<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-11999
ALTERRA HEALTHCARE CORPORATION
<TABLE>
<S><C>
DELAWARE 39-1771281
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
10000 INNOVATION DRIVE
MILWAUKEE, WI
53226
(Address of principal executive offices)
(Zip Code)
(414) 918-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
AS OF NOVEMBER 9, 2000, THERE WERE 22,109,810 SHARES OF THE
REGISTRANT'S COMMON STOCK, PAR VALUE $0.01, OUTSTANDING.
(Number of shares outstanding of each class of the issuer's classes of common
stock, as of the latest practical date.)
<PAGE> 2
ALTERRA HEALTHCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
PAGE NO.
-------------
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999......................................................................... 1
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999.................................................. 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999......................................................... 3
Notes to Condensed Consolidated Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 17
Part II. Other Information
Item 1. Legal Proceedings......................................................................... 17
Item 2. Change in Securities and Use of Proceeds.................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders....................................... 18
Item 5. Other Information......................................................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT CAPTION INFORMATION)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 46,858 $ 18,728
Accounts receivable, net........................................ 9,229 7,150
Notes receivable, net........................................... 1,051 32,530
Assets held for sale............................................ 69,357 9,501
Other current assets............................................ 53,583 41,320
------------- -------------
Total current assets........................................ 180,078 109,229
------------- -------------
Property and equipment, net......................................... 974,393 863,163
Restricted cash and investments..................................... 29,667 28,325
Goodwill, net....................................................... 11,023 5,106
Other assets........................................................ 90,205 55,574
------------- -------------
Total assets................................................ $ 1,285,366 $ 1,061,397
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations.................... $ 69,765 $ 9,945
Current obligations on assets held for sale...................... 33,938 ---
Short-term notes payable......................................... 9,885 29,009
Accounts payable - trade......................................... 7,040 11,036
Accounts payable - construction.................................. 731 6,616
Accrued expenses................................................. 43,771 37,972
Deferred rent and refundable deposits............................ 2,785 9,199
------------- -------------
Total current liabilities................................. 167,915 103,777
------------- -------------
Long-term obligations, less current installments..................... 596,671 563,072
Convertible debt..................................................... 385,173 228,600
Deferred gain on sale and other...................................... 12,821 11,592
Minority interest.................................................... 2,553 3,713
Redeemable preferred stock........................................... 4,614 ---
Stockholders' equity:
Preferred stock, 2,500,000 shares authorized; 1,250,000
designated, none of which are outstanding...................... --- ---
Common stock, $.01 par value; 100,000,000 shares authorized; of
which 22,111,671 and 22,100,032 shares were issued and outstanding,
respectively, on September 30, 2000 and 22,030,097 and 22,018,458 shares
were issued and outstanding, respectively,
on December 31, 1999........................................... 221 221
Treasury stock, $.01 par value; 11,639 shares in 1999 and 1998... (163) (163)
Additional paid-in capital....................................... 179,384 179,362
Accumulated deficit.............................................. (63,823) (28,777)
------------- -------------
Total stockholders' equity................................... 115,619 150,643
------------- -------------
Total liabilities and stockholders' equity................... $ 1,285,366 $ 1,061,397
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Resident service fees..................................... $120,631 $ 90,683 $330,158 $252,149
Management fees and other................................. 1,952 9,428 11,020 22,773
------------ ------------ ------------- ------------
Operating revenue....................................... 122,583 100,111 341,178 274,922
Operating expenses:
Residence operations...................................... 85,081 57,526 223,576 157,122
Lease expense............................................. 20,729 18,386 61,568 48,816
Lease income.............................................. (5,538) (7,579) (22,601) (17,405)
General and administrative................................ 11,063 9,268 38,248 28,166
Loss on disposal (see Note 2) ............................ (79) -- 11,975 --
Depreciation and amortization............................. 9,301 5,233 25,594 13,783
------------ ------------ ------------- ------------
Total operating expenses................................ 120,557 82,834 338,360 230,482
------------ ------------ ------------- ------------
Operating income....................................... 2,026 17,277 2,818 44,440
Other income (expense):
Interest expense, net..................................... (16,469) (9,075) (53,713) (23,150)
Payment-in-kind ("PIK") interest expense.................. (5,359) --- (6,769) ---
Equity in losses of unconsolidated affiliates............. (5,471) (597) (10,979) (667)
Minority interest in losses of consolidated subsidiaries 1,629 498 2,498 3,776
------------ ------------ ------------- ------------
Total other expense, net................................ (25,670) (9,174) (68,963) (20,041)
------------ ------------ ------------- ------------
(Loss) income before income taxes, extraordinary gain and
cumulative effect of a change in accounting principle..... (23,644) 8,103 (66,145) 24,399
Income tax benefit (expense) ............................... 6,948 (3,079) 22,563 (9,272)
------------ ------------ ------------- ------------
(Loss) income before extraordinary gain and cumulative effect of
a change in accounting principle............................ (16,696) 5,024 (43,582) 15,127
------------ ------------ ------------- ------------
Extraordinary gain on the early extinguishment of debt, net of
tax expense of $5,232 (see Note 4).......................... --- --- 8,536 ---
============ ============ ============= ============
Cumulative effect of a change in accounting principle, net of
tax benefit of $2,409 (see Note 5) ......................... --- --- --- (3,837)
------------ ------------ ------------- ------------
Net (loss) income........................................... $ (16,696) $ 5,024 $(35,046) $ 11,290
============ ============ ============= ============
(Loss) income per common share before extraordinary item and
cumulative effect of a change in accounting principle:
Basic..................................................... $ (0.76) $ 0.23 $ (1.97) $ 0.68
============ ============ ============= ============
Diluted .................................................. $ (0.76) $ 0.23 $ (1.97) $ 0.68
============ ============ ============= ============
Net (loss) income per common share:
Basic..................................................... $ (0.76) $ 0.23 $ (1.58) $ 0.51
============ ============ ============= ============
Diluted .................................................. $ (0.76) $ 0.23 $ (1.58) $ 0.50
============ ============ ============= ============
Weighted average common shares outstanding:
Basic..................................................... 22,110 22,085 22,112 22,084
============ ============ ============= ============
Diluted................................................... 22,110 22,085 22,112 22,366
============ ============ ============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income................................................................... $(35,046) $ 11,290
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities net of acquisitions:
Depreciation and amortization....................................................... 25,594 13,783
PIK interest........................................................................ 6,769 ---
Amortization of deferred financing.................................................. 6,194 982
Extraordinary gain on extinguishment of debt ....................................... (13,768) ---
Loss on disposal.................................................................... 11,975 ---
Deferred income taxes............................................................... (17,331) 3,432
Equity in net loss from investments in unconsolidated affiliates.................... 10,979 667
Minority interest in losses of consolidated subsidiaries............................ (2,498) (3,776)
Increase in net resident receivables................................................ (2,080) (4,012)
Decrease in pre-opening costs....................................................... --- 7,856
Decrease in income tax receivable................................................... 4,335 ---
Increase in other current assets.................................................... (1,539) (12,440)
Decrease in accounts payable........................................................ (3,996) (1,166)
Increase in accrued expenses and deferred rent...................................... 6,812 12,929
Decrease in accrued development reserve costs....................................... (9,349) (214)
Changes in other assets and liabilities, net........................................ 3,689 2,899
------------- -------------
Net cash (used in) provided by operating activities................................... (9,290) 32,230
------------- -------------
Cash flows used in investing activities:
Payments for property, equipment and project development costs...................... (76,498) (176,874)
Net proceeds from sale of plant, property and equipment............................ 999 18,263
Decrease (increase) in notes receivable............................................. (5,437) (9,852)
Acquisitions of facilities, net of cash and liabilities assumed.................... (20,896) (15,206)
Changes in investments in and advances to unconsolidated affiliates................. (4,350) (1,400)
Purchase of limited partnership interests.......................................... (22,144) (59,482)
Increase in long-term investments................................................... --- (5,161)
------------- -------------
Net cash used in investing activities................................................. (128,326) (249,712)
------------- -------------
Cash flows provided by financing activities:
Repayments of short-term borrowings................................................. (19,115) (981)
Repayments of long-term obligations................................................. (105,834) (77,859)
Proceeds from issuance of debt...................................................... 104,868 212,893
Proceeds from issuance of convertible debentures.................................... 197,926 ---
Payments for financing costs........................................................ (18,226) (5,391)
Proceeds from sale/leaseback transactions........................................... --- 72,014
Issuance of common stock and other capital contributions............................ 4,568 761
Contributions by minority partners and minority stockholders........................ 1,529 8,470
------------- -------------
Net cash provided by financing activities............................................. 165,716 209,907
------------- -------------
Net increase (decrease) in cash and cash equivalents................................. 28,130 (7,575)
------------- -------------
Cash and cash equivalents:
Beginning of period................................................................. 18,728 40,621
------------- -------------
End of period....................................................................... $ 46,858 $ 33,046
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized............................... $ 55,266 $ 25,871
============= =============
Cash (received) paid during period for income taxes, net of refunds............... $ (4,338) $ 4,397
============= =============
Debt assumed........................................................................ $ 48,887 ---
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 6
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheets as of September 30, 2000 and
December 31, 1999, the condensed consolidated statements of operations for the
three and nine months ended September 30, 2000 and 1999 and the condensed
consolidated statements of cash flows for the nine months ended September 30,
2000 and 1999 contained herein include the accounts of Alterra Healthcare
Corporation (the "Company") and its affiliates which are under the common
financial control of the Company. All significant intercompany accounts have
been eliminated in consolidation. In the opinion of management, all adjustments
(consisting only of normal recurring items) necessary for a fair presentation of
such condensed consolidated financial statements have been included. The results
of operations for the nine months ended September 30, 2000 are not necessarily
indicative of the results to be expected for the full fiscal year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K, for the year ended December 31, 1999.
(2) ASSET DISPOSITION PLAN
During the quarter ended June 30, 2000, the Company's Board of
Directors adopted an asset disposition plan which calls for the sale of 33
parcels of land which the Company previously purchased with the intent to build
assisted living residences but will no longer do so consistent with its
previously announced reduction of development activities. In addition, the asset
disposition plan calls for the sale of 36 assisted living residences (1,227
resident capacity) which are either operating (31 residences, 837 resident
capacity) or under construction (five residences, 390 resident capacity).
Properties included in the asset disposition plan were identified based on an
assessment of a variety of factors including geographic location, residence
size, return on invested capital and projected future capital requirements to
complete residence construction or lease-up. The Company has recorded a net loss
of $12.0 million through the quarter ended September 30, 2000 representing the
difference between historical cost and expected sales price on five of the
assets currently under construction and 11 of the operating residences. The
value of the assets held for sale, net of reserves, is reflected in the current
assets and outstanding debt on the assets held for sale is reflected in the
current liabilities portion of the Company's balance sheet.
During the three months ended September 30, 2000, the Company sold
certain of these assets for a net sale price of $2.9 million.
The following table represents condensed operating information related
to the 36 operating residences currently held for sale for the nine month
periods ended September 30, 2000 and 1999.
4
<PAGE> 7
<TABLE>
<CAPTION>
2000 1999
--------------- -------------
<S> <C> <C>
Revenue $16,145 $14,631
Residence operations expense 12,129 10,564
Lease expense 1,307 1,572
Interest expense 1,596 998
Depreciation expense 1,019 774
--------------- -------------
Income before taxes $ 94 $ 723
=============== =============
</TABLE>
Existing financing for assets included in the asset disposition plan
consists of $36.5 million of secured mortgage debt and approximately $16.8
million of operating lease obligations (based on the lessors' initial investment
in the operating leases).
(3) EQUITY-LINKED TRANSACTION
In the second quarter, the Company completed a financing transaction in which it
issued $173.0 million of convertible debentures and convertible preferred shares
to several investors including significant existing shareholders and convertible
debenture holders of the Company (the "Equity-Linked Transaction"). The
securities issued are convertible at $4.00 per share, bear a 9.75% semi-annual
cumulative payment-in-kind ("PIK") coupon or dividend and a mandatory redemption
in seven years. The Company may call the debentures at any time after three
years if the Company's common stock trades at an average price of at least $8.00
per share for the preceding 30 trading day period. On August 10, 2000, the
Company sold an additional $29.9 million of convertible debentures thereby
increasing the overall financing transaction to a total of $203.0 million.
(4) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF CONVERTIBLE DEBT
As part of the Equity-Linked Transaction completed in the second
quarter, the Company issued $26.9 million of Series C convertible debentures in
exchange for $31.7 million of its 5.25% convertible subordinated debentures due
December 15, 2002, and $9.6 million of its 7.00% convertible subordinated
debentures due June 1, 2004. As a result, the Company recorded an extraordinary
gain of $13.7 million ($8.5 million net of income taxes), which represents the
difference in book value of the Series C convertible debentures issued versus
the debt retired, net of unamortized debt issue costs.
(5) CHANGES IN ACCOUNTING PRINCIPLES
In the first quarter of 1999, the Company adopted the Statement of
Position No. 98-5, "Reporting on the Costs of Start-up Activities." This
Statement provides guidance on the financial reporting of start-up activities
and organization costs. It requires costs of start-up activities and
organization costs to be expensed when incurred. The Company's prior practice
was to capitalize such costs and amortize them over a one year period after
residence opening in the case of start-up costs and five years in the case of
organizational costs. The cumulative effect of the accounting change reflected
in the condensed consolidated statement of operations for the nine months ended
September 30, 1999 was $3.8 million, net of tax.
In June of 1998 the Financial Accounting Standards Board issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities," which is
effective for the Company's fiscal year 2000. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments imbedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at fair
value. This statement also requires that changes in the derivative's fair value
be recognized in earnings unless specific hedge accounting criteria are met. The
Company currently does not participate in any derivative financial instruments.
However, the Company will assess the impact of this new statement on any future
derivative transactions.
5
<PAGE> 8
(6) NET INCOME PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income per share amounts presented in the accompanying consolidated statements
of operations (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
2000 1999 2000 1999
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted income per share before
cumulative effect of a change in accounting principle
and extraordinary item................................ $(16,696) $ 5,024 $(43,582) $15,127
Extraordinary item....................................... --- --- 8,536 ---
Cumulative effect of a change in accounting principle.... --- ---- --- (3,837)
----------- ----------- ----------- ------------
Numerator for basic and diluted net income per share... $(16,696) $ 5,024 $(35,046) $11,290
=========== =========== =========== ============
Denominator:
Denominator for basic net income per common
share-weighted average shares......................... 22,110 22,085 22,112 22,084
Effect of dilutive securities:
Employee stock options.............................. --- 177 --- 282
----------- ---------- ----------- -----------
Denominator for diluted net income per common
share-weighted average shares plus
assumed conversions.................................... 22,110 22,262 22,112 22,366
=========== ========== =========== ===========
Basic income per common share before cumulative effect
of a change in accounting principle and extraordinary
item.................................................. $ (0.76) $ 0.23 $ (1.97) $ 0.68
Extraordinary item....................................... --- --- 0.39 ---
Cumulative effect of a change in accounting principle.... --- --- --- (0.17)
----------- ------------ ----------- -----------
Basic net income per common share (1).................... $ (0.76) $ 0.23 $ (1.58) $ 0.51
=========== ============ ============= =============
Diluted income per common share before cumulative effect
of a change in accounting principle and extraordinary
item.................................................. $ (0.76) $ 0.23 $ (1.97) $ 0.68
Extraordinary item....................................... --- --- 0.39 ---
Cumulative effect of a change in accounting principle --- --- --- (0.17)
----------- ------------ ------------- -------------
Diluted net income per common share (1)................. $ (0.76) $ 0.23 $ (1.58) $ 0.50
=========== ============ ============= =============
</TABLE>
(1) Nine month period ended September 30, 1999 does not total due to
rounding.
Shares issuable upon the conversion of convertible subordinated notes
have been excluded from the computation because the effect of their inclusion
would be anti-dilutive.
(7) RECLASSIFICATIONS
Certain reclassifications have been made in the 1999 financial
statements to conform with the 2000 financial statement presentation.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading national assisted company operating assisted living
residences and providing assisted living services in 28 states. Our growth in
recent years has had a significant impact on our results of operations and
accounts for most of the changes in results between the first nine months of
2000 and 1999. As of September 30, 2000 and 1999, we operated or managed 473 and
431 residences with aggregate capacities of 21,841 and 19,688 residents,
respectively. We, together with other parties who have purchased interests in
some of our construction residences, are also constructing 23 additional
residences with capacity for 1,270 residents as of September 30, 2000.
During the fourth quarter of 1999 we began to implement several
strategic initiatives designed to strengthen our balance sheet and to enable us
to focus on stabilizing and enhancing our core business operations. The
principal components of these strategic initiatives include:
- Reduced Development Activity. In light of the competitive
environment and tightening capital markets, we elected to
significantly reduce the scope of our assisted living development
activities. Specifically, in the fourth quarter of 1999 and the
first nine months of 2000 we have discontinued development
activity with respect to substantially all development sites. As
of November 14, 2000, we had 23 residences with capacity for 1,216
residents under construction. Upon completion of the construction
of these 23 residences, which we anticipate will occur with
respect to most of these residences by the second quarter of 2001,
we do not intend to engage in any further substantial construction
or development activity.
- Reduced Reliance upon Joint Venture Arrangements. In order to
simplify our capital structure, we have elected to reduce our
utilization of joint venture development arrangements and other
off-balance sheet ownership and development structures (so-called
"black box" structures). Historically, these arrangements were a
source of fee income for us and served to reduce the adverse
impact on our earnings of start-up losses associated with our
substantial volume of newly-opened residences. We believe,
however, that we can improve our future cash flow and liquidity by
retaining 100% of the revenue and operating cash flow from more of
our residences. No new joint venture arrangements have been
established during the first nine months of 2000.
- Deleveraging of our Balance Sheet. We have strengthened our
balance sheet and substantially addressed our short term capital
needs by completing a significant equity-linked financing during
the second and third quarters of 2000 (the "Equity-Linked
Transaction"). At the initial closing of the Equity-Linked
Transaction, we issued $173.0 million of convertible debentures
and convertible preferred shares to certain investors. In the
third quarter of 2000, we issued an additional $29.9 million of
convertible debentures pursuant to the option feature of the
Equity-Linked Transaction. In addition, the Company's Board of
Directors adopted an asset disposition plan in June 2000 which, if
successfully completed, is expected to yield approximately $45.0
million of cash and retire approximately $55.0 million of existing
debt and lease obligations.
- Focus on Cash Flow. As our portfolio of assisted living residences
stabilizes and matures, we intend to focus on cash flow. In this
regard we will seek to own (as opposed to lease) as much of our
real estate as we can, given our capital constraints. Ownership of
a greater percentage of our residences will increase depreciation
and amortization expense but
7
<PAGE> 10
improve our operating cash flow to the extent the related interest
expense on debt used to repurchase the property is lower than
historical lease expense. During the fourth quarter of 1999 and
first quarter of 2000, we purchased a total of 19 residences
previously leased from a healthcare REIT. When acceptable
financing is available, we will continue to seek opportunities to
increase cash flow through the purchase of additional residences
which are currently leased from various healthcare REITs.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Residence Service Fees. Residence service fees for the three months
ended September 30, 2000 were $120.6 million representing an increase of $29.9
million, or 33%, from $90.7 million for the comparable 1999 period.
Substantially all of this increase resulted from the addition of newly
constructed residences and other residences acquired by us and revenues from
residences previously held in unconsolidated joint venture structures. We
operated 473 and 431 residences at September 30, 2000 and 1999, respectively.
Other Revenues. Other revenues for the three months ended September 30,
2000 were $1.9 million, a decrease of $7.5 million from the $9.4 million of
other revenue for the three months ended September 30, 1999. The decrease is
attributable to reduced construction activity which resulted in lower management
fees on residences which were either managed for third parties or for entities
in which we held a minority ownership position. In addition, during the quarter
ended June 30, 2000, we purchased 49 residences which we previously either
managed for third parties or for entities in which we held minority ownership
positions. Management fees include charges for transitional services to recruit
and train staff, initial and recurring fees for use of our name and branding,
initial and recurring fees for use of our methodologies, services for assisting
with finance processing, and ongoing management services provided to operate the
residence.
Residence Operating Expenses. Residence operating expenses for the
three months ended September 30, 2000 increased to $85.1 million from $57.5
million in the three-month period ended September 30, 1999 due to the increased
number of residences operated during the 2000 period. Operating expenses as a
percentage of residence service fees for the three months ended September 30,
2000 and 1999 were 70.5% and 63.4%, respectively. This percentage increase
resulted primarily from increases in labor costs due to increased competition
for personnel and increases in liability insurance costs which resulted from the
most recent liability insurance policy renewal on July 1, 2000. The increase in
marginal expenses was also impacted by a slower lease-up of residences in some
areas of the country.
Lease Expense. Lease expense for the three months ended September 30,
2000 was $20.7 million, compared to $18.4 million in the comparable period in
1999. Such increase was primarily attributable to the utilization of additional
sale/leaseback financing and synthetic lease financing totaling $182.0 million
during the twelve-month period ended September 30, 2000.
Lease Income. We earned $5.5 million of lease income for the three
months ended September 30, 2000, compared to $7.6 million for the comparable
period in 1999, on residences owned or leased by us and leased or subleased to
unconsolidated joint ventures. Lease payment obligations of the unconsolidated
joint venture entities are generally equivalent to the debt service payable by
us on the leased residences, and thereby offset our costs associated with
obtaining and maintaining financing for such residences.
General and Administrative Expense. For the three months ended
September 30, 2000, general and administrative expenses were $11.1 million,
compared to $9.3 million for the comparable 1999 period, representing a decrease
as a percentage of operating revenue to 9.0% in the 2000 period from
8
<PAGE> 11
9.2% in the 1999 period. The $1.8 million increase in the 2000 period was
primarily attributable to salaries, related payroll taxes and employee benefits
for additional corporate personnel retained to support the increased number of
residences owned or leased and unconsolidated residences we manage.
Loss on Disposal. During the three months ended September 30, 2000, in
accordance with SFAS 121, "Accounting for Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of," we recorded a gain on disposal of $79,000
on certain of the assets which were sold where we estimated a sales price, net
of disposal costs, less than the book value in the prior quarter.
Depreciation and Amortization. Depreciation and amortization for the
three months ended September 30, 2000 was $9.3 million, representing an increase
of $4.1 million, from the $5.2 million of depreciation and amortization for
1999. This increase resulted primarily from the depreciation of fixed assets on
the larger number of new residences that were owned by us during the three
months ended September 30, 2000, versus the comparable period in 1999. In
addition, we acquired 19 residences with a capacity of 944 residents in December
1999 and January 2000, which were previously leased by us from a healthcare REIT
and have therefore begun to depreciate these assets.
Interest Expense, Net. Interest expense, net of interest income, was
$16.5 million for the three months ended September 30, 2000, compared to $9.1
million for the comparable period in 1999. Gross interest expense (before
interest capitalization and interest income) for the 2000 period was $19.1
million compared to $12.8 million for the 1999 period, an increase of $5.4
million. This increase is primarily attributable to an increase in the amount of
debt financing used in the 2000 period as compared to the 1999 period. We
capitalized $1.1 million of interest expense in the 2000 period compared to $2.2
million in the comparable 1999 period. This decrease is due primarily to the
reduction of assets under construction in 2000 compared to 1999. Interest income
was $1.5 million for both the 2000 period and the 1999 period.
PIK Interest, Net. PIK interest for the three months ended September
30, 2000 includes the incurrence of $5.4 million of interest expense on the
various PIK debentures which were issued in May and August 2000. We had no
similar interest for the 1999 period.
Equity in Losses of Unconsolidated Affiliates. Equity in losses of
unconsolidated affiliates for the three months ended September 30, 2000, was
$5.5 million, representing an increase of $4.9 million from $597,000 of losses
for the comparable 1999 period. One element of our plan which we began to
implement in the fourth quarter of 1999 was to reduce our reliance on joint
venture arrangements. As such, our joint venture partners have not made
substantial capital contributions to a number of joint ventures for several
quarters. Therefore, we have absorbed the losses of those unconsolidated joint
ventures in excess of capital contributed by the joint venture partner. The
increase in equity in losses of unconsolidated affiliates was also impacted by a
slower lease-up of residences which are held in unconsolidated joint ventures in
some areas of the country.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the three months ended
September 30, 2000 was $1.6 million, representing an increase of $1.1 million
from $498,000 for the comparable 1999 period. This increase was primarily
attributable to the partial buyout of 26 unconsolidated minority joint venture
arrangements which changed from unconsolidated minority joint ventures
arrangements to consolidated majority joint venture arrangements, during the
second quarter of 2000. During the third quarter of 2000, we had an average of
39 residences held in these consolidated joint venture arrangements compared to
an average of 11 residences held in similar joint venture arrangements during
the comparable 1999 period.
Income Taxes. For the three months ended September 30, 2000, we
recorded a current income tax provision of $364,000 which was offset by the
recognition of a $7.3 million deferred tax obligation resulting in a current
income tax benefit of $6.9 million. During the three months ended September 30,
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1999, we recorded a reduction in the current income tax benefit of $853,000
which was offset by the recognition of a $3.9 million deferred tax obligation
resulting in a current income tax expense of $3.0 million.
As of September 30, 2000, the Company's net deferred tax asset was
$37.1 million, $30.2 million of which relates to the Company's net operating
loss carryforward. In accordance with Statement of Financial Accounting
Standards No. 109, the Company is required to continuously evaluate the
recoverability of the deferred tax assets based on the criteria that it is "more
likely than not" that the deferred taxes will be recoverable through future
taxable income. This evaluation is made based on the Company's internal
projections, which are routinely updated to reflect more recent operating
trends. To the extent that updates to management projections result in reduced
taxable income in future periods, the Company may be required to establish a
valuation allowance on all or part of the net deferred tax asset. Based on its
current financial projections, management continues to believe that the Company
will recover these net deferred tax assets through future taxable income.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Residence Service Fees. Residence service fees for the nine months
ended September 30, 2000 were $330.1 million representing an increase of $78.0
million, or 30.9%, from the $252.1 million for the comparable 1999 period.
Substantially all of this increase resulted from the addition of newly
constructed residences and other residences acquired by us. We operated 471 and
431 residences at September 30, 2000 and 1999, respectively.
Other Revenues. Other revenues for the nine months ended September 30,
2000 were $11.0 million, a decrease of $11.8 million over the $22.8 million of
other revenue for the nine months ended September 30, 1999. The decrease is
attributable to reduced development activity which resulted in lower development
fees and management fees on residences which were either managed for third
parties or for entities in which we held a minority ownership position. In
addition, during the second quarter of 2000, we purchased 49 residences which we
previously either managed for third parties or for entities in which we held
minority ownership positions. Management fees include charges for transitional
services to recruit and train staff, initial and recurring fees for use of our
name and branding, initial and recurring fees for use of our methodologies,
services for assisting with finance processing, and ongoing management services
provided to operate the residence.
Residence Operating Expenses. Residence operating expenses for the nine
months ended September 30, 2000 increased to $223.6 million from $157.1 million
in the nine month period ended September 30, 1999 due to the increased number of
residences operated during the 2000 period. Operating expenses as a percentage
of resident service fees for the nine months ended September 30, 2000 and 1999
were 67.7% and 62.3%, respectively. This percentage increase resulted primarily
from increases in labor and employee benefit related costs due to increased
competition for personnel and increases in liability insurance costs which
resulted from the most recent liability insurance policy renewal on July 1,
2000. The increase in marginal expenses was also impacted by a slower lease-up
of residences in some areas of the country.
Lease Expense. Lease expense for the nine months ended September 30,
2000 was $61.6 million, compared to $48.8 million in the comparable period in
2000. Such increase was primarily attributable to the utilization of additional
sale/leaseback financing and synthetic lease financing totaling $182.0 million
during the twelve-month period ended September 30, 2000.
Lease Income. We earned $22.6 million of lease income for the nine
months ended September 30, 2000, compared to $17.4 million for the comparable
period in 1999, on residences owned or leased by us and leased or subleased to
unconsolidated joint ventures in 2000. Lease payment obligations of the
unconsolidated joint venture entities are generally equivalent to the debt
service payable by us on the leased residences, and thereby offset our costs
associated with obtaining and maintaining financing for such residences.
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General and Administrative Expense. For the nine months ended September
30, 2000, general and administrative expenses were $33.1 million prior to $5.1
million of non-recurring expenses, compared to $26.4 million before a $1.8
million write-off associated with our name change for the comparable 1999
period, representing 9.7% of operating revenue for both of the 1999 and 2000
periods. The $5.1 million of non-recurring expenses consist of $3.3 million
related to employee severance costs and the termination of several internal
software development and systems projects associated with our corporate
downsizing, and of a $1.8 million bad debt expense related to a management fee
note which was deemed to be uncollectible due to the acquisition of the related
residences in the second quarter. The $6.7 million increase in recurring
expenses in the 2000 period was primarily attributable to salaries, related
payroll taxes and employee benefits for additional corporate personnel retained
to support the increased number of residences owned and unconsolidated
residences we manage.
Loss on Disposal. During the nine months ended September 30, 2000, the
Company's Board of Directors adopted a plan to dispose of 36 residences with
aggregate capacity of 1,227 residents and 33 parcels of land. In accordance with
SFAS 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of," we recorded a loss on disposal on 16 of the 36 residences
where we estimated a sales price, net of disposal costs, less than the book
value by $12.0 million.
Depreciation and Amortization. Depreciation and amortization for the
nine months ended September 30, 2000 was $25.6 million, representing an increase
of $11.8 million, or 85.7%, from the $13.8 million of depreciation and
amortization for the comparable 1999 period. This increase resulted primarily
from depreciation of fixed assets on the larger number of new residences that
were owned by us during the nine months ended September 30, 2000, versus the
comparable period in 1999. In addition, we acquired 19 residences with a
capacity for 944 residents in December 1999 and January 2000 which were
previously leased by us from a healthcare REIT and have therefore begun to
depreciate these assets.
Interest Expense, Net. Interest expense, net of interest income, was
$52.3 million for the nine months ended September 30, 2000, prior to $1.4
million of bank amendment fees paid in the first nine months of the year
compared to $23.1 million of net interest expense for 1999. Gross interest
expense (before interest capitalization and interest income) for the 2000 period
was $61.4 million prior to the amendment fees paid compared to $33.8 million for
the 1999 period, an increase of $26.4 million. This increase is primarily
attributable to an increase in the amount of mortgage financing used in 2000 as
compared to 1999. The 2000 period also includes fees paid related to amending
bank agreements. We capitalized $3.3 million of interest expense in the 2000
period compared to $7.4 million in the 1999 period. This decrease in capitalized
interest is a result of our decision to reduce development and construction
activity in 2000. Our average construction in progress balance was $71.7 million
during the nine months ended September 30, 2000, compared to $130.5 million in
the 1999 period. Interest income for the 2000 period was $4.4 million as
compared to $3.3 million for the 1999 period. This increase was due to interest
on additional restricted cash balances in place in 2000 related primarily to
lease financing transactions.
PIK Interest, Net. PIK interest for the nine months ended September 30,
2000 includes the incurrence of $6.8 million of interest expense on the various
PIK debentures which were issued in May and August 2000. We had no similar
interest for the 1999 period.
Equity in Losses of Unconsolidated Affiliates. Equity in losses of
unconsolidated affiliates for the nine months ended September 30, 2000, was
$11.0 million, representing an increase of $10.3 million from $667,000 of losses
for the comparable 1999 period. One element of our plan which we began to
implement in the fourth quarter of 1999 was to reduce our reliance on joint
venture arrangements. As such, our joint venture partners have not made
substantial capital contributions to a number of joint ventures for several
quarters. Therefore, we have absorbed the losses of those unconsolidated joint
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ventures in excess of capital contributed by the joint venture partner. The
increase in equity in losses of unconsolidated affiliates was also impacted by a
slower lease-up of residences which are held in unconsolidated joint ventures in
some areas of the country.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the nine months ended
September 30, 2000 was $2.5 million, representing a decrease of $1.3 million
from $3.8 million for the comparable period in 1999. The decrease was primarily
attributable to the maturity in the residences that were owned by us in
consolidated joint venture arrangements during the 2000 period. During the first
nine months of 2000, we had an average of 26 residences held in consolidated
joint venture relationships compared to an average of 17 residences in
consolidated joint venture relationships during the first nine months of 1999.
Extraordinary Item. During the nine months ended September 30, 2000, we
recorded a gain on the early extinguishment of debt of $8.5 million relating to
our retirement of $41.4 million of convertible debt pursuant to the Equity
Linked Transaction. EITF 96-19, "Debtor's Accounting for a Modification or
Exchange of Debt Instruments", requires recognition of a gain or loss by the
debtor for early extinguishment of debt.
Cumulative Effect of Change in Accounting Principle. During the first
nine months of 1999 we incurred a cumulative effect of a change in accounting
principle of $3.8 million relating to the adoption of SOP 98-5, which requires
that costs of start-up activities and organization costs be expensed as
incurred.
Income Taxes. For the nine months ended September 30, 2000, we recorded
a current income tax provision of $573,000 which was offset by the recognition
of a $23.1 million deferred tax asset resulting in a current income tax benefit
of $22.6 million before the effect of the extraordinary item. The income tax
benefit for the nine months ended September 30, 2000 reflects the treatment of
PIK interest as non-deductible interest. We do not currently anticipate that the
interest expense which we will incur in the future related to the PIK
debentures, will be deductible for income tax purposes. During the nine months
ended September 30, 1999, we recorded a current income tax provision of $4.5
million and recognized a $4.8 million deferred tax liability resulting in a
current income tax expense of $9.3 million before the effect of a cumulative
change in accounting principle of $3.8 million.
As of September 30, 2000, the Company's net deferred tax asset was
$37.1 million, $30.2 million of which relates to the Company's net operating
loss carryforward. In accordance with Statement of Financial Accounting
Standards No. 109, the Company is required to continuously evaluate the
recoverability of the deferred tax assets based on the criteria that it is "more
likely than not" that the deferred taxes will be recoverable through future
taxable income. This evaluation is made based on the Company's internal
projections, which are routinely updated to reflect more recent operating
trends. To the extent that updates to management projections result in reduced
taxable income in future periods, the Company may be required to establish a
valuation allowance on all or part of the net deferred tax asset. Based on its
current financial projections, management continues to believe that the
Company will recover these net deferred tax assets through future taxable
income.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had $46.8 million in unrestricted cash and
cash equivalents and $12.2 million of working capital compared to unrestricted
cash and cash equivalents of $33.0 million and working capital of $23.7 million
at September 30, 1999.
For the nine months ended September 30, 2000 the operating cash flow
deficit was $9.3 million compared to cash flow from operations of $32.2 million
for the nine months ended September 30, 1999.
During the first nine months of 2000 we obtained approximately $104.9
million of new conventional debt financing. Approximately $30.0 million of this
financing was used to repay bridge financing and $30.0 million was used to
repurchase 19 residences from a healthcare REIT. The remaining conventional
financing was used to fund construction of our remaining unopened residences.
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On May 31, 2000, we completed the first closing of the Equity Linked
Transaction in which we issued $173.0 million of convertible debentures and
convertible preferred shares to investors. The securities issued include: (i)
$168.0 million of Series A, Series B and Series C convertible debentures with a
conversion price of $4.00 per share and a 9.75% semi-annual PIK coupon and a
seven year maturity, and (ii) $5.0 million of Series A convertible preferred
shares with a conversion price of $4.00 per share and a 9.75% semi-annual
cumulative PIK dividend and a mandatory redemption in seven years. The Series A
and Series C debentures and Series A preferred shares will be convertible at any
time at the respective holder's option into shares of common stock of the
Company. The Series B debentures will be convertible at any time at the
respective holder's option into non-voting Series B preferred shares having
rights (other than voting rights) substantially similar to the Company's common
stock. The Company may call the debentures and the Series A preferred shares at
any time after May 31, 2003, if the Company's common stock trades at an average
price of at least $8.00 per share for the preceding 30 trading day period. On
August 10, 2000, we issued an additional $29.9 million of Series B debentures
resulting in an aggregate transaction amount of $203.0 million.
We used the proceeds from this transaction, net of $15.2 million in
transaction costs, to (i) repay $48.3 million of bridge loans previously funded
by an affiliated group who participated as investors in the Equity-Linked
Transaction; (ii) retire outstanding convertible debt with a book basis of $41.4
million in exchange for $26.9 million in new Series C convertible debentures,
(iii) acquire equity interest in 14 residences (618 resident capacity)
previously managed by the Company for $21.0 million, (iv) acquire a 60%
ownership interest in the operations of 26 residences (2,159 resident capacity)
for $14.7 million, (v) repay $5.0 million of short-term borrowings under a bank
line-of-credit, and (vi) provide funds for working capital and other corporate
purposes including completing construction of our remaining unopened residences.
Historically, we have financed our operations and growth through a
combination of various forms of real estate financing (mortgage, synthetic lease
and sale/leaseback financing), capital contributions from joint venture partners
and the sale of our securities (common stock and convertible debentures) and, to
a lesser extent, cash from operations. At September 30, 2000, we had $1,095.4
million of outstanding debt principally consisting of $385.2 million of
convertible debentures having a weighted average interest rate of 7.88%, $199.2
million of fixed rate debt having a weighted average interest rate of 7.70%,
capitalized lease obligations of $67.1 million having a weighted average
interest rate of 9.61%, $434.0 million of variable rate debt having a weighted
average interest rate of 9.61% and short-term borrowings of approximately $9.9
million. Through September 30, 2000, we have also entered into approximately
$893.7 million of sale/leaseback and synthetic lease financings. In addition, we
have guaranteed an aggregate of $60.0 million of indebtedness of joint venture
and other off-balance sheet third-party entities.
As of September 30, 2000, we have the following series of redeemable
preferred stock and convertible subordinated debentures outstanding:
- $5.0 million aggregate principal amount of 9.75% Series A
cumulative convertible preferred shares due May 31, 2007. The
holders of these convertible preferred shares are entitled to
cumulative pay-in-kind (PIK) dividends at the rate of 9.75% per
annum, payable semi-annually in the form of additional shares of
Series A preferred stock on January 1 and July 1 of each year
commencing on January 1, 2001. The conversion price is $4.00 per
share. The Series A preferred stock is redeemable at our option
commencing on May 31, 2003, if the Company's common stock trades
at an average price of at least $8.00 per share for the preceding
30 trading day period. The holders of the convertible preferred
shares may convert at any time into shares of common stock of the
Company on a one to one basis.
- $42.5 million aggregate principal amount of 9.75% Series A
convertible debentures due May 31, 2007. These convertible
debentures bear PIK interest at 9.75% per annum payable
semi-
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annually in the form of Series B debentures on January 1 and July
1 of each year commencing on January 1, 2001. The conversion price
is $4.00 per share. The convertible debentures are redeemable at
our option commencing on May 31, 2003, if the Company's common
stock trades at an average price of at least $8.00 per share for
the preceding 30 trading day period. The holders of the
convertible debentures may convert at any time into shares of
common stock of the Company.
- $112.7 million aggregate principal amount of 9.75% Series B
convertible debentures due May 31, 2007. These convertible
debentures bear PIK interest at 9.75% per annum payable
semi-annually in the form of Series B debentures on January 1 and
July 1 of each year, commencing with January 1, 2001. The
conversion price is $400.00 per share. The convertible debentures
are redeemable at our option commencing on May 31, 2003, if the
Company's common stock trades at an average price of at least
$8.00 per share for the preceding 30 trading day period. The
holders of the convertible debentures may convert at any time into
non-voting Series B preferred shares, each share of which has
rights (other than voting rights) substantially similar to 100
shares of common stock of the Company.
- $42.7 million aggregate principal amount of 9.75% Series C
convertible debentures due May 31, 2007. These convertible
debentures bear PIK interest at 9.75% per annum payable
semi-annually in the form of Series C debentures on January 1 and
July 1 of each year, commencing with January 1, 2001. The
conversion price is $4.00 per share. The convertible debentures
are redeemable at our option commencing on May 31, 2003, if the
Company's common stock trades at an average price of at least
$8.00 per share for the preceding 30 trading day period. The
holders of the convertible debentures may convert at any time into
shares of common stock of the Company.
- $112.1 million aggregate principal amount of 5.25% convertible
subordinated debentures due December 15, 2002. These convertible
debentures bear interest at 5.25% per annum payable semi-annually
on June 15 and December 15 of each year. The conversion price is
$28.75, which is equivalent to a conversion ratio of 34.8 shares
of common stock per $1,000 in principal amount of the convertible
debentures. The convertible debentures are redeemable at our
option commencing on December 31, 2000, at specified premiums. The
holders of the convertible debentures may require us to repurchase
the convertible dentures at 101% of face value upon a change of
control, as defined in the convertible debenture;
- $40.4 million aggregate principal amount of 7.00% convertible
subordinated debentures due June 1, 2004. These convertible
debentures bear interest at 7.00% per annum payable semi-annually
on June 1 and December 1 of each year. The conversion price is
$20.25, which is equivalent to a conversion ratio of 49.4 shares
of common stock per $1,000 in principal amount of the convertible
debentures. The convertible debentures are redeemable at our
option commencing on June 15, 2000, at specified premiums; and
- $35.0 million aggregate principal amount 6.75% convertible
subordinated debentures due June 30, 2006. These convertible
debentures bear interest at 6.75% per annum payable semi-annually
on June 30 and December 30 of each year. The conversion price is
$20.38, which is equivalent to a conversion ratio of 49.3 shares
of common stock per $1,000 principal amount of the convertible
debentures. The convertible debentures are redeemable at our
option commencing on July 15, 1999, at specified premiums.
Our principal credit and financing agreements, including our
convertible debentures and our synthetic lease agreements, include cross-default
provisions that provide that a material default under our other credit
facilities constitute a default under that credit or financing agreement.
Accordingly, any material default arising under one of our credit or financing
agreements could result in many of our other major credit and financing
arrangements being in default. In addition, our principal credit agreements
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and debt instruments include various financial covenants and other restrictions,
including: (i) fixed charge coverage requirements, typically measured on a
trailing four quarter basis and which generally increase over the term of the
applicable credit agreement; (ii) maximum leverage ratios which limit our
aggregate senior indebtedness to total capitalization; (iii) various minimum net
worth or tangible net worth requirements; (iv) in some cases, property specific
debt service coverage requirements and similar financial covenants of the type
referenced above applicable to individual properties or to the pool of
residences financed by the applicable lender; and (v) the maintenance of
operating and other reserves for the benefit of the residences serving as
collateral for the applicable lender. Additionally, under some of our credit and
sale/leaseback facilities we are required to secure lender or lessor consent
prior to engaging in mergers, business combinations or change in control
transactions. As part of the recently completed Equity-Linked Transaction, we
have obtained modifications to financial covenants for all of our principal
credit agreements and debt instruments and we are currently in material
compliance with these covenants.
We will continue to address both our short and long-term liquidity
requirements. However, a number of our traditional financing sources, including
commercial banks and other secured lenders, have substantially reduced their
lending activities to the healthcare sector, which has reduced our access to
credit.
Our operations and remaining construction activity will require
significant additional capital resources in the future in order to fund: (i) our
costs associated with completing construction of 23 assisted living and
Alzheimer's care residences; (ii) our purchase from the third party joint
venture partners of minority and majority equity interests in assisted living
residences operated by us; (iii) our ongoing debt service obligations, including
maturities of our long-term debt and refinancing of short term debt; and (iv)
our obligation to finance the operations of third party development partners.
In addition, the Company is subject to contingent liabilities associated with
certain pending litigation (see Item 1 of Part II of this Quarterly Report.)
Although the Company believes it will prevail in defending against these
claims, no assurances can be given that capital will not be required to resolve
these matters.
We expect to fund a portion of our capital and liquidity requirements
from cash on hand, cash generated from operations, financing under existing debt
commitments, and, to a limited extent, equity from our joint venture development
partners. In addition, our Board of Directors has approved an asset disposition
plan in which we plan to sell 36 residences with an aggregate resident capacity
of 1,227 units and 33 parcels of land previously held for future development. We
anticipate that the aggregate proceeds from the sale of these assets will
generate approximately $100.0 million of cash, of which approximately $55.0
million will be used to retire existing secured mortgage and lease financing
relating to these properties. We expect to complete the sale of these assets
over the next six to twelve months.
We are obligated under our existing joint venture arrangements to
purchase the equity interests of our joint venture partners at fair market value
upon the election of our partners (the "Put"). We may also exercise options to
purchases these same joint venture interests either at uncapped fair market
value in the case of certain joint venture arrangements (the "FMV Call") or at
an agreed upon return on investment in the case of other arrangements (the
"Formula Call"). For joint ventures with the FMV Call, we estimate that the
amount required as of September 30, 2000 to acquire these joint venture
interests would be approximately $11.0 million. We do not anticipate that we
will purchase or be required to purchase the interests in these partnerships
with FMV Calls during the next 12 months. With respect to joint ventures which
include Formula Calls, we estimate that the call price as of September 30, 2000
would total approximately $63.0 million. However, we believe that the fair
market value of these residences, in the aggregate, should the Put be exercised,
is substantially less. The majority of the residences held in joint venture
arrangements are currently in the lease-up process. Based on a number of
assumptions, including assumptions relating to the availability of cash, ability
to refinance or sell the underlying assets, the time at which these options may
be exercised and the fair market values of these residences at the date these
options would be exercised, we estimate that we may utilize approximately $25.0
million to $63.0 million to effect joint venture purchases during the 12 month
period ending
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September 30, 2001. We are also negotiating with certain of our
joint venture partners to purchase our joint venture interests at terms
different from the existing agreements.
In this regard, we expect to complete during the fourth quarter of 2000
our acquisition of all of the remaining joint venture interests (representing
approximately 40% of the equity interests) not previously acquired by us in the
Equity-Linked Transaction in partnerships operating 26 of our residences.
Additionally, during the fourth quarter of 2000, we expect to complete the
acquisition of the 90% joint venture interests in limited liability companies
operating 26 other of our assisted living residences. To complete these
negotiated acquisitions of joint venture interests, we expect to pay
approximately $13.1 million in cash and $7.6 million in the form of a three year
promissory note bearing interest at 10% per annum.
As of September 30, 2000, our current portion of long-term debt and
short-term notes payable total $79.7 million. In addition, our long-term debt
instruments include maturities of $11.8 million in the fourth quarter of 2001.
In 2002, our scheduled debt maturities include $91.0 million of secured debt
and its 5.25% convertible subordinated debentures, which have an outstanding
balance of $112.1 million at September 30, 2000 and mature in December 2002. We
are currently seeking refinancing for certain of these debt maturities which
are scheduled to occur over the next two and one-half years and intend to
pursue multiple refinancing transactions through 2002. However, no assurance
can be given that refinancing alternatives will be available to satisfy these
debt maturities or that if available, such replacement financing will be on
terms as favorable as the debt financing currently in place.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company. Inflation
could, however, affect the Company's results of operations due to the Company's
dependence on its senior resident population who generally rely on liquid assets
and relatively fixed incomes to pay for the Company's services. As a result, the
Company may not be able to increase residence service fees to account fully for
increased operating expenses. In structuring its fees, the Company attempts to
anticipate inflation levels, but there can be no assurance that the Company will
be able to anticipate fully or otherwise respond to any future inflationary
pressures. In addition, given the amount of construction and development
activity which the Company anticipates, inflationary pressures could affect the
Company's cost of new product deployment and financing. There can be no
assurances that financing will be available on terms acceptable to the Company.
FORWARD-LOOKING STATEMENTS
The statements in this quarterly report relating to matters that are
not historical facts are forward-looking statements based on management's belief
and assumptions using currently available information. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such statements involve a number of risks and uncertainties,
including, but not limited to, substantial debt and operating lease payment
obligations, operating losses associated with new residences, our need for
additional financing and liquidity, our ability to implement our new strategic
initiatives and improve cash flow, risks associated with development and
construction, risks associated with acquisitions, competition, governmental
regulation and other risks and uncertainties detailed in the reports filed by
the Company with the Securities and Exchange Commission. Should one or more of
these risks materialize (or the consequences of such a development worsen), or
should the underlying assumptions prove incorrect, actual results could differ
materially from those forecasted or expected. The Company assumes no duty to
publicly update such statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. Changes in these factors may
cause fluctuations in the Company's earnings and cash flows.
We performed a sensitivity analysis which presents the hypothetical
change in fair value of those financial instruments held by us at September 30,
2000, which are sensitive to changes in interest rates. Market risk is estimated
as the potential change in fair value resulting from an immediate hypothetical
one point parallel shift in the yield curve. The fair value of the debt included
in the analysis is $444.0 million. Although not expected, a one-percentage point
change in the interest rates would have caused our annual interest expense to
change by approximately $5.1 million. Accordingly, a significant increase in
LIBOR based interest rates could have a material adverse effect on our earnings.
Although a majority of our debt and lease payment obligations as of or
during the nine months ended September 30, 2000, are not subject to floating
interest rates, indebtedness that we may incur in the future may bear interest
at a floating rate. Debt and annual operating lease payment obligations will
continue to increase as we complete our pending development and construction
activity. We expect to refinance $80.7 million of our fixed rate debt in 2000
and, as a result, convert this into variable rate debt.
We do not presently use financial derivative instruments to manage
interest costs. We do not use foreign currency exchange rate forward contracts
or commodity contracts and do not have foreign currency exposure as of September
30, 2000.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 22, 2000, Manor Care, Inc. ("Manor Care") and Manor Care of
America, Inc. filed a complaint against the Company in state court in Ohio
seeking to collect on a note executed by the Company in the principal amount of
$3.0 million in connection with the Company's development joint venture with
Manor Care. The Company has filed a motion to dismiss or stay the action in
favor of arbitration of the dispute. The Company intends to vigorously defend
against the claims alleged by Manor Care in this complaint.
On October 20, 2000, Manor Care filed a complaint against the Company
in the Delaware state superior court with respect to two purchase agreements
entered into on December 31, 1998 between the Company, Manor Care and a number
of Manor Care's subsidiaries and affiliates. One of these agreements related to
the purchase by the Company of a number of assisted living residences then owned
and operated by Manor Care and its subsidiaries, and the second agreement
related to the purchase by the Company of a number of assisted living residences
then under construction by Manor Care and its subsidiaries. Manor Care has
alleged that the Company was unable to close the purchases within the time
required by the agreements and that the Company allegedly fraudulently induced
Manor Care to delay the closings. Manor Care is seeking damages for this alleged
fraud in the amount of approximately $3.7 million. In addition, Manor Care has
alleged that the Company owes Manor Care $259,000 arising out of post-closing
prorations. The Company has not yet answered Manor Care's complaint, but intends
to vigorously defend against the claims alleged by Manor Care in this complaint.
In addition, the Company is pursuing (or intends to pursue) various
claims and counterclaims against Manor Care and its affiliates arising out of
the Company's prior business dealings with Manor Care.
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ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
On August 10, 2000, the Company issued $29.9 million in face amount of
Series B convertible pay-in-kind debentures due 2007 pursuant to the exercise of
an option feature of the Equity-Linked Transaction. These convertible
pay-in-kind debentures were sold to a Canadian bank without registration under
the Securities Act of 1933, as amended (the "Securities Act"), under the
exemption therefrom provided by Section 4(2) of the Securities Act and pursuant
to the safe harbor provided by Rule 506 of Regulation D promulgated thereunder.
Series B Debentures. The $29.9 million aggregate principal amount of
9.75% Series B convertible pay-in-kind debentures due May 31, 2007 bear
pay-in-kind interest at 9.75% per annum payable semi-annually in the form of
additional Series B debentures on January 1 and July 1 of each year, commencing
January 1, 2001. The Series B convertible debentures are redeemable at our
option commencing on May 31, 2003, if the Company's common stock trades at an
average price of at least $8.00 per share for the preceding 30 trading day
period. The holders of the Series B convertible debentures may convert at any
time, at a conversion price of $400.00 per share, into non-voting Series B
preferred shares, each share of which has rights (other than voting rights)
substantially similar to 100 shares of common stock of the Company.
The Company is using the proceeds from the sale of these convertible
securities to provide funds for working capital and other corporate purposes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on October
10, 2000. The only action taken at the meeting was to elect a board of nine
directors of the Company, five of whom were elected by holders of the Company's
common stock and four of whom were elected by the holders of the Company's
Series A 9.75% cumulative convertible pay-in-kind preferred stock. The results
were as follows:
<TABLE>
<CAPTION>
AUTHORITY
DIRECTOR FOR WITHHELD
------------------------------- ----------------- ------------------
<S> <C> <C>
Tim Buchanan 19,343,177 1,026,547
Gene E. Burleson 19,271,717 1,026,461
William F. Lasky 19,343,263 1,026,461
William G. Petty, Jr. 19,343,263 1,026,461
Steven L. Vick 19,343,263 1,026,461
<CAPTION>
AUTHORITY
PREFERRED DIRECTORS FOR WITHHELD
------------------------------- ----------------- ------------------
<S> <C> <C>
William Colson 1,140,000 110,000
Robert Haveman 1,140,000 110,000
Natalie Townsend 1,140,000 110,000
Jerry L. Tubergen 1,140,000 110,000
</TABLE>
The proposal to elect directors was set forth and described in the
Notice of Annual Meeting and Proxy Statement of the Company dated September 1,
2000, filed with the Commission pursuant to Rule 14a-6 under the Securities
Exchange Act of 1934, as amended.
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ITEM 5. OTHER INFORMATION
On November 13, 2000, William F. Lasky resigned as President
and Chief Executive Officer of the Company and was appointed as
Vice Chairman of the Board. Robert Haveman, a long-time member
of the Board of Directors and former Vice Chairman, has been
appointed interim President of the Company, and a national
search firm has been retained to identify a permanent successor
to Mr. Lasky.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Loan Agreement dated as of August 28, 2000 between Heller
Healthcare Finance, Inc., as Agent and a Lender; and the
Other Financial Institutions Who Hereafter Become Parties
to this Agreement, as Lenders; and AHC Borrower I, Inc.,
as Borrower. (Exhibits and schedules to this agreement
have been omitted; the Registrant agrees to furnish
supplementally to the Commission, upon request, a copy of
these exhibits and schedules.)
10.2 Form of Deed of Trust, Assignment of Leases, Rents and
Profits, Security Agreement and Financing Statement
("Mortgage/Deed of Trust") dated as of August 28, 2000
between AHC Borrower I, Inc, as Borrower; Joyce J. Gorman,
as Trustee, for the benefit of Heller Healthcare Finance,
Inc, in its individual capacity and as Agent for Lenders.
10.3 Schedule of mortgages and deeds of trust which are
substantially in the form of Mortgage/Deed of Trust
attached as Exhibit 10.2 hereto.
10.4 Amendment No. 8 to Credit Agreement dated as of August 31,
2000 between Firstar Bank, National Association and the
Registrant. (Exhibits to this agreement have been omitted;
the Registrant agrees to furnish supplementally to the
Commission, upon request, a copy of these exhibits.)
10.5 Form of Deed of Trust ("Mortgage/Deed of Trust") dated
August 31, 2000 between the Registrant, First Bank as
Lender and Chicago Title Insurance Company as Trustee.
10.6 Schedule of mortgages and deeds of trust which are
substantially in the form of Mortgage/Deed of Trust
attached as Exhibit 10.5 hereto.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K: The Registrant has filed no reports with the
Securities and Exchange Commission on Form 8-K during the quarter
ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milwaukee, State of
Wisconsin, on the 14th day of November, 2000.
ALTERRA HEALTHCARE CORPORATION
Date: November 14, 2000 By: /s/ Mark W. Ohlendorf
-----------------------------------------------
Mark W. Ohlendorf
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)
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