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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[MARK ONE]
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-11999
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ALTERRA HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 39-1771281
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
10000 INNOVATION DRIVE
MILWAUKEE, WI 53226
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 918-5000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE AMERICAN STOCK EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
5.25% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2002 AMERICAN STOCK EXCHANGE
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $94,056,168 as of March 24, 2000. The number of outstanding
shares of the Registrant's Common Stock was 22,100,032 shares as of March 24,
2000.
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Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for its 2000 Annual
Meeting of Stockholders are incorporated into Part III.
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The statements in this annual report on Form 10-K relating to matters that are
not historical facts, including, but not limited to, statements found in Item 1.
"Business" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from expectations. These include, without limitation, those set forth
under "Item 1. Business". These and other risks are set forth in the reports
filed by us with the Securities and Exchange Commission.
PART I
References in this report to the "Company," "us" or "we" refer to Alterra
Healthcare Corporation and its subsidiaries.
ITEM 1. BUSINESS
OVERVIEW
We are a leading national assisted living company operating assisted living
residences and providing assisted living services in 27 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 1999 and 1998. As of
December 31, 1999 and 1998, we operated or managed 450 and 350 residences with
aggregate capacity of approximately 20,700 and 15,000 residents, respectively.
We, together with other parties who have purchased interests in some of our
development residences, are also constructing or developing 55 additional
residences with additional capacity for 2,900 residents as of December 31, 1999.
During 1999, we generated operating revenue of $376.2 million and realized
operating income of $44.9 million and net income of $8.8 million prior to the
non-recurring charge, other one time adjustments and the cumulative effect of a
change in accounting principle.
Since 1993, we have grown as a result of our development and acquisition
activities, which have focused on purpose built, free-standing assisted living
residences. We have announced our intention to discontinue or defer a
substantial portion of our development projects not yet in construction in light
of the competitive environment and tighter capital markets.
In October 1997, we completed our merger (the "Sterling Merger") with Sterling
House Corporation ("Sterling"), which at the time of the merger operated 104
residences with an aggregate capacity of approximately 3,900 residents. In May
1996, we acquired New Crossings International Corporation ("Crossings"), an
assisted living company which operated 15 Crossings residences with a capacity
to accommodate approximately 1,420 residents throughout the western United
States; and in January 1996, we acquired Heartland Retirement Services, Inc.
("Heartland"), an assisted living company which operated 20 WovenHearts
residences with an aggregate capacity of approximately 330 residents throughout
Wisconsin. The Sterling Merger was accounted for as a pooling-of-interests and
both of the 1996 acquisition transactions were accounted for as purchases.
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 (i) a substantial reduction in
our development activity; (ii) a reduction in our utilization of and reliance
upon the use of joint venture (so called "black box" ) arrangements; (iii)
deleveraging our balance sheet; and (iv) focusing our activities on improving
the Company's cash flow. To implement these strategic initiatives and to address
our short- and long-term liquidity and capital needs, we intend to secure an
equity or equity-linked investment in the Company of at least $100 million
during the second quarter of 2000 (the "Equity Transaction").
Our statements in this annual report relating to matters that are not historical
facts are forward-looking statements based on our management's belief and
assumptions based upon currently available information. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
we are unable to provide assurances that our expectations will prove to be
correct. Forward-looking 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 our development and
construction activities, risks associated with acquisitions, competition,
governmental regulation and other uncertainties outlined in our reports filed
with the Securities and Exchange Commission. Should one or more of these risks
materialize (or the consequences of one or more of these risks worsen) or should
our underlying assumptions prove incorrect, our actual results of operation and
our financial position in the future could differ materially from those
forecasted or expected. We do not assume any duty to publicly update these
forward-looking statements.
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NEW CORPORATE BRAND NAME
In May of 1999, we changed the name of the corporation to Alterra Healthcare
Corporation. In doing so we have created a corporate brand name, Alterra, to
provide better consumer recognition of our products and service offerings. Our
residences operate under several brand names, including Clare Bridge, and Clare
Bridge Cottage, the brand names of our primary free-standing, dementia care
models, Wynwood, the brand name of our upper income, frail elderly model,
Sterling House, the brand name of our moderately priced frail elderly model, and
Alterra Villas, the brand name of our independent living model. Through the
Alterra brand name, we intend to create a strong, corporate level brand identity
across all of our residence model and service level offerings. We believe that
corporate level branding will leverage our national scale and will focus
potential residents and referral sources on the range of services we offer
rather than those offered by a single residence model. In addition, we believe
that corporate level branding will provide an opportunity to reduce future
marketing expenditures by eliminating duplication inherent in marketing each
product line and residence model separately.
ASSISTED LIVING SERVICES
We offer a full range of assisted living services based upon individual resident
needs. Prior to admission, residents are assessed by our staff to determine the
appropriate level of personal care and services required. Subsequently,
individual service agreements are developed by residence staff in conjunction
with the residents, their families and their physicians. These plans are
periodically reviewed, typically at six month intervals, or when a change in
medical or cognitive status occurs.
FRAIL-ELDERLY SERVICES. We offer residents 24-hour assistance with activities of
daily living ("ADLs"), ongoing health assessments, organized social activities,
three meals a day plus snacks, housekeeping and personal laundry services. All
residents are assessed at admission to determine the level of personal care and
service required and placed in a care level ranging from basic care to different
levels of advanced personal care. In addition, in some locations we offer our
residents exercise programs and programs designed to address issues associated
with early stages of Alzheimer's and other forms of dementia as more fully
described below.
Basic Care. At this level, residents are provided with a variety of
services, including 24 hour assistance with ADLs, ongoing health
assessments, three meals per day and snacks, coordination of special
diets planned by a registered dietitian, assistance with coordination
of physician care, social and recreational activities, housekeeping and
personal laundry services.
Additional Care. We also offer higher levels of personal care services
to residents who require more frequent or intensive physical assistance
or increased personal care and supervision due to cognitive
impairments. We refer to this care as "YourCare." Pricing for YourCare
is determined using a proprietary assessment tool which determines
additional services provided above basic care. Charges are based on
market rates and the cost of additional personal care required,
typically staffing. Rates charged for these services are added to the
rate charged for basic personal care, and depends upon the level and
frequency of personal care required and staffing needs. Residents
requiring the highest personal care level are typically very physically
frail or experiencing early stages of Alzheimer's disease or other
dementia. Physically frail residents may require medication management,
assistance with various ADLs, two-person transfer from a wheelchair or
incontinence care. Residents with cognitive impairment may require
frequent staff interaction and intervention due to confusion.
RISE (Restoring Independence, Strength and Energy). Some Wynwood
residences also offer RISE, a one-on-one exercise program designed to
help residents regain their independence and become healthier, and
stronger by improving flexibility, balance, strength and endurance. The
program is targeted to residents with health concerns related to
Parkinson's disease, strokes, osteoarthritis, osteoporosis, congestive
heart disease, hip fractures and other limitations in ambulation and
mobility. Monthly rates for the program range from $90 to $400
depending on the frequency and duration of sessions.
ESP (Extended Support Program). ESP, also offered at some Wynwood
residences, is a program designed to provide additional structure and
personal attention to residents with early stages of dementia.
Scheduled group recreational activities and social events help
residents build self-esteem and decrease anxiety related to confusion
and disorientation. The ESP program has been successful in retaining
residents who, due to their dementia, might otherwise need to relocate
to a more supportive environment. The monthly program rates range from
$325 to $450.
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Personal care and supportive services are offered in different residence models
which incorporate our philosophy of preserving resident's privacy, encouraging
choice and fostering independence in a home-like setting.
- - Wynwood. These multi-story residences are designed to serve primarily upper
income frail elderly individuals in metropolitan and suburban markets. The
Wynwood residences typically range in size from 37,500 to 45,000 square
feet and accommodate 60 to 78 residents. To achieve a more residential
environment in these large buildings, each wing or "neighborhood" in the
residence contains design elements scaled to a single-family home and
includes a living room, dining room, patio or enclosed porch, laundry room
and personal care area, as well as a care giver work station. We
customarily charge monthly rates per resident ranging from $1,800 to $2,700
for a shared room and from $2,500 to $3,100 for a private room. The average
rate in Wynwood residences during the fourth quarter of 1999 was
approximately $2,200.
- - Sterling House. These apartment-style residences are generally located in
select suburban communities and in small or medium sized towns with
populations of 10,000 or more persons. These residences range in size from
20,000 to 30,000 square feet and usually contain from 33 to 50 private
apartments, offering residents a choice of studio, one-bedroom and
one-bedroom deluxe apartments. These apartments typically include a bedroom
area, private bath, living area, individual temperature control and
kitchenettes and range in size from 320 to 420 square feet. Common space is
dispersed throughout the building and is residentially scaled. We
customarily charge monthly rates per resident from $1,300 to $2,800
depending on the apartment type, level of services required, resident
acuity and the geographic location of the residence. The average rate in
Sterling House residences during the fourth quarter of 1999 was
approximately $2,100.
- - Villas. These private apartment-style residences are designed to serve
upper income independent individuals in metropolitan and suburban markets.
The Villas residences typically range in size from 45,000 to 65,000 square
feet and contain 63 to 218 private apartments. These apartments typically
include a bedroom area, private bath, living/dining area, and kitchenettes
and range in size from 280 to 700 square feet. We offer a secure building
with comfortable common areas and pleasant outdoor surroundings. We
customarily charge monthly rates per resident ranging from $1,125 to $2,750
depending on the apartment type, level of services required, and geographic
location of the residence. The average rate in Villas residences during the
fourth quarter of 1999 was approximately $1,500.
ALZHEIMER'S DEMENTIA SERVICES. We believe we are one of the leading providers of
care to residents with cognitive impairments, including Alzheimer's and other
dementias, in our free-standing Clare Bridge and Clare Bridge Cottage
residences. Our programs provide the attention, personal care and services
needed to help cognitively impaired residents maintain a higher quality of life.
Specialized services include assistance with ADLs, behavior management and an
activities program, the goal of which is to provide a normalized environment
that supports resident's remaining functional abilities. Whenever possible,
residents participate in all facets of daily life at the residence, such as
assisting with meals, laundry and housekeeping.
Our specially designed, free-standing dementia residence models serve the
programmatic needs of individuals with Alzheimer's disease and other dementias.
Our dementia model residents typically require higher levels of personal care
and services as a result of their progressive decline in cognitive abilities,
including impaired memory, thinking and behavior. These residents require
increased supervision because they are typically highly confused, wander prone
and incontinent.
- - Clare Bridge. Our Clare Bridge dementia residence model ranges in size from
20,500 to 28,000 square feet, is a single-story residence accommodating 38
to 52 residents and is primarily located in metropolitan and suburban
markets. We seek to create a "home-like" setting that addresses the
resident's cognitive limitations using internal neighborhoods consisting of
rooms which are scaled to the size typically found in an upper-income,
single family home with the same level of furniture, fixtures and
carpeting. Key features specific to the needs of Clare Bridge residents
generally include indoor wandering paths, a simulated "town-square" area,
secure outdoor spaces with raised gardening beds, directional aids to
assist in "wayfinding" such as signs, color-coded neighborhoods and memory
boxes with the resident's photograph outside of their unit, and
specifically designed furniture suitable for incontinent residents. We
generally charge monthly rates per resident ranging from $2,800 for a
shared room to $4,000 for a private room in our Clare Bridge residences.
The average rate in Clare Bridge residences during the fourth quarter of
1999 was approximately $3,100.
- - Clare Bridge Cottage. During 1998 we introduced dementia residence models
focused on smaller to medium sized markets where income levels would not
support a more upscale Clare Bridge model. These residences range from 20
to 40 residents and offer services similar to the Clare Bridge. These
buildings resemble the Sterling House architectural styles with
enhancements for wandering paths, security and other features associated
with Clare Bridge. We customarily charge monthly rates between $2,600 and
$3,500 for services provided in the Clare Bridge Cottage. The average rate
in Clare Bridge Cottage residences during the fourth quarter of 1999 was
approximately $2,700.
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ACCESS TO SPECIALIZED MEDICAL SERVICES. In addition to our care and supportive
services we assist our residents with the coordination of access to medical
services from third parties, including home health care, rehabilitation therapy,
pharmacy services and hospice care. These providers are often reimbursed
directly by the resident or a third party payor, such as Medicare. In the
future, we may elect to provide these services directly using our own employees
or through contracts or joint venture agreements with other providers.
Commencing in early 1999, Crystal Health LLC, a joint venture formed by us and
Omnicare, Inc., a national institutional pharmacy company, commenced providing
pharmaceutical care services and medications to our residents and other elderly
customers.
JOINT VENTURES AND STRATEGIC ALLIANCES
Historically we have formed strategic alliances and joint ventures with
established real estate development and financial partners. These alliances and
joint ventures enabled us to develop and construct additional residences while
reducing the investment of, and associated risk to, us. Although we intend to
reduce our utilization and reliance upon joint venture and other off-balance
sheet ownership structures in the future, we operated or managed approximately
87 residences utilizing these types of arrangements as of December 31, 1999.
Joint Venture with Pioneer Development Company. In 1996, we established a joint
venture relationship (the "ALS-Northeast J.V.") with Pioneer Development
Company, a Syracuse, New York-based commercial real estate development and
construction company ("Pioneer"), to develop, own and operate assisted living
residences in targeted market areas throughout New York, Massachusetts,
Connecticut and Rhode Island (the "ALS-Northeast Territory"). We agreed with
Pioneer to capitalize and form separate project entities during a five-year
development term commencing in September 1996 to develop, construct, open and
operate residences in the ALS-Northeast Territory, with the Company and Pioneer
owning and funding either a 51% and 49% equity interest, a 65% and 35% equity
interest, or an 80% and 20% equity interest, respectively, in these project
entities. Under some circumstances, the development term for one or more states
in the ALS-Northwest Territory will be extended or shortened from the original
five-year term. During the development term, the Company and Pioneer have agreed
not to independently engage in other competitive activities in the ALS-Northeast
Territory, subject to limited exceptions. Pioneer will provide development and
construction management services to the ALS-Northeast J.V. and we will manage
the ALS-Northeast residences, all pursuant to agreed upon arrangements. Any
losses from the operation of residences jointly owned or leased by Alterra and
Pioneer are allocated on a basis consistent with the economic risk assumed by
each of the partners, which results in losses being disproportionately allocated
to Pioneer to the extent of its capital.
With respect to each ALS Northeast Territory residence, upon the first to occur
of (i) a residence achieving a 75% occupancy or (ii) the six-month anniversary
of the opening of a residence, Pioneer shall have the right to require us to
purchase Pioneer's interest in the residence (put option) and we shall have an
option to acquire (call option) Pioneer's interest in a ALS-Northeast residence.
The purchase price payable upon exercise of the put and call options are based
on the appraised fair market value of the residence or leasehold interest and
shall be payable in cash and/or shares of our Common Stock. At December 31,
1999, 12 of our residences were held in joint ventures with Pioneer.
Synthetic Lease Joint Venture Arrangements. In December 1998, we agreed to
purchase 28 assisted living residences from Manor Care and its affiliates, 26 of
which we acquired by obtaining approximately $190 million of financing through a
synthetic lease arrangement structured by Key Global Finance, an affiliate of
Key Bank National Association. The synthetic lease is a financing arrangement
that is similar to the sale/leaseback financing that has been offered to the
assisted living industry by various healthcare real estate investment trusts
(REITs), but under which the lessee party is treated as the fee owner of the
subject property for tax purposes and is entitled to acquire the leased property
for a predetermined price at the conclusion of the synthetic lease term.
Pursuant to this synthetic lease arrangement, an affiliate of Key Bank, Pita
General Corporation (the "Synthetic Lessor"), purchased the fee interest in the
26 residences from Manor Care and its affiliates (20 of the residences were
acquired by the Synthetic Lessor as of July 20, 1999 and the other six
residences were acquired as of September 30, 1999) utilizing mortgage loan
financing provided by Greenwich Capital Financial Products, Inc. ("Greenwich").
Greenwich's loan to the Synthetic Lessor is secured by, among other collateral,
mortgages on the 26 residences as well as by a surety bond provided by the
Centre group of companies, a member of the Zurich Financial Services Group. The
Greenwich loan is also secured by our guaranty as well as by our pledge of our
general partner interest in each of the "Synthetic Lease JVs" described below.
Simultaneously with its acquisition of the 26 residences, (i) the Synthetic
Lessor leased all 26 residences to AHC Tenant, Inc., one of our wholly-owned
subsidiaries ("AHC Tenant"), and (ii) AHC Tenant subleased the residences to the
26 Synthetic Lease JVs. Accordingly, each Synthetic Lease JV is operating its
respective residence pursuant to the terms of a sublease.
Each of the 26 "Synthetic Lease JVs" is a Delaware limited partnership having us
as the 1% general partner and TPI-HCR, LLC, a Delaware limited liability company
("TPI-HCR"), as the 99% limited partner.
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From June 30, 1999 through September 30, 1999, TPI-HCR contributed a total of
$15,750,000 of equity to the 26 Synthetic Lease JVs (with us also contributing
equity commensurate with our 1% interest therein). Then, in October 1999,
TPI/MFG Investors L.P., a Delaware limited partnership ("TPI/MFG"), was
organized to acquire a limited partner interest in TPI-HCR for an equity
contribution of $5,000,000, which amount was in turn contributed by TPI-HCR to
the capital of the Synthetic Lease JVs. We are the 1% general partner of
TPI/MFG and we also hold a 33.6% interest as a limited partner, having
contributed total equity to TPI/MFG in the amount of $1,728,723. The remaining
$3,271,277 of TPI/MFG's capital was contributed by a number of third-party
investors in exchange for limited partner interests aggregating 65.426%.
All profit and gain allocations and distributions of each of the Synthetic Lease
JVs, TPI-HCR, and TPI/MFG are made in proportion to the members' contributed
capital (subject to a preference totaling $942,123 to be paid to members of
TPI-HCR other than TPI/MFG to provide them with a negotiated return on, but not
a return of, their contributed capital through the date of TPI/MFG's investment
in October 1999). We have been retained by each Synthetic Lease JV to manage the
operations of its respective residence for a management fee and have also
received fees for certain other services rendered in connection with the
synthetic lease joint venture.
TPI-HCR has a currently exercisable "put option" to sell to us its interest in
any or all of the Synthetic Lease JVs. The purchase price payable by us pursuant
to the "put option" would be equal to the amount that TPI-HCR would receive if
the particular Synthetic Lease JV were to sell its respective residence at fair
market value (as determined pursuant to one or more appraisals), allocate any
resulting gain or loss as provided in the applicable partnership agreement,
satisfy all creditors, and then distribute any remaining proceeds to the JV
partners in liquidation of the Synthetic Lease JV in accordance with the
partnership agreement. Further, we have a currently exercisable "call option" to
purchase from TPI-HCR its interest in any or all of the Synthetic Lease JVs at a
purchase price equal to an amount computed to return to TPI-HCR its paid-in
capital contributions plus provide a negotiated return thereon. However, each
Synthetic Lease JV partnership agreement provides that a book account is to be
maintained to track the excess, if any, of any call option price paid with
respect to any Synthetic Lease JV over the price that would have been paid
pursuant to an exercise of the put option with respect to the Synthetic Lease
JV, with us ultimately being required also to pay such excess to TPI-HCR to the
extent (if any) that TPI-HCR does not receive the negotiated return on its
aggregate capital contributions to all the Synthetic Lease JVs.
The third-party limited partner investors in TPI/MFG, upon the election of a
majority (by percentage ownership) thereof, have the right to sell to us
all (but not less than all) of their interests in TPI/MFG. This "put option"
generally will be exercisable by the investors commencing in May 2000. The
purchase price payable by us pursuant to the put option would be equal to the
amount that the limited partner investors would receive if TPI/MFG were to sell
its membership interest in TPI-HCR at fair market value (as determined pursuant
to one or more appraisals), allocate any resulting gain or loss as provided in
the TPI/MFG partnership agreement, satisfy all creditors, and then distribute
any remaining proceeds to the TPI/MFG partners in liquidation of TPI/MFG in
accordance with its partnership agreement. Further, we have a call option to
purchase all (but not less than all) of the limited partner investors' interests
in TPI/MFG generally at any time at a purchase price equal to an amount computed
to return to the limited partner investors their paid-in capital contributions
plus provide a negotiated return thereon.
Franchise Arrangement with Eby Holdings. We have a franchise relationship with
Eby Holdings Inc. ("Eby"). Under the terms of this agreement, Eby receives the
right to build and operate residences using our branding, designs and operating
systems in designated geographic areas. Currently, Eby operates 21 residences in
the states of Iowa and Nebraska under the Sterling House brand. In consideration
for a franchise relationship, we receive fees payable at the opening of the
franchised residence. In addition, we receive fees equal to 3% of resident
service revenue generated by the franchised residences. We have options to
purchase franchised residences based on fixed valuation criteria or actual
prices per unit and right of first refusal.
Development Arrangement with Investor Group. In December 1998 and March 1999, we
entered into a series of transactions with a group of investors (the "Investor")
pursuant to which we agreed to develop for the Investor 16 assisted
living/dementia care residences in our construction or development pipeline. The
Investor acquired our development rights in these 16 projects for approximately
$21 million. We have agreed to complete construction of these residences on the
Investor's behalf, and will be reimbursed by the Investor for costs incurred
related to this construction (estimated to be approximately $56.0 million). We
also agreed to provide a $10 million supplemental financing loan to the Investor
to permit them to satisfy a portion of obligations not financed through third
party mortgages for these residences. The supplemental financing loan matures on
the date of maturity of the third party mortgages. In addition, we have agreed
to loan the Investor up to $1.6
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million for working capital purposes and to guarantee, subject to limitations,
the Investor's third party mortgage financing of the residences.
Alterra and the Investor also entered into a (i) development agreement
pursuant to which we are providing the development and management services
necessary to develop and construct the residences for a fee, and (ii) management
agreement pursuant to which we will manage the completed residences on terms
generally consistent with our other management agreements. We have a right of
first offer with respect to any proposed sale of these residences by the
Investor.
Joint Venture with Manor Care, Inc. On December 31, 1998, Alterra and Manor
Care, Inc., f/k/a HCR Manor Care, Inc. ("Manor Care") agreed to establish and
capitalize a joint venture to develop up to $500 million of Alterra-branded
Alzheimer's/dementia care and assisted living residences in Manor Care's core
markets over a three to five year period. Specifically, each of Alterra and
Manor Care agreed to transfer (at capitalized cost) development projects to this
venture from their respective development pipelines, forming separate joint
venture project entities to acquire, develop, own and operate each such project.
It was intended that majority equity ownership interests in these joint venture
project entities be funded and held by third-party investors.
On June 30, 1999, 14 Manor Care residences were placed into a joint venture
structure pursuant to the joint venture agreement with Manor Care. Those
residences were each transferred by Manor Care (or a subsidiary thereof) to a
separate Delaware limited partnership having HCR/Alterra Development LLC ("DevCo
I") (an entity owned 50% by us and 50% by Manor Care) as the 10% general
partner and a number of third-party investors as the 90% (in the aggregate)
limited partners. The total equity contributed to these "DevCo I JVs" by the
limited partners (excluding the 10% equity contribution by DevCo I as general
partner) has been $15.2 million.
The cash needs of each DevCo I JV were originally met by a combination of equity
contributions from DevCo I JV members and bridge loans from Manor Care, with
such bridge loans to be repaid upon the DevCo I JVs obtaining bank financing for
the residence. In addition to funding the purchase of the applicable residence
from Manor Care, each DevCo I JV has utilized such proceeds to complete
construction of the applicable residence and to fund startup losses during the
lease-up of such residence.
All profit and gain allocations and distributions of the DevCo I JVs are made in
proportion to the members' contributed capital (i.e., 90% to the limited partner
investors; 10% to DevCo I as general partner). Losses are allocated to the
members in proportion to contributed capital, with any losses in excess of
contributed capital to be allocated to DevCo I. We have been retained by
thirteen of the DevCo I JVs to manage the operations of its respective residence
for a management fee. Alterra and Manor Care have also received fees for certain
other services rendered in connection with the DevCo I joint venture.
Thirteen of the DevCo I JVs obtained construction/mini-perm mortgage financing
from a syndicate of banks assembled by Bank of America, which financing is
providing for approximately 75%-80% of the DevCo I JVs' projected capital needs.
Each of Manor Care and Alterra have guaranteed repayment of the Bank of America
facility, and Manor Care will receive for its guaranty an initial debt guaranty
fee equal to 1 1/4% and an ongoing debt guaranty fee equal to 1/2% per annum
(for the initial 18 months of the joint venture). Manor Care is also entitled to
a fee of $40,000 per residence related to the closing of the secured financing
for each residence.
The limited partner investors in each DevCo I JV, upon the election of a
majority (by percentage ownership) thereof, have the right to sell to us all
(but not less than all) of their interests in that or any or all other DevCo I
JVs. This put option generally is exercisable by the limited partners anytime
after one year from the date that the residence owned by the applicable DevCo I
JV first opens for business (the "Opening Date"). Upon any exercise of the put
option, DevCo I shall be obligated to sell to us all of its interest in that
particular DevCo I JV on the same terms as the sale of the limited partners'
interests. The purchase price payable by us pursuant to the put option would be
equal to the amount that the limited partners would receive if the DevCo I JV
were to sell its respective residence at fair market value (as determined
pursuant to one or more appraisals), allocate any resulting gain or loss as
provided in the applicable partnership agreement, satisfy all creditors, and
then distribute any remaining proceeds to the JV members in liquidation of the
DevCo I JV in accordance with the partnership agreement. Further, we have a
"call option" to purchase all (but not less than all) of the limited partners'
interests DevCo I JVs generally anytime after the applicable Opening Date at a
purchase price equal to an amount computed to return to the limited partners
their paid-in capital contributions plus provide a negotiated return in that
particular DevCo I JV thereon. Upon any exercise of the call option, we are
obligated to purchase all of DevCo I's interest on the same terms as the
purchase of the limited partners' Interests.
On September 30, 1999, an additional 29 residences were placed into a joint
venture structure pursuant to the joint venture
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agreement with Manor Care. Manor Care transferred 6 of the residences and we
transferred 16 properties constituting 23 residences (i.e., 7 of our properties
are "campus" properties having 2 residences each) to 22 separate Delaware
limited liability companies having HCR/Alterra Development II, LLC ("DevCo II")
as the 10% managing member and an unrelated investor as a 90% member (the "DevCo
II Investor"). The DevCo II Investor does not have any economic interest in any
of the 14 DevCo I JVs. The total equity contributed to these 22 "DevCo II JVs"
by the DevCo II Investor (excluding the 10% equity contribution by DevCo II) has
been $8.0 million.
The cash needs of each DevCo II JV have been met by a combination of the equity
contributions from the DevCo II Investor and DevCo II and from bridge loans made
by the party (as between Alterra and Manor Care) who transferred the particular
residence to such DevCo II JV, with such bridge loans to be repaid upon the
DevCo II JV's obtaining bank financing for the residence. In addition to funding
the purchase of the applicable residence from us or Manor Care, as the case may
be, each DevCo II JV has utilized such proceeds to develop and construct the
applicable residence and/or to fund startup losses during the lease-up of such
residence.
All profit and gain allocations and distributions of the DevCo II JVs are made
in proportion to the members' contributed capital (i.e., 90% to the DevCo II
Investor; 10% to DevCo II). Losses are allocated to the members in proportion to
contributed capital, with any losses in excess of contributed capital to be
allocated to DevCo II. We have been retained by each DevCo II JV to manage the
operations of its respective residence for a management fee. We and Manor Care
have also received fees for certain other services rendered in connection with
the DevCo II joint venture.
We have a "call option", currently exercisable through April 30, 2000, to
purchase the DevCo II Investor's interests in all (but not less than all) of the
DevCo II JVs at a purchase price equal to an amount computed to return to the
DevCo II Investor its paid in capital contributions plus provide a negotiated
return. Upon any exercise of that call option, we may also purchase DevCo II's
interests in any or all of the DevCo II JVs at a purchase price equal to the
amount of DevCo II's capital contributions (i.e., $888,888, if DevCo II's
interests in all of the DevCo II JVs were to be purchased). Upon any exercise of
these call options, we may elect to require Manor Care to acquire directly from
the DevCo II Investor and DevCo II their respective interest in those six DevCo
II JVs owning residences that were acquired from Manor Care or its affiliates.
In the event of such an election, the total call option price payable
(calculated as of March 31, 2000) to the Devco II Investor by Manor Care with
respect to those six Devco II JVs would be approximately $3.0 million, with our
purchase price for the remaining 16 Devco II JVs (again, which own 23
residences) being approximately $8.0 million. In the event that we do not
exercise the call option with respect to the DevCo II Investor's interests by
the April 30, 2000 expiration date, the DevCo II Investor thereafter will have a
"fair market value" put option to us similar to that described above with
respect to the DevCo I JV limited partner investors and, if such put option is
not exercised, will also have the right to remove us as managing member and as
the day-to-day operational manager of each DevCo II JV and also may cause the
DevCo II JVs to sell their respective residences at the DevCo II Investor's
discretion.
DevCo II has not been able to obtain third-party mortgage financing to refinance
the DevCo II JV bridge loans from us and from Manor Care and to otherwise fund
the development, construction, and startup expenditures for the DevCo II JV
residences. As a result, we currently anticipate and are exploring the
disposition by sale of the DevCo II JV residences to one or more third parties.
In the course of our effort to dispose of these residences, we may elect to buy
out the DevCo II Investor by exercising the call option for its interests in
these entities.
Other Joint Venture Structures. We are a party to various other joint venture
arrangements pursuant to which we and other third party partners are jointly
developing, constructing and operating Alterra-branded assisted living
residences. Generally, the Company and our joint venture partner form and
capitalize a limited partnership or a limited liability company that either
acquires a fee interest or a leasehold interest in an assisted living residence
under development by us. Our percentage equity interests in these joint venture
entities varies from joint venture to joint venture, ranging from 1% minority
interests up to 80% majority interests. These joint venture entities typically
retain us as manager pursuant to a market rate management agreement. Pursuant to
the operative agreements, we have the right to acquire (call option) the joint
venture partner's equity interest in the joint venture entity at a price based
upon an agreed upon return on investment or fair market value to the joint
venture partner. Similarly, after a specified waiting period, the joint venture
partner has the right to require us to purchase (put option) the partner's
equity interest in the joint venture entity at a price based upon the appraised
fair market value of the residence operated by the joint venture entity. Any
losses from the operation of residences owned or leased by these joint venture
structures are generally allocated on a basis consistent with the respective
partner's interest in overall cash distributions and the economic substance of
the joint venture arrangement, which may result in losses being
disproportionately allocated to the joint venture partners to the extent of
their invested capital.
GOVERNMENT REGULATION
Healthcare is an area of extensive and frequent regulatory change. The assisted
living industry is relatively new and, accordingly, the manner and extent to
which it is regulated at the Federal and state levels is evolving.
Our assisted living residences are subject to regulation and licensing by state
and local health and social service agencies and other regulatory authorities.
In some states in which we operate, the term "assisted living" may have a
statutory definition limited to a particular type of program or population. Some
of our assisted living residences may fall into other licensing categories or
may not require licensing in states with specific "assisted living" programs,
although these residences may offer services requiring licensure (e.g., licensed
home care services). Although regulatory requirements vary from state to state,
these requirements generally address, among other things: personnel education,
training and records; staffing levels; facility services, including
administration and assistance with self-administration of medication, and
limited nursing services; physical residence specification; furnishing of
residence units; food and housekeeping services; emergency evacuation plans; and
residence rights and responsibilities. New Jersey, Kentucky and Illinois also
require each assisted living residence to obtain a
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Certificate of Need ("CON") prior to its opening. Our residences are also
subject to various state or local building codes and other ordinances, including
safety codes. We anticipate that the states which are establishing regulatory
frameworks for assisted living residences will require licensing of assisted
living residences and will establish varying requirements with respect to this
licensing.
We have obtained all required licenses for each of our residences and expect
that we will obtain all required licenses for each new residence. Each of our
licenses must be renewed annually or biannually. We have also obtained a CON for
each residence under construction or development in New Jersey and Kentucky.
There is no construction or development currently in Illinois.
Like other health care facilities, assisted living residences are subject to
periodic survey or inspection by governmental authorities. From time to time in
the ordinary course of business, we receive deficiency reports. We review these
reports and seek to take appropriate corrective action. Although most inspection
deficiencies are resolved through a plan of correction, the reviewing agency
typically is authorized to take action against a licensed facility where
deficiencies are noted in the inspection process. Action may include imposition
of fines, imposition of a provisional or conditional license or suspension or
revocation of a license or other sanctions. Any failure by us to comply with
applicable requirements could have a material adverse effect on our business,
financial condition and results of operations. We believe that our residences
are in substantial compliance with all applicable regulatory requirements.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern some financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
providers. These laws prohibit, among other things, direct and indirect payments
that are intended to induce the referral of patients to, the arranging for
services by, or, the recommending of, a particular provider of health care items
or services. The Medicare/Medicaid anti-kickback law has been broadly
interpreted to apply to contractual relationships between health care providers
and sources of patient referral. State anti-remuneration laws vary from state to
state. Violation of these laws can result in loss of licensure, civil and
criminal penalties, and exclusion of health care providers or suppliers from
participation in (i.e., furnishing covered items or services to beneficiaries)
the Medicare and Medicaid programs. Although we receive only a minor portion of
our total revenues from Medicaid waiver programs and are otherwise not a
Medicare or Medicaid provider or supplier, we are subject to these laws because
(i) applicable state laws typically apply regardless of whether Medicare or
Medicaid payments are at issue and (ii) some of our assisted living residences
maintain contracts with health care providers and practitioners, including
pharmacies, home health organizations and hospices, through which the health
care providers make their health care products or services (some of which may be
covered by Medicare or Medicaid) available to our residents. There can be no
assurance that these laws will be interpreted in a manner consistent with our
practices.
In order to comply with the terms of the revenue bonds used to finance nine of
our residences, we are required to lease a minimum of 20% of the apartments in
each of the nine residences to low or moderate income persons as defined
pursuant to the Internal Revenue Code of 1986, as amended.
We are subject to the Fair Labor Standards Act, which governs matters including
minimum wage, overtime and other working conditions. A portion of our personnel
is paid at rates related to the federal minimum wage and accordingly, increases
in the minimum wage will result in an increase in our labor costs.
The sale of franchises is regulated by the Federal Trade Commission and by state
agencies located in jurisdictions other than those states where we currently
operate. Principally, these regulations require that written disclosures be made
prior to the offer for sale of a franchise. The disclosure documents are subject
to state review and registration requirements and must be periodically updated,
not less frequently than annually. In addition, some states have relationship
laws which prescribe the basis for terminating a franchisee's rights and
regulate both our and our franchisee's post-termination rights and obligations.
We are not aware of any non-compliance by the Company with applicable regulatory
requirements that would have a material adverse effect on our financial
condition or results of operations.
COMPETITION
The long-term care industry is highly competitive and, given the relatively low
barriers to entry and continuing health care costs containment pressures, we
expect that the assisted living segment of the industry will become increasingly
competitive in the future. We compete with other providers of elderly
residential care on the basis of the breadth and quality of our services, the
quality of our residences and, with respect to private pay patients or
residents, price. We also compete with other providers of long-term care in the
acquisition and development of additional residences. Our current and potential
competitors include national, regional and local operators of long-term care
residences, extended care centers,
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assisted/independent living centers, retirement communities, home health
agencies and similar providers, many of which have significantly greater
financial and other resources than we have. In addition, we compete with a
number of tax-exempt nonprofit organizations which can finance capital
expenditures on a tax-exempt basis or receive charitable contributions
unavailable to us and which are generally exempt from income tax. While our
competitive position varies from market to market, we believe that we compete
favorably in substantially all of the markets in which we operate based on key
competitive factors such as the breadth and quality of services offered,
residence quality, recruitment and retention of qualified health care personnel
and reputation among local referral sources.
TRADEMARKS
Sterling House(R), Crossings(R), WovenHearts(R), Wynwood(R), Clare Bridge(R),
and Clare Bridge Cottage(R) are registered service marks of ours and we claim
service mark protection in the marks Alternative Living Services(SM), Clare
Bridge(SM), Crystal Health Services(SM), and Alterra(SM).
EMPLOYEES
At December 31, 1999, we employed approximately 9,400 full-time employees and
4,400 part-time employees. None of our employees are represented by a collective
bargaining group.
FACTORS AFFECTING FUTURE RESULTS AND REGARDING FORWARD-LOOKING STATEMENTS
Our business, results of operations and financial condition are subject to many
risks, including those set forth below. In addition, the following important
factors, among others, could cause our actual results to differ materially from
those expressed in our forward-looking statements in this report and presented
elsewhere by us from time to time. When used in this report, the words
"believes," "anticipates" and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. We undertake no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrence of
unanticipated events. The following discussion highlights some of these risks
and others are discussed in this Form 10-K herein or in other documents filed by
us with the Securities and Exchange Commission.
RISKS ASSOCIATED WITH SHORTFALL IN LIQUIDITY. We will require a significant
amount of additional capital to complete the construction of residences under
construction and to fund the operating losses associated with newly open
residences until such residences reach stabilized occupancy. In addition, as
noted below, we have substantial debt and operating lease payment obligations.
The combination of a difficult financing and operating environment for
healthcare service companies has significantly reduced our access to additional
capital. A number of our traditional financing sources, including commercial
banks and other secured lenders have substantially reduced their lending
activities to the healthcare sector. In addition, the credit availability under
certain of our credit facilities has either been reduced or eliminated due to a
variety of factors, including our requests for modifications of some of the
financial covenants in certain of our credit agreements. To address our need for
capital, we are in the process of seeking to raise at least $100.0 million of
equity or equity-linked financing and expect to consummate such a transaction
during the second quarter of 2000. While we believe that we will be able to
consummate the Equity Transaction, there can be no assurances that we will do
so. If we are not able to consummate the Equity Transaction in a timely fashion,
we may not have sufficient liquidity to fund our construction and development
activities and to satisfy our debt and lease payment obligations. Because of
cross-default and cross-collateralization provisions in various of our
mortgages, debt instruments and in many of our leases, a default on one of our
payment obligations could result in acceleration of other obligations and could
materially adversely affect the Company. See "Substantial Debt and Operating
Lease Payment Obligations," "Development and Construction Risks" and
"Managment's Discussion and Analysis and Results of Operations -- Liquidity and
Capital Resources."
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS. We had lease expense
of $69.4 million and $44.2 million excluding sublease income for the years ended
December 31, 1999 and 1998, respectively, and our total indebtedness as of
December 31, 1999 was $830.6 million, and our net interest expense was $35.9
million and $11.0 million for the years ended December 31, 1999 and 1998,
respectively. Debt and annual operating lease payment obligations will continue
to increase significantly as we complete our pending construction and
development activities. In addition, development-stage residences may be
financed with construction loans and, therefore, there is a risk that, upon
completion of construction and/or lease up, permanent financing for newly
developed residences may not be available or may be available only on terms that
are unfavorable or unacceptable to us. Approximately $38.9 million of our total
indebtedness matures before December 31, 2000.
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Historically, we have not consistently had sufficient earnings to cover fixed
charges. In 1999, earnings were insufficient to cover fixed charges by $4.1
million prior to the non-recurring charge, other one time adjustments and the
cumulative effect of a change in accounting principle; and insufficient by $13.9
million for 1998. There can be no assurance that we will generate sufficient
cash flow to meet our future obligations. Any payment default or other default
with respect to outstanding obligations could cause the lender to foreclose upon
the residences securing the indebtedness or, in the case of an operating lease,
to terminate the lease, with a consequent loss of income and asset value to us.
Moreover, as noted above, the cross-default and cross-collateralization
provisions in various of our mortgages, debt instruments, and in many of our
leases, could result in acceleration of other obligations and adversely affect a
significant number of our other residences if we default in one of our payment
obligations. See "Need for Additional Financing; Risk of Rising Interest Rates."
OPERATING LOSSES ASSOCIATED WITH NEW RESIDENCES. Newly opened assisted living
residences typically operate at a loss during the first six to 18 months of
operation, primarily due to the incurrence of fixed and variable expenses in
advance of the achievement of targeted rent and service fee revenues from the
lease-up of these residences. As of December 31, 1999, of our 450 residences, 67
newly developed residences opened during 1999 and 27 residences purchased during
1999 were in lease up. In addition, the development and construction of assisted
living residences requires the commitment of substantial capital over a typical
six to 12 month construction period, the consequence of which may be an adverse
impact on our liquidity. As of December 31, 1999, we had 53 residences under
construction and two residences under development. In the case of acquired
residences, resident turnover and increased marketing expenditures which may be
required to reposition these residences, together with the possible disruption
of operations resulting from the implementation of renovations, may adversely
impact the financial performance of these residences for a period of time after
their acquisition. In addition, occupancy levels and the rates which we may be
able to charge for our services may be adversely affected in competitive market
circumstances which would negatively impact the operating results of affected
residences. Accordingly, there can be no assurance that we will not experience
unforeseen expenses, difficulties, complications and delays which could result
in greater than anticipated operating losses or otherwise materially adversely
affect our financial condition and results of operations. See "Development and
Construction Risks" and "--Competition."
ABILITY TO MANAGE EXPANSION AND BUSINESS DIVERSIFICATION. We intend to review
and, in appropriate circumstances, pursue opportunities for development and
expansion of new products and services, such as home health care, rehabilitation
and pharmacy services. Efforts to achieve business diversification, however, are
subject to risks, including our relative unfamiliarity with these businesses,
additional uncertainties related to government regulation and possible
difficulties in integrating new products or businesses.
NEED FOR FINANCING TO COMPLETE CONSTRUCTION AND FUND OPERATING LOSSES. We will
need to obtain sufficient financing to fund our remaining development and
construction activities. As of December 31, 1999, we had 53 residences under
construction and two residences under development. We estimate that we will
incur between $115.0 million and $125.0 million of additional costs to complete
these residences, of which between $65.0 million and $70.0 million relate to
Company owned or leased residences and between $50.0 million and $55.0 million
relate to residences which we are jointly developing with other parties. As
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources," some of our lenders
have required that we complete the Equity Transaction by the end of the second
quarter of 2000. If we do not complete the Equity Transaction by that time, our
lenders may not continue to make advances under our credit arrangements in a
manner that would allow us to finish our pending construction activity. In
addition, there can be no assurance that we will not experience unforeseen
expenses, difficulties, complications and delays which could result in greater
than anticipated operating losses or otherwise materially adversely affect our
financial condition and results of operations. We believe that upon successful
completion of the Equity Transaction the financing available from our existing
credit arrangements and pursuant to other sources of financing that we expect
would then be available to us would be sufficient to fund our remaining
development and acquisition activities.
We will from time to time seek additional funding through public or private
financing, including equity or debt financing. If additional funds are raised by
issuing equity or equity-linked securities, which we expect to do as part of the
Equity Transaction, our stockholders may experience dilution. In addition, we
will require significant financial resources to meet our operating and working
capital needs, including contractual obligations to purchase the equity interest
of joint venture partners in residences owned in joint ventures. See "Joint
Ventures and Related Mandatory Purchase Obligations." There can be no assurance
that any newly constructed residences will achieve a stabilized occupancy rate
and attain a resident mix that meet our expectations or generate sufficient
positive cash flow to cover operating and financing costs associated with these
residences. There can be no assurance that we will be successful in securing
additional financing or that adequate funding will be available and, if
available, will be on terms that are acceptable to us. A lack of funds may
require us to delay or eliminate all or some of our development projects and
acquisition plans. In addition, we may require additional financing to enable us
to respond to
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changing economic conditions, to expand our development program, although no
such expansion is currently under consideration, or to account for changes in
assumptions related to our development program.
Approximately $337.0 million, or 40.6%, of our total indebtedness as of December
31, 1999 was subject to floating interest rates. Although a majority of our debt
and lease payment obligations are not subject to floating interest rates,
indebtedness that we may incur in the future may bear interest at a floating
rate. We expect to restructure $130.8 million of our fixed rate debt in 2000
and, as a result, convert this into variable rate debt. See "Quantitative and
Qualitative Disclosures about Market Risk." In addition, future fixed rate
indebtedness and lease obligations will be based on interest rates prevailing at
the time these arrangements are obtained. Therefore, increases in prevailing
interest rates could increase our interest or lease payment obligations and
could have an adverse effect on our business, financial condition and results of
operations.
DEVELOPMENT AND CONSTRUCTION RISKS. As of December 31, 1999, we had 53
residences under construction and two residences under development. Development
projects generally are subject to various risks, including zoning, permitting,
health care licensing and construction delays, that may result in construction
cost overruns and longer development periods and, accordingly, higher than
anticipated start-up losses. Project management is subject to a number of
contingencies over which we will have little or no control and which might
adversely affect project costs and completion time. These contingencies include
shortages of, or the inability to obtain, labor or materials, the inability of
the general contractor or subcontractors to perform under their contracts,
strikes, adverse weather conditions and changes in applicable laws or
regulations or in the method of applying these laws and regulations. In
addition, we have slowed down this construction until the Equity Transaction is
completed. One of our principal construction lenders has delayed making further
advances on five residences currently in construction. As a result, liens have
been filed on these construction projects resulting in defaults under the
operative construction loan credit agreements. Although we have obtained waivers
through June 30, 2000 of these defaults, payment of these suppliers and
contractors will need to be effected in order to permanently resolve these
defaults. In addition, additional liens or lawsuits may be filed by contractors
and subcontractors unless the credit facility can be restored, which will in
turn result in further defaults under the operative credit agreements. Moreover,
upon resuming construction we may incur increased costs in order to complete
construction. As a result of these various factors, there can be no assurance
that we will not experience construction delays, that we will be successful in
developing and constructing currently planned or additional residences or that
any developed residence will be economically successful. Delays in our planned
development could result in increased costs or litigation costs which could
adversely affect our business, operating results and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS. We have acquired residences in the past, and
in 1999 completed a major transaction involving 28 residences from Manor Care,
Inc. Although we currently have no plans to do so, we may seek additional
acquisition opportunities in the future. However, no assurances can be given
that we will be successful in identifying any future acquisition opportunities
or completing any identified acquisitions. The acquisition of residences
involves a number of risks. Existing residences available for acquisition
frequently serve or target different market segments than those we presently
serve. It may be necessary in some cases to reposition and renovate acquired
residences or turn over the existing resident population to achieve a resident
acuity and income profile which is consistent with our current operations. In
addition, we may also determine that staff and operating management personnel
changes are necessary to successfully integrate these residences into our
existing operations. There can be no assurance that we will be successful in
repositioning any acquired residences or in effecting any necessary operational
or structural changes and improvements on a timely basis. Any failure by us to
make necessary operational or structural changes or to successfully reposition
acquired residences may adversely impact our business, operating results and
financial condition. In undertaking acquisitions of residences, we also may be
adversely impacted by unforeseen liabilities attributable to the prior operators
of these residences, against whom we may have little or no recourse.
JOINT VENTURES AND RELATED MANDATORY PURCHASE OBLIGATIONS. We have entered into
several joint ventures with regional real estate development partners and others
for the construction, development and ownership of assisted living residences in
targeted geographic areas. As of December 31, 1999, 97 of our operating
residences were jointly owned, directly or indirectly, with venture partners. Of
the 55 residences which were either under construction or development by us as
of December 31, 1999, a portion of these residences is being or will be
constructed or developed under joint venture agreements. We have agreed not to
own or operate competing assisted living residences during specified contractual
periods within specified geographic areas adjacent to residences developed
through several of our joint ventures. While we typically receive a fee for
managing residences developed through joint ventures, we share with our joint
venture partners any profits or losses realized from the operation or sale of
these residences. We are obligated under our joint venture arrangements to
purchase the equity interests of our joint venture partners upon the election of
the joint venture partners at a price based on the appraised value of the
residence owned by the applicable joint venture. These purchase rights generally
become exercisable during the period of six months to two years following the
opening of the residence owned by these joint ventures. As a result of these
provisions, we might become obligated to acquire additional interests in
residences developed through joint ventures on terms
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or at times that would otherwise not be acceptable to us, including times during
which we may not have adequate liquidity to fund acquisitions.
RESIDENCE MANAGEMENT, STAFFING AND LABOR COSTS. We compete with other providers
of assisted living services and long-term care with respect to attracting and
retaining personnel. We are dependent upon our ability to attract and retain
management personnel responsible for the day-to-day operations of each of our
residences. Any inability of ours to attract or retain qualified residence
management personnel could have a material adverse effect on our financial
condition or results of operations. In addition, a possible shortage of nurses
or trained personnel may require us to enhance our wage and benefits package in
order to compete in the hiring and retention of personnel. We are also dependent
upon the available labor pool of semi-skilled and unskilled employees in each of
the markets in which we operate. There can be no assurance that our labor costs
will not increase, or that, if they do increase, they can be matched by
corresponding increases in rates charged to residents. Any significant failure
by us to attract and retain qualified management and staff personnel, to control
our labor costs or to pass on any increased labor costs to residents through
rate increases would have a material adverse effect on our business, operating
results and financial condition.
COMPETITION. The long-term care industry is highly competitive and, given the
relatively low barriers to entry and continuing health care cost containment
pressures, we expect that the assisted living segment will become increasingly
competitive in the future. We compete with other companies providing assisted
living services as well as numerous other companies providing similar service
and care alternatives, such as home health care agencies, congregate care
facilities, retirement communities and skilled nursing facilities. While we
believe there is a need for additional assisted living residences in the markets
where we are constructing and developing residences, we expect that, as assisted
living residences receive increased market awareness and the number of states
which include assisted living services in their Medicaid programs increases,
competition will increase from new market entrants, many of whom may have
substantially greater financial resources than we have. There can be no
assurance that increased competition will not adversely affect our ability to
attract or retain residents or maintain our existing rate structures. Some of
our present and potential competitors have, or may have access to, greater
financial resources than those available to us. Consequently, there can be no
assurance that we will not encounter increased competition in the future which
could limit our ability to attract and retain residents, to maintain or increase
resident service fees or to expand our business and could have a material
adverse effect on our business, operating results and financial condition. We
are not able to accurately predict the effect that the health care industry
trend towards managed care will have on the assisted living marketplace. Managed
care, an arrangement whereby service and care providers agree to sell
specifically defined services to one or more public or private payors
(frequently not the end user or resident) subject to a predefined system in an
effort to achieve more efficiency with respect to utilization and cost, is not
currently a significant factor in the assisted living marketplace. However,
managed care plans sponsored by insurance companies or HMOs may in the future be
a factor in the assisted living marketplace. There can be no assurance that we
will not encounter increased competition or be subject to other competitive
pressures that could affect our business, operating results or financial
condition as a result of managed care.
GOVERNMENT REGULATION. Health care is an area of extensive and frequent
regulatory change. The assisted living industry is relatively new, and,
accordingly, the manner and extent to which it is regulated at the Federal and
state levels is evolving. Changes in the laws or new interpretations of existing
laws may have a significant impact on our methods and costs of doing business.
We are, and will continue to be, subject to varying degrees of regulation and
licensing by health or social service agencies and other regulatory authorities
in the various states and localities where we operate or intend to operate. We
and our activities are subject to zoning, health and other state and local
government laws and regulations. Zoning variances or use permits are often
required for construction. Severely restrictive regulations could impair our
ability to open additional residences at desired locations or could result in
costly delays. Several of our residences have been financed by revenue bonds. In
order to continue to qualify for favorable tax treatment of the interest payable
on these bonds, the financed residences must comply with federal income tax
requirements, principally pertaining to the maximum income level of a specified
portion of the residents. Failure to satisfy these requirements constitutes an
event of default under the bonds, thereby accelerating their maturity. Our
success will depend in part upon our ability to satisfy applicable regulations
and requirements and to procure and maintain required licenses in rapidly
changing regulatory environments. Any failure to satisfy applicable regulations
or to procure or maintain a required license could have a material adverse
effect on our business, operating results and financial condition.
Our operations could also be adversely affected by, among other things,
regulatory developments such as revisions in building code requirements for
assisted living residences, mandatory increases in the scope and quality of care
to be offered to residents and revisions in licensing and certification
standards. There can be no assurance that Federal, state or local laws or
regulations will not be imposed or expanded based on evolving regulatory
interpretations or based on new statutory or regulatory provisions which
adversely impact our business, financial condition, results of operations or
prospects. Our residence operations are also subject to health and other state
and local government regulations.
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We have entered into franchise agreements with third parties pursuant to which
these third parties operate assisted living residences under registered service
marks of ours utilizing systems and procedures prescribed by us. The sale of
franchises is regulated by the Federal Trade Commission and by state agencies.
Principally, these regulations require that written disclosures be made prior to
the sale of a franchise. In addition, some states have relationship laws which
prescribe the basis for terminating a franchisee's rights and regulate both the
franchisor's and our franchisees' post-termination rights and obligations. There
can be no assurance that changes in these regulations will not have an adverse
impact upon our ability to continue our franchising activities.
We intend to review and, in appropriate circumstances, pursue opportunities for
development and expansion into new products and services, among others. These
new products and services may include home health care, rehabilitation and
pharmacy services, among others. The Federal and state regulation of these
additional products and services may be more extensive than that related to our
assisted living operations. We have not in the past engaged in significant
activities outside of our core assisted living business. As we expand into new
products and services, we will be subject to additional Federal, state and local
laws and regulations. Non-compliance with these laws and regulations could have
a material adverse effect on our business, financial condition, results of
operations or prospects.
LIABILITY AND INSURANCE. The provision of personal and health care services
entails an inherent risk of liability. In recent years, participants in the
long-term care industry have become subject to an increasing number of lawsuits
alleging malpractice or related legal theories, many of which involved large
claims and resulted in the incurrence of significant defense costs. In addition,
compared to more institutional long-term care facilities, assisted living
residences (especially dementia care residences) of the type we operate offer
residents a greater degree of independence in their daily lives. This increased
level of independence, however, may subject the resident and us to risks that
would be reduced in more institutionalized settings. We currently maintain
liability insurance intended to cover these claims which we believe is adequate
based on the nature of the risks, historical experience and industry standards.
There can be no assurance, however, that claims in excess of this insurance or
claims not covered by insurance, such as claims for punitive damages, will not
arise. A successful claim against us not covered by, or in excess of, our
insurance could have a material adverse effect upon our financial condition and
results of operations. Claims against us, regardless of their merit or eventual
outcome, may also have a material adverse effect upon our ability to attract or
retain residents or expand our business and may require us to devote substantial
time to matters unrelated to day-to-day operations. In addition, insurance
policies must be renewed annually. There can be no assurance that we will be
able to obtain liability insurance in the future or that, if this insurance is
available, it will be available on acceptable economic terms.
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY. We currently
rely, and for the foreseeable future, we expect to rely, primarily on the
ability of our residents to pay for services from their own and their families'
financial resources. Generally, only elderly adults with income or assets
meeting or exceeding the comparable median in the region where our assisted
living residences are located can afford the fees for these residences.
Inflation or other circumstances which adversely affect the ability of residents
and potential residents to pay for assisted living services could have an
adverse effect on us. In the event that we encounter difficulty in attracting
seniors with adequate resources to pay for our services, we would be adversely
affected.
ENVIRONMENTAL LIABILITY RISKS ASSOCIATED WITH REAL PROPERTY. Under various
Federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at these properties, and may be held liable to a governmental entity or
to third parties for property damage and for investigation and cleanup costs
incurred by these parties in connection with the contamination. These laws
typically impose clean up responsibility and liability without regard to whether
the owner knew of or caused the presence of contaminants, and liability under
these laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation or responsibility. The
costs of investigation, remediation or removal of these substances may be
substantial, and the presence of these substances, or the failure to properly
remediate these properties, may adversely affect the owner's ability to sell or
lease the property or to borrow using the property as collateral. In addition,
some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of these
substances at the disposal or treatment facility, whether or not the facility is
owned or operated by this person. Finally, the owner of a site may be subject to
common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. With the exception of four
Sterling House residences operated by us or our predecessors since prior to
1995, we have conducted environmental assessments of all of our operating
residences and have conducted, or are in the process of conducting,
environmental assessments of all of our undeveloped sites and sites currently
under construction. These assessments have not revealed, and we are not
otherwise aware of, any environmental liability that we believe would have a
material adverse effect on our business, assets or results of operations. There
can be no assurance, however, that
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environmental assessments would detect all environmental contamination which
may give rise to material environmental liabilities. We believe that our
respective residences are in compliance in all material respects with all
applicable environmental laws. We have not been notified by any governmental
authority, or are otherwise aware, of any material non-compliance, liability or
claim relating to hazardous toxic substances or petroleum products in connection
with any of the residences we currently operate.
ANTI-TAKEOVER PROVISIONS. Our Restated Certificate of Incorporation authorizes
the issuance of 5,000,000 shares of preferred stock and 100,000,000 shares of
Common Stock. Subject to the rules of the American Stock Exchange ("AMEX") upon
which our Common Stock is listed, our Board of Directors have the power to issue
any or all of the authorized and unissued shares without stockholder approval,
and the preferred shares can be issued with rights, preferences and limitations
as may be determined by our Board. The rights of the holders of our Common Stock
will be subject to, and may be adversely affected by, the rights of any holders
of preferred stock that may be issued in the future. Although as part of the
Equity Transaction we expect to issue either preferred stock or debentures that
(in either case) would be convertible into our Common Stock, we presently have
no commitments or contracts to issue any additional shares of common stock
(other than pursuant to the exercise of outstanding stock options or the
conversion of our 6.75% Convertible Subordinated Debentures due 2006, 7%
Convertible Subordinated Debentures due 2004 or 5.25% Convertible Subordinated
Debentures due 2002) or any shares of preferred stock. Authorized and unissued
preferred stock and common stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could delay,
discourage, hinder or preclude an unsolicited acquisition of the Company, could
make it less likely that stockholders receive a premium for their shares as a
result of any attempt and could adversely affect the market price of and the
voting and other rights of the holders of outstanding shares of Common Stock. As
a Delaware corporation, we are subject to Section 203 of the Delaware General
Corporation Law (the "DGCL") which, in general, prevents an "interested
stockholder" (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) for three years following the date a
person became an interested stockholder unless specific conditions are
satisfied. In addition, the indenture relating to our approximately $143.8
million aggregate principal amount outstanding 5.25% Convertible Subordinated
Debentures provides that, upon a "change of control" (as defined in that
indenture), the holders of those debentures would have the right to require us
to repurchase those debentures at 101% of their face value.
On December 10, 1998, we entered into a Rights Agreement with American Stock
Transfer & Trust Company, as Rights Agent, pursuant to which we declared and
paid a dividend of one preferred share purchase right (a "Right") for each
outstanding share of our Common Stock. Each Right entitles the registered holder
to purchase from us one one-hundredth of a share of Series A Junior
Participating Preferred Stock, $.01 par value per share (the "Preferred
Shares"), at a price of $130.00 per one one-hundredth of a Preferred
Share. The Rights have anti-takeover effects, and they will cause substantial
dilution to a person or group that attempts to acquire us without conditioning
the offer on redemption of the Rights or on substantially all of the Rights also
being acquired. The Rights should not interfere with any merger or other
business combination approved by our Board since the Rights may be redeemed by
us in accordance with the Rights Agreement.
POSSIBLE PRICE VOLATILITY OF THE COMMON STOCK. The market price of our Common
Stock could be subject to significant fluctuations in response to various
factors and events, including variations in our operating results, and new
statutes or regulations or changes in the interpretation of existing statutes or
regulations affecting the health care industry generally or the assisted living
industry in particular. In addition, the stock market in recent years has
experienced broad price and volume fluctuations that often have been unrelated
to the operating performance of particular companies. These market fluctuations
also may adversely affect the market price of our Common Stock.
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ITEM 2. PROPERTIES
The table below shows information with respect to the residences which we
operated as of December 31, 1999. We own, lease, hold equity interest in or
manage, on behalf of third parties, these residences.
OPERATING RESIDENCES
OWNED (1) LEASED (2) UNCONSOLIDATED (3) MANAGED (4) TOTAL
------------------ ----------------- ------------------- -------------------- -------------------
LOCATION RES. CAP. RES. CAP. RES. CAP. RES. CAP. RES. CAP.
----------- ------- -------- ------ -------- ------- -------- -------- -------- -------- -------
AZ 7 349 4 190 5 313 -- -- 16 852
CA 2 307 -- -- 6 596 -- -- 8 903
CO 4 220 11 689 3 156 2 104 20 1,169
DE 1 72 -- -- -- -- -- -- 1 72
FL 13 564 32 1,374 13 856 -- -- 58 2,794
GA -- -- -- -- 4 281 1 36 5 317
ID 1 70 2 158 -- -- -- -- 3 228
IN 5 210 -- -- 12 488 -- -- 17 698
KS 13 436 11 357 2 96 1 50 27 939
MA 1 72 -- -- -- -- -- -- 1 72
MI 21 700 9 392 2 116 -- -- 32 1,208
MN 10 318 9 363 1 78 -- -- 20 759
NC 5 242 11 524 2 94 1 42 19 902
ND -- -- 1 71 -- -- -- -- 1 71
NJ 4 152 -- -- 3 322 2 98 9 572
NV 1 54 2 154 1 56 -- -- 4 264
NY 15 906 1 80 -- -- -- -- 16 986
OH 5 205 16 653 8 417 -- -- 29 1,275
OK -- -- 26 906 2 74 -- -- 28 980
OR 1 56 8 650 1 52 -- -- 10 758
PA 13 601 1 48 2 112 -- -- 16 761
SC 3 126 8 330 1 42 1 42 13 540
TN 2 90 2 86 5 212 -- -- 9 388
TX 1 37 25 963 5 272 -- -- 31 1,272
VA -- -- -- -- 2 96 -- -- 2 96
WA 3 156 4 388 3 164 -- -- 10 708
WI 14 354 21 532 4 135 6 48 45 1,069
------ ------- ----- ------- ------ ------- ------- ------- ------- ------
TOTAL 145 6,297 204 8,908 87 5,089 14 420 450 20,653
====== ======= ===== ======= ====== ======= ======= ======= ======= ======
(1) Owned residences are those that are wholly or majority owned by us.
(Twelve of these residences with a capacity of 619 are majority owned).
(2) Leased residences are those that we operate and lease from a third party.
(3) Unconsolidated residences are those residences managed by us, but
operated by an entity in which we own a minority equity interest.
(4) Managed residences are those residences that we manage under management
arrangements but in which we do not possess an ownership interest. We
have an option to purchase or lease eleven of these residences.
Of our 450 operating residences, 85% of them are five years old or less and 95%
are ten years old or less.
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At December 31, 1999, we were in various stages of constructing 53 residences
and developing two residences. Set forth below is information with respect to
residences in construction and residence sites in development on December 31,
1999.
RESIDENCES UNDER CONSTRUCTION OR DEVELOPMENT
UNDER CONSTRUCTION UNDER DEVELOPMENT
------------------------------ ------------------------------
LOCATION RESIDENCES CAPACITY RESIDENCES CAPACITY
- --------------- -------------- ----------- -------------- ------------
CA 5 298 -- --
CT 1 52 -- --
DE 1 52 -- --
FL 7 507 -- --
IN 1 38 -- --
KS 2 77 -- --
KY 2 78 -- --
MD 4 180 -- --
MN 1 26 -- --
NJ 6 282 1 78
NV 1 52 -- --
NY 4 178 -- --
NC 2 74 -- --
OH 2 120 -- --
OR 3 156 -- --
PA 2 124 -- --
SC 2 76 -- --
TN 2 78 -- --
TX 3 191 -- --
WI 2 118 1 52
------------- ---------- ------------- -----------
TOTAL 53 2,757 2 130
============= ========== ============= ===========
The residences under construction or development may be owned directly by joint
venture entities in which we will own varying percentages of equity interests.
See "Business - Joint Ventures and Strategic Alliances."
"Construction" means that construction activities have commenced (ground
breaking) and are ongoing. "Development" means that the site is under "control"
(pursuant to purchase agreements or options or otherwise) and development
activities with respect to the site have commenced and are ongoing (such as site
permitting, preparation of surveys and architectural plans, and negotiation of
construction contracts).
Residences under development may not in fact be constructed for a variety of
reasons, including zoning, permitting, health care licensing, financing and cost
related issues. In addition to residences listed in the table above as "under
development," we may also engage in preliminary development activities with
respect to other possible sites for future residences.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings relating to
claims arising in the ordinary course of our business. Neither we nor any of our
subsidiaries is a party to any legal proceeding, the outcome of which,
individually or in the aggregate, is expected to have a material adverse affect
on our financial condition or results of operations, with the possible exception
of the following matter.
During 1999, Altera Corporation, a San Jose, California based company engaged in
the business of designing, manufacturing and selling high-performance,
high-density programmable logic devices and associated development tools,
commenced litigation with the Company in the United States District Court for
the Northern District of California. The Plaintiff's complaint alleges claims
for trademark infringement, unfair competition, and trademark dilution under
federal, state and common law arising from the Company's use of the name
"Alterra". Plaintiff Altera Corporation seeks an injunction against the
Company's use of the Alterra name, as well as damages and attorneys' fees.
Plaintiff Altera Corporation sought both a temporary restraining order and a
preliminary injunction, but the District Court denied that relief. The District
Court's denials of the Plaintiff's motions were affirmed by the United States
Court of Appeals for the Ninth Circuit upon Plaintiff's appeal. The parties are
currently in the discovery phase of the litigation. Although we cannot provide
any assurances as to the
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outcome of this litigation, we believe that Plaintiff's claims are without merit
and intend to contest them vigorously. If the Plaintiff prevails in this matter,
it could have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 1999.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock is listed and traded on the American Stock Exchange (AMEX)
under the symbol "ALI". The Common Stock has been listed on the AMEX since
August 6, 1996, the date of our initial public offering. The number of holders
of record of the Common Stock as of March 24, 2000, was approximately 8,200.
The following table sets forth, for the periods indicated, the high and low
closing prices for the Common Stock as reported on AMEX.
HIGH LOW
------------- -----------
1999:
First Quarter........................ $ 33-9/16 $ 17
Second Quarter....................... 23-1/2 10-7/16
Third Quarter........................ 13-11/16 8-3/16
Fourth Quarter....................... 8-15/16 5-3/4
1998:
First Quarter........................ 34-1/2 27
Second Quarter....................... 35 24-3/4
Third Quarter........................ 30-1/2 17-1/8
Fourth Quarter....................... 34-1/4 17-1/4
We have never paid or declared cash dividends and currently intend to retain any
future earnings for the operation and expansion of our business. Any
determination to pay cash dividends in the future will be at the discretion of
the Board of Directors and will be dependent on our financial condition, results
of operations, contractual restrictions, capital requirements, business
prospects, restrictive debt covenants and other factors as the Board of
Directors deems relevant.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated historical financial data of ours presented below for
each of the five years ended December 31, 1999 has been derived from our audited
consolidated financial statements appearing elsewhere in this report. The
selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included in this report (in thousands, except per share data).
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- --------- ---------
STATEMENTS OF OPERATIONS DATA :
Revenue:
Operating revenue.............................. $ 376,181 $244,423 $ 130,744 $ 55,637 $ 15,061
----------- ----------- ----------- ---------- ----------
Operating expenses:
Residence operations........................... 224,213 147,931 81,558 35,977 8,717
Lease expense.................................. 69,375 44,174 25,524 9,035 944
Lease income................................... (25,507) (4,915) -- -- --
General and administrative..................... 44,898 23,200 22,168 11,143 5,890
Depreciation and amortization.................. 21,178 19,730 9,271 4,223 1,275
Non-recurring charge........................... 47,280 -- 4,656 976 --
----------- ----------- ----------- ---------- ----------
Total operating expenses................... 381,437 230,120 143,177 61,354 16,826
----------- ----------- ----------- ---------- ----------
Operating (loss) income.......................... (5,256) 14,303 (12,433) (5,717) (1,765)
Other (expense) income:
Interest expense, net.......................... (35,938) (11,024) (3,932) (3,231) (984)
Equity in losses of unconsolidated affiliates.. (1,442) (31) (226) (52) (716)
Minority interest in losses of consolidated
subsidiaries............................... 4,018 20,610 8,440 76 160
Other, net..................................... (20) (170) (112) (31) 479
---------- ----------- ----------- ---------- ----------
Total other (expense) income, net........ (33,382) 9,385 4,170 (3,238) (1,061)
---------- ----------- ----------- ---------- ----------
(Loss) income before income taxes, extraordinary
item and cumulative effect..................... (38,638) 23,688 (8,263) (8,955) (2,826)
---------- ----------- ----------- ---------- ----------
Income tax benefit (expense)..................... 14,669 (3,136) -- 159 991
---------- ----------- ----------- ---------- ----------
(Loss) income before extraordinary item and the
cumulative effect of a change in accounting
principle...................................... (23,969) 20,552 (8,263) (8,796) (1,835)
Extraordinary item - loss from early retirement
of financing agreements...................... -- -- -- -- (1,176)
Cumulative effect of a change in accounting
principle........................................ (3,837) -- -- -- --
----------- ----------- ----------- ---------- ----------
Net (loss) income ....................... $ (27,806) $ 20,552 $ (8,263) $ (8,796) $ (3,011)
=========== =========== =========== ========== ==========
Basic (loss) income per common share:
(Loss) income before extraordinary item (1), and
a change in accounting principle.............. $ (1.09) $ 0.94 $ (0.44) $ (0.57) $ (0.24)
Extraordinary item (1)......................... -- -- -- -- (0.15)
Change in accounting principle................ (0.17) -- -- -- --
----------- ----------- ----------- ---------- ----------
Basic (loss) income per common share (1)......... $ (1.26) $ 0.94 $ (0.44) $ (0.57) $ (0.39)
=========== =========== =========== ========== ==========
Diluted (loss) income per common share:
(Loss) income before extraordinary item (1), and
a change in accounting principle.............. $ (1.09) $ 0.92 $ (0.44) $ (0.57) $ (0.24)
Extraordinary item (1)......................... -- -- -- -- (0.15)
Change in accounting principle................. (0.17) -- -- -- --
----------- ----------- ----------- ---------- ----------
Diluted (loss) income per common share (1)...... $ (1.26) $ 0.92 $ (0.44) $ (0.57) $ (0.39)
=========== =========== =========== ========== ==========
Weighted average common shares outstanding (1):
Basic.......................................... 22,088 21,905 18,651 15,429 7,782
=========== =========== =========== ========== ==========
Diluted........................................ 22,088 24,145 18,651 15,429 7,782
=========== =========== =========== ========== ==========
(1) Basic and diluted share amounts are the same for 1995-1997 and 1999
since potentially issuable shares related to stock options and
convertible debt would have an anti-dilutive effect.
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1999 1998 1997 1996 1995
----------- ----------- ----------- --------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 18,728 $40,621 $79,838 $ 39,455 $20,394
Short-term investments...................... -- -- 90,000 -- --
Working capital............................. 5,452 28,305 129,528 20,532 10,425
Total assets................................ 1,061,397 777,810 553,552 204,353 82,450
Long-term obligations....................... 791,672 515,584 318,069 68,625 23,663
Stockholders' equity........................ $150,643 $177,112 $143,897 $ 91,064 $45,466
ITEM 7. 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 27 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 1999 and 1998. As of
December 31, 1999 and 1998, we operated or managed 450 and 350 residences with
aggregate capacity of approximately 20,700 and 15,000 residents, respectively.
We, together with other parties who have purchased interests in some of our
development residences, were also constructing or developing 55 additional
residences with additional capacity for 2,900 residents as of December 31, 1999.
During 1999, we generated operating revenue of $376.2 million and realized
operating income of $44.9 million and net income of $8.8 million prior to a
non-recurring charge, other one time adjustments, and the cumulative effect of a
change in accounting principle.
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 quarter of 2000, we have
discontinued development activity with respect to a substantial number
of development sites. As a consequence of this decision, we recorded
one time, non-recurring, pre-tax charges of $47.3 million ($29.3
million net of income tax benefit) in the fourth quarter of 1999
reflecting (i) our write-down of the carrying costs of discontinued
development sites and failed acquisitions, (ii) costs associated with
the planned reduction in development activities and the
discontinuation of operations of our wholly-owned construction
subsidiary, (iii) our write-off of deferred financing costs associated
with construction loan credit lines that will not be fully utilized,
and (iv) a reserve established against our note receivable with a
development joint venture resulting from the reduction of a previously
established financing commitment with that joint venture.
- 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.
- Deleveraging of our Balance Sheet. We are seeking to strengthen and
deleverage our balance sheet and to address our short and long-term
capital needs by securing an additional equity or equity-linked
investment in the Company. We have retained financial advisors to
assist us in securing this investment, and are currently in
negotiations with parties interested in making an investment in the
Company.
- 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 expenses but only impact our operating cash flow to the
extent of any related interest expense.
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We are currently seeking to address both our short and long-term liquidity
requirements. The combination of a difficult financing and operating environment
healthcare service companies has significantly reduced the Company's access
to credit. A number of the Company's traditional financing sources, including
commercial banks and other secured lenders, have substantially reduced their
lending activities to the healthcare sector. In addition, the credit
availability under certain of our credit facilities has either been reduced or
eliminated due to a variety of factors, including our request for modifications
of some of our financial covenants in certain of our credit agreements. To
address our need for capital, we are in the process of seeking to raise at least
$100.0 million of equity or equity-linked financing, and expect to consummate
such a transaction during the second quarter of 2000. Given that we have not
committed to a specific equity transaction with any of our prospective
investors, there is a risk that we will not complete an equity transaction.
However, given the high level of interest of our prospective investors, the
advanced stage of these negotiations and the familiarity and understanding that
these prospective investors have with respect to our Company and business, our
management team believes that the Company has the ability to complete a
substantial equity investment transaction in the second quarter of 2000. If we
are not able to consummate this equity transaction in a timely fashion, we may
not have sufficient liquidity to fund our future operations and other
obligations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Residence Service Fees. Residence service fees for the year ended December 31,
1999 were $349.8 million representing an increase of $113.9 million, or 48%,
from the $235.9 million for 1998. Substantially all of this increase resulted
from the addition of newly constructed residences, residences we acquired the
majority ownership interest in during 1999, and other residences we acquired. We
operated or managed 450 and 350 residences at December 31, 1999 and 1998,
respectively.
Other Revenues. Other revenues for the year ended December 31, 1999 were $26.4
million, an increase of $17.9 million over the $8.5 million of other revenue for
the year ended December 31, 1998. The increase is attributable to management
fees on an increased number of residences which were either managed for third
parties or operated in minority joint ventures in 1999 versus 1998. As of
December 31, 1999, we had 101 residences held in minority joint ventures or
managed for other owners as compared to 66 residences as of December 31, 1998.
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, and services for assisting with
finance processing, which are incurred during the start-up period of a new
residence, and ongoing management services provided to operate the residence.
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 1999 increased to $224.2 million, from $147.9 million in 1998, due
to the increased number of residences operated during 1999. Operating expenses
as a percentage of residence service fees, for the years ended December 31, 1999
and 1998 were 64.1% and 62.7%, respectively.
Lease Expense. Lease expense for the year ended December 31, 1999 was $69.4
million, compared to $44.2 million in 1998. This increase was primarily
attributable to the utilization of additional sale/leaseback financing totaling
$78.4 million during 1999 and to the incurrence of a full year of lease expense
in 1999 related to leases entered into in 1998.
Lease Income. We recorded lease income on residences we owned and leased to
unconsolidated joint ventures of $25.5 million for the year ended 1999, versus
$4.9 million for 1998. Under this arrangement, we retain ownership in underlying
assets in order to allow the use of our corporate financing arrangements. Lease
payment obligations of the unconsolidated joint venture entities are
approximately equivalent to the debt service payable by us on the leased
residences, which thereby, offset our costs associated with retaining ownership
in the fixed assets. As of December 31, 1999, we had 87 unconsolidated joint
ventures compared to 45 as of December 31, 1998.
General and Administrative Expense. General and administrative expenses for the
year ended December 31, 1999 were $42.6 million prior to a write-off of $2.3
million for failed acquisitions, corporate downsizing, and corporate office
relocation costs, compared to $23.2 million for 1998, representing an increase
as a percentage of operating revenue to 11.3% in 1999 from 9.5% in 1998. The
increase in expenses was primarily attributable to salaries, related payroll
taxes and employee benefits for additional corporate personnel retained to
support our growth and to support the increased number of unconsolidated
residences we manage.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 1999 was $20.6 million prior to a $600,000 write-off due to the
relocation of our national headquarters, representing an increase of $848,000,
or 4.3%, from the $19.7 million of depreciation and amortization for 1998. This
increase resulted primarily from depreciation of fixed assets on the larger
number of new residences that were operated by us during the year ended December
31, 1999, versus 1998. The increase in depreciation is partially offset by the
elimination of amortization on pre-opening costs which are now expensed when
they are incurred. Depreciation and amortization in 1998 includes $8.3 million
of amortization of pre-opening costs. As discussed below, we adopted a new
accounting principle related to pre-opening costs on January 1, 1999.
Non-recurring charge. We recorded a non-recurring charge of $47.3 million in the
fourth quarter of 1999 as a result of the decision to exit development
activities. The charge consists of the write-off of $28.4 million in costs
already incurred on
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development projects that will not be completed and the establishment of $8.6
million in reserves for costs related to exiting these activities. In
addition, the charge includes a $3.3 million reserve for employee costs and
lease obligations associated with closing down our construction subsidiary and
related activities at the national office. The Company also established a $7.0
million reserve related to a development joint venture with Manor Care, Inc.
which is further discussed in Note 2.
Interest Expense, Net. Interest expense, net of interest income, was $33.2
million for the year ended December 31, 1999 prior to a $2.7 million write-off
of deferred financing commitment fees, compared to $11.0 million for 1998. Gross
interest expense (before interest capitalization and interest income) for the
1999 period was $48.6 million prior to the commitment fee write-off, compared to
$29.8 million for 1998, an increase of $18.8 million. This increase is primarily
attributable to an increase in the amount of mortgage financing used in 1999 as
compared to 1998. We capitalized $10.3 million of interest expense in 1999
compared to $13.8 million in 1998. This decrease is a result of our decision to
reduce development and construction activity in 1999. We opened 67 newly
constructed residences during the year ended December 31, 1999 compared to 116
newly constructed residences in 1998. Interest income for 1999 was $5.1 million
as compared to $5.0 million for 1998.
Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in
losses of consolidated subsidiaries for the year ended December 31, 1999 was
$4.0 million, representing a decrease of $16.6 million from $20.6 million for
1998. The decrease was primarily attributable to the decrease in the number of
residences in various stages of lease-up that we owned in majority owned joint
venture arrangements. Throughout 1999, we had an average of 19 residences held
in these majority owned joint venture arrangements compared to an average of 46
residences held in similar majority owned joint venture arrangements during the
year ended December 31, 1998.
Income Taxes. For 1999, we recorded a current income tax benefit of $345,000 and
recognized a $14.4 million deferred asset resulting in a current income tax
benefit of $14.7 million before the cumulative effect of the change in
accounting principle. For 1998, we recorded a current income tax provision of
$9.6 million which was offset by the recognition of $6.5 million of deferred tax
assets resulting in a current income tax expense of $3.1 million.
Cumulative Effect of Change in Accounting Principle. During the first quarter 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 Income. As a result of the foregoing, net income prior to the previously
mentioned one time write-offs of $3.5 million ($5.6 million pre tax), the
non-recurring charge of $29.3 million ($47.3 million pre tax) and the cumulative
effect of a change in accounting principle of $3.8 million (net of tax), was
$8.8 million compared to net income of $20.6 million for 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Resident Service Fees. Resident services fees for the year ended December 31,
1998 were $235.9 million representing an increase of $107.1 million, or 83%,
from the $128.9 million for 1997. Substantially all of this increase resulted
from the addition of newly constructed residences and other residences we
acquired. We operated or managed 350 and 223 residences at December 31, 1998 and
1997, respectively.
Other Revenues. Other revenues for the year ended December 31, 1998 were $8.5
million, an increase of $6.6 million over the $1.9 million of other revenue for
the year ended December 31, 1997. The increase is attributable to management
fees on an increased number of residences which were either managed for third
parties or operated in minority joint ventures in 1998 versus 1997. As of
December 31, 1998, we had 66 residences operated in minority joint ventures or
managed for other owners as compared to 36 of these residences on December 31,
1997. The increase in other revenue was also impacted by 14 new residences
opened under franchise arrangements in 1998 and fees recognized from a
development arrangement in 1998.
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 1998 increased to $147.9 million from $81.6 million in 1997 due to
the increased number of residences operated during 1998. Operating expenses as a
percentage of resident service fees for the years ended December 31, 1998 and
1997 were 62.7% and 63.2%, respectively.
Lease Expense. Lease expense for the year ended December 31, 1998 was $44.2
million, compared to $25.5 million in 1997. This increase was primarily
attributable to the utilization of additional sale/leaseback financing totaling
$146.0 million during the twelve-month period ended December 31, 1998.
Sublease Income. We recorded $4.9 million of lease income on residences we owned
and leased to unconsolidated joint ventures in 1998. Under this arrangement, we
retain ownership in underlying assets in order to allow the use of our corporate
financing arrangements. Lease payment obligations of the unconsolidated joint
venture entities are approximately equivalent
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to the debt service payable by us on the leased residences, which thereby,
offset our costs associated with retaining ownership in the fixed assets. We had
no similar arrangements in 1997.
General and Administrative Expense. General and administrative expenses for the
year ended December 31, 1998 were $23.2 million compared to $16.5 million,
before Sterling Merger related charges of $5.7 million, for 1997. This
represents a decline as a percentage of operating revenue to 9.5% in 1998 from
12.6% in 1997. The increase in expenses was primarily attributable to salaries,
related payroll taxes and employee benefits for additional corporate personnel
retained to support our actual and anticipated growth.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 1998 was $19.7 million, representing an increase of $10.4 million,
or 113%, from the $9.3 million of depreciation and amortization for 1997. This
increase resulted primarily from depreciation of fixed assets and amortization
of pre-opening costs on the larger number of new residences that we operated
during the year ended December 31, 1998, versus 1997. We previously amortized
pre-opening costs over a twelve-month period from the date the residence opened.
Upon the adoption of the AICPA Statement of Position No. 98-5 "Reporting on the
Costs of Start-up Activities," on January 1, 1999, we expensed pre-opening
costs, as defined, when incurred.
Interest Expense, Net. Interest expense, net of interest income, was $11.0
million for the year ended December 31, 1998, compared to $3.9 million for 1997.
Gross interest expense (before interest capitalization and interest income) for
1998 was $29.8 million compared to $13.4 million for 1997, an increase of $16.4
million. This increase is primarily attributable to the issuance in May 1997 of
the 7% Convertible Subordinated Debentures due 2004, (the "7% Debentures") the
issuance in December 1997 of the 5.25% Convertible Subordinated Debentures due
2002, (the "5.25% Debentures") and an increase in the amount of mortgage
financing used in 1998 as compared to 1997. We capitalized $13.8 million of
interest expense in 1998 compared to $6.7 million in 1997 due to increased
construction activity in 1998. We opened 116 newly constructed residences during
the year ended December 31, 1998 compared to 78 newly constructed residences
opened in 1997. Interest income for 1998 was $5.0 million as compared to $2.8
million for 1997. This increase was primarily due to the investment of proceeds
received from the December 1997 concurrent convertible debt and equity offering.
Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in
losses of consolidated subsidiaries for the year ended December 31, 1998 was
$20.6 million, representing an increase of $12.2 million from $8.4 million for
1997. The increase was primarily attributable to the increase in the number of
residences in various stages of lease-up that we owned in majority owned joint
venture arrangements. Throughout 1998, we had an average of 46 residences held
in these majority owned joint venture arrangements compared to an average of 17
residences held in similar majority owned joint venture arrangements during the
year ended December 31, 1997.
Income Taxes. For the year ended December 31, 1998, we recorded a current income
tax provision of $9.6 million which was offset by the recognition of $6.5
million of deferred tax assets resulting in a current income tax expense of $3.1
million. The deferred tax asset recognition was generated primarily due to the
elimination of valuation allowances associated with net deferred tax assets in
1997 and prior.
Net Income. As a result of the foregoing, the net income for the year ended
December 31, 1998 was $20.6 million compared to a net loss of $8.3 million for
1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had approximately $18.7 million in unrestricted cash
and cash equivalents and $5.4 million of working capital compared to
unrestricted cash and cash equivalents of $40.6 million and working capital of
$28.3 million at December 31, 1998.
For the year ended December 31, 1999, cash flow from operations was $5.4 million
versus an operating cash flow deficit of $5.0 million and $7.8 million for the
years ended December 31, 1998 and 1997, respectively. The significant increase
in cash flow from operating activities is attributable to the greater number of
consolidated residences operating at or near stabilized occupancy levels during
1999 in comparison to 1998 and 1997.
During 1999, we closed on approximately $273.0 million of new debt financing and
capital lease obligations which included approximately $80.0 million of debt
used to refinance properties having prior debt balances of $75.0 million.
Additionally, financing was provided through $78.4 million of sale/leaseback
financing, $3.5 million of minority joint venture partner contributions and
$44.0 million of bridge loan financing.
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Net cash provided by these financing activities together with cash from
operations was used during 1999 to fund $181.8 million in construction and
development activity, $64.4 million in joint venture buyouts, $21.8 million in
acquisition activity and $21.5 million of construction bridge financing that we
provided to others under third party development arrangements.
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 December 31, 1999, we had $830.6 million
of outstanding debt principally consisting of $228.6 million of convertible
debentures having a weighted average interest rate of 5.86%, $168.7 million of
fixed rate debt having a weighted average interest rate of 7.53%, capitalized
lease obligations of $67.3 million having a weighted average interest rate of
9.93%, $337.0 million of variable rate debt having a weighted average interest
rate of 8.79% and short-term borrowings of approximately $29.0 million. Through
December 31, 1999, we have also entered into approximately $893.7 million of
sale/leaseback and synthetic lease financings. In addition, we have guaranteed
an aggregate of $114.0 million of indebtedness of joint venture and other
off-balance sheet third party entities.
During 1999 we completed a synthetic lease transaction relating to 26 assisted
living and Alzheimer's/dementia care residences that were previously owned and
operated by Manor Care, Inc. Pursuant to this transaction, an affiliate of a
commercial bank acquired the 26 residences for an aggregate purchase price of
approximately $189.1 million (including closing costs) and simultaneously leased
the 26 residences to a wholly-owned subsidiary of the Company. Our lease of
these 26 residences has a term of ten years, reflects initial rental based on a
lease constant of 9.93% and contains an option to purchase the 26 residences at
the end of the lease term for a pre-negotiated fixed price. For financial
accounting purposes, leases for 17 of the residences have been treated as
operating leases and leases for nine residences were treated as capital leases.
We have the following three series of convertible subordinated debentures
outstanding:
- $143.8 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 of the
Company, as defined in the convertible debenture;
- $50.0 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 annual 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 certain 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. In addition, under certain of our credit
and sale/leaseback facilities we are required to secure lender or lessor consent
prior to engaging in certain mergers, business combinations or change in control
transactions. As noted below, as a result of the non-recurring charges taken in
the fourth
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quarter of 1999 and reductions in our expected future earnings resulting from
our decision to reduce development and utilization of off-balance sheet joint
venture structures, we would have been in violation of net worth and fixed
charge coverage covenants imposed by several of our lenders had we not secured
modifications or waivers of these covenants.
Our operations and remaining construction activity will require significant
additional capital resources in the future in order to fund: (i) our remaining
construction of 55 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. Each of these principal uses of
capital resources are summarized below:
DEVELOPMENT ACTIVITIES. The development and construction of new,
purpose-built assisted living and Alzheimer's care residences has
historically been the principal use of the Company's capital resources.
Although we elected to discontinue a significant portion of our pending
development projects, we are continuing to construct and complete
approximately 55 residences currently in construction and development.
We estimate that between $65.0 million and $70.0 million will be
required to fund our ongoing construction during the twelve month
period ending December 31, 2000 and that other entities for whom we are
constructing residences will need to fund between $50.0 million and
$55.0 million during that same time period.
PURCHASE OF JOINT VENTURE INTERESTS. We are obligated under many of our
joint venture arrangements to purchase the equity interests of our
joint venture partners at fair market value upon the election of our
partners. During the next twelve months, we will be subject to
contingent purchase obligations with respect to equity interests held
by joint venture partners, exercisable at their election, related to
approximately 101 of our residences. At designated times or earlier, as
contingent purchase obligations are exercisable, we may also elect to
exercise our rights to purchase these interests. Based on a number of
assumptions, including assumptions as to the number of residences to be
operated with joint venture partners, the timing of completion of
development, the time at which these options may be exercised and the
fair market value of these residences at the date these options are
exercised, we estimate that we may need approximately $75 million to
$85 million to satisfy these purchase obligations during the twelve
month period ending December 31, 2000.
DEBT SERVICE. In addition to ongoing debt service and lease payment
obligations, including interest payments due on our convertible
debentures, we will be required to fund or refinance approximately
$29.0 million of short-term indebtedness and $9.9 million of long-term
indebtedness that will mature during the twelve month period ending
December 31, 2000. As of December 31, 1999, we had outstanding
approximately $130.8 million of debt (currently held by two lenders)
which includes provisions requiring us to repay a portion of the debt
if the operating cash flow from the residences financed by such debt
falls below specified levels, which we expect to occur. The repayment
of a portion of this debt was scheduled to occur in March and August of
2000. We have preliminary understandings with the two lenders holding
the debt that the terms of such debt will be modified during 2000 to
eliminate any required repayment in exchange for shortening the
maturity date of such debt to approximately two years and converting
the pricing on such debt to a floating rate structure. If these
modifications had been effected as of March 24, 2000, the floating rate
would be approximately 8.75%. Prior to these anticipated modifications,
this debt would mature in approximately 15 years and would bear
interest at fixed rates ranging from 7.56% to 7.63%. No assurance can
be given that we will be successful in obtaining the modifications
described above of this debt.
ADVANCES TO DEVELOPMENT PARTNERS. We have committed to provide up to
$113.9 million in financing to development partners under third party
arrangements. We have advanced $37.5 million pursuant to these
arrangements as of December 31, 1999. Subject to resolving any pending
loan covenant issues, we intend to finance or refinance these projects
under existing or future bank credit facilities.
We expect to fund a portion of our capital and liquidity requirements from cash
on hand, cash generated from operations, financing under existing debt and lease
commitments and, to a limited extent, equity from our joint venture development
partners. Our ability to utilize previously secured non-binding financing
commitments from REITs and other lenders has become substantially limited due in
part to our request and receipt of modifications of some of the lenders'
financial covenants, the volatility in the capital markets and factors affecting
the assisted living industry generally. In particular, one of our construction
loan facilities has delayed advances due on ongoing construction pending the
resolution of a number of loan facility capacity and residence construction
issues. In addition, many healthcare REITs and lenders are currently not
extending new financing and the property level underwriting requirements of
certain of our lenders are being more strictly applied. Accordingly, our ability
to secure financing on acceptable terms has become increasingly difficult. We
currently expect to have access to no
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more than $50 to $70 million of additional mortgage financing from existing
construction loan facilities during the twelve month period ending December 31,
2000. We do not expect to have access to any significant sale/leaseback
financing during the twelve month period ending December 31, 2000.
We are seeking to address our anticipated shortfall of our capital resources to
fund anticipated capital needs through the sale of at least $100 million of
additional equity or equity-linked securities of the Company. We have retained
investment bankers to assist us in identifying possible sources of equity
capital and to structure and negotiate an appropriate transaction. Although we
have had and are continuing to have discussions with a number of potential
investors, we are currently engaged in detailed negotiations with two investor
groups, both of which include existing shareholders of the Company. We believe
these investor groups have access to substantial financial resources and have a
history of making investments in the senior housing and assisted living
industries. While the transactions proposed by these two groups vary, we expect
that these transactions may involve either the issuance of convertible preferred
stock or convertible debentures of the Company, each convertible into our common
stock. In the case of convertible debentures, these debt securities would rank
senior to our $228.6 million of subordinated convertible debentures and would
accrue interest payable by the issuance of additional convertible debentures of
the Company. In the case of convertible preferred stock, these equity securities
would rank senior to all other classes of our capital stock and would be
entitled to quarterly dividends payable by the issuance of additional shares of
convertible preferred stock. Accordingly, we expect this transaction would be
dilutive to the current common stockholders of the Company. Any equity
transaction likely would be subject to various conditions, including: (i)
modification of certain financial covenants or other structural amendments in
some of our credit agreements to provide the Company more flexibility in
executing our business plan; (ii) the commitment of certain of our lenders to
extend maturities as well as to resume funding of their credit facilities in the
ordinary course; and (iii) various contractual consents and approvals. Given
that we have not committed to a specific equity transaction with any of our
prospective investors, there is a risk that we will not complete an equity
transaction. However, given the high level of interest of our prospective
investors, the advanced stage of these negotiations and the familiarity and
understanding that these prospective investors have with respect to our Company
and business, our management team believes that the Company has the ability to
complete an equity investment transaction in the second quarter of 2000.
We have taken several steps to maintain sufficient operational liquidity pending
finalizing and funding an equity transaction. These steps have included: (i)
stopping and/or slowing construction in progress in order to reduce
construction-related spending; (ii) borrowing $44.0 million pursuant to bridge
loan financing; and (iii) allowing construction-related payables to build up
over normal levels. Notwithstanding these measures, one of our principal
construction lenders has delayed making further advances on five residences
currently in construction. As a result, liens have been filed on these
construction projects resulting in defaults under the operative construction
loan credit agreements. Although the Company has obtained waivers through June
30, 2000 of these defaults, payment of these suppliers and contractors will need
to be effected in 2000 in order to permanently resolve these defaults. In
addition, additional liens or lawsuits may be filed by contractors and
subcontractors unless the advances under the credit facility are resumed, which
additional liens or lawsuits will in turn result in further defaults under the
operative credit agreements. Moreover, although the stopping or slowing of
construction in progress has helped to preserve operating liquidity, upon
resuming construction we may incur increased costs in order to complete
construction.
Due to the fourth quarter non-recurring charges and the anticipated reduction in
our projected earnings due to planned reduction in development activity and
reduced utilization of off-balance sheet joint venture structures, we would have
been in violation of some of the financial covenants in our major credit
facilities. However, we have obtained from these lenders either suspensions,
amendments or waivers of net worth or fixed charge coverage covenants in order
to avoid any actual default under these agreements and provide relief to the
Company through June 30, 2000. These suspensions, amendments and waivers impose
various conditions on the Company, including the requirement to secure equity or
equity-linked funding of at least $100.0 million on or before June 30, 2000 and,
in the case of one lender group, to have secured a written commitment with
respect to an equity transaction during the second quarter. To secure these
accommodations from our lenders, we have (i) agreed to pay various fees both in
form of cash and other consideration as well as established additional cash
reserves; (ii) increased the pricing on some of our financing, some of which
increases are permanent and others of which are temporary pending the completion
of our contemplated equity transaction; (iii) shortened the maturity dates on
some of our financing; (iv) delayed or waived our receipt of management fees and
reimbursement of operating costs of residences serving as collateral; and (v)
consented to the reduction of existing financing commitments of some of our
lenders.
If we are unable to finalize negotiations with an investor with respect to an
equity transaction or if we are unable to satisfy the conditions to a proposed
equity investment, the Company will need to seek to address its significant
short- and long-term liquidity shortfall through various measures, which may
include further debt restructuring, sale of assets on an expedited basis, the
surrender of collateral to certain of our lenders and further reduction of
overhead generally. However, we are not able to provide any assurance that,
without a significant equity transaction, the Company will be able to satisfy
its short-term or long-term liquidity needs. In addition, as we are seeking to
finalize and complete an equity transaction, we will need
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access to further advances under our construction lines, further extensions of
terms by construction-related creditors and access to further bridge financing.
We believe that upon executing and announcing a definitive agreement with
respect to an equity transaction that we will be able to work with various of
our lenders and lessors pending the closing and funding of the equity
transaction. However, we can provide no assurance that we will be able to reach
an accommodation with all of our lenders and lessors to accomplish this
objective.
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 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. In addition, given the significant amount of
construction and development activity which we anticipate, inflationary
pressures could affect our cost of new product deployment and financing. There
can be no assurances that financing will be available on terms acceptable to us.
ITEM 7A. 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 cause fluctuations in
our 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 December 31, 1999 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
percentage point parallel shift in the yield curve. The fair value of the debt
included in the analysis is $337.0 million. Although not expected, a one
percentage point change in the interest rates would have caused our annual
interest expense to change by approximately $3.4 million. Accordingly, a
significant increase in London Inter Bank Offered Rate ("LIBOR") could have a
material adverse effect on our earnings.
Although a majority of the debt and lease payment obligations we have as of, or
during the twelve months ended, December 31, 1999 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 significantly as we complete our pending development and
construction activity. We expect to refinance $130.8 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 our interest
costs. We do not use foreign currency exchange rate forward contracts or
commodity contracts and do not have foreign currency exposure as of December 31,
1999.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report.................................................................. 28
Consolidated Balance Sheets, as of December 31, 1999 and 1998................................. 29
Consolidated Statements of Operations for Years Ended December 31, 1999, 1998 and 1997........ 30
Consolidated Statements of Changes in Stockholders' Equity for Years Ended December 31,
1999, 1998 and 1997....................................................................... 31
Consolidated Statements of Cash Flows for Years Ended December 31, 1999, 1998 and 1997........ 32
Notes to Consolidated Financial Statements.................................................... 33-47
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alterra Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Alterra
Healthcare Corporation and subsidiaries (the Company) as of December 31, 1999
and 1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for the cost of start-up activities.
KPMG LLP
Chicago, Illinois
March 29, 2000
28
30
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
1999 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 18,728 $ 40,621
Accounts receivable, net............................................. 7,150 4,045
Pre-opening costs, net of amortization............................... -- 7,856
Notes receivable, net................................................ 32,530 10,986
Land held for sale................................................... 9,501 --
Other current assets................................................. 41,320 27,344
------------- ------------
Total current assets............................................. 109,229 90,852
------------- ------------
Property and equipment, net.............................................. 863,163 640,211
Restricted cash and investments.......................................... 28,325 4,504
Goodwill, net............................................................ 5,106 5,243
Other assets............................................................. 55,574 37,000
------------- ------------
Total assets..................................................... $1,061,397 $ 777,810
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations........................ $ 9,945 $ 4,376
Short-term notes payable............................................. 29,009 8,363
Accounts payable - trade............................................. 11,036 9,954
Accounts payable - construction...................................... 6,616 18,712
Accrued expenses..................................................... 37,972 15,723
Deferred rent and refundable deposits................................ 9,199 5,419
------------- ------------
Total current liabilities..................................... 103,777 62,547
------------- ------------
Long-term obligations, less current installments......................... 563,072 286,984
Convertible debt......................................................... 228,600 228,600
Deferred gain on sale and other.......................................... 11,592 18,347
Minority interest........................................................ 3,713 4,220
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued or outstanding......................................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
issued 22,111,671 shares of which 22,100,032 were outstanding
on December 31, 1999 and 22,030,097 shares of which
22,018,458 were outstanding on December 31, 1998.................. 221 220
Treasury stock, $.01 par value; 11,639 shares in 1999 and 1998....... (163) (163)
Additional paid-in capital........................................... 179,362 178,026
Accumulated deficit.................................................. (28,777) (971)
------------- ------------
Total stockholders' equity....................................... 150,643 177,112
------------- ------------
Total liabilities and stockholders' equity....................... $1,061,397 $ 777,810
============= ============
See accompanying notes to consolidated financial statements.
29
31
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
--------- --------- -----------
Revenue:
Resident service fees............................................ $349,770 $ 235,909 $ 128,856
Other............................................................ 26,411 8,514 1,888
-------- --------- -----------
Operating revenue.................................................... 376,181 244,423 130,744
Operating expenses (income):
Residence operations............................................. 224,213 147,931 81,558
Lease expense.................................................... 69,375 44,174 25,524
Lease income .................................................... (25,507) (4,915) --
General and administrative....................................... 44,898 23,200 22,168
Depreciation and amortization.................................... 21,178 19,730 9,271
Non-recurring charge (Note 5).................................... 47,280 -- 4,656
-------- --------- -----------
Total operating expenses..................................... 381,437 230,120 143,177
-------- --------- -----------
Operating (loss) income.............................................. (5,256) 14,303 (12,433)
Other (expense) income:
Interest expense, net............................................ (35,938) (11,024) (3,932)
Equity in losses of unconsolidated affiliates.................... (1,442) (31) (226)
Other expense.................................................... (20) (170) (112)
Minority interest in losses of consolidated
subsidiaries................................................... 4,018 20,610 8,440
-------- --------- -----------
Total other (expense), income, net........................... (33,382) 9,385 4,170
-------- --------- -----------
(Loss) income before income taxes and the cumulative effect of a change
in accounting principle........................................... (38,638) 23,688 (8,263)
Income tax benefit (expense)......................................... 14,669 (3,136) --
-------- --------- -----------
(Loss) income before the cumulative effect of a change in accounting
principle......................................................... (23,969) 20,552 (8,263)
-------- --------- -----------
Cumulative effect of change in accounting principle (net of tax
benefit) ............................................................ (3,837) -- --
-------- --------- -----------
Net (loss) income.................................................... $(27,806) $ 20,552 $ (8,263)
======== ========= ===========
(Loss) income per share before change in accounting principle:
Basic............................................................ $ (1.09) $ 0.94 $ (0.44)
======== ========= ===========
Diluted.......................................................... $ (1.09) $ 0.92 $ (0.44)
======== ========= ===========
Net (loss) income per share:
Basic............................................................ $ (1.26) $ 0.94 $ (0.44)
======== ========= ===========
Diluted.......................................................... $ (1.26) $ 0.92 $ (0.44)
======== ========= ===========
Weighted average common shares outstanding:
Basic............................................................ 22,088 21,905 18,651
======== ========= ===========
Diluted.......................................................... 22,088 24,145 18,651
======== ========= ===========
See accompanying notes to consolidated financial statements.
30
32
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
COMMON STOCK, TREASURY STOCK
AND ADDITIONAL
PAID-IN CAPITAL
--------------------------------
SHARES ACCUMULATED
OUTSTANDING AMOUNTS DEFICIT TOTAL
--------------- ------------ --------------- ------------
BALANCES AT DECEMBER 31, 1996.................. 18,539 $104,324 $(13,260) $ 91,064
--------------- ------------ --------------- ------------
Proceeds from issuance of common stock......... 2,800 60,744 -- 60,744
Shares issued - options exercised.............. 52 352 -- 352
Net loss..................................... -- -- (8,263) (8,263)
--------------- ------------ --------------- ------------
BALANCES AT DECEMBER 31, 1997.................. 21,391 $165,420 $(21,523) $143,897
--------------- ------------ --------------- ------------
Proceeds from issuance of common stock......... 427 9,331 -- 9,331
Shares issued - options exercised.............. 201 3,332 -- 3,332
Net income..................................... -- -- 20,552 20,552
--------------- ------------ --------------- ------------
BALANCES AT DECEMBER 31, 1998.................. 22,019 $178,083 $ (971) $177,112
--------------- ------------ --------------- ------------
Shares issued - options exercised.............. 81 1,337 -- 1,337
Net loss....................................... -- -- (27,806) (27,806)
--------------- ------------ --------------- ------------
BALANCES AT DECEMBER 31, 1999.................. 22,100 $179,420 $(28,777) $150,643
=============== ============ =============== ============
See accompanying notes to consolidated financial statements.
31
33
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net (loss) income ................................................. $ (27,806) $ 20,552 $ (8,263)
Adjustment to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization ..................................... 21,178 19,730 9,271
Amortization of deferred financing ................................ 3,679 1,593 123
Deferred income taxes ............................................. (16,732) (6,468) --
Equity in net loss from investments in unconsolidated affiliates .. 1,442 31 226
Minority interest in losses of consolidated subsidiaries .......... (4,018) (20,610) (8,440)
Tax effect of stock options exercised ............................. 537 1,709 --
Increase in net resident receivable ............................... (3,106) (2,213) (4,333)
Decrease (increase) in pre-opening costs .......................... 7,856 (11,965) (3,097)
Increase in income tax receivable ................................. (5,557) -- --
(Increase) decrease in other current assets ....................... (7,569) 3,347 (7,899)
Increase in accounts payable trade ................................ 1,082 4,077 (180)
Increase (decrease) in accrued expenses ........................... 10,011 (729) 8,583
(Decrease) increase in accrued merger charges ..................... (340) (5,151) 5,863
Increase in accrued development reduction charge .................. 13,348 -- --
Changes in other assets and liabilities, net ...................... 11,353 (8,971) 339
--------- --------- ---------
Net cash provided by (used in) operating activities ................. 5,358 (5,068) (7,807)
--------- --------- ---------
Cash flows from investing activities:
Payments for property, equipment and project development costs .... (181,794) (372,289) (286,487)
Net proceeds from sale of property and equipment .................. 18,263 -- 2,188
Increase in notes receivable, net of reserve....................... (21,544) (10,986) --
Acquisitions of facilities, net of cash .......................... (21,806) (49,509) (23,189)
Changes in investments in and advances to unconsolidated affiliates -- (4,682) (1,148)
Purchase of limited partnership interests ......................... (64,355) (27,053) (5,590)
Increase in long-term investments ................................. (23,821) (69) (1,600)
Decrease (increase) in short-term investments .................... -- 90,000 (90,000)
--------- --------- ---------
Net cash used in investing activities ............................... (295,057) (374,588) (405,826)
--------- --------- ---------
Cash flows from financing activities:
Repayments of short-term borrowings ............................... (1,130) (15,537) (34,335)
Repayments of long-term obligations ............................... (78,258) (53,089) (53,887)
Proceeds from issuance of debt .................................... 273,049 216,286 145,943
Proceeds from issuance of convertible debt ........................ -- 18,600 175,000
Payments for financing costs ...................................... (8,550) (8,932) (7,131)
Proceeds from sale/leaseback transactions ......................... 78,387 145,669 160,748
Issuance of common stock and other capital contributions .......... 797 10,710 61,285
Contributions by minority partners and minority stockholders ...... 3,511 26,732 6,393
--------- --------- ---------
Net cash provided by financing activities ........................... 267,806 340,439 454,016
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ................ (21,893) (39,217) 40,383
--------- --------- ---------
Cash and cash equivalents:
Beginning of year ................................................ 40,621 79,838 39,455
--------- --------- ---------
End of year ...................................................... $ 18,728 $ 40,621 $ 79,838
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized ............. $ 46,523 $ 27,631 $ 11,660
========= ========= =========
Cash paid during year for income taxes ............................ $ 1,424 $ 5,219 $ 94
========= ========= =========
See accompanying notes to consolidated financial statements.
32
34
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
Alterra Healthcare Corporation (the "Company") develops, owns,
and operates assisted living residences. As of December 31,
1999, the Company operated and managed 450 residences with
approximate capacity to accommodate 20,700 residents located
throughout the United States.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Alterra Healthcare Corporation and its majority-owned
subsidiaries. Results of operations of the majority-owned
subsidiaries are included from the date of acquisition. All
significant intercompany balances and transactions with such
subsidiaries have been eliminated in the consolidation.
Investments in other affiliated companies in which the Company
has a minority ownership position are accounted for on the
equity method.
Included in the consolidated financial statements are the
accounts of certain wholly owned subsidiaries that have been
formed as "special purpose entities" (SPEs) in accordance with
the requirements of certain of the Company's lenders. Mortgage
lenders imposing SPE requirements typically require that, in
connection with providing mortgage financing with respect to a
pool of residences, the residences actually be owned by one or
more SPEs, which become the borrower or borrowers under the
mortgage financing arrangement. Although lender requirements
with respect to such SPEs vary, a SPE typically is required to
maintain separate corporation records and books of account,
not commingle its assets with those of the parent company,
have a separate board of directors from the parent company,
(including at least one individual board member who is
independent of the parent company), maintain arm's length
relationships with the parent company, not guarantee or become
obligated for the debts of any other entity, including the
parent company, or to hold its credit as being available to
satisfy the obligations of others and not pledge its assets
for the benefit of any other entity, including the parent
company. Given the separate corporate existence of these SPEs
and the fact that the assets of each SPE are subject to the
prior claims of the individual creditors of the SPE, neither
the creditors nor stockholders of the Company (or of any other
of its subsidiaries) have any right to the assets of these
SPEs except indirectly by virtue of its (or the subsidiary's)
equity interest in such SPEs. SPEs included in the
consolidated financial statements include ALS Venture I, Inc.
(which owns 19 residences), ALS Venture II, Inc. (which owns
28 residences), ALS Financing, Inc. (which owns 5 residences)
and ALS Financing II, Inc. (which owns 7 residences and holds
a leasehold interest in one residence and an equitable
interest in one residence pursuant to an installment sale
contact), AHC Properties, Inc (which owns 10 residences), ALS
National SPE I, Inc. (which owns 5 residences), ALS Kansas,
Inc. (which owns 7 residences), ALS National, Inc. (which owns
2 residences), ALS West, Inc. (which owns 14 residences), ALS
Kenosha, Inc. (which owns 1 residence), ALS Olathe I, Inc.
(which owns 1 residence), AHC Purchaser, Inc. (which owns 19
residences), and AHC Tenant, Inc. (which leases 26
residences).
(C) USE OF ESTIMATES
The Company's financial statements have been prepared in
accordance with generally accepted accounting principles. The
preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
(D) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued 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
33
35
organization costs. It requires that costs of start-up
activities and organization costs be expensed when incurred.
The Company adopted the statement effective January 1, 1999,
and reported the impact as a cumulative effect of a change in
accounting principle. As of December 31, 1999, the effect of
adoption of this statement resulted in an after tax charge to
earnings of approximately $3.8 million, or $0.17 per diluted
share.
In September 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 1999. 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 its fair value. The
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 hedging activities. However, the Company
will assess the impact of this new statement on any future
hedging transactions.
(E) CASH EQUIVALENTS
The Company considers all highly liquid investments with
original maturities of less than ninety days to be cash
equivalents for purposes of the consolidated financial
statements.
(F) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF
CREDIT RISK
The Company determines fair value of financial assets based on
quoted market values. The fair value of debt is estimated
based on quoted market values, where available, or on current
rates offered to us for debt of the same maturities.
The Company's financial instruments exposed to concentrations
of credit risk consist primarily of cash and short-term
investments. The Company places its funds into high credit
quality financial institutions and, at times, such funds may
be in excess of the Federal Deposit Insurance Corporation
limits.
(G) LONG-LIVED ASSETS
Property and equipment are stated at cost, net of accumulated
depreciation. Property and equipment under capital leases are
stated at the present value of minimum lease payments.
Depreciation is computed over the estimated lives of the
assets using the straight-line method. Buildings and
improvements are depreciated over 20 to 40 years, and
furniture, fixtures, and equipment are depreciated over three
to seven years. Maintenance and repairs are expensed as
incurred.
Goodwill represents the costs of acquired net assets in excess
of their fair market values. Amortization of goodwill is
computed using the straight-line method over the expected
periods to be benefited, generally 40 years. The Company's
management periodically evaluates goodwill for impairment
based upon expectations of undiscounted cash flows in relation
to the net capital investment in the entity. Accumulated
amortization of goodwill was $586,485 and $449,649 as of
December 31, 1999 and 1998, respectively.
(H) DEFERRED FINANCING COSTS
Financing costs related to the issuance of debt are
capitalized and included in other assets, and are amortized to
interest expense using the effective-interest method over the
term of the related debt.
34
36
(I) REVENUE
Revenue, which is recorded when services are rendered,
consists primarily of resident service fees which are reported
at net realizable amounts. Other revenue consists of the
following components (in thousands):
1999 1998 1997
-------------- ---------- ----------
Management fees............................. $22,956 $5,676 $1,287
Franchise fees.............................. 2,290 1,545 305
Development fees........................... 1,165 1,293 296
-------------- ---------- ----------
Total other revenue....................... $26,411 $8,514 $1,888
============== ========== ==========
Management fees are recognized based on the terms of the
management agreements in place for managed residences owned by
third parties and those operated under unconsolidated joint
venture arrangements. Fees are generally recognized based on a
percentage of stabilized revenues. Fees are recognized during
the start up period to offset costs to hire and train staff,
licensing and other activities, as well as after managed
residences are open and operating.
Franchise fees are recognized based on the applicable
franchise agreements which charge fees for the right to use
Company brand names and operating systems. Fees are recognized
based on a fixed fee when franchised residences open and a
percentage of revenue once in operation.
Development fees are recognized based on the applicable
agreements whereby the Company receives fees for construction
of Company prototype buildings for the benefit of third
parties. These fees are recorded during the construction
period based on achievement of certain milestones as defined
in the development agreement.
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the expected future tax consequences attributable to temporary
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(K) NET INCOME (LOSS) PER COMMON SHARE
The Company presents both basic and diluted earnings per
share, where applicable. Basic earnings per share is computed
by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential
dilution that could occur if common stock equivalents were
exercised and then shared in the earnings of the Company.
Common stock equivalents were anti-dilutive in 1999 and 1997,
accordingly, basic and diluted loss per share amounts were the
same.
35
37
(L) RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997
financial statements to conform with the 1999 presentation.
(2) ACQUISITIONS AND DEVELOPMENT JOINT VENTURE
The Company completed the following acquisitions during 1998:
- An assisted living residence located in Southern California in
March 1998;
- Seven assisted living residences located in Kansas in
September 1998 acquired from a franchisee of the Company;
- Two assisted living residences located in Wisconsin, one of
which was still under construction, in September 1998.
The aggregate purchase price for all 1998 acquisitions totaled $62.8
million, $49.5 million of which was paid in cash and the remainder was
debt assumed by the Company. All 1998 acquisitions have been accounted
for using the purchase method.
During 1999, the Company completed the following acquisitions:
- An assisted living residence located in Wisconsin in May 1999;
- A leasehold interest in an assisted living residence located
in Washington in October 1999 accounted for as an operating
lease;
- A leasehold interest in an assisted living residence located
in California in November 1999 accounted for as a capital
lease.
The Company also consummated a synthetic lease transaction relating to
26 assisted living and Alzheimer's/dementia care residences that were
previously owned and operated by Manor Care, Inc. and its affiliates
(the "Transaction") in July and September 1999. Pursuant to the
Transaction, an affiliate of a commercial bank acquired the 26
residences for an aggregate purchase price of approximately $189.1
million (including closing costs) and simultaneously leased the 26
residences to AHC Tenant, Inc., a wholly-owned subsidiary of the
Company. The Company's lease of these 26 residences has a term of ten
years, reflects initial rental based on a lease constant of 9.93% and
contains an option to purchase the 26 residences at the end of the
lease term for a pre-negotiated fixed price. For financial accounting
purposes, leases for 17 of the residences have been treated as
operating leases and leases for nine residences were treated as capital
leases. The Company recorded $53.2 million of property and equipment
and $53.2 million of long term obligations upon completion of the
transaction related to these capital leases. As part of this
Transaction, the Company entered into 26 joint venture arrangements
with a third party investor which owns 99% of each joint venture. The
joint ventures sublease the real estate from AHC Tenant, Inc. The
Company manages these residences on behalf of the joint ventures.
The aggregate purchase price for all 1999 acquisitions and synthetic
lease transaction totaled $198.4 million, $21.8 million of which was
paid in cash and the remainder was debt and lease obligations assumed
by the Company. All 1999 acquisitions have been accounted for using the
purchase method.
The Company entered into the following significant joint ventures
during 1999:
Manor Care, Inc. and the Company established a joint venture to develop
up to $500 million of Alterra-branded Alzheimer's/dementia care and
assisted living residences in Manor Care's core markets over the next
three to five years. The Company began joint development under this
arrangement in the second quarter of 1999 with plans to continue joint
development activities over a three to five year period. As of
December 31, 1999, 43 residences have been contributed to this
development joint venture; 13 of these residences were open as of
December 31, 1999 with the remainder in various states of construction.
The Company has a 5% ownership interest in this joint venture and
certain call option rights and put option obligations with respect to
the equity interests held by joint venture partners.
36
38
The joint venture had $200 million of debt financing commitments from a
bank syndicate available of which $50.7 million was outstanding at
December 31, 1999 primarily relating to the 13 residences open at
December 31, 1999. This debt is guaranteed by both Manor Care Inc. and
the Company. The Company had $24.7 million in notes receivable
outstanding as of December 31, 1999 relating primarily to construction
costs on the 23 residences contributed by the Company not open as of
December 31, 1999. This receivable was to be satisfied through the
funding of the in-place bank financing.
On March 30, 2000, the Company and Manor Care, Inc. agreed to amend the
original $200 million financing commitment and lower the commitment to
$60 million. As a result, the Company has established a reserve of $5.0
million against the $24.7 million note receivable as of December 31,
1999. Of the $5.0 million reserve, $1.7 million relates to management
fees previously recorded as revenue by the Company per the original
agreement. The remaining $3.3 million represents reserves against
construction and development costs already incurred associated with a
portion of the residences which the Company does not plan to continue
developing. In addition, $2.0 million of the $10.6 million reserve
established for future costs associated with development activity
relates to anticipated additional costs incurred on development
projects currently in this joint venture for which the Company now
plans to terminate construction and dispose of the land.
(3) NOTES RECEIVABLE
Notes receivable represent balances due from third party investors. The
Company funds construction and working capital on behalf of the third
parties and anticipates payment upon the closing of construction
financing on these properties. The $32.5 million of notes receivable is
net of a $5.0 million reserve (See Note 2).
(4) LAND HELD FOR SALE AND OTHER CURRENT ASSETS
Land held for sale represents the net realizable value of 25 sites the
Company has decided not to develop and are currently offered for sale
(see Note 5).
Other current assets are comprised of the following at December 31 (in
thousands):
1999 1998
------------ -----------
Supply inventory.................................. $ 9,502 $ 7,511
Restricted cash................................... 7,191 9,313
Deferred tax...................................... 5,708 2,346
Income tax refund receivable...................... 5,557 --
Prepaid expenses.................................. 2,782 4,648
Other current assets.............................. 10,580 3,526
------------ -----------
Total other current assets.................... $41,320 $27,344
============ ===========
(5) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows (in
thousands):
1999 1998
--------- ---------
Land and improvements .................... $ 70,916 $ 55,037
Buildings and leasehold improvements 656,267 407,631
Furniture, fixtures, and equipment ....... 84,941 55,655
Construction in progress ................. 92,741 142,433
--------- ---------
Total property and equipment ............. 904,865 660,756
Less accumulated depreciation ............ (41,702) (20,545)
--------- ---------
Property and equipment, net .............. $ 863,163 $ 640,211
========= =========
At December 31, 1999, property and equipment includes $67.4 million of
buildings and improvements held under capital leases. The related
accumulated amortization totaled $945,689 at December 31, 1999.
37
39
Interest is capitalized in connection with the construction of
residences and is amortized over the estimated useful lives of the
residences. Interest capitalized in 1999, 1998 and 1997 was
approximately $10.3 million, $13.8 million and $6.7 million,
respectively.
During the fourth quarter of 1999, management reviewed development
projects not yet in construction and, in light of the competitive
environment and tighter capital markets, implemented a plan to exit or
defer a substantial portion of these projects. The plan to exit these
activities, including writing off costs, reclassification of land to
land held for sale and the closing of our construction subsidiary has
commenced. The write off of $28.4 million for costs already incurred on
development projects that will not be completed was charged to
operations, a reserve of $8.6 million was established for costs related
to exiting these activities, a reserve was established for the employee
costs and lease obligations associated with closing down our
construction subsidiary and related activities at the national office.
The Company also established a $7.0 million reserve related to projects
currently in a development joint venture with Manor Care, Inc. which is
discussed further in Note 2. In addition, the Company recorded other
charges as set forth in the following table, including a charge for
failed acquisitions, corporate downsizing, office relocation costs, and
additional asset write-off due to the relocation of the Company's
national headquarters. The following is a summary of the non-recurring
charge and other one-time charges (in thousands):
Non-recurring Charge: 1999
-------
Exiting construction and development activities.................... $28,400
Construction and development costs related to exit................. 8,600
Employee costs and lease obligations............................... 2,800
Other.............................................................. 480
-------
Restructuring charge $40,280
-------
Reserve related to development joint venture costs 7,000
-------
Total non-recurring charge $47,280
=======
Other:
Write-off of failed acquisitions, corporate downsizing, and office
relocation costs.................................................. $ 2,300
Write-off of deferred financing commitment fees................... 2,700
Write-off of assets due to national office relocation............. 600
-------
$ 5,600
=======
38
40
Other one time charges of $2.3 million were recorded in general and
administrative expenses, $600,000 in depreciation and amortization, and
$2.7 million in interest expense in the fourth quarter of 1999.
Construction in progress consisted principally of costs related to the
construction of assisted living residences with outstanding
construction commitments totaling between $65.0 million and $70.0
million and $93.9 million at December 31, 1999 and 1998.
(6) UNCONSOLIDATED AFFILIATES AND MANAGED RESIDENCES
The Company manages residences primarily in the start-up or lease-up
phases of operations in which it either has no ownership or a minority
ownership position, typically less than 10%. Historically, the Company
has subsequently elected to purchase or acquire the remaining ownership
interest in a majority of these residences, at which point the
residences are included in consolidated operating results. As of
December 31, 1999, the Company owned minority interests in entities
owning or leasing (and also manages) 87 residences and managed 14 other
residences. As of December 31, 1998, the Company owned minority equity
interests in entities owning or leasing (and also manages) 49
residences and managed 17 other residences. Included in other
liabilities of the Company's balance sheet are net advances from the
affiliates of $1.6 million and $2.0 million as of December 31, 1999 and
1998, respectively.
The results of operations of these unconsolidated and managed
residences for 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
-------- -------- --------
Residence service fees ............... $ 58,409 $ 20,693 $ 7,268
Residence operation expenses 65,374 18,602 5,692
-------- -------- --------
Residence (loss) profit .............. (6,965) 2,091 1,576
Management fee expense ............... 24,133 5,220 1,583
Financing expense .................... 28,660 12,551 2,367
-------- -------- --------
Loss before tax ...................... $(59,758) $(15,680) $ (2,374)
======== ======== ========
Financing expense on these residences includes $25.5 million and $4.9
million of lease expense in 1999 and 1998, respectively, which
represents lease income to the Company from these residences. The
Company retains ownership in the underlying assets and then leases the
assets to the unconsolidated and managed affiliates.
Included in the results above are six residences managed pursuant to an
agreement with an affiliate under which the Company provides payroll
processing and financial statement preparation services for a
partnership that is 50% owned by an officer and a stockholder. Under
the terms of this agreement, the Company charged an annual fee of
$10,000 in 1999 and $10,000 in 1998 for provision of such management
services.
39
41
(7) RESTRICTED CASH AND INVESTMENTS
Restricted cash and investments consist of certificates of deposit
restricted as collateral for lease arrangements and debt service
reserves with interest rates ranging from 4.0% to 5.5% and maturities
ranging from 1.5 years up to 10 years.
(8) OTHER ASSETS
Other assets are comprised of the following at December 31 (in
thousands):
1999 1998
---------- ------------
Deferred financing costs, net............ $23,242 $18,290
Deferred tax............................. 12,645 5,114
Lease security deposits.................. 9,663 5,685
Organizational and other costs, net...... -- 2,631
Deposits and other....................... 10,024 5,280
---------- ------------
Total other assets................... $55,574 $37,000
========== ============
(9) LONG-TERM DEBT, CAPITAL LEASES, AND FINANCING OBLIGATIONS
Long-term debt, capital leases, and financing obligations consist of
the following at December 31 (in thousands):
1999 1998
----------- ------------
5.25% convertible subordinated debentures due December 15,
2002, callable by the Company on or after December 31, 2000.... $143,750 $143,750
7.00% convertible subordinated debentures due June 1, 2004,
callable by the Company on or after June 15, 2000.............. 50,000 50,000
6.75% convertible subordinated debentures due June 30, 2006,
callable by the Company on or after July 15, 1999.............. 34,850 34,850
----------- ------------
Total convertible debt................................. $228,600 $228,600
----------- ------------
Mortgages payable, due from 2000 through 2022; weighted
average interest rates of 8.04%............................. $471,319 $280,219
Capital lease obligation payable through 2009; weighted
average interest rate of 9.93%................................. 53,079 --
Capital lease obligation payable through 2004; weighted
average interest rate of 10.00%................................ 14,299 --
Serial and term revenue bonds maturing serially from 1999
through 2013; interest rates ranging from 4.00% to 9.50%....... 4,320 6,761
Bridge loan financing at 8.00% interest........................ 30,000 --
Sale/leaseback financing obligation, variable interest at the
11th District FHLB rate plus 2-3/4%, payable in monthly
installments, due 2000......................................... -- 4,227
Other.......................................................... -- 153
----------- ------------
Total long-term obligations.............................. 801,617 519,960
Less current installments...................................... 9,945 4,376
----------- ------------
Total long-term obligations, less current
installments........................................... $791,672 $515,584
=========== ============
The mortgages payable and capital lease obligations are secured through
security agreements and guarantees by the Company. In addition, certain
security agreements require the Company to maintain collateral and debt
reserve
40
42
funds. These funds, which are recorded as restricted cash and long-term
investments, consist of certificates of deposit and restricted cash
required to be maintained from 1999 through 2009.
At December 31, 1999, the Company has outstanding $3.4 million of
mortgage notes payable that were assumed in conjunction with non-cash
acquisition activities in 1999.
In December 1999, the Company entered into a bridge loan arrangement
with an affiliated group (the "Bridge Lender") in connection with the
Company's repurchase of 19 Alterra residences then leased from a health
care REIT (the "REIT Residences"). Pursuant to this arrangement, the
Company borrowed $14.0 million (the "Tranche A Loan") for working
capital purposes and $30.0 million (Tranche B Loan") as bridge
financing for its initial purchase of seven REIT Residences in December
1999. The Tranche A Loan has a term of up to 12 months and bore
interest at an initial annual rate of 8% for the first three months, 9%
for the next three months and increasing thereafter by 0.5% per month.
The Tranche A Loan is secured by mortgages on certain land and a stock
pledge of a subsidiary corporation (the "Holding Subsidiary") formed to
serve as the holding company for the subsidiary formed to acquire the
REIT Residences. The Tranche B Loan had a term of up to six months,
bore interest at an annual rate of 10% for the first three months and
at a rate escalating by 0.5% per month thereafter. The Tranche B Loan
was secured by mortgages on the seven REIT Residences acquired with the
proceeds from the Tranche B Loan.
In February 2000, the Company acquired the remaining 12 REIT
Residences. In connection therewith, the Company obtained $60.0 million
of mortgage financing from one of its bank lenders, and utilized $30.0
million of the proceeds to purchase the 12 REIT Residences and $30.0
million to repay the Tranche B Loan.
In connection with this bridge loan arrangement, the Bridge Lender was
paid commitment and loan fees aggregating $820,000, acquired a $1.0
million redeemable, convertible preferred stock interest in the Holding
Subsidiary and was given the right to co-invest in certain future
Alterra equity transactions by converting its Tranche A Loan receivable
into an equity investment in Alterra. The Holding Subsidiary preferred
stock acquired by the Bridge Lender accrues dividends at 8% per annum,
is convertible at any time after December 31, 2000 into common shares
of the Holding Subsidiary representing approximately 35% of the
outstanding common stock of the Holding Subsidiary and may be redeemed
by Holding Subsidiary at any time for an amount equal to the fair
market value of the Subsidiary Preferred at that time provided that
such fair market value shall in no event exceed the sum of (i) its
stated value of $1.0 million (ii) the accrued and unpaid dividends
thereon and (iii) a redemption premium of $1.5 million if redeemed on
or before March 31, 2000, increasing by $300,000 per month thereafter.
One member of the Board of Directors of the Company, and certain of his
affiliates, hold equity interests in the Bridge Lender.
We expect to refinance $130.8 million of our fixed rate debt in 2000
and, as a result, convert this into variable rate debt. See
"Quantitative and Qualitative Disclosures about Market Risk."
Principal payments on long-term debt, capital leases, and financing
obligations for the next five years and thereafter are as follows (in
thousands):
2000............................................................. $ 9,945
2001............................................................. 4,601
2002............................................................. 155,695
2003............................................................. 27,335
2004............................................................. 55,228
Thereafter....................................................... 548,813
-----------
Total long-term debt, capital leases, and financing obligations.. $801,617
===========
41
43
(10) ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31 (in
thousands):
1999 1998
----------- ----------
Accrued charges related to exiting development activity..... $13,348 $ --
Accrued salaries and wages.................................. 6,016 4,780
Accrued vacation............................................ 4,671 2,819
Accrued property taxes...................................... 3,131 2,562
Accrued interest............................................ 3,036 1,295
Other....................................................... 7,770 4,267
----------- ----------
Total accrued expenses.................................. $37,972 $15,723
=========== ==========
(11) SHORT-TERM NOTES PAYABLE
As of December 31, 1999 short-term notes payable consist of a $15.0
million unsecured line of credit bearing interest at the then current
prime rate and a $14.0 Tranche A Loan obtained from the Bridge Lender
(see Note 9).
As of December 31, 1998, short-term notes payable consisted of a $5.0
million line of credit bearing interest at the then current prime rate
and $3.4 million of notes payable to a health care real estate
investment trust which were subsequently repaid upon repurchase of
seven buildings in December 1999.
(12) STOCKHOLDERS' EQUITY
In August 1996 the Company completed an initial public offering of
6,000,000 shares of common stock, of which 3,443,206 shares were sold
by the Company and 2,556,794 shares were sold by existing stockholders.
Net proceeds to the Company were approximately $40.0 million.
In December 1997 the Company completed a second public offering of
2,800,000 shares of common stock. Net proceeds to the Company were
approximately $61.0 million.
On December 10, 1998, the Company entered into a Rights Agreement with
American Stock Transfer & Trust Company, as Rights Agent, pursuant to
which it declared and paid a dividend of one preferred share purchase
right (a "Right") for each outstanding share of common stock. Each
Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Junior Participating Preferred
Stock, $.01 par value per share (the "Preferred Shares"), of the
Company at a price of $130.00 per one one-hundredth of a preferred
share.
(13) STOCK OPTION PLAN
In 1995 the Company adopted a stock option plan (the "1995 Plan")
pursuant to which the Company's Board of Directors may grant stock
options to officers and key employees. The 1995 Plan authorizes grants
of options to purchase up to 2,500,000 shares of authorized but
unissued common stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant. Generally,
stock options have 10-year terms, vest 25% per year, and become fully
exercisable after four years from the date of grant.
At December 31, 1999, 1,056,453 shares were available for grant under
the 1995 Plan. The per share weighted-average fair value of stock
options granted during 1999 and 1998 were $12.63 and $10.44 on the date
of grant using the Black Scholes option-pricing model with the
following weighted-average assumption: expected dividend yield 0.0%,
risk-free interest rate of 5.0%, expected volatility of 63% for 1999
grants and 43% for 1998 grants and an expected life of 7 years.
In conjunction with the 1997 merger of the Company and Sterling House
Corporation, Sterling stock options that were outstanding were
exchanged for options to purchase the Company's common stock, adjusted
for the exchange ratio operative in the merger. Under the terms of the
Sterling House Corporation 1995 Incentive Stock Option Plan, all
options became vested and immediately exercisable as a result of the
Sterling merger.
For financial reporting, the Company applies the intrinsic value method
of APB Opinion No. 25 in accounting for stock options and, accordingly,
compensation cost has been recognized only for stock options granted
below fair market value. Had the Company determined compensation cost
based on the fair value method prescribed by SFAS
42
44
No. 123 for stock options granted in 1999, 1998 and 1997, its net
(loss) income and net (loss) income per share would have been increased
(decreased) to the pro forma amounts indicated below, (in thousands,
except per share data):
NET (LOSS) INCOME NET (LOSS) INCOME
PER SHARE
---------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ---------- --------- --------- -----------
As reported...... $(27,806) $20,552 $(8,263) $(1.26) $0.92 $(0.44)
Pro forma........ $(27,857) $18,821 $(10,267) $(1.26) $0.78 $(0.55)
Stock option activity during the periods indicated is as follows:
WTD.-AVG.
NUMBER OF EXERCISE
SHARES PRICE
-------------- --------------
BALANCE AT DECEMBER 31, 1997 1,187,401 $ 9.43
Granted...................... 893,801 19.77
Exercised.................... (200,579) 8.15
Forfeited.................... (42,997) 17.49
------------ ---------
BALANCE AT DECEMBER 31, 1998 1,837,626 $14.45
Granted...................... 20,100 18.75
Exercised.................... (81,574) 9.66
Forfeited.................... (180,114) 19.24
------------ ---------
BALANCE AT DECEMBER 31, 1999..... 1,596,038 $14.20
============== =========
Stock options outstanding at December 31, 1999 are as follows:
AVERAGE
RANGE OF NUMBER REMAINING WTD.-AVG. NUMBER WTD.-AVG.
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- -------------------- --------------- ---------------- ------------ -------------- -------------
$ 0.00 - 0.09 11,007 5.8 $ 0.09 11,007 $ 0.09
$ 0.10 - 8.69 456,569 5.7 5.56 434,861 5.41
$ 8.70 - 11.12 65,175 7.3 11.02 65,175 11.02
$11.13 - 17.94 278,328 6.9 14.23 192,833 14.62
$17.95 - 20.81 703,386 8.4 18.65 185,499 18.69
$20.82 - 29.56 81,573 7.4 28.59 27,318 28.01
--------------- ---------------- ------------ -------------- -------------
Total 1,596,038 7.2 $14.20 916,693 $11.04
=============== ================ ============ ============== =============
(14) INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 are as follows (in thousands):
1999 1998 1997
------------ ---------- -----------
Income tax expense (benefit):
Current:
Federal............... $ (410) $ 8,577 $ 726
State................. 65 1,027 200
------------ ---------- -----------
Total current.............. (345) 9,604 926
Deferred:
Federal............... (15,017) (5,795) (726)
State................. (1,716) ( 673) (200)
------------ ---------- -----------
Total deferred........... (16,733) (6,468) (926)
------------ ---------- -----------
Total.................... $(17,078) $ 3,136 $ --
============ ========== ===========
43
45
Deferred tax assets and liabilities consist of the following at December
31 (in thousands):
1999 1998
------------- -------------
Deferred tax assets:
Net operating loss carryforwards............. $10,686 $1,154
Development write-off........................ 11,637 ---
Deferred gain sale/leaseback................. 2,825 5,392
Accrued expenses............................. 3,129 2,140
Investment in consolidated affiliates........ 1,076 1,194
Other........................................ 449 --
------------- -------------
Total deferred tax assets........................ $29,802 $9,880
============= =============
Deferred tax liabilities:
Acquisition basis............................ $ 1,715 $ 1,715
Depreciation................................. 8,894 771
------------- -------------
Deferred tax liabilities......................... $10,609 $2,486
============= =============
During 1999, a final reconciliation of the 1998 tax return resulted in
a depreciation reclassification. This reclassification reduced the
current payable and increased the deferred tax liability by $5.4
million. The valuation allowance for deferred tax assets as of December
31, 1999 and 1998 was $0. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not
that some portion of all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this
assessment. The Company believes that it is more likely than not that
the deferred tax asset will be realized.
The effective tax rate on income before income taxes varies from the
statutory Federal income tax rate as follows:
1999 1998 1997
----------- ------------ ------------
Statutory rate............. 35.0% 35.0% (34.0)%
State taxes, net........... 2.3 4.0 (5.5)
Valuation allowance........ -- (28.7) 39.5
Other...................... 0.7 2.9 --
----------- ------------ ------------
Effective tax rate......... 38.0% 13.2% 0.0%
=========== ============ ============
The Company has approximately $27.4 million of tax net operating loss
carryforwards at December 31, 1999. Any unused net operating loss
carryforwards will expire commencing in the year 2007 through 2019. The
utilization of net operating loss carryforwards may be further limited
as to future use due to the change in control provisions in the
Internal Revenue Code. In addition, the Company has alternative minimum
tax credit carryforwards of approximately $136,000 which are available
to reduce future federal regular income taxes, if any, over an
indefinite period.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practical
to estimate that value:
Cash and cash equivalents:
The carrying amount approximates fair value because of the short
maturity of those instruments.
Restricted cash and long-term investments:
The carrying amount approximates fair value because of the short
maturity of the underlying investments. Restricted cash and long-term
investments are classified as such because they are restricted as
collateral for lease arrangements and debt service reserves.
44
46
Short-term notes payable, mortgage notes payable, convertible
debentures payable:
The carrying amount of short-term notes payable approximates fair value
because of the short maturity of those instruments.
The carrying amount of mortgage notes payable approximates fair value
because the stated interest rates approximate fair value.
The fair value of the Company's convertible debentures is estimated
based on quoted market prices. At December 31, 1999, the Company's
convertible debentures had a book value of $228.6 million. Based on
quoted market prices at December 31, 1999, the fair value of those
convertible securities was estimated to be $130.0 million.
(16) COMMITMENTS AND CONTINGENCIES
The Company has entered into sale/leaseback agreements with certain
REITs as a source of financing the development, construction, and to a
lesser extent, acquisitions of assisted living residences. Under such
agreements, the Company typically sells to the REIT one or more
residences at a negotiated value and simultaneous with such sale the
Company enters into a lease agreement for such residences. The initial
terms of the leases vary from 10 to 15 years and include aggregate
renewal options ranging from 15 to 30 years. The Company is responsible
for all operating costs, including repairs, property taxes, and
insurance. The annual minimum lease payments are based upon a
percentage of the negotiated sales value of each residence. The
residences sold in sale/leaseback transactions typically are sold for
an amount equal to or less than their fair market value. The leases are
accounted for as operating leases with any applicable gain or loss
realized in the initial sales transaction being deferred and amortized
into income in proportion to rental expense over the initial term of
the lease.
During 1998 the Company entered into sale and leaseback financing
agreements with certain REITs for approximately $148.0 million with
financing terms similar to the arrangements described above. Any gain
or loss was deferred and will be amortized into income in proportion to
rental expense over the initial term of the lease.
During 1999 the Company entered into additional sale and leaseback
financing arrangements with certain REITs for approximately $78.4
million with financing terms similar to the arrangements described
above. Any gain or loss was deferred and will be amortized into income
in proportion to rental expense over the initial term of the lease.
The Company is required by certain REITs to obtain a letter of credit
as collateral for leased residences. Outstanding letters of credit at
December 31, 1999 and 1998 were $4.6 million and $4.3 million,
respectively.
In addition to leased residences, the Company leases certain office
space and equipment under noncancelable operating leases from
nonaffiliates that expire at various times through 2017. Rental expense
on all such operating leases, including residences, for the years ended
December 31, 1999, 1998, and 1997 was $69.4 million, $44.2 million and
$25.5 million, respectively.
Future minimum lease payments for the next five years and thereafter
under noncancelable leases at December 31, 1999 are as follows (in
thousands):
CAPITAL OPERATING
----------- -------------
2000..................................................... $6,335 $ 80,321
2001..................................................... 6,377 80,502
2002..................................................... 6,412 80,507
2003..................................................... 6,406 80,511
2004..................................................... 21,435 80,516
Thereafter............................................... 76,273 384,344
----------- -------------
Total minimum lease payment.............................. $123,238 $786,701
=============
Less amount representing interest........................ 55,860
-----------
Present value of net minimum capital lease payments...... 67,378
Less current portion..................................... 397
-----------
Long-term capital lease obligations...................... $ 66,981
===========
45
47
The Company has an option under most of its joint venture arrangements
to purchase the equity interests of its joint venture partners based
upon agreed upon terms and conditions (call option). If the Company
elects not to exercise this option, the joint venture partner can
require the Company to buy out the joint venture partner's equity
interest at the current fair market value (put option). Based on a
number of assumptions, including assumptions as to the number of
residences to be developed with joint venture partners, the timing of
such development, the time at which such options will be exercised, and
the fair market value of such residences at the date such options are
exercised, the Company estimates that it may require approximately $75
million to $85 million to satisfy these purchase obligations during
2000.
(17) EARNINGS PER COMMON SHARE
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). SFAS 128 was designed to simplify the standards
for computing earnings per share and increase the comparability of
earnings per share data on an international basis. SFAS 128 replaces
the presentation of primary earnings per share with a presentation of
basic earnings per share and requires dual presentation of basic and
diluted earnings per share on the face of the statement of income of
all entities with complex capital structures. The Company adopted SFAS
128 during the first quarter of fiscal 1998 and, accordingly, earnings
per share for all prior periods presented have been restated to conform
to the requirements of this new standard. The following table sets
forth the computation of basic and diluted earnings per share (in
thousands, except per share data):
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------- ------------- --------------
Numerator:
Numerator for basic earnings per share--net
(loss) income............................. $(27,806) $20,552 $(8,263)
Convertible debt interest add-back.......... -- 1,563 --
------------- ------------- --------------
Numerator for diluted earnings per
share--net (loss) income.................. $(27,806) $22,115 $(8,263)
============= ============= ==============
Denominator:
Denominator for basic earnings per
share--weighted average shares.............. 22,088 21,905 18,651
Effect of dilutive securities--stock
options.................................... -- 523 --
Effect of dilutive securities--convertible
debt....................................... -- 1,717 --
------------- ------------- --------------
Denominator for diluted earnings per
share--adjusted weighted-average shares and
assumed conversions......................... 22,088 24,145 18,651
============= ============= ==============
Basic (loss) earnings per common share........ $(1.26) $0.94 $ (0.44)
============= ============= ==============
Diluted (loss) earnings per common share...... $(1.26) $0.92 $ (0.44)
============= ============= ==============
46
48
(18) SUBSEQUENT EVENTS
In February 2000 the Company borrowed an additional $20.0 million from
the Bridge Lender (see Note 9) by amending and increasing the amount
borrowed under its Tranche A Loan. Upon amending the Tranche A Loan,
the interest rate on this loan increased to 10% per annum. As
additional security for the Tranche A Loan, the Company granted the
bridge lender mortgages on six residences. Of the $20.0 million
additional advance on the Tranche A Bridge Loan, $4.1 million was
placed in escrow to facilitate the funding of the remaining
construction costs with respect to the mortgaged residences. A facility
fee of $800,000 was paid to the Bridge Lender upon the closing of the
amended Tranche A Bridge Loan.
As discussed in Note 2, on March 30, 2000, the Company, together with
Manor Care Inc. modified the $200 million financing commitment under
its joint venture arrangement which will reduce the commitment to $60.0
million. As a result, the Company has established in the 1999 financial
statements a $5.0 million reserve against its note receivable from the
joint venture to reflect the estimated realizable value. An additional
$2.0 million reserve was established in the 1999 financial statements
for cost associated with exiting development projects which the Company
will not continue due to this renegotiation.
The Company is seeking to address its anticipated short and long term
capital needs through the sale of at least $100 million of additional
equity or equity-linked securities of the Company during the second
quarter of 2000. The Company has retained investment bankers to assist
in identifying possible sources of equity capital and to structure and
negotiate an appropriate transaction. The Company is currently engaged
in detailed negotiations with two investor groups, both of which
include existing stockholders of the Company.
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY FINANCIAL SUMMARY
(Unaudited)
(In thousands, except per share data)
QUARTER ENDED
---------------------------------------------------------
12/31 9/30 6/30 3/31
----------- ---------- ----------- -----------
1999
- -----------------------------------------------
Operating revenues.......................... $ 101,259 $100,111 $91,920 $82,891
Operating (loss) income..................... (32,325) 9,698 9,681 7,690
Net (loss) income........................... (39,096) 5,024 4,838 1,428
Basic (loss) income per share............... (1.81) 0.23 0.22 0.06
Diluted (loss) income per share............. $ (1.81) $ 0.23 $ 0.22 $ 0.06
1998
- -----------------------------------------------
Operating revenues.......................... $76,454 $66,286 $55,199 $46,484
Operating income (loss)..................... 10,778 2,064 1,578 (148)
Net income (loss)........................... 6,273 5,821 4,875 3,583
Basic income (loss) per share............... 0.29 0.27 0.22 0.16
Diluted income (loss) per share............. $ 0.27 $ 0.26 $ 0.22 $ 0.16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item with respect to the Company's
directors and executive officers and compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, is incorporated herein by reference
to the Alterra Healthcare Corporation definitive proxy statement to be filed
with the Securities and Exchange Commission in connection with the 2000 Annual
Meeting of Stockholders (the "2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
47
49
The information required under this item is incorporated by reference
to the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference
to the 2000 Proxy Statement.
48
50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. The following documents are filed as part of the report:
(a) FINANCIAL STATEMENTS. The following financial statements of
the Registrant and the Report of Independent Public
Accountants therein are filed as part of this Report on Form
10-K:
PAGE
-------------
Independent Auditor's Report........................... 28
Consolidated Balance Sheets............................ 29
Consolidated Statements of Operations.................. 30
Consolidated Statements of Shareholders' Equity........ 31
Consolidated Statements of Cash Flows.................. 32
Notes to Consolidated Financial Statements............. 33-47
(b) SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted as the required information either
is not applicable or is included in the Consolidated Financial
Statements or related notes.
(c) 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 December 31, 1999, other than its Form 8-K dated
October 19, 1999 in which the Registrant announced that it had
completed the acquisition of eight additional residences from
Manor Care, Inc.
(d) EXHIBITS. The following exhibits are filed as part of, or
incorporated by reference into this report on Form 10-K:
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, Registration No.
333-04595, filed with the Commission on July 30, 1996 (the "Form
S-1")).
3.2 Certificate of Merger, dated May 24, 1996 (incorporated herein by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-3, Registration No. 333-37737, filed with the
Commission on October 14, 1997 (the "Form S-3")).
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation, dated August 1, 1996 (incorporated herein by
reference to Exhibit 3.2 to the Form S-3).
3.4 Certificate of Amendment to Restated Certificate of Incorporation
effective May 26, 1998 (incorporated herein by reference to
Exhibit 3.1 to the Registrant's Form 10-Q for period ending June
30, 1998).
3.5 Certificate of Designation of Series A Junior Participating
Preferred Stock, dated December 10, 1998 (incorporated by
reference to Exhibit A to Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A, filed December 17, 1998).
3.6 Certificate of Amendment to Restated Certificate of Incorporation,
dated May 19, 1999.
49
51
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
3.7 Certificate of Ownership Merging Sterling House Corporation into
the Registrant effective December 31, 1999.
3.8 Restated Bylaws of the Registrant (incorporated herein by
reference to Exhibit 3.4 to the Registrant's Registration
Statement on Form S-3, Registration No. 333-39705, filed with the
Commission on November 6, 1997 (the "November S-3")).
3.9 Amendment to Restated Bylaws dated August 3, 1998 (incorporated by
reference to Registrant's Form 10-K for the period ending December
31, 1998).
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Form S-1).
4.2 See Articles Four, Six, Seven, Eight, Nine, Ten and Eleven of the
Registrant's Restated Certificate of Incorporation (incorporated
herein by reference to Exhibit 3.1 to the Form S-1) and the
Certificate of Amendment to the Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.2 to the
Form S-3).
4.3 See Articles 2, 3, 5, 7 and 8 of the Registrant's Restated Bylaws
(incorporated herein by reference to Exhibit 3.4 to the November
S-3).
4.4 Indenture dated as of May 23, 1996 by and between Sterling House
Corporation ("Sterling") and Fleet National Bank, as Trustee
(incorporated by reference to Exhibit 4.11 to Sterling's
Registration Statement on Form S-3 (Registration No. 333-15329
filed on November 1, 1996 (the "Sterling S-3")).
4.5 Form of Registration Rights Agreement dated as of May 17, 1996 by
and between Sterling and the initial purchasers of the 6.75%
Convertible Subordinated Debentures due 2006 (incorporated herein
by reference to Exhibit 4.9 to the Sterling S-3).
4.6 First Supplemental Indenture dated as of October 23, 1997 among
the Registrant, Sterling and State Street Bank and Trust Company,
as successor Trustee (incorporated herein by reference to Exhibit
4.9 to the November S-3).
4.7 Second Supplemental Indenture dated as of December 31, 1999 among
the Registrant and State Street Bank and Trust Company, as
successor trustee to Indenture dated as of May 23, 1996 between
Sterling House Corporation and Fleet National Bank, as Trustee.
4.8 Indenture dated as of May 21, 1996 by and between the Registrant
and IBJ Schroder Bank & Trust Company, as Trustee (incorporated by
reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K filed on May 27, 1997 (the "Form 8-K")).
4.9 Form of Registration Rights Agreement dated as of May 21, 1997 by
and between the Registrant and the purchasers of the 7%
Convertible Subordinated Debentures due 2004 (incorporated by
reference to Exhibit 99.2 to the Form 8-K).
4.10 Indenture dated as of December 19, 1997 by and between the
Registrant and United States Trust Company of New York, as Trustee
(incorporated by reference to Exhibit 1.1 to Registrant's
Registration Statement on Form 8-A, relating to Registration file
number 333-39705, filed with the Commission on December 16, 1997
(the "Form 8-A")).
4.11 First Supplemental Indenture dated as of December 19, 1997 by and
between the Registrant and United States Trust Company of New
York, as Trustee (incorporated by reference to Exhibit 1.2 to the
Form 8-A).
4.12 Second Supplemental Indenture dated as of January 2, 1998 by and
between the Registrant and United States Trust Company of New
York, as Trustee (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 8-K filed on January 26, 1998).
4.13 Amended and Restated Alternative Living Services, Inc. 1995
Incentive Compensation Plan (incorporated by reference to Exhibit
10.10 of the Form S-1). Represents an executive compensation plan
or arrangement.
50
52
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
4.14 Amendment to the Registrant's 1995 Amended and Restated Incentive
Compensation Plan (incorporated by reference to Exhibit 10.1 to
the Registrant's Form 10-Q for period ending September 30, 1998).
4.15 Rights Agreement dated as of December 10, 1998 between The
Registrant and American Stock Transfer & Trust Company, including
the form of Certificate of Designations of Series A Junior
Participating Preferred Stock of Alternative Living Services, Inc.
(Exhibit A), Form of Rights Certificate (Exhibit B), and Form of
Summary of Rights to Purchase Preferred Shares (Exhibit C)
(incorporated by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form 8-A, filed with the Commission on
December 17, 1998).
10.1 Services Agreement effective as of January 1, 1996 by and between
Petty, Kneen & Company, L.L.C. and the Company (incorporated by
reference to Exhibit 10.2 of the Form S-1). Represents an
executive compensation plan or arrangement.
10.2 Services Agreement by and between the Registrant and Richard W.
Boehlke dated as of May 23, 1996. (incorporated by reference to
Exhibit 10.7 of the Form S-1). Represents an executive
compensation plan or arrangement.
10.3 Employment Agreement by and between the Registrant and David M.
Boitano dated as of May 23, 1996 (incorporated by reference to
Exhibit 10.9 of the Form S-1). Represents an executive
compensation plan or arrangement.
10.4 Employment Agreement by and between the Registrant and G. Faye
Godwin dated as of May 23, 1996. (incorporated by reference to
Exhibit 10.11 of the Form S-1). Represents an executive
compensation plan or arrangement.
10.5 Employment Agreement dated as of January 1, 1999 by and between
the Registrant and William F. Lasky (incorporated by reference to
Exhibit 10.7 of the Registrant's Form 10-Q for period ending March
31, 1999). Represents an executive compensation plan or
arrangement.
10.6 Employment Agreement dated as of July 30, 1997 by and between the
Registrant. and Timothy J. Buchanan (incorporated by reference to
Exhibit 10.9 of the Registrant's Form 10-K for the year ended Dec.
31, 1997). Represents an executive compensation plan or
arrangement.
10.7 Employment Agreement dated as of July 30, 1997 by and between the
Registrant. and Steven L. Vick (incorporated by reference to
Exhibit 10.10 of the Registrant's Form 10-K for the year ended
Dec. 31, 1997). Represents an executive compensation plan or
arrangement.
10.8 Employment Agreement dated as of October 23, 1997 by and between
the Registrant and Mark W. Ohlendorf (incorporated by reference to
Exhibit 10.11 of the Registrant's Form 10-K for the year ended
Dec. 31, 1997). Represents an executive compensation plan or
arrangement.
10.9 Employment Agreement by and between the Registrant and Thomas E.
Komula dated as of July 3, 1996 (incorporated by reference to
Exhibit 10.63 of the Form S-1). Represents an executive
compensation plan or arrangement.
10.10 First Amended Joint Venture Agreement dated as of April 30, 1997
between the Registrant and Assisted Living Equities, LLC.
(incorporated by reference to Exhibit 10.18 of the Form S-1).
10.11 Amendment No. 1 to First Amended Joint Venture Agreement dated as
of January 1, 1999 between the Registrant and Assisted Living
Equities (incorporated by reference to Exhibit 10.16 of the
Registrant's Form 10-K for the year ended December 31, 1998).
10.12 Second Amended Joint Venture Agreement dated as of January 1, 1999
between the Registrant and Assisted Living Equities, LLC
(incorporated by reference to Exhibit 10.17 of the Registrant's
Form 10-K for the year ended December 31, 1998).
51
53
No. EXHIBIT
Description
- ------ ------------------------------------------------------------------
10.13 Assisted Living Consultant and Management Services Agreement by
and between Alternative Living Services and the Registrant dated
as of December 14, 1993. (incorporated by reference to Exhibit
10.32 of the Form S-1.)
10.14 Lease and Security Agreement by and between Nationwide Health
Properties, Inc. and New Crossings International Corporation dated
as of December 15, 1995 (the Atrium) (incorporated by reference to
Exhibit 10.35 of the Form S-1).
10.15 Schedule of Lease and Security Agreements by and between
Nationwide Health Properties, Inc. and New Crossings International
Corporation substantially similar to Exhibit 10.14 (incorporated
by reference to Exhibit 10.36 of the Form S-1).
10.16 Assumption Agreement dated December 18, 1995 by and between
Crossings International Corporation, New Crossings International
Corporation, Oregon Housing Agency and National Health Properties,
Inc. (Albany Residential) (incorporated by reference to Exhibit
10.53 of the Form S-1).
10.17 Schedule of Assumption Agreements substantially similar to Exhibit
10.16 (incorporated by reference to Exhibit 10.53 of the Form
S-1).
10.18 Lease Approval Agreement dated December 18, 1995 by and between
National Health Properties, Inc., New Crossings International
Corporation and Oregon Housing Agency (Albany Residential)
(incorporated by reference to Exhibit 10.55 of the Form S-1).
10.19 Schedule of Lease Approval Agreements substantially similar to
Exhibit 10.18 (incorporated by reference to Exhibit 10.56 of the
Form S-1).
10.20 Management Agreement dated August 30, 1990 by and between Housing
Division, State of Oregon and New Crossing International
Corporation (Albany Residential) (incorporated by reference to
Exhibit 10.59 of the Form S-1).
10.21 Facility Lease dated as of December 30, 1996, between Meditrust
Acquisition Corporation III and ALS Leasing, Inc. ("Form of
Facility Lease") (incorporated by reference to Exhibit 99.1 of the
Registrant's Form 8-K dated January 14, 1997).
10.22 Amended Schedule of Facility Leases which are substantially
similar to the Form of Facility Lease attached as Exhibit 10.21.
10.23 Guaranty by The Registrant to Meditrust Acquisition Corporation
III (incorporated by reference to Exhibit 99.3 of the Registrant's
Form 8-K dated January 14, 1997).
10.24 Affiliated Party Subordination Agreement dated December 30, 1996,
by and among ALS Leasing, Inc., the Registrant, the parties listed
on Schedule A thereto, all other Affiliates as defined therein and
Meditrust Acquisition Corporation III (incorporated by reference
to Exhibit 99.4 of the Registrant's Form 8-K dated January 14,
1997).
10.25 Agreement Regarding Related Lease Transactions dated December 30,
1996, by and among ALS Leasing, Inc., the Registrant and Meditrust
Acquisition Corporation III (incorporated by reference to Exhibit
99.5 of the Registrant's Form 8-K dated January 14, 1997).
10.26 Form of Facility Lease dated as of November 21, 1997, between
Meditrust Acquisition Corporation III and ALS Leasing, Inc. ("Form
of Facility Lease") (incorporated by reference to Exhibit 99.1 of
the Registrant's Form 8-K filed December 2, 1997).
10.27 Amended Schedule of Facility Leases which are substantially
similar to the Form of Facility Lease attached as Exhibit 10.26.
52
54
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
10.28 Guaranty by The Registrant to Meditrust Acquisition Corporation
III (incorporated by reference to Exhibit 99.3 of the Registrant's
Form 8-K filed December 2, 1997).
10.29 Affiliated Party Subordination Agreement dated November 21, 1997,
by and among ALS Leasing, Inc., the Registrant, the parties listed
on Schedule A thereto, all other Affiliates as defined therein and
Meditrust Acquisition Corporation III (incorporated by reference
to Exhibit 99.4 of the Registrant's Form 8-K filed December 2,
1997).
10.30 Agreement Regarding Related Lease Transactions dated November 21,
1997, by and among ALS Leasing, Inc., the Registrant and Meditrust
Acquisition Corporation III (incorporated by reference to Exhibit
99.5 of the Registrant's Form 8-K filed December 2, 1997).
10.31 Sixth Amendment to Amended and Restated Agreement Regarding
Related Lease Transactions, Amended and Restated Environmental
Indemnity Agreement and Amended and Restated Affiliated Party
Subordination Agreement dated September 4, 1998, by and among ALS
Leasing, Inc., the Registrant and Meditrust Acquisition
Corporation III (incorporated by reference to Exhibit 10.9 to the
Registrant's Form 10-Q for period ending September 30, 1998).
10.32 Seventh Amendment to Amended and Restated Agreement Regarding
Related Lease Transactions, dated September 4, 1998 by and among
ALS Leasing, Inc., the Registrant and Meditrust Acquisition
Corporation III (incorporated by reference to Exhibit 10.10 to the
Registrant's Form 10-Q for period ending September 30, 1998).
10.33 Eleventh Amendment to Amended and Restated Agreement Regarding
Related Lease Transactions, dated September 4, 1998, by and among
Assisted Living Properties, Inc., Meditrust Company, LLC Meditrust
Of Texas, Inc., Meditrust of Kansas, Inc., Meditrust of Ohio, Inc.
and MOC Health Care Company (incorporated by reference to Exhibit
10.11 to the Registrant's Form 10-Q for period ending September
30, 1998).
10.34 Form of Facility Lease dated as of September 4,1998 between
Meditrust Acquisition Corporation III and ALS Leasing, Inc. ("Form
of Facility Lease") (incorporated by reference to Exhibit 10.7 to
the Registrant's Form 10-Q for period ending September 30, 1998).
10.35 Amended Schedule of Facility Leases which are substantially
similar to the Form of Facility Lease attached as Exhibit 10.34.
10.36 Facility Lease Agreement dated as of April 30, 1997 between
Meditrust Acquisition Corporation III and ALS Leasing, Inc. for
property located in Manlius, New York.
10.37 Form of Facility Lease Agreement dated February 20, 1998 between
Meditrust of Ohio, Inc. and Assisted Living Properties, Inc. (the
"ALP Facility Leases")
10.38 Schedule of ALP Facility Leases which are substantially similar to
the Form of Lease attached as Exhibit 10.37.
10.39 Amendment to Sterling - Meditrust Leases dated as of December 23,
1999 among Assisted Living Properties, Inc., Sterling House
Corporation, the Registrant, ALS Leasing, Inc., Meditrust of
Kansas, Inc., New Meditrust Company LC, Meditrust Company LLC, T
and F Properties, LP and Meditrust Acquisition Company LLC.
10.40 Second Omnibus Amendment dated as of January 28, 2000 among
Assisted Living Properties, Inc., the Registrant, ALS Leasing,
Inc., Meditrust of Kansas, Inc., New Meditrust Company LC,
Meditrust Company LLC, T and F Properties, LP and Meditrust
Acquisition Company LLC.
10.41 Agreement of Purchase and Sale dated November 30, 1999 by the
Registrant, Meditrust Acquisition Company LLC, New Meditrust
Company LLC and T and F Properties, LP.
10.42 Guaranty and Suretyship Agreement by the Registrant in favor of
Nomura Asset Capital Corporation dated March 31, 1998
(incorporated by reference to Exhibit 10.1 to the Registrant's
Form 10-Q for period ending March 31, 1998).
53
55
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
10.43 Loan Agreement dated March 31, 1998 by and between ALS-Venture I,
Inc. and Nomura Asset Capital Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 10-Q for period
ending March 31, 1998).
10.44 Guaranty and Suretyship Agreement by the Registrant in favor of
Nomura Asset Capital Corporation dated May 26, 1998 (incorporated
by reference to Exhibit 10.1 to the Registrant's Form 10-Q for
period ending June 30, 1998).
10.45 Loan Agreement dated May 26, 1998, by and between ALS-Venture II,
Inc. and Nomura Asset Capital Corporation (incorporated by
reference to Exhibit 10.2 to the Registrant's Form 10-Q for period
ending June 30, 1998).
10.46 First Amendment to Loan Agreement and Reaffirmation Agreement
dated July 30, 1998, by and between The Capital Company of America
LLC and ALS Venture II, Inc. (incorporated by reference to Exhibit
10.2 to the Registrant's Form 10-Q for period ending September 30,
1998).
10.47 First Amendment to Loan Agreement and Reaffirmation Agreement
dated August 28, 1998, by and between Nomura Asset Capital Company
and ALS Venture I, Inc. (incorporated by reference to Exhibit 10.3
to the Registrant's Form 10-Q for period ending September 30,
1998).
10.48 Second Amendment to Loan Agreement, First Amendment to Guaranty
and Suretyship Agreement, and Reaffirmation Agreement dated
September 30, 1998, by and between The Capital Company of America
LLC and ALS-Venture II, Inc. (incorporated by reference to Exhibit
10.6 to the Registrant's Form 10-Q for period ending September 30,
1998).
10.49 Financing and Security Agreement dated September 28, 1998, by and
between ALS Holdings, Inc. and Bank United (incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-Q for period
ending September 30, 1998).
10.50 Form of Mortgage, Assignment and Security Agreement between ALS
Holdings, Inc., the Registrant and Bank United. (incorporated by
reference to Exhibit 10.53 to the Registrant's Form 10-K for
period ending December 31, 1998).
10.51 Guaranty of Payment Agreement dated September 28, 1998, by the
Registrant, for the benefit of Bank United (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 10-Q for period
ending September 30, 1998).
10.52 Additional Borrower Joinder Supplement by and among ALS Holdings,
Inc., ALS Wisconsin Holdings, Inc., the Registrant and Bank
United, dated December 10, 1998. (incorporated by reference to
Exhibit 10.55 to the Registrant's Form 10-K for period ending
December 31, 1998).
10.53 Amended and Restated Financing and Security Agreement (Master
Agreement) between ALS Holdings, Inc., et al, as Borrower, and
Bank United, as agent, dated as of February 12, 1999 (incorporated
by reference to Exhibit 10.2 of the Registrant's Form 10-Q for
period ending March 31, 1999).
10.54 First Amendment to Amended and Restated Financing and Security
Agreement dated as of October 29, 1999 between ALS Holdings, Inc.,
ALS Wisconsin Holdings, Inc. and Bank United, individually and as
agent for itself and certain other lenders (incorporated by
reference to Exhibit 10.19 of the Registrant's Form 10-Q for
period ending September 30, 1999).
10.55 First Amendment to Guaranty of Payment Agreement dated as of
October 29, 1999 by and among the Registrant and Bank United
individually and as agent for itself and certain additional
lenders (incorporated by reference to Exhibit 10.20 of the
Registrant's Form 10-Q for period ending September 30, 1999).
10.56 Amended Schedule of Bank United Mortgage, Assignment and Security
Agreements ("Mortgage") which are substantially similar to the
Form of Mortgage referenced in Exhibit 10.50.
10.57 Master Purchase Agreement between the Registrant and National
Health Investors, Inc. dated December 22, 1998. (incorporated by
reference to Exhibit 10.56 of the Registrant's Form 10-K for
period ending December 31, 1998).
54
56
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
10.58 Form of Lease between National Health Investors, Inc. and the
Registrant. ("Lease") dated as of December 22,1998 (incorporated
by reference to Exhibit 10.57 of the Registrant's Form 10-K for
period ending December 31, 1998).
10.59 Amended Schedule of Additional NHI Leases which are substantially
similar to the Form of Lease referenced in Exhibit 10.58
(incorporated by reference to Exhibit 10.6 of the Registrant's
Form 10-Q for period ending March 31, 1999).
10.60 Credit Agreement between the Registrant and Deutsche Bank AG dated
October 6, 1998 (incorporated by reference to Exhibit 10.59 of the
Registrant's Form 10-K for period ending December 31, 1998).
10.61 Master Construction Line of Credit Agreement between the
Registrant, Key Corporate Capital, Inc., and the lending
institutions named therein, dated October 6, 1998 (incorporated by
reference to Exhibit 10.60 of the Registrant's Form 10-K for
period ending December 31, 1998).
10.62 Form of Deed of Trust and Security Agreement ("Form of Key
Mortgage") between ALS National, Inc. and Key Corporate Capital,
Inc. dated September 1999 (incorporated by reference to Exhibit
10.2 of the Registrant's Form 10-Q for period ending September 30,
1999).
10.63 Form of Project Promissory Note ("Form of Key Note") by ALS
National, Inc. to Key Corporate Capital, Inc. (incorporated by
reference to Exhibit 10.3 of the Registrant's Form 10-Q for period
ending September 30, 1999).
10.64 Schedule of Mortgages and Notes which are substantially similar to
the Form of Key Mortgage referenced in Exhibit 10.62 and Form of
Key Note referenced in Exhibit 10.63 herein (incorporated by
reference to Exhibit 10.4 of the Registrant's Form 10-Q for period
ending September 30, 1999).
10.65 Master Loan Agreement between ALS West, Inc., the Registrant and
Guaranty Federal Bank, F.S.B., as agent, and the Lenders named
therein, dated as of January 8, 1999 (incorporated by reference to
Exhibit 10.1 of the Registrant's Form 10-Q for period ending March
31, 1999).
10.66 Loan Agreement dated July 30, 1998, by and between ALS Financing,
Inc. and GMAC Commercial Mortgage Corporation (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-Q for period
ending September 30, 1998).
10.67 Loan Agreement between ALS Financing II, Inc. and GMAC Commercial
Mortgage Corporation dated as of March 23, 1999 (incorporated by
reference to Exhibit 10.4 of the Registrant's Form 10-Q for period
ending March 31, 1999).
10.68 Lease and Security Agreement between the Registrant and SELCO
Service Corporation (regarding corporate office) dated as of
February 10, 1999 (incorporated by reference to Exhibit 10.5 of
the Registrant's Form 10-Q for period ending March 31, 1999).
10.69 Management Fee Loan Agreement between the Registrant and Third
Party Investors I, L.L.C. dated as of December 31, 1998
(incorporated by reference to Exhibit 10.9 of the Registrant's
Form 10-Q for period ending March 31, 1999).
10.70 Working Capital Loan Agreement between the Registrant and Third
Party Investors I, L.L.C. dated as of December 31, 1998
(incorporated by reference to Exhibit 10.10 of the Registrant's
Form 10-Q for period ending March 31, 1999).
10.71 Phase II Management Fee Loan Agreement between the Registrant and
Third Party Investors I, L.L.C. dated as of March 31, 1999
(incorporated by reference to Exhibit 10.12 of the Registrant's
Form 10-Q for period ending March 31, 1999).
55
57
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
10.72 Phase II Working Capital Loan Agreement between the Registrant and
Third Party Investors I, L.L.C. dated as of March 31, 1999
(incorporated by reference to Exhibit 10.13 of the Registrant's
Form 10-Q for period ending March 31, 1999).
10.73 Form of Development Agreement by and between the Registrant and
Third Party Investors I, L.L.C. dated as of March 31, 1999
(incorporated by reference to Exhibit 10.14 of the Registrant's
Form 10-Q for period ending March 31, 1999).
10.74 Schedule of additional TPI Development Agreements "Development
Agreement" which are substantially in the form of Development
Agreement attached as Exhibit 10.15 (incorporated by reference to
Exhibit 10.15 of the Registrant's Form 10-Q for period ending
March 31, 1999).
10.75 Form of Assisted Living Consultant and Management Services
Agreement by and between the Registrant and Third Party Investors
I, L.L.C. dated as of March 31, 1999 (incorporated by reference to
Exhibit 10.16 of the Registrant's Form 10-Q for period ending
March 31, 1999).
10.76 Schedule of additional TPI Assisted Living Consultant and
Management Services Agreements ("Management Agreements") which are
substantially in the form of Management Agreements referenced in
Exhibit 10.17 (incorporated by reference to Exhibit 10.17 of the
Registrant's Form 10-Q for period ending March 31, 1999).
10.77 Subordination, Representation and Guaranty Agreement between the
Registrant, Greenwich Capital Financial Products, Inc., and Third
Party Investors I, L.L.C. dated as of June 30, 1999 (incorporated
by reference to Exhibit 10.2 of the Registrant's Form 10-Q for
period ending June 30, 1999).
10.78 Guaranty dated August 31, 1999 by the Registrant in favor of Key
Corporate Capital Inc. as Administrative Agent under the Master
Construction Line of Credit Agreement among Third Party Investors
I, L.L.C., as Borrower, and the lending institutions and co-agents
named therein, and Key Corporate Capital Inc. (incorporated by
reference to Exhibit 10.11 of the Registrant's Form 10-Q for
period ending September 30, 1999).
10.79 Amended and Restated Purchase Rights and Financing Agreement dated
as of June 30, 1999 between the Registrant and Third Party
Investors I, L.L.C. (incorporated by reference to Exhibit 10.12 of
the Registrant's Form 10-Q for period ending September 30, 1999).
10.80 Convertible Subordinated Loan Agreement among Third Party
Investors I, L.L.C. and the Registrant dated September 30, 1999
(incorporated by reference to Exhibit 10.13 of the Registrant's
Form 10-Q for period ending September 30, 1999).
10.81 Bridge Construction Loan Agreement among Third Party Investors I,
L.L.C. and the Registrant dated September 30, 1999 (incorporated
by reference to Exhibit 10.14 of the Registrant's Form 10-Q for
period ending September 30, 1999).
10.82 Bridge Construction Loan Note by Third Party Investors I, L.L.C.
to the Registrant dated September 30, 1999 (incorporated by
reference to Exhibit 10.15 of the Registrant's Form 10-Q for
period ending September 30, 1999).
10.83 Supplementary Financing Loan Agreement among Third Party Investors
I, L.L.C. and the Registrant dated September 30, 1999
(incorporated by reference to Exhibit 10.16 of the Registrant's
Form 10-Q for period ending September 30, 1999).
10.84 Supplementary Financing Loan Note by Third Party Investors I,
L.L.C. to the Registrant dated September 30, 1999 (incorporated by
reference to Exhibit 10.17 of the Registrant's Form 10-Q for
period ending September 30, 1999).
10.85 Purchase Agreement and Agreement to Complete Construction dated as
of June 14, 1999, by and between Omega Healthcare Investors, Inc.
and Sterling House Corporation, ALS-Clare Bridge, Inc., and the
Registrant (incorporated by reference to Exhibit 10.3 of the
Registrant's Form 10-Q for period ending June 30, 1999).
56
58
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
10.86 Master Lease dated as of June 14, 1999, by and between Omega
Healthcare Investors, Inc. as Lessor and AHC Properties, Inc. as
Lessee (incorporated by reference to Exhibit 10.4 of the
Registrant's Form 10-Q for period ending June 30, 1999).
10.87 Kansas Master Lease dated as of June 14, 1999, by and between
Omega (Kansas), Inc. as Lessor and AHC Properties, Inc. as Lessee
(incorporated by reference to Exhibit 10.5 of the Registrant's
Form 10-Q for period ending June 30, 1999).
10.88 Lease Guaranty dated as of June 14, 1999, by the Registrant in
favor of Omega Healthcare Investors, Inc. and Omega (Kansas), Inc.
(incorporated by reference to Exhibit 10.6 of the Registrant's
Form 10-Q for period ending June 30, 1999).
10.89 Form of Lease Agreement by and between the Registrant and Health
Care REIT, Inc. dated as of January 22, 1996 (incorporated by
reference to Exhibit 10.7 of the Registrant's Form 10-Q for period
ending June 30, 1999).
10.90 Schedule of Health Care REIT, Inc. Leases which are substantially
similar to the Form of Lease referenced in Exhibit 10.89
(incorporated by reference to Exhibit 10.8 of the Registrant's
Form 10-Q for period ending June 30, 1999).
10.91 Form of Lease Agreement by and between Sterling House Corporation
and Health Care REIT, Inc. dated as of September 1995
(incorporated by reference to Exhibit 10.9 of the Registrant's
Form 10-Q for period ending June 30, 1999).
10.92 Schedule of Health Care REIT, Inc. Leases which are substantially
similar to the Form of Lease referenced in Exhibit 10.91
(incorporated by reference to Exhibit 10.10 of the Registrant's
Form 10-Q for period ending June 30, 1999).
10.93 Form of Lease Agreement by and between the Registrant and Health
Care REIT, Inc. dated as of December 1998 (incorporated by
reference to Exhibit 10.11 of the Registrant's Form 10-Q for
period ending June 30, 1999).
10.94 Schedule of Health Care REIT, Inc. Leases which are substantially
similar to the Form of Lease referenced in Exhibit 10.93
(incorporated by reference to Exhibit 10.12 of the Registrant's
Form 10-Q for period ending June 30, 1999).
10.95 Form of Lease Agreement by and between the Registrant and Health
Care REIT, Inc. dated as of March 1999 (incorporated by reference
to Exhibit 10.13 of the Registrant's Form 10-Q for period ending
June 30, 1999).
10.96 Schedule of Health Care REIT, Inc. Leases which are substantially
similar to the Form of Lease referenced in Exhibit 10.95
(incorporated by reference to Exhibit 10.14 of the Registrant's
Form 10-Q for period ending June 30, 1999).
10.97 Consent to Merger and Amendment to Sterling House Corporation -
Health Care REIT, Inc. Leases dated November 1, 1999 between
Sterling House Corporation, the Registrant and Health Care REIT,
Inc.
10.98 Master Lease Agreement dated as of July 16, 1999 between Pita
General Corporation ("Synthetic Lessor") and AHC Tenant, Inc.
("AHC Tenant"), a wholly-owned subsidiary of the Registrant (Annex
A to this agreement has been filed as Exhibit A to the Loan
Agreement filed as Exhibit 2.6 hereto) (incorporated by reference
to Exhibit 2.5 of the Registrant's Form 8-K filed August 4, 1999).
10.99 Loan Agreement dated as of July 16, 1999 between Synthetic Lessor,
AHC Tenant and Greenwich Capital Financial Products, Inc.
("Lender"), including the Master Glossary of Definitions included
as Exhibit A thereto (other exhibits and schedules to this
agreement, which are listed and summarized in the table of
contents to the agreement, have been omitted pursuant to Item
601(b)(2) of the Regulation S-K; the Registrant agrees to furnish
supplementally to the Commission, upon request, a copy of these
exhibits and schedules) (incorporated by reference to Exhibit 2.6
of the Registrant's Form 8-K filed August 4, 1999).
57
59
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
10.100 Participation Agreement dated as of July 16, 1999 between AHC
Tenant, Synthetic Lessor, Lender, SELCO Service Corporation
("SELCO"), The First National Bank of Chicago ("FNB"), ZC
Specialty Insurance Company ("ZC") and the Registrant
(incorporated by reference to Exhibit 2.7 of the Registrant's Form
8-K filed August 4, 1999).
10.101 Trust Agreement dated as of July 16, 1999 between FNB, Lender, ZC,
AHC Tenant, Synthetic Lessor, SELCO and the Registrant
(incorporated by reference to Exhibit 2.8 of the Registrant's Form
8-K filed August 4, 1999).
10.102 Flow of Funds Agreement dated as of July 16, 1999 between
Synthetic Lessor, Lender, ZC, FNB, AHC Tenant, the Registrant and
certain other parties thereto (incorporated by reference to
Exhibit 2.9 of the Registrant's Form 8-K filed August 4, 1999).
10.103 Reimbursement Agreement dated as of July 16, 1999 between ZC, AHC
Tenant and Synthetic Lessor (exhibits and schedules to this
agreement, which are listed and summarized in the table of
contents to the agreement, have been omitted pursuant to Item
601(b)(2) of the Regulation S-K; the Registrant agrees to furnish
supplementally to the Commission, upon request, a copy of these
exhibits and schedules) (incorporated by reference to Exhibit 2.10
of the Registrant's Form 8-K filed August 4, 1999).
10.104 Guaranty dated as of July 16, 1999 executed by the Registrant
(incorporated by reference to Exhibit 2.11 of the Registrant's
Form 8-K filed August 4, 1999).
10.105 Promissory Note dated as of July 16, 1999 executed by Synthetic
Lessor (incorporated by reference to Exhibit 2.12 of the
Registrant's Form 8-K filed August 4, 1999).
10.106 Master Amendment, Confirmation and Acknowledgment Agreement dated
September 28, 1999 between Pita General Corporation, AHC Tenant,
Inc., the Registrant, Greenwich Capital Financial Products, Inc.,
SELCO Service Corporation, The First National Bank of Chicago, ZC
Specialty Insurance Company, and certain other parties as defined
therein, including Exhibit 3.1(e) thereto (other 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) (incorporated by reference
to Exhibit 10.18 of the Registrant's Form 10-Q for period ending
September 30, 1999).
10.107 Form of Multifamily Mortgage, Assignment of Rents and Security
Agreement ("Form of Amresco Mortgage") between ALS Kansas, Inc.
and Amresco Capital, L.P. dated July 16, 1999, including Exhibit B
thereto (other exhibits to this agreement have been omitted; the
Registrant agrees to furnish supplementally to the Commission,
upon request, a copy of these exhibits) (incorporated by reference
to Exhibit 10.5 of the Registrant's Form 10-Q for period ending
September 30, 1999).
10.108 Form of Multifamily Note ("Form of Amresco Note") by ALS Kansas,
Inc. to Amresco Capital, L.P. dated July 16, 1999 (incorporated by
reference to Exhibit 10.6 of the Registrant's Form 10-Q for period
ending September 30, 1999).
10.109 Schedule of Mortgages and Notes which are substantially similar to
the Form of Amresco Mortgage referenced in Exhibit 10.107 and Form
of Amresco Note referenced in Exhibit 10.108 (incorporated by
reference to Exhibit 10.7 of the Registrant's Form 10-Q for period
ending September 30, 1999).
10.110 Credit Agreement ("the Bank of America Credit Agreement") between
the Borrowers defined therein ("Devco I Entities"), HCR/Alterra
Development, LLC ("HCR/Alterra"), as Guarantor, the Lenders
defined therein, Bank of America, N.A. as Administrative Agent,
The Chase Manhattan Bank as Syndication Agent, and Deutsche Bank
AG New York and/or Cayman Islands Branches and Bank United, F.S.B.
as Co-Agents, dated September 30, 1999 (exhibits and schedules to
this agreement, which are listed and summarized in the table of
contents to the agreement, have been omitted; the Registrant
agrees to furnish supplementally to the Commission, upon request,
a copy of these exhibits and schedules) (incorporated by reference
to Exhibit 10.8 of the Registrant's Form 10-Q for period ending
September 30, 1999).
58
60
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
10.111 Guaranty Agreement dated September 30, 1999 by the Registrant in
favor of Bank of America, N.A. as Administrative Agent under the
Credit Agreement referenced in Exhibit 10.8 herein (exhibits to
this agreement have been omitted; the Registrant agrees to furnish
supplementally to the Commission, upon request, a copy of these
exhibits) (incorporated by reference to Exhibit 10.9 of the
Registrant's Form 10-Q for period ending September 30, 1999).
10.112 Schedule of properties owned by Devco I and mortgaged under the
Bank of America Credit Agreement referenced in Exhibit 10.110
(incorporated by reference to Exhibit 10.10 of the Registrant's
Form 10-Q for period ending September 30, 1999).
10.113 Form of Lease dated July 16, 1999 between LTC Properties, Inc. and
the Registrant.
10.114 Schedule of LTC Leases which are substantially similar to the Form
of Lease referenced in Exhibit 10.113.
10.115 Amendment to Leases dated as of November 30, 1998 between LTC
Properties, Inc., Kansas-LTC Corporation, Texas-LTC Limited
Partnership, the Registrant and Sterling House Corporation.
10.116 Form of Building Loan Agreement ("Key Loan Agreement") dated as of
January 14, 2000 between Key Corporate Capital Inc. and Clinton
Brookside Drive, LLC.
10.117 Form of Secured Promissory Note ("Key Promissory Note") dated
January 14, 2000 between Key Corporate Capital Inc. and Clinton
Brookside Drive, LLC.
10.118 Form of Guaranty of Payment and Performance dated as of January
14, 2000 from the Registrant to Key Corporate Capital Inc. ("Key
Guaranty").
10.119 Schedule of Key Loan Agreements, Promissory Notes and Guaranties
which are substantially similar to the Forms referenced in
Exhibits 10.116, 10.117 and 10.118.
10.120 Loan Agreement dated as of December 13, 1999 between the
Registrant and RDVEPCO, L.L.C.
10.121 AHC Purchaser Holding, Inc. Subscription and Organizational
Agreement dated as of December 13, 1999 between AHC Purchaser
Holding, Inc., RDVEPCO, L.L.C. and the Registrant.
10.122 Amended and Restated Loan Agreement dated as of February 3, 2000
between the Registrant and RDVEPCO, L.L.C.
10.123 Amended and Restated Guaranty dated as of February 3, 2000 by ACH
Purchaser Holding, Inc. and RDVEPCO, L.L.C.
10.124 Construction Loan and Security Agreement dated as of May 1, 1998
between ALS Clare Bridge, Inc. and Sovereign Bank (the "Sovereign
Bank Loan Agreement").
10.125 Form of Open End Mortgage and Security Agreement dated May 1, 1998
between ALS-Clare Bridge, Inc. and Sovereign Bank.
10.126 Form of Guaranty and Surety Agreement dated May 1, 1998 between
the Registrant and Sovereign Bank.
10.127 Schedule of properties mortgaged under the Sovereign Bank Loan
Agreement and mortgages which are substantially similar to the
Form of Mortgage attached as Exhibit 10.125.
10.128 Revolving Credit Agreement dated August 19, 1997 between the
Registrant and Firstar Bank Milwaukee, NA.
10.129 Revolving Credit Note dated August 19, 1997 between Registrant and
Firstar Bank Milwaukee, NA.
59
61
NO. EXHIBIT
DESCRIPTION
- ------ ------------------------------------------------------------------
10.130 Amendment to Revolving Credit Agreement and Revolving Credit Note
dated February 27, 1999 between Registrant and Firstar Bank
Milwaukee, NA.
10.131 Second Amendment to Loan Agreement and Related Documents dated
September 9, 1999 between Registrant and Firstar Bank Milwaukee,
NA.
10.132 Form Consolidated Mortgage (the "M&T Mortgage") dated December 22,
1999 between Clifton Park Route 146, LLC and Manufacturers and
Traders Trust Company.
10.133 Continuing Guaranty dated December 22, 1999 between the Registrant
and Manufacturers and Traders Trust Company.
10.134 Schedule of M&T Mortgages which are substantially similar to the
form of M&T Mortgage attached as Exhibit 10.132.
10.135 Development Joint Venture Agreement between the Registrant and HCR
Manor Care, Inc. dated December 31, 1998. (incorporated by
reference to Exhibit 10.61 of the Registrant's Form 10-K for
period ending December 31, 1998).
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
27.1 Financial Data Schedule (for SEC use only).
60
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Milwaukee,
State of Wisconsin, on the 30th day of March, 2000.
ALTERRA HEALTHCARE CORPORATION
By: /s/ Mark W. Ohlendorf
---------------------------------------------------
Senior Vice President, Chief Financial
Officer and Assistant Secretary
(Principal Financial Officer)
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------------- ------------------------------------------- ---------------
/S/ WILLIAM F. LASKY
- -------------------------------------
William F. Lasky President, Chief Executive Officer and March 30, 2000
Director (Principal Executive Officer)
/S/ STEVEN L. VICK
- -------------------------------------
Steven L. Vick Chief Operating Officer and Director March 30, 2000
/S/ MARK W. OHLENDORF
- -------------------------------------
Mark W. Ohlendorf Senior Vice President, Chief Financial March 30, 2000
Officer and Assistant Secretary
/S/ JOHN D. PETERSON
- -------------------------------------
John D. Peterson Vice President, Controller and Assistant March 30, 2000
Secretary (Principal Accounting Officer)
/S/ WILLIAM G. PETTY, JR.
- -------------------------------------
William G. Petty , Jr. Chairman of the Board and Director March 30, 2000
/S/ TIMOTHY J. BUCHANAN
- -------------------------------------
Timothy J. Buchanan Vice Chairman and Director March 30, 2000
/S/ RICHARD W. BOEHLKE
- -------------------------------------
Richard W. Boehlke Director March 30, 2000
/S/ GENE E. BURLESON
- -------------------------------------
Gene E. Burleson Director March 30, 2000
/S/ ROBERT HAVEMAN
- -------------------------------------
Robert Haveman Director March 30, 2000
/S/ JERRY L. TUBERGEN
- -------------------------------------
Jerry L. Tubergen Director March 30, 2000
61