<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 June 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
DELAWARE 39-1771281
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 AUGUST 10, 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 practicable date.)
<PAGE> 2
ALTERRA HEALTHCARE CORPORATION
INDEX
Part I. Financial Information
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999......................................................................... 1
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999....................................................... 2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 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..................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 18
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds................................................. 19
Item 6. Exhibits and Reports on Form 8-K.......................................................... 20
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 28,784 $ 18,728
Accounts receivable, net......................................... 8,091 7,150
Notes receivable................................................. 4,597 32,530
Assets held for sale............................................. 70,912 9,501
Other current assets............................................. 44,105 41,320
-------------- ----------------
Total current assets......................................... 156,489 109,229
-------------- ----------------
Property and equipment, net........................................ 967,887 863,163
Restricted cash and investments.................................... 37,617 28,325
Goodwill, net...................................................... 11,079 5,106
Other assets....................................................... 74,740 55,574
-------------- ----------------
Total assets................................................. $ 1,247,812 $ 1,061,397
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations.................... $ 7,903 $ 9,945
Current obligations on assets held for sale...................... 36,527 ---
Short-term notes payable......................................... 10,000 29,009
Accounts payable - trade......................................... 3,770 11,036
Accounts payable - construction.................................. 1,234 6,616
Accrued expenses................................................. 45,250 37,972
Deferred rent and refundable deposits............................ 6,644 9,199
-------------- ----------------
Total current liabilities.................................... 111,328 103,777
-------------- ----------------
Long-term obligations, less current installments................... 633,071 563,072
Convertible debt................................................... 355,269 228,600
Deferred gain on sale and other.................................... 6,888 11,592
Minority interest.................................................. 4,373 3,713
Redeemable preferred stock......................................... 4,566 ---
Stockholders' equity:
Preferred stock; 2,500,000 shares authorized and designated;
none of which are issued or are outstanding................. --- ---
Common stock, $.01 par value; 100,000,000 shares
authorized; issued 22,121,449 shares of which
22,109,810 were outstanding on June 30, 2000 and
December 31, 1999....................................... 221 221
Treasury stock, $.01 par value; 11,639 shares in 2000 and
1999............................................................ (163) (163)
Additional paid-in capital......................................... 179,385 179,362
Accumulated deficit................................................ (47,126) (28,777)
------------- ---------------
Total stockholders' equity..................................... 132,317 150,643
-------------- ----------------
Total liabilities, redeemable preferred stock and
stockholders' equity........................................... $ 1,247,812 $ 1,061,397
============== ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Resident service fees........................................ $ 108,082 $ 84,344 $ 209,527 $ 161,466
Management fees and other.................................... 3,957 7,576 9,068 13,345
------------ ------------ ------------- ------------
Operating revenue.......................................... 112,039 91,920 218,595 174,811
Operating expenses:
Residence operations......................................... 72,309 52,497 138,495 99,596
Lease expense................................................ 20,592 15,971 40,839 30,430
Lease income................................................. (8,334) (4,937) (17,063) (9,826)
General and administrative................................... 16,209 9,280 27,185 18,898
Loss on disposal (see Note 2) ............................... 12,054 --- 12,054 ---
Depreciation and amortization................................ 8,624 4,525 16,293 8,550
------------ ------------ ------------- ------------
Total operating expenses................................... 121,454 77,336 217,803 147,648
------------ ------------ ------------- ------------
Operating (loss) income.................................... (9,415) 14,584 792 27,163
------------ ------------ ------------- ------------
Other income (expense):
Interest expense, net........................................ (20,325) (7,611) (37,243) (14,075)
Payment-in-kind ("PIK") interest expense..................... (1,411) --- (1,411) ---
Equity in losses of unconsolidated affiliates................ (3,132) (152) (5,508) (70)
Minority interest in losses of consolidated subsidiaries..... 360 983 869 3,278
------------ ------------ ------------- ------------
Total other expense, net................................... (24,508) (6,780) (43,293) (10,867)
------------ ------------ ------------- ------------
(Loss) income before income taxes, extraordinary gain and
cumulative effect of a change in accounting principle........ (33,923) 7,804 (42,501) 16,296
Income tax benefit (expense) .................................. 12,355 (2,966) 15,615 (6,193)
------------ ------------ ------------- ------------
(Loss) income before extraordinary gain and cumulative effect
of a change in accounting principle............................ (21,568) 4,838 (26,886) 10,103
Extraordinary gain on the early extinguishment of debt, net of
tax expense of $5,232 (see Note 4)............................. 8,536 --- 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.............................................. $ (13,032) $ 4,838 $ (18,350) $ 6,266
============ ============ ============= ============
(Loss) income per common share before extraordinary item and cumulative effect
of a change in accounting principle:
Basic........................................................ $ (0.98) $ 0.22 $ (1.22) $ 0.46
============ ============ ============= ============
Diluted ..................................................... $ (0.98) $ 0.22 $ (1.22) $ 0.45
============ ============ ============= ============
Net (loss) income per common share:
Basic........................................................ $ (0.59) $ 0.22 $ (0.83) $ 0.28
============ ============ ============= ============
Diluted ..................................................... $ (0.59) $ 0.22 $ (0.83) $ 0.28
============ ============ ============= ============
Weighted average common shares outstanding:
Basic........................................................ 22,110 22,085 22,107 22,080
============ ============ ============= ============
Diluted...................................................... 22,110 22,345 22,107 22,442
============ ============ ============= ============
</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>
Six Months Ended
June 30,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income................................................................... $ (18,350) $ 6,266
Adjustments to reconcile net (loss) income to net cash provided by operating activities
net of acquisitions:
Depreciation and amortization....................................................... 16,293 8,550
PIK interest ....................................................................... 1,411 ---
Amortization of deferred financing.................................................. 4,856 1,249
Extraordinary gain on extinguishment of debt........................................ (13,768) ---
Loss on disposal.................................................................... 12,054 ---
Deferred income taxes............................................................... (10,404) (501)
Equity in net loss from investments in unconsolidated affiliates.................... 5,508 70
Minority interest in losses of consolidated subsidiaries............................ (869) (3,278)
Decrease (increase) in net resident receivables..................................... (942) (3,498)
Decrease in pre-opening costs....................................................... ---- 7,856
Decrease income tax receivable...................................................... 4,335 ---
Decrease (increase) in other current assets........................................ 1,885 (4,840)
Decrease in accounts payable........................................................ (7,266) (993)
Increase in accrued expenses and deferred rent...................................... 10,597 6,767
Decrease in accrued development reserve costs....................................... (7,752) ---
Changes in other assets and liabilities, net........................................ 4,406 624
------------- -------------
Net cash provided by operating activities............................................. 1,994 18,272
Cash flows (used by) investing activities:
Payments for property, equipment and project development costs...................... (59,841) (140,470)
Increase in notes receivable, net of reserve........................................ (3,265) (4,599)
Acquisitions of facilities, net of cash............................................. ---- (15,206)
Acquisitions of facilities, net of liabilities assumed.............................. (20,896) ----
Changes in investments in and advances to unconsolidated affiliates................. (950) (675)
Purchase of limited partnership interests........................................... (22,144) (34,461)
Increase in long-term investments................................................... (65) (3,713)
------------- -------------
Net cash used in investing activities................................................. (107,161) (199,124)
Cash flows from (used by) financing activities:
Repayments of short-term borrowings................................................. (19,000) ---
Repayments of long-term obligations................................................. (106,613) (45,649)
Proceeds from issuance of debt...................................................... 80,917 169,282
Proceeds from the issuance of convertible debentures................................ 168,022 ----
Payments for financing costs........................................................ (14,200) (5,104)
Proceeds from sale/leaseback transactions........................................... ---- 64,391
Issuance of preferred stock and other capital contributions......................... 4,568 746
Contributions by minority partners and minority stockholders........................ 1,529 5,182
------------- -------------
Net cash provided by financing activities............................................. 115,223 188,848
Net increase in cash and cash equivalents............................................. 10,056 7,996
------------- -------------
Cash and cash equivalents:
Beginning of period................................................................. 18,728 49,934
------------- -------------
End of period....................................................................... $ 28,784 $ 57,930
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized............................... $ 34,926 $ 18,384
Cash paid during period for income taxes, net of refunds............................ $ 257 $ 4,386
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 June 30, 2000 and
December 31, 1999, the condensed consolidated statements of operations for the
three and six months ended June 30, 2000 and 1999, and the condensed
consolidated statements of cash flows for the six months ended June 30, 2000 and
1999 contained in this Quarterly Report on Form 10-Q include the accounts of
Alterra Healthcare Corporation ("Alterra" or the "Company") and our affiliates
which are under our common financial control. All significant intercompany
accounts have been eliminated in consolidation. In our opinion, all adjustments
(consisting only of normal recurring items) necessary for a fair presentation of
these condensed consolidated financial statements have been included. The
results of operations for the three and six months ended June 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 our Annual Report on Form
10-K, for the year ended December 31, 1999, as amended.
(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 loss of
$12.1 million in the quarter ended June 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.
4
<PAGE> 7
The following table represents condensed operating information related
to the 31 operating residences currently held for sale for the six month periods
ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
Revenue $ 10,461 $ 9,608
Residence operations expense 7,886 6,837
Lease expense 865 1,012
Interest expense 1,016 642
Depreciation expense 668 520
--------------- -------------
Income before taxes $ 26 $ 597
=============== =============
</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
On May 31, 2000 the Company completed a financing transaction in which
it issued $173.0 million of convertible debentures and convertible preferred
shares to certain investors including significant existing shareholders and
convertible debenture holders of the Company (the "Equity-Linked Transaction").
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 payment-in-kind ("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 investor's
option into shares of common stock of the Company. The Series B debentures will
be convertible at any time at the investor'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 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. As part of the transaction, the Company had the option to
issue to approved parties, and the investors had the option to purchase, up to
an additional $29.9 million of Series B or C debentures within 180 days of May
31, 2000 (the "Option"), which would result in an aggregate transaction amount
of approximately $203.0 million.
The Company used the proceeds from this transaction to (i) repay $48.3
million of bridge loans previously funded by an affiliated group; (ii) retire
$41.4 million of existing convertible debt (see Note 4), (iii) acquire the
operations of 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, including completing construction of the
Company's remaining unopened residences.
The holders of the Series A convertible preferred shares have the right
to elect four members to the Company's nine person Board of Directors.
5
<PAGE> 8
(4) EXTRAORDINARY GAIN ON EXTINGUISHMENT OF CONVERTIBLE DEBT
As part of the Equity-Linked Transaction, 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) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999 we 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. Our prior practice was to capitalize these 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 three months ended March 31, 1999
was $3.8 million, net of tax.
6
<PAGE> 9
(6) NET (LOSS) 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 Six Months Ended
June 30, June 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................................ $ (21,568) $ 4,838 $ (26,886) $ 10,103
Extraordinary item....................................... 8,536 ---- 8,536 ----
Cumulative effect of a change in accounting principle.... ---- ---- ---- (3,837)
----------- ------------ ------------- ------------
Numerator for basic and diluted net income per share... $ (13,032) $ 4,838 (18,350) $ 6,266
=========== ============ ============= =============
Denominator:
Denominator for basic net income per common
share-weighted average shares.......................... 22,110 22,085 22,107 22,080
Effect of dilutive securities:
Employee stock options.............................. ---- 260 ---- 362
----------- ------------ ------------- -------------
Denominator for diluted net income per common
share-weighted average shares plus assumed
conversions........................................... 22,110 22,345 22,107 22,442
=========== ============ ============= =============
Basic income per common share before cumulative effect
of a change in accounting principle and extraordinary
item.................................................. $ (0.98) $ 0.22 $ (1.22) $ 0.46
Extraordinary item....................................... .39 ---- .39 ----
Cumulative effect of a change in accounting principle.... ---- ---- ---- (0.17)
----------- ------------ ------------- -------------
Basic net income per common share (1).................... $ (0.59) $ 0.22 $ (0.83) $ 0.28
=========== ============ ============= =============
Diluted income per common share before cumulative effect
of a change in accounting principle and extraordinary
item.................................................. $ (0.98) $ 0.22 $ (1.22) $ 0.45
Extraordinary item....................................... .39 ---- .39 ----
Cumulative effect of a change in accounting principle ---- ---- ---- (0.17)
----------- ------------ ------------- -------------
Diluted net income per common share..................... $ (0.59) $ 0.22 $ (0.83) $ 0.28
=========== ============ ============= =============
</TABLE>
(1) Six month period ended June 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
Reclassifications have been made in the 1999 financial statements to
conform with the 2000 financial statement presentation.
7
<PAGE> 10
(8) SUBSEQUENT EVENT
On August 10, 2000, the Company issued an additional $29.9 million of
Series B convertible debentures pursuant to the Option.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a leading national assisted living 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 our results between 2000 and 1999. As of
June 30, 2000 and 1999, we operated or managed 471 and 389 residences with
aggregate capacity of 21,761 and 16,900 residents, respectively. We, together
with other parties who have purchased interests in some of our construction
residences, are also constructing 28 additional residences with capacity for
1,463 residents as of June 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 half of 2000 we have discontinued
development activity with respect to substantially all
development sites. As of August 10, 2000, we had 28
residences with capacity for 1,463 residents under
construction. Upon completion of the construction of these 28
residences, which we anticipate will occur with respect to
most of these residences by the end of 2000, 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 half of 2000.
- Deleveraging of our Balance Sheet. We have strengthened our
balance sheet and substantially addressed our short and
long-term capital needs by completing a significant
equity-linked financing during the second quarter of 2000
(the "Equity-Linked Transaction"). At the initial closing of
the Equity-Linked Transaction on May 31, 2000, 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.
8
<PAGE> 11
- 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 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 JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Residence Service Fees. Residence service fees for the three months
ended June 30, 2000 were $108.1 million, representing an increase of $23.8
million or 28% from the $84.3 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 or
managed 471 and 389 residences at June 30, 2000 and 1999, respectively.
Other Revenues. Other revenues for the three months ended June 30, 2000
were $4.0 million, a decrease of $3.6 million from the $7.6 million of other
revenue for the three months ended June 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 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 June 30, 2000 increased to $72.3 million from $52.5 million
in the three-month period ended June 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 June 30, 2000 and 1999 were
66.9% and 62.2%, respectively. This percentage increase resulted primarily from
increases in labor and employee benefit related costs due to increased
competition for personnel. 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 June 30, 2000
was $20.6 million, compared to $16.0 million in the comparable period in 1999.
This increase was primarily attributable to the utilization of additional
sale/leaseback financing and synthetic lease financing totaling $189.6 million
during the twelve-month period ended June 30, 2000.
Lease Income. We earned $8.3 million of lease income for the three
months ended June 30, 2000, compared to $4.9 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 these residences.
9
<PAGE> 12
General and Administrative Expense. For the three months ended June 30,
2000, general and administrative expenses were $11.1 million prior to
non-recurring expenses of $5.1 million, compared to $9.3 million, representing a
decrease as a percentage of operating revenue from 10.0% in the 1999 period to
9.9% in the 2000 period. The $5.1 million of nonrecurring 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 a $1.8 million bad debt reserve 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 $2.2 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 three months ended June 30, 2000, our
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, less disposal costs, of less than the book value by
$12.1 million.
Depreciation and Amortization. Depreciation and amortization for the
three months ended June 30, 2000, was $8.6 million representing an increase of
$4.1 million, or 91.1%, from the $4.5 million of depreciation and amortization
for 1999. This increase resulted primarily from depreciation of fixed assets on
the larger number of new residences that were owned by us during the three
months ended June 30, 2000, versus the comparable 1999 period. 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 and PIK Interest, Net. Interest expense, net of
interest income, was $21.7 million for the three months ended June 30, 2000,
compared to $7.6 million of net interest expense for 1999. Gross interest
expense (before interest capitalization and interest income) for the 2000 period
was $24.0 million compared to $11.2 million for the 1999 period, an increase of
$12.8 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 and the incurrence
of $1.4 million of interest expense on the various PIK debentures which were
issued on May 31, 2000. We capitalized $975,000 of interest expense in the 2000
period compared to $2.6 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 $67.1 million
during the three months ended June 30, 2000, compared to $123.0 million in the
1999 period. Interest income for the 2000 period was $1.4 million as compared to
$1.0 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.
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Equity in Losses of Unconsolidated Affiliates. Equity in losses of
unconsolidated affiliates for the three months ended June 30, 2000, was $3.1
million, representing an increase of $2.9 million from $152,000 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, the Company has 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 June
30, 2000, was $360,000, representing a decrease of $623,000 from $983,000 for
the comparable 1999 period. 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 second quarter of 2000, we had
an average of 22 residences held in these consolidated joint venture
arrangements compared to an average of 13 residences held in similar joint
venture arrangements during the comparable 1999 period.
Income Taxes. For the three months ended June 30, 2000, we recorded a
current income tax provision of $156,000 which was offset by the recognition of
a $12.6 million deferred tax asset resulting in a current income tax benefit of
$12.4 million. During the three months ended June 30, 1999, we recorded a
current income tax provision of $2.5 million and recognized a $500,000 deferred
tax liability resulting in a current income tax expense of $3.0 million. The
income tax benefit for the three months ended June 30, 2000 reflects the
treatment of PIK interest expense 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.
Extraordinary Item. During the three months ended June 30, 2000, the
Company recorded a gain on the early extinguishment of debt of $8.5 million net
of taxes relating to the Company's 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 extinguishment of debt.
Net (Loss) Income. As a result of the foregoing, net loss for the three
months ended June 30, 2000, was $13.0 million compared to net income of
$4.8 million for 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Residence Service Fees. Residence service fees for the six months ended
June 30, 2000 were $209.5 million, representing an increase of $48.0 million or
30% from the $161.5 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 or managed 471 and 389 residences
at June 30, 2000 and 1999, respectively.
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Other Revenues. Other revenues for the six months ended June 30, 2000
were $9.1 million, a decrease of $4.2 million from the $13.3 million of other
revenue for the six months ended June 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
six months 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 six
months ended June 30, 2000 increased to $138.5 million from $99.6 million in the
six-month period ended June 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 six months ended June 30, 2000 and 1999 were 66.1% and
61.6%, respectively. This percentage increase resulted primarily from increases
in labor and employee benefit related costs due to increased competition for
personnel. 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 six months ended June 30, 2000 was
$40.8 million, compared to $30.4 million in the comparable period in 1999. This
increase was primarily attributable to the utilization of additional
sale/leaseback financing and synthetic lease financing totaling $189.6 million
during the twelve-month period ended June 30, 2000.
Lease Income. We earned $17.1 million of lease income for the six
months ended June 30, 2000, compared to $9.8 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 these residences.
General and Administrative Expense. For the six months ended June 30,
2000, general and administrative expenses were $22.1 million prior to $5.1
million of non-recurring expenses, compared to $17.1 million before a $1.8
million write-off associated with our name change for the comparable 1999
period, representing an increase as a percentage of operating revenue from 9.7%
in the 1999 period to 10.1% in the 2000 period. The $5.1 million 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 $5.3 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 six months ended June 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 31 residences
where we estimated a sales price, less disposal costs, of less than the book
value by $12.1 million.
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Depreciation and Amortization. Depreciation and amortization for the
six months ended June 30, 2000, was $16.3 million representing an increase of
$7.7 million, or 89.5%, from the $8.6 million of depreciation and amortization
for 1999. This increase resulted primarily from depreciation of fixed assets on
the larger number of new residences that were owned by us during the six months
ended June 30, 2000, versus the comparable 1999 period. 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 and PIK Interest, Net. Interest expense, net of
interest income, was $37.3 million for the six months ended June 30, 2000, prior
to $1.4 million of bank amendment fees paid in the first half of the year
compared to $14.1 million of net interest expense for 1999. Gross interest
expense (before interest capitalization and interest income) for the 2000 period
was $42.3 million prior to the amendment fees paid compared to $21.0 million for
the 1999 period, an increase of $21.3 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 and the incurrence of $1.4 million of interest expense on the
various PIK debentures which were issued on May 31, 2000. We capitalized $2.2
million of interest expense in the 2000 period compared to $5.2 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 $81.6 million during the six months ended
June 30, 2000, compared to $130.5 million in the 1999 period. Interest income
for the 2000 period was $2.9 million as compared to $1.8 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.
Equity in Losses of Unconsolidated Affiliates. Equity in losses of
unconsolidated affiliates for the six months ended June 30, 2000, was $5.5
million, representing an increase of $5.4 million from $70,000 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, the Company has 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 six months ended June
30, 2000, was $869,000, representing a decrease of $2.4 million from $3.3
million for the comparable 1999 period. 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 half of 2000, we
had an average of 21 residences held in these consolidated joint venture
arrangements compared to an average of 24 residences held in similar joint
venture arrangements during the comparable 1999 period.
Income Taxes. For the six months ended June 30, 2000, we recorded a
current income tax provision of $200,000 which was offset by the recognition of
a $15.8 million deferred tax asset resulting in a current income tax benefit of
$15.6 million. The income tax benefit for the six months ended June 30, 2000
reflects the treatment of PIK interest expense 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 six months ended June 30, 1999, we recorded a current income tax
provision of $5.3 million which was offset by the recognition of $900,000 of
deferred tax liability resulting in a current income tax expense of $6.6 million
before the effect of a cumulative change in accounting principle of $3.8
million.
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Extraordinary Item. During the six months ended June 30, 2000, the
Company recorded a gain on the early extinguishment of debt of $8.5 million
relating to the Company's 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 extinguishment of debt.
Cumulative Effect of Change in Accounting Principle. During the first
half 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.
Net (Loss) Income. As a result of the foregoing, net loss for the six
months ended June 30, 2000, was $18.4 million compared to net income of $6.3
million for 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $28.8 million in unrestricted cash and cash
equivalents and $45.2 million of working capital compared to unrestricted cash
and cash equivalents of $18.7 million and working capital of $5.4 million at
December 31, 1999.
For the six months ended June 30, 2000 and 1999, cash flows from
operations were $2.0 million and $18.3 million, respectively.
During the first half of 2000 we obtained approximately $80.9 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.
On May 31, 2000, we completed 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. As part of the Equity-Linked Transaction, the
Company had the option to issue to approved parties, and the investors had the
option to purchase up to an additional $29.9 million of Series B or C debentures
within 180 days of May 31, 2000, which would result in an aggregate transaction
amount of approximately $203.0 million. On August 10, 2000, the Company issued
$29.9 million of Series B convertible debentures pursuant to this option
feature.
The Company used the proceeds from this transaction, net of $13.4
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)
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provide funds for working capital and other corporate purposes including
completing construction of the Company's remaining unopened residences and
repurchasing, in open market and privately negotiated transactions, a portion of
the Company's outstanding 5.25% convertible subordinated debentures due December
2002.
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 June 30, 2000, we had $1,042.8 million
of outstanding debt principally consisting of $355.3 million of convertible
debentures having a weighted average interest rate of 6.67%, $199.8 million of
fixed rate debt having a weighted average interest rate of 8.74%, capitalized
lease obligations of $67.2 million having a weighted average interest rate of
9.93%, $410.5 million of variable rate debt having a weighted average interest
rate of 9.22% and short-term borrowings of approximately $10.0 million. Through
June 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 June 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-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.
- $82.8 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.
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- $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 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.
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We will continue to address both our short and long-term liquidity
requirements. 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 28 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.
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 $60.0
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 June 30, 2000 to acquire these joint venture interests
would be $11.3 million. We do not anticipate that we will purchase or be
required to purchase the interests in these partnerships with FMV Calls. With
respect to joint ventures which include Formula Calls, we estimate that the call
price as of June 30, 2000 would total approximately $60.0 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 these 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 $20.0 million to $60.0 million to effect joint venture purchases
during the 12 month period ended June 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. However, no agreements have
been reached in this regard.
As of June 30, 2000, the Company's current portion of long-term debt
and short-term notes payable total $17.9 million. In addition, the Company's
long-term debt instruments include maturities of $102.5 million in the third
quarter of 2001 and $11.8 million in the fourth quarter of 2001. In 2002, the
Company's 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 June 30, 2000) mature in December 2002. The Company is
currently seeking refinancing for certain of these debt maturities which are
scheduled to occur over the next two and one-half years and intends 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.
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IMPACT OF INFLATION
To date inflation has not had a significant impact on us. Inflation
could, however, affect our results of operations due to our dependence on our
senior resident population who generally rely on liquid assets and relatively
fixed incomes to pay for our services. As a result, we may not be able to
increase residence service fees to account fully for increased operating
expenses. In structuring our fees we attempt to anticipate inflation levels, but
there can be no assurance that we will be able to anticipate fully or otherwise
respond to any future inflationary pressures.
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 we believe that
the expectations reflected in these forward-looking statements are reasonable,
we cannot give any assurances that these expectations will prove to be correct.
These 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 us with the Securities and
Exchange Commission. Should one or more of these risks materialize (or the
consequences of a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. We assume no duty to publicly update these statements.
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 June 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 $420.5 million. Although not expected, a one-percentage point
change in the interest rates would have caused our annual interest expense to
change by approximately $4.2 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 six months ended June 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.
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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 June 30,
2000.
PART II - OTHER INFORMATION
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
Pursuant to the Equity-Linked Transaction consummated on May 31, 2000,
the Company issued (i) 1,250,000 shares of its Series A 9.75% cumulative
convertible pay-in-kind preferred stock (the "Series A Stock") and (ii) $168
million in face amount of Series A, Series B and Series C convertible
pay-in-kind debentures due 2007. On August 10, 2000, the Company issued an
additional $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. The Series A Stock and these convertible pay-in-kind
debentures were sold to a small group of accredited investors 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 A Stock. The Series A Stock was sold for its stated value, $4.00
per share, representing aggregate proceeds of $5 million. The holders of the
Series A Stock are entitled to cumulative, pay-in-kind (PIK) dividends at the
rate of 9.75% of the stated value, payable semiannually on January 1st and July
1st of each year commencing on January 1, 2001. If at any time the Company's
common stock is not listed or admitted to trading on a national exchange, the
dividend rate shall increase to 12.25%. The Series A Stock ranks senior to the
Company's common stock with respect to dividend rights and rights on
liquidation, winding up or dissolution. Specifically, no dividend or
distribution may be made to the holders of the common stock, and no common stock
may be repurchased or redeemed by the Company, unless all accrued and unpaid
dividends on shares of Series A Stock have been paid. The Series A Stock shall
be entitled to receive, in the event of liquidation of the Company, an amount in
cash equal to the stated value of the Series A Stock for each share outstanding,
plus an amount in cash equal to the accrued but unpaid dividends thereon to the
date of liquidation, before any payment may be made to the holders of the common
stock. The Series A 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 then outstanding shares
of Series A Stock must be redeemed by the Company at stated value, plus all
accrued but unpaid dividends, upon the earlier of (i) May 31, 2007 or (ii) the
date of redemption by the Company of the Series A and B convertible pay-in-kind
debentures. 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. The
holders of the Series A Stock are entitled to vote on all matters voted on by
the holders of common stock, other than the election of directors. However, the
holders of the Series A Stock are also entitled to elect, as a class, four of
nine members of the Company's Board of Directors.
The Series A Debentures. The $42.5 million aggregate principal amount
of 9.75% Series A convertible pay-in-kind debentures due May 31, 2007 bear PIK
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 on January
1, 2001. The Series A 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 A convertible debentures may convert at any time into
shares of common stock of the Company, at the conversion price of $4.00 per
share.
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Series B Debentures. The $82.8 million aggregate principal amount of
9.75% Series B convertible pay-in-kind debentures due May 31, 2007 bear PIK
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.
Series C Debentures. The $42.7 million aggregate principal amount of
9.75% Series C convertible pay-in-kind debentures due May 31, 2007 bear PIK
interest at 9.75% per annum payable semi-annually in the form of additional
Series C debentures on January 1 and July 1 of each year, commencing on January
1, 2001. The Series C 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 C convertible debentures may convert at any time into
shares of the common stock of the Company, at the conversion price of $4.00 per
share.
The Company is using the proceeds from the Equity-Linked Transaction,
net of $13.4 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 100% 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amended Schedule of ALS National, Inc. Mortgages and Notes which
are substantially in the form of Key Corporate Capital, Inc.
Mortgage and Note attached as Exhibits 10.2 and 10.3 to the
Company's Form 10-Q for the period ending September 30, 1999
10.2 Amended Schedule of Mortgages and Security Agreements, Secured
Promissory Notes and Guaranties (the "Loan Documents") which are
substantially in the form of Key Corporate Capital, Inc. Loan
Documents attached as exhibits 10.116, 10.117 and 10.118 to the
Registrant's Form 10-K for the period ending December 31, 1999
10.3 Second Amendment to Amended and Restated Financing and Security
Agreement dated as of May 10, 2000 between ALS Holdings, Inc.,
ALS Wisconsin Holdings, Inc. and Bank United
10.4 Third Amendment to Guaranty of Payment Agreement dated as of May
10, 2000 among Registrant and Bank United
10.5 Third Amendment to Amended and Restated Financing and Security
Agreement dated as of May 31, 2000 between ALS Holdings, Inc.,
ALS Wisconsin Holdings, Inc. and Bank United
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10.6 Fourth Amendment to Guaranty of Payment Agreement dated as of
May 31, 2000 among Registrant and Bank United
10.7 Second Amendment to Guaranty Agreement and Waiver dated as of May
31, 2000 among Registrant, Bank of America, N.A. and the Lenders
named therein
10.8 Second Modification of Master Loan Agreement dated as of May 31,
2000 between ALS West, Inc., the Registrant and Guaranty Federal
Bank, F.S.B.
10.9 Waiver and Amendment No. 3 to Credit Agreement dated March 27,
2000 between the Registrant and Firstar Bank
10.10 Amendment No. 5 to Credit Agreement dated May 31, 2000 between
the Registrant and Firstar Bank
10.11 Letter Agreement dated March 30, 2000 between Key Corporate
Capital Inc., the limited liability companies named therein, and
the Registrant
10.12 Letter Agreement dated May 31, 2000 between Key Corporate Capital
Inc., the limited liability companies named therein, and the
Registrant
10.13 Amendment No. 3 to Master Construction Line of Credit Agreement
dated as of March 1, 2000 between the Registrant, ALS National,
Inc., Key Corporate Capital, Inc., Bank of America and the
Lenders named therein. (exhibits to this agreement have been
omitted pursuant to Item 601(b)(2) of Regulation S-K; the
Registrant agrees to furnish supplementally to the
Commission, upon request, a copy of these exhibits)
10.14 Amendment No. 4 to Master Construction Line of Credit Agreement
dated as of May 25, 2000 between the Registrant, ALS National,
Inc., Key Corporate Capital, Inc., Bank of America and the
Lenders named therein
10.15 Third Master Amendment dated as of May 31, 20000 between Pita
General Corporation, ZC Specialty Insurance Company, Greenwich
Capital Financial Products, Inc., Selco Service Corporation, the
Registrant, AHC Tenant, Inc., a wholly-owned subsidiary of the
Registrant and the banks and the Registrant's subsidiaries and
joint venture entities named therein. (exhibits to this agreement
have been omitted pursuant to Item 601(b)(2) of Regulation S-K;
the Registrant agrees to furnish supplementally to the
Commission, upon request, a copy of these exhibits)
10.16 Debenture Purchase Agreement dated as of August 10, 2000 by
and among the Registrant, RDVEPCO, L.L.C., Group One Investors,
L.L.C., Holiday Retirement 2000, LLC, the Elsa D. Prince Living
Trust, RDV Manor Care, L.L.C. and the Toronto-Dominion Bank,
(schedules to this agreement have been omitted pursuant to Item
601(b)(2) of Regulation S-K; the Registrant agrees to furnish
supplementally to the Commission, upon request, a copy of these
schedules)
11.1 Statement Regarding Computation of Net (Loss) Income Per Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K: The Registrant filed the following report
with the Securities and Exchange Commission on Form 8-K during
the quarter ended March 30, 2000.
On May 5, 2000, the Company filed a Current Report on Form 8-K dated
April 26, 2000 reporting under Item 5 thereof that the Company had issued a
press release (the "Press Release") reporting the Company had entered into a
purchase agreement pursuant to which it agreed to issue between $138.0 million
and $203.0 million of convertible debentures and convertible preferred shares to
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certain investors. A copy of the Press Release is filed as an exhibit thereto.
On June 8, 2000, the Company filed a Current Report on Form 8-K dated
April 26, 2000 reporting under Item 5 thereof that the Company had issued a
press release (the "Press Release") reporting the consummation of the Financing
Transaction pursuant to which it issued approximately $173.0 million of
convertible debentures and convertible preferred shares to certain investors. A
copy of the Press Release is filed as an exhibit thereto.
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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 11th day of August, 2000.
ALTERRA HEALTHCARE CORPORATION
Date: August 11, 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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