Exhibit 99.1

Atria Senior Living

Group, Inc.

Consolidated Financial Statements as of and for the

Years Ended December 31, 2009 and 2008, and

Independent Auditors’ Report

---

 

ATRIA SENIOR LIVING GROUP, INC.

TABLE OF CONTENTS

 

 

		Page
INDEPENDENT AUDITORS’ REPORT			1
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008:
Statements of Operations			2
Balance Sheets			3
Statements of Stockholder’s Equity			4
Statements of Cash Flows			5–6
Notes to Consolidated Financial Statements			7–24

---

 

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors of

Atria Senior Living Group, Inc.

Louisville, Kentucky

We have audited the accompanying consolidated balance sheets of Atria Senior Living Group, Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholder’s equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Louisville, Kentucky

February 19, 2010

---

 

ATRIA SENIOR LIVING GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(In thousands)

 

 

		2009				2008
REVENUES:
Assisted and independent living revenues		$	441,663			$	441,847
Managed facility reimbursements			66,634				70,613
Management fees			8,818				9,471
Total operating revenues			517,115				521,931
OPERATING EXPENSES:
Assisted and independent living operating expenses			293,421				288,434
Managed facility reimbursed expenses			66,634				70,613
General and administrative expenses			43,896				52,429
Depreciation and amortization			46,268				42,362
Community rent expense			19,259				19,097
Development expenses			1,773				427
Loss on disposition of assets — net			1,156				2,333
Impairment and lease termination costs			875				455
Other operating expenses			1				50
Total operating expenses			473,283				476,200
OPERATING INCOME			43,832				45,731
OTHER INCOME (EXPENSE):
Interest expense			(68,721	)			(69,244	)
Interest income			749				5,597
Loss on debt extinguishment			(462	)			(489	)
Other — net			153				17
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			(24,449	)			(18,388	)
INCOME TAX BENEFIT			4,732				4,458
LOSS FROM CONTINUING OPERATIONS			(19,717	)			(13,930	)
LOSS FROM DISCONTINUED OPERATIONS — Net of tax			(103	)			(1,629	)
NET LOSS		$	(19,820	)		$	(15,559	)

See notes to consolidated financial statements.

 

- 2 -

---

 

ATRIA SENIOR LIVING GROUP, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2009 AND 2008

(In thousands, except share amounts)

 

 

		2009				2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	174,235			$	211,514
Restricted cash — current			9,247				10,034
Resident accounts receivable — net			3,961				4,640
Due from affiliates			11,876				10,881
Assets held for sale			1,600				1,601
Deferred income taxes			2,047				2,417
Other current assets			6,534				16,133
Total current assets			209,500				257,220
PROPERTY AND EQUIPMENT — net			1,036,590				1,013,112
LEASEHOLD INTERESTS AND OTHER INTANGIBLES — net			19,044				20,701
GOODWILL			96,784				96,784
DEFERRED FINANCING COSTS — net			13,674				13,683
LEASEHOLD DEPOSITS			5,127				4,497
RESTRICTED CASH			10,242				9,623
TOTAL		$	1,390,961			$	1,415,620
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable		$	6,443			$	13,642
Accrued liabilities			55,105				61,664
Due to affiliates			95				1,228
Liabilities associated with assets held for sale			82				53
Capital lease obligations due within one year			1,010				5,195
Long-term debt due within one year			17,138				14,034
Total current liabilities			79,873				95,816
CAPITAL LEASE AND DEFERRED FINANCING OBLIGATIONS			223,267				233,566
LONG-TERM DEBT			831,564				806,531
DEFERRED INCOME TAXES			34,601				39,776
OTHER LONG-TERM LIABILITIES			10,670				9,125
Total liabilities			1,179,975				1,184,814
COMMITMENTS AND CONTINGENCIES			—				—
STOCKHOLDER’S EQUITY:
Common stock, $.001 par value — authorized 2,000 shares; 1,000 issued and outstanding			—				—
Paid-in capital			997,064				997,064
Accumulated deficit			(786,078	)			(766,258	)
Total stockholder’s equity			210,986				230,806
TOTAL		$	1,390,961			$	1,415,620

See notes to consolidated financial statements.

 

- 3 -

---

 

ATRIA SENIOR LIVING GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(In thousands, except share amounts)

 

 

																		Total Stockholder’s Equity
		Common Stock								Paid-In-Capital				Accumulated Deficit
		Shares				Amount
BALANCE — January 1, 2008			1,000			$	—			$	997,064			$	(750,699	)		$	246,365
Net loss			—				—				—				(15,559	)			(15,559	)
BALANCE — December 31, 2008			1,000				—				997,064				(766,258	)			230,806
Net loss			—				—				—				(19,820	)			(19,820	)
BALANCE — December 31, 2009			1,000			$	—			$	997,064			$	(786,078	)		$	210,986

See notes to consolidated financial statements.

 

- 4 -

---

 

ATRIA SENIOR LIVING GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(In thousands)

 

 

		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS:
Loss from continuing operations		$	(19,717	)		$	(13,930	)
Adjustments to reconcile loss from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization			46,268				42,362
Deferred taxes			(4,766	)			(4,483	)
Deferred financing costs amortization			2,593				2,289
Amortization of leasehold interests			2,064				2,086
Provision for doubtful accounts			1,252				1,204
Loss on disposition of assets — net			1,156				2,333
Loss on debt extinguishment			462				489
Other			33				592
Change in operating assets and liabilities:
Resident accounts receivable — net			(555	)			2,805
Other current assets			9,514				(8,871	)
Accounts payable and other accrued liabilities			(11,108	)			8,116
Due to/from affiliates			(2,129	)			3,178
Net cash provided by operating activities			25,067				38,170
CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS:
Purchase of property and equipment			(69,374	)			(60,710	)
Acquisitions			(19,737	)			(18,500	)
Proceeds from sale of notes			1,971				—
Proceeds from sale of property and equipment			30				437
Change in restricted cash and leasehold deposits			(462	)			4,161
Net cash used in investing activities			(87,572	)			(74,612	)

 

(Continued)

 

- 5 -

---

ATRIA SENIOR LIVING GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

(In thousands)

 

 

		2009				2008
CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS:
Issuance of long-term debt		$	65,231			$	130,798
Repayment of principal on long-term debt and bonds			(37,157	)			(23,303	)
Debt issuance costs			(2,736	)			(3,155	)
Other			—				(495	)
Net cash provided by financing activities			25,338				103,845
NET CASH (USED IN) PROVIDED BY CONTINUING OPERATIONS			(37,167	)			67,403
NET CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS:
Net cash used in operating activities			(112	)			(10,973	)
Net cash provided by investing activities			—				10,139
CHANGE IN CASH AND CASH EQUIVALENTS			(37,279	)			66,569
CASH AND CASH EQUIVALENTS — Beginning of year			211,514				144,945
CASH AND CASH EQUIVALENTS — End of year		$	174,235			$	211,514
SUPPLEMENTAL INFORMATION:
Cash paid during the year for interest payments		$	62,442			$	67,102
Purchase of property and equipment included in accrued liabilities		$	6,500			$	10,976

See notes to consolidated financial statements.

(Concluded)

 

- 6 -

---

 

ATRIA SENIOR LIVING GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

 

 

1.	THE COMPANY AND BACKGROUND

Organization — Atria Senior Living Group, Inc. (“Atria”) and subsidiaries (the “Company”), an indirect wholly-owned subsidiary of LF Strategic Realty Investors II L.P., LFSRI II-CADIM Alternative Partnership L.P., and LFSRI II Alternative Partnership L.P. (collectively known as “LFSRI II”), is a national provider of assisted and independent living services for seniors.

Background — As of December 31, 2009, the Company owned or operated 95 communities located in 27 states with a total of 11,285 units. Of the 95 communities, 71 are owned by the Company and 24 are operated by the Company pursuant to long-term leases. The Company also managed 31 communities for Lazard Senior Housing Partners LP (“LSHP”), a related investment fund (refer to Note 3 for a discussion of the Master Agreement).

 

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying consolidated financial statements include the Company’s subsidiaries and all variable interest entities where the Company is considered the primary beneficiary. Intercompany transactions have been eliminated.

As discussed in Note 5, the Company has presented certain operations on a discontinued basis.

Variable Interest Entities — The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 (previously FASB Interpretation No. 46, Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51, as revised), addresses consolidation by business enterprises of variable interest entities (“VIE”). A VIE is subject to the consolidation provisions if it cannot support its financial activities without additional subordinated financial support from third parties or its equity investors lack any one of the following characteristics: the ability to make decisions about its activities through voting rights, the obligation to absorb losses of the entity if they occur, or the right to receive residual returns of the entity if they occur. A VIE is required to be consolidated by its primary beneficiary. The primary beneficiary is the party that holds the variable interest that is exposed to the majority of the entity’s expected losses and/or residual returns. For the purposes of determining a primary beneficiary, all related party interests must be combined with the actual interests of the Company in the VIE.

The Company has a variable interest in Senior Quarters Operating Company (“SQOC”). SQOC is the operator of 14 licensed assisted living facilities located in the state of New York and is 100% owned by an individual that is a director of Atria. SQOC operates the facilities under operating agreements with subsidiaries of the Company. SQOC is a VIE and the Company has consolidated SQOC as it has determined that it is the primary beneficiary. There are no consolidated assets that represent collateral for the VIE at December 31, 2009. The creditors have no recourse to the general credit of the Company. Intercompany amounts and balances have been eliminated.

The Company entered into an agreement with Forest City Daly Home Care Agency LLC (“FCD HCA”), a licensed home care services agency, in August 2007. Under the terms of the agreement, the Company had a variable interest in FCD HCA and was considered its primary beneficiary. The Company consolidated the assets and liabilities of the VIE as of the commencement date through April 2009. In May 2009, the Company purchased the operations and related assets of FCD HCA.

 

- 7 -

---

 

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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 reporting period. Actual results could differ from those estimates.

Revenues — Revenues are recognized when services are rendered and consist principally of monthly resident fees and fees for other ancillary services. Payments received in advance of services being rendered are recorded as deferred revenue which is included in accrued liabilities in the accompanying consolidated balance sheets. Residence and service agreements are for a term of one year, cancellable with 30 days notice from either party. Revenues from management contracts are recognized in the period earned in accordance with the terms of the management agreement.

Substantially all revenues are derived from private pay sources. Amounts due from residents are stated at net realizable value. The allowance for doubtful accounts at December 31, 2009 and 2008 was approximately $1.9 million and $2.1 million, respectively.

Advertising Costs — The Company expenses advertising costs as incurred. Advertising expense included in continuing operations was approximately $4.4 million and $3.7 million for the years ended December 31, 2009 and 2008, respectively.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. Cash and cash equivalents are carried at cost, which approximates their fair value.

The Company has invested a portion of its cash in money market funds, which are exposed to various risks, including interest rate, credit, and overall market risk. These funds have readily determinable market values. The Company identifies the cash invested in these funds as cash and cash equivalents as the Company has the ability to buy and sell shares at any time. As of December 31, 2009 and 2008, the Company had approximately $107.1 million and $118.9 million, respectively, invested in prime money market funds.

Restricted Cash — Current — Restricted Cash — current includes insurance, real estate taxes and repair escrows held by third party lenders that will be disbursed in twelve months or less. Also included are replacement reserves to be released to the Company by third party lenders in the next twelve months as reimbursement for amounts previously expended by the Company for capital items.

Long-Lived Assets — Property and equipment are stated at cost. Depreciation expense is computed by the straight-line method over the estimated useful lives as follows: buildings (40 years), building and improvements (5-20 years) and furniture and equipment (3-10 years). Leasehold improvements are depreciated over the shorter of the lease term or useful life. Repairs and maintenance expense included in continuing operations was approximately $12.5 million and $11.3 million for the years ended December 31, 2009 and 2008, respectively.

 

- 8 -

---

 

Property and equipment consist of the following at December 31, 2009 and 2008 (in thousands):

 

		2009				2008
Land		$	156,091			$	153,316
Buildings and improvements			1,077,297				1,033,970
Furniture and equipment			82,745				73,107
Construction in progress			45,073				34,683
Total			1,361,206				1,295,076
Accumulated depreciation			(324,616	)			(281,964	)
Total property and equipment — net		$	1,036,590			$	1,013,112

Assets held under capital leases are included in the amounts above and consist of the following at December 31, 2009 and 2008 (in thousands):

 

		2009				2008
Land		$	24,556			$	26,880
Buildings and improvements			169,047				184,445
Furniture and equipment			5,481				6,139
Total			199,084				217,464
Accumulated depreciation			(15,131	)			(11,787	)
Total assets held under capital leases — net		$	183,953			$	205,677

In January 2009, the Company exercised a purchase option for $19.0 million for one community that was previously accounted for as a capital lease. The purchase was financed with $14.9 million of long-term debt.

In January 2008, the Company exercised a purchase option for $18.5 million for one community that was previously accounted for as a capital lease. The purchase price was financed with long-term debt.

The Company accounts for long-lived assets in accordance with the provisions of ASC Topic 360 (previously Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long Lived Assets). This guidance requires that intangible assets and long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company regularly reviews the carrying value of its long-lived assets with respect to any events or circumstances that indicate impairment or that depreciation estimates may require adjustment. If such circumstances suggest the recorded amounts are more than the sum of the undiscounted cash flows, the carrying values of such assets are reduced to fair market value. Assets to be disposed of are reported at the lower of the carrying amount or fair value of the assets. At December 31, 2009 and 2008, the Company does not believe that the carrying value or the depreciation periods of its intangible assets and long-lived assets require any material adjustment.

 

- 9 -

---

 

ASC Topic 410 (previously SFAS No. 143, Accounting for Asset Retirement Obligations), addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. This guidance applies to legal obligations related to the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of leases. The fair value of a liability for an asset retirement obligation must be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The liability is discounted and accretion expense is recognized using the credit-adjusted risk-free interest rate in effect when the liability was initially recognized. An entity is required to recognize a liability for a legal obligation to perform asset retirement activities when the retirement is conditional on a future event and if the liability’s fair value can be reasonably estimated. This standard has not had a material effect on the Company’s earnings or financial position. The Company is currently evaluating potential investments in its existing properties that could result in significant future capital improvements to certain of the Company’s facilities. It is possible that the estimates used by the Company in accounting for its obligations could change in the near term depending on the timing of the projects approved in the future.

Goodwill, Leasehold Interests, and Other Intangibles — The Company accounts for business combinations under the purchase method. Accordingly, the aggregate purchase price of business combinations is allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on estimated fair values. Estimates are based on historical, financial, and market information.

The Company’s intangible assets at December 31, 2009 and 2008, consist of the following (in thousands):

 

		2009				2008
Goodwill		$	109,975			$	109,975
Accumulated Amortization			(13,191	)			(13,191	)
Goodwill — net			96,784				96,784
Leasehold interests			31,014				31,014
Other intangibles			2,280				1,513
Accumulated Amortization			(14,250	)			(11,826	)
Other intangibles — net			19,044				20,701
Total intangibles — net		$	115,828			$	117,485

The Company has completed its most recent annual goodwill impairment test at December 31, 2009 and has determined that no impairment exists. Goodwill is allocated to the carrying value of each facility and analyzed in connection with our evaluation of permanent impairment based on the relative fair value of the community to the Company as a whole. The fair values used in this evaluation are estimated based upon discounted future cash flow projections for the reporting unit. These cash flow projections are based upon a number of estimates and assumptions such as revenue and expense growth rates, capitalization rates and discount rates.

The amortization period of the leasehold interests includes renewal periods on the underlying leases extending to 2051.

 

- 10 -

---

 

Other intangibles consist primarily of customer contracts, lease restructuring fees, additional rent charges and deferred lease costs, which are amortized over the life of the assets.

Estimated aggregate amortization expense for intangible assets subject to amortization is approximately $2.5 million for 2010 and $2.1 million for each of the next four years.

Leases — Leases that substantially transfer all of the benefits and risks of ownership of property to the Company, or otherwise meet the criteria for capitalizing a lease in accordance with accounting principles generally accepted in the United States, are accounted for as capital leases. Property and equipment recorded under capital leases are depreciated on the same basis as other property and equipment. Amortization related to capital leases is included in the consolidated statements of operations within depreciation and amortization expense. Rental payments under operating leases are expensed as incurred.

Deferred Financing Costs — Costs incurred in connection with obtaining financing are deferred and amortized (included in interest expense) over the life of the related long-term debt using the straight-line method, which approximates the effective interest method. Deferred financing costs are presented net of accumulated amortization of approximately $9.4 million and $7.0 million for the years ended December 31, 2009 and 2008, respectively.

Leasehold Deposits — Leasehold deposits of approximately $5.1 million and $4.5 million as of December 31, 2009 and 2008, respectively, consist of cash payments made by the Company to certain lessors as required by the Company’s operating leases.

Restricted Cash and Other Non-Current Assets — Long-term restricted cash totaled approximately $10.2 million and $9.6 million at December 31, 2009 and 2008, respectively, which includes funds held for repair and replacement and debt service reserve escrows that are not expected to be disbursed to the Company within twelve months. Also included are money market funds held by RCI Insurance Company, a wholly-owned captive insurance company.

Income Taxes — The Company accounts for income taxes using the asset and liability method whereby 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to adjust net deferred tax assets to the amount which management believes will more likely than not be recoverable. In making such determination, management considers available positive and negative evidence, including future reversals of existing taxable temporary differences, future taxable income, and the implementation of prudent tax planning strategies. In the event that the Company is able to utilize its deferred tax assets in excess of their recorded amount, the valuation allowance will be reduced with a corresponding reduction to income tax expense.

ASC Topic 740 (previously FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes) prescribes a recognition threshold and measurement attribute for the recognition, measurement, presentation, and disclosure of uncertain tax positions that the Company has taken or expects to take on a tax return. ASC Topic 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the income tax position. Income tax positions must meet a more-likely-than-not recognition threshold to be

 

- 11 -

---

recognized. The Company adopted this guidance as of January 1, 2009 and the adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows as of and for the year ended December 31, 2009.

Fair Value Measurements — ASC Topic 820 (previously SFAS No. 157, Fair Value Measurements) defines fair value, provides a framework for measuring fair value, and expanded disclosures required for fair value measurements. This guidance also defines a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest to lowest priority, are described below:

Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

The Company adopted ASC Topic 820 (previously FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157) for all non-financial assets and liabilities in 2009. The adoption did not have a material impact on the Company’s financial position, results of operations, or cash flows as of and for the year ended December 31, 2009.

The Company also adopted ASC Topic 825 (previously SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115) as of January 1, 2008, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. In addition, it also establishes recognition, presentation, and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Company has not made any fair value elections with respect to any of its eligible assets or liabilities as of December 31, 2009.

Recently Issued Accounting Standards — ASC Topic 805 (previously SFAS No. 141 (revised 2007), Business Combinations) provides guidance for the way companies account for business combinations. This guidance requires transaction-related costs to be expensed as incurred, which were previously accounted for as a cost of acquisition. ASC Topic 805 also requires acquirers to estimate the acquisition-date fair value of any contingent consideration and recognize any subsequent changes in the fair value of contingent consideration in earnings. In addition, restructuring costs the acquirer was not obligated to incur shall be recognized separately from the business acquisition. The Company adopted this guidance on a prospective basis as of January 1, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows as of and for the year ended December 31, 2009. The Company has a total valuation allowance of $187.4 million as of December 31, 2009, to reduce its deferred tax assets, of which $15.9 million was recognized in purchase accounting to reserve a portion of an acquired entity’s deferred tax assets. Deferred tax assets related to acquired entities will affect income tax expense in the period of reversal if they are settled for lesser amounts. As of December 31, 2009, the Company has not reduced the valuation allowance established in connection with the acquisition.

 

- 12 -

---

 

ASC Topic 810 (previously SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, An Amendment of ARB No. 51) requires all entities to report noncontrolling interests in subsidiaries as a separate component of equity in the consolidated financial statements. A single method of accounting has been established for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation. Companies no longer recognize a gain or loss on partial disposals of a subsidiary where control is retained. In addition, in partial acquisitions where control is obtained, the acquiring company will recognize and measure at fair value 100 percent of the assets and liabilities, including goodwill, as if the entire target company had been acquired. The company adopted this guidance as of January 1, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations, or cash flows as of and for the year ended December 31, 2009.

In May 2009, the FASB issued guidance under ASC Topic 855 (previously SFAS No. 165, Subsequent Events), which provided general accounting standards for the disclosure of events that occur after the balance sheet date but before the financial statements are issued or available for issue. This guidance does not apply to subsequent events of transactions that are within the scope of other generally accepted accounting principles that provide different guidance on the accounting treatment of subsequent events. ASC Topic 855 includes a new required disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. Such disclosures are required for financial statements issued after June 15, 2009 and are included in these consolidated financial statements.

In June 2009, the FASB issued guidance under ASC Topic 810 (previously SFAS No. 167, Amendments to FASB Interpretation No. 46(R)), which amended the consolidation guidance for VIEs. The new guidance requires a company to perform an analysis to determine whether its variable interest gives it a controlling financial interest in a VIE. The amendment, which requires ongoing reassessments, redefines the primary beneficiary as the party that (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. The guidance includes enhanced disclosures about a company’s involvement in a VIE and also eliminates the exemption for qualifying special purpose entities. The guidance is effective for the Company on January 1, 2010. The Company is currently evaluating the impact, if any, on the Company’s financial position, results of operations, and cash flows.

In June 2009, the FASB adopted ASC Topic 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162), which is effective for periods after September 15, 2009. The ASC became the source of authoritative US Generally Accepted Accounting Principals (“GAAP”) applied to nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other non-grandfathered non-SEC accounting literature not included in the ASC is considered non-authoritative. The Company adopted the ASC as the single source of authoritative nongovernmental generally accepted accounting principles.

 

3.	RELATED PARTY TRANSACTIONS

The Company reimbursed LFSRI II for certain professional fees which it paid on the Company’s behalf and for travel and out of pocket costs incurred by the general partner of LFSRI II directly related to the activities of the Company. These costs totaled approximately $281,000 and $510,000 for the years ended December 31, 2009 and 2008, respectively. These expenses are included in general and administrative expenses in the accompanying consolidated statements of operations. Additionally, in 2009, the Company reimbursed LFSRI II $511,000 for certain professional fees related to development activities which have been capitalized and included in property and equipment.

 

- 13 -

---

 

The Company and Lazard Senior Housing Partners LP (“LSHP”), a real estate opportunity fund formed for the purpose of making debt and equity investments in senior housing assets, are parties to a Master Agreement under which the Company is engaged to provide certain management, operating and loan servicing activities for the investments made by LSHP. A majority of the partner capital interests in LSHP also hold partnership interests in LFSRI II. Under the terms of the Master Agreement, any new facilities acquired by LSHP, which are not already encumbered by an existing third party management agreement, will be added to this arrangement. The Master Agreement has an initial term of ten years (expiring July 2015) with automatic one year renewal periods thereafter, and establishes standardized terms for the facilities for which the Company will be engaged to provide services (the “Facility Management Agreements”). As of December 31, 2009 and 2008, the Company managed 31 and 32 communities, respectively, for One Lantern Senior Living LLC (“OLSL LLC”) and SG Senior Living LLC (“SGSL”) under the terms of the Facility Management Agreement.

Pursuant to the Facility Management Agreements, during the initial 24 months that a facility is owned, the Company receives a management fee of 5.00% of cash revenue. After this initial period, the Company receives a management fee of 3.00% to 5.00% of cash revenue based on the operating margins of the managed facilities. The Facility Management Agreements require the Company to be reimbursed for the payroll and related costs of on-site employees as well as certain other costs that are incurred by the Company. These reimbursements are in addition to the management fees.

Six communities which are licensed by New York Department of Health (“NYDOH”) pay fixed monthly management fees instead of a percentage of cash revenue pursuant to separate management agreements.

During 2009 and 2008, the Company received management fees of approximately $8.8 million and $9.5 million, respectively, under these agreements. Additionally, reimbursements for payroll and related expenses, as well as other expenses incurred by the Company on behalf of the communities managed for OLSL LLC and SGSL, totaled approximately $66.6 million and $70.6 million, respectively. As of December 31, 2009 and 2008, the communities managed for OLSL LLC and SGSL owed the Company approximately $11.9 million and $10.9 million, respectively, related to management fees and reimbursable expenses.

During the years ended December 31, 2009 and 2008, the Company received $227,000 and $170,000 in revenue from OLSL LLC, respectively, for residents that were relocated from an OLSL LLC facility to an Atria facility.

 

4.	ACQUISITIONS

In May 2009, the Company purchased the operations and related assets and liabilities of FCD HCA for $736,000, which was funded from existing cash balances. The acquisition was accounted for under the purchase method of accounting. The Company recorded an intangible asset for customer contracts that were in place between the home care agency and residents, which are amortizing over 18 months, the estimated life of the contracts. Tangible assets and other intangible assets were immaterial. The home care services agency has been included in the results of operations for all periods presented as it was previously consolidated as a VIE.

 

5.	ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

Assets qualifying as “held for sale” are required to be recorded at the lower of their carrying value or fair value, less costs to sell, and must be classified separately on the Company’s consolidated balance sheets. In addition, operating results and cash flows for communities either sold or held for sale are required to be classified as discontinued operations in the Company’s accompanying consolidated statements of operations and cash flows.

 

- 14 -

---

 

During 2008, four communities were transferred to new operators and the following amounts were segregated from continuing operations and included in discontinued operations, net of tax in the accompanying consolidated statements of operations for the years ended December 31, 2009 and 2008 (in thousands):

 

		2009				2008
Revenues		$	1			$	3,063
Net operating loss		$	(136	)		$	(344	)
Non-operating expenses			—				(1,024	)
Impairment and lease modification costs			(22	)			(357	)
Gain (loss) on disposition of assets — net			16				(449	)
Pretax loss on discontinued operations			(142	)			(2,174	)
Income tax benefit			39				545
Loss from discontinued operations — net of tax		$	(103	)		$	(1,629	)

The following assets and liabilities were segregated and included in Assets Held for Sale and Liabilities associated with Assets Held for Sale in the accompanying consolidated balance sheets as of December 31, 2009 and 2008 (in thousands):

 

		2009				2008
Property and equipment — net		$	1,600			$	1,601
Total assets held for sale		$	1,600			$	1,601
Current liabilities		$	82			$	53
Total liabilities associated with assets held for sale		$	82			$	53

 

6.	RETURN ON INVESTMENT OF UNCONSOLIDATED COMMUNITIES

In July 2009, the Company sold two outstanding notes and its .01% interest in a non-consolidated partnership for $2.0 million. The notes were previously reserved due to uncertainty of collection; therefore, the Company recognized a $2.0 million gain from sale which is included in loss on disposition of assets — net in the accompanying financial statements. The Company also ceased management services with the associated low income apartment complex and has no continuing involvement with the property.

 

7.	LEASES AND DEFERRED FINANCING OBLIGATIONS

Capital Leases and Deferred Financing Obligations — In April 2009, the Company amended lease agreements for nine communities. The term and renewal options related to these leases were unchanged. The initial term expires December 2021 with three ten year renewal options. One community has an

 

- 15 -

---

additional fourth renewal option for nine years. The modifications to the lease terms included a 2% annual increase in the base rent payment and the elimination of additional rent that was previously tied to the increase in the Consumer Price Index. Additionally, the lease amendments included changes in the various dates at which fixed rate purchase options for the nine communities can be exercised, ranging from January 1, 2012 to January 1, 2017. The amendments did not result in changes to the accounting classification of these leases.

Future minimum lease payments for capital leases and deferred financing obligations, including amounts that would be due under future purchase options as of December 31, 2009, are as follows (in thousands):

 

Years Ending December 31
2010		$	16,990
2011			17,250
2012			34,242
2013			41,924
2014			41,643
Thereafter			159,660
			311,709
Less:
Amounts representing interest			(87,432	)
Amounts due within one year			(1,010	)
Capital lease and deferred financing obligations		$	223,267

The fair value of the Company’s capital leases and deferred financing obligations has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. As of December 31, 2009 the fair value of capital lease and deferred financing obligations approximated $229.0 million. As of December 31, 2008, the carrying value of capital lease and deferred financing obligations approximated fair value.

Operating Leases — The Company leases real estate under cancelable and non-cancelable arrangements that are accounted for as operating leases. Certain of the leases require the payment of additional rent based on a percentage increase of gross revenues. Leases are subject to increases based upon changes in the consumer price index or gross revenues, subject to certain limits, as defined in the individual lease agreements. During 2009 and 2008, such additional rent expense included in continuing operations amounted to approximately $1.2 million and $1.1 million, respectively.

 

- 16 -

---

 

Future minimum lease payments required under non-cancelable operating leases classified in continuing operations as of December 31, 2009, are as follows (in thousands):

 

Years Ending December 31
2010		$	18,040
2011			17,961
2012			10,673
2013			9,187
2014			8,766
Thereafter			52,963
Total		$	117,590

The Company is subject to various restrictive covenants including certain occupancy requirements for four communities that are leased under operating leases. In order for the properties to qualify as a “qualified residential rental project” in accordance with the Internal Revenue Code (for the underlying bonds to maintain their tax-exempt status), at least 20% of the units must be made available to persons whose adjusted family income is 50% or less of the area median gross income (adjusted for family size). As of December 31, 2009, all of the communities were in compliance with the low-income requirements.

As of December 31, 2009, the Company had approximately $4.7 million in outstanding letters of credit (the “L/Cs”) securing lease obligations. The lessors may draw upon the L/Cs if there are defaults under the related leases. The L/Cs expire between April 30, 2010 and September 1, 2010. The L/Cs are secured by certificates of deposit that are included in current restricted cash in the accompanying consolidated balance sheets.

 

8.	LONG-TERM DEBT

A summary of long-term debt at December 31, 2009 and 2008 is as follows (in thousands):

 

		2009				2008
Mortgage notes payable, 2.49% to 8.06% (weighted average 5.86%) payable in periodic installments through 2038		$	833,949			$	813,236
Line of Credit payable January 2021 (8.00% at December 31, 2009)			12,474				5,113
Note payable due December 2010 (7.00% at December 31, 2009)			2,000				2,000
			848,423				820,349
Fair value adjustments resulting from original purchases			279				216
Less amounts due within one year			(17,138	)			(14,034	)
Total		$	831,564			$	806,531

In January 2009, the Company exercised a purchase option for one community. The $19.0 million purchase was financed with a $14.9 million ten-year note with the remainder paid from existing cash balances. Interest and principal on the note are payable monthly at a fixed rate of 6.18% based on a 30-year amortization period.

 

- 17 -

---

 

In April 2009, a lessor provided the Company with a $35.0 million line of credit. The Company may request draws on the line at any time through December 31, 2011, to fund upgrade expenditures and alterations for eight leased communities. Individual draws bear interest at a rate equal to 10.00%. The line of credit includes interest-only payments and has a term extending through January 4, 2021, with mandatory pre-payments in the event of an early termination of the related leases or in the event of the execution of the related purchase options. As of December 31, 2009, the Company had not drawn any of the available proceeds.

The Company previously obtained a $30.0 million line of credit with the same lessor. The Company can draw on the line at any time through December 31, 2010, to fund upgrade expenditures and alterations for the eight leased communities. The individual draws bear interest at a rate equal to the greater of 8.00% or the current ten year treasury rate plus 3.00%. The line of credit includes interest-only payments and has a term extending through January 2021, with mandatory pre-payments in the event of an early termination of the related leases or in the event of the execution of the related purchase options. The Company may make optional prepayments in 2012, 2013 and 2014 in an amount not to exceed $10.0 million per year. As of December 31, 2009, $12.5 million was outstanding on this line of credit.

In May 2009, the Company refinanced two communities and entered into new mortgage agreements totaling $34.2 million. The mortgage notes mature in June 2019. Interest and principal are payable monthly at a fixed rate of 6.15%. A total of $24.0 million of the proceeds were used to payoff the existing mortgage debt. In conjunction with the payoff, the Company recorded a loss on debt extinguishment of approximately $363,000.

In August 2009, the Company obtained additional financing related to the development of a community located in Irvine, California. The construction loan has a maximum available loan amount of $8.15 million with a maturity date of January 1, 2013. Interest is payable monthly at LIBOR + 6.00%. As of December 31, 2009, the Company had not drawn any of the available proceeds.

In September 2009, the Company obtained additional financing related to the development of a community located in Walnut Creek, California. The construction loan has a maximum available loan amount of $6.6 million with an initial maturity date of October 1, 2012 and a one-year extension option. Interest is payable monthly at LIBOR + 6.00%. As of December 31, 2009, the Company had not drawn any of the available proceeds.

In January 2008, the Company exercised a purchase option for one community. The $18.5 million purchase price was financed through a ten-year fixed rate note. Interest and principal are payable monthly at a fixed rate of 6.00% based on a 25-year amortization period.

In February 2008, the Company refinanced two communities and entered into new mortgage agreements totaling $16.2 million. The mortgage notes mature in March 2018. Interest and principal are payable monthly at fixed rates between 5.90% and 6.30% based on a 30-year amortization period. A total of $6.9 million of the proceeds was used to payoff the existing mortgage debt. In conjunction with the payoff, the Company recorded a loss on debt extinguishment of approximately $70,000 in February 2008.

In February 2008, the Company obtained additional financing related to 25 communities and entered into new mortgage agreements totaling $72.5 million. The underlying mortgage notes mature between January 2013 and April 2016. Interest and principal are payable monthly at fixed rates of 5.30% to 5.90% based on a 30-year amortization period. The proceeds are expected to be used by the Company to fund future capital improvements to the Company’s facilities.

 

- 18 -

---

 

In September 2008, the Company refinanced one community and entered into a new mortgage agreement totaling $10.6 million. The mortgage note matures in October 2018. Interest and principal are payable monthly at a fixed rate of 6.20% based on a 30-year amortization period. A total of $3.5 million of the proceeds was used to payoff the existing mortgage debt. In conjunction with the payoff, the Company recorded a loss on debt extinguishment of approximately $240,000 in September 2008.

At December 31, 2009 and 2008, substantially all of the Company’s property and equipment is collateralized under long-term debt and lease arrangements.

Aggregate maturities of long-term debt as of December 31, 2009, are as follows (in thousands):

 

Years Ending December 31
2010		$	17,138
2011			16,910
2012			83,768
2013			207,544
2014			145,211
Thereafter			377,852
Total		$	848,423

The fair value of the Company’s debt has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. As of December 31, 2009 and 2008, the Company estimated that the fair value of its long-term debt approximated $832.3 million and $793.5 million, respectively.

The Company’s various debt and lease agreements contain financial and other covenants. As of December 31, 2009, the Company was in compliance with all such covenants.

 

9.	INCOME TAXES

During 2009 and 2008, the Company recorded income tax benefits related to continuing operations as follows (in thousands):

 

		2009				2008
Current tax expense		$	(34	)		$	(25	)
Deferred tax benefit			4,766				4,483
Total tax benefit		$	4,732			$	4,458

Discontinued operations include a deferred tax benefit of $38,700 in 2009 and $545,000 in 2008.

 

- 19 -

---

 

A reconciliation of the federal statutory rate to the effective income tax rate for continuing operations is as follows:

 

		2009				2008
Federal statutory rate			(35.0	)%			(35.0	)%
State income taxes — net of federal income tax benefit			(5.0	)			(5.0	)
Other items			(1.5	)			1.6
Valuation allowance			22.2				14.2
Effective income tax rate			(19.3	)%			(24.2	)%

A summary of the deferred income taxes by source included in the accompanying consolidated balance sheets at December 31, 2009 and 2008 is as follows (in thousands):

 

		2009				2008
Deferred tax assets:
Net operating losses		$	191,177			$	182,828
Capital losses			182				2,619
Accrued expenses not currently deductible			7,396				7,964
Capital lease and deferred financing obligations			89,367				95,160
Intangible assets			2,095				3,544
Other			4,151				4,267
Total gross deferred tax assets			294,368				296,382
Valuation allowance			(187,372	)			(184,134	)
Net deferred tax asset			106,996				112,248
Deferred tax liabilities:
Tax over book depreciation			(138,340	)			(148,395	)
Other			(1,210	)			(1,212	)
Total deferred tax liabilities			(139,550	)			(149,607	)
Net deferred tax liability		$	(32,554	)		$	(37,359	)

At December 31, 2009 and 2008, the Company had net operating loss carryforwards of approximately $477.9 million and $459.1 million, respectively, which expire in years 2011 through 2029. Approximately $165.9 million of the net operating loss carryforwards existing at December 31, 2009, are attributable to previously acquired entities, and the utilization of these losses is subject to limitations imposed by the Internal Revenue Code.

At December 31, 2009, the Company has a valuation allowance of approximately $187.4 million to reduce its deferred tax assets to an amount that is more likely than not to be realized. In determining the need for and the amount of the valuation allowance, the Company considered the future reversals of existing taxable temporary differences, future taxable income exclusive of reversals of existing taxable temporary differences and the implementation of prudent and feasible tax planning strategies. Although realization is not assured for the net deferred tax asset, management believes it is more likely than not

 

- 20 -

---

that they will be utilized based on the future reversals of existing taxable temporary differences. If future taxable income is less than the amount that has been assumed in determining the deferred tax asset, then an increase in the valuation allowance will be required with a corresponding increase to income tax expense. Alternatively, if future taxable income exceeds the level that has been assumed in calculating the deferred tax asset, the valuation allowance could be reduced with the corresponding reduction to income tax expense. In 2009, the Company increased the valuation allowance by $3.2 million and recognized a corresponding expense. The increase in the valuation allowance was primarily due to a change in the estimated future reversal of existing taxable temporary differences.

The Company records interest and penalties related to uncertain tax positions as income tax expense. As of December 31, 2009, the Company had determined that no uncertain tax positions existed and thus, no interest or penalties were accrued.

The Company is subject to taxation in the U.S. and various state and local jurisdictions. As of December 31, 2009, the Company’s tax years for 2005 to 2009 are subject to examination by the tax authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years before 2005.

 

10.	OTHER CURRENT ASSETS AND ACCRUED LIABILITIES

A summary of other current assets at December 31, 2009 and 2008 is as follows (in thousands):

 

		2009				2008
Prepaid insurance		$	2,436			$	2,211
Prepaid property taxes			1,411				1,288
Food and supplies inventory			1,256				1,034
Prepaid expenses			693				909
Non-resident receivables			254				2,203
Deposit with payroll processor			84				7,562
Prepaid deal costs			—				601
Other			400				325
Total		$	6,534			$	16,133

A summary of accrued liabilities at December 31, 2009 and 2008 is as follows (in thousands):

 

		2009				2008
Accrued payroll and benefits		$	18,651			$	26,749
Deferred revenue			8,418				8,401
Accrued capital expenditures			6,500				10,976
Accrued insurance			4,689				4,776
Accrued interest			4,508				18
Accrued taxes other than income			4,394				6,086
Construction retainers			2,612				526
Accrued legal			942				673
Accrued professional fees			444				259
Other accrued expenses			3,947				3,200
Total		$	55,105			$	61,664

 

- 21 -

---

 

11.	EMPLOYEE BENEFIT PLAN

The Company sponsors a 401(k) plan for employees who meet certain minimum eligibility requirements. Retirement plan expense included in continuing operations was approximately $1.0 million and $1.1 million in 2009 and 2008, respectively.

 

12.	SHARE-BASED PAYMENT ARRANGEMENTS

ASC Topic 718 (previously SFAS No. 123R, Accounting for Stock-Based Compensation), establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees.

In 2006, Atria Holdings LLC (“Holdings”), parent of the Company and a wholly-owned subsidiary of LFSRI II, adopted an Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”). The primary revision adopted in the LLC Agreement was to create two authorized classes of membership interests in Holdings: Common Units and Participation Units. The holders of Common Units (“Common Members”) have rights with respect to the management and operation of Holdings, as well as rights with respect to profits and losses and distributions. The holders of Participation Units (“Participation Members”) have no rights with respect to the management and operation of Holdings, but do have rights with respect to profits and losses and distributions.

At the time of a qualifying sale of the Company, as defined in the LLC Agreement, Participation Members will be entitled to distributions based on formulas in the LLC Agreement. Distributions to Participation Members shall, to the extent practicable, be made in the same form of consideration as corresponding distributions to Common Members.

Participation Members’ interests in Holdings are subject to certain terms and conditions pursuant to individual admission letters. While the terms and conditions of the individual admission letters vary, in general, the Participation Members must be employed by the Company when a qualifying sale occurs in order to be entitled to a distribution, unless terminated without cause, as defined in the LLC Agreement, prior to distributions, in which case the executive will be entitled to a portion of their interest based on a vesting schedule. The Participation Units vest one-third on December 31 in the year of grant with the remainder vesting on December 31 two years later. A change in control, as defined in the LLC Agreement, will result in 100% accelerated vesting of all Participation Units.

Valuation models require the input of highly subjective assumptions, and changes in assumptions used can materially affect the fair value estimate. Expected volatility and dividends are based on implied and historical factors related to the Company’s common stock and public competitors within the assisted-living industry. Expected term represents the estimated weighted-average duration that the Participation Units will be outstanding. Due to the limited number of Participation Members, the Company has assumed that all Participation Units outstanding as of December 31, 2009, will vest and none will be forfeited in determining the grant date fair value of the Participation Units.

 

- 22 -

---

 

As of December 31, 2009, 82 Participation Units were outstanding that were issued to certain key executives that are employed by the Company. A summary of the Participation Units issued to employees of the Company for the years ended December 31, 2009 and 2008 are as follows (dollars in thousands):

 

		Participation Units				Estimated Grant Date Fair Value
Outstanding — January 1, 2008			74			$	7,000
Issued during 2008			8				900
Outstanding — December 31, 2008			82				7,900
Issued during 2009			—				—
Outstanding — December 31, 2009			82			$	7,900

The fair value of each Participation Unit was determined based on a discounted cash flow analysis of the expected future value of the Company based on financial projections and valuation multiples that are common to the assisted-living industry. Certain additional key assumptions are noted in the following table for the participation units issued in 2008.

 

Dividend yield			—	%
Expected volatility			48.5	%
Discount rate (cost of capital)			13.5	%
Expected term of participating units granted			3.4 years

The Participation Units that are outstanding as of December 31, 2009, include certain performance conditions that must be met in order for the Participation Members to receive a distribution. These performance conditions include a change of control or sale of the Company. Accruals of compensation expense for an award with a performance condition are to be accrued only if it is probable that the performance condition will be achieved. The performance conditions associated with the Participation Units were not met or deemed probable as of December 31, 2009, and thus no expense has been recorded in the accompanying financial statements. If the performance conditions are met or deemed to be met in a future period the Company would be required to record additional expense totaling $7.9 million based on the Participation Units outstanding as of December 31, 2009.

 

13.	GENERAL, PROFESSIONAL AND WORKER’S COMPENSATION LIABILITY RESERVES

RCI Insurance Company (“RCI”) is a wholly-owned captive insurance company domiciled in South Carolina and is consolidated in the accompanying financial statements. RCI insures general and professional liability risks of the Company in excess of a $100,000 deductible that is retained by the Company. RCI insures claims up to $1.0 million per claim, above the deductible, and $3.0 million in the aggregate. Funding for RCI is based upon actuarial evaluations of claims and industry trends.

Even though the Company funds certain amounts to RCI to pay potential claims, the Company retains various levels of professional and general liability risks. The financial statements include estimates of the ultimate costs for both reported and incurred but not reported claims. The Company has also purchased separate umbrella coverage to cover risk exposures in excess of RCI limits.

 

- 23 -

---

 

Currently, claims against the Company are in various stages of adjudication and/or litigation, some of which may result in payment from RCI. In the opinion of management, the ultimate disposition of claims incurred to date should not have a material adverse effect on the financial position or operations of the Company.

The Company is primarily self-insured for worker’s compensation and employee medical costs. Estimated costs and liabilities associated with these self-insurance programs are determined using actuarial models based on the Company’s claim history and estimates of ultimate losses.

 

14.	CONTINGENCIES AND GUARANTEES

The Company is subject to claims and legal actions in the ordinary course of its business. The Company believes that any liability resulting from these matters, after taking into consideration its insurance coverages and amounts recorded in the consolidated financial statements, will not have a material adverse effect on its consolidated financial position, results of operations, and cash flows.

The Company has made certain guarantees to third parties, particularly related to communities that have been sold. These guarantees may survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments to be made under these guarantees, as the triggering events are not subject to predictability. The Company believes the likelihood of any losses resulting from these guarantees, including the affect of insurance coverages that would mitigate any potential payments, is remote, and historically the Company has not been required to make payments under these guarantees.

 

15.	SUBSEQUENT EVENTS

The Company’s financial statements are available for issue as of February 19, 2010. Any subsequent events have been evaluated through this date.

In February 2010, the Company refinanced one community and entered into a new mortgage agreement totaling $15.0 million. An initial advance of $8.5 million was used to pay off existing mortgage debt on the community. The remainder of the proceeds totaling $6.5 million is available at future dates and will partially be used to fund a $3.0 million development project at the community. The mortgage note matures in 2015. Interest and principal are payable monthly at LIBOR plus 5.80% (with a LIBOR floor of 1.50%), based on a 25 year amortization schedule.

******

 

- 24 -