eight of these communities are owned by Columbia
House I, Limited Partnership ("Columbia House"), which is partially owned
indirectly by the Company's Chairman and Chief Executive Officer. See "Strategic
Relationships --Columbia House Relationship."
In conjunction with the closing of the Emeritrust transaction, the Company
also operates 25 communities pursuant to a three year management agreement
and will receive management fees equal to 5% of revenues, as well as an
additional 2% of revenue contingent on such communities achieving positive
cash flows. See "--Operating Strategy."
ADMINISTRATION
The Company employs an integrated structure of management, financial systems and
controls to maximize operating efficiency and contain costs. In addition, the
Company has developed the internal procedures, policies and standards it
believes are necessary for effective operation and management of its assisted
living communities. The Company has recruited experienced key employees from
several established operators in the long-term-care services field and believes
it has assembled the administrative, operational and financial personnel that
will enable it to continue to manage its operating strategies effectively.
The Company has established Central, Eastern and Western Operational Divisions.
Each division is headed by a divisional director who reports to the Company's
Vice President of Operations. Each division is comprised of several operating
regions headed by a regional director who provides management support services
for each of the communities in his/her respective region. Day to day community
operations are supervised by an on-site community director who, in certain
jurisdictions, must satisfy certain licensing requirements. The Company provides
management support services to each of its residential communities, including
establishing operating standards, recruiting, training, and financial and
accounting services.
The Company has centralized finance and other operational functions at its
headquarters in Seattle, Washington in order to allow community-based personnel
to focus on resident care. The Seattle office as a whole is responsible for:
establishing Company-wide policies and procedures; financial and marketing
functions; management of the Company's acquisition and development activities;
and providing overall strategic direction to the Company.
INFORMATION TECHNOLOGY
The Company utilizes a blend of centralized and decentralized accounting and
computer systems that link each community with the Company's headquarters. These
systems enables the Company to closely monitor operating costs and quickly
distribute financial and operating information to appropriate levels of
management in a cost efficient manner. Management believes that its current data
systems are adequate for current operations and provide the flexibility to meet
the continued growth of its operations without disruption or significant
modification to existing systems through fiscal year 1999. The Company uses high
quality hardware and operating systems from current and proven technologies to
support its current technology infrastructure. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000".
INTERNATIONAL EXPANSION
Demographic trends in Japan suggest a tremendous future need for assisted living
services as part of the health care system. The percentage of Japanese citizens
over the age of 65 is expected to increase from 7.1% in 1970 to 23.3% by 2010.
In April 1998 the Company entered into a joint venture, Sanyo Emeritus
Corporation, with Sanyo Electric Company, Ltd. ("Sanyo") of Osaka, Japan to
provide assisted living services in Japan. The Company's first assisted living
community in Japan is under construction and is anticipated to open in December
1999. The community will be among the first assisted living communities in Japan
to offer private apartments on a month-to-month rental. See "Strategic
Relationships--Sanyo Relationship".
BRANDING
In 1998, the Company developed a brand concept for the Company's communities.
The Company adopted the "Loyalton" name for its newly developed communities as
well as selected existing communities. The Company believes that this branding
will allow its residents, shareholders and employees to develop some brand
loyalty and recognition of the Emeritus and Loyalton name throughout the
Company's markets.
MARKETING AND REFERRAL RELATIONSHIPS
The Company's operating strategy is designed to integrate its assisted living
communities into the continuum of healthcare providers in the geographic markets
in which it operates. One objective of this strategy is to enable residents who
require additional healthcare services to benefit from the Company's
relationships with local hospitals, home healthcare agencies and skilled nursing
facilities in order to obtain the most appropriate level of care. Thus, the
Company seeks to establish relationships with local hospitals (including through
joint marketing efforts, where appropriate) and home healthcare agencies,
alliances with visiting nurses associations and, on a more limited basis,
priority transfer agreements with local, high-quality skilled nursing
facilities. In addition to benefiting residents, the implementation of this
operating strategy has strengthened and expanded the company's network of
referral sources.
Of the Company's 117 Operating Communities and 17 Development Communities, 29
are located in markets or proposed markets in which Holiday also operates its
independent living facilities. The Company believes that its assisted living
communities will offer an attractive alternative for Holiday residents as they
age and require more extensive services. The Company and Holiday do not have any
formal understanding or written agreement regarding joint marketing programs. As
a result, there can be no assurance that joint marketing programs envisioned
with Holiday will be effected. Furthermore, there can be no assurance that, if
effected, such joint marketing programs will be successful in attracting
additional residents to the Company's assisted living communities or that the
Company's and Holiday's interest will be compatible in the future. See
"Strategic Relationships --Holiday Relationship".
STRATEGIC RELATIONSHIPS
ALERT RELATIONSHIP
In November 1996, the Company agreed to purchase up to 6,888,466 shares of
convertible preferred stock of Alert Care Corporation ("Alert"), an Ontario,
Canada based owner and operator of assisted living communities at prices
ranging from $0.67 to $0.74 per share (Cdn). In addition, the Company
acquired an option to purchase an additional 4,000,000 shares of convertible
preferred stock at an exercise price of $1.00 per share (Cdn), as well as an
option to purchase from Eclipse Capital Management ("Eclipse"), the majority
shareholder of Alert, and certain other shareholders of Alert, 9,050,000
issued and outstanding shares of common stock of Alert and 950,000 issued and
outstanding shares of Class A non-voting stock of Alert both at an exercise
price of $3.25 per share (Cdn). If all options were exercised, the Company
would own 60.0% of Alert.
Each Preferred Share is convertible into one common share or one Class A
nonvoting share, at the holder's election; the Preferred Shares are immediately
convertible into Class A nonvoting shares but are not immediately convertible
into common shares and are so convertible only after the controlling persons of
Alert have transferred to others (which could include the Company) not less than
10 million shares of common or Class A nonvoting shares (as of March 23, 1999
there are approximately 23.9 million such shares outstanding) and such
controlling persons are relieved of certain guarantees of indebtedness.
As of December 31, 1996, the Company had purchased and held 2,577,692 shares of
preferred stock for a total investment of $1,800,000 (Cdn) or $1,331,000 (US).
In 1997, the Company purchased an additional 5,010,774 shares of preferred stock
increasing its ownership to 7,588,466 shares or $4,111,000 (US). As of December
31, 1997, the Company's total investment in Alert represented on an as-converted
basis approximately 24.2% of the outstanding common and Class A nonvoting shares
combined. In 1998, the Company purchased an additional 3,300,000 shares of
preferred stock resulting in an ownership interest of 31.3% or 10,888,466
shares.
Alert has entered into an exclusive management agreement to manage the Company's
future assisted living communities in Ontario. Eclipse, through its wholly-owned
subsidiary, Eclipse Construction Inc., develops and constructs retirement homes
for Alert on a contract basis. Under the agreement, Eclipse has entered into an
exclusive development agreement with the Company and Alert to develop their
future construction projects in Ontario. No communities have been developed
under these agreements as of March 23, 1999.
COLUMBIA HOUSE RELATIONSHIP
Columbia House I, Limited Partnership ("Columbia House"), a Washington limited
partnership in which Mr. Baty, the Company's Chairman and Chief Executive
Officer indirectly controls the general partner and in which Mr. Baty holds an
indirect 60% interest, develops, owns and leases low income senior housing
projects. The Company has entered into agreements with Columbia House to
provide certain administrative support, due diligence and financial support
services to Columbia House with respect to the acquisition, development and
administration of Columbia House communities. The Company currently manages
eight communities owned by Columbia House consisting of approximately 720
units and provides administrative services for another community consisting of
approximately 100 units.
HOLIDAY RELATIONSHIP
Twenty-nine of the Company's Operating Communities are located near existing or
proposed independent living facilities operated by Holiday. The Company believes
that its focus on expanding in locations near Holiday facilities will often
enable it to gauge the need for its services in a particular market by
evaluating Holiday's operating performance, and that successful Holiday
facilities will generally reflect the combination of criteria required for a
successful assisted living community. In addition, the Company believes that, as
a result of Mr. Baty's close relationship with Holiday, opportunities may arise
for (i) development of assisted living communities on sites near existing or
proposed Holiday independent living facilities and (ii) joint marketing programs
for attracting residents to the Company's assisted living communities and
Holiday's independent living facilities, depending on the level of services
required. The Company and Holiday have no written agreement or formal
understanding concerning their relationship, and there can be no assurance that
opportunities for such development or joint marketing programs will arise and
that the Company's and Holiday's interests will be compatible in the future. In
February 1998, the Company and a Holiday affiliate entered into four management
agreements whereby a Holiday affiliate will provide management services relating
to four assisted living communities located in Texas and developed by the
Company. The Company sold interests in three of these communities in
conjunction with the Emeritrust transaction, but Holiday will continue to manage
all four properties in accordance with the original management agreements. The
agreements consist of initial terms of two years six months and management fees
based on 6% of gross revenues payable monthly. Mr. Baty and Mr. Colson, a
director of the Company are the principal shareholders, directors and senior
executive officers of Holiday, and substantially all the independent living
facilities operated by Holiday are owned by partnerships controlled by Messrs.
Baty and Colson and in which they have varying financial interests.
NORTHSTAR RELATIONSHIP
In October 1997, NorthStar Capital Partners LLC ("NorthStar"), a private
investment group with financial backing from a Union Bank of Switzerland
Securities affiliate and Quantum Realty Partners, a fund advised by Soros Fund
Management LLC, invested $25.0 million in the Company through the purchase of
25,000 shares of Series A Convertible Exchangeable Redeemable Preferred Stock
(the "Series A Preferred Stock"), representing approximately 10% ownership in
the Company. Each share of Series A Preferred Stock is convertible into that
number of shares of the Company's Common Stock equal to the liquidation value of
a share of Series A Preferred Stock ($1,000) divided by the conversion price of
$18.20 per share. Currently the Series A Preferred Stock is convertible into an
aggregate of 1,373,626 shares of Common Stock. The Series A Preferred Stock is
also exchangeable into convertible debt at the option of the Company. The
conversion price is subject to adjustment in the event of stock dividends, stock
subdivisions and combinations, and extraordinary distributions. The Series A
Preferred Stock provides for cumulative quarterly
dividend payments of 9% and has a mandatory redemption date of October 24, 2004.
PAINTED POST PARTNERS RELATIONSHIP
During 1995, the Company's two most senior executive officers, CEO and then
current President, formed a New York general partnership (the "Partnership") to
facilitate the operation of assisted living communities in the state of New
York, which generally requires that natural persons be designated as the
licensed operators of assisted living communities. The Company and the
Partnership have entered into Administrative Services Agreements that extend for
the term of the underlying leases. The fees payable to the Company under the
Administrative Services Agreements have been established at a level that would
equal or exceed the profit of the community operated efficiently at full
occupancy and, unless reset by agreement of the parties, will rise automatically
on an annual basis in accordance with changes in the Consumer Price Index. In
addition, the Company has agreed to indemnify the partners against losses, and
in exchange, the partners have agreed to assign any profits to the Company. As a
part of the general non-competition agreements of the CEO and former President,
each has agreed that in the event he were to cease as a senior executive of the
Company, he would transfer his interest in the Partnership for a nominal charge
to his successor at the Company or other person designated by the Company.
SANYO RELATIONSHIP
In April 1998, the Company entered into a joint venture with Sanyo to provide
assisted living services in Japan. The joint venture, Sanyo Emeritus
Corporation ("Sanyo Emeritus"), has been formed to provide a residential
based health care alternative for Japan's growing elderly population. Sanyo
Emeritus was initially capitalized with Y50 million ($384,000 US), with the
Company and Sanyo each providing half the funds. The joint venture's first
assisted living community in Japan is under construction and is anticipated
to open in late 1999. Similar to the United States, the elderly population in
Japan is experiencing dramatic growth. The percentage of Japan's citizens
over 65 years of age is expected to increase from 7.1% in 1970 to 23.3% by
2010. In 1999, the Japanese Government is changing the current reimbursement
system and the Company expects that assisted living services will be an
integral part of this new system thereby offering Japan's elderly greater
flexibility in choosing their health care.
COMPETITION
The number of assisted living communities in the United States, the ownership of
which is fragmented, is increasing rapidly. As the assisted living industry
continues to grow, fewer attractive development sights may be available. This
market saturation could have an adverse effect on the Company's newly developed
communities and their ability to reach stabilized occupancy levels. Moreover,
the senior housing services industry has been subject to pressures that have
resulted in the consolidation of many small local operations into larger
regional and national multi-facility operations. While there are several
national and regional companies that provide senior living alternatives, the
Company anticipates that its primary source of competition will originate from
local and regional assisted living companies that operate, manage and develop
residences within the same geographic area as the Company, as well as retirement
facilities and communities, home healthcare agencies, not-for-profit or
charitable operators and, to a lesser extent, skilled nursing facilities and
convalescent centers. The Company believes that quality of service, reputation,
a facility's location, physical appearance and price will be significant
competitive factors. Some of the Company's competitors have significantly
greater resources, experience and recognition within the healthcare community
than does the Company.
EMPLOYEES
As of December 31, 1998, the Company had 5,108 employees, including 3,627 full
time employees, of which 92 were employed at the Company's headquarters. None of
the Company's employees are currently represented by a labor union, and the
Company is not aware of any union-organizing activity among its employees. The
Company believes that its relationship with its employees is good.
Although the Company believes it is able to employ sufficiently skilled
personnel to staff the communities it operates or manages, a shortage of skilled
personnel in any of the geographic areas in which it operates could adversely
affect the Company's ability to recruit and retain qualified employees and
control its operating expenses.
TRADEMARKS
The Registration of the Company's FlexAssist service mark was granted in
February 1997.
FACTORS AFFECTING FUTURE RESULTS AND REGARDING FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including, but not limited to, those set forth below. In
addition, the following important factors, among others, could cause the
Company's actual results to differ materially from those expressed in the
Company's forward-looking statements in this report and presented elsewhere by
management from time to time. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. A number of the matters and subject areas discussed in this report are
not historical or current facts and refer to potential future circumstances,
operations, and prospects. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from the Company's actual
future experience involving any one or more of such matters and subject areas
relating to demand, pricing, competition, construction, licensing, construction
delays on new developments contractual and licensure, and other delays on the
disposition of assisted living communities in the Company's portfolio, and the
ability of the Company to continue managing its costs while maintaining high
occupancy rates and market rate assisted living charges in its assisted living
communities. The Company has attempted to identify, in context, certain of the
factors that they currently believe may cause actual future experience and
results to differ from the Company's current expectations regarding the relevant
matter or subject area. The Company undertakes no obligation to publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date of this report or to
reflect the occurrence of unanticipated events.
RECENT ORGANIZATION; HISTORY OF LOSSES
The Company was organized and began operations in July 1993 and has operated
at a loss since its inception. For 1997 and 1998, the Company recorded a net
loss of $28.2 million and $31.0 million, respectively. These historical
losses are attributable to the growth in the size of the Company's portfolio
fueled by both acquisitions and developments. The majority of the acquired
Operating Communities operate at a loss following acquisition and the Company
expects such facilities to continue to operate at a loss for at least 12 to
18 months after the date of acquisition. Although the Company has slowed its
development activities, it continues to develop new assisted living
communities, all of which are expected to incur start-up losses for at least
12 months after commencing operations. As a result, the Company expects to
continue to incur losses at least through the end of 1999. In an effort to
reduce the impact of start-up losses from acquired and newly developed
communities on its current portfolio, the Company began a major restructuring
of its portfolio during 1998, selling its ownership and lease interests in 28
communities which represented net losses of $12.7 million and $16.5 million
or 45% and 54% of the Company's 1997 and 1998 net losses, respectively.
Continuing with this trend, in March 1999, the Company completed a
disposition of an additional 19 communities with aggregate 1998 net losses of
$300,000. See "Company Operations - Operating Strategy". There can be no
assurance, however, that the Company's operations will become profitable at
the rate currently expected by the Company, or at all. The Company's
inability to achieve profitability on a timely basis could have an adverse
effect on the Company's business, operating results, financial condition and
the market price of its Common Stock.
DIFFICULTIES INCREASING AND STABILIZING OCCUPANCY RATES; DIFFICULTIES
CONTAINING COSTS
Prior to the second quarter of 1998 the Company had experienced challenges
regarding its ability to increase occupancy levels as well as its ability to
match variable cost levels with occupancy. The Company's losses are partially
the result of lower than expected occupancy levels at the Company's newly
developed and acquired communities. In addition, the Company incurred higher
than expected variable costs as it established staffing and other costs
configurations to fluctuate effectively with occupancy. The Company has
increased occupancy levels significantly in the last three quarters of 1998,
filling more than 1,500 units. The Company has also improved and streamlined
a cost containment program geared at matching costs with occupancy levels.
However, there is no assurance that occupancy levels will continue to
increase at the rate currently expected by the Company, or at all or that
cost levels will continue to vary according to occupancy levels. The
Company's inability to increase occupancy levels or to control costs
throughout its portfolio could have an adverse effect on the Company's
business, financial condition and operating results.
SUBSTANTIAL DEBT AND LEASE OBLIGATIONS OF THE COMPANY
At December 31, 1998, the Company had mortgage indebtedness in an aggregate
amount of $125.4 million, with minimum principal payments estimated to be
approximately $12.6 million in 1999. As of December 31, 1998, approximately
$108.4 million principal amount of the Company's indebtedness bore interest at
fluctuating rates; therefore, increases in prevailing interest rates would
increase the Company's interest payment obligations and could have an adverse
effect on the Company's operating results and financial condition. At December
31, 1998, the Company was also a party to long-term operating leases for 52 of
its residential communities, which require minimum annual lease payments
estimated to be approximately $29.8 million in 1999. In addition, the Company
will have approximately $13.3 and $75.1 million in principal amount of debt
repayment obligations that become due in 2000 and 2001, respectively. The
Company intends to continue to finance its properties through a combination of
mortgage financing and operating leases, including leases arising through
sale/leaseback transactions. As a result of such mortgages and leases, a
substantial portion of the Company's cash flow will be devoted to debt service
and lease payments. There can be no assurance that the Company will generate
sufficient cash flow from operations to cover required interest, principal and
lease payments. Furthermore, from time to time the Company has not been in
compliance with certain covenants in its financing agreements. While to date the
Company has been able to obtain waivers for such noncompliance, there can be no
assurance that in the future it will be able to comply with such covenants,
which generally relate to matters such as cash flow and debt coverage ratios. If
the Company were unable to meet interest, principal or lease payments, it could
be required to re-negotiate such payments or obtain additional equity or debt
financing. There can be no assurance, however, that such efforts would be
successful or timely or that the terms of any such financing or refinancing
would be acceptable to the Company. Furthermore, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgage and
sale/leaseback agreements, a default by the Company on one of its payment
obligations could adversely affect a significant number of the Company's
properties. The Company's leverage may also adversely affect the Company's
ability to respond to changing business and economic conditions or continue its
development and acquisition program.
NEED FOR ADDITIONAL CAPITAL; NEGATIVE CASH FLOW AND FINANCING REQUIREMENTS
The Company has experienced negative operating cash flow due to its significant
developments and acquisitions of assisted living communities since its
inception. The Company expects its newly developed assisted living communities
to generate positive cash flow nine to twelve months after commencing
operations. In addition, the Company expects that the properties it acquires for
repositioning as assisted living communities will typically require at least 12
months to 18 months after acquisition to begin to generate positive cash flows.
In an effort to reduce the impact of start-up losses from acquired and newly
developed communities on its current cash flow, the Company began a major
restructuring of its portfolio during 1998, selling its ownership and lease
interests in 28 communities. See "Company Operations - Operating Strategy".
There can be no assurance that any newly developed or repositioned community
will achieve a stabilized occupancy rate and resident mix that meets the
Company's expectations, generate positive cash flow or operating results
sufficient to allow the Company to refinance outstanding indebtedness secured by
the community through sale/leaseback transactions. The Company's future success
depends in part on arranging sale/leaseback financing or mortgage refinancing
for assisted living communities that have achieved stabilized occupancy rates,
resident mix and operating margins after initial development or repositioning.
The Company will from time to time seek additional funding through public or
private financing, including equity financing. If additional funds are raised by
issuing equity securities, the Company's shareholders may experience dilution.
There can be no assurance, however, that adequate equity, debt or sale/leaseback
financing will be available as needed or on terms acceptable to the Company. A
lack of available funds may require the Company to delay, scale back or
eliminate all or some of its development and acquisition projects.
CONFLICTS OF INTEREST WITH HOLIDAY
Mr. Baty, the Company's Chief Executive Officer, and Mr. Colson, a director of
the Company, are the principal shareholders, directors and senior executive
officers of Holiday, and substantially all the independent living facilities
operated by Holiday are owned by partnerships controlled by Messrs. Baty and
Colson and in which they have varying financial interests. Messrs. Baty's and
Colson's responsibilities to Holiday and its affiliates include overseeing the
management of independent living facilities, the acquisition, financing and
refinancing of existing facilities and the
development and construction of, and capital-raising activities to finance new
facilities. Although the Company believes that its relationship with Holiday is
beneficial, the financial interests and management and financing
responsibilities of Messrs. Baty and Colson, with respect to Holiday and its
affiliated partnerships could present conflicts of interest, including conflicts
relating to the selection of future development or acquisition sites,
competition for potential residents in markets where both companies operate and
the allocation of time and efforts of Mr. Baty. Because Mr. Baty is the Chief
Executive Officer of the Company and a principal executive officer of Holiday,
circumstances could arise that would distract him from the Company's operations,
which distractions could have an adverse effect on the Company's business,
operating results and financial condition. Moreover, there can be no assurance
that the Company's and Holiday's interests will remain compatible.
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL
The Company depends, and will continue to depend, on the services of Daniel R.
Baty, its Chairman of the Board and Chief Executive Officer. The loss of the
services of Mr. Baty could have a material adverse effect on the Company's
operating results and financial condition. Mr. Baty has financial interests in
and management responsibilities with respect to Holiday and its related
partnerships. And, as a result, he will not be devoting his full time and
efforts to the Company. Under certain circumstances, Mr. Baty could have
conflicts of interest in allocating his time and efforts between the Company and
Holiday. The Company has entered into a noncompetition agreement with Mr. Baty
but this noncompetition agreement does not limit Mr. Baty's current role with
Holiday, or the related partnerships which own or lease properties currently
operated by Holiday, so long as assisted living is an incidental component to
Holiday's operation or management of independent-living facilities. The Company
has obtained a key employee insurance policy covering the life of of Mr. Baty in
the amount of $10.0 million. The Company also depends on its ability to attract
and retain management personnel who will be responsible for the day-to-day
operations of each of its residential communities. If the Company is unable to
hire qualified management to operate its assisted living communities, the
Company's business, operating results and financial condition could be adversely
affected. In March 1999, Raymond R. Brandstrom and Frank A. Ruffo retired from
their offices of President and Executive Vice President of the Company,
respectively, and will continue consulting on behalf of the Company. Mr.
Brandstrom will maintain his involvement in the Company's Board of Directors as
Vice Chairman.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances, including, without limitation, asbestos-containing materials,
that could be located on, in or under such property. Such laws and regulations
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of these substances could be substantial and
the liability of an owner or operator as to any property is generally not
limited under such laws and regulations, and could exceed the property's value
and the aggregate assets of the owner or operator. The presence of these
substances or failure to remediate such substances properly may also adversely
affect the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner, operator or
any entity who arranges for the disposal of hazardous or toxic substances such
as asbestos-containing materials, at a disposal site may also be liable for the
costs of any required remediation or removal of the hazardous or toxic
substances at the disposal site. In connection with the ownership or operation
of its properties, the Company could be liable for these costs, as well as
certain other costs, including governmental fines and injuries to persons or
properties. As a result, the presence, with or without the Company's knowledge,
of hazardous or toxic substances at any property held or operated by the Company
could have an adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY
The Company currently, and for the foreseeable future, expects to rely primarily
on its residents' ability to pay the Company's fees from their own or familial
financial resources. Generally only seniors with income or assets meeting or
exceeding the comparable median in the region where the Company's assisted
living communities are located can afford the Company's fees. Inflation or other
circumstances that adversely affect the ability of seniors to pay for the
Company's services could have an adverse effect on the Company. If the Company
encounters difficulty in attracting seniors with adequate resources to pay for
its services, its business, operating results and financial condition could be
adversely affected.
GOVERNMENTAL REGULATION
Healthcare is heavily regulated at the federal, state and local levels and
represents an area of expensive and frequent regulatory change. A number of
legislative and regulatory initiatives relating to long-term care are proposed
or under study at both the federal and state levels that, if enacted or adopted,
could have an adverse effect on the Company's business and operating results.
The Company cannot predict whether and to what extent any such legislative or
regulatory initiatives will be enacted or adopted, and therefore cannot assess
what effect any current or future initiative would have on the Company's
business and operating results. Changes in applicable laws and new
interpretations of existing laws can significantly affect the Company's
operations, as well as its revenues (particularly those from governmental
sources) and expenses. The Company's residential communities are subject to
varying degrees of regulation and licensing by local and state health and social
service agencies and other regulatory authorities specific to their location.
While regulations and licensing requirements often vary significantly from state
to state, they typically relate to fire safety, sanitation, staff training,
staffing levels and living accommodations such as room size, number of bathrooms
and ventilation, as well as regulatory requirements relating specifically to
certain of the Company's health-related services. The Company's success will
depend in part of its ability to satisfy such regulations and requirements and
to acquire and maintain any required licenses. In addition, with respect to its
residents who receive financial assistance from governmental sources for their
assisted living services, the Company is subject to certain federal and state
regulations that prohibit certain business practices and relationships that
might affect healthcare services reimbursable under Medicaid or similar state
reimbursements programs. The Company's failure to comply with such regulations
could jeopardize its reimbursement payments for any affected residents and, if
excessive, could result in fines and the suspension or failure to renew the
Company's operating licenses. Federal, state and local governments occasionally
conduct unannounced investigations, audits and reviews to determine whether
violations of applicable rules and regulations exist. Devoting management and
staff time and legal resources to such investigations, as well as any material
violation by the Company that is discovered in any such investigation, audit or
review, could have a material adverse effect on the Company's business and
operating results. There can be no assurance that regulatory oversight of
construction efforts associated with repositionings will not result in loss of
residents and disruption of community operations.
LIABILITY AND INSURANCE
The Company's business entails an inherent risk of liability. In recent years,
participants in the long-term-care industry have become subject to an increasing
number of lawsuits alleging malpractice or related legal theories, many of which
involve large claims and significant legal costs. The Company expects that from
time to time it will be subject to such suits as a result of the nature of its
business. The Company currently maintains insurance policies in amounts and with
such coverage and deductibles as it deems appropriate, based on the nature and
risks of its business, historical experience and industry standards. There can
be no assurance, however, that claims in excess of the Company's insurance
coverage or claims not covered by the Company's insurance coverage will not
arise. A successful claim against the Company not covered by, or in excess of,
the Company's insurance could have a material adverse effect on the Company's
operating results and financial condition. Claims against the Company,
regardless of their merit or eventual outcome, may also have a material adverse
effect on the Company's ability to attract residents or expand its business and
would require management to devote time to matters unrelated to the operation of
the Company's business. In addition, the Company's insurance policies must be
renewed annually, and there can be no assurance that the Company will be able to
obtain liability insurance coverage in the future or, if available, that such
coverage will be on acceptable terms.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock could be subject to significant
fluctuations in response to various factors and events, including, but not
limited to, the liquidity of the market for the Common Stock, variations in the
Company's operating results, variations from analysts expectations, new statutes
or regulations or changes in the interpretation of existing statutes or
regulations affecting the healthcare industry generally or the assisted living
residence business in particular. In addition, the stock market in recent years
has experienced broad price and volume fluctuations that often have been
unrelated to the operating performance of particular companies. These market
fluctuations also may adversely affect the market price of the Common Stock.
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTIES
The Company's assisted living communities generally consist of one- to
three-story buildings and include common dining and social areas. Twenty-two of
the Company's Operating Communities offer independent living services and four
are operating as skilled nursing facilities.
The table below summarizes certain information regarding the Operating
Communities.
Emeritus
Operations
Community Location Commenced Units (a) Beds (b) Interest
- -------------------------------------------- ------------------- -------------- ---------- ---------- --------------------
ARIZONA
La Villita * (2) Phoenix Jun. 1994 87 87 Manage
Loyalton of Phoenix (3) Phoenix Jan. 1999 101 111 Lease
Olive Grove * Phoenix Jun. 1994 98 111 Lease
Scottsdale Royale + Scottsdale Aug. 1994 63 63 Own
Villa Ocotillo Scottsdale Sep. 1994 102 106 Own
CALIFORNIA
Creston Village + Paso Robles Mar. 1998 97 107 Joint Venture
Emerald Hills * Auburn Jun. 1998 89 98 Manage
Fulton Villa Stockton Apr. 1995 81 81 Own
Laurel Place *+ (2) San Bernadino Apr. 1996 70 71 Manage
Northbay Retirement + Fairfield Apr. 1998 172 189 Joint Venture
Rosewood Court Fullerton Mar. 1996 71 78 Lease
The Terrace + (2) Grand Terrace Jan. 1996 87 87 Manage
Villa Del Rey * Escondido Mar. 1997 84 84 Own
CONNECTICUT
Cold Spring Commons * Rocky Hill May 1997 80 88 Joint Venture
DELAWARE
Gardens at White Chapel (2) Newark Sep. 1998 99 109 Manage
Green Meadows at Dover Dover Oct. 1995 49 60 Lease
FLORIDA
Barrington Place (2) LeCanto May 1996 80 120 Manage
Beneva Park Club (2) Sarasota Jul. 1995 96 102 Manage
Central Park Village *+ (2) Orlando Jul. 1995 179 193 Manage
College Park Club * (2) Brandenton Jul. 1995 87 93 Manage
Colonial Park Club (3) Sarasota Aug. 1996 90 90 Lease
La Casa Grande New Port Richey May 1997 195 232 Own
The Lodge at Mainlands (2) Pinellas Park Aug. 1996 154 162 Manage
Madison Glen (2) Clearwater May 1996 130 154 Manage
Park Club of Brandon Brandon July 1995 90 88 Lease
Park Club of Ft. Myers Ft. Myers July 1995 79 82 Lease
Park Club of Oakbridge Lakeland July 1995 89 88 Lease
River Oaks Englewood May 1997 153 200 Own
Springtree (2) Sunrise May 1996 180 246 Manage
Stanford Centre Altamonte Springs May 1997 118 181 Own
IDAHO
Camlu Retirement + Coeur d'Alene Nov. 1996 82 85 Manage
Highland Hills (3) Pocatelo Oct. 1996 49 55 Lease
Juniper Meadows Lewiston Dec. 1997 80 88 Own
The Lakewood Inn + (3) Coeur d'Alene Mar. 1996 104 114 Lease
Ridge Wind (3) Chubbock Aug. 1996 80 106 Lease
Summer Wind Boise Sep. 1995 49 53 Lease
ILLINOIS
Canterbury Ridge Urbana Nov. 1998 101 111 Manage
Emeritus
Operations
Community Location Commenced Units (a) Beds (b) Interest
- -------------------------------------------- ------------------- -------------- ---------- ---------- --------------------
IOWA
Silver Pines Cedar Rapids Jan. 1995 80 80 Own
KANSAS
Elm Grove Estates (2) Hutchinson Jun. 1997 116 128 Manage
KENTUCKY
Stonecreek Lodge * Louisville May 1997 80 88 Joint Venture
MARYLAND
Martin's Glen Essex Feb. 1999 97 107 Manage
MASSACHUSETTS
Meadow Lodge at Drum Hill * Chelmsford Oct. 1997 80 88 Joint Venture
The Pines at Tewksbury *(3) Tewksbury Jan. 1996 49 65 Lease
Woods at Eddy Pond * Auburn Jun. 1997 80 88 Joint Venture
MISSISSIPPI
Loyalton of Biloxi Biloxi Feb. 1999 83 91 Manage
Ridgeland Court * Ridgeland Aug. 1997 79 87 Joint Venture
Silverleaf Manor Meridian Aug. 1998 101 111 Manage
MISSOURI
Autumn Ridge + Herculaneum Jun. 1997 94 94 Manage
MONTANA
Springmeadows Residence Bozeman May 1997 74 81 Own
NEVADA
Concorde * Las Vegas Nov. 1996 113 125 Own
NEW JERSEY
Laurel Lake Estates Voorhees Jul. 1995 113 115 Lease
NEW YORK
Bassett Manor (1) Williamsville Nov. 1996 104 106 Lease
Bassett Park Manor (1) Williamsville Nov. 1996 78 80 Lease
Bellevue Manor (1) Syracuse Nov. 1996 90 90 Lease
Colonie Manor (1) Latham Nov. 1996 94 94 Lease
East Side Manor (1) Fayettville Nov. 1996 79 87 Lease
Green Meadows at Painted Post (1) Painted Post Oct. 1995 73 96 Lease
Perinton Park Manor (1) Fairport Nov. 1996 78 86 Lease
West Side Manor - Rochester (1) Rochester Nov. 1996 72 72 Lease
West Side Manor - Syracuse (1) Syracuse Nov. 1996 77 79 Lease
Woodland Manor (1) Vestal Nov. 1996 60 116 Lease
NORTH CAROLINA
Heritage Health Center # Hendersonville Feb. 1996 67 135 Lease
Heritage Hills Retirement Community + Hendersonville Feb. 1996 99 99 Own
Heritage Lodge Assisted living Hendersonville Feb. 1996 20 24 Lease
Pine Park Retirement Community + Hendersonville Feb. 1996 110 110 Lease
Pines of Goldsboro Goldsboro Nov. 1998 101 111 Manage
OHIO
Brookside Estates (2) Middleburg Heights Oct. 1998 99 101 Manage
Park Lane + Toledo Jan. 1998 92 101 Manage
OREGON
Meadowbrook (3) Ontario Jun. 1995 53 55 Lease
PENNSYLVANIA
Green Meadows at Allentown Allentown Oct. 1995 76 97 Lease
Green Meadows at Latrobe Latrobe Oct. 1995 84 125 Lease
Emeritus
Operations
Community Location Commenced Units (a) Beds (b) Interest
- -------------------------------------------- ------------------- -------------- ---------- ---------- --------------------
SOUTH CAROLINA
Anderson Place - The Summer House + (3) Anderson Oct. 1996 30 40 Lease
Anderson Place - The Village (3) Anderson Oct. 1996 75 75 Lease
Anderson Place - The Health Center # (3) Anderson Oct. 1996 22 44 Lease
Bellaire Place * (2) Greenville Jul. 1997 81 89 Manage
Countryside Park Easley Feb. 1996 48 66 Lease
Countryside Village Assisted living Easley Feb. 1996 47 77 Lease
Countryside Village Health Care Center # Easley Feb. 1996 24 44 Lease
Countryside Village Retirement Center + Easley Feb. 1996 75 78 Lease
Skylyn Health Center # Spartanburg Feb. 1996 26 48 Lease
Skylyn Personal Care Center Spartanburg Feb. 1996 80 119 Lease
Skylyn Retirement Community + Spartanburg Feb. 1996 155 155 Lease
York Care York Apr. 1997 50 100 Manage
TENNESSEE
Walking Horse Meadows *+ (2) Clarksville Jun. 1997 50 55 Manage
TEXAS
Amber Oaks *+ San Antonio Apr. 1997 155 267 Lease
Cambria * El Paso Oct. 1996 79 87 Lease
Dowlen Oaks (2) Beaumont Mar. 1997 79 87 Manage
Eastman Estates (2) Longview Jul. 1997 70 77 Manage
Elmbrook Estates (3) Lubbock Feb. 1997 79 87 Lease
Lakeridge Place (2) Wichita Falls Jul. 1997 80 88 Manage
Meadowlands Terrace * (2) Waco Jul. 1997 71 78 Manage
Myrtlewood Estates (2) San Angelo Aug. 1997 79 87 Manage
The Palisades *+ El Paso Apr. 1997 158 215 Lease
Redwood Springs + San Marcos Apr. 1997 90 90 Lease
Saddleridge Lodge (2) Midland Mar. 1997 79 87 Manage
Seville Estates * (2) Amarillo Mar. 1997 50 55 Manage
Sherwood Place * Odessa Oct. 1996 79 87 Lease
Vickery Towers at Belmont + Dallas Apr. 1995 301 331 Manage
UTAH
Emeritus Estates (2) Ogden Apr. 1998 83 91 Manage
VIRGINIA
Carriage Hill Retirement Bedford Sep. 1994 88 134 Lease
Cobblestones at Fairmont * Manassas Sep. 1996 75 82 Own
Wilburn Gardens Fredericksburg Jan. 1999 101 111 Manage
WASHINGTON
Charlton Place Tacoma Jul. 1998 95 104 Manage
Cooper George *+ Spokane Jun. 1996 141 159 Partnership
Courtyard at the Willows * Puyallup Oct. 1997 100 110 Own
Evergreen Lodge (3) Federal Way Apr. 1996 98 124 Lease
Fairhaven Estates *(3) Bellingham Oct. 1996 50 55 Lease
Garrison Creek Lodge * Walla Walla Jun. 1996 80 88 Lease
Harbour Pointe Shores (2) Ocean Shores Mar. 1997 50 55 Manage
The Hearthstone (3) Moses Lake Nov. 1996 84 92 Lease
Kirkland Lodge Kirkland Feb. 1996 75 85 Own
Renton Villa * Renton Sep. 1993 79 97 Lease
Richland Gardens Richland Jul. 1998 100 110 Manage
Seabrook * Everett Jun. 1994 60 62 Lease
Van Vista/Columbia House Vancouver Oct. 1997 100 100 Admin Services
Emeritus
Operations
Community Location Commenced Units (a) Beds (b) Interest
- -------------------------------------------- ------------------- -------------- ---------- ---------- --------------------
WYOMING
Park Place + (2) Casper Feb. 1996 60 60 Manage
Sierra Hills Cheyenne Jun. 1998 83 91 Manage
---------- ----------
Total Operating Communities 10,354 11,910
---------- ----------
---------- ----------
* Near an existing or proposed Holiday facility.
+ Currently offers independent living services.
# Currently operates as a skilled nursing facility.
(a) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.
(b) "Beds" reflects the actual number of beds, which in no event is
greater than the maximum number of licensed beds allowed under the
community's license.
(1) The Company provides administrative services to the community which is
operated by Painted Post Partnership through a lease agreement with an
independent third party. See "Strategic Relationships - Painted Post
Partners Relationship".
(2) The interest in this community has been sold effective 12/31/98, but
Emeritus will manage the buildings pursuant to a three year management
contract.
(3) The interest in this community has been sold pursuant to the
consummation of Emeritrust II. See "Company Operations - Operating
Strategy".
DEVELOPMENTS
The following table summarizes certain information regarding the Development
Communities under construction, which are communities where construction
activities, such as ground-breaking activities, exterior construction or
interior build-out have commenced.
Scheduled Site
Community Location Opening Units (a) Beds (b) Interest
- ------------------------------------- --------------------- -------------- ----------- ----------- -----------------
ANTICIPATED 1999 OPENINGS:
ARIZONA
Loyalton of Flagstaff (1) Flagstaff 2nd Quarter 61 67 Lease
FLORIDA
The Allegro St. Augustine 3rd Quarter 111 122 Manage
Heritage Oaks Tallahassee 4th Quarter 120 132 Manage
MARYLAND
Baltimore Baltimore 4th Quarter 120 134 Manage
Loyalton of Hagerstown (1) Hagerstown 3rd Quarter 100 110 Lease
MISSISSIPPI
Trace Point Clinton 3rd Quarter 100 110 Joint Venture
Loyalton of Hattiesburg Hattiesburg 3rd Quarter 83 91 Manage
NEW YORK
Brockport Brockport 3rd Quarter 84 92 Manage
Queensbury Commons Queensbury 4th Quarter 84 92 Manage
Loyalton of Lakewood (1) Lakewood 4th Quarter 83 91 Lease
VIRGINIA
Loyalton of Staunton (1) Staunton 3rd Quarter 101 111 Lease
WASHINGTON
Arbor Place at Silver Lake Everett 2nd Quarter 101 111 Manage
JAPAN
Kurashiki Kurashiki 4th Quarter 116 116 Joint Venture
----------- -----------
TOTAL 1999 OPENINGS 1,264 1,379
----------- -----------
----------- -----------
ANTICIPATED 2000 OPENINGS:
ARIZONA
Green Valley Green Valley 3rd Quarter 83 91 Own
CALIFORNIA
Village at Granite Bay Granite Bay 3rd Quarter 100 110 Joint Venture
MISSISSIPPI
Brandon Brandon 4th Quarter 100 110 Manage
NEW JERSEY
Loyalton of Cape May Cape May 4th Quarter 100 110 Own
----------- -----------
TOTAL 2000 OPENINGS 383 421
----------- -----------
----------- -----------
* Near an existing or proposed Holiday facility.
(a) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.
(b) "Beds" reflects the actual number of beds, which in no event is
greater than the maximum number of licensed beds allowed under the
community's license.
(1) The interest in this community has been sold pursuant to the
consummation of Emeritrust II.
The Company's executive offices are located in Seattle, Washington, where the
Company leases approximately 26,500 square feet of space. The agreement includes
a lease term of 10 years with two five-year renewal options.
ITEM 3. LEGAL PROCEEDINGS
On April 24, 1998, the Company commenced a lawsuit against ARV Assisted Living
Inc. ("ARV") in Superior Court of the State of California for the County of
Orange alleging that share purchases on January 16, 1998 by Prometheus Assisted
Living LLC ("Prometheus") triggered the so-called flip-in feature of ARV's
poison pill.
The effect of the flip-in feature having been triggered by Prometheus is to
require ARV to distribute to all shareholders (other than Prometheus)
certificates for one Right per share owned on January 16, 1998. The Company
believes that each Right would be exercisable for approximately 9.56 shares at a
purchase price of $7.32 per share. The Rights are exercisable until August 8,
2007 and are transferable separate from the ARV common stock.
In connection with Prometheus' initial investment in ARV in July 1997, ARV
adopted a Rights Agreement (commonly referred to as a poison pill) which
provides that the flip-in feature is triggered if Prometheus acquires
"beneficial ownership" of 50% or more of ARV's outstanding common stock. The
flip-in is a defensive feature intended to discourage accumulation of control of
stock in excess of a specified level by allowing all shareholders other than the
acquiror to purchase additional common stock at a 50% discount to the average
closing market price of ARV's stock for the 30 trading days prior to the flip-in
being triggered.
In a Schedule 13D filing on January 20, 1998, Prometheus disclosed that on
January 16th it had acquired additional shares of ARV common stock, increasing
Prometheus' direct share ownership to 45% of the outstanding ARV common stock.
Previous Schedule 13D filings by Prometheus disclose that Prometheus also then
beneficially owned another 9% of ARV's common stock as a result of the
Stockholders' Voting Agreement dated October 29, 1997, between Prometheus and
certain management stockholders of ARV (collectively, the "Management
Stockholders"). Under the Stockholders' Voting Agreement, each Management
Stockholder agreed with Prometheus to vote its shares of ARV common stock in
support of Prometheus' nominees to ARV's Board of Directors.
The Company' complaint alleges that the Stockholders' Voting Agreement increases
Prometheus' beneficial ownership from its 45% direct ownership to 54%, thereby
triggering the flip-in feature of the poison pill. For purposes of determining
Prometheus' beneficial ownership, the Rights Agreement treats Prometheus as
beneficially owning shares held by "any other person with which Prometheus has
any agreement, arrangement or understanding whether or not in writing, for the
purpose of acquiring, holding, voting or disposing of any securities of ARV."
The Company' complaint seeks the following injunctive and declaratory relief:
(i) an order directing ARV to distribute Right Certificates to all holders of
common stock of ARV (other than Prometheus) as of January 16, 1998; and (ii) an
order declaring that a "Trigger Event" (as defined in the Rights Agreement)
occurred on January 16, 1998 when Prometheus acquired beneficial ownership of
more than 50% of ARV's common stock.
Prometheus is an investment vehicle controlled by Lazard Freres Real Estate
Investors L.L.C. ("Lazard"). Lazard's activities consist principally of acting
as general partner of several real estate investment partnerships affiliated
with Lazard Freres & Co. LLC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders during
the fourth quarter of its fiscal year ended December 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information about the executive officers
of the Company. There are no family relationships between any of the directors
or executive officers of the Company.
Name Age Position
- ---- --- --------
Daniel R. Baty 54 Chairman of the Board and Chief Executive Officer
Gary D. Witte 54 Vice President, Operations
Kelly J. Price 30 Vice President, Finance, Chief Financial Officer, Principal
Accounting Officer and Secretary
Sarah J. Curtis 36 Vice President, Sales and Marketing
Daniel R. Baty, one of the Company's founders, has served as its Chief Executive
Officer and as a director since inception in 1993 and became Chairman of the
Board in April 1995. Mr. Baty has served as the chairman of the board of Holiday
since 1987 and as its chief executive officer from 1991 through September 1997.
Since 1984, Mr. Baty has served as chairman of the board of Columbia-Pacific
Group Inc. ("Columbia Pacific") and, since 1986, chairman of the board of
Columbia Pacific Management, Inc. ("Columbia Management"), both of which
companies are wholly owned by Mr. Baty and engaged in developing
independent-living facilities and providing consulting services regarding that
market.
Gary D. Witte, joined the Company as Vice President, Operations in November
1996. From 1985 to June 1996, he was Vice President of Operations, Southern
Region of Hillhaven/Vencor Corporation. Mr. Witte held a variety of operating
positions at that company for 20 years.
Kelly J. Price has served as the Company's Vice President since February 1997,
as Chief Financial Officer and Secretary since September 1995 and as Principal
Accounting Officer since February 1998. Prior to that, from January 1995 he was
the Company's Director of Finance. From September 1991 until joining the
Company, Mr. Price was employed at Deloitte & Touche LLP in both the Management
Consulting and Accounting practice, last serving as a senior consultant in the
real estate and healthcare industries.
Sarah J. Curtis, jointed the Company as Vice President of Sales and Marketing in
March 1997. Prior to that, from March 1996 she was National Director of Sales
for Beverly Enterprises, Inc. From July 1991 until February 1996 Ms. Curtis was
Regional Director of Sales and Marketing of Hillhaven/Vencor Corporation.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the American Stock Exchange, Inc.
("AMEX") under the symbol "ESC". The Common Stock has been listed on the AMEX
since November 21, 1995, the date of the Company's initial public offering.
The following table sets forth, for the periods indicated, the high and low
closing prices for the Common Stock as reported on AMEX.
High Low
1996
First Quarter.............................................. $ 21.7500 $ 11.6250
Second Quarter............................................. $ 20.8750 $ 17.6250
Third Quarter.............................................. $ 18.0000 $ 14.0000
Fourth Quarter............................................. $ 16.0000 $ 10.0000
1997
First Quarter.............................................. $ 13.5000 $ 11.1250
Second Quarter............................................. $ 16.2500 $ 11.5000
Third Quarter.............................................. $ 15.5000 $ 13.8750
Fourth Quarter............................................. $ 16.2500 $ 11.8750
1998
First Quarter.............................................. $ 13.5020 $ 10.6875
Second Quarter............................................. $ 10.7500 $ 13.3750
Third Quarter.............................................. $ 9.1250 $ 12.4375
Fourth Quarter............................................. $ 8.6250 $ 11.3750
1999
First Quarter (through March 23, 1999)..................... $ 15.1250 $ 11.3750
As of March 26, 1999, the number of record holders of the Company's Common Stock
was 160.
The Company has never declared or paid any dividends on its Common Stock, and
expects to retain any future earnings to finance the operation and expansion of
its business. Future dividend payments will depend on the results or operations,
financial condition, capital expenditure plans and other obligations of the
Company and will be at the sole discretion of the Company's Board of Directors.
Certain of the Company's existing leases and lending arrangements contain
provisions that restrict the Company's ability to pay dividends, and it is
anticipated that the terms of future leases and the debt financings may contain
similar restrictions. Therefore, the Company does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been derived from the
audited consolidated financial statements of the Company and subsidiaries for
the years ended December 31, 1994, 1995, 1996, 1997 and 1998. The data set forth
below should be read in conjunction with the consolidated financial statements
and related notes thereto included elsewhere in the Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Year ended December 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- -------------- -------------- ------------ -----------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total operating revenues..................... $ 4,409 $ 21,277 $ 68,926 $117,772 $151,820
Total operating expenses..................... 4,761 22,149 74,053 139,323 171,405
-------------- -------------- -------------- ------------ --------
Loss from operations........................ (352) (872) (5,127) (21,551) (19,585)
-------------- -------------- -------------- ------------ --------
Net other expense............................ (1,080) (6,815) (3,075) (6,660) (9,194)
Extraordinary loss on extinguishment of
debt......................................... -- (1,267) -- -- (937)
Cumulative effect of change in accounting
principle.................................... -- -- -- -- (1,320)
-------------- -------------- -------------- ------------ --------
Net loss........................... (1,432) (8,954) (8,202) (28,211) (31,036)
-------------- -------------- -------------- ------------ --------
-------------- -------------- -------------- ------------ --------
Preferred stock dividends.................... -- -- -- 425 2,250
-------------- -------------- -------------- ------------ --------
Net loss to common shareholders.... $ (1,432) $ (8,954) $ (8,202) $(28,636) $(33,286)
-------------- -------------- -------------- ------------ --------
-------------- -------------- -------------- ------------ --------
Loss per common share before extraordinary item
and cumulative effect of change in accounting
principle-
Basic and diluted.......................... $ (0.95) $ (0.75) $ (2.60) $ (2.96)
Extraordinary loss per common share -
Basic and diluted.......................... $ (0.16) $ -- $ -- $ (.09)
Cumulative effect of change in accounting
principle loss per common share -
Basic and diluted.......................... $ -- $ -- $ -- $ (.12)
Net loss per common share -
Basic and diluted.......................... $ (1.11) $ (0.75) $ (2.60) $ (3.17)
Weighted average number of common shares
Outstanding (1) -
Basic and diluted.......................... 8,062 11,000 11,000 10,484
-------------- -------------- ------------ --------
-------------- -------------- ------------ --------
CONSOLIDATED OPERATING DATA:
Communities operated
(2).......................................... 6 22 69 99 109
Number of units
(2).......................................... 494 1,857 5,807 8,624 11,112
(1) The weighted average shares outstanding were retroactively adjusted
for the 9,200-for-1 split on April 14,1995.
(2) Information is as of the end of the period and excludes the Operating
Communities and units therein that are managed by others.
------------------------------------------------------------------------------
As of December 31,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------------- ------------- -------------- ------------- ---------------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 220 $ 9,507 $ 23,039 $ 17,537 $ 11,442
Working capital (deficit)..................... (2,762) 4,091 9,757 12,074 (977)
Total assets.................................. 24,493 115,635 158,038 228,573 192,870
Long-term debt, less current portion.......... 22,684 66,814 60,260 108,117 119,674
Minority interests............................ 77 2,229 1,918 1,176 910
Shareholders' equity (deficit)................ (1,462) 34,895 26,188 1,207 (45,964)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Emeritus is a nationally integrated senior housing services organization focused
on operating residential-style assisted living communities. The Company is one
of the largest and most experienced providers of assisted living communities in
the United States. These communities provide a residential housing alternative
for senior citizens who need help with the activities of daily living, with an
emphasis on assisted living and personal care services.
The Company's revenues are derived primarily from rents and service fees charged
to its residents. For 1996, 1997 and 1998, the Company generated total operating
revenues of $68.9 million, $117.8 million and $151.8 million, respectively. As
of December 31, 1998, the Company's accumulated deficit was $80.5 million and
its total shareholders' deficit was $46.0 million. For 1996, 1997 and 1998, the
Company incurred losses of $8.2 million, $28.6 million and $28.8 million
(excluding the extraordinary item and a charge related to the cumulative effect
of a change in accounting principle in 1998), respectively.
The Company's losses to date result from a number of factors. These factors
include, but are not limited to: the development of 48 and acquisition of 69
assisted living communities since inception that incurred operating losses
during the initial 12 to 24 month rent-up phase; initially lower levels of
occupancy at the Company's communities than originally anticipated; financing
costs arising from sale/leaseback transactions and mortgage financing;
refinancing transactions at proportionately higher levels of debt; and
increased administrative and corporate expenses to facilitate the Company's
growth.
During 1998 the Company adopted an operating strategy focused on: 1)
increasing occupancy throughout the Company's portfolio, 2) reducing
acquisition and development activities and 3) disposing of select communities
operating at a loss. Occupancy at December 31, 1998 increased 9% to 81%
compared to 72% at December 31, 1997. In addition, average occupancy
increased 4% to 77% for 1998 compared to 73% for 1997. The Company has
significantly reduced its acquisition and development activities during 1998.
The Company acquired 36 and 10 communities in 1996 and 1997, respectively,
and two communities during 1998. In addition, the Company opened 11, 20 and
five development communities in 1996, 1997 and 1998 respectively. Slowing its
acquisition and development activities has enabled the Company to utilize its
resources more efficiently and increase its focus on community operations.
During 1998 the Company disposed of its interests in 28 communities, 22 of
which were leased from Meditrust. The Company retains a management interest
in all 28 facilities through three year management contracts and has an
option and a right of first refusal to purchase 22 and three of these
facilities, respectively, during this three year period. In addition, the
Company has disposed of its leasehold interests in an additional 19
communities during the first quarter of 1999.
As of March 23, 1999, the Company held ownership, leasehold or management
interests in 117 residential communities (the "Operating Communities")
consisting of approximately 10,400 units with the capacity for 12,000
residents, located in 29 states. Of the 117 Operating Communities, 20 and 11
newly developed communities were opened during 1997 and 1998, respectively.
The Company owns, has a leasehold interest in, management interest in or has
acquired an option to purchase development sites for 17 new assisted living
communities (the "Development Communities"). Of the Development Communities,
13 are scheduled to open during 1999, the remainder in 2000. The Company
leases 53 of its residential communities, typically from a financial
institution such as a Real Estate Investment Trust ("REIT"), owns 15
communities, manages or provides administrative services for 41 communities
and has a partnership interest or joint venture in seven communities.
Additionally, the Company holds a minority interest in Alert Care Corporation
("Alert"), an Ontario, Canada based owner and operator of 21 assisted living
communities consisting of approximately 1,200 units with a capacity of
approximately 1,300 residents. See "--Strategic Relationships - Alert
Relationship". Assuming completion of the Development Communities scheduled
to open throughout 1999 and including the minority interest in Alert, the
Company will own, lease, have an ownership or partnership interest in, joint
venture or manage 151 properties in 29 states, Canada and Japan, containing
an aggregate of approximately 12,900 units with capacity of over 14,500
residents. There can be no assurance, however, that the Development
Communities will be completed on schedule and will not be affected by
construction delays, the effects of government regulation or other factors
beyond the Company's control." The Company's management of assisted living
communities owned or leased by others has not been material to the Company's
business or revenue.
The following table sets forth a summary of the Company's property
interests.
As of December 31,
----------------------------------------------------------------------------------------------
1995 1996 1997 1998
--------------------- --------------------- ----------------------- -----------------------
Buildings Units Buildings Units Buildings Units Buildings Units
--------------------- --------------------- ----------------------- -----------------------
Owned 14 1,496 15 1,485 19 2,099 15 1,492
Leased 9 662 53 4,165 76 6,124 52 3,937
Managed/Admin Services -- -- 1 83 4 327 38 3,734
Joint Venture/Partnership 1 22 2 162 1 140 8 809
--------------------- --------------------- ----------------------- -----------------------
Sub Total 24 2,180 71 5,895 100 8,690 113 9,972
Annual Growth 243% 273% 196% 170% 41% 47% 13% 15%
Pending Acquisitions 13 895 8 1,028 -- -- -- --
New Developments 26 2,112 27 2,296 26 2,483 21 2,029
Minority Interest (Alert) -- -- 17 959 22 1,248 21 1,203
--------------------- --------------------- ----------------------- -----------------------
Total 63 5,187 123 10,178 148 12,421 155 13,204
--------------------- --------------------- ----------------------- -----------------------
Annual Growth 232% 194% 95% 96% 20% 22% 5% 6%
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items of the
Company's Consolidated Statements of Operations as a percentage of total
revenues and the percentage change of the dollar amounts from year to year.
Year-to-Year
Percentage of Revenues Percentage
Years ended December 31, Increase (Decrease)
1996 1997 1998 1996-1997 1997-1998
------------ ------------ ------------ -------------- --------------
Revenues......................................... 100 % 100 % 100 % 71% 29 %
Expenses:
Community operations ....................... 71 70 73 69 34
General and administrative ................. 9 9 9 76 26
Depreciation and amortization .............. 4 6 4 131 (14)
Rent ....................................... 23 29 27 115 20
Other ...................................... -- 4 -- N/A N/A
------------ ------------ ------------
Total operating expenses .............. 107 118 113 88 23
------------ ------------ ------------
Loss from operations .................. (7) (18) (13) 320 (9)
------------ ------------ ------------
Other expense:
Interest expense, net ...................... 4 6 9 141 69
Other, net ................................. -- (1) (3) N/A 531
Extraordinary loss on early extinguishment
of debt ...................................... -- -- 1 -- N/A
Cumulative effect of change in accounting
principle .................................... 1 -- N/A
------------ ------------ ------------
Net loss .............................. (12)% (24)% (20)% 244 % 10 %
------------ ------------ ------------
------------ ------------ ------------
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Total operating revenues for 1998 were $151.8 million, reflecting a
$34.0 million increase, or 29% compared to $117.8 million for 1997. The
increase is primarily due increased occupancy throughout the Company's
portfolio. Occupancy at December 31, 1998 increased 9% to 81% compared to 72%
as of December 31, 1997. Furthermore, average occupancy for 1998 was 77%
compared to 73% for 1997, an increase of 4%. In addition to the increase in
occupancy, the Company opened five newly developed communities in 1998 which
accounted for a $3.0 million increase in revenue.
COMMUNITY OPERATIONS. Community operating expenses increased to $110.6 million
for 1998 from $82.8 for 1997, an increase of $27.8 million, or 34%. As a
percentage of total revenues, community operations increased to 73% for 1998
compared to 70% for 1997. These increases are the result of 1) increased labor
costs due to the overall census increase throughout the Company's portfolio, 2)
the opening of five newly developed communities during 1998, 3) increased sales
and marketing costs and 4) the recording of start-up and organization costs as
operating expenses in accordance with SOP 98-5, which would previously have
been deferred and amortized.
GENERAL AND ADMINISTRATIVE. General and Administrative ("G&A") costs have
increased $2.8 million, or 26% to $13.6 million for 1998 compared to $10.8
million for 1997. As a percentage of revenues, G&A costs have stayed relatively
constant at 9% for 1998 and 1997. The overall increase of $2.8 million is
primarily attributable to greater personnel costs due to the growth of the
Company.
DEPRECIATION AND AMORTIZATION. For 1998 depreciation and amortization expense
decreased 14% to $5.7 million from $6.6 million for 1997. As a percentage of
total revenue, depreciation and amortization expense decreased to 4% for 1998
compared to 6% for 1997. The decrease is the result of expensing previously
deferred start-up in accordance with SOP 98-5.
RENT. Rent expense for 1998 increased 20% or $6.8 million to $41.5 million from
$34.7 million for 1997. This increase is primarily attributable to the opening
of five newly developed communities in 1998 and 20 in 1997. In addition, the
increase is partly the result of lease provisions providing for additional
payments based on a percentage of revenue in the 1998 period. As a percentage of
total revenue, rent expense decreased 2% to 27% for the year ended December 31,
1998 compared to 29% for the year ended December 31, 1997.
OTHER. As compared to 1997 where the Company incurred $4.4 million of charges
related to the termination of the Company's tender offer for ARV and changes in
the Company's operating structure, the Company incurred no such operating costs
in 1998.
INTEREST EXPENSE. Interest expense increased $5.8 million or 69% to $14.2
million for 1998 compared to $8.4 million for 1997, As a percentage of revenue,
interest expense increased 3% to 9% for 1998 compared to 6% for 1997. This
increase is primarily the result of an increase in mortgage interest expense due
to the refinancing of several properties during the second quarter of 1998. In
addition, total debt increased approximately $11 million to $132 million as of
December 31, 1998 compared to $121 million as of December 31, 1997.
OTHER, NET. For 1998, other, net increased $3.2 million to $3.8 million from
approximately $600,000, a 531% increase. The increase is a result of gains
realized on the sale of investment securities and the dispositions of
communities.
EXTRAORDINARY ITEM. The Company recognized an extraordinary loss of
approximately $937,000 for 1998, representing the write-off of loan fees and
other related costs of the Company's early extinguishment of debt when it
refinanced 10 communities.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In 1998, the Company
incurred a cumulative effect of a change in accounting principle of $1.3 million
related to the early adoption of SOP 98-5, which requires that costs of start-up
activities and organization costs be expensed as incurred.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. Total operating revenues for 1997 were $117.8 million, representing a
$48.8 million, or 71%, increase over revenues of $68.9 million for 1996. The
increase resulted from the opening of new developments and the related fill-up
of units and the acquisition of communities during 1997. The Company ended with