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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NUMBER 1-12000
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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 (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (414) 918-5000
-------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE AMERICAN STOCK
EXCHANGE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH
COMMON STOCK, PAR VALUE $.01 REGISTERED
5.25% CONVERTIBLE SUBORDINATED AMERICAN STOCK EXCHANGE
DEBENTURE DUE 2002 AMERICAN STOCK EXCHANGE
SERIES A JUNIOR PREFERRED STOCK AMERICAN STOCK EXCHANGE
PURCHASE RIGHTS
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 $12,143,968 as of March 23 2001. The number of outstanding
shares of the Registrant's Common Stock was 22,109,810 shares as of March 23,
2001.
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Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for its 2001 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 national assisted living company operating assisted living residences
and providing assisted living services in 28 states. Our rapid growth in recent
years has had a significant impact on our results of operations and is a
principal factor in describing the changes in our results between 2000 and 1999.
As of December 31, 2000 and 1999, we operated or managed 474 and 450 residences
with aggregate capacity of approximately 22,100 and 20,700 residents,
respectively. As of December 31, 2000, we were also constructing 18 additional
residences with additional capacity for 974 residents. As of December 31, 2000,
88 of our residences, including 5 residences which were under construction, were
in joint venture arrangements with third parties. During 2000, we generated
operating revenue of $466.5 million and realized an operating loss of $14.5
million and a pretax loss of $79.8 million prior to non-recurring charges,
extraordinary item and the loss on disposal.
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, risks associated with recent defaults under loan
and lease obligations, risks associated with a shortfall in our liquidity and
the implementation of our restructuring plan, risks associated with the
disposition of assets and termination of leases, substantial debt and operating
lease payment obligations, operating losses associated with new residences, our
need for additional financing and liquidity, risks associated with our
construction activities, risks associated with 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.
RECENT DEVELOPMENTS
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 included (i) a substantial reduction
in our development activity; (ii) a reduction in our utilization of and reliance
upon the use of joint venture 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 completed an equity-linked investment in the
Company of $203 million during the second and third quarters of 2000 (the
"Equity Transaction").
We used the proceeds of the Equity Transaction, net of $15.2 million in
transaction costs, to (i) repay $48.3 million of bridge loans previously funded
by an affiliated group who participated as investors in the Equity Transaction,
(ii) retire outstanding convertible debt with a book basis of $41.4 million in
exchange for $26.9 million in newly issued debentures, (iii) acquire equity
interests in 14 residences previously managed by us for $21.0 million, (iv)
acquire a 60% interest in the operations of 26 residences for $14.7 million, (v)
repay $5.0 million of short-term borrowings under a bank line-of-credit, and
(vi) provide $71.9 million of funds for working capital and other corporate
purposes, including funding construction of our remaining unopened residences.
In the fourth quarter of 2000, $10.2 million of these proceeds were used to
acquire the remaining 40% equity interest in certain joint ventures, as
contemplated by the Equity Transaction. At the time of the Equity Transaction,
we believed that the net proceeds of that transaction, together with other
financing transactions that we anticipated would occur in 2001, would provide
sufficient cash resources for us to complete our remaining construction
activities and to cover our operating cash deficits until the Company achieved
positive operating cash flow.
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In the second half of 2000, however, two issues emerged that have had a
materially adverse impact on our liquidity. First, costs associated with
operating our residences, labor and liability insurance costs in particular,
increased significantly in the second half of 2000. Second, due both to a
generally unfavorable financing market for assisted living residences and the
declining credit fundamentals at both the residence and corporate level, we were
unable to complete our anticipated financing transactions in 2001. These
financing transactions were originally projected to yield cash proceeds that
would have been used to fund a portion of our overall cash requirements.
Virtually all of the net cash proceeds of the Equity Transaction have been used
to fund our operating cash flow deficits and to complete construction of our
remaining unopened residences.
By February 2001, our overall cash position had declined to approximately $10
million, a level which we believe to be insufficient. As we began 2001, our
operations produced approximately $7 million per month of cash flow before
monthly secured debt service and lease payments. Our monthly secured debt
service and lease payments total approximately $12 million. We also have been
making approximately $2 million per month in net cash expenditures related to
the completion of our construction activities. In addition, we face significant
debt maturities in 2001 and 2002.
In February 2001, we retained financial advisors and special reorganization
counsel to assist us in evaluating alternatives to restore the financial
viability of our business. To conserve cash and protect the financial integrity
of our operations, we did not make debt service and lease payments of
approximately $7 million in March 2001. As a result, we are in default under
many of our major loan and lease facilities. In March 2001, we obtained a $7.5
million bridge loan to fund current operations from certain of our principal
stock and debenture holders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
We believe that our operating cash flow has improved or will continue to improve
due to overhead reductions that we implemented and increases in monthly rents
that we charge to our residents which were effective in the first quarter of
2001. Nevertheless, we believe that our operations will not produce sufficient
cash flow to satisfy all of our obligations until the conclusion of our
restructuring activities, which we have commenced. As we seek to complete our
restructuring activities, it is our intention to maintain sufficient cash
resources such that we can fund our on-going obligations to our employees,
suppliers and other trade creditors on a timely basis.
RESTRUCTURING PLAN. We are seeking to implement a restructuring plan (the
"Restructuring Plan") that involves the disposition of selected assets and the
restructuring of our capital structure, including our senior indebtedness,
leases (both operating and synthetic), convertible PIK debentures, convertible
subordinated debentures, joint venture arrangements and our equity
capitalization.
Portfolio Rationalization. Our Restructuring Plan calls for the disposition of a
substantial number of our residences (collectively, the "Disposition Assets")
that we have determined to be non-strategic for one of a variety of reasons,
including the geographic location of certain of these residences. The
disposition of the residences included in the Disposition Assets is expected to
be accomplished primarily by actively working with the lenders and lessors to
identify new operators and selling assets through an organized sales process.
We expect that we will recognize a significant pre-tax loss estimated to be in
excess of $150 million related to the sale of the Disposition Assets during
2001. In addition, we are discussing a number of alternatives with our lenders
and lessors to address any potential cash shortfalls that may result from the
dispositions. A condition to our disposing of the Disposition Assets will be
obtaining the consent of the applicable lender or lessor and, in certain cases,
the consent of the applicable joint venture partner.
Senior Indebtedness and Leases. In addition to discussions related to the sale
of the Disposition Assets, we have commenced discussions with our various
lenders and lessors to restructure certain of our debt and lease obligations.
Some of the residence portfolios financed by our lenders or lessors operate at
cash flow deficits either before or after associated debt service. The
Restructuring Plan calls for these lenders or lessors to defer debt service
payments (and in certain cases to fund additional indebtedness to satisfy
operating cash flow losses) through the date of the sale of the Disposition
Assets. None of our lenders or lessors has yet agreed to these debt service
payment deferrals or shortfall funding arrangements.
Our existing senior and subordinated indebtedness includes principal maturities
totaling $313.7 million, $213.9 million and $112.6 million in 2001, 2002 and
2003, respectively. The Restructuring Plan calls for the deferral of all debt
maturities and
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some other currently scheduled principal payments until after 2003. None of our
lenders or bondholders has yet agreed to these principal payment deferrals.
In addition to payment-related modifications, we will seek to modify other terms
of our senior indebtedness and lease arrangements. Many of our senior debt
instruments and certain of our lease instruments include financial covenants
applicable either to the performance of the Company as a whole, to the
performance of the financed portfolio or to the performance of individual
residences. We will seek to modify or eliminate many of these financial
covenants.
The Restructuring Plan calls for us to negotiate a termination of our debt
guaranty, management and other obligations relating to 13 residences that are
currently held in a joint venture structure involving Manor Care, Inc. and a
third-party equity investor group (see "Joint Ventures and Strategic Alliances -
Joint Venture with Manor Care, Inc.").
Convertible PIK Debentures, Convertible Subordinated Debentures and Joint
Venture Interests. The Restructuring Plan calls for us to exchange debt, equity
or equity-linked securities for our existing $208.7 million in face amount of
convertible PIK debentures, $187.2 million in face amount of convertible
subordinated debentures and various joint venture interests in certain of our
residences. We intend to seek to negotiate exchange transactions with these
capital structure constituents that result in a simplified capital structure
that reflects the relative value of the debenture or joint venture interests of
these third parties. We have only recently commenced discussions with some of
these parties, and do not yet have any definitive agreements with any of these
parties.
Discussions with our various capital structure constituents have only commenced
during recent weeks, or in some cases have not commenced at all, and no binding
agreements have been reached. No assurance can be given that we will be
successful in negotiating appropriate agreements with our various capital
structure constituents. As we proceed with these negotiations, we expect that we
will be making modifications to the Restructuring Plan to address issues that
arise. In addition, should our operating results further deteriorate or should
any of our several lenders, lessors, convertible debenture holders or joint
venture partners take aggressive action which could jeopardize our assets or
liquidity, we may be forced to pursue a court supervised reorganization of the
Company.
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.
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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 $120 to $350 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 $300 to $350.
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 generally
charge monthly rates per resident ranging from $1,500 for a shared room to
$4,500 for a private room depending on the apartment type, level of
services required, resident activity and the geographic location of the
residence. The average rate in Wynwood residences during the fourth quarter
of 2000 was approximately $2,500.
- - 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 generally
charge monthly rates per resident from $1,900 to $3,150 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 2000 was approximately $2,300.
- - 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 $2,875
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 2000 was approximately $1,800.
ALZHEIMER'S DEMENTIA SERVICES. We believe we are one of the leading providers of
care to residents with cognitive impairments, including Alzheimer's and other
dementias, in our 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
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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 $1,500 to $5,000
depending on the apartment type, level of services required, resident
activity, and geographic location of the residence. The average rate in
Clare Bridge residences during the fourth quarter of 2000 was approximately
$3,200.
- - 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 $2,200 and
$4,200 for services depending on the apartment type, level of services
required, resident activity, and geographic location of the residence. The
average rate in Clare Bridge Cottage residences during the fourth quarter
of 2000 was approximately $2,800.
ACCESS TO SPECIALIZED MEDICAL SERVICES. In addition to our care and supportive
services we assist our residents with the coordination of access to medical
services from third parties, including home health care, rehabilitation therapy,
pharmacy services and hospice care. These providers are often reimbursed
directly by the resident or a third party payor, such as Medicare. In the
future, we may elect to provide these services directly using our own employees
or through contracts or joint venture agreements with other providers.
JOINT VENTURES AND STRATEGIC ALLIANCES
Historically, we formed strategic alliances and joint ventures with established
real estate development and financial partners. These alliances and joint
ventures enabled us to develop and construct additional residences while
reducing the investment of, and associated risk to, us. Although we intend to
discontinue our utilization and reliance upon joint venture and other
off-balance sheet ownership structures in the future, we operated or managed
approximately 84 residences utilizing these types of arrangements as of December
31, 2000.
Joint Venture with Pioneer Development Company. In 1996, we established a joint
venture relationship (the "Alterra-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 "Alterra-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 Alterra-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 Alterra-Northeast 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
Alterra-Northeast Territory, subject to limited exceptions. Pioneer is providing
development and construction management services to the Alterra-Northeast J.V.
and we are managing the Alterra-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 Alterra 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
Alterra-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, 2000, 12 of our residences were held in joint ventures
with Pioneer. We are currently in negotiations with Pioneer regarding a possible
discontinuation of this joint venture relationship.
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
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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.
Pursuant to the Devco I agreements, Alterra is obligated to fund operating
deficits of the Devco I JVs under certain circumstances. As of December 31,
2000, Alterra had advanced in excess of $5.0 million to Devco I JVs to fund
operating deficits.
On September 30, 1999, an additional 29 residences were placed into a joint
venture structure pursuant to the joint venture agreement with Manor Care. Manor
Care transferred six of the residences and we transferred 16 properties
constituting 23 residences (i.e., seven of our properties are "campus"
properties having two 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 had no 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) was $8.0
million.
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The cash needs of each DevCo II JV were 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 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 were made
in proportion to the members' contributed capital (i.e., 90% to the DevCo II
Investor; 10% to DevCo II). Losses were allocated to the members in proportion
to contributed capital, with any losses in excess of contributed capital
allocated to DevCo II. We were retained by each DevCo II JV to manage the
operations of its respective residence for a management fee. We and Manor Care
also received fees for certain other services rendered in connection with the
DevCo II joint venture.
On March 30, 2000, the commitment under the Bank of America facility was reduced
to $60 million and various of the corporate financial covenants related to the
Company under its guarantee of the Bank of America facility were modified. We
exercised our "call option" on May 3, 2000, to purchase the DevCo II Investor's
interests in 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 the exercise of that call option, we
elected to require Manor Care to acquire directly from the Devco II Investor and
DevCo II their respective interests in those six DevCo II JVs owning residences
that were acquired from Manor Care or its affiliates. After acquiring our 16
properties constituting 23 residences (i.e., seven of our properties are
"campus" properties having two residences each) we subsequently discontinued
construction and development of 14 of the 23 properties. Several of the parcels
of land were sold during 2000.
On January 26, 2001 (with an effective date of December 31, 2000), the Bank of
America credit facility was modified to: (i) shorten the maturity date of the
facility to June 29, 2001 from its original maturity date of September 30, 2002;
(ii) reduce the commitment under the facility to $57.0 million; (iii) eliminate
various corporate financial covenants related to the Company; and (iv) eliminate
certain property-level financial covenants previously applicable to the DevCo
residences.
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. Under
certain of these arrangements, we have agreed to fund the operating deficit
requirements of the applicable joint venture once the available equity and debt
financing is fully utilized. Pursuant to the operative agreements, we have the
right to acquire (call option) the joint venture partner's equity interest in
the joint venture entity at a price based upon an agreed upon return on
investment or fair market value to the joint venture partner. Similarly, after a
specified waiting period, the joint venture partner has the right to require us
to purchase (put option) the partner's equity interest in the joint venture
entity at a price based upon the appraised fair market value of the residence
operated by the joint venture entity. 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. We intend to
seek to negotiate with the applicable joint venture partners a termination of
these arrangements as a part of the Restructuring Plan.
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 18 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.
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.
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Our assisted living residences are subject to regulation and licensing by state
and local health and social service agencies and other regulatory authorities.
In some states in which we operate, the term "assisted living" may have a
statutory definition limited to a particular type of program or population. Some
of our assisted living residences may fall into other licensing categories or
may be independent apartments where services are provided by a licensed home
healthcare agency. Although regulatory requirements vary from state to state,
these requirements generally address, among other things: personnel education,
training and records; staffing levels; facility services, including
administration and assistance with self-administration of medication, and
limited nursing services; physical residence specification; furnishing of
residence units; food and housekeeping services; emergency evacuation plans; and
residence rights and responsibilities. New Jersey and Kentucky also require each
assisted living residence to obtain a Certificate of Need ("CON") prior to its
opening. Our residences are also subject to various state or local building
codes and other ordinances, including safety codes. We anticipate that the
states which are establishing regulatory frameworks for assisted living
residences will require licensing of assisted living residences and will
establish varying requirements with respect to this licensing.
We have obtained all required licenses for each of our residences 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.
Like other healthcare facilities, assisted living residences are subject to
periodic survey or inspection by governmental authorities. From time to time in
the ordinary course of business, government agencies issue deficiency reports
and impose remedial action.. We review these reports and remedial actions and
seek to take appropriate corrective action. Although most inspection
deficiencies are resolved through a plan of correction, the reviewing agency
typically is authorized to take action against a licensed facility where
deficiencies are noted in the inspection process. Action may include imposition
of fines, imposition of a provisional or conditional license or suspension or
revocation of a license or other sanctions. 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 are currently a defendant in a criminal negligence action involving one of
our residents. While we are vigorously defending the prosecution of this action,
if we were to be convicted of this misdemeanor, our ability to obtain and renew
certain of our licenses and to participate in certain government payor programs
could be materially and adversely affected.
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 may be subject to these laws
because (i) applicable state laws typically apply regardless of whether Medicare
or Medicaid payments are at issue and in certain cases (ii) some of our assisted
living residences maintain contracts with healthcare providers and
practitioners, including pharmacies, home health organizations and hospices,
through which the 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
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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 healthcare costs containment pressures, we
expect that the assisted living segment of the industry will become increasingly
competitive in the future. We compete with other providers of elderly
residential care on the basis of the breadth and quality of our services, the
quality of our residences and, with respect to private pay patients or
residents, price. 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, 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, 2000, we employed approximately 10,400 full-time employees and
4,000 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 RECENT DEFAULTS UNDER LOAN AND LEASE OBLIGATIONS. We did
not make loan and lease payments to many of our lenders and lessors in March
2001 and are now in default with respect to these obligations. Management
believes that, despite the pendency of these defaults, during the near term the
majority of these lenders and lessors will continue to participate in
restructuring discussions with us. No assurances may be given, however, that
this will be the case. In fact, one of our lessors has given us notice that it
is terminating our leases for 11 residences and other lenders and lessors have
begun to exercise various remedies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." As our principal credit, lease and other financing facilities are
cross-defaulted to a material default occurring under other credit, lease or
financing facilities, a payment default under one such facility could result in
our being in default under many other such facilities, which could adversely
affect the Company's ability to restructure without reorganization proceedings.
In addition, the Company's convertible debentures include subordination
provisions that prohibit payments to the debenture holders (other than
payment-in-kind coupon payments) after the occurrence of a payment default on
the Company's senior
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indebtedness. As such, the Company is currently prohibited from making payments
related to its convertible debentures until such time that no payment-related
defaults exist related to its senior indebtedness.
RISKS ASSOCIATED WITH SHORTFALL IN LIQUIDITY AND IMPLEMENTATION OF RESTRUCTURING
PLAN. As a result of on-going operating losses and significant upcoming debt
maturities, we expect that our projected cash needs during 2001 and 2002 will
exceed our projected identified cash resources. In addition, 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. 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 default under certain of our credit agreements. If we are
unable to develop and successfully implement on a negotiated basis our
Restructuring Plan with our lenders, lessors, convertible debenture holders and
joint venture partners, we will not have sufficient liquidity to make our
scheduled debt and lease payments, or to fund our remaining construction
activities. In that event, we would have little choice but to seek to effect a
reorganization of the Company pursuant to a court supervised reorganization. See
"Substantial Debt and Operating Lease Payment Obligations," "Development and
Construction Risks" and "Management's Discussion and Analysis and Results of
Operations -- Liquidity and Capital Resources." Were we to seek to reorganize
the Company pursuant to a court supervised reorganization, we believe that it
would be more difficult for us to attract and retain residents to our residences
and employees. In addition, we would expect to be subject to increased
regulatory oversight as a result of our financial condition, resulting from
concerns of regulatory bodies that our financial difficulties may result in a
decrease in the quality of care provided by us.
RISKS ASSOCIATED WITH THE DISPOSITION OF ASSETS AND TERMINATION OF LEASES. A key
component of our Restructuring Plan relates to the disposition of a number of
residences that are owned or leased by the Company. This disposition strategy
involves a number of risks and uncertainties. Availability of financing for
assisted living properties is currently limited due to substantial reductions in
lending activity by traditional financing sources including commercial banks,
other secured lenders and real estate investment trusts ("REITs"). As such,
potential purchasers of Company residences may be limited in their ability to
obtain necessary financing which may affect both the price at which Company
assets may be sold and the ability of potential purchasers to execute
transactions. In addition, the residences that the Company intends to sell or
otherwise dispose of generally are in lease-up or have historically operated at
a loss. Both the availability of financing and number of potential purchasers
tend to be more limited for residences that have historically operated at a
loss. In addition, many operating companies within the assisted living sector
have encountered financial and operating difficulties similar to those
experienced by the Company. This may limit the universe of potential purchasers
as those other assisted living companies may be financially or operationally
incapable of effecting acquisition transactions or may be attempting to sell or
otherwise dispose of assets from their own portfolios. Finally, with respect to
a number of residences included in our Disposition Assets, we are not free to
sell or dispose of the residence without the consent of the applicable lender or
lessor and, in certain cases, the consent of our joint venture partners.
SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENT OBLIGATIONS. We had lease expense
of $82.4 million and $69.4 million excluding sublease income for the years ended
December 31, 2000 and 1999, respectively. Our total indebtedness as of December
31, 2000 was $1.1 billion, and our net interest expense was $62.6 million and
$32.3 million for the years ended December 31, 2000 and 1999, respectively. Debt
and annual operating lease payment obligations will continue to increase as we
complete our pending construction activities. In addition, residences under
construction 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 $323.7 million
of our total indebtedness matures before December 31, 2001 or is in default as
of December 31, 2000.
Historically, we have not consistently had sufficient earnings to cover fixed
charges. Earnings were insufficient to cover fixed charges by $71.7 million and
$4.1 million in 2000 and 1999, respectively prior to non recurring charges, the
loss on disposal, other one time adjustments, and the cumulative effect of a
change in accounting principle. 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
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residences if we default in one of our payment obligations. See "Need for
Financing to Complete Construction and Fund Operating Losses."
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, 2000, of our 474 residences, 28
newly developed residences opened during 2000 and 70 residences opened or
purchased during 1999 were in lease up. In addition, the 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, 2000, we had 18 residences
under construction. 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 "Construction Risks" and
"Competition."
NEED FOR FINANCING TO COMPLETE CONSTRUCTION AND FUND OPERATING LOSSES. We will
need to obtain sufficient financing to fund our remaining construction
activities and anticipated losses. As of December 31, 2000, we had 18 residences
under construction. We estimate that we will incur between $10 million and $15
million of additional costs to complete these residences, of which between $7
million and $11 million relate to Company owned or leased residences and between
$3 million and $4 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," our access to additional funding is severely restricted. 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 will from time to time seek additional equity or debt financing. If
additional funds are raised by issuing equity or equity-linked securities, 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 construction projects and acquisition plans.
Approximately $533.3 million, or 47.5%, of our total indebtedness as of December
31, 2000 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. 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.
CONSTRUCTION RISKS. As of December 31, 2000, we had 18 residences under
construction. Construction 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 construction 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 light of our financial condition, we severely curtailed our
construction activity and have delayed making payments to contractors and
subcontractors on three 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. In addition, additional liens or
lawsuits may be filed by contractors and subcontractors unless we can access
sufficient working capital to satisfy our obligations, 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
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not experience construction delays that we will be successful in constructing
currently planned residences or that any developed residence will be
economically successful. Delays in our planned construction activity could
result in increased costs or litigation costs which could adversely affect our
business, operating results and financial condition.
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, 2000, 84 of our operating
residences were jointly owned, directly or indirectly, with venture partners. Of
the 18 residences which were under construction by us as of December 31, 2000, a
portion of these residences are being constructed 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 and, in certain cases,
have agreed to fund operating deficits arising after all available equity and
debt financing is utilized. 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 or at times
that would otherwise not be acceptable to us, including times during which we
may not have adequate liquidity to fund acquisitions.
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
be successfully asserted. A successful claim against us not covered by, or in
excess of, our insurance could have a material adverse effect upon our financial
condition and results of operations. Claims against us, regardless of their
merit or eventual outcome, 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.
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. In the event that the Company determines that
it must seek to accomplish its Restructuring Plan through a court supervised
reorganization, we expect that the foregoing risks could pose an even greater
challenge for the Company.
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
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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. In the event that the Company determines
that it must seek to accomplish its Restructuring Plan through a court
supervised reorganization, we expect that the foregoing risks could pose an even
greater challenge for the Company.
GOVERNMENT REGULATION. Healthcare is an area of extensive and frequent
regulatory change. The assisted living industry is relatively new, and,
accordingly, the manner and extent to which it is regulated at the Federal and
state levels is evolving. Changes in the laws or new interpretations of existing
laws may have a significant impact on our methods and costs of doing business.
We are, and will continue to be, subject to varying degrees of regulation and
licensing by health or social service agencies and other regulatory authorities
in the various states and localities where we operate or intend to operate. We
and our activities are subject to zoning, health and other state and local
government laws and regulations. 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.
We are currently a defendant in a criminal negligence action involving one of
our residents. While we are vigorously defending the prosecution of this action,
if the Company were to be convicted of this misdemeanor, the Company's ability
to obtain and renew certain of our licenses and to participate in certain
government payor programs could be materially and adversely affected.
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.
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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. In the event that the Company determines that it must seek to
accomplish its Restructuring Plan through a court supervised reorganization, we
expect that the foregoing risks could pose an even greater challenge for the
Company.
ENVIRONMENTAL LIABILITY RISKS ASSOCIATED WITH REAL PROPERTY. Under various
Federal, state and local environmental laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up hazardous or toxic substances or petroleum product
releases at these properties, and may be held liable to a governmental entity or
to third parties for property damage and for investigation and cleanup costs
incurred by these parties in connection with the contamination. These laws
typically impose clean up responsibility and liability without regard to whether
the owner knew of or caused the presence of contaminants, and liability under
these laws has been interpreted to be joint and several unless the harm is
divisible and there is a reasonable basis for allocation or responsibility. The
costs of investigation, remediation or removal of these substances may be
substantial, and the presence of these substances, or the failure to properly
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 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 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. We are obligated to issue
additional shares of Common Stock or, in certain cases, preferred stock, upon
the exercise of conversion or other rights under various outstanding warrants,
convertible debentures and convertible preferred stock described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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 $112.0 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.
15
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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. There has been significant
volatility in the market price of the Common Stock and the Company's convertible
subordinated debentures, and it is likely that the price of these securities
will fluctuate in the future. The Company's current financial condition, the
Company's effort to implement its Restructuring Plan, our recent operating
results, changes in general conditions in the economy, the financial markets or
the health care industry, or other developments affecting the Company or its
competitors, could cause the market price of the Common Stock and the Company's
convertible subordinated debentures to fluctuate substantially. In addition, in
recent years the stock market and, in particular, the health care industry
segment, has experienced significant price and volume fluctuations. This
volatility has affected the market price of securities issued by many companies
for reasons unrelated to their operating performance.
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ITEM 2. PROPERTIES
The table below shows, by state, the number and the associated capacity of the
residences that we own, lease, hold equity interest in or manage, on behalf of
third parties, as of December 31, 2000.
OPERATING RESIDENCES
Owned (1) Leased (2) Unconsolidated (3) Managed (4) Total
------------------ ------------------ ------------------ ------------------ ------------------
Location No. Cap. No. Cap. No. Cap. No. Cap. No. Cap.
- ------------ ------- ------- ------- ------- ------- ------- ------- ------- ------- --------
AZ 11 624 4 190 1 38 -- -- 16 852
CA 7 624 1 240 2 125 -- -- 10 989
CO 8 444 11 689 1 36 -- -- 20 1,169
DE 1 72 -- -- -- -- -- -- 1 72
FL 29 1,637 25 1,080 7 296 3 176 64 3,189
GA 5 317 -- -- -- -- -- -- 5 317
ID 1 70 2 158 -- -- -- -- 3 228
IN 6 252 -- -- 11 446 -- -- 17 698
KS 17 584 8 265 3 118 1 50 29 1,017
MA 1 72 -- -- -- -- -- -- 1 72
MD 2 98 -- -- 2 82 -- -- 4 180
MI 18 550 12 542 -- -- 2 116 32 1,208
MN 12 396 8 311 1 78 -- -- 21 785
NC 7 340 11 524 1 38 -- -- 19 902
ND -- -- 1 71 -- -- -- -- 1 71
NJ 7 520 2 52 2 130 -- -- 11 702
NV 2 108 3 208 -- -- -- -- 5 316
NY 18 1,032 1 80 -- -- -- -- 19 1,112
OH 6 304 16 658 4 147 3 171 29 1,280
OK -- -- 26 906 2 74 -- -- 28 980
OR 2 164 8 594 3 156 -- -- 13 914
PA 13 595 1 48 1 52 1 60 16 755
SC 4 162 9 372 2 82 -- -- 15 616
TN 2 90 2 86 6 250 -- -- 10 426
TX 2 95 24 921 1 36 4 236 31 1,288
VA 1 56 -- -- 1 40 -- -- 2 96
WA 3 156 4 388 3 164 -- -- 10 708
WI 18 453 21 564 1 80 2 16 42 1,113
------- ------- ------- ------- ------- ------- ------- ------- ------- --------
TOTAL 203 9,815 200 8,947 55 2,468 16 825 474 22,055
======= ======= ======= ======= ======= ======= ======= ======= ======= ========
(1) Owned residences are those that are wholly or majority owned by us,
including those leased under synthetic leases.
(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 or posses
a de minimus ownership position. We have an option to purchase or lease
thirteen of these residences.
Of our 474 operating residences, 79% are five years old or less and 95% are ten
years old or less.
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At December 31, 2000, we were in various stages of constructing 18 residences.
Set forth below is information with respect to residences in construction on
December 31, 2000.
RESIDENCES UNDER CONSTRUCTION
Under Construction
-----------------------
Location Residences Capacity
-------- ---------- ----------
CA 3 216
CT 1 52
DE 1 52
FL 2 172
IN 1 38
KY 2 78
NJ 2 74
NY 1 52
NC 2 74
TN 1 36
TX 1 52
WI 1 78
---------- ----------
TOTAL 18 974
========== ==========
The residences under construction may be owned directly by joint venture
entities in which we own varying percentages of equity interests. See "Business
- - Joint Ventures and Strategic Alliances."
"Construction" means that construction activities have commenced
(groundbreaking) and are ongoing.
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 matters.
On August 22, 2000, Manor Care, Inc. ("Manor Care") and Manor Care of America,
Inc. filed a complaint against the Company in state court in Ohio seeking to
collect on a note executed by the Company in the principal amount of $3.0
million in connection with the Company's development joint venture with Manor
Care. The Company has filed a motion to dismiss or stay the action in favor of
arbitration of the dispute. A hearing on this motion has been scheduled in April
2001. The Company intends to vigorously defend against the claims alleged by
Manor Care in this complaint.
On October 20, 2000, Manor Care filed a complaint against the Company in the
Delaware state superior court with respect to two purchase agreements entered
into on December 31, 1998 between the Company, Manor Care and a number of Manor
Care's subsidiaries and affiliates. One of these agreements related to the
purchase by the Company of a number of assisted living residences then owned and
operated by Manor Care and its subsidiaries, and the second agreement related to
the purchase by the Company of a number of assisted living residences then under
construction by Manor Care and its subsidiaries. Manor Care has alleged that the
Company was unable to close the purchases within the time required by the
agreements and that the Company allegedly fraudulently induced Manor Care to
delay the closings. Manor Care is seeking damages for this alleged fraud in the
amount of approximately $3.7 million. In addition, Manor Care has alleged that
the Company owes Manor Care $259,000 arising out of post-closing prorations. The
Company has filed a motion to dismiss Manor Care's complaint, and intends to
vigorously defend against the claims alleged by Manor Care in this complaint.
In addition, the Company is pursuing (or intends to pursue) various claims and
counterclaims against Manor Care and its affiliates arising out of the Company's
business dealings with Manor Care. Manor Care and its affiliates are likewise
also pursuing other claims and counterclaims against Alterra and its affiliates
arising out of its business dealings with Alterra.
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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, 2000.
PART II
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, 2001, was approximately 7,600.
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
-------- --------
2000:
First Quarter............ $8.250 $4.000
Second Quarter........... 4.000 1.688
Third Quarter............ 2.500 1.938
Fourth Quarter........... 3.188 0.875
1999:
First Quarter............ $33.563 $17.000
Second Quarter........... 23.500 10.438
Third Quarter............ 13.688 8.188
Fourth Quarter........... 8.938 5.750
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 presented below for each of
the five years ended December 31, 2000 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,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Revenue:
Operating revenue ................................ $ 466,495 $ 376,181 $ 244,423 $ 130,744 $ 55,637
--------- --------- --------- --------- ---------
Operating expenses:
Residence operations ............................. 313,514 224,213 147,931 81,558 35,977
Lease expense .................................... 82,352 69,375 44,174 25,524 9,035
Lease income ..................................... (28,222) (25,507) (4,915) -- --
General and administrative ....................... 50,360 44,898 23,200 22,168 11,143
Loss on disposal ................................. 22,515 -- -- -- --
Depreciation and amortization .................... 36,210 21,178 19,730 9,271 4,223
Non-recurring charge ............................. 4,232 47,280 -- 4,656 976
--------- --------- --------- --------- ---------
Total operating expenses ....................... 480,961 381,437 230,120 143,177 61,354
--------- --------- --------- --------- ---------
Operating (loss) income ............................ (14,466) (5,256) 14,303 (12,433) (5,717)
Other (expense) income:
Interest expense, net ............................ (62,628) (32,259) (9,431) (3,809) (3,231)
Amortization of financing costs .................. (8,595) (3,679) (1,593) (123) --
Convertible debt paid in kind interest ("PIK").... (12,483) -- -- -- --
Equity in losses of
unconsolidated affiliates ...................... (14,762) (1,442) (31) (226) (52)
Other, net ....................................... -- (20) (170) (112) (31)
Minority interest in losses of
consolidated subsidiaries ..................... 1,264 4,018 20,610 8,440 76
--------- --------- --------- --------- ---------
Total other (expense) income, net ............. (97,204) (33,382) 9,385 4,170 (3,238)
--------- --------- --------- --------- ---------
(Loss) income before income taxes,
extraordinary item and cumulative
effect ........................................... (111,670) (38,638) 23,688 (8,263) (8,955)
--------- --------- --------- --------- ---------
Income tax benefit (expense) ....................... (14,672) 14,669 (3,136) -- 159
--------- --------- --------- --------- ---------
(Loss) income before extraordinary
item and cumulative effect of a
change in accounting principle ................... (126,342) (23,969) 20,552 (8,263) (8,796)
Extraordinary item - gain from
early retirement of financing agreements .......... 8,536 -- -- -- --
Cumulative effect of a change in
accounting principle ............................. -- (3,837) -- -- --
--------- --------- --------- --------- ---------
Net (loss) income ............................. $(117,806) $ (27,806) $ 20,552 $ (8,263) $ (8,796)
========= ========= ========= ========= =========
Basic (loss) income per common share:
(Loss) income before extraordinary
item (1), and a change in
accounting principle ............................ $ (5.71) $ (1.09) $ 0.94 $ (0.44) $ (0.57)
Extraordinary item (1) ........................... 0.39 -- -- -- --
Change in accounting principle .................. -- (0.17) -- -- --
--------- --------- --------- --------- ---------
Basic (loss) income per common
share (1) ........................................ $ (5.33) $ (1.26) $ 0.94 $ (0.44) $ (0.57)
========= ========= ========= ========= =========
Diluted (loss) income per common
share:
(Loss) income before
extraordinary item (1), and a
change in accounting principle .................. $ (5.71) $ (1.09) $ 0.92 $ (0.44) $ (0.57)
Extraordinary item (1) ........................... 0.39 -- -- -- --
Change in accounting principle ................... -- (0.17) -- -- --
--------- --------- --------- --------- ---------
Diluted (loss) income per common
share (1) ........................................ $ (5.33) $ (1.26) $ 0.92 $ (0.44) $ (0.57)
========= ========= ========= ========= =========
Weighted average common shares
outstanding (1):
Basic ............................................ 22,108 22,088 21,905 18,651 15,429
========= ========= ========= ========= =========
Diluted .......................................... 22,108 22,088 24,145 18,651 15,429
========= ========= ========= ========= =========
(1) Basic and diluted share amounts are the same for 1996-1997 and 1999-2000
since potentially issuable shares related to stock options and convertible debt
would have an anti-dilutive effect.
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2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents ... $ 23,688 $ 18,728 $ 40,621 $ 79,838 $ 39,455
Short-term investments ...... -- -- -- 90,000 --
Working capital ............. (129,226) 5,452 28,305 129,528 20,532
Total assets ................ 1,227,765 1,061,397 777,810 553,552 204,353
Long-term obligations ....... 803,848 791,672 515,584 318,069 68,625
Stockholders' equity ........ $ 32,859 $ 150,643 $ 177,112 $ 143,897 $ 91,064
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a national assisted living company operating assisted living residences
and providing assisted living services in 28 states. Our growth in recent years
has had a significant impact on our results of operations and is an important
factor in explaining the changes in our results between 2000 and 1999. As of
December 31, 2000 and 1999, we operated or managed 474 and 450 residences with
aggregate capacity of approximately 22,100 and 20,700 and residents,
respectively. We, together with other parties who have purchased interests in
some of our development residences, were also constructing 18 additional
residences with additional capacity for 974 residents as of December 31, 2000.
During 2000, we generated operating revenue of $466.5 million and realized an
operating loss of $14.5 million and a pretax loss of $79.8 million prior to
non-recurring charges, extraordinary item, and a loss on disposal.
In light of our current liquidity situation, we are seeking to implement a
Restructuring Plan that contemplates the disposition of a significant portion of
our residences and the restructuring of our senior indebtedness, leases (both
operating and synthetic), convertible debentures, joint venture arrangements and
equity capitalization. The pending Restructuring Plan, and recent developments
impacting our liquidity and operating results, are summarized under the caption
"Business - Recent Developments," which is incorporated in this Item 7 by this
reference.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Residence Service Fees. Residence service fees for year ended December 31, 2000
were $452.9 million representing an increase of $103.1 million, or 29.5%, from
the $349.8 million for the comparable 1999 period. Substantially all of this
increase resulted from occupancy growth at certain of our recently opened
residences and the addition of newly constructed residences, residences we
acquired and a portfolio wide growth in occupancy. We operated or managed 474
and 450 residences at December 31, 2000 and 1999, respectively.
Other Revenues. Other revenues for the year ended December 31, 2000 were $13.6
million, a decrease of $12.8 million over the $26.4 million of other revenue for
the year ended December 31, 1999. The decrease is attributable to reduced
development activity which resulted in lower development fees and management
fees on residences which were either managed for third parties or for entities
in which we held a minority ownership position. In addition, during the second
quarter of 2000, we purchased 49 residences which we previously either managed
for third parties or for entities in which we held minority ownership positions.
Management fees include charges for transitional services to recruit and train
staff, initial and recurring fees for use of our name and branding, initial and
recurring fees for use of our methodologies, services for assisting with finance
processing, and ongoing management services provided to operate the residence.
Residence Operating Expenses. Residence operating expenses for the year ended
December 31, 2000 increased to $313.5 million from $224.2 million in the year
ended December 31, 1999 due to the increased number of residences operated
during the 2000 period. Operating expenses as a percentage of resident service
fees for the year ended December 31, 2000 and 1999 were 69.2% and 64.1%,
respectively. This percentage increase resulted primarily from increases in
labor and employee benefit related costs due to increased competition for
personnel and increases in liability insurance costs which resulted from the
most recent liability insurance policy renewal on July 1, 2000. The increase in
marginal expenses was also impacted by a slower lease-up of residences in some
areas of the country.
Lease Expense. Lease expense for the year ended December 31, 2000 was $82.4
million, compared to $69.4 million in the comparable period in 1999. Such
increase was primarily attributable to the incurrence of a full year of lease
expense in 2000 related to leases entered into in 1999.
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22
Lease Income. We earned $28.2 million of lease income for year ended December
31, 2000, compared to $25.5 million for the comparable period in 1999, on
residences owned or leased by us and leased or subleased to unconsolidated joint
ventures. Lease payment obligations of the unconsolidated joint venture entities
are generally equivalent to the debt service payable by us on the leased
residences, and thereby offset our costs associated with obtaining and
maintaining financing for such residences.
General and Administrative Expense. For the year ended December 31, 2000,
general and administrative expenses were $45.3 million prior to $5.1 million of
non-recurring expenses, compared to $42.6 million before a $2.3 million
write-off for failed acquisitions, corporate downsizing, and corporate office
relocation costs for the comparable 1999 period, representing a decrease to 9.7%
of operating revenue in 2000 from 11.3% in 1999. The $5.1 million of
non-recurring expenses consist of $3.3 million related to employee severance
costs and the termination of several internal software development and systems
projects associated with our corporate downsizing, and a $1.8 million bad debt
expense related to a management fee note which was deemed to be uncollectible
due to the acquisition of the related residences in the second quarter.
Loss on Disposal. During the year ended December 31, 2000, the Company's Board
of Directors adopted a plan to dispose of 67 residences with aggregate capacity
of 2,377 residents and 33 parcels of land. In accordance with SFAS 121,
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of," we recorded a loss on disposal on 31 of the 67 residences where we
estimated net sales proceeds using undiscounted cashflows, net of disposal
costs, are less than the book value by $22.2 million net of subsequent gains.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 2000 was $36.2 million, representing an increase of $15.0 million,
or 70.9%, from the $21.2 million of depreciation and amortization for the
comparable 1999 period. This increase resulted primarily from depreciation of
fixed assets on the larger number of new residences that were owned by us during
the year ended December 31, 2000, versus the comparable period in 1999. In
addition, we acquired 19 residences with a capacity for 944 residents in
December 1999 and January 2000 which were previously leased by us from a
healthcare REIT and have therefore incurred depreciation on these assets.
Non recurring charge. A non recurring charge of $4.2 million was recorded in the
fourth quarter of 2000 relating to severance of various general and
administrative positions of $1.1 million, the termination of a management
contract of $2.0 million and the discontinuance of our pharmacy joint venture of
$1.1 million, representing a decrease of $43.1 million, compared to a non
recurring charge of $47.3 million in 1999 to exit development activities.
Interest Expense, Net. Interest expense, net of interest income, was $61.2
million for the year ended December 31, 2000, prior to $1.4 million of bank
amendment fees compared to $32.3 million of net interest expense for 1999. Gross
interest expense (before interest capitalization and interest income) for the
2000 period was $71.1 million prior to the amendment fees paid compared to $47.6
million for the 1999 period, an increase of $23.4 million. This increase is
primarily attributable to an increase in the amount of mortgage financing used
in 2000 as compared to 1999. The 2000 period also includes fees paid related to
amending bank agreements. We capitalized $4.0 million of interest expense in the
2000 period compared to $10.3 million in the 1999 period. This decrease in
capitalized interest is a result of our decision to reduce development and
construction activity in 2000. Our average construction in progress balance was
$65.1 million during the twelve months ended December 31, 2000, compared to
$117.8 million in the 1999 period. Interest income for the 2000 period was $5.9
million as compared to $5.1 million for the 1999 period. This increase was due
to interest on additional restricted cash balances in place in 2000 related
primarily to lease financing transactions.
Amortization of Financing Costs. Amortization of financing costs for the year
ended December 31, 2000 was $8.6 million, representing an increase of $4.9
million from the $3.7 million of amortized financing costs for the comparable
1999 period. This increase resulted primarily from amortization of financing
costs on the larger number of residences that were owned by us during the year
ended December 31, 2000, versus the comparable period in 1999. In addition, we
completed the Equity Transaction totaling $203.0 million in 2000 and have begun
to amortize the $15.2 million of related costs.
PIK Interest, Net. PIK interest for the year ended December 31, 2000 includes
$12.5 million of interest expense on the various PIK debentures which were
issued in May and August 2000. We had no similar PIK interest expense for the
1999 period.
Equity in Losses of Unconsolidated Affiliates. Equity in losses of
unconsolidated affiliates for the twelve months ended December 31, 2000, was
$14.8 million, representing an increase of $13.4 million from $1.4 million of
losses for the comparable 1999 period. In the fourth quarter of 1999, we began
reducing our reliance on joint venture arrangements. As such, our joint venture
partners have not made substantial capital contributions to a number of joint
ventures for several
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23
quarters. Therefore, we have absorbed the losses of those unconsolidated joint
ventures in excess of capital contributed by the joint venture partner. The
increase in equity in losses of unconsolidated affiliates was also impacted by a
slower lease-up of residences which are held in unconsolidated joint ventures..
Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in
losses of consolidated subsidiaries for the year ended December 31, 2000 was
$1.3 million, representing a decrease of $2.7 million from $4.0 million for the
comparable period in 1999. The decrease was primarily attributable to the
maturity in the residences that were owned by us in consolidated joint venture
arrangements during the 2000 period. Throughout 2000, we had an average of 23
residences held in consolidated joint venture relationships compared to an
average of 19 residences in consolidated joint venture relationships during the
year ended December 31, 1999.
Extraordinary Item. During the year ended December 31, 2000, we recorded a gain
on the early extinguishment of debt of $8.5 million (net of tax) relating to our
retirement of $41.4 million of convertible debt related to the Equity
Transaction. EITF 96-19, "Debtor's Accounting for a Modification or Exchange of
Debt Instruments," requires recognition of a gain or loss by the debtor for
early extinguishment of debt.
Cumulative Effect of Change in Accounting Principle. During the first quarter of
1999 we incurred a cumulative effect of a change in accounting principle of $3.8
million relating to the adoption of Statement of Position 98-5, which requires
that costs of start-up activities and organization costs be expensed as
incurred.
Income Taxes. For the period ended December 31, 2000, we recorded a current
state income tax provision of $573,000 and a deferred tax provision of $14.1
million resulting in a total income tax provision of $14.7 million before the
effect of the extraordinary item. The income tax expense for the period ended
December 31, 2000 reflects the treatment of PIK interest as non-deductible
interest. We do not currently anticipate that the interest expense which we will
incur in the future related to the PIK debentures will be deductible for income
tax purposes. During the period ended December 31, 1999, we recorded a current
income tax benefit of $345,000 and recognized a $14.4 million deferred asset
resulting in a current income tax benefit of $14.7 million before the cumulative
effect of the change in accounting principle of $3.8 million.
As of December 31, 2000, our deferred tax asset was reduced to zero. In
accordance with Statement of Financial Accounting Standards No. 109, we are
required to continuously evaluate the recoverability of deferred tax assets
based on the criteria that it is "more likely than not" that the deferred taxes
will be recoverable through future taxable income. This evaluation is made based
on our internal projections which are routinely updated to reflect more recent
operating trends. Based on our current financial projections, we are uncertain
that we will recove