UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
___X___ Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the
fiscal year ended December 31, 2005
Commission
file number 01-13031
American
Retirement Corporation
(Exact
Name of Registrant as Specified in its Charter)
Tennessee |
|
62-1674303 |
(State
or Other Jurisdiction of |
|
(I.R.S.
Employer |
Incorporation
or Organization) |
|
Identification
No.) |
|
|
|
111
Westwood Place, Suite 200, Brentwood, TN |
|
37027 |
(Address
of Principal Executive Offices) |
|
(Zip
Code) |
|
|
|
Registrant’s
Telephone Number, Including Area Code: |
|
(615)
221-2250 |
|
|
|
Securities
registered pursuant to Section 12(b) of the Act
|
|
|
|
Title
of Each Class |
Name
of Each Exchange on Which Registered
|
Common
Stock, par value $.01 per share |
|
NYSE |
Series
A Preferred Stock Purchase Rights |
|
NYSE |
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Exchange Act of
1933.
Yes
o
No
þ
Indicate
by check mark if the Registrant is not required to file reports pursuant
to
Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o
No
þ
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 þ
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer as defined in Rule 12b-2 of
the Securities Exchange Act of 1934. Large accelerated filer o
Accelerated
filer þ
Non-Accelerated
filer o
Indicate
by check mark whether the Registrant is a shell company as defined in
Rule 12b-2 of the Securities Exchange Act of 1934. Yes o
No
þ
The
aggregate market value of common stock held by non-affiliates of the registrant
as of June 30, 2005, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $360.7 million. The
market
value calculation was determined using a per share price of $14.62, the
price at
which the common stock was last sold on the New York Stock Exchange on
such
date. For purposes of this calculation, shares held by non-affiliates excludes
only those shares beneficially owned by officers, directors, and shareholders
owning 10% or more of the outstanding common stock (and, in each case,
their
immediate family members and affiliates).
The
number
of shares of the Registrant’s common stock, $.01 par value per share,
outstanding as of February 22, 2006, was 35,270,969.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Registrant’s Proxy Statement for use in connection with the Annual
Meeting of Shareholders to be held on May 17, 2006 are incorporated by
reference
into Part III, items 10, 11, 12, 13 and 14 of this Form 10-K.
|
CONTENTS:
|
|
|
|
Page
|
PART
I
|
|
|
Item
1.
|
Business
|
3
|
Item
1A.
|
Risk
Factors
|
15
|
Item
1B.
|
Unresolved
Staff Comments
|
20
|
Item
2.
|
Properties
|
21
|
Item
3.
|
Legal
Proceedings
|
25
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
25
|
|
|
|
PART
II
|
|
|
|
|
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters
|
|
|
and
Issuer Purchases of Equity Securities
|
25
|
Item
6.
|
Selected
Financial Data
|
25
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of
Operations
|
29
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
57
|
Item
8.
|
Financial
Statements and Supplementary Data
|
58
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
94
|
Item
9A.
|
Controls
and Procedures
|
94
|
Item
9B.
|
Other
Information
|
94
|
|
|
|
PART
III
|
|
|
|
|
|
Item
10.
|
Directors
and Executive Officers of the Registrant
|
96
|
Item
11.
|
Executive
Compensation
|
96
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
96
|
Item
13.
|
Certain
Relationships and Related Transactions
|
96
|
Item
14.
|
Principal
Accountant Fees and Services
|
96
|
|
|
|
PART
IV
|
|
|
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
97
|
|
|
|
Signatures
|
|
|
PART
I
Item
1. Business
The
Company
American
Retirement Corporation is
one of
the largest operators of senior living communities in the United States.
We are
a senior living and health care services provider offering a broad range
of care
and services to seniors, including independent living, assisted living,
skilled
nursing and therapy services. The senior living industry is a growing
and highly
fragmented industry. We believe we are one of the few national operators
providing a range of service offerings and price levels across multiple
communities. We also offer a broad array of ancillary services, primarily
through our Innovative Senior Care programs, which provide therapy, home
health
and other wellness services to our residents and to residents of other
senior
living communities. At December 31, 2005, we operated 76 senior living
communities in 19 states, with an aggregate unit capacity of approximately
14,300 units and resident capacity of approximately 15,950. At December
31,
2005, we owned 26 communities (including 9 partially owned through joint
ventures), leased 43 communities, and managed seven communities. Our
revenues
for the year ended December 31, 2005 were $495.0 million, of which approximately
83% was from private pay sources, 15% from Medicare and 2% from Medicaid.
We
operate
independent living communities, continuing care retirement communities,
and
free-standing assisted living communities primarily in large population
centers.
We have also developed specialized care programs for residents with Alzheimer's
and other forms of dementia, and provide therapy services to many of
our
residents. We were established in 1978 and our operating philosophy was
inspired
by the vision of our founders, Dr. Thomas F. Frist, Sr. and Jack C. Massey,
to
enhance the lives of seniors by striving to provide the highest quality
of care
and services in well-operated communities designed to improve and protect
the
quality of life, independence, personal freedom, privacy, spirit, and
dignity of
our residents.
Recent
Developments
Secondary
Equity Offering
On
January
24, 2006, we completed a public offering of 3,450,000 shares of our common
stock, including the underwriter’s over-allotment of 450,000 shares. The shares
were priced at $26.60. The net proceeds of the offering, after deducting
underwriting discounts and commissions and expenses, were approximately
$89.8
million. The proceeds from this offering were used to repay approximately
$29.0
million of debt. The balance of the proceeds will be used to fund possible
future acquisitions, to fund expansion activity, and for general corporate
purposes, including working capital.
Acquisition
of Independent Living Communities
On
February 8, 2006, we announced that a joint venture in which we have
an
ownership interest had entered into a definitive asset purchase agreement
with
affiliates of Cypress Senior Living, Inc. to acquire four senior living
communities located in two states for an aggregate purchase price of
$146.3
million, subject to customary closing adjustments and transaction expenses.
The
communities have a capacity of 896 independent living units and are located
in
Arlington, Dallas and Ft. Worth, Texas and Leawood, Kansas.
The
acquisition will be accomplished through two joint ventures, which will be
owned 20% by us and 80% by an institutional real estate investor. The
joint
venture has obtained a firm commitment from Merrill Lynch Capital, a
division of
Merrill Lynch Business Financial Services Inc., to provide approximately
$95.5
million of senior debt financing. The remainder of the purchase price
will be
funded by proportional capital contributions from the members of the
joint
venture entities. We will manage the portfolio pursuant to a long-term
management agreement.
Operating
Segments
We
operate
in three distinct business segments:
retirement centers, free-standing assisted living communities, and management
services.
Retirement
Centers.
We
operate large continuing care retirement centers and independent living
communities which we refer to as retirement centers, that provide a continuum
of
services, including independent living, assisted living, Alzheimer’s, memory
enhancement and dementia programs and skilled nursing care. Our retirement
centers include rental communities and entrance fee communities. We
also
offer a broad array of ancillary services, primarily through our Innovative
Senior Care programs, which provide therapy and other wellness services
to our
residents and to residents of other senior living communities. Our
retirement centers are large, often campus style or high-rise settings,
with an
average unit capacity of 311 units. These communities generally maintain
high
and consistent occupancy levels, many with waiting lists of prospective
residents. Our retirement centers are the largest segment of our business
and
comprise 29 of the 76 communities that we operate, with unit capacity
of
approximately 9,000, representing approximately 63% of the total unit
capacity
of our communities. At
December 31, 2005 and 2004, our retirement centers had an occupancy rate
of
96%.
Free-standing
Assisted Living Communities.
Our
free-standing assisted living communities provide specialized assisted
living
care to residents in a comfortable residential atmosphere. Most of the
free-standing assisted living communities provide specialized care such
as
Alzheimer’s, memory enhancement and other dementia programs. These
communities are designed to provide care in a home-like setting, which
we
believe residents prefer as opposed to the more clinical or institutional
settings offered by some other providers. We
provide
personalized care plans for each resident, activity programs, and through
our
Innovative Senior Care programs, extensive wellness programs and therapy
services. Our free-standing assisted living communities are much smaller
than
our retirement centers and had an average unit capacity of 94 units.
As of
December 31, 2005, we operated 41 free-standing assisted living communities,
with unit capacity of approximately 3,800, representing
approximately 27% of the total unit capacity of our communities. Twenty-seven
of
these free-standing assisted
living communities
had
occupancy rates of 90% or better at December 31, 2005. Excluding
nine communities partially owned through non-consolidated joint ventures,
the 32
free-standing assisted living communities included in this segment had
occupancy
rates of 91% and 89% at December 31, 2005 and 2004, respectively.
Management
Services.
Our
management services segment includes six large retirement centers owned
by
others and operated by us under multi-year management agreements. Under
our
management agreements for these six communities, we receive management
fees as
well as reimbursed expense revenues, which represent the reimbursement
of
certain expenses we incur on behalf of the owners.
Two of
these communities are retirement center cooperatives that are owned by
their
residents, and three others are owned by not-for-profit sponsors. The
remaining
managed retirement center is owned by an
unaffiliated third party. These six communities have approximately 1,400
units,
representing approximately 10% of the total unit capacity of our communities
as
of December 31, 2005.
We
also
operate a seventh retirement center, Freedom Square, under a long-term
management agreement. In accordance with applicable accounting rules,
the
operating results of Freedom Square are included in the consolidated
results of
our retirement center segment.
We
also
manage nine free-standing assisted living communities in which we have
a
non-controlling minority ownership interest. Eight of these were acquired
during
November 2005 from the Epoch Senior Living group.
Operating
results from these three business segments are discussed further in Management’s
Discussion and Analysis of Financial Condition and Results of Operations
and
Note 18 to our consolidated financial statements.
Care
and Services Programs
We
provide
a wide array of senior living and health care services at our communities,
including independent living, assisted living and memory enhanced services
(with
special programs and living units for residents with Alzheimer's and
other forms
of dementia) and skilled nursing services. We also provide a broad array
of
ancillary services through our Innovative Senior Care program, including
therapy
services and other wellness programs. By offering a variety of services
and
involving the active participation of the resident, resident's family
and
medical consultants, we are able to customize our service plans to meet
the
specific needs and desires of each resident. As a result, we believe
that we are
able to maximize resident satisfaction and avoid the high cost of delivering
all
services to every resident without regard to need, preference, or
choice.
Independent
Living Services
We
provide
independent living services to seniors who do not yet need assistance
or support
with activities, but who prefer the physical and psychological comfort
of a
residential community for seniors that offers health care and other services.
The independent living services we provide include daily meals and dining
programs, transportation, social and recreational activities, laundry,
housekeeping, security, and health care monitoring. We employ health
care
professionals to foster the wellness of our independent living residents
by
offering health screenings, ongoing dietary, exercise and fitness classes,
and
chronic disease management (such as diabetes with blood glucose monitoring).
Subject to applicable government regulation, personal care and medical
services
are available to independent living residents. Our residency agreements
with our
independent living residents (other than entrance fee contracts) are
generally
for a term of one year (terminable by the resident upon 30 to 60 days
written notice), although most residents remain for many years. The agreements
generally provide for increases in billing rates each year (subject to
specified
ceilings at certain communities). Residents are also billed monthly for
ancillary services utilized over and above those included in their recurring
monthly service fees. These revenues are generally paid from private
pay sources
and are recognized monthly when the services are provided.
Assisted
Living and Memory Enhanced Services
Residents
who receive our assisted living services generally need assistance with
some or
all activities of daily living, but do not require the more acute medical
care
provided in a typical nursing home environment. Upon admission, each
assisted
living resident is assessed, in consultation with the resident, the resident's
family and medical consultants, to determine his or her health status,
including
functional abilities and need for personal care services. Each resident
also
completes a lifestyles assessment to determine the resident's preferences.
From
these assessments, a care plan is developed in an effort to ensure that
the
specific needs and preferences of each resident are satisfied to the
extent
possible. Each resident's care plan is reviewed periodically to determine
when a
change in care is needed.
We
have
adopted a philosophy of assisted living care with the goal of allowing
a
resident to maintain a dignified, independent lifestyle. Residents and
their
families are encouraged to be partners in their care and to take as much
responsibility for the resident’s well being as possible. The basic types of
assisted living services offered by us include:
·
|
Personal
Care Services -
which include assistance with daily activities such as ambulation,
bathing, dressing, eating, grooming, personal hygiene, monitoring
or
assistance with medications, and confusion management;
|
·
|
Support
Services -
such as meals, assistance with social and recreational activities,
laundry
services, general housekeeping, maintenance services and transportation
services; and
|
·
|
Special
Care Services -
such as our “Arbors” memory enhancement programs and other specialized
services to care for residents with Alzheimer's and other forms
of
dementia in a comfortable, homelike
setting.
|
We
maintain programs and special “Arbors” units at most of our assisted living
communities for residents with Alzheimer's and other forms of dementia.
These
programs provide the attention, care, and services to help those residents
maintain a higher quality of life. Specialized services include assistance
with
activities of daily living, behavior management, and a lifeskills-based
activity
program, the goal being to provide a normalized environment that supports
residents' remaining functional abilities. These special units are located
in a
separate area of the communities and have their own dining and lounge
facilities, and specially trained staff.
Agreements
for our assisted living services are month to month and provide for annual
or
other periodic increases to the monthly service fees. Monthly service
fees are
based on size of unit selected, additional services provided, and level
of care
required. Specialized units for those with Alzheimer’s or other forms of
dementia have higher billing rates to cover the increased staffing and
program
costs associated with these services. These revenues, generally from
private pay
sources, are recognized as revenue on a monthly basis when the services
are
provided.
Skilled
Nursing
Within
our
retirement center campuses, we operate seventeen skilled nursing centers
providing traditional skilled nursing care by registered nurses, licensed
practical nurses, and certified nursing aides. We also offer a range
of therapy
rehabilitation services in these communities. Therapy services are typically
rendered immediately after, or in lieu of, acute hospitalization in order
to
treat specific medical conditions. Our skilled nursing services are primarily
utilized by our independent and assisted living residents who
occupy
the skilled nursing centers at our retirement centers on a temporary
or
long-term basis. However, we also provide skilled nursing services to
those
admitted from outside the retirement center for temporary stays following
hospitalization or other health issues, some of which also become long-term
residents of the retirement center. These skilled nursing services are
provided
to the individuals on a daily fee basis, with additional charges for
specialized
equipment, therapy, medications or medical supplies in many cases. These
services are paid for primarily by private pay sources, long-term care
insurance, and, to a much lesser extent, under the Medicare, and in limited
cases Medicaid, programs. Daily rates are revised periodically in response
to
cost changes and market conditions. These daily revenues are recognized
when the
services are provided.
Innovative
Senior Care (Therapy Services)
We
currently provide a range of education, wellness, and therapy services
to our
independent living, assisted living, and skilled nursing residents as
part of
our Innovative Senior Care programs, including our Care3 and Optimum
Life
service offerings. These programs are focused on wellness and physical
fitness
to allow residents to maintain maximum independence. These services provide
many
continuing education opportunities for residents and their families through
health fairs, seminars, and other consultative interactions. The therapy
services we provide include physical, occupational, speech and other
specialized
therapy services. In addition to providing these in-house therapy and
wellness
services at our communities, we also provide these services to other
senior
living communities that we do not own or operate. These services may
be
reimbursed under the Medicare program or paid directly by residents from
private
pay sources and revenues are recognized as services are provided.
Managed
Communities
Our
management agreements with third-parties have typical terms of three
to twenty
years and require us to provide a wide range of services. We may be responsible
for providing all associates, and all marketing and operations services
at the
community. In other agreements, we may provide management personnel only,
and
more limited services including assistance with marketing, finance and
other
operations. In each case, the costs of owning and operating the community
are
the responsibility of the owner. In most cases, we receive a monthly
fee for our
services based either on a contractually fixed amount or a percentage
of
revenues or income. Our existing management agreements, many of which
contain
extension options, expire at various times through August 2020, but certain
agreements may be canceled by the owner of the community, without cause,
on
three to six months written notice.
Entrance
Fee Agreements
Seven
of
our retirement centers (three owned, three leased and one managed) are
continuing care retirement centers that provide housing and health care
services
through entrance fee agreements with residents. These seven entrance
fee
communities are included in the consolidated results of our retirement
centers.
In addition, we manage three other retirement centers utilizing entrance
fee
agreements, but we do not receive the economic benefits of the entrance
fee
sales for these communities.
Under
our
entrance fee agreements, residents pay an entrance fee, typically $100,000
to
$400,000 or more, upon initial occupancy of a unit. The amount of the
entrance
fee varies depending upon the type and size of the dwelling unit, the
type of
contract plan selected, whether the contract contains a lifecare benefit
(healthcare discount) for the resident, the amount and timing of refund,
and
other variables. These agreements are subject to regulations in various
states.
Our entrance fee agreements are designed to provide housing and care
for the
remainder of a resident’s lifespan.
In
addition to their initial entrance fee, residents under all of our entrance
fee
agreements also pay a monthly service fee, which entitles them to the
use of
certain amenities and certain services. Since we receive entrance fees
upon
initial occupancy, the monthly fees are generally less than fees at a
comparable
rental community. Residents may also elect to obtain additional ancillary
services, which are billed on a monthly basis or as the services are
provided.
We recognize these additional fees as revenue on a monthly basis when
these
services are provided.
We
generally categorize our entrance fee agreements as either traditional
plans or
“partner” plans, each of which are accounted for differently.
Traditional
Plans - These agreements generally include limited lifecare benefits
(healthcare
discount) which are typically: (a) a certain number of free days in the
community’s skilled nursing center during the resident’s lifetime; (b) a
discounted rate for skilled nursing or assisted living services; or (c)
a
combination of the two. We offer a range of these types of contracts,
including
contracts
with more limited healthcare discounts (and therefore generally higher
percentage refunds at termination), and contracts with larger healthcare
discounts (and therefore generally lower percentage refunds at
termination).
Under
our
traditional plans, a portion of the entrance fee is generally refundable
to the
resident or the resident’s estate upon termination of the entrance fee contract,
with the refund being payable a specified number of days after contract
termination. These agreements contain provisions reducing the percentage
of the
original entrance fee that is refundable to the resident over time. In
a
relatively short period of time (generally two to four years), the contractually
refundable portion of the entrance fee is reduced from the original amount
paid
by the resident, down to the fixed minimum percentage stated in the agreement
(which can range from zero to 100% of the total fee paid by the resident).
For
accounting purposes, we classify the fixed refundable portion of the
entrance
fee, which will be refundable regardless of when the contract terminates,
as
“refundable portion of entrance fees” on our balance sheet. The remaining
portion of the entrance fee is recorded as “deferred entrance fee income” on our
balance sheet and is amortized into our revenue using the straight-line
method
over the estimated remaining life expectancy of the resident, based upon
actuarial projections.
The
average length of stay of our entrance fee residents is ten to twelve
years. Our
experience shows that residents typically move in and spend the remainder
of
their lifespan at our entrance fee communities, with voluntary terminations
by
residents at de minimis levels (less than 3% per year). Our experience
also
shows that refunds due to prior residents or their estates are typically
offset
(with a substantial excess cushion) by resale of the vacant apartments
to a
subsequent residents.
Since
termination of a resident’s agreement can result under many contracts in a
refund being due in less than one year, the refundable portion of these
entrance
fees (equal to the stated fixed minimum refund percentage) is recorded
on our
balance sheet as a current liability, although we do not believe that
payment of
these liabilities will typically require use of our current cash balances,
but
instead will be offset by the proceeds of future entrance fee sales.
The
deferred entrance fee income is generally classified as a long-term liability
on
our balance sheet, with a portion shown as a current liability during
the early
years of a resident’s agreement (until the contractual provisions of the
agreement reduce the potential refund to the fixed minimum percentage
stated in
the agreement).
Partner
Plans - At certain of our entrance fee communities, we maintain an entrance
fee
program known as the “partner plan” which allows the resident to participate in
the appreciation in the value of the resident’s unit. Under our partner plans,
the entrance fee is refundable to the resident or the resident’s estate only
upon the sale of the unit to a succeeding resident unless otherwise required
by
applicable state law. Typically, partner plan residents receive priority
access
to assisted living and skilled nursing services, but no discounted or
other
lifecare benefits. The resident shares in a specified percentage, typically
50%,
of any appreciation in the entrance fee paid by the succeeding resident.
The
entire entrance fee under a partner plan is recorded as deferred entrance
fee
income and is amortized into revenue using the straight-line method over
the
remaining life of the building. The deferred entrance fee income for
partner
plans is shown as a long-term liability on our balance sheet.
Business
Operations
Management
Structure
Each
of
our retirement centers is managed by an executive director, with various
department heads responsible for functional areas such as assisted living,
activities, dining services, maintenance, human resources and finance.
Within
the retirement centers, healthcare professionals manage the assisted
living and
memory enhanced programs, as well as wellness and other programs. For
those
communities with health centers providing skilled nursing services, licensed
professionals also manage those services and direct the nursing
staff.
Each
of
the free-standing assisted
living communities
is
managed by a residence manager whose primary focus is resident care.
These
communities receive daily administrative central support for operations,
care
planning, clinical assessments, quality assurance, accounting and finance,
human
resources, dining and maintenance. By providing strong program management
and
administrative support from the home office and at the regional level,
the staff
at the free-standing assisted
living communities
can focus
on the care of the residents and interaction with their families or other
caregivers.
The
retirement centers and free-standing assisted
living communities
report to
regional operations vice presidents. These regional vice presidents and
their
staff regularly visit the communities, providing inspection of the communities,
staff development and training, financial and program reviews, regulatory
and
compliance support, and quality assurance reviews.
Our
home
office provides central support to the communities in various areas,
including
information technology, human resources, training, accounting, finance,
internal
audit, insurance and risk management, legal, development, sales and marketing,
dining services, therapy services, operations and program support, and
national
purchasing programs. Home office staff also provides support for budgeting,
financial analysis and strategic planning. In addition, quality assurance
and
risk management staff review and monitor key safety and quality measurements,
train community staff, and visit communities regularly for regulatory
and other
compliance programs. Human resource programs are developed for staff
training
and retention in the communities, and are implemented by the home office
and
regional staff.
Our
belief
is that, through our regional and home office staff and because of our
scale, we
are able to provide strong support in each functional area on a cost
effective
basis, which provides an advantage over many other smaller or local competitors.
In addition, by providing daily administrative support to our free-standing
assisted
living communities
we
believe that our community staff is able to stay focused on resident
care and
provide a higher level of service to the residents and their
families.
Marketing
Each
community has an on-site marketing director, and additional marketing
staff
based on its size. These community based marketing personnel are involved
in
daily activities with prospective residents and key referral sources
including
current residents and their families. Home office and regional marketing
directors assist each community in developing, implementing and monitoring
their
detailed marketing plan. The marketing plans include goals for lead generation,
wait lists, referrals, community outreach, awareness events, prospect
follow-up,
and monthly move-ins. Competitive analyses are also updated regularly.
Home
office marketing staff provide coordination and monitoring of these marketing
plans, development of pricing strategies and overall marketing plans,
marketing
planning and support for upcoming expansions and developments, assistance
with
creative media, collection and analysis of data measuring effectiveness
of
promotions, advertising, and lead sources, and selection and training
of
regional and community staff. Our belief is that this locally based marketing
approach, coupled with strong regional and central monitoring and support,
provides an advantage over many smaller or regional competitors.
Feedback
and Quality Assurance
We
solicit
regular feedback from our residents, their families, and our associates
through
various satisfaction surveys. We also regularly perform quality assurance
reviews by community, regional and home office staff, in addition to
being
subject to surveys and reviews by various local, state and federal regulatory
agencies. Our belief is that each of these activities provides important
feedback, which can be used by management to maintain high levels of
safety and
quality, and to continue to look for opportunities to improve our procedures
and
programs.
Senior
Living Industry
The
senior
living industry is highly fragmented and characterized by numerous local
and
regional operators. We are one of a limited number of national competitors
that
provide a broad range of community locations and service level offerings
at
varying price levels. The industry has seen significant growth in recent
years
and has been marked by the emergence of the assisted living segment in
the
mid-1990s.
We
believe
that a number of trends will contribute to the growth in the senior living
industry. The primary market for senior living services is individuals
age 75 and older. According to U.S. Census data, this group is one of
the fastest growing segments of the United States population and is expected
to
more than double between the years 2000 and 2030. The population of seniors
age 85 and over has also increased in recent years, and is expected to
continue to grow. As a result of these expected demographic trends, we
expect an
increase in the demand for senior living services in future years. In
addition,
the aggregate home equity held by seniors age 75 and over has grown
significantly in recent years, which has greatly increased the number
of seniors
who can afford our services.
We
believe
the senior living industry has been and will continue to be impacted
by several
other trends. The use of long-term care insurance is increasing among
current
and future seniors as a means of planning for the costs of senior living
services. In addition, as a result of increased mobility in society,
reduction
of average family size, and increased number of two-wage earner
couples, more seniors are looking for alternatives outside of their family
for
their care. Many seniors have also shown an increasing preference for
communities that allow them to “age in place” in a residential setting, which
provides them maximum independence and quality of life in contrast to
more
institutional or clinical settings. The emergence of the assisted living
segment
of the industry in the mid-1990s is a prime example of this
trend.
Competition
The
senior
living and health care services industry is highly competitive and we
expect
that providers within the industry will continue to be competitive in
the
future. We believe that the primary competitive factors in the senior
living and
health care services industry are: (i) reputation for and commitment to a
high quality of care; (ii) quality of support services offered;
(iii) price of services; (iv) physical appearance and amenities
associated with the communities; and (v) location. We compete with other
companies providing independent living, assisted living, skilled nursing,
and
other similar service and care alternatives.
The
senior
living industry is highly fragmented and characterized by many local
or regional
operators. We are one of a limited number of national competitors that
operate a
large number of communities in multiple locations, and that provide a
broad
range of senior living services at varying price levels. Our size allows
us to
centralize administrative functions that give the decentralized managerial
operations cost-efficient support. We believe we have a reputation as
a leader
in the industry and as a provider of high quality services.
We
also
compete with other health care businesses with respect to attracting
and
retaining high quality professionals including nurses, therapists, technicians,
aides, managers and other associates. The market for these professionals
has
become very competitive, with resulting pressure on salaries and compensation
levels. However, we believe that we are able to attract and retain quality
associates through our reputation, culture, organizational stability,
and
competitive compensation.
Business
Strategy
Our
business strategy is to provide high-quality services to seniors at reasonable
prices, maintain strong competitive positions and build critical mass
in each of
our key markets, and to enhance the value of our communities by expanding
services and improving operating results. We plan to implement this business
strategy primarily through the following steps.
Growth
Through Expansion and Development:
We
currently have nine active expansion projects and four active development
projects in process, including our managed communities which represent
approximately 1,500 units additional capacity. Many of these are in the
construction stage, and several are expected to open during the second half
of 2006. Our four development projects include:
|
·
|
Development
of two entry fee continuing care retirement centers near Austin,
TX and
Villages, FL, on the sites of our two existing assisted living
communities
(The Villages is a large active seniors planned community north
of
Orlando).
|
|
·
|
Development
of a rental continuing care retirement center in Denver, CO
through a
joint venture.
|
|
·
|
Development
of a free-standing assisted living community in Nashville,
TN for a
non-profit senior living company.
|
In
addition, we have approximately 750 additional units at six communities
which
are in the active planning stage, typically working through the design,
zoning
and entitlement processes. We also have identified numerous other expansion
opportunities (in excess of 1,000 additional units) which are in the
preliminary
planning stage, and may provide opportunities for additional future
growth.
Growth
Through Acquisition:
We
expect
to periodically look for opportunities to acquire other senior living
communities, particularly focused on building critical mass within our
markets.
We believe that by having a network of communities within a market, it
gives us
the critical mass to efficiently provide various ancillary service programs.
We
will look to enhance our value by adding both retirement centers and
free-standing assisted living communities in selected markets. We may
consider
certain projects through joint ventures or long-term management contracts.
Expand
Our Ancillary Service Programs:
We
offer a
range of therapy, home health and wellness programs to our residents,
primarily
through our Innovative Senior Care programs, including our Care3 and
Optimum
Life service offerings. We also have contracts to provide these services
to
other senior living communities in our markets. We believe that having
critical
mass in a market through a network of communities is important for the
success
and growth of our ancillary service programs. We provide a broad range
of other
ancillary services, and have recently partnered with others for expanded
service
offerings in telecommunications and pharmacy services. We expect to continue
to
grow these ancillary service revenues, which should increase our revenue
per
unit in the future.
Improve
Our Community Results:
|
·
|
Our
free-standing assisted living segment occupancy was 91% at
December 31,
2005. We are focused on further increasing the occupancy in
these
communities as well as selected retirement centers. We expect
that further
occupancy increases will not require significant incremental
cost
increases, and therefore will result in high incremental operating
margins.
|
|
·
|
We
expect that revenue per unit will increase in the future as
a result of
increased ancillary service revenues, price increases, and
the
“mark-to-market” effect of resident turnover as residents with lower rates
are replaced by those paying higher current selling rates.
We expect to
recover operating cost increases through periodic price increases
as we
have in the past.
|
|
·
|
We
will continue to actively market the units in our entrance
fee
communities, and increase prices, subject to market conditions,
in
response to increased home values and equity in selected markets.
The net
resale cash flow from selling entrance fee units at current
prices, net of
percentage refunds generally paid to estates of prior residents,
provides
a significant source of cash each
year.
|
Maintain
a Platform for Operating Excellence and Growth:
By
focusing on areas we believe are key drivers in our business, we believe
we have
formed a platform that not only supports operating excellence at our
existing
communities, but also readily supports the growth of our portfolio through
acquisition, expansion and development.
Quality
Assurance and Risk Management - We
place a
high priority on and devote a significant amount of resources to quality
assurance, safety, and risk management. As a result of our scale, we
are able to
provide cost effective insurance programs, training programs, information
systems support, and quality assurance programs. We believe that the
expertise
we have developed may provide a competitive advantage over smaller competitors
unable to devote similar effort and resources in this important
area.
People
- As
a
service oriented business with high labor requirements, we will continue
to
focus on attracting and retaining high quality personnel to ensure we
are
delivering high quality services in a cost effective manner. In order
to be
successful in our effort, we have dedicated in-house recruiters to find
the
right people, designed programs to improve retention of associates, and
conducted training programs to ensure our associates are trained to excel
in
their roles. We also believe that the significant industry experience
and tenure
of our senior management team is also one of our strengths.
Systems
- We
have
developed certain proprietary systems to provide our managers with timely
access
to the information necessary to manage and control pricing levels, unit
inventory levels, and the turnover and retention of associates. We believe
that
these systems provide strategic value in managing our business, and are
readily
scalable to support its growth. In addition, they are designed to be
implemented
quickly in order to integrate newly acquired communities into our
portfolio.
Marketing
and Sales - We
strive
to excel at the marketing and sales of senior living communities. We
have
developed various programs focused on generating referrals to our communities,
which provide a very effective referral source of new move-ins. Based
on our
years of experience, we also believe we are very successful at planning
and
implementing the proper positioning, pricing, and service level package
at our
existing and newly acquired communities.
Government
Regulation
Senior
living companies are subject to various federal, state and local regulations,
which are frequently revised. While such requirements vary by state,
they
typically regulate, among other matters, the number of licensed beds,
provision
of services, staffing levels, professional licensing, distribution of
pharmaceuticals, billing practices, equipment, operating procedures,
environmental matters, and compliance with building and safety codes.
Our
communities are also subject to various zoning restrictions, local building
codes, and other ordinances, such as fire safety codes. Certain states
require a
certificate of need review in order to provide skilled nursing or other
services. Currently, the operation of independent living and assisted
living
residences are subject to limited federal and state laws, although regulation
has increased in recent years. We believe that the regulation of assisted
living
services may increase in the future.
Our
skilled nursing centers and home health agencies are subject to Federal
certification requirements in order to participate in the Medicare and
Medicaid
programs. Approximately 16.5%,
14.9%, and 13.3% of
our
total revenues for the years ended December 31, 2005, 2004, and 2003,
respectively, were attributable to Medicare, including Medicare-related
private
co-insurance, and a small amount of Medicaid. These reimbursement programs
are
subject to extensive regulation and frequent change, which may be beneficial
or
detrimental to us. As
of
January 1, 2006, certain per person annual limits on Medicare reimbursement
for
therapy services became effective, subject to certain exceptions. Although
we
are awaiting final regulatory and administrative procedures, these limits
will
reduce certain portions of our therapy services revenues and the profitability
of those services. There continue to be various federal and state legislative
and regulatory proposals to implement cost containment measures that
would limit
payments to healthcare providers in the future. Changes in the reimbursement
policies of the Medicare program could have an adverse effect on our
results of
operations and cash flow.
In
addition, there are various Federal and state laws prohibiting other
types of
fraud and abuse by health care providers, including criminal and civil
provisions that prohibit filing false claims or making false statements
to
receive payment or certification under Medicare or Medicaid and failing
to
refund overpayments or improper payments. Violation of these laws can
result in
loss of licensure, civil and criminal penalties, and exclusion of health
care
providers or suppliers from participation in Medicare, Medicaid, and
other state
and Federal reimbursement programs.
Our
entrance fee communities are subject to regulation by certain state departments
of insurance and various state agencies, and must meet various financial
and
other guidelines and disclosure requirements.
Many
of
our communities are subject to periodic survey or inspection by governmental
authorities. From time to time in the ordinary course of business, one
or more
of our communities may be cited for operating or other deficiencies by
regulatory authorities. Although most inspection deficiencies can be
resolved
through a plan of correction, the regulatory agency may have the right
to levy
fines, impose conditions on operating licenses, suspend licenses, or
propose
other sanctions for the facility.
There
are
currently numerous legislative and regulatory initiatives at the state
and
Federal levels addressing patient privacy concerns, including regulations
regarding privacy and security under the Health Insurance Portability
and
Accountability Act of 1996 (“HIPAA”). These regulations restrict how health care
providers use and disclose individually identifiable health information
and
grant patients certain rights related to their health information. Final
HIPAA
security regulations became effective in April 2005 and govern the security
of
individually identifiable health information that is electronically maintained
or transmitted. Failure to comply with the privacy, security or transaction
standard regulations enacted under HIPAA can result in civil and criminal
penalties. We do not expect costs incurred, or costs to be incurred in
order to
continue compliance with HIPAA to have a material impact on our operating
results.
Insurance
The
delivery of personal and health care services entails an inherent risk
of
liability. Participants in the senior living and health care services
industry
have become subject to an increasing number of lawsuits alleging negligence
or
related legal theories, many of which involve large claims and result
in the
incurrence of significant exposure and defense costs. Currently, we maintain
general and professional medical malpractice insurance policies for our
owned,
leased and certain of our managed communities under a master insurance
program.
Premiums and deductibles for this insurance coverage have risen dramatically
in
recent years. In response to these conditions, we have significantly
increased
the staff and resources involved in quality assurance, compliance and
risk
management during the past several years, and have also modified our
insurance
programs. During
2005, we maintained single incident and aggregate liability protection
in the
amount of $25.0 million
for general
liability and $15.0 million for professional liability, with self-insured
retentions of $1.0 million and $5.0 million, respectively, with a larger
self-insured component and decreased premiums over 2004. Beginning January
2006,
we formed a wholly-owned “captive” insurance company for the purpose of insuring
certain portions of our risk retention under our general and professional
liability insurance programs. Our captive insurance company is subject
to
applicable reserve requirements and regulations.
As
of
December 31, 2005, the Company’s coverage for workers’ compensation and related
programs, excluding Texas, included excess loss coverage in an aggregate
amount
of $6.3 million with a deductible amount of $350,000 per individual
claim. As of December 31, 2005, the Company provided cash collateralized
letters of credit in the aggregate amount of $8.2 million
related to this program, which are reflected as restricted cash on the
Company’s
consolidated balance sheet. For work-related injuries in Texas, the Company
is a
non-subscriber under Texas state law, meaning that work-related losses
are
covered under a defined benefit program outside of the Texas Workers'
Compensation system. The Company carries excess loss coverage of $1.0
million
per individual, with a deductible of $250,000 under its non-subscriber
program. Losses are paid as incurred and estimated losses are accrued
on a
monthly basis. The Company utilizes a third party administrator to process
and
pay filed claims.
We
also
maintain a self-insurance program for employee medical coverage, with
stop-loss
insurance coverage of amounts in excess of $250,000 per associate. Estimated
costs related to these self-insurance programs are accrued based on known
claims
and projected settlements of unasserted claims incurred but not yet reported.
Subsequent changes in actual experience (including claim costs, claim
frequency,
and other factors) could result in adjustments to these estimates.
Given
our
high retention levels and our captive insurance company, we are largely
self-insured for typical claims. In addition, there can be no assurance
that a
claim in excess of our insurance coverage limits will not arise. A claim
against
us not covered by, or in excess of, our coverage limits could have a
material
adverse effect. Furthermore, there can be no assurance that we will be
able to
obtain liability insurance in the future on acceptable terms.
Employees
At
December 31, 2005, we employed 10,400 associates, of which approximately
6,750
were full-time employees. We believe that our relationship with our associates
is good.
Executive
Officers of the Registrant
The
following table sets forth certain information concerning our executive
officers.
Name
|
|
Age
|
|
Position
|
W.
E. Sheriff
|
|
63
|
|
Chairman,
Chief Executive Officer and President
|
Gregory
B. Richard
|
|
52
|
|
Executive
Vice President and Chief Operating Officer
|
Bryan
D. Richardson
|
|
47
|
|
Executive
Vice President - Finance and Chief Financial Officer
|
George
T. Hicks
|
|
48
|
|
Executive
Vice President - Finance and Internal Audit,
|
H.
Todd Kaestner
|
|
50
|
|
Executive
Vice President - Corporate Development
|
James
T. Money
|
|
56
|
|
Executive
Vice President - Sales and Marketing
|
Terry
L. Frisby
|
|
55
|
|
Senior
Vice President - Human Resources/Corporate Culture
|
|
|
|
|
and
Compliance
|
Jack
Leebron
|
|
56
|
|
Senior
Vice President - Legal Services
|
Ross
C. Roadman
|
|
55
|
|
Senior
Vice President - Strategic Planning and Investor
Relations
|
E.
Carl Johnson
|
|
55
|
|
Senior
Vice President -
Development
|
W.E.
Sheriff
has
served as Chairman and Chief Executive Officer of our Company and our
predecessors since April 1984 and as our President since 2003. From 1973
to
1984, Mr. Sheriff served in various capacities for Ryder System, Inc.,
including
as President and Chief Executive Officer of its Truckstops of America
division.
Mr. Sheriff also serves on the boards of various educational and charitable
organizations and in varying capacities with several trade
organizations.
Gregory
B. Richard
has
served as our Executive Vice President and Chief Operating Officer since
January
2003 and previously served as our Executive Vice President - Community
Operations since January 2000. Mr. Richard was formerly with a pediatric
practice management company from May 1997 to May 1999, serving as President
and
Chief Executive Officer from October 1997 to May 1999. Prior to this,
Mr.
Richard was with Rehability Corporation, a publicly traded outpatient
physical
rehabilitation service provider, from July 1986 to October 1996, serving
as
Senior Vice President of Operations and Chief Operating Officer from
September
1992 to October 1996.
Bryan
D. Richardson has
served
as our Executive Vice President - Finance and Chief Financial Officer
since
April 2003 and previously served as our Senior Vice President - Finance
since
April 2000. Mr. Richardson was formerly with a national graphic arts
company
from 1984 to 1999 serving in various capacities, including Senior Vice
President
of Finance of a digital prepress division from May 1994 to October 1999,
and
Senior Vice President of Finance and Chief Financial Officer from 1989
to 1994.
Mr. Richardson was previously with the national public accounting firm
PriceWaterhouseCoopers.
George
T. Hicks
has
served as our Executive Vice President - Finance and Internal Audit,
Secretary
and Treasurer since September 1993. Mr. Hicks has served in various capacities
for our predecessors since 1985, including Chief Financial Officer from
September 1993 to April 2003 and Vice President - Finance and Treasurer
from
November 1989 to September 1993.
H.
Todd Kaestner
has
served as our Executive Vice President - Corporate Development since
September
1993. Mr. Kaestner has served in various capacities for our predecessors
since
1985, including Vice President - Development from 1988 to 1993 and Chief
Financial Officer from 1985 to 1988.
James
T. Money
has
served as our Executive Vice President - Sales and Marketing since September
1993. Mr. Money has served in various capacities for our predecessors
since
1978, including Vice President - Development from 1985 to 1993.
Terry
L. Frisby has
served
as our Senior Vice President - Human Resources/Corporate Culture and
Compliance
since January 1999. Mr. Frisby served as Vice President - Corporate Culture
and
Compliance from July 1998 to January 1999. Prior to this, Mr. Frisby
was
principal of a healthcare consulting business located in Nashville, Tennessee,
from 1988 to 1998. Mr. Frisby serves on the Executive Council for Human
Resources with the Assisted Living Federation of America.
Jack
Leebron has
served
as our Senior Vice President - Legal Services since May 2004. Mr. Leebron
served
as Vice President of Legal Services from May 2003 to May 2004. Mr. Leebron’s
prior positions include five years as General Counsel to Regency Pacific,
Inc.,
General Counsel to Bryant Exploration Company, and the private practice
of law
for 16 years. He presently holds current licensure to practice law in
Colorado,
Washington, Oklahoma and Tennessee. He is a member of the Tennessee Bar
Association, the Oklahoma Bar Association, the Washington Bar Association,
the
American Health Lawyers Association, the Risk and Insurance Management
Society,
Inc., and the Association of Corporate Counsel.
Ross
C. Roadman has
served
as our Senior Vice President - Strategic Planning and Investor Relations
since
May 1999. Previously,
Mr. Roadman served in various capacities, since 1980, at Ryder System,
Inc.,
including as Group Director of Investor and Community Relations, Assistant
Treasurer, Division Controller, and Director of Planning. Before joining
Ryder,
he held positions with Ernst & Young and the International Monetary Fund. He
serves on the boards of several educational and charitable organizations
as well
as being active in various professional organizations.
E.
Carl Johnson has
served
as our Senior Vice President - Development since September 2005. Mr.
Johnson was previously Co-Founder and Chief Operating Officer of LifeTrust
America from 1996 to December 2004. LifeTrust America was the owner and
operator
of 59 Senior Independent and Assisted Living properties in 8 states.
He served
as a member of the Board of Directors of the National Assisted Living
Federation
(ALFA) and was a charter member of the Kentucky ALFA chapter. Before
joining
LifeTrust, Mr. Johnson was President of Health Information Associates,
a
subsidiary of Hospital Corporation of America.
Available
Information
Our
internet website address is http://www.arclp.com.
Our website address is provided as an inactive textual reference only.
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on
Form 8-K and amendments to those reports are available free of charge
through
our website as soon as reasonably practicable after such forms, reports
or
materials are electronically filed with or furnished to the Securities
and
Exchange Commission. Information contained on our website is not part
of this
report, and is not incorporated by reference.
We
have
posted our Corporate Governance Guidelines, Code of Business Conduct
and Ethics,
and the charters of our Audit, Compensation, Executive, Nominating and
Corporate
Governance and Quality Assurance Committees on our website at http://www.arclp.com.
Our
corporate governance materials are available in print free of charge
to any
shareholder upon request to our Corporate Secretary, American Retirement
Corporation, 111 Westwood Place, Suite 200, Brentwood, Tennessee 37027.
Our
code
of ethics that applies to each principal executive officer, principal
financial
officer, principal accounting officer or controller and persons performing
similar functions is also available on our website.
Item
1A. Risk Factors
Risks
Associated with Forward Looking Statements
This
Form
10-K contains certain forward-looking statements within the meaning of
the
federal securities laws, which are intended to be covered by the safe
harbors
created thereby. Those forward-looking statements include all statements
that
are not historical statements of fact and those regarding our intent,
belief or
expectations including, but not limited to, all statements concerning
our
anticipated improvement in operations and anticipated or expected cash
flow; our
expectations regarding trends in the senior living industry; the discussions
of
our operating and growth strategy; our liquidity and financing needs;
our
expectations regarding future entrance fee sales or increasing occupancy
at our
retirement centers or free-standing assisted living communities; our
alternatives for raising additional capital and satisfying our periodic
debt and
lease obligations; our projections of revenue, income or loss, capital
expenditures, interest rates, and future operations; our anticipated
expansions,
development or acquisition activity; and the availability of insurance
programs
to us or the adequacy of such programs. All forward-looking statements
involve
risks and uncertainties including, without limitation, the risks and
uncertainties described in this report under Item 1A. “Risks Related to Our
Business.”
Should
one
or more of those risks materialize, actual results could differ materially
from
those forecasted or expected. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable,
any
of these assumptions could prove to be inaccurate, and therefore, there
can be
no assurance that the forward-looking statements included in this Form
10-K will
prove to be accurate. In light of the significant uncertainties inherent
in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person
that our
forecasts, expectations, objectives or plans will be achieved. We undertake
no
obligation to publicly release any revisions to any forward-looking statements
contained herein to reflect events and circumstances occurring after
the date
hereof or to reflect the occurrence of unanticipated events.
Risks
Related to Our Business
We
have substantial debt and operating lease obligations which will require
significant amounts of cash each year.
We
have
substantial debt and lease obligations. Our cash needs for our lease
and
interest payments and principal payments on outstanding debt will remain
high
for the foreseeable future. At December 31, 2005, we had long-term debt,
including current portion, of $324.0 million. During the twelve months
ending December 31, 2006, we are obligated to pay minimum rental
obligations of approximately $68.2 million under long-term operating leases
and have current scheduled debt principal and lease payments of
$28.8 million. At December 31, 2005, we had $40.8 million of
unrestricted cash and cash equivalents, $28.4 million of restricted cash
and $90.5 million of negative working capital. For the year ended
December 31, 2004, our net cash provided by operations was $60.8
million. There can be no assurance that we will be able to generate
sufficient cash flows from operations and entrance fee sales to meet
required
interest, principal, and lease payments in future periods.
Certain
of
our debt agreements and leases contain various financial and other restrictive
covenants, which may limit our flexibility in operating our business.
Any
payment or other default with respect to such obligations could cause
lenders to
accelerate payment obligations or to foreclose upon our communities securing
such indebtedness or, in the case of any of our operating leases, terminate
the
lease, with a consequent loss of income and asset value to us. Furthermore,
because of cross-default and cross-collateralization provisions in certain
debt
instruments and leases, a default by us on one of our obligations could
result
in default or acceleration of other obligations. Failure to remain in
compliance
with the covenants and obligations contained in our debt instruments
and leases
could have a material adverse impact on us.
Our
liability insurance may not be adequate to cover claims which may arise
against
us.
The
delivery of personal and health care services entails an inherent risk
of
liability. In recent years, participants in the senior living and health
care
services industry have become subject to an increasing number of lawsuits
alleging negligence or related legal theories, many of which involve
large
claims and result in the incurrence of significant exposure and defense
costs.
Currently, we maintain general and professional medical malpractice insurance
policies for our owned, leased and certain of our managed communities
under a
master insurance program. Premiums and deductibles for this insurance
coverage
have risen dramatically in recent years. We are largely self-insured
for typical
claims. In response to these conditions, we have significantly increased
the
staff and resources involved in quality assurance, compliance and risk
management during the past several years, and have also modified our
insurance
programs. We cannot assure you that our current level of accruals will
be
adequate to cover the actual liabilities that we may ultimately incur.
We also
cannot assure you that a claim in excess of our insurance coverage limits
will
not arise. A claim against us that is not covered by, or is in excess
of, our
coverage limits could have a material adverse effect upon us. Furthermore,
we
cannot assure you that we will be able to obtain adequate liability insurance
in
the future or that, if such insurance is available, it will be available
on
acceptable terms.
We
rely on reimbursement from governmental programs for a portion of our
revenues,
and are subject to changes in reimbursement levels, which could adversely
affect
our results of operations and cash flow.
We
rely on
reimbursement from governmental programs for a portion of our revenues,
and we
cannot assure you that reimbursement levels will not decrease in the
future,
which could adversely affect our results of operations and cash flow.
For the
year ended December 31, 2005, we derived 15% of our revenues from Medicare
and 2% from Medicaid. As of January 1, 2006, certain per person annual
limits on
Medicare reimbursement for therapy services became effective, subject
to certain
exceptions. Although we are awaiting final regulatory and administrative
procedures, these limits will reduce certain portions of our therapy
services
revenues and the profitability of those services. There continue to be
various
federal and state legislative and regulatory proposals to implement cost
containment measures that would limit payments to healthcare providers
in the
future. Changes in the reimbursement policies of the Medicare program
could have
an adverse effect on our results of operations and cash flow.
We
may be adversely affected by the limited availability of management,
nursing and
other personnel for our communities and by increased labor
costs.
We
compete
with other providers of senior living and health care services with respect
to
attracting and retaining qualified management personnel responsible for
the
day-to-day operations of each of our communities and skilled technical
personnel
responsible for providing resident care and therapy services. In certain
markets, a shortage of nurses, therapists or trained personnel has required
us
to enhance our wage and benefits package in order to compete in the hiring
and
retention of such personnel or to hire more expensive temporary personnel.
We
are also heavily dependent on the available labor pool of semi-skilled
and
unskilled associates in each of the markets in which we operate. At times,
we
have experienced a competitive labor market, periodic shortages of qualified
workers in certain markets, and wage rate increases for certain of our
associates. We cannot be sure that our labor costs will not increase,
or that,
if they do increase, they can be matched by corresponding increases in
rates
charged to residents. If we are unable to attract and retain qualified
management and staff personnel, control our labor costs, or pass on increased
labor costs to residents through rate increases, our business, financial
condition, and results of operations would be adversely affected.
We
may be adversely affected by rising interest rates.
Future
indebtedness, from commercial banks or otherwise, and lease obligations,
including those related to communities leased from REITs (real estate
investment
trusts), are expected to be based on interest rates prevailing at the
time such
debt and lease arrangements are obtained. As of December 31, 2005, we had
$239.1 million of fixed rate debt and $84.9 million of variable rate
debt outstanding. Increases in prevailing interest rates would increase
our
interest obligations with respect to a substantial portion of our variable
rate
debt, and would likely increase our interest and lease payment obligations
on
our future indebtedness and leases. An increase in prevailing interest
rates, if
material, could have a material adverse effect on our business, financial
condition, and results of operations.
We
may be unable to refinance debt obligations on acceptable
terms.
We
may
need to refinance certain future debt maturities as they come due. Our
ability
to refinance debt obligations may be impacted by our operational results,
industry and economic conditions, capital
market conditions, and other factors that may not be within our control.
Our
inability to refinance various debt maturities as they come due in future
years
on acceptable terms could have an adverse impact on us and our financial
condition.
We
may not be able to successfully integrate acquired communities and new
managed
communities into our operations, which could adversely affect our business,
financial condition and results of operations.
During
the
past year, we have completed several acquisitions of retirement communities
and
have entered into agreements to manage other communities. We also expect
to
complete acquisitions and enter into new management agreements in the future.
Achieving the expected benefits of these acquisitions and new management
agreements will depend in large part on our completion of the integration
of the
operations and personnel of the new communities in a timely and efficient
manner. If we cannot overcome the challenges we face in completing the
integration, our ability to effectively and profitably manage the new
communities could suffer. Moreover, the integration process itself may
be
disruptive to our business, as it will divert the attention of management
from
its normal operational responsibilities and duties. We cannot offer any
assurance that we will be able to successfully integrate the new communities’
operations or personnel or realize the anticipated benefits of the acquisitions
and new management agreements. Our failure to successfully complete the
integration could harm our business, financial condition and results of
operations.
If
we are unable to expand our communities in accordance with our plans, our
anticipated revenues and results of operations could be adversely
affected.
We
are
currently working on projects that will expand several of our existing
senior
living communities over the next several years, and develop certain new
senior
living communities. These projects are in various stages of development
and are
subject to a number of factors over which we have little or no control.
Such factors include the necessity of arranging separate leases, mortgage
loans
or other financings to provide the capital required to complete these projects;
difficulties or delays in obtaining zoning, land use, building, occupancy,
licensing, certificate of need and other required governmental permits
and
approvals; failure to complete construction of the projects on budget and
on
schedule; failure of third-party contractors and subcontractors to perform
under
their contracts; shortages of labor or materials that could delay projects
or
make them more expensive; adverse weather conditions that could delay completion
of projects; increased costs resulting from general economic conditions
or
increases in the cost of materials; and increased costs as a result of
changes
in laws and regulations.
We
cannot
assure you that we will elect to undertake or complete all of our proposed
expansion and development projects, or that we will not experience delays
in
completing those projects. In addition, we may incur substantial costs
prior to
achieving stabilized occupancy for each such project and cannot assure
you that
these costs will not be greater than we have anticipated. We also cannot
assure
you that any of our development projects will be economically successful.
Our
failure to achieve our expansion and development plans could adversely
impact
our growth objectives, and our anticipated revenues and results of
operations.
The
senior living industry is very competitive and has been subject to periodic
oversupply conditions, which could have a material adverse effect on our
revenues, earnings and expansion plans.
The
senior
living industry is highly competitive. We compete with other companies
providing
independent living, assisted living, skilled nursing, therapy and other
similar
services and care alternatives. We expect that there will be competition
from
existing competitors and new market entrants, some of whom may have
substantially greater financial resources than us. In addition, some of
our
competitors operate on a not-for-profit basis or as charitable organizations
and
have the ability to finance capital expenditures on a tax-exempt basis
or
through the receipt of charitable contributions, neither of which is available
to us. Furthermore, if the development of new senior living communities
outpaces
the demand for those communities in the markets in which we have senior
living
communities, those markets may become saturated or over-built. Regulation
of the
independent and assisted living industry, which represents a substantial
portion
of our senior living services, currently is not substantial and does not
represent a significant barrier to entry. Consequently, the development
of new
senior living communities could outpace demand. Increased competition for
residents could also require us to undertake unbudgeted capital improvements
or
to lower our rates. An oversupply of senior living communities in our markets
or
increased competition could adversely affect our business and results of
operations.
We
may be adversely affected by the loss of our key officers or
associates.
We
rely
upon the services of our executive officers. The loss of our executive
officers
and the inability to attract and retain qualified management personnel
could
affect our ability to manage our business and could adversely affect our
business, financial condition and results of operations.
We
may be adversely affected by the termination of residency and care agreements
with our residents.
Our
residency and care agreements with our independent living residents (other
than
entrance fee contracts) are generally for a term of one year (terminable
by the
resident upon 30 to 60 days written notice). Although most residents remain
for many years, we do not contract with residents for longer periods of
time. If
a large number of residents elected to terminate their resident agreements
at or
around the same time, our revenues and earnings could be adversely affected.
Although most entrance fee residents remain for many years, our entrance
fee
agreements are also terminable upon death or with thirty days notice. If
a large
number of entrance fee agreements were terminated around at approximately
the
same time, triggering certain refund liabilities, and we were unable to
resell
the apartment units quickly or at reasonable price levels, our cash flows
could
be adversely affected.
We
are dependent upon attracting residents who have sufficient resources to
pay for
our services. Circumstances that adversely affect the ability of our residents
to pay for our services could have a material adverse effect on
us.
Approximately
83% of our total revenues for the years ended December 31, 2005 and 2004
were attributable to private pay sources. We expect to continue to rely
primarily on the ability of residents to pay for our services from their
personal or family financial resources and long-term care insurance. Future
economic or investment market conditions or other circumstances
that adversely affect the ability of seniors to pay for our services could
have
a material adverse effect on our business, financial condition, and results
of
operations.
We
are susceptible to risks associated with the lifecare benefits that we
offer the
residents of our lifecare entrance fee communities.
We
operate
seven lifecare entrance fee communities that offer residents a limited
lifecare
benefit. Residents of these communities pay an upfront entrance fee upon
occupancy, of which a portion is generally refundable, with an additional
monthly service fee while living in the community. This limited lifecare
benefit
is typically (a) a certain number of free days in the community’s health
center during the resident’s lifetime, (b) a discounted rate for such
services, or (c) a combination of the two. The lifecare benefit varies
based upon the extent to which the resident’s entrance fee is refundable. The
pricing of entrance fees, refundability provisions, monthly service fees,
and
lifecare benefits are determined utilizing actuarial projections of the
expected
morbidity and mortality of the resident population. In the event the entrance
fees and monthly service payments established for our communities are not
sufficient to cover the cost of lifecare benefits granted to residents,
the
results of operations and financial condition of these communities could
be
adversely affected.
Residents
of these entrance fee communities are guaranteed a living unit and nursing
care
at the community during their lifetime, even if the resident exhausts his
or her
financial resources and becomes unable to satisfy his or her obligations
to the
community. In addition, in the event a resident requires nursing care and
there
is insufficient capacity for the resident in the nursing facility at the
community where the resident lives, the community must contract with a
third
party to provide such care. Although we screen potential residents to ensure
that they have adequate assets, income, and reimbursements from government
programs and third parties to pay their obligations to our communities
during
their lifetime, we cannot assure you that such assets, income, and
reimbursements will be sufficient in all cases. If insufficient, we have
rights
of set-off against the refundable portions of the residents’ deposits, and would
also seek available reimbursement under Medicaid or other available programs.
To
the extent that the financial resources of some of the residents are not
sufficient to pay for the cost of facilities and services provided to them,
or
in the event that our communities must pay third parties to provide nursing
care
to residents of our communities, our results of operations and financial
condition would be adversely affected.
We
are susceptible to risks associated with the concentration of our facilities
in
certain geographic areas.
Part
of
our business strategy is to own, lease or manage senior living communities
in
concentrated geographic service areas. We have a large concentration of
communities in Florida, Texas, Arizona and Colorado, among other areas.
Accordingly, our operating results may be adversely affected by various
regional
and local factors, including economic conditions, real estate market conditions,
competitive conditions, hurricanes and other weather conditions and applicable
laws and regulations.
We
have incurred losses in recent years and have only recently been
profitable.
We
experienced losses from operations during the past several years, as recently
as
2004. We have been profitable since the quarter ended December 31, 2004 as
a result of various factors, including increased occupancy at our communities,
increased revenue per unit from rate increases and additional fees and
services,
and reduced debt service costs. Our future earnings and cash flow from
operations may be negatively impacted by various operating and market factors,
many of which are beyond our control, and there can be no assurance that
recent
trends will continue.
We
are susceptible to risks associated with government regulation of the healthcare
industry and the burdens of compliance with such
regulations.
Federal
and state governments regulate various aspects of our business. The development
and operation of senior living communities and the provision of health
care
services are subject to federal, state, and local licensure, certification,
and
inspection laws. Failure to comply with these laws and regulations could
result
in the denial of reimbursement, the imposition of fines, temporary suspension
of
admission of new patients, restrictions on operating or marketing entrance
fee
communities, suspension or decertification from Medicare, Medicaid, or
other
state or federal reimbursement programs, restrictions on our ability to
acquire
new communities or expand existing communities, or revocation of a community’s
license. We cannot assure you that we will not be subject to penalties
in the
future, or that federal, state, or local governments will not impose
restrictions on our activities that could materially adversely affect our
business, financial condition, or results of operations.
Various
states, including several of the states in which we currently operate,
control
the supply of licensed skilled nursing beds through certificate of need
(CON) or other programs. In those states, approval is required for the
construction of certain types of new health care communities, the addition
of
licensed beds and some capital expenditures at those communities. To the
extent
that a CON or other similar approval is required for the acquisition or
construction of new communities or the expansion of the number of licensed
beds,
services, or existing communities, we could be adversely affected by our
failure
or inability to obtain that approval, changes in the standards applicable
for
that approval, and possible delays and expenses associated with obtaining
that
approval.
Federal
and state anti-remuneration laws, such as “anti-kickback” laws, govern some
financial arrangements among health care providers and others who may be
in a
position to refer or recommend patients to those providers. These laws
prohibit,
among other things, some direct and indirect payments that are intended
to
induce the referral of patients to, the arranging for services by, or the
recommending of a particular provider of health care items or services.
Federal
anti-kickback laws have been broadly interpreted to apply to some contractual
relationships between health care providers and sources of patient referral.
Similar state laws vary, are sometimes vague, and seldom have been interpreted
by courts or regulatory agencies. Violation of these laws can result in
loss of
licensure, substantial civil and criminal penalties and exclusion of health
care
providers or suppliers from participation in Medicare and Medicaid programs.
There can be no assurance that those laws will be interpreted in a manner
consistent with our practices.
Under
the
Americans with Disabilities Act of 1990, all places of public accommodation
are
required to meet federal requirements related to access and use by disabled
persons. A number of additional federal, state and local laws exist that
also
may require modifications to existing and planned communities to create
access
to the properties by disabled persons. Although we believe that our communities
are substantially in compliance with present requirements or are exempt
therefrom, if required changes involve a greater expenditure than anticipated
or
must be made on a more accelerated basis than anticipated, additional costs
would be incurred by us. Further legislation may impose additional burdens
or
restrictions with respect to access by disabled persons, the costs of compliance
with which could be substantial.
The
Health
Insurance Portability and Accountability Act of 1996, or HIPAA, among other
things, established standards for the use of and access to health information.
Known as the administrative simplification requirements, these provisions,
as
implemented by regulations published by the United States Department of
Health
and Human Services, established among other things, standards for the security
and privacy of health information. Additionally, the rules provide for
the use
of uniform standard codes for electronic transactions and require the use
of
uniform employer identification codes. Penalties for violations can range
from
civil fines to criminal sanctions for the most serious offenses. Compliance
with
the rules was phased in through April 2005. These rules are complicated,
and
there are still a number of unanswered questions with respect to the extent
and
manner in which the HIPAA rules apply to businesses such as those operated
by
us.
We
are subject to risks associated with complying with Section 404 of the
Sarbanes-Oxley Act of 2002.
We
are
subject to various regulatory requirements, including the Sarbanes-Oxley
Act of
2002. Under Section 404 of the Sarbanes-Oxley Act of 2002, our management
is required to include a report with each Annual Report on Form 10-K
regarding its internal controls over financial reporting. We have implemented
processes documenting and evaluating our system of internal controls.
Complying
with these new requirements is extremely expensive, time consuming and
subject
to changes in regulatory requirements. The existence of one or more material
weaknesses, management’s conclusion that its internal controls over financial
reporting are not effective, or the inability of our auditors to express
an
opinion or attest that our management’s report is fairly stated, could result in
a loss of investor confidence in our financial reports, adversely affect
our
stock price and/or subject us to sanctions or investigation by regulatory
authorities
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
The
table
below sets forth certain information with respect to the senior living
communities we operated at December 31, 2005.
Retirement
Centers |
|
Unit
Capacity(1)
|
|
|
Community
|
Location
|
IL
|
AL
|
ME
|
SN
|
Total
|
|
Commencement
of
Operations(2)
|
Owned(3):
Freedom
Village Brandywine
|
West
Brandywine, PA
|
292
|
16
|
18
|
47
|
373
|
|
Jun-00
|
Freedom
Plaza Care Center(8)
|
Peoria,
AZ
|
-
|
44
|
-
|
128
|
172
|
|
Jul-01
|
Homewood
at Corpus Christi
|
Corpus
Christi, TX
|
60
|
30
|
-
|
-
|
90
|
|
May-97
|
Lake
Seminole Square
|
Seminole,
FL
|
305
|
33
|
-
|
-
|
338
|
|
Jul-98
|
Galleria
Woods
|
Birmingham,
AL
|
154
|
24
|
-
|
30
|
208
|
|
Jan-05
|
Wilora
Lake Lodge
|
Charlotte,
NC
|
135
|
48
|
-
|
-
|
183
|
|
Dec-97
|
Subtotal
|
|
946
|
195
|
18
|
205
|
1,364
|
|
|
Leased:
Broadway
Plaza(4)
|
Ft.
Worth, TX
|
214
|
40
|
-
|
122
|
376
|
|
Apr-92
|
Carriage
Club of Charlotte(5)
|
Charlotte,
NC
|
276
|
56
|
34
|
42
|
408
|
|
May-96
|
Carriage
Club of Jacksonville(6)
|
Jacksonville,
FL
|
238
|
60
|
-
|
-
|
298
|
|
May-96
|
Freedom
Plaza Arizona(7)
|
Peoria,
AZ
|
346
|
-
|
-
|
128
|
474
|
|
Jul-98
|
Freedom
Plaza Sun City Center(9)
|
Sun
City Center, FL
|
428
|
26
|
-
|
108
|
562
|
|
Jul-98
|
Freedom
Village Holland(9)
|
Holland,
MI
|
327
|
21
|
28
|
67
|
443
|
|
Jul-98
|
The
Hampton at Post Oak(6)
|
Houston,
TX
|
148
|
39
|
-
|
56
|
243
|
|
Oct-94
|
Heritage
Club(10)
|
Denver,
CO
|
200
|
35
|
-
|
-
|
235
|
|
Feb-95
|
Heritage
Club at Greenwood Village(11)
|
Denver,
CO
|
-
|
75
|
15
|
90
|
180
|
|
Dec-00
|
Holley
Court Terrace(12)
|
Oak
Park, IL
|
161
|
18
|
|
-
|
179
|
|
Oct-01
|
Homewood
at Victoria(13)
|
Victoria,
TX
|
59
|
30
|
|
-
|
89
|
|
May-97
|
Imperial
Plaza(14)
|
Richmond,
VA
|
758
|
148
|
-
|
-
|
906
|
|
Oct-97
|
Oakhurst
Towers(15)
|
Denver,
CO
|
170
|
-
|
-
|
-
|
170
|
|
Feb-99
|
Parklane
West(16)
|
San
Antonio, TX
|
-
|
17
|
-
|
124
|
141
|
|
Jan-00
|
Park
Regency(16)
|
Chandler,
AZ
|
120
|
28
|
17
|
66
|
231
|
|
Sep-98
|
Richmond
Place(17)
|
Lexington,
KY
|
178
|
60
|
20
|
-
|
258
|
|
Apr-95
|
Santa
Catalina Villas(4)
|
Tucson,
AZ
|
158
|
70
|
15
|
42
|
285
|
|
Jun-94
|
Somerby
at Jones Farm(18)
|
Huntsville,
AL
|
136
|
48
|
-
|
-
|
184
|
|
Apr-99
|
Somerby
at University Park(18)
|
Birmingham,
AL
|
238
|
90
|
28
|
-
|
356
|
|
Apr-99
|
The
Summit at Westlake Hills(4)
|
Austin,
TX
|
149
|
30
|
-
|
90
|
269
|
|
Apr-92
|
Trinity
Towers(16)
|
Corpus
Christi, TX
|
197
|
62
|
20
|
75
|
354
|
|
Jan-90
|
Westlake
Village (19)
|
Cleveland,
OH
|
211
|
56
|
-
|
-
|
267
|
|
Oct-94
|
Subtotal
|
|
4,712
|
1,009
|
177
|
1,010
|
6,908
|
|
|
Managed
Property:
Freedom
Square(20)
|
Seminole,
FL
|
362
|
107
|
76
|
194
|
739
|
|
Jul-98
|
Total
Retirement Centers
|
|
6,020
|
1,311
|
271
|
1,409
|
9,011
|
|
|
Free-standing
Assisted Living Communities
|
|
Unit
Capacity(1)
|
|
|
Community
|
Location
|
IL
|
AL
|
ME
|
SN
|
Total
|
|
Commencement
of
Operations(2)
|
Owned(3):
Bahia
Oaks Lodge
|
Sarasota,
FL
|
-
|
92
|
-
|
-
|
92
|
|
Jun-98
|
Freedom
Inn at Scottsdale
|
Scottsdale,
AZ
|
-
|
94
|
26
|
-
|
120
|
|
Mar-01
|
Hampton
at Cypress Station(23)
|
Houston,
TX
|
-
|
80
|
19
|
-
|
99
|
|
Feb-99
|
Hampton
at Willowbrook
|
Houston,
TX
|
-
|
52
|
19
|
-
|
71
|
|
Jun-99
|
Homewood
at Air Force Village
|
San
Antonio, TX
|
-
|
39
|
-
|
-
|
39
|
|
Nov-00
|
Homewood
at Castle Hills
|
San
Antonio, TX
|
22
|
59
|
21
|
-
|
102
|
|
Feb-01
|
Homewood
at Rockefeller Gardens
|
Cleveland,
OH
|
37
|
66
|
34
|
-
|
137
|
|
Dec-99
|
Homewood
at Tarpon Springs
|
Tarpon
Springs, FL
|
-
|
64
|
-
|
-
|
64
|
|
Aug-97
|
Summit
at Lakeway
|
Austin,
TX
|
-
|
66
|
15
|
-
|
81
|
|
Sep-00
|
Summit
at Northwest Hills
|
Austin,
TX
|
-
|
106
|
16
|
-
|
122
|
|
Aug-00
|
Village
of Homewood(22)
|
Lady
Lake, FL
|
-
|
32
|
16
|
-
|
48
|
|
Apr-98
|
Subtotal
|
|
59
|
750
|
166
|
-
|
975
|
|
|
Leased:
Broadway
Plaza at Pecan Park(11)
|
Fort
Worth, TX
|
-
|
80
|
20
|
-
|
100
|
|
Aug-00
|
Broadway
Plaza at Westover Hills (16)
|
Ft.
Worth, TX
|
-
|
74
|
17
|
-
|
91
|
|
Feb-01
|
Hampton
at Pearland(16)
|
Houston,
TX
|
15
|
52
|
18
|
-
|
85
|
|
Feb-00
|
Hampton
at Pinegate(16)
|
Houston,
TX
|
-
|
81
|
18
|
-
|
99
|
|
May-00
|
Hampton
at Spring Shadows(16)
|
Houston,
TX
|
-
|
53
|
16
|
-
|
69
|
|
May-99
|
Hampton
at Shadowlake(16)
|
Houston,
TX
|
-
|
83
|
16
|
-
|
99
|
|
Apr-99
|
Heritage
Club at Aurora(24)
|
Aurora,
CO
|
-
|
80
|
18
|
-
|
98
|
|
Jun-99
|
Heritage
Club at Lakewood(24)
|
Lakewood,
CO
|
-
|
78
|
18
|
-
|
96
|
|
Apr-00
|
Homewood
at Bay Pines(24)
|
St
Petersburg, FL
|
-
|
80
|
-
|
-
|
80
|
|
Jul-99
|
Homewood
at Boca Raton(11)
|
Boca
Raton, FL
|
-
|
60
|
18
|
-
|
78
|
|
Oct-00
|
Homewood
at Boynton Beach(6)
|
Boynton
Beach, FL
|
-
|
81
|
18
|
-
|
99
|
|
Jan-00
|
Homewood
at Brookmont Terrace(25)
|
Nashville,
TN
|
-
|
62
|
34
|
-
|
96
|
|
May-00
|
Homewood
at Cleveland Park(24)
|
Greenville,
SC
|
-
|
75
|
17
|
-
|
92
|
|
Aug-00
|
Homewood
at Coconut Creek(11)
|
Coconut
Creek, FL
|
-
|
80
|
18
|
-
|
98
|
|
Feb-00
|
Homewood
at Countryside(24)
|
Safety
Harbor, FL
|
-
|
57
|
26
|
-
|
83
|
|
Oct-99
|
Homewood
at Deane Hill (16)
|
Knoxville,
TN
|
-
|
78
|
29
|
-
|
107
|
|
Oct-98
|
Homewood
at Delray Beach(26)
|
Delray
Beach, FL
|
-
|
52
|
32
|
-
|
84
|
|
Oct-00
|
Homewood
at Naples(24)
|
Naples,
FL
|
-
|
76
|
24
|
-
|
100
|
|
Sep-00
|
Homewood
at Richmond Heights(6)
|
Cleveland,
OH
|
-
|
78
|
17
|
-
|
95
|
|
Feb-00
|
Homewood
at Sun City Center(9)
|
Sun
City Center, FL
|
-
|
60
|
31
|
-
|
91
|
|
Aug-99
|
Homewood
at Shavano Park(6)
|
San
Antonio, TX
|
-
|
63
|
19
|
-
|
82
|
|
Jun-00
|
Subtotal
|
|
15
|
1,483
|
424
|
-
|
1922
|
|
|
|
|
Unit
Capacity(1)
|
|
|
Community
|
Location
|
IL
|
AL
|
ME
|
SN
|
Total
|
|
Commencement
of
Operations(2)
|
Managed
with Partial Ownership through Joint Ventures:
Freedom
Inn Minnetonka(28)
|
Minnetonka,
MN
|
-
|
90
|
39
|
-
|
129
|
|
Nov-05
|
Freedom
Inn at Overland Park(28)
|
Overland
Park, KS
|
-
|
87
|
14
|
-
|
101
|
|
Nov-05
|
Freedom
Inn of Sun City West(28)
|
Sun
City West, AZ
|
-
|
83
|
14
|
-
|
97
|
|
Nov-05
|
Freedom
Inn of Roswell(28)
|
Roswell,
GA
|
-
|
96
|
-
|
-
|
96
|
|
Nov-05
|
Freedom
Inn Ventana Canyon(28)
|
Tucson,
AZ
|
-
|
92
|
-
|
-
|
92
|
|
Nov-05
|
Hampton
Assisted Living at Tanglewood(28)
|
Houston,
TX
|
-
|
112
|
-
|
-
|
112
|
|
Nov-05
|
Heritage
Club at Denver Tech Center(28)
|
Denver,
CO
|
-
|
81
|
16
|
-
|
97
|
|
Nov-05
|
Heritage
Club Las Vegas(28)
|
Las
Vegas, NV
|
-
|
90
|
18
|
-
|
108
|
|
Nov-05
|
McLaren
Homewood Village(21)
|
Flint,
MI
|
-
|
80
|
35
|
-
|
115
|
|
Apr-00
|
Subtotal
|
|
-
|
811
|
136
|
-
|
947
|
|
|
Total
Free-standing Assisted Living Communities
|
74
|
3,044
|
726
|
-
|
3,844
|
|
|
Management
Services: (27)
|
|
Unit
Capacity(1)
|
|
|
Community
|
Location
|
IL
|
AL
|
ME
|
SN
|
Total
|
|
Commencement
of
Operations(2)
|
ASF
Bradford Village
|
Edmond,
OK
|
78
|
44
|
-
|
111
|
233
|
|
Sep-05
|
Burcham
Hills
|
East
Lansing, MI
|
84
|
67
|
34
|
133
|
318
|
|
Nov-78
|
Glenview
at Pelican Bay
|
Naples,
FL
|
118
|
-
|
-
|
33
|
151
|
|
Jul-98
|
Legacy
Crossings
|
Franklin,
TN
|
124
|
-
|
-
|
-
|
124
|
|
Feb-04
|
Parkplace
|
Denver,
CO
|
177
|
43
|
17
|
-
|
237
|
|
Oct-94
|
The
Towers
|
San
Antonio, TX
|
353
|
-
|
-
|
-
|
353
|
|
Oct-94
|
Subtotal
|
|
934
|
154
|
51
|
277
|
1,416
|
|
|
Grand
Total
|
|
7,028
|
4,509
|
1,048
|
1,686
|
14,271
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As
of December 31, 2005, unit capacity by care level and type: independent
living residences (IL), assisted living residences (AL), memory
enhanced
or Alzheimers (ME), and skilled nursing beds
(SN).
|
(2)
|
Indicates
the date on which we acquired each of our owned and leased communities,
or
commenced operating our managed communities. We have operated
certain of
our communities pursuant to management agreements prior to acquiring
the
communities.
|
(3)
|
Our
owned communities may be subject to mortgage liens or serve as
collateral
for various financing arrangements. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and
Capital Resources.”
|
(4)
|
Leased
pursuant to a master operating lease expiring September 23, 2013,
with
renewal options for up to two additional ten-year
terms.
|
(5)
|
Leased
pursuant to an operating lease expiring December 31, 2016, with
renewal
options for up to two additional five-year
terms.
|
(6)
|
Leased
pursuant to a master operating lease expiring March 31, 2017,
with renewal
options for up to two additional ten-year
terms.
|
(7)
|
Leased
pursuant to an operating lease expiring July 2018, with renewal
options
for up to two additional ten-year
terms.
|
(8)
|
The
community was owned by Maybrook Realty, Inc., of which W.E. Sheriff,
our
chairman, chief executive officer and president owns 50%. This
lease was
previously operated pursuant to an operating lease. During July
2005, we
exercised our option to purchase the real assets of this community
at a
predetermined price.
|
(9)
|
Leased
pursuant to a master operating lease expiring July 15, 2014,
which
provides for certain purchase options and therefore is recorded
as a lease
financing obligation. In addition, the lease includes renewal
options for
up to three additional ten-year terms.
|
(10)
|
Leased
pursuant to a master operating lease expiring June 30, 2012,
which
provides for certain purchase options and therefore is recorded
as lease
financing obligations. In addition, the lease includes renewal
options for
up to five additional ten-year terms.
|
(11)
|
Leased
pursuant to an operating lease expiring March 31, 2017, which
provides for
a contingent earn-out and therefore is recorded as a lease financing
obligation. In addition, the lease includes renewal options for
up to two
additional five-year terms.
|
(12)
|
Leased
pursuant to an operating lease expiring February 28, 2017, with
renewal
options for up to two additional five-year terms.
|
(13)
|
Leased
pursuant to an operating lease expiring July 2011, with renewal
options
for up to two additional ten-year
terms.
|
(14)
|
Leased
pursuant to an operating lease expiring July 2017, with a seven-year
renewal option. We also have an option to purchase the community
at the
expiration of the lease term.
|
(15)
|
Leased
pursuant to a 14-year operating lease expiring December 2012.
We also have
an option to purchase the community at the expiration of the
lease term.
|
(16)
|
Leased
pursuant to a master operating lease expiring June 30, 2014,
with renewal
options for up to four additional ten-year
terms.
|
(17)
|
Leased
pursuant to a master operating lease expiring July 15, 2014,
with renewal
options for up to three additional ten-year terms.
|
(18)
|
Leased
pursuant to an operating lease expiring August 25, 2018, with
renewal
options for up to two additional ten-year terms.
|
(19)
|
Leased
pursuant to a seven-year operating lease expiring December 31,
2007, with
two renewal options of 13 and ten years. The sale lease-back
agreement
also includes a right of first
refusal.
|
(20)
|
Under
consolidation rules required by Financial Accounting Standards
Board
(“FASB”) Interpretation No. 46(R), Consolidation
of Variable Interest Entities
(“FIN 46(R)”) , the balance sheet and operating results of Freedom Square,
net of intercompany eliminations and minority interest, are
included in
our consolidated financial statements, as opposed to management
service
revenue and reimbursement expenses. Freedom Square is operated
pursuant to a management agreement with a 20-year term, with
two renewal
options for additional ten-year terms, that provides for a
management fee
equal to all cash received by the community in excess of operating
expenses, refunds of entry fees, capital expenditure reserves,
debt
service, and certain payments to the community’s owner. We have an option
to purchase the community at a predetermined price and we guarantee
the
community’s long-term debt.
|
(21)
|
Owned
by a joint venture in which we own a 37.5%
interest.
|
(22)
|
Previously
owned by a joint venture in which we owned a 50% interest.
In July 2005,
we purchased the former partner’s interest in the
property.
|
(23)
|
Previously
leased pursuant to an operating lease. During February 2005,
we purchased
the real assets underlying this
community.
|
(24)
|
Leased
pursuant to a master operating lease expiring June 30, 2012,
with renewal
options for up to four additional ten-year
terms.
|
(25)
|
Leased
pursuant to an operating lease expiring October 31, 2017, which
provides
for a contingent earn-out and therefore is recorded as lease
financing
obligations. In addition, the lease includes renewal options
for up to two
additional five-year terms.
|
(26)
|
Leased
pursuant to a master operating lease expiring March 31, 2017,
which
provided for a contingent earn-out which expired on December
31, 2005. As
a result of the earn-out expiration, the lease for this community
was
accounted for as an operating lease beginning December 31,
2005. The lease
includes renewal options for up to two additional ten-year
terms.
|
(27)
|
Our
management agreements are generally for terms of five to ten
years, but
may be canceled by the owner of the community, without cause,
on three to
six months written notice. Pursuant to the management agreements,
we are
generally responsible for providing management personnel, marketing,
nursing, resident care and dietary services, accounting and
data
processing reports, and other services for these communities
at the
owner’s expense and receive a monthly fee for our services based
either on
a contractually fixed amount or percentage of revenues or income
plus
reimbursement for certain expenses.
|
(28)
|
Owned
by a joint venture in which we own a 20%
interest.
|
Item
3. Legal Proceedings
The
ownership of property and the provision of services related to the senior
living
industry entails an inherent risk of liability. Although we are engaged
in
routine litigation incidental to our business, there is no legal proceeding
to
which we are a party, which, in the opinion of our management, will have
a
material adverse effect upon our financial condition, results of operations,
or
liquidity.
We
carry
liability insurance against certain types of claims that we believe meets
industry standards. We believe that these liabilities have been adequately
accrued for as of December 31, 2005. See “Business - Insurance.” There can be no
assurance that we will continue to maintain such insurance, or that any
future
legal proceedings (including any related judgments, settlements or costs)
will
not have a material adverse effect on our financial condition, liquidity,
or
results of operations.
Item
4. Submission of Matters to a Vote of Security Holders
Not
applicable.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our
common
stock trades on the New York Stock Exchange under the symbol “ACR.” The
following table sets forth, for the periods indicated, the high and low
sales
prices for our common stock as reported on the NYSE.
Year
Ended December 31, 2005
|
|
High
|
|
Low
|
First
Quarter
|
|
$
15.20
|
|
$
9.75
|
Second
Quarter
|
|
15.94
|
|
13.00
|
Third
Quarter
|
|
19.23
|
|
13.30
|
Fourth
Quarter
|
|
26.82
|
|
17.19
|
|
|
|
|
|
Year
Ended December 31, 2004
|
|
High
|
|
Low
|
First
Quarter
|
|
$
6.12
|
|
$
3.17
|
Second
Quarter
|
|
5.64
|
|
4.27
|
Third
Quarter
|
|
7.79
|
|
5.05
|
Fourth
Quarter
|
|
12.25
|
|
6.65
|
As
of February 22, 2006, there were approximately 396 shareholders of record.
It
is the
current policy of our Board of Directors to retain all future earnings
to
reinvest in the business, repay debt obligations and for use as working
capital.
Accordingly, we do not anticipate declaring or paying cash dividends
on our
common stock in the foreseeable future. The payment of cash dividends
in the
future will be at the sole discretion of our Board of Directors and will
depend
on, among other things, our earnings, operations, capital requirements,
financial condition, restrictions in then existing financing agreements,
and
other factors deemed relevant by the Board of Directors.
We
did not
sell any securities during the year ended December 31, 2005 without registration
under the Securities Act of 1933, as amended.
Item
6. Selected
Financial Data
The
selected financial data presented below should be read in conjunction
with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our Consolidated Financial Statements and notes thereto included
elsewhere in this report.(1)
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
Operating
and Other Data:
|
|
|
|
|
|
Communities
(At end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
29
|
|
|
28
|
|
|
28
|
|
|
27
|
|
|
26
|
|
Free-standing
ALs
|
|
|
|
|
|
41
|
|
|
33
|
|
|
33
|
|
|
33
|
|
|
32
|
|
Managed
|
|
|
|
|
|
6
|
|
|
5
|
|
|
4
|
|
|
5
|
|
|
7
|
|
Total
communities
|
|
|
|
|
|
76
|
|
|
66
|
|
|
65
|
|
|
65
|
|
|
65
|
|
Unit
capacity (At end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
9,011
|
|
|
8,866
|
|
|
8,876
|
|
|
8,530
|
|
|
7,981
|
|
Free-standing
ALs
|
|
|
|
|
|
3,844
|
|
|
3,002
|
|
|
3,004
|
|
|
2,997
|
|
|
2,906
|
|
Managed
|
|
|
|
|
|
1,416
|
|
|
1,187
|
|
|
1,066
|
|
|
1,362
|
|
|
1,889
|
|
Total
capacity
|
|
|
|
|
|
14,271
|
|
|
13,055
|
|
|
12,946
|
|
|
12,889
|
|
|
12,776
|
|
Occupancy
rate (At end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
96%
|
|
|
96%
|
|
|
95%
|
|
|
94%
|
|
|
94%
|
|
Free-standing
ALs
|
|
|
|
|
|
91%
|
|
|
89%
|
|
|
83%
|
|
|
80%
|
|
|
63%
|
|
Managed
|
|
|
|
|
|
95%
|
|
|
96%
|
|
|
96%
|
|
|
91%
|
|
|
90%
|
|
Total
occupancy rate
|
|
|
|
|
|
95%
|
|
|
94%
|
|
|
92%
|
|
|
91%
|
|
|
86%
|
|
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
(2)
|
|
Statement
of Operations Data:
|
|
|
|
(in
thousands, except per share data)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
center revenues
|
|
|
|
|
$
|
378,114
|
|
$
|
347,179
|
|
$
|
312,723
|
|
$
|
287,198
|
|
$
|
254,039
|
|
Free-standing
AL revenues
|
|
|
|
|
|
110,269
|
|
|
96,264
|
|
|
83,584
|
|
|
69,661
|
|
|
29,217
|
|
Management
and development services
|
|
|
|
|
|
3,528
|
|
|
1,882
|
|
|
1,522
|
|
|
1,138
|
|
|
2,631
|
|
Reimbursed
expenses
|
|
|
|
|
|
3,089
|
|
|
2,284
|
|
|
2,148
|
|
|
2,112
|
|
|
4,909
|
|
Total
revenues
|
|
|
|
|
|
495,000
|
|
|
447,609
|
|
|
399,977
|
|
|
360,109
|
|
|
290,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of community service revenue,
exclusive
of depreciation expense
shown
separately below
|
|
|
|
|
|
326,504
|
|
|
300,797
|
|
|
280,808
|
|
|
263,864
|
|
|
205,257
|
|
Lease
expense
|
|
|
|
|
|
60,936
|
|
|
60,076
|
|
|
46,484
|
|
|
71,901
|
|
|
35,452
|
|
Depreciation
and amortization,
inclusive
of general and administrative depreciation of $1,925, $1,990,
$1,728,
$1,424, and $1,299, respectively
|
|
|
|
|
|
36,392
|
|
|
31,148
|
|
|
26,867
|
|
|
24,079
|
|
|
22,171
|
|
Amortization
of leasehold
acquisition
costs
|
|
|
|
|
|
2,567
|
|
|
2,917
|
|
|
2,421
|
|
|
11,183
|
|
|
1,980
|
|
Asset
impairments
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,877
|
|
|
6,343
|
|
(Gain)
loss on sale of assets
|
|
|
|
|
|
709
|
|
|
(41)
|
|
|
(23,153)
|
|
|
1,812
|
|
|
1,375
|
|
Reimbursed
expenses
|
|
|
|
|
|
3,089
|
|
|
2,284
|
|
|
2,148
|
|
|
2,112
|
|
|
4,909
|
|
General
and administrative
|
|
|
|
|
|
30,327
|
|
|
28,671
|
|
|
25,410
|
|
|
26,721
|
|
|
29,297
|
|
Total
costs and operating expenses
|
|
|
|
|
|
460,524
|
|
|
425,852
|
|
|
360,985
|
|
|
411,549
|
|
|
306,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
|
|
|
34,476
|
|
|
21,757
|
|
|
38,992
|
|
|
(51,440)
|
|
|
(15,988)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
15,815
|
|
|
31,477
|
|
|
53,570
|
|
|
48,855
|
|
|
40,268
|
|
Other
(income) expense, net
|
|
|
|
|
|
(4,556)
|
|
|
(3,230)
|
|
|
(2,894)
|
|
|
(5,966)
|
|
|
(9,080)
|
|
Income
tax expense (benefit)
|
|
|
|
|
|
(47,530)
|
(4)
|
|
2,421
|
|
|
2,661
|
|
|
487
|
|
|
(12,041)
|
|
Minority
interest
|
|
|
|
|
|
1,049
|
|
|
2,406
|
|
|
1,789
|
|
|
(423)
|
|
|
(129)
|
|
Net
income (loss)
|
|
|
|
|
$
|
69,698
|
|
$
|
(11,317)
|
|
$
|
(16,134)
|
|
$
|
(94,393)
|
|
$
|
(35,006)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
|
|
$
|
2.29
|
|
$
|
(0.48)
|
|
$
|
(0.88)
|
|
$
|
(5.46)
|
|
$
|
(2.03)
|
|
Dilutive
earnings (loss) per share
|
|
|
|
|
$
|
2.17
|
|
$
|
(0.48)
|
|
$
|
(0.88)
|
|
$
|
(5.46)
|
|
$
|
(2.03)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used for basic
earnings
(loss) per share data
|
|
|
|
|
|
30,378
|
|
|
23,798
|
|
|
18,278
|
|
|
17,294
|
|
|
17,206
|
|
Effect
of dilutive common stock options
and
non-vested shares
|
|
|
|
|
|
1,746
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Weighted
average shares used for dilutive
earnings
(loss) per share data
|
|
|
|
|
|
32,124
|
|
|
23,798
|
|
|
18,278
|
|
|
17,294
|
|
|
17,206
|
|
|
|
At
December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
(2)
|
|
2001
(2)
|
|
Balance
Sheet Data (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
40,771
|
|
$
|
28,454
|
|
$
|
17,192
|
|
$
|
18,684
|
|
$
|
20,335
|
|
Restricted
cash
|
|
|
28,435
|
|
|
50,134
|
|
|
43,601
|
|
|
42,305
|
|
|
82,395
|
|
Working
capital deficit (3)
|
|
|
(90,509)
|
|
|
(98,995)
|
|
|
(96,360)
|
|
|
(85,651)
|
|
|
(433,400)
|
|
Land,
buildings and equipment, net
|
|
|
551,298
|
|
|
496,297
|
|
|
533,145
|
|
|
644,002
|
|
|
581,974
|
|
Total
assets
|
|
|
879,474
|
|
|
749,250
|
|
|
776,513
|
|
|
903,678
|
|
|
911,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
-
|
|
|
-
|
|
|
10,856
|
|
|
15,956
|
|
|
132,930
|
|
Long-term
debt and lease financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations,
including current portion
|
|
|
324,000
|
|
|
335,082
|
|
|
360,679
|
|
|
542,227
|
|
|
447,228
|
|
Refundable
portion of entrance fees
|
|
|
85,164
|
|
|
79,148
|
|
|
72,980
|
|
|
69,875
|
|
|
57,217
|
|
Current
portion of deferred entrance fee income
|
|
|
38,407
|
|
|
33,800
|
|
|
30,004
|
|
|
30,078
|
|
|
7,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
deferred entrance fee income
|
|
|
122,417
|
|
|
111,386
|
|
|
109,809
|
|
|
103,912
|
|
|
55,827
|
|
Deferred
gain on sale lease-back transactions
|
|
|
89,012
|
|
|
98,876
|
|
|
92,596
|
|
|
27,622
|
|
|
13,055
|
|
Shareholders’
equity
|
|
|
132,755
|
|
|
5,701
|
|
|
1,985
|
|
|
12,905
|
|
|
107,182
|
|
(1)
|
Effective
January 1, 2004, we changed our method of accounting for variable
interest
entities in accordance with FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities.” As
a
result, we have consolidated the results of a managed community
(Freedom
Square), and have restated all prior periods presented to conform
to this
presentation.
|
(2)
|
The
financial information shown as of December 31, 2002 and 2001
and for the
year ended December 31, 2001 has not been audited and reflects
our
previously issued financial information restated for the
effects on such
periods, as applicable, of the issues giving rise to restatements,
as
discussed in Note 2 of our Consolidated Financial Statements
in our 2004
Form 10-K/A as filed June 10, 2005.
|
(3)
|
At
December 31, 2005, our working capital deficit includes the
classification
of $123.6 million of entrance fees and $4.6 million of tenant
deposits as
current liabilities as required by applicable accounting
pronouncements.
Based upon our historical operating experience, we anticipate
that only
approximately 9% to 12% of those entrance fee liabilities
will actually
become payable, and be required to be settled in cash, during
the next
twelve months. Furthermore, we expect that any entrance fee
liabilities
due within the next twelve months will be offset by proceeds
generated by
subsequent entrance fee sales of the vacated units. Entrance
fee sales,
net of refunds paid, provided $31.2 million of cash during
2005. |
(4)
|
During
the year ended December 31, 2005, we reduced our valuation
allowance
against deferred assets by approximately $55.7 million,
which resulted in
a significant tax benefit in the period. See Note 17
to the consolidated
financial
statements. |
Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
Overview
The
senior
living industry is experiencing growth as a result of demographic changes
and
various other factors. According to census data, the over age 75 population
in
the United States is growing much faster than the general population.
We have
seen increasing demand for services at both our retirement centers and
our
free-standing assisted living communities during the past year, and expect
that
this demand will continue over the next several years. As a general rule,
economic factors that affect seniors will have a corresponding impact
on the
senior living industry. For example, general concerns regarding lower
interest
rates on savings and uncertainty of investment returns have impacted
seniors
during recent years, as well as uncertainties related to world events
such as
the Iraqi war. On the other hand, the continuing strength of the home
resale
market in most areas of the country has been beneficial to seniors, since
the
equity from the sale of a home is a significant source of funding for
senior
living care in many cases. In addition, overall economic conditions and
general
consumer confidence can impact the senior living industry, since many
adult
children subsidize the cost for care of elderly parents, and share in
decisions
regarding their care.
The
assisted living industry is maturing and rapidly evolving. The demand
for
assisted living services increased significantly beginning with the emergence
of
the industry segment in the mid-1990s. However, the development of new
assisted
living communities across the country outstripped demand during the 1998-2001
period, resulting in oversupply of unit capacity, longer fill up times,
price
pressures and deep discounting. The steadily increasing demand for assisted
living services, coupled with minimal new development activity, reduced
much of
the oversupply in many of our markets in 2002 and 2003. As a result,
we were
able to increase occupancy, increase rates and reduce promotional discounting
for our free-standing assisted living communities during 2003 and subsequent
years. Based on available industry data, we believe that demand will
increase
and that new assisted living development in the near term will remain
at
sustainable levels and, accordingly, expect this trend to continue. The
average
length of stay in our free-standing assisted living community segment
is
approximately two years, which represents a challenge and an opportunity
for us.
We must find a number of new residents to maintain and build occupancy.
However,
we also have the opportunity to “mark-to-market” if we are able to attract new
residents at higher current market rates, replacing prior residents with
lower
or discounted rates.
Our
retirement center segment is a more mature segment of the industry, and
has seen
demand and price increases in recent years, with new unit capacity entering
the
market at sustainable levels. Management expects this growth in demand
and
selling rate increases to continue over the next several years. The average
length of stay is much longer in our retirement centers, approximately
five to
seven years in the rental communities, and approximately ten to twelve
years in
the entrance fee communities. In addition, we believe that many of our
retirement centers benefit from significant barriers to entry from competitors,
including the significant cost and length of time to develop competitive
communities, certificate of need requirements for nursing beds in certain
states, the difficulty in finding acceptable development sites in the
geographical areas in which our retirement centers are located, and the
length
of time and difficulty in developing strong competitive
reputations.
We
earn
our revenues primarily by providing housing and services to our residents.
Approximately 83% of our revenues come from private pay sources, meaning
that
residents or their families pay from their own funds (or from the proceeds
of
their privately funded long-term care policies). All private pay residents
are
billed in advance for the next month’s housing and care. In addition, we receive
private pay revenues from the sale of entrance fee contracts at our entrance
fee
communities. While this cash is received at the time the resident moves
in, the
non-refundable portion of the entrance fee is primarily recognized as
income for
financial reporting purposes over the actuarial life of the
resident.
Our
most
significant expenses are:
|
·
|
Cost
of community service revenues
-
Labor and labor related expenses for community associates represent
approximately 63% of this line item. Other significant items
in this
category are food costs, property taxes, utility costs, marketing
costs
and insurance.
|
|
· |
General
and administrative
-
Labor costs also represent the largest component for this category,
comprising the home office and regional staff supporting community
operations. Other significant items are liability reserve
|
|
|
accruals
and related costs, travel, and legal and professional service
costs. In
response to higher liability insurance costs and deductibles
in recent
years, and the inherent liability risk in providing personal
and
health-related services to seniors, we have significantly increased
our
staff and resources involved in quality assurance, compliance
and risk
management.
|
|
·
|
Lease
expense
-
Our lease expense has grown significantly over the past several
years, as
a result of the large number of sale-leaseback transactions
completed in
connection with various financing transactions. Our lease expense
includes
the rent expense for all operating leases, including an accrual
for lease
escalators in future years (generally, the impact of these
future
escalators is spread evenly over the lease term for financial
reporting
purposes), and is reduced by the amortization of deferred gains
on
previous sale-leaseback transactions.
|
|
·
|
Depreciation
and amortization expense
-
We incur significant depreciation expense on our fixed assets
(primarily
community buildings and equipment) and amortization expense
related
primarily to leasehold acquisition
costs.
|
|
·
|
Interest
expense
-
Our interest expense is comprised of interest on our outstanding
debt,
capital lease and lease financing obligations.
|
Significant
Fiscal 2005 Events and Results of Operations
Completion
of 2005 Public Offering
On
January
26, 2005, we completed a public offering of 5,175,000 shares of our common
stock, including the underwriter’s over-allotment of 675,000 shares. The shares
were priced at $10.25. The net proceeds of the offering, after deducting
underwriting discounts and commissions and estimated expenses, were
approximately $49.9 million. The proceeds of this offering were primarily
used
to repay higher cost debt, fund acquisitions and expansion and development
activity, and for general corporate purposes.
We
have
had significant restricted cash balance requirements related to leases,
insurance programs, regulatory reserves for entrance fee communities,
and other
purposes. In many cases these requirements have been met through fully
cash
collateralized letters of credit. As a result of this offering, a
mortgage-backed letter of credit facility obtained during June 2005,
and other
factors, we were able to reduce our current and long-term restricted
cash
requirements as of December 31, 2005 to $28.4 million, a reduction of
$21.7
million during 2005.
On
January
24, 2006, subsequent to year end, we completed an additional secondary
public
offering of common stock. See “Business - Recent Developments”.
Acquisitions
Activity
During
2005, we added 1,273 additional units that we own or manage as a result
of three
transactions:
|
·
|
We
acquired Galleria Woods, an entrance fee continuing care retirement
community in Birmingham, AL. After renovating the community during
2005, we expect to increase the occupancy through additional
entrance fee
sales over its current 76% occupancy
level.
|
|
·
|
During
September, we entered into a long-term management agreement
with a
not-for-profit sponsor for Bradford Village, an entrance fee
retirement
center in Oklahoma City, OK.
|
|
·
|
In
November, a joint venture in which we own 20% acquired eight
free-standing assisted living communities from an affiliate
of Epoch
Senior Living, Inc.
|
|
·
|
These
communities provide additional critical mass in many of our
key markets,
and provide additional opportunities for additional operating
improvement
and ancillary revenue growth. Our recent equity offering during
January
2006 will provide funds for acquiring additional senior living
communities
as opportunities arise.
|
Historic
Highlights
|
·
|
Prior
to the late 1990s, we exclusively owned and operated retirement
centers.
Our expansion into the assisted living market during the late
1990s (with
most of our free-standing assisted living communities opening
during 1999
and 2000) resulted in large amounts of new debt and lease financing.
While
the assisted living market grew rapidly during this period,
an oversupply
of new units caused slower than anticipated fill up times for
these
assisted living communities, at lower than anticipated prices.
Consequently, many of our free-standing assisted living communities
incurred large start-up losses beginning in 2000, and took
longer than
anticipated to reach stabilized occupancy levels.
|
|
·
|
During
2002, we had over $370 million of current debt maturities (largely
associated with the development and financing of our free-standing
assisted living communities) which were maturing at a time
when the
free-standing assisted living communities were still filling
up and
producing weak operating results. In order to address our debt
maturities,
we successfully completed a refinancing plan that included
mortgage
refinancings, a series of sale-leaseback transactions (predominately
on
assisted living properties then in fill up stage), an exchange
offer for
our maturing convertible debentures and the 19.5% mezzanine
loan. We
believe that this arrangement avoided the significant shareholder
dilution
that would have resulted from issuing equity at very low valuations.
As a
result of these transactions, we addressed our maturing obligations,
but
we remained highly leveraged with a substantial amount of debt
and lease
obligations, including the high cost mezzanine debt. Many of
these
financing transactions resulted in large gains or losses. While
the losses
immediately reduced our reported equity, the gains were largely
deferred
over the lease terms.
|
|
·
|
Over
the past three years, our operating results have improved significantly.
Our retirement centers maintained and increased their high
occupancy
rates, and increased average revenue per unit per month. Our
free-standing
assisted living segment continued its fill up, ending 2005
at 91%
occupancy and significantly increasing revenue per unit per
month.
|
|
·
|
As
a
result, we were able to complete various refinancing transactions
during
the 2003 to 2005 period that completely repaid the high cost
mezzanine
debt during 2004 (over three years early), and significantly
reduced our
interest and debt service costs. In addition, we completed
a $50 million
secondary equity offering during January 2005, which further
enabled us to
repay higher cost debt, and fund growth through the acquisition,
expansion
of existing facilities and development of new senior living
communities.
During January 2006, we completed a subsequent $90 million
secondary
equity offering and used the proceeds to repay debt, fund growth
through
acquisition and expansion, and provide working capital. See
“Business -
Recent Developments.”
|
Highlights
of Operating Results
In
order
to continue to increase and improve our financial results, we are focusing
on
the following:
|
·
|
Improving
operating results of our existing senior living communities,
through
increased occupancy and revenue per unit, control of operating
expenses,
and other operational improvements
|
|
·
|
Increasing
the ancillary service components of our revenue, primarily
from our
Innovative Senior Care programs which provide therapy and related
wellness
services to our residents and increasingly to residents of
other senior
living communities.
|
|
·
|
Our
growth provides opportunities to leverage our scale through
cost and
operational efficiencies in the areas of general and administrative
costs,
risk management and insurance, purchasing, information systems,
and other
areas.
|
|
·
|
Reduce
debt service costs by repaying higher cost
debt.
|
|
·
|
Growth
through acquisition of senior living
communities.
|
|
·
|
Expansion
of many of our existing communities, and selective development
of new
senior living communities.
|
Our
statements of operations in recent years should be considered in light
of the
following factors, some of which are likely to influence our future operating
results and financial outlook:
|
·
|
Our
statements of operations for the year ended December 31, 2005
show
significant improvement versus the respective prior year periods.
Net
income for the year ended December 31, 2005 was $69.7
million,
including the $55.7 million impact of the reduction of our
deferred tax
valuation allowance, versus a net loss for the year ended December
31,
2004 of $11.3 million. Cash provided by operating activities
has increased
$21.6
million,
to $60.8
million
from $39.1 million for the year ended December 31, 2005 and
2004,
respectively.
|
|
·
|
We
are focused on increasing the revenues and operating contribution
of our
retirement centers. Revenue per unit increases at our retirement
centers
resulted primarily from increases in selling rates, increased
therapy and
ancillary service revenues, as well as annual billing rate
increases to
existing residents. In addition, a significant component of
the average
revenue per unit increase stems from the “mark-to-market” effect of
resident turnover. Since monthly rates for new residents (current
market
selling rates) are generally higher than billing rates for
current
residents (since annual increases to billing rates are typically
capped in
resident agreements), turnover typically results in significantly
increased monthly fees for the new resident. This “mark-to-market”
increase is generally more significant in entrance fee communities
due to
much longer average length of stay (ten or more
years).
|
|
·
|
For
the year ended December 31, 2005, retirement center revenues
increased
8.9%
versus prior year, and segment operating contribution increased
9.0%
versus the same period last year. Operating contribution per
unit per
month was $1,234
for 2005, an increase of 6.7% versus prior year, and for the
fourth
quarter of calendar 2005 was $1,267.
|
|
·
|
We
are also focusing on increasing our free-standing assisted
living segment
operating contribution further primarily by increasing occupancy
above the
current 91% level, and by increasing revenue per unit through
price
increases, ancillary services, and the “mark-to-market” effect of turnover
of units that are at lower rates, while maintaining control
of our
operating costs. Since monthly rates for new residents (current
market
selling rates) are generally higher than billing rates for
current
residents, turnover typically results in significantly increased
monthly
fees for the new resident. We believe that, absent unforeseen
market or
pricing pressures, occupancy increases above 90% should produce
high
incremental community operating contribution margins for this
segment. The
risks to improving occupancy in our free-standing assisted
living
community portfolio are unexpected increases in move outs in
any period
(due to health or other reasons) and the development of new
unit capacity
or renewed price discounting by competitors in our markets,
which could
make it more difficult to fill vacant units and which could
result in
lower revenue per unit.
|
|
·
|
Our
free-standing assisted living communities have continued to
increase
revenue and segment operating contribution during 2005, primarily
as a
result of a 9.0% year over year increase in revenue per unit
for the year
ended December 31, 2005, as well as an increase in ending occupancy
from
89% as of December 31, 2004, to 91% as of December 31, 2005.
The increased
revenue per unit in our free-standing assisted living communities
resulted
primarily from selling rate increases, reduced discounting,
and turnover
of units resulting in new residents paying higher current market
rates. In
addition, our residency agreements provide for annual rate
increases. The
increased amount of ancillary services, including therapy services,
also
contributed to the increased revenue per
unit.
|
|
·
|
Our
free-standing assisted living community incremental increase
in operating
contribution as a percentage of revenue increase was 63%
for the year ended December 31, 2005. Our free-standing assisted
living
community operating contribution per unit per month was $1,125
for 2005,
an increase of 27.1% versus prior year, and for the fourth
quarter of 2005
was $1,258.
|
Segment
Results
We
operate
in three business segments:
retirement centers, free-standing assisted living communities, and management
services.
The
following table presents the number, total unit capacity and total ending
and
average occupancy percentages of our communities by operating segment
at
December 31, 2005, 2004 and 2003.
|
|
Number
of Communities /
|
|
Ending
Occupancy % /
|
|
Average
Occupancy% /
|
|
|
|
Total
Ending Capacity
|
|
Ending
Occupied Units
|
|
Average
Occupied Units
|
|
|
|
December
31,
|
|
December
31,
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
29
|
|
|
28
|
|
|
28
|
|
|
96%
|
|
|
96%
|
|
|
95%
|
|
|
95%
|
|
|
95%
|
|
|
94%
|
|
|
|
|
9,011
|
|
|
8,866
|
|
|
8,876
|
|
|
8,655
|
|
|
8,482
|
|
|
8,397
|
|
|
8,578
|
|
|
8,398
|
|
|
8,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
ALs
|
|
|
41
|
|
|
33
|
|
|
33
|
|
|
91%
|
|
|
89%
|
|
|
83%
|
|
|
90%
|
|
|
86%
|
|
|
81%
|
|
|
|
|
3,844
|
|
|
3,002
|
|
|
3,004
|
|
|
3,493
|
|
|
2,664
|
|
|
2,483
|
|
|
2,814
|
|
|
2,582
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
Services
|
|
|
6
|
|
|
5
|
|
|
4
|
|
|
95%
|
|
|
96%
|
|
|
96%
|
|
|
95%
|
|
|
94%
|
|
|
93%
|
|
|
|
|
1,416
|
|
|
1,187
|
|
|
1,066
|
|
|
1,345
|
|
|
1,137
|
|
|
1,027
|
|
|
1,190
|
|
|
1,093
|
|
|
1,152
|
|
Total
|
|
|
76
|
|
|
66
|
|
|
65
|
|
|
95%
|
|
|
94%
|
|
|
92%
|
|
|
94%
|
|
|
93%
|
|
|
91%
|
|
|
|
|
14,271
|
|
|
13,055
|
|
|
12,946
|
|
|
13,493
|
|
|
12,283
|
|
|
11,907
|
|
|
12,582
|
|
|
12,073
|
|
|
11,704
|
|
We
measure
the performance of our three business segments, in part, based upon the
operating contribution produced by these business segments. We compute
operating
contribution by deducting the operating expenses associated with a segment
from
the revenues produced by that segment. The following table sets forth
certain
selected financial and operating data on an operating segment basis(1)
(dollars
in thousands, except for per unit amounts).
|
|
Years
Ended December 31,
|
|
2005
vs. 2004
|
|
2004
vs. 2003
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Change
|
|
%
|
|
Change
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$
|
378,114
|
|
$
|
347,179
|
|
$
|
312,723
|
|
$
|
30,935
|
|
|
8.9%
|
|
$
|
34,456
|
|
|
11.0
|
%
|
Free-standing
ALs
|
|
|
110,269
|
|
|
96,264
|
|
|
83,584
|
|
|
14,005
|
|
|
14.5%
|
|
|
12,680
|
|
|
15.2
|
%
|
Management
Services
|
|
|
6,617
|
|
|
4,166
|
|
|
3,670
|
|
|
2,451
|
|
|
58.8%
|
|
|
496
|
|
|
13.5
|
%
|
Total
revenue
|
|
$
|
495,000
|
|
$
|
447,609
|
|
$
|
399,977
|
|
$
|
47,391
|
|
|
10.6%
|
|
$
|
47,632
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
occupied units
|
|
|
8,655
|
|
|
8,482
|
|
|
8,397
|
|
|
173
|
|
|
2.0%
|
|
|
85
|
|
|
1.0
|
%
|
Ending
occupancy %
|
|
|
96%
|
|
|
96%
|
|
|
95%
|
|
|
0%
|
|
|
|
|
|
1%
|
|
|
|
|
Average
occupied units
|
|
|
8,578
|
|
|
8,398
|
|
|
8,118
|
|
|
180
|
|
|
2.1%
|
|
|
280
|
|
|
3.4
|
%
|
Average
occupancy %
|
|
|
95%
|
|
|
95%
|
|
|
94%
|
|
|
0%
|
|
|
|
|
|
1%
|
|
|
|
|
Revenue
per occupied unit (per month)
|
|
$
|
3,673
|
|
$
|
3,445
|
|
$
|
3,210
|
|
$
|
228
|
|
|
6.6%
|
|
$
|
235
|
|
|
7.3
|
%
|
Operating
contribution per unit (per month)
|
|
|
1,234
|
|
|
1,157
|
|
|
1,015
|
|
|
77
|
|
|
6.7%
|
|
|
142
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
and healthcare revenue
|
|
|
378,114
|
|
|
347,179
|
|
|
312,723
|
|
|
30,935
|
|
|
8.9%
|
|
|
34,456
|
|
|
11.0
|
%
|
Cost
of community service revenue, exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation
presented separately below
|
|
|
251,050
|
|
|
230,590
|
|
|
213,886
|
|
|
20,460
|
|
|
8.9%
|
|
|
16,704
|
|
|
7.8
|
%
|
Segment
operating contribution (2)
|
|
|
127,064
|
|
|
116,589
|
|
|
98,837
|
|
|
10,475
|
|
|
9.0%
|
|
|
17,752
|
|
|
18.0
|
%
|
Operating
contribution margin
(3)
|
|
|
33.6%
|
|
|
33.6%
|
|
|
31.6%
|
|
|
0.0%
|
|
|
0.0%
|
|
|
2.0%
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing
ALs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
occupied units (4)
|
|
|
2,643
|
|
|
2,533
|
|
|
2,368
|
|
|
110
|
|
|
4.3%
|
|
|
165
|
|
|
7.0
|
%
|
Ending
occupancy % (4)
|
|
|
91%
|
|
|
89%
|
|
|
83%
|
|
|
2%
|
|
|
|
|
|
6%
|
|
|
|
|
Average
occupied units (4)
|
|
|
2,578
|
|
|
2,453
|
|
|
2,314
|
|
|
125
|
|
|
5.1%
|
|
|
139
|
|
|
6.0
|
%
|
Average
occupancy % (4)
|
|
|
90%
|
|
|
86%
|
|
|
82%
|
|
|
4%
|
|
|
|
|
|
4%
|
|
|
|
|
Revenue
per occupied unit (per month)
|
|
$
|
3,564
|
|
$
|
3,270
|
|
$
|
3,010
|
|
$
|
294
|
|
|
9.0%
|
|
$
|
260
|
|
|
8.6
|
%
|
Operating
contribution per unit (per month)
|
|
|
1,125
|
|
|
885
|
|
|
600
|
|
|
240
|
|
|
27.1%
|
|
|
285
|
|
|
47.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resident
and healthcare revenue
|
|
|
110,269
|
|
|
96,264
|
|
|
83,584
|
|
|
14,005
|
|
|
14.5%
|
|
|
12,680
|
|
|
15.2
|
%
|
Cost
of community service revenue, exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation
presented separately below
|
|
|
75,454
|
|
|
70,207
|
|
|
66,922
|
|
|
5,247
|
|
|
7.5%
|
|
|
3,285
|
|
|
4.9
|
%
|
Segment
operating contribution (2)
|
|
|
34,815
|
|
|
26,057
|
|
|
16,662
|
|
|
8,758
|
|
|
33.6%
|
|
|
9,395
|
|
|
56.4
|
%
|
Operating
contribution margin (3)
|
|
|
31.6%
|
|
|
27.1%
|
|
|
19.9%
|
|
|
4.5%
|
|
|
16.6%
|
|
|
7.2%
|
|
|
36.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
services operating contribution
|
|
$
|
3,528
|
|
$
|
1,882
|
|
$
|
1,522
|
|
$
|
1,646
|
|
|
87.5%
|
|
$
|
360
|
|
|
23.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
segment operating contributions
|
|
|
165,407
|
|
|
144,528
|
|
|
117,021
|
|
|
20,879
|
|
|
14.4%
|
|
|
27,507
|
|
|
23.5
|
%
|
As
a
% of total revenue
|
|
|
33.4%
|
|
|
32.3%
|
|
|
29.3%
|
|
|
1.1%
|
|
|
3.4%
|
|
|
3.0%
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
expense
|
|
|
60,936
|
|
|
60,076
|
|
|
46,484
|
|
|
860
|
|
|
1.4%
|
|
|
13,592
|
|
|
29.2
|
%
|
Depreciation
and amortization, inclusive of general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administative
depreciation and amortization of $1,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1,990
and $1,728, respectively
|
|
|
36,392
|
|
|
31,148
|
|
|
26,867
|
|
|
5,244
|
|
|
16.8%
|
|
|
4,281
|
|
|
15.9
|
%
|
Amortization
of leasehold acquisition costs
|
|
|
2,567
|
|
|
2,917
|
|
|
2,421
|
|
|
(350
|
)
|
|
(12.0%
|
)
|
|
496
|
|
|
20.5
|
%
|
Loss
(gain) on sale of assets
|
|
|
709
|
|
|
(41
|
)
|
|
(23,153
|
)
|
|
750
|
|
|
NM
|
|
|
23,112
|
|
|
NM
|
|
General
and administrative
|
|
$
|
30,327
|
|
$
|
28,671
|
|
$
|
25,410
|
|
$
|
1,656
|
|
|
5.8%
|
|
$
|
3,261
|
|
|
12.8
|
%
|
Income
from operations
|
|
$
|
34,476
|
|
$
|
21,757
|
|
$
|
38,992
|
|
$
|
12,719
|
|
|
58.5%
|
|
$
|
(17,235
|
)
|
|
(44.2
|
%)
|
|
(1)
|
Selected
financial and operating data does not include any inter-segment
transations or allocated costs.
|
|
(2)
|
Segment
Operating Contribution is calculated by subtracting the segment
operating
expenses from the segment revenues.
|
|
(3)
|
Segment
Operating Contribution Margin is calculated by dividing the
operating
contribution of the segment by the respective segment
revenues.
|
|
(4)
|
Excludes
nine free-standing assisted living communities in which we
own a
non-controlling interest through joint ventures. These joint
ventures are
not
included in the consolidated free-standing assisted living
segment
results. The net results of these joint ventures are accounted
for using
the equity
method and are included in Other income (expense) in the consolidated
statement of operations. See Note 8 to the consolidated financial
statements.
|
NM
Not
Meaningful
Year
Ended December 31, 2005 Compared with the Year Ended December 31,
2004
Retirement
Centers
Revenue
-
Retirement center revenues were $378.1
million
for the year ended December 31, 2005, compared to $347.2 million for
the year
ended December 31, 2004, an increase of $30.9
million,
or 8.9%,
which
was comprised of:
|
·
|
$4.6
million
related to revenues from the February 2005 acquisition of Galleria
Woods.
At December 31, 2005, 159 units or 76% of the community was
occupied. We
expect occupancy to increase at this retirement center following
the
completion of a renovation of the community initiated in 2005.
|
|
·
|
$25.3
million
from increased revenue per occupied unit. This increase is
comprised
primarily of selling rate increases and increased ancillary
services
provided to residents (including a $10.2
million
increase in therapy services revenue). Rate increases include
the
mark-to-market effect from turnover of residents (reselling
units at
higher current selling rates), annual increases in monthly
service fees
from existing residents and the impact of increased Medicare
reimbursement
rates for skilled nursing and therapy services. We expect that
selling
rates to new residents will generally continue to increase
during fiscal
2006 absent an adverse change in market conditions.
|
|
·
|
$1.0
million
from other increases in occupancy. Occupancy of the retirement
center
segment at December 31, 2005 was 96%. Any occupancy gains above
this level
should produce significant incremental operating contributions.
We are
focused on maintaining this high level of occupancy across
the portfolio,
and making incremental occupancy gains at selected communities
with below
average occupancy levels for our retirement
centers.
|
Costs
of community service revenue
-
Retirement
center costs of community service revenue (exclusive of depreciation)
were
$251.1 million for the year ended December 31, 2005, compared to $230.6
million
for the year ended December 31, 2004, an increase of $20.5 million, or
8.9%,
which was comprised of:
|
·
|
$4.8
million
related to operating expenses from the February acquisition
of Galleria
Woods.
|
|
·
|
$12.2
million
of increased labor and related costs. This increase is primarily
a result
of wage rate increases for associates and additional staffing
costs,
including approximately $4.7
million
supporting the growth of our therapy services program. Although
wage rates
of associates are expected to increase each year, we do not
expect
significant changes in staffing levels in our retirement center
segment,
other than to support community expansions or the growth of
ancillary
programs such as therapy services.
|
|
·
|
$3.5
million
of other year-to-year cost increases. This includes increases
in operating
expenses such as utilities, property taxes, marketing, food,
ancillary
costs and other property related
costs.
|
Segment
operating contribution
-
Retirement
center operating contribution was $127.1 million for the year ended December
31,
2005, compared to $116.6 million for the years ended December 31, 2004,
an
increase of $10.5 million, or 9.0%.
|
·
|
The
operating contribution margin was consistent at 33.6% for the
year ended
December 31, 2005 and 2004, respectively.
|
|
·
|
The
operating contribution margin in 2005 reflected continued operational
improvements throughout the retirement center segment resulting
from
increased occupancy and revenue per occupied unit (including
continued
growth of the therapy services program), and control of community
service
revenue costs including labor, employee benefits and insurance
related
costs. These margin improvements were offset by the break-even
contribution of the Galleria Woods community acquired in February
2005,
and the additional start-up costs associated with the growth
of our
therapy programs and outside therapy
contracts.
|
Free-standing
Assisted Living Communities
Revenue
-
Free-standing assisted living community revenues were $110.3 million
for the
year ended December 31, 2005, compared to $96.3 million for the year
ended
December 31, 2004, an increase of $14.0 million, or 14.5%, which was
comprised
of:
|
·
|
$10.6
million from increased revenue per occupied unit. This increase
includes
the impact of price increases, reduced discounting and promotional
allowances, and the mark-to-market effect from turnover
of residents (reselling units at higher current rates), and
includes
$2.1 million related to increased revenues from therapy services.
We will
be focused on increasing revenue per occupied unit, subject
to market
constraints, through price increases, as well as the mark-to-market
turnover of residents with prior discounted rates, and an increase
in
ancillary services such as therapy.
|
|
·
|
$3.4
million from increased occupancy. Total occupancy increased
from 89% at
December 31, 2004 to 91% at December 31, 2005, an increase
of 2 percentage
points. We are focused on continuing to increase the occupancy
in the
free-standing assisted living communities, and believe that
over the
long-term, this segment of our business should be able to achieve
average
occupancy levels at or near those achieved in our retirement
center
segment. We are focused on increasing our number of move-ins,
increasing
average length of stay, and expanding our marketing efforts
and sales
training in order to increase
occupancy.
|
Costs
of community service revenue -
Free-standing assisted living costs of community service revenue (exclusive
of
depreciation) were $75.5 million for the year ended December 31, 2005,
compared
to $70.2 million for the year ended December 31, 2004, an increase of
$5.2
million, or 7.5%, which was comprised of:
|
·
|
$3.7
million
of
additional labor and labor related costs. This increase is
primarily a
result of wage rate increases for associates and additional
staffing costs
of approximately $1.4
million
supporting the growth of our therapy services programs. We
do not expect
significant increases in staffing levels in our free-standing
assisted
living communities as occupancy levels increase over the current
91%,
since most of our communities are nearly fully staffed at current
occupancy levels. However, growth of ancillary revenue programs
such as
therapy may require additional staff to support incremental
activity. As a
result of higher
recruiting and retention costs of qualified personnel, we
expect
increased wage rates each year, subject to labor market
conditions.
|
|
·
|
$1.5
million of other net cost increases. This includes increased
community
overhead costs, such as marketing and utilities, as well as
food costs,
property tax expenses and various other cost
increases.
|
Segment
operating contribution
-
Free-standing
assisted living segment operating contribution was $34.8 million for
the year
ended December 31, 2005, compared to $26.1 million for the year ended
December
31, 2004, an increase of $8.8 million, or 33.6%.
|
·
|
For
the year ended December 31, 2005 and 2004, the operating contribution
margin increased to 31.6% from 27.1%, an increase of 4.5 percentage
points
or 16.6%.
|
|
·
|
The
increased margin primarily relates to strong increases in revenue
per
occupied unit and occupancy increases, coupled with control
of community
service revenue costs. The incremental increase in operating
contribution
as a percentage of revenue increase was 62.5% for the year
ended December
31, 2005.
|
We
believe
that, absent unforeseen cost pressures, revenue increases resulting from
occupancy increases should continue to produce high incremental community
operating contribution margins (as a percentage of revenue increase)
for this
segment.
Management
Services
Management
services operating contribution was $3.5
million and $1.9 million
for the year ended December 31, 2005 and 2004, respectively. This increase
is
the result of an increase in service revenue related to several management
service contracts acquired during the year.
Lease
Expense.
Lease
expense was $60.9 million for the year ended December 31, 2005, compared
to
$60.1 million for the year ended December 31, 2004, an increase of $0.9
million,
or 1.4%.
|
·
|
As
a
result of a sale-leaseback transaction completed in July 2004,
a
retirement center is currently operated pursuant to an operating
lease
(previously owned). Lease expense increased $1.7 million as
a result of
this transaction. This increase was offset by approximately
$0.9 million
of increased amortization of deferred gain on sale and $2.5
million in
reduced lease expense associated with the February 2005 acquisition
of the
real assets of one free-standing assisted living community
and the July
2005 acquisition of the real assets underlying a retirement
center. These
communities were previously operated pursuant to operating
leases.
|
|
·
|
As
a
result of the expiration of contingent earn-outs included in
lease
agreements for two free-standing assisted living communities,
these leases
were accounted for as operating leases as of December 31, 2004
(versus
lease financing obligation treatment for these leases in prior
periods).
Lease expense for the year ended December 31, 2005 increased
$1.6 million
related to these two free-standing assisted living communities.
|
|
·
|
The
remainder of the increase in lease expense was the result of
rent
increases and contingent rent.
|
|
·
|
Net
lease expense for the year ended December 31, 2005 was $60.9
million,
which includes current lease payments of $67.9 million, plus
straight-line
accruals for future lease escalators of $4.9 million, net of
the
amortization of the deferred gain from prior sale-leasebacks
of $11.9
million.
|
|
·
|
As
of December 31, 2005, we had operating leases for 34 of our
communities,
including 18 retirement centers and 16 free-standing assisted
living
communities.
|
Depreciation
and Amortization.
Depreciation and amortization expense was $36.4 million for the year
ended
December 31, 2005, compared to $31.1 million for the year ended December
31,
2004, an increase of $5.2 million, or 16.8%.
|
·
|
Approximately
$3.1 million of the increase was related to the July 2004 sale-leaseback
transaction which reduced the depreciable asset lives to the
ten year
initial lease term for two retirement centers and one free-standing
assisted living community.
|
|
·
|
As
a
result of the July 2005 acquisition of the real assets underlying
a
retirement center, and the February 2005 acquisitions of Galleria
Woods
and the acquisition of the real assets underlying one free-standing
assisted living community, depreciation increased $0.5 million.
The
retirement center and free-standing assisted living community
were
previously operated pursuant to operating leases. These increases
were
partially offset as a result of the expiration of contingent
earn-outs for
two free-standing assisted living communities, which were previously
accounted for as lease financings, which resulted in a $0.4
million
decrease in depreciation expense. The remainder of the increase
was
primarily attributable to ongoing development and expansion
capital
improvements.
|
Amortization
of Leasehold Acquisition Costs.
Amortization of leasehold acquisition costs was $2.6 million for the
year ended
December 31, 2005, compared to $2.9 million for the year ended December
31,
2004. This decrease primarily relates to the acquisitions of the real
assets of
a retirement center in July 2005 and a free standing assisted living
community
in February 2005. These communities were previously operated pursuant
to
operating leases.
Loss
(Gain) on Disposal or Sale of Assets. Loss
on
disposal or sale of assets was $0.7 million for the year ended December
31,
2005, compared to a $41,000 gain for the year ended December 31, 2004.
This loss
was related to fixed asset disposals at certain communities.
General
and Administrative.
General
and administrative expense was $30.3 million for the year ended December
31,
2005, compared to $28.7 million for the year ended December 31, 2004,
an
increase of $1.7 million, or 5.8%.
|
·
|
$2.4
million related to payroll and other costs associated with
general
corporate growth and expansion, which was offset by a decrease
of $1.4
million from the accrual during 2004 of a one-time executive
bonus
resulting from the achievement of specified goals related to
improvements
in our capital structure, and a decrease of $1.2 million related
to
general and professional liability insurance and
reserves
|
|
·
|
$1.9
million from increased stock compensation expense, primarily
as a result
of a significant increase in our stock valuation and the related
variable
accounting expense associated with performance based restricted
stock
granted to certain of our executive officers during
2005.
|
|
·
|
General
and administrative expense as a percentage of total consolidated
revenues
was 6.1% and 6.4% for the years ended December 31, 2005 and
2004.
|
|
·
|
We
believe that measuring general and administrative expense as
a percentage
of total consolidated revenues and combined revenues (including
unconsolidated managed revenues) provides insight as to the
level of our
overhead in relation to our total operating activities (including
those
that relate to management services). General and administrative
expense as
a percentage of total combined revenues was 5.5% and 5.8% for
the year
ended December 31, 2005 and 2004, respectively, calculated
as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Total
consolidated revenues
|
|
$
|
495,000
|
|
$
|
447,609
|
|
Revenues
of unconsolidated managed communities
|
|
|
59,463
|
|
|
51,997
|
|
Less
management fees
|
|
|
3,528
|
|
|
1,882
|
|
Total
combined revenue
|
|
$
|
550,935
|
|
$
|
497,724
|
|
|
|
|
|
|
|
|
|
Total
general and administrative expense
|
|
$
|
30,327
|
|
$
|
28,671
|
|
|
|
|
|
|
|
|
|
General
and administrative expense as a % of total consolidated
revenues
|
|
|
6.1%
|
|
|
6.4%
|
|
General
and administrative expense as a % of total combined
revenue
|
|
|
5.5%
|
|
|
5.8%
|
|
Interest
Expense. Interest
expense was $15.8 million for the year ended December 31, 2005, compared
to
$31.5 million for the year ended December 31, 2004, a decrease of $15.7
million,
or 49.8%. This decrease was primarily the result of:
|
·
|
The
sale-leaseback transactions completed in July 2004, in which
we repaid the
remaining $82.6 million balance of the mezzanine loan, and
$18.9 million
of first mortgage debt. These
transactions decreased the year ended December 31, 2005 interest
expense
compared to the year ended December 31, 2004 interest expense
by
approximately $13.3 million.
|
|
·
|
The
December 31, 2004 expiration of contingent earn-outs included
in lease
agreements for two free-standing assisted living communities.
These leases
are currently accounted for as operating leases (versus lease
financing
obligation treatment for these leases for periods prior to
December 31,
2004). Interest expense for the year ended December 31, 2005
decreased
$1.3 million related to these two free-standing assisted
living
communities.
|
|
· |
Our
public equity offering completed in January 2005 resulted
in the repayment
of $17.2 million of 9.625% mortgage notes, issued in 2001,
due October 1,
2008. In addition, during January 2005, we repaid a $5.7
million, 9% fixed
interest mortgage note, issued in July 2004, due July 2006. These
repayments were made from the proceeds of the
offering, and decreased the year ended December 31, 2005
interest expense
compared to the year ended December 31, 2004 interest expense
by
approximately $1.5
million.
|
|
·
|
The
redemption of $4.5 million in principal amount of our Series
B Notes on
April 30, 2004. This transaction decreased the year ended December
31,
2005 interest expense compared to the year ended December 31,
2004
interest expense by approximately $0.2
million.
|
|
·
|
The
remainder of the decrease was attributable to routine debt
payments and
was partially offset by a $1.0 million increase in interest
expense
related to debt associated with certain real asset acquisitions
for the
year ended December 31, 2005.
|
Interest
Income. Interest
income was $4.4 million for the year ended December 31, 2005, compared
to $2.8
million for the year ended December 31, 2004. This increase is primarily
attributable to gains on various investments and the interest income
received on
notes issued during fiscal 2005. See Note 6 to our consolidated financial
statements. Interest income will vary subject to continued reductions
in
required cash balances and changes in interest rates.
Other
Income. Other
income was $0.2 million and $0.4 million for the year ended December
31, 2005
and 2004, respectively. Other income includes miscellaneous income and
expense
as well as our equity in the earnings or losses of unconsolidated subsidiaries
in which we own a non-controlling financial interest.
Income
Taxes.
Income
tax expense was a benefit of $47.5 million for the year ended December
31, 2005,
compared to an expense of $2.4 million for the year ended December 31,
2004. As
of December 31, 2005 and 2004, the Company carried a valuation allowance
against
deferred tax assets in the amount of $6.1 million and $66.1 million,
respectively, a decrease of $60.0 million over 2004. As a general principle,
in
assessing valuation of its deferred tax assets, management considers
whether it
is more likely than not that some or all of the deferred tax assets will
be
realized. The ultimate realization of deferred tax assets related to
deductible
temporary differences is dependent upon the generation of future taxable
income
during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in making
this
assessment. In determining when it may meet the “more likely than not”
recoverability criteria for its deferred tax assets, the Company will
continue
to assess its projected future taxable income and other factors.
During
the
year ended December 31, 2005, the Company determined that it would reduce
its
valuation allowance against deferred assets by approximately $55.7 million,
resulting in a significant tax benefit in the year. This determination
was made
following a comprehensive analysis and careful consideration of the factors
described above in light of the following attributes:
|
· |
the
nature and predictable timing of reversal of the subject deferred
tax
assets and the nature and timing of losses that contributed
to the tax
valuation allowance,
|
|
· |
the
Company’s recently reported positive income from operations, net income
and occupancy data,
|
|
· |
senior
management’s proven ability to reasonably project future operating
results, and
|
|
· |
the
continued improvement in the Company’s capital structure
|
As
a
result of the reduction in the deferred tax valuation allowance, the
Company
recognized a $47.5 million net income tax benefit for the year ended
December
31, 2005.
Minority
Interest in Earnings of Consolidated Subsidiaries, Net of Tax. Minority
interest in earnings of consolidated subsidiaries, net of tax, was $1.0
million
and $2.4 million for the year ended December 31, 2005 and 2004, respectively.
This reduction in minority interest was primarily attributable to the
July 2004
sale-leaseback transaction in which we sold a substantial majority of
our
interest in two retirement centers and one free-standing assisted living
community (while retaining a 10% interest in those communities), partially
offset by improved operating performance at Freedom Square.
Net
Income. We
experienced net income of $69.7 million (including the $55.7 million
impact of
the reduction of our tax valuation allowance), or $2.29 earnings per
basic and
$2.17 earnings per diluted share, for the year ended December 31, 2005,
compared
to a net loss of $11.3 million, or $0.48 loss per basic and diluted share,
for
the year ended December 31, 2004.
Year
Ended December 31, 2004 Compared with the Year Ended December 31,
2003
Retirement
Centers
Revenue
-
Retirement center revenues were $347.2 million for the year ended December
31,
2004, compared to $312.7 million for the year ended December 31, 2003,
an
increase of $34.5 million, or 11.0%, which was comprised of:
|
·
|
$6.1
million from increased occupancy due to the August 2003 lease
of two
previously managed communities, which increased revenues by
$12.5 million,
offset by a $6.4 million decrease in revenues resulting from
the September
2003 sale-manageback of a previously owned retirement center.
We increased
average occupancy in retirement centers by 280 units
when comparing December 31, 2004 with December 31, 2003. The
280 unit
increase includes the partial year impact of converting the
two previously
managed retirement centers to a lease during August 2003, which
was offset
by a decrease resulting from the sale-manageback of a retirement
center
during September 2003.
|
|
·
|
$4.0
million from other increases in occupancy. Occupancy of the
retirement
center segment at December 31, 2004 was 96%. Any occupancy
gains above
this level should produce significant incremental operating
contributions.
|
|
·
|
$24.4
million from increased revenue per occupied unit. This increase
is
comprised primarily of selling rate increases and increased
ancillary
services provided to residents (including an $8.6 million increase
in
therapy services and a $2.0 million increase in entrance fee
income). Rate
increases include the impact of increased Medicare reimbursement
rates for
skilled nursing and therapy services, the mark-to-market effect
from
turnover of residents (reselling units at higher current selling
rates)
and annual increases in monthly service fees from existing
residents.
|
Cost
of community service revenues
-
Retirement
center cost of community service revenues (exclusive of depreciation)
were
$230.6 million for the year ended December 31, 2004, compared to $213.9
million
for the year ended December 31, 2003, an increase of $16.7 million, or
7.8%,
which was comprised of:
|
·
|
$3.8
million increase due to the August 2003 lease of two previously
managed
communities, which increased expenses by $7.1 million, offset
by the
September 2003 sale-manageback of a previously owned retirement
center,
which decreased expenses $3.3 million.
|
|
·
|
$10.2
million of increased labor and related costs. This increase
is primarily a
result of wage rate increases for associates and additional
staffing
costs, including approximately $3.1 million supporting the
growth of our
therapy services program.
|
|
·
|
$2.7
million of other year-to-year cost increases. This includes
increases in
operating expenses such as utilities, property taxes, marketing,
food,
ancillary costs and other property related
costs.
|
Community
operating contribution
-
Retirement
center operating contribution was $116.6 million for the year ended December
31,
2004, compared to $98.8 million for the year ended December 31, 2003,
an
increase of $17.8 million, or 18.0%.
|
·
|
The
operating contribution margin increased from 31.6% at December
31, 2003 to
33.6% at December 31, 2004, an increase of 2.0 percentage points.
|
|
·
|
The
increased operating contribution margin in 2004 primarily relates
to
continued operational improvements throughout the retirement
center
segment resulting from increased occupancy and revenue per
occupied unit
(including continued growth of the therapy services program),
and control
of cost of community service revenues including labor, employee
benefits
and insurance related costs.
|
Free-standing
Assisted Living Communities
Revenue
-
Free-standing assisted living community revenues were $96.3 million for
the year
ended December 31, 2004, compared to $83.6 million for the year ended
December
31, 2003, an increase of $12.7 million, or 15.2%, which was comprised
of:
|
·
|
$8.6
million from increased revenue per occupied unit. This increase
includes
the impact of price increases, reduced discounting and promotional
allowances, and the mark-to-market effect from turnover
of residents (reselling units at higher current rates), and
includes
$1.9 million related to increased revenues from therapy services.
|
|
·
|
$4.1
million from increased occupancy. Occupancy increased from
83% at December
31, 2003 to 89% at December 31, 2004, an increase of 6 percentage
points.
|
|
·
|
These
amounts exclude the revenue and occupancy for two free-standing
assisted
living communities owned through unconsolidated joint
ventures.
|
Costs
of community service revenues
-
Free-standing assisted living costs of community service revenues (exclusive
of
depreciation) were $70.2 million for the year ended December 31, 2004,
compared
to $66.9 million for the year ended December 31, 2003, an increase of
$3.3
million or 4.9%, which was comprised of:
|
·
|
$3.2
million
of
additional labor and labor related costs. This increase is
primarily a
result of wage rate increases for associates and additional
staffing costs
of approximately $1.2 million supporting the growth of our
therapy
services programs.
|
|
·
|
$0.1
million of other net cost increases. This includes increased
community
overhead costs, food costs and various other cost
increases.
|
Community
operating contribution
-
Free-standing
assisted living community operating contribution was $26.1 million for
the year
ended December 31, 2004, compared to $16.7 million for the year ended
December
31, 2003, an increase of $9.4 million, or 56.4%.
|
·
|
For
the year ended December 31, 2004 and 2003, respectively, the
operating
contribution margin increased from 19.9% to 27.1%, an increase
of 7.2
percentage points.
|
|
·
|
The
increased margin primarily relates to strong increases in revenue
per
occupied unit and some occupancy increases, coupled with control
of
community service revenue costs. The incremental increase in
operating
contribution as a percentage of revenue increase was 74% for
the year
ended December 31, 2004 versus December 31, 2003.
|
Management
Services.
Management
services revenues and operating contribution were $1.9 million for the
year
ended December 31, 2004, compared to $1.5 million for the year ended
December
31, 2003, an increase of $0.4 million, or 23.7%. The increase results
from the
September
2003 sale-manageback of a previously owned retirement center. During
the
year ended December 31, 2004, we consolidated a managed community (Freedom
Square) in accordance with new accounting literature and have restated
all prior
periods presented to conform to this presentation.
Lease
Expense.
Lease
expense was $60.1 million for the year ended December 31, 2004, compared
to
$46.5 million for the year ended December 31, 2003, an increase of $13.6
million, or 29.2%.
|
· |
As
a
result of sale-leaseback transactions completed in 2004, a
retirement
center is currently operated pursuant to an operating lease
(previously
owned) and two retirement centers are currently lease financing
obligations (previously owned). As a result of the sale-leaseback
transactions completed in 2003, five owned or managed retirement
centers
became leased properties, with lease expense recognized for
a full year in
2004 versus a partial year in 2003. These transactions
increased lease expense by $19.3 million in 2004 compared to
2003, offset
by approximately $5.9 million of increased amortization of
deferred gain
on sale.
|
|
·
|
Net
lease expense for the year ended December 31, 2004 was $60.1
million,
which includes current lease payments of $65.0 million, plus
straight-line
accruals for future lease escalators of $6.0 million, net of
the
amortization of the deferred gain from prior sale-leasebacks
of $10.9
million.
|
|
·
|
As
a
result of the expiration of contingent earn-outs included in
lease
agreements for two free-standing assisted living communities,
these leases
are accounted for as operating leases as of December 31, 2004
(versus
lease financing obligation treatment for these leases in prior
periods).
Lease expense for the two free-standing assisted living communities
is
expected to be approximately $0.4 million a quarter.
|
|
·
|
As
of December 31, 2004, we had operating leases for 35 of our
communities,
including 19 retirement centers and 16 free-standing assisted
living
communities.
|
Depreciation
and Amortization.
Depreciation and amortization expense was $31.1 million for the year
ended
December 31, 2004, compared to $26.8 million for the year ended December
31,
2003, an increase of $4.3 million, or 15.9%. Approximately $4.2 million
of the
increase was related to the July 2004 transaction which reduced the depreciable
asset lives to the ten year initial lease term for two retirement centers
and
one free-standing assisted living community. In addition, depreciation
expense
increased $1.0 million related to 2004 and 2003 depreciation on assets
previously held-for-sale. These increases are offset by $2.9 million
decrease of
depreciation expense related to the 2003 sale lease-back of three retirement
centers and the sale of an additional retirement center. Depreciation
expense
for the quarter ended December 31, 2004 was $9.2 million.
Amortization
of Leasehold Acquisition Costs.
Amortization of leasehold acquisition costs was $2.9 million for the
year ended
December 31, 2004, compared to $2.4 million for the year ended December
31,
2003, an increase of $0.5 million or 20.5%. This increase was related
to the
August 2003 lease of two retirement centers that we previously managed,
which
increased leasehold acquisition costs by $12.8 million, adjusted by a
$0.9
million reduction in prior leasehold acquisition costs, for a net increase
of
$11.9 million.
Gain
on the Sale of Assets.
Gain on
the sale of assets for the year ended December 31, 2003 was $23.2 million.
This
gain resulted from the sale-manageback of a retirement center in September
2003.
General
and Administrative.
General
and administrative expense was $28.7 million for the year ended December
31,
2004, compared to $25.4 million for the year ended December 31, 2003,
an
increase of $3.3 million, or 12.8%.
|
·
|
Overall
costs related to our insurance coverages, including claim reserves
for
general and professional liability, increased $1.5 million
during the year
ended December 31, 2004 compared to the year ended December
31,
2003.
|
|
·
|
Additional
general and administrative costs were incurred during 2004.
Increased
audit and consulting costs related to compliance with Sarbanes-Oxley
during 2004 amounted to approximately $0.9 million during the
year. The
year ended December 31, 2004 also included $0.4 million of
costs
associated with a restricted stock grant to certain of our
executive
officers.
|
|
·
|
Approximately
$1.2 million of the increase was the result of costs incurred
in
conjunction with the July 2004 sale-leaseback transaction,
offset by
approximately $0.8 million of costs incurred during the year
ended
December 31, 2003 related to the 2003 sale-leaseback
transactions.
|
|
·
|
General
and administrative expense as a percentage of total consolidated
revenues
was 6.4% for the years ended December 31, 2004 and 2003.
|
|
· |
We
believe that measuring general and administrative expense as
a percentage
of total consolidated revenues and combined revenues (including
unconsolidated managed revenues) provides insight as to the
level of our
overhead in relation to our total operating activities (including
those
that relate to management services). General and administrative
expense as a percentage of total combined revenues was 5.8%
and 5.7% for
the year ended December 31, 2004 and 2003, respectively, calculated
as
follows:
|
|
|
Year
Ended December 31,
|
|
|
|
2004
|
|
2003
|
|
Total
consolidated revenues
|
|
$
|
447,609
|
|
$
|
399,977
|
|
Revenues
of unconsolidated managed communities
|
|
|
51,997
|
|
|
48,808
|
|
Less
management fees
|
|
|
1,882
|
|
|
1,522
|
|
Total
combined revenue
|
|
$
|
497,724
|
|
$
|
447,263
|
|
|
|
|
|
|
|
|
|
Total
general and administrative expense
|
|
$
|
28,671
|
|
$
|
25,410
|
|
|
|
|
|
|
|
|
|
General
and administrative expense as a % of total consolidated
revenues
|
|
|
6.4%
|
|
|
6.4%
|
|
General
and administrative expense as a % of total combined
revenue
|
|
|
5.8%
|
|
|
5.7%
|
|
Interest
Expense. Interest
expense was $31.5 million for the year ended December 31, 2004, compared
to
$53.6 million for the year ended December 31, 2003, a decrease of $22.1
million,
or 41.2%. This decrease was primarily the result of:
|
·
|
In
connection with the sale-leaseback transactions completed in
July 2004, we
repaid the remaining $82.6 million balance of the mezzanine
loan, and
$18.9 million of first mortgage debt. These transactions decreased
the
year ended December 31, 2004 interest expense compared to the
year ended
December 31, 2003 interest expense by approximately $13.7 million.
This
decrease was offset by the write-off of $3.3 million of unamortized
financing costs relating to the early prepayment of the debt
repaid in the
transaction.
|
|
·
|
As
a
result of the sale-leaseback transactions completed in September
2003, we
repaid $112.8 million of first mortgage debt, and $51.8 million
of the
mezzanine loan. Interest expense for the year ended December
31, 2003 was
$53.6 million. This amount includes $11.0 million of interest
expense on
debt repaid or refinanced during
2003.
|
Income
Taxes.
The
provision for income taxes was an expense of $2.4 million for the year
ended
December 31, 2004, and $2.7 million for the year ended December 31, 2003.
These
taxes are largely the result of tax on gains recognized in connection
with the
July 2004 and September 2003 sale and sale-leaseback transactions. We
have a
valuation allowance against deferred tax assets of approximately $66.1
million
as of December 31, 2004, which increased by approximately $10.1 million
during
calendar year 2004. As a result of our reported losses in the prior years,
we
did not meet the “more likely than not” recoverability criteria necessary to
currently recognize the benefit of our deferred tax assets, except for
those
assets which will be recovered through known reversals of deferred tax
liabilities.
Minority
Interest in Earnings of Consolidated Subsidiaries, Net of Tax. Minority
interest in earnings of consolidated subsidiaries, net of tax, was $2.4
million
and $1.8 million for the year ended December 31, 2004 and 2003, respectively.
This amount was attributable to the HCPI equity investment made during
September
2002, as well as the Freedom Square management agreement consolidated
in
accordance with applicable accounting literature. A $0.9 million reduction
in
minority interest was attributable to the July 2004 sale-leaseback in
which we
sold a substantial majority of our interest in two retirement centers
and one
free-standing assisted living community (while retaining a 10% interest
in those
three communities). Offsetting this decrease is an increase of $1.5 million,
which was attributable to increased entrance fee sales for the year ended
December 31, 2004 versus December 31, 2003 at Freedom Square.
Net
Loss. We
experienced a net loss of $11.3 million, or $0.48 loss per diluted share,
for
the year ended December 31, 2004, compared to a net loss of $16.1 million,
or
$0.88 loss per diluted share, for the year ended December 31,
2003.
Quarterly
Results
The
following tables present certain quarterly operating results for each
of our
last eight fiscal quarters, derived from our unaudited financial statements.
We
believe that all necessary adjustments have been included in the amounts
stated
below to present fairly the quarterly results when read in conjunction
with the
Consolidated Financial Statements. Results of operations for any particular
quarter are not necessarily indicative of results of operations for a
full year
or predictive of future periods.
|
|
2005
Quarter Ended
|
|
Year
Ended
|
|
|
|
Mar
31
|
|
June
30(1)
|
|
Sept
30
|
|
Dec
31
|
|
Dec
31, 2005
|
|
|
|
(amounts
in thousands, except per share data)
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
118,991
|
|
$
|
121,699
|
|
$
|
124,749
|
|
$
|
129,561
|
|
$
|
495,000
|
|
Income
from operations |
|
|
6,769 |
|
|
9,245 |
|
|
9,045 |
|
|
9,417 |
|
|
34,476 |
|
Net
income
|
|
|
2,625
|
|
|
59,000
|
|
|
4,090
|
|
|
3,983
|
|
|
69,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
$
|
1.90
|
|
$
|
0.13
|
|
$
|
0.13
|
|
$
|
2.29
|
|
Weighted
average basic shares outstanding
|
|
|
28,899
|
|
|
31,053
|
|
|
30,918
|
|
|
31,073
|
|
|
30,378
|
|
Diluted
|
|
$
|
0.09
|
|
$
|
1.82
|
|
$
|
0.13
|
|
$
|
0.12
|
|
$
|
2.17
|
|
Weighted
average diluted shares outstanding
|
|
|
30,700
|
|
|
32,331
|
|
|
32,513
|
|
|
32,953
|
|
|
32,124
|
|
|
|
2004
Quarter Ended
|
|
Year
Ended
|
|
|
|
Mar
31
|
|
June
30
|
|
Sept
30(2)
|
|
Dec
31
|
|
Dec
31, 2004
|
|
|
|
(amounts
in thousands, except per share data)
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
109,143
|
|
$
|
110,149
|
|
$
|
112,049
|
|
$
|
116,268
|
|
$
|
447,609
|
|
Income
from operations |
|
|
5,588 |
|
|
7,305 |
|
|
2,993 |
|
|
5,871 |
|
|
21,757 |
|
Net
income
|
|
|
(4,507)
|
|
|
(2,260)
|
|
|
(6,663)
|
|
|
2,113
|
|
|
(11,317)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
($
0.21)
|
|
|
($
0.09)
|
|
|
($
0.27)
|
|
$
|
0.08
|
|
$
|
(0.48)
|
|
Weighted
average basic shares outstanding
|
|
|
21,258
|
|
|
24,290
|
|
|
24,665
|
|
|
24,977
|
|
|
23,798
|
|
Diluted
|
|
|
($
0.21)
|
|
|
($
0.09)
|
|
|
($
0.27)
|
|
$
|
0.08
|
|
$
|
(0.48)
|
|
Weighted
average diluted shares outstanding
|
|
|
21,258
|
|
|
24,290
|
|
|
24,665
|
|
|
26,606
|
|
|
23,798
|
|
|
(1) |
During
the quarter ended June 30, 2005, we reduced our valuation allowance
against deferred assets by approximately $55.7 million, which
resulted in
a significant tax benefit in the period.
See Note 17 to our consolidated financial
statements.
|
|
(2) |
During
the quarter ended September 30, 2004, we recorded a write-off
of $3.3
million of unamortized financing costs (in interest expense)
relating to
the early prepayment of debt.
|
Liquidity
and Capital Resources
We
believe
that our current cash and cash equivalents and expected cash flow from
operations will be sufficient to fund our operating requirements, capital
expenditure requirements, periodic debt service requirements, lease and
tax
obligations during the next twelve months.
Our
primary sources of cash from operating activities are the collection
of monthly
and other billings for providing housing, healthcare services and ancillary
services at our communities, proceeds from the sale of entrance fees,
and
management fees from the communities we manage for third parties. These
collections are primarily from residents or their families, with approximately
17% coming from various reimbursement programs (primarily Medicare).
The primary
uses of cash for our ongoing operations include the payment of community
operating expenses, including labor costs and related benefits, general
and
administrative costs, lease and interest payments, principal payments
required
under various debt agreements, refunds due upon termination of entrance
fee
contracts, working capital requirements, and capital expenditures necessary
to
maintain our buildings and equipment.
We
have
substantial payment commitments on our outstanding debt, capital leases
and
lease financing obligations and operating lease obligations. As shown
in the
Future Cash Commitments table below, we have significant payment obligations
during the next five years. These commitments and our plans regarding
them are
described below:
|
·
|
In
addition to our long term debt of $146.6 million we have capital
lease and
lease financing obligations of $177.4 million, for total debt
of $324.0
million at December 31, 2005. We also guaranty $18.0 million
of third
party senior debt in connection with a retirement center and
a
free-standing assisted living community that we operate.
|
|
·
|
We
have long-term debt payments including recurring principal
amortization
and other amounts due each year plus various maturities of
mortgages and
other loans. We have scheduled debt principal payments of $146.6
million,
including $12.0 million due during the twelve months ending
December 31,
2006. We intend to pay these amounts as they come due primarily
from cash
provided by operations. See our Future Cash Commitments table
below.
|
|
·
|
As
of December 31, 2005, we lease 43 of our communities (34 operating
leases
and 9 leases accounted for as lease financing obligations).
As a result,
we have significant lease payments. Our capital lease and lease
financing
obligations include payments of $16.9 million that are due
in the twelve
months ending December 31, 2006. During the twelve months ending
December
31, 2006, we are also obligated to make minimum rental payments
of
approximately $68.2 million under long-term operating leases.
We intend to
pay these capital lease, lease financing obligations and operating
lease
obligations primarily from cash provided by operations. See
our Future
Cash Commitments table below.
|
As
of
December 31, 2005, we had approximately $40.8 million in unrestricted
cash and
cash equivalents and $28.4 million in restricted cash. For the year ended
December 31, 2005, the Company’s cash provided by operations was $60.8 million.
At December 31, 2005, we had $90.5 million of negative working capital,
which
includes the classification of $123.6 million of entrance fees and $4.6
million
in tenant deposits as current liabilities as required by applicable accounting
pronouncements. Based upon our historical operating experience, we anticipate
that only approximately 9% to 12% of those entrance fee liabilities will
actually come due, and be required to be settled in cash, during the
next twelve
months. We expect that any entrance fee liabilities due within the next
twelve
months will be fully offset by the proceeds generated by subsequent entrance
fee
sales. Entrance fee sales, net of refunds paid, provided $31.2 million
of cash
for the year ended December 31, 2005.
On
January
26, 2005, we completed a public offering of 5,175,000 shares of our common
stock, including the underwriter’s over-allotment of 675,000 shares. The shares
were priced at $10.25. The net proceeds of the offering, after deducting
underwriting discounts, commissions and expenses, were approximately
$49.9
million.
On
January
24, 2006, the Company completed an additional public offering of 3,450,000
shares of its common stock, including the underwriter’s over-allotment of
450,000 shares. The shares were priced at $26.60. The net proceeds of
the
offering, after deducting underwriting discounts and commissions, were
approximately $89.8 million.
We
would
expect, from time to time, to selectively pursue potential future acquisitions
of senior living communities and businesses engaged in activities that
are
similar or complementary to our business. Such transactions may be funded
by a
combination of our equity investment in combination with debt financing,
or with
lease or other financing. Certain transactions may be structured as joint
ventures with other third party capital partners, typically with us having
a
minority ownership interest and providing management services to the
communities.
We
also
plan to add additional expansion units to our portfolio, primarily through
the
expansion of our existing retirement center communities and by expanding
two of
our existing free-standing assisted living communities into full retirement
center campuses. We currently have expansion projects in various stages
of
development relating to a number of our communities. Several of these
have
recently begun construction or are expected to begin construction during
the
next twelve months, and will increase our unit capacity over the next
several
years (beginning in 2006). These projects are expected to be financed
through a
combination of our cash investment, lessor and lender financing, and
entrance
fee sale proceeds (for certain projects).
We
may
also, from time to time, selectively pursue the development and construction
of
new senior living communities. These new development projects would generally
require us to provide a portion of the funding as equity investment and
to
arrange mortgage or other financing for the remaining cost, or may utilize
lease
financing. Certain development projects may be structured as joint ventures
with
other third party capital partners.
We
do not
expect changes in interest rates to have a material effect on our income
or cash
flows in 2006, since 73.8% of our debt has fixed rates. There can be no
assurances, however, that interest rates will not significantly change
and
increase our future debt service costs.
Certain
of
our indebtedness and lease agreements are cross-collateralized or
cross-defaulted. Any default with respect to such obligations could cause
our
lenders or lessors to declare defaults, accelerate payment obligations
or
foreclose upon the communities securing such indebtedness or exercise their
remedies with respect to such communities, which could have a material
adverse
effect on us. Certain of our debt instruments and leases contain financial
and
other covenants, typically related to the specific communities financed
or
leased. We believe that projected results from operations and cash flows
will be
sufficient to satisfy these covenants. However, there can be no assurances
that
we will remain in compliance with those covenants, or in the event of future
non-compliance, that our creditors will grant amendments or
waivers.
We
have
primarily used a combination of mortgage financing, lease financing, and
convertible debentures to finance our cash needs over the past several
years. In
the future, subject to our performance and market conditions, we would
expect to
utilize various types of financing including mortgage financing, lease
financing, and public debt or equity offerings as well.
Fiscal
2005 Transactions and Debt Activity
On
September 22, 2005, we entered into a $21.0 million construction loan with
a
commercial lender in order to finance the expansion of one of our assisted
living communities in Austin, Texas. The expansion involves the development
of a
99-bed skilled nursing facility that will be integrated into the community.
The
loan matures in September 2008, and includes two one-year extension options.
The
outstanding principal balance of the loan will bear interest at a variable
rate
equal to LIBOR plus 2.75%. We will be required to make monthly payments
of
interest only through the scheduled maturity date. If we exercise our extension
options, we will also be required to make monthly principal payments (based
upon
a 25 year amortization schedule) during the extension period(s). At
December 31, 2005, we have $5.6 million outstanding under this loan.
On
December 12, 2005, we entered into a transaction with ASF of Green Hills,
LLC,
an affiliate of American Seniors Foundation, Inc., a non-profit entity
("ASF"),
pursuant to which we entered into a management services agreement to manage
the
development and construction of ASF’s rental assisted living community in
Nashville, Tennessee, and subsequently manage the operations of the community.
ASF’s total development cost of the project is estimated to be approximately
$32.3 million. We agreed to provide certain initial financing to ASF, by
providing a $32.3 million loan to ASF, which will be advanced by us primarily
over the next twelve months. A $26.3 million promissory note receivable
matures
on December 12, 2010 and bears interest at a variable rate equal to one
month
LIBOR plus 250 basis points. A second $6.1 million promissory note receivable
matures on December 12, 2015 and bears interest at 10.5%. Under the promissory
notes, ASF is required to make monthly payments of interest only through
the
scheduled maturity dates. At December 31, 2005, $5.5 was outstanding under
these
notes receivable from ASF. ASF intends to refinance these notes with long-term
tax-exempt financing upon stabilization of the community.
In
order
to provide this financing to ASF, we obtained a $26.3 million construction
loan
from a commercial bank. The loan matures on December 12, 2010 and bears
interest
at a variable rate equal to one-month LIBOR plus 225 basis points. Under
this
loan, we are required to make monthly payments of interest only through
the
scheduled maturity date. We have pledged the two ASF promissory notes,
and
related collateral, to the lender. At December 31, 2005, we have $1.7 million
outstanding under this loan.
On
December 22, 2005, we entered into three loans with a commercial lender
to
facilitate the expansion of our Brandywine, Pennsylvania entrance fee
continuing
care retirement community. The aggregate principal amount of the loans
is $25.8
million. In consummation of this transaction, we obtained:
|
·
|
A
$9.4 million construction loan in order to finance the development
of 28
independent living units to be known as the Terrace Homes at
Brandywine,
which will be integrated as part of the community's campus.
The loan
matures on December 22, 2008 and bears interest, at our election,
at a
variable rate equal to LIBOR plus 2.75% or the lender's base
rate plus
1.0%. Under this loan, we are required to make monthly payments
of
interest only through the scheduled maturity date. The loan
will primarily
be repaid with the proceeds from the sale of the entrance fee
independent
units. At December 31, 2005, we have outstanding $0.1 million
related to
this construction loan.
|
|
·
|
An
$11.4 million construction loan in order to finance a 57-unit
expansion of
the healthcare center at the community. The loan matures on
December 22,
2008 and includes two one-year extension options (subject to
the
satisfaction of certain conditions, including the payment of
an extension
fee). The loan bears interest, at our election, at a variable
rate equal
LIBOR plus 2.75% or the lender's base rate plus 1.0%. Under
this loan, we
are required to make monthly payments of interest only through
the
scheduled maturity date. If we exercise our extension options,
we will
additionally be required to make monthly principal payments
through the
term of the loan. At December 31, 2005, we have outstanding
$4.1 million
related to this construction loan.
|
|
·
|
A
$5.0 million term loan, which replaces a $4.5 million term
loan repaid
during March 2005. The loan matures on December 22, 2008 and
we have two
one-year extension options (subject to the satisfaction of
certain
conditions, including the payment of an extension fee). The
loan bears
interest, at our election, at a variable rate equal to LIBOR
plus 2.5% or
the lender's base rate plus 1.0%. Under this loan, we are required
to make
monthly payments of interest only through the scheduled maturity
date. If
we exercise our extension options, we will additionally be
required to
make monthly principal payments through the term of the loan.
At December
31, 2005, we have outstanding $5.0 million related to this
loan.
|
Fiscal
2004 Transactions and Debt Activity
HCPI
Sale-Leaseback and Repayment of Mezzanine Loan
In
September 2002, we entered into a $112.8 million mezzanine loan with
Health Care
Property Investors, Inc. or HCPI for a five-year term. At the same time,
HCPI
also made a $12.2 million equity investment in certain other subsidiaries
that
functioned solely as passive real estate holding companies owning the
real
property and improvements of nine retirement centers. HCPI received a
9.8%
ownership interest in those subsidiaries as a result of that
investment.
In
September 2003, we partially repaid the mezzanine loan through a separate
multi-property transaction with HCPI that resulted in the repayment of
$51.8
million of the principal and accrued interest on the mezzanine loan
On
July
15, 2004, we completed a multi-property sale-leaseback transaction with
HCPI. In
the transaction, we sold a substantial majority of our interest in the
real
property and improvements underlying two retirement centers and one
free-standing assisted living community, while retaining a 10% interest
in those
three communities. We also sold to HCPI all of our interest in the real
property
and improvements underlying one of our other retirement centers.(1)
We
continued to operate all four of the communities involved in the transaction
under a master lease. The proceeds from the transaction were used primarily
to
repay $18.9 million of mortgage debt and the remaining $82.6 million
balance of
the mezzanine loan with HCPI.
The
four
communities involved in the July 15, 2004 transaction were valued at
$153.5
million, as supported by fair market value appraisals. The communities
had a
combined capacity of 1,353 units, including independent living, assisted
living,
memory enhancement and skilled nursing units. Two of the communities
are located
in Florida, one in Kentucky and one in Michigan. As a result of the transaction,
we owned 10% of the real estate holding companies owning three of the
communities. HCPI owned 90% of those holding companies and 100% of the
fourth
real estate holding company. These four real estate holding companies
leased the
four communities to us pursuant to a master lease.
The
master
lease agreement has an initial term of ten years, plus three ten year
renewal
periods at our option. The initial lease rate is 8.8% on the $153.5 million
value, consisting of a 9% base lease rate on invested equity in the real
estate
holding companies
and a pass-through of the cost of $24.8 million of mortgage debt for
two of the
real estate holding companies. The $24.8 million of mortgage debt was
retained
by two of the real estate holding companies and, commencing July 2004,
was no
longer consolidated on our balance sheet. Our existing guarantee with
respect to
$16.8 million of that debt was unchanged and remained in place. The lease
also
contained certain formula-based lease rate escalators. For the three
communities
in which we retained a 10% interest, we also retained a formula-based
option
(transaction value escalated at 3% per annum, compounded annually) to
repurchase
the real estate, which option was exercisable at the end of the base
lease term
or any renewal term. The agreement also has a provision which allows
up to $0.9
million of additional proceeds on the free-standing assisted living community
contingent on achievement of certain operating results at that
community.
The
master
lease has been accounted for as an operating lease for one of the retirement
centers and as a lease financing with respect to the other three communities
as
a result of the continuing 10% ownership interest and other factors.
Because of
the lease financing treatment for these three communities, the amount
of debt on
our balance sheet remains approximately the same following the transaction.
The
debt associated with these three new lease financings is being fully
amortized
over the initial ten-year lease term. No gain or loss was recognized
for the
three communities with lease financing treatment. For the community being
accounted for as an operating lease, we realized a gain of approximately
$16.3
million, which was deferred and is being amortized over the initial ten-year
lease term.
As
a
result of the transaction, during the third quarter of 2004, we wrote-off
$3.3
million of unamortized financing costs relating to the early prepayment
of the
mezzanine loan and the other debt repaid, and we expensed approximately
$1.2
million of other transaction related costs. Additionally, we recorded
$2.5
million current tax expense related to the taxable gain on the sale of
our
interest in the four communities after full utilization of U.S. Federal
net
operating losses. The transaction resulted in the repayment of the remaining
$82.6 million balance of the mezzanine loan, including accrued interest,
as well
as $18.9 million of mortgage debt.
We
also
obtained on July 15, 2004 a separate mortgage loan from HCPI in the amount
of
$5.7 million. Interest was payable monthly at 9%, with the principal
balance due
in July 2006. The note is secured by mortgages on one of our free-standing
assisted living communities, an undeveloped land parcel and a free-standing
assisted living community leased to a third party. This mortgage loan
was fully
repaid with the proceeds of the January 2005 public offering.
____________________
(1)
|
Prior
to the transaction, we held 90.2% and HCPI held 9.8% interests
in the real
property underlying the three retirement centers and we owned
a 61%
interest in the free-standing assisted living community through
a joint
venture with unaffiliated parties. After the transaction, we
retained a
10% interest in the real property and improvements underlying
two of the
retirement centers and the free-standing assisted living community
through
our 10% interest in the real estate holding companies that
serve as the
lessors for these communities. We continue to operate all four
communities
as lessee under a master lease.
|
Other
Fiscal 2004 Debt Activity
During
the
year ended December 31, 2004, we refinanced $38.6 of mortgage debt which
had a
scheduled maturity of April 2005, with a total of $43.1 million of mortgage
debt, comprised of a $38.5 million mortgage loan and a $4.6 million mortgage
loan. The $38.5 million loan has a seven-year maturity, and is secured
by three
free-standing assisted living communities. The $4.6 million loan has
a two-year
maturity and is secured by a fourth free-standing assisted living community.
The
$38.5 million mortgage debt bears interest at a variable rate with a
5.0% floor,
and the $4.6 million mortgage loan bears interest at a variable rate
with a
floor of 6.5%. The $38.6 million mortgage debt which was retired had
a variable
rate with a 6.75% floor.
On
February 12, 2004, we announced that we were electing to redeem $4.5
million in
principal amount of our Series B Notes at a redemption price of 105%
(expressed
as a percentage of principal amount), plus accrued but unpaid interest
to the
redemption date. On April 1, 2004, we further announced that we were
electing to
redeem the remaining $2.1 million principal balance of our Series B Notes
on
April 30, 2004 at a redemption price of 103.5% (expressed as a percentage
of
principal amount), plus accrued but unpaid interest to the redemption
date. As a
result of these two redemption notices, holders of Series B Notes elected
to
convert $10.9 million of Series B Notes into 4,808,898 shares of common
stock at
the conversion price of $2.25 per share, and approximately $36,000 of
Series B
Notes were redeemed. As of April 30, 2004, no Series B Notes remained
outstanding.
Cash
Flow, Investing and Financing Activity
During
the
year ended December 31, 2005, we generated a positive net cash flow of
$12.3
million. Net cash provided by operating activities was $60.8 million,
net cash
used by investing activities was $48.4 million and net cash used by financing
activities was $35,000. Our unrestricted cash balance was $40.8 million
as of
December 31, 2005, as compared to $28.5 million as of December 31, 2004.
Cash
was primarily provided from significantly improved operating results
and net
entrance fee sales, and proceeds from refinancing transactions, while
cash was
used primarily for acquisition and development activity, debt service
and lease
obligations, capital expenditures and working capital.
Net
cash
provided by operating activities increased to $60.8 million for the year
ended
December 31, 2005 from $39.1 million for the year ended December 31,
2004, an
improvement of $21.6 million, primarily as a result of significantly
improved
operational results and increased cash from the non-refundable portion
of
entrance fee sales.
Net
cash
from entrance fee sales, net of refunds paid on entrance fee terminations,
was
$31.2 million for the years ended December 31, 2005 and 2004, versus
$26.7
million for the year ended December 31, 2003, as follows:
Net
cash provided by entrance fee sales:
|
|
For
the years ended December 31,
|
|
(in
thousands)
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Proceeds
from entrance fee sales - deferred income
|
|
$ |
37,404
|
|
$ |
31,992
|
|
$ |
30,588
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from entrance fee sales - refundable portion
|
|
|
14,895
|
|
|
12,069
|
|
|
11,202
|
|
Refunds
of entrance fee terminations
|
|
|
(21,105
|
)
|
|
(12,871
|
)
|
|
(15,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by entrance fee sales
|
|
$ |
31,194
|
|
$ |
31,190
|
|
$ |
26,683
|
|
Although
accounting rules require that refundable portion of entrance fees and
a portion
of deferred entrance fee income are shown as a current liability (which
total
$123.6 million as of December 31, 2005), we expect that not only will
any
refunds due within the next year be offset by new entrance fee sales,
but that
new sales will continue to be a significant source of cash to us.
We
are
focused on maintaining strong entrance fee sales for 2006, however, given
the
high occupancy at our existing entrance fee communities, additional growth
of
entrance fee sales at these communities may become a function of the
available
inventory of vacant units. Excluding the February 2005 acquisition of
Galleria
Woods, our existing entrance fee communities’ independent living units average
98% occupancy.
We
routinely make capital expenditures to maintain or enhance communities
under our
control. Our maintenance capital spending is primarily for refurbishing
apartments and maintaining the quality of our communities. Capital spending
for
the year ended December 31, 2005 was $56.4 million, including $22.8 million
of
maintenance capital spending, $20.0 million related to acquisitions of
communities and real property and $13.6 million of capital expenditures
related
to development and expansion activities. Our expected fiscal 2006 maintenance
capital spending is approximately $28 million. In addition, capital spending
on
expansion and development activities is expected to increase over the
next
twelve months as a result of several active projects.
Net
cash
used by financing activities was $35,000 for the year ended December
31, 2005,
compared with $14.3 million of cash used during the year ended December
31,
2004. During the year ended December 31, 2005, we received proceeds of
$23.7
million from issuance of long term debt and $49.9 million from the January
2005
offering of 5.2 million shares of our common stock. For the year ended
December
31, 2005, we made principal payments on our indebtedness of $63.3 million,
refunded $21.1 million related to entrance fee terminations and paid
$4.1
million in distributions to minority interest holders.
In
connection with certain entrance fee communities, we made principal payments
under master trust agreements of $1.1 million during 2005.
During
2004, we experienced a net cash flow of $11.3 million. Net cash provided
by
operating activities was $39.1 million, net cash used by investing activities
was $13.6 million and net cash used by financing activities was $14.3
million.
Our unrestricted cash balance was $28.5 million as of December 31, 2004.
Primarily, cash was provided from improved operating results and strong
entrance
fee sales, proceeds from refinancing transactions and issuance of long-term
debt, while cash was used primarily for debt service and lease obligations,
working capital and capital expenditures.
Future
Cash Commitments
The
following tables summarize our total contractual obligations and commercial
commitments as of December 31, 2005 (amounts in thousands):
|
|
Payments
Due by Twelve Months Ended December 31,
|
|
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations and related interest
|
|
$
|
211,795
|
|
$
|
22,344
|
|
$
|
26,560
|
|
$
|
25,509
|
|
$
|
15,685
|
|
$
|
32,452
|
|
$
|
89,245
|
|
Capital
lease and lease financing obligations and related interest
|
|
|
212,764
|
|
|
21,790
|
|
|
22,014
|
|
|
22,492
|
|
|
22,863
|
|
|
23,423
|
|
|
100,182
|
|
Operating
lease obligations
|
|
|
700,092
|
|
|
68,246
|
|
|
69,291
|
|
|
67,980
|
|
|
69,054
|
|
|
69,829
|
|
|
355,692
|
|
Refundable
entrance fee obligations(1)
|
|
|
85,164
|
|
|
9,368
|
|
|
9,368
|
|
|
9,368
|
|
|
9,368
|
|
|
9,368
|
|
|
38,324
|
|
Other
|
|
|
1,620
|
|
|
1,620
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
contractual obligations
|
|
|
1,211,435
|
|
|
123,368
|
|
|
127,233
|
|
|
125,349
|
|
|
116,970
|
|
|
135,072
|
|
|
583,443
|
|
Notes
receivable and related interest(2)
|
|
|
(67,017)
|
|
|
(3,063)
|
|
|
(2,645)
|
|
|
(2,648)
|
|
|
(2,645)
|
|
|
(9,971)
|
|
|
(46,045)
|
|
Contractual
obligations, net
|
|
$
|
1,144,418
|
|
$
|
120,305
|
|
$
|
124,588
|
|
$
|
122,701
|
|
$
|
114,325
|
|
$
|
125,101
|
|
$
|
537,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of Commitment Expiration Per Period
|
|
|
|
|
Total
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Thereafter
|
|
Guaranties(3)
|
|
$
|
17,968
|
|
$
|
8,683
|
|
$
|
368
|
|
$
|
399
|
|
$
|
432
|
|
$
|
467
|
|
$
|
7,619
|
|
Construction
commitments
|
|
|
50,590
|
|
|
48,022
|
|
|
2,568
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Additional
cash funding requirements (4)
|
|
|
26,844
|
|
|
21,476
|
|
|
5,368
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
commercial commitments
|
|
$
|
95,402
|
|
$
|
78,181
|
|
$
|
8,304
|
|
$
|
399
|
|
$
|
432
|
|
$
|
467
|
|
$
|
7,619
|
|
(1)
|
Future
refunds of entrance fees are estimated based on historical
payment trends.
These refund obligations are offset by proceeds received from
resale of
the vacated apartment units. Historically, proceeds from resale
of
entrance fee units each year completely offset refunds paid,
and generate
excess cash to us.
|
(2)
|
A
portion of the lease payments noted in the above table is repaid
to us as
interest income on a note receivable from the
lessor.
|
(3)
|
Guarantees
include mortgage debt related to two communities. The mortgage
debt we
guarantee relates to a retirement center under a long-term
operating lease
agreement, and to a free-standing assisted living community
in which we
have a joint venture interest.
|
(4) |
|
We
have committed to fund the construction of a free-standing
assisted living
community for an unrelated non-profit entity. We will finance
this
commitment through internal sources and a $26.3 million construction
loan
from a commercial bank.
|
Critical
Accounting Policies
Certain
critical accounting policies are complex and involve significant judgments
by
our management, including the use of estimates and assumptions, which
affect the
reported amounts of assets, liabilities, revenues and expenses. As a
result,
changes in these estimates and assumptions could significantly affect
our
financial position or results of operations. We base our estimates on
historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual
results
may differ from these estimates under different assumptions or conditions.
The
significant accounting policies used in the preparation of our financial
statements are more fully described in Note 2 to our consolidated financial
statements. Our critical accounting policies are described below.
Revenue
Recognition and Assumptions at Entrance Fee Communities
Our
seven
entrance fee communities provide housing and healthcare services through
entrance fee agreements with residents. Under certain of these agreements,
residents pay an entrance fee upon entering into the contract and are
contractually guaranteed certain limited lifecare benefits in the form
of
healthcare discounts. The recognition of entrance fee income requires
the use of
various actuarial estimates. We recognize this revenue by recording the
nonrefundable portion of the residents’ entrance fees as deferred entrance fee
income and amortizing it into revenue using the straight-line method
over the
estimated remaining life expectancy of each resident or couple. We periodically
assess the reasonableness of these mortality tables and other actuarial
assumptions, and measurement of future service obligations.
Self-Insurance
Liability Accruals
We
are
subject to various legal proceedings and claims that arise in the ordinary
course of our business. We maintain general liability and professional
malpractice insurance policies for our owned, leased and certain managed
communities under a master insurance program. Our 2005 policy provided
single
incident and aggregate liability protection in the amount of $25.0
million
for
general liability and $15.0 million for professional liability, with
self-insured retentions of $1.0 million and $5.0 million, respectively.
As a
result, we are self-insured for most typical claims. In addition, we
maintain a
self-insured workers compensation program (with excess loss coverage
in an
aggregate amount of $6.3 million with a deductible amount of $350,000
per
individual claim and $1.0 million per individual, with a deductible of
$250,000
per Texas non-subscriber claim) and a self insured employee medical program
(with excess loss coverage of $250,000 per claim). We are self-insured
for
amounts below these excess loss coverage amounts. We review the adequacy
of our
accruals related to these liabilities on an ongoing basis, using historical
claims, third party administrator estimates, consultants, advice from
legal
counsel and industry loss development factors, and adjust accruals periodically.
Estimated costs related to these self-insurance programs are accrued
based on
known claims and projected claims incurred but not yet reported. Subsequent
changes in actual experience are monitored and estimates are updated
as
information is available.
Tax
Valuation Allowance
We
account
for income taxes under the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 109,
Accounting for Income Taxes.
Under
this method, deferred tax assets and liabilities are determined based
on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances
are
established when necessary to reduce deferred tax assets to the amounts
that are
expected to be realized. As of December 31, 2005 and 2004, the Company
carried a
valuation allowance against deferred tax assets in the amount of $6.1
million
and $66.1 million, respectively. In assessing valuation of its deferred
tax
assets, management considers whether it is more likely than not that
some or all
of the deferred tax assets will be realized. The ultimate realization
of
deferred tax assets related to deductible temporary differences is dependent
upon the generation of future taxable income during the periods in which
those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax
planning strategies in making this assessment. In determining when it
may meet
the “more likely than not” recoverability criteria for its deferred tax assets,
the Company will continue to assess its projected future taxable income
and
other factors.
Lease
Accounting
We
determine whether to account for our leases as either operating or financing
leases depending on the underlying terms. As of December 31, 2005, we
operated
43 of our senior living communities under long-term leases (34 operating
and 9
lease financing obligations). The determination of this classification
is
complex and in certain situations requires a significant level of judgment.
Our
classification criteria is based on estimates regarding the fair value
of the
leased community, minimum lease payments, our effective cost of funds,
the
economic life of the community and certain other terms in the lease agreements.
As stated in Note 2 to our consolidated financial statements, communities
under
operating leases are accounted for in our statement of operations as
lease
expense for actual rent paid plus or minus any increases or decreases
in lease
escalators where such escalators are not dependent upon factors directly
related
to the future use of the leased property. For communities under capital
lease
and lease financing obligation arrangements, a liability is established
on our
balance sheet based on either the present value of the lease payments
or the
gross proceeds received and a corresponding long-term asset is recorded.
Lease
payments are allocated between principal and interest on the remaining
base
lease obligation and the lease asset is depreciated over the term of
the lease.
In addition, we amortize leasehold improvements purchased during the
term of the
lease over the shorter of their economic life or the lease term. Sale
lease-back
transactions are recorded as lease financing obligations when the transactions
include a form of continuing involvement, such as purchase options or
contingent
earn-outs.
Certain
of
our leases provide for various additional lease payments, as well as
renewal
options. Many of our leases contain fixed or formula based rent escalators.
To
the extent that the escalator increases are tied to a fixed index or
rate, lease
payments are accounted for on a straight-line basis over the life of
the lease.
In addition, we recognize all rent-free or rent holiday periods in operating
leases on a straight-line basis over the lease term, including the rent
holiday
period.
Leasehold
Acquisition Costs
At
December 31, 2005 and 2004, we had $21.9 million and $29.4 million,
respectively, of leasehold acquisition costs. The terms of the leasehold
interests range from April 2012 to August 2018. Leasehold acquisition
costs are
amortized principally on a straight-line basis over the remaining contractual
or
expected life of the related lease agreements, if shorter. Accumulated
amortization for the years ended December 31, 2005 and 2004 was $9.6
million and
$9.4 million, respectively. Leasehold acquisition costs are assessed
for
impairment based upon the amount of estimated undiscounted future cash
flows
from the communities over the remaining lease terms.
Allowance
for Doubtful Accounts
Accounts
receivable are reported net of an allowance for doubtful accounts, to
represent
our estimate of the amount that ultimately will be realized in cash.
The
allowance for doubtful accounts was $4.2 million and $3.2 million as
of December
31, 2005 and 2004, respectively. The adequacy of our allowance for doubtful
accounts is reviewed on an ongoing basis, using historical payment trends,
write-off experience, analyses of receivable portfolios by payor source
and
aging of receivables, as well as a review of specific accounts, and adjustments
are made to the allowance as necessary. Changes in legislation or economic
conditions could have an impact on the collection of existing receivable
balances or future allowance considerations.
During
2005 and 2004, 16.5% and 14.9%, respectively, of our resident and health
care
revenues were derived from services covered by various third-party payor
programs, including Medicare and Medicaid. Billings for services under
third-party payor programs are recorded net of estimated retroactive
adjustments
under reimbursement programs. Retroactive adjustments are accrued on
an
estimated basis in the period the related services are rendered and adjusted
in
future periods or as final settlements are determined. We accrue contractual
or
cost related adjustments from Medicare or Medicaid when assessed (without
regard
to when the assessment is paid or withheld), even if we have not agreed
to or
are appealing the assessment. Subsequent positive or negative adjustments
to
these accrued amounts are recorded in net revenues when known.
Long-lived
Assets and Goodwill
As
of
December 31, 2005, our long-lived assets were comprised primarily of
$551.3
million of land, buildings and equipment and $21.9 million of leasehold
acquisition costs. In accounting for our long-lived assets, other than
goodwill
and other intangible assets, we apply the provisions of Statement of
Financial
Accounting Standards (“SFAS”) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. Beginning
January 1, 2002, we accounted for goodwill and other intangible assets
under the
provisions of SFAS No. 142, Goodwill
and Other Intangible Assets. As
of
December 31, 2005, we had $36.5 million of goodwill.
The
determination and measurement of an impairment loss under these accounting
standards requires the significant use of judgment and estimates. The
determination of fair value of these assets utilizes cash flow projections
that
assume certain future revenue and cost levels, assumed discount rates
based upon
current market conditions and other valuation factors, all of which
involve the
use of significant judgment and estimation. Future events may indicate
differences from management’s current judgments and estimates which could, in
turn, result in impairment. Future events that may result in impairment
charges
include increases in interest rates, which would impact discount rates,
lower
than projected occupancy rates and changes in the cost structure of
existing
communities.
Purchase
Options
Purchase
options to acquire property are recorded at their cost and, upon exercise,
are
applied to the cost of the property at the time of acquisition. Nonrefundable
purchase options are expensed when they expire or when we determine
it is no
longer probable that the property will be acquired. We currently have
purchase
options underlying two communities and two land parcels with an aggregate
recorded value of $9.4 million. Based upon variable termination clauses
dependent upon occupancy, an option with a recorded value of $8.3 million
will
expire in July 2017 and an option with a recorded value of $1.0 million
will
expire in December 2012. We intend to exercise these purchase options.
If it is
determined at some future time that we no longer intended to exercise
these
options, we will transfer them for other consideration, or that their
value was
impaired, a loss would be recorded at that time.
Recognition
of Contingent Earn-outs
During
2002 and 2001, as part of eight sale lease-back transactions with a
third party
buyer, contingent earn-outs of $5.3 million (out of a maximum of $15.7
million)
were recorded. The earn-out provisions of the lease agreements specify
certain
criteria that must be met to receive the earn-out consideration. Based
upon our
review of the earn-out criteria, we believe that these estimated amounts
are
realizable, however, actual results may differ from these estimates
under
different assumptions or conditions. Management periodically assesses
the
recoverability of the recorded balances and adjusts the carrying amount
to its
revised estimate with a corresponding increase or decrease to interest
expense.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based
Payment (“SFAS
123(R)”). This standard revises SFAS No. 123, APB No. 25 and related accounting
interpretations, and eliminates the use of the intrinsic value method.
As noted
previously, we used the intrinsic value method of APB 25 during 2005
to value
stock options, and accordingly, no compensation expense has been recognized
for
stock options as we grant stock options with exercise prices equal
to our common
stock market price on the date of the grant. Alternatively, SFAS No.
123(R)
requires the expensing of all stock-based compensation, including stock
options,
using the fair value based method. In
April
2005, the Securities and Exchange Commission (“SEC”) issued a release that
amends the compliance dates for SFAS 123(R), which requires us to apply
Statement 123(R) as of January 1, 2006. We have adopted SFAS 123(R)
as of
January 1, 2006.
SFAS
123(R) requires public companies to adopt its requirements using either
the
“modified prospective” or the “modified retrospective” method. The“modified
prospective” method requires the recognition of compensation cost beginning with
the effective date (a) based on the requirements of SFAS 123(R) for
all
share-based payments granted after the effective date and (b) based
on the
requirements of SFAS 123 as originally issued (“SFAS 123(O)”) for all awards
granted to employees prior to the effective date of SFAS 123(R) that
remain
unvested on the effective date. The “modified retrospective” method includes the
requirements of the modified prospective method described above, but
also
permits us to restate, based on the amounts previously recognized under
SFAS
123(O) for purposes of pro forma disclosures, either (a) all prior
periods
presented or (b) prior interim periods of the year of adoption. We
have
elected to expense our share-based payments using the modified prospective
transition method prescribed in SFAS 123(R). Accordingly, no expense
is
recognized for awards vested in prior periods.
As
permitted by Statement 123(O) and through December 31, 2005, we accounted
for
share-based payments to employees using APB No. 25’s intrinsic value method and,
since prior grants were generally issued with an exercise price equal
to the
market price of our common stock on the date of grant, we recognized
no
compensation cost for employee stock options. Accordingly, the adoption
of SFAS
123(R)’s fair value method will have a significant impact on our result of
operations, although it will have no impact on our overall financial
position.
Had we adopted SFAS 123(R) in prior periods, the impact of that
standard would have approximated the impact of Statement 123 as described
in the
disclosure of pro forma net income and earnings per share in Note 2(s)
to our
consolidated financial statements.
As
of
December 31, 2005, we have approximately 0.8 million unvested options
outstanding that will be expensed over the applicable remaining requisite
service period. The total fair value of these unvested outstanding options
is
approximately $1.9 million, net of deferred tax benefits of approximately
$0.6
million, of which $0.7 million will be expensed during fiscal 2006, net
of $0.1
million of deferred tax benefits. As shown in the following table, the
total
estimated impact of the adoption of SFAS 123(R) and total expense related
to all
stock-based compensation plans for the year ending December 31, 2006
is expected
to approximate $1.5 million and $4.1 million, respectively (amounts shown
below
in thousands):
Unvested
options (1)
|
|
$
|
0.8
|
|
Estimated
fiscal 2006 option grants
|
|
|
1.0
|
|
Associate
Stock Purchase Plan
|
|
|
0.2
|
|
Estimated
deferred tax benefits
|
|
|
(0.5
|
)
|
Total
estimated expense associated with adoption of SFAS 123R
|
|
|
1.5
|
|
Restricted
stock, net of deferred tax benefits
|
|
|
2.6
|
|
Total
estimated fiscal 2006 share-based compensation expense
|
|
$
|
4.1
|
|
|
|
|
|
|
(1)
Relates to the expense associated with unvested options outstanding
prior
to
|
|
|
|
|
the
adoption of SFAS 123R.
|
|
|
|
|
SFAS
123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than
as an
operating cash flow as required under previous accounting literature.
This
requirement will reduce net operating cash flows and increase net financing
cash
flows in periods after adoption. Because the timing of these cash flows
are
directly dependent upon when employees exercise stock options, we cannot
reliably estimate the impact of this change to our statements of cash
flows.
The
weighted average fair value of options granted during 2005, 2004 and
2003 was
$6.89, $2.40, and $1.02, respectively. Considering 2005 market trends,
we expect
this average to continue to increase. We had 0.8 million and 0.7 million
unvested options outstanding at December 31, 2005 and 2004, respectively.
The
application of this new guidance will result in an increase in compensation
related expense beginning January 1, 2006.
In
June
2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue
No. 05-06, Determining
the Amortization Period for Leasehold Improvements Purchased after Lease
Inception or Acquired in a Business Combination (“EITF
05-06”). EITF 05-06 concludes that the amortization period for leasehold
improvements acquired in a business combination and leasehold improvements
that
are in service significantly after and not contemplated at the beginning
of the
lease term should be amortized over the shorter of the useful life of
the assets
or a term that includes required lease periods and renewals that are
deemed to
be reasonably assured at the date of inception. As of December 31, 2005,
this
pronouncement had no material effect on our financial position, results
of
operations or cash flows.
In
June 2005, the EITF reached consensus in EITF 04-5, Determining
Whether a General Partner, or the General Partners as a Group, Controls
a
Limited Partnership or Similar Entity When the Limited Partners Have
Certain
Rights,
to
provide guidance on how general partners in a limited partnership should
determine whether they control a limited partnership and therefore should
consolidate it. The EITF provides that the presumption of general partner
control would be overcome only when the limited partners have either
of two
types of rights. The first type, referred to as kick-out rights, is the
right to
dissolve or liquidate the partnership or otherwise remove the general
partner
without cause. The second type, referred to as participating rights, is
the right to effectively participate in significant decisions made in
the
ordinary course of the partnership’s business. The kick-out rights and the
participating rights must be substantive in order to overcome the presumption
of
general partner control. The consensus is effective for general partners
of all
new limited partnerships formed and for existing limited partnerships
for which
the partnership agreements are modified subsequent to the date of FASB
ratification (June 29, 2005). For existing limited partnerships that have
not been modified, the guidance in EITF 04-5 is effective no later than
the
beginning of the first reporting period in fiscal years beginning after
December
15, 2005. We do not believe that the adoption of EITF 04-5 will have a
material effect on our financial position, results of operations or cash
flows.
In
May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections”,
a
replacement to APB Opinion No. 20, “Accounting
Changes”
and
SFAS
No. 3, “Reporting
Accounting Changes in Interim Financial Statements.”
SFAS
No. 154 changes the requirements for the accounting for and reporting
of a
change in accounting principle. SFAS No. 154 requires retrospective application
to prior periods financial statements for changes in accounting principle,
unless it is impracticable to determine either the period-specific effects
or
the cumulative effect of the change. This statement also requires that
a change
in depreciation, amortization, or depletion method for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate effected by
a change
in accounting principle. Additionally, SFAS No. 154 carries forward the
guidance
in APB Opinion No. 20 for reporting the correction of an error, a change
in
accounting estimate and requires justification of a change in accounting
principle. This pronouncement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005, and accordingly, we will adopt SFAS No. 154 in the first quarter
of
2006.
In
March 2005, the FASB issued FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143 (“FIN
No.
47”). FIN No. 47 clarifies that the term, conditional asset retirement
obligation as used in SFAS No. 143, Accounting
for Asset Retirement Obligations,
refers
to a legal obligation to perform an asset retirement activity in which
the
timing and/or method of settlement are conditional upon a future event
that may
or may not be within the control of the entity. Even though uncertainty
about the timing and/or method of settlement exists and may be conditional
upon
a future event, the obligation to perform the asset retirement activity
is
unconditional. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the
fair
value of the liability can be reasonably estimated. Uncertainty about the
timing and/or method of settlement of a conditional asset retirement
obligation
should be factored into the measurement of the liability when sufficient
information exists. The fair value of a liability for the conditional
asset retirement obligation should be recognized when incurred generally
upon
acquisition, construction, or development or through the normal operation
of the
asset. SFAS No. 143 acknowledges that in some cases, sufficient
information may not be available to reasonably estimate the fair value
of an
asset retirement obligation. FIN No. 47 also clarifies when an entity
would have sufficient information to reasonably estimate the fair value
of an
asset retirement obligation. The adoption of FIN No. 47 did not have a
material effect on our financial position, results of operations or cash
flows.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29.”
The
guidance in APB Opinion No. 29, Accounting
for Nonmonetary Transactions,
is based
on the principle that exchanges of nonmonetary assets should be measured
based
on the fair value of assets exchanged. The guidance in that opinion,
however,
included certain exceptions to that principle. SFAS No. 153 amends APB
No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets that do not have commercial substance. A nonmonetary
exchange
has commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. SFAS No. 153 is effective
for nonmonetary exchanges occurring in fiscal periods beginning after
June 15, 2005, while early application was permitted for nonmonetary asset
exchanges occurring in fiscal periods beginning after December 2004.
We adopted
the provisions of SFAS No. 153 on April 1, 2005.
Off-Balance
Sheet Arrangements - Managed Communities
Our
management services segment includes six large retirement centers owned
by
others and operated by us pursuant to multi-year management agreements.
Under
our management agreements
for these six communities, we receive management fees as well as reimbursed
expense revenues, which represent the reimbursement of certain expenses
we incur
on behalf of the owners. Two of these communities are retirement center
cooperatives that are owned by their residents, and three others are
owned by
not-for-profit sponsors. The remaining retirement center is owned by
an
unaffiliated third party. These six communities have approximately
1,400 units, representing approximately 10% of the total unit capacity of
our communities as of December 31, 2005.
We
also
own non-controlling interests in 10 senior living communities as of December
31,
2005, one of which is under development. Our interests, through limited
liability companies and partnerships, are 20% in 9 communities and 37.5%
in one
of the communities. We do not control these entities, since the other
partners
and members participate in the management decisions of these communities.
Accordingly, these investments are accounted for under the equity method,
and we
recognize profits on sales of services to these entities to the extent
of the
ventures’ outside ownership interest. We have joined our venture partners in
guaranteeing $8.4 million of first mortgage debt (secured by the joint
venture’s
assets) of one of these communities at December 31, 2005.
Related
Party Transactions
We
place
an emphasis on identifying transactions with parties known to be related
to
ensure that terms of any transactions are equal to the terms that clearly
independent third parties would have negotiated in similar transactions.
We
believe that each of our related party transactions were consummated
on terms no
more favorable to the related parties than in arm's length transactions.
During
2001 and 2000, we acquired leasehold interests in six free-standing assisted
living communties owned by affiliates of John Morris, one of our directors.
A
$7.6 million, 9.625% fixed interest only note, due October 1, 2008 was
issued to
Dr. Morris’ affiliates. This note, and certain similar notes, were secured by
our interest in a retirement center located in Richmond, Virginia and
a
free-standing assisted living community in San Antonio, Texas. The terms
of this
note and its related security instruments are identical to those issued
to
certain unaffiliated entities in connection with the simultaneous acquisition
of
certain other communities. On January 26, 2005, we repaid this note and
two
similar notes (total repayment of $17.2 million) using proceeds from
our January
2005 equity offering.
On
July 7,
2005, we acquired all of the real property interests underlying Freedom
Plaza
Care Center (FPCC), a 128-bed skilled nursing and 44-unit assisted living
center
in Peoria, Arizona for $20.3 million. We previously operated FPCC pursuant
to a
long-term operating lease with Maybrook Realty, which was 50% owned by
W.E.
Sheriff, our chairman and chief executive officer and president. We consummated
the acquisition pursuant to an option under the lease, which provided
for a
fixed purchase price of $20.3 million. We also contemporaneously acquired
the
third-party ground lessor’s interest in the property, including an adjacent
parcel of land, for a purchase price of $3.1 million. The total purchase
price for these two transactions was $23.4 million, which was supported by
a fair market value appraisal. The purchase price was paid with
$4.7 million of cash and with the proceeds of an $18.7 million
mortgage loan which and is secured by the community.
Impact
of Inflation
Inflation
could affect our future revenues and results of operations because of,
among
other things, our dependence on senior residents, many of whom rely primarily
on
fixed incomes to pay for our services. As a result, during inflationary
periods,
we may not be able to increase resident 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.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk
Disclosure
About Interest Rate Risk We
are
subject to market risk from exposure to changes in interest rates based
on our
financing, investing, and cash management activities. We utilize a balanced
mix
of debt maturities along with both fixed-rate and variable-rate debt
to manage
our exposure to changes in interest rates. For
fixed
rate debt, changes in interest rates generally affect the fair market
value of
the debt, but not earnings or cash flows. Conversely, for variable rate
debt,
changes in interest rates generally do not impact fair market value of
the debt,
but do affect the future earnings and cash flows. Generally we do not
prepay
fixed rate debt prior to maturity without penalty. Therefore, interest
rate risk
and changes in fair market value should not have a significant impact
on the
fixed rate debt until we are required to refinance such debt. At
December 31, 2005, we have $84.9 million of variable rate debt. Each
one-percentage point increase in interest rates would result in an increase
in
interest expense for the coming year of approximately $0.8 million.
We
do not
expect changes in interest rates to have a material effect on income
or cash
flows in 2006, since 73.8% of our debt has fixed rates. There can be
no
assurances, however, that interest rates will not significantly change
and
materially affect the Company. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources.”
In
addition, we have entered into an interest rate swap agreement with a
major
financial institution to manage our exposure. The swap involves the receipt
of a
fixed interest rate payment in exchange for the payment of a variable
rate
interest payment without exchanging the notional principal amount. Under
the
agreement, we receive a fixed rate of 6.87% on the $32.9 million of debt,
and
pays a floating rate stated by the swap agreement based upon LIBOR and
a foreign
currency index with a maximum rate of 8.12%.
Item
8. Financial Statements and Supplementary Data
Index
to Financial Statements
|
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
59
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
60
|
|
|
Consolidated
Balance Sheets --- December 31, 2005 and 2004
|
63
|
|
|
Consolidated
Statements of Operations --- Years ended December 31, 2005,
2004 and
2003
|
64
|
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Loss ---
|
|
Years
ended December 31, 2005, 2004 and 2003
|
65
|
|
|
Consolidated
Statements of Cash Flows --- Years ended December 31, 2005,
2004 and
2003
|
66
|
|
|
Notes
to Consolidated Financial Statements
|
69
|
|
|
Financial
Statement Schedules
|
103
|
|
Schedule
II - Valuation and Qualifying Accounts
|
|
Schedule
IV - Mortgage Loans on Real Estate
|
|
|
|
All
other schedules omitted are not required, inapplicable or the
information
|
|
required
is furnished in the financial statements or notes
therein.
|
|
|
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management
is responsible for establishing and maintaining adequate internal control
over
financial reporting, and for performing an assessment of the effectiveness
of
internal control over financial reporting as of December 31, 2005. Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company's system of internal control
over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the Company are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the Company's assets that could have a material effect on
the
consolidated financial statements.
Because
of
its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with
the
policies or procedures may deteriorate.
Management
performed an assessment of the effectiveness of the Company's internal
control
over financial reporting as of December 31, 2005 based upon criteria in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (''COSO''). Based on its assessment
and
those criteria, management determined that, as of December 31, 2005, the
Company’s internal control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles.
Management's
assessment of the effectiveness of the Company's internal control over
financial
reporting as of December 31, 2005 has been audited by KPMG LLP, the
independent registered public accounting firm that audited the financial
statements included in this annual report, as stated in their attestation
report, which appears on page 61.
The
Company
acquired
Galleria Woods during 2005, and management has excluded from its assessment
of
the effectiveness of its internal control over financial reporting as of
December 31, 2005, Galleria Woods’ internal control over financial reporting
associated with total assets of $18.3 million and total revenues of $4.6
million included in the consolidated financial statements of American
Retirement Corporation and subsidiaries as of and for the year ended December
31, 2005. Our
independent registered public accounting firm’s audit of the Company’s
evaluation of internal control over financial reporting also excluded an
audit
of the internal control over financial reporting of Galleria Woods.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
American
Retirement Corporation:
We
have
audited the accompanying consolidated balance sheets of American Retirement
Corporation and subsidiaries (the Company) as of December 31, 2005 and
2004 and
the related consolidated statements of operations, shareholders’ equity and
comprehensive income (loss), and cash flows for each of the years in
the
three-year period ended December 31, 2005. In connection with our audits
of the
consolidated financial statements, we have also audited financial statement
Schedule II - Valuation and Qualifying Accounts and financial statement
Schedule
IV - Mortgage Loans on Real Estate as of December 31, 2005 and for each
of the
years in the three-year period ended December 31, 2005. These consolidated
financial statements and financial statement schedules are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based
on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of American Retirement
Corporation and subsidiaries as of December 31, 2005 and 2004 and the
results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects,
the
information set forth therein.
We
also
have audited, in accordance with the standards of the Public Company
Accounting
Oversight Board (United States), the effectiveness of American Retirement
Corporation and subsidiaries’ internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control
-
Integrated Framework issued by the Committee of Sponsoring Organizations
of the
Treadway Commission (COSO), and our report dated February 24, 2006 expressed
an
unqualified opinion on management’s assessment of, and the effective operation
of, internal control over financial reporting.
/s/
KPMG
LLP
Nashville,
Tennessee
February
24, 2006
REPORT
OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
American
Retirement Corporation:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that American Retirement
Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established
in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). American Retirement
Corporation’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect of the financial statements.
Because
of
its inherit limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that American Retirement Corporation and
subsidiaries maintained effective internal control over financial reporting
as
of December 31, 2005, is fairly stated, in all material respects, based
on
criteria established in Internal Control - Integrated Framework issued
by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also,
in our opinion, American Retirement Corporation and subsidiaries maintained,
in
all material respects, effective internal control over financial reporting
as of
December 31, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the
Treadway Commission (COSO).
American
Retirement
Corporation acquired Galleria Woods during 2005, and management excluded
from
its assessment of the effectiveness of American Retirement Corporation’s
internal control over financial reporting as of December 31, 2005, Galleria
Woods’ internal control over financial reporting associated with total assets
of
$18.3 million and total revenues of $4.6 million included in the consolidated
financial statements of American Retirement Corporation and subsidiaries
as of
and for the year ended December 31, 2005. Our
audit
of internal control over financial reporting of American Retirement Corporation
also excluded an evaluation of the internal control over financial reporting
of
Galleria Woods.
We
also
have audited, in accordance with the standards of the Public Company
Accounting
Oversight Board (United States), the consolidated balance sheets of American
Retirement Corporation and subsidiaries as of December 31, 2005 and 2004
and the
related consolidated statements of operations, shareholders’ equity and
comprehensive income (loss), and cash flows for each of the years in
the
three-year period ended December 31, 2005, and our report dated February
24,
2006 expressed an unqualified opinion on those consolidated financial
statements.
/s/
KPMG
LLP
Nashville,
Tennessee
February
24, 2006
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEETS
|
(in
thousands, except share data)
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
40,771
|
|
$
|
28,454
|
|
Restricted
cash
|
|
|
18,554
|
|
|
25,270
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
24,480
|
|
|
16,175
|
|
Inventory
|
|
|
1,389
|
|
|
1,364
|
|
Prepaid
expenses
|
|
|
3,346
|
|
|
2,667
|
|
Deferred
income taxes
|
|
|
9,795
|
|
|
5,645
|
|
Other
current assets
|
|
|
15,790
|
|
|
8,490
|
|
Total
current assets
|
|
|
114,125
|
|
|
88,065
|
|
|
|
|
|
|
|
|
|
Restricted
cash, excluding amounts classified as current
|
|
|
9,881
|
|
|
24,864
|
|
Land,
buildings and equipment, net
|
|
|
551,298
|
|
|
496,297
|
|
Notes
receivable
|
|
|
32,865
|
|
|
18,563
|
|
Deferred
income taxes
|
|
|
45,234
|
|
|
-
|
|
Goodwill
|
|
|
36,463
|
|
|
36,463
|
|
Leasehold
acquisition costs, net of accumulated amortization
|
|
|
21,938
|
|
|
29,362
|
|
Other
assets
|
|
|
67,670
|
|
|
55,636
|
|
Total
assets
|
|
$
|
879,474
|
|
$
|
749,250
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
11,978
|
|
$
|
10,372
|
|
Current
portion of capital lease and lease financing obligations
|
|
|
16,868
|
|
|
16,474
|
|
Accounts
payable
|
|
|
4,902
|
|
|
5,937
|
|
Accrued
payroll and benefits
|
|
|
12,599
|
|
|
10,125
|
|
Accrued
property taxes
|
|
|
8,653
|
|
|
8,872
|
|
Other
accrued expenses
|
|
|
12,428
|
|
|
9,023
|
|
Other
current liabilities
|
|
|
9,072
|
|
|
8,505
|
|
Tenant
deposits
|
|
|
4,563
|
|
|
4,804
|
|
Refundable
portion of entrance fees
|
|
|
85,164
|
|
|
79,148
|
|
Deferred
entrance fee income
|
|
|
38,407
|
|
|
33,800
|
|
Total
current liabilities
|
|
|
204,634
|
|
|
187,060
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
134,605
|
|
|
125,584
|
|
Capital
lease and lease financing obligations, less current
portion
|
|
|
160,549
|
|
|
182,652
|
|
Deferred
entrance fee income
|
|
|
122,417
|
|
|
111,386
|
|
Deferred
gains on sale-leaseback transactions
|
|
|
89,012
|
|
|
98,876
|
|
Deferred
income taxes
|
|
|
-
|
|
|
4,163
|
|
Other
long-term liabilities
|
|
|
24,186
|
|
|
19,615
|
|
Total
liabilities
|
|
|
735,403
|
|
|
729,336
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
11,316
|
|
|
14,213
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (See notes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, no par value; 5,000,000 shares authorized, no
|
|
|
|
|
|
|
|
shares
issued or outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $.01 par value; 200,000,000 shares authorized,
|
|
|
|
|
|
|
|
31,751,575
and 25,636,429 shares issued and outstanding,
respectively
|
|
|
315
|
|
|
252
|
|
Additional
paid-in capital
|
|
|
225,476
|
|
|
168,092
|
|
Accumulated
deficit
|
|
|
(90,727
|
)
|
|
(160,425
|
)
|
Deferred
compensation, restricted stock
|
|
|
(2,309
|
)
|
|
(2,218
|
)
|
Total
shareholders' equity
|
|
|
132,755
|
|
|
5,701
|
|
Total
liabilities and shareholders' equity
|
|
$
|
879,474
|
|
$
|
749,250
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Revenues:
|
|
|
|
|
|
|
|
Resident
and health care
|
|
$
|
488,383
|
|
$
|
443,443
|
|
$
|
396,307
|
|
Management
and development services
|
|
|
3,528
|
|
|
1,882
|
|
|
1,522
|
|
Reimbursed
expenses
|
|
|
3,089
|
|
|
2,284
|
|
|
2,148
|
|
Total
revenues
|
|
|
495,000
|
|
|
447,609
|
|
|
399,977
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of community service revenue, exclusive of depreciation expense
|
|
|
|
|
|
|
|
|
|
|
presented
separately below
|
|
|
326,504
|
|
|
300,797
|
|
|
280,808
|
|
Lease
expense
|
|
|
60,936
|
|
|
60,076
|
|
|
46,484
|
|
Depreciation
and amortization, inclusive of general and administrative
|
|
|
|
|
|
|
|
|
|
|
depreciation
and amortization of $1,925, $1,990, and $1,728, respectively
|
|
|
36,392
|
|
|
31,148
|
|
|
26,867
|
|
Amortization
of leasehold acquisition costs
|
|
|
2,567
|
|
|
2,917
|
|
|
2,421
|
|
Loss
(gain) on disposal or sale of assets
|
|
|
709
|
|
|
(41
|
)
|
|
(23,153
|
)
|
Reimbursed
expenses
|
|
|
3,089
|
|
|
2,284
|
|
|
2,148
|
|
General
and administrative
|
|
|
30,327
|
|
|
28,671
|
|
|
25,410
|
|
Total
costs and operating expenses
|
|
|
460,524
|
|
|
425,852
|
|
|
360,985
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
34,476
|
|
|
21,757
|
|
|
38,992
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(15,815
|
)
|
|
(31,477
|
)
|
|
(53,570
|
)
|
Interest
income
|
|
|
4,364
|
|
|
2,783
|
|
|
2,762
|
|
Other
|
|
|
192
|
|
|
447
|
|
|
132
|
|
Other
expense, net
|
|
|
(11,259
|
)
|
|
(28,247
|
)
|
|
(50,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes and minority interest
|
|
|
23,217
|
|
|
(6,490
|
)
|
|
(11,684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
|
(47,530
|
)
|
|
2,421
|
|
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before minority interest
|
|
|
70,747
|
|
|
(8,911
|
)
|
|
(14,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in earnings of consolidated subsidiaries, net of
tax
|
|
|
(1,049
|
)
|
|
(2,406
|
)
|
|
(1,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
69,698
|
|
$
|
(11,317
|
)
|
$
|
(16,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$
|
2.29
|
|
$
|
(0.48
|
)
|
$
|
(0.88
|
)
|
Dilutive
earnings (loss) per share
|
|
$
|
2.17
|
|
$
|
(0.48
|
)
|
$
|
(0.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used for basic earnings (loss) per share
data
|
|
|
30,378
|
|
|
23,798
|
|
|
18,278
|
|
Effect
of dilutive common stock options and non-vested shares
|
|
|
1,746
|
|
|
-
|
|
|
-
|
|
Weighted
average shares used for dilutive earnings (loss) per share
data
|
|
|
32,124
|
|
|
23,798
|
|
|
18,278
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(LOSS)
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common
stock
|
|
paid-in
|
|
Accumulated
|
|
Deferred
|
|
shareholders'
|
|
|
|
Shares
|
|
Amount
|
|
capital
|
|
deficit
|
|
Compensation
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
|
17,341,191
|
|
$
|
173
|
|
$
|
145,706
|
|
$
|
(132,974
|
)
|
$
|
-
|
|
$
|
12,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
and comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(16,134
|
)
|
|
-
|
|
|
(16,134
|
)
|
Issuance
of common stock pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
associate
stock purchase plan
|
|
|
62,793
|
|
|
1
|
|
|
111
|
|
|
-
|
|
|
-
|
|
|
112
|
|
Issuance
of common stock for conversion
of
convertible debentures
|
|
|
2,266,517
|
|
|
23
|
|
|
5,079
|
|
|
-
|
|
|
-
|
|
|
5,102
|
|
Balance
at December 31, 2003
|
|
|
19,670,501
|
|
$
|
197
|
|
$
|
150,896
|
|
$
|
(149,108
|
)
|
$
|
-
|
|
$
|
1,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
and comprehensive loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(11,317
|
)
|
|
-
|
|
|
(11,317
|
)
|
Issuance
of common stock pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
associate
stock purchase plan
|
|
|
155,042
|
|
|
2
|
|
|
598
|
|
|
-
|
|
|
-
|
|
|
600
|
|
Issuance
of common stock pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock option exercise,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
related income tax benefit
|
|
|
561,988
|
|
|
5
|
|
|
2,813
|
|
|
-
|
|
|
-
|
|
|
2,818
|
|
Issuance
of common stock for conversion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
convertible debentures
|
|
|
4,808,898
|
|
|
48
|
|
|
11,167
|
|
|
-
|
|
|
-
|
|
|
11,215
|
|
Issuance
of restricted stock
|
|
|
440,000
|
|
|
-
|
|
|
2,618
|
|
|
-
|
|
|
(2,618
|
)
|
|
-
|
|
Amortization
of restricted stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
400
|
|
|
400
|
|
Balance
at December 31, 2004
|
|
|
25,636,429
|
|
$
|
252
|
|
$
|
168,092
|
|
$
|
(160,425
|
)
|
$
|
(2,218
|
)
|
$
|
5,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
and comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
69,698
|
|
|
-
|
|
|
69,698
|
|
Issuance
of common stock pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
secondary
offering
|
|
|
5,175,000
|
|
|
52
|
|
|
49,878
|
|
|
-
|
|
|
-
|
|
|
49,930
|
|
Issuance
of common stock pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
associate
stock purchase plan
|
|
|
101,000
|
|
|
1
|
|
|
978
|
|
|
-
|
|
|
-
|
|
|
979
|
|
Issuance
of restricted stock
|
|
|
277,000
|
|
|
-
|
|
|
2,038
|
|
|
-
|
|
|
(2,038
|
)
|
|
-
|
|
Cancellation
of restricted stock
|
|
|
(42,910
|
)
|
|
-
|
|
|
(311
|
)
|
|
-
|
|
|
|
|
|
(311
|
)
|
Issuance
of common stock pursuant to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock option exercise,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
related income tax benefit
|
|
|
605,056
|
|
|
10
|
|
|
4,801
|
|
|
-
|
|
|
-
|
|
|
4,811
|
|
Amortization
of restricted stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,947
|
|
|
1,947
|
|
Balance
at December 31, 2005
|
|
|
31,751,575
|
|
$
|
315
|
|
$
|
225,476
|
|
$
|
(90,727
|
)
|
$
|
(2,309
|
)
|
$
|
132,755
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
69,698
|
|
$
|
(11,317
|
)
|
$
|
(16,134
|
)
|
Adjustments
to reconcile net income (loss) to cash and cash
|
|
|
|
|
|
|
|
|
|
|
equivalents
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit from release of tax valuation allowance
|
|
|
(55,697
|
)
|
|
-
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
38,959
|
|
|
34,065
|
|
|
29,288
|
|
Loss
on extinguishment of debt
|
|
|
794
|
|
|
-
|
|
|
-
|
|
Amortization
of deferred financing costs
|
|
|
674
|
|
|
4,700
|
|
|
2,259
|
|
Entrance
fee items:
|
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred entrance fee income
|
|
|
(18,264
|
)
|
|
(17,502
|
)
|
|
(15,423
|
)
|
Proceeds
from entrance fee sales - deferred income
|
|
|
37,404
|
|
|
31,992
|
|
|
30,588
|
|
Accrual
of deferred interest
|
|
|
-
|
|
|
-
|
|
|
1,996
|
|
Amortization
of deferred gain on sale-leaseback transactions
|
|
|
(11,815
|
)
|
|
(10,902
|
)
|
|
(4,960
|
)
|
Amortization
of deferred compensation, restricted stock
|
|
|
1,947
|
|
|
400
|
|
|
-
|
|
Minority
interest in earnings of consolidated subsidiaries
|
|
|
1,049
|
|
|
2,406
|
|
|
1,789
|
|
Tax
benefit from exercise of stock options
|
|
|
2,266
|
|
|
432
|
|
|
-
|
|
(Gains)
losses from unconsolidated joint ventures
|
|
|
(6
|
)
|
|
278
|
|
|
478
|
|
Loss
(gain) on sale or disposal of assets
|
|
|
709
|
|
|
(41
|
)
|
|
(23,153
|
)
|
Changes
in assets and liabilities, exclusive of acquisitions
|
|
|
|
|
|
|
|
|
|
|
and
sale-leaseback transactions:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(9,031
|
)
|
|
(1,273
|
)
|
|
(792
|
)
|
Inventory
|
|
|
(17
|
)
|
|
(56
|
)
|
|
183
|
|
Prepaid
expenses
|
|
|
(915
|
)
|
|
1,233
|
|
|
188
|
|
Other
assets
|
|
|
(2,393
|
)
|
|
2,303
|
|
|
5,825
|
|
Deferred
income taxes
|
|
|
(243
|
)
|
|
(484
|
)
|
|
1,645
|
|
Accounts
payable
|
|
|
(1,040
|
)
|
|
1,137
|
|
|
(1,093
|
)
|
Accrued
interest
|
|
|
(159
|
)
|
|
(204
|
)
|
|
392
|
|
Other
accrued expenses and other current liabilities
|
|
|
3,181
|
|
|
(190
|
)
|
|
(99
|
)
|
Tenant
deposits
|
|
|
(331
|
)
|
|
53
|
|
|
(237
|
)
|
Deferred
lease liability
|
|
|
2,638
|
|
|
5,285
|
|
|
3,472
|
|
Other
liabilities
|
|
|
1,347
|
|
|
(3,184
|
)
|
|
1,033
|
|
Net
cash and cash equivalents provided by operating activities
|
|
|
60,755
|
|
|
39,131
|
|
|
17,245
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Additions
to land, buildings and equipment
|
|
|
(36,440
|
)
|
|
(19,262
|
)
|
|
(16,467
|
)
|
Acquisition
of communities and property, net of cash acquired
|
|
|
(20,007
|
)
|
|
-
|
|
|
-
|
|
Investment
in joint ventures
|
|
|
(13,635
|
)
|
|
-
|
|
|
-
|
|
Proceeds
from the sale of assets
|
|
|
9,472
|
|
|
12,594
|
|
|
8,405
|
|
Acquisition
of other assets
|
|
|
(1,000
|
)
|
|
-
|
|
|
-
|
|
Investment
in restricted cash
|
|
|
(13,617
|
)
|
|
(22,551
|
)
|
|
(29,734
|
)
|
Proceeds
from release of restricted cash
|
|
|
34,263
|
|
|
14,540
|
|
|
27,353
|
|
Net
change in other restricted cash accounts
|
|
|
785
|
|
|
342
|
|
|
(391
|
)
|
Issuance
of notes receivable
|
|
|
(9,465
|
)
|
|
-
|
|
|
(4
|
)
|
Receipts
from notes receivable
|
|
|
333
|
|
|
362
|
|
|
255
|
|
Other
investing activities
|
|
|
908
|
|
|
358
|
|
|
112
|
|
Net
cash and cash equivalents used by investing activities
|
|
|
(48,403
|
)
|
|
(13,617
|
)
|
|
(10,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of long-term debt
|
|
|
23,736
|
|
|
54,100
|
|
|
19,267
|
|
Proceeds
from lease financing
|
|
|
-
|
|
|
120,500
|
|
|
-
|
|
Proceeds
from the issuance of common stock, net of transaction
|
|
|
|
|
|
|
|
|
|
|
expenses
of $3,166, $0 and $0
|
|
|
49,930
|
|
|
-
|
|
|
-
|
|
Proceeds
from the issuance of stock pursuant to the associate stock
|
|
|
|
|
|
|
|
|
|
|
purchase
plan
|
|
|
979
|
|
|
597
|
|
|
112
|
|
Proceeds
from the exercise of stock options
|
|
|
2,545
|
|
|
2,389
|
|
|
-
|
|
Refundable
entrance fee items:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from entrance fee sales - refundable portion
|
|
|
14,895
|
|
|
12,069
|
|
|
11,202
|
|
Refunds
of entrance fee terminations
|
|
|
(21,105
|
)
|
|
(12,871
|
)
|
|
(15,107
|
)
|
Principal
payments on long-term debt
|
|
|
(63,309
|
)
|
|
(184,962
|
)
|
|
(17,551
|
)
|
Distributions
to minority interest holders
|
|
|
(4,066
|
)
|
|
(4,215
|
)
|
|
(3,228
|
)
|
Principal
reductions in master trust liability
|
|
|
(1,071
|
)
|
|
(1,234
|
)
|
|
(1,389
|
)
|
Expenditures
for financing costs
|
|
|
(2,569
|
)
|
|
(625
|
)
|
|
(978
|
)
|
Contingent
earnouts
|
|
|
-
|
|
|
-
|
|
|
(594
|
)
|
Net
cash and cash equivalents used by financing activities
|
|
|
(35
|
)
|
|
(14,252
|
)
|
|
(8,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
(continued)
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
12,317
|
|
$
|
11,262
|
|
$
|
(1,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
28,454
|
|
|
17,192
|
|
|
18,684
|
|
Cash
and cash equivalents at end of year
|
|
$
|
40,771
|
|
$
|
28,454
|
|
$
|
17,192
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for interest
|
|
$
|
15,608
|
|
$
|
24,338
|
|
$
|
40,449
|
|
Income
taxes paid
|
|
$
|
5,048
|
|
$
|
4,838
|
|
$
|
1,761
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the years ended December 31, 2005, 2004 and 2003, the Company
(acquired)/sold certain communities and interests in real property
and
improvements, and entered into and amended certain lease agreements
for an
aggregate (consideration) proceeds of ($10.5 million), $12.6
million and
$8.4 million. In conjunction with these transactions, assets
and
liabilities changed as follows:
|
|
|
|
Years
ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Land,
buildings and equipment (acquired) disposed
|
|
$
|
(59,698
|
)
|
$
|
16,165
|
|
$
|
115,223
|
|
Other
assets
|
|
|
6,631
|
|
|
(7,131
|
)
|
|
(3,643
|
)
|
Accrued
interest and other liabilities
|
|
|
265
|
|
|
(6,926
|
)
|
|
(1,597
|
)
|
Refundable
portion of entrance fees
|
|
|
631
|
|
|
-
|
|
|
-
|
|
Deferred
entrance fee income
|
|
|
9,779
|
|
|
-
|
|
|
-
|
|
Deferred
gain on sale-leaseback transaction
|
|
|
-
|
|
|
16,568
|
|
|
69,934
|
|
Long-term
debt, including current portion
|
|
|
26,819
|
|
|
-
|
|
|
(168,471
|
)
|
Minority
interest
|
|
|
5,038
|
|
|
(6,082
|
)
|
|
(3,041
|
)
|
Cash
(paid) received in conjunction with (acquisition) disposal
|
|
|
|
|
|
|
|
|
|
|
of
communities and property, net of cash received or paid
|
|
$ |
(10,535 |
) |
$
|
12,594
|
|
$
|
8,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the years ended December 31, 2005 and 2004, contingent earn-out
agreements
related to three free-standing assisted living communities
(which were
sold and leased-back in 2002) expired. These agreements constituted
continuing involvement at the time of the lease, thus the transaction
was
recorded as a lease financing. The expiration of these contingent
earn-out
agreements results in operating lease treatment for two free-standing
assisted living communities. As a result, land, buildings and
equipment
and debt changed as follows:
|
|
|
Years
ended December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Land,
buildings and equipment
|
|
$ |
(5,332 |
) |
|
(12,420
|
)
|
$
|
-
|
|
Lease
financing obligations
|
|
|
5,538 |
|
|
12,849
|
|
|
-
|
|
Deferred
gains on sale-leaseback transactions
|
|
|
(206 |
) |
|
(429
|
)
|
|
-
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
|
(in
thousands)
|
|
|
During
the year ended December 31, 2005, the Company completed a transaction
with
a real estate investment trust ("REIT") pursuant to which the
Company
received $9.5 million in proceeds under its existing leases
on two of its
retirement center communities. This investment by the REIT
is recorded by
the Company as a refinancing of a previous $8.7 million note
payable. In
connection with this refinancing, the Company incurred a loss
on debt
extinguishment which is included as a non-cash charge in the
Company's
consolidated statements of cash flows for the year ended December
31,
2005.
|
|
|
During
the years ended December 31, 2005 and 2004, the Company granted
277,000
and 440,000, respectively, shares of restricted stock. Initially
measured
compensation related to these grants was $1.7 million and $2.6
million,
respectively, which is being amortized as compensation expense
over the
period of vesting. See Note 12. In addition, during the year
ended
December 31, 2004, the Company issued 4,808,898 shares of common
stock,
par value $0.01 per share, to certain holders of the Series
B Notes. The
holders elected to convert $10.9 million of the Series B Notes
to common
stock at the conversion price of $2.25 per share. During the
year ended
December 31, 2003, the Company issued 2,266,517 common shares,
par value
$0.01 per share, to holders of the Company's 10% Series B Convertible
Senior Subordinated Notes (Series B Notes). The holders elected
to convert
$5.1 million of the Series B Notes to common stock at the conversion
price
of $2.25 per share. As a result, debt and equity changed as
follows:
|
|
|
Years
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Accrued
interest
|
|
$
|
-
|
|
$
|
383
|
|
|
(5,102
|
)
|
Long-term
debt
|
|
|
-
|
|
|
10,820
|
|
|
23
|
|
Common
stock
|
|
|
-
|
|
|
48
|
|
|
5,079
|
|
Additional
paid-in capital
|
|
|
2,034
|
|
|
13,773
|
|
|
-
|
|
Deferred
compensation, restricted stock
|
|
|
(2,034
|
)
|
|
(2,618
|
)
|
|
-
|
|
See
accompanying notes to consolidated financial statements.
AMERICAN
RETIREMENT CORPORATION AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(1)
Organization and Presentation
The
accompanying consolidated financial statements as of December 31, 2005
and 2004
and for each of the years in the three year period ended December 31,
2005,
include the accounts of American Retirement Corporation (“ARC”) and its
wholly-owned and majority-owned subsidiaries (ARC and such subsidiaries
being
collectively referred to as the “Company”) that operate, own and manage senior
living communities. The accounts of limited liability companies, joint
ventures
and partnerships are consolidated when the Company maintains effective
control
over such entities' assets and operations, notwithstanding, in some cases,
a
lack of majority ownership. Under current authoritative literature, the
Company
consolidates the communities it manages for others if the Company has
the
unilateral ability to conduct the ordinary course of business of the
managed
communities and is the primary beneficiary of the managed entities’ operations.
As a result, the Company consolidates the operating results of a managed
community and a community currently under development. All significant
inter-company balances and transactions have been eliminated in
consolidation.
(2)
Summary of Significant Accounting Policies and
Practices
The
Company principally provides housing, health care, and other related
services to
senior residents through the operation and management of senior living
communities located throughout the United States. The communities provide
a
combination of independent living, assisted living and skilled nursing
services.
The following is a summary of the Company’s significant accounting
policies.
(a)
|
Use
of Estimates and Assumptions: The
preparation of the consolidated financial statements requires
management
to make estimates and assumptions relating to the reported
amounts of
assets and liabilities and disclosure of contingent assets
and liabilities
at the date of the consolidated financial statements and the
reported
amounts of revenues and expenses during the period. Significant
items
subject to such estimates and assumptions include the carrying
amount of
land, buildings and equipment, leasehold acquisition costs,
goodwill,
purchase options and contingent earn-outs; valuation allowances
for
accounts and notes receivable and deferred income tax assets;
actuarial
life expectations of residents; and obligations related to
employee
benefits and liability claims. Actual results could differ
from those
estimates.
|
(b)
|
Recognition
of Revenue: The
Company provides residents with housing and health care services
through
various types of agreements. The Company also receives fees
for developing
certain communities and managing other senior living communities
owned by
others.
|
The
majority of the Company’s communities provide housing and health care services
through annually renewable agreements with the residents. Under these
agreements, residents are billed monthly fees for housing and additional
services, which are recognized as revenue under these agreements on a
monthly
basis as the services are provided to its residents.
Management
services revenue is recorded monthly as services and administrative support
under management agreements are provided to the owners and lessees of
the
subject communities. Such revenues are determined by an agreed formula
set forth
in the applicable management agreement (e.g., a specified percentage
of
revenues, income or cash flows of the managed community, or a negotiated
fee per
the management agreement).
Certain
communities provide housing and health care services under various types
of
entrance fee agreements with residents (entrance fee communities). These
agreements require new independent living residents to pay an upfront
entrance
fee, and may obligate the Company to provide a limited healthcare benefit
in the
form of future assisted living or skilled nursing housing and services
during
the life of the resident. These benefits generally take the form of reduced
monthly or daily rates for assisted living or skilled nursing services,
or a
certain number of days of these services are allowed at no additional
cost
during each quarter or year. Each new entrance fee resident must meet
certain
asset and income criteria as part of these lifecare agreements.
Generally,
a portion of the entrance fee is refundable to the resident or the resident’s
estate upon termination of the agreement. Since termination of a resident’s
agreement can result under
many
contracts in a refund being due in less than one year, the refundable
portion of
these entrance fees (equal to the stated fixed minimum refund percentage)
is
recorded on the balance sheet as a current liability. The remaining portion
of
entrance fees is shown as deferred entrance fee income. While deferred
entrance
fee income is generally classified as a long-term liability on the balance
sheet, a portion is shown as a current liability during the early years
of a
resident’s agreement (only until the contractual provisions of the agreement
decrease the potential refund to the fixed minimum percentage stated
in the
agreement).
The
deferred entrance fee income is amortized into revenue using the straight-line
method over the estimated remaining life expectancy of the resident,
based upon
actuarial projections. Additionally, under these agreements the residents
pay a
monthly service fee, which entitles them to the use of certain amenities
and
certain services. Residents may also elect to obtain additional ancillary
services, which are also billed on a monthly basis, as the services are
provided. The Company recognizes these additional fees as revenue on
a monthly
basis when earned.
Certain
communities also provide services under a type of an entrance fee agreement
whereby the entrance fee is fully refundable to the resident or the resident’s
estate contingent upon the occupation of the unit by the next resident,
unless
otherwise required by applicable state law. In this situation, the resident
also
shares in a percentage, typically 50%, of any appreciation in the entrance
fee
paid by the succeeding resident, but receives no healthcare benefit.
This
contingent refund is paid to the preceding resident only upon occupancy
of the
unit by a new, succeeding resident. Because these refunds are contingent
and
only payable out of subsequent entrance fee proceeds, these entrance
fees are
classified on the Company’s consolidated balance sheet as deferred entrance fee
income. Because these units can be reoccupied during the remaining life
of the
building and the Company’s obligations continue as long as the unit can be
reoccupied, these refunds are amortized into revenue on a straight-line
basis
over the remaining life of the building. Additionally, under these agreements
the residents pay a monthly service fee, which entitles them to the use
of
certain amenities and services. These residents may also elect to obtain
additional ancillary services, which are billed on a monthly basis, as
the
services are provided. The Company recognizes these additional fees as
revenue
on a monthly basis when earned. If residents terminate these agreements,
they
are required to continue to pay their monthly service fee for the lesser
of a
specified time period (typically one year) or until the relevant unit
is
reoccupied.
Resident
and health care revenues are reported at the estimated net realizable
amounts
from residents, third-party payors, and others for services rendered,
including
estimated retroactive adjustments under reimbursement agreements with
third-party payors.
The
Company also provides certain management services related to the development
or
expansion and construction management of senior living communities, for
which it
receive certain fees. The Company recognizes these revenues as services
are
rendered.
(c)
|
Cash
and Cash Equivalents:
For
purposes of the Consolidated Statements of Cash Flows, the
Company
considers highly liquid debt investments with original maturities
of three
months or less to be cash equivalents.
|
(d)
|
Restricted
Cash:
Restricted cash includes cash equivalents held by lenders under
loan
agreements in escrow for property taxes and property improvements,
operating reserves required by certain state licensing authorities
and
certificates of deposit, held as collateral for letters of
credit or in
conjunction with leasing activity and insurance requirements,
as well as
resident deposits. Restricted cash is determined to be short-term
when the
restriction requirement will expire within twelve months.
|
For
purposes of the Consolidated Statements of Cash Flows, purchases of restricted
cash instruments and proceeds from the sale or release of such instruments
are
presented gross if their expected turnover or maturity exceeds three
months.
Activity for restricted cash accounts which have a turnover rate of three
months
or less is presented net.
(e)
|
Accounts
Receivable:
Accounts receivable are reported at the net invoiced amount.
The allowance
for doubtful accounts is the estimated amount of probable credit
losses in
accounts receivable. At December 31, 2005 and 2004, the allowance
for
doubtful accounts included in accounts receivable is $4.2 million
and $3.2
million, respectively. During the year ended December 31, 2005
and 2004,
the Company recorded $2.3 million and $1.9 million, respectively,
of bad
debt expense. The Company determines the allowance based on
historical
write-off experience, actual resident information and payor
type. Account
balances are charged off against the allowance after all means
of
collection have been exhausted and the potential for recovery
is
considered remote.
|
(f)
|
Inventory:
Inventory
consists of supplies and is stated at the lower of cost (first-in,
first-out) or market.
|
(g)
|
Land,
Buildings, and Equipment:
Land, buildings, and equipment are recorded at cost and include
interest
capitalized on long-term construction projects during the construction
period, as well as other costs directly related to the acquisition,
development, and construction of the communities. In accordance
with the
Company’s policy, expenditures related to maintaining and enhancing
communities under its control are capitalized where such expenditures
exceed $500 and enhance the value of or increase the economic
life of the
underlying asset. Maintenance,
repairs and betterments that do not enhance the value of or
increase the
life of the assets are expensed as incurred. Depreciation
and amortization are computed using the straight-line method
over the
estimated useful lives of the related assets. Buildings and
improvements
are depreciated over 15 to 40 years, and furniture, fixtures
and equipment
are depreciated over three to seven years. Assets under lease
financings
and leasehold improvements are
amortized over the shorter of their useful life or remaining
base lease
term. Construction in progress includes costs incurred related
to the
development, construction or remodeling of senior living communities.
If a
project is abandoned or delayed, any costs previously capitalized
are
measured for impairment and expensed accordingly.
|
(h)
|
Purchase
Options:
Purchase options to acquire property are recorded at their
cost and, upon
exercise, are applied to the cost of the property at the time
of
acquisition. Nonrefundable purchase options are expensed when
they expire
or when the Company determines it is no longer probable that
the property
will be acquired. If the Company determines at some future
time that it no
longer intends to exercise these options, that it will transfer
them for
other consideration, or that their value is impaired, a loss
would be
recorded at that time.
|
(i)
|
Notes
Receivable:
Notes receivable are recorded at cost, less any related allowance
for
impairment. Impairment losses are included in the allowance
for doubtful
accounts through a charge to bad debt expense. Management considers
a note
to be impaired when it is probable that the Company will be
unable to
collect all amounts due according to the contractual terms
of the note
agreement.
|
(j)
|
Goodwill:
Goodwill represents the excess of costs over fair value of
assets of
businesses acquired. Goodwill and intangible assets acquired
in a purchase
and determined to have an indefinite useful life are not amortized,
but
instead tested for impairment at least annually in accordance
with the
provisions of Statement of Financial Accounting Standards No.
142,
Goodwill
and Other Intangible Assets.
SFAS No. 142 requires intangible assets with definite useful
lives be
amortized over their respective useful life to their estimated
residual
values, and reviewed for impairment in accordance with SFAS
No. 144,
Accounting
for Impairment or Disposal of Long-Lived Assets.
As
of December 31, 2005 and 2004, the Company had $36.5 million
of goodwill.
|
(k)
|
Leasehold
Acquisition Costs:
Leasehold acquisition costs consist primarily of costs incurred
in
conjunction with entering into certain new leases and for costs
incurred
for the acquisition of lease rights from previously managed
special
purpose entity communities. These costs provide the Company
the
opportunity to lease the communities. Leasehold acquisition
costs are
amortized principally on a straight-line basis over the remaining
contractual or expected life of the related lease agreements
if shorter.
|
(l) |
|
Other
Assets:
Other assets consist primarily of security deposits, unexercised
nonrefundable purchase options, deferred financing costs, costs
of
acquiring lifecare contracts, deferred entrance fee receivables,
contingent earn-outs, investments in joint ventures and investments
in
leased communities. Deferred financing costs are amortized
using the
straight-line method over the terms of the related debt agreements.
Costs
of acquiring initial lifecare contracts are amortized over
the life
expectancy of the initial residents of a lifecare community.
Nonrefundable
purchase options to acquire property are recorded at their
cost and, upon
exercise, are applied to the cost of the property acquired.
Contingent
earn-outs represent management’s estimate
of additional sale proceeds to be received from the counterparty
in
certain sale lease-back transactions which were accounted for
as financing
transactions. Management periodically assesses the recoverability
of the
recorded balances of contingent earn-outs and adjusts the carrying
amount
to its revised estimate with a corresponding increase or decrease
to
interest expense. Investments in leased communities represent
the
Company’s investment in two retirement centers and one free-standing
assisted living community and are accounted for using the equity
method.
|
(m)
|
Accounting
for Interests in Joint Ventures:
The Company makes a determination whether it holds a controlling
interest
in joint ventures is which it has only partial ownership. In
cases where
it has a majority or controlling ownership, the entity is consolidated
with an adjustment for the minority interest of the third parties.
When
the Company owns a non-controlling minority interest (since
other partners
or members control or participate in the management decisions
of these
entities), the
investments are accounted for under the equity method. The
investments are
recorded at cost and subsequently adjusted for equity in net
income
(losses) and cash contributions and distributions. The Company
recognizes profits on sales of services to these entities to
the extent of
the ventures’ outside ownership interest. The
Company recognizes an impairment loss when there is a loss
in the value in
the equity method investment which is deemed to be an other-than-temporary
decline. See Note 8. In
the case of ventures which are
considered to be variable interest entities, the Company will
consolidate
the results of these ventures in accordance with FIN No. 46R,
Consolidation
of Variable Interest Entities,
if
it is the primary beneficiary.
|
(n)
|
Lease
Classification:
The
Company, as the lessee, makes a determination with respect
to each of
these leases whether they should be accounted for as operating
or
financing leases. The Company bases its classification criteria
on
estimates regarding the fair value of the leased community,
minimum lease
payments, the Company’s effective cost of funds, the economic life of the
community and certain other terms in the lease agreements.
Lease expense
attributable to communities under operating leases is recognized
on a
straight-line basis over the base lease term. Contingent rent
that depends
on factors directly related to the future use of leased property
is
accrued when it is deemed probable such amounts will be due.
For
communities under financing obligation arrangements, a liability
is
established on the balance sheet based on either the present
value of the
lease payments or the gross proceeds received and a corresponding
long-term asset is recorded. Lease payments are allocated between
principal and interest on the lease obligation and the lease
asset is
depreciated over the term of the lease. In addition, the Company
depreciates assets under lease financings and amortizes leasehold
improvements over the shorter of their economic life or the
base lease
term. Sale lease-back transactions are recorded as lease financing
obligations when the transactions include a form of continuing
involvement, such as purchase options or contingent
earn-outs.
|
Certain
of
these leases provide for various additional lease payments, as well as
renewal
options. Many of these leases contain fixed or formula based rent escalators.
To
the extent that the formula based escalator is based on a fixed rate
increase,
lease payments are accounted for on a straight-line basis over the life
of the
lease. In addition, the Company recognizes all rent holidays in operating
leases
on a straight-line basis over the lease term, including the rent holiday
period.
(o)
|
Other
Liabilities:
The
Company periodically reviews the adequacy of its accruals related
to
general and professional liability, workers’ compensation, employee
medical claims and other claims on an ongoing basis, using
historical
claims, third party administrator estimates, advice from legal
counsel and
industry loss development factors.
|
(p)
|
Obligation
to Provide Future Services:
Under the terms of certain entrance fee contracts, the Company
is
obligated to provide future lifecare services to its residents.
The
Company, through the use of external advisors, periodically
calculates the
present value of the net cost of future services and use of
facilities and
compares that amount with the present value of future resident
cash
inflows. If the present value of the net cost of future services
and use
of facilities exceeds discounted future cash inflows, a liability
will be
recorded with a corresponding charge to income. As of December
31, 2005
and 2004, the Company did not have a liability associated with
its
obligation to provide future services and use of
facilities.
|
(q) |
|
Income
Taxes:
Income taxes are accounted for under the asset and liability
method.
Deferred tax assets and liabilities are recognized for the
future tax
consequences attributable to differences between the financial
statement
carrying amounts of existing assets and liabilities and their
respective
tax bases and operating loss and tax credit carryforwards.
Deferred tax
assets and liabilities are recorded using enacted tax rates
expected to
apply to taxable income in the year in which those
temporary differences are expected to be recovered or settled.
A valuation
allowance is recorded to adjust net deferred tax assets to
the amount
which management believes will more likely than not be recoverable.
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.
|
(r)
|
Earnings
per Share. Basic and diluted earnings per share for the three
years ended December 31, 2005, 2004 and 2003 have been computed
on the
basis of the weighted average number of shares outstanding.
Diluted
earnings per share reflect the potential dilution that could
occur if
securities or other contracts to issue common stock were
exercised or
converted into common stock. During the year ended December
31, 2005,
there were approximately 2.1 million options to purchase
shares of common
stock which had an exercise price below the average market
price of the
common shares outstanding on a weighted average
basis.
|
A
computation of diluted earnings (loss) per share is as follows (in
thousands):
|
|
For
the year ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net
income (loss)
|
|
$ |
69,698
|
|
$ |
(11,317)
|
|
$ |
(16,134)
|
|
Weighted
average shares used for basic earnings per share data
|
|
|
30,378
|
|
|
23,798
|
|
|
18,278
|
|
Effect
of dilutive common securities:
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options and non-vested stock
|
|
|
1,746 |
|
|
- |
|
|
- |
|
Weighted
average shares used for diluted earnings per share data
|
|
|
32,124
|
|
|
23,798
|
|
|
18,278
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share
|
|
$ |
2.29 |
|
$ |
(0.48) |
|
$ |
(0.88) |
|
Effect
of dilutive securities
|
|
|
(0.12)
|
|
|
-
|
|
|
-
|
|
Diluted
income (loss) per share
|
|
$ |
2.17
|
|
$ |
(0.48)
|
|
$ |
(0.88)
|
|
The
Company had 28,000 options outstanding during the year ended December
31, 2005
that were excluded from the computation of diluted earnings per share
because
the options’ exercise price was greater than the average market price of the
common shares and, therefore, the effect would be anti-dilutive. All
options
outstanding during the year ended December 31, 2004 and 2003 were excluded
from
the computation of diluted earnings per share for such periods because
of net
losses during these periods.
During
2004 and 2003, the Company elected to redeem the balance of its 10%
Series B
Convertible Senior Subordinated Notes due 2008 (Series B Notes). The
notes were
not included in the computation of diluted earnings per share for the
year ended
December 31, 2004 and 2003 as the effect would be
anti-dilutive.
(s)
|
Stock-Based
Compensation:
In
December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS
No. 123(R), Accounting
for Share Based Payment, an
amendment to SFAS No. 148,
Stock-Based Compensation - Transition and Disclosure and
a revision to SFAS No. 123,
Accounting for Stock-Based Compensation
(“SFAS No. 123(O)”). SFAS No. 123(R) requires alternative methods of
transition for the change to the fair value method of accounting
for
stock-based employee compensation and is effective as of the
beginning of
the first annual period that begins after June 15, 2005. The
impact of the
adoption of SFAS No. 123(R) is discussed in Note 2(z) to these
consolidated financial statements.
|
The
Company applies the intrinsic-value-based method of accounting prescribed
by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations including FASB Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation,
an interpretation of APB Opinion No. 25, to account for its fixed plan
stock options. Under this method, compensation expense is recorded on
the date
of grant only if the current market price of the underlying stock exceeded
the
exercise price. SFAS No. 123(O) established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. The following table illustrates the effect
on net
income (loss) if the fair-value-based method had been applied to all
outstanding
and unvested awards in each period.
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net
income (loss), as reported
|
|
$ |
69,698
|
|
$ |
(11,317)
|
|
$ |
(16,134)
|
|
Add:
Stock-based compensation included in net income
|
|
|
1,913
|
|
|
400
|
|
|
-
|
|
Deduct
total stock-based employee compensation expense
determined
under fair-value-based method, net of tax
|
|
|
(3,295) |
|
|
(1,346) |
|
|
(557) |
|
Pro
forma net income (loss)
|
|
$ |
68,316
|
|
$ |
(12,263)
|
|
$ |
(16,691)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$ |
2.29
|
|
$ |
(0.48)
|
|
$ |
(0.88)
|
|
Diluted
- as reported
|
|
$ |
2.17
|
|
$ |
(0.48)
|
|
$ |
(0.88)
|
|
Basic
- pro forma
|
|
$ |
2.25
|
|
$ |
(0.52)
|
|
$ |
(0.91)
|
|
Diluted
- pro forma
|
|
$ |
2.13
|
|
$ |
(0.52)
|
|
$ |
(0.91)
|
|
(t)
|
Fair
Value of Financial Instruments:
The
carrying amount of cash and cash equivalents approximates
fair value
because of the short-term nature of these accounts and
because amounts are
invested in accounts earning market rates of interest.
The carrying value
of restricted cash, accounts receivable, debt associated
with assets
held-for-sale and accounts payable approximate their fair
values because
of the short-term nature of these accounts. The carrying
value of notes
receivable and debt approximates fair value as the interest
rates
approximate the current rates available to the Company.
The interest rate
swap is carried at fair value.
|
(u)
|
Derivative
Financial Instruments:
The
Company recognizes all derivatives as either assets or
liabilities,
measured at fair value, in the consolidated balance sheets.
The accounting
for changes in the fair value (i.e., gains or losses) of
a derivative
instrument depends on whether it has been designated and
qualifies as part
of a hedging relationship and, if so, on the reason for
holding
it.
|
At
December 31, 2005 and 2004, the Company’s derivative financial instruments
consisted of one interest rate swap agreement accounted for as a hedge
against
changes in the fair value of certain debt liabilities. The notional amount
of
the agreement is $34.8 million and matures on July 1, 2008. Under the
terms of
the agreement, the Company receives a fixed rate payment of 6.87% on
the
respective debt (balance at December 31, 2005 was $32.9 million), but
pays a
floating rate stated by the swap agreement based on LIBOR and a foreign
currency
index, with a maximum
rate of 8.12%. The
fair
value of the remaining interest rate swap as of December 31, 2005 and
2004 was a
$0.8 million and a $0.9 million liability, respectively. Subsequent changes
in
the fair values of the interest rate swap are recorded in earnings.
(v)
|
Impairment
of Long-Lived Assets:
In
accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of
Long-Lived Assets, long-lived assets, such as property and
equipment, and
certain identifiable intangibles subject to amortization are
reviewed for
impairment whenever events or changes in circumstances indicate
that the
carrying amount of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the
carrying
amount of an asset to future undiscounted net cash flows expected
to be
generated by the asset. If such assets are considered to be
impaired, the
impairment to be recognized is the amount by which the carrying
amount of
the assets exceeds the fair value of the assets. Assets to
be disposed of
are separately presented on the balance sheet as held-for-sale
and
reported at the lower of the carrying amount or fair value
less the costs
to sell, and are no longer depreciated. The assets and liabilities
of a
disposal group classified as held-for-sale are presented separately
in the
appropriate asset and liability section of the balance sheet.
|
(w)
|
Comprehensive
Income (Loss):
During 2005, 2004 and 2003, the Company’s only component of comprehensive
income (loss) was net income (loss).
|
(x)
|
Segment
Disclosures:
The
Company operates in three reportable business segments: retirement
centers, free-standing assisted living communities and management
services.
|
(y)
|
Reclassifications:
Certain amounts have been reclassified to conform to fiscal
2005
presentation.
|
(z)
|
Recently
Issued Accounting Standards:
|
In
December 2004, the FASB issued SFAS No. 153, “Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29.”
The
guidance in APB Opinion No. 29, Accounting
for Nonmonetary Transactions,
is based
on the principle that exchanges of nonmonetary assets should be measured
based
on the fair value of assets exchanged. The guidance in that opinion,
however,
included certain exceptions to that principle. SFAS No. 153 amends APB
No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets that do not have commercial substance. A nonmonetary
exchange
has commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. SFAS No. 153 is effective
for nonmonetary exchanges occurring in fiscal periods beginning after
June 15, 2005, while early application was permitted for nonmonetary asset
exchanges occurring in fiscal periods beginning after December 2004.
The Company
adopted the provisions of SFAS No. 153 on April 1, 2005.
In
March
2005, the FASB issued FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations, an interpretation of FASB
Statement No. 143 (“FIN
No.
47”). FIN No. 47 clarifies that the term, conditional asset retirement
obligation as used in SFAS No. 143, Accounting
for Asset Retirement Obligations,
refers
to a legal obligation to perform an asset retirement activity in which
the
timing and/or method of settlement are conditional upon a future event
that may
or may not be within the control of the entity. Even though uncertainty
about the timing and/or method of settlement exists and may be conditional
upon
a future event, the obligation to perform the asset retirement activity
is
unconditional. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the
fair
value of the liability can be reasonably estimated. Uncertainty about the
timing and/or method of settlement of a conditional asset retirement
obligation
should be factored into the measurement of the liability when sufficient
information exists. The fair value of a liability for the conditional
asset retirement obligation should be recognized when incurred generally
upon
acquisition, construction, or development or through the normal operation
of the
asset. SFAS No. 143 acknowledges that in some cases, sufficient
information may not be available to reasonably estimate the fair value
of an
asset retirement obligation. FIN No. 47 also clarifies when an entity
would have sufficient information to reasonably estimate the fair value
of an
asset retirement obligation. The adoption of FIN No. 47 had no material
effect on the Company’s financial position, results of operations or cash
flows.
In
May 2005, the FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections”,
a
replacement to APB Opinion No. 20, “Accounting
Changes”
and
SFAS
No. 3, “Reporting
Accounting Changes in Interim Financial Statements.”
SFAS
No.
154 changes the requirements for the accounting for and reporting of
a change in
accounting principle. SFAS No. 154 requires retrospective application
to prior
periods financial statements for changes in accounting principle, unless
it is
impracticable to determine either the period-specific effects or the
cumulative
effect of the change. This statement also requires that a change in
depreciation, amortization, or depletion method for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate effected by
a change
in accounting principle. Additionally, SFAS No. 154 carries forward the
guidance
in APB Opinion No. 20 for reporting the correction of an error, a change
in
accounting estimate and requires justification of a change in accounting
principle. This pronouncement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005, and accordingly, the Company will adopt SFAS No. 154 in the first
quarter
of 2006.
In
June
2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue
No. 05-06, Determining
the Amortization Period for Leasehold Improvements Purchased after Lease
Inception or Acquired in a Business Combination (“EITF
05-06”). EITF 05-06 concludes that the amortization period for leasehold
improvements acquired in a business combination and leasehold improvements
that
are in service significantly after and not contemplated at the beginning
of the
lease term should be amortized over the shorter of the useful life of
the assets
or a term that includes required lease periods and renewals that are
deemed to
be reasonably assured at the date of inception. As of December 31, 2005,
this
pronouncement had no material effect on the Company’s financial position,
results of operations or cash flows.
In
June
2005, the EITF reached consensus in EITF 04-5, Determining
Whether a General Partner, or the General Partners as a Group, Controls
a
Limited Partnership or Similar Entity When the Limited Partners Have
Certain
Rights,
to
provide guidance on how general partners in a limited partnership should
determine whether they control a limited partnership and therefore should
consolidate it. The EITF agreed that the presumption of general partner
control would be overcome only when the limited partners have either
of two
types of rights. The first type, referred to as kick-out rights, is the
right to
dissolve or liquidate the partnership or otherwise remove the general
partner
without cause. The second type, referred to as participating rights, is
the right to effectively participate in significant decisions made in
the
ordinary course of the partnership’s business. The kick-out rights and the
participating rights must be substantive in order to overcome the presumption
of
general partner control. The consensus is effective for general partners
of all
new limited partnerships formed and for existing limited partnerships
for which
the partnership agreements are modified subsequent to the date of FASB
ratification (June 29, 2005). For existing limited partnerships that have
not been modified, the guidance in EITF 04-5 is effective no later than
the
beginning of the first reporting period in fiscal years beginning after
December
15, 2005. The Company does not believe that the adoption of EITF 04-5 will
have a material effect on its financial position, results of operations
or cash
flows.
In
December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based
Payment (“SFAS
No.
123(R)”). This standard revises SFAS No. 123, APB No. 25 and related accounting
interpretations, and eliminates the use of the intrinsic value method.
This
standard requires the expensing of all stock-based compensation, including
stock
options, using the fair value based method. In
April
2005, the Securities and Exchange Commission (“SEC”) issued a release that
amends the compliance dates for SFAS 123(R), which requires us to apply
SFAS No.
123(R) as of January 1, 2006. The Company has adopted SFAS No. 123(R)
as of
January 1, 2006.
SFAS
123(R) requires public companies to adopt its requirements using either
the
“modified prospective” or the “modified retrospective” method. The“modified
prospective” method requires the recognition of compensation cost beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for
all
share-based payments granted after the effective date and (b) based on
the
requirements of SFAS 123 as originally issued (“SFAS No. 123(O)”) for all awards
granted to employees prior to the effective date of SFAS No. 123(R) that
remain
unvested on the effective date. The “modified retrospective” method includes the
requirements of the modified prospective method described above, but
also
permits the Company to restate, based on the amounts previously recognized
under
SFAS No. 123(O) for purposes of pro forma disclosures, either (a) all
prior
periods presented or (b) prior interim periods of the year of adoption.
The
Company has elected to expense its share-based payments using the modified
prospective transition method prescribed in SFAS No. 123 (R).
As
permitted by SFAS No. 123(O) and through December 31, 2005, the Company
accounted for share-based payments to employees using APB No. 25’s intrinsic
value method and, since prior grants were generally issued with an exercise
price equal to the market price of our common stock on the date of grant,
recognized no compensation cost for employee stock options. Accordingly,
the
adoption of SFAS No. 123(R)’s fair value method will have a significant impact
on our result of operations, although it will have no impact on our overall
financial position. Had the Company adopted SFAS No. 123(R) in prior
periods,
the impact of that standard would have approximated the impact of SFAS
No.
123(O) as described in the disclosure of pro forma net income and earnings
per
share in Note 2(s) to these consolidated financial statements.
As
of
December 31, 2005, the Company had approximately 0.8 million unvested
options
outstanding that will be expensed over the applicable remaining requisite
service period. The total fair value of these unvested outstanding options
is
approximately $1.9 million, net of deferred tax benefits of approximately
$0.6
million, of which $0.7 million will be expensed during fiscal 2006, net
of $0.1
million of deferred tax benefits. As shown on the following table, the
total
estimated impact of the adoption of SFAS No. 123(R) and total expense
related to
all stock-based compensation plans for the year ending December 31, 2006
is
expected to approximate $1.5 million and $4.1 million, respectively (amounts
shown below in millions):
Unvested
options
(1)
|
|
$
|
0.8
|
|
Estimated
fiscal 2006 option grants
|
|
|
1.0
|
|
Associate
Stock Purchase Plan
|
|
|
0.2
|
|
Estimated
deferred tax benefits
|
|
|
(0.5
|
)
|
Total
estimated expense associated with adoption of SFAS No.
123R
|
|
|
1.5
|
|
Restricted
stock, net of estimated deferred tax benefits
|
|
|
2.6
|
|
Total
estimated fiscal 2006 stock compensation expense
|
|
$
|
4.1
|
|
|
|
|
|
|
(1)
Relates to the expense associated with unvested options outstanding
prior
to
|
|
|
|
|
the
adoption of SFAS No. 123R.
|
|
|
|
|
SFAS
No.
123(R) also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than
as an
operating cash flow as required under current literature. This requirement
will
reduce net operating cash flows and increase net financing cash flows
in periods
after adoption. Because the timing of these cash flows are directly
dependent
upon when employees exercise stock options, the Company cannot reliably
estimate
the impact of this change to its statements of cash flows.
The
weighted average fair value of options granted during 2005, 2004 and
2003 was
$6.89, $2.40, and $1.02, respectively. Considering 2005 market trends,
we expect
this average to continue to increase. The Company had 0.8 million and
0.7
million unvested options outstanding at December 31, 2005 and 2004,
respectively.
(3)
Restricted Cash
The
composition of restricted cash at December 31, 2005 and 2004 is as follows
(in
thousands):
|
|
2005
|
|
2004
|
|
Held
by trustee under agreement:
|
|
|
|
|
|
Certificates
of deposit
|
|
$
|
8,859
|
|
$
|
18,122
|
|
Cash
and other short-term investments
|
|
|
19,576
|
|
|
32,012
|
|
|
|
|
28,435
|
|
|
50,134
|
|
Less
long-term restricted cash
|
|
|
9,881
|
|
|
24,864
|
|
Short-term
restricted cash
|
|
$
|
18,554
|
|
$
|
25,270
|
|
The
certificates of deposit are pledged to a variety of parties for various
reasons
such as state requirements (primarily for entrance fee communities),
collateral
for various self-insurance programs, and collateral to support the Company’s
lease obligations. The Company recognizes interest income on
these
certificates of deposit when earned.
(4)
Other Current Assets
A
summary
of other current assets at December 31, 2005 and 2004 is as follows (in
thousands):
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Lifecare receivables
|
|
$
|
4,158
|
|
$
|
2,587
|
|
Income
tax receivable
|
|
|
2,843
|
|
|
969
|
|
Contingent
Earnouts Receivable
|
|
|
5,259
|
|
|
1,359
|
|
Other
current assets
|
|
|
3,530
|
|
|
3,575
|
|
Total
current assets
|
|
$
|
15,790
|
|
$
|
8,490
|
|
Contingent
earn-out receivables relate to a 2003 sale lease-back transaction with
a third
party buyer. The earn-out provisions of the related lease agreements
specify
certain criteria that must be met to receive the earn-out consideration.
Based
upon the Company’s review of the earn-out performance criteria, the Company
believes that these estimates are realizable, however management periodically
assesses the recoverability of the recorded balances and adjusts the
carrying
amount of these assets when necessary. During 2005, an earn-out was reclassified
from a long-term receivable to a current receivable as a result of its
October
31, 2006 expiration.
(5)
Land, Buildings, and Equipment
A
summary
of land, buildings, and equipment at December 31, 2005 and 2004 is as
follows
(in thousands):
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Land
and improvements
|
|
$
|
42,225
|
|
$
|
26,634
|
|
Land
held for development
|
|
|
4,301
|
|
|
7,451
|
|
Buildings
and improvements
|
|
|
534,550
|
|
|
492,309
|
|
Furniture,
fixtures, and equipment
|
|
|
54,731
|
|
|
50,019
|
|
Leasehold
improvements
|
|
|
15,532
|
|
|
13,077
|
|
|
|
|
651,339
|
|
|
589,490
|
|
Less
accumulated depreciation
|
|
|
(122,359
|
)
|
|
(98,687
|
)
|
Construction
in progress
|
|
|
22,318
|
|
|
5,494
|
|
Total
|
|
$ |
551,298
|
|
$
|
496,297
|
|
The
schedule above includes assets related to nine communities at December
31, 2005
and ten communities at December 31, 2004 that were accounted for as lease
financing obligations. At December 31, 2005 and 2004, respectively, the
schedule
above includes: land improvements of $2.7 million and $1.8 million, buildings
and improvements of $182.7 million and $187.6 million, furniture, fixtures,
and
equipment of $10.2 million and $9.9 million, leasehold improvements of
$0.9
million and $0.5 million related to capital lease or lease financing
obligations. At December 31, 2005 and 2004, the Company’s accumulated
depreciation related to these assets totaled $37.0 million and $21.6
million,
respectively.
Depreciation
expense was $35.8 million, $30.7 million, and $26.4 million for the years
ended
December 31, 2005, 2004, and 2003, respectively.
(6)
Notes Receivable
During
2005, the Company entered into a 15-year management agreement with ASF
of
Edmond, LLC, an affiliate of American Seniors Foundation ("ASF") to manage
a
not-for-profit community in Edmond, Oklahoma that ASF recently acquired.
The
Company facilitated ASF's $9 million acquisition by providing a $6.0
million,
4.5 year senior mortgage loan bearing interest at one month LIBOR plus
4%, and a
$4.5 million, 15-year junior mortgage loan bearing interest at 12.5%,
both of
which are fully collateralized by the assets of the facility. It is ASF's
intention to replace the interim financing with permanent tax-exempt
financing
at the appropriate time. At December 31, 2005, the Company has $9.5 million
outstanding under these notes, which approximates current fair
value.
On
December 12, 2005, the Company entered into a transaction with ASF of
Green
Hills, LLC, an affiliate of ASF, pursuant to which the Company entered
into a
management services agreement to manage the development and construction
of
ASF’s rental assisted living community in Nashville, Tennessee, and subsequently
manage the operations of the community. ASF’s total development cost of the
project is estimated to be approximately $32.3 million. The Company agreed
to
provide certain initial financing to ASF, by providing a $32.3 million
loan to
ASF, which will be advanced by the Company primarily over the next twelve
months. The loan is evidenced by a construction loan agreement and two
promissory notes and is secured by a first mortgage lien. A $26.3 million
promissory note receivable matures on December 12, 2010 and bears interest
at a
variable rate equal to one month LIBOR plus 250 basis points. A second
$6.1
million promissory note receivable matures on December 12, 2015 and bears
interest at 10.5%. Under the promissory notes, ASF is required to make
monthly
payments of interest only through the scheduled maturity dates. At December
31,
2005, $5.5 was outstanding under these notes receivable from ASF. ASF
intends to
refinance these notes with long-term tax-exempt financing upon stabilization
of
the community.
In
order
to provide this financing to ASF, the Company obtained a $26.3 million
construction loan from a commercial bank. The loan matures on December
12, 2010
and bears interest at a variable rate equal to one-month LIBOR plus 225
basis
points. The loan is evidenced by a construction loan agreement and promissory
note. Under this loan, the Company is required to make monthly payments
of
interest only through the scheduled maturity date. The loan is secured
by a
collateral assignment of the ASF loan documents. At December 31, 2005,
the
Company has $1.7 million outstanding under this loan.
At
December 31, 2005, the Company also held a note resulting from a loan
to a
lessor of a retirement community that is being leased by the Company.
This note
generally earns interest at a fixed rate of approximately 6%. Interest
and
principal are due monthly based on a 35 year amortization. The note receivable
matures in June 2038 and is secured by the related community. At December
31,
2005, the Company has $18.0 million outstanding under this note, including
the
current portion, which approximates current fair value.
(7)
Leasehold Acquisitions
At
December 31, 2005 and 2004, the Company had $21.9 million and $29.4 million,
respectively, of net leasehold acquisition costs. The subject leases
terminate
at various points through August 2018. Leasehold acquisition costs are
amortized
principally on a straight-line basis over the remaining contractual or
expected
life of the related lease agreements (generally ten to 15 years, or,
if shorter,
the expected life of the lease). Accumulated amortization for the years
ended
December 31, 2005 and 2004 was $9.6 million and $9.4 million, respectively.
Amortization expense for the years ended December 31, 2005, 2004 and
2003 was
$2.6 million, $2.9 million, and $2.4 million, respectively. The Company
assesses
the leasehold acquisition costs for impairment based upon the amount
of
estimated undiscounted future cash flows over the remaining lease
terms.
(8)
Other Assets and Joint Ventures
Other
assets at December 31, 2005 and 2004 consist of the following (in
thousands):
|
|
2005
|
|
2004
|
|
Investments
in and advances to joint ventures
|
|
$
|
16,616
|
|
$
|
2,361
|
|
Investment
in leased communities
|
|
|
9,725
|
|
|
10,160
|
|
Nonrefundable
purchase options
|
|
|
9,397
|
|
|
9,300
|
|
Security
deposits
|
|
|
8,780
|
|
|
8,780
|
|
Deferred
entrance fee receivables
|
|
|
4,648
|
|
|
5,654
|
|
Deferred
financing costs, net
|
|
|
4,984
|
|
|
1,552
|
|
Contingent
earn-outs
|
|
|
-
|
|
|
3,900
|
|
Long-term
prepaid rent
|
|
|
1,323
|
|
|
1,416
|
|
Costs
of acquiring lifecare contracts, net
|
|
|
1,507
|
|
|
1,755
|
|
Other
|
|
|
10,690
|
|
|
10,758
|
|
Total
|
|
$
|
67,670
|
|
$
|
55,636
|
|
|
|
|
|
|
|
|
|
During
2004, the Company sold a substantial majority of our interest in
the real
property underlying two retirement centers and one free-standing
assisted living
community, while retaining a 10% interest in real estate holding
companies that
own the three communities. The Company continues to operate the communities
under a master lease. This investment in leased communities is accounted
for
using the equity method.
On
November 1, 2005, the Company entered into a joint venture agreement
with Senior
Housing Partners III (“SHP”). The joint venture is owned 20% by the Company and
80% by SHP, a senior housing affiliate of Prudential Real Estate
Investors.
Simultaneously, the Company assigned to the joint venture its rights
in a
purchase agreement for the acquisition of eight senior living communities
from
an affiliate of Epoch Senior Living, Inc., for a purchase price of
$138.0
million plus customary transaction expenses and the assumption of
certain
operating obligation of the communities. Pursuant to the joint venture
agreement, the Company will manage the communities pursuant to a
long-term
management agreement. The subject communities are located in Arizona
(2),
Colorado, Georgia, Kansas, Minnesota, Nevada and Texas. At December
31, 2005,
the Company’s investment in this joint venture was $11.2 million.
The
joint
venture was capitalized by proportional equity contributions from
the Company
and SHP, and an $85.0 million term loan obtained from a commercial
bank. The
loan bears interest at one-month LIBOR plus a 2% margin and requires
payments of
interest only until its scheduled maturity on October 31, 2010. Beginning
on
November 1, 2007, the joint venture could be required to commence
payment under
a 25-year mortgage amortization schedule, if the joint venture fails
to maintain
certain financial covenants specified in the agreement.
Summary
combined unaudited financial information of the Company’s joint ventures as of
and for the years ended December 31, 2005 and 2004 follows (in
thousands):
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Current
assets
|
|
$
|
6,985
|
|
$
|
920
|
|
Land,
buildings and equipment, net
|
|
|
148,433
|
|
|
12,751
|
|
Other
assets
|
|
|
1,949
|
|
|
139
|
|
Total
assets
|
|
$
|
157,367
|
|
$
|
13,810
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
9,865
|
|
$
|
5,257
|
|
Long-term
liabilities
|
|
|
93,910
|
|
|
12,184
|
|
Total
liabilities
|
|
|
103,775
|
|
|
17,441
|
|
Partners’
and members’ equity (deficit)
|
|
|
53,592
|
|
|
(3,631)
|
|
Total
liabilities and partners’ and members equity (deficit)
|
|
$
|
157,367
|
|
$
|
13,810
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
9,385
|
|
$
|
4,843
|
|
Net
loss
|
|
|
(1,393)
|
|
|
(779)
|
|
At
December 31, 2005 and 2004, the Company had $16.6 million and $2.4 million,
respectively, of investments in and advances to these joint ventures.
For the
years ended December 31, 2005, 2004, and 2003, respectively, the Company
recognized $0, $0.3 million, and $0.5 million of net losses related to
these
unconsolidated joint ventures.
(9)
Secondary Public Offering and Acquisitions
On
January
26, 2005, the Company completed a public offering of 5,175,000 shares
of common
stock, including the underwriter’s over-allotment of 675,000 shares. The shares
were priced at $10.25. The net proceeds of the offering, after deducting
underwriting discounts and commissions, were approximately $49.9
million.
The
Company used the proceeds of its January 26, 2005 secondary offering
to make
certain debt repayments. During January 2005, the Company repaid in full
the
balance on a mortgage loan from Health Care Property Investors (HCPI)
in the
amount of $5.7 million, bearing interest at 9%. In addition, during January
2005, the Company repaid in full the $17.2 million of 9.625% fixed interest-only
mortgage notes, issued in 2001, due October 1, 2008.
On
February 1, 2005, the Company acquired Galleria Woods, an entrance-fee
continuing care retirement community with 207 units, located in Birmingham,
Alabama. The Company acquired the community for approximately $5.5 million
of
cash (including closing costs) plus the assumption of existing entrance-fee
refund obligations of approximately $10.4 million, generally repayable
from the
entrance fees of future residents.
The
transaction was accounted for using the “purchase” method as required by SFAS
No. 141, Business
Combinations, and
accordingly, the results of operations of the acquired community were
included
in the Company’s consolidated financial statements from the date of acquisition.
The cost to acquire Galleria Woods was allocated to the assets acquired
and
liabilities assumed based on their fair values.
On
October
14, 2005, the Company entered into a joint venture agreement with Denver
Lowry
Senior Housing, LLC (“DLSH”) to develop and operate a rental continuing care
retirement community in Denver, Colorado. The joint venture is owned
20% by the
Company and 80% by DLSH, an affiliate of CNL Capital Corp. Pursuant to
the joint
venture agreement, the Company will act as developer of the $38.0 million
project and will manage the community pursuant to a long-term management
agreement.
In
order
to finance construction of the facility, the venture entered into a $25.5
million construction loan with a commercial lender. The loan is evidenced
by a
loan agreement and a promissory note, and is secured by a first mortgage
lien.
The loan matures on December 1, 2008, and the joint venture has two one-year
extension options. The outstanding principal balance of the loan bears
interest
at a variable rate equal to LIBOR plus 2.75%. The joint venture will
be required
to make monthly payments of interest only through the scheduled maturity
date.
If the joint venture exercises its extension options, it will also be
required
to make monthly principal payments (based upon a 25 year amortization
schedule)
during the extension period(s).
The
Company also agreed to provide an operating deficits guaranty for the
benefit of
the lender, pursuant to which the Company may be required to fund certain
of the
joint venture's operating deficits. In the event that the Company is
required to
fund any such operating deficits, the amounts so funded will be treated
as
advances by the Company to the joint venture and will be required to
be repaid
prior to any other distributions being made to the members of the joint
venture.
(10)
Long-term Debt and Other Transactions
A
summary
of long-term debt is as follows (in thousands):
|
|
December
31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Various
mortgage notes, interest at variable and fixed rates, generally
payable
monthly with any unpaid principal and interest due between
2006 and 2037.
Interest rates at December 31, 2005 range from 6.5% to 9.50%.
The loans
are secured by certain land, buildings and equipment.
|
|
$
|
109,090
|
|
$
|
109,401
|
|
|
|
|
|
|
|
|
|
Various
construction loans, interest generally payable monthly with
unpaid
principal due between 2006 and 2009. Variable interest rates
at December
31, 2005 range from 4.4% to 8.3%. The loans are secured by
certain real
property.
|
|
|
17,392
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Various
other long-term debt, generally payable monthly with any
unpaid principal
and interest due between 2006 and 2018. Variable and fixed
interest rates
at December 31, 2005 range from 4.7% to 9.0%. The loans are
secured by
certain land, buildings and equipment.
|
|
|
20,101
|
|
|
26,555
|
|
|
|
|
|
|
|
|
|
Subtotal
debt
|
|
|
146,583
|
|
|
135,956
|
|
Capital
lease and lease financing obligations with principal and
interest payable
monthly bearing interest at fixed rates ranging from 0.4%
to 10.9%, with
final payments due between 2006 and 2017. The obligations
are secured by
certain land, buildings and equipment.
|
|
|
177,417
|
|
|
199,126
|
|
|
|
|
|
|
|
|
|
Total
debt, including capital lease and lease financing
obligations
|
|
|
324,000
|
|
|
335,082
|
|
|
|
|
|
|
|
|
|
Less
current portion of debt
|
|
|
11,978
|
|
|
10,372
|
|
Less
current portion of capital lease and lease financing
obligations
|
|
|
16,868
|
|
|
16,474
|
|
Long-term
debt, excluding current portion
|
|
$
|
295,154
|
|
$
|
308,236
|
|
The
aggregate scheduled maturities of long-term debt were as follows (in
thousands):
|
|
Long-term
Debt
|
|
Capital
Lease and Lease Financing Obligations
|
|
Total
Debt
December
31,
2005
|
|
2006
|
|
$
|
11,978
|
|
$
|
16,868
|
|
$
|
28,846
|
|
2007
|
|
|
17,317
|
|
|
17,354
|
|
|
34,671
|
|
2008
|
|
|
16,905
|
|
|
18,107
|
|
|
35,012
|
|
2009
|
|
|
8,783
|
|
|
18,878
|
|
|
27,661
|
|
2010
|
|
|
26,470
|
|
|
19,808
|
|
|
46,278
|
|
Thereafter
|
|
|
65,130
|
|
|
86,402
|
|
|
151,532
|
|
|
|
$
|
146,583
|
|
$
|
177,417
|
|
$
|
324,000
|
|
The
Company has various construction loan commitments totaling approximately
$50.6
million that are not reflected in its consolidated financial statements
at
December 31, 2005.
On
June
29, 2005, the Company obtained a letter of credit facility from a
commercial
bank. The facility provides for the issuance of up to $10.7 million
of standby
letters of credit and is collateralized by a mortgage on two of the
Company’s
free-standing assisted living communities. The
Company presently has $8.4 million of letters of credit outstanding
under this
facility, which has an initial term of one year, and can be renewed
for two
additional one year periods in accordance with its terms. A fee of
1% per annum
is payable for any letters of credit issued under the facility. In
the event a
standby letter of credit is drawn upon, the amount so drawn will
bear interest
at the prime rate. The
letter
of credit facility contains certain financial covenants and other
restrictions
related to certain communities. As
a
result of this letter of credit facility, the Company released approximately
$8.4 million from its restricted cash balance, which was used to
repay
debt.
Earn-outs
Approximately
$56.4 million of the Company’s $177.4 million of lease financing obligations
include contingent earn-out provisions under certain leases which
expire between
March 2006 and October 2006. The contingent earn-out provisions relate
to one
retirement center and five free-standing assisted living communities.
When these
provisions expire, the Company’s continuing involvement related to the initial
sale-leaseback transactions will be relieved and the subject leases
will no
longer be accounted for as lease financing obligations, but will
be accounted
for as operating leases. As a result, lease expense
will increase. The expected reduction of lease financing obligations
as a result
of these expirations, unless further extended, is:
During
the three months ended March 31, 2006
|
|
$ |
7.3
million
|
|
During
the three months ended December 31, 2006
|
|
|
46.7
million
|
|
|
|
$ |
54.0
million
|
|
On
December 31, 2005, the earn-out related to an underlying lease of a free
standing assisted living community expired. The expiration of this earn-out
relieved the Company’s continuing involvement and changed the accounting from a
lease financing obligation to an operating lease. As a result, fixed
assets
decreased $5.3 million and lease financing obligations decreased $5.5
million.
The net gain of $0.2 million was deferred and recognized over the remaining
term
of the lease.
During
the
year ended December 31, 2004, the Company elected to forgo earn-outs
related to
two free-standing assisted living communities. The expiration of these
earn-outs
relieved the continuing involvement and changed the accounting from lease
financing obligations to operating leases. As a result, fixed assets
decreased
$12.4 million and lease financing obligations decreased $12.8 million,
with the
net gain of $0.4 million deferred and recognized over the remaining term
of the
lease.
Guaranties
The
Company guaranties approximately $18.0 million of mortgage debt that
is not
reflected on the Company’s balance sheet, of which $9.6 million relates to a
retirement center which the Company leases and $8.4 million relates to
a joint
venture which the Company manages. These guaranties require that the
Company pay
or perform the borrower’s obligation. Accordingly, the Company would be required
to make any payments, and perform any obligations, if the relevant borrower
fails to do so. To date, the Company has not been required to fund any
debt
guaranties, and at December 31, 2005, the Company does not believe that
it will
be required to make payments under its current outstanding guaranties.
If we
were required to fund a debt guaranties, the Company would be entitled
to seek
indemnity or contribution payments from the borrower and, if applicable,
any
co-guarantor.
Substantially
all of the Company's assets are pledged (including first priority mortgages)
to
secure its indebtedness. Certain of the Company’s indebtedness and lease
agreements are cross-collateralized or cross-defaulted. Any default with
respect to such obligations could cause the Company’s lenders or lessors to
declare defaults, accelerate payment obligations or foreclose upon
the
communities securing such indebtedness or exercise their remedies with
respect
to such communities, which could have a material adverse effect on
the Company.
Certain of the Company’s debt instruments and leases contain financial and other
covenants, typically related to the specific communities financed or
leased.
(11)
Operating Leases
As
of
December 31, 2005, the Company operated 43 of its senior living communities
under long-term leases (34 operating leases and nine leases classified
as lease
financing obligations). Of the 34 operating lease communities, 26 are
operated
under four master lease agreements, with the remaining communities
leased under
individual lease agreements. The Company also leases its corporate
offices and
is obligated under several ground leases for senior living communities.
The
remaining base lease terms vary from two to thirteen years. Many of the
leases provide for renewal, extension and purchase options. Many of
the leases
also provide for graduated lease payments, either based upon fixed
rate
increases or a specified formula. In addition, several leases have
provisions
for contingent lease payments based on occupancy levels or other measures.
To
the extent that lease escalators are dependent on an existing index
or rate,
lease increases associated with the escalators are accounted for on
a
straight-line basis over the life of the lease. In addition, a majority
of the
Company’s lease agreements impose certain restrictions or required
authorizations for certain changes such as expansions or significant
modifications.
Net
lease
expense for the year ended December 31, 2005 was $60.9 million, which
includes
lease payments of $67.9 million, plus accruals for future lease escalators
dependent upon an existing index or rate (straight-line lease expense)
of $4.9
million, net of the amortization of the deferred gain from prior sale-leasebacks
of $11.9 million. Total net lease expense was $60.9 million, $60.1
million and
$46.5 million for 2005, 2004, and 2003, respectively.
Future
minimum lease payments at December 31, 2005 are as follows (in thousands):
2006
|
|
$
|
68,246
|
|
2007
|
|
|
69,291
|
|
2008
|
|
|
67,980
|
|
2009
|
|
|
69,054
|
|
2010
|
|
|
69,829
|
|
Thereafter
|
|
|
355,692
|
|
|
|
$
|
700,092
|
|
The
following table provides a summary of operating lease obligations at
December
31, 2005 by lessor:
|
|
Future
Minimum Lease Payments
|
|
|
|
Year
Ending
|
|
Remaining
|
|
|
|
December
31, 2006
|
|
Lease
Term
|
|
Master
lease agreements for eleven communities. Initial term ranging
from 10 to
15 years, with renewal options for two additional ten year
terms.
|
|
$
|
25,063
|
|
$
|
223,894
|
|
|
|
|
|
|
|
|
|
Operating
lease agreements for three communities with an initial term
of 15 years
and renewal options for two additional five year terms or two
additional
ten year terms.
|
|
|
9,294
|
|
|
128,545
|
|
|
|
|
|
|
|
|
|
Master
lease agreement for nine communities. Initial 12 year term,
with renewal
options for two additional five year terms.
|
|
|
11,085
|
|
|
86,701
|
|
|
|
|
|
|
|
|
|
Operating
lease agreement for a community which has a 23 year term, with
a seven
year renewal option. The Company also has an option to purchase
the
community at the expiration of the lease term.
|
|
|
4,344
|
|
|
45,768
|
|
|
|
|
|
|
|
|
|
Operating
lease agreement for a community with an initial term of 15
years with two
five year renewal options and a right of first refusal to repurchase
the
community. The Company recorded a deferred gain of $11.7 million
on the
sale, which is being amortized over the base term of the lease.
|
|
|
3,894
|
|
|
40,346
|
|
|
|
|
|
|
|
|
|
Master
lease agreement for six communities with an initial ten year
term, with
renewal options for four additional ten year terms.
|
|
|
6,140
|
|
|
36,542
|
|
|
|
|
|
|
|
|
|
Other
lease agreements for three communities, as well as various
home office
leases. Initial terms ranging from eight to 17 years, with
various renewal
options.
|
|
|
8,426
|
|
|
70,050
|
|
|
|
|
|
|
|
|
|
Total
operating lease obligations
|
|
$
|
68,246
|
|
$
|
631,846
|
|
During
2005, the Company purchased the real assets of a retirement center and
a
free-standing assisted living community which were previously operating
pursuant
to operating leases. Furthermore, a lease related to an assisted-living
community which was previously accounted for as a lease financing obligation
was
reclassified to an operating lease as a result of the expiration of an
earn-out
and the Company’s continuing involvement in the lease. During 2004, the Company
entered into an operating lease agreement for a retirement center, which
previously had been owned.
(12)
Refundable Entrance Fees and Deferred Entrance Fee Income
Entrance
fees related to the residency and care agreements entered into with residents
are received at the time of occupancy. The refundable portion of the
entrance
fee equal to the stated minimum refund percentage is reported as a liability
(refundable portion of entrance fees) and is not amortized. The remaining
portion of the fee is reported as deferred entrance fee income and is
generally
amortized into income over the actuarially determined life expectancy
of each
resident. Entrance fees that are refundable to the resident upon occupation
of
the unit by the next resident are recorded as deferred entrance fee income
and
amortized into revenue over the remaining life of the building.
Residency
and care agreements may be terminated by residents at any time for any
reason
with 30 days notice. Generally, a portion of the entrance fee is refundable
to
the resident or the resident’s estate upon termination of the agreement. Since
termination of a resident’s agreement can result under many contracts in a
refund being due in less than one year, the refundable portion of these
entrance
fees (equal to the stated fixed minimum refund percentage) is recorded
on the
balance sheet as a current liability. The Company’s experience is that payment
of these liabilities is offset by subsequent entrance fee sales. The
deferred
entrance fee income is generally a long-term liability on the balance
sheet,
except that a portion is shown as a current liability during the early
years of
a resident’s agreement (only until the contractual provisions of the agreement
reduce the potential refund to the fixed minimum percentage stated in
the
agreement). At termination, the refundable amount is paid to the resident
or
resident’s estate. Payments of such refunds are charged against the resident’s
deferred entrance
fees and refundable portion of entrance fees, and any gain or loss is
included
in resident and health care services revenue.
Under
certain of the Company’s residency and health care agreements for its lifecare
communities, residents entered into a Master Trust Agreement whereby amounts
were paid by the resident into a trust account. These funds were then made
available to the related communities in the form of a non-interest bearing
loan
to provide permanent financing for the related communities and are
collateralized by the land, buildings and equipment at the community. As
of
December 31, 2005, the remaining obligation under the Master Trust Agreements
is
$27.4 million and is payable monthly based on a 40-year amortization of
each
resident’s balance. The current installment due in 2006, and annually for the
subsequent five-year period, is approximately $1.0 million. The annual
obligation is reduced as individual residency agreements terminate.
Upon
termination of the resident’s occupancy under a Master Trust Agreement, the
resident or the resident’s estate receives a payment of the remaining loan
balance from the trust and pays a lifecare fee to the community based on
a
formula in the residency and health care agreement, not to exceed a specified
percentage of the resident’s original amount paid to the trust. This lifecare
fee is amortized by the Company into revenue on a straight-line basis over
the
estimated life expectancy of the resident beginning with the date of occupancy
by the resident. The amortization of the lifecare fees is included in resident
and health care revenue in the consolidated results of operations. At December
31, 2005 and 2004, the Company had accrued $4.6 million and $5.7 million,
respectively, as deferred entrance fee receivables which are included as
a
component of other assets. The Company reports the obligation under the
Master
Trust Agreements as a refundable portion of entrance fees and deferred
entrance
fee income based on the applicable residency agreements.
In February
2005, the Company acquired a continuing care retirement community in Birmingham,
Alabama. As a result of this acquisition, the Company assumed $9.8 million
in
deferred entrance fee income and $0.6 million of refundable entrance fee
liabilities.
Entrance
fee liabilities at December 31, 2005 and 2004, respectively (in thousands)
were:
|
|
Master
Trust
|
|
Other
Residency
Agreements
|
|
Total
|
|
At
December 31, 2005:
|
|
|
|
|
|
|
|
Other
current liabilities
|
|
$
|
999
|
|
$
|
-
|
|
$
|
999
|
|
Refundable
portion of entrance fees
|
|
|
12,551
|
|
|
72,613
|
|
|
85,164
|
|
Deferred
entrance fee income – current portion
|
|
|
-
|
|
|
38,407
|
|
|
38,407
|
|
Deferred
entrance fee income – long-term portion
|
|
|
13,856
|
|
|
108,561
|
|
|
122,417
|
|
|
|
$
|
27,406
|
|
$
|
219,581
|
|
$
|
246,987
|
|
|
|
Master
Trust
|
|
Other
Residency
Agreements
|
|
Total
|
|
At
December 31, 2004:
|
|
|
|
|
|
|
|
Other
current liabilities
|
|
$
|
1,363
|
|
$
|
-
|
|
$
|
1,363
|
|
Refundable
portion of entrance fees
|
|
|
14,466
|
|
|
64,682
|
|
|
79,148
|
|
Deferred
entrance fee income – current portion
|
|
|
-
|
|
|
33,800
|
|
|
33,800
|
|
Deferred
entrance fee income – long-term portion
|
|
|
16,851
|
|
|
94,535
|
|
|
111,386
|
|
|
|
$
|
32,680
|
|
$
|
193,017
|
|
$
|
225,697
|
|
The
refundable portion of entrance fees is shown on the balance sheet as
a current
liability. A portion of the deferred entrance fee income is also classified
as a
current liability during the early years of a resident’s agreement. Although
these amounts are classified as a current liability based on the agreement
terms, the Company expects that, consistent with historical trends, the
refund
obligations actually paid in any year will be offset by the resale of
the
vacated apartment units.
(13)
Shareholders’ Equity
The
Company is authorized to establish and issue, from time to time, up to
5 million
shares of no par value preferred stock, in one or more series, with such
dividend rights, dividend rate, conversion rights, voting rights, rights
and
terms of redemption (including sinking fund provisions), redemption price
or
prices, and liquidation preference as authorized by the Board of Directors.
At
December 31, 2005
and
2004, no preferred shares had been issued.
On
November 18, 1998, the Company's Board of Directors adopted a Shareholders'
Rights Plan (the "Rights Plan") to protect the interests of the Company's
shareholders if the Company is confronted with coercive or unfair takeover
tactics by third parties. Pursuant to the Rights Plan, a dividend of
one Right
for each outstanding share of the Company's Common Stock was issued to
shareholders of record on December 7, 1998. Under certain conditions,
each Right
may be exercised to purchase one one-hundredth of a share of Series A
Preferred
Stock at an exercise price of $86.25 per Right. Each Right will become
exercisable following the tenth day after a person's or group's acquisition
of,
or commencement of a tender or exchange offer for 15% or more of the
Company's
Common Stock. If a person or group acquires 15% or more of the Company's
Common
Stock, each right will entitle its holder (other than the person or group
whose
action has triggered the exercisability of the Rights) to purchase common
stock
of either the Company or the acquiring company (depending on the form
of the
transaction) having a value of twice the exercise price of the Rights.
The
Rights will also become exercisable in the event of certain mergers or
asset
sales involving more than 50% of the Company's assets or earning power.
The
Rights may be redeemed prior to becoming exercisable, subject to approval
by the
Company's Board of Directors, for $0.001 per Right. The Rights expire
on
November 18, 2008. The Company has reserved 2,000,000 shares of Series
A
Preferred Stock for issuance upon exercise of the Rights.
The
Company had previously issued Series B Notes which were convertible into
shares
of the Company’s common stock at any time prior to their April 1, 2008 maturity,
at the option of the holder, at the conversion price of $2.25 per share.
During
the year ended December 31, 2003, holders of Series B Notes elected to
convert
$5.1 million of the $16.0 million of convertible debentures to common
stock at
the conversion price of $2.25 per share. As a result, the Company issued
2,266,517 shares of common stock. On February 12, 2004, the Company announced
that it was electing to redeem $4.5 million in principal amount of its
Series B
Notes and on March 12, 2004, $27,320 was redeemed at a redemption price
of 105%
(expressed as a percentage of principal amount), plus accrued but unpaid
interest to the redemption date. On April 1, 2004, the Company further
announced
that it was electing to redeem the remaining $2.1 million principal balance
of
its Series B Notes and on April 30, 2004, $8,356 was redeemed at a redemption
price of 103.5% (expressed as a percentage of principal amount), plus
accrued
but unpaid interest to the redemption date. As a result of these two
redemption
notices, holders of Series B Notes elected to convert $10.9 million of
Series B
Notes into 4,808,898 shares of common stock at the conversion price of
$2.25 per
share, and as of April 30, 2004, no Series B Notes remained
outstanding.
On
January
26, 2005, the Company completed a public offering of 5,175,000 shares
of its
common stock, including the underwriter’s over-allotment of 675,000 shares. The
shares were priced at $10.25. The net proceeds of the offering, after
deducting
underwriting discounts and commissions, were approximately $49.9 million.
(14)
Stock-Based Compensation
Stock
Incentive Plan
In
1997,
the Company adopted a stock incentive plan (the “1997 Plan”) providing for the
grant of stock options, stock appreciation rights, restricted stock,
and/or
other stock-based awards. Pursuant to the 1997 Plan, as amended, or
approximately 4.4
million shares of common stock at December 31, 2005, have been issued
or
reserved under the 1997 Plan.
Restricted
Stock
On
September 22, 2005, the Company granted certain members of management
a total of
277,000 shares of performance-based non-vested stock. The
shares
underlying the grant will vest in three stand-alone tranches on March
31, 2006,
March 31, 2007, and March 31, 2008, subject to continued employment and
the
Company’s achievement of certain performance targets set for each tranche. The
first tranche was subject to “variable” accounting rules under APB 25. As a
result, 2005 compensation expense related to the first tranche was recognized
and varied with changes in the Company’s stock price. Upon the adoption of SFAS
No. 123(R) on January 1, 2006, the Company will expense the remainder
of the
unvested shares over the vesting term based on grant-date fair values,
which are
set at the time all key terms, including performance measures, are set
for each
tranche.
On
July
19, 2004, the Company granted certain members of management a total of
440,000
shares of restricted stock. This
stock
had a $5.95 market value at the date of grant and vests ratably over
a period of
three years from the grant date, subject only to continued employment.
Compensation expense under the grant is “fixed” under the provisions of APB
Opinion No. 25 and will be treated similarly upon adoption of the adoption
of
SFAS No. 123(R) on January 1, 2006. Measured
compensation related to the grant totaled $2.6 million which is being
amortized
as compensation expense over the period of vesting.
For
the
years ended December 31, 2005, 2004 and 2003, the Company expensed $1.9
million,
$0.4 million and $0, respectively, as compensation expense related to
the
amortization of the restricted stock grants.
Stock
Options
The
option
exercise price and vesting provisions of stock options are fixed when
options
are granted. The options generally expire ten years from the date of
grant and
vest over a three-year period. The weighted average fair value of options
granted during 2005, 2004 and 2003 was $6.89, $2.40, and $1.02, respectively.
A
summary
of the Company’s stock option activity, and related information for the years
ended December 31, 2005, 2004 and 2003, respectively, is presented below
(shares
in thousands):
Options
|
Shares
|
Average
Exercise
Price
|
Outstanding
at December 31, 2002
|
2,127
|
$
4.73
|
Granted
|
156
|
2.20
|
Exercised
|
─
|
─
|
Forfeited
|
(208)
|
9.83
|
Outstanding
at December 31, 2003
|
2,075
|
$
3.99
|
Granted
|
895
|
5.20
|
Exercised
|
(562)
|
4.26
|
Forfeited
|
(149)
|
4.66
|
Outstanding
at December 31, 2004
|
2,259
|
$
4.43
|
Granted
|
392
|
14.91
|
Exercised
|
(605)
|
4.21
|
Forfeited
|
(109)
|
7.85
|
Outstanding
at December 31, 2005
|
1,937
|
$
4.43
|
The
following table summarizes information about stock options outstanding
at
December 31, 2005 (shares in thousands):
Range
of Exercise Prices
|
Number
Outstanding
|
Number
Exercisable
at
December
31,
2005
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
$
1.650 - 3.000
|
106
|
69
|
7.04
|
$
2.25
|
$
3.100 - 3.140
|
697
|
697
|
5.11
|
3.10
|
$
3.440 - 4.000
|
54
|
51
|
5.57
|
3.83
|
$
4.900 - 4.900
|
447
|
109
|
8.25
|
4.90
|
$
4.950 - 7.940
|
190
|
95
|
7.42
|
5.85
|
$
8.000 - 14.000
|
98
|
62
|
4.41
|
12.70
|
$
14.110 - 14.110
|
211
|
54
|
9.38
|
14.11
|
$
14.120 - 19.280
|
120
|
23
|
8.36
|
16.62
|
$
24.730 - 25.100
|
14
|
-
|
9.91
|
25.03
|
$
1.650 - 25.100
|
1,937
|
1,160
|
6.84
|
6.43
|
There
were
exercisable options to purchase an aggregate of 1,160,149 shares at
a weighted
average exercise price of $4.84 per share as of December 31, 2005.
In
accordance with SFAS No. 148, pro forma information regarding net income
or loss
and income or loss per share as disclosed in Note 2(s) to these consolidated
financial statements has been determined by the Company using the
“Black-Scholes” option pricing model with the following weighted average
assumptions for the years ended December 31, 2005, 2004 and 2003, respectively:
3.17%, 1.12% and 1.16% risk-free interest rate, 0% dividend yield,
66.0%, 67.0%
and 69.6% volatility rate, and an expected life of the options equal
to the
remaining vesting period.
In
December 2004, the FASB issued SFAS No. 123 (Revised), Share-Based
Payment (SFAS
123(R). This standard revises SFAS No. 123, APB No. 25 and related
accounting
interpretations, and eliminates the use of the intrinsic value method.
The
adoption of SFAS 123(R) will have a significant effect on the Company’s
statement of operations, which is discussed in Note 2(z) to these consolidated
financial statements.
Associate
Stock Purchase Plan
In
1997,
the Company adopted an associate stock purchase plan (“ASPP”) pursuant to which
an aggregate of 418,078 shares remain authorized and available for
issuance to
employees at December 31, 2005. Under the ASPP, employees (excluding
officers)
who have been employed by the Company continuously for at least 90
days are
eligible, subject to certain limitations, as of the first day of any
option
period (January 1 through June 30, or July 1 through December 31) (an
“Option
Period”) to contribute on an after-tax basis up to 15% of their base pay per
pay
period through payroll deductions and/or a single lump sum contribution
per
Option Period to be used to purchase shares of common stock. On the
last trading
day of each Option Period, the amount contributed by each participant
over the
course of the Option Period will be used to purchase up to 700 shares
of common
stock at a purchase price per share equal to 85% of the closing market
price of
the common stock on the last day of the option Option Period. The ASPP
is
intended to qualify for favorable tax treatment under Section 423 of
the
Internal Revenue Code. During 2005, 2004 and 2003, respectively, 127,315,
155,042 and 62,793 shares were issued pursuant to the ASPP at an average
purchase price of $15.52, $4.63 and $1.77 per share, respectively.
(15)
Executive Officer Incentive Compensation Plans
During
2003 the Board of Directors modified the incentive compensation programs
for its
senior officers, which reduced the annual incentive opportunity for
this group,
and added a program that provided a one-time additional incentive opportunity
under a multi-year program. During the period beginning in 2003 and
ending in
2007, the senior officer group could earn an additional incentive bonus
upon
achieving certain specified goals regarding improvements in the Company’s
capital structure, financial results, or other specified goals. These
amounts
would be paid out during the quarter following the time the objective
is met.
During 2004, approximately $2.0 million of additional incentive bonuses
were
approved by the Company’s Board
of
Directors and paid during the fourth quarter 2004 as a result of achieving
the
specified goals related to improvements in the Company’s capital structure.
(16)
Retirement Plans
Associates
of the Company participate in a savings plan (the “401(k) Plan”) which is
qualified under Sections 401 (a) and 401(k) of the Code. To be eligible,
an
associate must have been employed by the Company for at least three months.
The
401(k) Plan permits associates to make voluntary contributions up to
specified
limits. The Company matches 1% of participant contributions, up to 2%
of the
participant’s monthly compensation. In addition, the Company may make
discretionary contributions up to 2% of the participant’s quarterly
compensation. The Company may also contribute an additional amount determined
in
its sole judgment. In 2005, 2004 and 2003, Company contributions totaled
approximately $0.9 million, $0.6 million, $0.5 million,
respectively.
In
September 2004, the Company established a deferred compensation plan
which
allows a select group of management or highly compensated employees to
defer a
portion of their cash compensation. Participants voluntarily electing
to defer
portions of their cash compensation shall be deferred for a minimum of
five
years or until a separation of service (as defined in the plan). Amounts
deferred by each participant are accrued but unfunded by the Company
and accrue
interest at the prime rate plus one percent per annum, but not less than
six
percent per annum or greater than ten percent per annum. At December
31, 2005,
the deferred amount plus accrued interest is approximately $0.7 million.
In
2004,
the Company adopted a supplemental executive retirement plan (SERP) that
allows
eligible executives to defer a portion of their compensation. Currently,
Mr.
Sheriff is the only participant in the SERP, and he elected to defer
$48,000 of
his base salary during 2005 and 2004. The participant directs the investment
of
these deferred amounts among several available investment funds. Generally,
the
participant will be entitled to receive the amount of his or her SERP
account,
upon termination of employment with the Company by death, disability
or
retirement.
The
Company maintains a non-qualified deferred compensation plan (the “162 Plan”)
which allows associates who are “highly compensated” under IRS guidelines to
make after-tax contributions to an investment account established in
such
associates’ name. Additional contributions may be made by the Company at its
discretion. All contributions to the 162 Plan are subject to the claims
of the
Company’s creditors. The Company contributed $42,000 per year on behalf of Mr.
Sheriff during 2005, 2004 and 2003.
(17)
Income Taxes
Income
tax
expense for the years ended December 31, 2005, 2004, and 2003 were attributable
to income (losses) before income taxes and minority interest and consists
of the
following (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
U.S.
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
5,396
|
|
$
|
2,955
|
|
$
|
552
|
|
Deferred
|
|
|
(43,239)
|
|
|
-
|
|
|
-
|
|
Total
U.S. Federal
|
|
|
(37,843)
|
|
|
2,955
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
621
|
|
|
1,508
|
|
|
464
|
|
Deferred
|
|
|
(10,308)
|
|
|
(2,042)
|
|
|
1,645
|
|
Total
State
|
|
|
(9,687)
|
|
|
(534)
|
|
|
2,109
|
|
Total
income tax (benefit) expense
|
|
$
|
(47,530)
|
|
$
|
2,421
|
|
$
|
2,661
|
|
The
tax
effect of temporary differences that give rise to significant portions
of the
deferred tax assets and liabilities at December 31, 2005 and 2004 are
presented
below (in thousands):
|
|
Years
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Deferred
tax assets:
|
|
|
|
|
|
Federal
and state operating loss carryforwards
|
|
$
|
4,163
|
|
$
|
4,642
|
|
Deferred
gains on sale lease-back transactions
|
|
|
35,775
|
|
|
40,344
|
|
Accrued
expenses not deductible for tax
|
|
|
2,999
|
|
|
2,770
|
|
Intangible
assets
|
|
|
4,844
|
|
|
4,609
|
|
Asset
impairment charges and other losses
|
|
|
468
|
|
|
1,337
|
|
Deferred
entrance fee revenue
|
|
|
33,312
|
|
|
30,103
|
|
Deferred
rent
|
|
|
5,464
|
|
|
4,830
|
|
Other
|
|
|
2,784
|
|
|
3,267
|
|
Total
gross deferred tax assets
|
|
|
89,809
|
|
|
91,902
|
|
Less
valuation allowance
|
|
|
(6,083)
|
|
|
(66,096)
|
|
Total
deferred tax assets, net of valuation allowance
|
|
|
83,726
|
|
|
25,806
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Buildings
and equipment
|
|
|
27,710
|
|
|
22,608
|
|
Other
|
|
|
987
|
|
|
1,716
|
|
Total
gross deferred tax liabilities
|
|
|
28,697
|
|
|
24,324
|
|
Net
deferred tax asset
|
|
$
|
55,029
|
|
$
|
1,482
|
|
The
following table summarizes the significant differences between the
U.S. Federal
statutory tax rate and the Company’s effective tax rate for financial statement
purposes on income (loss) before income taxes and minority
interest:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Statutory
tax rate income (loss)
|
|
|
35.0%
|
|
|
(35.0%
|
)
|
|
(35.0%
|
)
|
State
income taxes, net of Federal benefit
|
|
|
(27.0%)
|
|
|
(5.3%
|
)
|
|
15.2%
|
|
Non-deductible
expenses and other items
|
|
|
(1.3%)
|
|
|
0.5%
|
|
|
0.7%
|
|
Change
in Federal valuation allowance
|
|
|
(211.4%)
|
|
|
77.1%
|
|
|
41.9%
|
|
Total
|
|
|
(204.7%)
|
|
|
37.3%
|
|
|
22.8%
|
|
As
of
December 31, 2005 and 2004, the Company carried a valuation allowance
against
deferred tax assets in the amount of $6.1 million and $66.1 million,
respectively, a decrease of $60.0 million. In assessing valuation of
its
deferred tax assets, management considers whether it is more likely than
not
that some or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets related to deductible temporary differences
is dependent upon the generation of future taxable income during the
periods in
which those temporary differences become deductible. Management considers
the
scheduled reversal of deferred tax liabilities, projected future taxable
income,
and tax planning strategies in making this assessment. In determining
when it
may meet the “more likely than not” recoverability criteria for its deferred tax
assets, the Company will continue to assess its projected future taxable
income
and other factors.
During
2005, the Company determined that it would reduce its valuation allowance
against deferred assets, resulting in a significant tax benefit. This
determination was made following a comprehensive analysis and careful
consideration of the factors described above and the following
attributes:
· the
nature
and predictable timing of reversal of the subject deferred tax assets
and the
nature and timing of losses that contributed
to
the tax
valuation allowance,
· the
Company’s reported positive income from operations, net income and occupancy
data,
· senior
management’s proven ability to reasonably project future operating results, and
· the
continued improvement in the Company’s capital structure
(18)
Segment Information
The
Company has significant operations principally in three business segments:
(1)
retirement centers, (2) free-standing assisted living communities and
(3)
management services. Retirement centers represent 29 of the Company’s senior
living communities at which the Company provides a continuum of care
services
such as independent living, assisted living, Alzheimer’s and skilled nursing
care. The Company currently operates 41 free-standing assisted living
communities. Free-standing assisted living communities are generally
comprised
of stand-alone assisted living communities that are not located on a
retirement
center campus, which also provide specialized care such as Alzheimer’s and
memory enhancement programs. Free-standing assisted living communities
are
generally much smaller than retirement centers. The management services
segment
includes fees from management agreements for communities owned by others,
and
reimbursed expense revenues together with associated expenses. The
Company has six management agreements with third parties relating to
six
retirement centers. The
Company also operates a seventh retirement center, Freedom Square, under
a
long-term
management agreement. In accordance with applicable accounting rules,
the
operating results of Freedom Square are included in the consolidated
results of
the Company’s retirement center segment and, accordingly, are not included in
the management services segment.
The
accounting policies of the segments are the same as those described in
the
summary of significant accounting policies. The following table sets
forth
certain segment financial and operating data(1)
(in
thousands).
|
|
Years
Ended December 31,
|
|
Revenues:
|
|
2005
|
|
2004
|
|
2003
|
|
Retirement
Centers
|
|
$
|
378,114
|
|
$
|
347,179
|
|
$
|
312,723
|
|
Free-standing
Assisted Living Communities
|
|
|
110,269
|
|
|
96,264
|
|
|
83,584
|
|
Management
Services (2)
|
|
|
6,617
|
|
|
4,166
|
|
|
3,670
|
|
Total
|
|
$
|
495,000
|
|
$
|
447,609
|
|
$
|
399,977
|
|
Segment
operating contribution: (3)
|
|
|
|
|
|
|
|
|
|
|
Retirement
Centers
|
|
$
|
127,064
|
|
$
|
116,589
|
|
$
|
98,837
|
|
Free-standing
Assisted Living Communities
|
|
|
34,815
|
|
|
26,057
|
|
|
16,662
|
|
Management
Services
|
|
|
3,528
|
|
|
1,882
|
|
|
1,522
|
|
Total
|
|
$
|
165,407
|
|
$
|
144,528
|
|
$
|
117,021
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
expense
|
|
$ |
60,936
|
|
$ |
60,076
|
|
$ |
46,484
|
|
Depreciation
and amortization (including general and administrative
|
|
|
|
|
|
|
|
|
|
|
depreciation
and amortization of $1,925, $1,990 and 1,728,
respectively)
|
|
|
36,392
|
|
|
31,148
|
|
|
26,867
|
|
Amortization
of leasehold acquisition costs
|
|
|
2,567
|
|
|
2,917
|
|
|
2,421
|
|
(Gain)
loss on sale of assets
|
|
|
709
|
|
|
(41
|
)
|
|
(23,153
|
)
|
General
and administrative
|
|
|
30,327
|
|
|
28,671
|
|
|
25,410
|
|
Income
from operations
|
|
$
|
34,476
|
|
$
|
21,757
|
|
$
|
38,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31,
|
|
|
|
Total
Assets:
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Retirement
Centers
|
|
$
|
521,581
|
|
$
|
498,132
|
|
|
|
|
Free-standing
Assisted Living Communities
|
|
|
188,548
|
|
|
182,353
|
|
|
|
|
Management
Services
|
|
|
169,345
|
|
|
68,765
|
|
|
|
|
Total
|
|
$
|
879,474
|
|
$
|
749,250
|
|
|
|
|
|
(1)
|
Segment
financial and operating data does not include any inter-segment
transactions or allocated costs.
|
|
(2)
|
Management
Services represent the Company’s management fee revenues, reimbursed
expense revenue, as well as reimbursed expenses of $3.1 million,
$2.3
million and $2.1 million, respectively for the years ended
December 31,
2005, 2004 and 2003.
|
|
(3)
|
Segment
operating contribution is
defined as segment revenues less cost of community service
revenue (which
includes costs of community service revenue and reimbursed
expenses and
excludes depreciation).
|
(19)
Commitments and Contingencies
The
Company is subject to various legal proceedings and claims that arise in
the
ordinary course of its business. In the opinion of management, the ultimate
liability with respect to those proceedings and claims will not materially
affect the financial position, operations, or liquidity of the Company.
The
Company maintains commercial insurance on a claims-made basis for medical
malpractice and professional liabilities.
Insurance
The
delivery of personal and health care services entails an inherent risk
of
liability. Participants in the senior living and health care services industry
have become subject to an increasing number of lawsuits alleging negligence
or
related legal theories, many of which involve large claims and result in
the
incurrence of significant exposure and defense costs. The Company currently
maintains general and professional medical malpractice insurance policies
for
the Company's owned, leased and certain of its managed communities under
a
master insurance program. Premiums
and deductibles for this insurance coverage have risen dramatically in
recent
years. In response to these conditions, the Company has significantly increased
the staff and resources involved in quality assurance, compliance and risk
management during the past several years, and have also modified its insurance
programs.
The
Company currently maintains single incident and aggregate liability protection
in the amount of $25.0 million
for
general liability and $15.0 million for professional liability, with
self-insured retentions of $1.0 million and $5.0 million,
respectively.
The
Company believes it has adequately accrued amounts to cover open claims
not yet
settled and incurred but not reported claims as of December 31,
2005.
The
Company operates under a self-insured workers’ compensation program, with excess
loss coverage provided by third party carriers. As of December 31, 2005,
the
Company’s coverage for workers’ compensation and related programs, excluding
Texas, included excess loss coverage in an aggregate amount of $6.3 million
with a deductible amount of $350,000 per claim. As of December 31, 2005,
the
Company provided cash collateralized letters of credit in the aggregate
amount
of $8.2 million related to this program, which are reflected as restricted
cash
on the Company’s consolidated balance sheet. For work-related injuries in Texas,
the Company is a non-subscriber under Texas state law, meaning that work-related
losses are covered under a defined benefit program outside of the Texas
Workers'
Compensation system. The Company carries excess loss coverage of $1.0 million
per individual with a deductible of $250,000 per individual under its
non-subscriber program. Losses are paid as incurred and estimated losses
are
accrued on a monthly basis. The Company utilizes a third party administrator
to
process and pay filed claims.
The
Company maintains a self-insurance program for employee medical coverage,
with
stop-loss insurance coverage of amounts in excess of $250,000 per associate.
Estimated costs related to this self-insurance program are accrued based
on
known claims and projected settlements of unasserted claims incurred but
not yet
reported to the Company. Subsequent changes in actual experience (including
claim costs, claim frequency, and other factors) could result in additional
costs to the Company.
During
the
years ended December 31, 2005, 2004, and 2003, respectively, the Company
expensed $17.0 million, $17.2 million and $15.7 million, respectively,
related
to premiums, claims and costs for general
liability and professional medical malpractice,
workers’
compensation, and employee
medical insurance
related
to multiple insurance years.
Management
Agreements
The
Company’s management agreements are generally for terms of three to 20 years,
but certain of the agreements may be canceled by the owner of the community,
without cause, on three to six months’ notice. Certain of these management
agreements provide the Company with long-term renewal options. Pursuant
to the
management agreements, the Company is generally responsible for providing
management personnel, marketing, nursing, resident care and dietary services,
accounting and data processing services, and other services for these
communities at the owner’s expense and receives a monthly fee for its services
based on either a contractually fixed amount, a percentage of revenues
or
income, or cash flows in excess of operating expenses and certain cash
flows of
the community. The Company’s existing management agreements expire at various
times through August 2020.
In
connection with these management agreements, the Company has guaranteed
mortgage
debt of $8.4 million related to a joint venture which the Company
manages.
Regulatory
Requirements
Federal
and state governments regulate various aspects of the Company's business.
The
development and operation of health care facilities and the provision of
health
care services are subject to federal, state, and local licensure, certification,
and inspection laws that regulate, among other matters, the number of licensed
beds, the provision of services, the distribution of pharmaceuticals, billing
practices and policies, equipment, staffing (including professional licens-ing),
operating policies and procedures, fire prevention measures, environmental
matters, and compliance with building and safety codes. Failure to comply
with
these laws and regulations could result in the denial of reimbursement,
the
imposition of fines, temporary suspension of admission of new patients,
suspension or decertification from the Medicare programs, restrictions
on the
ability to acquire new communities or expand existing communities, and,
in
extreme cases, the revocation of a community's license or closure of a
community. Management believes the Company was in compliance with such
federal
and state regulations at December 31, 2005.
Other
A
portion of
the
Company’s skilled nursing revenues are attributable to reimbursements under
Medicare. Certain
per person annual limits on therapy services, which were temporarily effective
beginning in September 2003 before being deferred, became effective again
as of
January 2006. Administrative procedures regarding auto-exceptions to these
limits and approval processes for other exceptions by individual are being
implemented by Medicare representatives. While we expect that these limits
will
reduce our therapy revenues from certain residents, we do not expect them
to
have a significant impact on our overall business. There continue to be
various
federal and state legislative and regulatory proposals to implement cost
containment measures that will limit payments to healthcare providers in
the
future. Changes in the reimbursement policies of the Medicare program could
have
an adverse effect on our results of operations and cash flow.
(20)
Related Party Transactions
W.E.
Sheriff, the Company’s chairman and chief executive officer, owned 50% of
Maybrook Realty, Inc., which owned Freedom Plaza Care Center (FPCC), a
128-bed
skilled nursing and 44-bed assisted living center, with approximately 7,000
square feet of office space subleased to a third party, in Peoria, Arizona.
From
October 1999 until June 2001, the Company managed FPCC pursuant to its
management agreement for the Freedom Plaza CCRC in Peoria, Arizona. The
Company
also served as the developer of an expansion of FPCC, which was completed
July
2001. Effective July 1, 2001, the Company entered into a long-term operating
lease for FPCC in substitution of the prior management arrangement. Total
lease
payments during 2005 and 2004 under this lease were $1.1 and $2.2 million,
respectively. On July 7, 2005, the Company acquired all of the real property
interests underlying Freedom Plaza Care Center for $20.3 million.
During
2001 and 2000, the Company acquired leasehold interests in six free-standing
assisted living communities owned by affiliates of John Morris, a director
of
the Company. The Company issued a $7.6 million, 9.625% fixed interest only
note,
due October 1, 2008. This note, and certain similar notes were secured
by the
Company’s interest in a retirement center located in Richmond, Virginia and a
free-standing assisted living community in San Antonio, Texas. The terms
of this
note and its related security instruments were identical to those issued
to
certain unaffiliated entities in connection with the simultaneous acquisition
of
certain other communities. This note was fully repaid by the Company with
the
proceeds of the January 2005 secondary offering.
(21)
Subsequent Events
Secondary
Equity Offering
On
January
24, 2006, the Company completed a public offering of 3,450,000 shares of
its
common stock, including the underwriter’s over-allotment of 450,000 shares. The
shares were priced at $26.60. The net proceeds of the offering, after deducting
underwriting discounts and commissions and estimated expenses, were
approximately $89.8 million. The proceeds from this offering were used
to repay
approximately $29.0 million of outstanding debt, with the balance to be
used to
fund possible future acquisitions, to fund expansion activity, and for
general
corporate purposes, including working capital.
Acquisition
of Independent Living Communities (Cypress)
On
February 8, 2006, the Company announced that a joint venture in which it
has an
ownership interest had entered into a definitive asset purchase agreement
with
affiliates of Cypress Senior Living, Inc. to acquire four senior living
communities located in two states for an aggregate purchase price of $146.3
million, subject to customary closing adjustments and transaction expenses.
The
communities have capacity of 896 independent living units and are located
in
Arlington, Dallas and Ft. Worth, Texas and Leawood, Kansas.
The
acquisition will be accomplished through two joint ventures, which will
be owned
20% by the Company and 80% by an institutional real estate investor. The
joint
venture has obtained a firm commitment from Merrill Lynch Capital, a division
of
Merrill Lynch Business Financial Services Inc., to provide approximately
$95.5
million of senior debt financing. The remainder of the purchase price will
be
funded by proportional capital contributions from the members of the joint
venture entities. The Company will manage the portfolio pursuant to a long-term
management agreement.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
Item
9A. Controls and Procedures
Part
A. Evaluation of Disclosure Controls and Procedures
American
Retirement Corporation’s Chief Executive Officer and Chief Financial Officer
have reviewed and evaluated the effectiveness of our disclosure controls
and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as
of the
end of the period covered by this annual report. Based on that evaluation,
the
Chief Executive Officer and Chief Financial Officer have concluded that
our
disclosure controls and procedures effectively and timely provide them
with
material information relating to us and our consolidated subsidiaries required
to be disclosed in the reports we file or submit under the Exchange
Act.
Part
B. Management’s Report on Internal Control Over Financial
Reporting
Management's
Report on Internal Control Over Financial Reporting, which appears in Item
8 of
this Form 10-K, is incorporated by reference herein.
Part
C. Attestation Report of Independent Registered Public Accounting
Firm
The
attestation report of our independent registered public accounting firm,
which
appears in Item 8 of this Form 10-K, is incorporated by reference herein.
Part
D. Changes in Internal Control Over Financial
Reporting
There
were
no changes in our internal control over financial reporting during the
quarter
ended December 31, 2005 that have materially affected, or are reasonably
likely
to materially affect, our internal control over financial
reporting.
Item
9B. Other Information
Not
applicable.
PART
III
Item
10. Directors and Executive Officers of the Registrant
The
information required by this item is incorporated herein by reference to
the
Company’s definitive proxy statement for its Annual Meeting of Shareholders to
be held May 17, 2006 to be filed with the Securities and Exchange Commission
(the “SEC”) under the captions “Election of Directors,” “Corporate Governance”
and “Section 16(a) Beneficial Ownership Reporting Compliance.” Pursuant to
General Instruction G(3), certain information concerning the executive
officers
of the Company is included in Part I of this report under the caption “Executive
Officers of the Registrant.”
Item
11. Executive Compensation
The
information required by this item is incorporated herein by reference to
the
section entitled “Executive Compensation” in the Company’s definitive proxy
statement for its Annual Meeting of Shareholders to be held May 17, 2006
to be
filed with the SEC.
Item
12. Security Ownership of Certain Beneficial Owners and Management and
Related
Stockholder Matters
The
information required by this item is incorporated herein by reference to
the
sections entitled “Security Ownership of Management and Certain Beneficial
Owners” and “Executive Compensation” in the Company’s definitive proxy statement
for its Annual Meeting of Shareholders to be held May 17, 2006 to be filed
with
the SEC.
Item
13. Certain Relationships and Related Transactions
The
information required by this item is incorporated herein by reference to
the
section entitled “Certain Transactions” in the Company’s definitive proxy
statement for its Annual Meeting of Shareholders to be held May 17, 2006
to be
filed with the SEC.
Item
14. Principal Accountant Fees and
Services
The
information required by this item is incorporated herein by reference to
the
section entitled “Fees Billed to the Company by KPMG LLP During 2005 and 2004”
in the Company’s definitive proxy statement for its Annual Meeting of
Shareholders to be held May 17, 2006 to be filed with the SEC.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
Item
15.
(a) (1) Financial
Statements: See Item 8
(2)
Financial Statement Schedules: See Item 8
(3)
Exhibits required by item 601 of Regulation S-K are as follows:
Exhibit
Number
|
Description |
|
|
3.1
|
Charter
of the Registrant (restated electronically for SEC filing
purposes
only)1
|
3.2
|
Bylaws
of the Registrant, as amended2
|
4.1
|
Specimen
Common Stock certificate3
|
4.2
|
Article
8 of the Registrant’s Charter (included in Exhibit 3.1)
|
4.3
|
Rights
Agreement, dated November 18, 1998, between American Retirement
Corporation and American Stock Transfer and Trust
Company4
|
10.1*
|
American
Retirement Corporation 1997 Stock Incentive Plan, as
amended5
|
10.2*
|
American
Retirement Corporation Associate Stock Purchase
Plan3
|
10.3*
|
First
Amendment to Associate Stock Purchase Plan6
|
10.4*
|
Second
Amendment to Associate Stock Purchase Plan7
|
10.5*
|
Third
Amendment to Associate Stock Purchase Plan8
|
10.6*
|
American
Retirement Corporation 401(k) Plan and Trust Adoption
Agreement5
|
10.7*
|
Amendment
No. 1 to American Retirement Corporation 401(k)
Plan8
|
10.8*
|
Officers’
Incentive Compensation Plan
|
10.9*
|
American
Retirement Corporation Supplemental Executive Retirement
Plan8
|
10.10
|
Lease
and Security Agreement, dated January 2, 1997, by and between
Nationwide
Health Properties, Inc. and American Retirement Communities,
L.P.3
|
10.11
|
Lease
and Security Agreement, dated January 2, 1997, by and between
N.H. Texas
Properties Limited Partnership and Trinity Towers Limited
Partnership3
|
10.12
|
Letter
of Intent, dated February 24, 1997, by Nationwide Health
Properties, Inc.
to American Retirement Corporation3
|
10.13
|
Deed
of Lease, dated as of October 23, 1997, between Daniel U.S.
Properties
Limited Partnership, as Lessor, and ARC Imperial Plaza, Inc.,
as
Lessee6
|
10.14
|
Term
Sheet, dated May 28, 1999, among Health Care REIT, Inc. and
American
Retirement Corporation9
|
10.15
|
Real
Estate Mortgage and Security Agreement, dated May 8, 2000,
between Lake
Seminole Square Management Company, Inc., Freedom Group-Lake
Seminole
Square, Inc. and Aid Association for
Lutherans10
|
10.16
|
Construction
Loan Agreement, dated September 28, 2000 between ARC Scottsdale,
LLC and
Guaranty Federal Bank, F.S.B.11
|
10.17
|
First
Amendment to Amended and Restated Financing and Security
Agreement11
|
10.18
|
First
Amendment to Amended and Restated Guaranty of Payment
Agreement11
|
10.19
|
Lease
Agreement by and between Cleveland Retirement Properties,
LLC, and ARC
Westlake Village, Inc., dated December 18,
200012
|
10.20*
|
Executive
Change in Control Severance Benefits Plan13
|
10.21
|
Operating
Lease, dated July 1, 2001, between Maybrook Realty, Inc.
and ARC HDV,
LLC5
|
10.22
|
Master
Lease and Security Agreement, dated July 31, 2001, between
ARC Pinegate,
L.P., ARC Pearland, L.P., American Retirement Corporation,
Trinity Towers,
L.P., ARC Lakeway, L.P., ARC Spring Shadow, L.P., Nationwide
Health
Properties, Inc. and NH Texas Properties,
L.P.5
|
10.23
|
Deed
of Trust Note, dated December 3, 2001, between Highland Mortgage
Company
and ARC Wilora Lake, Inc. 14
|
10.24
|
Lease
Agreement by and between Countryside ALF, LLC and ARCLP -
Charlotte, LLC,
dated January 1, 200215
|
10.25
|
Lease
Agreement by and between CNL Retirement - AM Illinois L.P.
and ARC Holley
Court, LLC, dated February 11,
200215
|
10.26
|
Lease
Agreement by and between CNL Retirement - AM Colorado L.P.
and ARC
Greenwood Village, Inc., dated March 21,
200215
|
10.27
|
First
Amendment to Master Lease and Security Agreement, dated February
7,
200215
|
10.28
|
Master
Lease Agreement, dated March 29, 2002, between ARC Shavano,
L.P., ARC
Richmond Heights, LLC, ARC Delray Beach, LLC, ARC Victoria,
L.P., ARC
Carriage Club of Jacksonville, Inc., ARC Post Oak, L.P. and
Health Care
Property Investors Inc. 15
|
10.29
|
Lease
Agreement by and between Freedom Plaza Limited Partnership,
an Arizona
Limited Partnership, and American Retirement Corporation,
a Tennessee
Corporation, dated April 1, 200216
|
10.30
|
Promissory
Note dated April 1, 2002, between Freedom Plaza Limited Partnership,
an
Arizona Limited Partnership, and American Retirement Corporation,
a
Tennessee Corporation16
|
10.31
|
Promissory
Note dated July 1, 2002, between GMAC Commercial Mortgage
Corporation, a
California Corporation (as Lender), and ARC Santa Catalina
Real Estate
Holdings, LLC, a Delaware Corporation17
|
10.32
|
Master
Lease Agreement (Pool I), dated July 9, 2002, between ARC
Pinegate, L.P.,
ARC Pearland, L.P., Trinity Towers, L.P., ARC Lakeway, L.P.,
ARC Spring
Shadow, L.P., ARC Shadowlake, L.P., ARC Willowbrook, L.P.,
ARC Park
Regency, Inc., ARC Parklane, Inc., Nationwide Health Properties,
Inc., and
NH Texas Properties L.P. 17
|
10.33
|
Master
Lease Agreement (Pool II), dated July 9, 2002, between American
Retirement
Corporation, ARC Naples, LLC, ARC Aurora, LLC, ARC Lakewood,
LLC, ARC
Heritage Club, Inc., ARC Countryside, LLC, ARC Cleveland
Park, LLC,
Nationwide Health Properties, Inc., and MLD Delaware
Trust17
|
10.34
|
Amended
and Restated Loan Agreement, dated as of September 30, 2002,
between ARCPI
Holdings, Inc. and Health Care Property Investors, Inc.
17
|
10.35
|
Master
Lease Agreement, dated as of September 30, 2002, between
Fort Austin Real
Estate Holdings, LLC, ARC Santa Catalina Real Estate Holdings,
LLC, ARC
Richmond Place Real Estate Holdings, LLC, ARC Holland Real
Estate
Holdings, LLC, ARC Sun City Center Real Estate Holdings,
LLC, ARC Lake
Seminole Square Real Estate Holdings, LLC, ARC Brandywine
Real Estate
Holdings, LLC, Fort Austin Limited Partnership, ARC Santa
Catalina, Inc.,
ARC Richmond Place, Inc., Freedom Village of Holland, Michigan,
Freedom
Village of Sun City Center, Ltd., Lake Seminole Square Management
Company,
Inc., Freedom Group-Lake Seminole Square, Inc. and ARC Brandywine,
LLC17
|
10.36
|
Promissory
Note dated December 17, 2002, between GMAC Commercial Mortgage
Corporation, a California Corporation (as Lender), and ARC
Sun City Center
Real Estate Holdings, LLC, a Delaware
Corporation1
|
10.37
|
Second
Amendment to Master Lease Agreement (Phase I), dated February
28, 2003,
between Health Care Property Investors, Inc., a Maryland
corporation,
Texas HCP Holding, L.P., a Delaware Limited Partnership,
ARC Richmond
Heights, LLC, a Tennessee limited liability company, ARC
Shavano, L.P., a
Tennessee limited partnership, ARC Delray Beach, LLC, a Tennessee
limited
liability company, ARC Victoria, L.P., a Tennessee limited
partnership,
ARC Carriage Club of Jacksonville, Inc., a Tennessee corporation,
ARC Post
Oak, L.P., a Tennessee limited partnership, and ARC Boynton
Beach, LLC, a
Tennessee limited liability company18
|
10.38
|
Lease
Agreement, dated August 25, 2003, between Alabama Somerby,
LLC and CNL
Retirement DSL1 Alabama, LP.19
|
10.39
|
Lease
Agreement, dated August 25, 2003, between Alabama Somerby,
LLC and CNL
Retirement DSL1 Alabama, LP. 19
|
10.40
|
Promissory
Note, dated as of August 25, 2003, between Alabama Somerby,
LLC and Daniel
Senior Living, L.L.C. 19
|
10.41
|
First
Amendment to Master Lease Agreement, dated as of September
23, 2003,
between Fort Austin Real Estate Holdings, LLC, ARC Santa
Catalina Real
Estate Holdings, LLC, ARC Richmond Place Real Estate Holdings,
LLC, ARC
Holland Real Estate Holdings, LLC, ARC Sun City Center Real
Estate
Holdings, LLC, ARC Lake Seminole Square Real Estate Holdings,
LLC, ARC
Brandywine Real Estate Holdings, LLC, Fort Austin Limited
Partnership, ARC
Santa Catalina, Inc., ARC Richmond Place, Inc., Freedom Village
of
Holland, Michigan, Freedom Village of Sun City Center, Ltd.,
Lake Seminole
Square Management Company, Inc., Freedom Group-Lake Seminole
Square, Inc.
and ARC Brandywine, LLC. 19
|
10.42
|
Loan
agreement, dated March 8, 2004, between ARC Castle Hills,
L.P., a
Tennessee Limited Partnership, and Guaranty
Bank.20
|
10.43
|
Loan
agreement, dated March 8, 2004, between ARC Northwest Hills,
L.P., a
Tennessee Limited Partnership, and Guaranty
Bank.20
|
10.44
|
Loan
agreement, dated March 8, 2004, between ARC Scottsdale, LLC,
a Tennessee
Limited Liability Company, and Guaranty
Bank.20
|
10.45
|
Loan
agreement, dated March 8, 2004, between ARC Westover Hills,
L.P., a
Tennessee Limited Partnership, and Guaranty Bank.
20
|
10.46
|
Fourth
Amendment to Master Lease Agreement (Phase I), dated July
15, 2004,
between Health Care Property Investors, Inc., a Maryland
corporation,
Texas HCP Holding, L.P., a Delaware Limited Partnership,
ARC Richmond
Heights, LLC, a Tennessee limited liability company, ARC
Shavano, L.P., a
Tennessee limited partnership, ARC Delray Beach, LLC, a Tennessee
limited
liability company, ARC Victoria, L.P., a Tennessee limited
partnership,
ARC Carriage Club of Jacksonville, Inc., a Tennessee corporation,
ARC Post
Oak, L.P., a Tennessee limited partnership, and ARC Boynton
Beach, LLC, a
Tennessee limited liability company. 21
|
10.47
|
Third
Amendment to Master Lease Agreement (Phase II), dated July
15, 2004,
between ARC Richmond Place Real Estate Holdings, LLC, ARC
Holland Real
Estate Holdings, LLC, ARC Sun City Center Real Estate Holdings,
LLC, ARC
Lake Seminole Square Real Estate Holdings, LLC, ARC Brandywine
Real Estate
Holdings, LLC, ARC Richmond Place, Inc., Freedom Village
of Holland,
Michigan, Freedom Village of Sun City Center, Ltd., Lake
Seminole Square
Management Company, Inc., Freedom Group-Lake Seminole Square,
Inc. and ARC
Brandywine, LLC. 21
|
10.48
|
First
Amendment to Master Lease Agreement (Phase III), dated July
15, 2004,
between Health Care Property Investors, Inc., a Maryland
corporation,
Texas HCP Holding, L.P., a Delaware Limited Partnership,
Texas HCP Revx,
L.P., ARC Richmond Place Real Estate Holdings, LLC, ARC Holland
Real
Estate Holdings, LLC, ARC Sun City Center Real Estate Holdings,
LLC, ARC
Labarc Real Estate Holdings, LLC, Fort Austin Limited Partnership,
ARC
Santa Catalina, Inc., ARC Richmond Place, Inc., Freedom Village
of
Holland, Michigan, Freedom Village of Sun City Center, Ltd.,
and Labarc
L.P. 22
|
10.49*
|
American
Retirement Corporation Deferred Compensation Plan.
21
|
10.50*
|
2004
and 2005 Additional Bonus Criteria Under Officer’s Incentive Compensation
Plan 23
|
10.51*
|
Summary
of Director and Executive Officer Compensation
|
10.52*
|
Form
of Non-Qualified Stock Option Agreement 23
|
10.53*
|
Form
of Incentive Stock Option Agreement 23
|
10.54*
|
Form
of Outside Director Stock Option Agreement
23
|
10.55*
|
Form
of Restricted Stock Agreement 23
|
10.56
|
Loan
Agreement dated as of July 7, 2005, between Bank of America,
N.A. and ARC
HDV, LLC, a Tennessee limited liability company.
24
|
10.57
|
Promissory
Note dated July 7, 2005, executed by ARC HDV, LLC, a Tennessee
limited
liability company, in favor of Bank of America, N.A.
24
|
10.58
|
Promissory
Note dated July 7, 2005, executed by ARC HDV, LLC, a Tennessee
limited
liability company, in favor of Bank of America, N.A.
24
|
10.59
|
Construction
Loan Administration Agreement, dated July 7, 2005, between
Bank of
America, N.A., and ARC HDV, LLC, a Tennessee limited liability
company.
24
|
10.60
|
Construction
Loan Promissory Note dated July 7, 2005, executed by ARC
HDV, LLC, a
Tennessee limited liability company, in favor of Bank of
America, N.A.
24
|
10.61
|
Limited
Guaranty dated July 7, 2005, executed by American Retirement
Corporation,
a Tennessee corporation, in favor of Bank of America, N.A.
24
|
10.62
|
First
Amendment to Lease Agreement, dated June 29, 2005, between
CNL Retirement
DSL1 Alabama, LP, a Delaware limited partnership, and Alabama
Somerby,
LLC, a Delaware limited liability company.
24
|
10.63
|
Second
Amendment to Master Lease, dated June 30, 2005, by and between
Health Care
Property Investors, Inc., a Maryland corporation, Texas HCP
Holding, L.P.,
a Delaware limited partnership, for itself and as successor-by-merger
to
Texas HCP REVX, L.P., a Delaware limited partnership, ARC
Richmond Place
Real Estate Holdings, LLC, a Delaware limited liability company,
ARC
Holland Real Estate Holdings, LLC, a Delaware limited liability
company,
ARC Sun City Center Real Estate Holdings, LLC, a Delaware
limited
liability company, and ARC LaBARC Real Estate Holdings, LLC,
a Delaware
limited liability company, on the one hand, and Fort Austin
Limited
Partnership, a Texas limited partnership, ARC Santa Catalina,
Inc., a
Tennessee corporation, ARC Richmond Place, Inc., a Delaware
corporation,
Freedom Village of Holland, Michigan, a Michigan general
partnership,
Freedom Village of Sun City Center, Ltd., a Florida limited
partnership,
and LaBARC, L.P., a Tennessee limited partnership, on the
other hand.
24
|
10.64
|
Fifth
Amendment to Master Lease (Phase I), dated June 30, 2005,
by and between
Health Care Property Investors, Inc., a Maryland corporation
and Texas HCP
Holding, L.P., a Delaware limited partnership, on the one
hand, and ARC
Richmond Heights, LLC, a Tennessee limited liability company,
ARC Boynton
Beach, LLC, a Tennessee limited liability company, ARC
Delray Beach, LLC,
a Tennessee limited liability company, ARC Victoria, L.P.,
a Tennessee
limited partnership, ARC Carriage Club of Jacksonville,
Inc., a Tennessee
corporation, ARC Shavano, L.P., a Tennessee limited partnership
and ARC
Post Oak, L.P., a Tennessee limited partnership, on the
other hand.
24
|
10.65
|
Fourth
Amendment to Master Lease and Security Agreement, dated
June 30, 2005, by
and among Nationwide Health Properties, Inc., a Maryland
corporation, and
NH Texas Properties Limited Partnership, a Texas limited
partnership, ARC
Pinegate, L.P., a Tennessee limited partnership, ARC Pearland,
L.P., a
Tennessee limited partnership, Trinity Towers Limited Partnership,
a
Tennessee limited partnership, ARC Lakeway, L.P., a Tennessee
limited
partnership, ARC Spring Shadow, L.P., a Tennessee limited
partnership, ARC
Shadowlake, L.P., a Tennessee limited partnership, ARC
Willowbrook, L.P.,
a Tennessee limited partnership, ARC Park Regency, Inc.,
a Tennessee
corporation, ARC Parklane, Inc., a Tennessee corporation,
ARC Westover
Hills, L.P., a Tennessee limited partnership, ARC Deane
Hill, LLC, a
Tennessee limited liability company and American Retirement
Corporation, a
Tennessee corporation. 24
|
10.66
|
Third
Amendment to Master Lease and Security Agreement (Pool
2), dated June 30,
2005, by and among Nationwide Health Properties, Inc.,
a Maryland
Corporation, MLD Delaware Trust, a Delaware business trust,
ARC Naples,
LLC, a Tennessee limited liability company, ARC Aurora,
LLC, a Tennessee
limited liability company, ARC Lakewood, LLC, a Tennessee
limited
liability company, ARC Countryside, LLC, a Tennessee limited
liability
company, ARC Cleveland Park, LLC, a Tennessee limited liability
company,
and American Retirement Corporation, a Tennessee corporation.
24
|
10.67
|
First
Amendment to Lease and Security Agreement (Heritage Club),
dated June 30,
2005, by and among NHP Heritage Club, LLC, a Colorado limited
liability
company, ARC Heritage Club, Inc., a Tennessee corporation,
and American
Retirement Corporation, a Tennessee
corporation.24
|
10.68*
|
Fifth
Amendment to American Retirement Corporation Associate
Stock Purchase
Plan. 24
|
10.69
|
First
Amendment to Lease Agreement, dated June 29, 2005, between
CNL Retirement
DSL1 Alabama, LP, a Delaware limited partnership, and Alabama
Somerby,
LLC, a Delaware limited liability company.
24
|
10.70
|
Loan
Agreement dated as of September 22, 2005, between GMAC Commercial
Mortgage
Bank, a Utah industrial bank and ARC Lakeway, L.P., a Tennessee
limited
partnership. 25
|
10.71
|
Promissory
Note dated September 22, 2005, executed by ARC Lakeway, L.P.,
a Tennessee
limited partnership, in favor of GMAC Commercial Mortgage
Bank, a Utah
industrial bank. 25
|
10.72*
|
Fourth
Amendment to American Retirement Corporation Associate Stock Purchase
Plan.26 |
10.73*
|
Form
of Performance-Based Restricted Stock Agreement.
|
10.74
|
Purchase
and Sale Agreement dated September 8, 2005 by and between
Epoch SL VI,
Inc., a Delaware Corporation, and American Retirement Corporation,
a
Tennessee Corporation
|
10.75
|
Credit
and Security Agreement dated as of November 2, 2005 between
ARC Sun City
West, LLC, a Delaware limited liability company, ARC Roswell
LLC, a
Delaware limited liability company, ARC Vegas, LLC, a Delaware
limited
liability company, ARC Tucson, LLC, a Delaware limited liability
company,
ARC Overland Park, LLC, a Delaware limited liability company,
ARC
Minnetonka, LLC, a Delaware limited liability company, ARC
Denver Monaco,
LLC, a Delaware limited liability company, and ARC Tanglewood,
L.P., a
Delaware limited partnership and Merrill Lynch Capital, a
division of
Merrill Lynch Business Financial Services Inc.
|
10.76
|
Term
Note dated November 2, 2005, executed by ARC Sun City West,
LLC, a
Delaware limited liability company, ARC Roswell LLC, a Delaware
limited
liability company, ARC Vegas, LLC, a Delaware limited liability
company,
ARC Tucson, LLC, a Delaware limited liability company, ARC
Overland Park,
LLC, a Delaware limited liability company, ARC Minnetonka,
LLC, a Delaware
limited liability company, ARC Denver Monaco, LLC, a Delaware
limited
liability company, and ARC Tanglewood, L.P., a Delaware limited
partnership, in favor of Merrill Lynch Capital, a division
of Merrill
Lynch Business Financial Services Inc.
|
10.77
|
Operating
Agreement of SHP-ARC II, LLC, dated September 8, 2005, by
and between PIM
Senior Portfolio, a Delaware limited liability company, and
ARC Epoch
Holding Company, Inc., a Tennessee corporation..
|
10.78
|
Amended
and Restated Limited Liability Company Agreement of Denver
Lowry JV, LLC,
a Delaware limited liability company (the “Company”), dated October 14,
2005, by Denver Lowry Senior Housing, LLC, a Delaware limited
liability
company, and ARC Lowry, LLC, a Tennessee limited liability
company, as
member.
|
10.79
|
Loan
Agreement dated November 3, 2005, between Denver Lowry JV,
LLC, a Delaware
limited liability company, and GMAC Commercial Mortgage Bank,
a Utah
industrial bank.
|
10.80
|
Promissory
Note dated November 3, 2005, between Denver Lowry JV, LLC,
a Delaware
limited liability company, and GMAC Commercial Mortgage Bank,
a Utah
industrial bank.
|
10.81
|
Operating
Deficit Guaranty Agreement dated November 3, 2005, by American
Retirement
Corporation, a Tennessee corporation, for the benefit of
GMAC Commercial
Mortgage Bank, a Utah industrial corporation.
|
10.82
|
Exceptions
To Nonrecourse Guaranty dated November 3, 2005, by American
Retirement
Corporation, a Tennessee corporation, for the benefit of
GMAC Commercial
Mortgage Bank, a Utah industrial corporation.
|
10.83
|
Construction
Loan Agreement dated December 12, 2005, by and between American
Retirement
Corporation, a Tennessee corporation and Bank of America,
N.A., a national
banking association.
|
10.84
|
Promissory
Note dated December 12, 2005, between American Retirement
Corporation, a
Tennessee Corporation, in favor of Bank of America, N.A.,
a national
banking association.
|
10.85
|
Construction
Loan Agreement dated December 12, 2005, by and between ASF
of Green Hills,
LLC, a Tennessee non-profit limited liability company, and
American
Retirement Corporation, a Tennessee corporation.
|
10.86
|
Promissory
Note dated December 12, 2005, between ASF of Green Hills,
LLC, a Tennessee
non-profit limited liability company, in favor of American
Retirement
Corporation, a Tennessee corporation.
|
10.87
|
Promissory
Note dated December 12, 2005, between ASF of Green Hills,
LLC, a Tennessee
non-profit limited liability company, in favor of American
Retirement
Corporation, a Tennessee corporation.
|
10.88
|
Loan
Agreement (AL Expansion) dated December 22, 2005, by and
between ARC
Brandywine, L.P., a Delaware limited partnership, and Guaranty
Bank, a
federal savings bank.
|
10.89
|
Promissory
Note (AL Expansion) dated December 22, 2005, by and between
ARC
Brandywine, L.P., a Delaware limited partnership, in favor
of Guaranty
Bank, a federal savings bank.
|
10.90
|
Loan
Agreement (Healthcare Center) dated December 22, 2005, by
and between ARC
Brandywine, L.P., a Delaware limited partnership, and Guaranty
Bank, a
federal savings bank.
|
10.91
|
Promissory
Note (Healthcare Center) dated December 22, 2005, by and
between ARC
Brandywine, L.P., a Delaware limited partnership, in favor
of Guaranty
Bank, a federal savings bank.
|
10.92
|
Loan
Agreement (Terrace Homes) dated December 22, 2005, by and
between ARC
Brandywine, L.P., a Delaware limited partnership, and Guaranty
Bank, a
federal savings bank.
|
10.93
|
Promissory
Note (Terrace Homes) dated December 22, 2005, by and between
ARC
Brandywine, L.P., a Delaware limited partnership, in favor
of Guaranty
Bank, a federal savings bank.
|
21
|
Subsidiaries
of the Registrant
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
31.1
|
Certification
of W.E. Sheriff pursuant to Section 302 of the Sarbanes-Oxley
Act of
2002.
|
31.2
|
Certification
of Bryan D. Richardson pursuant to Section 302 of the Sarbanes-Oxley
Act
of 2002.
|
32.1
|
Certification
of W.E. Sheriff pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2
|
Certification
of Bryan D. Richardson pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
______________
1
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2002.
|
2
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
|
3
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-1
(Registration No. 333-23197).
|
4
|
Incorporated
by reference to the Registrant’s Current Report on Form 8-K, dated
November 24, 1998.
|
5
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001.
|
6
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
|
7
|
Incorporated
by reference to the Registrant’s Registration Statement on Form S-8
(Registration No 333-106669).
|
8
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2003.
|
9
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999.
|
10
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
|
11
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000.
|
12
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
|
13
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.
|
14
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.
|
15
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002.
|
16
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002.
|
17
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002.
|
18
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2003.
|
19
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003.
|
20
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004.
|
21
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004.
|
22
|
Incorporated
by reference to the Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on
October 27, 2004.
|
23
|
Incorporated
by reference to the Registrant’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2004.
|
24
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005.
|
25
|
Incorporated
by reference to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005.
|
26 |
Incorporated
by reference to Exhibit 4.5 to the Registrant's Registration
statement on
Form S-8 (Registration No.333-126096) |
*
Management
contract or compensatory plan or arrangement.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
|
|
AMERICAN
RETIREMENT CORPORATION |
|
|
|
Date: February
24, 2006 |
By: |
/s/ W.E.
Sheriff |
|
W.E.
Sheriff |
|
Chairman,
Chief Executive Officer and President |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
Signature
|
|
Title
|
Date |
|
|
|
|
/s/
W.E. Sheriff
|
|
Chairman, |
February
24, 2006 |
W.E.
Sheriff
|
|
Chief
Executive Officer and President |
|
|
|
(Principal
Executive Officer) |
|
|
|
|
|
/s/
Bryan D. Richardson
|
|
Executive
Vice President - Finance |
February
24, 2006 |
Bryan
D. Richardson
|
|
and
Chief Financial Officer (Principal |
|
|
|
Financial
and Accounting Officer) |
|
|
|
|
|
/s/
Frank M. Bumstead
|
|
Director |
February
24, 2006 |
Frank
M. Bumstead
|
|
|
|
|
|
|
|
/s/
Donald D. Davis
|
|
Director |
February
24, 2006 |
Donald
D. Davis
|
|
|
|
|
|
|
|
/s/
John C. McCauley
|
|
Director |
February
24, 2006 |
John
C. McCauley
|
|
|
|
|
|
|
|
/s/
John A. Morris, Jr., M.D.
|
|
Director |
February
24, 2006 |
John
A. Morris, Jr., M.D.
|
|
|
|
|
|
|
|
/s/
Daniel K. O’Connell
|
|
Director |
February
24, 2006 |
Daniel
K. O’Connell
|
|
|
|
|
|
|
|
/s/
J. Edward Pearson
|
|
Director |
February
24, 2006 |
J.
Edward Pearson
|
|
|
|
|
|
|
|
/s/
James R. Seward
|
|
Director |
February
24, 2006 |
James
R. Seward
|
|
|
|
|
|
|
|
/s/
Nadine C. Smith
|
|
Director |
February
24, 2006 |
Nadine
C. Smith
|
|
|
|
|
|
|
|
/s/
Lawrence J. Stuesser
|
|
Director |
February
24, 2006 |
Lawrence
J. Stuesser
|
|
|
|
American
Retirement Corporation
|
Schedule
II - Valuation and Qualifying Accounts
|
(In
thousands)
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
Balance
at
Beginning
of
Period
|
|
|
Charged
to costs and expenses
|
|
|
Charged
to other accounts
|
|
|
Deductions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003
|
|
$
|
2,621
|
|
$
|
1,501
|
|
$
|
-
|
|
$
|
(1,560
|
)
|
$
|
2,562
|
|
Year
ended December 31, 2004
|
|
$
|
2,562
|
|
$
|
1,942
|
|
$
|
-
|
|
$
|
(1,266
|
)
|
$
|
3,238
|
|
Year
ended December 31, 2005
|
|
$
|
3,238
|
|
$
|
2,347
|
|
$
|
33
|
|
$
|
(1,464
|
)
|
$
|
4,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Valuation Account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003
|
|
$
|
47,934
|
|
$
|
8,537
|
|
$
|
-
|
|
$
|
-
|
|
$
|
56,471
|
|
Year
ended December 31, 2004
|
|
$
|
56,471
|
|
$
|
9,625
|
|
$
|
-
|
|
$
|
-
|
|
$
|
66,096
|
|
Year
ended December 31, 2005
|
|
$
|
66,096
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(60,013
|
)
|
$
|
6,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
for Contractual loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2003
|
|
$
|
697
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(21
|
)
|
$
|
676
|
|
Year
ended December 31, 2004
|
|
$
|
676
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(606
|
)
|
$
|
70
|
|
Year
ended December 31, 2005
|
|
$
|
70
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(70
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American
Retirement Corporation
|
|
Schedule
IV - Mortgage Loans on Real Estate
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
Interest
Rate
|
|
|
Date
|
|
|
|
|
|
Prior
liens
|
|
|
|
|
|
Carrying
amount of mortgages(5)
|
|
|
Principal
amount of loans subject to delinquent principal
or interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
mortgage loan
|
|
|
5.90%
|
|
|
6/1/2038
|
|
|
(1)
|
|
|
-
|
|
|
17,945
|
|
|
17,945
|
|
|
-
|
|
First
mortgage loan
|
|
|
(2)
|
|
|
3/14/2010
|
|
|
(2)
|
|
|
-
|
|
|
6,000
|
|
|
6,000
|
|
|
-
|
|
First
mortgage loan
|
|
|
12.50%
|
|
|
10/31/2020
|
|
|
(3)
|
|
|
-
|
|
|
3,465
|
|
|
3,465
|
|
|
-
|
|
First
mortgage loan
|
|
|
(4)
|
|
|
12/12/2010
|
|
|
(4)
|
|
|
|
|
|
1,701
|
|
|
1,701
|
|
|
|
|
First
mortgage loan
|
|
|
10.50%
|
|
|
12/12/2015
|
|
|
(5)
|
|
|
|
|
|
3,754
|
|
|
3,754
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
-
|
|
$
|
32,865
|
|
$
|
32,865
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Principal payment based upon a June 1, 2038 amortization schedule
with
outstanding principal due at maturity.
|
(2)
Monthly payments of interest only are due until maturity of the
loan on
March 14, 2010. This loan bears a variable
rate of interest
equal
to one-month LIBOR plus 4.0%.
|
(3)
Monthly payments of interest only are due through October 31,
2010, with
monthly payments of principal and interest
commencing
thereafter and continuing through the maturity of the loan on
October 31,
2020.
|
(4)
Monthly payments of interest only are due until maturity of the
loan on
December 12, 2010. This loan bears a variable
rate of
interest equal to one-month LIBOR plus 2.5%.
|
(5)
Monthly payments of interest only are due until maturity of the
loan on
December 12, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2002
|
|
|
|
|
$
|
18,439
|
|
|
|
|
|
|
|
|
|
|
Collections
of principal
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2003
|
|
|
|
|
|
18,283
|
|
|
|
|
|
|
|
|
|
|
Collections
of principal
|
|
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
|
|
18,121
|
|
|
|
|
|
|
|
|
|
|
New
mortgage loans
|
|
|
|
|
14,920
|
|
|
|
|
|
|
|
|
|
|
Collections
of principal
|
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
|
|
$ |
32,865
|
|
|
|
|
|
|
|