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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
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)
450 N. SUNNYSLOPE ROAD, SUITE 300
BROOKFIELD, WI
53005
(Address of principal executive offices)
(Zip Code)
(414) 641-5100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
AS OF AUGUST 10, 1999, THERE WERE 22,084,888 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 June 30, 1999 and
December 31, 1998......................................................................... 1
Condensed Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998....................................................... 2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998.............................................................. 3
Notes to Condensed Consolidated Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 12
Part II. Other Information
Item 4. Submissions of Matters to a Vote of Security Holders...................................... 12
Item 6. Exhibits and Reports on Form 8-K.......................................................... 13
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1999 1998
-------------- ----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 57,930 $ 49,934
Accounts receivable.............................................. 7,244 4,045
Pre-opening costs, net of amortization........................... -- 7,856
Note receivable.................................................. 15,585 10,986
Other current assets............................................. 25,578 18,031
--------------- -----------------
Total current assets......................................... 106,337 90,852
--------------- -----------------
Property and equipment, net........................................ 726,561 640,211
Long-term investments.............................................. 8,217 4,504
Goodwill, net...................................................... 5,172 5,243
Other assets....................................................... 46,794 37,000
--------------- -----------------
Total assets................................................. $893,081 $777,810
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations.................... $ 11,293 $ 4,376
Short-term notes payable......................................... 8,363 8,363
Accounts payable - Trade......................................... 5,871 6,854
Accounts payable - Construction.................................. 8,103 21,812
Accrued expenses................................................. 20,956 15,723
Deferred rent and refundable deposits............................ 6,762 5,419
--------------- -----------------
Total current liabilities.................................... 61,348 62,547
--------------- -----------------
Long-term obligations, less current installments................... 406,273 286,984
Convertible debt................................................... 228,600 228,600
Deferred gain on sale and other.................................... 10,175 18,347
Minority interest.................................................. 2,126 4,220
Stockholders' equity:
Common stock..................................................... 222 219
Additional paid-in capital....................................... 179,042 177,864
Retained earnings (accumulated deficit).......................... 5,295 (971)
--------------- -----------------
Total stockholders' equity..................................... 184,559 177,112
--------------- -----------------
Total liabilities and stockholders' equity................... $893,081 $777,810
=============== =================
See accompanying notes to condensed consolidated financial statements.
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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
1999 1998 1999 1998
----------- ------------ ------------- -------------
Revenue:
Resident service fees........................................ $ 84,344 $ 54,635 $161,466 $100,286
Other........................................................ 7,576 564 13,345 1,397
----------- ------------ ------------- -------------
Operating revenue.......................................... 91,920 55,199 174,811 101,683
Operating expenses:
Residence operations......................................... 52,497 34,127 99,596 63,571
Lease expense................................................ 15,971 10,062 30,430 19,051
General and administrative................................... 9,246 5,183 18,864 9,985
Depreciation and amortization................................ 4,525 4,249 8,550 7,646
----------- ------------ ------------- -------------
Total operating expenses................................... 82,239 53,621 157,440 100,253
----------- ------------ ------------- -------------
Operating income........................................... 9,681 1,578 17,371 1,430
----------- ------------ ------------- -------------
Other income (expense):
Interest expense, net........................................ (7,611) (1,812) (14,075) (2,541)
Lease income................................................. 4,937 -- 9,826 --
Other, net................................................... (34) (70) (34) (97)
Equity in (losses) of unconsolidated affiliates.............. (152) (10) (70) (22)
Minority interest in losses of consolidated subsidiaries.... 983 5,189 3,278 9,688
----------- ------------ ------------- -------------
Total other (expense) income net........................... (1,877) 3,297 (1,075) 7,028
----------- ------------ ------------- -------------
Income before income taxes and the cumulative effect of a
change in accounting principle................................. 7,804 4,875 16,296 8,458
Income taxes..................................................... 2,966 -- 6,193 --
----------- ------------ ------------- -------------
Income after taxes....................................... 4,838 4,875 10,103 8,458
----------- ------------ ------------- -------------
Cumulative effect of a change in accounting principle, net of
tax benefit of $2,409 (see Note 4) ........................... --- --- (3,837) --
----------- ------------ ------------- -------------
Net income....................................................... $4,838 $ 4,875 $6,266 $ 8,458
=========== ============ ============= =============
Income per common share before change in accounting principle:
Basic........................................................ $0.22 $ 0.22 $0.46 $0.39
=========== ============ ============= =============
Diluted...................................................... $0.22 $ 0.22 $0.45 $0.38
=========== ============ ============= =============
Net income per common share:
Basic........................................................ $0.22 $0.22 $0.28 $0.39
=========== ============ ============= =============
Diluted...................................................... $0.22 $0.22 $0.28 $0.38
=========== ============ ============= =============
Weighted average common shares outstanding:
Basic........................................................ 22,085 21,912 22,080 21,840
=========== ============ ============= =============
Diluted...................................................... 22,345 22,413 22,442 22,367
=========== ============ ============= =============
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)
Six Months Ended
June 30,
-------------------------------
1999 1998
------------- -------------
Cash flows from operating activities:
Net income.......................................................................... $ 6,266 $ 8,458
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................................... 8,550 7,646
Deferred income taxes............................................................... (501) ---
Equity in net loss from investments in unconsolidated affiliates.................... 70 22
Minority interest in losses of consolidated subsidiaries............................ (3,278) (9,688)
Tax effect of stock options exercised............................................... 537 ---
Increase in net resident receivables................................................ (3,498) (856)
Decrease (increase) in pre-opening costs............................................ 7,856 (7,927)
(Increase) decrease in other current assets......................................... (4,840) 115
(Decrease) increase in accounts payable............................................. (993) 2,725
Increase in accrued expenses........................................................ 6,767 1,522
Decrease in accrued merger costs.................................................... (267) (3,861)
Changes in other assets and liabilities, net........................................ 1,603 (1,885)
------------- -------------
Net cash provided by (used in) operating activities................................... 18,272 (3,729)
------------- -------------
Cash flows from investing activities:
Payments for property, equipment and project development costs...................... (140,470) (162,145)
Increase in notes receivable........................................................ (4,599) ---
Acquisitions of facilities, net of cash............................................ (15,206) (8,477)
Changes in investments in and advances to unconsolidated affiliates................. (675) (16,159)
Purchase of joint venture interests................................................. (34,461) (8,057)
Decrease in short-term investments................................................... --- 65,000
Increase in long-term investments................................................... (3,713) ---
------------- -------------
Net cash used in investing activities................................................. (199,124) (129,838)
------------- -------------
Cash flows from financing activities:
Repayments of short-term borrowings................................................. --- (14,587)
Repayments of long-term obligations................................................. (45,649) (32,103)
Proceeds from issuance of debt...................................................... 169,282 72,561
Proceeds from issuance of convertible debt.......................................... --- 18,750
Payments for financing costs........................................................ (5,104) (2,651)
Proceeds from sale/leaseback transactions........................................... 64,391 49,160
Issuance of common stock and other capital contributions............................ 746 9,768
Contributions by minority partners and minority stockholders........................ 5,182 8,678
------------- -------------
Net cash provided by financing activities............................................. 188,848 109,576
------------- -------------
Net increase (decrease) in cash and cash equivalents.................................. 7,996 (23,991)
------------- -------------
Cash and cash equivalents:
Beginning of period................................................................. 49,934 79,838
------------- -------------
End of period....................................................................... $ 57,930 $ 55,847
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized............................... $ 18,384 $ 10,391
============= =============
Cash paid during period for income taxes............................................ $ 4,386 $ 1,256
============= =============
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 June 30, 1999 and
December 31, 1998, the condensed consolidated statements of operations for the
three and six months ended June 30, 1999 and 1998 and the condensed consolidated
statements of cash flows for the six months ended June 30, 1999 and 1998
contained herein include the accounts of Alterra Healthcare Corporation (the
"Company") and its affiliates which are under the common financial control of
the Company. All significant intercompany accounts have been eliminated in
consolidation. In the opinion of management, all adjustments (consisting only of
normal recurring items) necessary for a fair presentation of such condensed
consolidated financial statements have been included. The results of operations
for the six months ended June 30, 1999 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 the Company's Annual Report
on Form 10-K, for the year ended December 31, 1998.
(2) ACQUISITIONS
On April 21, 1999, the Company acquired three assisted living
residences from HCR Manor Care, Inc. as part of the strategic alliance formed
with HCR Manor Care, Inc. on December 31, 1998, having an aggregate capacity of
231 residents. This acquisition, which has been accounted for as a purchase, had
a purchase price of $14.4 million, all of which was paid in cash.
On May 12, 1999, the Company acquired an assisted living residence
having an aggregate capacity of 48 residents in Kenosha, Wisconsin. This
acquisition, which has been accounted for as a purchase, had a purchase price of
$4.3 million, $800,000 of which was paid in cash and the remainder was debt and
liabilities assumed by the Company.
(3) FINANCING
The Company obtained $24.3 million in new construction financing during
the second quarter of 1999. The terms for these financings are all three years,
currently bear floating interest rates ranging from 6.9% to 7.0% and are secured
by 20 residences.
The Company obtained $55.8 million in sale/leaseback financing from
real estate investment trusts ("REITs") during the second quarter of 1999. The
initial lease term for these arrangements are 14 years, and the weighted average
effective lease rate is 9.8%. Any gain or loss arising from the sale of
residences to the REITs has been deferred and will be amortized into income in
proportion to rental expense over the initial term of the lease.
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(4) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1999, the Company 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. The Company's prior practice
was to capitalize such 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. This Statement is required to be adopted for fiscal years
beginning after December 15, 1998 and accordingly, was adopted by the Company
effective January 1, 1999. The cumulative effect of the accounting change
reflected in the condensed consolidated statement of operations for the six
months ended June 30, 1999 was $3.8 million, net of tax.
(5) NET INCOME PER COMMON SHARE
The following table summarizes the computation of basic and diluted net
income per share amounts presented in the accompanying consolidated statements
of operations (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
1999 1998 1999 1998
----------- ------------ ------------- ------------
Numerator:
Numerator for basic and diluted income per share before cumulative
effect of a change in accounting principle ...................... $ 4,838 $ 4,875 $ 10,103 $ 8,458
Cumulative effect of a change in accounting principle .............. -- -- (3,837) --
------- ------- ---------- ----------
Numerator for basic and diluted net income per share ............... $ 4,838 $ 4,875 $ 6,266 $ 8,458
======= ======= ========== ==========
Denominator:
Denominator for basic net income per common
share-weighted average shares ................................... 22,085 21,912 22,080 21,840
Effect of dilutive securities:
Employee stock options ........................................ 260 501 362 527
------- ------- ---------- ----------
Denominator for diluted net income per common share-weighted average
shares plus assumed conversions .................................. 22,345 22,413 22,442 22,367
======= ======= ========== ==========
Basic income per common share before cumulative effect
of a change in accounting principle ............................. $ 0.22 $ 0.22 $ 0.46 $ 0.39
Cumulative effect of a change in accounting principle .............. -- -- (0.17) --
------- ------- ---------- ----------
Basic net income per common share(1) ............................... $ 0.22 $ 0.22 $ 0.28 $ 0.39
======= ======= ========== ==========
Diluted income per common share before cumulative effect
of a change in accounting principle ............................. $ 0.22 $ 0.22 $ 0.45 $ 0.38
Cumulative effect of a change in accounting principle .............. -- -- (0.17) --
------- ------- ---------- ----------
Diluted net income per common share ............................... $ 0.22 $ 0.22 $ 0.28 $ 0.38
======= ======= ========== ==========
(1) Six month period ended June 30, 1999 does not total due to rounding.
Shares issuable upon the conversion of convertible subordinated notes
have been excluded from the computation because the effect of their inclusion
would be anti-dilutive.
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(6) SUBSEQUENT EVENT
On July 20, 1999, the Company completed and funded a $140 million
acquisition and financing transaction related to its refinancing of three
already acquired properties and the acquisition of an additional 17 properties
from HCR Manor Care, Inc.. This closing related to the previously announced
agreement to acquire 28 residences from HCR Manor Care, Inc. for a total of
approximately $200 million. The 17 residences were financed (and the three
residences acquired from HCR Manor Care, Inc. in April 1999 were refinanced),
under a synthetic lease arrangement with an initial effective lease rate of
9.7%. The Company expects the remaining eight residences to close in the third
quarter as final financing, regulatory, and construction due diligence are
completed and requisite approvals are received.
(7) RECLASSIFICATIONS
Certain reclassifications have been made in the 1998 financial
statements to conform with the 1999 financial statement presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OVERVIEW
OVERVIEW
The Company's continued growth has had a significant impact on its
results of operations and accounts for most of the changes in results between
the first six months of 1999 and 1998. As of June 30, 1999 and 1998, the Company
operated or managed 389 and 291 residences with aggregate capacities of 16,900
and 12,300 residents, respectively. The Company is also constructing or
developing approximately 133 residences with aggregate capacity of 5,500 as of
June 30, 1999. For the six months ended June 30, 1999, the Company generated
operating revenue of $174.8 million, and realized operating income of $17.4
million, and net income of $10.1 million prior to the cumulative effect of a
change in accounting.
Since 1993, the Company has grown as a result of its development and
acquisition activities, which have focused on purposeful built, free-standing
assisted living residences. The Company intends to continue its development
strategy and, at June 30, 1999, was constructing 77 residences and developing an
additional 56 residences.
On December 31, 1998, the Company entered into a strategic alliance
with HCR Manor Care, Inc.. The alliance includes four principal arrangements:
- - The Company agreed to acquire from HCR Manor Care, Inc. 28
Alzheimer's/dementia care and assisted living residences with a capacity
for approximately 2,400 residents located in 12 states for $200 million in
cash. The Company completed the acquisition of three of these residences in
April 1999, an additional 17 residences in July 1999 and expects to
complete the acquisition of the remaining eight in the third quarter of
1999.
- - HCR Manor Care, Inc. and the Company agreed to establish and capitalize a
joint venture to develop $500 million of Alterra-branded
Alzheimer's/dementia care and assisted living residences in HCR's core
markets over the next three to five years. The Company began joint
development under this arrangement in the second quarter of 1999 and will
continue joint development activities over a three to five year period.
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- - HCR Manor Care, Inc. has the right to license from the Company the use of
Alterra's Clare Bridge(R) service mark, to share various best practices,
and to engage in joint marketing activities relating to HCR's remaining
Alzheimer's/dementia care residences. The Company and HCR Manor Care, Inc.
executed definitive agreements with respect to this arrangement in April
1999.
- - HCR Manor Care, Inc. and the Company have agreed to form a new company to
provide a variety of ancillary services to the Company's resident
population, including rehabilitation therapy and hospice care. The Company
and HCR Manor Care, Inc. executed definitive agreements with respect to
this arrangement in April 1999.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
Residence Service Fees. Residence service fees for the three months
ended June 30, 1999 were $84.3 million representing an increase of $29.7
million, or 54%, from the $54.6 million for the comparable 1998 period.
Substantially all of this increase resulted from the addition of newly
constructed residences and other residences acquired by the Company. The Company
operated 389 and 291 residences at June 30, 1999 and 1998, respectively.
Other Revenues. Other revenues for the three months ended June 30, 1999
were $7.6 million, an increase of $7.0 million over the $564,000 of other
revenue for the three months ended June 30, 1998. The increase is attributable
to management fees on a greater number of residences which were either managed
for third parties, including residences in transition from the HCR Manor Care,
Inc. alliance or for entities in which the Company held a minority ownership
position in the 1999 period versus the 1998 period. As of June 30, 1999, the
Company had 67 such residences compared to 43 such residences as of June 30,
1998.
Residence Operating Expenses. Residence operating expenses for the
three months ended June 30, 1999 increased to $52.5 million from $34.1 million
in the three-month period ended June 30, 1998 due to the increased number of
residences operated during the 1999 period. Operating expenses as a percentage
of residence service fees for the three months ended June 30, 1999 and 1998 were
62.2% and 62.5%, respectively.
Lease Expense. Lease expense for the three months ended June 30, 1999
was $16.0 million, compared to $10.1 million in the comparable period in 1998.
Such increase was primarily attributable to the utilization of additional
sale/leaseback financing totaling $199 million during the twelve-month period
ended June 30, 1999.
General and Administrative Expense. For the three months ended June 30,
1999, general and administrative expenses were $9.2 million, compared to $5.2
million for the comparable 1998 period, representing an increase as a percentage
of operating revenue to 10.1% in the 1999 period from 9.4% in the 1998 period.
The increase as a percentage of operating revenues is a result of additional
expenses incurred in transitioning newly managed residences from the joint
venture development arrangement with HCR Manor Care, as well as residences
acquired or to be acquired from HCR Manor Care, Inc. The increase in expenses
from 1998 was primarily attributable to salaries, related payroll taxes and
employee benefits for additional corporate personnel retained to support the
Company's actual and anticipated growth.
Depreciation and Amortization. Depreciation and amortization for the
three months ended June 30, 1999 was $4.5 million, representing an increase of
$276,000, or 6.5%, from the $4.2 million of depreciation and amortization for
the comparable 1998 period. This increase resulted primarily from depreciation
of fixed assets on the larger number of new residences that were owned by the
Company during the three months ended June 30, 1999, versus the comparable
period in 1998. This increase was
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offset by the elimination of amortization on pre-opening costs which are now
expensed when they are incurred.
Interest Expense, Net. Interest expense, net of interest income, was
$7.6 million for the three months ended June 30, 1999, compared to $1.8 million
for the comparable period in 1998. Gross interest expense (before interest
capitalization and interest income) for the 1999 period was $11.2 million
compared to $7.1 million for the 1998 period, an increase of $4.1 million. This
increase is primarily attributable to an increase in the amount of debt
financing used in the 1999 period as compared to the 1998 period. The Company
capitalized $2.6 million of interest expense in the 1999 period compared to $3.8
million in the comparable 1998 period. This decrease is due primarily to a
decrease in assets under construction financed using general corporate funds in
1999 compared to 1998. Interest income for the 1999 period was $1.0 million as
compared to $1.5 million for the 1998 period. This decrease was primarily due to
a reduction in average cash and investment balances from 1998 to 1999. The large
1998 balance was due to proceeds from the Company's concurrent offering of
common stock and 5.25% convertible subordinated debentures in December 1997.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the three months ended June
30, 1999 was $1.0 million, representing a decrease of $4.2 million from $5.2
million for the comparable 1998 period. The decrease was primarily attributable
to the decrease in the number of residences in various stages of lease-up that
were owned by the Company in consolidated joint venture arrangements during the
1999 period. During the second quarter of 1999, the Company had an average of 13
residences held in these consolidated joint venture arrangements compared to an
average of 54 residences held in similar joint venture arrangements during the
comparable 1998 period.
Income Taxes. For the three months ended June 30, 1999, the Company
recorded a current income tax provision of $2.5 million and recognized a
$500,000 deferred tax liability resulting in a current income tax expense of
$3.0 million. No income tax provision was recorded for the same period in 1998
due to the utilization of net operating loss carryforwards.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
Residence Service Fees. Residence service fees for the six months ended
June 30, 1999 were $161.4 million representing an increase of $61.2 million, or
61%, from the $100.3 million for the comparable 1998 period. Substantially all
of this increase resulted from the addition of newly constructed residences and
other residences acquired by the Company. The Company operated 389 and 291
residences at June 30, 1999 and 1998, respectively.
Other Revenues. Other revenues for the six months ended June 30, 1999
were $13.3 million, an increase of $11.9 million over the $1.4 million of other
revenue for the six months ended June 30, 1998. The increase is attributable to
management fees on a greater number of residences which were either managed for
third parties, including residences in transition from the HCR Manor Care, Inc.
alliance or for entities in which the Company held a minority ownership position
in the 1999 period versus the 1998 period. As of June 30, 1999, the Company had
67 such residences compared to 43 such residences as of June 30, 1998. The
increase in other revenue was also impacted by $2.2 million of development fees
recognized in the first six months of 1999 in connection with development
activities conducted by the Company on behalf of third parties.
Residence Operating Expenses. Residence operating expenses for the six
months ended June 30, 1999 increased to $99.6 million from $63.6 million in the
six month period ended June 30, 1998 due to the increased number of residences
operated during the 1999 period. Operating expenses as a percentage of operating
revenue for the six months ended June 30, 1999 and 1998 were 61.7% and 63.4%,
respectively.
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Lease Expense. Lease expense for the six months ended June 30, 1999 was
$30.4 million, compared to $19.1 million in the comparable period in 1998. Such
increase was primarily attributable to the utilization of additional
sale/leaseback financing totaling $199 million during the twelve-month period
ended June 30, 1999.
General and Administrative Expense. For the six months ended June 30,
1999, general and administrative expenses before costs related to the $1.8
million write-off of existing signage and other expenses associated with the
name change from Alternative Living Services, Inc.. to Alterra Healthcare
Corporation were $17.1 million, compared to $10.0 million for the comparable
1998 period, representing 10% of operating revenue, consistent with the 1998
period. The increase in expenses was primarily attributable to salaries, related
payroll taxes and employee benefits for additional corporate personnel retained
to support the Company's actual and anticipated growth.
Depreciation and Amortization. Depreciation and amortization for the
six months ended June 30, 1999 was $8.6 million, representing an increase of
$900,000, or 11.8%, from the $7.6 million of depreciation and amortization for
the comparable 1998 period. This increase resulted primarily from depreciation
of fixed assets on the larger number of new residences that were owned by the
Company during the six months ended June 30, 1999, versus the comparable period
in 1998. This increase was offset by the elimination of amortization on
pre-opening costs which are now expensed when they are incurred.
Interest Expense, Net. Interest expense, net of interest income, was
$14.1 million for the six months ended June 30, 1999, compared to $2.5 million
for the comparable period in 1998. Gross interest expense (before interest
capitalization and interest income) for the 1999 period was $21.0 million
compared to $12.7 million for the 1998 period, an increase of $8.3 million. This
increase is primarily attributable to an increase in the amount of debt
financing used in the 1999 period as compared to the 1998 period. The Company
capitalized $5.2 million of interest expense in the 1999 period compared to $6.9
million in the comparable 1998 period. This decrease is due to a decrease in
assets under construction financed using general corporate funds in the 1999
period compared to the 1998 period. Interest income for the 1999 period was $1.8
million as compared to $3.3 million for the 1998 period. This increase was
primarily due to the investment in the 1998 period of the proceeds received from
the December 1997 concurrent convertible debt and equity offering.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the six months ended June
30, 1999 was $3.3 million, representing a decrease of $6.4 million from $9.7
million for the comparable period in 1998. The decrease was primarily
attributable to the decrease in the number of residences in various stages of
lease-up that are owned by the Company in consolidated joint venture
arrangements during the 1999 period. During the first half of 1999, the Company
had an average of 24 residences held in consolidated joint venture relationships
compared to an average of 46 residences in consolidated joint venture
relationships during the first half of 1998.
Income Taxes. For the six months ended June 30, 1999, the Company
recorded a current income tax provision of $5.3 million and recognized a
$900,000 deferred tax liability resulting in a current income tax expense of
$6.6 million before the effect of a cumulative change in accounting. No income
tax provision was recorded for the same period in 1998 due to the utilization of
net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999 cash flow from operations was
$18.3 million versus an operating cash flow deficit of $3.7 million for six
months ended June 30, 1998.
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During the six months ended June 30, 1999, the Company closed on
approximately $169.3 million of new debt financing which included approximately
$55.0 million of debt used to refinance properties having prior debt balances of
$45.1 million. Additional financing was provided through $64.4 million of
sale/leaseback financing and $5.2 million of minority partner contributions.
This new financing along with approximately $8.0 million in available
cash and investments and cash from operations was used during the six month
period ending June 30, 1999 to fund $140.5 million in construction and
development activity, $34.5 million in joint venture buy-outs, $15.2 million in
acquisition activity, and $4.6 million of construction bridge financing under
third party development arrangements.
At June 30, 1999, the Company had working capital of $45.0 million
compared to working capital of $90.5 million at June 30, 1998. The decrease was
due to the utilization of $77 million in cash and investments generated by the
December 1997 equity and convertible debt offerings to fund additional
construction and development activities during 1998 and 1999.
To achieve its growth objectives, the Company will need to obtain
sufficient financing to fund its development, construction and acquisition
activities. The Company has plans to develop or acquire approximately $500
million of residences (inclusive of the $200 million of residences acquired or
to be acquired from HCR Manor Care, Inc.) for the 12-month period ending June
30, 2000. Historically, the Company has financed its development program and
acquisitions through a combination of various forms of real estate financing
(mortgage and sale/leaseback financing), capital contributions from joint
venture partners and the sale of its securities. The Company has executed
non-binding letters of intent with various healthcare REITs with approximately
$66.6 million of remaining capacity at June 30, 1999. The Company also had
available $252.6 million of remaining financing capacity from conventional
lenders, as of June 30, 1999, which financing is accessible by the Company upon
satisfying the respective lender's property underwriting requirements. On July
20, 1999, the Company completed a $140 million synthetic lease transaction
related to 20 residences acquired from HCR Manor Care, Inc. The Company expects
to acquire an additional eight residences from HCR Manor Care, Inc. in the third
quarter of 1999 using a similar financing arrangement. In addition to financing
construction and development costs, the Company may require capital resources to
meet its obligations under joint venture arrangements. The Company believes that
its cash on hand, financing under these commitments, other debt and equity
financing that the Company expects to be able to access and equity contributions
from its joint venture development partners will be sufficient to fund its
growth strategy for the next 12 months.
A lack of funds may require the Company to delay or eliminate all or
some of its development projects and acquisition plans. In addition, the Company
may require additional financing to enable it to acquire additional residences,
to respond to changing economic conditions, to expand the Company's development
program or to account for changes in assumptions related to its development
program. There can be no assurance that any newly constructed residences will
achieve a stabilized occupancy level and attain a resident mix that meet the
Company's expectations or generate sufficient positive cash flow to cover
operating and financing costs associated with such residences. There can be no
assurance that the Company will be successful in securing additional financing
or that adequate funding will be available and, if available, will be on terms
that are acceptable to the Company.
The Company is obligated under certain of its joint venture
arrangements to purchase the equity interests of its joint venture partners at
fair market value upon the election of such partners. Within the next twelve
months, the Company will become subject to such contingent purchase obligations
with respect to equity interests held by joint venture partners, exercisable at
their election, related to certain of the Company's residences. At such times,
or earlier, as such contingent purchase obligations are exercisable, the Company
may also elect to exercise its rights to purchase such interests. Based on a
number of assumptions, including assumptions as to the number of residences to
be developed with joint venture partners, the timing of such development, the
time at which such options may be exercised and the fair market value of such
residences at the date such options are exercised, the Company estimates
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that it may require approximately $50 million to $55 million to satisfy these
purchase obligations during the 12 month period ended June 30, 2000.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company. Inflation
could, however, affect the Company's results of operations due to the Company's
dependence on its senior resident population who rely on liquid assets and
relatively fixed incomes to pay for the Company's services. As a result, the
Company may not be able to increase residence service fees to account fully for
increased operating expenses. In structuring its fees, the Company attempts to
anticipate inflation levels, but there can be no assurance that the Company will
be able to anticipate fully or otherwise respond to any future inflationary
pressures. In addition, given the significant amount of construction and
development activity which the Company anticipates, inflationary pressures could
affect the Company's cost of new product deployment and financing. There can be
no assurances that financing will be available on terms acceptable to the
Company.
YEAR 2000 ISSUE
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, computer systems that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000 (the so-called "Year 2000 Issue"). This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in normal business activities.
The Company has evaluated its computer systems to determine what
modification (if any) are necessary to make such systems compatible with the
year 2000 requirements. Because many of the Company's computer systems have been
put into service within the last several years, or are currently being replaced
with year 2000 compliant systems, the Company does not expect any such
modifications to have a material adverse effect on the Company's consolidated
financial position or results of operations. However, given the complex nature
of computer systems used in the Company's operations, there can be no assurance
that all the Company's computer systems will be year 2000 compliant or that all
the year 2000 Issue will not have a material adverse affect on the Company.
Similarly, there can be no assurance that the computer systems of other
companies on which the Company's systems rely will be timely modified, or that a
failure to modify such systems by another company, or modifications that are
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
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 the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such 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, the ability to
manage rapid growth and business diversification, the need for additional
financing, development and construction risks, risks associated with
acquisitions, competition, governmental regulation and other risks and
uncertainties detailed in the reports filed by the Company with the Securities
and Exchange Commission. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. The Company assumes no duty to publicly update such 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 cause
fluctuations in the Company's earnings and cash flows.
The Company performed a sensitivity analysis which presents the
hypothetical change in fair value of those financial instruments held by the
Company at June 30, 1999 which are sensitive to changes in interest rates.
Market risk is estimated as the potential change in fair value resulting from an
immediate hypothetical one percentage point parallel shift in the yield curve.
The fair value of the debt included in the analysis is $160.7 million. Although
not expected, a one percentage point change in the interest rates would have
caused the Company's annual interest expense to change by approximately $1.6
million. Accordingly, a significant increase in LIBOR based interest rates could
have a material adverse effect on the Company's earnings.
Although a majority of the debt and lease payment obligations of the
Company as of or during the three months ended, June 30, 1999 are not subject to
floating interest rates, indebtedness that the Company may incur in the future
may bear interest at a floating rate. Debt and annual operating lease payment
obligations will continue to increase as the Company pursues its growth
strategy.
The Company does not presently use financial derivative instruments to
manage its interest costs. The Company does not use foreign currency exchange
rate forward contracts or commodity contracts and does not have foreign currency
exposure as of June 30, 1999.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on May 19,
1999, and the following matters were voted on at that meeting:
Action was taken to amend and restate article one of the Company's
restated certificate of incorporation to change the Company's name. The results
were as follows: For, 17,324,015; Against, 11,938; and Abstentions, 240,471.
Action was taken to elect a board of eight directors of the Company.
The results were as follows:
AUTHORITY
DIRECTOR FOR WITHHELD
- ------------------------------- ---------------- ------------------
Richard W. Boehlke 17,529,181 47,243
Tim Buchanan 17,529,021 47,403
Gene E. Burleson 17,529,181 47,243
Robert Haveman 17,529,181 47,243
William F. Lasky 17,529,181 47,243
William G. Petty, Jr. 17,529,181 47,243
Jerry L. Tubergen 17,529,181 47,243
Steven Vick 17,529,131 47,293
The proposal to elect directors and to amend the Company's restated
Certificate of Incorporation were set forth and described in the Notice of
Annual Meeting and Proxy Statement of the Company dated
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April 15, 1999, filed with the Commission pursuant to Rule 14b-3 under the
Securities Exchange Act of 1934, as amended.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Schedule of Bank United Mortgage, Assignment and Security
Agreements ("Mortgage") which are substantially similar to
the Form of Mortgage attached as Exhibit 10.53 to the
Company's 10-K for the period ending December 31, 1998
10.2 Subordination, Representation and Guaranty Agreement between
the Company, Greenwich Capital Financial Products, Inc., and
Third Party Investors I, L.L.C. dated as of June 30, 1999
10.3 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 Company
10.4 Master Lease dated as of June 14, 1999, by and between Omega
Healthcare Investors, Inc. as Lessor and AHC Properties, Inc.
as Lessee
10.5 Kansas Master Lease dated as of June 14, 1999, by and between
Omega (Kansas), Inc. as Lessor and AHC Properties, Inc. as
Lessee
10.6 Lease Guaranty dated as of June 14, 1999, by Alterra
Healthcare Corporation in favor of Omega Healthcare Investors,
Inc. and Omega (Kansas), Inc.
10.7 Form of Lease Agreement by and between the Company and Health
Care REIT, Inc. dated as of January 22, 1996
10.8 Schedule of Health Care REIT, Inc. Leases which are
substantially similar to the Form of Lease attached as Exhibit
10.7
10.9 Form of Lease Agreement by and between Sterling House
Corporation and Heath Care REIT, Inc. dated as of September
1995
10.10 Schedule of Health Care REIT, Inc. Leases which are
substantially similar to the Form of Lease attached as Exhibit
10.9
10.11 Form of Lease Agreement by and between the Company and Health
Care REIT, Inc. dated as of December 1998
10.12 Schedule of Health Care REIT, Inc. Leases which are
substantially similar to the Form of Lease attached as Exhibit
10.11
10.13 Form of Lease Agreement by and between the Company and Health
Care REIT, Inc. dated as of March 1999
10.14 Schedule of Health Care REIT, Inc. Leases which are
substantially similar to the Form of Lease attached as Exhibit
10.13
11.1 Statement Regarding Computation of Net Income (Loss) 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 June 30, 1999.
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 Brookfield, State of
Wisconsin, on the 13th day of August, 1999.
ALTERRA HEALTHCARE CORP., INC.
Date: August 13, 1999 By: /s/ Thomas E. Komula
--------------------------------
Thomas E. Komula
Senior Vice President, Treasurer,
Chief Financial
Officer and Secretary
(Principal Financial Officer)
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