1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 1-11999
ALTERRA HEALTHCARE CORPORATION
DELAWARE 39-1771281
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10000 INNOVATION DRIVE
MILWAUKEE, WI
53226
(Address of principal executive offices)
(Zip Code)
(414) 918-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
AS OF MARCH 31, 2000, THERE WERE 22,109,810 SHARES OF THE REGISTRANT'S
COMMON STOCK, PAR VALUE $0.01, OUTSTANDING.
(Number of shares outstanding of each class of the issuer's classes of common
stock, as of the latest practical date.)
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ALTERRA HEALTHCARE CORPORATION
INDEX
Part I. Financial Information
PAGE NO.
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31,
1999..................................................................................... 1
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999.................................................................. 2
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999.................................................................. 3
Notes to Condensed Consolidated Financial Statements..................................... 4 - 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 6 - 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K......................................................... 13-14
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, December 31,
2000 1999
------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 16,089 $ 18,728
Accounts receivable, net............................................ 7,003 7,150
Notes receivable, net............................................... 32,978 32,530
Land held for sale.................................................. 9,501 9,501
Other current assets................................................ 41,325 41,320
----------- -----------
Total current assets............................................ 106,896 109,229
----------- -----------
Property and equipment, net........................................... 908,815 863,163
Restricted cash and investments....................................... 28,485 28,325
Goodwill, net......................................................... 5,071 5,106
Other assets.......................................................... 66,628 55,574
----------- -----------
Total assets.................................................... $ 1,115,895 $ 1,061,397
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations....................... $ 10,094 $ 9,945
Short-term notes payable............................................ 15,009 29,009
Accounts payable - trade............................................ 3,616 11,036
Accounts payable - construction..................................... 3,726 6,616
Accrued expenses.................................................... 46,763 37,972
Deferred rent and refundable deposits............................... 7,477 9,199
----------- -----------
Total current liabilities...................................... 86,685 103,777
----------- -----------
Long-term obligations, less current installments...................... 639,630 563,072
Convertible debt...................................................... 228,600 228,600
Deferred gain on sale and other....................................... 11,887 11,592
Minority interest..................................................... 3,745 3,713
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued or outstanding...................................... -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; issued 22,111,671 shares of which
22,100,032 were outstanding on March 31, 2000 and
December 31, 1999............................................... 221 221
Treasury stock, $.01 par value; 11,639 shares in 2000 and 1999..
(163) (163)
Additional paid-in capital...................................... 179,385 179,362
Accumulated deficit............................................. (34,095) (28,777)
----------- -----------
Total stockholders' equity.................................... 145,348 150,643
----------- -----------
Total liabilities and stockholders' equity.................... $ 1,115,895 $ 1,061,397
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31,
---------------------------------
2000 1999
--------------- --------------
Revenue:
Resident service fees.................................................................. $ 101,445 $ 77,122
Management fees and other.............................................................. 5,111 5,769
-------------- --------------
Operating revenue.................................................................... 106,556 82,891
Operating expenses:
Residence operations................................................................... 66,186 47,099
Lease expense.......................................................................... 20,247 14,459
Lease income........................................................................... (8,729) (4,889)
General and administrative............................................................. 10,976 9,618
Depreciation and amortization.......................................................... 7,669 4,025
-------------- --------------
Total operating expenses............................................................. 96,349 70,312
-------------- --------------
Operating income..................................................................... 10,207 12,579
-------------- --------------
Other income (expense):
Interest expense, net.................................................................. (16,918) (6,464)
Equity in (losses) income of unconsolidated affiliates................................ (2,376) 82
Minority interest in losses of consolidated subsidiaries............................... 509 2,295
-------------- --------------
Total other expense, net............................................................ (18,785) (4,087)
-------------- --------------
(Loss) income before income taxes and the cumulative effect of a change in accounting
principle.............................................................................. (8,578) 8,492
Income tax benefit (expense)............................................................. 3,260 (3,227)
-------------- --------------
(Loss) income before the cumulative effect of a change in accounting principle........... (5,318) 5,265
-------------- --------------
Cumulative effect of a change in accounting principle, net of tax benefit of $2,409
(see Note 4) .......................................................................... -- (3,837)
-------------- --------------
Net (loss) income........................................................................ $ (5,318) $ 1,428
============== ==============
Earnings per common share - basic and diluted:
(Loss) income before cumulative effect of a change in accounting principle........... $ (0.24) $ 0.24
============== ==============
Cumulative effect on prior periods (to December 31, 1998) of changing to a different
method .............................................................................. -- $ (0.18)
============== ==============
Net (loss) income per common share - basic and diluted............................... $ ( 0.24) $ 0.06
============== ==============
Weighted average common shares outstanding:
Basic................................................................................ 22,103 22,068
============== ==============
Diluted.............................................................................. 22,103 22,551
============== ==============
See accompanying notes to condensed consolidated financial statements.
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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended
March 31,
-------------------------------
2000 1999
------------- -------------
Cash flows from operating activities:
Net (loss) income................................................................... $(5,318) $1,428
Adjustments to reconcile net (loss) income to net cash provided by operating activities
net of acquisitions:
Depreciation and amortization....................................................... 7,669 4,025
Amortization of deferred financing.................................................. 1,616 547
Deferred income taxes............................................................... (3,282) (1,015)
Equity in net loss from investments in unconsolidated affiliates.................... 2,376 (82)
Minority interest in losses of consolidated subsidiaries............................ (509) (2,295)
Tax effect of stock options exercised............................................... 22 460
Decrease (increase) in net resident receivables..................................... 147 (2,136)
Decrease in pre-opening costs...................................................... -- 7,856
Decrease income tax receivable..................................................... 4,335 --
Decrease (increase) in other current assets......................................... 568 (1,502)
Decrease in accounts payable trade.................................................. (7,420) (3,544)
Increase in accrued expenses and deferred rent..................................... 9,176 3,393
Decrease in accrued development reserve costs..................................... (1,695) --
Changes in other assets and liabilities, net........................................ (3,146) 1,123
----------- -----------
Net cash provided by operating activities............................................. 4,539 8,258
----------- -----------
Cash flows (used by) investing activities:
Payments for property, equipment and project development costs...................... (20,556) (69,969)
Increase in notes receivable, net of reserve...................................... (6,099) (13,097)
Changes in investments in and advances to unconsolidated affiliates................. (1,761) (500)
Purchase of limited partnership interests........................................... -- (15,235)
Increase in short-term investments................................................. -- (1,565)
----------- -----------
Net cash used in investing activities................................................. (28,416) (100,366)
----------- -----------
Cash flows from (used by) financing activities:
Repayments of short-term borrowings................................................. (30,000) --
Repayments of long-term obligations................................................. (1,662) (45,122)
Proceeds from issuance of debt...................................................... 54,029 128,863
Payments for financing costs........................................................ (1,672) (3,905)
Proceeds from sale/leaseback transactions........................................... -- 8,401
Issuance of common stock and other capital contributions............................ 2 645
Contributions by minority partners and minority stockholders........................ 541 4,000
----------- -----------
Net cash provided by financing activities............................................. 21,238 92,882
----------- -----------
Net decrease in cash and cash equivalents............................................. 2,639 774
----------- -----------
Cash and cash equivalents:
Beginning of period................................................................. 18,728 40,621
=========== ===========
End of period....................................................................... $16,089 $41,395
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized............................... $14,012 $6,130
=========== ===========
Cash paid during period for income taxes, net of refunds............................ $ (4,270) $2,499
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheets as of March 31, 2000 and
December 31, 1999, the condensed consolidated statements of operations for the
three months ended March 31, 2000 and 1999, and the condensed consolidated
statements of cash flows for the three months ended March 31, 2000 and 1999
contained in this Quarterly Report on Form 10-Q include the accounts of Alterra
Healthcare Corporation ("Alterra" or the "Company") and our affiliates which are
under our common financial control. All significant intercompany accounts have
been eliminated in consolidation. In our opinion, all adjustments (consisting
only of normal recurring items) necessary for a fair presentation of these
condensed consolidated financial statements have been included. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the results to be expected for the full fiscal year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K, for the year ended December 31, 1999, as amended.
(2) ACQUISITIONS
During the quarter ended March 31, 2000, we reacquired fee interests in
12 residences which were previously leased from a healthcare real estate
investment trust ("REIT"). This acquisition, which has been accounted for as a
purchase, had a purchase price of $27.7 million, all of which was paid in cash.
These residences, along with seven residences reacquired in December 1999, were
subsequently financed through $60.0 million of mortgage financing which closed
during the first quarter of 2000.
(3) FINANCING
In February 2000 the Company borrowed an additional $20.0 million under
an existing bridge loan (the "Bridge Loan"). Simultaneously with this additional
advance, the interest rate on this loan increased to 10% per annum. As
additional security for the Bridge Loan, we granted the bridge lender mortgages
on six residences. Of the $20.0 million additional advance on the Bridge Loan,
$4.1 million was placed in escrow to facilitate the funding of the remaining
construction costs with respect to the mortgaged residences. A facility fee of
$800,000 was paid to the bridge lender upon the closing of the amended Bridge
Loan.
In March 2000 the Company, together with Manor Care, Inc., reduced to $60
million the $200 million financing commitment made by a bank syndicate to
provide construction financing to the Company's development joint venture with
Manor Care, Inc. As a result the Company has established in the 1999 financial
statements a $5.0 million reserve against its note receivable from this joint
venture to reflect the estimated realizable value. An additional $2.0 million
reserve was established in the 1999 financial statements for costs associated
with exiting development projects which we will not continue due to this
reduction in this credit facility.
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(4) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999 we adopted the Statement of Position No.
98-5, "Reporting on the Costs of Start-up Activities." This Statement provides
guidance on the financial reporting of start-up activities and organization
costs. It requires costs of start-up activities and organization costs to be
expensed when incurred. Our prior practice was to capitalize these costs and
amortize them over a one-year period after residence opening in the case of
start-up costs and five years in the case of organizational costs. The
cumulative effect of the accounting change reflected in the condensed
consolidated statement of operations for the three months ended March 31, 1999
was $3.8 million, net of tax.
(5) NET (LOSS) INCOME PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
(loss) income per share amounts presented in the accompanying consolidated
statements of operations (in thousands, except per share data):
Three Months Ended
March 31,
-------------------------------------
2000 1999
---------------- --------------
Numerator:
Numerator for basic and diluted (loss) income per share before
cumulative effect of a change in accounting principle............... $(5,318) $5,265
Cumulative effect of a change in accounting principle.................. -- (3,837)
----------- --------------
Numerator for basic and diluted net (loss) income per share.......... $(5,318) $1,428
=========== ==============
Denominator:
Denominator for basic net (loss) income per common share-weighted
average shares...................................................... 22,103 22,068
Effect of dilutive securities:
Employee stock options.............................................. -- 483
----------- --------------
Denominator for diluted net (loss) income per common share-weighted
average shares plus assumed conversions.............................. 22,103 22,551
=========== ==============
Basic (loss) income per common share before cumulative effect of a
change in accounting principle...................................... $ (0.24) $ 0.24
Cumulative effect of a change in accounting principle.................. -- (0.17)
----------- -------------
Basic net (loss) income per common share............................... $ (0.24) $ 0.06
=========== =============
Diluted (loss) income per common share before cumulative effect of a
change in accounting principle...................................... $ (0.24) $ 0.24
Cumulative effect of a change in accounting principle.................. -- (0.18)
----------- -------------
Diluted net (loss) income per common share .......................... $ (0.24) $ 0.06
=========== =============
Shares issuable upon the conversion of convertible subordinated
debentures have been excluded from the computation because the effect of their
inclusion would be anti-dilutive.
(6) RECLASSIFICATIONS
Reclassifications have been made in the 1999 financial statements to
conform with the 2000 financial statement presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a leading national assisted living company operating assisted
living residences and providing assisted living services in 28 states. Our
growth in recent years has had a significant impact on our results of operations
and accounts for most of the changes in our results between 2000 and 1999. As of
March 31, 2000 and 1999, we operated or managed 465 and 369 residences with
aggregate capacity of 21,526 and 15,841 residents, respectively. We, together
with other parties who have purchased interests in some of our development
residences, were also constructing or developing 40 additional residences with
additional capacity for 2,066 residents as of March 31, 2000.
During the fourth quarter of 1999 we began to implement several strategic
initiatives designed to strengthen our balance sheet and to enable us to focus
on stabilizing and enhancing our core business operations. The principal
components of these strategic initiatives include:
- Reduced Development Activity. In light of the competitive
environment and tightening capital markets, we elected to
significantly reduce the scope of our assisted living
development activities. Specifically, in the fourth quarter of
1999 and the first quarter of 2000 we have discontinued
development activity with respect to a substantial number of
development sites.
- Reduced Reliance upon Joint Venture Arrangements. In order to
simplify our capital structure, we have elected to reduce our
utilization of joint venture development arrangements and other
off-balance sheet ownership and development structures (so-called
"black box" structures). Historically, these arrangements were a
source of fee income for us and served to reduce the adverse impact
on our earnings of start-up losses associated with our substantial
volume of newly-opened residences. We believe, however, that we can
improve our future cash flow and liquidity by retaining 100% of the
revenue and operating cash flow from more of our residences. No new
joint venture arrangements were established during the first
quarter of 2000.
- Deleveraging of our Balance Sheet. We are seeking to strengthen and
deleverage our balance sheet and to address our short and long-term
capital needs by securing an additional equity or equity-linked
investment. We have entered into a definitive agreement pursuant to
which we expect to issue a minimum of $138 million of convertible
senior debentures and convertible preferred shares. This
transaction is expected to close during the second quarter of 2000.
- Focus on Cash Flow. As our portfolio of assisted living residences
stabilizes and matures, we intend to focus on cash flow. In this
regard we will seek to own (as opposed to lease) as much of our
real estate as we can, given our capital constraints. Ownership of
a greater percentage of our residences will increase depreciation
and amortization expenses but only impact our operating cash flow
to the extent of any related interest expense. During the fourth
quarter of 1999 and first quarter of 2000, we purchased a total of
19 facilities previously leased from a healthcare REIT.
We are currently seeking to address both our short and long-term liquidity
requirements. The combination of a difficult financing and operating environment
for healthcare service companies has significantly reduced our access to credit.
A number of our traditional financing sources, including commercial banks and
other secured lenders, have substantially reduced their lending activities to
the healthcare sector. In addition, the credit availability under our credit
facilities has either been reduced or eliminated due to a variety of factors,
including our request for modifications of some of our financial covenants in
some of our credit agreements. To address our need for capital, we have entered
into a definitive agreement pursuant to which we expect to issue at least $138.0
million of convertible senior debentures and convertible preferred shares. We
currently anticipate that this transaction will close during the second quarter
of 2000. The transaction is contingent upon our ability to modify certain
covenants in our credit agreements and our ability to obtain requisite
regulatory approvals.
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THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
Residence Service Fees. Residence service fees for the three months
ended March 31, 2000 were $101.4 million, representing an increase of $24.3
million or 32% from the $77.1 million for the comparable 1999 period.
Substantially all of this increase resulted from the addition of newly
constructed residences and other residences acquired by us. We operated or
managed 465 and 369 residences at March 31, 2000 and 1999, respectively.
Other Revenues. Other revenues for the three months ended March 31,
2000 were $5.1 million, a decrease of $700,000 from the $5.8 million of other
revenue for the three months ended March 31, 1999. The decrease is attributable
to fewer development fees in the 2000 period which were partially offset by
increased ongoing 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
three months ended March 31, 2000 increased to $66.2 million from $47.1 million
in the three-month period ended March 31, 1999, due to the increased number of
residences operated during the 2000 period. Operating expenses as a percentage
of residence service fees for the three months ended March 31, 2000 and 1999
were 65.2% and 61.1%, respectively. This percentage increase resulted primarily
from increases in labor and employee benefit related costs due to increased
competition for personnel. The increase in marginal expenses was also impacted
by a slower lease-up of residences in some areas of the country.
Lease Expense. Lease expense for the three months ended March 31, 2000
was $20.2 million, compared to $14.5 million in the comparable period in 1999.
This increase was primarily attributable to the utilization of additional
sale/leaseback financing and synthetic lease financing totaling $258.9 million
during the twelve-month period ended March 31, 2000.
Lease Income. We earned $8.7 million of lease income for the three
months ended March 31, 2000, compared to $4.9 million for the comparable period
in 1999, on residences owned or leased by us and leased or subleased to
unconsolidated joint ventures. Lease payment obligations of the unconsolidated
joint venture entities are generally equivalent to the debt service payable by
us on the leased residences, and thereby offset our costs associated with
obtaining and maintaining financing for these residences.
General and Administrative Expense. For the three months ended March
31, 2000, general and administrative expenses were $11.0 million, compared to
$7.8 million before a $1.8 million write-off associated with our name change for
the comparable 1999 period, representing an increase as a percentage of
operating revenue from 9.4% in the 1999 period to 10.3% in the 2000 period. The
$3.2 million increase in expenses in the 2000 period was primarily attributable
to salaries, related payroll taxes and employee benefits for additional
corporate personnel retained to support the increased number of unconsolidated
residences we manage.
Depreciation and Amortization. Depreciation and amortization for the
three months ended March 31, 2000, was $7.7 representing an increase of $3.6
million, or 90.5%, from the $4.0 million of depreciation and amortization for
1999. This increase resulted primarily from depreciation of fixed assets on the
larger number of new residences that were owned by us during the three months
ended March 31, 2000, versus the comparable 1999 period. In addition, we
acquired 19 residences with a capacity for 944 residents in December 1999 and
January 2000 which were previously leased by us from a healthcare REIT. Since we
now own these properties, our depreciation expense is higher.
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Interest Expense, Net. Interest expense, net of interest income, was
$15.6 million for the three months ended March 31, 2000, prior to $1.4 million
of bank amendment fees paid in the quarter compared to $6.5 million of net
interest expense for 1999. Gross interest expense (before interest
capitalization and interest income) for the 2000 period was $18.3 million prior
to the amendment fees paid compared to $9.8 million for the 1999 period, an
increase of $8.5 million. This increase is primarily attributable to an increase
in the amount of mortgage financing used in 2000 as compared to 1999. We
capitalized $1.2 million of interest expense in the 2000 period compared to $2.5
million in the 1999 period. This decrease in capitalized interest is a result of
our decision to reduce development and construction activity in 2000. Our
average construction in progress balance was $81.6 million during the three
months ended March 31, 2000, compared to $138.0 million in the 1999 period.
Interest income for the 2000 period was $1.5 million as compared to $791,000 for
the 1999 period. This increase was due to interest on additional restricted cash
balances in place in 2000 related primarily to lease financing transactions.
Equity in (Losses) Income of Unconsolidated Affiliates. Equity in
losses of unconsolidated affiliates for the three months ended March 31, 2000,
was $(2.4) million, representing an increase of $(2.5) million from $82,000 of
income for the comparable 1999 period. The increase was primarily attributable
to the increase in the number of residences in unconsolidated entities which are
in various stages of lease-up during the 2000 period. During the first quarter
of 2000 we had an average of 91 residences held in these unconsolidated joint
venture arrangements compared to an average of 52 residences held in similar
joint venture arrangements during the comparable 1999 period. The increase in
equity in losses of unconsolidated affiliates was also impacted by a slower
lease-up of residences in some areas of the country.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the three months ended March
31, 2000, was $509,000, representing a decrease of $1.8 million from $2.3
million for the comparable 1999 period. The decrease was primarily attributable
to the decrease in the number of residences in various stages of lease-up that
were owned by us in consolidated joint venture arrangements during the 2000
period. During the first quarter of 2000, we had an average of 12 residences
held in these consolidated joint venture arrangements compared to an average of
31 residences held in similar joint venture arrangements during the comparable
1999 period.
Income Taxes. For the three months ended March 31, 2000, we recorded a
current income tax provision of $53,000 which was offset by the recognition of a
$3.3 million deferred tax asset resulting in a current income tax benefit of
$3.3 million. During the three months ended March 31, 1999, we recorded a
current income tax provision of $2.8 million which was offset by the recognition
of $400,000 of deferred tax liability resulting in a current income tax expense
of $3.2 million before the effect of a cumulative change in accounting principle
of $3.8 million.
Cumulative Effect of Change in Accounting Principle. During the first
quarter of 1999 we incurred a cumulative effect of a change in accounting
principle of $3.8 million relating to the adoption of SOP 98-5, which requires
that costs of start-up activities and organization costs be expensed as
incurred.
Net Income (Loss). As a result of the foregoing, net loss for the three
months ended March 31, 2000, was $5.3 million compared to net income of $1.4
million for 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had approximately $16.1 million in unrestricted
cash and cash equivalents and $20.2 million of working capital compared to
unrestricted cash and cash equivalents of $18.7 million and working capital of
$5.4 million at December 31, 1999.
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For the three months ended March 31, 2000 and 1999, cash flows from
operations were $4.5 million versus $8.3 million, respectively.
During the first quarter of 2000 we closed on approximately $54.0
million of new debt financing. Additionally, financing was provided through
$541,000 of minority joint venture partner contributions and $20.0 million of
bridge loan financing.
Net cash provided by these financing activities together with cash from
operations was used during the three months ended March 31, 2000, to fund $20.6
million in construction and development activity, and $6.1 million of
construction bridge financing that we provided to others under third-party
development arrangements.
Historically, we have financed our operations and growth through a
combination of various forms of real estate financing (mortgage, synthetic lease
and sale/leaseback financing), capital contributions from joint venture partners
and the sale of our securities (common stock and convertible debentures) and, to
a lesser extent, cash from operations. At March 31, 2000, we had $893.3 million
of outstanding debt principally consisting of $228.6 million of convertible
debentures having a weighted average interest rate of 5.86%, $222.6 million of
fixed rate debt having a weighted average interest rate of 7.53%, capitalized
lease obligations of $67.2 million having a weighted average interest rate of
9.93%, $325.9 million of variable rate debt having a weighted average interest
rate of 8.79%, a bridge loan of $34.0 million having a weighted average interest
rate of 10%, and short-term borrowings of approximately $15.0 million. Through
March 31, 2000, we have also entered into approximately $893.7 million of
sale/leaseback and synthetic lease financings. In addition, we have guaranteed
an aggregate of $114.0 million of indebtedness of joint venture and other
off-balance sheet third-party entities.
We have the following three series of convertible subordinated debentures
outstanding:
- $143.8 million aggregate principal amount of 5.25% convertible
subordinated debentures due December 15, 2002. These convertible
debentures bear interest at 5.25% per annum payable semi-annually
on June 15 and December 15 of each year. The conversion price is
$28.75, which is equivalent to a conversion ratio of 34.8 shares
of common stock per $1,000 in principal amount of the convertible
debentures. The convertible debentures are redeemable at our
option commencing on December 31, 2000, at specified premiums.
The holders of the convertible debentures may require us to
repurchase the convertible dentures at 101% of face value upon a
change of control, as defined in the convertible debenture;
- $50.0 million aggregate principal amount of 7.00% convertible
subordinated debentures due June 1, 2004. These convertible
debentures bear interest at 7.00% per annum payable semi-annually
on June 1 and December 1 of each year. The conversion price is
$20.25, which is equivalent to a conversion ratio of 49.4 shares
of common stock per $1,000 in principal amount of the convertible
debentures. The convertible debentures are redeemable at our
option commencing on June 15, 2000, at specified premiums; and
- $35.0 million aggregate principal amount 6.75% convertible
subordinated debentures due June 30, 2006. These convertible
debentures bear interest at 6.75% per annum payable semi-annually
on June 30 and December 30 of each year. The conversion price is
$20.38, which is equivalent to a conversion ratio of 49.3 shares
of common stock per $1,000 principal amount of the convertible
debentures. The convertible debentures are redeemable at our
option commencing on July 15, 1999, at specified premiums.
Our principal credit and financing agreements, including our
convertible debentures and our synthetic lease agreements, include cross-default
provisions that provide that a material default under our other credit
facilities constitute a default under that credit or financing agreement.
Accordingly, any
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material default arising under one of our credit or financing agreements could
result in many of our other major credit and financing arrangements being in
default. In addition, our principal credit agreements and debt instruments
include various financial covenants and other restrictions, including: (i) fixed
charge coverage requirements, typically measured on a trailing four quarter
basis and which generally increase over the term of the applicable credit
agreement; (ii) maximum leverage ratios which limit our aggregate senior
indebtedness to total capitalization; (iii) various minimum net worth or
tangible net worth requirements; (iv) in some cases, property specific debt
service coverage requirements and similar financial covenants of the type
referenced above applicable to individual properties or to the pool of
residences financed by the applicable lender; and (v) the maintenance of
operating and other reserves for the benefit of the residences serving as
collateral for the applicable lender. Additionally, under some of our credit and
sale/leaseback facilities we are required to secure lender or lessor consent
prior to engaging in mergers, business combinations or change in control
transactions. As noted below, as a result of the non-recurring charges taken in
the fourth quarter of 1999 and reductions in our expected future earnings
resulting from our decision to reduce development and utilization of off-balance
sheet joint venture structures, we would have been in violation of net worth and
fixed charge coverage covenants imposed by several of our lenders had we not
secured modifications or waivers of these covenants.
Our operations and remaining construction activity will require
significant additional capital resources in the future in order to fund: (i) our
remaining construction of 40 assisted living and Alzheimer's care residences;
(ii) our purchase from the third party joint venture partners of minority and
majority equity interests in assisted living residences operated by us; (iii)
our ongoing debt service obligations, including maturities of our long-term debt
and refinancing of short term debt; and (iv) our obligation to finance the
operations of third party development partners.
We expect to fund a portion of our capital and liquidity requirements
from cash on hand, cash generated from operations, financing under existing debt
and lease commitments and, to a limited extent, equity from our joint venture
development partners. Our ability to utilize previously secured non-binding
financing commitments from REITs and other lenders has become substantially
limited due in part to our requests and receipt of modifications of some of the
lenders' financial covenants, the volatility in the capital markets and factors
affecting the assisted living industry generally. In particular, one of our
construction loan facilities has delayed advances due on ongoing construction
pending the resolution of a number of loan facility capacity and residence
construction issues. In addition, many healthcare REITs and lenders are
currently not extending new financing and the property level underwriting
requirements of some of our lenders are being more strictly applied.
Accordingly, our ability to secure financing on acceptable terms has become
increasingly difficult. We currently expect to have access to no more than $50
to $70 million of additional mortgage financing from existing construction loan
facilities during the twelve-month period ending December 31, 2000. We do not
expect to have access to any significant sale/leaseback financing during the
twelve-month period ending December 31, 2000.
On April 26, 2000, we entered into a purchase agreement pursuant to
which we expect to issue at least $138.0 million of convertible senior
debentures and convertible preferred shares to several investors, including
investment entities established by significant existing shareholders of ours as
well as an investment vehicle of Messrs. Daniel Baty and William Colson, senior
executives and directors of Holiday Retirement Corporation and Emeritus
Corporation (together the "Investors").
The transaction consists of: (i) $133.0 million of Series A and Series
B convertible senior debentures ($42.5 million of Series A debentures and $90.5
million of Series B debentures) with a conversion price of $4.00 per share, a
9.75% semi-annual payment-in-kind ("PIK") coupon and a seven year maturity, and
(ii) $5.0 million of Series A convertible preferred shares with a conversion
price of $4.00 per share and a 9.75% semi-annual PIK dividend and a mandatory
redemption in seven years. The Series A debentures and Series A preferred shares
will be convertible at any time at the holder's option into shares of our common
stock. The Series B debentures will be convertible at any time at the holder's
option into non-voting Series B preferred shares having rights (other than
voting rights) substantially
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similar to our common stock. We may call the debentures and the Series A
preferred shares at any time after three years if our common stock trades at an
average price of at least $8.00 per share for the then preceding 30 trading day
period. As part of the transaction the Investors will have the option to
purchase up to an additional $65.0 million of Series B debentures for an
aggregate transaction amount of approximately $200.0 million.
The definitive agreement is subject to several closing conditions
including: (i) receipt of covenant modifications from several of our lenders and
lessors, (ii) Hart-Scott-Rodino compliance, (iii) receipt of all appropriate
regulatory and other necessary approvals, (iv) other customary closing
conditions, and (v) a closing by no later than May 31, 2000. No assurances can
be made that the transaction will be consummated or, if consummated, completed
on a timely basis and on terms acceptable to us.
We will use the proceeds from this transaction to: (i) finance the
completion of residences currently under construction, (ii) repay interim bridge
indebtedness provided by one of the Investors, (iii) acquire a recently built
portfolio of 14 of our managed assisted living residences from one of the
Investors, (iv) selectively acquire third-party equity interests in some of our
joint-venture arrangements, including joint-venture interests held by affiliates
of some of the Investors, and (v) for working capital and other general
corporate purposes.
Pending the purchase of these convertible securities, we have taken
several steps to maintain sufficient operational liquidity. These steps have
included: (i) stopping and/or slowing construction in progress in order to
reduce construction related spending; (ii) borrowing $44.0 million pursuant to
bridge loan financing provided by one of the Investors; and (iii) allowing
construction related payables to build up over normal levels. Notwithstanding
these measures, one of our principal construction lenders has delayed making
further advances on five residences currently in construction. As a result,
liens have been filed on these construction projects resulting in defaults under
the operative construction loan credit agreements. Although we have obtained
waivers through June 30, 2000 of these defaults, payment of these suppliers and
contractors will need to be effected in 2000 in order to permanently resolve
these defaults. In addition, additional liens or lawsuits may be filed by
contractors and subcontractors unless the advances under the credit facility are
resumed, which additional liens or lawsuits will in turn result in further
defaults under the operative credit agreements. Moreover, although the stopping
or slowing of construction in progress has helped to preserve operating
liquidity, upon resuming construction we may incur increased costs in order to
complete construction.
Due to the fourth quarter 1999 non-recurring charges and the
anticipated reduction in our projected earnings due to planned reduction in
development activity and reduced utilization of off-balance sheet joint venture
structures, we would have been in violation of some of the financial covenants
in our major credit facilities. However, we have obtained from these lenders
either suspensions, amendments or waivers of net worth or fixed charge coverage
covenants in order to avoid any actual default under these agreements and
provide relief to us through June 30, 2000. These suspensions, amendments and
waivers impose various conditions on us, including the requirement to secure
equity or equity-linked funding of at least $100.0 million on or before June 30,
2000. To obtain these accommodations from our lenders, we have: (i) agreed to
pay various fees both in form of cash and other consideration as well as
established additional cash reserves; (ii) increased the pricing on some of our
financing, some of which increases are permanent and others of which are
temporary pending the completion of our contemplated equity transaction; (iii)
shortened the maturity dates on some of our financing; (iv) delayed or waived
our receipt of management fees and reimbursement of operating costs of
residences serving as collateral; and (v) consented to the reduction of existing
financing commitments of some of our lenders.
If we are unable to satisfy the conditions to the pending proposed
equity transaction (including obtaining necessary lender and lessor waivers and
amendments) or are otherwise unable to consummate this investment transaction,
we will need to seek to address our significant short and long-term liquidity
shortfall through various measures, which may include further debt
restructuring, sale of assets on an
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expedited basis, the surrender of collateral to some of our lenders and further
reduction of overhead generally. However, we are not able to provide any
assurance that, without a significant equity transaction, we will be able to
satisfy our short-term or long-term liquidity needs. In addition to the
requirement imposed by several of our lenders that we complete a $100.0 million
or greater equity transaction by June 30, 2000, our $44.0 million bridge loan is
due on June 30, 2000 (if an equity transaction is not completed prior to that
date). As we are seeking to complete the pending equity transaction we will need
access to further advances under our construction lines, further extensions of
terms by construction-related creditors and access to further bridge financing.
We can provide no assurance that we will be able to reach an accommodation with
all of our lenders and lessors to secure needed interim funding. Likewise, we
can provide no assurance that we will have the ability to satisfy our
significant ongoing capital needs if the pending equity transaction is not
closed in a timely manner.
IMPACT OF INFLATION
To date inflation has not had a significant impact on us. Inflation
could, however, affect our results of operations due to our dependence on our
senior resident population who generally rely on liquid assets and relatively
fixed incomes to pay for our services. As a result, we may not be able to
increase residence service fees to account fully for increased operating
expenses. In structuring our fees we attempt to anticipate inflation levels, but
there can be no assurance that we will be able to anticipate fully or otherwise
respond to any future inflationary pressures. In addition, given the amount of
construction and development activity which we anticipate, inflationary
pressures could affect our cost of new product deployment and financing. There
can be no assurances that financing will be available on terms acceptable to us.
FORWARD-LOOKING STATEMENTS
The statements in this quarterly report relating to matters
that are not historical facts are forward-looking statements based on
management's belief and assumptions using currently available information.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, we cannot give any assurances that these expectations
will prove to be correct. These statements involve a number of risks and
uncertainties, including, but not limited to, substantial debt and operating
lease payment obligations, operating losses associated with new residences, our
need for additional financing and liquidity, our ability to implement our new
strategic initiatives and improve cash flow, risks associated with development
and construction, risks associated with acquisitions, competition, governmental
regulation, and other risks and uncertainties detailed in the reports filed by
us with the Securities and Exchange Commission. Should one or more of these
risks materialize (or the consequences of a development worsen), or should the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected. We assume no duty to publicly update these
statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in interest
rates, foreign exchange rates and equity prices. Changes in these factors may
cause fluctuations in the Company's earnings and cash flows.
We performed a sensitivity analysis which presents the hypothetical
change in fair value of those financial instruments held by us at March 31,
2000, which are sensitive to changes in interest rates. Market risk is estimated
as the potential change in fair value resulting from an immediate hypothetical
one-percentage point parallel shift in the yield curve. The fair value of the
debt included in the analysis is $408.1 million. Although not expected, a
one-percentage point change in the interest rates would have caused our annual
interest expense to change by approximately $3.8 million. Accordingly, a
significant increase in LIBOR based interest rates could have a material adverse
effect on our earnings.
Although a majority of our debt and lease payment obligations as of or
during the three months ended March 31, 2000, are not subject to floating
interest rates, indebtedness that we may incur in the future may bear interest
at a floating rate. Debt and annual operating lease payment obligations will
continue to increase as we complete our pending development and construction
activity. We expect to refinance $130.8 million of our fixed rate debt in 2000
and, as a result, convert this into variable rate debt.
We do not presently use financial derivative instruments to manage
interest costs. We do not use foreign currency exchange rate forward contracts
or commodity contracts and do not have foreign currency exposure as of March 31,
2000.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Purchase Agreement dated as of April 26, 2000 between the Registrant
and RDVEPCO, L.L.C., a Michigan limited liability company, Group One
Investors, L.L.C., a Michigan limited liability company, and Holiday
Retirement 2000, LLC, a Washington limited liability company
(incorporated by reference to Exhibit 99.2 of the Registrant's Form
8-K filed May 5, 2000).
4.1 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.
4.2 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.
4.3 Amendment to Rights Agreement made as of April 26, 2000 between
Registrant and American Stock Transfer & Trust Company, as Rights
Agent.
10.1 Loan Agreement dated as of January 28, 2000 between AHC Purchaser,
Inc. and GMAC Commercial Mortgage Corporation.
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10.2 Second Amended and Restated Loan Agreement dated as of April 26,
2000 between Registrant and RDVEPCO, L.L.C.
10.3 Amended Schedule of Mortgages and Security Agreements, Secured
Promissory Notes and Guaranties ("Loan Documents") which are
substantially in the form of Key Corporate Capital, Inc., Loan
Documents attached as Exhibits 10.116, 10.117 and 10.118 to the
Registrant's Form 10-K for the period ending December 31, 1999.
10.4 First Amendment to Credit Agreement, First Amendment to Guaranty
Agreement and Suspension and Waiver Agreement dated as of March 30,
2000 between the Borrowers named therein, HCR/Alterra Development,
LLC, the Registrant, Manor Care, Inc., Bank of America, N.A., as
Administrative Agent, and the Lenders named in the Credit Agreement.
11.1 Statement Regarding Computation of Net Income Per Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K: The Registrant has filed no reports with
the Securities and Exchange Commission on Form 8-K during the
quarter ended March 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Milwaukee, State of
Wisconsin, on the 15th day of May, 2000.
ALTERRA HEALTHCARE CORPORATION
Date: May 15, 2000 By: /s/ Mark W. Ohlendorf
-------------------------------------------------
Mark W. Ohlendorf
Senior Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial Officer)
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