UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Amendment No. 1 ________________________________ |
[MARK ONE]
x | AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 | |
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 _______________________________________ | ||
Alterra Healthcare Corporation | ||
(Exact name of Registrant as specified in its charter) | ||
Delaware | 39-1771281 | |
(State of Incorporation) 10000 Innovation Drive Milwaukee, WI (Address of principal executive offices) | (IRS Employer Identification No.) 53226 (Zip Code) | |
Registrant's telephone number, including area code (414) 918-5000 _________________________ Securities registered pursuant to Section 12(b) of the Securities Exchange Act: | ||
NONE | ||
Securities registered pursuant to Section 12(g) of the Securities Exchange Act: Title of each class Common Stock, par value $.01 5.25% Convertible Subordinated Debenture due 2002 Series A Junior Preferred Stock Purchase Rights | ||
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.— | ||
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes _____ Nox | ||
The aggregate market value of the voting stock held by non-affiliates of the Registrant was $2,449,289 as of March 24, 2003. The number of outstanding shares of the Registrant's Common Stock was 22,266,262 shares as of March 24, 2003. | ||
EXPLANATORY NOTE
This Report on Form 10-K/A amends and restates in their entirety the following Items of the Annual Report on Form 10-K of Alterra Healthcare Corporation (the "Company") for the fiscal year ended December 31, 2002 (the "2002 Form 10-K"):
Items 1, 7, 10, 12 and 16 have been amended to make various minor and typographical corrections and eliminate duplicative statements in the initial filing of the 2002 Form 10-K.
Item 8 has been amended to include additional subsequent event disclosures in Footnote 1 (b) and to make various minor and typographical corrections to the initial filing of the 2002 Form 10-K.
This Report on Form 10-K/A also amends and restates in its entirety the Signature Page of the 2002 Form 10-K (dates of execution inadvertently omitted from the initial filing of the 2002 Form 10-K).
ITEM 1. BUSINESS
Overview
We are a national assisted living company operating assisted living residences and providing assisted living services in 24 states. Our recent restructuring activities have had a significant impact on our results of operations and are important factors in explaining the changes in our results between 2002 and 2001. As of December 31, 2002 and 2001, we operated or managed 383 and 430 residences with aggregate capacity of approximately 18,200 and 20,200 residents, respectively. As of December 31, 2002, 20 of our residences were operated in joint venture arrangements with third parties, 18 of which were operated in unconsolidated joint ventures. During 2002, we generated operating revenue of $416.7 million and realized income from operations of $13.5 million and pretax loss from continuing operations of $82.2 million, both prior to gain on disposal of assets.
On January 22, 2003, in order to seek to facilitate and complete our on-going restructuring initiatives, the Company filed a voluntary petition for relief (the "Chapter 11 Filing") in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") to reorganize under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). None of the Company's subsidiaries or affiliates are included in the Chapter 11 Filing. The Company remains in possession of its assets and properties and continues to operate its business as a "debtor-in-possession" ("DIP") under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. On March 18, 2003, upon application of the American Stock Exchange ("AMEX"), the Securities and Exchange Commission struck the Company's common stock and other securities from listing and registration on the AMEX.
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. Such forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the Company's operation and business environment which may cause the actual results of the Company to be materially different from any future results expressed or implied in such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, the following: the ability of the Company to satisfy its operating and capital needs during the pendency of its Bankruptcy Case; the Company's abilit y to successfully negotiate necessary modifications and amendments with its secured lenders and lessors; the Company's ability to access financing needed to refinance significant pending debt maturities; the ability of the Company to continue as a going concern; the ability of the Company to develop, prosecute, confirm and consummate a Chapter 11 plan of reorganization; the Company's ability to identify and consummate a liquidity transaction providing net proceeds in amounts necessary to effectively address the projected capital and liquidity needs of the Company; risks associated with third parties seeking and obtaining court approval for the appointment of a Chapter 11 trustee or to convert the case to a Chapter 7 liquidation; the potential adverse impact of the Chapter 11 Filing on the Company's relationships with its residents, vendors and employees; competition and the ability of the Company to attract private pay residents to its residences; the Company's ability to fund and maintain self insurance pro grams at levels necessary to address potential liability claims and satisfy the requirements of lenders and lessors; government legislation and regulation; and other risks and uncertainties as may be set forth from time to time in the Company's reports filed with the Securities and Exchange Commission.
Chapter 11 Bankruptcy and Restructuring Activities
In February 2001 our overall cash position had declined to a level which we believed to be insufficient to operate the Company. Accordingly, in February 2001 we retained financial advisors and special reorganization counsel to assist us in evaluating alternatives to restore financial viability. To conserve cash and protect the financial integrity of our operations, beginning in March 2001 we elected not to make selected scheduled debt service and lease payments, of which $5.1 million remains unpaid as of December 31, 2002. As a result, we are in default under several of our principal credit facilities. Our operating cash flow has improved due to overhead reductions that have been implemented and increases in monthly rents that we charge to our residents which were effective in 2002. 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.
In March of 2001 we began to implement a restructuring plan ("Restructuring Plan"), the principal objectives of which are:
-- To create a cash flow positive base of operation by (i) disposing of under-performing and non-strategic assets, and (ii) allowing retained residences the opportunity to stabilize (generate sufficient cash flow to fund operations, capital spending and other cash requirements);
-- To eliminate pending defaults and restructure the Company's senior financing instruments (secured debt arrangements and leases);
-- To reduce the leverage on the Company's operating assets;
-- To protect the Company's operations during the pendency of our restructuring by shielding our employees, residents and vendors from any adverse consequences of the restructuring; and
-- To the extent practicable, to seek to restore value to the Company's junior capital constituencies.
The principal components of our Restructuring Plan are the disposition of selected assets and the restructuring of our capital structure, including our "senior capital" constituencies comprised principally of our secured indebtedness and leases (operating and capital), our "junior capital" constituencies comprised principally of our convertible pay-in-kind (PIK) debentures, our other convertible subordinated debentures and our equity capitalization, and our remaining joint venture relationships. Discussions with various senior capital structure constituencies commenced in the spring of 2001, and have resulted in a number of restructuring agreements with lenders and lessors with respect to individual credit and lease facilities.
On January 22, 2003, we filed a voluntary petition with the Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code (the "Bankruptcy" or the "Bankruptcy Case"). The Company believes that its Chapter 11 Filing is an appropriate and necessary step to conclude its reorganization initiatives commenced in 2001. The focus of our restructuring efforts in 2001 and 2002 has been portfolio rationalization and the restructuring of our senior financing obligations with our secured lenders and lessors. We believe the Bankruptcy will allow us to complete our restructuring of our senior financing obligations and to commence and complete the restructuring of our junior capital structure, which includes unsecured obligations and claims, our convertible subordinated debentures and our preferred and common stock.
In conjunction with our Chapter 11 Filing, we secured a $15 million debtor-in-possession ("DIP") credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. Additional borrowings under the DIP credit facility will require further approval of the Bankruptcy Court, which we expect to obtain in April 2003.
On February 4, 2003, the Office of the U.S. Trustee for the District of Delaware appointed an official committee of unsecured creditors in our Bankruptcy Case.
On March 27, 2003, we filed with the Bankruptcy Court a Plan of Reorganization (the "Plan") and a Disclosure Statement Accompanying Plan of Reorganization (the "Disclosure Statement"). Immediately prior to the filing of our Plan and Disclosure Statement, we also filed a motion (the "Bidding Procedures Motion") with the Bankruptcy Court seeking approval of bidding procedures with respect to the solicitation and selection of a transaction contemplating either (i) the sale of capital stock of the reorganized Alterra to be effective and funded upon the confirmation and effectiveness of our Plan (an "Exit Equity Transaction") or (ii) the sale, as a going concern, of all or substantially all of the assets of Alterra to be effective and funded upon the confirmation and effectiveness of our Plan (an "Asset Sale Transaction," together with an Exit Equity Transaction, referred to herein as a "Liquidity Transaction").
Going forward, we will report our financial statements on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Accordingly, all pre-petition liabilities subject to compromise will be segregated in the Consolidated Balance Sheets and classified as Liabilities subject to compromise, at the estimated amount of allowable claim. Liabilities not subject to compromise are separately classified as current and non-current. Revenues, expenses, realized gains and losses, and provisions for losses resulting from the reorganization are reported separately as Reorganization items. Cash used for reorganization items is disclosed separately in the Consolidated Statements of Cash Flows. Based on our Chapter 11 Filing, we estimate that $576.0 million of lia bilities as of December 31, 2002 would be deemed to be subject to compromise in accordance with SOP 90-7.
The principal components of our restructuring efforts to date and the further restructuring contemplated by the Plan are summarized below.
Portfolio Rationalization. The Restructuring Plan calls for the disposition of 136 of our residences (collectively, the "Disposition Assets") that we determined to be non-strategic for one or more of a variety of reasons. The disposition of the residences included in the Disposition Assets has been accomplished primarily by actively working with the lenders and lessors to identify new operators and selling assets through an organized sales process. During the year ended December 31, 2002 we recognized a net gain on disposal of $3.9 million, including a gain of $13.7 million in continuing operations and a loss of $9.8 million in discontinued operations, relating to the sale of 36 residences, 11 land parcels and four lease terminations. Additionally, as a result of various asset refinancings, six assets were removed from the Disposition Asset classification and a corresponding gain of $9.2 million was recognized in accordance with SFAS No. 121 and SFAS No. 144, resulting from the reversal of the related loss reserve estimates due to changes in valuations associated with those assets. As of December 31, 2002, 105 residences representing 4,692 resident capacity have either been sold or transferred to a new lessee. In addition, we sold 21 land parcels and transitioned ownership of 3 residences through deed-in-lieu of foreclosure transactions. As of December 31, 2002, approximately $68.3 million is reserved for losses relating to future asset sales, lease terminations and joint venture settlements. A condition to our disposing of the remaining 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.
Restructuring of Our Senior Indebtedness and Leases. The Company has a complex senior capital structure, comprised of at least 15 significant multi-residence secured credit facilities and six significant portfolios of operating residences that are leased from real estate investment trusts (REITs). Many of our secured credit facilities are structured to incorporate various so-called "bankruptcy-remote" features (i.e., structures designed to improve the applicable lender's rights and leverage in the event of a bankruptcy of the parent company, Alterra), including structuring the credit facility such that the fee owner of the mortgaged residences and the borrower under the credit facility is a newly formed subsidiary of Alterra whose sole activity is to own and operate the residences financed under that credit facility. The structure of certain of these credit facilities serves to limit the Company's ability to restructure these facilities through a bankruptcy, making it generally preferable for the Company to negotiate consensual restructurings with each group of lenders providing secured financing to the Company.
The Company commenced negotiations with its secured lenders and lessors during 2001. Each separate negotiation has been unique and based on the characteristics of the underlying credit facility, including the credit facility's collateral, terms and structure. Accordingly, our restructuring needs and objectives have varied from one credit facility to the next. Depending on the particular credit facility, we have attempted to reset maturities, address any deficiencies, reset covenants, obtain waivers of default interest and penalties, and secure consent from the lenders and lessors for sales of residences included in their collateral or lease portfolio.
Secured Lender Negotiations. At the outset of our restructuring, management sought to restructure secured loan facilities that, in management's view, would generate significant deficiency claims (i.e., claims in excess of the value of the applicable mortgage portfolio) in the event the applicable lenders sought to call the loan and foreclose on their collateral. Four credit facilities, representing $215.3 million in aggregate financing at December 31, 2002 (secured by mortgages on 39 residences with an aggregate capacity of 2,696 beds) represent, in our view, significant potential deficiency claims in the range of $81.4 million to $99.6 million. In these negotiations, we sought to limit or eliminate these potential deficiency claims against the Company in exchange for our agreement to cooperate with the applicable lenders to facilitate an orderly transition of ownership (and, in certain cases, management) of the mortgaged residences to the lenders or their designees (through deed-in-lieu of fore closure transactions or so-called friendly foreclosures). In transitioning ownership of the mortgaged residences to the lenders, we offered to provide interim management services to the lenders with respect to the mortgaged residences. During 2002, we executed definitive agreements of this type with three different lender groups with regard to three of these "impaired" credit facilities, originally representing $104.2 million of financing secured by 31 residences with an aggregate capacity of 1,520 beds. As a result of refinancings, asset sales and foreclosures during 2002, $44.3 million of indebtedness secured by mortgages on 12 residences included in these three executed definitive agreements is remaining at December 31, 2002.
In May 2002, our one remaining significantly "impaired" lender group that provided $171.0 million in aggregate financing (secured by mortgages on 26 residences with an aggregate capacity of 2,154 beds) caused title to all of the stock of our subsidiary that operated these mortgaged residences to be transferred to a third party. Accordingly, we no longer own these residences, although we do currently serve as interim manager for this lender group. As a result of the stock transfer, these residences are no longer consolidated and operations related to these residences through May 31, 2002 are reported as discontinued operations. We have recorded $58.5 million related to our estimated liability associated with our guaranty (including payment of the termination fee due upon full payment of the mortgage obligations). The liability associated with our guaranty obligation was calculated as the difference between the fair market value of the assets and the underlying mortgage obligations. Also included in dis continued operations is a loss of approximately $24.0 million, which represents the write off of the net assets of our former subsidiary at the time of the transfer of the stock of that subsidiary.
For comparative purposes, the reconciliation between the December 31, 2001 and December 31, 2002 balance sheet to record the stock transfer of this former subsidiary, AHC Tenant, Inc. and the impact of other assets dispositions that we have completed are as follows:
| | Working | | |||||||
Total current assets | $ | 150,547 | $ | (4,316 | ) $ | (40,128 | ) | $ | 106,103 | |
Property and equipment, net | 727,416 | (189,221 | ) | (46,070 | ) | 492,125 | ||||
Other assets | 160,237 | (10,804 | ) | (76,511 | ) | 72,922 | ||||
Total assets | $ | 1,038,200 | $ | (204,341 | ) $ | (162,709 | ) | $ | 671,150 | |
Total current liabilities | 1,211,292 | (174,354 | ) | (56,649 | ) | 980,289 | ||||
Other liabilities | 93,834 | (5,927 | ) | 91,882 | 179,789 | |||||
Total equity | (266,926 | ) | (24,060 | ) | (197,942 | ) | (488,928 | ) | ||
Total liabilities and equity | $ | 1,038,200 | $ | (204,341 | ) $ | (162,709 | ) | $ | 671,150 |
In January 2003, we entered into agreements with this lender group pursuant to which: (i) we have agreed to manage these 26 residences on an interim basis without a management fee, and to cooperate in transitioning management to any successor manager appointed by the credit participants, and (ii) the Company is entitled to be released of its guaranty and other principal obligations (with the exception of certain environmental indemnities) under this financing structure upon the satisfaction of certain conditions, including the payment of $5.7 million of fees to the credit participants on or prior to the confirmation of a plan of reorganization in our Bankruptcy Case.
In addition to these impaired credit facilities, we are continuing to seek to negotiate amendments and modifications with the applicable lenders with respect to our other principal secured credit facilities in order to, depending on the specific case, reset covenants, obtain consent to sell certain mortgaged residences, secure waivers of prior defaults and, in certain cases, to extend scheduled maturities. These credit facilities represent $300.9 million of financing secured by an aggregate of 94 residences with an aggregate capacity of 4,502 beds as of December 31, 2002. Discussions with certain of these lenders have commenced, and we have executed definitive binding agreements with lenders with respect to $174.4 million of indebtedness secured by 60 residences with an aggregate capacity of 2,677 beds, providing for, among other things, extensions of debt maturities, waivers of prior defaults and amendments of certain covenants. In February 2003, we refinanced 31 residences previously financed pursuan t to two secured debt facilities, obtaining $61.0 million of sale leaseback financing related to 25 residences with a capacity of 894 beds and borrowing $6.9 million of secured debt secured by 6 residences with a capacity of 182 beds. (See "Subsequent Events," Note 20 to the Consolidated Financial Statements for further discussion). We anticipate that we will need to negotiate restructuring agreements and to secure waivers and amendments with certain of our secured lenders as a condition to confirming our Plan and consummating any Liquidity Transaction.
REIT Lessor Negotiations. At December 31, 2002, we had five multi-residence portfolios leased from various REITs, not including the 25 residence sale/leaseback financing closed in February 2003. These portfolios include an aggregate of 200 residences with an aggregate capacity of 8,715 beds. We have entered into restructuring agreements with respect to each of these five multi-residence lease portfolios. These restructurings included the amendment of certain lease covenants and terms and, in three lease facilities, the conversion of individual leases into single master leases. The cash rent due under one lease facility was modified through the application of various deposits held by the landlord to satisfy a portion of the cash rent obligation in the early years of the restructured master lease.
Restructuring of Junior Capital Structure. As of December 31, 2002, the Company's junior capital structure is comprised of unsecured debt of approximately $439.7 million and equity capitalization consisting of $6.1 million aggregate principal amount of 9.75% Series A Cumulative Convertible Preferred Stock due May 30, 2007 (the "Series A Stock") and 22.2 million shares of Common Stock. The principal components of the Company's unsecured indebtedness as of December 31, 2002 (amounts exclude accrued but unpaid interest) include:
i. $11.0 million aggregate principal face amount of promissory notes issued in connection with the restructuring of certain joint venture arrangements (the "Unsecured Senior Notes") and $5.1 million of other unsecured notes (the "Unsecured Notes");
ii. $252.4 million aggregate principal amount of 9.75% pay-in-kind convertible debentures due May 30, 2007 (the "PIK Debentures") issued in three separate series in 2000;
iii. $112.0 million aggregate principal amount of 5.25% convertible subordinated debentures due December 15, 2002 (the "5.25% Debentures");
iv. $40.4 million aggregate principal amount of 7.00% convertible subordinated debentures due June 1, 2004 (the "7.00% Debentures"); and
v. $34.9 million aggregate principal amount of 6.75% convertible subordinated debentures due June 30, 2006 (the "6.75% Debentures").
The outstanding 5.25% Debentures, 7.00% Debentures and 6.75% Debentures (collectively, the "Original Debentures") are subordinated to all other "senior indebtedness" of the Company (as defined in the applicable indenture governing such debentures), and the PIK Debentures are subordinated to all "senior indebtedness" of the Company (as defined in the applicable indentures governing such debentures), other than the Original Debentures. Although defined somewhat differently in the several indentures governing the Original Debentures and the PIK Debentures (collectively, the "Subordinated Debentures"), "senior indebtedness" is defined to generally include indebtedness for borrowed money and other similar obligations of Alterra (other than the other series of Original Debentures).
All of our Subordinated Debentures are currently in default due to our failure to make coupon payments on the Original Debentures and due to cross default provisions triggered by payment defaults on our secured debt.
As a result of several notices of default received by the Company with respect to secured 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). As a result, we did not make cash interest payments on the Original Debentures in 2001, 2002 and January 2003 of $5.5 million, $11.0 million and $5.5 million, respectively. In the event that the Company is dissolved, liquidated or reorganized, all amounts due in payment of the Company's "senior indebtedness" must be paid or provided for before any payment may be made on account of the Subordinated Debentures.
To the extent that the Company is not able to restructure its capital structure and is forced to liquidate, applicable principles of corporate law (specifically, the liquidation priority of debt over equity and the priority of preferred stock over common stock) and the subordination provisions governing the Subordinated Debentures would dictate that:
• All obligations relating to the PIK Debentures ($252.4 million at December 31,2002) would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Original Debentures;
• All obligations relating to the Original Debentures ($207.4 million including accrued and unpaid interest at December 31, 2002), as well as all other indebtedness of the Company, would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Series A Stock and Common Stock; and
• All liquidation preferences related to our outstanding Series A Stock (approximately $6.1 million as of December 31, 2002) would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Common Stock.
In restructuring our junior capital structure, the relative rights in liquidation of our various junior capital constituencies will be a significant factor in determining the extent to which the claims and interests of these various constituencies will need to be modified, exchanged or entitled to any distribution of value as the Company is restructured.
Our Plan, filed with the Bankruptcy Court on March 27, 2003, contemplates that the Company will conduct a marketing process to solicit and identify the "highest and best" proposal for a Liquidity Transaction, which could involve a sale of equity securities in the reorganized Alterra through an Exit Equity Transaction or a sale of all or substantially all of the assets of Alterra, as a going concern, pursuant to an Asset Sale Transaction. In either case, management believes that the Liquidity Transaction will provide a fair valuation of the reorganized Alterra that will facilitate the completion of the reorganization and will provide a source of liquidity to make distributions of cash, securities or other property to the holders of various junior capital structure constituents, all to the extent that such holders are entitled to a distribution pursuant to the Plan based on applicable principles of bankruptcy and corporate law and the subordination provisions governing the Subordinated Debentures.
Given the uncertainty as to the outcome of our remaining restructuring negotiations with senior capital constituencies, and given the impact of operative subordination provisions and corporate and bankruptcy law doctrines governing the relative rights of holders of debt and equity interests in the Company, it is very difficult for us to predict what value, if any, various junior capital constituencies will receive in the restructured Alterra. While it is management's intention, to the extent practicable, to seek to restore value to our junior capital, no assurances may be given as to what value, if any, various junior capital constituencies will have in the restructured Company. Based on our current estimates of value, it appears likely that no distribution of value would be made to certain classes of unsecured debt or to any class of capital stock of the Company upon the conclusion of the Bankruptcy Case.
Joint Venture Arrangements. The Restructuring Plan calls for us to seek to acquire joint venture interests in certain of our residences in order to simplify our capital structure. In many cases, our acquisition of these joint venture interests (or termination of the applicable joint venture's interest in our residences) is necessary for us to satisfy restructuring requirements established by our senior lenders and lessors.
We have had buy-out or settlement negotiations with investors who currently have interests in an aggregate of 41 joint venture arrangements. As of December 31, 2002, 19 of those joint venture arrangements are associated with residences operating under lease or sublease agreements with the joint venture, while the lease or sublease agreements of the remaining 22 joint venture arrangements have been terminated. No assurance may be given as to whether these negotiations will result in an agreement which enables the Company to acquire 100% of these joint venture entities. If these negotiations fail, the Company's ability to restructure certain of its senior capital financing facilities may be adversely affected. If lenders or lessors providing financing to the Company with respect to residences operated by joint ventures seek to foreclose on their mortgages or to terminate their leases, and as a result joint venture entities have their right to operate such residences impaired, Alterra may be forced to defen d damage claims asserted by certain of its joint venture partners.
As of December 2002, we entered into an agreement with one of our joint venture partners pursuant to which we have agreed to purchase all of the remaining joint venture interests not held by the Company in eight residences and to acquire promissory notes previously issued by the Company aggregating approximately $3.6 million in exchange for the issuance of a 5-year unsecured promissory note for $7.2 million from the reorganized Alterra upon confirmation of our plan of reorganization by the Bankruptcy Court. Accordingly, the consummation of this transaction will be contingent upon, among other things, a successful Chapter 11 reorganization of the Company and Bankruptcy Court approval.
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 service 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.
Personal care and supportive services are offered in different residence models which incorporate our philosophy of preserving residents' 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. TheWynwood 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 caregiver work station. The average monthly rate charged per resident inWynwood residences during the fourth quarter of 2002 was approximately $2,700.• 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. The average monthly rate charged per resident inSterling House residences during the fourth quarter of 2002 was approximately $2,500.• Villas. These private apartment-style residences are designed to serve upper-income independent individuals in metropolitan and suburban markets. TheVillas 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. TheVillas offer a secure building with comfortable common areas and pleasant outdoor surroundings. The average monthly rate charged per resident inVillas residences during the fourth quarter of 2002 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 freestandingClare Bridge andClare 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 residents' 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, freestanding 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.
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 VenturesHistorically, 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 our investment and the associated risk. Although we discontinued developing and financing new residences utilizing joint venture and other off-balance sheet ownership structures beginning in 2000, as of December 31, 2002 we continue to have interests in 41 joint venture arrangements, with 19 of those joint venture arrangements associated with 20 residences actively operating under lease or sublease agreements with the joint venture, while the lease or sublease agreements of the remaining 22 joint venture arrangements have been terminated.
During 2001 and 2002 the Company, as landlord, terminated lease or sublease agreements with 22 joint ventures in response to uncured rent defaults by the joint ventures under these agreements, or as a result of asset dispositions or deed-in-lieu foreclosure transactions. As of December 31, 2002 the Company has issued $2.8 million of promissory notes in connection with such terminations. During 2002 we negotiated an agreement that contemplates a final settlement with one investor group holding joint venture partner interests in 8 residences. The settlement contemplates the Company's purchase of the joint venture interests in these 8 residences and $3.3 million of existing Alterra notes in exchange for the issuance of a $7.2 million senior unsecured note upon the confirmation of a plan of reorganization in the Bankruptcy Case. Alterra's performance under the agreement is contingent upon Bankruptcy Court approval.
With respect to our remaining joint ventures, the Company and our joint venture partner generally formed and capitalized a limited partnership or a limited liability company that acquired 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 9.8% minority interests to 51.0% majority interests. These joint venture entities typically retain us as manager pursuant to a market rate management agreement. Under certain of these arrangements, we agreed to fund the operating deficit requirements of the applicable joint venture for a three year period once the available equity and debt financing was 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. In certain circumstances, the purchase price payable upon an exercise of the put option is based upon a fair market value determination based on an assumption that the applicable residence has achieved and is maintaining stabilized occupancy. 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 who made disproportionate contributions of invested capital. We are seeking to negotiate a conclusion of these remaining joint venture arrangements as a part of the Restructuring Plan.
Government RegulationHealthcare is an area of extensive and frequent regulatory change. The assisted living industry is relatively new and, accordingly, the manner and extent to which it is regulated at the federal and state levels is evolving.
Our assisted living residences are subject to regulation and licensing by state and local health and social service agencies and other regulatory authorities. In some states in which we operate, the term "assisted living" may have a statutory definition limited to a particular type of program or population. Some of our assisted living residences may fall into other licensing categories or may 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 requires each assisted living res idence 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. Each of our licenses must be renewed annually or biannually.
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. Currently, two of the Company's residences are the subject of pending state license revocation proceedings, which the Company is vigorously contesting. Any failure by us to comply with applicable requirements could have a material adverse effect on our business, financial condition a nd results of operations. Regulatory authorities in some of the states in which we operate have increased the frequency of their inspections due to our Chapter 11 filing.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid anti-kickback law, govern some financial arrangements among healthcare 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 healthcare items or services. The Medicare/Medicaid anti-kickback law has been broadly interpreted to apply to contractual relationships between healthcare 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 healthcare 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 fr om 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 healthcare providers make their healthcare 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.
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.
CompetitionThe 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. 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 exe mpt 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 healthcare personnel, and reputation among local referral sources.Trademarks
Alterra®, St Crossings®, Wynwood®, Clare Bridge®, Sterling Cottage ® and Clare Bridge Cottage®are registered service marks of ours.
EmployeesAt December 31, 2002, we employed approximately 7,900 full-time employees and 3,900 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. Through its Restructuring Plan and Bankruptcy Case, the Company is seeking to materially restructure many of its principal senior and junior credit instruments, the result of which restructurings are expected to have a material impact on the value attributable to and the rights of our various junior capital structure constituencies. 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 public ly 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 other sections of this Form 10-K or in other documents filed by us with the Securities and Exchange Commission.
Uncertainty Regarding Consequences of Restructuring and Bankruptcy Case. On January 22, 2003, in order to facilitate and to seek to complete our on-going restructuring initiatives, the Company filed a voluntary petition with the Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code. In connection with the Chapter 11 Filing, there can be no assurance:• That the Company will be able to successfully solicit and consummate a Liquidity Transaction that provides sufficient capital to the Company to facilitate confirmation of our Plan and to address our projected capital and liquidity needs;
• That any plan of reorganization confirmed in connection with the Bankruptcy Case will allow the Company to operate profitably or give the Company sufficient liquidity to meet its operational needs;
• That the Company will be able to successfully negotiate with its secured lenders and lessors further modifications and amendments to the Company's secured debt and lease facilities in order to facilitate consummation of the Plan and satisfy any conditions to funding a Liquidity Transaction imposed by the prospective investor group;
• Regarding the future availability or terms of financing in light of the Company's financial condition and need to address significant upcoming debt maturities in 2003 and 2004;
• Regarding any adverse actions which may be taken by creditors or lessors of the Company which may have the effect of preventing or unduly delaying confirmation of a plan of reorganization in connection with the Bankruptcy Case; and
• That third parties will not seek to obtain or in fact obtain Bankruptcy Court approval to terminate or shorten the exclusivity period for the Company to confirm a plan of reorganization, for the appointment of a trustee or to convert the Bankruptcy Case to a Chapter 7 liquidation.
The Company's ability to access capital markets will likely be limited;
• The Company's senior management may be required to expend a substantial amount of time and effort structuring a plan of reorganization, which could have a disruptive impact on management's ability to focus on the operation of the Company's business;
• The Company may be unable to retain employees, including top management and other key personnel;
• The Company may experience a reduction in the census at its assisted living facilities; and
• Vendors and suppliers to the Company may stop providing services or supplies to the Company or provide such services or supplies only on "cash on delivery," "cash on order" or other terms that could have an adverse impact on the Company's liquidity.
While it is management's intention, to the extent practicable, to seek to restore value to the various constituencies comprising our junior capital structure, in light of uncertainty as to the fair value of a reorganized Alterra available for distribution to junior capital constituencies, the outcome of restructuring negotiations with our secured lenders and lessors and the impact of the subordination provisions governing our Subordinated Debentures and corporate and bankruptcy law doctrines relating to the relative rights of holders of debt and equity interests in the Company, no assurances may be given as to the value, if any, various junior capital structure constituencies will have in the restructured Company. Based on our current estimates of value, it appears likely that no distribution of value would be made to certain classes of unsecured debt or to any class of capital stock of the Company upon conclusion of the Bankruptcy Case. Similarly, as our Plan is largely dependent upon our ability to negot iate and to comply with consensual restructuring arrangements with our principal lenders and lessors, no assurances may be given as to whether we will be able to restructure the Company.
In addition, as more fully described in Note 1 to the Company's consolidated financial statements appearing elsewhere herein, there is substantial doubt about the Company's ability to continue as a going concern in light of the Company's recurring losses and violations of certain debt covenants and cross covenants. If no plan of reorganization is confirmed by the Bankruptcy Court and implemented by the Company in a timely manner, then the Company may be liquidated.
Risks Associated with Continuing Defaults under Loan, Lease and Subordinated Debenture Obligations. We did not make loan and lease payments to many of our secured lenders and lessors during 2001 and are now in default with respect to certain of these 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 a lease, to terminate the lease, with a consequent loss of income and asset value to us. As the substantial majority of our secured debt relates to loans to our subsidiaries (who are not debtors in the Bankruptcy Case), the automatic stay of our Chapter 11 Filing would not stay foreclosure actions with respect to the majority of our mortgaged residences, if lenders were to elect to pursue such a remedy. Management believes that, despite the pendency of these defaults, during the near term the majority of these secured lenders and lessors will continue to pa rticipate in restructuring discussions with us. No assurances can be given, however, that this will be the case. In fact, one of our lessors has terminated 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 many of our principal credit, lease and other financing facilities are cross-defaulted to a material default occurring under other credit, lease or financing facilities, our continuing payment defaults under certain of our credit facilities has resulted in our being in default under many other loan and lease facilities. A component of our Restructuring Plan is seeking to secure waivers of these cross-defaults from the applicable lenders and lessors.
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 indebtedness. As such, the Company is currently prohibited from making interest and principal payments related to its Subordinated Debentures until such time that no payment-related defaults exist related to its senior indebtedness. As a result of failing to make these payments due to the governing subordination provisions, the Company is in default of its outstanding Subordinated Debentures.
Risks Associated with Continuing Shortfall in Liquidity and Timing of Confirmation of our Plan.As a result of on-going operating losses and significant current or upcoming debt maturities, we expect that our projected cash needs will exceed our projected identified cash resources unless we are able to confirm our Plan and consummate a Liquidity Transaction in the second half of 2003. In light of our current financial condition and ongoing restructuring activities and the difficult financing and operating environment for healthcare service companies generally, our access to additional capital is significantly reduced. If we are unable to successfully identify and consummate a Liquidity Transaction and implement our Plan in a timely manner, we will not have sufficient liquidity to continue to operate as a going concern. See "Substantial Debt and Operating Lease Payment Obligations; Current and Pending Maturities," and "Management's Discussion and Analysis and Results of Operat ions -- Liquidity and Capital Resources."
Substantial Debt and Operating Lease Payment Obligations; Current and Pending Maturities.We had lease expense of $58.7 million and $61.9 million for the years ended December 31, 2002 and 2001, respectively. Our total indebtedness as of December 31, 2002 was $980.5 million, and our net interest expense was $50.6 million and $62.0 million for the years ended December 31, 2002 and 2001, respectively. Approximately $808.9 million of our total indebtedness matures before December 31, 2003, or is in default as of December 31, 2002.
Historically, we have not had sufficient earnings to cover fixed charges. Earnings from operations were insufficient to cover fixed charges by $77.4 million and $77.5 million in 2002 and 2001, respectively, prior to non-recurring charges, the loss on disposal and other one-time adjustments. Even if we are able to substantially restructure our credit and lease obligations, given the significant leverage employed in financing our operations there can be no assurance that we will generate sufficient cash flow to meet our future obligations. Additionally, our ability to consummate a Liquidity Transaction and to confirm our Plan will be dependent upon our ability to identify sources of refinancing, on acceptable terms, of our significant pending debt maturities.
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 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 fo r residences that are operating significantly below their economic potential. 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 because those other assisted living companies may be financially or operationally incapable of effecting acquisition transactions or because they 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.
Joint Ventures.As of December 31, 2002, 20 of our operating residences were jointly owned or operated with venture partners. We are currently seeking to negotiate the buy-out of joint venture interests held by third parties in the majority of our remaining joint venture residences. If we are not able to negotiate the buy-out of these joint venture interests, our ability to restructure certain of our secured debt and lease facilities and to consummate a Liquidity Transaction may be adversely affected. To the extent that loan and lease arrangements financing joint venture residences are not restructured, the exercise of foreclosure, lease termination and other remedies by lenders and lessors will result in the forfeiture of such joint ventures' investment in our residences. In these circumstances, the Company may be forced to defend damage claims asserted by certain of its joint venture partners.
Liability and Insurance.The provision of personal and healthcare 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, including criminal prosecutions, 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 create a greater risk of adverse events that would occur in more institutionalized settings. The rapidly escalating magnitude of tort claims and the resulting rapid increase in the cost of medical malpractice liability insurance have been significant issues for the assisted living industry in general for the l ast several years. Before 2000, Alterra was able to purchase "traditional" medical malpractice liability insurance at a much lower cost than current premium levels. For the coverage year ended June 30, 2000, Alterra paid a premium of approximately $1.5 million to insure its 17,000 beds under a policy with coverage limits of $22.0 million and a deductible of $25,000 per claim. For the coverage year ended June 30, 2001, the annual premium had increased to approximately $6.0 million under a policy with coverage limits of $15.0 million and a deductible of $250,000 per claim (an increase of more than six-fold including the projected impact of deductible payments). For periods after June 30, 2001, Alterra has been unable to purchase medical malpractice insurance in the traditional insurance market and therefore has resorted to various forms of self-insurance. In order to fund a self-insurance program upon consummation of its Plan, Alterra will need access to additional capital from a Liquidity Tra nsaction. There can be no assurance that claims in excess of our current insurance programs 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, including pending criminal proceedings against the Company, may also have a material adverse effect upon our ability to attract or retain residents, to retain applicable licenses, or to expand our business, and may require us to devote substantial time to matters unrelated to day-to-day operations. Similarly, there can be no assurance that we will be able to obtain liability insurance in the future or that, if insurance is available, it will be available on acceptable economic terms or with coverages we or our lenders and lessors require, in light of our current financial circ umstance.
American Stock Exchange Delisting. On March 18, 2003, the Securities and Exchange Commission struck the Company's common stock and other securities from listing and registration on the AMEX. Although it is possible that our securities could trade on the over-the-counter market, no such market has developed. The extent of the public market for the securities and the availability of quotations would depend upon such factors as the aggregate market value of each class of securities, the interest in maintaining a market in such securities on the part of securities firms and other factors. There can be no assurance that any public market for our securities will exist. In addition, as a result of our failure to maintain the trading status of our Common Stock on a national trading exchange or system, the interest rate on the PIK Debentures has increased from 9.75% at December 31, 2002 to 12.25% at March 18, 2003, and the dividend accrual rate on our Series A Stock has increased from 9.75% at D ecember 31, 2002 to 12.25% at March 18, 2003.
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 sign ificant 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.We believe that due to the recent Chaper11 filing, the foregoing labor-related risks may be enhanced.
Competition.The long-term care industry is highly competitive and, given the relatively low barriers to entry and continuing healthcare 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. As assisted living residences receive increased market awareness and the number of states which include assisted living services in their Medicaid programs increases, competition will increase from new market entrants, many of whom may have substantially greater financial resources than we have. There can be no assurance that increased competition will not adversely affect our ability to attract or retain residents or maintain our existing rate structures. Many of our pres ent 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 healthcare 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. We believe that due to the recent Chaper 11 Filing, the foregoing competitive 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. 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 maxim um 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 as well as criminal statutes. It is possible that if convicted of a crime, 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.
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, general market declines in values or returns on investments, 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. As a result of the Chapter 11 Filing, 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 remedi ate 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. In connection with our acquisition and financing of new residences, we typically secure an environmental assessment of the applicable residence. There can be no assurance, however, that environmental assessments would detect all environmental contamination which m ay 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.
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 24 states. Our growth in recent years and ongoing restructuring activities have had a significant impact on our results of operations and are an important factor in explaining the changes in our results between 2002 and 2001. As of December 31, 2002 and 2001, we operated or managed 383 and 430 residences with aggregate capacity of approximately 18,200 and 20,200 residents, respectively. During 2002 we generated operating revenue of $416.7 million and realized income from operations of $13.5 million and a pretax loss of $82.2 million, both prior to loss on disposal of assets.
On January 22, 2003, we filed a voluntary petition with the Bankruptcy Court to reorganize under Chapter 11 of the Bankruptcy Code. The Company believes that its Chapter 11 Filing is an appropriate and necessary step to seek to conclude its reorganization initiatives commenced in 2001. The focus of our restructuring efforts in 2001 and 2002 has been portfolio rationalization and the restructuring of our senior financing obligations with our secured lenders and lessors. We believe the Bankruptcy will allow us to complete our restructuring of our senior financing obligations and to commence and complete the restructuring of our junior capital structure, which includes unsecured obligations and claims, our convertible subordinated debentures and our preferred and common stock. In addition, interim or permanent restructuring agreements have been reached with a number of our joint venture partners.
In conjunction with our Chapter 11 Filing, we secured a $15 million DIP credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. Additional borrowings under the DIP credit facility will require further approval of the Bankruptcy Court, which we expect to obtain in April 2003.
On March 27, 2003, we filed with the Bankruptcy Court a Plan of Reorganization and a Disclosure Statement Accompanying Plan of Reorganization. Immediately prior to the filing of our Plan and Disclosure Statement, we also filed a "Bidding Procedures Motion" with the Bankruptcy Court seeking approval of bidding procedures with respect to the solicitation and selection of a transaction contemplating either (i) the sale of capital stock of the reorganized Alterra to be effective and funded upon the confirmation and effectiveness of our Plan or (ii) the sale, as a going concern, of all or substantially all of the assets of Alterra to be effective and funded upon the confirmation and effectiveness of our Plan.
Going forward, we will report our financial statements on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and in accordance with SOP 90-7. Accordingly, all pre-petition liabilities subject to compromise will be segregated in the Consolidated Balance Sheets and classified as liabilities subject to compromise, at the estimated amount of allowable claim. Liabilities not subject to compromise are separately classified as current and non-current. Revenues, expenses, realized gains and losses, and provisions for losses resulting from the reorganization are reported separately as reorganization items. Cash used for reorganization items is disclosed separately in the Consolidated Statements of Cash Flows. Based on our Chapter 11 Filing, we estimate that $576.0 million of liabilities as of December 31, 2002 would be deemed to be subject to compromise in accordance with SOP 90-7.
Critical Accounting Policies
In response to the Securities and Exchange Commission's Release Numbers 33-8040,Cautionary Advice Regarding Disclosure About Critical Accounting Policies,and 33-8056,Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations,we have identified the following critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and the allowance for doubtful accounts receivable and asset impairment. We state these accounting policies in the notes to our consolidated financial statements and at relevant sections in this discussion and analysis. Our estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions.
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 we have a minority ownership position are accounted for on the equity method.
Revenue Recognition
Resident service fee revenue, which is recorded when services are rendered, consists primarily of resident service fees that are reported at net realizable amounts.
We must make estimates of the uncollectibility of our accounts receivable related deferred rent and other revenue or income. We specifically analyze accounts receivable and historical bad debts when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on our net income, because a higher bad debt allowance would result in lower net income. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101,Revenue Recognition, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.
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.
We apply Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, to recognize and measure impairment of long-lived assets. We review each long-lived asset for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the real estate investment's use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair market value.
Assets held for sale are carried at the lower of carrying amount or fair value, less costs to sell. Depreciation and amortization are suspended during the period held for sale. We are required to make subjective assessments as to whether there are impairments in the value of our real estate properties. These assessments have a direct impact on our net income, because taking an impairment loss results in an immediate negative adjustment to net income.
The Company is seeking to negotiate restructurings of several of its principal secured debt and lease obligations and, upon completing these negotiations, will seek to restructure its principal unsecured debt obligations, comprised primarily of the outstanding convertible debentures. Furthermore, at December 31, 2002, 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.
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.
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Residence Service Fees.Residence service fees for the year ended December 31, 2002 were $413.6 million representing a decrease of $13.7 million, or 3.2%, from the $427.3 million for the comparable 2001 period. This decrease resulted primarily from a decrease in the number of residences operated in 2002, together with a decline in occupancy rates offset by rate increases instituted during the past 12 months. Average rates were $2,826 and $2,710 as of December 31, 2002 and 2001, respectively. Company-wide occupancy was 83.5% and 84.9% as of December 31, 2002 and 2001, respectively.
Other Revenues. Other revenues for the year ended December 31, 2002 were $3.2 million, a decrease of $3.0 million over the $6.2 million of other revenue for the year ended December 31, 2001. The decrease is attributable to reduced development and franchise activity and a reduction in management fees on residences which were either managed for third parties or for entities in which we held a minority ownership position. 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, 2002 decreased to $287.4 million from $290.7 million in the year ended December 31, 2001. Operating expenses as a percentage of resident service fees for the year ended December 31, 2002 and 2001 were 69.5% and 68.0%, respectively. This percentage increase resulted primarily from increases in labor and employee benefit related costs due to increased competition for personnel and an increase in insurance costs.
Lease Expense. Lease expense for the year ended December 31, 2002 was $58.7 million, compared to $61.9 million in the comparable period in 2001. This decrease is the result of lease terminations and restructurings that occurred during the past 12 months.
Gain on Lease Termination.The $6.2 million gain on lease termination consists of deferred gains recognized due to a new master lease completed during the three months ended June 30, 2002.
Lease Income. We earned $13.8 million of lease income for the year ended December 31, 2002, comparedto $21.3 million for the comparable period in 2001, on residences owned or leased by us and leased or subleased to unconsolidated joint ventures. This decrease in lease income occurred due to a reduction in the number of unconsolidated joint ventures from 42 to 18 as of December 31, 2001 and 2002, respectively. 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, 2002, on-going general and administrative expenses were $38.1 million, before $8.4 million in legal and consulting restructuring costs, compared to $42.4 million prior to $6.5 million in restructuring costs for the comparable 2001 period, representing a decrease of general and administrative expense as a percentage of operating revenue from 9.8% in 2001 to 9.1% in 2002. The $4.3 million decrease in on-going expenses in the 2002 period was primarily attributable to cost reductions which we have implemented to improve corporate efficiencies.
Loss on Disposal. The Company adopted a plan to dispose of 136 residences with aggregate capacity of 6,150 residents and 33 parcels of land. During the year ended December 31, 2001, the Company recognized a pre-tax loss of $163.5 million (net of $3.6 million gain on sale) to reflect the Disposition Assets at the lower of carrying value or estimated fair value less costs to sell and to write off the carrying value of assets associated with terminated residence leases. As of December 31, 2001, 59 residences and ten land parcels had either been sold or transferred to a new lessee. The Company recognized an additional pre-tax loss of $25.8 million upon sale or transfer of these assets. As of December 31, 2001, approximately $150.5 million is reserved for losses relating to future asset sales or lease terminations.
During the year ended December 31, 2002, we sold or terminated leases on 36 residences and 11 land parcels (1,481 resident capacity) resulting in a gain on disposal of $13.7 million. Additionally, as a result of various asset refinancings, six assets were removed from the Disposition Asset classification and a corresponding gain of $9.2 million was recognized in accordance with SFAS No. 121 and SFAS. No. 144, resulting from the reversal of the related loss reserve estimates due to changes in valuations associated with those assets. As of December 31, 2002, 105 residences and 21 land parcels have either been sold or transferred to a new lessee and approximately $58.9 million is reserved for losses relating to future asset sales or lease terminations.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2002 was $25.8 million, representing a decrease of $8.7 million, or 25.2%, from the $34.5 million of depreciation and amortization for the comparable 2001 period. This decrease resulted primarily from the sale of 36 assets during the past 12 months, the assets classified as held for sale which are not depreciated, and the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," which eliminates ongoing depreciation of goodwill and other intangible assets.
Impairment Charge. The Company recognized an impairment charge of $4.8 million in accordance with SFAS No. 144 for the year ended December 31, 2002. This impairment charge was based on the difference between an asset's carrying amount and fair value, where the fair value was determined by estimating the present value of estimated future cash flows.
Interest Expense, Net. Interest expense, net of interest income, was $49.6 million for the year ended December 31, 2002, prior to $973,000 of bank penalties compared to $57.2 million of interest expense prior to $4.8 million of bank penalties for 2001. Gross interest expense (before interest capitalization and interest income) for the 2002 period was $49.9 million prior to bank penalties compared to $59.2 million for the 2001 period, a decrease of $9.3 million. As a result of our decision to reduce development and construction activity beginning in 2001, as of December 31, 2002 all construction activity has stopped and no capitalized interest has been recorded. For the year ended December 31, 2001, we capitalized $1.9 million of interest expense relating to an average construction in progress balance of $16.3 million in the 2001 period. Interest income for the 2002 period was $328,000 as compared to $2.0 million for the 2001 period. This decrease was due primarily to lower restricted cash bal ances in place in 2002 related primarily to lease financing transactions.
Amortization of Financing Costs.Amortization of financing costs for the year ended December 31, 2002 was $5.0 million, representing a decrease of $4.8 million from the $9.8 million of amortized financing costs for the comparable 2001 period. This decrease is the result of debt retirements and fully amortized financing costs.
PIK Interest, Net. "Pay-In-Kind" (PIK) interest for the years ended December 31, 2002 and 2001 was $25.8 million and $24.3 million, respectively, and includes interest expense on the various PIK Debentures which were issued in May and August 2000.
Equity in Losses of Unconsolidated Affiliates. Equity in losses of unconsolidated affiliates for the twelve months ended December 31, 2002, was $4.9 million, representing a decrease of $9.4 million from $14.3 million of losses for the comparable 2001 period. Our joint venture partners have not made substantial capital contributions to a number of joint ventures for several quarters. Therefore, we have absorbed the losses of those unconsolidated joint ventures in excess of capital contributed by the joint venture partner. The decrease in equity in losses of unconsolidated affiliates is due to a reduction in the number of unconsolidated joint ventures from 42 to 18 as of December 31, 2001 and 2002, respectively, resulting from joint venture and lease terminations that occurred during 2002.
Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in losses of consolidated subsidiaries for the year ended December 31, 2001 was $426,000. As a result of joint venture settlements completed during 2001, we no longer have any residences owned by us in consolidated joint venture arrangements and subsequently, have no minority interest in losses of consolidated subsidiaries for the year ended December 31, 2002.
Goodwill Impairment Loss.The Company adopted the provisions of SFAS No. 142 as of January 1, 2002. Under the transitional provisions of SFAS No. 142, the Company identified its reporting units and performed impairment tests on the net goodwill associated with each of these reporting units. The fair value of the owned reporting units was determined by estimating the terminal value of the future cash flows. The fair value of the leased reporting units was determined by estimating the present value of the cash flows for the life of the lease. Based on this impairment testing, the Company recorded an impairment loss of $54.7 million in the first quarter of 2002. The impairment loss has been recorded as a cumulative effect of change in accounting principle and as loss on discontinued operations in the accompanying condensed consolidated statements of operations for the year ended December 31, 2002. As of December 31, 2002, the Company performed its annual impairment test required by the provisions of SFAS No. 142 in which an additional impairment loss of $9.5 million was identified based on revised cash flow projections. The $9.5 million annual impairment loss has been recorded in other expenses in the accompanying consolidated statements of operations for the year ended December 31, 2002.
Income Taxes.For the period ended December 31, 2002, we recorded a current state and local income tax provision of $100,000. The income tax expense for the period ended December 31, 2002 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.
As of December 31, 2002, we do not have a deferred tax asset. 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 $419.4 million Net Operating Loss "NOL" carryforward could be subject to limitations based on the change of control provisions in the Internal Revenue Code which may become operative in a liquidity transaction or through the implementation of our Plan. Accordingly, we have established a valuation allowance against the entire net deferred tax assets.
Loss on Discontinued Operations.In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." We adopted SFAS No. 144 beginning on January 1, 2002. As a result of the adoption of SFAS No. 144, during the year ended December 31, 2002 we reclassified to discontinued operations the revenues and expenses of 19 residences with a capacity of 929 beds that were part of executed deed in lieu restructuring agreements or are leased residences pending sale. Included in discontinued operations for the year ended December 31, 2002 is an impairment loss of $12.9 million which represents the difference between the nineteen residences' carrying value and the residences' estimated fair value less costs to sell. Additionally, three residences with a capacity of 114 beds were reclassified to discontinued operations resulting from their sale or lease termination in 2002.
In May 2002, one lender group transferred to a third party title to all of the outstanding common stock of our then subsidiary which operated 26 residences serving as collateral for $171.0 million of indebtedness. Accordingly, we no longer operate these residences, although we serve as interim manager for the lender group. As a result of the stock transfer, these residences are no longer consolidated and operations related to these residences through May 31, 2002 are reported as discontinued operations. We have recorded a reserve of $58.5 million related to our estimated liability associated with our guaranty (including payment of the termination fee due upon full payment of the mortgage obligations). The liability associated with our guaranty obligation was calculated as the difference between the approximate fair market value of the assets and the underlying mortgage obligations. Also included in discontinued operations is a loss of approximately $24.0 million, which represents the write off of the net assets of our former subsidiary at the time of the transfer of the stock of the subsidiary.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," having a required effective date for fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. Under the transitional provisions of SFAS No. 142, we identified reporting units and performed impairment tests on the net goodwill associated with each of these reporting units. The fair value of the reporting units was determined by estimating the present value of future cash flows. Based on this impairment testing, we recorded an impairment loss of $8.8 million associated with those residences classified as discontinued operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," related to the accounting for debt extinguishments, leases, and intangible assets of motor carriers. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 with earlier adoption encouraged. The Company adopted FASB 145 and as a result of the early adoption, we recognized a gain of $6.0 million related to a debt extinguishment that was paid on our behalf as a result of a restructuring settlement. This gain was recognized in discontinued operations consistent with the classification of the related assets.
For comparative purposes and in accordance with SFAS No. 144, the December 31, 2001 and 2000 financial statements have been reclassified for the comparable residences to reflect the above reclassifications.
Cumulative Effect of Change in Accounting Principle.In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," having a required effective date for fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. Under the transitional provisions of SFAS No. 142, we identified reporting units and performed impairment tests on the net goodwill associated with each of these reporting units. The fair value of the reporting units was determined by estimating the present value of future cash flows. Based on this impairment testing, we recorded an impairment loss of $54.7 million in the first quarter of 2 002, of which $8.8 million is associated and reported with those residences classified as discontinued operations. The remaining $45.9 million impairment loss has been recorded as a cumulative effect of change in accounting principle in the accompanying consolidated statements of operations for the year ended December 31, 2002.
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Residence Service Fees.Residence service fees for the year ended December 31, 2001 were $427.3 million representing an increase of $17.3 million, or 4.2%, from the $410.0 million for the comparable 2000 period. This increase resulted primarily from rate increases instituted during the past 12 months. Average rates were $2,710 and $2,402 as of December 31, 2001 and 2000, respectively. Company-wide occupancy was 84.9% and 88.3% as of December 31, 2001 and 2000, respectively.
Other Revenues. Other revenues for the year ended December 31, 2001 were $6.2 million, a decrease of $7.4 million over the $13.6 million of other revenue for the year ended December 31, 2000. The decrease is attributable to reduced development and franchise activity and a reduction in management fees on residences which were either managed for third parties or for entities in which we held a minority ownership position. 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, 2001 increased to $290.7 million from $277.5 million in the year ended December 31, 2000. Operating expenses as a percentage of resident service fees for the year ended December 31, 2001 and 2000 were 68.0% and 67.7%, respectively. This percentage increase resulted primarily from increases in labor and employee benefit related costs due to increased competition for personnel, an increase in insurance costs, and increases in utility costs.
Lease Expense. Lease expense for the year ended December 31, 2001 was $61.9 million, compared to $71.6 million in the comparable period in 2000. This decrease is the result of lease terminations that occurred during the last 12 months.
Lease Income. We earned $21.3 million of lease income for year ended December 31, 2001, comparedto $28.2 million for the comparable period in 2000, on residences owned or leased by us and leased or subleased to unconsolidated joint ventures. This decrease in lease income occurred due to a reduction in the number of unconsolidated joint ventures from 84 to 42 as of December 31, 2000 and 2001, respectively. 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, 2001, general and administrative expenses were $42.4 million prior to $6.5 million of restructuring costs, compared to $45.3 million before $5.1 million of non-recurring expenses for the comparable 2000 period, representing a decrease of on-going general and administrative expense as a percentage of operating revenue from 10.7% in 2000 to 9.8% in 2001. The $6.5 million of restructuring costs represents fees and other costs associated with the retention of restructuring professionals and associated activities. The $5.1 million of non-recurring expenses in 2000 consisted 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 of 2000.
Loss on Disposal. During the year ended December 31, 2001, the Company's Board of Directors adopted a plan to dispose of 82 residences representing 130 beds. During the second quarter of 2001, the Company recognized a pre-tax loss of $163.5 million (net of $3.6 million gain on sale) to reflect the Disposition Assets at the lower of carrying value or estimated fair value less costs to sell and to write off the carrying value of assets associated with terminated residence leases. As of December 31, 2001, 59 residences and ten land parcels have either been sold or transferred to a new lessee. The Company recognized an additional pre-tax loss of $25.8 million upon sale or transfer of these assets. As of December 31, 2001, approximately $150.5 million is reserved for losses relating to future asset sales or lease terminations.
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 cash flows, net of disposal costs, were 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, 2001 was $34.5 million, representing an increase of $1.5 million, or 4.5%, from the $33.0 million of depreciation and amortization for the comparable 2000 period. This increase is the result of a change during the second quarter in the accounting for the corporate office building synthetic lease where the synthetic lessor no longer bears economic risk and, as a result, this previously unconsolidated synthetic lease SPE was consolidated through May 2002.
Non-recurring Charge. A non-recurring charge of $4.2 million was recorded in the fourth quarter of 2000 relating to severance related to the elimination 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. No similar charge was recorded in 2001.
Interest Expense, Net. Interest expense, net of interest income, was $57.2 million for the year ended December 31, 2001, prior to $4.8 million of bank penalties compared to $56.7 million of interest expense prior to $1.4 million of bank amendment fees for 2000. Gross interest expense (before interest capitalization and interest income) for the 2001 period was $59.2 million prior to the bank penalties compared to $62.6 million for the 2000 period, an increase of $2.1 million. We capitalized $1.9 million of interest expense in the 2001 period compared to $4.0 million in the 2000 period. This decrease in capitalized interest is a result of our decision to reduce development and construction activity in 2001. Our average construction in progress balance was $16.3 million during the twelve months ended December 31, 2001, compared to $65.1 million in the 2000 period. Interest income for the 2001 period was $2.0 million as compared to $5.9 million for the 2000 period. This decrease was due primaril y to lower restricted cash balances in place in 2001 related primarily to lease financing transactions.
Amortization of Financing Costs.Amortization of financing costs for the year ended December 31, 2001 was $9.8 million, representing an increase of $1.2 million from the $8.6 million of amortized financing costs for the comparable 2000 period. This increase resulted primarily from recognizing a full year of amortization associated with the PIK Debentures during 2001 versus four months of amortization in the prior year.
Gain on Debt Extinguishment. During the year ended December 31, 2000, we recorded a gain on the early extinguishment of debt of $13.8 million (net of tax) relating to our retirement of $41.4 million of convertible debt related to the Equity Transaction. This transaction is recognized in other operating expenses in accordance with SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which the Company adopted in 2002.
PIK Interest, Net. "Pay-In-Kind" (PIK) interest for the year ended December 31, 2001 includes $24.3 million of interest expense on the various PIK Debentures which were issued in May and August 2000. This is an increase of $11.8 million from the $12.5 million of PIK interest expense for the year ended December 31, 2000. This increase resulted primarily from recognizing a full year of interest expense in 2001 versus a partial year in 2000.
Equity in Losses of Unconsolidated Affiliates. Equity in losses of unconsolidated affiliates for the twelve months ended December 31, 2001, was $14.3 million, representing an increase of $1.5 million from $12.8 million of losses for the comparable 2000 period. Our joint venture partners have not made substantial capital contributions to a number of joint ventures for several quarters. Therefore, we have absorbed the losses of those unconsolidated joint ventures in excess of capital contributed by the joint venture partner. The increase in equity in losses of unconsolidated affiliates was also impacted by a slower lease-up of residences which are held in unconsolidated joint ventures.
Minority Interest in Profits/Losses of Consolidated Subsidiaries. Minority interest in profits of consolidated subsidiaries for the year ended December 31, 2001 was $426,000, representing a decrease of $838,000 from $1.3 million for the comparable period in 2000. The decrease was primarily attributable to the decrease in the number of residences that were owned by us in consolidated joint venture arrangements resulting from the joint venture settlements completed during 2001.
Loss on Discontinued Operations.In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." We adopted SFAS No. 144 beginning on January 1, 2002. As a result of the adoption of SFAS No. 144, during the year ended December 31, 2002 we reclassified to discontinued operations the revenues and expenses of 19 residences with a capacity of 929 beds that were part of executed deed in lieu restructuring agreements or are leased residences pending sale. Additionally, three residences with a capacity of 114 beds were reclassified to discontinued operations resulting from their sale or lease termination in 2002.
For comparative purposes and in accordance with SFAS No. 144, the December 31, 2001 and 2000 financial statements have been reclassified for the comparable residences to reflect the above reclassifications.
Income Taxes.For the period ended December 31, 2001, we recorded a current state and local income tax provision of $120,000. The income tax expense for the period ended December 31, 2001 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.
As of December 31, 2001, we do not have a deferred tax asset. 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 $299.3 million Net Operating Loss "NOL" carryforward could be subject to limitations based on the change of control provisions in the Internal Revenue Code which may become operative in a liquidity transaction or through the implementation of our Plan. Accordingly, we have established a valuation allowance against the entire net deferred tax assets.
Liquidity and Capital Resources
At December 31, 2002, we had $13.8 million in unrestricted cash and cash equivalents and an $874.2 million working capital deficit compared to unrestricted cash and cash equivalents of $20.0 million and a $1.1 billion working capital at December 31, 2001.
For the year ended December 31, 2002, operating cash flow was $20.9 million compared to $9.7 million for the year ended December 31, 2001. The cash flow for the 2001 and 2002 periods reflect our decision to defer debt service and lease payments to selected lenders and lessors.
In conjunction with our Chapter 11 Filing, in January 2003 we secured a $15 million DIP credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. Additional borrowings under the DIP credit facility will require further approval of the Bankruptcy Court, which we expect to obtain in April 2003.
During 2001 we completed sale/leaseback refinancing transactions with one of our major REITs relating to seven residences for an aggregate purchase price of $26.5 million. The proceeds of these refinancings were used principally to retire mortgage and accrued interest obligations. We also negotiated extensions of loan maturities of between one to four years with respect to approximately $72.3 million of our secured debt during 2001.
During 2002 we completed a sale/leaseback transaction accounted for as a financing of three residences with one of our REITs for an aggregate purchase price of $11.8 million. The proceeds of this refinancing were used principally to retire mortgage loan and accrued interest obligations. We also entered into a settlement agreement with two lender groups with respect to defaulted "impaired" secured indebtedness originally aggregating $76.6 million (plus $4.3 million of accrued and unpaid interest and late fees and approximately $4.0 million due under an interest rate cap agreement that was terminated in March 2001) under credit facilities secured by mortgages on 22 residences. These settlements are structured to immediately shift the economics of ownership and control over the disposition of the mortgaged residences to the lenders. Subsequent to executing the applicable settlement agreement, we exercised refinancing options on three residences and now operate those residences pursuant to a sal e-leaseback agreement. In exchange, we received the lenders' binding commitment to execute and deliver a waiver of any deficiency claims (including accrued interest and obligations related to the terminated interest rate cap agreement) and release of our guaranty with respect to this indebtedness upon satisfaction of certain conditions. Until March 31, 2003 (as to 11 residences) and June 30, 2003 (as to 12 residences), or such earlier time as the lenders sell a residence or replace the Company as manager, we are obligated to manage the residences for a management fee equal to six percent of facility revenue for the first six months after the closing date of the applicable settlement agreement and seven percent thereafter. Any net operating income from the residences is paid to the lenders as debt service. As a result of asset sales during the third and fourth quarters, a remaining $25.7 million of indebtedness is secured by mortgages on six residences originally included in the two settlement agreements. We have estimated the potential deficiency claims related to the remaining residences associated with these credit facilities to be in the range of $19.8 million to $20.8 million as of December 31, 2002. We executed a settlement agreement with another of our impaired lender groups with regard to a credit facility representing $42.1 million of financing secured by 15 residences with an aggregate capacity of 675 beds. In exchange for a conditional release of any deficiency claims, we have agreed to cooperate in the transition of ownership of the mortgaged residences to the lenders or their designees (through deed-in-lieu of foreclosure transactions or so-called friendly foreclosures). Specifically, as these residences are transferred by the Company, we receive a release with respect to a pro-rata portion of the allocated loan amount and related penalties and interest. In transitioning ownership of the mortgaged residences to the lenders, we are offering to provide interim management services. Contempor aneous with the execution of this settlement agreement, we closed on a sale-leaseback financing representing $28.8 million with respect to nine residences with an aggregate capacity of 342 beds, including six residences originally financed by this lender group. Subsequent to this settlement, the Company participated in the transition of 3 residences through deed-in-lieu of foreclosures.
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.
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 Subordinated Debentures) and, to a lesser extent, cash from operations. At December 31, 2002, we had $980.5 million of outstanding debt principally consisting of $439.7 million of Subordinated Debentures having a weighted average interest rate of 8.11%, $107.0 million of fixed rate debt having a weighted average interest rate of 7.41%, capitalized and financing lease obligations of $76.9 million having a weighted average interest rate of 10.98%, $334.6 million of variable rate debt having a weighted average interest rate of 6.01%, and $15.2 million and $7.1 million of notes payable and short-term borrowings, respectively. Through December 31, 2002, we have also entered into approximately $550.9 million of sale/leasebac k financings.
Our principal credit and financing agreements, including our Subordinated Debentures and our lease agreements, include cross-default provisions that provide that a material default under our other credit facilities constitutes a default under that credit or financing agreement. Accordingly, any material default arising under one of our credit or financing agreements could result (and, as discussed below, has resulted) in many of our other major credit and financing arrangements being in default. In addition, our principal credit and financing agreements 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 servi ce 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. We are currently not in compliance with certain of these covenants, although we have negotiated limited in time waivers with certain lenders and lessors. 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 elected not to fund certain debt service and lease payment obligations due in 2001 and 2002 without the consent of the applicable lender or lessor. Through additional payments, prepayments associated with asset sales and application of escrowed amounts, as of December 31, 2002, we had $5.1 million of delinquent outstanding scheduled debt service to lenders or lessors who hold mortgages on, or from whom we lease 36 residences in the aggregate (1,564 resident capacity). We have received a written notice of acceleration from lenders with respect to indebtedness aggregating $51.7 million at December 31, 2002. In addition, indebtedness of approximately $136.7 million has fully matured during 2002 and is past due. Many of our other credit and lease facilities are in technical default as a result of these payment defaults associated with other loan and lease facilities, but several of these lenders and lessors have executed limited in time waivers. We have received written notices of default from most of these lenders or lessors, three lessors have terminated leases for 17 residences (940 resident capacity) and other lenders have elected to apply deposits and reserve funds of ours held by such lenders against the past due payments. Five lenders have activated or are in the process of activating "cash traps" of bank accounts relating to the operation of residences mortgaged to such lenders, either pursuant to arrangements set forth in the applicable loan documents or as negotiated with the Company. We are also in litigation with a former lessor with respect to their damage claim associated with the early termination of their 11 residence lease portfolio.
Our operations will require significant additional capital resources in the future in order to fund: (i) the professional fees and other related costs associated with our Bankruptcy Case and Restructuring Plan; (ii) our ongoing debt service and lease obligations, including repayment of our DIP credit facility and maturities of our long-term debt and refinancing of short term debt; (iii) deferred capital expenditures; (iv) normalizing our professional and general liability insurance programs; and (v) general working capital needs. Since July 1, 2001, due to our limited cash resources and a general lack of availability of traditional professional and general liability insurance products, we have maintained substantially lower levels of liability insurance than would be desirable given actuarial estimates. Accordingly, our Restructuring Plan contemplates higher cash requirements for insurance in the future than we have incurred in the recent past.
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) slower fill rates in our pre-stabilized residences and reduction in occupancy levels in certain of our stabilized residences. As a result of ongoing operating losses and these identified future capital needs, we expect that our projected cash needs during 2003 will exceed our projected identified cash resources. To satisfy these cash shortfalls and to preserve the integrity of our operations, we are pursuing a Liquidity Transaction and a Restructuring Plan which seeks, among other things, to dispose of a significant number of our residences which operate with cash shortfalls and to defer some of our debt service obligations until those disposition and negotiated restructurings of our principal debt and lease obligations can occur. See "Business-- Chapter 11 Bankruptcy and Restructuring Activities".
At the outset of our restructuring, management sought to restructure secured loan facilities that, in management's view, would generate significant deficiency claims (i.e., claims in excess of the value of the applicable mortgage portfolio) in the event the applicable lenders sought to call the loan and foreclose on their collateral. Management believes that four credit facilities representing $215.3 million in aggregate financing at December 31, 2002 (secured by mortgages on 39 residences with a capacity of 2,696 beds) appear to represent significant potential deficiency claims in the range of $81.4 million to $99.6 million. In these negotiations, we sought to limit or eliminate these potential deficiency claims against the Company in exchange for our agreement to cooperate with the applicable lenders to facilitate an orderly transition of ownership (and, in certain cases, management) of the mortgaged residences to the lenders or their designees (through deed-in-lieu of foreclosure transactions or so-c alled friendly foreclosures). In transitioning ownership of the mortgaged residences to the lenders, we offered to provide interim or long-term management services to the lenders with respect to the mortgaged residences. As noted above, during 2002, we executed definitive agreements of this type with three different lender groups with regard to three of these "impaired" credit facilities, originally representing $104.2 million of financing secured by 31 residences with an aggregate capacity of 1,520 beds. As a result of refinancings, asset sales and foreclosures during the third and fourth quarters, $44.3 million of indebtedness secured by mortgages on 12 residences included in the three executed definitive agreements is remaining at December 31, 2002.
In May 2002, the lender group for our remaining "impaired" facility, representing $171.0 million in aggregate financing (secured by mortgages on 26 residences with an aggregate capacity of 2,154 beds) caused title to all of the stock of our subsidiary that operated these mortgaged residences to be transferred to a third party. Accordingly, we no longer own these residences, although we do currently manage these residences for this lender group and are actively negotiating with the lender group seeking to limit or eliminate any deficiency claim arising under our guaranty of this financing. As a result of the stock transfer, these residences are no longer consolidated and operations related to these residences through May 31, 2002 are reported as discontinued operations. We have recorded $58.5 million related to our estimated liability associated with our guaranty (including payment of the termination fee due upon full payment of the mortgage obligations). The liability associated with our guaranty obli gation was calculated as the difference between the fair market value of the assets and the underlying mortgage obligations. Also included in discontinued operations is a loss of approximately $24.0 million, which represents the write off of the net assets of our former subsidiary at the time of the transfer of the stock of that subsidiary.
In January 2003, we entered into agreements with this lender group pursuant to which: (i) we have agreed to manage these 26 residences on an interim basis without a management fee, and to cooperate in transitioning management to any successor manager appointed by the credit participants, and (ii) the Company is entitled to be released of its guaranty and other principal obligations (with the exception of certain environmental indemnities) under this financing structure upon the satisfaction of certain conditions, including the payment of $5.7 million of fees to the credit participants on or prior to the confirmation of a plan of reorganization in our Bankruptcy Case.
In addition to these impaired credit facilities, we are continuing to seek to negotiate amendments and modifications with the applicable lenders with respect to our other principal secured credit facilities in order to, depending on the specific case, reset covenants, obtain consent to sell certain mortgaged residences, secure waivers of prior defaults and, in certain cases, to extend scheduled maturities. These credit facilities represent $300.9 million of financing secured by an aggregate of 94 residences with an aggregate capacity of 4,502 beds as of December 31, 2002. Discussions with certain of these lenders have commenced, and we have executed definitive binding agreements with lenders with respect to $174.4 million of indebtedness secured by 60 residences with an aggregate capacity of 2,677 beds, providing for, among other things, extensions of debt maturities, waivers of prior defaults and amendments of certain covenants. In February 2003, we refinanced 32 residences previously financed pursuan t to two secured debt facilities, obtaining $61.0 million of sale leaseback financing related to 25 residences with a capacity of 894 beds and borrowing $6.9 million of secured debt secured by six residences with a capacity of 182 beds. (See "Subsequent Events," Note 20 to the Consolidated Financial Statements for further discussion). We anticipate that we will need to negotiate restructuring agreements and to secure waivers and amendments with certain of our secured lenders as a condition to confirming our Plan and consummating any Liquidity Transaction.
As of December 31, 2002, we had five multi-residence portfolios leased with various REITs, not including the 25 residence sale/leaseback financing closed in February 2003. These portfolios include an aggregate of 200 residences with a capacity of 8,715 beds. We have entered into restructuring agreements with respect to each of these lease portfolios. These restructurings included the amendment of certain lease covenants and terms and, in three lease facilities, the conversion of individual leases into single master leases. The cash rent due under one lease facility was modified through the application of various deposits held by the landlord to satisfy a portion of the cash rent obligation in the early years of the restructured master lease.
As of December 31, 2002, the Company's junior capital structure is comprised of unsecured debt of approximately $439.7 million and equity capitalization consisting of $6.1 million aggregate principal amount of 9.75% Series A Cumulative Convertible Preferred Stock due May 30, 2007 and 22.2 million shares of Common Stock. The principal components of the Company's unsecured indebtedness as of December 31, 2002 (amounts exclude accrued but unpaid interest) include:
i. $11.0 million aggregate principal face amount of promissory notes issued in connection with the restructuring of certain joint venture arrangements (the "Unsecured Senior Notes") and $5.1 million of other unsecured notes (the "Unsecured Notes");
ii. $252.4 million aggregate principal amount of 9.75% pay-in-kind convertible debentures due May 30, 2007 (the "PIK Debentures") issued in three separate series in 2000;
iii. $112.0 million aggregate principal amount of 5.25% convertible subordinated debentures due December 15, 2002 (the "5.25% Debentures");
iv. $40.4 million aggregate principal amount of 7.00% convertible subordinated debentures due June 1, 2004 (the "7.00% Debentures"); and
v. $34.9 million aggregate principal amount of 6.75% convertible subordinated debentures due June 30, 2006 (the "6.75% Debentures").
The outstanding 5.25% Debentures, 7.00% Debentures and 6.75% Debentures (collectively, the "Original Debentures") are subordinated to all other "senior indebtedness" of the Company (as defined in the applicable indenture governing such debentures), and the PIK Debentures are subordinated to all "senior indebtedness" of the Company (as defined in the applicable indentures governing such debentures), other than the Original Debentures. Although defined somewhat differently in the several indentures governing the Original Debentures and the PIK Debentures (collectively, the "Subordinated Debentures"), "senior indebtedness" is defined to generally include indebtedness for borrowed money and other similar obligations of Alterra (other than the other series of Original Debentures).
All of our Subordinated Debentures are currently in default due to our failure to make coupon payments on the Original Debentures and due to cross default provisions triggered by payment defaults on our secured debt.
As a result of several notices of default received by the Company with respect to secured 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). As a result, we did not make cash interest payments on the Original Debentures in 2001, 2002 and January 2003 of $5.5 million, $11.0 million and $5.5 million, respectively. In the event that the Company is dissolved, liquidated or reorganized, all amounts due in payment of the Company's "senior 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 "senior indebtedness" obligations (including, without limitation, our several secured credit facilities) and resolve all pending defaults related to this indebtedness, 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) or to restructure the Subordinated Debentures.
To the extent that the Company is not able to restructure its capital structure and is forced to liquidate, applicable principles of corporate law (specifically, the liquidation priority of debt over equity and the priority of preferred stock over common stock) and the subordination provisions governing the Subordinated Debentures would dictate that:
In restructuring our junior capital structure, the relative rights in liquidation of our various junior capital constituencies will be a significant factor in determining the extent to which the claims and interests of these various constituencies will need to be modified, exchanged or entitled to any distribution of value as the Company is restructured.
Our Plan, filed with the Bankruptcy Court on March 27, 2003, contemplates that the Company will conduct a marketing process in order to solicit and identify the "highest and best" proposal for a Liquidity Transaction, which could involve a sale of equity securities in the reorganized Alterra through an Exit Equity Transaction or a sale of all or substantially all of the assets of Alterra, as a going concern, pursuant to an Asset Sale Transaction. In either case, management believes that the Liquidity Transaction will provide a fair valuation of the reorganized Alterra that will facilitate the completion of the reorganization and will provide a source of liquidity to make distributions of cash, securities or other property to the holders of various junior capital structure constituents, all to the extent that such holders are entitled to a distribution pursuant to applicable principals of bankruptcy law and the subordination provisions governing the Subordinated Debentures.
Given the uncertainty as to the outcome of our remaining restructuring negotiations with senior capital constituencies, and given the impact of operative subordination provisions and corporate and bankruptcy law doctrines governing the relative rights of holders of debt and equity interests in the Company, it is very difficult for us to predict what value, if any, various junior capital constituencies will receive in the restructured Alterra. While it is management's intention, to the extent practicable, to seek to restore value to our junior capital, no assurances may be given as to what value, if any, various junior capital constituencies will have in the restructured Company. Based on our current estimates of value, it appears that no distribution of value would be made to certain classes of unsecured debt or to any class of capital stock of the Company upon the conclusion of the Bankruptcy Case.
The Restructuring Plan calls for us to seek to acquire joint venture interests in certain of our residences in order to simplify our capital structure. In many cases, our acquisition of these joint venture interests (or termination of the applicable joint venture's interest in our residences) is necessary for us to satisfy restructuring requirements established by our senior lenders and lessors.
We have had buy-out or settlement negotiations with investors who currently have interests in an aggregate of 41 joint venture arrangements. As of December 31, 2002, 19 of those joint venture arrangements are associated with residences operating under lease or sublease agreements with the joint venture, while the lease or sublease agreements of the remaining 22 joint venture arrangements have been terminated. No assurance may be given as to whether these negotiations will result in an agreement which enables the Company to acquire 100% of these joint venture entities. If these negotiations fail, the Company's ability to restructure certain of its senior capital financing facilities may be adversely affected. If lenders or lessors providing financing to the Company with respect to residences operated by joint ventures seek to foreclose on their mortgages or to terminate their leases, and as a result joint venture entities have their right to operate such residences impaired, Alterra may be forced t o defend damage claims asserted by certain of its joint venture partners.
As of December 2002, we entered into an agreement with one of our joint venture partners pursuant to which we have agreed to purchase all of the remaining joint venture interests not held by the Company in eight residences and to acquire promissory notes previously issued by the Company aggregating approximately $3.6 million in exchange for the issuance of a 5-year unsecured promissory note for $7.2 million from the reorganized Alterra upon confirmation of our plan of reorganization by the Bankruptcy Court. Accordingly, the consummation of this transaction will be contingent upon, among other things, a successful Chapter 11 reorganization of the Company and Bankruptcy Court approval.
As of December 31, 2002, our current portion of long-term debt and short-term notes payable totaled $808.9 million. These current maturities include $362.1 million of debt and lease obligations, $439.7 million of PIK Debentures and other Subordinated Debentures that are in default or pursuant to cross-default provisions may be declared in default and may be accelerated at the lender's election, and $7.1 million of short-term notes payable and borrowings. In 2003 our scheduled debt maturities include $51.2 million of secured debt and $136.7 million of indebtedness which has fully matured and is past due as of December 31, 2002.
To address our long-term liquidity and capital needs, including our upcoming debt maturities, we intend to (i) seek to identify and consummate a Liquidity Transaction in connection with confirming our Plan; (ii) continue our negotiations with our lenders, lessors, joint venture partners, and to seek to implement the Restructuring Plan and the Plan; (iii) continue to implement operating initiatives focused on overall rate and occupancy improvement and overhead reductions; (iv) dispose of under-performing and non-strategic residences in order to reduce associated financing costs, operating expenses and to generate cash; and (v) seek to identify sources of financing to refinance pending and near term debt maturities. As our Restructuring Plan and the Plan are largely dependent upon our ability to implement negotiated consensual restructuring arrangements with our various capital structure constituencies, no assurances may be given as to whether we will be able to restructure the Company or to restore value to various of our capital structure constituencies.
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.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
Alterra Healthcare Corporation and Subsidiaries: | ||
Independent Auditors' Report | 40 | |
Consolidated Balance Sheets as of December 31, 2002 and 2001 | 41 | |
Consolidated Statements of Operations for the Years Ended | 42 | |
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended | 43 | |
Consolidated Statements of Cash Flows for the Years Ended | 44 | |
Notes to the Consolidated Financial Statements | 46-65 | |
Independent Auditors' Report
The Board of Directors and Stockholders
Alterra Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Alterra Healthcare Corporation and Subsidiaries (the Corporation) as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 Corporation as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
As discussed in notes 4 and 8, the Corporation adopted the provisions of Statement of Financial Standard (SFAS) No. 142,Goodwill and Other Intangible Assets, and SFAS No. 144,Accounting for Impairment or Disposal of Long-lived Assets, respectively, on January 1, 2002. The accompanying consolidated financial statements have been prepared assuming that the Corporation will continue as a going concern.
As more fully described in note 1 to the consolidated financial statements, on January 22, 2003, the Corporation filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The uncertainties inherent in the bankruptcy process and the Corporation's recurring losses along with the violations of certain debt covenants and cross covenants violations as of December 31, 2002 and 2001 raise substantial doubt about the Corporation's ability to continue as a going concern. The Corporation is currently operating its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court, and continuation of the Corporation as a going concern is contingent upon, among other things, the confirmation of a plan of reorganization, the ability to comply with all debt covenants, the ability to generate sufficient cash from operations, and the ability to obtain financing sources to meet future obligations. If no reorganization plan is approved, it is po ssible that the Corporation may be liquidated. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
KPMG LLP
Chicago, Illinois
March 27, 2003
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In thousands except share data)
2002 | 2001 | |||||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 13,797 | $ | 19,996 | ||
Accounts receivable, net | 10,253 | 10,539 | ||||
Notes receivable, net | -- | 500 | ||||
Assets held for sale | 57,243 | 88,166 | ||||
Other current assets | 24,810 | 31,346 | ||||
Total current assets | 106,103 | 150,547 | ||||
Property and equipment, net | 492,125 | 727,416 | ||||
Restricted cash and investments | 2,188 | 3,312 | ||||
Goodwill, net | 35,515 | 104,915 | ||||
Other assets | 35,219 | 52,010 | ||||
Total assets | $ | 671,150 | $ | 1,038,200 | ||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||
Current liabilities: | ||||||
Current installments of long-term obligations, including convertible debt | $ | 722,689 | $ | 977,651 | ||
Current debt maturities on assets held for sale | 79,108 | 140,054 | ||||
Short-term notes payable | 7,144 | 10,753 | ||||
Accounts payable | 6,812 | 4,450 | ||||
Accrued expenses | 91,196 | 62,336 | ||||
Guaranty liability | 58,500 | -- | ||||
Deferred rent and refundable deposits | 14,840 | 16,048 | ||||
Total current liabilities | 980,289 | 1,211,292 | ||||
Long-term obligations, less current installments | 171,510 | 82,752 | ||||
Deferred gain on sale and other | 2,147 | 5,593 | ||||
Redeemable preferred stock | 6,132 | 5,489 | ||||
Stockholders' equity (deficit): | ||||||
Preferred stock, 2,500,000 shares authorized; 1,550,000 and 1,250,000 |
-- |
-- | ||||
Common stock, $.01 par value; 100,000,000 shares authorized; | | | ||||
Treasury stock, $.01 par value; 11,639 shares in 2002 and 2001 | (163 | ) | (163 | ) | ||
Additional paid-in capital | 179,526 | 179,526 | ||||
Accumulated deficit | (668,512 | ) | (446,510 | ) | ||
Total stockholders' equity deficit | (488,928 | ) | (266,926 | ) | ||
Total liabilities and stockholders' equity (deficit) | $ | 671,150 | $ | 1,038,200 | ||
See accompanying notes to consolidated financial statements. | ||||||
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
2002 | 2001 | 2000 | |||||||
Revenue: | |||||||||
Resident service fees | $ | 413,553 | $ | 427,259 | $ | 410,028 | |||
Other | 3,162 | 6,152 | 13,615 | ||||||
Operating revenue | 416,715 | 433,411 | 423,643 | ||||||
Operating expenses (income): | |||||||||
Residence operations | 287,434 | 290,713 | 277,530 | ||||||
Lease expense | 58,658 | 61,866 | 71,589 | ||||||
Gain on lease termination | (6,204 | ) | -- | -- | |||||
Lease income | (13,755 | ) | (21,336 | ) | (28,222) | ||||
General and administrative | 46,541 | 48,881 | 50,360 | ||||||
(Gain) loss on disposal | (22,914 | ) | 189,287 | 22,515 | |||||
Depreciation and amortization | 25,766 | 34,535 | 32,976 | ||||||
Impairment charge | 4,773 | -- | -- | ||||||
Non-recurring charge | -- | -- | 4,232 | ||||||
Total operating expenses | 380,299 | 603,946 | 430,980 | ||||||
Operating income (loss) | 36,416 | (170,535 | ) | (7,337) | |||||
Other (expense) income: | |||||||||
Interest expense, net | (50,556 | ) | (62,029 | ) | (58,083) | ||||
| Amortization of financing costs | (4,967 | ) | (9,786 | ) | (8,595) | ||||
Gain on debt extinguishments | -- | -- | 13,768 | ||||||
Convertible debt paid in kind ("PIK") interest | (25,824 | ) | (24,303 | ) | (12,483) | ||||
Equity in losses of unconsolidated affiliates | (4,856 | ) | (14,338 | ) | (12,763) | ||||
Minority interest in profits of consolidated subsidiaries | -- | 426 | 1,264 | ||||||
Goodwill impairment loss | (9,487 | ) | -- | -- | |||||
Total other expense, net | (95,690 | ) | (110,030 | ) | (76,892) | ||||
Loss before income taxes and the cumulative effect of a change in | (59,274 | ) | (280,565 | ) | (84,229) | ||||
Income tax (expense) benefit | (100 | ) | (120 | ) | (25,100) | ||||
Loss from continuing operations before cumulative effect of a change | $ | (59,374 | ) | $ | (280,685 | ) | $ | (109,329) | |
Loss on discontinued operations (net of $5,196 of tax expense in | (116,762 | ) | (19,242 | ) | (8,477) | ||||
Cumulative effect of change in accounting principle | (45,866 | ) | -- | -- | |||||
Net loss | $ | (222,002 | ) | $ | (299,927 | ) | $ | (117,806) | |
Basic loss per common share: | |||||||||
Loss from continuing operations before a change in | $ | (2.67 | ) | $ | (12.65 | ) | $ | (4.95) | |
Loss on discontinued operations | (5.24 | ) | (0.87 | ) | (0.38) | ||||
Change in accounting principle | (2.06 | ) | -- | -- | |||||
Basic loss per common share | $ | (9.97 | ) | $ | (13.52 | ) | $ | (5.33) | |
Diluted loss per share: | |||||||||
Loss from continuing operations before a change in accounting | $ | (2.67 | ) | $ | (12.65 | ) | $ | (4.95) | |
Loss on discontinued operations | (5.24 | ) | (0.87 | ) | (0.38) | ||||
Change in accounting principle | (2.06 | ) | -- | -- | |||||
Diluted loss per common share | $ | (9.97 | ) | $ | (13.52 | ) | $ | (5.33) | |
Weighted average common shares outstanding: | |||||||||
Basic | 22,266 | 22,192 | 22,108 | ||||||
Diluted | 22,266 | 22,192 | 22,108 | ||||||
See accompanying notes to consolidated financial statements. | |||||||||
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 2002, 2001 and 2000
(In thousands)
|
Common Stock, | |||||||||
Shares | | Accumulated | | |||||||
Balances at December 31, 1999 | 22,100 | $ | 179,420 | $ | (28,777 | ) | $ | 150,643 | ||
Shares issued-- options exercised | 10 | 22 | -- | 222 | ||||||
Net loss; | -- | -- | (117,806 | ) | (117,806 | ) | ||||
Balances at December 31, 2000 | 22,110 | $ | 179,442 | $ | (146,583 | ) | $ | 32,859 | ||
Shares issued-- options exercised | 156 | 142 | -- | 142 | ||||||
Net loss | -- | -- | (299,927 | ) | (299,927 | ) | ||||
Balances at December 31, 2001 | 22,266 | $ | 179,584 | $ | (446,510 | ) | $ | (266,926 | ) | |
Net loss | -- | -- | (222,002) | (222,002) | ||||||
Balances at December 31, 2002 | 22,266 | $ | 179,584 | $ | (668,512) | $ | (488,928) | |||
See accompanying notes to consolidated financial statements.
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
2002 | 2001 | 2000 | |||||||
Cash flows from operating activities: | |||||||||
Net loss | $ | (222,002 | ) | $ | (299,927 | ) | $ | (117,806 | ) |
Adjustment to reconcile net loss to net cash (used in) provided by |
| ||||||||
Depreciation and amortization | 25,766 | 34,535 | 32,976 | ||||||
PIK interest | 25,824 | 24,303 | 12,483 | ||||||
Amortization of deferred financing costs | 4,967 | 9,786 | 8,595 | ||||||
(Gain) loss on disposal | (22,914 | ) | 189,287 | 22,515 | |||||
Impairment charges | 14,260 | -- | -- | ||||||
Loss on discontinued operations | 116,762 | 19,242 | 8,477 | ||||||
Gain on debt extinguishment | -- | -- | (13,768 | ) | |||||
Cumulative effect of change in accounting principle | 45,866 | -- | -- | ||||||
Deferred income taxes | 100 | 120 | 25,100 | ||||||
Equity in net loss from investments in unconsolidated affiliates | 4,856 | 14,338 | 12,763 | ||||||
(Increase) decrease in net resident receivable | (1,998 | ) | 350 | (4,633 | ) | ||||
Decrease (increase) in other current assets | 6,057 | 7,176 | (12,912 | ) | |||||
Increase (decrease) in accounts payable | 3,467 | (12,723 | ) | (231 | ) | ||||
Increase in accrued expenses and deferred rent | 12,165 | 4,161 | 8,653 | ||||||
Increase in past due interest and late fees | 10,373 | 17,900 | -- | ||||||
Decrease in accrued development reserve costs | -- | (1,147 | ) | (11,555 | ) | ||||
Changes in other assets and liabilities, net | (2,672 | ) | 2,284 | 752 | |||||
Net cash provided by (used in) operating activities | 20,877 | 9,685 | (28,591 | ) | |||||
Cash flows (used in) from investing activities: | |||||||||
Payments for property, equipment and project development costs | (8,544 | ) | (23,932 | ) | (86,092 | ) | |||
Net proceeds from sale of property and equipment | 60,280 | 73,926 | 2,217 | ||||||
Decrease (increase) in notes receivable, net of reserve | 500 | 4,463 | (9,349 | ) | |||||
Acquisitions of facilities, net of cash | -- | -- | (20,896 | ) | |||||
Changes in investments in and advances to unconsolidated affiliates | (159 | ) | 188 | (4,126 | ) | ||||
Purchase of joint venture partnership interests | (1,400 | ) | (782 | ) | (35,742 | ) | |||
Net cash provided by (used in) investing activities | 50,677 | 53,863 | (153,988 | ) | |||||
Cash flows from financing activities: | |||||||||
(Repayments) proceeds of short-term borrowings | (3,609 | ) | 767 | (19,228 | ) | ||||
Repayments of long-term obligations | (111,314 | ) | (99,050 | ) | (106,980 | ) | |||
Proceeds from issuance of debt | -- | 5,491 | 127,432 | ||||||
Proceeds from issuance of convertible debt | -- | -- | 197,926 | ||||||
Payments for financing costs | (2,655 | ) | (1,068 | ) | (18,427 | ) | |||
Proceeds from sale/leaseback transactions | 39,825 | 26,458 | -- | ||||||
Issuance of preferred stock, common stock and other capital | -- | 142 | 4,568 | ||||||
Contributions by minority partners and minority stockholders | -- | 20 | 2,248 | ||||||
Net cash (used in) provided by financing activities | (77,753 | ) | (67,240 | ) | 187,539 | ||||
Net (decrease) increase in cash and cash equivalents | (6,199 | ) | (3,692 | ) | 4,960 | ||||
Cash and cash equivalents: | |||||||||
Beginning of year | 19,996 | 23,688 | 18,728 | ||||||
End of year | $ | 13,797 | $ | 19,996 | $ | 23,688 | |||
Supplemental disclosure of cash flow information: | |||||||||
Cash paid for interest, net of amounts capitalized | $ | 55,574 | $ | 89,887 | $ | 79,898 | |||
Cash refunded during year for income taxes | $ | (333 | ) | $ | (50 | ) | $ | (4,596 | ) |
Debt assumed | $ | -- | $ | -- | $ | 48,887 | |||
Non cash items: | |||||||||
Synthetic lease assets consolidated | $ | -- | $ | 112,236 | $ | -- | |||
Synthetic lease debt consolidation | $ | -- | $ | 119,726 | $ | -- | |||
Notes issued in exchange for joint venture interests | $ | 1,000 | $ | 14,565 | $ | -- | |||
Deconsolidated assets related to subsidiary stock transfer | $ | 189,221 | $ | -- | $ | -- | |||
Deconsolidated liabilities related to subsidiary stock transfer | $ | 174,534 | $ | -- | $ | -- |
See accompanying notes to consolidated financial statements.
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
(1) Nature of Business and Summary of Significant Accounting Policies
(a) Business
(b) Going Concern
In conjunction with its Chapter 11 Filing, the Company secured a $15.0 million debtor-in-possession ("DIP") credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving the borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. Additional borrowings under the DIP credit facility will require further approval of the Bankruptcy Court.
On February 4, 2003, the Office of the U.S. Trustee for the District of Delaware appointed an official committee of unsecured creditors in our Bankruptcy Case (the "Creditors Committee").
On March 27, 2003, the Company filed with the Bankruptcy Court a Plan of Reorganization (the "Plan") and a Disclosure Statement Accompanying Plan of Reorganization (the "Disclosure Statement"). Immediately prior to the filing of its Plan and Disclosure Statement, the Company also filed a motion (the "Bidding Procedures Motion") with the Bankruptcy Court seeking approval of bidding procedures with respect to the solicitation and selection of a transaction contemplating either (i) the sale of capital stock of the reorganized Alterra to be effective and funded upon the confirmation and effectiveness of the Plan (an "Exit Equity Transaction") or (ii) the sale, as a going concern, of all or substantially all of the assets of Alterra to be effective and funded upon the confirmation and effectiveness of the Plan (an "Asset Sale Transaction," together with an Exit Equity Transaction, referred to herein as a "Liquidity Transaction").
Going forward, the Company will report its financial statements on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and in accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Accordingly, all pre-petition liabilities subject to compromise will be segregated in the Consolidated Balance Sheets and classified as Liabilities subject to compromise, at the estimated amount of allowable claim. Liabilities not subject to compromise are separately classified as current and non-current. Revenues, expenses, realized gains and losses, and provisions for losses resulting from the reorganization are reported separately as Reorganization items. Cash used for reorganization items is disclosed separately in the Consolidated Statements of Cash Flows.
Based on the Company's Chapter 11 Filing, the following liabilities at December 31, 2002 are deemed to be subject to compromise in accordance with SOP 90-7, on a proforma basis (in thousands):
Accounts payable | $ | 6,812 | |
General liability insurance reserve | 20,098 | ||
Reserve for loss on joint venture settlements | 9,407 | ||
Accrued interest on convertible debt | 22,371 | ||
Guaranty liability | 58,500 | ||
Notes payable | 13,000 | ||
PIK debentures | 252,429 | ||
Convertible debt | 187,248 | ||
Redeemable preferred stock | 6,132 | ||
Proforma liabilities subject to compromise | $ | 575,997 |
(c) Principles of Consolidation
The consolidated financial statements include the accounts of 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 equitymethod.
(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.
(e) Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations (SFAS No. 143)." SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for fiscal years beginning after May 15, 2002 with earlier adoption encouraged. The Company adopted SFAS No. 145 and accordingly a gain of $6 million was recognized in discontinued operations consistent with the operations of the related assets.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Accordingly, the Company will apply the provisions of SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for financial statements and interim annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-- Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interest in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The Company believes it is reasonably possible that its unconsolidated joint ventures will be deemed Variable Interest Entities; however this is not expected to have a material impact on the consolidated financial statements.
(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).
Goodwill represents the costs of acquired net assets in excess of their fair market values and is not subject to amortization. The Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets."
Under the transitional provisions of SFAS No. 142, the Company identified its reporting units and performed impairment tests on the net goodwill associated with each of these reporting units. The fair value of the owned reporting units was determined by estimating the terminal value of the future cash flows. The fair value of the leased reporting units was determined by estimating the present value of the cash flows for the life of the lease. Based on this impairment testing, the Company recorded an impairment loss of $54.7 million in the first quarter of 2002, of which $8.8 million is associated and reported with those residences classified as discontinued operations. The impairment loss has been recorded as a cumulative effect of change in accounting principle and as loss on discontinued operations in the accompanying consolidated statements of operations for the year ended December 31, 2002. As of December 31, 2002, the Company performed its annual impairment test required by the provisions of SFA S No. 142 in which an additional impairment loss of $9.5 million was identified based on revised cash flow projections. The $9.5 million annual impairment loss has been recorded in other expenses in the accompanying consolidated statements of operations for the year ended December 31, 2002.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over the expected periods to be benefited, generally 13 to 40 years.
(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 that are reported at net realizable amounts. Other revenue consists of the following components (in thousands):
2002 | 2001 | 2000 | ||||
Management fees | $ | 2,601 | $ | 4,869 | $ | 10,826 |
Franchise fees | -- | 243 | 1,878 | |||
Development fees | -- | -- | 428 | |||
Miscellaneous fees | 561 | 1,040 | 483 | |||
Total other revenue | $ | 3,162 | $ | 6,152 | $ | 13,615 |
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 that 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.
Miscellaneous fees include beauty shop and hospice rent revenue, incontinence care program revenue and vending machine revenue.
(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 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 2002, 2001 and 2000, accordingly, basic and diluted loss per share amounts were the same.
(n) Stock Option Plan
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 2002, 2001 and 2000, its net loss and net loss per share would have been increased to the pro forma amounts indicated below, (in thousands, except per share data):
Net Loss | ||||||||||
2002 | 2001 | 2000 | ||||||||
As reported | $ | (222,002 | ) | $ | (299,927 | ) | $ | (117,806 | ) | |
Deduct: Total Stock-based employee |
(40 |
) |
(40 |
) |
(147 |
) | ||||
Pro forma | $ | (222,042 | ) | $ | (299,967 | ) | $ | (117,953 | ) | |
Net loss per share: | ||||||||||
As reported | $ | (9.97 | ) | $ | (13.52 | ) | $ | (5.33 | ) | |
Pro forma | $ | (9.97 | ) | $ | (13.52 | ) | $ | (5.33 | ) | |
(o) Reclassifications
Certain reclassifications have been made to the 2001 and 2000 financial statements to conform with the 2002 presentation.
(2) Joint Venture Activity
The Company completed the following joint venture settlements during 2001:
• In October 2001 the Company closed on the buyout of joint venture partner interests in 15 residences with an aggregate capacity of 643 residents in connection with a modification and settlement agreement with one investor group. The Company issued $2.6 million of notes in consideration for the acquired interests and amended the terms of its joint venture arrangement with respect to the ten residences still operated in a joint venture with this investor group.
• In December 2001 the Company terminated its joint venture with Pioneer Development Company by exchanging ownership interests in 12 joint venture (556 resident capacity) entities jointly owned with this group, resulting in the Company and Pioneer each acquiring sole ownership in six of these residences. The Company received $1.6 million in cash and a $500,000 note for a net payment related to its joint venture interests.
• In December 2001 the Company terminated its joint venture with Manor Care, Inc. relating to 13 residences in connection with consummating a global settlement of various pending litigations and arbitration proceedings between the Company and Manor Care and its affiliates. In addition, the Company was released of its joint debt guarantee associated with a $57.7 million revolving line of credit. The Company issued $12.0 million in notes in exchange for the release of its debt guarantee, the termination of the joint venture interests, and the settlement of all pending litigation and arbitration proceedings with Manor Care.
The Company completed the following joint venture settlements during 2002:
• In January 2002 the Company closed on the buyout of joint venture partner interests in one residence with an aggregate capacity of 42 residents in connection with a modification and settlement agreement with one investor group. The Company paid $600,000 in consideration for their acquired interests.
• In October 2002 the Company closed on the buyout of joint venture partner interests in one residence with an aggregate capacity of 40 residents. In consideration for the acquired interests the Company paid $800,000 in cash and issued a $1.0 million note.
(3) Notes Receivable
As of December 31, 2001, the notes receivable balance consists of a short-term note bearing interest at 9.0%, payable by Pioneer Development Company in 2002 as part of the joint venture termination settlement entered into during December 2001. The balance of this note receivable was paid in full during 2002.
(4) Assets Held for Sale and Other Current Assets
The Company has adopted plans to dispose of or terminate leases on 136 residences with an aggregate capacity of 6,150 residents and 33 parcels of land. Residences included in the disposition plan were identified based on an assessment of a variety of factors, including geographic location, residence size, operating performance and lender negotiations. As of December 31, 2002, 105 residences representing 4,692 resident capacity have either been sold or transferred to a new lessee. In addition, the Company sold 21 land parcels and transitioned ownership of 3 residences through deed-in-lieu foreclosure transactions. As of December 31, 2002, approximately $58.9 million is reserved for losses relating to future asset sales or lease terminations.
In accordance with the SFAS No.121 and SFAS No. 144 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 sale proceeds. The amount of the impairment loss to be recognized is the difference between the residence's carrying value and the residence's estimated fair value less costs to sell. The Company's policy is to consider a residence to be held for sale or disposition when the Company has committed to a plan to sell such residence and active marketing activity has commenced or it is expected to commence in the near term. In accordance with SFAS No. 121, during the year ended December 31, 2001, the Company recorded a net loss of $189.3 million to reflect the assets held for sale at the lower of their carrying value or estimated fair value less costs to sell and to write off the carrying value of assets related to terminated residence leases or asset dispositions. In accord ance with SFAS No. 144, during the year ended December 31, 2002, the Company recognized an impairment loss of $12.9 million and reclassified as held for sale 19 residences included as part of executed deed in lieu restructuring agreements and six leased residences with pending sales. Also in accordance with SFAS No. 144, the impairment loss and revenues and expenses of these residences have been recorded as discontinued operations for the year ended December 31, 2002. Assets held for sale is principally comprised of net property and equipment, goodwill and the corresponding mortgage liability. We expect to sell these residences and land parcels in the next six to twelve months.
The following table represents condensed operating information (in thousands) included in the loss on discontinued operations in accordance with SFAS No. 144 of the Consolidated Statements of Operations of the Company:
2002 | 2001 | 2000 | |||||||
Loss from operations | $ | (8,559 | ) | $ | (19,242 | ) | $ | (8,477 | ) |
FAS 144 impairment loss | (12,942 | ) | -- | -- | |||||
Guaranty liability | (58,500 | ) | -- | -- | |||||
Net asset write off of former subsidiary | (24,060 | ) | -- | -- | |||||
Gain on debt extinguishment | 5,954 | -- | -- | ||||||
Loss on disposal | (9,826 | ) | |||||||
Cumulative effect of change in accounting | (8,829 | ) | -- | -- | |||||
Loss on discontinued operations | $ | (116,762 | ) | $ | (19,242 | ) | $ | (8,477 | ) |
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. The value of the assets held for sale, net of reserves, is reflected in current assets and the outstanding debt related to the assets held for sale is reflected in current liabilities on our balance sheet.
The following table represents condensed operating information related to the 86 operating residences which have been sold, are held for sale, or had leases terminated as of December 31, 2002, and are included in the loss from continuing operations of the Consolidated Statements of Operations of the Company. These residences do not qualify for discontinued operations treatment as they fall under the provisions of SFAS No. 121. In some cases, based on the timing of the asset disposal or lease termination, results may not be comparable (in thousands).
2002 | 2001 | 2000 | |||||||
Revenue | $ | 30,473 | $ | 58,663 | $ | 65,888 | |||
Residence operations expense | 26,489 | 48,804 | 54,798 | ||||||
Lease expense | 735 | 4,049 | 8,122 | ||||||
Interest expense | 4,618 | 10,554 | 11,246 | ||||||
Depreciation and amortization expense | 1,164 | 6,665 | 5,857 | ||||||
Loss before taxes | $ | (2,533 | ) | $ | (11,409 | ) | $ | (14,135 | ) |
Other current assets are comprised of the following at December 31 (in thousands):
2002 | 2000 | |||||
Restricted cash | $ | 9,162 | $ | 12,920 | ||
Supply inventory | 8,885 | 10,157 | ||||
Prepaid expenses | 4,832 | 5,479 | ||||
Other current assets | 1,931 | 2,790 | ||||
Total other current assets | $ | 24,810 | $ | 31,346 |
(5) Property and Equipment
A summary of property and equipment at December 31 follows (in thousands):
2002 | 2001 | |||||
Land and improvements | $ | 61,490 | $ | 65,660 | ||
Buildings and leasehold improvements | 444,880 | 659,955 | ||||
Furniture, fixtures, and equipment | 88,457 | 88,271 | ||||
Total property and equipment | 594,827 | 813,886 | ||||
Less accumulated depreciation | (102,702 | ) | (86,470 | ) | ||
Property and equipment, net | $ | 492,125 | $ | 727,416 |
Interest is capitalized in connection with the construction of residences and is amortized over the estimated useful lives of the residences. As a result of our decision to reduce development activity in 2001, no interest was capitalized during the period ended December 31, 2002. Interest capitalized in 2001 and 2000 was approximately $1.9 million and $3.9 million, respectively.
(6) Unconsolidated Affiliates and Managed Residences
The Company manages certain residences operated by joint ventures in which it either has no ownership or a minority ownership position, typically less than 10%. The Company also manages certain other residences, including 26 residences managed as a result of the transfer of title to all the stock of its subsidiary to a third party during the year. As of December 31, 2002, the Company owned minority equity interests in entities owning or leasing (and also managed) 18 residences and managed 29 other residences. As of December 31, 2001, the Company owned minority interests in entities owning or leasing (and also managed) 42 residences and managed six other residences. Substantially all the earnings of these unconsolidated residences are included in the statements of operations. Included in other assets of the Company's balance sheet are net investment in and advances to affiliates of $1.7 million and $1.6 million as of December 31, 2002 and 2001, respectively.
The results of operations of these unconsolidated and managed residences for 2002, 2001 and 2000 are as follows (in thousands):
2002 | 2001 | 2000 | |||||||
Residence service fees | $ | 82,223 | $ | 77,874 | $ | 86,147 | |||
Residence operation expenses | 62,155 | 58,514 | 76,577 | ||||||
Residence profit | 20,068 | 19,360 | 9,570 | ||||||
Management fee expense | 2,601 | 4,869 | 11,309 | ||||||
Financing expense | 29,725 | 30,758 | 43,692 | ||||||
Income (loss) before tax | $ | (12,258 | ) | $ | (16,267 | ) | $ | (45,431 | ) |
Financing expense on these residences includes $13.8 million, $21.3 million, and $28.2 million of lease and mortgage expense in 2002, 2001, and 2000, 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. Both the underlying assets and the associated mortgage liability is reported in the Company's balance sheet.
(7) Restricted Cash and Investments
Restricted cash and investments consist of debt service reserves with interest rates ranging from 1% to 3% and maturities ranging from one to twelve months.
(8) Goodwill
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," having a required effective date for fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statement. Other intangible assets will continue to be amortized over their useful lives. The Company adopted SFAS No. 142 effective January 1, 2002.
In accordance with SFAS No. 142, the effect of this accounting change is applied prospectively. Amortization expense related to goodwill and other intangible assets was $6.2 million for the year ended December 31, 2001. Supplemental comparative disclosure as if the change had been retroactively applied to the prior period is as follows (in thousands, except per share amounts):
| For the Years Ended December 31, | ||||||||||||
2002 | 2001 | 2000 | |||||||||||
Reported net loss from continuing |
$ |
(59,374 |
) |
$ |
(280,685 |
) |
$ |
(109,329 |
) | ||||
Add: Goodwill amortization | -- | 6,188 | 5,150 | ||||||||||
Adjusted net loss from continuing |
$ |
(59,374 |
) |
$ |
(274,497 |
) |
$ |
(104,179 |
) | ||||
Basic and diluted earnings per share: | |||||||||||||
Reported net loss per share from |
$ |
(2.67 |
) |
$ |
(12.65 |
) |
$ |
(4.95 |
) | ||||
Goodwill amortization-- per share | -- | 0.28 | 0.23 | ||||||||||
Adjusted basic and diluted net loss per |
$ |
(2.67 |
) |
$ |
(12.37 |
) |
$ |
(4.72 |
) | ||||
Under the transitional provisions of SFAS No. 142, the Company identified its reporting units and performed impairment tests on the net goodwill associated with each of these reporting units. The fair value of the owned reporting units was determined by estimating the terminal value of the future cash flows. The fair value of the leased reporting units was determined by estimating the present value of the cash flows for the life of the lease. Based on this impairment testing, the Company recorded an impairment loss of $54.7 million in the first quarter of 2002, of which $8.8 million ($0.40 per share impact) is associated and reported with those residences classified as discontinued operations. The impairment loss has been recorded as a cumulative effect of change in accounting principle and in discontinued operations for the year ended December 31, 2002. As of December 31, 2002, the Company performed its annual impairment test required under the provisions of SFAS No. 142 in which an additional impai rment loss of $9.5 million was identified based on revised cash flow projections. The $9.5 million annual impairment loss has been recorded in other expenses in the accompanying consolidated statements of operations for the year ended December 31, 2002. The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows (in thousands):
Balance as of January 1, 2002 | $ | 104,915 | |
Transition impairment loss | (54,695) | ||
Annual impairment loss | (9,487) | ||
Asset dispositions and transfers to | (5,218) | ||
Balance as of December 31, 2002 | $ | 35,515 |
(9) Other Assets
Other assets are comprised of the following at December 31 (in thousands):
2002 | 2001 | ||||
Deferred financing costs, net | $ | 18,710 | $ | 35,081 | |
Lease security deposits | 7,443 | 7,266 | |||
Deposits and other | 9,066 | 9,663 | |||
Total other assets | $ | 35,219 | $ | 52,010 |
(10) 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):
2002 | 2001 | ||||
5.25% convertible subordinated debentures due December 15, 2002, | $ | 112,043 | $ | 112,043 | |
7.00% convertible subordinated debentures due June 1, 2004, | 40,355 | 40,355 | |||
6.75% convertible subordinated debentures due June 30, 2006, | 34,850 | 34,850 | |||
9.75% Series A convertible debentures due May 31, 2007, originally | 42,500 | 42,500 | |||
9.75% Series B convertible debentures due May 31, 2007, originally | 155,167 | 137,221 | |||
9.75% Series C convertible debentures due May 31, 2007, originally | 54,762 | 49,795 | |||
Total convertible debt | $ | 439,677 | $ | 416,764 | |
Mortgages payable, due from 2003 through 2037; weighted average | $ | 131,719 | $ | 27,535 | |
Capital and financing lease obligation payable through 2020; weighted | 76,967 | 37,140 | |||
Serial and term revenue bonds maturing serially from 2003 through | 3,405 | 3,645 | |||
Notes payable through 2007; weighted average interest rate of 8.62% | 15,286 | 14,432 | |||
Capital leases, financing obligations and mortgage payable in default | 306,253 | 700,941 | |||
Total long-term obligations | 973,307 | 1,200,457 | |||
Less current installments and debt maturities on assets held for sale | 801,797 | 1,117,705 | |||
Total long-term obligations, less current installments | $ | 171,510 | $ | 82,752 |
As of December 31, 2002 and 2001, the Company was in violation of various covenants with several of its credit facilities. In addition, in order to conserve its liquidity, the Company did not make certain 2002 and 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 results in the Company being in default under other such facilities. Obligations in the amount of $306.2 million are currently classified as current liabilities because the applicable lenders have the right to accelerate their loans due to the existence of a default.
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 se curities, 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 1 and July 1 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 s tated 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 was originally 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. The effective conversion price is $2.83 per share as of December 31, 2002. The holders of the Series A Stock are entitled to vote on all matters voted on by the holders of Co mmon 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. As of December 31, 2002, the $6.1 million principal balance includes $1.2 million of accrued but undeclared PIK dividends relating to the dividend payment dates in 2001, 2002 and January 1, 2003.
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 were 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 A 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 (effective conversion price of $2.83 per share at December 31, 2002, due to the operation of applicable anti-dilution provisions).
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 were 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 (effective conversion price of $283.00 per share at December 31, 2002, due to the operation of applicable anti-dilution provisions), 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 were 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 (effective conversion price of $2.83 per share at December 31, 2002, due to the operation of applicable anti-dilution provisions).
Principal payments on long-term debt, capital leases, and financing obligations for the next five years and thereafter are as follows (in thousands):
2003 | $ | 801,797 |
2004 | 86,471 | |
2005 | 475 | |
2006 | 12,515 | |
2007 | 5,095 | |
Thereafter | 66,954 | |
Total long-term debt, capital leases, and financing obligations | $ | 973,307 |
The 2003 principal payment obligations include obligations classified as current liabilities because the applicable lenders have the right to accelerate their loans due to the existence of default, and $136.7 million of indebtedness that has matured and is past due as of December 31, 2002.
(11) Short-term Notes Payable
In March 2001, the Company obtained a $7.5 million Bridge Loan that had an initial six-month term, is secured by first mortgages on several residences, and originally bore interest at an escalating interest rate, commencing at 10% per annum. At the Company's election, the Bridge Loan was extended by an additional six months whereupon the Bridge Loan became convertible into convertible subordinated debentures of the Company having rights and terms substantially similar to the 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). 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. Effective March 1, 2002, the Company entered into an amendment with the bridge lenders that fixed the interest rate on the Bridge Loan at 9.0% per annum and extende d the maturity date for the Bridge Loan to January 5, 2003. As of December 31, 2002 and 2001, the Bridge Loan had an outstanding balance of $4.2 million and $6.0 million, respectively.
In addition, as of December 31, 2002 and 2001, short-term notes payable consists of $2.9 million and $4.8 million, respectively, outstanding line of credit bearing interest at 4.25% and 5.75%, respectively.
(12) Accrued Expenses
2002 | 2001 | |||
Accrued salaries and wages | $ | 13,520 | $ | 10,190 |
Accrued interest | 30,440 | 21,744 | ||
General liability insurance reserve | 20,098 | 9,526 | ||
Accrued property taxes | 6,373 | 7,859 | ||
Accrued vacation | 4,751 | 5,813 | ||
Reserve for loss on joint venture settlements | 9,407 | -- | ||
Other | 6,607 | 7,204 | ||
Total accrued expenses | $ | 91,196 | $ | 62,336 |
During 2001 the Company implemented a self-insurance program related to liability coverage. The reserve as of December 31, 2002 and 2001 is based on estimates of the magnitude of the expected losses.
(13) 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.
(14) Stock Option Plan
At December 31, 2002, 1,371,460 shares were available for grant under the 1995 Plan. There were no options granted during 2002. The per share weighted-average exercise price of stock options granted during 2001 was $1.31 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 2001 and 2000 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.
Stock option activity during the periods indicated is as follows:
Number of | Wtd.-Avg. | |||
Balance at December 31, 2000 | 965,187 | $ | 12.65 | |
Granted | 1,000,000 | 1.31 | ||
Exercised | -- | 0.00 | ||
Forfeited | 267,170 | 14.06 | ||
Balance at December 31, 2001 | 1,698,017 | $ | 5.75 | |
Granted | -- | 0.00 | ||
Exercised | -- | 0.00 | ||
Forfeited | 569,477 | 1.31 | ||
Balance at December 31, 2002 | 1,128,540 | $ | 7.04 | |
Stock options outstanding at December 31, 2002 are as follows:
Range of | Number | Average | Wtd.-Avg. | Number | Wtd.-Avg. | ||||||||
$ | 0.09-- 1.40 | 501,229 | 6.0 | $ | 1.31 | 167,896 | $ | 1.30 | |||||
$ | 1.40-- 8.69 | 354,313 | 4.2 | 5.80 | 324,249 | 5.81 | |||||||
$ | 8.70-- 17.94 | 55,807 | 4.4 | 15.66 | 55,807 | 15.66 | |||||||
$ | 17.95-- 20.81 | 190,895 | 6.0 | 18.80 | 189,517 | 18.81 | |||||||
$ | 20.82-- 29.56 | 26,296 | 5.3 | 29.34 | 26,296 | 29.34 | |||||||
Total: | 1,128,540 | 5.2 | $ | 7.04 | 763,765 | $ | 9.57 |
(15) Income Taxes
2002 | 2001 | 2000 | |||||||
Income tax expense (benefit): | |||||||||
Current: | |||||||||
Federal | $ | -- | $ | -- | $ | -- | |||
State | 100 | 120 | 573 | ||||||
Total current | 100 | 120 | 573 | ||||||
Deferred: | |||||||||
Federal | -- | -- | 20,011 | ||||||
State | -- | -- | 2,516 | ||||||
Total deferred | -- | -- | 24,527 | ||||||
Total | $ | 100 | $ | 120 | $ | 25,100 |
2002 | 2001 | |||||
Deferred tax assets: | ||||||
Net operating loss carryforwards | $ | 163,566 | $ | 116,712 | ||
Development write-off | 2,250 | 7,990 | ||||
Deferred gain sale/leaseback | -- | 2,337 | ||||
Building reserve | 27,352 | 58,649 | ||||
Accrued expenses | 12,593 | 8,348 | ||||
Investment in consolidated affiliates | 1,017 | 1,017 | ||||
Loss contingency | 22,815 | -- | ||||
Other | 741 | 1,096 | ||||
Total deferred tax assets | 230,334 | 196,149 | ||||
Less valuation allowance | (218,899 | ) | (161,447 | ) | ||
Deferred tax assets, net of valuation allowance | $ | 11,435 | $ | 34,702 | ||
Deferred tax liabilities: | ||||||
Acquisition basis | 1,715 | 1,715 | ||||
Depreciation | 4,550 | 32,987 | ||||
Deferred gain on sale/leaseback | 5,170 | -- | ||||
Deferred tax liabilities | $ | 11,435 | $ | 34,702 |
The valuation allowance for deferred tax assets as of December 31, 2002 and 2001 was $218.9 million and $161.4, respectively. During 2000, a valuation allowance 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.
The effective tax rate on income before income taxes varies from the statutory Federal income tax rate as follows:
| 2002 | 2001 | 2000 | ||
Statutory rate | 35.0% | 35.0% | 35.0% | ||
State taxes, net | 4.0% | 4.0% | 4.0% | ||
Valuation allowance | (25.9) | (36.1) | (63.0) | ||
PIK interest | (4.1) | (2.8) | (5.1) | ||
Stock transfer | (7.1) | -- | -- | ||
Other | (1.9) | (0.1) | (0.7) | ||
0.0% | 0.0% | (29.8)% |
The Company has approximately $419.4 million of tax net operating loss carryforwards at December 31, 2002. Any unused net operating loss carryforwards will expire commencing in the year 2007 through 2022. 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 which may become operative in a liquidity transaction or through the implementation of the Plan. 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.
(16) 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 and financing obligations 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, 2002, the Company's convertible debentures had a book value of $187.3 million. At December 31, 2002, there is not a meaningful market for these bonds.
(17) Commitments and Contingencies
As of December 31, 2002, we had five multi-residence portfolios leased from various REITs. These portfolios include an aggregate of 200 residences with an aggregate capacity of 8,715 beds. We have entered into restructuring agreements with respect to each of these five leased portfolios. These restructurings included the amendment of certain lease covenants and terms and, in three lease facilities, the conversion of individual leases into single master leases. The cash rent due under one lease facility was modified through the application of various deposits held by the landlord to satisfy a portion of the cash rent obligation in the early years of the restructured master lease.
During 2002, the Company completed sale/leaseback transactions accounted for as a financing of 12 residences with REITs for an aggregate purchase price of $40.6 million. The proceeds of this refinancing were used principally to retire mortgage loan and accrued interest obligations.
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, 2002 and 2001 were $3.5 million.
In addition to leased residences, the Company leases certain office space and equipment under noncancelable operating leases that expire at various times through 2004. Rental expense on all such operating leases, including residences, for the years ended December 31, 2002, 2001, and 2000 was $58.7 million, $61.9 million and $71.6 million, respectively.
Future minimum lease payments for the next five years and thereafter under noncancelable leases at December 31, 2002, are as follows (in thousands):
Capital | Operating | ||||
2003 | $ | 8,506 | $ | 62,338 | |
2004 | 19,013 | 63,769 | |||
2005 | 7,248 | 64,844 | |||
2006 | 7,248 | 66,432 | |||
2007 | 7,248 | 68,053 | |||
Thereafter | 143,927 | 223,746 | |||
Total minimum lease payment | 193,190 | $ | 549,182 | ||
Less amount representing interest | 116,223 | ||||
Long-term capital lease obligations | $ | 76,967 |
As of December 31, 2002 and 2001, the Company was in violation of various covenants with several of its credit facilities. In addition, in order to conserve its liquidity, the Company did not make certain 2001 and 2002 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 results in the Company being in default under other such facilities. Obligations in the amount of $306.3 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 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 will not require more than $10.0 million to satisfy these purchase obligations during 2003.
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.
The Company elected not to fund certain debt service and lease payment obligations due during 2001 and 2002 without the consent of the applicable lender or lessor. Through additional payments, prepayments associated with asset sales and application of escrowed amounts, as of December 31, 2002, the Company had $5.1 million of delinquent outstanding scheduled debt service to lenders or lessors who hold mortgages on, or from whom the Company leases, 36 residences in the aggregate (1,564 resident capacity). The Company has received a written notice of acceleration from lenders with respect to indebtedness aggregating $52.2 million. In addition, indebtedness of approximately $136.7 million has fully matured and is past due. Many of our other credit and lease facilities are in technical default as a result of these payment defaults associated with other loan and lease facilities, but several of these lenders and lessors have executed limited in time waivers. The Company is also in default under various fin ancial and other covenants contained in certain credit and lease arrangements. The Company has received written notices of default from most of these lenders or lessors, three lessors have terminated leases for 17 residences (940 resident capacity) and other lenders have elected to apply deposits and reserve funds held by such lenders against the past due payments. Five lenders have activated or are in the process of activating "cash traps" of bank accounts relating to the operation of residences mortgaged to such lenders, either pursuant to arrangements set forth in the applicable loan documents or as subsequently negotiated with the Company. The Company is also in litigation with a former lessor with respect to their damage claim associated with the early termination of their 11 residence lease portfolio.
The Company's convertible debentures include subordination provisions that prohibit the Company from making interest payments to the debenture holders (other than payment-in-kind coupon payments) after the occurrence of payment defaults on the Company's senior indebtedness. As such, the Company defaulted in making coupon payments on its 5.25%, 6.75% and 7.00% convertible subordinated debentures aggregating approximately $5.5 million, $11.0 million and $5.5 million in 2001, 2002 and January 2003, respectively.
See Note (1) (b) for information regarding the Company's Bankruptcy Case.
(18) 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, | |||||||||
2002 | 2001 | 2000 | |||||||
Numerator: | |||||||||
Numerator for basic earnings per share | $ | (222,002 | ) | $ | (299,927 | ) | $ | (117,806 | ) |
Numerator for diluted earnings per | $ | (222,002 | ) | $ | (299,927 | ) | $ | (117,806 | ) |
Denominator: | |||||||||
Denominator for basic earnings per | 22,266 | 22,192 | 22,108 | ||||||
Denominator for diluted earnings per |
22,266 |
22,192 |
22,108 | ||||||
Basic loss per common share | $ | (9.97 | ) | $ | (13.52 | ) | $ | (5.33 | ) |
Diluted loss per common share | $ | (9.97 | ) | $ | (13.52 | ) | $ | (5.33 | ) |
(19) Impairment Charge
(20) Subsequent Events
In January 2003, the Company entered into agreements with one significantly impaired lender group pursuant to which: (i) the Company has agreed to manage 26 residences on an interim basis without a management fee, and to cooperate in transitioning management to any successor manager appointed by the credit participants, and (ii) the Company is entitled to be released of its guaranty and other principal obligations (with the exception of certain environmental indemnities) under this financing structure upon the satisfaction of certain conditions, including the payment of $5.7 million of fees to the credit participants on or prior to the confirmation of a plan of reorganization in our Bankruptcy Case.
In conjunction with our Chapter 11 Filing, in January 2003 we secured a $15 million DIP credit facility from affiliates of certain principal holders of the Company's pay-in-kind securities issued in the summer of 2000. The Bankruptcy Court issued an order approving our borrowing up to $6.5 million under the DIP credit facility on an interim basis on January 24, 2003. Additional borrowings under the DIP credit facility will require further approval of the Bankruptcy Court.
On February 28, 2003, the Company closed on a $67.9 million sale leaseback and mortgage financing with a new REIT. This financing includes 31 residences with resident capacity of 1,076 beds located in 12 states. The proceeds from this transaction were primarily used to refinance maturing debt and acquire 49% of a joint venture interest.
Supplementary Financial Information
Quarterly Information (Unaudited)
(In thousands, except per share data)
12/31 | 9/30 | 6/30 | 3/31 | |||||||||
2002 | ||||||||||||
Operating revenues | $ | 104,593 | $ | 102,505 | $ | 104,070 | $ | 105,547 | ||||
Operating (loss) income | (6,899 | ) | 13,691 | 17,831 | 11,793 | |||||||
Net loss | (51,369 | ) | (5,906 | ) | (90,229 | ) | (74,498 | ) | ||||
Basic (loss) per share | $ | (2.31 | ) | $ | (0.27 | ) | $ | (4.05 | ) | $ | (3.34 | ) |
Diluted (loss) per share | $ | (2.31 | ) | $ | (0.27 | ) | $ | (4.05 | ) | $ | (3.34 | ) |
2001 | ||||||||||||
Operating revenues | $ | 108,218 | $ | 106,845 | $ | 108,177 | $ | 110,171 | ||||
Operating income (loss) | 1,594 | (8,910 | ) | (157,947 | ) | (5,272 | ) | |||||
Net loss | (27,271 | ) | (42,804 | ) | (192,230 | ) | (37,622 | ) | ||||
Basic loss per share | $ | (1.23 | ) | $ | (1.94 | ) | $ | (8.69 | ) | $ | (1.70 | ) |
Diluted loss per share | $ | (1.23 | ) | $ | (1.94 | ) | $ | (8.69 | ) | $ | (1.70 | ) |
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
Name | Age | Position |
Gene E. Burleson | 62 | Chairman of the Board and Director |
William E. Colson | 61 | Director |
Ronald G. Geary | 55 | Director |
Robert Haveman | 55 | Director |
William G. Petty, Jr. | 57 | Director |
Patrick F. Kennedy | 51 | Director, Chief Executive Officer and President |
Chet H. Bradeen | 58 | Senior Vice President of Operations |
Mark W. Ohlendorf | 43 | Senior Vice President, Chief Financial Officer, |
Gene E. Burlesonhas served as a director of the Company since 1995 and as Chairman of the Board since January 2003. Mr. Burleson has served as Chairman of the Board of Mariner Healthcare, Inc., a diversified provider of long-term and specialty healthcare services, from February 2000 to May 2002. Mr. Burleson served as the Chief Executive Officer and a director of Vitalink Pharmacy Services, Inc. from February 1997 to August 1997. He served as Chairman of the Board of GranCare, Inc. ("GranCare"), a provider of long-term and specialty healthcare services, from January 1994 to November 1997 and as Chief Executive Officer of GranCare from December 1990 to February 1997. Mr. Burleson also currently serves on the Board of Directors of Deckers Outdoor Corporation, a specialty shoe manufacturer, and a numbers of private companies.
William E. Colson has served as a director of the Company since 2000. Mr. Colson is a founder of Holiday Retirement Corp., a major operator of independent living retirement facilities, and has been its President and Chief Operating Officer since 1987 and its Chief Executive Officer since December 1999. Mr. Colson also serves as President and Managing General Partner of Colson & Colson Construction Co., which develops and constructs retirement communities and multi-family projects, since 1963. Mr. Colson also serves as a member of the Executive Board of the American Seniors Housing Association.
Ronald G. Gearyhas served as a director of the Company since May of 2001. Mr. Geary has served as a director and President of ResCare, Inc., a provider of residential, training, educational and support services to populations with special needs, since 1990 and as Chief Executive Officer since 1993. He was elected Chairman of the Board of ResCare in June 1998. Mr. Geary also serves as a director of Ventas, Inc., a real estate investment trust.
Robert Havemanhas served as a director of the Company since 1995 and served as Vice Chairman of the Board of the Company from May 2000 to November 2000 and as President of the Company from November 2000 to January 2001. Mr. Haveman has served as Treasurer of EDP Management Corp., a privately-held investment management firm, since April 1997. Mr. Haveman served as the Secretary/Treasurer of the Prince Corporation, an automotive interior trim manufacturer, from 1987 to 1997.
William G. Petty, Jr. has served as a director of the Company since 1993, served as Chairman of the Board of the Company from December 1993 to May 2000 and served as Chief Executive Officer of the Company from December 1993 to April 1996. He has served as a Managing Director of Beecken, Petty & Company, the general partner of a private healthcare investment fund, since December 1996. Mr. Petty served as the Vice Chairman of GranCare from July 1995 to November 1997.
Patrick F. Kennedyhas served as a director of the Company since May 2002, as Chief Executive Officer of the Company since November of 2001 and as President of the Company since January of 2002. Since 1995, Mr. Kennedy has served as Senior Vice President and as a director of Holiday Retirement Corp., a major operator of independent living retirement facilities.
Chet H. Bradeenhas served as Senior Vice President of the Company since July 2001. Prior to joining the Company, Mr. Bradeen served as Chief Executive Officer of Sun Healthcare Asia Pacific, the Asian division of a large long-term care company, from 1998 to 2001. From 1995 to 1998, Mr. Bradeen served as Chief Executive Officer of Sun Healthcare UK.
Mark W. Ohlendorf has served as Senior Vice President of the Company since October 1997, as Chief Financial Officer since November 1999 and as Secretary since July 2000. He served as the Chief Financial Officer of Sterling from April 1997 to October 1997. Mr. Ohlendorf served as Vice President, Chief Financial Officer and Treasurer of Vitas Healthcare Corporation from December 1990 to April 1997. Mr. Ohlendorf is a Certified Public Accountant.
There are no family relationships among any of the executive officers or directors of the Company. Upon the Company's issuance of 1,250,000 shares of Series A Stock on May 31, 2000, the holders of the Series A Stock were given the right to elect four directors to the Company's Board of Directors. On May 30, 2002, Ms. Natalie K. Townsend and Messrs. William E. Colson, Robert Haveman and Jerry L. Tubergen were elected as Series A Directors of the Company by the holders of the Series A Stock to serve until the Company's next annual meeting of stockholders. Ms. Townsend and Mr. Tubergen have subsequently resigned from the Board. No other arrangement or understanding exists between any director or director nominee and any other person pursuant to which he or she was or is to be selected as a director or director nominee of the Company.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors, executive officers, and persons who own beneficially more than 10% of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of such securities of the Company. Directors, executive officers and greater than 10% stockholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file.
To the Company's knowledge, based solely on its review of the copies of such reports furnished to the Company and representations that no other reports were required, all Section 16(a) filing requirements applicable to its directors, executive officers and greater than 10% beneficial owners were complied with during 2002, except that Mr. Kennedy did not report his acquisition of beneficial ownership (by virtue of becoming a member of Holiday Retirement Consulting, LLC on Decmber 31, 2001) of 269,500 shares of Common Stock and 12,305 shares of Series B preferred stock in December 2001 until he filed a Form 4 on April 10, 2002, or his disposition of beneficial ownership of these same shares (by virtue of the redemption of his member interest in Holiday Retirement Consulting, LLC in December 2002) until he filed a Form 4 on or about March 31, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of March 15, 2003 by; (i) each person known by the Company to own more than 5% of the outstanding shares of Common Stock or the Series A Stock: (ii) each of the Company's directors; (iii) each of the Company's executive officers included in the Summary Compensation Table included elsewhere herein; and (iv) all of the Company's directors and executive officers as a group. Except as otherwise noted, the person or entity named has sole voting and investment power over the shares indicated.
Shares of Common | Series A Stock(2) | |||
Name | Number | Percent | Number | Percent |
Jerry L. Tubergen (3)(4) | 12,868,832 | 40.2% | 1,205,776 | 91.2% |
Richard M. DeVos, Jr. (3)(4) | 12,715,400 | 39.8 | 1,205,776 | 91.2 |
The Toronto-Dominion Bank (3)(5) | 12,249,250 | 35.5 | ||
HBK Investments L.P. (3)(6) | 11,483,375 | 34.0 | ||
Robert Haveman (3)(7) † | 10,539,995 | 32.9 | 1,205,776 | 91.2 |
Elsa D. Prince (3)(7) | 10,437,367 | 32.6 | 1,205,776 | 91.2 |
RDVEPCO, L.L.C. (3)(8) | 9,716,026 | 30.4 | 1,205,776 | 91.2 |
AR Investments, Ltd. (9) | 2,167,900 | 9.7 | ||
Dimensional Fund Advisors (10) | 1,400,100 | 6.3 | ||
Warburg Pincus Asset Management, Inc. (11) | 1,263,100 | 5.7 | ||
Transamerica Corporation and Transamerica Investment | 1,149,900 | 5.2 | ||
William E. Colson (13) (14) † | 563,346 | 2.5 | 116,346 | 8.8 |
Holiday Retirement 2000, LLC (3)(13) | 560,846 | 2.5 | 116,346 | 8.8 |
Patrick F. Kennedy (14)‡ † | 0 | * | ||
Mark W. Ohlendorf‡ | 242,647 | 1.1 | ||
William G. Petty, Jr. (15)† | 141,658 | * | ||
Anthony Geonnotti, Jr. | 23,782 | * | ||
Gene E. Burleson (16)† | 52,167 | * | ||
Chet H. Bradeen‡ | 0 | * | ||
Ronald G. Geary† | 0 | * | ||
Kristin A. Ferge‡ | 0 | * | ||
All Executive Officers and Directors as a Group (9 Persons) (17) | 11,565,595 | 35.2 | ||
† Director of the Company.
‡ Executive officer or former executive officer of the Company. See Item 10, "Directors and Executive Officers of the Registrant."
* Less than 1%.
(1) Information as to the beneficial ownership of Common Stock has either been furnished to the Company by or on behalf of the indicated persons or is taken from reports on file with the Securities and Exchange Commission.
(2) Shares of Series A Stock are convertible at any time at the holder's option into shares of the Company's Common Stock. Therefore, shares listed in the "Series A Stock" column are included in the shares listed in the respective owner's "Common Stock" column.
(3) On May 31, 2000, Alterra completed a financing transaction in which it issued $173 million of convertible debentures and convertible preferred shares to certain investors, including RDVEPCO, L.L.C., a Michigan limited liability company ("RDVEPCO"), the Elsa D. Prince Living Trust (the "Prince Trust"), RDV Manor Care, LLC, a Michigan limited liability company ("RDVMC"), Holiday Retirement 2000, LLC, a Washington limited liability company ("Holiday"), Group One Investors, L.L.C., a Michigan limited liability company ("Group One") and HBK Master Fund L.P., a Cayman Islands limited partnership (the "Equity Transaction"). The securities issued in the Equity Transaction included: (i) $168 million of the Company's Series A, Series B and Series C PIK Debentures due 2007 (collectively, the "Debentures") with an original conversion price of $4.00 per share, a 9.75% semi-annual payment-in-kind ("PIK") coup on and a seven year maturity and (ii) $5 million of shares of the Company's Series A Stock with an original conversion price of $4.00 per share, a 9.75% semi-annual, cumulative PIK dividend and a mandatory redemption in seven years. The Series A and the Series C Debentures and the Series A Stock are convertible at any time at the applicable holder's option into shares of Common Stock of the Company. The Series B Debentures are convertible at any time at the applicable holder's option into shares of the Company's Series B Non-Voting Participating Preferred Stock (the "Series B Stock") having rights (other than voting rights) substantially similar to the Company's Common Stock. Additional information regarding the Equity Transaction is included in Item 13, "Certain Relationships and Related Transactions."
As further described in the notes below, beneficial ownership information reflected in this table includes shares of Common Stock issuable upon the conversion of Series A and C Debentures and Series A Stock issued in the Equity Transaction. Pursuant to the anti-dilution provisions governing the PIK Debentures and the Series A Stock issued in the Equity Transaction, the effective conversion price for the PIK Debentures and the Series A Stock has decreased from $4.00 to $2.83 per share of Common Stock for the Series A and Series C Debentures and from $400 to $283 per share of Series B Stock for the Series B Debentures as of December 31, 2001. However, pursuant to these anti-dilution provisions, the actual conversion price for the Series A and C Debentures and the Series A stock remains at $4.00 per share and for the Series B Debentures remains at $400 per share; but upon conversion of these convertible securities the holder thereof will now also receive shares of Series B-1 Preferred Stock, in addition to Co mmon Stock, in such amounts as to provide such holder an equity interest in the Company as though the conversion price for the Series A and C Debentures and Series A Stock on the one hand, and the Series B Debentures on the other hand, were decreased to $2.83 and $283 per share, respectively. As this table reflects beneficial ownership of the Company's voting securities (and the Series B-1 Preferred Stock is not a voting security of the Company), this table reflects conversion prices for the Series A Stock and for the Series A and C Debentures at $4.00 per share.
(4) Based upon a Schedule 13D filed on June 12, 2000, as amended December 11, 2000, by RDV ALTCO, L.L.C., a Michigan limited liability company, RDV Corporation, a Michigan corporation, Richard M. DeVos, Jr., Daniel G. DeVos, Suzanne C. DeVos VanderWeide, Douglas L. DeVos, Jerry L. Tubergen, Elisabeth D. DeVos, Helen J. DeVos, The Richard M. and Helen J. DeVos Foundation, The Dick and Betsy DeVos Foundation, The Douglas and Maria DeVos Foundation, The Jerry L. and Marcia D. Tubergen Foundation, Windquest Group, Inc., a Michigan corporation, Buttonwood Capital, Inc., a Michigan corporation and RDV Capital Management L.P., a Delaware limited partnership (collectively, the "RDV Reporting Persons"), the RDV Reporting Persons may be deemed to beneficially own an aggregate of 12,995,576 shares of Common Stock, including 12,649,624 shares and 12,778,634 shares reflected as beneficially owned by Richard M. DeVos, Jr. and Jerry L. Tubergen, respectively. Based upon their Schedul e 13D, the RDV Reporting Persons as a group have sole power to vote or to direct the vote and sole power to dispose or direct the disposition of 3,200,052 shares of Common Stock. Based upon their Schedule 13D, the RDV Reporting Persons, as a group may be deemed to beneficially own (i) 1,140,000 shares of Series A Stock; (ii) $40,722,000 Series A Debentures of the Company; (iii) $4,450,000 of the Company's 7.00% convertible subordinated debentures, due 2004 (the "7% Debentures"); and (iv) $16,000,000 of the Company's 5.25% convertible subordinated debentures, due 2002 (the "5.25% Debentures"), all of which are convertible at any time at the holders' option into 1,140,000, 10,180,500, 219,753 and 556,522 shares of the Company's Common Stock, respectively. Assuming conversion of the securities described above, the RDV Reporting Persons will have sole voting and dispositive power with respect to 3,200,052 shares of the Company's Common Stock. Certain shares reported as beneficially owned b y the RDV Reporting Persons are also reported as beneficially owned by RDVEPCO and the Prince Reporting Persons (as defined below). For further information regarding the RDV Reporting Persons' beneficial ownership of the Company's Common Stock, please see the Schedule 13D referenced in this note. The principal business address of Richard M. DeVos, Jr. is 7575 Fulton Street East, Ada, Michigan 49355. Mr. Tubergen's principal business address is 500 Grand Bank Building, 126 Ottawa, N.W. Grand Rapids, Michigan 49503. In addition, the RDV Reporting Persons, including Richard M. DeVos, Jr. and Jerry L. Tubergen, may be deemed to beneficially own 65,776 shares of Series A Stock, as issued to RDVEPCO pursuant to a dividend on the Series A Stock on January 2, 2001, which is convertible into Common Stock.
(5) Pursuant to the Equity Transaction, as of August 10, 2000, Toronto-Dominion acquired $29,904,000 of Series B Debentures from the Company and $10,000,000 of Series B Debentures from other debenture holders. Pursuant to an agreement with the Company, Toronto-Dominion has the right to exchange its Series B Debentures for Series C Debentures, which are convertible into Common Stock, subject to compliance by Toronto-Dominion and its affiliates with applicable laws and regulations that restrict their holdings of voting securities. This table reflects Toronto-Dominion's beneficial ownership assuming that it exchanges all of its Series B Debentures for Series C Debentures and converts all of such Series C Debentures into shares of Common Stock. The Company understands, however, that under currently applicable regulatory provisions Toronto-Dominion is prohibited from holding in excess of five percent of the outstanding Common Stock. The Merchant Banking Division of Toronto-Dominion, TD Capital Group, manages Toro nto-Dominion's investment in the Company. The principal business address of Toronto-Dominion and TD Capital Group is P.O. Box 1, TD Tower, Toronto, Ontario M5K 1A2, Canada.
(6) HBK Master Fund L.P. ("HBK Master Fund") owns $43,697,500 in face amount of the Series C Debentures of the Company, which are convertible into shares of the Company's Common Stock. Assuming conversion of such Series C Debentures, HBK Investments L.P. ("Investments") (pursuant to Investment Management Agreements among the parties) will have sole voting power and sole dispositive power with respect to the 10,924,375 shares of the Company's Common Stock issuable to HBK Master Fund. In addition, HBK Master Fund owns 1,100 shares of Common Stock and $11,370,000 in face amount of the 6.75% Debentures of the Company due 2006, which are convertible into shares of the Company's Common Stock. Assuming conversion of such 6.75% Debentures, Investments (pursuant to Investment Management Agreements among the parties) will have sole voting power and sole dispositive power with respect to the 557,900 shares of the Company's Common Stock issuable to HBK Master Fund.
The principal place of business of HBK Master Fund and Investments is 777 Main Street, Suite 2750, Fort Worth, Texas 76102.
(7) Based upon a Schedule 13D filed on June 12, 2000, by EDP Assisted Living Properties, L.L.C., a Michigan limited liability company, Elsa D. Prince and Robert Haveman (collectively the "Prince Reporting Persons"), the Prince Reporting Persons may be deemed to beneficially own an aggregate of 10,674,583 shares of Common Stock, including 10,371,591 shares and 10,452,052 shares reflected as beneficially owned by Elsa D. Prince and Robert Haveman, respectively. Based upon their Schedule 13D, the Prince Reporting Persons as a group have sole power to vote or to direct the vote and sole power to dispose or direct the disposition of 525,523 shares of Common Stock. Based upon their Schedule 13D, the Prince Reporting Persons, as a group may be deemed to beneficially own (i) 1,140,000 shares of Series A Stock; (ii) $34,041,000 Series A Debentures of the Company; and (iii) $6,950,000 of 7.00% Debentures, all of which are convertible at any time at the holders' option into 1,140,000, 8,510,250, and 343,209 sha res of the Company's Common Stock, respectively. Assuming conversion of the securities described above, the Prince Reporting Persons will have sole voting and dispositive power with respect to 525,523 shares of the Company's Common Stock. Certain shares reported as beneficially owned by the Prince Reporting Persons are also reported as beneficially owned by RDVEPCO and the RDV Reporting Persons. For further information regarding the Prince Reporting Persons' beneficial ownership of the Company's Common Stock, please see the Schedule 13D referenced in this note. The Prince Reporting Persons' principal business address is 190 S. River Avenue, Suite 300, Holland, Michigan 49423. In addition, the Prince Reporting Persons, including Elsa D. Prince and Robert Haveman, may be deemed to beneficially own 65,776 shares of Series A Stock, as issued to RDVEPCO pursuant to a dividend on the Series A Stock on January 2, 2001, which is convertible into Common Stock.
(8) Based upon a Schedule 13D filed by RDVEPCO on June 12, 2000, RDVEPCO may be deemed to beneficially own an aggregate of 9,650,250 shares of Common Stock. RDVEPCO was organized in December 1999 for the principal purpose of investing in or engaging in other financial transactions with Alterra. The principal business address of RDVEPCO is 500 Grand Bank Building, 126 Ottawa Avenue, N.W., Grand Rapids, Michigan 49503. RDVEPCO is managed by its two members, RDV ALTCO, L.L.C. and EDP Assisted Living Properties, L.L.C. For additional information regarding RDV ALTCO, L.L.C. and EDP Assisted Living Properties, L.L.C., see notes (3), (4) and (5) hereto. Based upon its Schedule 13D, RDVEPCO has sole power to vote or direct the vote and sole power to dispose or to direct the disposition of the 9,650,250 shares of Common Stock. Based upon its Schedule 13D, RDVEPCO owns (i) 1,140,000 shares of Series A Stock; and (ii) $34,041,000 Series A Debentures of the Company, all of which are convertible at any time at RDVEPCO' s option into 1,140,000 and 8,510,250 shares of the Company's Common Stock, respectively. In addition, RDVEPCO may be deemed to beneficially own 65,776 shares of Series A Stock, as issued pursuant to a dividend on the Series A Stock on January 2, 2001, which is convertible into Common Stock. Assuming conversion of such Series A Stock and Series A Debentures, RDVEPCO will have sole voting and dispositive power with respect to 9,716,026 shares of the Company's Common Stock. Certain shares reported as beneficially owned by RDVEPCO are also reported as beneficially owned by the RDV Reporting Persons and the Prince Reporting Persons. For further information regarding RDVEPCO's beneficial ownership of the Company's Common Stock, please see the Schedule 13D referenced in this note.
(9) Based upon a Schedule 13D filed on January 18, 2000, as amended on January 26, 2000 and February 25, 2000, by AR Investments Limited, a Cayman Islands corporation ("AR Investments"), RH Investments Limited, a Cayman Islands corporation ("RH Investments"), VXM Investments Limited, a Cayman Islands corporation ("VXM Investments"), LXB Investments Limited, a Cayman Islands corporation ("LXB Investments"), HR Investments Limited, a Cayman Islands corporation ("HR Investments"), Barry Trust, a Guernsey, Channel Islands trust, Rachel Trust, a Guernsey, Channel Islands trust, Vivian Trust, a Guernsey, Channel Islands trust, Lillian Trust, a Guernsey, Channel Islands trust, Henry Trust, a Guernsey, Channel Islands trust, The Monument Trust Company Limited, a Guernsey, Channel Islands corporation, IPC Advisors S.A.R.L., a Luxembourg corporation, LMR Investments Limited, a Cayman Islands corporation, The LMR Family Trust, a Cayman Islands Trust and Caledonian Bank & Trust Limited, a Cayman Islands corporation (col lectively, the "Reporting Persons"), AR Investments, RH Investments, VXM Investments, LXB Investments, and HR Investments own an aggregate of 2,167,900 shares of Common Stock. According to the Schedule 13D, each Reporting Person may be deemed to be a beneficial owner of all 2,167,900 shares of Common Stock held by the Reporting Persons. The Reporting Persons as a group have sole power to vote or to direct the vote and sole power to dispose or to direct the disposition of the 2,167,900 shares of Common Stock. The principal place of business of the Reporting Persons is c/o Unsworth & Associates, Herengracht 483, 1017 BT, Amsterdam, The Netherlands.
(10) Based upon its Schedule 13G filed on February 11, 2003, Dimensional Fund Advisors Inc. is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940. Its principal place of business is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. Dimensional Fund Advisors Inc. has sole voting power with respect to all of the share of the Company's Common Stock held by it.
(11) Based upon its Schedule 13G filed on January 13, 1999, Warburg Pincus Asset Management, Inc. ("Warburg Pincus") is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940. Its principal place of business is 466 Lexington Avenue, New York, New York 10017. Of the total shares of the Company's Common Stock held by Warburg Pincus, it has sole voting power with respect to only 1,034,000 of such shares.
(12) Based upon their Schedule 13G filed on February 16, 1999, as amended January 22, 2000, Transamerica Investment Services, Inc. ("TIS") is an investment adviser registered under Section 203 of the Investment Advisers Act of 1940 and is a subsidiary of Transamerica Corporation ("Transamerica"). Transamerica's principal place of business is 600 Montgomery Street, San Francisco, California 94111, and TIS' principal place of business is 1150 Olive Street, Los Angeles, California 90015. Transamerica may be deemed to be the beneficial owner of 1,149,900 shares of the Company's Common Stock, of which 125,000 shares are owned directly by Transamerica. The remaining 1,024,900 shares of the Company's Common Stock, including 744,500 of such shares, are beneficially owned by direct and indirect subsidiaries of Transamerica. TIS is deemed to be the beneficial owner of 1,149,000 shares of the Company's Common Stock pursuant to separate arrangements whereby TIS acts as investment adviser to certain in dividuals and entities, including two insurance company subsidiaries of Transamerica. Each of the individuals and entities for which TIS acts as investment adviser has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the securities held or purchased pursuant to such arrangements.
(13) Includes shares issuable upon conversion of securities held by Holiday, a limited liability company organized for the principal purpose of participating in the Equity Transaction with Alterra, which acquired 110,000 shares of Series A Stock, $1,778,000 of Series A Debentures and $3,782,000 of Series B Debentures in the Equity Transaction. The principal place of business of Holiday is 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121. Holiday is managed by each of William Colson, Norman Brenden, and Daniel R. Baty, each of whom may be deemed to beneficially own the shares of Common Stock and Series A Stock beneficially owned by Holiday.
(14) Mr. Colson's and Mr. Kennedy's beneficial ownership reflected in the table does not include 296,750 shares of Common Stock issuable upon the conversion of Series C Debentures held by Holiday Retirement Consulting, LLC, which is owned by Holiday Retirement Corp. Both Mr. Colson and Mr. Kennedy are an executive officer, director and shareholder of Holiday Retirement Corp., but each disclaims beneficial ownership of these shares.
(15) Mr. Petty's beneficial ownership includes options to acquire 98,628 shares exercisable within 60 days of March 15, 2003.
(16) Mr. Burleson's beneficial ownership includes options to acquire 12,141 shares exercisable within 60 days of March 15, 2003.
(17) Includes options to acquire 327,545 shares exercisable within 60 days of March 15, 2003.
ITEM 16. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K |
1. The following documents are filed as part of the report:
Page | |
Independent Auditor's Report | 40 |
Consolidated Balance Sheets | 41 |
Consolidated Statements of Operations | 42 |
Consolidated Statements of Shareholders' Equity | 43 |
Consolidated Statements of Cash Flows | 44 |
Notes to Consolidated Financial Statements | 46-65 |
(d) EXHIBITS. The following exhibits are filed as part of, or incorporated by reference into this report on Form 10-K:
| 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 | Certificate of Elimination of the Series B-1 Non-Voting Participating Preferred Stock filed with the Delaware Secretary of State on December 20, 2001 (incorporated by reference to Exhibit 3.10 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
3.11 | Certificate of Designation of the Series B-1 of the Series B-1 Non-voting Participating Redeemable Preferred Stock of the Registrant filed with the Delaware Secretary of State on December 20, 2001 (incorporated by reference to Exhibit 3.11 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
3.12 | Amended and Restated Bylaws of the Registrant dated December 23, 2002 (filed herewith). | |
4.1 | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.2 to the Form S-1). | |
4.2 | See Articles Four, Six, Seven, Eight, Nine, Ten and Eleven 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, 3.9 and 3.11 above. | |
4.3 | See Articles 2, 3, 5, 7 and 8 to the Registrant's Amended and Restated Bylaws referenced at Exhibit 3.12 above. | |
| EXHIBIT Description | |
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, 1997 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). | |
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). |
| EXHIBIT Description | |
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 Form10-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 (incorporated by reference to Exhibit 4.21 to the Registrant's Form 10-K for the year ended December 31, 2000). | |
10.1 | Consulting Services Agreement dated as of November 1, 2001 by and between the Registrant and Holiday Retirement Consulting Services LLC (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.2 | Employment Agreement dated as of November 1, 2000 by and between the Registrant and Mark W. Ohlendorf (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-K for the year ended December 31, 2000). Represents an executive compensation plan or arrangement. | |
10.3 | Employment Agreement dated as of June 8, 2001 by and between the Registrant and Chet Bradeen (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.4 | Form of Employment Agreement by and between the Registrant and Patrick F. Kennedy dated as of June 1, 2002 (filed herewith). Represents an executive compensation plan or arrangement. | |
10.5 | Master Lease dated as of April 9, 2002 by and between the Registrant and Nationwide Health Properties, Inc. and its affiliates (certain 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 10.3to the Registrant's Form 10-Q for the period ending June 30, 2002). | |
10.6 | Memorandum of Understanding dated as of April 9, 2002 by and between the Registrant and Nationwide Health Properties, Inc., and its affiliates (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q for the period ending June 30, 2002). | |
10.7 | First Amendment dated December 30, 2002, to Memorandum of Understanding dated as of April 9, 2002 by and between the Registrant and Nationwide Health Properties, Inc., and its affiliates (filed herewith). | |
10.8 | Letter of Credit Agreement dated as of April 9, 2002 by and between the Registrant and Nationwide Health Properties, Inc., and its affiliates (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q for the period ending June 30, 2002). | |
10.9 | Form of Lease and Security Agreement by and between Nationwide Health Properties, Inc. and New Crossings International Corporation (the "NHP/Crossings Lease and Security Agreements") dated as of December 15, 1995 (the Atrium) (incorporated by reference to Exhibit 10.35 of the Form S-1). |
| EXHIBIT Description | |
10.10 | Amended Schedule of NHP/Crossings Lease and Security Agreements which are substantially in the form of the Lease and Security Agreement referenced above (filed herewith). | |
10.11 | Management Agreement dated August 3, 1990, by and between Housing Division, State of Oregon and New Crossings International Corporation (Albany Residential) (incorporated by reference to Exhibit 10.59 of the Form F-1). | |
10.12 | Master Lease dated as of April 9, 2002 by and between JER/NHP Senior Living Acquisition, LLC, and its affiliates and ALS Leasing, Inc. and Assisted Living Properties, Inc. (certain 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 10.2 to the Registrant's Form 10-Q for the period ending June 30, 2002). | |
10.13 | Memorandum of Understanding dated as of April 9, 2002 by and among the Registrant, ALS Leasing, Inc., Assisted Living Properties, Inc. and JER/NHP Senior Living Acquisition, LLC and its affiliates (incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-Q for the period ending June 30, 2002). | |
10.14 | First Amendment dated December 30, 2002, to Memorandum of Understanding dated as of April 9, 2002 by and among the Registrant , ALS Leasing, Inc., Assisted Living Properties, Inc., JER/NHP Senior Living Acquisition, LLC, and its affiliates (filed herewith). | |
10.15 | Letter of Credit Agreement dated as of April 9, 2002 by and between JER/NHP Senior Living Acquisition, LLC, and its affiliates and ALS Leasing, Inc., and Assisted Living Properties, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the period ending March 31, 2002). | |
10.16 | Guaranty of Lease and Letter of Credit Agreement dated as of April 9, 2002 by and between the Registrant and JER/NHP Senior Living Acquisition, LLC, and its affiliates (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q for the period ending March 31, 2002). | |
10.17 | Stock Pledge Agreement dated as of April 9, 2002 by and between the Registrant and JER/NHP Senior Living Acquisition, and its affiliates (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q for the period ending March 31, 2002). | |
10.18 | Master Lease (Alterra Pool 2) dated as of October 7, 2002 by and between JER/NHP Senior Living Acquisition, LLC and ALS Leasing, Inc. (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 10.3 to the Registrant's Form 10-Q for the period ending September 30, 2002). | |
10.19 | Memorandum of Understanding dated as of October 7, 2002 by and between Registrant, ALS Leasing, Inc. and JER/NHP Senior Living Acquisition, LLC. (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q for the period ending September 30, 2002). | |
10.20 | First Amendment dated December 30, 2002, to Memorandum of Understanding dated as of October 7, 2002 by and between the Registrant, ALS Leasing, Inc. and JER/NHP Senior Living Acquisition, LLC (filed herewith). | |
10.21 | Letter of Credit Agreement dated as of October 7, 2002 by and between JER/NHP Senior Living Acquisition, LLC and ALS Leasing, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q for the period ending September 30, 2002). | |
10.22 | Guaranty of Lease and Letter of Credit Agreement dated as of October 7, 2002 by and between the Registrant and JER/NHP Senior Living Acquisition, LLC (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the period ending September 30, 2002). |
| EXHIBIT Description | |
10.23 | Stock Pledge Agreement dated as of October 7, 2002 by and between Registrant and JER/NHP Senior Living Acquisition, LLC. (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q for the period ending September 30, 2002). | |
10.24 | Loan Agreement dated March 31, 1998 by and between ALS-Venture I, Inc. and Nomura Asset Capital Corporation, as assigned to Capmark Services, L.P. (incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q for the period ending March 31, 1998). | |
10.25 | 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, dated April 7, 2000 (incorporated by reference to Exhibit 10.38 to the Registrant's Form 10-K for the year ended December 31, 2000). | |
10.26 | Modification and Reaffirmation Agreement dated as of December 11, 2002 by and among ALS-Venture I, Inc., the Registrant, ALS-Clare Bridge, Inc. and Capmark Services, L.P. (incorporated by reference to Exhibit 99.4 to the Registrant's Form 8-K/A filed January 31, 2003). | |
10.27 | Amended and Restated Financing and Security Agreement (Master Agreement) between ALS Holdings, Inc., and ALS Wisconsin Holdings, Inc., as Borrower, and Bank United (now Washington Mutual Bank FA), individually and as agent for itself and certain other lenders, 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). | |
10.28 | 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). | |
10.29 | Second Amendment to Amended and Restated Financing and Security Agreement dated as of May 10, 2000 between ALS Holdings, Inc., ALS Wisconsin Holdings, Inc. and Bank United, individually and as agent for itself and certain other lenders (incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-Q for the period ending June 30, 2000). | |
10.30 | Third Amendment to Amended and Restated Financing and Security Agreement dated as of May 31, 2000 between ALS Holdings, Inc., ALS Wisconsin Holdings, Inc. and Bank United, individually and as agent for itself and certain other lenders (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q for the period ending June 30, 2000). | |
10.31 | 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). | |
10.32 | 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 10.57 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.33 | Guaranty of Payment Agreement dated September 28, 1998, by the Registrant, for the benefit of Bank United, individually and as agent for itself and certain other lenders (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q for the period ending September 30, 1998). | |
10.34 | First Amendment to Guaranty of Payment Agreement dated as of October 29, 1999 by and between the Registrant and Bank United, individually and as agent for itself and certain other lenders (incorporated by reference to Exhibit 10.20 to the Registrant's Form 10-Q for the period ending September 30, 1999). | |
10.35 | Suspension, Waiver and Modification Agreement dated March 28, 2000 by and betweenALS Holdings, Inc., ALS Wisconsin Holdings, Inc., the Registrant and Bank United,individually and as agent for itself and certain other lenders (filed herewith). |
| EXHIBIT Description | |
10.36 | Third Amendment to Guaranty of Payment Agreement dated as of May 10, 2000 by and between the Registrant and Bank United, individually and as agent for itself and certain other lenders (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q for the period ending June 30, 2000). | |
10.37 | Fourth Amendment to Guaranty of Payment Agreement dated as of May 31, 2000 by and between the Registrant and Bank United, individually and as agent for itself and certain other lenders (incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-Q for the period ending June 30, 2000). | |
10.38 | Additional Borrower Joinder Supplement dated December 10, 1998 by and between ALS Holdings, Inc., ALS Wisconsin Holdings, Inc., the Registrant and Bank United, individually and as agent for itself and certain other lenders (incorporated by reference to Exhibit 10.55 to the Registrant's Form 10-K for the period ending December 31, 1998). | |
10.39 | Forbearance and Collateral Account Agreement dated as of November 1, 2001 by and between ALS Holdings, Inc., ALS Wisconsin Holdings, Inc., Washington Mutual Bank FA, Firstar Bank Milwaukee, N.A. and AmSouth Bank (incorporated by reference to Exhibit 10.55 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.40 | Amendment No.1 to Forbearance and Collateral Account Agreement made as of December, 2001 between ALS Holdings, Inc., ALS Wisconsin Holdings, Inc., Washington Mutual Bank FA, Firstar Bank Milwaukee, N.A. and AmSouth Bank (incorporated by reference to Exhibit 10.56 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.41 | Amendment No. 2 to Forbearance and Collateral Account Agreement as of October 8, 2002 by and between ALS Holdings, Inc., Alterra Healthcare Corporation, Washington Mutual Bank, FA, U.S. Bank National Association and AmSouth Bank (incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q for the period ending September 30, 2002). | |
10.42 | Collateral Disposition Agreement as of October 8, 2002 by and between ALS Holdings, Inc., ALS Wisconsin Holdings, Inc., Alterra Healthcare Corporation, Washington Mutual Bank, FA, U.S. Bank National Association and AmSouth Bank (as defined in the Agreement) (certain 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 10.6 to the Registrant's Form 10-Q for the period ending September 30, 2002). | |
10.43 | 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). | |
10.44 | 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). | |
10.45 | 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). | |
10.46 | 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). | |
10.47 | 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). |
| EXHIBIT Description | |
10.48 | 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). | |
10.49 | 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 10.64 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.50 | Settlement Agreement Regarding Loans dated as of June 25, 2002 by and among the Registrant, ALS National, Inc., Key Corporate Capital Inc. and the Lenders (as defined in the Agreement) (certain 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 10.1 to the Registrant's Form 10-Q for the period ending June 30, 2002). | |
10.51 | Master Loan Agreement between ALS West, Inc., the Registrant and Guaranty Federal Bank, F.S.B. (now, Guaranty Bank), 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). | |
10.52 | 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). | |
10.53 | Assumption, Extension and Modification Agreement dated as of July 26, 2002 by and among ALS West, Inc., AHC West, Inc., Guaranty Bank and the Registrant (incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q for the period ending September 30, 2002). | |
10.54 | Amended Schedule of Properties financed under the Guaranty Bank Master Loan Agreement (filed herewith). | |
10.55 | Loan Agreement by and between ALS Financing, Inc. and GMAC Commercial Mortgage Corporation dated July 30, 1998, as assigned to LaSalle Bank National Association, as trustee for GMAC Commercial Mortgage Securities, Inc., Commercial Mortgage Pass-Through Certificates, Series 1998-C2 (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the period ending September 30, 1998). | |
10.56 | Loan Agreement between ALS Financing II, Inc. and GMAC Commercial Mortgage Corporation dated as of March 23, 1999, as assigned to FMAC (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q for the period ending March 31, 1999). | |
10.57 | Loan Agreement between AHC Purchaser, Inc. and GMAC Commercial Mortgage Corporation dated as of January 28, 2000, as assigned to LaSalle Bank National Association, as trustee for the registered holders of FMAC Commercial Mortgage Asset Corporation, Mortgage Pass-Through Certificates, Series 2000-FL-F (incorporated by reference to Exhibit 10.1 to the Registrant's Form 10-Q for the period ending March 31, 2000). | |
10.58 | 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 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) (incorporated by reference to Exhibit 10.73 to the Registrant's Form 10-K for the year ended December 31, 2000). | |
10.59 | Amendment No. 1 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 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 (incorporated by reference to Exhibit 10.74 to the Registrant's Form 10-K for the year ended December 31, 2000). |
| EXHIBIT Description | |
10.60 | 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 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) (incorporated by reference to Exhibit 10.75 to the Registrant's Form 10-K for the year ended December 31, 2000). | |
10.61 | Guaranty dated August 31, 1999 by the Registrant in favor of Key Corporate Capital Inc. as 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). | |
10.62 | Settlement Agreement dated as of March 6, 2002 by the Registrant, Third Party Investors I, LLC and Key Corporate Capital Inc. as Agent, and the Lenders (as defined therein) (certain 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 10.75 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.63 | 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). | |
10.64 | 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). | |
10.65 | 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). | |
10.66 | 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). | |
10.67 | Forbearance Agreement and Amendment to Master Leases dated as of January 31, 2002 by and between the Registrant, AHC Properties, Inc. and Omega Healthcare Investors, Inc. (incorporated by reference to Exhibit 10.80 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.68 | First Amendment to Security Agreements dated as of January 31, 2002 by and between the Registrant, AHC Properties, Inc., Omega Healthcare Investors, Inc. and Omega (Kansas), Inc. (incorporated by reference to Exhibit 10.81 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.69 | Amended and Restated Cross-Default Agreement dated as of January 31, 2002 by and between the Registrant, ALS-Clare Bridge, Inc., AHC Properties, Inc., Omega Healthcare Investors, Inc. and Omega (Kansas), Inc. (incorporated by reference to Exhibit 10.82 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.70 | Amended and Restated Master Lease Agreement dated as of July 1, 2001 among Health Care REIT, Inc. and its affiliates and the Registrant. (certain 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 10.3 to the Registrant's Form 10-Q for the period ending June 30, 2001). | |
10.71 | First Amendment to the Amended and Restated Master Lease Agreement dated as of July 16, 2001 among Health Care REIT, Inc. and its affiliates and the Registrant (incorporated by reference to Exhibit 10.4 to the Registrant's Form 10-Q for the period ending June 30, 2001). |
| EXHIBIT Description | |
10.72 | Second Amendment to the Amended and Restated Master Lease Agreement dated as of December 21, 2001 among Health Care REIT, Inc. and its affiliates and the Registrant (incorporated by reference to Exhibit 10.85 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.73 | Third Amendment to the Amended and Restated Master Lease Agreement dated as of March 19, 2002 Health Care REIT, Inc. and its affiliates and the Registrant (incorporated by reference to Exhibit 10.86 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.74 | Fourth Amendment to the Amended and Restated Master Lease Agreement dated as of December 27, 2002 among Health Care REIT, Inc. and its affiliates and the Registrant (filed herewith). | |
10.75 | Master Lease Agreement dated as of July 16, 1999 between Pita General Corporation ("Synthetic Lessor") and AHC Tenant, Inc. ("AHC Tenant"), formerly 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). | |
10.76 | 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). | |
10.77 | 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). | |
10.78 | 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). | |
10.79 | 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). | |
10.80 | 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). | |
10.81 | 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). | |
10.82 | Promissory Note dated as of July 16, 1999 by Synthetic Lessor (incorporated by reference to Exhibit 2.12 to the Registrant's Form 8-K filed August 4, 1999). | |
10.83 | Master Amendment, Confirmation and Acknowledgment Agreement dated September 28, 1999 between Synthetic Lessor, AHC Tenant, the Registrant, Lender, SELCO, FNB, ZC, 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). |
| EXHIBIT Description | |
10.84 | Third Master Amendment dated May 31, 2000 between Synthetic Lessor, AHC Tenant, the Registrant, Lender, SELCO, FNB, ZC 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). | |
10.85 | Fourth Master Amendment dated June 30, 2000 between Synthetic Lessor, AHC Tenant, the Registrant, Lender, SELCO, FNB, ZC, and certain other parties as defined therein (incorporated by reference to Exhibit 10.100 to the Registrant's Form 10-K for the year ended December 31, 2000). | |
10.86 | Sixth Master Amendment dated as of December 27, 2002, by and among Synthetic Lessor, ZC, AHC Tenant, LaSalle Bank National Association, as trustee for the holder of Commercial Mortgage Pass-Through Certificates Series 2000-ZC2, the Registrant, AHC Acquisition Co., SELCO and Bank One, National Association, as trustee, and certain other parties as defined therein (certain of the exhibits to this document have been omitted from this Report; the Registrant agrees to furnish copies of such omitted exhibits supplementally to the Securities and Exchange Commission upon request) (incorporated by reference to Exhibit 99.2 to the Registrant's Form 8-K/A filed January 31, 2003). | |
10.87 | Amended and Restated Assisted Living Consultant and Operations Agreement dated December 27, 2002 between the Registrant and AHC Tenant. (incorporated by reference to Exhibit 99.3 to the Registrant's Form 8-K/A filed January 31, 2003). | |
10.88 | 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, as assigned to FNMA (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). | |
10.89 | Form of Multifamily Note ("Form of Amresco Note") by ALS Kansas, Inc. to Amresco Capital, L.P. dated July 16, 1999 as assigned to FNMA (incorporated by reference to Exhibit 10.6 to the Registrant's Form 10-Q for the period ending September 30, 1999). | |
10.90 | 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). | |
10.91 | Amended and Restated Lease dated as of December 15, 2002 between LTC-K1 Inc., successor-in-interest to LTC Properties, Inc., and the Registrant (certain of the exhibits to this document have been omitted from this Report; the Registrant agrees to furnish copies of such omitted exhibits supplementally to the Securities and Exchange Commission upon request) (incorporated by reference to Exhibit 99.7 to the Registrant's Form 8-K/A filed January 31, 2003). | |
10.92 | Amended and Restated Lease dated as of December 15, 2002 between LTC-K2 Limited Partnership., successor-in-interest to LTC Properties, Inc. and the Registrant (certain of the exhibits to this document have been omitted from this Report; the Registrant agrees to furnish copies of such omitted exhibits supplementally to the Securities and Exchange Commission upon request) (incorporated by reference to Exhibit 99.8 to the Registrant's Form 8-K/A filed January 31, 2003). | |
10.93 | Master Lease Agreement dated as of December 15, 2002 between LTC Properties, Inc., Texas-LTC Limited Partnership and North Carolina Real Estate Investments, LLC and the Registrant (certain of the exhibits to this document have been omitted from this Report; the Registrant agrees to furnish copies of such omitted exhibits supplementally to the Securities and Exchange Commission upon request) (incorporated by reference to Exhibit 99.9 to the Registrant's Form 8-K/A filed January 31, 2003). |
| EXHIBIT Description | |
10.94 | Master Lease Agreement dated as of December 15, 2002 between Kansas-LTC Corporation and the Registrant (ertain of the exhibits to this document have been omitted from this Report; the Registrant agrees to furnish copies of such omitted exhibits supplementally to the Securities and Exchange Commission upon request) (incorporated by reference to Exhibit 99.10 to the Registrant's Form 8-K/A filed January 31, 2003). | |
10.95 | Exchange and Settlement Agreement by and among Assisted Living Equities, LLC, Alternative Living Services-New York, Inc. and the Registrant dated as of May 30, 2001 (certain 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 10.6 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.96 | Purchase Agreement by and between the Registrant, AHC Exchange Corporation, AHC Niagara, LLC and Pioneer Acquisition Company dated as of December 7, 2001 (certain 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 10.7 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.97 | Form of Amended and Restated Secured Promissory Note ("Key Promissory Note") dated December 21, 2001 by Clinton Brookside Drive, LLC in favor of Key Corporate Capital, Inc. (incorporated by reference to Exhibit 10.105 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.98 | Form of Amended and Restated Guaranty of Payment and Performance dated as of December 21, 2001 from the Registrant to Key Corporate Capital Inc. ("Amended Key Guaranty") (incorporated by reference to Exhibit 10.106 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.99 | Amended Schedule of Key Promissory Notes and Amended Key Guaranties which are substantially similar to the forms referenced above (incorporated by reference to Exhibit 10.107 to the Registrant's Form 10-K for the year ended December 31, 2001.) | |
10.100 | 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). | |
10.101 | First Amendment to Loan Agreement and First Amendment to Registration Rights Agreement dated as of March 1, 2002 by and among the Registrant, RDVEPCO, L.L.C., Holiday Retirement 2000, LLC, The Toronto-Dominion Bank, and HBK Master Fund, L.P. (incorporated by reference to Exhibit 10.5 to the Registrant's Form 10-Q for the period ending March 31, 2002). | |
10.102 | 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). | |
10.103 | 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). | |
10.104 | 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). |
| EXHIBIT Description | |
10.105 | 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). | |
10.106 | 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). | |
10.107 | 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). | |
10.108 | 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). | |
10.109 | Amended Schedule of properties mortgaged under the Sovereign Bank Loan Agreement and mortgageswhich are substantially similar to the Sovereign Mortgage referenced above(incorporated by reference to Exhibit 10.116 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.110 | 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). | |
10.111 | 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). | |
10.112 | 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). | |
10.113 | 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). | |
10.114 | 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). | |
10.115 | 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). | |
10.116 | 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). | |
10.117 | 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). | |
10.118 | Amended Schedule of Firstar Mortgages and Deeds of Trust which are substantially in the form of Mortgage/Deed of Trust referenced above (filed herewith). |
| EXHIBIT Description | |
10.119 | 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). | |
10.120 | First Amendment to Loan Agreement dated as of December 31, 2000 between Heller Healthcare Finance, Inc. and AHC Borrower I, Inc. (incorporated by reference to Exhibit 10.142 to the Registrant's Form 10-K for the year ended December 31, 2000). | |
10.121 | 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). | |
10.122 | Amended Schedule of Heller Mortgages and Deeds of Trust which are substantially in the form of Heller Mortgage/Deed of Trust referenced above (filed herewith). | |
10.123 | Purchase and Sale Agreement dated as of February 28, 2003 by and among ALS Venture II, Inc. and Wynwood of Chapel Hill LLC as Sellers and SNH ALT Leased Properties Trust as Purchaser (certain exhibits to this agreement have been omitted; the Registrant agrees to furnish supplementally to the Commission, upon request, a copy of these exhibits) (filed herewith). | |
10.124 | Lease Agreement dated as of February 28, 2003 between AHC Trailside, Inc. and SNH ALT Leased Properties Trust (certain exhibits to this agreement have been omitted; the Registrant agrees to furnish supplementally to the Commission, upon request, a copy of these exhibits) (filed herewith). | |
10.125 | Guaranty Agreement dated as of February 28, 2003 by Registrant in favor of SNH ALT Leased Properties Trust (filed herewith). | |
10.126 | Guaranty Agreement dated as of February 28, 2003 by Pomacy Corporation in favor of SNH ALT Leased Properties Trust (filed herewith). | |
10.127 | Loan Agreement dated as of February 28, 2003 by and between Pomacy Corporation and SNH ALT Mortgaged Properties Trust (certain exhibits to this agreement have been omitted; the Registrant agrees to furnish supplementally to the Commission, upon request, a copy of these exhibits) (filed herewith). | |
10.128 | Guaranty Agreement dated as of February 28, 2003 by the Registrant in favor of SNH ALT Mortgaged Properties Trust (filed herewith). | |
10.129 | Guaranty Agreement dated as of February 28, 2003 by AHC Trailside, Inc. in favor of SNH ALT Mortgaged Properties Trust (filed herewith). | |
10.130 | Office Lease dated December 31, 2001 between the Registrant and Innovation Partners, LLC (incorporated by reference to Exhibit 10.130 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.131 | Form of Promissory Note dated December 31, 2001 by the Registrant in favor of the Lenders set forth in the schedule attached thereto (incorporated by reference to Exhibit 10.131 to the Registrant's Form 10-K for the year ended December 31, 2001). | |
10.132 | Form of Subordinated Promissory Note dated December 31, 2001 by the Registrant in favor of the Lenders set forth in the schedule attached thereto (incorporated by reference to Exhibit 10.132 to the Registrant's Form 10-K for the year ended December 31, 2001). |
No.
EXHIBIT
Description
10.133
Purchase Agreement dated December 27, 2002 by and between the Registrant and Elderly Living IX, Limited Partnership. (incorporated by reference to Exhibit 99.11 to the Registrant's Form 8-K/A filed January 31, 2003).
10.134
Debtor-In-Possession Credit Agreement dated as of January 22, 2003 among the Registrant, the persons identified therein as Lenders and Holiday Retirement Consulting Services LLC, acting as agent for the Lenders (certain of the exhibits to this document have been omitted; the Registrant agrees to furnish copies of such omitted exhibits supplementally to the Securities and Exchange Commission upon request) (incorporated by reference to Exhibit 99.5 to the Registrant's Form 8-K/A filed January 31, 2003).
10.135
Intercreditor, Standstill and Subordination Agreement dated as of January 22, 2003 between Capmark Services, L.P. and Holiday Retirement Consulting Services LLC, in its capacity as Agent for the holder of the Mezzanine Loan (as defined therein) (certain of the exhibits to this document have been omitted; the Registrant agrees to furnish copies of such omitted exhibits supplementally to the Securities and Exchange Commission upon request) (incorporated by reference to Exhibit 99.6 to the Registrant's Form 8-K/A filed January 31, 2003).
11.1
Statement re: Computation of Per Share Earnings.
21.1
Subsidiaries of the Registrant.
23.1
Consent of KPMG LLP, dated March 27, 2003.
23.2
Consent of KPMG LLP, dated April 3, 2003.
99.1
Certification of the Company's Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2
Certification of the Company's Chief Financial Office pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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 | Changes | Period | |||||
Allowance for Uncollectible Accounts Receivable | ||||||||||
Year Ended December 31, 2000 | (2,861,387 | ) | (2,012,785 | ) | 2,465,267 | --- | (2,408,905 | ) | ||
Year Ended December 31, 2001 | (2,408,905 | ) | (3,771,337 | ) | 1,651,007 | --- | (4,529,235 | ) | ||
Year Ended December 31, 2002 | (4,529,235 | ) | (2,419,018 | ) | 1,312,361 | (5,635,892 | ) | |||
Tax Valuation Allowance | ||||||||||
Year Ended December 31, 2000 | --- | --- | --- | (53,042,000 | ) | (53,042,000 | ) | |||
Year Ended December 31, 2001 | (53,042,000 | ) | --- | --- | (108,405,000 | ) | (161,447,000 | ) | ||
Year Ended December 31, 2002 | (161,447,000 | ) | --- | --- | (57,452,000 | ) | (218,899,000 | ) | ||
Reserve for Loss on Disposal and Joint Venture Settlements | ||||||||||
Year Ended December 31, 2000 | --- | --- | --- | --- | (22,163,468 | ) | ||||
Year Ended December 31, 2001 | (22,163,468 | ) | (161,247,224 | ) | 32,888,982 | --- | (150,521,710 | ) | ||
Year Ended December 31, 2002 | (150,521,710 | ) | (15,442,864 | ) | 97,655,580 | --- | (68,308,994 | ) | ||
The Board of Directors and Stockholders
Alterra Healthcare Corporation:
Under date of March 27, 2003, we reported on the consolidated balance sheets of Alterra Healthcare Corporation and Subsidiaries (the Corporation) as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule inthe Form 10-K. This financial statement schedule is the responsibility of the Corporation's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, this financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in notes 4 and 8, the Corporation adopted the provisions of Statement of Financial Standard (SFAS) No. 142,Goodwill and Other Intangible Assets, and SFAS No. 144,Accounting for Impairment or Disposal of Long-lived Assets, respectively, in 2002.
The audit report on the consolidated financial statements of the Corporation referred to above contains an explanatory paragraph that states that the Corporation filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The uncertainties inherent in the bankruptcy process and the Corporation's recurring losses along with the violations of certain debt covenants and cross covenants violations as of December 31, 2002 and 2001 raise substantial doubt about the Corporation's ability to continue as a going concern. The Corporation is currently operating its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court, and continuation of the Corporation as a going concern is contingent upon, among other things, the confirmation of a plan of reorganization, the ability to comply with all debt covenants, the ability to generate sufficient cash from operations, and the ability to obtain financing sources to meet future obligations. If no re organization plan is approved, it is possible that the Corporation may be liquidated. The consolidated financial statement schedule does not include any adjustments that might result from the outcome of these uncertainties.
KPMG LLP
Chicago, Illinois
March 27, 2003
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 31st day of March, 2003.
ALTERRA HEALTHCARE CORPORATION |
By: /s/ Mark W. Ohlendorf |
Mark W. Ohlendorf |
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/ Patrick F. Kennedy | March 31, 2003 | |||
Patrick F. Kennedy | President and Chief Executive Officer | |||
/s/ Mark W. Ohlendorf | Senior Vice President, Chief Financial | March 31, 2003 | ||
Mark W. Ohlendorf | Officer and Secretary | |||
(Principal Financial Officer) | ||||
/s/ Kristin A. Ferge | Vice President, Treasurer, and Assistant | March 31, 2003 | ||
Kristin A. Ferge | (Principal Accounting Officer) | |||
/s/ Gene E. Burleson | March 31, 2003 | |||
Gene E. Burleson | Chairman of the Board and Director | |||
/s/ William E. Colson | March 31, 2003 | |||
William E. Colson | Director | |||
/s/ Ronald G. Geary | March 31, 2003 | |||
Ronald G. Geary | Director | |||
/s/ Robert Haveman | March 31, 2003 | |||
Robert Haveman | Director | |||
/s/ William G. Petty, Jr. | March 31, 2003 | |||
William G. Petty, Jr. | Director | |||
SIGNATURE
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized.
By:/s/ Kristin A. Ferge
Kristin A. Ferge
Vice President, Treasurer and Assistant Secretary
Dated: April 3, 2003