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 September 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
incorporation or organization) Identification No.)
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 NOVEMBER 12, 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.
-----------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998.............................................................. 1
Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998....................................... 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 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)
September 30, December 31,
1999 1998
---------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 33,046 $ 40,621
Accounts receivable.............................................. 8,057 4,045
Pre-opening costs, net of amortization........................... -- 7,856
Notes receivable................................................. 20,838 10,986
Restricted cash in escrow accounts............................... 11,713 9,313
Other current assets............................................. 30,471 18,031
--------- ---------
Total current assets......................................... 104,125 90,852
--------- ---------
Property and equipment, net........................................ 796,754 640,211
Long-term investments.............................................. 9,665 4,504
Goodwill, net...................................................... 5,136 5,243
Other assets....................................................... 62,653 37,000
--------- ---------
Total assets................................................. $ 978,333 $ 777,810
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations.................... $ 10,312 $ 4,376
Short-term notes payable......................................... 18,512 8,363
Accounts payable trade........................................... 5,688
Accounts payable - construction.................................. 12,054 21,812
Accrued expenses................................................. 25,932 15,723
Deferred rent and refundable deposits............................ 7,925 5,419
--------- ---------
Total current liabilities.................................... 80,423 62,547
--------- ---------
Long-term obligations, less current installments................... 467,273 286,984
Convertible debt................................................... 228,600 228,600
Deferred gain on sale and other.................................... 10,250 18,347
Minority interest.................................................. 2,304 4,220
Stockholders' equity:
Common stock..................................................... 222 219
Additional paid-in capital....................................... 178,942 177,864
Retained earnings (accumulated deficit).......................... 10,319 (971)
--------- ---------
Total stockholders' equity..................................... 189,483 177,112
--------- ---------
Total liabilities and stockholders' equity................... $ 978,333 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
1999 1998 1999 1998
----------- ------------ ------------- ------------
Revenue:
Resident service fees........................................ $ 90,683 $ 64,544 $ 252,149 $ 164,830
Management fees and other.................................... 9,428 1,742 22,773 3,139
-------- -------- --------- ---------
Operating revenue.......................................... 100,111 66,286 274,922 167,969
Operating expenses:
Residence operations......................................... 57,526 40,492 157,122 104,063
Lease expense................................................ 18,386 11,901 48,816 30,952
General and administrative................................... 9,268 6,295 28,166 16,377
Depreciation and amortization................................ 5,233 5,534 13,783 13,180
-------- -------- --------- ---------
Total operating expenses................................... 90,413 64,222 247,887 164,572
-------- -------- --------- ---------
Operating income........................................... 9,698 2,064 27,035 3,397
-------- -------- --------- ---------
Other income (expense):
Interest expense, net........................................ (9,075) (2,744) (23,150) (5,285)
Lease income................................................. 7,579 -- 17,405 --
Equity in (losses) of unconsolidated affiliates.............. (597) (32) (667) (54)
Minority interest in losses of consolidated subsidiaries..... 498 5,984 3,776 15,672
-------- -------- --------- ---------
Total other (expense) income net........................... (1,595) 3,208 (2,636) 10,333
-------- -------- --------- ---------
Income before income taxes and the cumulative effect of a
change in accounting principle............................... 8,103 5,272 24,399 13,730
Income tax (expense) benefit................................... (3,079) 549 (9,272) 549
-------- -------- --------- ---------
Income before the cumulative effect of a change in
accounting principle................................. 5,024 5,821 15,127 14,279
-------- -------- --------- ---------
Cumulative effect of a change in accounting principle, net of
tax benefit of $2,409 (see Note 3) ......................... -- -- (3,837) --
-------- -------- -------- ---------
Net income..................................................... $ 5,024 $ 5,821 $ 11,290 $ 14,279
======== ======== ======== =========
Income per common share before change in accounting principle:
Basic...................................................... $0.23 $ 0.27 $ 0.68 $ 0.65
======== ======= ======= =========
Diluted.................................................... $0.23 $ 0.26 $ 0.68 $ 0.64
======== ======= ======== =========
Net income per common share:
Basic...................................................... $0.23 $ 0.27 $ 0.51 $ 0.65
======== ======= ======= =========
Diluted.................................................... $0.23 $ 0.26 $ 0.50 $ 0.64
======== ======= ======= =========
Weighted average common shares outstanding:
Basic...................................................... 22,085 21,946 22,084 21,876
======== ======== ======== =========
Diluted.................................................... 22,262 22,409 22,366 22,386
======== ======== ======== =========
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)
Nine Months Ended
September 30,
----------------------------
1999 1998
------------- -------------
Cash flows from operating activities:
Net income.......................................................................... $ 11,290 $ 14,279
Adjustments to reconcile net income to net cash provided by (used in) operating
activities net of acquisitions:
Depreciation and amortization....................................................... 13,783 13,180
Deferred income taxes............................................................... 3,432 --
Equity in net loss from investments in unconsolidated affiliates.................... 667 54
Minority interest in losses of consolidated subsidiaries............................ (3,776) (15,672)
Tax effect of stock options exercised............................................... 320 1,330
Increase in net resident receivables................................................ (4,012) (2,119)
Decrease (increase) in pre-opening costs............................................ 7,856 (9,179)
(Increase) in other current assets.................................................. (12,440) (4,221)
(Decrease) in accounts payable...................................................... (1,166) (1,816)
Increase in accrued expenses and deferred rent...................................... 12,929 10,686
Decrease in accrued merger costs.................................................... (214) (4,160)
Changes in other assets and liabilities, net........................................ 3,561 (7,663)
-------- --------
Net cash provided by (used in) operating activities................................... 32,230 (5,301)
-------- --------
Cash flows from investing activities:
Payments for property, equipment and project development costs...................... (176,874) (283,767)
Net proceeds from sale of plant, property, and equipment............................ 18,263 --
Increase in notes receivable........................................................ (9,852) --
Acquisitions of facilities, net of cash............................................ (15,206) (43,278)
Changes in investments in and advances to unconsolidated affiliates................. (1,400) (11,818)
Purchase of joint venture interests................................................. (59,482) (17,755)
Decrease in short-term investments.................................................. -- 90,000
Increase in long-term investments................................................... (5,161) --
-------- --------
Net cash used in investing activities................................................. (249,712) (266,618)
-------- --------
Cash flows from financing activities:
Repayments of short-term borrowings................................................. (981) (15,537)
Repayments of long-term obligations................................................. (77,859) (53,015)
Proceeds from issuance of debt...................................................... 212,893 176,177
Proceeds from issuance of convertible debt.......................................... -- 18,750
Payments for financing costs........................................................ (5,391) (4,803)
Proceeds from sale/leaseback transactions........................................... 72,014 107,563
Issuance of common stock and other capital contributions............................ 761 10,149
Contributions by minority partners and minority stockholders........................ 8,470 18,754
-------- --------
Net cash provided by financing activities............................................. 209,907 258,038
-------- --------
Net decrease in cash and cash equivalents............................................. (7,575) (13,881)
-------- --------
Cash and cash equivalents:
Beginning of period................................................................. 40,621 79,838
======== =======
End of period........................................................................ $ 33,046 $ 65,957
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized............................... $ 25,871 $ 14,317
=========== ========
Cash paid during period for income taxes............................................ $ 4,397 $ 1,322
=========== ========
See footnote 2 for discussion of capitalized lease transaction.
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 September 30, 1999 and
December 31, 1998, the condensed consolidated statements of operations for the
three and nine months ended September 30, 1999 and 1998 and the condensed
consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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
During the quarter ended September 30, 1999, the Company consummated a
synthetic lease transaction relating to 26 assisted living and
Alzheimer's/dementia care residences that were previously owned and operated by
Manor Care, Inc. and it's affiliates (the "Transaction"). Pursuant to the
Transaction, an affiliate of Key Bank National Association acquired the 26
residences for an aggregate purchase price of approximately $189.1 million
(including closing costs) and simultaneously leased the 26 residences to AHC
Tenant, Inc., a wholly-owned subsidiary of the Company. Mortgage financing for
the acquisition in the amount of $174.5 million was provided by Greenwich
Capital Financial Products and credit enhancement of this financing in the form
of a surety bond was provided by a member of the Zurich Financial Services
Group. The Company's leases of these 26 residences have a term of ten years,
reflect initial rental based on a lease constant of 9.93% and contain an option
to purchase the 26 residences at the end of the lease term for a pre-negotiated
fixed price. For financial accounting purposes, leases for 17 of the residences
will be treated as operating leases and leases for nine residences will be
treated as capital leases. The Company recorded $53.2 million of property and
equipment and $53.2 million of long term obligations upon completion of the
Transaction related to these capital leases. The Company also entered into
leases with Manor Care, Inc. with respect to two additional residences formerly
operated by Manor Care, Inc.
(3) 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. The cumulative effect of the accounting change reflected
in the condensed consolidated statement of operations for the nine months ended
September 30, 1999 was $3.8 million, net of tax.
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(4) 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 Nine Months Ended
September 30, September 30,
--------------------------- ------------------------------
1999 1998 1999 1998
----------- ------------ ------------- -------------
Numerator:
Numerator for basic and diluted income per share before
cumulative effect of a change in accounting principle.. $ 5,024 $ 5,821 $ 15,127 $ 14,279
Cumulative effect of a change in accounting principle..... -- -- (3,837) --
------- -------- ------- --------
Numerator for basic and diluted net income per share...... $ 5,024 $ 5,821 $ 11,290 $ 14,279
======= ======== ======== ========
Denominator:
Denominator for basic net income per common
share-weighted average shares.......................... 22,085 21,946 22,084 21,876
Effect of dilutive securities:
Employee stock options............................... 177 463 282 510
------- ------- -------- --------
Denominator for diluted net income per common
share-weighted average shares plus assumed conversions.. 22,262 22,409 22,366 22,386
======= ======= ======== ========
Basic income per common share before cumulative effect
of a change in accounting principle.................... $ 0.23 $ 0.27 $ 0.68 $ 0.65
Cumulative effect of a change in accounting principle..... -- -- (0.17) --
------- ------- -------- --------
Basic net income per common share......................... $ 0.23 $ 0.27 $ 0.51 $ 0.65
======= ======= ======== ========
Diluted income per common share before cumulative effect
of a change in accounting principle.................... $ 0.23 $ 0.26 $ 0.68 $ 0.64
Cumulative effect of a change in accounting principle..... -- -- (0.17) --
------- ------- ------- --------
Diluted net income per common share (1).................. $ 0.23 $ 0.26 $ 0.50 $ 0.64
======= ======= ======= ========
(1) Nine month period ended September 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.
(5) RECLASSIFICATIONS
Certain reclassifications have been made in the 1998 financial
statements to conform with the 1999 financial statement presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 nine months of 1999 and 1998. As of September 30, 1999 and 1998, the
Company operated or managed 431 and 336 residences with aggregate capacities of
19,688 and 14,315 residents, respectively. The Company is also constructing or
developing approximately 116 residences with aggregate capacity of 5,400 as of
September 30, 1999. However, the Company has announced its intention during the
fourth quarter of 1999 to review development projects not yet in construction
and, in light of the competitive environment and tighter capital markets, to
discontinue or defer a substantial portion of these projects. See "-Liquidity
and Capital Resources." For the nine months ended September 30, 1999, the
Company generated operating revenue of $274.9 million, and realized operating
income of $27.0 million, and net income of $15.1 million prior to the cumulative
effect of a change in accounting.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
Residence Service Fees. Residence service fees for the three months
ended September 30, 1999 were $90.6 million representing an increase of $26.1
million, or 40%, from the $64.5 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 431 and 336 residences at September 30, 1999 and 1998, respectively.
Management Fees and Other Revenues. Management Fees and other revenues
for the three months ended September 30, 1999 were $9.4 million, an increase of
$7.7 million over the $1.7 million of other revenue for the three months ended
September 30, 1998. The increase is attributable to management fees on a greater
number of residences which were either managed for third parties or for entities
in which the Company held a minority ownership position in the 1999 period
versus the 1998 period. As of September 30, 1999, the Company managed 92 such
residences compared to 61 such residences as of September 30, 1998. Management
fees include charges for transitional services to recruit and train staff,
initial and recurring fees for the use of the Company's Name and branding,
initial and recurring fees for the use of the Company's 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 September 30, 1999 increased to $57.5 million from $40.5
million in the three-month period ended September 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 September 30,
1999 and 1998 were 63.4% and 62.7%, respectively. This percentage increase
resulted primarily from increases in labor costs due to increased competition
for personnel. The increase in marginal expenses was also impacted by a slower
lease-up of residences in some markets.
Lease Expense. Lease expense for the three months ended September 30,
1999 was $18.4 million, compared to $11.9 million in the comparable period in
1998. Such increase was primarily attributable to the utilization of additional
sale/leaseback financing totaling $115.4 million during the twelve-month period
ended September 30, 1999.
General and Administrative Expense. For the three months ended
September 30, 1999, general and administrative expenses were $9.3 million,
compared to $6.3 million for the comparable 1998 period, representing a decrease
as a percentage of operating revenue to 9.3% in the 1999 period from 9.5% in the
1998 period.
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The $3.0 million 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 growth.
Depreciation and Amortization. Depreciation and amortization for the
three months ended September 30, 1999 was $5.2 million, representing a decrease
of $300,000, or 5.4%, from the $5.5 million of depreciation and amortization for
the comparable 1998 period. This decrease resulted primarily from the
elimination of amortization on pre-opening costs which are now expensed when
they are incurred. This decrease was offset by depreciation of fixed assets on
the larger number of new residences that were owned by the Company during the
three months ended September 30, 1999, versus the comparable period in 1998.
Interest Expense, Net. Interest expense, net of interest income, was
$9.1 million for the three months ended September 30, 1999, compared to $2.7
million for the comparable period in 1998. Gross interest expense (before
interest capitalization and interest income) for the 1999 period was $12.7
million compared to $8.0 million for the 1998 period, an increase of $4.7
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 $2.2 million of interest expense in the 1999 period compared
to $3.7 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 $1.5 million
as compared to $1.6 million for the 1998 period. This decrease was primarily due
to a reduction in average cash and investment balances from 1998 to 1999.
Lease Income. The Company recorded $7.6 million of lease income on
residences owned or leased by the Company and leased or subleased to
unconsolidated joint ventures in 1999. Lease payment obligations of the
unconsolidated joint venture entities are generally equivalent to the debt
service payable by the Company on the leased residences, and thereby offset
Company costs associated with obtaining and maintaining financing for such
residences. The Company had no such arrangements in 1998.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the three months ended
September 30, 1999 was $498,000, representing a decrease of $5.5 million from
$6.0 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 third quarter of 1999, the
Company had an average of 11 residences held in these consolidated joint venture
arrangements compared to an average of 60 residences held in similar joint
venture arrangements during the comparable 1998 period.
Income Taxes. For the three months ended September 30, 1999, the
Company recorded a reduction in the current income tax provision of $853,000
which was offset by the recognition of a $3.9 million deferred tax obligation
resulting in a current income tax expense of $3.0 million. During the three
months ended September 30, 1998, the Company recorded a current income tax
provision of $4.3 million which was offset by the recognition of $4.9 million of
deferred tax assets resulting in a current income tax benefit of $549,000.
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Residence Service Fees. Residence service fees for the nine months
ended September 30, 1999 were $252.1 million representing an increase of $87.3
million, or 53%, from the $164.8 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 431 and 336 residences at September 30, 1999 and 1998, respectively.
Management Fees and Other Revenues. Management Fees and other revenues
for the nine months ended September 30, 1999 were $22.8 million, an increase of
$19.7 million over the $3.1 million of other revenue for the nine months ended
September 30, 1998. The increase is attributable to management fees on a greater
number of residences which were either managed for third parties or for entities
in which the Company held a minority ownership position in the 1999 period
versus the 1998 period. As of September 30, 1999, the Company managed 92 such
residences compared to 61 such residences as of September 30, 1998. Management
fees include charges for transitional services to recruit and train staff,
initial and recurring fees for use of the Company's name and branding, initial
and recurring fees for the use of the Company's methodologies, services for
assisting with finance processing, and ongoing management services provided to
operate the residence. The increase in other revenue was also impacted by $3.0
million of development fees recognized in the first nine 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 nine
months ended September 30, 1999 increased to $157.1 million from $104.1 million
in the nine month period ended September 30, 1998 due to the increased number of
residences operated during the 1999 period. Operating expenses as a percentage
of resident service fees for the nine months ended September 30, 1999 and 1998
were 62.3% and 63.1%, respectively.
Lease Expense. Lease expense for the nine months ended September 30,
1999 was $48.8 million, compared to $30.9 million in the comparable period in
1998. Such increase was primarily attributable to the utilization of additional
sale/leaseback financing totaling $115.4 million during the twelve-month period
ended September 30, 1999.
General and Administrative Expense. For the nine months ended September
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 $26.4 million, compared to $16.4 million for the comparable
1998 period, representing a decrease as a percentage of operating revenue to
9.6% in the 1999 period from 9.8% in the 1998 period. The $10.0 million 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 growth.
Depreciation and Amortization. Depreciation and amortization for the
nine months ended September 30, 1999 was $13.8 million, representing an increase
of $600,000, or 4.6%, from the $13.2 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 nine months ended September 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
$23.1 million for the nine months ended September 30, 1999, compared to $5.3
million for the comparable period in 1998. Gross
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interest expense (before interest capitalization and interest income) for the
1999 period was $33.8 million compared to $20.8 million for the 1998 period, an
increase of $13.0 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 $7.4 million of interest expense in the
1999 period compared to $10.6 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 $3.3 million as compared to $4.9 million for the
1998 period.
Lease Income. The Company recorded $17.4 million of lease income on
residences owned or leased by the Company and leased or subleased to
unconsolidated joint ventures in 1999. Lease payment obligations of the
unconsolidated joint venture entities are generally equivalent to the debt
service payable by the Company on the leased residences, and thereby offset
Company costs associated with obtaining and maintaining financing for such
residences. The Company had no such arrangements in 1998.
Minority Interest in Losses of Consolidated Subsidiaries. Minority
interest in losses of consolidated subsidiaries for the nine months ended
September 30, 1999 was $3.8 million, representing a decrease of $11.9 million
from $15.7 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 nine months of 1999, the
Company had an average of 17 residences held in consolidated joint venture
relationships compared to an average of 52 residences in consolidated joint
venture relationships during the first nine months of 1998.
Income Taxes. For the nine months ended September 30, 1999, the Company
recorded a current income tax provision of $4.5 million and recognized a $4.8
million deferred tax liability resulting in a current income tax expense of $9.3
million before the effect of a cumulative change in accounting. During the nine
months ended September 30, 1998, the Company recorded a current income tax
provision of $4.3 million which was offset by the recognition of $4.9 million of
deferred tax assets resulting in a current income tax benefit of $549,000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its 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, the sale of its securities (common stock and convertible
debentures) and, to a lesser extent, cash from operations. At September 30,
1999, the Company had $724.7 million of outstanding debt principally consisting
of $228.6 of convertible debentures having a weighted average interest rate of
5.86%, $252.1 million of fixed rate debt having a weighted average interest rate
of 7.56%, capitalized lease obligations of $53.2 million having a weighted
average interest rate of 9.16% and $190.8 million of variable rate debt having
a weighted average interest rate of 7.89%.
At September 30, 1999, the Company had approximately $33.0 million in
unrestricted cash and cash equivalents and $23.7 million working capital
(compared to working capital of $40.4 million at September 30,1998). For the
nine months ended September 30, 1999 cash flow from operations was $32.2 million
versus an operating cash flow deficit of $5.3 million for nine months ended
September 30, 1998. The significant increase in cash flow is attributable to the
greater number of consolidated residences operating at or near stabilized
occupancy levels during the 1999 period in comparison to the comparable 1998
period. During the nine months ended September 30, 1999, the Company closed on
approximately $212.9 million of new debt financing and capital lease obligations
which included approximately $79.7 million of debt used to refinance properties
having prior debt balances of $66.1 million. Additionally, financing was
provided through $72.0 million of sale/leaseback financing and $8.5 million of
minority partner contributions.
Net cash provided by financing activities together with cash from
operations was used during the nine month period ending September 30, 1999 to
fund $176.8 million in construction and development activity, $59.5 million in
joint venture buy-outs, $15.2 million in acquisition activity, and $9.9 million
of construction bridge financing under third party development arrangements.
The Company has 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
the option of the company commencing on December 31, 2000,
at specified premiums. The holders of the convertible
debentures may require the Company to repurchase the
convertible debentures; upon a change of control of the
Company, as defined in the convertible debenture;
- $50.0 million aggregate principal amount of 7.00%
convertible subordinated debentures due June 1, 2004. These
convertible debentures bear interest at 7.00% per annum
payable semi-annually on June 1 and December 1 of each year.
The conversion price is $20.25, which is equivalent to a
conversion ratio of 49.4 shares of common stock per $1,000
in principal amount of the convertible debentures. The
convertible debentures are redeemable at the option of the
Company 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 the option of the
Company commencing on July 15, 1999, at specified premiums;
The Company's principal credit agreements and debt instruments include
various financial covenants and other restrictions, including: (i) debt service
coverage requirements, typically measured on a trailing four quarter basis,
which typically increase over the term of the applicable credit agreement; (ii)
maximum leverage ratios which limit the Company's aggregate senior indebtedness
to total capitalization; (iii) various minimum net worth or tangible net worth
requirements; (iv) in certain cases, property specific financial covenants of
the type referenced above applicable to individual properties or to the pool of
residences financed by the applicable lender; and (v) the maintenance of
operating and other reserves for the benefit of the residences serving as
collateral for the applicable lender. In addition, under certain of its credit
and sale/leaseback facilities, the Company is required to secure lender or
lessor consent prior to engaging in certain mergers, business combinations or
change in control transactions.
The Company's operations and growth will require significant additional
capital resources in the future in order to fund; (i) the Company's ongoing
construction and development of assisted living and Alzheimer's care
residences; (ii) the Company's purchase of minority and majority equity
interests in assisted living residences operated by the Company from the third
party joint venture partners; (iii) ongoing debt service obligations, including
maturities of its long-term debt; and (iv) certain obligations to finance the
operations of third party developments partners. Each of these principal uses
of capital resources are summarized below:
Development Activities. The development and construction of new,
purpose-built assisted living and Alzheimer's care residences has
historically been the principal use of the Company's capital resources. In
many markets in which the Company operates, competition has increased
significantly in recent periods and, in selected markets, the supply of
assisted living beds exceeds demand. Concurrently, financing for new
assisted living residences has become more difficult and more expensive to
obtain. In light of this competitive environment and the tightening of the
capital markets, the Company is actively reviewing its development
projects not yet in construction in order to determine which to complete
or terminate. In conducting this analysis, the Company is considering
market-specific and competitive factors on a site-by-site basis. The
Company anticipates that upon completion of this review it will elect to
discontinue a significant portion of its pending development projects and,
accordingly, record a charge related to the write-down of markets and
sites under development and the reduction of its development activities to
a modest level.
The Company will continue to construct and complete substantially all
of the 61 residences currently in construction. The Company estimates
that between $100.0 million and $115.0 million will be required to fund
its ongoing construction and development activity during the next twelve
months, depending upon the scope of its scale back of development and new
construction activities.
Purchase of Joint Venture Interests. The Company is obligated under
many 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. During the next twelve months, the Company will be 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 operated 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 that it may
require approximately $55 million to $70 million to satisfy these purchase
obligations during the twelve month period ending September 30, 2000.
Debt Service. In addition to ongoing debt service and lease payment
obligations, including interest payments due on its convertible debentures,
the Company will be required to fund or refinance approximately $58.8
million of long-term indebtedness that will mature during the twelve
months ending September 30, 2000. In addition, in the quarter ended
September 30, 1999, the Company arranged a series of operating leases
which were used to finance $135.9 million of the acquisition of residences
from Manor Care, Inc.
Advances to Development Partners. The Company has committed in certain
circumstances to provide up to $113.9 million in financing to development
partners under third party arrangements. The Company has advanced $17.3
million pursuant to these arrangements as of September 30, 1999. The
Company intends to finance these projects under existing bank credit
facilities.
The Company expects to fund a portion of its capital and liquidity
requirements from cash on hand, cash generated from operations, financing under
existing debt and lease commitments and equity from its joint venture
development partners. The Company has executed non-binding letters of intent
with various healthcare REITs and other lessors with approximately $69.9
million of remaining capacity at September 30, 1999 and had available
approximately $419.8 million of remaining financing capacity from conventional
mortgage lenders as of September 30, 1999, which conventional mortgage financing
is accessible by the Company upon satisfying the respective lenders' property
underwriting requirements. Included in this $419.8 million of mortgage financing
commitments is $151.8 million of financing available under a construction loan
facility established by the Company and Manor Care, Inc. to finance projects
developed through their development joint venture relationship. The Company
does not expect to utilize all of this financing to fund development of Company
projects. The Company's ability to utilize non-binding financing commitments
from REITs and other lenders has become substantially limited due in part to the
volatility in the capital markets and factors affecting the assisted living
industry generally. In particular, many healthcare REITs are currently not
extending new financing. In addition, the property level underwriting
requirements of certain of the Company's lenders are being more strictly
applied. Accordingly, the Company's ability to secure financing on acceptable
terms has become increasingly difficult.
The Company is currently exploring alternatives to obtain additional
sources of capital, to reduce or defer certain of its capital obligations and to
deleverage (i.e., reduce debt and other financial commitments in relation to
equity) its balance sheet. Among the alternatives the Company is considering
are the sale of equity or convertible securities, the sale of assets in a
"sale/manage-back" transaction, altering or reducing its utilization of joint
venture development arrangements, and discontinuing or deferring development
projects. Although beneficial from a liquidity or cash flow perspective, certain
of these alternatives, if implemented, could have a material and adverse impact
upon the Company's future earnings and could require the Company to seek
modifications from its lenders with respect to certain of its financing
covenants. There can be no assurance that the Company will be successful in
these efforts or that it will be able to access additional debt and equity
financing required to fund its operations and growth on acceptable terms in the
future.
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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 generally 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
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assurance that the Company 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 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's year 2000 readiness plan consists of:
- Identify and assess year 2000 issues in the Company's information and
non-information technology systems including inquiring of third parties
with whom it does significant business, such as vendors and suppliers,
as to the state of their year 2000 readiness; and
- Repair or replace non-compliant information and non-information
technology.
The Company has identified year 2000 risks in the following areas:
- THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS MIGHT NOT BE YEAR 2000
COMPLIANT. The Company has assessed its readiness in regard to year
2000 issues, and believe that all material hardware and software
utilized in its operations and, specifically, in its accounting
systems, is year 2000 compliant. This assessment included obtaining
year 2000 certifications from all software vendors, installation of
software patches issued by these vendors and specific year 2000 testing
of all material software. Despite the Company's efforts to identify and
resolve year 2000 issues, it cannot guarantee that all of its systems
will be year 2000 compliant.
- THE COMPANY'S NON-INFORMATION TECHNOLOGY SYSTEMS MIGHT NOT BE YEAR 2000
COMPLIANT. Its non-information technology systems are its building
management and life/safety systems, which include its emergency call
systems, electrical locking systems, fire alarm systems, fire alarm
monitoring systems, and in limited cases, elevator systems. The Company
has assessed its readiness of these systems in regard to year 2000
issues by deploying approximately 12 regional maintenance personnel
who contacted, as part of their normal course of business, all
manufacturers and vendors of material non-information technology
systems requesting written certification that each of their systems is
year 2000 compliant. Any systems identified as not in compliance will
be upgraded or replaced.
- THE COMPANY MAY HAVE YEAR 2000 ISSUES WITH SIGNIFICANT THIRD
PARTIES. It has obtained year 2000 compliance letters from its major
financial institution and tested compliance for key third party systems
like check processing and ACH/direct deposit transmissions. However,
some third parties, including certain utilities and the federal
government, continue to be in the process of evaluating and updating
their internal systems and cannot yet assure the Company that their
systems are year 2000 compliant. The Company plans to monitor the
progress of its major vendors in achieving year 2000 compliance and,
where possible, develop alternative means to obtain necessary goods and
services.
The Company does not anticipate any major interruption in its business as a
result of year 2000 issues. Accordingly, The Company does not expect that the
Year 2000 Issue will have a material adverse effect upon its operations or that
it will incur any material expense associated with year 2000 compliance.
However, despite the Company's efforts to identify and resolve year 2000
compliance problems, it cannot guarantee that all of its systems or that
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third parties on which the Company relies will be year 2000 compliant. As a
result the Company's operations could be interrupted or adversely effected. In
the worst case scenario, if the Company's non-information technology systems
suffered year 2000 issues, it would implement it's standard emergency operation
plan. This plan primarily includes incurring additional staffing and if
necessary relocation of it's residents to alternate locations. If the Company
needs to sustain this additional staffing or were unable to occupy it's existing
buildings for an extended period of time, it could have a material adverse
effect on the Company's business and operations.
The Company has not established a contingency plan to address potential year
2000 noncompliance with respect to it's information systems or those of it's
major vendors. The Company is currently considering the extent to which such a
plan is necessary. Because the Company depends on organizations who maintain
systems outside of our control, such as telecommunications, power supplies and
the federal government, which may not have adequately addressed year 2000
issues, it cannot guarantee that it will not face unexpected problems associated
with year 2000 issues effecting it's operations, business and financial
condition.
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.
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.
The Company performed a sensitivity analysis which presents the
hypothetical change in fair value of those financial instruments held by the
Company at September 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 $199.5 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 $1.5
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, September 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 September 30, 1999.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amended Schedule of Bank United Mortgages which are
substantially similar to the Form of Bank United Mortgage
attached as Exhibit 10.53 to the Registrant's 10-K for the
period ending December 31, 1998.
10.2 Form of Deed of Trust and Security Agreement ("Form of Key
Mortgage") between ALS National, Inc. and Key Corporate
Capital, Inc. dated September 1999.
10.3 Form of Project Promissory Note ("Form of Key Note") by ALS
National, Inc. to Key Corporate Capital, Inc.
10.4 Schedule of Mortgages and Notes which are substantially
similar to the Form of Key Mortgage attached as Exhibit 10.2
and Form of Key Note attached as Exhibit 10.2 herein.
10.5 Form of Multifamily Mortgage, Assignment of Rents and
Security Agreement ("Form of Amresco Mortgage") between ALS
Kansas, Inc. and Amresco Capital, L.P. dated July 16, 1999,
including Exhibit B thereto (other exhibits to this agreement
have been omitted; the Registrant agrees to furnish
supplementally to the Commission, upon request, a copy of
these exhibits).
10.6 Form of Multifamily Note ("Form of Amresco Note") by ALS
Kansas, Inc. to Amresco Capital, L.P. dated July 16, 1999.
10.7 Schedule of Mortgages and Notes which are substantially
similar to the Form of Amresco Mortgage attached as Exhibit
10.5 and Form of Amresco Note attached as Exhibit 10.5
herein.
10.8 Credit Agreement ("the Bank of America Credit Agreement")
between the Borrowers defined therein ("Devco I Entities"),
HCR/Alterra Development, LLC ("HCR/Alterra"), as Guarantor,
the Lenders defined therein, Bank of America, N.A. as
Administrative Agent, The Chase Manhattan Bank as Syndication
Agent, and Deutsche Bank AG New York and/or Cayman Islands
Branches and Bank United, F.S.B. as Co-Agents, dated
September 30, 1999 (exhibits and schedules to this agreement,
which are listed and summarized in the table of contents to
the agreement, have been omitted; the Registrant agrees to
furnish supplementally to the Commission, upon request, a
copy of these exhibits and schedules).
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10.9 Guaranty Agreement dated September 30, 1999 by the Registrant
in favor of Bank of America, N.A. as Administrative Agent
under the Credit Agreement attached as Exhibit 10.8 herein
(exhibits to this agreement have been omitted; the Registrant
agrees to furnish supplementally to the Commission, upon
request, a copy of these exhibits).
10.10 Schedule of Devco I properties mortgaged under the Bank of
America Credit Agreement attached as Exhibit 10.8 herein.
10.11 Guaranty dated August 31, 1999 by the Registrant in favor of
Key Corporate Capital Inc. as Administrative Agent under the
Master Construction Line of Credit Agreement among Third
Party Investors I, L.L.C., as Borrower, and the lending
institutions and co-agents named therein, and Key Corporate
Capital Inc.
10.12 Amended and Restated Purchase Rights and Financing Agreement
dated as of June 30, 1999 between the Registrant and Third
Party Investors I, L.L.C.
10.13 Convertible Subordinated Loan Agreement among Third Party
Investors I, L.L.C. and the Company dated September 30, 1999.
10.14 Bridge Construction Loan Agreement among Third Party
Investors I, L.L.C. and the Company dated September 30, 1999.
10.15 Bridge Construction Loan Note by Third Party Investors I,
L.L.C. to the Company dated September 30, 1999.
10.16 Supplementary Financing Loan Agreement among Third Party
Investors I, L.L.C. and the Company dated September 30, 1999.
10.17 Supplementary Financing Loan Note by Third Party Investors I,
L.L.C. to the Company dated September 30, 1999.
10.18 Master Amendment, Confirmation and Acknowledgment Agreement
dated September 28, 1999 between Pita General Corporation,
AHC Tenant, Inc., the Registrant, Greenwich Capital Financial
Products, Inc., SELCO Service Corporation, The First National
Bank of Chicago, ZC Specialty Insurance Company, and certain
other parties as defined therein, including Exhibit 3.1(e)
thereto (other exhibits and schedules to this agreement have
been omitted; the Registrant agrees to furnish supplementally
to the Commission, upon request, a copy of these exhibits and
schedules).
10.19 First Amendment to Amended and Restated Financing and
Security Agreement.
10.20 First Amendment to Guarantee of Payment Agreement.
11.1 Statement Regarding Computation of Net Income Per Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K: The Registrant filed the following report
with the Securities and Exchange Commission on Form 8-K during the
quarter ended September 30, 1999:
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On August 3, 1999, the Company filed a Current Report on Form
8-K dated July 20, 1999 reporting the consummation of a
synthetic lease transaction relating to 20 assisted living
and Alzheimer's/dementia care residences previously owned and
operated by HCR Manor Care, Inc.
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 12th day of November, 1999.
ALTERRA HEALTHCARE CORP., INC.
Date: November 12, 1999 By: /s/ Mark W. Ohlendorf
----------------------------------
Mark W. Ohlendorf
Chief Financial Officer
(Principal Financial Officer)
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