UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
___________________

Form 10-Q

|[ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|----- | ----------------------------------------------------------------------------------------
|      |                                                                                         
|      | For the quarterly period ended March 31, 2002                                           
|      |                                                                                         
|[   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|      |                                                                                         

Commission File Number: 1-12000

ALTERRA HEALTHCARE CORPORATION

|Delaware
(State or other jurisdiction of incorporation or organization)        |  | 39-1771281
(IRS employer identification no.)
|------------------------------------------------------------------------------ |  | --------------------------------------------
|                                                                               |  |                                             
|10000 Innovation Drive, Milwaukee, WI
(Address of principal executive offices) |  | 53226
(Zip code)                            
|                                                                               |  |                                             
|(414) 918-5000
(Registrant's telephone number, including area code)           



Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

|Yes X |  | No
|----- |  | --

Number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of March 31, 2002: 22,219,168.

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ALTERRA HEALTHCARE CORPORATION
INDEX





|        | Part I.   Financial Information                                                                              |         
|------- | ------------------------------------------------------------------------------------------------------------ | --------
|        |                                                                                                              | Page No.
|Item 1. | Financial Statements:                                                                                        |         
|        |                                                                                                              |         
|        | Unaudited Condensed Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001                   | 1       
|        |                                                                                                              |         
|        | Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001 | 2       
|        |                                                                                                              |         
|        | Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2001 | 3       
|        |                                                                                                              |         
|        | Notes to Condensed Consolidated Financial Statements                                                         | 4-12    
|        |                                                                                                              |         
|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations                        | 12-21   
|        |                                                                                                              |         
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                                   | 21      
|        |                                                                                                              |         
|        | Part II.   Other Information                                                                                 |         
|        |                                                                                                              |         
|Item 1. | Legal Proceedings                                                                                            | 22      
|        |                                                                                                              |         
|Item 3. | Defaults Upon Senior Securities                                                                              | 23      
|        |                                                                                                              |         
|Item 6. | Exhibits and Reports on Form 8-K                                                                             | 24-25   

---





PART 1.    FINANCIAL INFORMATION

ITEM 1.     
FINANCIAL STATEMENTS

ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)



|                                                                                                                                                                |   | March 31,2002 |   |   | December 31,2001 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- | - | - | ---------------- | -
|                                                                                                                                                                |   | (unaudited)   |   |   |                  |  
|ASSETS                                                                                                                                                          |   |               |   |   |                  |  
|Current assets:                                                                                                                                                 |   |               |   |   |                  |  
|Cash and cash equivalents                                                                                                                                       | $ | 20,759        |   | $ | 19,996           |  
|Accounts receivable, net                                                                                                                                        |   | 11,806        |   |   | 10,539           |  
|Notes receivable, net                                                                                                                                           |   | 490           |   |   | 500              |  
|Assets held for sale                                                                                                                                            |   | 98,103        |   |   | 88,166           |  
|Other current assets                                                                                                                                            |   | 31,472        |   |   | 31,346           |  
|Total current assets                                                                                                                                            |   | 162,630       |   |   | 150,547          |  
|Property and equipment, net                                                                                                                                     |   | 691,442       |   |   | 727,416          |  
|Restricted cash and investments                                                                                                                                 |   | 2,954         |   |   | 3,312            |  
|Goodwill, net                                                                                                                                                   |   | 49,050        |   |   | 104,915          |  
|Other assets                                                                                                                                                    |   | 49,825        |   |   | 52,010           |  
|Total assets                                                                                                                                                    | $ | 955,901       |   | $ | 1,038,200        |  
|                                                                                                                                                                |   |               |   |   |                  |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                            |   |               |   |   |                  |  
|Current liabilities:                                                                                                                                            |   |               |   |   |                  |  
|Current installments of long-term obligations, including
convertible debt                                                                                       | $ | 952,676       |   | $ | 977,651          |  
|Current debt maturities on assets held for sale                                                                                                                 |   | 144,036       |   |   | 140,054          |  
|Short-term notes payable                                                                                                                                        |   | 10,753        |   |   | 10,753           |  
|Accounts payable                                                                                                                                                |   | 3,616         |   |   | 4,450            |  
|Accrued expenses                                                                                                                                                |   | 67,497        |   |   | 62,336           |  
|Deferred rent and refundable deposits                                                                                                                           |   | 14,281        |   |   | 16,048           |  
|Total current liabilities                                                                                                                                       |   | 1,192,859     |   |   | 1,211,292        |  
|Long-term obligations, less current installments                                                                                                                |   | 93,888        |   |   | 82,752           |  
|Deferred gain on sale and other                                                                                                                                 |   | 4,933         |   |   | 5,593            |  
|Redeemable preferred stock                                                                                                                                      |   | 5,645         |   |   | 5,489            |  
|Stockholders' equity:                                                                                                                                           |   |               |   |   |                  |  
|Preferred stock, 2,500,000 shares authorized and 1,550,000 of which have been designated at March 31, 2002 and December 31, 2001, none of which are outstanding |   | --            |   |   | --               |  
|Common stock, $.01 par value; 100,000,000 shares authorized; of which 22,219,168 were issued and outstanding, on March 31, 2002 and December 31, 2001           |   | 221           |   |   | 221              |  
|Treasury stock, $.01 par value; 11,639 shares in 2002 and 2001                                                                                                  |   | (163          | ) |   | (163             | )
|Additional paid-in capital                                                                                                                                      |   | 179,526       |   |   | 179,526          |  
|Accumulated deficit                                                                                                                                             |   | (521,008      | ) |   | (446,510         | )
|Total stockholders' (deficit)                                                                                                                                   |   | (341,424      | ) |   | (266,926         | )
|Total liabilities and stockholders' (deficit)                                                                                                                   | $ | 955,901       |   | $ | 1,038,200        |  
|                                                                                                                                                                |   |               |   |   |                  |  





See accompanying notes to condensed consolidated financial statements.

---

ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In Thousands)



|                                                                                                               |   | Three Months EndedMarch 31 |  
|-------------------------------------------------------------------------------------------------------------- | - | -------------------------- | -
|                                                                                                               |   | 2002                       |  
|Revenue:                                                                                                       |   |                            |  
|Resident service fees                                                                                          | $ | 124,432                    |  
|Other                                                                                                          |   | 1,116                      |  
|Operating revenue                                                                                              |   | 125,548                    |  
|                                                                                                               |   |                            |  
|Operating expenses (income):                                                                                   |   |                            |  
|Residence operations                                                                                           |   | 83,478                     |  
|Lease expense                                                                                                  |   | 15,062                     |  
|Lease income                                                                                                   |   | (4,024                     | )
|General and administrative                                                                                     |   | 10,540                     |  
|(Gain) loss on disposal                                                                                        |   | (2,011                     | )
|Depreciation and amortization                                                                                  |   | 7,939                      |  
|Total operating expenses                                                                                       |   | 110,984                    |  
|Operating income (loss)                                                                                        |   | 14,564                     |  
|                                                                                                               |   |                            |  
|Other expense:                                                                                                 |   |                            |  
|Interest expense, net                                                                                          |   | 17,529                     |  
|Amortization of financing costs                                                                                |   | 2,054                      |  
|Convertible debt paid in kind ("PIK") interest                                                                 |   | 6,136                      |  
|Equity in losses of unconsolidated affiliates                                                                  |   | 2,274                      |  
|Minority interest in losses of consolidated subsidiaries                                                       |   | --                         |  
|Total other expense                                                                                            |   | 27,993                     |  
|                                                                                                               |   |                            |  
|Loss from continuing operations before income taxes and cumulative effect of change in accounting principle    |   | (13,429                    | )
|                                                                                                               |   |                            |  
|Income tax expense                                                                                             |   | (30                        | )
|                                                                                                               |   |                            |  
|Loss from continuing operations before cumulative effect of change in accounting principle                     | $ | (13,459                    | )
|                                                                                                               |   |                            |  
|Loss on discontinued operations                                                                                |   | (6,344                     | )
|                                                                                                               |   |                            |  
|Cumulative effect of change in accounting principle                                                            |   | (54,695                    | )
|                                                                                                               |   |                            |  
|Net loss                                                                                                       | $ | (74,498                    | )
|                                                                                                               |   |                            |  
|Earnings per common share - basic and diluted:                                                                 |   |                            |  
|Loss from continuing operations before cumulative effect of change in accounting principle - basic and diluted |   | (.61                       | )
|Loss on discontinued operations - basic and diluted                                                            |   | (.28                       | )
|Cumulative effect of change in accounting principles - basic and diluted                                       |   | (2.46                      | )
|Net loss per common share - basic and diluted                                                                  | $ | (3.35                      | )
|Weighted average common shares outstanding:                                                                    |   |                            |  
|Basic                                                                                                          |   | 22,219                     |  
|Diluted                                                                                                        |   | 22,219                     |  





See accompanying notes to condensed consolidated financial statements.

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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)

|                                                                                |   | Three Months EndedMarch 31, |  
|------------------------------------------------------------------------------- | - | --------------------------- | -
|                                                                                |   | 2002                        |  
|Cash flows from operating activities:                                           |   |                             |  
|Net loss                                                                        | $ | (74,498                     | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |   |                             |  
|Depreciation and amortization                                                   |   | 7,939                       |  
|PIK Interest                                                                    |   | 6,136                       |  
|Amortization of deferred financing costs                                        |   | 2,054                       |  
|Cumulative effect of change in accounting principle                             |   | 54,695                      |  
|(Gain) loss on disposal                                                         |   | (2,011                      | )
|Loss on discontinued operations                                                 |   | 6,344                       |  
|Equity in net loss from investments in unconsolidated affiliates                |   | 2,274                       |  
|(Decrease) increase in net resident receivable                                  |   | (1,267                      | )
|Decrease in other current assets                                                |   | 24                          |  
|Decrease in accounts payable trade                                              |   | (834                        | )
|(Decrease) increase in accrued expenses and deferred rent                       |   | (302                        | )
|Increase in past due interest and late fees                                     |   | 2,481                       |  
|Increase (decrease) in accrued reserve costs and merger charges                 |   | --                          |  
|Changes in other assets and liabilities, net                                    |   | 5,743                       |  
|Net cash provided by operating activities                                       |   | 8,778                       |  
|                                                                                |   |                             |  
|Cash flows from investing activities:                                           |   |                             |  
|Payments for property, equipment and project development costs                  |   | (1,622                      | )
|Net proceeds from sale of property and equipment                                |   | 8,912                       |  
|Decrease (increase) in notes receivable, net                                    |   | 10                          |  
|Changes in investments in and advances to unconsolidated affiliates             |   | 274                         |  
|Net cash provided (used) in investing activities                                |   | 7,574                       |  
|                                                                                |   |                             |  
|Cash flows from financing activities:                                           |   |                             |  
|Repayments of short-term borrowings                                             |   | --                          |  
|Repayments of long-term obligations                                             |   | (15,360                     | )
|Proceeds from issuance of debt                                                  |   | --                          |  
|Payments for financing costs                                                    |   | (229                        | )
|Net cash (used) provided by financing activities                                |   | (15,589                     | )
|                                                                                |   |                             |  
|Net increase in cash and cash equivalents                                       |   | 763                         |  
|                                                                                |   |                             |  
|Cash and cash equivalents:                                                      |   |                             |  
|Beginning of period                                                             |   | 19,996                      |  
|End of period                                                                   | $ | 20,759                      |  
|                                                                                |   |                             |  
|Supplemental disclosure of cash flow information:                               |   |                             |  
|Cash paid for interest, including amounts capitalized                           | $ | 15,198                      |  
|Cash refunded during period for income taxes                                    | $ | (8                          | )





See accompanying notes to condensed consolidated financial statements.

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ALTERRA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)





(1)     
Basis of Presentation



The condensed consolidated balance sheets as of March 31, 2002 and December 31, 2001, the condensed consolidated statements of operations for the three months ended March 31, 2002 and 2001, and the condensed consolidated statements of cash flows for the three months ended March 31, 2002 and 2001 contained in this Quarterly Report on Form 10-Q include the accounts of Alterra Healthcare Corporation ("Alterra" or the "Company") and our affiliates which are under our common financial control.  All significant intercompany accounts have been eliminated in consolidation.  In our opinion, all adjustments (consisting only of normal recurring items) necessary for a fair presentation of these condensed consolidated financial statements have been included.  The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full fiscal year.



The condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America.  The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K, for the year ended December 31, 2001, as amended.



(2)     Restructuring Activities

In February 2001 our overall cash position had declined to a level which we believed to be insufficient to operate the Company.  Accordingly, in February 2001 we retained financial advisors and special reorganization counsel to assist us in evaluating alternatives to restore financial viability.  To conserve cash and protect the financial integrity of our operations, beginning in March 2001 we have elected not to make selected scheduled debt service and lease payments, of which $6.2 million remains unpaid as of March 31, 2002.  As a result, we are in default under several major loan and lease facilities.  We believe that our operating cash flow has improved and will continue to improve due to overhead reductions that have been implemented and increases in monthly rents that we charge to our residents which were effective in 2001 and that we project will occur in 2002.  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 have commenced.



In March of 2001 we began to implement a restructuring plan ("Restructuring Plan"), the principal objectives of which are:




     
To create a cash flow positive base of operation by (i) disposing of under-performing and non-strategic assets, and (ii) allowing retained residences the opportunity to stabilize (generate sufficient cash flow to fund operations, capital spending and other cash requirements);


     
To eliminate pending defaults and restructure the Company's senior financing instruments (secured debt arrangements and leases);


     
To reduce the leverage on the Company's operating assets;


     
To protect the Company's operations during the pendency of our restructuring by shielding our employees, residents and vendors from any adverse consequences of the restructuring; and


     
To the extent practicable, to seek to restore value to the Company's junior capital constituencies.

The principal components of our Restructuring Plan are the disposition of selected assets and the restructuring of our capital structure, including our "senior capital" constituencies comprised principally by our secured indebtedness and leases (operating and capital), our "junior capital" constituencies comprised principally by our convertible pay-in-kind (PIK) debentures, our other convertible subordinated debentures and our equity capitalization, and our remaining joint venture relationships.  Discussions with various senior capital structure constituencies commenced in the spring of 2001 and are ongoing.  While several binding restructuring arrangements have been executed, negotiations with respect to the majority of our secured debt arrangements have not been concluded.  Negotiations with junior capital structure constituencies have not commenced, as these negotiations are dependent upon the outcome of our negotiations with senior capital structure constituencies and the fact that, pursuant to the subordination provisions governing our convertible subordinated debentures, we are limited in our ability to restructure the convertible subordinated debentures until we have cured pending defaults related to our secured indebtedness.  Given that significant restructuring discussions and negotiations are still to be concluded, we expect that we may be making modifications to the Restructuring Plan to address issues that arise during the course of these negotiations.

---



Portfolio Rationalization.  The 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 are 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.



Beginning in April 2001, we started to market the Disposition Assets.  Potential buyers, brokers and lenders were provided various information related to the Disposition Assets and confidentiality agreements have been executed with a number of interested parties.  We recognized a pre-tax loss from operations of $189.2 million during the year ended December 31, 2001 to reflect the Disposition Assets at the lower of carrying value or estimated fair value less costs to sell and to write off the carrying value of assets associated with 17 terminated residence leases.   During the three months ended March 31, 2002, we recognized a gain on disposal of $2.0 million relating to the sale or lease termination of six residences.  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.  As of March 31, 2002, 66 residences representing 3,052 resident capacity have either been sold or transferred to a new lessee.  In addition, we sold 10 land parcels.  As of March 31, 2002, approximately $148.9 million is reserved for losses relating to future asset sales or lease terminations.



Restructuring of Our Senior Indebtedness and Leases.  In addition to active efforts to effect the sale or other disposition of the Disposition Assets, we have commenced discussions with many of our secured lenders and lessors to restructure certain of our debt and lease obligations.



The Company has a complex senior capital structure, comprised of at least 15 significant multi-residence secured credit facilities and five significant portfolios of operating residences that are leased from real estate investment trusts (REITs).  Many of our secured credit facilities are structured to incorporate various so-called "bankruptcy-remote" features (i.e., structures designed to improve the applicable lender's rights and leverage in the event of a bankruptcy of the parent company, Alterra), including structuring the credit facility such that the fee owner of the mortgaged residences and the borrower under the credit facility is a newly formed subsidiary of Alterra whose sole activity is to own and operate the residences financed under that credit facility.  The structure of certain of these credit facilities serves to limit the Company's ability to restructure these facilities through a bankruptcy, making it generally preferable for the Company to negotiate consensual restructurings with each group of lenders providing secured financing to the Company.

The Company commenced negotiations with its secured lenders and lessors during 2001.  Each separate negotiation is unique and is based on the characteristics of the underlying credit facility, including the credit facility's collateral, terms and structure.  Accordingly, our restructuring needs and objectives vary from one credit facility to the next.  Depending on the particular credit facility, we are attempting to reset maturities, address any deficiencies, reset covenants, obtain waivers of default interest and penalties, and secure consent from the lenders and lessors for sales of residences included in their collateral or lease portfolio.



Secured Lender Negotiations.  Management is actively seeking to restructure secured loan facilities that, in management's view, would generate significant deficiency claims (i.e., claims in excess of the value of the applicable mortgage portfolio) in the event the applicable lenders sought to call the loan and foreclose on their collateral.  Management believes that three credit facilities representing $251.6 million in aggregate financing (secured by mortgages on 54 residences with a capacity of 3,390 beds) appear to represent significant potential deficiency claims in the range of $90 million to $160 million.  In these negotiations, we are seeking to obtain a release of these potential deficiency claims against the Company in exchange for our agreement to cooperate with the applicable lenders to facilitate an orderly transition of ownership (and, in certain cases, management) of the mortgaged residences to the lenders or their designees (through deed-in-lieu of foreclosure transactions or so-called friendly foreclosures).  In transitioning ownership of the mortgaged residences to the lenders, we are offering to provide interim or long-term management services to the lenders with respect to the mortgaged residences.  As of March 31, 2002, we have executed one definitive agreement of this type with one lender group with regard to a credit facility representing $39.0 million of financing secured by 11 residences with an aggregate capacity of 482 beds and are in active negotiations with the lenders of three other "impaired" credit facilities.



---

In addition to these impaired credit facilities, we are also seeking to negotiate amendments and modifications with the applicable lenders with respect to our other principal secured credit facilities in order to, depending on the specific case, reset covenants, obtain consent to sell certain mortgaged residences, secure waivers of prior defaults and, in certain cases, to extend scheduled maturities.  These credit facilities represent $401.9 million of financing secured by an aggregate of 137 residences with a capacity of 6,135 beds.  Discussions with certain (but not all) of these lenders have commenced, but none have yet resulted in definitive binding restructuring agreements.



REIT Lessor Negotiations.  We currently have five multi-residence portfolios leased from various REITs.  These portfolios include an aggregate of 204 residences with a capacity of 8,928 beds.  We have completed the restructuring of four of our leased portfolios (aggregate of 164 residences with 7,240 beds).  These restructurings included the amendment of certain lease covenants and terms and, in three lease facilities, the conversion of individual leases into single master leases.  The cash rent due under one lease facility was modified through the application of various deposits held by the landlord to satisfy a portion of the cash rent obligation in the early years of the restructured master lease.



Restructuring negotiations are currently underway with respect to our one remaining REIT-leased portfolio.  In these restructuring negotiations, we are seeking to extend lease terms, revise covenants as necessary, and obtain additional funding for capital expenditures.  In consideration for these modifications, the applicable REIT lessor is requesting that we convert individual leases into multi-residence master lease.



Restructuring of Junior Capital Structure.  As of March 31, 2002, the Company's junior capital structure is comprised of approximately $422.4 million of unsecured debt and equity capitalization comprised of $5.6 million aggregate principal amount of 9.75% Series A Cumulative Convertible Preferred Stock due May 30, 2007 (the "Series A Stock") and 22.2 million shares of Common Stock.  The principal components of the Company's unsecured indebtedness as of March 31, 2002 (amounts exclude accrued but unpaid interest) include:



i.     
$10.0 million aggregate principal face amount of 9.0% promissory notes due in December 2006, issued in connection with the restructuring of certain joint venture arrangements (the "Unsecured Notes");



ii.     
$235.1 million aggregate principal amount of 9.75% pay-in-kind convertible debentures due May 30, 2007, (the "PIK Debentures") issued in three separate series in the Equity Transaction;



iii.     
$112.0 million aggregate principal amount of 5.25% convertible subordinated debentures due December 15, 2002 (the "5.25% Debentures");

iv.     
$40.4 million aggregate principal amount of 7.00% convertible subordinated debentures due June 1, 2004 (the "7.00% Debentures"); and

v.     
$34.9 million aggregate principal amount of 6.75% convertible subordinated debentures due June 30, 2006 (the "6.75% Debentures").



The outstanding 5.25% Debentures, 7.00% Debentures and 6.75% Debentures (collectively, the "Original Debentures") are subordinated to all other "senior indebtedness" of the Company (as defined in the applicable indenture governing such debentures), and the PIK Debentures are subordinated to all "senior indebtedness" of the Company (as defined in the applicable indentures governing such debentures), other than the Original Debentures.  Although defined somewhat differently in the several indentures governing the Original Debentures and the PIK Debentures (collectively, the "Subordinated Debentures"), "senior indebtedness" is defined to generally include indebtedness for borrowed money and other similar obligations of Alterra (other than the other series of Original Debentures).



All of our Subordinated Debentures are currently in default due to our failure to make coupon payments on the Original Debentures and due to cross default provisions triggered by payment defaults on our secured debt.



---

As a result of several notices of default received by the Company with respect to secured indebtedness that by its terms may be accelerated by the applicable lenders, neither we nor the applicable indenture trustees for the Subordinated Debentures are permitted by the subordination provisions of the indentures governing the respective Subordinated Debentures to make any payment or distribution on account of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures).  As a result, we did not make cash interest payments on the Original Debentures in July 2001 and January 2002 of $5.5 million and $5.8 million, respectively.  In the event that the Company is dissolved, liquidated or reorganized, all amounts due in payment of the Company's "senior indebtedness" must be paid or provided for before any payment may be made on account of the Subordinated Debentures.  Accordingly, unless and until we are able to restructure our "senior indebtedness" obligations (including, without limitation, our several secured credit facilities) and resolve all pending defaults related to this indebtedness, we will not be permitted to make any interest or other payments to the holders of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures) or to restructure the Subordinated Debentures.



To the extent that the Company is not able to restructure its capital structure and is forced to liquidate, applicable principals of corporate law (specifically, the liquidation priority of debt over equity and the priority of preferred stock over common stock) and the subordination provisions governing the Subordinated Debentures would dictate that:



- All of our obligations relating to our secured and unsecured loans, including the Unsecured Notes and any deficiency claims relating to our secured loan facilities, would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Subordinated Debentures;



- All obligations relating to the PIK Debentures would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Original Debentures;



- All obligations relating to the Original Debentures, as well as all other indebtedness of the Company, would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Series A Stock and Common Stock; and



- All liquidation preferences related to our outstanding Series A Stock (approximately $5.6 million as of December 31, 2001) would be required to be paid in full before any liquidation proceeds are distributed to the holders of our Common Stock.



In seeking to restructure our junior capital structure, the relative rights in liquidation of our various junior capital constituencies will be a significant factor in determining the extent to which the claims and interests of these various constituencies will need to be modified or exchanged as the Company is restructured.



In light of the subordination provisions governing the Subordinated Debentures, we are currently prohibited from restructuring the Subordinated Debentures, the largest component of our junior capital structure.  If we are able to successfully complete the restructuring of our secured credit facilities, we anticipate that we will seek to exchange an equity or equity-linked security of the Company for all or a portion of the outstanding Subordinated Debentures.  The extent to which all of the Subordinated Debentures will be permitted to participate in this exchange offer, and the value and rights associated with this new equity or equity-linked security to be offered to the holders of the PIK Debentures and Original Debentures, respectively, will be contingent upon the value of the restructured Alterra and will be impacted by the subordination provision operative with respect to the various series of Subordinated Debentures.



We may seek to effect a restructuring of certain of the Subordinated Debentures by an exchange offer to the holders of such debentures.  However, to successfully restructure the Subordinated Debentures we will need the consent of substantially all of the holders of these debentures to the terms of our exchange offer.  In the alternative, the Company may seek to restructure certain components of its junior capital structure (most likely the Subordinated Debentures and the Company's equity capitalization) by reorganizing the Company pursuant to a filing of a largely pre-arranged restructuring plan under Chapter 11 of the United States Bankruptcy Code ("Chapter 11").  In a case commenced under Chapter 11, the Company can successfully restructure without the need of obtaining the active consent of substantially all of the holders of the Subordinated Debentures because Chapter 11 provides specific voting requirements and other mechanisms for completing a restructuring under court supervision.



Given the uncertainty as to the outcome of our many ongoing restructuring negotiations with senior capital structure constituencies, and given the impact of operative subordination provisions and corporate law doctrines governing the relative rights of holders of debt and equity interests in the Company, it is very difficult for us to predict what value, if any, various junior capital structure constituencies will receive in the restructured Alterra.  While it is management's intention, to the extent practicable, to seek to restore value to our junior capital structure, no assurances may be given as to what value, if any, various junior capital structure constituencies will have in the restructured Company.



---

Joint Venture Arrangements.  The Restructuring Plan calls for us to seek to acquire joint venture interests in certain of our residences in order to simplify our capital structure.  In many cases, our acquisition of these joint venture interests (or termination of the applicable joint venture's interest in our residences) is necessary for us to satisfy restructuring requirements established by our senior lenders and lessors.



During 2001 we negotiated a series of agreements that resulted in the discontinuation of joint venture arrangements with respect to 42 residences.  Also in December 2001, we terminated our joint venture with Manor Care, Inc. relating to 13 residences in connection with consummating a global settlement of various pending litigations and arbitration proceedings between the Company and Manor Care and its affiliates.



We are engaged in buy-out negotiations with investor groups who currently have joint venture interests in 45 residences in the aggregate.  No assurance may be given as to whether these negotiations will result in an agreement as to the Company acquiring 100% of these joint venture entities.  If these negotiations fail, the Company's ability to restructure certain of its senior capital financing facilities may be adversely affected.  If lenders or lessors providing financing to the Company with respect to residences operated by joint ventures seek to foreclose on their mortgages or to terminate their leases, and as a result joint venture entities have their right to operate such residences impaired, Alterra may be forced to defend damage claims asserted by certain of its joint venture partners.



Efforts to Secure New Equity.  As we continue to restructure the Company, we may find it necessary to seek new equity investment in the Company to be funded upon completion of the restructuring in order to achieve financial stability, fund certain deferred expenditures and fund certain non-recurring costs of the restructuring.  This investment would likely be contingent on a successful restructuring of the Company and, accordingly, would not be funded until negotiations, settlements and restructurings with our lenders, lessors, Subordinated Debenture and equity holders and joint venture partners have concluded.  Any additional equity investment in the Company, if it can be arranged, may significantly dilute the equity interests of all parties holding (or receiving in the restructuring) equity or equity-linked securities in the restructured Alterra.





(3)     
New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," having a required effective date for fiscal years beginning after December 15, 2001.  Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statement.  Other intangible assets will continue to be amortized over their useful lives.  The Company adopted SFAS No. 142 effective January 1, 2002 and as a result, is no longer amortizing $104.9 million of goodwill as of that date.



Under the transitional provisions of SFAS No. 142, the Company identified its reporting units and performed impairment tests on the net goodwill associated with each of these reporting units.  The fair value of the owned reporting units was determined by estimating the terminal value of the future cash flows.  The fair value of the leased reporting units was determined by estimating the present value of the cash flows for the life of the lease.  Based on this impairment testing, the Company recorded an impairment loss of $54.7 million in the first quarter.  The impairment loss has been recorded as a cumulative effect of change in accounting principle in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2002.



---



In accordance with SFAS No. 142, the effect of this accounting change is applied prospectively.  Supplemental comparative disclosure as if the change had been retroactively applied to the prior period is as follows (in thousands, except per share amounts):







|                                                                                                                                    |  | For the Three Months |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | -
|                                                                                                                                    |  | Ended March 31,      |  
|                                                                                                                                    |  | 2002                 |  
|                                                                                                                                    |  |                      |  
|Reported net loss from continuing operations before cumulative effect of change in accounting principle                             |  | $(13,459             | )
|Add:  Goodwill amortization                                                                                                         |  | --                   |  
|                                                                                                                                    |  |                      |  
|Adjusted net loss from continuing operations before cumulative effect of change in accounting principle                             |  | $(13,459             | )
|                                                                                                                                    |  |                      |  
|Basic and diluted earnings per share:                                                                                               |  |                      |  
|                                                                                                                                    |  |                      |  
|Reported net loss per share from continuing operations before cumulative effect of change in accounting principle                   |  | (.61                 | )
|Goodwill amortization, per share                                                                                                    |  | --                   |  
|                                                                                                                                    |  |                      |  
|Adjusted basic and diluted net loss per share from continuing operations before cumulative effect of change in accounting principle |  | $(.61                | )







In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations (SFAS No. 143)."  SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets.  The Company also records a corresponding asset which is depreciated over the life of the asset.  Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.  The Company is required to adopt SFAS No. 143 on January 1, 2003.



In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."  The Company adopted SFAS No. 144 beginning on January 1, 2002.  As a result of the adoption of SFAS No. 144, the Company has reclassified to discontinued operations the revenues and expenses of 5 residences with a capacity of 216 beds that were part of an executed deed in lieu restructuring agreement.  For comparative purposes and in accordance with SFAS No. 144, the March 31, 2001 financial statements have been restated for comparative purposes to reflect this classification.  Those assets classified as held for sale at December 31, 2001 continue to be accounted for in accordance with SFAS No. 121.





(4)     
Assets Held for Sale



As part of our Restructuring Plan, our Board of Directors has adopted an asset disposition plan to dispose or terminate leases on 107 residences with an aggregate capacity of 4,660 residents and 33 parcels of land.  Residences included in the disposition plan were identified based on an assessment of a variety of factors including geographic location, residence size, operating performance, and lender negotiations.  As of March 31, 2002, 66 residences representing 3,052 resident capacity, including 13 residences sold as part of a joint venture termination with Manor Care, Inc. in December 2001, have either been sold or transferred to a new lessee.  In addition, the Company sold ten land parcels.



---

In accordance with SFAS No. 121 and SFAS No. 144, we have recorded an impairment loss on our properties to be held for sale whenever their carrying value cannot be fully recovered through the estimated cashflows including net sale proceeds.  The amount of the impairment loss to be recognized is the difference between the residence's carrying value and the residence's estimated fair value less costs to sell.   Our policy is to consider a residence to be held for sale or disposition when we have committed to a plan to sell such residence and active marketing activity has commenced or it is expected to commence in the near term.  In accordance with SFAS No. 144, we have recognized a loss on disposal of $6.3 million and classified 5 residences included as part of an executed deed in lieu restructuring agreement as held for sale.  Assets held for sale is principally comprised of net property and equipment, goodwill and the corresponding mortgage liability.  We expect to sell these residences and land parcels in the next six to twelve months.  As of March 31, 2002, approximately $148.9 million is reserved for losses relating to future asset sales or lease terminations.



There are a number of factors that may affect the timing of a sale and the sale price that will ultimately be achieved for these residences, including, among other things, the following: potential increased competition from any other assisted living residences in the area, the relative attractiveness of assisted living residences for investment purposes, interest rates, the actual operations of the residence, the ability to retain existing residents and attract new residents at the residence and a buyout of joint venture interests.  As a result, there is no assurance as to what price will ultimately be obtained upon a sale of these residences or the timing of such a sale.  The value of the assets held for sale, net of reserves, is reflected in current assets and the outstanding debt related to the assets held for sale is reflected in current liabilities on our balance sheet.



During the three months ended March 31, 2002, we sold or terminated leases on six residences (258 resident capacity).  The sale or lease termination of these assets resulted in the retirement of approximately $16.6 million of debt and lease obligations and a gain on disposal of $2.0 million.



The following table represents condensed operating information for the three months ended March 31, 2002 and 2001, respectively, as related to the 120 operating residences which have been sold, are held for sale, or had leases terminated as of March 31, 2002, as reported in the Consolidated Statements of Operations of the Company.  In some cases, based on the timing of the asset disposal or lease termination, results may not be comparable (in thousands).





|                             |   | 2002   |   |   | 2001    |  
|---------------------------- | - | ------ | - | - | ------- | -
|                             |   |        |   |   |         |  
|Revenue                      | $ | 25,339 |   | $ | 34,082  |  
|Residence operations expense |   | 21,521 |   |   | 31,727  |  
|Lease expense                |   | 241    |   |   | 2,902   |  
|Interest expense             |   | 5,538  |   |   | 8,178   |  
|Depreciation expense         |   | 320    |   |   | 3,782   |  
|Loss before taxes            | $ | (2,281 | ) | $ | (12,507 | )





(5)     
Bridge Loan



In an effort to retain sufficient cash to fund operations of all our residences and address our short-term liquidity needs, in March 2001 we obtained a $7.5 million bridge loan provided by certain of our principal stock and convertible debenture holders (the "Bridge Loan") and elected not to fund certain of our debt service and lease payments obligations.



The $7.5 million Bridge Loan had an initial six-month term, is secured by first mortgages on several residences and bears interest at an escalating interest rate, commencing at 10% per annum. At our election, the Bridge Loan was extended by an additional six months whereupon the Bridge Loan became convertible into convertible subordinated debentures of the Company having rights and terms substantially similar to our Series B 9.75% pay-in-kind convertible debentures, but having a conversion price equal to $75 per share of Series B preferred stock (a Common Stock equivalent price of $0.75 per share).  The bridge lenders also are entitled to participate in any transaction involving the issuance by the Company of equity or equity-linked securities during the term of the Bridge Loan.



---





As an inducement to make the Bridge Loan, the Company issued the bridge lenders warrants to purchase an aggregate of 6,000 shares of a newly designated class of the Company's preferred stock, the Series B-1 Non-Voting Participating Preferred Stock (the "Series B-1 Preferred Stock"), having rights and terms substantially similar to ten shares of the Company's Series B preferred stock.  Each share of the Series B-1 Preferred Stock underlying the warrants has rights, other than voting rights, substantially similar to 1,000 shares of Common Stock of the Company.  The five-year warrants are exercisable at a price of $750 per share for 2,000 shares of the Series B-1 Preferred Stock, $1,000 per share for 2,000 shares of the Series B-1 Preferred Stock and $1,250 per share for 2,000 shares of the Series B-1 Preferred Stock.  Pursuant to the anti-dilution provisions operative in the outstanding PIK Debentures and Series A Stock originally issued in the Equity Transaction, as a result of the issuance of these warrants and the Bridge Loan becoming convertible into convertible subordinated debentures due to the extension of the term of this Bridge Loan, effective as of December 31, 2001, the effective conversion price for these debentures and the Series A Stock decreased from $4.00 to $2.68 per share of Common Stock for the Series A and Series C Debentures and the Series A Stock and from $400 to $268 per share of Series B preferred stock for the Series B Debentures.  The actual conversion price for the Series A and C Debentures and the Series A stock remains at $4.00 per share and for the Series B Debentures remains at $400 per share; however, upon conversion of these convertible securities the holder thereof will now also receive shares of Series B-1 Preferred Stock, in addition to Common Stock, in such amounts as to provide such holder an equity interest in the Company as though the conversion price for the Series A and C Debentures and Series A Stock on the one hand, and the Series B Debentures on the other hand, were decreased to $2.68 and $268 per share, respectively.



Effective as of March 1, 2002, we entered into an amendment with the bridge lenders that fixed the interest rate on the Bridge Loan at 9.0% per annum and extended the maturity date for the Bridge Loan to January 5, 2003.





(6)     
Net Loss Per Common Share



The following table summarizes the computation of basic and diluted net loss per share amounts presented in the accompanying consolidated statements of operations (in thousands, except per share data):







|                                                                                                                                                |  | Three Months EndedMarch 31, |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | -
|                                                                                                                                                |  | 2002                        |  
|Numerator:                                                                                                                                      |  |                             |  
|Numerator for basic and diluted earnings per share - loss from continuing operations before cumulative effect of change in accounting principle |  | $(13,459                    | )
|Loss on discontinued operations                                                                                                                 |  | (6,344                      | )
|Cumulative effect of change in accounting principle                                                                                             |  | (54,695                     | )
|Numerator for basic and diluted earnings per share - net loss                                                                                   |  | (74,498                     | )
|                                                                                                                                                |  |                             |  
|Denominator:                                                                                                                                    |  |                             |  
|Denominator for basic and diluted net loss per common share-weighted average shares plus assumed conversions                                    |  | 22,219                      |  
|                                                                                                                                                |  |                             |  
|Basic and diluted earnings per share - loss from continuing operations before cumulative effect of change in accounting principle               |  | $ (.61                      | )
|Loss on discontinued operations                                                                                                                 |  | (.28                        | )
|Cumulative effect of change in accounting principle                                                                                             |  | (2.46                       | )
|Basic and diluted net loss per common share                                                                                                     |  | $(3.35                      | )
|                                                                                                                                                |  |                             |  

Shares issuable upon the conversion of convertible subordinated debentures and employee stock options have been excluded from the computation because the effect of their inclusion would be anti-dilutive.

---



(7)      
Subsequent Events

Effective April 9, 2002, we completed the restructuring of two of our principal lease portfolios.  The two separate portfolios total 107 residences with a total capacity to serve approximately 5,000 residents.  As part of the restructuring of the lease portfolios, lease terms were extended, corporate and property level covenants were reset and individual residence leases were converted into new master leases.   In addition, we were given the ability to draw down up to approximately $6.0 million for capital expenditures related to the two portfolios and were granted purchase options on certain residences that we intend to dispose of pursuant to our portfolio rationalization activities.

(8)     
Reclassifications

Reclassifications have been made in the 2001 financial statements to conform with the 2002 financial statement presentation.



ITEM 2.     
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 25 states.  Our growth in recent years and recent restructuring activities has had a significant impact on our results of operations and are important factors in explaining the changes in our results between 2002 and 2001.  As of March 31, 2002 and 2001, we operated or managed 424 and 481 residences with aggregate capacity of 19,882 and 22,409 residents, respectively.  As of March 31, 2002, 45 of our residences were operated in joint venture arrangements with third parties.

In light of pending payment and covenant defaults under many of our senior credit facilities and all of our outstanding series of convertible debentures, we are seeking to implement a Restructuring Plan that contemplates the disposition of a significant portion of our residences and the restructuring of our secured indebtedness, leases (operating and capital), convertible debentures, joint venture arrangements and equity capitalization.  The pending Restructuring Plan, and recent developments impacting our liquidity and operating results, are summarized in Footnote 2 to the financial statements and are incorporated in this Item 2 by reference.



Critical Accounting Policies



In response to the Securities and Exchange Commission's Release Numbers 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies,and 33-8056, Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations,we have identified the following critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.



On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and the allowance for doubtful accounts receivable and asset impairment. We state these accounting policies in the notes to our consolidated financial statements and in relevant sections in this discussion and analysis. Our estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from those estimates and those estimates could be different under different assumptions or conditions.



Principles of Consolidation



The consolidated financial statements include the accounts of the Alterra Healthcare Corporation and its majority-owned subsidiaries.  Results of operations of the majority-owned subsidiaries are included from the date of acquisition.  All significant inter-company balances and transactions with such subsidiaries have been eliminated in the consolidation.  Investments in other affiliated companies in which we have a minority ownership position are accounted for on the equity method.



---

Included in the consolidated financial statements are the accounts of certain wholly owned subsidiaries that have been formed as "special purpose entities" (SPEs) in accordance with the requirements of certain of our lenders.  Mortgage lenders imposing SPE requirements typically require that, in connection with providing mortgage financing with respect to a pool of residences, the residences actually be owned by one or more SPEs, which become the borrower or borrowers under the mortgage financing arrangement.  Although lender requirements with respect to such SPEs vary, a SPE may be required to maintain separate corporation records and books of account, not commingle its assets with those of the parent company, have a separate board of directors from the parent company (including at least one individual board member who is independent of the parent company), maintain arm's length relationships with the parent company, not guarantee or become obligated for the debts of any other entity, including the parent company, or hold its credit as being available to satisfy the obligations of others and not pledge its assets for the benefit of any other entity, including the parent company.  Given the separate corporate existence of certain of these SPEs and the fact that the assets of each SPE are subject to the prior claims of the individual creditors of the SPE, neither the creditors nor stockholders of the Company (or of any other of its subsidiaries) have any right to the assets of these SPEs except indirectly by virtue of its (or the subsidiary's) equity interest in such SPEs.



Revenue Recognition



Resident service fee revenue, which is recorded when services are rendered, consists primarily of resident service fees that are reported at net realizable amounts.



We must make estimates of the uncollectibility of our accounts receivable related deferred rent and other revenue or income. We specifically analyze accounts receivable and historical bad debts when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on our net income, because a higher bad debt allowance would result in lower net income.  The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.



Long-Lived Assets



Property and equipment are stated at cost, net of accumulated depreciation.  Property and equipment under capital leases are stated at the present value of minimum lease payments.  Depreciation is computed over the estimated lives of the assets using the straight-line method. Buildings and improvements are depreciated over 20 to 40 years, and furniture, fixtures, and equipment are depreciated over three to seven years.  Maintenance and repairs are expensed as incurred.



Goodwill represents the costs of acquired net assets in excess of their fair market values.  We periodically evaluate goodwill for impairment based upon expectations of undiscounted cash flows in relation to the net capital investment in the entity.



We apply Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to recognize and measure impairment of long-lived assets. We review each long-lived asset for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the real estate investment's use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair market value.



Assets held for sale are carried at the lower of carrying amount or fair value, less costs to sell. Depreciation and amortization are suspended during the period held for sale. We are required to make subjective assessments as to whether there are impairments in the value of our real estate properties. These assessments have a direct impact on our net income, because taking an impairment loss results in an immediate negative adjustment to net income.



We are seeking to negotiate restructurings of several of our principal secured debt and lease obligations and, upon completing these negotiations, will seek to restructure our principal unsecured debt obligations, comprised primarily of the outstanding convertible debentures.  Furthermore, at March 31, 2002, we were in violation of certain debt covenants. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability, classification or amounts of assets and liabilities that may result from the outcome of lenders or lessors taking action to foreclose on their collateral under their secured credit agreements as a result of these defaults.



---

Income Taxes



Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.



Three Months Ended March 31, 2002 Compared to the Three Months Ended March 31, 2001



Residence Service Fees.  Residence service fees for the three months ended March 31, 2002 were $124.4 million, representing a decrease of $1.1 million from the $125.5 million for the comparable 2001 period. This decrease resulted primarily from a decline in occupancy rates offset by rate increases instituted during the past 12 months.  Average rates were $2,808 and $2,587 as of March 31, 2002 and 2001, respectively.  Company-wide occupancy was 81.1% and 86.3% as of March 31, 2002 and 2001, respectively.  In addition, the Company operated 57 fewer residences (aggregate resident capacity of 2,527 beds) in the 2002 period than the 2001 period as a result of asset sales.



Other Revenues.  Other revenues for the three months ended March 31, 2002 were $1.1 million, a decrease of $700,000 from the $1.8 million of other revenue for the three months ended March 31, 2001. The decrease is attributable to reduced development and franchise activity and a reduction in management fees on residences which were either managed for third parties or for entities in which we held a minority ownership position.  Management fees include charges for transitional services to recruit and train staff, initial and recurring fees for use of our name and branding, initial and recurring fees for use of our methodologies, services for assisting with finance processing, and ongoing management services provided to operate the residence.



Residence Operating Expenses.  Residence operating expenses for the three months ended March 31, 2002 decreased to $83.5 million from $86.1 million in the three-month period ended March 31, 2001.  Operating expenses as a percentage of resident service fees for the three months ended March 31, 2002 and 2001 were 67.1% and 68.6%, respectively.  This percentage decrease resulted primarily from ongoing cost reduction strategies instituted during the past 12 months.  In addition, the Company operated 57 fewer residences (aggregate resident capacity of 2,527 beds) in the 2002 period than the 2001 period as a result of asset sales.



Lease Expense.  Lease expense for the three months ended March 31, 2002 was $15.1 million, compared to $21.0 million in the comparable period in 2001.  This decrease is the result of the termination of 21 residence leases and a change during the second quarter of 2001 in the accounting for two synthetic leases (includes the financing of $174.4 million on 26 residences representing 2,159 beds and the corporate office building) where the synthetic lessor no longer bears economic risk and, as a result, these previously unconsolidated synthetic lease SPEs are now consolidated.



Lease Income.  We earned $4.0 million of lease income for the three months ended March 31, 2002, compared to $5.5 million for the comparable period in 2001, on residences owned or leased by us and leased or subleased to unconsolidated joint ventures.  This decrease in lease income occurred due to a reduction in the number of unconsolidated joint ventures from 89 to 45 as of December 31, 2001 and 2002, respectively.  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 three months ended March 31, 2002, general and administrative expenses were $9.1 million, before $1.4 million in restructuring costs, compared to $10.2 million before $1.2 million in restructuring costs for the comparable period in 2001, representing a decrease as a percentage of operating revenue from 7.3% in the 2002 period compared to 8.0% in the 2001 period.  The $1.1 million decrease in on-going expenses in the 2002 period was primarily attributable to cost reductions which we have implemented to improve corporate efficiencies.



---

Loss on Disposal.  The Company's Board of Directors adopted a plan to dispose of 107 residences with aggregate capacity of 4,660 residents and 33 parcels of land.  During the three months ended March 31, 2001, 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 of $12.0 million, which includes losses to reflect the Disposition Assets at their lower of carrying value or estimated fair value less costs to sell and to write off the carrying value of assets associated with terminated residence leases.



During the three months ended March 31, 2002, we sold or terminated leases on six residences (258 resident capacity) resulting in a gain on disposal of  $2.0 million.



Depreciation and Amortization.  Depreciation and amortization for the three months ended March 31, 2002, was $7.9 million representing a decrease of $1.3 million, or 14.1%, from the $9.2 million of depreciation and amortization for 2001.  This decrease resulted primarily from the adoption of FASB Statement 142 which eliminates ongoing depreciation of goodwill and other intangible assets and the sale of 45 assets during the past 12 months.



Interest Expense, Net.  Interest expense, net of interest income, was $17.1 million for the three months ended March 31, 2002, prior to $410,000 of bank penalties paid in the quarter compared to $16.7 million of net interest expense for the comparable 2001 period, prior to $511,000 of bank amendment fees paid in the quarter.  Gross interest expense (before interest capitalization and income) for the 2002 period was $17.3 million prior to the bank penalties paid compared to $17.8 million prior to bank penalties paid for the 2001 period.  As a result of our decision to reduce development and construction activity beginning in 2001, as of March 31, 2002, all construction activity has stopped and no capitalized interest was recorded for the quarter.  For the three months ended March 31, 2001, we capitalized $327,000 of interest expense relating to an average construction in progress balance of $31.6 million.  Interest income for the 2002 period was $196,000 as compared to $761,000 million for the 2001 period.  This decrease was due primarily to lower restricted cash balances in place in the 2002 period related primarily to lease financing transactions.



Amortization of Financing Costs.  Amortization of financing costs for the three months ended March 31, 2002 was $2.1 million compared to $2.4 million of amortized financing costs for the comparable 2001 period.



PIK Interest, Net.  "Pay-In-Kind" (PIK) interest for the three months ended March 31, 2002 and 2001 was $6.1 million and $6.4 million, respectively, and includes interest expense on the PIK Debentures which were issued in May and August 2000.



Equity in Losses of Unconsolidated Affiliates.  Equity in losses of unconsolidated affiliates for the three months ended March 31, 2002, was $2.3 million, representing a decrease of $2.2 million from $4.5 million of losses for the comparable 2001 period.  During the first quarter of 2002 we had an average of 42 residences held in unconsolidated joint venture arrangements compared to an average of 56 residences held in similar joint venture arrangements during the comparable 2001 period.  Our joint venture partners have not made substantial capital contributions to a number of joint ventures for several quarters.  Therefore, we have absorbed the losses of those unconsolidated joint ventures in excess of capital contributed by the joint venture partner.



Minority Interest in Losses of Consolidated Subsidiaries. Minority interest in losses of consolidated subsidiaries for the three months ended March 31, 2001, was $44,000.  As a result of joint venture settlements completed during 2001, we no longer have any residences owned by us in consolidated joint venture arrangements and subsequently, have no minority interest in losses of consolidated subsidiaries for the three months ended March 31, 2002.



Income Taxes.  For the quarters ended March 31, 2002 and 2001, we recorded a current state and local income tax provision of $30,000.  The income tax expense for these periods reflect 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.



As of March 31, 2002 and 2001, we do not have a deferred tax asset.  In accordance with SFAS No. 109, we are required to continuously evaluate the recoverability of the 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 recover these net deferred tax assets through future taxable income.  In addition, the utilization of our $314.4 million Net Operating Loss carryforward could be subject to limitations based on the change of control provisions in the Internal Revenue Code.  Accordingly, we have established a valuation allowance against the entire deferred tax assets.  As of March 31, 2002 and 2001, this valuation allowance was $186.6 million and $65.6 million, respectively.



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Loss on Discontinued Operations.  In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lives Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."  We adopted SFAS No. 144 beginning on January 1, 2002.  As a result of the adoption of SFAS No. 144, we reclassified to discontinued operations the revenues and expenses of 5 residences with a capacity of 216 beds that were part of an executed deed in lieu restructuring agreement.  Included in discontinued operations for the three months ended March 31, 2002 is an impairment loss of $6.3 million which represents the difference between the five residences' carrying value and the residences' estimated fair value less costs to sell.   For comparative purposes and in accordance with SFAS No. 144, the March 31, 2001 financial statements have been reclassified for the comparable residences to reflect this classification.



Cumulative Effect of Change in Accounting Principle.  In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," having a required effective date for fiscal years beginning after December 15, 2001.  Under SFAS No. 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized but will be subject to annual impairment tests in accordance with the Statement.  Other intangible assets will continue to be amortized over their useful lives.  Under the transitional provisions of SFAS No. 142, we identified reporting units and performed impairment tests on the net goodwill associated with each of these reporting units.  The fair value of the reporting units was determined by estimating the present value of future cash flows.  Based on this impairment testing, we recorded an impairment loss of $54.7 million in the first quarter of 2002.  The impairment loss has been recorded as a cumulative effect of change in accounting principle in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2002.





Liquidity and Capital Resources



At March 31, 2002, we had $20.8 million in unrestricted cash and cash equivalents and a $1.0 billion working capital deficit compared to unrestricted cash and cash equivalents of $20.0 million and a $1.1 billion working capital deficit at December 31, 2001.



For the quarter ended March 31, 2002, the operating cash flow was $8.8 million compared to the operating cash flow of $15.4 million for the quarter ended March 31, 2001.



During the quarter ended March 31, 2002 we completed a sale/leaseback transaction accounted for as a financing of three residences with one of our REITs for an aggregate purchase price of $11.8 million.  The proceeds of this refinancing were used principally to retire mortgage loan and accrued interest obligations.  During the quarter ended March 31, 2002, we also entered into a settlement agreement with a lender group with respect to defaulted indebtedness aggregating approximately $39.0 million (plus $4.5 million of accrued and unpaid interest and late fees and approximately $4.0 million due under an interest rate cap agreement that was terminated March 2001) under a credit facility secured by mortgages on 11 residences.  The settlement is structured to immediately shift the economics of ownership and control over the disposition of the mortgaged residences to the lenders.  In exchange, we received the lenders' binding commitment to execute and deliver a waiver of any deficiency claims (including accrued interest and obligations related to the terminated interest rate cap agreement) and release of our guaranty with respect to this indebtedness upon satisfaction of certain conditions.  We have estimated the prospective deficiency claim related to this credit facility at approximately $37 million.  Until March 31, 2003, or such earlier time as the lenders sell a residence or replace the Company as manager, we are obligated to manage the residences for a management fee equal to six percent of facility revenue through June 30, 2002 and seven percent thereafter.  Any net operating income from the residences is paid to the lenders as debt service.



In an effort to retain sufficient cash to fund operations of all our residences and address our short-term liquidity needs, in March 2001 we obtained a $7.5 million bridge loan provided by certain of our principal stock and convertible debenture holders (the "Bridge Loan") and elected not to fund certain of our debt service and lease payment obligations.  As a result, we are currently in default under many of our credit and sale/leaseback facilities.



As an inducement to make the Bridge Loan, we issued the bridge lenders stock purchase warrants to purchase an aggregate of 6,000 shares of a newly designated Series B-1 class of our preferred stock having rights and terms substantially similar to ten shares of our Series B preferred stock issuable upon conversion of our Series B PIK Debentures.  Each share of the new preferred stock has rights, other than voting rights, substantially similar to 1,000 shares of Common Stock of the Company.  Accordingly, 6,000 shares of the new preferred stock represent six million Common Stock equivalent shares.  The five-year warrants are exercisable at a price of $750 per share for 2,000 shares of the new preferred stock, $1,000 per share for 2,000 shares of the new preferred stock and $1,250 per share for 2,000 shares of the new preferred stock.



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The $7.5 million Bridge Loan had an initial six-month term, is secured by first mortgages on several residences, and originally bore interest at an escalating interest rate, commencing at 10% per annum.  At our election, the Bridge Loan was extended by an additional six months whereupon the Bridge Loan became convertible into convertible subordinated debentures of the Company having rights and terms substantially similar to our Series B PIK Debentures, but having a conversion price equal to $750 per share of Series B-1 preferred stock (a Common Stock equivalent price of $0.75 per share).  The bridge lenders also are entitled to participate in any transaction involving the issuance by the Company of equity or equity-linked securities during the term of the Bridge Loan.  As of March 1, 2002, we entered into an amendment with the bridge lenders that fixed the interest rate on the Bridge Loan at 9.0% per annum and extended the maturity date for the Bridge Loan to January 5, 2003.



As a result of the Bridge Loan becoming convertible into convertible subordinated debentures and our issuance of a stock purchase warrant in connection with the Bridge Loan, as of December 31, 2001, the effective conversion price for the PIK Debentures and the Series A Stock has decreased from $4.00 to $2.68 per share of Common Stock for the Series A and Series C PIK Debentures and the Series A Stock and from $400 to $268 per share of Series B stock for the Series B PIK Debentures (the actual conversion price for the Series A and C PIK Debentures and the Series A Stock remains at $4.00 per share and for the Series B PIK Debentures remains at $400 per share; however, upon conversion of these convertible securities the holder thereof will also receive shares of Series B-1 preferred stock, in addition to Common Stock or Series B preferred stock, as applicable, in such amounts as to provide such holder an equity interest in the Company as though the conversion price for the Series A and C PIK Debentures and Series A Stock on the one hand, and the Series B PIK Debentures on the other hand, were decreased to $2.68 and $268 per share, respectively).



Historically, we financed our operations and growth through a combination of various forms of real estate financing (mortgage and sale/leaseback financing), capital contributions from joint venture partners and the sale of our securities (Common Stock, preferred stock and Subordinated Debentures) and, to a lesser extent, cash from operations.  At March 31, 2002, we had $1.2 billion of outstanding debt principally consisting of $422.4 million of Subordinated Debentures having a weighted average interest rate of 8.05%, $108.6 million of fixed rate debt having a weighted average interest rate of 7.39%, capitalized and financing lease obligations of $219.9 million having a weighted average interest rate of 9.44%, $425.3 million of variable rate debt having a weighted average interest rate of 6.31%, and $14.4 million and $10.8 million of notes payable and short-term borrowings, respectively.  Through March 31, 2002, we have also entered into approximately $578.1 million of sale/leaseback financings.



Our principal credit and financing agreements, including our Subordinated Debentures and our lease agreements, include cross-default provisions that provide that a material default under our other credit facilities constitutes a default under that credit or financing agreement.  Accordingly, any material default arising under one of our credit or financing agreements could result (and, as discussed below, has resulted) in many of our other major credit and financing arrangements being in default.  In addition, our principal credit and financing agreements include various financial covenants and other restrictions, including: (i) fixed charge coverage requirements, typically measured on a trailing four quarter basis and which generally increase over the term of the applicable credit agreement; (ii) maximum leverage ratios which limit our aggregate senior indebtedness to total capitalization; (iii) various minimum net worth or tangible net worth requirements; (iv) in some cases, property specific debt service coverage requirements and similar financial covenants of the type referenced above applicable to individual properties or to the pool of residences financed by the applicable lender; and (v) the maintenance of operating and other reserves for the benefit of the residences serving as collateral for the applicable lender.  We are currently not in compliance with certain of these covenants, although we have negotiated limited in time waivers with certain lenders and lessors.  Additionally, under some of our credit and sale/leaseback facilities we are required to secure lender or lessor consent prior to engaging in mergers, business combinations or change in control transactions.



We elected not to fund certain debt service and lease payment obligations due in 2001 and 2002 without the consent of the applicable lender or lessor.  Through additional payments, prepayments associated with asset sales and application of escrowed amounts, as of March 31, 2002, we had $6.2 million of delinquent outstanding scheduled debt service to lenders or lessors who hold mortgages on, or from whom we lease 74 residences in the aggregate (2,972 resident capacity).  We have received a written notice of acceleration from lenders with respect to indebtedness aggregating $181.6 million.  In addition, indebtedness of approximately $48.7 million has fully matured as of the quarter ended March 2002 and is past due.  Many of our other credit and lease facilities are in technical default as a result of these payment defaults associated with other loan and lease facilities, but several of these lenders and lessors have executed limited in time waivers.  We have received written notices of default from most of these lenders or lessors, three lessors have terminated leases for 17 residences (940 resident capacity) and other lenders have elected to apply deposits and reserve funds of ours held by such lenders against the past due payments.  Five lenders have activated or are in the process of activating "cash traps" of bank accounts relating to the operation of residences mortgaged to such lenders, either pursuant to arrangements set forth in the applicable loan documents or as negotiated with the Company.  We are also in litigation with a former lessor with respect to their damage claim associated with the early termination of their 11 residence lease portfolio.



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Our operations will require significant additional capital resources in the future in order to fund: (i) the professional fees and other related costs associated with our Restructuring Plan; (ii) our ongoing debt service and lease obligations, including maturities of our long-term debt and refinancing of short term debt; and (iii) deferred capital expenditures.  Additionally, growth in residence operating cash flow has been slower than projected as a result of (i) increased operating costs, including labor, utilities and liability insurance and, (ii) to a lesser extent, slower fill rates in our pre-stabilized residences and reduction in occupancy levels in certain of our stabilized residences.  As a result of ongoing operating losses and these upcoming capital needs, we expect that our projected cash needs during 2002 will exceed our projected identified cash resources.  To satisfy these cash shortfalls and to preserve the integrity of our operations, we are pursuing a Restructuring Plan which seeks, among other things, to dispose of a significant number of our residences which operate with cash shortfalls and to defer some of our debt service obligations until those disposition and negotiated restructurings of our principal debt and lease obligations can occur.  See Footnote 2 to the financial statements.



Management is actively seeking to restructure secured loan facilities that, in management's view, would generate significant deficiency claims (i.e., claims in excess of the value of the applicable mortgage portfolio) in the event the applicable lenders sought to call the loan and foreclose on their collateral.  Management believes that three credit facilities representing $251.6 million in aggregate financing (secured by mortgages on 54 residences with a capacity of 3,390 beds) appear to represent significant potential deficiency claims in the range of $90 million to $160 million.  In these negotiations, we are seeking to obtain a release of these potential deficiency claims against the Company in exchange for our agreement to cooperate with the applicable lenders to facilitate an orderly transition of ownership (and, in certain cases, management) of the mortgaged residences to the lenders or their designees (through deed-in-lieu of foreclosure transactions or so-called friendly foreclosures).  In transitioning ownership of the mortgaged residences to the lenders, we are offering to provide interim or long-term management services to the lenders with respect to the mortgaged residences.  As noted above, during the quarter ended March 31, 2002, we executed one definitive agreement of this type with one lender group with regard to a credit facility representing $39.0 million of financing secured by 11 residences with an aggregate capacity of 482 beds.



In addition to these impaired credit facilities, we are also seeking to negotiate amendments and modifications with the applicable lenders with respect to our other principal secured credit facilities in order to, depending on the specific case, reset covenants, obtain consent to sell certain mortgaged residences, secure waivers of prior defaults and, in certain cases, to extend scheduled maturities.  These credit facilities represent $401.9 million of financing secured by an aggregate of 137 residences with a capacity of 6,135 beds.  Discussions with certain (but not all) of these lenders have commenced, but none have yet resulted in definitive binding restructuring agreements.



We currently have five multi-residence portfolios leased from various REITs.  These portfolios include an aggregate of 204 residences with a capacity of 8,928 beds.  We have completed the restructuring of four of our leased portfolios (aggregate of 164 residences with 7,240 beds).  These restructurings included the amendment of certain lease covenants and terms and, in three lease facilities, the conversion of individual leases into single master leases.  The cash rent due under one lease facility was modified through the application of various deposits held by the landlord to satisfy a portion of the cash rent obligation in the early years of the restructured master lease.

Restructuring negotiations are currently underway with respect to our one remaining REIT-leased portfolio.  In these restructuring negotiations, we are seeking to extend lease terms, revise covenants as necessary, and obtain additional funding for capital expenditures.  In consideration for these modifications, the applicable REIT lessor is requesting that we convert individual leases into multi-residence master lease.



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As of March 31, 2002, we have the following series of redeemable preferred stock and Subordinated Debentures outstanding:



|· | $5.6 million aggregate principal amount of 9.75% Series A cumulative convertible preferred shares due May 30, 2007.  The holders of these convertible preferred shares are entitled to cumulative pay-in-kind (PIK) dividends at the rate of 9.75% per annum, payable semi-annually in the form of additional shares of Series A Stock on January 1 and July 1 of each year commencing on January 1, 2001.  The Company did not declare the July 1, 2001 and January 1, 2002, dividend on the Series A Stock due to the Company's financial condition at these dates.  The holders of the convertible preferred shares may convert at any time into shares of Common Stock of the Company.  The effective conversion price is $2.68 per share (as of December 31, 2001).  The Series A Stock is redeemable at our option commencing on May 30, 2003, if the Company's Common Stock trades at an average price of at least $8.00 per share for the preceding 30 trading day period.  As of March 31, 2002, the $5.6 million aggregate principal balance includes $591,000 of undeclared and unpaid PIK dividends relating to the dividend payment dates of July 1, 2001 and January 1, 2002 and $141,000 of accrued dividends relating to the dividend payment date of July 1, 2002.
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|· | $42.5 million aggregate principal amount of 9.75% Series A PIK Debentures due May 30, 2007 (the "Series A Debentures").  These convertible debentures bear PIK interest at 9.75% per annum payable semi-annually in the form of Series B PIK Debentures on January 1 and July 1 of each year commencing on January 1, 2001.  The effective conversion price is $2.68 per share (as of December 31, 2001).  The Series A Debentures are redeemable at our option commencing on May 30, 2003, if the Company's Common Stock trades at an average price of at least $8.00 per share for the preceding 30 trading day period.  The holders of the Series A Debentures may convert at any time into shares of Common Stock of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|· | $141.6 million aggregate principal amount of 9.75% Series B PIK Debentures due May 30, 2007 (the "Series B Debentures").  These convertible debentures bear PIK interest at 9.75% per annum payable semi-annually in the form of Series B PIK Debentures on January 1 and July 1 of each year, commencing with January 1, 2001.  The effective conversion price is $268 per share (as of December 31, 2001).  The Series B Debentures are redeemable at our option commencing on May 30, 2003, if the Company's Common Stock trades at an average price of at least $8.00 per share for the preceding 30 trading day period.  The holders of the Series B Debentures may convert at any time into non-voting Series B preferred shares, each share of which has rights (other than voting rights) substantially similar to 100 shares of Common Stock of the Company.  As of March 31, 2002, the $141.6 million aggregate principal balance includes $4.4 million of accrued dividends relating to the dividend payment date of July 1, 2002.                                                                                                                                                                                                                                      
|· | $51.0 million aggregate principal amount of 9.75% Series C PIK Debentures due May 30, 2007 (the "Series C Debentures").  These convertible debentures bear PIK interest at 9.75% per annum payable semi-annually in the form of Series C Debentures on January 1 and July 1 of each year, commencing with January 1, 2001.  The effective conversion price is $2.68 per share (as of December 31, 2001).  The Series C Debentures are redeemable at our option commencing on May 30, 2003, if the Company's Common Stock trades at an average price of at least $8.00 per share for the preceding 30 trading day period.  The holders of the Series C Debentures may convert at any time into shares of Common Stock of the Company.  As of March 31, 2002, the $51.0 million aggregate principal balance includes $1.2 million of accrued dividends relating to the dividend payment date of July 1, 2002.                                                                                                                                                                                                                                                                                                                                                                        
|· | $112.0 million aggregate principal amount of 5.25% convertible subordinated debentures due December 15, 2002.  These convertible debentures bear interest at 5.25% per annum payable semi-annually on June 15 and December 15 of each year.  The conversion price is $28.75, which is equivalent to a conversion ratio of 34.8 shares of Common Stock per $1,000 in principal amount of the 5.25% Debentures.  The 5.25% Debentures are redeemable at our option at specified premiums.  The holders of the 5.25% Debentures may require us to repurchase the 5.25% Debentures at 101% of face value upon a change of control, as defined in the 5.25% Debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|· | $40.4 million aggregate principal amount of 7.00% convertible subordinated debentures due June 1, 2004.  These convertible debentures bear interest at 7.00% per annum payable semi-annually on June 1 and December 1 of each year.  The conversion price is $20.25, which is equivalent to a conversion ratio of 49.4 shares of Common Stock per $1,000 in principal amount of the 7% Debentures. The 7% Debentures are redeemable at our option at specified premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|· | $34.9 million aggregate principal amount 6.75% convertible subordinated debentures due June 30, 2006.  These convertible debentures bear interest at 6.75% per annum payable semi-annually on June 30 and December 30 of each year.  The conversion price is $20.38, which is equivalent to a conversion ratio of 49.3 shares of Common Stock per $1,000 principal amount of the 6.75% Debentures.  The 6.75% Debentures are redeemable at our option at specified premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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The outstanding Original Debentures, comprised of the 5.25% Debentures, 7.00% Debentures and 6.75% Debentures, are subordinated to all other "senior indebtedness" of the Company (as defined in the applicable indenture governing such debentures), and the PIK Debentures are subordinated to all "senior indebtedness" of the Company (as defined in the applicable indentures governing such debentures), other than the Original Debentures.  Although defined somewhat differently in the several indentures governing the Original Debentures and the PIK Debentures (collectively, the "Subordinated Debentures"), "senior indebtedness" is defined to generally include indebtedness for borrowed money and other similar obligations of Alterra (other than the other series of Original Debentures).



As a result of several notices of default received by the Company with respect to secured indebtedness that by its terms may be accelerated by the applicable lenders, neither we nor the applicable indenture trustees for the Subordinated Debentures are permitted by the subordination provisions of the indentures governing the respective Subordinated Debentures to make any payment or distribution on account of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures).  As a result, we did not make cash interest payments on the Original Debentures in June 2001 and January 2002 of $5.5 million and $5.8 million, respectively.  In the event that the Company is dissolved, liquidated or reorganized, all amounts due in payment of the Company's "senior indebtedness" must be paid or provided for before any payment may be made on account of the Subordinated Debentures.  Accordingly, unless and until we are able to restructure our "senior indebtedness" obligations (including, without limitation, our several secured credit facilities) and resolve all pending defaults related to this indebtedness, we will not be permitted to make any interest or other payments to the holders of the Subordinated Debentures (other than the payment of PIK coupons on the PIK Debentures) or to restructure the Subordinated Debentures.



As of March 31, 2002, our current portion of long-term debt and short-term notes payable totaled $1.1 billion. These current maturities include $652.5 million of debt and lease obligations, $422.4 million of PIK Debentures and other Subordinated Debentures that are in default or pursuant to cross-default provisions may be declared in default and may be accelerated at the lender's election, and $25.1 million of short-term notes payable and borrowings.  In 2002 our scheduled debt maturities include $150.8 million of secured debt and our 5.25% Debentures, which have an outstanding balance of $112.0 million at March 31, 2002 and mature in December 2002.



We are obligated under our existing joint venture arrangements to purchase the equity interests of our joint venture partners at fair market value upon the election of our partners (the "Put").  We may also exercise options to purchase these same joint venture interests either at uncapped fair market value in the case of certain joint venture arrangements (the "FMV Call") or at an agreed upon return on investment in the case of other arrangements (the "Formula Call").  For the three joint ventures with the FMV Call, we estimate that the amount required as of March 31, 2002 to acquire these joint venture interests would have been approximately $1.2 million.  With respect to joint ventures that include Formula Calls, we estimate that the call price as of March 31, 2002 would have totaled approximately $57.0 million.  However, we believe that the fair market value of these residences, in the aggregate, should the Put be exercised, is substantially less.



During 2001 we negotiated a series of arrangements that resulted in the discontinuation of joint venture arrangements with respect to 42 residences.  Also in December 2001, we terminated our joint venture with Manor Care, Inc. relating to 13 residences in connection with consummating a global settlement of various pending litigations and arbitration proceedings between the Company and Manor Care and its affiliates.  Pursuant to this settlement, the Company was released under its debt guaranty of a $57.7 million revolving line of credit established for this joint venture.  The Company issued $12 million of notes in connection with this settlement and release transaction.



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To address our long-term liquidity and capital needs, including our upcoming debt maturities, we intend to (i) continue our negotiations with our lenders, lessors, joint venture partners, and to seek to implement the Restructuring Plan (ii) continue to implement operating initiatives focused on overall rate and occupancy improvement and overhead reductions, (iii) dispose of under-performing and non-strategic residences in order to reduce associated financing costs, operating expenses and to generate cash, and (iv) seek to identify additional equity or equity-linked capital to be funded contingent upon the substantial completion of our restructuring.  As our Restructuring Plan is largely dependent upon our ability to implement negotiated consensual restructuring arrangements with our various capital structure constituencies, no assurances may be given as to whether we will be able to restructure the Company or to restore value to various of our capital structure constituencies.



Impact of Inflation



To date inflation has not had a significant impact on us.  Inflation could, however, affect our results of operations due to our dependence on our senior resident population who generally rely on liquid assets and relatively fixed incomes to pay for our services.  As a result, we may not be able to increase residence service fees to account fully for increased operating expenses.  In structuring our fees we attempt to anticipate inflation levels, but there can be no assurance that we will be able to anticipate fully or otherwise respond to any future inflationary pressures.



Forward-Looking Statements



The statements in this quarterly report relating to matters that are not historical facts are forward-looking statements based on management's belief and assumptions using currently available information. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot give any assurances that these expectations will prove to be correct.  These statements involve a number of risks and uncertainties, including, but not limited to, uncertainty regarding the consequences of the restructuring, risks associated with continuing defaults under loan, lease and subordinated debenture obligations, risks associated with the continuing shortfall in our liquidity and implementation of our Restructuring Plan, risks associated with the disposition of assets and the termination of leases, substantial debt and operating lease payment obligations and current and pending maturities, operating losses associated with new residences, our  need for additional financing and liquidity risks associated with our risks associated with liability claims and insurance, competition, governmental regulation and other risks and uncertainties detailed in the reports filed by us with the Securities and Exchange Commission.  Should one or more of these risks materialize (or the consequences of a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected.  We assume no duty to publicly update these statements.





ITEM 3.     
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices.  Changes in these factors may cause fluctuations in the Company's earnings and cash flows.



We performed a sensitivity analysis which presents the hypothetical change in fair value of those financial instruments held by us at March 31, 2002, which are sensitive to changes in interest rates.  Market risk is estimated as the potential change in fair value resulting from an immediate hypothetical one-percentage point parallel shift in the yield curve.  The fair value of the debt included in the analysis is $425.3 million.  Although not expected, a one-percentage point change in the interest rates would have caused our annual interest expense to change by approximately $4.3 million.  Accordingly, a significant increase in LIBOR based interest rates could have a material adverse effect on our earnings.



We do not presently use financial derivative instruments to manage interest costs.  We do not use foreign currency exchange rate forward contracts or commodity contracts and do not have foreign currency exposure as of March 31, 2002.

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PART II.   OTHER INFORMATION





ITEM 1.     
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 matters described below.



We elected not to fund certain debt service and lease payment obligations due during 2001 and 2002 without the consent of the applicable lender or lessor.  Through additional payments, prepayments associated with asset sales and application of escrowed amounts, as of March 31, 2002, we had $6.2 million of delinquent outstanding scheduled debt service to lenders or lessors who hold mortgages on, or from whom we lease, 74 residences in the aggregate (2,972 resident capacity).  We have received a written notice of acceleration from lenders with respect to indebtedness aggregating $181.6 million.  In addition, indebtedness of approximately $48.7 million has fully matured and is past due.  Many of our other credit and lease facilities are in technical default as a result of these payment defaults associated with other loan and lease facilities, but several of these lenders and lessors have executed limited in time waivers.  We are also in default under various financial and other covenants contained in certain of our credit and lease arrangements.  We have received written notices of default from most of these lenders or lessors, three lessors have terminated leases for 17 residences (940 resident capacity) and other lenders have elected to apply deposits and reserve funds of ours held by such lenders against the past due payments.  Five lenders have activated or are in the process of activating "cash traps" of bank accounts relating to the operation of residences mortgaged to such lenders, either pursuant to arrangements set forth in the applicable loan documents or as subsequently negotiated with the Company.  We are also in litigation commenced in 2001 in the Chancery Court of Davidson County, Tennessee, with a former lessor who has asserted a damage claim arising out of the early termination of its 11 residence lease portfolio.



Litigation was commenced in 2001 in state court in Milwaukee, Wisconsin, by a lender seeking the appointment of a receiver for 20 residences that serve as collateral for $39.4 million of remaining financing provided by that lender.  In April 2002, this litigation was dismissed without prejudice by the lender.  We are currently actively seeking to negotiate and finalize definitive agreements with respect to the restructuring of this mortgage loan facility.



The Company's Subordinated Debentures include subordination provisions that prohibit the Company from making interest payments to the debenture holders (other than payment-in-kind coupon payments) after the occurrence of payment defaults on the Company's senior indebtedness.  As such, we defaulted in making coupon payments on our 5.25%, 6.75% and 7.00% Debentures aggregating approximately $5.5 million and $5.8 million in July 2001 and January 2002, respectively.



We are seeking to address all of our pending defaults of our senior and junior capital structure obligations through our Restructuring Plan.  However, our Restructuring Plan is largely dependent upon our ability to negotiate consensual modifications and waivers with our various capital structure constituents.  Absent an agreed upon resolution with these third parties, our lenders, lessors, and debenture holders may begin exercising remedies under their applicable financing agreements that could substantially hinder or disrupt our efforts to restructure the Company and result in a liquidation of the Company.



The Company is a defendant in a criminal negligence action commenced in May 2001 involving one of the Company's residences and pending in Hennipin County, Minnesota.  It is possible that if convicted of a crime, the Company's ability to obtain and renew certain of its licenses and to participate in certain government payor programs could be materially and adversely affected.



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ITEM 3.     
DEFAULTS UPON SENIOR SECURITIES

In order to maintain sufficient operating liquidity, we elected not to fund certain 2001 and 2002 debt service and lease payment obligations.  Specifically, without the consent of the applicable lender or lessor, we failed to pay debt service to lenders or lease payment to lessors who hold mortgages on, or from whom we lease, 74 residences in the aggregate (2,972 resident capacity).  We have received a written notice of acceleration from lenders with respect to indebtedness aggregating $181.6 million.  In addition, indebtedness of approximately $48.7 million has fully matured and is past due.  Many of our other credit and lease facilities are in technical default as a result of these payment defaults associated with other loan and lease facilities, but several of these lenders and lessors have executed limited in time waivers. We have received written notices of default from most of these lenders or lessors, three lessors have terminated leases for 17 residences (940 beds) and other lenders or lessors have elected to apply our deposits and reserve funds held by such lenders and lessors against past due payments.  Five lenders have activated or are in the process of activating "cash traps" of bank accounts relating to the operation of residences mortgaged to such lenders.



We are also in litigation with a former lessor with respect to their damage claim associated with the early termination of their 11 residence lease portfolio.



We expect that absent an agreed upon resolution, other lenders and lessors may also begin exercising remedies under their loan and lease documents. We are not aware of any further steps taken by these lenders to exercise their remedies subsequent to the acceleration or maturity of the debt and we are currently working with these lenders to extend maturities and to enter into forbearance agreements as we seek to implement our Restructuring Plan.



The indentures pursuant to which the $422.4 million of outstanding Subordinated Debentures were issued include as an event of default the acceleration of any other indebtedness of the Company of a specified amount (ranging from $1.0 million to $10.0 million).  Accordingly, as a result of notices of acceleration that we received with respect to $181.6 million of mortgage indebtedness, we are in default with respect to our $422.4 million of Subordinated Debentures.



We sought forbearance agreements from certain of our lenders and lessors with respect to debt service and lease payments due in 2001 and 2002, but did not have written agreements in place with most of our lenders and lessors at the time these payments were due.  As we did not make certain loan and lease payments during 2001 and 2002, we 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.  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 results in our being in default under many other such facilities, which could adversely affect our ability to restructure without reorganization proceedings.



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ITEM 6.     EXHIBITS AND REPORTS ON FORM 10-Q



|ExhibitNumber |     | Description                                                                                                                                                                                                                                                                                    
|------------- | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |     |                                                                                                                                                                                                                                                                                                
|              | (a) | Exhibits.  The following exhibits are filed as part of this report.                                                                                                                                                                                                                            
|              |     |                                                                                                                                                                                                                                                                                                
|10.1          |     | Letter of Credit Agreement dated as of April 9, 2002 by and among JER/NHP Senior Living Acquisition, LLC, JER/NHP Senior Living Texas, L.P., JER/NHP Senior Living Wisconsin, LLC, JER/NHP Senior Living Kansas, Inc., ALS Leasing, Inc., and Assisted Living Properties, Inc.                 
|              |     |                                                                                                                                                                                                                                                                                                
|10.2          |     | Guaranty of Lease and Letter of Credit Agreement dated as of April 9, 2002 by and among the Registrant, JER/NHP Senior Living Acquisition, LLC, JER/NHP Senior Living Texas, L.P., JER/NHP Senior Living Wisconsin, LLC, and JER/NHP Senior Living Kansas, Inc.                                
|              |     |                                                                                                                                                                                                                                                                                                
|10.3          |     | Stock Pledge Agreement dated as of April 9, 2002 by and among the Registrant, JER/NHP Senior Living Acquisition, LLC, JER/NHP Senior Living Texas, L.P., JER/NHP Senior Living Wisconsin, LLC, and JER/NHP Senior Living Kansas, Inc.                                                          
|              |     |                                                                                                                                                                                                                                                                                                
|10.4          |     | Memorandum of Understanding dated as of April 9, 2002 by and among the Registrant, ALS Leasing, Inc., Assisted Living Properties, Inc., JER/NHP Senior Living Acquisition, LLC, JER/NHP Senior Living Texas, L.P., JER/NHP Senior Living Wisconsin, LLC, and JER/NHP Senior Living Kansas, Inc.
|              |     |                                                                                                                                                                                                                                                                                                
|10.5          |     | First Amendment to Loan Agreement and First Amendment to Registration Rights Agreement dated as of March 1, 2002 by and among the Registrant, RDVEPCO, L.L.C., Holiday Retirement 2000, LLC, The Toronto-Dominion Bank, and HBK Master Fund, L.P.                                              
|              |     |                                                                                                                                                                                                                                                                                                
|11.1          |     | Statement Regarding Computation of Net Income Per Share.                                                                                                                                                                                                                                       
|              |     |                                                                                                                                                                                                                                                                                                
|              |     |                                                                                                                                                                                                                                                                                                





SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milwaukee, State of Wisconsin, on the 15th day of May, 2002.



|                    |  | ALTERRA HEALTHCARE CORPORATION                                                                  
|------------------- |  | ------------------------------------------------------------------------------------------------
|                    |  |                                                                                                 
|                    |  |                                                                                                 
|                    |  | /s/  Mark W. Ohlendorf                                                                          
|Date:  May 15, 2002 |  | By:   Mark W. Ohlendorf, Senior Vice President, Chief Financial Officer, Treasurer and Secretary

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EXHIBIT 11.1     
   COMPUTATION OF NET INCOME PER SHARE





|                                                                                                                               |   | Three Months EndedMarch 31, |  
|------------------------------------------------------------------------------------------------------------------------------ | - | --------------------------- | -
|                                                                                                                               |   | 2002                        |  
|Basic:                                                                                                                         |   |                             |  
|Net loss from continuing operations before cumulative effect of change in accounting principle - attributable to common shares | $ | (13,459                     | )
|Loss on discontinued operations                                                                                                |   | (6,344                      | )
|Cumulative effect of change in accounting principle                                                                            |   | (54,695                     | )
|Net loss attributable to common shares                                                                                         |   | (74,498                     | )
|Weighted average common shares outstanding                                                                                     |   | 22,219                      |  
|                                                                                                                               |   |                             |  
|Net loss from continuing operations before cumulative effect of change in accounting principle - per share                     | $ | (.61                        | )
|Loss on discontinued operations - per share                                                                                    |   | (.28                        | )
|Cumulative effect of change in accounting principle - per share                                                                |   | (2.46                       | )
|Net loss per common share                                                                                                      | $ | (3.35                       | )
|                                                                                                                               |   |                             |  

Diluted: Not included as convertible debentures are antidilutive.