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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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[MARK ONE]
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-11999
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ALTERRA HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 39-1771281
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
10000 INNOVATION DRIVE
MILWAUKEE, WI 53226
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 918-5000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE AMERICAN STOCK EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 AMERICAN STOCK EXCHANGE
5.25% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2002 AMERICAN STOCK EXCHANGE
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $94,056,168 as of March 24, 2000. The number of outstanding
shares of the Registrant's Common Stock was 22,100,032 shares as of March 24,
2000.
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Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for its 2000 Annual
Meeting of Stockholders are incorporated into Part III.
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The statements in this annual report on Form 10-K relating to matters that are
not historical facts, including, but not limited to, statements found in Item 1.
"Business" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from expectations. These include, without limitation, those set forth
under "Item 1. Business". These and other risks are set forth in the reports
filed by us with the Securities and Exchange Commission.
PART I
References in this report to the "Company," "us" or "we" refer to Alterra
Healthcare Corporation and its subsidiaries.
ITEM 1. BUSINESS
OVERVIEW
We are a leading national assisted living company operating assisted living
residences and providing assisted living services in 27 states. Our growth in
recent years has had a significant impact on our results of operations and
accounts for most of the changes in our results between 1999 and 1998. As of
December 31, 1999 and 1998, we operated or managed 450 and 350 residences with
aggregate capacity of approximately 20,700 and 15,000 residents, respectively.
We, together with other parties who have purchased interests in some of our
development residences, are also constructing or developing 55 additional
residences with additional capacity for 2,900 residents as of December 31, 1999.
During 1999, we generated operating revenue of $376.2 million and realized
operating income of $44.9 million and net income of $8.8 million prior to the
non-recurring charge, other one time adjustments and the cumulative effect of a
change in accounting principle.
Since 1993, we have grown as a result of our development and acquisition
activities, which have focused on purpose built, free-standing assisted living
residences. We have announced our intention to discontinue or defer a
substantial portion of our development projects not yet in construction in light
of the competitive environment and tighter capital markets.
In October 1997, we completed our merger (the "Sterling Merger") with Sterling
House Corporation ("Sterling"), which at the time of the merger operated 104
residences with an aggregate capacity of approximately 3,900 residents. In May
1996, we acquired New Crossings International Corporation ("Crossings"), an
assisted living company which operated 15 Crossings residences with a capacity
to accommodate approximately 1,420 residents throughout the western United
States; and in January 1996, we acquired Heartland Retirement Services, Inc.
("Heartland"), an assisted living company which operated 20 WovenHearts
residences with an aggregate capacity of approximately 330 residents throughout
Wisconsin. The Sterling Merger was accounted for as a pooling-of-interests and
both of the 1996 acquisition transactions were accounted for as purchases.
During the fourth quarter of 1999, we began to implement several strategic
initiatives designed to strengthen our balance sheet and to enable us to focus
on stabilizing and enhancing our core business operations. The principal
components of these strategic initiatives include (i) a substantial reduction in
our development activity; (ii) a reduction in our utilization of and reliance
upon the use of joint venture (so called "black box" ) arrangements; (iii)
deleveraging our balance sheet; and (iv) focusing our activities on improving
the Company's cash flow. To implement these strategic initiatives and to address
our short- and long-term liquidity and capital needs, we intend to secure an
equity or equity-linked investment in the Company of at least $100 million
during the second quarter of 2000 (the "Equity Transaction").
Our statements in this annual report relating to matters that are not historical
facts are forward-looking statements based on our management's belief and
assumptions based upon currently available information. Although we believe that
the expectations reflected in these forward-looking statements are reasonable,
we are unable to provide assurances that our expectations will prove to be
correct. Forward-looking statements involve a number of risks and uncertainties,
including, but not limited to, substantial debt and operating lease payment
obligations, operating losses associated with new residences, our need for
additional financing and liquidity, our ability to implement our new strategic
initiatives and improve cash flow, risks associated with our development and
construction activities, risks associated with acquisitions, competition,
governmental regulation and other uncertainties outlined in our reports filed
with the Securities and Exchange Commission. Should one or more of these risks
materialize (or the consequences of one or more of these risks worsen) or should
our underlying assumptions prove incorrect, our actual results of operation and
our financial position in the future could differ materially from those
forecasted or expected. We do not assume any duty to publicly update these
forward-looking statements.
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NEW CORPORATE BRAND NAME
In May of 1999, we changed the name of the corporation to Alterra Healthcare
Corporation. In doing so we have created a corporate brand name, Alterra, to
provide better consumer recognition of our products and service offerings. Our
residences operate under several brand names, including Clare Bridge, and Clare
Bridge Cottage, the brand names of our primary free-standing, dementia care
models, Wynwood, the brand name of our upper income, frail elderly model,
Sterling House, the brand name of our moderately priced frail elderly model, and
Alterra Villas, the brand name of our independent living model. Through the
Alterra brand name, we intend to create a strong, corporate level brand identity
across all of our residence model and service level offerings. We believe that
corporate level branding will leverage our national scale and will focus
potential residents and referral sources on the range of services we offer
rather than those offered by a single residence model. In addition, we believe
that corporate level branding will provide an opportunity to reduce future
marketing expenditures by eliminating duplication inherent in marketing each
product line and residence model separately.
ASSISTED LIVING SERVICES
We offer a full range of assisted living services based upon individual resident
needs. Prior to admission, residents are assessed by our staff to determine the
appropriate level of personal care and services required. Subsequently,
individual service agreements are developed by residence staff in conjunction
with the residents, their families and their physicians. These plans are
periodically reviewed, typically at six month intervals, or when a change in
medical or cognitive status occurs.
FRAIL-ELDERLY SERVICES. We offer residents 24-hour assistance with activities of
daily living ("ADLs"), ongoing health assessments, organized social activities,
three meals a day plus snacks, housekeeping and personal laundry services. All
residents are assessed at admission to determine the level of personal care and
service required and placed in a care level ranging from basic care to different
levels of advanced personal care. In addition, in some locations we offer our
residents exercise programs and programs designed to address issues associated
with early stages of Alzheimer's and other forms of dementia as more fully
described below.
Basic Care. At this level, residents are provided with a variety of
services, including 24 hour assistance with ADLs, ongoing health
assessments, three meals per day and snacks, coordination of special
diets planned by a registered dietitian, assistance with coordination
of physician care, social and recreational activities, housekeeping and
personal laundry services.
Additional Care. We also offer higher levels of personal care services
to residents who require more frequent or intensive physical assistance
or increased personal care and supervision due to cognitive
impairments. We refer to this care as "YourCare." Pricing for YourCare
is determined using a proprietary assessment tool which determines
additional services provided above basic care. Charges are based on
market rates and the cost of additional personal care required,
typically staffing. Rates charged for these services are added to the
rate charged for basic personal care, and depends upon the level and
frequency of personal care required and staffing needs. Residents
requiring the highest personal care level are typically very physically
frail or experiencing early stages of Alzheimer's disease or other
dementia. Physically frail residents may require medication management,
assistance with various ADLs, two-person transfer from a wheelchair or
incontinence care. Residents with cognitive impairment may require
frequent staff interaction and intervention due to confusion.
RISE (Restoring Independence, Strength and Energy). Some Wynwood
residences also offer RISE, a one-on-one exercise program designed to
help residents regain their independence and become healthier, and
stronger by improving flexibility, balance, strength and endurance. The
program is targeted to residents with health concerns related to
Parkinson's disease, strokes, osteoarthritis, osteoporosis, congestive
heart disease, hip fractures and other limitations in ambulation and
mobility. Monthly rates for the program range from $90 to $400
depending on the frequency and duration of sessions.
ESP (Extended Support Program). ESP, also offered at some Wynwood
residences, is a program designed to provide additional structure and
personal attention to residents with early stages of dementia.
Scheduled group recreational activities and social events help
residents build self-esteem and decrease anxiety related to confusion
and disorientation. The ESP program has been successful in retaining
residents who, due to their dementia, might otherwise need to relocate
to a more supportive environment. The monthly program rates range from
$325 to $450.
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Personal care and supportive services are offered in different residence models
which incorporate our philosophy of preserving resident's privacy, encouraging
choice and fostering independence in a home-like setting.
- - Wynwood. These multi-story residences are designed to serve primarily upper
income frail elderly individuals in metropolitan and suburban markets. The
Wynwood residences typically range in size from 37,500 to 45,000 square
feet and accommodate 60 to 78 residents. To achieve a more residential
environment in these large buildings, each wing or "neighborhood" in the
residence contains design elements scaled to a single-family home and
includes a living room, dining room, patio or enclosed porch, laundry room
and personal care area, as well as a care giver work station. We
customarily charge monthly rates per resident ranging from $1,800 to $2,700
for a shared room and from $2,500 to $3,100 for a private room. The average
rate in Wynwood residences during the fourth quarter of 1999 was
approximately $2,200.
- - Sterling House. These apartment-style residences are generally located in
select suburban communities and in small or medium sized towns with
populations of 10,000 or more persons. These residences range in size from
20,000 to 30,000 square feet and usually contain from 33 to 50 private
apartments, offering residents a choice of studio, one-bedroom and
one-bedroom deluxe apartments. These apartments typically include a bedroom
area, private bath, living area, individual temperature control and
kitchenettes and range in size from 320 to 420 square feet. Common space is
dispersed throughout the building and is residentially scaled. We
customarily charge monthly rates per resident from $1,300 to $2,800
depending on the apartment type, level of services required, resident
acuity and the geographic location of the residence. The average rate in
Sterling House residences during the fourth quarter of 1999 was
approximately $2,100.
- - Villas. These private apartment-style residences are designed to serve
upper income independent individuals in metropolitan and suburban markets.
The Villas residences typically range in size from 45,000 to 65,000 square
feet and contain 63 to 218 private apartments. These apartments typically
include a bedroom area, private bath, living/dining area, and kitchenettes
and range in size from 280 to 700 square feet. We offer a secure building
with comfortable common areas and pleasant outdoor surroundings. We
customarily charge monthly rates per resident ranging from $1,125 to $2,750
depending on the apartment type, level of services required, and geographic
location of the residence. The average rate in Villas residences during the
fourth quarter of 1999 was approximately $1,500.
ALZHEIMER'S DEMENTIA SERVICES. We believe we are one of the leading providers of
care to residents with cognitive impairments, including Alzheimer's and other
dementias, in our free-standing Clare Bridge and Clare Bridge Cottage
residences. Our programs provide the attention, personal care and services
needed to help cognitively impaired residents maintain a higher quality of life.
Specialized services include assistance with ADLs, behavior management and an
activities program, the goal of which is to provide a normalized environment
that supports resident's remaining functional abilities. Whenever possible,
residents participate in all facets of daily life at the residence, such as
assisting with meals, laundry and housekeeping.
Our specially designed, free-standing dementia residence models serve the
programmatic needs of individuals with Alzheimer's disease and other dementias.
Our dementia model residents typically require higher levels of personal care
and services as a result of their progressive decline in cognitive abilities,
including impaired memory, thinking and behavior. These residents require
increased supervision because they are typically highly confused, wander prone
and incontinent.
- - Clare Bridge. Our Clare Bridge dementia residence model ranges in size from
20,500 to 28,000 square feet, is a single-story residence accommodating 38
to 52 residents and is primarily located in metropolitan and suburban
markets. We seek to create a "home-like" setting that addresses the
resident's cognitive limitations using internal neighborhoods consisting of
rooms which are scaled to the size typically found in an upper-income,
single family home with the same level of furniture, fixtures and
carpeting. Key features specific to the needs of Clare Bridge residents
generally include indoor wandering paths, a simulated "town-square" area,
secure outdoor spaces with raised gardening beds, directional aids to
assist in "wayfinding" such as signs, color-coded neighborhoods and memory
boxes with the resident's photograph outside of their unit, and
specifically designed furniture suitable for incontinent residents. We
generally charge monthly rates per resident ranging from $2,800 for a
shared room to $4,000 for a private room in our Clare Bridge residences.
The average rate in Clare Bridge residences during the fourth quarter of
1999 was approximately $3,100.
- - Clare Bridge Cottage. During 1998 we introduced dementia residence models
focused on smaller to medium sized markets where income levels would not
support a more upscale Clare Bridge model. These residences range from 20
to 40 residents and offer services similar to the Clare Bridge. These
buildings resemble the Sterling House architectural styles with
enhancements for wandering paths, security and other features associated
with Clare Bridge. We customarily charge monthly rates between $2,600 and
$3,500 for services provided in the Clare Bridge Cottage. The average rate
in Clare Bridge Cottage residences during the fourth quarter of 1999 was
approximately $2,700.
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ACCESS TO SPECIALIZED MEDICAL SERVICES. In addition to our care and supportive
services we assist our residents with the coordination of access to medical
services from third parties, including home health care, rehabilitation therapy,
pharmacy services and hospice care. These providers are often reimbursed
directly by the resident or a third party payor, such as Medicare. In the
future, we may elect to provide these services directly using our own employees
or through contracts or joint venture agreements with other providers.
Commencing in early 1999, Crystal Health LLC, a joint venture formed by us and
Omnicare, Inc., a national institutional pharmacy company, commenced providing
pharmaceutical care services and medications to our residents and other elderly
customers.
JOINT VENTURES AND STRATEGIC ALLIANCES
Historically we have formed strategic alliances and joint ventures with
established real estate development and financial partners. These alliances and
joint ventures enabled us to develop and construct additional residences while
reducing the investment of, and associated risk to, us. Although we intend to
reduce our utilization and reliance upon joint venture and other off-balance
sheet ownership structures in the future, we operated or managed approximately
87 residences utilizing these types of arrangements as of December 31, 1999.
Joint Venture with Pioneer Development Company. In 1996, we established a joint
venture relationship (the "ALS-Northeast J.V.") with Pioneer Development
Company, a Syracuse, New York-based commercial real estate development and
construction company ("Pioneer"), to develop, own and operate assisted living
residences in targeted market areas throughout New York, Massachusetts,
Connecticut and Rhode Island (the "ALS-Northeast Territory"). We agreed with
Pioneer to capitalize and form separate project entities during a five-year
development term commencing in September 1996 to develop, construct, open and
operate residences in the ALS-Northeast Territory, with the Company and Pioneer
owning and funding either a 51% and 49% equity interest, a 65% and 35% equity
interest, or an 80% and 20% equity interest, respectively, in these project
entities. Under some circumstances, the development term for one or more states
in the ALS-Northwest Territory will be extended or shortened from the original
five-year term. During the development term, the Company and Pioneer have agreed
not to independently engage in other competitive activities in the ALS-Northeast
Territory, subject to limited exceptions. Pioneer will provide development and
construction management services to the ALS-Northeast J.V. and we will manage
the ALS-Northeast residences, all pursuant to agreed upon arrangements. Any
losses from the operation of residences jointly owned or leased by Alterra and
Pioneer are allocated on a basis consistent with the economic risk assumed by
each of the partners, which results in losses being disproportionately allocated
to Pioneer to the extent of its capital.
With respect to each ALS Northeast Territory residence, upon the first to occur
of (i) a residence achieving a 75% occupancy or (ii) the six-month anniversary
of the opening of a residence, Pioneer shall have the right to require us to
purchase Pioneer's interest in the residence (put option) and we shall have an
option to acquire (call option) Pioneer's interest in a ALS-Northeast residence.
The purchase price payable upon exercise of the put and call options are based
on the appraised fair market value of the residence or leasehold interest and
shall be payable in cash and/or shares of our Common Stock. At December 31,
1999, 12 of our residences were held in joint ventures with Pioneer.
Synthetic Lease Joint Venture Arrangements. In December 1998, we agreed to
purchase 28 assisted living residences from Manor Care and its affiliates, 26 of
which we acquired by obtaining approximately $190 million of financing through a
synthetic lease arrangement structured by Key Global Finance, an affiliate of
Key Bank National Association. The synthetic lease is a financing arrangement
that is similar to the sale/leaseback financing that has been offered to the
assisted living industry by various healthcare real estate investment trusts
(REITs), but under which the lessee party is treated as the fee owner of the
subject property for tax purposes and is entitled to acquire the leased property
for a predetermined price at the conclusion of the synthetic lease term.
Pursuant to this synthetic lease arrangement, an affiliate of Key Bank, Pita
General Corporation (the "Synthetic Lessor"), purchased the fee interest in the
26 residences from Manor Care and its affiliates (20 of the residences were
acquired by the Synthetic Lessor as of July 20, 1999 and the other six
residences were acquired as of September 30, 1999) utilizing mortgage loan
financing provided by Greenwich Capital Financial Products, Inc. ("Greenwich").
Greenwich's loan to the Synthetic Lessor is secured by, among other collateral,
mortgages on the 26 residences as well as by a surety bond provided by the
Centre group of companies, a member of the Zurich Financial Services Group. The
Greenwich loan is also secured by our guaranty as well as by our pledge of our
general partner interest in each of the "Synthetic Lease JVs" described below.
Simultaneously with its acquisition of the 26 residences, (i) the Synthetic
Lessor leased all 26 residences to AHC Tenant, Inc., one of our wholly-owned
subsidiaries ("AHC Tenant"), and (ii) AHC Tenant subleased the residences to the
26 Synthetic Lease JVs. Accordingly, each Synthetic Lease JV is operating its
respective residence pursuant to the terms of a sublease.
Each of the 26 "Synthetic Lease JVs" is a Delaware limited partnership having us
as the 1% general partner and TPI-HCR, LLC, a Delaware limited liability company
("TPI-HCR"), as the 99% limited partner.
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From June 30, 1999 through September 30, 1999, TPI-HCR contributed a total of
$15,750,000 of equity to the 26 Synthetic Lease JVs (with us also contributing
equity commensurate with our 1% interest therein). Then, in October 1999,
TPI/MFG Investors L.P., a Delaware limited partnership ("TPI/MFG"), was
organized to acquire a limited partner interest in TPI-HCR for an equity
contribution of $5,000,000, which amount was in turn contributed by TPI-HCR to
the capital of the Synthetic Lease JVs. We are the 1% general partner of
TPI/MFG and we also hold a 33.6% interest as a limited partner, having
contributed total equity to TPI/MFG in the amount of $1,728,723. The remaining
$3,271,277 of TPI/MFG's capital was contributed by a number of third-party
investors in exchange for limited partner interests aggregating 65.426%.
All profit and gain allocations and distributions of each of the Synthetic Lease
JVs, TPI-HCR, and TPI/MFG are made in proportion to the members' contributed
capital (subject to a preference totaling $942,123 to be paid to members of
TPI-HCR other than TPI/MFG to provide them with a negotiated return on, but not
a return of, their contributed capital through the date of TPI/MFG's investment
in October 1999). We have been retained by each Synthetic Lease JV to manage the
operations of its respective residence for a management fee and have also
received fees for certain other services rendered in connection with the
synthetic lease joint venture.
TPI-HCR has a currently exercisable "put option" to sell to us its interest in
any or all of the Synthetic Lease JVs. The purchase price payable by us pursuant
to the "put option" would be equal to the amount that TPI-HCR would receive if
the particular Synthetic Lease JV were to sell its respective residence at fair
market value (as determined pursuant to one or more appraisals), allocate any
resulting gain or loss as provided in the applicable partnership agreement,
satisfy all creditors, and then distribute any remaining proceeds to the JV
partners in liquidation of the Synthetic Lease JV in accordance with the
partnership agreement. Further, we have a currently exercisable "call option" to
purchase from TPI-HCR its interest in any or all of the Synthetic Lease JVs at a
purchase price equal to an amount computed to return to TPI-HCR its paid-in
capital contributions plus provide a negotiated return thereon. However, each
Synthetic Lease JV partnership agreement provides that a book account is to be
maintained to track the excess, if any, of any call option price paid with
respect to any Synthetic Lease JV over the price that would have been paid
pursuant to an exercise of the put option with respect to the Synthetic Lease
JV, with us ultimately being required also to pay such excess to TPI-HCR to the
extent (if any) that TPI-HCR does not receive the negotiated return on its
aggregate capital contributions to all the Synthetic Lease JVs.
The third-party limited partner investors in TPI/MFG, upon the election of a
majority (by percentage ownership) thereof, have the right to sell to us
all (but not less than all) of their interests in TPI/MFG. This "put option"
generally will be exercisable by the investors commencing in May 2000. The
purchase price payable by us pursuant to the put option would be equal to the
amount that the limited partner investors would receive if TPI/MFG were to sell
its membership interest in TPI-HCR at fair market value (as determined pursuant
to one or more appraisals), allocate any resulting gain or loss as provided in
the TPI/MFG partnership agreement, satisfy all creditors, and then distribute
any remaining proceeds to the TPI/MFG partners in liquidation of TPI/MFG in
accordance with its partnership agreement. Further, we have a call option to
purchase all (but not less than all) of the limited partner investors' interests
in TPI/MFG generally at any time at a purchase price equal to an amount computed
to return to the limited partner investors their paid-in capital contributions
plus provide a negotiated return thereon.
Franchise Arrangement with Eby Holdings. We have a franchise relationship with
Eby Holdings Inc. ("Eby"). Under the terms of this agreement, Eby receives the
right to build and operate residences using our branding, designs and operating
systems in designated geographic areas. Currently, Eby operates 21 residences in
the states of Iowa and Nebraska under the Sterling House brand. In consideration
for a franchise relationship, we receive fees payable at the opening of the
franchised residence. In addition, we receive fees equal to 3% of resident
service revenue generated by the franchised residences. We have options to
purchase franchised residences based on fixed valuation criteria or actual
prices per unit and right of first refusal.
Development Arrangement with Investor Group. In December 1998 and March 1999, we
entered into a series of transactions with a group of investors (the "Investor")
pursuant to which we agreed to develop for the Investor 16 assisted
living/dementia care residences in our construction or development pipeline. The
Investor acquired our development rights in these 16 projects for approximately
$21 million. We have agreed to complete construction of these residences on the
Investor's behalf, and will be reimbursed by the Investor for costs incurred
related to this construction (estimated to be approximately $56.0 million). We
also agreed to provide a $10 million supplemental financing loan to the Investor
to permit them to satisfy a portion of obligations not financed through third
party mortgages for these residences. The supplemental financing loan matures on
the date of maturity of the third party mortgages. In addition, we have agreed
to loan the Investor up to $1.6
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million for working capital purposes and to guarantee, subject to limitations,
the Investor's third party mortgage financing of the residences.
Alterra and the Investor also entered into a (i) development agreement
pursuant to which we are providing the development and management services
necessary to develop and construct the residences for a fee, and (ii) management
agreement pursuant to which we will manage the completed residences on terms
generally consistent with our other management agreements. We have a right of
first offer with respect to any proposed sale of these residences by the
Investor.
Joint Venture with Manor Care, Inc. On December 31, 1998, Alterra and Manor
Care, Inc., f/k/a HCR Manor Care, Inc. ("Manor Care") agreed to establish and
capitalize a joint venture to develop up to $500 million of Alterra-branded
Alzheimer's/dementia care and assisted living residences in Manor Care's core
markets over a three to five year period. Specifically, each of Alterra and
Manor Care agreed to transfer (at capitalized cost) development projects to this
venture from their respective development pipelines, forming separate joint
venture project entities to acquire, develop, own and operate each such project.
It was intended that majority equity ownership interests in these joint venture
project entities be funded and held by third-party investors.
On June 30, 1999, 14 Manor Care residences were placed into a joint venture
structure pursuant to the joint venture agreement with Manor Care. Those
residences were each transferred by Manor Care (or a subsidiary thereof) to a
separate Delaware limited partnership having HCR/Alterra Development LLC ("DevCo
I") (an entity owned 50% by us and 50% by Manor Care) as the 10% general
partner and a number of third-party investors as the 90% (in the aggregate)
limited partners. The total equity contributed to these "DevCo I JVs" by the
limited partners (excluding the 10% equity contribution by DevCo I as general
partner) has been $15.2 million.
The cash needs of each DevCo I JV were originally met by a combination of equity
contributions from DevCo I JV members and bridge loans from Manor Care, with
such bridge loans to be repaid upon the DevCo I JVs obtaining bank financing for
the residence. In addition to funding the purchase of the applicable residence
from Manor Care, each DevCo I JV has utilized such proceeds to complete
construction of the applicable residence and to fund startup losses during the
lease-up of such residence.
All profit and gain allocations and distributions of the DevCo I JVs are made in
proportion to the members' contributed capital (i.e., 90% to the limited partner
investors; 10% to DevCo I as general partner). Losses are allocated to the
members in proportion to contributed capital, with any losses in excess of
contributed capital to be allocated to DevCo I. We have been retained by
thirteen of the DevCo I JVs to manage the operations of its respective residence
for a management fee. Alterra and Manor Care have also received fees for certain
other services rendered in connection with the DevCo I joint venture.
Thirteen of the DevCo I JVs obtained construction/mini-perm mortgage financing
from a syndicate of banks assembled by Bank of America, which financing is
providing for approximately 75%-80% of the DevCo I JVs' projected capital needs.
Each of Manor Care and Alterra have guaranteed repayment of the Bank of America
facility, and Manor Care will receive for its guaranty an initial debt guaranty
fee equal to 1 1/4% and an ongoing debt guaranty fee equal to 1/2% per annum
(for the initial 18 months of the joint venture). Manor Care is also entitled to
a fee of $40,000 per residence related to the closing of the secured financing
for each residence.
The limited partner investors in each DevCo I JV, upon the election of a
majority (by percentage ownership) thereof, have the right to sell to us all
(but not less than all) of their interests in that or any or all other DevCo I
JVs. This put option generally is exercisable by the limited partners anytime
after one year from the date that the residence owned by the applicable DevCo I
JV first opens for business (the "Opening Date"). Upon any exercise of the put
option, DevCo I shall be obligated to sell to us all of its interest in that
particular DevCo I JV on the same terms as the sale of the limited partners'
interests. The purchase price payable by us pursuant to the put option would be
equal to the amount that the limited partners would receive if the DevCo I JV
were to sell its respective residence at fair market value (as determined
pursuant to one or more appraisals), allocate any resulting gain or loss as
provided in the applicable partnership agreement, satisfy all creditors, and
then distribute any remaining proceeds to the JV members in liquidation of the
DevCo I JV in accordance with the partnership agreement. Further, we have a
"call option" to purchase all (but not less than all) of the limited partners'
interests DevCo I JVs generally anytime after the applicable Opening Date at a
purchase price equal to an amount computed to return to the limited partners
their paid-in capital contributions plus provide a negotiated return in that
particular DevCo I JV thereon. Upon any exercise of the call option, we are
obligated to purchase all of DevCo I's interest on the same terms as the
purchase of the limited partners' Interests.
On September 30, 1999, an additional 29 residences were placed into a joint
venture structure pursuant to the joint venture
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agreement with Manor Care. Manor Care transferred 6 of the residences and we
transferred 16 properties constituting 23 residences (i.e., 7 of our properties
are "campus" properties having 2 residences each) to 22 separate Delaware
limited liability companies having HCR/Alterra Development II, LLC ("DevCo II")
as the 10% managing member and an unrelated investor as a 90% member (the "DevCo
II Investor"). The DevCo II Investor does not have any economic interest in any
of the 14 DevCo I JVs. The total equity contributed to these 22 "DevCo II JVs"
by the DevCo II Investor (excluding the 10% equity contribution by DevCo II) has
been $8.0 million.
The cash needs of each DevCo II JV have been met by a combination of the equity
contributions from the DevCo II Investor and DevCo II and from bridge loans made
by the party (as between Alterra and Manor Care) who transferred the particular
residence to such DevCo II JV, with such bridge loans to be repaid upon the
DevCo II JV's obtaining bank financing for the residence. In addition to funding
the purchase of the applicable residence from us or Manor Care, as the case may
be, each DevCo II JV has utilized such proceeds to develop and construct the
applicable residence and/or to fund startup losses during the lease-up of such
residence.
All profit and gain allocations and distributions of the DevCo II JVs are made
in proportion to the members' contributed capital (i.e., 90% to the DevCo II
Investor; 10% to DevCo II). Losses are allocated to the members in proportion to
contributed capital, with any losses in excess of contributed capital to be
allocated to DevCo II. We have been retained by each DevCo II JV to manage the
operations of its respective residence for a management fee. We and Manor Care
have also received fees for certain other services rendered in connection with
the DevCo II joint venture.
We have a "call option", currently exercisable through April 30, 2000, to
purchase the DevCo II Investor's interests in all (but not less than all) of the
DevCo II JVs at a purchase price equal to an amount computed to return to the
DevCo II Investor its paid in capital contributions plus provide a negotiated
return. Upon any exercise of that call option, we may also purchase DevCo II's
interests in any or all of the DevCo II JVs at a purchase price equal to the
amount of DevCo II's capital contributions (i.e., $888,888, if DevCo II's
interests in all of the DevCo II JVs were to be purchased). Upon any exercise of
these call options, we may elect to require Manor Care to acquire directly from
the DevCo II Investor and DevCo II their respective interest in those six DevCo
II JVs owning residences that were acquired from Manor Care or its affiliates.
In the event of such an election, the total call option price payable
(calculated as of March 31, 2000) to the Devco II Investor by Manor Care with
respect to those six Devco II JVs would be approximately $3.0 million, with our
purchase price for the remaining 16 Devco II JVs (again, which own 23
residences) being approximately $8.0 million. In the event that we do not
exercise the call option with respect to the DevCo II Investor's interests by
the April 30, 2000 expiration date, the DevCo II Investor thereafter will have a
"fair market value" put option to us similar to that described above with
respect to the DevCo I JV limited partner investors and, if such put option is
not exercised, will also have the right to remove us as managing member and as
the day-to-day operational manager of each DevCo II JV and also may cause the
DevCo II JVs to sell their respective residences at the DevCo II Investor's
discretion.
DevCo II has not been able to obtain third-party mortgage financing to refinance
the DevCo II JV bridge loans from us and from Manor Care and to otherwise fund
the development, construction, and startup expenditures for the DevCo II JV
residences. As a result, we currently anticipate and are exploring the
disposition by sale of the DevCo II JV residences to one or more third parties.
In the course of our effort to dispose of these residences, we may elect to buy
out the DevCo II Investor by exercising the call option for its interests in
these entities.
Other Joint Venture Structures. We are a party to various other joint venture
arrangements pursuant to which we and other third party partners are jointly
developing, constructing and operating Alterra-branded assisted living
residences. Generally, the Company and our joint venture partner form and
capitalize a limited partnership or a limited liability company that either
acquires a fee interest or a leasehold interest in an assisted living residence
under development by us. Our percentage equity interests in these joint venture
entities varies from joint venture to joint venture, ranging from 1% minority
interests up to 80% majority interests. These joint venture entities typically
retain us as manager pursuant to a market rate management agreement. Pursuant to
the operative agreements, we have the right to acquire (call option) the joint
venture partner's equity interest in the joint venture entity at a price based
upon an agreed upon return on investment or fair market value to the joint
venture partner. Similarly, after a specified waiting period, the joint venture
partner has the right to require us to purchase (put option) the partner's
equity interest in the joint venture entity at a price based upon the appraised
fair market value of the residence operated by the joint venture entity. Any
losses from the operation of residences owned or leased by these joint venture
structures are generally allocated on a basis consistent with the respective
partner's interest in overall cash distributions and the economic substance of
the joint venture arrangement, which may result in losses being
disproportionately allocated to the joint venture partners to the extent of
their invested capital.
GOVERNMENT REGULATION
Healthcare is an area of extensive and frequent regulatory change. The assisted
living industry is relatively new and, accordingly, the manner and extent to
which it is regulated at the Federal and state levels is evolving.
Our assisted living residences are subject to regulation and licensing by state
and local health and social service agencies and other regulatory authorities.
In some states in which we operate, the term "assisted living" may have a
statutory definition limited to a particular type of program or population. Some
of our assisted living residences may fall into other licensing categories or
may not require licensing in states with specific "assisted living" programs,
although these residences may offer services requiring licensure (e.g., licensed
home care services). Although regulatory requirements vary from state to state,
these requirements generally address, among other things: personnel education,
training and records; staffing levels; facility services, including
administration and assistance with self-administration of medication, and
limited nursing services; physical residence specification; furnishing of
residence units; food and housekeeping services; emergency evacuation plans; and
residence rights and responsibilities. New Jersey, Kentucky and Illinois also
require each assisted living residence to obtain a
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Certificate of Need ("CON") prior to its opening. Our residences are also
subject to various state or local building codes and other ordinances, including
safety codes. We anticipate that the states which are establishing regulatory
frameworks for assisted living residences will require licensing of assisted
living residences and will establish varying requirements with respect to this
licensing.
We have obtained all required licenses for each of our residences and expect
that we will obtain all required licenses for each new residence. Each of our
licenses must be renewed annually or biannually. We have also obtained a CON for
each residence under construction or development in New Jersey and Kentucky.
There is no construction or development currently in Illinois.
Like other health care facilities, assisted living residences are subject to
periodic survey or inspection by governmental authorities. From time to time in
the ordinary course of business, we receive deficiency reports. We review these
reports and seek to take appropriate corrective action. Although most inspection
deficiencies are resolved through a plan of correction, the reviewing agency
typically is authorized to take action against a licensed facility where
deficiencies are noted in the inspection process. Action may include imposition
of fines, imposition of a provisional or conditional license or suspension or
revocation of a license or other sanctions. Any failure by us to comply with
applicable requirements could have a material adverse effect on our business,
financial condition and results of operations. We believe that our residences
are in substantial compliance with all applicable regulatory requirements.
Federal and state anti-remuneration laws, such as the Medicare/Medicaid
anti-kickback law, govern some financial arrangements among health care
providers and others who may be in a position to refer or recommend patients to
providers. These laws prohibit, among other things, direct and indirect payments
that are intended to induce the referral of patients to, the arranging for
services by, or, the recommending of, a particular provider of health care items
or services. The Medicare/Medicaid anti-kickback law has been broadly
interpreted to apply to contractual relationships between health care providers
and sources of patient referral. State anti-remuneration laws vary from state to
state. Violation of these laws can result in loss of licensure, civil and
criminal penalties, and exclusion of health care providers or suppliers from
participation in (i.e., furnishing covered items or services to beneficiaries)
the Medicare and Medicaid programs. Although we receive only a minor portion of
our total revenues from Medicaid waiver programs and are otherwise not a
Medicare or Medicaid provider or supplier, we are subject to these laws because
(i) applicable state laws typically apply regardless of whether Medicare or
Medicaid payments are at issue and (ii) some of our assisted living residences
maintain contracts with health care providers and practitioners, including
pharmacies, home health organizations and hospices, through which the health
care providers make their health care products or services (some of which may be
covered by Medicare or Medicaid) available to our residents. There can be no
assurance that these laws will be interpreted in a manner consistent with our
practices.
In order to comply with the terms of the revenue bonds used to finance nine of
our residences, we are required to lease a minimum of 20% of the apartments in
each of the nine residences to low or moderate income persons as defined
pursuant to the Internal Revenue Code of 1986, as amended.
We are subject to the Fair Labor Standards Act, which governs matters including
minimum wage, overtime and other working conditions. A portion of our personnel
is paid at rates related to the federal minimum wage and accordingly, increases
in the minimum wage will result in an increase in our labor costs.
The sale of franchises is regulated by the Federal Trade Commission and by state
agencies located in jurisdictions other than those states where we currently
operate. Principally, these regulations require that written disclosures be made
prior to the offer for sale of a franchise. The disclosure documents are subject
to state review and registration requirements and must be periodically updated,
not less frequently than annually. In addition, some states have relationship
laws which prescribe the basis for terminating a franchisee's rights and
regulate both our and our franchisee's post-termination rights and obligations.
We are not aware of any non-compliance by the Company with applicable regulatory
requirements that would have a material adverse effect on our financial
condition or results of operations.
COMPETITION
The long-term care industry is highly competitive and, given the relatively low
barriers to entry and continuing health care costs containment pressures, we
expect that the assisted living segment of the industry will become increasingly
competitive in the future. We compete with other providers of elderly
residential care on the basis of the breadth and quality of our services, the
quality of our residences and, with respect to private pay patients or
residents, price. We also compete with other providers of long-term care in the
acquisition and development of additional residences. Our current and potential
competitors include national, regional and local operators of long-term care
residences, extended care centers,
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assisted/independent living centers, retirement communities, home health
agencies and similar providers, many of which have significantly greater
financial and other resources than we have. In addition, we compete with a
number of tax-exempt nonprofit organizations which can finance capital
expenditures on a tax-exempt basis or receive charitable contributions
unavailable to us and which are generally exempt from income tax. While our
competitive position varies from market to market, we believe that we compete
favorably in substantially all of the markets in which we operate based on key
competitive factors such as the breadth and quality of services offered,
residence quality, recruitment and retention of qualified health care personnel
and reputation among local referral sources.
TRADEMARKS
Sterling House(R), Crossings(R), WovenHearts(R), Wynwood(R), Clare Bridge(R),
and Clare Bridge Cottage(R) are registered service marks of ours and we claim
service mark protection in the marks Alternative Living Services(SM), Clare
Bridge(SM), Crystal Health Services(SM), and Alterra(SM).
EMPLOYEES
At December 31, 1999, we employed approximately 9,400 full-time employees and
4,400 part-time employees. None of our employees are represented by a collective
bargaining group.
FACTORS AFFECTING FUTURE RESULTS AND REGARDING FORWARD-LOOKING STATEMENTS
Our business, results of operations and financial condition are subject to many
risks, including those set forth below. In addition, the following important
factors, among others, could cause our actual results to differ materially from
those expressed in our forward-looking statements in this report and presented
elsewhere by us from time to time. When used in this report, the words
"believes," "anticipates" and similar expressions are intended to identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
report. We undertake no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the occurrence of
unanticipated events. The following discussion highlights some of these risks
and others are discussed in this Form 10-K herein or in other documents filed by
us with the Securities and Exchange Commission.
RISKS ASSOCIATED WITH SHORTFALL IN LIQUIDITY. We will require a significant
amount of additional capital to complete the construction of residences under
construction and to fund the operating losses associated with newly open
residences until such residences reach stabilized occupancy. In addition, as
noted below, we have substantial debt and operating lease payment obligations.
The combination of a difficult financing and operating environment for
healthcare service companies has significantly reduced our access to additional
capital. A number of our traditional financing sources, including commercial
banks and other secured lenders have substantially reduced their lending
activities to the healthcare sector. In addition, the credit availability under
certain of our credit facilities has either been reduced or eliminated due to a
variety of factors, including our requests for modifications of some of the
financial covenants in certain of our credit agreements. To address our need for
capital, we are in the process of seeking to raise at least $100.0 million of
equity or equity-linked financing and expect to consummate such a transaction
during the second quarter of 2000. While we believe that we will be able to
consummate the Equity Transaction, there can be no assurances that we will do
so. If we are not able to consummate the Equity Transaction in a timely fashion,
we may not have sufficient liquidity to fund our construction and development
activities and to satisfy our debt and lease payment obligations. Because of
cross-default and cross-collateralization provisions in various of our
mortgages, debt instruments and in many of our leases, a default on one of our
payment obligations could result in acceleration of other obligations and could
materially adversely affect the Company. See "Substantial Debt and Operating
Lease Payment Obligations," "Development and Construction Risks" and
"Managment's Discussion and Analysis and Results of Operations -- Liquidity and
Capital Resources."
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS. We had lease expense
of $69.4 million and $44.2 million excluding sublease income for the years ended
December 31, 1999 and 1998, respectively, and our total indebtedness as of
December 31, 1999 was $830.6 million, and our net interest expense was $35.9
million and $11.0 million for the years ended December 31, 1999 and 1998,
respectively. Debt and annual operating lease payment obligations will continue
to increase significantly as we complete our pending construction and
development activities. In addition, development-stage residences may be
financed with construction loans and, therefore, there is a risk that, upon
completion of construction and/or lease up, permanent financing for newly
developed residences may not be available or may be available only on terms that
are unfavorable or unacceptable to us. Approximately $38.9 million of our total
indebtedness matures before December 31, 2000.
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Historically, we have not consistently had sufficient earnings to cover fixed
charges. In 1999, earnings were insufficient to cover fixed charges by $4.1
million prior to the non-recurring charge, other one time adjustments and the
cumulative effect of a change in accounting principle; and insufficient by $13.9
million for 1998. There can be no assurance that we will generate sufficient
cash flow to meet our future obligations. Any payment default or other default
with respect to outstanding obligations could cause the lender to foreclose upon
the residences securing the indebtedness or, in the case of an operating lease,
to terminate the lease, with a consequent loss of income and asset value to us.
Moreover, as noted above, the cross-default and cross-collateralization
provisions in various of our mortgages, debt instruments, and in many of our
leases, could result in acceleration of other obligations and adversely affect a
significant number of our other residences if we default in one of our payment
obligations. See "Need for Additional Financing; Risk of Rising Interest Rates."
OPERATING LOSSES ASSOCIATED WITH NEW RESIDENCES. Newly opened assisted living
residences typically operate at a loss during the first six to 18 months of
operation, primarily due to the incurrence of fixed and variable expenses in
advance of the achievement of targeted rent and service fee revenues from the
lease-up of these residences. As of December 31, 1999, of our 450 residences, 67
newly developed residences opened during 1999 and 27 residences purchased during
1999 were in lease up. In addition, the development and construction of assisted
living residences requires the commitment of substantial capital over a typical
six to 12 month construction period, the consequence of which may be an adverse
impact on our liquidity. As of December 31, 1999, we had 53 residences under
construction and two residences under development. In the case of acquired
residences, resident turnover and increased marketing expenditures which may be
required to reposition these residences, together with the possible disruption
of operations resulting from the implementation of renovations, may adversely
impact the financial performance of these residences for a period of time after
their acquisition. In addition, occupancy levels and the rates which we may be
able to charge for our services may be adversely affected in competitive market
circumstances which would negatively impact the operating results of affected
residences. Accordingly, there can be no assurance that we will not experience
unforeseen expenses, difficulties, complications and delays which could result
in greater than anticipated operating losses or otherwise materially adversely
affect our financial condition and results of operations. See "Development and
Construction Risks" and "--Competition."
ABILITY TO MANAGE EXPANSION AND BUSINESS DIVERSIFICATION. We intend to review
and, in appropriate circumstances, pursue opportunities for development and
expansion of new products and services, such as home health care, rehabilitation
and pharmacy services. Efforts to achieve business diversification, however, are
subject to risks, including our relative unfamiliarity with these businesses,
additional uncertainties related to government regulation and possible
difficulties in integrating new products or businesses.
NEED FOR FINANCING TO COMPLETE CONSTRUCTION AND FUND OPERATING LOSSES. We will
need to obtain sufficient financing to fund our remaining development and
construction activities. As of December 31, 1999, we had 53 residences under
construction and two residences under development. We estimate that we will
incur between $115.0 million and $125.0 million of additional costs to complete
these residences, of which between $65.0 million and $70.0 million relate to
Company owned or leased residences and between $50.0 million and $55.0 million
relate to residences which we are jointly developing with other parties. As
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources," some of our lenders
have required that we complete the Equity Transaction by the end of the second
quarter of 2000. If we do not complete the Equity Transaction by that time, our
lenders may not continue to make advances under our credit arrangements in a
manner that would allow us to finish our pending construction activity. In
addition, there can be no assurance that we will not experience unforeseen
expenses, difficulties, complications and delays which could result in greater
than anticipated operating losses or otherwise materially adversely affect our
financial condition and results of operations. We believe that upon successful
completion of the Equity Transaction the financing available from our existing
credit arrangements and pursuant to other sources of financing that we expect
would then be available to us would be sufficient to fund our remaining
development and acquisition activities.
We will from time to time seek additional funding through public or private
financing, including equity or debt financing. If additional funds are raised by
issuing equity or equity-linked securities, which we expect to do as part of the
Equity Transaction, our stockholders may experience dilution. In addition, we
will require significant financial resources to meet our operating and working
capital needs, including contractual obligations to purchase the equity interest
of joint venture partners in residences owned in joint ventures. See "Joint
Ventures and Related Mandatory Purchase Obligations." There can be no assurance
that any newly constructed residences will achieve a stabilized occupancy rate
and attain a resident mix that meet our expectations or generate sufficient
positive cash flow to cover operating and financing costs associated with these
residences. There can be no assurance that we will be successful in securing
additional financing or that adequate funding will be available and, if
available, will be on terms that are acceptable to us. A lack of funds may
require us to delay or eliminate all or some of our development projects and
acquisition plans. In addition, we may require additional financing to enable us
to respond to
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changing economic conditions, to expand our development program, although no
such expansion is currently under consideration, or to account for changes in
assumptions related to our development program.
Approximately $337.0 million, or 40.6%, of our total indebtedness as of December
31, 1999 was subject to floating interest rates. Although a majority of our debt
and lease payment obligations are not subject to floating interest rates,
indebtedness that we may incur in the future may bear interest at a floating
rate. We expect to restructure $130.8 million of our fixed rate debt in 2000
and, as a result, convert this into variable rate debt. See "Quantitative and
Qualitative Disclosures about Market Risk." In addition, future fixed rate
indebtedness and lease obligations will be based on interest rates prevailing at
the time these arrangements are obtained. Therefore, increases in prevailing
interest rates could increase our interest or lease payment obligations and
could have an adverse effect on our business, financial condition and results of
operations.
DEVELOPMENT AND CONSTRUCTION RISKS. As of December 31, 1999, we had 53
residences under construction and two residences under development. Development
projects generally are subject to various risks, including zoning, permitting,
health care licensing and construction delays, that may result in construction
cost overruns and longer development periods and, accordingly, higher than
anticipated start-up losses. Project management is subject to a number of
contingencies over which we will have little or no control and which might
adversely affect project costs and completion time. These contingencies include
shortages of, or the inability to obtain, labor or materials, the inability of
the general contractor or subcontractors to perform under their contracts,
strikes, adverse weather conditions and changes in applicable laws or
regulations or in the method of applying these laws and regulations. In
addition, we have slowed down this construction until the Equity Transaction is
completed. One of our principal construction lenders has delayed making further
advances on five residences currently in construction. As a result, liens have
been filed on these construction projects resulting in defaults under the
operative construction loan credit agreements. Although we have obtained waivers
through June 30, 2000 of these defaults, payment of these suppliers and
contractors will need to be effected in order to permanently resolve these
defaults. In addition, additional liens or lawsuits may be filed by contractors
and subcontractors unless the credit facility can be restored, which will in
turn result in further defaults under the operative credit agreements. Moreover,
upon resuming construction we may incur increased costs in order to complete
construction. As a result of these various factors, there can be no assurance
that we will not experience construction delays, that we will be successful in
developing and constructing currently planned or additional residences or that
any developed residence will be economically successful. Delays in our planned
development could result in increased costs or litigation costs which could
adversely affect our business, operating results and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS. We have acquired residences in the past, and
in 1999 completed a major transaction involving 28 residences from Manor Care,
Inc. Although we currently have no plans to do so, we may seek additional
acquisition opportunities in the future. However, no assurances can be given
that we will be successful in identifying any future acquisition opportunities
or completing any identified acquisitions. The acquisition of residences
involves a number of risks. Existing residences available for acquisition
frequently serve or target different market segments than those we presently
serve. It may be necessary in some cases to reposition and renovate acquired
residences or turn over the existing resident population to achieve a resident
acuity and income profile which is consistent with our current operations. In
addition, we may also determine that staff and operating management personnel
changes are necessary to successfully integrate these residences into our
existing operations. There can be no assurance that we will be successful in
repositioning any acquired residences or in effecting any necessary operational
or structural changes and improvements on a timely basis. Any failure by us to
make necessary operational or structural changes or to successfully reposition
acquired residences may adversely impact our business, operating results and
financial condition. In undertaking acquisitions of residences, we also may be
adversely impacted by unforeseen liabilities attributable to the prior operators
of these residences, against whom we may have little or no recourse.
JOINT VENTURES AND RELATED MANDATORY PURCHASE OBLIGATIONS. We have entered into
several joint ventures with regional real estate development partners and others
for the construction, development and ownership of assisted living residences in
targeted geographic areas. As of December 31, 1999, 97 of our operating
residences were jointly owned, directly or indirectly, with venture partners. Of
the 55 residences which were either under construction or development by us as
of December 31, 1999, a portion of these residences is being or will be
constructed or developed under joint venture agreements. We have agreed not to
own or operate competing assisted living residences during specified contractual
periods within specified geographic areas adjacent to residences developed
through several of our joint ventures. While we typically receive a fee for
managing residences developed through joint ventures, we share with our joint
venture partners any profits or losses realized from the operation or sale of
these residences. We are obligated under our joint venture arrangements to
purchase the equity interests of our joint venture partners upon the election of
the joint venture partners at a price based on the appraised value of the
residence owned by the applicable joint venture. These purchase rights generally
become exercisable during the period of six months to two years following the
opening of the residence owned by these joint ventures. As a result of these
provisions, we might become obligated to acquire additional interests in
residences developed through joint ventures on terms
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or at times that would otherwise not be acceptable to us, including times during
which we may not have adequate liquidity to fund acquisitions.
RESIDENCE MANAGEMENT, STAFFING AND LABOR COSTS. We compete with other providers
of assisted living services and long-term care with respect to attracting and
retaining personnel. We are dependent upon our ability to attract and retain
management personnel responsible for the day-to-day operations of each of our
residences. Any inability of ours to attract or retain qualified residence
management personnel could have a material adverse effect on our financial
condition or results of operations. In addition, a possible shortage of nurses
or trained personnel may require us to enhance our wage and benefits package in
order to compete in the hiring and retention of personnel. We are also dependent
upon the available labor pool of semi-skilled and unskilled employees in each of
the markets in which we operate. There can be no assurance that our labor costs
will not increase, or that, if they do increase, they can be matched by
corresponding increases in rates charged to residents. Any significant failure
by us to attract and retain qualified management and staff personnel, to control
our labor costs or to pass on any increased labor costs to residents through
rate increases would have a material adverse effect on our business, operating
results and financial condition.
COMPETITION. The long-term care industry is highly competitive and, given the
relatively low barriers to entry and continuing health care cost containment
pressures, we expect that the assisted living segment will become increasingly
competitive in the future. We compete with other companies providing assisted
living services as well as numerous other companies providing similar service
and care alternatives, such as home health care agencies, congregate care
facilities, retirement communities and skilled nursing facilities. While we
believe there is a need for additional assisted living residences in the markets
where we are constructing and developing residences, we expect that, as assisted
living residences receive increased market awareness and the number of states
which include assisted living services in their Medicaid programs increases,
competition will increase from new market entrants, many of whom may have
substantially greater financial resources than we have. There can be no
assurance that increased competition will not adversely affect our ability to
attract or retain residents or maintain our existing rate structures. Some of
our present and potential competitors have, or may have access to, greater
financial resources than those available to us. Consequently, there can be no
assurance that we will not encounter increased competition in the future which
could limit our ability to attract and retain residents, to maintain or increase
resident service fees or to expand our business and could have a material
adverse effect on our business, operating results and financial condition. We
are not able to accurately predict the effect that the health care industry
trend towards managed care will have on the assisted living marketplace. Managed
care, an arrangement whereby service and care providers agree to sell
specifically defined services to one or more public or private payors
(frequently not the end user or resident) subject to a predefined system in an
effort to achieve more efficiency with respect to utilization and cost, is not
currently a significant factor in the assisted living marketplace. However,
managed care plans sponsored by insurance companies or HMOs may in the future be
a factor in the assisted living marketplace. There can be no assurance that we
will not encounter increased competition or be subject to other competitive
pressures that could affect our business, operating results or financial
condition as a result of managed care.
GOVERNMENT REGULATION. Health care is an area of extensive and frequent
regulatory change. The assisted living industry is relatively new, and,
accordingly, the manner and extent to which it is regulated at the Federal and
state levels is evolving. Changes in the laws or new interpretations of existing
laws may have a significant impact on our methods and costs of doing business.
We are, and will continue to be, subject to varying degrees of regulation and
licensing by health or social service agencies and other regulatory authorities
in the various states and localities where we operate or intend to operate. We
and our activities are subject to zoning, health and other state and local
government laws and regulations. Zoning variances or use permits are often
required for construction. Severely restrictive regulations could impair our
ability to open additional residences at desired locations or could result in
costly delays. Several of our residences have been financed by revenue bonds. In
order to continue to qualify for favorable tax treatment of the interest payable
on these bonds, the financed residences must comply with federal income tax
requirements, principally pertaining to the maximum income level of a specified
portion of the residents. Failure to satisfy these requirements constitutes an
event of default under the bonds, thereby accelerating their maturity. Our
success will depend in part upon our ability to satisfy applicable regulations
and requirements and to procure and maintain required licenses in rapidly
changing regulatory environments. Any failure to satisfy applicable regulations
or to procure or maintain a required license could have a material adverse
effect on our business, operating results and financial condition.
Our operations could also be adversely affected by, among other things,
regulatory developments such as revisions in building code requirements for
assisted living residences, mandatory increases in the scope and quality of care
to be offered to residents and revisions in licensing and certification
standards. There can be no assurance that Federal, state or local laws or
regulations will not be imposed or expanded based on evolving regulatory
interpretations or based on new statutory or regulatory provisions which
adversely impact our business, financial condition, results of operations or
prospects. Our residence operations are also subject to health and other state
and local government regulations.
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We have entered into franchise agreements with third parties pursuant to which
these third parties operate assisted living residences under registered service
marks of ours utilizing systems and procedures prescribed by us. The sale of
franchises is regulated by the Federal Trade Commission and by state agencies.
Principally, these regulations require that written disclosures be made prior to
the sale of a franchise. In addition, some states have relationship laws which
prescribe the basis for terminating a franchisee's rights and regulate both the
franchisor's and our franchisees' post-termination rights and obligations. There
can be no assurance that changes in these regulations will not have an adverse
impact upon our ability to continue our franchising activities.
We intend to review and, in appropriate circumstances, pursue opportunities for
development and expansion into new products and services, among others. These
new products and services may include home health care, rehabilitation and
pharmacy services, among others. The Federal and state regulation of these
additional products and services may be more extensive than that related to our
assisted living operations. We have not in the past engaged in significant
activities outside of our core assisted living business. As we expand into new
products and services, we will be subject to additional Federal, state and local
laws and regulations. Non-compliance with these laws and regulations could have
a material adverse effect on our business, financial condition, results of
operations or prospects.
LIABILITY AND INSURANCE. The provision of personal and health care services
entails an inherent risk of liability. In recent years, participants in the
long-term care industry have become subject to an increasing number of lawsuits
alleging malpractice or related legal theories, many of which involved large
claims and resulted in the incurrence of significant defense costs. In addition,
compared to more institutional long-term care facilities, assisted living
residences (especially dementia care residences) of the type we operate offer
residents a greater degree of independence in their daily lives. This increased
level of independence, however, may subject the resident and us to risks that
would be reduced in more institutionalized settings. We currently maintain
liability insurance intended to cover these claims which we believe is adequate
based on the nature of the risks, historical experience and industry standards.
There can be no assurance, however, that claims in excess of this insurance or
claims not covered by insurance, such as claims for punitive damages, will not
arise. A successful claim against us not covered by, or in excess of, our
insurance could have a material adverse effect upon our financial condition and
results of operations. Claims against us, regardless of their merit or eventual
outcome, may also have a material adverse effect upon our ability to attract or
retain residents or expand our business and may require us to devote substantial
time to matters unrelated to day-to-day operations. In addition, insurance
policies must be renewed annually. There can be no assurance that we will be
able to obtain liability insurance in the future or that, if this insurance is
available, it will be available on acceptable economic terms.
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY. We currently
rely, and for the foreseeable future, we expect to rely, primarily on the
ability of our residents to pay for services from their own and their families'
financial resources. Generally, only elderly adults with income or assets
meeting or exceeding the comparable median in the region where our assisted
living residences are located can afford the fees for these residences.
Inflation or other circumstances which adversely affect the ability of residents
and potential residents to pay for assisted living services could have an
adverse effect on us. In the event that we encounter difficulty in attracting
seniors with adequate resources to pay for our services, we would be adversely
affected.
ENVIRONMENTAL LIABILITY RISKS ASSOCIATED WITH REAL PROPERTY. Under various
Federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at these properties, and may be held liable to a governmental entity or
to third parties for property damage and for investigation and cleanup costs
incurred by these parties in connection with the contamination. These laws
typically impose clean up responsibility and liability without regard to whether
the owner knew of or caused the presence of contaminants, and liability under
these laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation or responsibility. The
costs of investigation, remediation or removal of these substances may be
substantial, and the presence of these substances, or the failure to properly
remediate these properties, may adversely affect the owner's ability to sell or
lease the property or to borrow using the property as collateral. In addition,
some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances also may be liable for the costs of removal or remediation of these
substances at the disposal or treatment facility, whether or not the facility is
owned or operated by this person. Finally, the owner of a site may be subject to
common law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. With the exception of four
Sterling House residences operated by us or our predecessors since prior to
1995, we have conducted environmental assessments of all of our operating
residences and have conducted, or are in the process of conducting,
environmental assessments of all of our undeveloped sites and sites currently
under construction. These assessments have not revealed, and we are not
otherwise aware of, any environmental liability that we believe would have a
material adverse effect on our business, assets or results of operations. There
can be no assurance, however, that
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environmental assessments would detect all environmental contamination which
may give rise to material environmental liabilities. We believe that our
respective residences are in compliance in all material respects with all
applicable environmental laws. We have not been notified by any governmental
authority, or are otherwise aware, of any material non-compliance, liability or
claim relating to hazardous toxic substances or petroleum products in connection
with any of the residences we currently operate.
ANTI-TAKEOVER PROVISIONS. Our Restated Certificate of Incorporation authorizes
the issuance of 5,000,000 shares of preferred stock and 100,000,000 shares of
Common Stock. Subject to the rules of the American Stock Exchange ("AMEX") upon
which our Common Stock is listed, our Board of Directors have the power to issue
any or all of the authorized and unissued shares without stockholder approval,
and the preferred shares can be issued with rights, preferences and limitations
as may be determined by our Board. The rights of the holders of our Common Stock
will be subject to, and may be adversely affected by, the rights of any holders
of preferred stock that may be issued in the future. Although as part of the
Equity Transaction we expect to issue either preferred stock or debentures that
(in either case) would be convertible into our Common Stock, we presently have
no commitments or contracts to issue any additional shares of common stock
(other than pursuant to the exercise of outstanding stock options or the
conversion of our 6.75% Convertible Subordinated Debentures due 2006, 7%
Convertible Subordinated Debentures due 2004 or 5.25% Convertible Subordinated
Debentures due 2002) or any shares of preferred stock. Authorized and unissued
preferred stock and common stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could delay,
discourage, hinder or preclude an unsolicited acquisition of the Company, could
make it less likely that stockholders receive a premium for their shares as a
result of any attempt and could adversely affect the market price of and the
voting and other rights of the holders of outstanding shares of Common Stock. As
a Delaware corporation, we are subject to Section 203 of the Delaware General
Corporation Law (the "DGCL") which, in general, prevents an "interested
stockholder" (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) for three years following the date a
person became an interested stockholder unless specific conditions are
satisfied. In addition, the indenture relating to our approximately $143.8
million aggregate principal amount outstanding 5.25% Convertible Subordinated
Debentures provides that, upon a "change of control" (as defined in that
indenture), the holders of those debentures would have the right to require us
to repurchase those debentures at 101% of their face value.
On December 10, 1998, we entered into a Rights Agreement with American Stock
Transfer & Trust Company, as Rights Agent, pursuant to which we declared and
paid a dividend of one preferred share purchase right (a "Right") for each
outstanding share of our Common Stock. Each Right entitles the registered holder
to purchase from us one one-hundredth of a share of Series A Junior
Participating Preferred Stock, $.01 par value per share (the "Preferred
Shares"), at a price of $130.00 per one one-hundredth of a Preferred
Share. The Rights have anti-takeover effects, and they will cause substantial
dilution to a person or group that attempts to acquire us without conditioning
the offer on redemption of the Rights or on substantially all of the Rights also
being acquired. The Rights should not interfere with any merger or other
business combination approved by our Board since the Rights may be redeemed by
us in accordance with the Rights Agreement.
POSSIBLE PRICE VOLATILITY OF THE COMMON STOCK. The market price of our Common
Stock could be subject to significant fluctuations in response to various
factors and events, including variations in our operating results, and new
statutes or regulations or changes in the interpretation of existing statutes or
regulations affecting the health care industry generally or the assisted living
industry in particular. In addition, the stock market in recent years has
experienced broad price and volume fluctuations that often have been unrelated
to the operating performance of particular companies. These market fluctuations
also may adversely affect the market price of our Common Stock.
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ITEM 2. PROPERTIES
The table below shows information with respect to the residences which we
operated as of December 31, 1999. We own, lease, hold equity interest in or
manage, on behalf of third parties, these residences.
OPERATING RESIDENCES
OWNED (1) LEASED (2) UNCONSOLIDATED (3) MANAGED (4) TOTAL
------------------ ----------------- ------------------- -------------------- -------------------
LOCATION RES. CAP. RES. CAP. RES. CAP. RES. CAP. RES. CAP.
----------- ------- -------- ------ -------- ------- -------- -------- -------- -------- -------
AZ 7 349 4 190 5 313 -- -- 16 852
CA 2 307 -- -- 6 596 -- -- 8 903
CO 4 220 11 689 3 156 2 104 20 1,169
DE 1 72 -- -- -- -- -- -- 1 72
FL 13 564 32 1,374 13 856 -- -- 58 2,794
GA -- -- -- -- 4 281 1 36 5 317
ID 1 70 2 158 -- -- -- -- 3 228
IN 5 210 -- -- 12 488 -- -- 17 698
KS 13 436 11 357 2 96 1 50 27 939
MA 1 72 -- -- -- -- -- -- 1 72
MI 21 700 9 392 2 116 -- -- 32 1,208
MN 10 318 9 363 1 78 -- -- 20 759
NC 5 242 11 524 2 94 1 42 19 902
ND -- -- 1 71 -- -- -- -- 1 71
NJ 4 152 -- -- 3 322 2 98 9 572
NV 1 54 2 154 1 56 -- -- 4 264
NY 15 906 1 80 -- -- -- -- 16 986
OH 5 205 16 653 8 417 -- -- 29 1,275
OK -- -- 26 906 2 74 -- -- 28 980
OR 1 56 8 650 1 52 -- -- 10 758
PA 13 601 1 48 2 112 -- -- 16 761
SC 3 126 8 330 1 42 1 42 13 540
TN 2 90 2 86 5 212 -- -- 9 388
TX 1 37 25 963 5 272 -- -- 31 1,272
VA -- -- -- -- 2 96 -- -- 2 96
WA 3 156 4 388 3 164 -- -- 10 708
WI 14 354 21 532 4 135 6 48 45 1,069
------ ------- ----- ------- ------ ------- ------- ------- ------- ------
TOTAL 145 6,297 204 8,908 87 5,089 14 420 450 20,653
====== ======= ===== ======= ====== ======= ======= ======= ======= ======
(1) Owned residences are those that are wholly or majority owned by us.
(Twelve of these residences with a capacity of 619 are majority owned).
(2) Leased residences are those that we operate and lease from a third party.
(3) Unconsolidated residences are those residences managed by us, but
operated by an entity in which we own a minority equity interest.
(4) Managed residences are those residences that we manage under management
arrangements but in which we do not possess an ownership interest. We
have an option to purchase or lease eleven of these residences.
Of our 450 operating residences, 85% of them are five years old or less and 95%
are ten years old or less.
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At December 31, 1999, we were in various stages of constructing 53 residences
and developing two residences. Set forth below is information with respect to
residences in construction and residence sites in development on December 31,
1999.
RESIDENCES UNDER CONSTRUCTION OR DEVELOPMENT
UNDER CONSTRUCTION UNDER DEVELOPMENT
------------------------------ ------------------------------
LOCATION RESIDENCES CAPACITY RESIDENCES CAPACITY
- --------------- -------------- ----------- -------------- ------------
CA 5 298 -- --
CT 1 52 -- --
DE 1 52 -- --
FL 7 507 -- --
IN 1 38 -- --
KS 2 77 -- --
KY 2 78 -- --
MD 4 180 -- --
MN 1 26 -- --
NJ 6 282 1 78
NV 1 52 -- --
NY 4 178 -- --
NC 2 74 -- --
OH 2 120 -- --
OR 3 156 -- --
PA 2 124 -- --
SC 2 76 -- --
TN 2 78 -- --
TX 3 191 -- --
WI 2 118 1 52
------------- ---------- ------------- -----------
TOTAL 53 2,757 2 130
============= ========== ============= ===========
The residences under construction or development may be owned directly by joint
venture entities in which we will own varying percentages of equity interests.
See "Business - Joint Ventures and Strategic Alliances."
"Construction" means that construction activities have commenced (ground
breaking) and are ongoing. "Development" means that the site is under "control"
(pursuant to purchase agreements or options or otherwise) and development
activities with respect to the site have commenced and are ongoing (such as site
permitting, preparation of surveys and architectural plans, and negotiation of
construction contracts).
Residences under development may not in fact be constructed for a variety of
reasons, including zoning, permitting, health care licensing, financing and cost
related issues. In addition to residences listed in the table above as "under
development," we may also engage in preliminary development activities with
respect to other possible sites for future residences.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various legal proceedings relating to
claims arising in the ordinary course of our business. Neither we nor any of our
subsidiaries is a party to any legal proceeding, the outcome of which,
individually or in the aggregate, is expected to have a material adverse affect
on our financial condition or results of operations, with the possible exception
of the following matter.
During 1999, Altera Corporation, a San Jose, California based company engaged in
the business of designing, manufacturing and selling high-performance,
high-density programmable logic devices and associated development tools,
commenced litigation with the Company in the United States District Court for
the Northern District of California. The Plaintiff's complaint alleges claims
for trademark infringement, unfair competition, and trademark dilution under
federal, state and common law arising from the Company's use of the name
"Alterra". Plaintiff Altera Corporation seeks an injunction against the
Company's use of the Alterra name, as well as damages and attorneys' fees.
Plaintiff Altera Corporation sought both a temporary restraining order and a
preliminary injunction, but the District Court denied that relief. The District
Court's denials of the Plaintiff's motions were affirmed by the United States
Court of Appeals for the Ninth Circuit upon Plaintiff's appeal. The parties are
currently in the discovery phase of the litigation. Although we cannot provide
any assurances as to the
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outcome of this litigation, we believe that Plaintiff's claims are without merit
and intend to contest them vigorously. If the Plaintiff prevails in this matter,
it could have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 1999.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock is listed and traded on the American Stock Exchange (AMEX)
under the symbol "ALI". The Common Stock has been listed on the AMEX since
August 6, 1996, the date of our initial public offering. The number of holders
of record of the Common Stock as of March 24, 2000, was approximately 8,200.
The following table sets forth, for the periods indicated, the high and low
closing prices for the Common Stock as reported on AMEX.
HIGH LOW
------------- -----------
1999:
First Quarter........................ $ 33-9/16 $ 17
Second Quarter....................... 23-1/2 10-7/16
Third Quarter........................ 13-11/16 8-3/16
Fourth Quarter....................... 8-15/16 5-3/4
1998:
First Quarter........................ 34-1/2 27
Second Quarter....................... 35 24-3/4
Third Quarter........................ 30-1/2 17-1/8
Fourth Quarter....................... 34-1/4 17-1/4
We have never paid or declared cash dividends and currently intend to retain any
future earnings for the operation and expansion of our business. Any
determination to pay cash dividends in the future will be at the discretion of
the Board of Directors and will be dependent on our financial condition, results
of operations, contractual restrictions, capital requirements, business
prospects, restrictive debt covenants and other factors as the Board of
Directors deems relevant.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated historical financial data of ours presented below for
each of the five years ended December 31, 1999 has been derived from our audited
consolidated financial statements appearing elsewhere in this report. The
selected consolidated financial data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and notes
thereto included in this report (in thousands, except per share data).
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- --------- ---------
STATEMENTS OF OPERATIONS DATA :
Revenue:
Operating revenue.............................. $ 376,181 $244,423 $ 130,744 $ 55,637 $ 15,061
----------- ----------- ----------- ---------- ----------
Operating expenses:
Residence operations........................... 224,213 147,931 81,558 35,977 8,717
Lease expense.................................. 69,375 44,174 25,524 9,035 944
Lease income................................... (25,507) (4,915) -- -- --
General and administrative..................... 44,898 23,200 22,168 11,143 5,890
Depreciation and amortization.................. 21,178 19,730 9,271 4,223 1,275
Non-recurring charge........................... 47,280 -- 4,656 976 --
----------- ----------- ----------- ---------- ----------
Total operating expenses................... 381,437 230,120 143,177 61,354 16,826
----------- ----------- ----------- ---------- ----------
Operating (loss) income.......................... (5,256) 14,303 (12,433) (5,717) (1,765)
Other (expense) income:
Interest expense, net.......................... (35,938) (11,024) (3,932) (3,231) (984)
Equity in losses of unconsolidated affiliates.. (1,442) (31) (226) (52) (716)
Minority interest in losses of consolidated
subsidiaries............................... 4,018 20,610 8,440 76 160
Other, net..................................... (20) (170) (112) (31) 479
---------- ----------- ----------- ---------- ----------
Total other (expense) income, net........ (33,382) 9,385 4,170 (3,238) (1,061)
---------- ----------- ----------- ---------- ----------
(Loss) income before income taxes, extraordinary
item and cumulative effect..................... (38,638) 23,688 (8,263) (8,955) (2,826)
---------- ----------- ----------- ---------- ----------
Income tax benefit (expense)..................... 14,669 (3,136) -- 159 991
---------- ----------- ----------- ---------- ----------
(Loss) income before extraordinary item and the
cumulative effect of a change in accounting
principle...................................... (23,969) 20,552 (8,263) (8,796) (1,835)
Extraordinary item - loss from early retirement
of financing agreements...................... -- -- -- -- (1,176)
Cumulative effect of a change in accounting
principle........................................ (3,837) -- -- -- --
----------- ----------- ----------- ---------- ----------
Net (loss) income ....................... $ (27,806) $ 20,552 $ (8,263) $ (8,796) $ (3,011)
=========== =========== =========== ========== ==========
Basic (loss) income per common share:
(Loss) income before extraordinary item (1), and
a change in accounting principle.............. $ (1.09) $ 0.94 $ (0.44) $ (0.57) $ (0.24)
Extraordinary item (1)......................... -- -- -- -- (0.15)
Change in accounting principle................ (0.17) -- -- -- --
----------- ----------- ----------- ---------- ----------
Basic (loss) income per common share (1)......... $ (1.26) $ 0.94 $ (0.44) $ (0.57) $ (0.39)
=========== =========== =========== ========== ==========
Diluted (loss) income per common share:
(Loss) income before extraordinary item (1), and
a change in accounting principle.............. $ (1.09) $ 0.92 $ (0.44) $ (0.57) $ (0.24)
Extraordinary item (1)......................... -- -- -- -- (0.15)
Change in accounting principle................. (0.17) -- -- -- --
----------- ----------- ----------- ---------- ----------
Diluted (loss) income per common share (1)...... $ (1.26) $ 0.92 $ (0.44) $ (0.57) $ (0.39)
=========== =========== =========== ========== ==========
Weighted average common shares outstanding (1):
Basic.......................................... 22,088 21,905 18,651 15,429 7,782
=========== =========== =========== ========== ==========
Diluted........................................ 22,088 24,145 18,651 15,429 7,782
=========== =========== =========== ========== ==========
(1) Basic and diluted share amounts are the same for 1995-1997 and 1999
since potentially issuable shares related to stock options and
convertible debt would have an anti-dilutive effect.
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1999 1998 1997 1996 1995
----------- ----------- ----------- --------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 18,728 $40,621 $79,838 $ 39,455 $20,394
Short-term investments...................... -- -- 90,000 -- --
Working capital............................. 5,452 28,305 129,528 20,532 10,425
Total assets................................ 1,061,397 777,810 553,552 204,353 82,450
Long-term obligations....................... 791,672 515,584 318,069 68,625 23,663
Stockholders' equity........................ $150,643 $177,112 $143,897 $ 91,064 $45,466
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a leading national assisted living company operating assisted living
residences and providing assisted living services in 27 states. Our growth in
recent years has had a significant impact on our results of operations and
accounts for most of the changes in our results between 1999 and 1998. As of
December 31, 1999 and 1998, we operated or managed 450 and 350 residences with
aggregate capacity of approximately 20,700 and 15,000 residents, respectively.
We, together with other parties who have purchased interests in some of our
development residences, were also constructing or developing 55 additional
residences with additional capacity for 2,900 residents as of December 31, 1999.
During 1999, we generated operating revenue of $376.2 million and realized
operating income of $44.9 million and net income of $8.8 million prior to a
non-recurring charge, other one time adjustments, and the cumulative effect of a
change in accounting principle.
During the fourth quarter of 1999, we began to implement several strategic
initiatives designed to strengthen our balance sheet and to enable us to focus
on stabilizing and enhancing our core business operations. The principal
components of these strategic initiatives include:
- Reduced Development Activity. In light of the competitive environment
and tightening capital markets, we elected to significantly reduce the
scope of our assisted living development activities. Specifically, in
the fourth quarter of 1999 and the first quarter of 2000, we have
discontinued development activity with respect to a substantial number
of development sites. As a consequence of this decision, we recorded
one time, non-recurring, pre-tax charges of $47.3 million ($29.3
million net of income tax benefit) in the fourth quarter of 1999
reflecting (i) our write-down of the carrying costs of discontinued
development sites and failed acquisitions, (ii) costs associated with
the planned reduction in development activities and the
discontinuation of operations of our wholly-owned construction
subsidiary, (iii) our write-off of deferred financing costs associated
with construction loan credit lines that will not be fully utilized,
and (iv) a reserve established against our note receivable with a
development joint venture resulting from the reduction of a previously
established financing commitment with that joint venture.
- Reduced Reliance upon Joint Venture Arrangements. In order to simplify
our capital structure, we have elected to reduce our utilization of
joint venture development arrangements and other off-balance sheet
ownership and development structures (so-called "black box"
structures). Historically, these arrangements were a source of fee
income for us and served to reduce the adverse impact on our earnings
of start-up losses associated with our substantial volume of
newly-opened residences. We believe, however, that we can improve our
future cash flow and liquidity by retaining 100% of the revenue and
operating cash flow from more of our residences.
- Deleveraging of our Balance Sheet. We are seeking to strengthen and
deleverage our balance sheet and to address our short and long-term
capital needs by securing an additional equity or equity-linked
investment in the Company. We have retained financial advisors to
assist us in securing this investment, and are currently in
negotiations with parties interested in making an investment in the
Company.
- Focus on Cash Flow. As our portfolio of assisted living residences
stabilizes and matures, we intend to focus on cash flow. In this
regard, we will seek to own (as opposed to lease) as much of our real
estate as we can, given our capital constraints. Ownership of a
greater percentage of our residences will increase depreciation and
amortization expenses but only impact our operating cash flow to the
extent of any related interest expense.
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We are currently seeking to address both our short and long-term liquidity
requirements. The combination of a difficult financing and operating environment
healthcare service companies has significantly reduced the Company's access
to credit. A number of the Company's traditional financing sources, including
commercial banks and other secured lenders, have substantially reduced their
lending activities to the healthcare sector. In addition, the credit
availability under certain of our credit facilities has either been reduced or
eliminated due to a variety of factors, including our request for modifications
of some of our financial covenants in certain of our credit agreements. To
address our need for capital, we are in the process of seeking to raise at least
$100.0 million of equity or equity-linked financing, and expect to consummate
such a transaction during the second quarter of 2000. Given that we have not
committed to a specific equity transaction with any of our prospective
investors, there is a risk that we will not complete an equity transaction.
However, given the high level of interest of our prospective investors, the
advanced stage of these negotiations and the familiarity and understanding that
these prospective investors have with respect to our Company and business, our
management team believes that the Company has the ability to complete a
substantial equity investment transaction in the second quarter of 2000. If we
are not able to consummate this equity transaction in a timely fashion, we may
not have sufficient liquidity to fund our future operations and other
obligations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Residence Service Fees. Residence service fees for the year ended December 31,
1999 were $349.8 million representing an increase of $113.9 million, or 48%,
from the $235.9 million for 1998. Substantially all of this increase resulted
from the addition of newly constructed residences, residences we acquired the
majority ownership interest in during 1999, and other residences we acquired. We
operated or managed 450 and 350 residences at December 31, 1999 and 1998,
respectively.
Other Revenues. Other revenues for the year ended December 31, 1999 were $26.4
million, an increase of $17.9 million over the $8.5 million of other revenue for
the year ended December 31, 1998. The increase is attributable to management
fees on an increased number of residences which were either managed for third
parties or operated in minority joint ventures in 1999 versus 1998. As of
December 31, 1999, we had 101 residences held in minority joint ventures or
managed for other owners as compared to 66 residences as of December 31, 1998.
Management fees include charges for transitional services to recruit and train
staff, initial and recurring fees for use of our name and branding, initial and
recurring fees for use of our methodologies, and services for assisting with
finance processing, which are incurred during the start-up period of a new
residence, and ongoing management services provided to operate the residence.
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 1999 increased to $224.2 million, from $147.9 million in 1998, due
to the increased number of residences operated during 1999. Operating expenses
as a percentage of residence service fees, for the years ended December 31, 1999
and 1998 were 64.1% and 62.7%, respectively.
Lease Expense. Lease expense for the year ended December 31, 1999 was $69.4
million, compared to $44.2 million in 1998. This increase was primarily
attributable to the utilization of additional sale/leaseback financing totaling
$78.4 million during 1999 and to the incurrence of a full year of lease expense
in 1999 related to leases entered into in 1998.
Lease Income. We recorded lease income on residences we owned and leased to
unconsolidated joint ventures of $25.5 million for the year ended 1999, versus
$4.9 million for 1998. Under this arrangement, we retain ownership in underlying
assets in order to allow the use of our corporate financing arrangements. Lease
payment obligations of the unconsolidated joint venture entities are
approximately equivalent to the debt service payable by us on the leased
residences, which thereby, offset our costs associated with retaining ownership
in the fixed assets. As of December 31, 1999, we had 87 unconsolidated joint
ventures compared to 45 as of December 31, 1998.
General and Administrative Expense. General and administrative expenses for the
year ended December 31, 1999 were $42.6 million prior to a write-off of $2.3
million for failed acquisitions, corporate downsizing, and corporate office
relocation costs, compared to $23.2 million for 1998, representing an increase
as a percentage of operating revenue to 11.3% in 1999 from 9.5% in 1998. The
increase in expenses was primarily attributable to salaries, related payroll
taxes and employee benefits for additional corporate personnel retained to
support our growth and to support the increased number of unconsolidated
residences we manage.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 1999 was $20.6 million prior to a $600,000 write-off due to the
relocation of our national headquarters, representing an increase of $848,000,
or 4.3%, from the $19.7 million of depreciation and amortization for 1998. This
increase resulted primarily from depreciation of fixed assets on the larger
number of new residences that were operated by us during the year ended December
31, 1999, versus 1998. The increase in depreciation is partially offset by the
elimination of amortization on pre-opening costs which are now expensed when
they are incurred. Depreciation and amortization in 1998 includes $8.3 million
of amortization of pre-opening costs. As discussed below, we adopted a new
accounting principle related to pre-opening costs on January 1, 1999.
Non-recurring charge. We recorded a non-recurring charge of $47.3 million in the
fourth quarter of 1999 as a result of the decision to exit development
activities. The charge consists of the write-off of $28.4 million in costs
already incurred on
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development projects that will not be completed and the establishment of $8.6
million in reserves for costs related to exiting these activities. In
addition, the charge includes a $3.3 million reserve for employee costs and
lease obligations associated with closing down our construction subsidiary and
related activities at the national office. The Company also established a $7.0
million reserve related to a development joint venture with Manor Care, Inc.
which is further discussed in Note 2.
Interest Expense, Net. Interest expense, net of interest income, was $33.2
million for the year ended December 31, 1999 prior to a $2.7 million write-off
of deferred financing commitment fees, compared to $11.0 million for 1998. Gross
interest expense (before interest capitalization and interest income) for the
1999 period was $48.6 million prior to the commitment fee write-off, compared to
$29.8 million for 1998, an increase of $18.8 million. This increase is primarily
attributable t