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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, 2000
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 ________
COMMISSION FILE NUMBER 1-12000
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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 (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 918-5000
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE AMERICAN STOCK
EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH
COMMON STOCK, PAR VALUE $.01 REGISTERED
5.25% CONVERTIBLE SUBORDINATED AMERICAN STOCK EXCHANGE
DEBENTURE DUE 2002 AMERICAN STOCK EXCHANGE
SERIES A JUNIOR PREFERRED STOCK AMERICAN STOCK EXCHANGE
PURCHASE RIGHTS
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 $12,143,968 as of March 23 2001. The number of outstanding
shares of the Registrant's Common Stock was 22,109,810 shares as of March 23,
2001.
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Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for its 2001 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 national assisted living company operating assisted living residences
and providing assisted living services in 28 states. Our rapid growth in recent
years has had a significant impact on our results of operations and is a
principal factor in describing the changes in our results between 2000 and 1999.
As of December 31, 2000 and 1999, we operated or managed 474 and 450 residences
with aggregate capacity of approximately 22,100 and 20,700 residents,
respectively. As of December 31, 2000, we were also constructing 18 additional
residences with additional capacity for 974 residents. As of December 31, 2000,
88 of our residences, including 5 residences which were under construction, were
in joint venture arrangements with third parties. During 2000, we generated
operating revenue of $466.5 million and realized an operating loss of $14.5
million and a pretax loss of $79.8 million prior to non-recurring charges,
extraordinary item and the loss on disposal.
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, risks associated with recent defaults under loan
and lease obligations, risks associated with a shortfall in our liquidity and
the implementation of our restructuring plan, risks associated with the
disposition of assets and termination of leases, substantial debt and operating
lease payment obligations, operating losses associated with new residences, our
need for additional financing and liquidity, risks associated with our
construction activities, risks associated with 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.
RECENT DEVELOPMENTS
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 included (i) a substantial reduction
in our development activity; (ii) a reduction in our utilization of and reliance
upon the use of joint venture 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 completed an equity-linked investment in the
Company of $203 million during the second and third quarters of 2000 (the
"Equity Transaction").
We used the proceeds of the Equity Transaction, net of $15.2 million in
transaction costs, to (i) repay $48.3 million of bridge loans previously funded
by an affiliated group who participated as investors in the Equity Transaction,
(ii) retire outstanding convertible debt with a book basis of $41.4 million in
exchange for $26.9 million in newly issued debentures, (iii) acquire equity
interests in 14 residences previously managed by us for $21.0 million, (iv)
acquire a 60% interest in the operations of 26 residences for $14.7 million, (v)
repay $5.0 million of short-term borrowings under a bank line-of-credit, and
(vi) provide $71.9 million of funds for working capital and other corporate
purposes, including funding construction of our remaining unopened residences.
In the fourth quarter of 2000, $10.2 million of these proceeds were used to
acquire the remaining 40% equity interest in certain joint ventures, as
contemplated by the Equity Transaction. At the time of the Equity Transaction,
we believed that the net proceeds of that transaction, together with other
financing transactions that we anticipated would occur in 2001, would provide
sufficient cash resources for us to complete our remaining construction
activities and to cover our operating cash deficits until the Company achieved
positive operating cash flow.
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In the second half of 2000, however, two issues emerged that have had a
materially adverse impact on our liquidity. First, costs associated with
operating our residences, labor and liability insurance costs in particular,
increased significantly in the second half of 2000. Second, due both to a
generally unfavorable financing market for assisted living residences and the
declining credit fundamentals at both the residence and corporate level, we were
unable to complete our anticipated financing transactions in 2001. These
financing transactions were originally projected to yield cash proceeds that
would have been used to fund a portion of our overall cash requirements.
Virtually all of the net cash proceeds of the Equity Transaction have been used
to fund our operating cash flow deficits and to complete construction of our
remaining unopened residences.
By February 2001, our overall cash position had declined to approximately $10
million, a level which we believe to be insufficient. As we began 2001, our
operations produced approximately $7 million per month of cash flow before
monthly secured debt service and lease payments. Our monthly secured debt
service and lease payments total approximately $12 million. We also have been
making approximately $2 million per month in net cash expenditures related to
the completion of our construction activities. In addition, we face significant
debt maturities in 2001 and 2002.
In February 2001, we retained financial advisors and special reorganization
counsel to assist us in evaluating alternatives to restore the financial
viability of our business. To conserve cash and protect the financial integrity
of our operations, we did not make debt service and lease payments of
approximately $7 million in March 2001. As a result, we are in default under
many of our major loan and lease facilities. In March 2001, we obtained a $7.5
million bridge loan to fund current operations from certain of our principal
stock and debenture holders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
We believe that our operating cash flow has improved or will continue to improve
due to overhead reductions that we implemented and increases in monthly rents
that we charge to our residents which were effective in the first quarter of
2001. Nevertheless, we believe that our operations will not produce sufficient
cash flow to satisfy all of our obligations until the conclusion of our
restructuring activities, which we have commenced. As we seek to complete our
restructuring activities, it is our intention to maintain sufficient cash
resources such that we can fund our on-going obligations to our employees,
suppliers and other trade creditors on a timely basis.
RESTRUCTURING PLAN. We are seeking to implement a restructuring plan (the
"Restructuring Plan") that involves the disposition of selected assets and the
restructuring of our capital structure, including our senior indebtedness,
leases (both operating and synthetic), convertible PIK debentures, convertible
subordinated debentures, joint venture arrangements and our equity
capitalization.
Portfolio Rationalization. Our Restructuring Plan calls for the disposition of a
substantial number of our residences (collectively, the "Disposition Assets")
that we have determined to be non-strategic for one of a variety of reasons,
including the geographic location of certain of these residences. The
disposition of the residences included in the Disposition Assets is expected to
be accomplished primarily by actively working with the lenders and lessors to
identify new operators and selling assets through an organized sales process.
We expect that we will recognize a significant pre-tax loss estimated to be in
excess of $150 million related to the sale of the Disposition Assets during
2001. In addition, we are discussing a number of alternatives with our lenders
and lessors to address any potential cash shortfalls that may result from the
dispositions. A condition to our disposing of the Disposition Assets will be
obtaining the consent of the applicable lender or lessor and, in certain cases,
the consent of the applicable joint venture partner.
Senior Indebtedness and Leases. In addition to discussions related to the sale
of the Disposition Assets, we have commenced discussions with our various
lenders and lessors to restructure certain of our debt and lease obligations.
Some of the residence portfolios financed by our lenders or lessors operate at
cash flow deficits either before or after associated debt service. The
Restructuring Plan calls for these lenders or lessors to defer debt service
payments (and in certain cases to fund additional indebtedness to satisfy
operating cash flow losses) through the date of the sale of the Disposition
Assets. None of our lenders or lessors has yet agreed to these debt service
payment deferrals or shortfall funding arrangements.
Our existing senior and subordinated indebtedness includes principal maturities
totaling $313.7 million, $213.9 million and $112.6 million in 2001, 2002 and
2003, respectively. The Restructuring Plan calls for the deferral of all debt
maturities and
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some other currently scheduled principal payments until after 2003. None of our
lenders or bondholders has yet agreed to these principal payment deferrals.
In addition to payment-related modifications, we will seek to modify other terms
of our senior indebtedness and lease arrangements. Many of our senior debt
instruments and certain of our lease instruments include financial covenants
applicable either to the performance of the Company as a whole, to the
performance of the financed portfolio or to the performance of individual
residences. We will seek to modify or eliminate many of these financial
covenants.
The Restructuring Plan calls for us to negotiate a termination of our debt
guaranty, management and other obligations relating to 13 residences that are
currently held in a joint venture structure involving Manor Care, Inc. and a
third-party equity investor group (see "Joint Ventures and Strategic Alliances -
Joint Venture with Manor Care, Inc.").
Convertible PIK Debentures, Convertible Subordinated Debentures and Joint
Venture Interests. The Restructuring Plan calls for us to exchange debt, equity
or equity-linked securities for our existing $208.7 million in face amount of
convertible PIK debentures, $187.2 million in face amount of convertible
subordinated debentures and various joint venture interests in certain of our
residences. We intend to seek to negotiate exchange transactions with these
capital structure constituents that result in a simplified capital structure
that reflects the relative value of the debenture or joint venture interests of
these third parties. We have only recently commenced discussions with some of
these parties, and do not yet have any definitive agreements with any of these
parties.
Discussions with our various capital structure constituents have only commenced
during recent weeks, or in some cases have not commenced at all, and no binding
agreements have been reached. No assurance can be given that we will be
successful in negotiating appropriate agreements with our various capital
structure constituents. As we proceed with these negotiations, we expect that we
will be making modifications to the Restructuring Plan to address issues that
arise. In addition, should our operating results further deteriorate or should
any of our several lenders, lessors, convertible debenture holders or joint
venture partners take aggressive action which could jeopardize our assets or
liquidity, we may be forced to pursue a court supervised reorganization of the
Company.
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.
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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 $120 to $350 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 $300 to $350.
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 generally
charge monthly rates per resident ranging from $1,500 for a shared room to
$4,500 for a private room depending on the apartment type, level of
services required, resident activity and the geographic location of the
residence. The average rate in Wynwood residences during the fourth quarter
of 2000 was approximately $2,500.
- - 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 generally
charge monthly rates per resident from $1,900 to $3,150 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 2000 was approximately $2,300.
- - 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 $2,875
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 2000 was approximately $1,800.
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
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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 $1,500 to $5,000
depending on the apartment type, level of services required, resident
activity, and geographic location of the residence. The average rate in
Clare Bridge residences during the fourth quarter of 2000 was approximately
$3,200.
- - 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 $2,200 and
$4,200 for services depending on the apartment type, level of services
required, resident activity, and geographic location of the residence. The
average rate in Clare Bridge Cottage residences during the fourth quarter
of 2000 was approximately $2,800.
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.
JOINT VENTURES AND STRATEGIC ALLIANCES
Historically, we 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
discontinue our utilization and reliance upon joint venture and other
off-balance sheet ownership structures in the future, we operated or managed
approximately 84 residences utilizing these types of arrangements as of December
31, 2000.
Joint Venture with Pioneer Development Company. In 1996, we established a joint
venture relationship (the "Alterra-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 "Alterra-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 Alterra-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 Alterra-Northeast 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
Alterra-Northeast Territory, subject to limited exceptions. Pioneer is providing
development and construction management services to the Alterra-Northeast J.V.
and we are managing the Alterra-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 Alterra 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
Alterra-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, 2000, 12 of our residences were held in joint ventures
with Pioneer. We are currently in negotiations with Pioneer regarding a possible
discontinuation of this joint venture relationship.
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
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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.
Pursuant to the Devco I agreements, Alterra is obligated to fund operating
deficits of the Devco I JVs under certain circumstances. As of December 31,
2000, Alterra had advanced in excess of $5.0 million to Devco I JVs to fund
operating deficits.
On September 30, 1999, an additional 29 residences were placed into a joint
venture structure pursuant to the joint venture agreement with Manor Care. Manor
Care transferred six of the residences and we transferred 16 properties
constituting 23 residences (i.e., seven of our properties are "campus"
properties having two 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 had no 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) was $8.0
million.
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The cash needs of each DevCo II JV were 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 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 were made
in proportion to the members' contributed capital (i.e., 90% to the DevCo II
Investor; 10% to DevCo II). Losses were allocated to the members in proportion
to contributed capital, with any losses in excess of contributed capital
allocated to DevCo II. We were retained by each DevCo II JV to manage the
operations of its respective residence for a management fee. We and Manor Care
also received fees for certain other services rendered in connection with the
DevCo II joint venture.
On March 30, 2000, the commitment under the Bank of America facility was reduced
to $60 million and various of the corporate financial covenants related to the
Company under its guarantee of the Bank of America facility were modified. We
exercised our "call option" on May 3, 2000, to purchase the DevCo II Investor's
interests in 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 the exercise of that call option, we
elected to require Manor Care to acquire directly from the Devco II Investor and
DevCo II their respective interests in those six DevCo II JVs owning residences
that were acquired from Manor Care or its affiliates. After acquiring our 16
properties constituting 23 residences (i.e., seven of our properties are
"campus" properties having two residences each) we subsequently discontinued
construction and development of 14 of the 23 properties. Several of the parcels
of land were sold during 2000.
On January 26, 2001 (with an effective date of December 31, 2000), the Bank of
America credit facility was modified to: (i) shorten the maturity date of the
facility to June 29, 2001 from its original maturity date of September 30, 2002;
(ii) reduce the commitment under the facility to $57.0 million; (iii) eliminate
various corporate financial covenants related to the Company; and (iv) eliminate
certain property-level financial covenants previously applicable to the DevCo
residences.
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. Under
certain of these arrangements, we have agreed to fund the operating deficit
requirements of the applicable joint venture once the available equity and debt
financing is fully utilized. 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. We intend to
seek to negotiate with the applicable joint venture partners a termination of
these arrangements as a part of the Restructuring Plan.
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 18 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.
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.
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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 be independent apartments where services are provided by a licensed home
healthcare agency. 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 and Kentucky also require each
assisted living residence to obtain a 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.
Like other healthcare facilities, assisted living residences are subject to
periodic survey or inspection by governmental authorities. From time to time in
the ordinary course of business, government agencies issue deficiency reports
and impose remedial action.. We review these reports and remedial actions 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 are currently a defendant in a criminal negligence action involving one of
our residents. While we are vigorously defending the prosecution of this action,
if we were to be convicted of this misdemeanor, our ability to obtain and renew
certain of our licenses and to participate in certain government payor programs
could be materially and adversely affected.
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 may be subject to these laws
because (i) applicable state laws typically apply regardless of whether Medicare
or Medicaid payments are at issue and in certain cases (ii) some of our assisted
living residences maintain contracts with healthcare 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
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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 healthcare 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, 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, 2000, we employed approximately 10,400 full-time employees and
4,000 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 RECENT DEFAULTS UNDER LOAN AND LEASE OBLIGATIONS. We did
not make loan and lease payments to many of our lenders and lessors in March
2001 and are now in default with respect to these obligations. Management
believes that, despite the pendency of these defaults, during the near term the
majority of these lenders and lessors will continue to participate in
restructuring discussions with us. No assurances may be given, however, that
this will be the case. In fact, one of our lessors has given us notice that it
is terminating our leases for 11 residences and other lenders and lessors have
begun to exercise various remedies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." As our principal credit, lease and other financing facilities are
cross-defaulted to a material default occurring under other credit, lease or
financing facilities, a payment default under one such facility could result in
our being in default under many other such facilities, which could adversely
affect the Company's ability to restructure without reorganization proceedings.
In addition, the Company's convertible debentures include subordination
provisions that prohibit payments to the debenture holders (other than
payment-in-kind coupon payments) after the occurrence of a payment default on
the Company's senior
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indebtedness. As such, the Company is currently prohibited from making payments
related to its convertible debentures until such time that no payment-related
defaults exist related to its senior indebtedness.
RISKS ASSOCIATED WITH SHORTFALL IN LIQUIDITY AND IMPLEMENTATION OF RESTRUCTURING
PLAN. As a result of on-going operating losses and significant upcoming debt
maturities, we expect that our projected cash needs during 2001 and 2002 will
exceed our projected identified cash resources. In addition, 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. 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 default under certain of our credit agreements. If we are
unable to develop and successfully implement on a negotiated basis our
Restructuring Plan with our lenders, lessors, convertible debenture holders and
joint venture partners, we will not have sufficient liquidity to make our
scheduled debt and lease payments, or to fund our remaining construction
activities. In that event, we would have little choice but to seek to effect a
reorganization of the Company pursuant to a court supervised reorganization. See
"Substantial Debt and Operating Lease Payment Obligations," "Development and
Construction Risks" and "Management's Discussion and Analysis and Results of
Operations -- Liquidity and Capital Resources." Were we to seek to reorganize
the Company pursuant to a court supervised reorganization, we believe that it
would be more difficult for us to attract and retain residents to our residences
and employees. In addition, we would expect to be subject to increased
regulatory oversight as a result of our financial condition, resulting from
concerns of regulatory bodies that our financial difficulties may result in a
decrease in the quality of care provided by us.
RISKS ASSOCIATED WITH THE DISPOSITION OF ASSETS AND TERMINATION OF LEASES. A key
component of our Restructuring Plan relates to the disposition of a number of
residences that are owned or leased by the Company. This disposition strategy
involves a number of risks and uncertainties. Availability of financing for
assisted living properties is currently limited due to substantial reductions in
lending activity by traditional financing sources including commercial banks,
other secured lenders and real estate investment trusts ("REITs"). As such,
potential purchasers of Company residences may be limited in their ability to
obtain necessary financing which may affect both the price at which Company
assets may be sold and the ability of potential purchasers to execute
transactions. In addition, the residences that the Company intends to sell or
otherwise dispose of generally are in lease-up or have historically operated at
a loss. Both the availability of financing and number of potential purchasers
tend to be more limited for residences that have historically operated at a
loss. In addition, many operating companies within the assisted living sector
have encountered financial and operating difficulties similar to those
experienced by the Company. This may limit the universe of potential purchasers
as those other assisted living companies may be financially or operationally
incapable of effecting acquisition transactions or may be attempting to sell or
otherwise dispose of assets from their own portfolios. Finally, with respect to
a number of residences included in our Disposition Assets, we are not free to
sell or dispose of the residence without the consent of the applicable lender or
lessor and, in certain cases, the consent of our joint venture partners.
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS. We had lease expense
of $82.4 million and $69.4 million excluding sublease income for the years ended
December 31, 2000 and 1999, respectively. Our total indebtedness as of December
31, 2000 was $1.1 billion, and our net interest expense was $62.6 million and
$32.3 million for the years ended December 31, 2000 and 1999, respectively. Debt
and annual operating lease payment obligations will continue to increase as we
complete our pending construction activities. In addition, residences under
construction 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 $323.7 million
of our total indebtedness matures before December 31, 2001 or is in default as
of December 31, 2000.
Historically, we have not consistently had sufficient earnings to cover fixed
charges. Earnings were insufficient to cover fixed charges by $71.7 million and
$4.1 million in 2000 and 1999, respectively prior to non recurring charges, the
loss on disposal, other one time adjustments, and the cumulative effect of a
change in accounting principle. 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
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residences if we default in one of our payment obligations. See "Need for
Financing to Complete Construction and Fund Operating Losses."
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, 2000, of our 474 residences, 28
newly developed residences opened during 2000 and 70 residences opened or
purchased during 1999 were in lease up. In addition, the 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, 2000, we had 18 residences
under construction. 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 "Construction Risks" and
"Competition."
NEED FOR FINANCING TO COMPLETE CONSTRUCTION AND FUND OPERATING LOSSES. We will
need to obtain sufficient financing to fund our remaining construction
activities and anticipated losses. As of December 31, 2000, we had 18 residences
under construction. We estimate that we will incur between $10 million and $15
million of additional costs to complete these residences, of which between $7
million and $11 million relate to Company owned or leased residences and between
$3 million and $4 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," our access to additional funding is severely restricted. 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 will from time to time seek additional equity or debt financing. If
additional funds are raised by issuing equity or equity-linked securities, 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 construction projects and acquisition plans.
Approximately $533.3 million, or 47.5%, of our total indebtedness as of December
31, 2000 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. 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.
CONSTRUCTION RISKS. As of December 31, 2000, we had 18 residences under
construction. Construction 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 construction 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 light of our financial condition, we severely curtailed our
construction activity and have delayed making payments to contractors and
subcontractors on three 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. In addition, additional liens or
lawsuits may be filed by contractors and subcontractors unless we can access
sufficient working capital to satisfy our obligations, 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
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not experience construction delays that we will be successful in constructing
currently planned residences or that any developed residence will be
economically successful. Delays in our planned construction activity could
result in increased costs or litigation costs which could adversely affect our
business, operating results and financial condition.
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, 2000, 84 of our operating
residences were jointly owned, directly or indirectly, with venture partners. Of
the 18 residences which were under construction by us as of December 31, 2000, a
portion of these residences are being constructed 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 and, in certain cases,
have agreed to fund operating deficits arising after all available equity and
debt financing is utilized. 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 or at times
that would otherwise not be acceptable to us, including times during which we
may not have adequate liquidity to fund acquisitions.
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
be successfully asserted. 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.
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. In the event that the Company determines that
it must seek to accomplish its Restructuring Plan through a court supervised
reorganization, we expect that the foregoing risks could pose an even greater
challenge for the Company.
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
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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. In the event that the Company determines
that it must seek to accomplish its Restructuring Plan through a court
supervised reorganization, we expect that the foregoing risks could pose an even
greater challenge for the Company.
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. 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.
We are currently a defendant in a criminal negligence action involving one of
our residents. While we are vigorously defending the prosecution of this action,
if the Company were to be convicted of this misdemeanor, the Company's ability
to obtain and renew certain of our licenses and to participate in certain
government payor programs could be materially and adversely affected.
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.
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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. In the event that the Company determines that it must seek to
accomplish its Restructuring Plan through a court supervised reorganization, we
expect that the foregoing risks could pose an even greater challenge for the
Company.
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 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 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. We are obligated to issue
additional shares of Common Stock or, in certain cases, preferred stock, upon
the exercise of conversion or other rights under various outstanding warrants,
convertible debentures and convertible preferred stock described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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 $112.0 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.
15
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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. There has been significant
volatility in the market price of the Common Stock and the Company's convertible
subordinated debentures, and it is likely that the price of these securities
will fluctuate in the future. The Company's current financial condition, the
Company's effort to implement its Restructuring Plan, our recent operating
results, changes in general conditions in the economy, the financial markets or
the health care industry, or other developments affecting the Company or its
competitors, could cause the market price of the Common Stock and the Company's
convertible subordinated debentures to fluctuate substantially. In addition, in
recent years the stock market and, in particular, the health care industry
segment, has experienced significant price and volume fluctuations. This
volatility has affected the market price of securities issued by many companies
for reasons unrelated to their operating performance.
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ITEM 2. PROPERTIES
The table below shows, by state, the number and the associated capacity of the
residences that we own, lease, hold equity interest in or manage, on behalf of
third parties, as of December 31, 2000.
OPERATING RESIDENCES
Owned (1) Leased (2) Unconsolidated (3) Managed (4) Total
------------------ ------------------ ------------------ ------------------ ------------------
Location No. Cap. No. Cap. No. Cap. No. Cap. No. Cap.
- ------------ ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
AZ 11 624 4 190 1 38 -- -- 16 852
CA 7 624 1 240 2 125 -- -- 10 989
CO 8 444 11 689 1 36 -- -- 20 1,169
DE 1 72 -- -- -- -- -- -- 1 72
FL 29 1,637 25 1,080 7 296 3 176 64 3,189
GA 5 317 -- -- -- -- -- -- 5 317
ID 1 70 2 158 -- -- -- -- 3 228
IN 6 252 -- -- 11 446 -- -- 17 698
KS 17 584 8 265 3 118 1 50 29 1,017
MA 1 72 -- -- -- -- -- -- 1 72
MD 2 98 -- -- 2 82 -- -- 4 180
MI 18 550 12 542 -- -- 2 116 32 1,208
MN 12 396 8 311 1 78 -- -- 21 785
NC 7 340 11 524 1 38 -- -- 19 902
ND -- -- 1 71 -- -- -- -- 1 71
NJ 7 520 2 52 2 130 -- -- 11 702
NV 2 108 3 208 -- -- -- -- 5 316
NY 18 1,032 1 80 -- -- -- -- 19 1,112
OH 6 304 16 658 4 147 3 171 29 1,280
OK -- -- 26 906 2 74 -- -- 28 980
OR 2 164 8 594 3 156 -- -- 13 914
PA 13 595 1 48 1 52 1 60 16 755
SC 4 162 9 372 2 82 -- -- 15 616
TN 2 90 2 86 6 250 -- -- 10 426
TX 2 95 24 921 1 36 4 236 31 1,288
VA 1 56 -- -- 1 40 -- -- 2 96
WA 3 156 4 388 3 164 -- -- 10 708
WI 18 453 21 564 1 80 2 16 42 1,113
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
TOTAL 203 9,815 200 8,947 55 2,468 16 825 474 22,055
======= ======= ======= ======= ======= ======= ======= ======= ======= ========
(1) Owned residences are those that are wholly or majority owned by us,
including those leased under synthetic leases.
(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 or posses
a de minimus ownership position. We have an option to purchase or lease
thirteen of these residences.
Of our 474 operating residences, 79% are five years old or less and 95% are ten
years old or less.
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At December 31, 2000, we were in various stages of constructing 18 residences.
Set forth below is information with respect to residences in construction on
December 31, 2000.
RESIDENCES UNDER CONSTRUCTION
Under Construction
-----------------------
Location Residences Capacity
-------- ---------- ----------
CA 3 216
CT 1 52
DE 1 52
FL 2 172
IN 1 38
KY 2 78
NJ 2 74
NY 1 52
NC 2 74
TN 1 36
TX 1 52
WI 1 78
---------- ----------
TOTAL 18 974
========== ==========
The residences under construction may be owned directly by joint venture
entities in which we own varying percentages of equity interests. See "Business
- - Joint Ventures and Strategic Alliances."
"Construction" means that construction activities have commenced
(groundbreaking) and are ongoing.
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 matters.
On August 22, 2000, Manor Care, Inc. ("Manor Care") and Manor Care of America,
Inc. filed a complaint against the Company in state court in Ohio seeking to
collect on a note executed by the Company in the principal amount of $3.0
million in connection with the Company's development joint venture with Manor
Care. The Company has filed a motion to dismiss or stay the action in favor of
arbitration of the dispute. A hearing on this motion has been scheduled in April
2001. The Company intends to vigorously defend against the claims alleged by
Manor Care in this complaint.
On October 20, 2000, Manor Care filed a complaint against the Company in the
Delaware state superior court with respect to two purchase agreements entered
into on December 31, 1998 between the Company, Manor Care and a number of Manor
Care's subsidiaries and affiliates. One of these agreements related to the
purchase by the Company of a number of assisted living residences then owned and
operated by Manor Care and its subsidiaries, and the second agreement related to
the purchase by the Company of a number of assisted living residences then under
construction by Manor Care and its subsidiaries. Manor Care has alleged that the
Company was unable to close the purchases within the time required by the
agreements and that the Company allegedly fraudulently induced Manor Care to
delay the closings. Manor Care is seeking damages for this alleged fraud in the
amount of approximately $3.7 million. In addition, Manor Care has alleged that
the Company owes Manor Care $259,000 arising out of post-closing prorations. The
Company has filed a motion to dismiss Manor Care's complaint, and intends to
vigorously defend against the claims alleged by Manor Care in this complaint.
In addition, the Company is pursuing (or intends to pursue) various claims and
counterclaims against Manor Care and its affiliates arising out of the Company's
business dealings with Manor Care. Manor Care and its affiliates are likewise
also pursuing other claims and counterclaims against Alterra and its affiliates
arising out of its business dealings with Alterra.
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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, 2000.
PART II
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, 2001, was approximately 7,600.
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
-------- --------
2000:
First Quarter............ $8.250 $4.000
Second Quarter........... 4.000 1.688
Third Quarter............ 2.500 1.938
Fourth Quarter........... 3.188 0.875
1999:
First Quarter............ $33.563 $17.000
Second Quarter........... 23.500 10.438
Third Quarter............ 13.688 8.188
Fourth Quarter........... 8.938 5.750
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 presented below for each of
the five years ended December 31, 2000 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,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Revenue:
Operating revenue ................................ $ 466,495 $ 376,181 $ 244,423 $ 130,744 $ 55,637
--------- --------- --------- --------- ---------
Operating expenses:
Residence operations ............................. 313,514 224,213 147,931 81,558 35,977
Lease expense .................................... 82,352 69,375 44,174 25,524 9,035
Lease income ..................................... (28,222) (25,507) (4,915) -- --
General and administrative ....................... 50,360 44,898 23,200 22,168 11,143
Loss on disposal ................................. 22,515 -- -- -- --
Depreciation and amortization .................... 36,210 21,178 19,730 9,271 4,223
Non-recurring charge ............................. 4,232 47,280 -- 4,656 976
--------- --------- --------- --------- ---------
Total operating expenses ....................... 480,961 381,437 230,120 143,177 61,354
--------- --------- --------- --------- ---------
Operating (loss) income ............................ (14,466) (5,256) 14,303 (12,433) (5,717)
Other (expense) income:
Interest expense, net ............................ (62,628) (32,259) (9,431) (3,809) (3,231)
Amortization of financing costs .................. (8,595) (3,679) (1,593) (123) --
Convertible debt paid in kind interest ("PIK").... (12,483) -- -- -- --
Equity in losses of
unconsolidated affiliates ...................... (14,762) (1,442) (31) (226) (52)
Other, net ....................................... -- (20) (170) (112) (31)
Minority interest in losses of
consolidated subsidiaries ..................... 1,264 4,018 20,610 8,440 76
--------- --------- --------- --------- ---------
Total other (expense) income, net ............. (97,204) (33,382) 9,385 4,170 (3,238)
--------- --------- --------- --------- ---------
(Loss) income before income taxes,
extraordinary item and cumulative
effect ........................................... (111,670) (38,638) 23,688 (8,263) (8,955)
--------- --------- --------- --------- ---------
Income tax benefit (expense) ....................... (14,672) 14,669 (3,136) -- 159
--------- --------- --------- --------- ---------
(Loss) income before extraordinary
item and cumulative effect of a
change in accounting principle ................... (126,342) (23,969) 20,552 (8,263) (8,796)
Extraordinary item - gain from
early retirement of financing agreements .......... 8,536 -- -- -- --
Cumulative effect of a change in
accounting principle ............................. -- (3,837) -- -- --
--------- --------- --------- --------- ---------
Net (loss) income ............................. $(117,806) $ (27,806) $ 20,552 $ (8,263) $ (8,796)
========= ========= ========= ========= =========
Basic (loss) income per common share:
(Loss) income before extraordinary
item (1), and a change in
accounting principle ............................ $ (5.71) $ (1.09) $ 0.94 $ (0.44) $ (0.57)
Extraordinary item (1) ........................... 0.39 -- -- -- --
Change in accounting principle .................. -- (0.17) -- -- --
--------- --------- --------- --------- ---------
Basic (loss) income per common
share (1) ........................................ $ (5.33) $ (1.26) $ 0.94 $ (0.44) $ (0.57)
========= ========= ========= ========= =========
Diluted (loss) income per common
share:
(Loss) income before
extraordinary item (1), and a
change in accounting principle .................. $ (5.71) $ (1.09) $ 0.92 $ (0.44) $ (0.57)
Extraordinary item (1) ........................... 0.39 -- -- -- --
Change in accounting principle ................... -- (0.17) -- -- --
--------- --------- --------- --------- ---------
Diluted (loss) income per common
share (1) ........................................ $ (5.33) $ (1.26) $ 0.92 $ (0.44) $ (0.57)
========= ========= ========= ========= =========
Weighted average common shares
outstanding (1):
Basic ............................................ 22,108 22,088 21,905 18,651 15,429
========= ========= ========= ========= =========
Diluted .......................................... 22,108 22,088 24,145 18,651 15,429
========= ========= ========= ========= =========
(1) Basic and diluted share amounts are the same for 1996-1997 and 1999-2000
since potentially issuable shares related to stock options and convertible debt
would have an anti-dilutive effect.
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2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents ... $ 23,688 $ 18,728 $ 40,621 $ 79,838 $ 39,455
Short-term investments ...... -- -- -- 90,000 --
Working capital ............. (129,226) 5,452 28,305 129,528 20,532
Total assets ................ 1,227,765 1,061,397 777,810 553,552 204,353
Long-term obligations ....... 803,848 791,672 515,584 318,069 68,625
Stockholders' equity ........ $ 32,859 $ 150,643 $ 177,112 $ 143,897 $ 91,064
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a national assisted living company operating assisted living residences
and providing assisted living services in 28 states. Our growth in recent years
has had a significant impact on our results of operations and is an important
factor in explaining the changes in our results between 2000 and 1999. As of
December 31, 2000 and 1999, we operated or managed 474 and 450 residences with
aggregate capacity of approximately 22,100 and 20,700 and residents,
respectively. We, together with other parties who have purchased interests in
some of our development residences, were also constructing 18 additional
residences with additional capacity for 974 residents as of December 31, 2000.
During 2000, we generated operating revenue of $466.5 million and realized an
operating loss of $14.5 million and a pretax loss of $79.8 million prior to
non-recurring charges, extraordinary item, and a loss on disposal.
In light of our current liquidity situation, we are seeking to implement a
Restructuring Plan that contemplates the disposition of a significant portion of
our residences and the restructuring of our senior indebtedness, leases (both
operating and synthetic), convertible debentures, joint venture arrangements and
equity capitalization. The pending Restructuring Plan, and recent developments
impacting our liquidity and operating results, are summarized under the caption
"Business - Recent Developments," which is incorporated in this Item 7 by this
reference.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Residence Service Fees. Residence service fees for year ended December 31, 2000
were $452.9 million representing an increase of $103.1 million, or 29.5%, from
the $349.8 million for the comparable 1999 period. Substantially all of this
increase resulted from occupancy growth at certain of our recently opened
residences and the addition of newly constructed residences, residences we
acquired and a portfolio wide growth in occupancy. We operated or managed 474
and 450 residences at December 31, 2000 and 1999, respectively.
Other Revenues. Other revenues for the year ended December 31, 2000 were $13.6
million, a decrease of $12.8 million over the $26.4 million of other revenue for
the year ended December 31, 1999. The decrease is attributable to reduced
development activity which resulted in lower development fees and management
fees on residences which were either managed for third parties or for entities
in which we held a minority ownership position. In addition, during the second
quarter of 2000, we purchased 49 residences which we previously either managed
for third parties or for entities in which we held minority ownership positions.
Management fees include charges for transitional services to recruit and train
staff, initial and recurring fees for use of our name and branding, initial and
recurring fees for use of our methodologies, services for assisting with finance
processing, and ongoing management services provided to operate the residence.
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 2000 increased to $313.5 million from $224.2 million in the year
ended December 31, 1999 due to the increased number of residences operated
during the 2000 period. Operating expenses as a percentage of resident service
fees for the year ended December 31, 2000 and 1999 were 69.2% and 64.1%,
respectively. This percentage increase resulted primarily from increases in
labor and employee benefit related costs due to increased competition for
personnel and increases in liability insurance costs which resulted from the
most recent liability insurance policy renewal on July 1, 2000. The increase in
marginal expenses was also impacted by a slower lease-up of residences in some
areas of the country.
Lease Expense. Lease expense for the year ended December 31, 2000 was $82.4
million, compared to $69.4 million in the comparable period in 1999. Such
increase was primarily attributable to the incurrence of a full year of lease
expense in 2000 related to leases entered into in 1999.
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22
Lease Income. We earned $28.2 million of lease income for year ended December
31, 2000, compared to $25.5 million for the comparable period in 1999, on
residences owned or leased by us and leased or subleased to unconsolidated joint
ventures. Lease payment obligations of the unconsolidated joint venture entities
are generally equivalent to the debt service payable by us on the leased
residences, and thereby offset our costs associated with obtaining and
maintaining financing for such residences.
General and Administrative Expense. For the year ended December 31, 2000,
general and administrative expenses were $45.3 million prior to $5.1 million of
non-recurring expenses, compared to $42.6 million before a $2.3 million
write-off for failed acquisitions, corporate downsizing, and corporate office
relocation costs for the comparable 1999 period, representing a decrease to 9.7%
of operating revenue in 2000 from 11.3% in 1999. The $5.1 million of
non-recurring expenses consist of $3.3 million related to employee severance
costs and the termination of several internal software development and systems
projects associated with our corporate downsizing, and a $1.8 million bad debt
expense related to a management fee note which was deemed to be uncollectible
due to the acquisition of the related residences in the second quarter.
Loss on Disposal. During the year ended December 31, 2000, the Company's Board
of Directors adopted a plan to dispose of 67 residences with aggregate capacity
of 2,377 residents and 33 parcels of land. In accordance with SFAS 121,
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of," we recorded a loss on disposal on 31 of the 67 residences where we
estimated net sales proceeds using undiscounted cashflows, net of disposal
costs, are less than the book value by $22.2 million net of subsequent gains.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 2000 was $36.2 million, representing an increase of $15.0 million,
or 70.9%, from the $21.2 million of depreciation and amortization for the
comparable 1999 period. This increase resulted primarily from depreciation of
fixed assets on the larger number of new residences that were owned by us during
the year ended December 31, 2000, versus the comparable period in 1999. In
addition, we acquired 19 residences with a capacity for 944 residents in
December 1999 and January 2000 which were previously leased by us from a
healthcare REIT and have therefore incurred depreciation on these assets.
Non recurring charge. A non recurring charge of $4.2 million was recorded in the
fourth quarter of 2000 relating to severance of various general and
administrative positions of $1.1 million, the termination of a management
contract of $2.0 million and the discontinuance of our pharmacy joint venture of
$1.1 million, representing a decrease of $43.1 million, compared to a non
recurring charge of $47.3 million in 1999 to exit development activities.
Interest Expense, Net. Interest expense, net of interest income, was $61.2
million for the year ended December 31, 2000, prior to $1.4 million of bank
amendment fees compared to $32.3 million of net interest expense for 1999. Gross
interest expense (before interest capitalization and interest income) for the
2000 period was $71.1 million prior to the amendment fees paid compared to $47.6
million for the 1999 period, an increase of $23.4 million. This increase is
primarily attributable to an increase in the amount of mortgage financing used
in 2000 as compared to 1999. The 2000 period also includes fees paid related to
amending bank agreements. We capitalized $4.0 million of interest expense in the
2000 period compared to $10.3 million in the 1999 period. This decrease in
capitalized interest is a result of our decision to reduce development and
construction activity in 2000. Our average construction in progress balance was
$65.1 million during the twelve months ended December 31, 2000, compared to
$117.8 million in the 1999 period. Interest income for the 2000 period was $5.9
million as compared to $5.1 million for the 1999 period. This increase was due
to interest on additional restricted cash balances in place in 2000 related
primarily to lease financing transactions.
Amortization of Financing Costs. Amortization of financing costs for the year
ended December 31, 2000 was $8.6 million, representing an increase of $4.9
million from the $3.7 million of amortized financing costs for the comparable
1999 period. This increase resulted primarily from amortization of financing
costs on the larger number of residences that were owned by us during the year
ended December 31, 2000, versus the comparable period in 1999. In addition, we
completed the Equity Transaction totaling $203.0 million in 2000 and have begun
to amortize the $15.2 million of related costs.
PIK Interest, Net. PIK interest for the year ended December 31, 2000 includes
$12.5 million of interest expense on the various PIK debentures which were
issued in May and August 2000. We had no similar PIK interest expense for the
1999 period.
Equity in Losses of Unconsolidated Affiliates. Equity in losses of
unconsolidated affiliates for the twelve months ended December 31, 2000, was
$14.8 million, representing an increase of $13.4 million from $1.4 million of
losses for the comparable 1999 period. In the fourth quarter of 1999, we began
reducing our reliance on joint venture arrangements. As such, our joint venture
partners have not made substantial capital contributions to a number of joint
ventures for several
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quarters. Therefore, we have absorbed the losses of those unconsolidated joint
ventures in excess of capital contributed by the joint venture partner. The
increase in equity in losses of unconsolidated affiliates was also impacted by a
slower lease-up of residences which are held in unconsolidated joint ventures..
Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in
losses of consolidated subsidiaries for the year ended December 31, 2000 was
$1.3 million, representing a decrease of $2.7 million from $4.0 million for the
comparable period in 1999. The decrease was primarily attributable to the
maturity in the residences that were owned by us in consolidated joint venture
arrangements during the 2000 period. Throughout 2000, we had an average of 23
residences held in consolidated joint venture relationships compared to an
average of 19 residences in consolidated joint venture relationships during the
year ended December 31, 1999.
Extraordinary Item. During the year ended December 31, 2000, we recorded a gain
on the early extinguishment of debt of $8.5 million (net of tax) relating to our
retirement of $41.4 million of convertible debt related to the Equity
Transaction. EITF 96-19, "Debtor's Accounting for a Modification or Exchange of
Debt Instruments," requires recognition of a gain or loss by the debtor for
early extinguishment of debt.
Cumulative Effect of Change in Accounting Principle. During the first quarter of
1999 we incurred a cumulative effect of a change in accounting principle of $3.8
million relating to the adoption of Statement of Position 98-5, which requires
that costs of start-up activities and organization costs be expensed as
incurred.
Income Taxes. For the period ended December 31, 2000, we recorded a current
state income tax provision of $573,000 and a deferred tax provision of $14.1
million resulting in a total income tax provision of $14.7 million before the
effect of the extraordinary item. The income tax expense for the period ended
December 31, 2000 reflects the treatment of PIK interest as non-deductible
interest. We do not currently anticipate that the interest expense which we will
incur in the future related to the PIK debentures will be deductible for income
tax purposes. During the period ended December 31, 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 of $3.8 million.
As of December 31, 2000, our deferred tax asset was reduced to zero. In
accordance with Statement of Financial Accounting Standards No. 109, we are
required to continuously evaluate the recoverability of deferred tax assets
based on the criteria that it is "more likely than not" that the deferred taxes
will be recoverable through future taxable income. This evaluation is made based
on our internal projections which are routinely updated to reflect more recent
operating trends. Based on our current financial projections, we are uncertain
that we will recover these net deferred tax assets through future taxable
income. In addition, the utilization of the $131.3 million Net Operating Loss
"NOL" carryforward could be subject to limitations based on the change of
control provisions in the Internal Revenue Code. Accordingly, we have
established a valuation allowance against the entire net deferred tax assets.
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.
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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 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
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 Statement of Position 98-5, which
requires that costs of start-up activities and organization costs be expensed as
incurred.
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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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had $23.7 million in unrestricted cash and cash
equivalents and a $129.2 million working capital deficit compared to
unrestricted cash and cash equivalents of $18.7 million and working capital of
$5.4 million at December 31, 1999.
For the year ended December 31, 2000 the operating cash flow deficit was $28.6
million compared to cash flow from operations of $5.4 million for the year ended
December 31, 1999.
During 2000 we obtained approximately $127.4 million of new conventional debt
financing. Approximately $30.0 million of this financing was used to repay
bridge financing and $30.0 million was used to repurchase 19 residences from a
REIT lessor. The remaining conventional financing was used to fund construction
of our remaining unopened residences.
On May 31, 2000, we completed the first closing of the Equity Transaction
pursuant to which we issued $173.0 million of convertible debentures and
convertible preferred shares to investors. The securities issued include: (i)
$168.0 million of Series A, Series B and Series C convertible debentures with an
original conversion price of $4.00 per share and a 9.75% semi-annual PIK coupon
and a seven year maturity; and (ii) $5.0 million of Series A convertible
preferred shares with an original conversion price of $4.00 per share and a
9.75% semi-annual cumulative PIK dividend and a mandatory redemption in seven
years. The Series A and Series C debentures and Series A preferred shares are
convertible at any time at the respective holder's option into shares of common
stock of the Company. The Series B debentures are convertible at any time at the
respective holder's option into non-voting Series B preferred shares having
rights (other than voting rights) substantially similar to the Company's common
stock. As a result of our issuance of a stock purchase warrant in connection
with bridge financing we obtained in March 2001, the conversion price for these
securities has been reduced from $4.00 to $3.36 per share pursuant to the
anti-dilution provisions of these securities. The Company may call the
debentures and the Series A preferred shares at any time after May 31, 2003, if
the Company's common stock trades at an average price of at least $8.00 per
share for the preceding 30 trading day period. On August 10, 2000, we issued an
additional $29.9 million of Series B debentures resulting in an aggregate
transaction amount of $203.0 million. With the payment of the first PIK coupon
and dividend as of January 1, 2001, we now have $208.6 million of convertible
PIK debentures and $5.0 million of Series A convertible preferred shares
outstanding.
We used the proceeds from this transaction, net of $15.2 million in transaction
costs, to (i) repay $48.3 million of bridge loans previously funded by an
affiliated group who participated as investors in the Equity Transaction, (ii)
retire outstanding convertible debt with a book basis of $41.4 million in
exchange for $26.9 million in new Series C convertible debentures, (iii) acquire
equity interests in 14 residences (618 resident capacity) previously managed by
the Company for $21.0 million, (iv) acquire a 60% ownership interest in the
operations of 26 residences (2,159 resident capacity) for $14.7 million, (v)
repay $5.0 million of short-term borrowings under a bank line-of-credit, and
(vi) provide funds for working capital and other corporate purposes, including
funding construction of our remaining unopened residences.
Historically, we 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, preferred stock and convertible
debentures) and, to a lesser extent, cash from operations. At December 31, 2000,
we had $1.1 billion of outstanding debt principally consisting of $395.9 million
of convertible debentures having a weighted average interest rate of 7.93%,
$120.5 million of fixed rate debt having a weighted average interest rate of
7.69%, capitalized lease obligations of $63.4 million having a weighted average
interest rate of 9.59%, $533.3 million of variable rate debt having a weighted
average interest rate of 9.41% and short-term borrowings of approximately $9.7
million. Through December 31, 2000, we have also entered into approximately
$893.7 million of sale/leaseback and synthetic lease financings. In addition, we
have guaranteed an aggregate of $57.0 million of indebtedness of joint venture
and other off-balance sheet third-party entities.
As of December 31, 2000, our current portion of long-term debt and short-term
notes payable totaled $323.7 million. These current maturities include $171.1
million of debt and lease obligations that are in default. In addition, our
long-term debt instruments include maturities of $25.7 million in the first
quarter of 2001. We, together with Manor Care, Inc., have also guaranteed $57.0
million of indebtedness of a joint venture arrangement that will mature in the
second quarter of 2001. In
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2002, our scheduled debt maturities include $214.0 million of secured debt and
our 5.25% convertible subordinated debentures, which have an outstanding balance
of $112.0 million at December 31, 2000 and mature in December 2002.
As of January 1, 2001, we have the following series of redeemable preferred
stock and convertible subordinated debentures outstanding:
- $5.0 million aggregate principal amount of 9.75% Series A cumulative
convertible preferred shares due May 31, 2007. The holders of these
convertible preferred shares are entitled to cumulative pay-in-kind
(PIK) dividends at the rate of 9.75% per annum, payable semi-annually
in the form of additional shares of Series A preferred stock on
January 1 and July 1 of each year commencing on January 1, 2001. The
conversion price is $3.36 per share. The Series A preferred stock is
redeemable at our option commencing on May 31, 2003, if the Company's
common stock trades at an average price of at least $8.00 per share
for the preceding 30 trading day period. The holders of the
convertible preferred shares may convert at any time into shares of
common stock of the Company on a one to one basis.
- $42.5 million aggregate principal amount of 9.75% Series A convertible
debentures due May 31, 2007 (the "Series A Debentures"). These
convertible debentures bear PIK interest at 9.75% per annum payable
semi-annually in the form of Series B debentures on January 1 and July
1 of each year commencing on January 1, 2001. The conversion price is
$3.36 per share. The convertible debentures are redeemable at our
option commencing on May 31, 2003, if the Company's common stock
trades at an average price of at least $8.00 per share for the
preceding 30 trading day period. The holders of the convertible
debentures may convert at any time into shares of common stock of the
Company.
- $121.0 million aggregate principal amount of 9.75% Series B
convertible debentures due May 31, 2007 (the "Series B Debentures").
These convertible debentures bear PIK interest at 9.75% per annum
payable semi-annually in the form of Series B debentures on January 1
and July 1 of each year, commencing with January 1, 2001. The
conversion price is $336.00 per share. The convertible debentures are
redeemable at our option commencing on May 31, 2003, if the Company's
common stock trades at an average price of at least $8.00 per share
for the preceding 30 trading day period. The holders of the
convertible debentures may convert at any time into non-voting Series
B preferred shares, each share of which has rights (other than voting
rights) substantially similar to 100 shares of common stock of the
Company.
- $45.1 million aggregate principal amount of 9.75% Series C convertible
debentures due May 31, 2007 (the "Series C Debentures"). These
convertible debentures bear PIK interest at 9.75% per annum payable
semi-annually in the form of Series C debentures on January 1 and July
1 of each year, commencing with January 1, 2001. The conversion price
is $3.36 per share. The convertible debentures are redeemable at our
option commencing on May 31, 2003, if the Company's common stock
trades at an average price of at least $8.00 per share for the
preceding 30 trading day period. The holders of the convertible
debentures may convert at any time into shares of common stock of the
Company.
- $112.0 million aggregate principal amount of 5.25% convertible
subordinated debentures due December 15, 2002 (the "5.25%
Debentures"). 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 at specified premiums. The holders of the convertible
debentures may require us to repurchase the convertible debentures at
101% of face value upon a change of control, as defined in the
convertible debenture;
- $40.4 million aggregate principal amount of 7.00% convertible
subordinated debentures due June 1, 2004 (the "7.00% Debentures").
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 at specified premiums; and
- $34.9 million aggregate principal amount 6.75% convertible
subordinated debentures due June 30, 2006 (the "6.75% Debentures").
These convertible debentures bear interest at 6.75% per annum payable
semi-annually on June 30 and December 30 of each year. The conversion
price is $20.38, which is equivalent to a conversion ratio of 49.3
shares of common stock per $1,000 principal amount of the convertible
debentures. The convertible debentures are redeemable at our option at
specified premiums.
The outstanding 5.25% Debentures, 7.00% Debentures and 6.75% Debentures
(collectively, the "Original Debentures") are subordinated to all other
indebtedness of the Company, and the Series A Debentures, the Series B
Debentures and the Series C Debentures (collectively, the "PIK Debentures," and
together with the Original Debentures, the "Subordinated
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Debentures") are subordinated to all indebtedness of the Company other than the
Original Debentures. As a result of several notices of default received by the
Company with respect to other indebtedness that, by its terms, may be
accelerated by the applicable lenders, neither we nor the applicable indenture
trustees for the Subordinated Debentures are permitted by the subordination
provisions of the indentures governing the respective Subordinated Debentures to
make any payment or distribution on account of the Subordinated Debentures
(other than the payment of PIK coupons on the PIK Debentures). In the event that
the Company is dissolved, liquidated or reorganized, all amounts due in payment
of the Company's other indebtedness must be paid or provided for before any
payment may be made on account of the Subordinated Debentures. Accordingly,
unless and until we are able to restructure our debt and lease obligations and
resolve all these pending defaults, we will not be permitted to make any
interest or other payments to the holders of the Subordinated Debentures (other
than the payment of PIK coupons on the PIK Debentures).
Our principal credit and financing agreements, including our convertible
debentures and our synthetic lease agreements, include cross-default provisions
that provide that a material default under our other credit facilities
constitute a default under that credit or financing agreement. Accordingly, any
material default arising under one of our credit or financing agreements could
result in many of our other major credit and financing arrangements being in
default. In addition, our principal credit agreements and debt instruments
include various financial covenants and other restrictions, including: (i) fixed
charge coverage requirements, typically measured on a trailing four quarter
basis and which generally increase over the term of the applicable credit
agreement; (ii) maximum leverage ratios which limit our aggregate senior
indebtedness to total capitalization; (iii) various minimum net worth or
tangible net worth requirements; (iv) in some cases, property specific debt
service coverage requirements and similar financial covenants of the type
referenced above applicable to individual properties or to the pool of
residences financed by the applicable lender; and (v) the maintenance of
operating and other reserves for the benefit of the residences serving as
collateral for the applicable lender. Additionally, under some of our credit and
sale/leaseback facilities we are required to secure lender or lessor consent
prior to engaging in mergers, business combinations or change in control
transactions.
We are obligated under our existing joint venture arrangements to purchase the
equity interests of our joint venture partners at fair market value upon the
election of our partners (the "Put"). We may also exercise options to purchases
these same joint venture interests either at uncapped fair market value in the
case of certain joint venture arrangements (the "FMV Call") or at an agreed upon
return on investment in the case of other arrangements (the "Formula Call"). For
joint ventures with the FMV Call, we estimate that the amount required as of
December 31, 2000 to acquire these joint venture interests would have been
approximately $12.0 million. We do not anticipate that we will purchase or be
required to purchase the interests in these partnerships with FMV Calls during
the next 12 months. With respect to joint ventures which include Formula Calls,
we estimate that the call price as of December 31, 2000 would have totaled
approximately $50.0 million. However, we believe that the fair market value of
these residences, in the aggregate, should the Put be exercised, is
substantially less. The majority of the residences held in joint venture
arrangements are currently in the lease-up process. Related to our Restructuring
Plan, we are negotiating with certain of our joint venture partners to purchase
or acquire their joint venture interests at terms different from the existing
agreements. During the fourth quarter of 2000, we completed the acquisition of
all of the remaining joint venture interests (representing approximately 40% of
the equity interests) not previously acquired by us in the Equity Transaction in
partnerships operating 26 of our residences.
Our operations and remaining construction activity will require significant
additional capital resources in the future in order to fund: (i) our costs
associated with completing construction of 18 assisted living and Alzheimer's
care residences; (ii) our purchase from the third party joint venture partners
of minority and majority equity interests in assisted living residences operated
by us; (iii) our ongoing debt service obligations, including maturities of our
long-term debt and refinancing of short term debt; and (iv) our obligation to
finance the operations of third party development partners. We are also subject
to contingent liabilities associated with certain pending litigation (see Item 3
of Part I of this Report). Additionally, growth in residence operating cash flow
has been slower than projected as a result of (i) increased operating costs,
including labor, utilities and liability insurance and, (ii) to a lesser extent,
slower fill rates in our pre-stabilized residences and reduction in occupancy
levels in certain of our stabilized residences. As a result of on-going
operating losses and these upcoming capital needs, we expect that our projected
cash needs during 2001 and 2002 will exceed our projected identified cash
resources. To satisfy these cash shortfalls to preserve the integrity of our
operations, we are pursuing a Restructuring Plan which seeks to, among other
things, dispose of a significant number of our residences which operate with
cash shortfalls and defer some of our debt service obligations until those
disposition and restructuring transactions can occur (See "Business-Recent
Developments").
In an effort to retain sufficient cash to fund operations of all our residences
and address our short-term liquidity needs, in March 2001 we obtained a $7.5
million bridge loan provided by certain of our principal stock and convertible
debenture holders (the "Bridge Loan") and elected not to fund certain of our
debt service and lease payment obligations. As a result, we are currently in
default under many of our credit and sale/leaseback facilities.
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The $7.5 million Bridge Loan has a six-month term, is secured by first mortgages
on several residences and bears interest at an escalating interest rate,
commencing at 10% per annum. At our option, the Bridge Loan may be extended by
an additional six months whereupon the Bridge Loan will become convertible into
convertible subordinated debentures of the Company having rights and terms
substantially similar to our Series B 9.75% pay-in-kind convertible debentures,
but having a conversion price equal to $75 per share of Series B preferred stock
(a common stock equivalent price of $0.75 per share) or, if during the original
six month term of the Bridge Loan we have sold any shares of common stock or
Series B preferred stock at a higher price per share, such higher price per
share. The bridge lenders also are entitled to participate in any transaction
involving the issuance by the Company of equity or equity-linked securities
during the term of the Bridge Loan.
As an inducement to make the Bridge Loan, we issued the bridge lenders stock
purchase warrants to purchase an aggregate of 60,000 shares of a newly
designated class of our preferred stock having rights and terms substantially
similar to our Series B Non-Voting Participating Preferred Stock issuable upon
conversion of our Series B debentures. Like our Series B Preferred Stock, each
share of the new preferred stock has rights, other than voting rights,
substantially similar to 100 shares of common stock of the Company. Accordingly,
60,000 shares of the new preferred stock represent 6 million common stock
equivalent shares. The five-year warrants are exercisable at a price of $75 per
share for 20,000 shares of the new preferred stock, $100 per share for 20,000
shares of the new preferred stock and $125 per share for 20,000 shares of the
new preferred stock. Pursuant to the anti-dilution provisions operative in the
$213.8 million of outstanding 9.75 % convertible pay-in-kind debentures and
preferred stock that we originally issued in May and August 2000, upon the
issuance of these warrants the conversion price for these debentures and
preferred shares decreased from $4.00 to $3.36 per share of common stock.
We elected not to fund certain of our debt service and lease payment obligations
due in March 2001. Specifically, without the consent or waiver of the applicable
lendor or lessor, we failed to pay March 2001 debt service to lenders who hold
mortgages on 35 residences (1,645 resident capacity) and we failed to make
rental payments under operating or synthetic lease arrangements to lessors who
hold title to 51 residences (3,321 resident capacity). We have received written
notices of default from most of these lenders or lessors, one lessor has
terminated leases for 11 residences (504_resident capacity) and other lenders
have elected to apply deposits and reserve funds of ours held by such lenders
against the past due payments as well as activating "cash traps" of bank
accounts relating to the operation of residences mortgaged to such lenders as
permitted under such lenders' loan documents. We expect that other notices of
default will be forthcoming and that absent an agreed upon resolution, other
lenders may also begin exercising remedies under their loan documents and
realization upon collateral. At the present time, however, we are not aware that
any foreclosure actions have commenced against any of our owned residences. We
further anticipate that we will not make April 2001 payments to many of such
lenders or lessors and such non-payment may continue in certain instances until
the Asset Disposition has been completed.
In addition, we did not fund the March 2001 lease payment on the synthetic lease
for our headquarters. The lessor has declared a lease default, both the lessor
and the lessor's mortgagee have demanded that we purchase the headquarters for
the full lease balance, and the lessor has realized on deposits held as security
for payment of the lease balance. We presently are discussing short term
financing with the landlord's mortgagee for the remaining $14 million lease
balance.
We sought forbearance agreements from certain of our lenders and lessors with
respect to March 2001 debt service and lease payments, but did not have written
agreements in place with most of our lenders and lessors at the time these
payments were due, nor do we expect such agreements to be in place with respect
to most of our debt service and lease payments due in April 2001. As we did not
make loan and lease payments to these lenders and lessors in March 2001, we are
now in default with respect to these obligations. Management believes that,
despite the pendency of these defaults, during the near term the majority of
these lenders and lessors will continue to participate in restructuring
discussions with us. No assurances may be given, however, that this will be the
case. As our principal credit, lease and other financing facilities are cross
defaulted to a material default occurring under other credit, lease or financing
facilities, a payment default under one such facility could result in our being
in default under many other such facilities, which could adversely affect our
ability to restructure without reorganization proceedings.
To address our long-term liquidity and capital needs, including our upcoming
debt maturities, we intend to (i) develop a Restructuring Plan with our lenders,
lessors, convertible debenture holders and joint venture partners, (ii) continue
to implement operating initiatives focused on overall rate and occupancy
improvement and overhead reductions, (iii) dispose of under-performing and
non-strategic residences in order to reduce associated financing costs,
operating expenses and to generate cash, and (iv) seek to identify additional
equity or equity-linked capital.
28
29
We have retained Silverman Consulting and Cohen & Steers Capital Advisors to
help develop and implement our Restructuring Plan. A summary description of our
Restructuring Plan is included under the caption "Business - Recent
Developments," and is incorporated in this section by this reference. While we
are attempting to negotiate the terms of a restructuring of our principal
obligations with our lenders, lessors, holders of Subordinated Debentures and
joint venture partners outside of a reorganization proceeding under the
Bankruptcy Code, it may be necessary for us to seek to reorganize pursuant to
the provisions of Chapter 11 of the Bankruptcy Code if we conclude that we need
to avail ourselves of the substantive and procedural provisions of a court
supervised reorganization.
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, 2000 which
are sensitive to changes in interest rates. Market risk is estimated as the
potential change in fair value resulting from an immediate hypothetical
one-percentage point parallel shift in the yield curve. The fair value of the
debt included in the analysis is $533.3 million. Although not expected, a
one-percentage point change in the interest rates would have caused our annual
interest expense to change by approximately $5.3 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, 2000, are not subject to floating
interest rates, indebtedness that we may incur in the future may bear interest
at a floating rate. Debt and annual operating lease payment obligations will
continue to increase significantly as we complete our pending construction
activity.
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,
2000.
29
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report...................................... 31
Consolidated Balance Sheets as of December 31, 2000 and 1999...... 32
Consolidated Statements of Operations for Years Ended December
31, 2000, 1999 and 1998......................................... 33
Consolidated Statements of Changes in Stockholders' Equity for
Years Ended December 31,
2000, 1999 and 1998............................................. 34
Consolidated Statements of Cash Flows for Years Ended December
31, 2000, 1999 and 1998........................................... 35
Notes to Consolidated Financial Statements........................ 36-54
30
31
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, 2000
and 1999, 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, 2000. 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 the results of our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 as of December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the years in the three year period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and was in violation of certain debt covenants and cross
covenants as of December 31, 2000. As a result of the covenant violations and
cross covenant violations, the Company is in default on the related debt.
Additionally, the Company did not make certain scheduled loan principal and
lease payments due in March of 2001. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, in 1999 the
Company changed its method of accounting for the cost of start-up activities.
KPMG LLP
Chicago, Illinois
March 23, 2001
31
32
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS EXCEPT SHARE DATA)
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 23,688 $ 18,728
Accounts receivable, net ...................................... 11,782 7,150
Notes receivable, net ......................................... 4,963 32,530
Assets held for sale .......................................... 154,775 9,501
Other current assets .......................................... 56,832 41,320
----------- -----------
Total current assets ........................................ 252,040 109,229
----------- -----------
Property and equipment, net ...................................... 891,880 863,163
Restricted cash and investments .................................. 21,507 28,325
Goodwill, net .................................................... 10,276 5,106
Other assets ..................................................... 52,062 55,574
----------- -----------
Total assets ................................................ $ 1,227,765 $ 1,061,397
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations ................. $ 214,890 $ 9,945
Current debt maturities on assets held for sale ............... 98,828 --
Short-term notes payable ...................................... 9,986 29,009
Accounts payable - trade ...................................... 10,805 11,036
Accounts payable - construction ............................... 1,049 6,616
Accrued expenses .............................................. 42,778 37,972
Deferred rent and refundable deposits ......................... 2,930 9,199
----------- -----------
Total current liabilities ............................. 381,266 103,777
----------- -----------
Long-term obligations, less current installments ................. 403,036 563,072
Convertible debt ................................................. 395,914 228,600
Deferred gain on sale and other .................................. 5,286 11,592
Minority interest ................................................ 4,506 3,713
Redeemable preferred stock ....................................... 4,898 --
Stockholders' equity:
Preferred stock, 2,500,000 shares authorized;
1,250,000 designated at December 31, 2000, none
of which are outstanding .................................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
of which 22,111,671 and 22,109,810 were issued and
outstanding, respectively, on December 31, 2000 and
22,111,671 shares of which 22,100,032 were outstanding
on December 31, 1999 ........................................ 221 221
Treasury stock, $.01 par value; 11,639 shares in
2000 and 1999.................................................. (163) (163)
Additional paid-in capital .................................... 179,384 179,362
Accumulated deficit ........................................... (146,583) (28,777)
----------- -----------
Total stockholders' equity .................................. 32,859 150,643
----------- -----------
Total liabilities and stockholders' equity .................. $ 1,227,765 $ 1,061,397
=========== ===========
See accompanying notes to consolidated financial statements.
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33
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
--------- --------- ---------
Revenue:
Resident service fees ..................................... $ 452,880 $ 349,770 $ 235,909
Other ..................................................... 13,615 26,411 8,514
--------- --------- ---------
Operating revenue ............................................ 466,495 376,181 244,423
Operating expenses (income):
Residence operations ...................................... 313,514 224,213 147,931
Lease expense ............................................. 82,352 69,375 44,174
Lease income .............................................. (28,222) (25,507) (4,915)
General and administrative ................................ 50,360 44,898 23,200
Loss on disposal .......................................... 22,515 -- --
Depreciation and amortization ............................. 36,210 21,178 19,730
Non-recurring charge ...................................... 4,232 47,280 --
--------- --------- ---------
Total operating expenses ................................ 480,961 381,437 230,120
--------- --------- ---------
Operating (loss) income ...................................... (14,466) (5,256) 14,303
Other (expense) income:
Interest expense, net ..................................... (62,628) (32,259) (9,431)
Amortization of financing costs ........................... (8,595) (3,679) (1,593)
Convertible debt paid in kind ("PIK") interest ............ (12,483) -- --
Equity in losses of unconsolidated affiliates ............. (14,762) (1,442) (31)
Other expense ............................................. -- (20) (170)
Minority interest in losses of consolidated subsidiaries .. 1,264 4,018 20,610
--------- --------- ---------
Total other (expense) income, net ....................... (97,204) (33,382) 9,385
--------- --------- ---------
(Loss) income before income taxes, extraordinary
gain and the cumulative effect of a change in
accounting principle ....................................... (111,670) (38,638) 23,688
Income tax (expense) benefit ................................. (14,672) 14,669 (3,136)
(Loss) income before extraordinary gain and cumulative effect
of a change in accounting principle ..................... (126,342) (23,969) 20,552
--------- --------- ---------
Extraordinary gain on early extinguishment of debt
(net of $5,232 tax expense) ............................. 8,536 -- --
Cumulative effect of change in accounting principle
(net of $2,509 tax benefit) ............................. -- (3,837) --
Net (loss) income ............................................ $(117,806) $ (27,806) $ 20,552
========= ========= =========
Basic (loss) income per common share:
(Loss) income before extraordinary item, and a change
in accounting principle ............................... $ (5.71) $ (1.09) $ 0.94
Extraordinary item ........................................ 0.39 -- --
Change in accounting principle ............................ -- (0.17) --
--------- --------- ---------
Basic (loss) income per common share ...................... $ (5.33) $ (1.26) $ 0.94
========= ========= =========
Diluted (loss) income per share:
(Loss) income before extraordinary item, and
a change in accounting principle ......................... $ (5.71) $ (1.09) $ 0.92
Extraordinary item ........................................ 0.39 -- --
Change in accounting principle ............................ -- (0.17) --
--------- --------- ---------
Diluted (loss) income per common share .................... $ (5.33) $ (1.26) $ 0.92
========= ========= =========
Weighted average common shares outstanding:
Basic ..................................................... 22,108 22,088 21,905
========= ========= =========
Diluted ................................................... 22,108 22,088 24,145
========= ========= =========
See accompanying notes to consolidated financial statements.
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34
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
COMMON STOCK,
TREASURY STOCK
AND ADDITIONAL
PAID-IN CAPITAL
-------------------------
SHARES ACCUMULATED
OUTSTANDING AMOUNTS DEFICIT TOTAL
----------- --------- ----------- ---------
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
=========== ========= =========== =========
Shares issued - options exercised ........... 10 22 -- 22
Net loss .................................... -- -- (117,806) (117,806)
----------- --------- ----------- ---------
BALANCES AT DECEMBER 31, 2000 ............... 22,110 $ 179,442 $(146,583) $ 32,859
=========== ========= =========== =========
See accompanying notes to consolidated financial statements.
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35
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net (loss) income .................................................... $(117,806) $ (27,806) $ 20,552
Adjustment to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization ........................................ 36,210 21,178 19,730
PIK interest ......................................................... 12,483 -- --
Amortization of deferred financing costs ............................. 8,595 3,679 1,593
Extraordinary gain on extinguishment of debt ......................... (13,768) -- --
Loss on disposal ..................................................... 22,515 -- --
Deferred income taxes ................................................ 19,904 (16,732) (6,468)
Equity in net loss from investments in unconsolidated affiliates ..... 14,762 1,442 31
Minority interest in losses of consolidated subsidiaries ............. (1,264) (4,018) (20,610)
Tax effect of stock options exercised ................................ 22 537 1,709
Increase in net resident receivable .................................. (4,633) (3,106) (2,213)
Decrease (increase) in pre-opening costs ............................. -- 7,856 (11,965)
Decrease (increase) in income tax receivable ......................... 5,438 (5,557) --
(Increase) decrease in other current assets . ........................ (12,912) (7,569) 3,347
(Decrease) increase in accounts payable .............................. (231) 1,082 4,077
Increase (decrease) in accrued expenses and deferred rent ............ 8,653 10,011 (729)
(Decrease) in accrued merger charges ................................. -- (340) (5,151)
(Decrease) increase in accrued development reserve costs ............. (11,555) 13,348 --
Changes in other assets and liabilities, net ......................... 4,996 11,353 (8,971)
--------- --------- ---------
Net cash (used in) provided by operating activities .................... (28,591) 5,358 (5,068)
--------- --------- ---------
Cash flows from investing activities:
Payments for property, equipment and project development costs ....... (86,092) (181,794) (372,289)
Net proceeds from sale of property and equipment ..................... 2,217 18,263 --
Increase in notes receivable, net of reserve ........................ (9,349) (21,544) (10,986)
Acquisitions of facilities, net of cash ............................. (20,896) (21,806) (49,509)
Changes in investments in and advances to unconsolidated affiliates... (4,126) -- (4,682)
Purchase of limited partnership interests ......................... .. (35,742) (64,355) (27,053)
Increase in long-term investments .................................... -- (23,821) (69)
Decrease in short-term investments ................................... -- -- 90,000
--------- --------- ---------
Net cash used in investing activities .................................. (153,988) (295,057) (374,588)
--------- --------- ---------
Cash flows from financing activities:
Repayments of short-term borrowings .................................. (19,228) (1,130) (15,537)
Repayments of long-term obligations .................................. (106,980) (78,258) (53,089)
Proceeds from issuance of debt ....................................... 127,432 273,049 216,286
Proceeds from issuance of convertible debt ........................... 197,926 -- 18,600
Payments for financing costs ......................................... (18,427) (8,550) (8,932)
Proceeds from sale/leaseback transactions ............................ -- 78,387 145,669
Issuance of preferred stock, common stock and other capital
contributions ...................................................... 4,568 797 10,710
Contributions by minority partners and minority stockholders ......... 2,248 3,511 26,732
--------- --------- ---------
Net cash provided by financing activities .............................. 187,539 267,806 340,439
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................... 4,960 (21,893) (39,217)
--------- --------- ---------
Cash and cash equivalents:
Beginning of year ................................................... 18,728 40,621 79,838
========= ========= =========
End of year ......................................................... $ 23,688 $ 18,728 $ 40,621
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized ................ $ 79,898 $ 46,523 $ 27,631
Cash (refunded) paid during year for income taxes .................. $ (4,596) $ 1,424 $ 5,219
Debt assumed ......................................................... $ 48,887 -- --
See accompanying notes to consolidated financial statements.
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36
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(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, 2000, the
Company operated and managed 474 residences with approximate capacity
to accommodate 22,100 residents located throughout the United States.
(b) GOING CONCERN
During the fourth quarter of 1999, the Company began to implement
several strategic initiatives designed to strengthen its balance sheet
and to enable management to focus on stabilizing and enhancing the
Company's core business operations. To implement these strategic
initiatives, the Company completed an equity-linked investment
transaction of $203 million during the second and third quarters of
2000. At the time of the equity-linked investment, management believed
that the net proceeds of that transaction, together with other
anticipated financing transactions, would provide sufficient cash
resources for the Company to complete its remaining construction
activities and to cover operating cash deficits until the Company
achieved positive operating cash flow. By early 2001, however, it
became clear that the Company's projected cash requirements were in
excess of available identified cash resources.
By February 2001, the Company's overall cash position had declined to
a level which management believed to be insufficient to operate the
Company. In February 2001 the Company retained financial advisors and
special reorganization counsel to assist the Company in evaluating
alternatives to restore the financial viability of its business. To
conserve cash and protect the financial integrity of its operations,
the Company did not make debt service and lease payments of
approximately $7 million in March 2001. As a result, the Company is in
default under several major loan and lease facilities. Management
believes that the Company's operating cash flow has improved or will
continue to improve due to overhead reductions that have been
implemented and increases in monthly rents that the Company charges to
its residents which were effective in the first quarter of 2001.
Nevertheless, management believes that the Company's operations will
not produce sufficient cash flow to satisfy all of the Company's
obligations until the conclusion of restructuring activities, which
have commenced.
The Company is pursuing a restructuring plan (the "Restructuring
Plan") that involves the disposition of selected assets and the
restructuring of the Company's capital structure, including senior
indebtedness, leases (both operating and synthetic), convertible PIK
debentures, convertible subordinated debentures, joint venture
arrangements and the Company's equity capitalization.
The Restructuring Plan calls for the disposition of a substantial
number of residences (collectively, the "Disposition Assets") that
management has determined to be non-strategic. The Company anticipates
that it may recognize a significant pre-tax loss related to the sale
of the Disposition Assets during 2001. In addition, the Company is
discussing a number of alternatives with its lenders and lessors to
address any potential cash shortfalls that may result from the
dispositions.
In addition to discussions related to the sale of the Disposition
Assets, the Company has commenced discussions with its various lenders
and lessors to restructure certain debt and lease obligations. Some of
the residence portfolios financed by the Company's lenders or lessors
operate at cash flow deficits either before or after associated debt
service. The Restructuring Plan calls for these lenders or lessors to
defer debt service payments (and in certain cases to fund additional
indebtedness to satisfy operating cash flow losses) through the date
of the sale of the Disposition Assets. The Restructuring Plan calls
for the deferral of all debt maturities and some other currently
scheduled principal payments until after 2003. The Restructuring Plan
also calls for the Company to negotiate the termination of its debt
guaranty, management and other obligations relating to 13 residences
that are currently held in a joint venture
36
37
structure involving Manor Care, Inc. and a third-party equity investor
group. None of the Company's lenders, lessors or joint venture
partners has yet agreed to these modifications.
The Restructuring Plan calls for the Company to exchange debt, equity
or equity-linked securities for its convertible PIK debentures,
convertible subordinated debentures and various joint venture
interests in certain of the Company's residences. The Company intends
to seek to negotiate exchange transactions with these capital
structure constituents that result in a simplified capital structure
that reflects the relative value of the debenture or joint venture
interests of these third parties.
Discussions with the Company's various capital structure constituents
have only commenced during recent weeks, or in some cases have not
commenced at all, and no binding agreements have been reached. As the
Company proceeds with these negotiations, it expects that it will make
modifications to the Restructuring Plan to address issues that arise.
In addition, should the Company's operating results further
deteriorate or should any of the Company's several lenders, lessors,
convertible debenture holders or joint venture partners take
aggressive action which could jeopardize the Company's assets or
liquidity, the Company may be forced to pursue a court supervised
reorganization.
The Company has incurred historical net losses and for the year ended
December 31, 2000, the Company had a net loss of $117.8 million. In
addition, during the year ended 2000 the Company had a negative
operating cash flow of $28.6 million, and at year end the Company had
a working capital deficit of $129.2 million. Furthermore, at December
31, 2000 the Company was in violation of certain debt covenants. The
consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
(c) 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 inter-company 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 may
be 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 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 certain 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 10 residences, and holds a mortgage on one residence), ALS
Venture II, Inc. (which owns 36 residences), AHC Purchaser, Inc.
(which owns 18 residences), and AHC Tenant, Inc. (which leases 26
residences).
(d) USE OF ESTIMATES
The Company's financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America. These accounting principles require 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 may
differ from those estimates.
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38
(e) RECENT ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No.
125." FAS 140 revises the standards for accounting for securitizations
and other transfers of financial assets and collateral and requires
certain additional disclosures, although it continues most of the
provisions of FAS 125 without consideration. The provisions of FAS 140
are effective for periods beginning after December 15, 2000. The
Company currently is evaluating the impact, if any, of adopting the
provisions of FAS 140.
In April 1999 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 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 FASB issued SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities," which is effective as
of January 1, 2001. This statement, as amended by SFAS 137, Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 - An Amendment of FASB
Statement No. 133, and SAFS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133, 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 and other
forms of derivative 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.
(f) 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.
(g) 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.
(h) 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. (See Note 4).
Intangible leasehold interests are the costs of acquiring joint
venture interests in the operations of residences which are leased.
Depreciation is computed over the remaining lives of the leases.
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 $1.2 million and $.6 million
as of December 31, 2000 and 1999, respectively.
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(i) ASSETS HELD FOR SALE
Property and equipment held for sale are carried at the lower of cost
or estimated fair value less costs to sell.
(j) 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.
(k) 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):
2000 1999 1998
-------- -------- --------
Management fees............... $ 11,309 $ 22,956 $ 5,676
Franchise fees................ 1,878 2,290 1,545
Development fees............. 428 1,165 1,293
-------- -------- --------
Total other revenue......... $ 13,615 $ 26,411 $ 8,514
======== ======== ========
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.
(l) 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.
(m) NET (LOSS) INCOME 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 2000 and 1999,
accordingly, basic and diluted loss per share amounts were the same.
(n) RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998
financial statements to conform with the 2000 presentation.
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(2) ACQUISITIONS AND JOINT VENTURE ACTIVITY
The Company completed the following acquisitions during 2000:
- Fourteen assisted living residences located in several states
were purchased in May 2000 for $20.9 million net of acquired
cash, and in the purchase the Company assumed $48.9 million in
debt and recorded goodwill of $6.2 million.
The Company completed the following acquisitions during 1999:
- 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 third party investors which own 99% of each joint venture. The
joint ventures subleased the real estate from AHC Tenant, Inc. The
Company managed these residences on behalf of the joint ventures.
During 2000 the Company purchased the 99% equity interests in these
joint ventures from the third party investors for $24.3 million.
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 were 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. 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 established reserves of $7.0
million against the $24.7 million note receivable as of December 31,
1999. In May 2000, the Company purchased the 95% equity interests in 23
residences previously contributed by the Company to the development
joint venture. At the time of purchase, one residence was open and 22
were in various states of construction. In connection with
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the Company's global reduction in development activity, the Company
elected to terminate construction on 14 of these residences and
complete the remaining nine; five of which remain under construction at
December 31, 2000 and four or which are operating. Manor Care also
acquired the 95% equity interests in a total of seven residences
previously contributed by Manor Care to the development joint venture
in May and October, 2000, leaving 13 residences in joint ventures under
this arrangement at December 31, 2000, all of which are operating. At
December 31, 2000, the Company has $7.5 million in notes receivable
outstanding primarily relating to operating deficit advances made to
these 13 joint ventures. Aside from these existing residences, there is
no intent to develop any further new Alterra-branded
Alzheimer's/dementia care and assisted living residences in this joint
venture.
(3) NOTES RECEIVABLE
Notes receivable represent balances due from 13 joint venture entities.
The Company funds working capital on behalf of the joint venture and
anticipates payment upon the sale of the property or cash flow
generated from the joint venture.
(4) ASSETS HELD FOR SALE AND OTHER CURRENT ASSETS
(a) Assets Held for Sale
The Company's Board of Directors adopted a plan to dispose of
67 residences with an aggregate capacity of 2,377 residents
and 33 parcels of land during the year ended December 31,
2000. In accordance with the SFAS No.121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121") the Company has recorded an
impairment loss on its properties to be held for sale whenever
their carrying value cannot be fully recovered through the
estimated cashflows including net sales proceeds. The amount
of the impairment loss to be recognized would be the
difference between the residence's carrying value and the
residence's estimated fair value. The Company's policy is to
consider a residence to be held for sale or disposition when
the Company has committed to plan to sell such residence and
active marketing activity has commenced or it is expected to
commence in the near term. The Company expects to sell these
residences and land parcels in the next six to twelve months.
Adjustments for impairment loss for such residences
(subsequent to the date of adoption of SFAS 121) are made in
each period as necessary to report these residences at the
lower of carrying value or estimated fair value less costs to
sell. During 2000, the Company recorded an impairment loss on
31 of the 67 residences where the Company estimated cashflows
including net sales proceeds using undiscounted cash flows,
net of disposal costs, less than book value by $22.2 million
net of subsequent gains.
There are a number of factors that may affect the timing of a
sale and the sale price that will ultimately be achieved for
these residences, including, among other things, the
following: potential increased competition from any other
assisted living residences in the area, the relative
attractiveness of assisted living residences for investment
purposes, interest rates, the actual operations of the
residence, the ability to retain existing residents and
attract new residents at the residence and a buyout of joint
venture interests. As a result, there is no assurance as to
what price will ultimately be obtained upon a sale of these
residences or the timing of such a sale.
During the year, the results of operations of the consolidated
operating residences in the assets held for sale included
residence service fees of $35.9 million, residence operation
expenses of $26.7 million and a pretax loss of $0.5 million.
The Company also recorded a minority interest add-back of $0.2
million and an equity loss of $0.3 million from the
unconsolidated residences.
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(b) Other Current Assets
Other current assets are comprised of the following at December 31 (in
thousands):
2000 1999
---- ----
Restricted cash................................... $ 27,598 $ 7,191
Supply inventory.................................. 12,115 9,502
Prepaid expenses.................................. 4,713 2,782
Income tax refund receivable...................... 119 5,557
Deferred tax...................................... -- 5,708
Other current assets.............................. 12,287 10,580
-------- -------
Total other current assets.................... $56,832 $41,320
======== =======
(5) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows (in
thousands):
2000 1999
---- ----
Land and improvements............................ $ 82,218 $ 70,916
Buildings and leasehold improvements............. 691,809 619,241
Intangible leasehold interests................... 52,174 37,026
Furniture, fixtures, and equipment............... 94,199 84,941
Construction in progress......................... 41,850 92,741
Total property and equipment..................... 962,250 904,865
Less accumulated depreciation.................... (70,370) (41,702)
-------- --------
Property and equipment, net...................... $891,880 $863,163
======== ========
At December 31, 2000, property and equipment includes $63.4 million of
buildings and improvements held under capital leases. The related
accumulated amortization totaled $2.2 million at December 31, 2000.
Interest is capitalized in connection with the construction of
residences and is amortized over the estimated useful lives of the
residences. Interest capitalized in 2000, 1999 and 1998 was
approximately $3.9 million, $10.3 million and $13.8 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
commenced in 1999. 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.
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The following is a summary of the non-recurring charge and other
one-time charges (in thousands):
1999
----
Non-recurring charge:
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
=======
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.
The Company did not make any adjustments to the 1999 restructuring
liability during 2000, and it has paid all of the anticipated expenses
except $1.1 million by December 31, 2000.
Construction in progress consisted principally of costs related to the
construction of assisted living residences with outstanding
construction commitments totaling between $10.0 million and $15.0
million and between $65.0 million and $70.0 million at December 31,
2000 and 1999, respectively.
(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, 2000, the Company owned minority interests in entities
owning or leasing (and also managed) 71 residences and managed four
other residences. As of December 31, 1999, the Company owned minority
equity interests in entities owning or leasing (and also managed) 87
residences and managed 14 other residences. Included in other assets of
the Company's balance sheet are net advances to the affiliates of $1.7
million as of December 31, 2000, and in other liabilities $1.6 million
of net advances from the affiliates as of December 31, 1999,
respectively.
The results of operations of these unconsolidated and managed
residences for 2000, 1999 and 1998 are as follows (in thousands):
2000 1999 1998
---- ---- ----
Residence service fees ................................ $ 86,147 $ 58,409 $ 20,693
Residence operation expenses .......................... 76,577 65,374 18,602
-------- -------- --------
Residence profit (loss) ............................... 9,570 (6,965) 2,091
Management fee expense ................................ 11,309 23,919 5,676
Financing expense ..................................... 43,692 31,965 12,433
-------- -------- --------
Loss before tax ....................................... $(45,431) $(62,848) $(16,018)
======== ======== ========
Financing expense on these residences includes $28.2 million and $25.5
million of lease and mortgage expense in 2000 and 1999, 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.
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Included in the results above are partial year results for four
residences managed and full year results for two 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 a director and a
stockholder. Under the terms of this agreement, the Company charged an
annual fee of $5,834 in 2000 and $10,000 in 1999 for provision of such
management services. As of January 31, 2001, this management agreement
has been terminated.
(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 4.8% to 6.8% and maturities
ranging from 1.5 years to nine years.
(8) OTHER ASSETS
Other assets are comprised of the following at December 31 (in
thousands):
2000 1999
---- ----
Deferred financing costs, net........ $ 35,286 $ 23,242
Lease security deposits.............. 10,630 9,663
Deferred tax......................... -- 12,645
Deposits and other................... 6,146 10,024
-------- --------
Total other assets............... $ 52,062 $ 55,574
======== ========
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(9) LONG-TERM DEBT, CAPITAL LEASES, REDEEMABLE PREFERRED STOCK, AND
FINANCING OBLIGATIONS
Long-term debt, capital leases, and financing obligations consist of
the following at December 31 (in thousands):
2000 1999
---- ----
5.25% convertible subordinated debentures due December 15, 2002,
callable by the Company on or after December 31, 2000............. $112,043 $143,750
7.00% convertible subordinated debentures due June 1, 2004,
callable by the Company on or after June 15, 2000................. 40,355 50,000
6.75% convertible subordinated debentures due June 30, 2006,
callable by the Company on or after July 15, 2000................. 34,850 34,850
9.75% Series A convertible debentures due May 31, 2007, callable
by the Company on or after May 31, 2003........................... 42,500 --
9.75% Series B convertible debentures due May 31, 2007, callable
by the Company on or after May 31, 2003........................... 121,019 --
9.75% Series C convertible debentures due May 31, 2007, callable
by the Company on or after May 31, 2003........................... 45,147 --
-------- --------
Total convertible debt.................................... $395,914 $228,600
-------- --------
Mortgages payable, due from 2000 through 2022; weighted average
interest rates of 8.04%..................................... $538,677 $471,319
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%........................................... 10,682 14,299
Serial and term revenue bonds maturing serially from 2000 through
2013; interest rates ranging from 4.00% to 9.50%.................. 6,290 4,320
Bridge loan financing at 8.00% interest........................... -- 30,000
Capital lease obligations and mortgage payable in cross- defaults. 161,106 --
--------- --------
Total long-term obligations................................. 1,112,668 801,617
Less current installments......................................... 313,718 9,945
--------- --------
Total long-term obligations, less current installments.... $798,950 $791,672
========= ========
As of December 31, 2000, the Company was in violation of its fixed
charge covenant with several of its credit facilities. In addition, in
order to conserve its liquidity, the Company did not make certain March
2001 debt service and lease payments. As the Company's principal
credit, lease and other financing facilities are cross-defaulted to a
material default occurring under other credit, lease or financing
facilities, a payment default by the Company under one such facility
may result in the Company being in default under other such facilities.
Obligations in the amount of $171.1 million are currently classified as
current liabilities because the applicable lenders have the right to
accelerate their loans due to the existence of a pending default.
The mortgages payable are secured through security agreements and
guarantees by the Company. In addition, certain security agreements
require the Company to maintain collateral and debt reserve 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 2000 through 2009.
At December 31, 2000, 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
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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 had 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 was 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. The Tranche A Loan was repaid in
conjunction with the 2000 Equity-Linked Transaction described below.
On May 31, 2000, the Company completed a financing transaction in which
it issued $173.0 million of convertible debentures and convertible
preferred shares to several investors, including affiliates of the
Company. The securities issued were initially convertible at $4.00 per
share, bear a 9.75% semi-annual payment-in-kind ("PIK") coupon or
dividend and have a seven year maturity. The Company may call the
securities at any time after three years if the trading price of the
Company's common stock averages at least $8.00 for the preceding 30
trading days. This initial closing contemplated that the Company had
the option to issue up to an additional $29.9 million of these
debentures within 180 days following the May 31, 2000 closing. The
Company recorded a gain on the early extinguishment of debt of $8.5
million related to its retirement of $41.4 million of convertible debt
in the initial closing. On August 10, 2000, the Company exercised its
option to issue the additional $29.9 million of securities, thereby
increasing the overall financing transaction to a total of $203.0
million (the May 31, 2000 and August 10, 2000 closings are referred to
together as the "2000 Equity-Linked Transaction"). The securities
issued in this transaction include the following:
Series A Stock. 1,250,000 shares of the Series A Stock were sold for
the stated value, $4.00 per share, representing aggregate proceeds of
$5 million. The holders of the Series A Stock are entitled to
cumulative PIK dividends at the rate of 9.75% of the stated value,
payable semiannually on January 1st and July 1st of each year
commencing on January 1, 2001. If at any time the Company's common
stock is not listed or admitted to trading on a national exchange, the
dividend rate increases to 12.25%. The Series A Stock ranks senior to
the Company's common stock with respect to dividend rights and rights
on liquidation, winding up or dissolution. Specifically, no dividend or
distribution may be made to the holders of the common stock, and no
common stock may be repurchased or redeemed by the Company, unless all
accrued and unpaid dividends on shares of Series A Stock have been
paid. The Series A Stock is entitled to receive, in the event of
liquidation of the Company, an amount in cash equal to the stated value
of the Series A Stock for each share outstanding, plus an amount in
cash equal to the accrued but unpaid dividends thereon to the date of
liquidation, before any payment may be made to the holders of the
common stock. The Series A Stock is redeemable at the Company's option
commencing on May 31, 2003, if the Company's common stock trades at an
average price of at least $8.00 per share for the preceding 30 trading
day period. The then outstanding shares of Series A Stock must be
redeemed by the Company at stated value, plus all accrued but unpaid
dividends, upon the earlier of (i) May 31, 2007 or (ii) the date of
redemption by the Company of the Series A and B convertible pay-in-kind
debentures. The holders of the convertible preferred shares may convert
at any time into shares of common stock of the Company, on a one-to-one
basis. The holders of the Series A Stock are entitled to vote on all
matters voted on by the holders of common stock, other than the
election of directors. However, the holders of the Series A Stock are
also entitled to elect, as a class, four of nine members of the
Company's Board of Directors.
The Series A Debentures. The $42.5 million original aggregate principal
amount of 9.75% Series A convertible pay-in-kind debentures due May 31,
2007 bear PIK interest at 9.75% per annum payable semi-annually in the
form of additional Series B debentures on January 1 and July 1 of each
year, commencing on January 1, 2001. The Series A convertible
debentures are redeemable at the Company's option commencing on May 31,
2003, if the Company's common stock trades at an average price of at
least $8.00 per share for the preceding 30 trading day period. The
holders of the Series convertible debentures may convert at any time
into shares of common stock of the Company, at the initial conversion
price of $4.00 per share.
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Series B Debentures. The $112.6 million original aggregate principal
amount of 9.75% Series B convertible pay-in-kind debentures due May 31,
2007 bear PIK interest at 9.75% per annum payable semi-annually in the
form of additional Series B debentures on January 1 and July 1 of each
year, commencing January 1, 2001. The Series B convertible debentures
are redeemable at the Company's option commencing on May 31, 2003, if
the Company's common stock trades at an average price of at least $8.00
per share for the preceding 30 trading day period. The holders of the
Series B convertible debentures may convert at any time, at an initial
conversion price of $400.00 per share, into non-voting Series B
preferred shares, each share of which has rights (other than voting
rights) substantially similar to 100 shares of common stock of the
Company.
Series C Debentures. The $42.8 million original aggregate principal
amount of 9.75% Series C convertible pay-in-kind debentures due May 31,
2007 bear PIK interest at 9.75% per annum payable semi-annually in the
form of additional Series C debentures on January 1 and July 1 of each
year, commencing on January 1, 2001. The Series C convertible
debentures are redeemable at the Company's option commencing on May 31,
2003, if the Company's common stock trades at an average price of at
least $8.00 per share for the preceding 30 trading day period. The
holders of the Series C convertible debentures may convert at any time
into shares of the common stock of the Company, at the initial
conversion price of $4.00 per share.
Principal payments, pursuant to original payment terms, on long-term
debt, capital leases, and financing obligations for the next five years
and thereafter are as follows (in thousands):
2001............................................................. $313,718
2002............................................................. 213,966
2003............................................................. 112,554
2004............................................................. 53,876
2005............................................................. 54,649
Thereafter....................................................... 363,905
----------
Total long-term debt, capital leases, and financing obligations.. $1,112,668
==========
Also see Note 18 - Subsequent Events.
(10) SHORT-TERM NOTES PAYABLE
As of December 31, 2000, short-term notes payable consist of a $9.9
million line of credit bearing interest at the then current prime rate.
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.
(11) ACCRUED EXPENSES
Accrued expenses are comprised of the following at December 31 (in
thousands):
2000 1999
---- ----
Accrued salaries and wages.................................. $11,608 $ 6,016
Accrued interest............................................ 6,604 3,036
Accrued property taxes...................................... 6,593 3,131
Accrued vacation............................................ 5,599 4,671
Accrued charges related to exiting development activity..... 1,147 13,348
Other....................................................... 11,227 7,770
------- -------
Total accrued expenses.................................. $42,778 $37,972
======= =======
During the fourth quarter of 2000, management implemented operating
initiatives focused on overall rate and occupancy improvement and
overhead reductions. As a consequence of this decision, the Company
recorded one time nonrecurring, pretax charges of $4.2 million. This
included $1.1 million of severance of various general and
administrative positions, $1.1 million to discontinue our pharmacy
joint venture, and $2.0 million to terminate a management agreement.
The Company has already paid $2.6 million of these expenses at December
31, 2000.
See Note 5 - Property and Equipment with respect to the 1999
development charge.
47
48
(12) STOCKHOLDERS' EQUITY
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, 2000, 1,607,554 shares were available for grant under
the 1995 Plan. The per share weighted-average fair value of stock
options granted during 2000 and 1999 were $3.83 and $12.63 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 50% for 2000
grants and 63% for 1999 grants and an expected life of seven 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 purposes, 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 No. 123 for stock options granted in 2000, 1999
and 1998, 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
-------------------------------------------------------------------- -----------------------------------------
2000 1999 1998 2000 1999 1998
------------------ ---------- --------- ------- ------- ------- -----
As reported....... $(117,806) $(27,806) $20,552 $(5.33) $(1.26) $0.92
Pro forma......... $(117,953) $(27,857) $18,821 $(5.34) $(1.26) $0.78
Stock option activity during the periods indicated is as follows:
WTD.-AVG.
NUMBER OF EXERCISE
SHARES PRICE
--------- ------
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
Granted........................... 121,656 5.69
Exercised......................... (9,778) 0.09
Forfeited......................... (742,729) 14.06
--------- ------
BALANCE AT DECEMBER 31, 2000 965,187 $12.65
========= ======
48
49
Stock options outstanding at December 31, 2000 are as follows:
AVERAGE
RANGE OF NUMBER REMAINING WTD.-AVG. NUMBER WTD.-AVG.
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES 12/31/00 LIFE PRICE AT 12/31/00 PRICE
--------------------- ----------- ---------------- --------- ----------- ---------
$ 0.00 - 0.09 1,229 5.0 $ 0.09 1,229 $ 0.09
$ 0.10 - 8.69 408,888 6.2 5.85 287,232 5.92
$ 8.70 - 11.12 65,175 7.0 11.02 65,175 11.02
$11.13 - 17.94 124,470 6.5 14.92 122,394 14.87
$17.95 - 20.81 323,840 8.0 18.74 170,291 18.74
$20.82 - 29.56 41,585 7.3 28.30 24,117 27.99
----------- ---------------- --------- ----------- ---------
Total 965,187 6.7 $12.65 670,438 $12.09
=========== ================ ========= =========== =========
(14) INCOME TAXES
The components of the provision for income taxes for the years ended
December 31 are as follows (in thousands):
2000 1999 1998
------- -------- -------
Income tax expense (benefit):
Current:
Federal................... $ -- $(410) $ 8,577
State..................... 573 65 1,027
------- -------- -------
Total current.................. 573 (345) 9,604
Deferred:
Federal................... 12,797 (12,831) (5,795)
State..................... 1,302 (1,493) (673)
------- -------- -------
Total deferred................ 14,099 (14,324) (6,468)
------- -------- -------
Total......................... $14,672 $(14,669) $ 3,136
======= ======== =======
Deferred tax assets and liabilities consist of the following at
December 31 (in thousands):
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards ......... $ 51,227 $ 10,686
Development write-off .................... 6,503 11,637
Deferred gain sale/leaseback ............. 2,550 2,825
Building reserve ......................... 8,830 --
Accrued expenses ......................... 3,669 3,129
Investment in consolidated affiliates .... 1,076 1,076
Other .................................... 729 449
-------- --------
Total deferred tax assets ..................... 74,584 29,802
Less valuation allowance ................. (53,042) --
-------- --------
Deferred tax assets, net of valuation allowance $ 21,542 $ 29,802
======== ========
Deferred tax liabilities:
Acquisition basis ........................ 1,715 $ 1,715
Depreciation ............................. 19,827 8,894
-------- --------
Deferred tax liabilities ...................... $ 21,542 $ 10,609
======== ========
The valuation allowance for deferred tax assets as of December 31,
2000 and 1999 was $53.0 million and $0, respectively. During 2000, a
valuation allowance of $53.0 million was established because the
Company was uncertain that such deferred tax assets in excess of the
applicable reversing deferred tax liabilities would be realized in
future years. 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.
49
50
The effective tax rate on income before income taxes varies from the
statutory Federal income tax rate as follows:
2000 1999 1998
---- ---- ----
Statutory rate .... 35.0 % 35.0% 35.0%
State taxes, net .. 4.0% 2.3 4.0
Valuation allowance (47.5) -- (28.7)
PIK interest ...... (3.9) -- --
Other ............. (0.7) 0.7 2.9
---- ---- ----
(13.1)% 38.0% 13.2%
==== ==== ====
The Company has approximately $131.3 million of tax net operating
loss carryforwards at December 31, 2000. Any unused net operating
loss carryforwards will expire commencing in the year 2007 through
2020. 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.
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, 2000, the Company's
convertible debentures had a book value of $187.6 million. At
December 31, 2000, there is not a meaningful market for these bonds
and based on quoted market prices, the fair value of these
convertible securities was estimated to be 13-18% of the par value.
(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.
50
51
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, 2000 and 1999 were $3.8 million and $4.6 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, 2000, 1999, and 1998 was $82.4 million,
$69.4 million and $44.2 million, respectively.
Future minimum lease payments for the next five years and thereafter
under noncancelable leases at December 31, 2000 are as follows (in
thousands):
CAPITAL OPERATING
------- ---------
2001 ..................................................... 53,865 85,337
2002 ..................................................... 1,158 87,340
2003 ..................................................... 1,200 89,395
2004 ..................................................... 11,208 91,502
2005 ..................................................... -- 93,657
Thereafter ............................................... -- 380,542
------- --------
Total minimum lease payment .............................. $67,431 $827,773
========
Less amount representing interest ........................ 3,992
--------
Present value of net minimum capital lease payments ...... 63,439
Less current portion ..................................... 52,757
--------
Long-term capital lease obligations ...................... $10,682
========
As of December 31, 2000, the Company was in violation of its fixed
charge covenant with several of its credit facilities. In addition,
in order to conserve its liquidity, the Company did not make certain
March 2001 debt service and lease payments. As the Company's
principal credit, lease and other financing facilities are
cross-defaulted to a material default occurring under other credit,
lease or financing facilities, a payment default by the Company under
one such facility may result in the Company being in default under
other such facilities. Obligations in the amount of $52.7 million are
currently classified as current liabilities because the applicable
lenders have the right to accelerate their loans due to the existence
of a pending default.
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 2001.
From time to time, the Company is involved in various legal
proceedings relating to claims arising in the ordinary course of its
business. Neither the Company nor its 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 the
Company's financial condition or results of operations, with the
possible exception of the following matters.
On August 22, 2000, Manor Care, Inc. ("Manor Care") and Manor Care of
America, Inc. filed a complaint against the Company in state court in
Ohio seeking to collect on a note executed by the Company in the
principal amount of $3.0 million in connection with the Company's
development joint venture with Manor Care. The Company has filed a
motion to dismiss or stay the action in favor of arbitration of the
dispute. A hearing on this motion has been scheduled in April 2001.
The Company intends to vigorously defend against the claims alleged
by Manor Care in this complaint.
51
52
On October 20, 2000, Manor Care filed a complaint against the Company
in the Delaware state superior court with respect to two purchase
agreements entered into on December 31, 1998 between the Company,
Manor Care and a number of Manor Care's subsidiaries and affiliates.
One of these agreements related to the purchase by the Company of a
number of assisted living residences then owned and operated by Manor
Care and its subsidiaries, and the second agreement related to the
purchase by the Company of a number of assisted living residences
then under construction by Manor Care and its subsidiaries. Manor
Care has alleged that the Company was unable to close the purchases
within the time required by the agreements and that the Company
allegedly fraudulently induced Manor Care to delay the closings.
Manor Care is seeking damages for this alleged fraud in the amount of
approximately $3.7 million. In addition, Manor Care has alleged that
the Company owes Manor Care $259,000 arising out of post-closing
prorations. The Company has filed a motion to dismiss Manor Care's
complaint, and intends to vigorously defend against the claims
alleged by Manor Care in this complaint.
In addition, the Company is pursuing (or intends to pursue) various
claims and counterclaims against Manor Care and its affiliates
arising out of the Company's business dealings with Manor Care. Manor
Care and its affiliates are likewise also pursuing other claims and
counterclaims against Alterra and its affiliates arising out of its
business dealings with Alterra.
(17) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
YEARS ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
--------- -------- -------
Numerator:
Numerator for basic earnings per share -- net
(loss) income ............................... $(117,806) $(27,806) $20,552
Convertible debt interest add-back .............. -- -- 1,563
---------- --------- -------
Numerator for diluted earnings per share -- net
(loss) income ............................... $(117,806) $(27,806) $22,115
========== ========= =======
Denominator:
Denominator for basic earnings per share --
weighted average shares ..................... 22,108 22,088 21,905
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 ................................. 22,108 22,088 24,145
========= ======== =======
Basic (loss) earnings per common share ............ $ (5.33) $ (1.26) $ 0.94
========= ======== =======
Diluted (loss) earnings per common share .......... $ (5.33) $ (1.26) $ 0.92
========= ======== =======
52
53
(18) SUBSEQUENT EVENTS
On March 5, 2001, the Company closed on a $7.5 million bridge loan
provided by certain of the Company's principal stock and convertible
debenture holders. The bridge loan has a six-month term and bears
interest at an escalating interest rate, commencing at 10% per annum
for the first three months, 11% per annum for the next three months
and, if the maturity of the bridge loan is extended, escalating by
one-half of one percent for each month thereafter. The bridge loan is
secured by first mortgages on two residences in construction, three
vacant residences held for disposition and several parcels of raw
land. At the Company's option, the six-month term of the loan may be
extended by an additional six months whereupon the bridge loan will
become convertible into convertible subordinated debentures of the
Company having rights and terms substantially similar to the
Company's Series B 9-3/4% pay-in-kind convertible debentures, but
having a conversion price equal to the greater of (i) $75 per share
of Series B preferred stock (a common stock equivalent price of $0.75
per share) and (ii) if during the original six month term of the
bridge loan the Company has sold any shares of common stock or Series
B preferred stock (or any securities convertible into common stock or
Series B preferred stock) in a transaction resulting in gross
proceeds of in excess of $5 million, the equivalent price per share
of such common stock or Series B preferred stock (or the conversion
price thereof, whichever is applicable). Pursuant to the agreements
with the bridge lenders, the bridge lenders will be entitled to
participate in any transaction involving the issuance by the Company
of equity or equity-linked securities during the term of the bridge
loan.
As an inducement to make the bridge loan, the Company issued the
bridge lenders warrants to purchase an aggregate of 60,000 shares of
a newly designated class of the Company's preferred stock, the Series
B-1 Non-Voting Participating Preferred Stock (the "Series B-1
Preferred Stock"), having rights and terms substantially similar to
the Company's Series B preferred stock. Like the Series B preferred
stock, each share of the Series B-1 Preferred Stock underlying the
warrants has rights, other than voting rights, substantially similar
to 100 shares of common stock of the Company. The five-year warrants
are exercisable at a price of $75 per share for 20,000 shares of the
Series B-1 Preferred Stock, $100 per share for 20,000 shares of the
Series B-1 Preferred Stock and $125 per share for 20,000 shares of
the Series B-1 Preferred Stock.
Pursuant to the anti-dilution provisions operative in the $213.8
million of outstanding 9-3/4% convertible pay-in-kind debentures and
preferred stock originally issued in the 2000 Equity-Linked
Transaction, upon the issuance of these warrants the conversion price
for these debentures decreased from $4.00 to $3.36 per share of
common stock for the Series A and Series C debentures and from $400
to $336 per share of Series B preferred stock for the Series B
debentures. In the event the bridge loan becomes convertible or the
Company issues equity or equity-linked securities at prices that are
below the adjusted conversion prices for the 9-3/4% convertible
debentures, the conversion prices will be reduced further pursuant to
the anti-dilution provisions of these debentures.
In March 2001, National Health Investors ("NHI") terminated 11 leases
after the Company failed to make its March 2001 rent payment. These
11 residences represent 504 beds. For the year-ended December 31,
2000, these residences generated $12.3 million in revenue, $8.6
million in operating expenses, and $4.0 million in lease expense. The
average occupancy at December 31, 2000 related to these 11 residences
was 85%. The Company anticipates a write-off on the disposal of these
assets of approximately $7 to $10 million.
53
54
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY FINANCIAL SUMMARY
(Unaudited)
(In thousands, except per share data)
QUARTER ENDED
--------------------------------------------------------
12/31 9/30 6/30 3/31
----- ---- ---- ----
2000
--------------------------------
Operating revenues ............ $ 125,317 $ 122,583 $ 112,039 $ 106,556
Operating (loss) income ....... (17,284) 2,026 (9,415) 10,207
Net (loss) income ............. (82,760) (16,696) (13,032) (5,318)
Basic (loss)income per share .. $ (3.74) $ (0.76) $ (0.59) $ (0.24)
Diluted (loss) income per share $ (3.74) $ (0.76) $ (0.59) $ (0.24)
1999
--------------------------------
Operating revenues ............ $ 101,259 $ 100,111 $ 91,920 $ 82,891
Operating income (loss) ....... (32,325) 9,698 9,681 7,690
Net income (loss) ............. (39,096) 5,024 4,838 1,428
Basic income (loss) per share . (1.81) 0.23 0.22 0.06
Diluted income (loss) per share $ (1.81) $ 0.23 $ 0.22 $ 0.06
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 2001 Annual Meeting of
Stockholders (the "2001 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated by reference to the
2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated by reference to the
2001 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated by reference to the
2001 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 ............................................ 31
Consolidated Balance Sheets ............................................. 32
Consolidated Statements of Operations ................................... 33
Consolidated Statements of Shareholders' Equity.......................... 34
Consolidated Statements of Cash Flows ................................... 35
Notes to Consolidated Financial Statements .............................. 36-54
54
55
(b) SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES. See Exhibit 11.1
of the Report.
(c) REPORTS ON FORM 8-K. The Registrant filed no reports with
the Securities and Exchange Commission on Form 8-K during
the quarter ended December 31, 2000.
(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, effective August 9, 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 the period ending June 30,
1998).
3.5 Certificate of Designation of the 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 (incorporated by reference to Exhibit 3.6 to the
Registrant's 10-K for the period ending December 31, 1999).
3.7 Certificate of Ownership Merging Sterling House Corporation into the
Registrant effective December 31, 1999 (incorporated by reference to
Exhibit 3.7 to the Registrant's 10-K for the period ending December
31, 1999). .
3.8 Certificate of Designation of the Series A 9.75% Cumulative
Convertible Pay-In-Kind Preferred Stock and the Series B Non-Voting
Participating Preferred Stock of the Registrant filed with the
Delaware Secretary of State on May 31, 2000 (incorporated by
reference to Exhibit 99.4 to the Registrant's Form 8-K filed on June
8, 2000).
3.9 Certificate of Designation of the Series B-1 Non-voting Participating
Preferred Stock of the Registrant filed with the Delaware Secretary
of State on March 2, 2001 (incorporated by reference to Exhibit 99.4
to the Registrant's Form 8-K filed March 8, 2001).
3.10 Amended and Restated Bylaws of the Registrant dated February 13, 2001
(filed herewith).
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Form S-1).
55
56
NO. EXHIBIT
DESCRIPTION
4.2 See Articles Four, Six, Seven, Eight, Nine, Ten and Eleven to the
Registrant's Restated Certificate of Incorporation referenced at
Exhibit 3.1 above, the Certificates of Amendment to the Restated
Certificate of Incorporation referenced at Exhibits 3.3 and 3.4 above
and the Certificates of Designation referenced at Exhibits 3.5, 3.8
and 3.9 above.
4.3 See Articles 2, 3, 5, 7 and 8 to the Registrant's Amended and
Restated Bylaws referenced at Exhibit 3.10 above.
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 (incorporated by
reference to Exhibit 4.7 to Registrant's Form 10-K for the period
ending December 31, 1999).
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 Registrant's Form 8-K filed on May 27, 1997).
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 Amended and Restated 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 4.1 to the Registrant's Form 10-Q for the period ending March
31, 2000).
4.12 Amended and Restated 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
4.2 to the Registrant's Form 10-Q for the period ending March 31,
2000).
4.13 Indenture dated as of May 31, 2000 between the Registrant and U.S.
Trust Company of Texas, N.A. relating to the Registrant's Series A
9.75% Convertible Pay-In-Kind Debentures due 2007, Series B 9.75%
Convertible Pay-In-Kind Debentures due 2007, and Series C 9.75%
Convertible Pay-In-Kind Debentures due 2007 (incorporated by
reference to Exhibit 99.5 to the Registrant's Form 8-K filed on June
8, 2000).
4.14 Form of Registration Rights Agreement dated as of May 31, 2000 by and
between the Registrant and the Purchasers named therein in connection
with the purchase to the Registrant's Series A 9.75% Convertible
Pay-In-Kind Preferred Stock, Series A 9.75% Convertible Pay-In-Kind
Debentures, Series B 9.75% Convertible Pay-In-Kind Debentures and
Series C 9.75% Convertible Pay-In-Kind Debentures (incorporated by
reference to Exhibit 99.8 to the Registrant's Form 8-K filed on June
8, 2000).
56
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NO. EXHIBIT
DESCRIPTION
4.15 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.
4.16 Amendment to the Registrant's 1995 Amended and Restated Incentive
Compensation Plan (incorporated by reference to Exhibit 3.2 to the
Registrant's Form 8-K filed August 14, 1998).
4.17 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).
4.18 Amendment to Rights Agreement dated made as of April 26, 2000 between
the Registrant and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 4.3 to the Registrant's
Form 10-Q for the period ending March 31, 2000).
4.19 Amendment to Rights Agreement dated made as of May 31, 2000 between
the Registrant and American Stock Transfer & Trust Company
(incorporated by reference to Exhibit 99.9 to the Registrant's Form
8-K filed June 8, 2000).
4.20 Form of Warrant Certificate issued by the Registrant on March 5, 2001
to the entities scheduled in Exhibit 99.3 to the Registrant's Form
8-K filed March 8, 2001 (incorporated by reference to Exhibit 99.2 to
the Registrant's 8-K filed March 8, 2001).
4.21 Registration Rights Agreement dated as of March 5, 2001 by and
between the Registrant and the Purchasers named therein in connection
with the purchase of the Registrant's Series B-1 Non-Voting
Participating Preferred Stock (filed herewith).
10.1 Consulting Agreement between the Registrant and William F. Lasky
dated as of November 13, 2000 (filed herewith). Represents an
executive compensation plan or arrangement.
10.2 Employment Agreement dated as of November 1, 2000 by and between the
Registrant and Steven L. Vick. (filed herewith). Represents an
executive compensation plan or arrangement.
10.3 Employment Agreement dated as of November 1, 2000 by and between the
Registrant and Mark W. Ohlendorf (filed herewith). Represents an
executive compensation plan or arrangement.
10.4 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).
10.5 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).
10.6 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 to the Registrant's Form
10-K for the year ended December 31, 1998).
10.7 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.)
10.8 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).
57
58
NO. EXHIBIT
DESCRIPTION
10.9 Schedule of Lease and Security Agreements by and between Nationwide
Health Properties, Inc. and New Crossings International Corporation
substantially similar to the Lease and Security Agreement referenced
above (incorporated by reference to Exhibit 10.36 of the Form S-1).
10.10 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).
10.11 Schedule of Assumption Agreements substantially similar to the
Assumption Agreement referenced above (incorporated by reference to
Exhibit 10.53 of the Form S-1).
10.12 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).
10.13 Schedule of Lease Approval Agreements substantially similar to Lease
Approval Agreements referenced above (incorporated by reference to
Exhibit 10.56 of the Form S-1).
10.14 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).
10.15 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 to the
Registrant's Form 8-K dated January 14, 1997).
10.16 Amended Schedule of Facility Leases which are substantially similar
to the Form of Facility Lease referenced above (incorporated by
reference to Exhibit 10.22 to Registrant's Form 10-K for the period
ending December 31, 1999).
10.17 Guaranty by the Registrant to Meditrust Acquisition Corporation III
(incorporated by reference to Exhibit 99.3 to the Registrant's Form
8-K dated January 14, 1997).
10.18 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 to the Registrant's Form 8-K dated January 14, 1997).
10.19 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 to the Registrant's Form 8-K dated January 14, 1997).
10.20 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 to the
Registrant's Form 8-K filed December 2, 1997).
10.21 Amended Schedule of Facility Leases which are substantially similar
to the Form of Facility Lease referenced above (incorporated by
reference to Exhibit 10.27 to Registrant's Form 10-K for the period
ending December 31, 1999).
10.22 Guaranty by the Registrant to Meditrust Acquisition Corporation III
(incorporated by reference to Exhibit 99.3 to the Registrant's Form
8-K filed December 2, 1997).
10.23 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 to the Registrant's Form 8-K filed December 2, 1997).
58
59
NO. EXHIBIT
DESCRIPTION
10.24 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 to the Registrant's Form 8-K filed December 2, 1997).
10.25 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 the period ending September 30, 1998).
10.26 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 the period ending September 30, 1998).
10.27 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 the period ending September 30,
1998).
10.28 Form of Facility Lease dated as of September 4,1998 between Meditrust
Acquisition Corporation III and ALS Leasing, Inc. ("MAC Form of
Facility Lease") (incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-Q for the period ending September 30, 1998).
10.29 Amended Schedule of Facility Leases which are substantially similar
to the MAC Form of Facility Lease referenced above (incorporated by
reference to Exhibit 10.35 to Registrant's Form 10-K for the period
ending December 31, 1999).
10.30 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 (incorporated by reference to Exhibit 36
to Registrant's Form 10-K for the period ending December 31, 1999).
10.31 Form of Facility Lease Agreement dated February 20, 1998 between
Meditrust of Ohio, Inc. and Assisted Living Properties, Inc. (the
"ALP Facility Leases") (incorporated by reference to Exhibit 37 to
Registrant's Form 10-K for the period ending December 31, 1999).
10.32 Schedule of ALP Facility Leases which are substantially similar to
the Form of ALP Facility Lease referenced above (incorporated by
reference to Exhibit 10.38 to Registrant's Form 10-K for the period
ending December 31, 1999).
10.33 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 (incorporated by
reference to Exhibit 10.39 to Registrant's Form 10-K for the period
ending December 31, 1999).
10.34 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
(incorporated by reference to Exhibit 10.40 to Registrant's Form 10-K
for the period ending December 31, 1999).
10.35 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 (incorporated by reference to Exhibit
10. 41 to Registrant's Form 10-K for the period ending December 31,
1999).
10.36 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 the
period ending March 31, 1998).
59
60
NO. EXHIBIT
DESCRIPTION
10.37 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 the period ending
March 31, 1998).
10.38 Second Amendment to Loan Agreement and Reaffirmation Agreement by and
between ALS-Venture I, Inc., Alterra Healthcare Corporation,
ALS-Clare Bridge, Inc. and Capmark Services, L.P., as assignee of
Nomura Asset Capital Corporation, dated April 7, 2000 (filed
herewith).
10.39 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 the
period ending June 30, 1998).
10.40 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 the period ending
June 30, 1998).
10.41 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 the period ending September 30, 1998).
10.42 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 the period ending September 30, 1998).
10.43 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 the period ending September 30, 1998).
10.44 Third Amendment to Loan Agreement and Reaffirmation Agreement dated
November 29, 2000, by and between The Capital Company of America LLC
and ALS-Venture II, Inc. (filed herewith).
10.45 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 the period ending
September 30, 1998).
10.46 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 to the Registrant's Form 10-Q for the
period ending March 31, 1999).
10.47 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 to the Registrant's Form 10-Q for the period ending
September 30, 1999).
10.48 Second Amendment to Amended and Restated Financing and Security
Agreement dated as of May 10, 2000 among ALS Holdings, Inc., ALS
Wisconsin Holdings, Inc. and Bank United (incorporated by reference
to Exhibit 10.3 to the Registrant's Form 10-Q for the period ending
June 30, 2000).
10.49 Third Amendment to Amended and Restated Financing and Security
Agreement dated as of May 10, 2000 among ALS Holdings, Inc., ALS
Wisconsin Holdings, Inc. and Bank United (incorporated by reference
to Exhibit 10.5 to the Registrant's Form 10-Q for the period ending
June 30, 2000).
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 the
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 the period ending
September 30, 1998).
60
61
NO. EXHIBIT
DESCRIPTION
10.52 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 to the Registrant's Form 10-Q for the
period ending September 30, 1999).
10.53 Third Amendment to Guaranty of Payment Agreement dated as of May 10,
2000 by and among the Registrant and Bank United individually and as
agent for itself and certain additional lenders (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 10-Q for the
period ending June 30, 2000).
10.54 Fourth Amendment to Guaranty of Payment Agreement dated as of May 31,
2000 by and among the Registrant and Bank United individually and as
agent for itself and certain additional lenders (incorporated by
reference to Exhibit 10.6 to the Registrant's Form 10-Q for the
period ending June 30, 2000).
10.55 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 the period ending December 31,
1998).
10.56 Amended Schedule of Bank United Mortgage, Assignment and Security
Agreements ("Bank United Mortgage") which are substantially similar
to the Form of Bank United Mortgage referenced above (incorporated by
reference to Exhibit 10.56 to Registrant's Form 10-K for the period
ending December 31, 1999).
10.57 Master Purchase Agreement between the Registrant and National Health
Investors, Inc. dated December 22, 1998. (incorporated by reference
to Exhibit 10.56 to the Registrant's Form 10-K for the period ending
December 31, 1998).
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 to the Registrant's Form 10-K for the
period ending December 31, 1998).
10.59 Amended Schedule of Additional NHI Leases which are substantially
similar to the Form of Lease referenced above (incorporated by
reference to Exhibit 10.6 to the Registrant's Form 10-Q for the
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 to the
Registrant's Form 10-K for the 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 to the Registrant's Form 10-K for the period ending December
31, 1998).
10.62 Amendment No. 3 to Master Construction Line of Credit Agreement dated
as of March 1, 2000 between the Registrant, ALS National, Inc., Key
Corporate Capital, Inc., Bank of America and the Lenders named
therein (incorporated by reference to Exhibit 10.13 to the
Registrant's Form 10-Q for the period ending June 30, 2000).
10.63 Amendment No.4 to Master Construction Line of Credit Agreement dated
as of May 25, 2000 between the Registrant, ALS National, Inc., Key
Corporate Capital, Inc., Bank of America and the Lenders named
therein (incorporated by reference to Exhibit 10.14 to the
Registrant's Form 10-Q for the period ending June 30, 2000).
10.64 Form of Deed of Trust and Security Agreement ("Form of Key/ALS
National Mortgage") between ALS National, Inc. and Key Corporate
Capital, Inc. dated September 1999 (incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q for the period ending
September 30, 1999).
10.65 Form of Project Promissory Note ("Form of Key/ALS National Note") by
ALS National, Inc. to Key Corporate Capital, Inc. (incorporated by
reference to Exhibit 10.3 to the Registrant's Form 10-Q for the
period ending September 30, 1999).
61
62
NO. EXHIBIT
DESCRIPTION
10.66 Amended Schedule of Mortgages and Notes which are substantially
similar to the Form of Key/ALS National Mortgages and Notes
referenced above (incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the period ending June 30, 2000).
10.67 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 to the Registrant's Form 10-Q for the period ending
March 31, 1999).
10.68 Second Modification of Master Loan Agreement dated as of May 31, 2000
between ALS West, Inc., the Registrant and Guaranty Federal Bank,
F.S.B. (incorporated by reference to Exhibit 10.8 to the Registrant's
Form 10-Q for the period ending June 30, 2000).
10.69 Loan Agreement by and between ALS Financing, Inc. and GMAC Commercial
Mortgage Corporation dated July 30, 1998 (incorporated by reference
to Exhibit 10.1 to the Registrant's Form 10-Q for the period ending
September 30, 1998).
10.70 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 to the Registrant's Form 10-Q for the
period ending March 31, 1999).
10.71 Loan Agreement between AHC Purchaser, Inc. and GMAC Commercial
Mortgage Corporation dated as of January 28, 2000 (incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-Q for the
period ending March 31, 2000).
10.72 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 to the Registrant's
Form 10-Q for the period ending March 31, 1999).
10.73 Master Construction Line of Credit Agreement among Third Party
Investors I, LLC, the lending institutions and co-agents named
therein and Key Corporate Capital, Inc. as Administrative Agent dated
August 31, 1999 (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)
(filed herewith).
10.74 Amendment No. 1 to Master Construction Line of Credit among Third
Party Investors I, LLC, the lending institutions and co-agents named
herein and Key Corporate Capital, Inc. as Administrative Agent dated
March 1, 2000 (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
(filed herewith).
10.75 Amendment No. 2 to Master Construction Line of Credit among Third
Party Investors I, LLC, the lending institutions and co-agents named
therein and Key Corporate Capital, Inc. as Administrative Agent dated
May 25, 2000 (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 schedule)
(filed herewith).
10.76 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 to the Registrant's Form 10-Q for the period ending
September 30, 1999).
10.77 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 to the
Registrant's Form 10-Q for the period ending June 30, 1999).
10.78 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 to the Registrant's
Form 10-Q for the period ending June 30, 1999).
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63
NO. EXHIBIT
DESCRIPTION
10.79 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 to the Registrant's Form
10-Q for the period ending June 30, 1999).
10.80 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 to the Registrant's Form
10-Q for the period ending June 30, 1999).
10.81 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 to the Registrant's Form 10-Q for the period ending June
30, 1999).
10.82 Schedule of Health Care REIT, Inc. Leases which are substantially
similar to the Form of Lease referenced above (incorporated by
reference to Exhibit 10.8 to the Registrant's Form 10-Q for the
period ending June 30, 1999).
10.83 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 to the Registrant's Form 10-Q for the
period ending June 30, 1999).
10.84 Schedule of Health Care REIT, Inc. Leases which are substantially
similar to the Form of Lease referenced above (incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-Q for the
period ending June 30, 1999).
10.85 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 to the Registrant's Form 10-Q for the period ending
June 30, 1999).
10.86 Schedule of Health Care REIT, Inc. Leases which are substantially
similar to the Form of Lease referenced above (incorporated by
reference to Exhibit 10.12 to the Registrant's Form 10-Q for the
period ending June 30, 1999).
10.87 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 to the Registrant's Form 10-Q for the period ending
June 30, 1999).
10.88 Schedule of Health Care REIT, Inc. Leases which are substantially
similar to the Form of Lease referenced above (incorporated by
reference to Exhibit 10.14 to the Registrant's Form 10-Q for the
period ending June 30, 1999).
10.89 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.
10.90 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 to the Registrant's Form 8-K filed August 4, 1999)
(incorporated by reference to Exhibit 2.5 to the Registrant's Form
8-K filed August 4, 1999).
10.91 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; 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 to the Registrant's Form
8-K filed August 4, 1999).
10.92 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 to the Registrant's Form 8-K filed August 4, 1999).
10.93 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 to the Registrant's Form 8-K filed August
4, 1999).
63
64
NO. EXHIBIT
DESCRIPTION
10.94 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 to the
Registrant's Form 8-K filed August 4, 1999).
10.95 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; 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 to
the Registrant's Form 8-K filed August 4, 1999).
10.96 Guaranty dated as of July 16, 1999 executed by the Registrant
(incorporated by reference to Exhibit 2.11 to the Registrant's Form
8-K filed August 4, 1999).
10.97 Promissory Note dated as of July 16, 1999 executed by Synthetic
Lessor (incorporated by reference to Exhibit 2.12 to the Registrant's
Form 8-K filed August 4, 1999).
10.98 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 (incorporated by reference to Exhibit 10.15 to the
Registrant's Form 10-Q for the period ending June 30, 2000).
10.99 Third Master Amendment dated May 31, 2000 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, (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 10.15
to the Registrant's Form 10-Q for the period ending June 30, 2000).
10.100 Fourth Master Amendment dated June 30, 2000 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 (filed herewith).
10.101 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 to the Registrant's Form 10-Q for the period ending
September 30, 1999).
10.102 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 to the Registrant's Form 10-Q for the
period ending September 30, 1999).
10.103 Schedule of Mortgages and Notes which are substantially similar to
the Form of Amresco Mortgage and Form of Amresco Note referenced
above (incorporated by reference to Exhibit 10.7 to the Registrant's
Form 10-Q for the period ending September 30, 1999).
10.104 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 to
the Registrant's Form 10-Q for the period ending September 30, 1999).
64
65
NO. EXHIBIT
DESCRIPTION
10.105 First Amendment to the Bank of America Credit Agreement, First
Amendment to Guaranty Agreement and Suspension and Wavier Agreement
dated as of March 30, 2000 between the Borrowers named therein,
HCR/Alterra, the Registrant, Manor Care, Inc., Bank of America, as
administrative agent, and the Lenders named therein (incorporated by
reference to Exhibit 10.4 to the Registrant's Form 10-Q for the
period ending March 31, 2000).
10.106 Second Amendment to the Bank of America Credit Agreement, third
Amendment to Guaranty Agreement and Waiver dated as of January 26,
2001 between the Borrowers named therein, HCR/Alterra Development,
LLC, the Registrant, Manor Care, Inc., Bank of America, N.A., as
administrative agent, and the Lenders named therein (filed herewith).
10.107 Guaranty Agreement dated September 30, 1999 by the Registrant in
favor of Bank of America, N.A. as Administrative Agent under the Bank
of America Credit Agreement referenced above (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 to the
Registrant's Form 10-Q for the period ending September 30, 1999).
10.108 Second Amendment to Guaranty Agreement and Wavier dated as of May 31,
2000 among the Registrant, Bank of America, N.A., as Administrative
Agent under the Bank of America Credit Agreement, and the Lenders
named therein (incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10Q for the period ending June 30, 2000).
10.109 Schedule of properties owned by Devco I and mortgaged under the Bank
of America Credit Agreement referenced above (incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-Q for the
period ending September 30, 1999).
10.110 Form of Lease dated July 16, 1999 between LTC Properties, Inc. and
the Registrant (incorporated by reference to Exhibit 10.113 to the
Registrant's Form 10-K for the period ending December 31, 1999).
10.111 Schedule of LTC Leases which are substantially similar to the Form of
LTC Lease referenced above (incorporated by reference to Exhibit
10.114 to the Registrant's Form 10-K for the period ending December
31, 1999).
10.112 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
(incorporated by reference to Exhibit 10.115 to the Registrant's Form
10-K for the period ending December 31, 1999).
10.113 Form of Building Loan Agreement ("Key Loan Agreement") dated as of
January 14, 2000 between Key Corporate Capital Inc. and Clinton
Brookside Drive, LLC (incorporated by reference to Exhibit 10.116 to
the Registrant's Form 10-K for the period ending December 31, 1999).
10.114 Form of Secured Promissory Note ("Key Promissory Note") dated January
14, 2000 between Key Corporate Capital Inc. and Clinton Brookside
Drive, LLC (incorporated by reference to Exhibit 10.117 to the
Registrant's Form 10-K for the period ending December 31, 1999).
10.115 Form of Guaranty of Payment and Performance dated as of January 14,
2000 from the Registrant to Key Corporate Capital Inc. ("Key
Guaranty") (incorporated by reference to Exhibit 10.118 to the
Registrant's Form 10-K for the period ending December 31, 1999).
10.116 Amended Schedule of Key Loan Agreements, Key Promissory Notes and Key
Guaranties which are substantially similar to the forms referenced
above (incorporated by reference to Exhibit 10.2 to the Registrant's
Form 10-Q for the period ending June 30, 2000).
10.117 Letter Agreement dated March 30, 2000 between Key Corporate Capital,
Inc., the limited liability companies name therein, and the
Registrant (incorporated by reference to Exhibit 10.11 to the
Registrant's Form 10-Q for the period ending June 30, 2000).
65
66
NO. EXHIBIT
DESCRIPTION
10.118 Letter Agreement dated May 31, 2000 between Key Corporate Capital,
Inc., the limited liability companies name therein, and the
Registrant (incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-Q for the period ending June 30, 2000).
10.119 Loan Agreement dated as of March 5, 2001 between the Registrant and
RDVEPCO, L.L.C, Holiday Retirement 2000, LLC, The Toronto-Dominion
Bank and HBK Master Fund, L.P. (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 99.1 to the Registrant's Form 8-K filed March 8,
2001).
10.120 Purchase Agreement dated as of April 26, 2000 between the Registrant
and RDVEPCO, L.L.C., Group One Investors, L.L.C. and Holiday
Retirement 2000, LLC (schedules to this agreement have been omitted;
the Registrant agrees to furnish supplementally to the Commission,
upon request, a copy of these schedules) (incorporated by reference
to Exhibit 99.2 to the Registrant's Form 8-K filed May 4, 2000).
10.121 First Amendment to Purchase Agreement dated as of May 31, 2000
between Registrant and RDVEPCO, L.L.C., Group One Investors, L.L.C.,
Holiday Retirement 2000, LLC, the Elsa D. Prince Living Trust and RDV
Manor Care, L.L.C. (collectively, the "Purchasers"), excluding
Exhibits A, B and C thereto and excluding the schedules to this
agreement (the Registrant agrees to furnish supplementally to the
Commission, upon request, a copy of these schedules) (incorporated by
reference to Exhibit 99.2 to the Registrant's Form 8-K dated June 8,
2000).
10.122 Debenture Purchase Agreement dated as of August 10, 2000 by and among
the Registrant, RDVEPCO, L.L.C., Group One Investors, L.L.C., Holiday
Retirement 2000, LLC, the Elsa D. Prince Living Trust, RDV Manor
Care, L.L.C. and Toronto Dominion Investments, Inc. (schedules to
this agreement have been omitted; the Registrant agrees to furnish
supplementally to the Commission, upon request, a copy of these
schedules) (incorporated by reference to Exhibit 10.16 to the
Registrant's Form 10-Q for the period ending June 30, 2000).
10.123 Construction Loan and Security Agreement dated as of May 1, 1998
between ALS Clare Bridge, Inc. and Sovereign Bank (the "Sovereign
Bank Loan Agreement") (incorporated by reference to Exhibit 10.124 to
the Registrant's Form 10-K for the period ending December 31, 1999).
10.124 Form of Open End Mortgage and Security Agreement (the "Sovereign
Mortgage") dated May 1, 1998 between ALS-Clare Bridge, Inc. and
Sovereign Bank (incorporated by reference to Exhibit 10.125 to the
Registrant's Form 10-K for the period ending December 31, 1999).
10.125 Form of Guaranty and Surety Agreement dated May 1, 1998 between the
Registrant and Sovereign Bank (incorporated by reference to Exhibit
10.126 to the Registrant's Form 10-K for the period ending December
31, 1999).
10.126 Schedule of properties mortgaged under the Sovereign Bank Loan
Agreement and mortgages which are substantially similar to the
Sovereign Mortgage referenced above (incorporated by reference to
Exhibit 10.127 to the Registrant's Form 10-K for the period ending
December 31, 1999).
10.127 Revolving Credit Agreement dated August 19, 1997 between the
Registrant and Firstar Bank Milwaukee, NA. (incorporated by reference
to Exhibit 10.128 to the Registrant's Form 10-K for the period ending
December 31, 1999).
10.128 Revolving Credit Note dated August 19, 1997 between Registrant and
Firstar Bank Milwaukee, NA. (incorporated by reference to Exhibit
10.129 to the Registrant's Form 10-K for the period ending December
31, 1999).
10.129 Amendment to Revolving Credit Agreement and Revolving Credit Note
dated February 27, 1999 between Registrant and Firstar Bank
Milwaukee, NA. (incorporated by reference to Exhibit 10.130 to the
Registrant's Form 10-K for the period ending December 31, 1999).
66
67
NO. EXHIBIT
DESCRIPTION
10.130 Second Amendment to Loan Agreement and Related Documents dated
September 9, 1999 between Registrant and Firstar Bank Milwaukee, NA
(incorporated by reference to Exhibit 10.131 to the Registrant's Form
10-K for the period ending December 31, 1999).
10.131 Waiver and Amendment No. 3 to Credit Agreement dated March 27, 2000
between the Registrant and Firstar Bank Milwaukee, NA (incorporated
by reference to Exhibit 10.9 to the Registrant's Form 10-Q for the
period ending June 30, 2000).
10.132 Amendment No. 5 to Credit Agreement dated May 31, 2000 between the
Registrant and Firstar Bank Milwaukee, NA (incorporated by reference
to Exhibit 10.10 to the Registrant's Form 10-Q for the period ending
June 30, 2000).
10.133 Amendment No. 8 to Credit Agreement dated as of August 31, 2000
between the Registrant and Firstar Bank Milwaukee, NA (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 10.4 to the
Registrant's Form 10-Q for the period ending September 30, 2000).
10.134 Form of Deed of Trust ("Mortgage/Deed of Trust") dated August 31,
2000 between the Registrant, First Bank as Lender and Chicago Title
Insurance Company as Trustee (incorporated by reference to Exhibit
10.5 to the Registrant's Form 10-Q for the period ending September
30, 2000).
10.135 Schedule of Firstar Mortgages and Deeds of Trust which are
substantially in the form of Mortgage/Deed of Trust referenced above
(incorporated by reference to Exhibit 10.6 to the Registrant's Form
10-Q for the period ending September 30, 2000).
10.136 Form Consolidated Mortgage (the "M&T Mortgage") dated December 22,
1999 between Clifton Park Route 146, LLC and Manufacturers and
Traders Trust Company (incorporated by reference to Exhibit 10.132 to
the Registrant's Form 10-K for the period ending December 31, 1999).
10.137 Continuing Guaranty dated December 22, 1999 between the Registrant
and Manufacturers and Traders Trust Company (incorporated by
reference to Exhibit 10.133 to the Registrant's Form 10-K for the
period ending December 31, 1999).
10.138 Schedule of M&T Mortgages which are substantially similar to the form
of M&T Mortgage referenced above (incorporated by reference to
Exhibit 10.134 to the Registrant's Form 10-K for the period ending
December 31, 1999).
10.139 Development Joint Venture Agreement between the Registrant and HCR
Manor Care, Inc. dated December 31, 1998. (incorporated by reference
to Exhibit 10.61 to the Registrant's Form 10-K for the period ending
December 31, 1998).
10.140 Section 2.2(a) Purchase Agreement and Assignment dated as of May 31,
2000 between the Registrant, the Purchasers name therein and HBK
Master Fund L.P. (incorporated by reference to Exhibit 99.7 to the
Registrant's Form 8-K filed on June 8, 2000).
10.141 Loan Agreement dated as of August 28, 2000 between Heller Healthcare
Finance, Inc., as Agent and a Lender; and the other financial
institutions who hereafter become parties to the Agreement, as
Lenders; and AHC Borrower I, Inc., as Borrower (exhibits and
schedules to this agreement have been omitted; the Registrant agrees
to furnish supplementally to the Commission, upon request, a copy of
these exhibits and schedules) (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q for the period ending September
30, 2000).
10.142 First Amendment to Loan Agreement dated as of December 31, 2000
between Heller Healthcare Finance, Inc. and AHC Borrower I, Inc.
(filed herewith).
67
68
NO. EXHIBIT
DESCRIPTION
10.143 Form of Deed of Trust, Assignment of Leases, Rents and Profits,
Security Agreement and Financing Statement ("Heller Mortgage/Deed of
Trust") dated as of August 28, 2000 between AHC Borrower I, Inc, as
Borrower; Joyce J. Gorman, as Trustee, for the benefit of Heller
Healthcare Finance, Inc, in its individual capacity and as Agent for
Lenders (incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-Q for the period ending September 30, 2000).
10.144 Schedule of Heller Mortgages and Deeds of Trust which are
substantially in the form of Heller Mortgage/Deed of Trust referenced
above (incorporated by reference to Exhibit 10.3 of the Registrant's
Form 10-Q for the period ending September 30, 2000).
11.1 Statement re: Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
2. Schedule of Valuation and Qualifying accounts
Additions
Balance at Charged to Write-offs Balance at
Beginning Costs and and Other End of
Description of Period Expenses Disposals Charges Period
- --------------------------------------------------------------------------------------------------------------------
Allowance for Uncollectible
Accounts Receivable
Year Ended December 31, 1998 (136,098) (491,284) 125,964 - (501,418)
Year Ended December 31, 1999 (501,418) (2,524,698) 164,730 - (2,861,387)
Year Ended December 31, 2000 (2,861,387) (2,012,785) 2,465,267 - (2,408,905)
Tax Valuation Allowance
Year Ended December 31, 1998 (6,816,000) - 6,816,000 - -
Year Ended December 31, 1999 - - - - -
Year Ended December 31, 2000 - (53,042,000) - - (53,042,000)
68
69
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Alterra Healthcare Corporation
Under the date of March 23, 2001 we reported on the consolidated balance sheets
of Alterra Healthcare Corporation and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2000, as contained in the annual report on Form 10-K for the year
2000. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement schedule as listed
in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
The audit report on the consolidated financial statements of Alterra Healthcare
Corporation and subsidiaries referred to above contains an explanatory paragraph
that states that the Company has suffered recurring losses from operations and
was in violation of certain debt covenants and cross covenants as of December
31, 2000. As a results of the covenant violations and cross covenant violations,
the Company is in default of the related debt. Additionally, the Company did not
make certain scheduled loan principal and lease payments due in March of 2001.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
Chicago, Illinois
March 23, 2001
70
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, 2001.
ALTERRA HEALTHCARE CORPORATION
By: /s/ Mark W. Ohlendorf
-------------------------------------------------
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
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/ STEVEN L. VICK President, Chief Operating Officer March 30, 2001
- ----------------------------- and Director
Steven L. Vick
/S/ MARK W. OHLENDORF Senior Vice President, Chief Financial March 30, 2001
- ----------------------------- Officer, Treasurer and Secretary
Mark W. Ohlendorf (Principal Financial Officer)
/S/ KRISTIN A. FERGE Vice President and Assistant Secretary March 30, 2001
- ----------------------------- (Principal Accounting Officer)
Kristin A. Ferge
/S/ JERRY L. TUBERGEN
- -----------------------------
Jerry L. Tubergen Chairman of the Board and Director March 30, 2001
/S/ WILLIAM F. LASKY
- -----------------------------
William F. Lasky Vice Chairman and Director March 30, 2001
/S/ TIMOTHY J. BUCHANAN
- -----------------------------
Timothy J. Buchanan Director March 30, 2001
/S/ GENE E. BURLESON
- -----------------------------
Gene E. Burleson Director March 30, 2001
/S/ WILLIAM E. COLSON
- -----------------------------
William E. Colson Director March 30, 2001
/S/ ROBERT HAVEMAN
- -----------------------------
Robert Haveman Director March 30, 2001
/S/ WILLIAM G. PETTY, JR.
- -----------------------------
William G. Petty, Jr. Director March 30, 2001
/S/ NATALIE TOWNSEND
- -----------------------------
Natalie Townsend Director March 30, 2001
69