AlerisLife Inc. - Quarter Report: 2007 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x                                                                                          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-16817

FIVE STAR QUALITY CARE, INC.

(Exact Name of Registrant as Specified in its Charter)

400 Centre Street, Newton, Massachusetts 02458

(Address of Principal Executive Offices)

 

617-796-8387

(Registrants telephone Number)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o  Accelerated filer x   Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o  No x

Number of Common Shares outstanding at May 10, 2007: 31,684,134 shares of common stock, $0.01 par value.

FIVE STAR QUALITY CARE, INC.

 

FORM 10-Q

 

March 31, 2007

 

INDEX

 

		Page
PART I	Financial Information
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheet – March 31, 2007 and December 31, 2006	1
	Consolidated Statement of Income – Three Months Ended March 31, 2007 and 2006	2
	Consolidated Statement of Cash Flows – Three Months Ended March 31, 2007 and 2006	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	18
	Warning Concerning Forward Looking Statements	19
PART II	Other Information
Item 6.	Exhibits	20
	Signatures	21

 

As used herein the terms “we”, “us”, “our” and “Five Star” include Five Star Quality Care, Inc. and its consolidated subsidiaries unless otherwise expressly stated or the context otherwise requires.

Part I.   Financial Information

Item 1.  Consolidated Financial Statements

FIVE STAR QUALITY CARE, INC.

CONSOLIDATED BALANCE SHEET

(dollars in thousands, except share data)

		March 31, 2007			December 31, 2006
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	46,186		$	46,241
Accounts receivable, net of allowance of $6,198 and $5,005 at March 31, 2007 and December 31, 2006, respectively		60,210			67,791
Prepaid expenses		10,331			16,112
Investments		40,759			50,434
Restricted cash – insurance arrangements		2,342			3,043
Restricted investments – insurance arrangements		3,783			2,448
Restricted cash – other		3,473			4,925
Other current assets		13,456			14,766
Total current assets		180,540			205,760
Long term assets:
Property and equipment, net		119,924			114,898
Restricted cash – insurance arrangements		6,034			7,786
Restricted investments – insurance arrangements		9,746			6,262
Restricted cash – other		774			774
Goodwill and other intangible assets		22,490			22,611
Other long term assets		8,116			8,320
		$	347,624		$	366,411
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	19,347		$	22,805
Accrued expenses		24,710			18,825
Accrued compensation and benefits		19,206			19,218
Due to Senior Housing Properties Trust (“SNH”)		10,372			9,988
Mortgage notes payable		6,920			33,317
Accrued real estate taxes		5,263			6,035
Security deposit liability		15,298			15,097
Other current liabilities		7,784			7,644
Total current liabilities		108,900			132,929
Long term liabilities:
Mortgage notes payable		11,407			11,454
Convertible senior notes		126,500			126,500
Continuing care contracts		3,608			3,649
Other long term liabilities		25,034			24,449
Total long term liabilities		166,549			166,052
Commitments and contingencies
Shareholders’ equity:
Preferred stock, par value $0.01: 1,000,000 shares authorized, none issued		—			—
Common stock, par value $0.01: 50,000,000 shares authorized, 31,684,134 and 31,682,134 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		316			316
Additional paid-in capital		286,368			286,344
Accumulated deficit		(214,671		)	(219,435		)
Unrealized gain on investments		162			205
Total shareholders’ equity		72,175			67,430
		$	347,624		$	366,411

 

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONSOLIDATED STATEMENT OF INCOME

(dollars in thousands, except per share amounts)

(unaudited)

		Three months ended March 31,
		2007			2006
Revenues:
Senior living revenue		$	196,658		$	180,788
Hospital revenue		26,770			—
Pharmacy revenue		16,248			11,254
Total revenues		239,676			192,042
Operating expenses:
Senior living wages and benefits		101,623			90,835
Other senior living operating expenses		49,469			48,488
Hospital expenses		24,256			—
Pharmacy expenses		15,942			10,691
Management fee to Sunrise Senior Living Services, Inc. (“SLS”)		—			3,538
Rent expense		32,171			25,609
General and administrative		10,059			7,220
Depreciation and amortization		3,179			2,268
Total operating expenses		236,699			188,649
Operating income		2,977			3,393
Interest and other income		1,065			324
Interest expense		(1,778		)	(758		)
Gain on extinguishment of debt		3,557			—
Income from continuing operations before income taxes		5,821			2,959
Provision for income taxes		208			—
Income from continuing operations		5,613			2,959
Loss from discontinued operations		(849		)	(1,300		)
Net income		$	4,764		$	1,659
Weighted average shares outstanding - basic		31,684			20,061
Weighted average shares outstanding - diluted		41,415			20,061
Basic income per share from:
Continuing operations		$	0.18		$	0.14
Discontinued operations		(0.03		)	(0.06		)
Net income per share		$	0.15		$	0.08
Diluted income per share from:
Continuing operations		$	0.17		$	0.14
Discontinued operations		(0.02		)	(0.06		)
Net income per share		$	0.15		$	0.08

 

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(dollars in thousands)

(unaudited)

		Three months ended March 31,
		2007			2006
Cash flows from operating activities:
Net income		$	4,764		$	1,659
Adjustments to reconcile net income to cash provided by (used in)  operating activities:
Depreciation and amortization		3,179			2,274
Gain on extinguishment of debt		(3,557		)	—
Loss from discontinued operations		849			1,300
Provision for bad debt expense, net		1,193			1,019
Unrealized loss on investments		(43		)	(22		)
Changes in assets and liabilities:
Accounts receivable		6,388			(248		)
Prepaid expenses and other assets		7,311			(299		)
Investments		9,675			—
Accounts payable and accrued expenses		2,451			557
Accrued compensation and benefits		(12		)	(3,118		)
Due to/from SLS		—			(2,107		)
Due to/from SNH		384			(37		)
Other current and long term liabilities		113			(2,100		)
Cash provided by (used in) operating activities		32,695			(1,122		)
Net cash used in discontinued operations		(849		)	(1,300		)
Cash flows from investing activities:
Deposits into restricted cash and investment accounts, net		(914		)	(3,115		)
Acquisition of property and equipment		(17,745		)	(10,322		)
Proceeds from disposition of property and equipment held for sale		9,645			5,331
Withdrawals from restricted cash for purchases of property and equipment		—			5,112
Cash used in investing activities		(9,014		)	(2,994		)
Cash flows from financing activities:
Proceeds from borrowings on revolving credit facility		—			13,500
Repayments of borrowings on revolving credit facility		—			(13,500		)
Repayments of mortgage note payable		(22,887		)	(139		)
Cash used in financing activities		(22,887		)	(139		)
Change in cash and cash equivalents		(55		)	(5,555		)
Cash and cash equivalents at beginning of period		46,241			16,376
Cash and cash equivalents at end of period		$	46,186		$	10,821
Supplemental cash flow information:
Cash paid for interest		$	715		$	678
Non-cash investing and financing activities:
Issuance of common stock		24			—

 

See accompanying notes.

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FIVE STAR QUALITY CARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share amounts)

(unaudited)

Note 1.  Basis of Presentation and Organization

The accompanying consolidated financial statements of Five Star Quality Care, Inc. have been prepared without audit.  Certain information and disclosures required by generally accepted accounting principles for complete financial statements have been condensed or omitted.  We believe the disclosures made are adequate to make the information presented not misleading.  However, the accompanying financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006.  In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included.  All intercompany transactions and balances have been eliminated.  Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.  Reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.  Material changes are limited to reclassifying security deposits out of other current liabilities.  These reclassifications had no effect on net income or shareholders’ equity.

As of March 31, 2007, we operated 160 senior living communities containing 17,909 living units, including 111 primarily independent and assisted living communities containing 13,493 living units and 49 nursing homes containing 4,416 living units.  Of our 111 primarily independent and assisted living communities, we leased 95 communities containing 12,274 living units from Senior Housing Properties Trust, or Senior Housing, our former parent, and we own or lease from parties other than Senior Housing 16 communities containing 1,219 living units.  We lease all but two of our nursing homes from Senior Housing.  Our 160 communities include 5,674 independent living apartments, 6,260 assisted living suites and 5,975 skilled nursing beds.  We also operate six institutional pharmacies, one of which provides mail order pharmaceuticals to the general public, and we operate two rehabilitation hospitals that we lease from Senior Housing.  Our two rehabilitation hospitals contain 342 beds available for inpatient services and 21 affiliated outpatient clinics.

Note 2.  Comprehensive Income

Comprehensive income for the three months ended March 31, 2007 and 2006 is summarized below:

		Three months ended March 31,
		2007			2006
Net income		$	4,764		$	1,659
Unrealized loss on investments		(43		)	(22		)
Net comprehensive income		$	4,721		$	1,637

 

Note 3.  Financial Data By Segment

Our reportable segments consist of our senior living community business and our rehabilitation hospital business that we began to operate in October 2006.   In the senior living community segment, we operate independent living and congregate care communities, assisted living communities and nursing homes.  Our rehabilitation hospital segment provides inpatient health rehabilitation services at two locations and outpatient health rehabilitation services at 21 locations.  We do not consider our pharmacy operations to be a significant, separately reportable segment of our business, but we report our pharmacy revenues and expense as separate items combined with our corporate and other activities.  All of our operations and assets are located in the United States.  

We use segment operating profit as an important measure to evaluate performance and for decision making purposes.  Segment operating profit excludes interest and other income, interest expense and certain corporate expenses. 

Our revenues by segment, along with a reconciliation of segment operating profit to income from continuing operations before income taxes, are as follows:

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		Senior Living Communities			Rehabilitation Hospitals			Corporate and Other (1)			Total
Three months ended March 31, 2007
Revenues		$	196,658		$	26,770		$	16,248		$	239,676
Segment expenses:
Senior living, rehabilitation hospital and pharmacy expenses		151,092			24,256			15,942			191,290
Rent expense		29,602			2,569			—			32,171
Depreciation and amortization		2,211			217			751			3,179
Total segment expenses		182,905			27,042			16,693			226,640
Segment operating profit (loss)		13,753			(272		)	(445		)	13,036
General and administrative expenses (2)		—			—			(10,059		)	(10,059		)
Operating income (loss)		13,753			(272		)	(10,504		)	2,977
Interest and other income		—			—			1,065			1,065
Interest expense		(537		)	—			(1,241		)	(1,778		)
Gain on extinguishment of debt		3,557			—			—			3,557
Provision for income taxes		—			—			(208		)	(208		)
Income (loss) from continuing operations		$	16,773		$	(272	)	$	(10,888	)	$	5,613
Total Assets as of March 31, 2007		$	299,090		$	18,977		$	29,557		$	347,624
Three months ended March 31, 2006
Revenues		$	180,788		$	—		$	11,254		$	192,042
Segment expenses:
Senior living, rehabilitation hospital and pharmacy expenses		139,323						10,691			150,014
Management fee SLS		3,538			—			—			3,538
Rent expense		25,609			—			—			25,609
Depreciation and amortization		1,855			—			413			2,268
Total segment expenses		170,325			—			11,104			181,429
Segment operating profit		10,463			—			150			10,613
General and administrative expenses (2)		—			—			(7,220		)	(7,220		)
Operating income (loss)		10,463			—			(7,070		)	3,393
Interest and other income		—			—			324			324
Interest expense		(643		)	—			(115		)	(758		)
Income (loss) from continuing operations		$	9,820		$	—		$	(6,861	)	$	2,959
Total Assets as of March 31, 2006		$	204,564		$	—		$	19,069		$	223,633

 

(1) Corporate and Other includes operations that are not considered a significant, separately reportable segment of our business and income and expenses that are not attributable to a specific segment.

(2) General and administrative expenses are not attributable to a specific segment and include items such as corporate payroll and benefits and outside service expenses.

Note 4.  Income Taxes

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48.  FIN 48 prescribes how we should recognize, measure and present in our financial statements uncertain tax positions that have been taken or are expected to be taken in a tax return. Pursuant to FIN 48, we can recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that has a greater than 50% likelihood of being

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realized upon settlement. We classify interest and penalties related to uncertain tax positions, if any, in our financial statements as a component of general and administrative expense.  

As required, we adopted FIN 48 effective January 1, 2007 and have concluded the effect is not material to our consolidated financial statements.  Accordingly, we did not record a cumulative effect adjustment related to the adoption of FIN 48.  At the date of adoption, we had $785 in unrecognized tax benefits plus significant tax loss carry forwards totaling approximately $202,500 which, if recognized, would favorably affect our effective tax rate.  We do not believe that our unrecognized tax benefits will change significantly in the next 12 months.

Because we have historically reported losses we do not currently recognize the benefit of all of our deferred tax assets, including tax loss carry forwards that may be used to offset future taxable income.  We will, however, continue to assess our ability to generate sufficient taxable income during future periods in which our deferred tax assets may be realized. When we believe that we will more likely than not recover our deferred tax assets, we will record deferred tax assets as an income tax benefit in the consolidated statement of operations, which will affect our results of operations. Our net operating loss carry forwards begin to expire in 2023, if unused. The tax loss carry forwards and tax returns filed for the 2002 through 2006 tax years are subject to examination by taxing authorities. 

For the quarter ended March 31, 2007, we recognized tax expenses of $208 which includes $151 of alternative minimum taxes and certain state taxes that are payable without regard to our tax loss carry forwards and $57 of a non cash, deferred tax liability arising from the amortization of goodwill for tax purposes but not for book purposes.   We may recognize this deferred tax liability as a reduction in the income tax provision if, in some future period, we expense the related items of goodwill for book purposes as the result of its sale, other disposition or impairment.

Note 5.  Earnings Per Share

Basic earnings per share for the periods ended March 31, 2007 and 2006 is computed using the weighted average number of shares outstanding during the periods.  Diluted earnings per share for the period ended March 31, 2007 reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income applicable to common shareholders that would result from the assumed issuance.  The effect of our convertible senior notes on loss from discontinued operations per share is anti-dilutive for the three months ended March 31, 2007. 

The following table provides a reconciliation of both net income and the number of common shares used in the computations of diluted earnings per share, or EPS: 

		Three Months Ended March 31,
		2007								2006
		Income (loss)			Shares		Per Share			Income (loss)			Shares		Per Share
Income from continuing operations		$	5,613		31,684		$	0.18		$	2,959		20,061		$	0.14
Effect of convertible senior notes		1,241			9,731					—			—
Amounts used to calculate diluted EPS from continuing operations		6,854			41,415		$	0.17		2,959			20,061		$	0.14
Amounts used to calculate diluted EPS from discontinued operations		$	(849	)	41,415		$	(0.02	)	$	(1,300	)	20,061		$	(0.06	)

 

Note 6. Line of Credit

We have a $25,000 revolving line of credit for acquisitions, working capital and general business purposes.  The amount we are able to borrow at any time is subject to limitations based upon qualifying collateral.  We are the borrower under this revolving credit facility and certain of our subsidiaries guarantee our obligations under the facility that is secured by our and our guarantor subsidiaries’ accounts receivable, deposit accounts and related assets.  The facility contains covenants requiring us to maintain collateral, minimum net worth and certain other

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financial ratios, places limits on our ability to incur or assume debt or create liens with respect to certain of our properties and has other customary provisions.  In certain circumstances and subject to available collateral and lender approvals, the maximum amounts which we may draw under this credit facility may be increased to $50,000.  The termination date, May 8, 2008, may be extended twice, in each case by twelve months, subject to lender approval, our payment of extension fees and other conditions.  As of March 31, 2007 and May 10, 2007, no amounts were outstanding under this credit facility. As of March 31, 2007 and May 10, 2007 we believe we are in compliance with all applicable covenants under this credit facility.    Interest expense and other associated costs related to this facility were $0 and $115 for the three months ended March 31, 2007 and 2006, respectively.

Note 7. Mortgages Payable

At March 31, 2007, four of our communities were encumbered by five United States Department of Housing and Urban Development, or HUD, insured mortgages totaling $18,327.  In February 2007, we prepaid six mortgages that were secured by five of our senior living communities.  We paid $22,923 to retire these six mortgages, which consisted of approximately $22,198 in principal and interest and $725 in prepayment penalties.  Because we had carried these mortgages at a premium to their face value, we recognized a net gain of $3,557 in connection with the early extinguishment of debt.  In April 2007, we prepaid one additional mortgage that was secured by one of our communities.  We paid $5,944 to retire this mortgage, which consisted of approximately $5,828 in principal and $116 in prepayment penalties.  Because we had carried this mortgage at a premium to its face value, we will recognize a gain of approximately $934 in connection with the early extinguishment of debt in the second quarter of 2007.  Mortgage interest expense, including premium amortization, was $579 and $644 for the three months ended March 31, 2007 and 2006, respectively.

Note 8. Convertible Senior Notes due 2026

In October 2006, we issued $126,500 principal amount of 3.75% convertible senior notes.  Our net proceeds from this offering were approximately $122,600.  These notes are convertible into our common shares at any time.  The initial conversion rate, which is subject to adjustment, is 76.9231 common shares per $1,000 principal amount of notes, which represents an initial conversion price of $13.00 per share.  Interest expense and other associated costs on the notes was $1,241 for the three months ended March 31, 2007.  The notes are guaranteed by certain of our domestic wholly owned subsidiaries.  These notes mature October 15, 2026 and may be prepaid by us anytime after October 20, 2011.  These notes were issued pursuant to an indenture which contains various customary covenants; we believe we are in compliance with all applicable covenants of the indenture pursuant to which the notes were issued.

Note 9.  Related Party Transactions

We lease 142 of the 160 senior living communities we operated on March 31, 2007 from Senior Housing for total annual minimum rent of $125,345.  In addition to the minimum rent, we paid $552 and $293 in percentage rent to Senior Housing for the three months ended March 31, 2007 and 2006, respectively.

During the three months ended March 31, 2007, as permitted by our leases with Senior Housing, we sold to Senior Housing, at cost, $9,645 of improvements made to properties leased from Senior Housing, and the annual rent payable to Senior Housing increased by $945.

Note 10.  Discontinued Operations

In March 2007, we agreed with Senior Housing that it should sell two assisted living communities in Pennsylvania, which we lease from Senior Housing.  Senior Housing is in the process of selling these assisted living communities and, upon their sale, our annual minimum rent payable to Senior Housing will decrease by 9.5% of the net proceeds of the sale to Senior Housing.  As of March 31, 2007, we have disposed of substantially all of our assets and settled all liabilities related to these two communities.  We have reclassified the statement of operations for all periods presented to show the results of operations of the communities which have been sold or are expected to be sold as discontinued.  A summary of the operating results of these discontinued operations included in the financial statements for the three months ended March 31, 2007 and 2006 is:

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Note 11.   Guarantor Financial Information

Our convertible notes are guaranteed by certain of our domestic wholly owned subsidiaries.  Such guarantees are full, unconditional and joint and several.  Condensed consolidating financial information related to the Company, its guarantor subsidiaries and non-guarantor subsidiaries for all periods presented are reflected below:

Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2007

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Senior living revenue		$	—		$	84,041		$	112,617		$	—		$	196,658
Hospital revenue		—			—			26,770			—			26,770
Pharmacy revenue		—			—			16,248			—			16,248
Total revenues					84,041			155,635			—			239,676
Operating expenses:
Senior living wages and benefits		—			38,729			62,894			—			101,623
Other senior living operating expenses		—			26,057			23,412			—			49,469
Hospital expenses		—			—			24,256			—			24,256
Pharmacy expenses		—			—			15,942			—			15,942
Rent expense		—			16,624			15,547			—			32,171
General and administrative		—			—			10,059			—			10,059
Depreciation and amortization		—			1,174			2,005			—			3,179
Total operating expenses		—			82,584			154,115			—			236,699
Operating income		—			1,457			1,520			—			2,977
Interest and other income		—			(10		)	1,075			—			1,065
Interest expense		—			—			(1,778		)	—			(1,778		)
Gain on extinguishment of debt		—			—			3,557			—			3,557
Equity in earnings of subsidiaries		4,764			—			—			(4,764		)	—
Income from continuing operations before income taxes		4,764			1,447			4,374			(4,764		)	5,821
Provision for income taxes		—			—			208			—			208
Income from continuing operations		4,764			1,447			4,166			(4,764		)	5,613
Loss from discontinued operations		—			—			(849		)	—			(849		)
Net income		$	4,764		$	1,447		$	3,317		$	(4,764	)	$	4,764

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Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2006

 

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Senior living revenue		$	—		$	81,017		$	99,771		$	—		$	180,788
Pharmacy revenue		—						11,254			—			11,254
Total revenues					81,017			111,025			—			192,042
Operating expenses:
Senior living wages and benefits		—			34,567			56,268			—			90,835
Other senior living operating expenses		—			25,935			22,553			—			48,488
Pharmacy expenses		—			—			10,691			—			10,691
Management fee to SLS		—			3,538			—			—			3,538
Rent expense		—			16,036			9,573			—			25,609
General and administrative		—			—			7,220			—			7,220
Depreciation and amortization		—			949			1,319			—			2,268
Total operating expenses		—			81,025			107,624			—			188,649
Operating (loss) income		—			(8		)	3,401			—			3,393
Interest and other income		—			75			249			—			324
Interest expense		—			—			(758		)	—			(758		)
Equity in earnings of subsidiaries		1,659			—			—			(1,659		)	—
Income from continuing operations before income taxes		1,659			67			2,892			(1,659		)	2,959
Provision for income taxes		—			—			—			—			—
Income from continuing operations		1,659			67			2,892			(1,659		)	2,959
Loss from discontinued operations		—			(69		)	(1,231		)	—			(1,300		)
Net income		$	1,659		$	(2	)	$	1,661		$	(1,659	)	$	1,659

 

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Condensed Consolidating Balance Sheet

As of March 31, 2007

 

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	—		$	2,732		$	43,454		$	—		$	46,186
Accounts receivable, net		—			2,070			58,140			—			60,210
Restricted cash and investments		—			2,948			6,650			—			9,598
Investments		—			—			40,759			—			40,759
Prepaid expenses and other current assets		—			4,834			18,953			—			23,787
Total current assets		—			12,584			167,956			—			180,540
Property and equipment, net		—			23,469			96,455			—			119,924
Investment in subsidiary and long term receivable from (to) subsidiaries		200			—			200			(400		)	—
Restricted cash and investments		—			3,072			13,482			—			16,554
Intercompany		228,680			—			—			(228,680		)	—
Goodwill and other intangible assets		—			—			22,490			—			22,490
Other long term assets		—			—			8,116			—			8,116
		$	228,880		$	39,125		$	308,699		$	(229,080	)	$	347,624
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other current liabilities		$	—		$	29,473		$	72,507		$	—		$	101,980
Mortgage notes payable		—			—			6,920			—			6,920
Total current liabilities		—			29,473			79,427			—			108,900
Long term liabilities:
Mortgage notes payable		—			—			11,407			—			11,407
Convertible senior notes		—			—			126,500			—			126,500
Notes payable to related parties		200			—			—			(200		)	—
Other long term liabilities		—			6,577			22,065			—			28,642
Total long term liabilities		200			6,577			159,972			(200		)	166,549
Total shareholders’ equity		228,680			3,075			69,300			(228,880		)	72,175
		$	228,880		$	39,125		$	308,699		$	(229,080	)	$	347,624

 

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Condensed Consolidating Balance Sheet

As of December 31, 2006

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents		$	—		$	8,065		$	38,176		$	—		$	46,241
Accounts receivable, net		—			13,209			54,582			—			67,791
Investments		—			—			50,434			—			50,434
Prepaid expenses and other current assets		—			8,353			32,941			—			41,294
Total current assets		—			29,627			176,133			—			205,760
Property and equipment, net		—			23,061			91,837			—			114,898
Investment in subsidiary and long term receivable from (to) subsidiaries		200			—			200			(400		)	—
Restricted cash		—			3,072			11,750			—			14,822
Intercompany		228,656			—			—			(228,656		)	—
Goodwill and other intangible assets		—			—			22,611			—			22,611
Other long term assets		—			—			8,320			—			8,320
		$	228,856		$	55,760		$	310,851		$	(229,056	)	$	366,411
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other current liabilities		$	—		$	41,852		$	57,760		$	—		$	99,612
Mortgage notes payable		—			—			33,317			—			33,317
Total current liabilities		—			41,852			91,077			—			132,929
Long term liabilities:
Mortgage notes payable		—			—			11,454			—			11,454
Convertible senior notes		—			—			126,500			—			126,500
Notes payable to related parties		200			—			—			(200		)	—
Other long term liabilities		—			6,431			21,667			—			28,098
Total long term liabilities		200			6,431			159,621			(200		)	166,052
Total shareholders’ equity		228,656			7,477			60,153			(228,856		)	67,430
		$	228,856		$	55,760		$	310,851		$	(229,056	)	$	366,411

 

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Condensed Consolidating Cash Flow Statement

For the three months ended March 31, 2007

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from operating activities:
Net income		$	4,764		$	1,447		$	3,317		$	(4,764	)	$	4,764
Undistributed equity in earnings of subsidiaries		(4,764		)	—			—			4,764			—
Adjustments to reconcile net income to cash provided by (used in) operating activities, net		—			(5,212		)	32,294			—			27,082
Net cash provided by (used in) operating activities		—			(3,765		)	35,611			—			31,846
Cash Flows from investing activities:
Capital expenditures		—			(5,156		)	(12,589		)	—			(17,745		)
Proceeds from the sale of property and equipment		—			3,588			6,057			—			9,645
Other, net		—			—			(914		)	—			(914		)
Net cash used in investing activities		—			(1,568		)	(7,446		)	—			(9,014		)
Cash Flows from financing activities:
Change in borrowings, net		—			—			(22,887		)	—			(22,887		)
Net cash used in financing activities		—			—			(22,887		)	—			(22,887		)
Change in cash and cash equivalents		—			(5,333		)	5,278			—			(55		)
Cash and cash equivalents at beginning of period		—			8,065			38,176			—			46,241
Cash and cash equivalents at end of period		$	—		$	2,732		$	43,454		$	—		$	46,186

 

Condensed Consolidating Cash Flow Statement

For the three months ended March 31, 2006

		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from operating activities:
Net income		$	1,659		$	(2	)	$	1,661		$	(1,659	)	$	1,659
Undistributed equity in earnings of subsidiaries		(1,659		)	—			—			1,659			—
Adjustments to reconcile net income to cash provided by (used in) operating activities, net		—			1,432			(5,513		)	—			(4,081		)
Net cash provided by (used in) operating activities		—			1,430			(3,852		)	—			(2,422		)
Cash Flows from investing activities:
Capital expenditures		—			(3,406		)	(6,916		)	—			(10,322		)
Proceeds from the sale of property and equipment		—			1,758			3,573			—			5,331
Other, net		—			825			1,172			—			1,997
Net cash used in investing activities		—			(823		)	(2,171		)	—			(2,994		)
Cash Flows from financing activities:
Change in borrowings, net		—			—			(139		)	—			(139		)
Net cash used in financing activities		—			—			(139		)	—			(139		)
Change in cash and cash equivalents		—			607			(6,162		)	—			(5,555		)
Cash and cash equivalents at beginning of period		—			7,076			9,300			—			16,376
Cash and cash equivalents at end of period		$	—		$	7,683		$	3,138		$	—		$	10,821

 

Note 12.   Subsequent Events

On April 30, 2007, we acquired a 48 unit assisted living community located in Tennessee for approximately $4,900.  We financed the acquisition by assuming a $4,600 non recourse HUD mortgage and paying the balance of the purchase price with cash on hand.  The interest rate on the assumed HUD mortgage is 7.65%.  We will include the results of this community’s operations in our consolidated financial statements from date of acquisition.  All of the community’s revenues come from residents’ private resources.  We acquired this community to expand our business strategy of focusing our operations in high quality senior living assets where residents pay for our services with private resources.

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