| AMERICAN RETIREMENT CORP Item 1A Risk Factors Risks Associated with Forward Looking Statements This Form 10-K contains certain forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby |
| Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, all statements concerning our anticipated improvement in operations and anticipated or expected cash flow; our expectations regarding trends in the senior living industry; the discussions of our operating and growth strategy; our liquidity and financing needs; our expectations regarding future entrance fee sales or increasing occupancy at our retirement centers or free-standing assisted living communities; our alternatives for raising additional capital and satisfying our periodic debt and lease obligations; our projections of revenue, income or loss, capital expenditures, interest rates, and future operations; our anticipated expansions, development or acquisition activity; and the availability of insurance programs to us or the adequacy of such programs |
| All forward-looking statements involve risks and uncertainties including, without limitation, the risks and uncertainties described in this report under Item 1A “Risks Related to Our Business |
| ” Should one or more of those risks materialize, actual results could differ materially from those forecasted or expected |
| Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could prove to be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Form 10-K will prove to be accurate |
| In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our forecasts, expectations, objectives or plans will be achieved |
| We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events |
| Risks Related to Our Business We have substantial debt and operating lease obligations which will require significant amounts of cash each year |
| We have substantial debt and lease obligations |
| Our cash needs for our lease and interest payments and principal payments on outstanding debt will remain high for the foreseeable future |
| At December 31, 2005, we had long-term debt, including current portion, of dlra324dtta0 million |
| During the twelve months ending December 31, 2006, we are obligated to pay minimum rental obligations of approximately dlra68dtta2 million under long-term operating leases and have current scheduled debt principal and lease payments of dlra28dtta8 million |
| At December 31, 2005, we had dlra40dtta8 million of unrestricted cash and cash equivalents, dlra28dtta4 million of restricted cash and dlra90dtta5 million of negative working capital |
| For the year ended December 31, 2004, our net cash provided by operations was dlra60dtta8 million |
| There can be no assurance that we will be able to generate sufficient cash flows from operations and entrance fee sales to meet required interest, principal, and lease payments in future periods |
| Certain of our debt agreements and leases contain various financial and other restrictive covenants, which may limit our flexibility in operating our business |
| Any payment or other default with respect to such obligations could cause lenders to accelerate payment obligations or to foreclose upon our communities securing such indebtedness or, in the case of any of our operating leases, terminate the lease, with a consequent loss of income and asset value to us |
| Furthermore, because of cross-default and cross-collateralization provisions in certain debt instruments and leases, a default by us on one of our obligations could result in default or acceleration of other obligations |
| Failure to remain in compliance with the covenants and obligations contained in our debt instruments and leases could have a material adverse impact on us |
| Our liability insurance may not be adequate to cover claims which may arise against us |
| The delivery of personal and health care services entails an inherent risk of liability |
| In recent years, participants in the senior living and health care services industry have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the incurrence of significant exposure and defense costs |
| Currently, we maintain general and professional medical malpractice insurance policies for our owned, leased and certain of our managed communities under a master insurance program |
| Premiums and deductibles for this insurance coverage have risen dramatically in recent years |
| In response to these conditions, we have significantly increased the staff and resources involved in quality assurance, compliance and risk management during the past several years, and have also modified our insurance programs |
| We cannot assure you that our current level of accruals will be adequate to cover the actual liabilities that we may ultimately incur |
| We also cannot assure you that a claim in excess of our insurance coverage limits will not arise |
| A claim against us that is not covered by, or is in excess of, our coverage limits could have a material adverse effect upon us |
| Furthermore, we cannot assure you that we will be able to obtain adequate liability insurance in the future or that, if such insurance is available, it will be available on acceptable terms |
| 15 _________________________________________________________________ We rely on reimbursement from governmental programs for a portion of our revenues, and are subject to changes in reimbursement levels, which could adversely affect our results of operations and cash flow |
| We rely on reimbursement from governmental programs for a portion of our revenues, and we cannot assure you that reimbursement levels will not decrease in the future, which could adversely affect our results of operations and cash flow |
| For the year ended December 31, 2005, we derived 15prca of our revenues from Medicare and 2prca from Medicaid |
| As of January 1, 2006, certain per person annual limits on Medicare reimbursement for therapy services became effective, subject to certain exceptions |
| Although we are awaiting final regulatory and administrative procedures, these limits will reduce certain portions of our therapy services revenues and the profitability of those services |
| There continue to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit payments to healthcare providers in the future |
| Changes in the reimbursement policies of the Medicare program could have an adverse effect on our results of operations and cash flow |
| We may be adversely affected by the limited availability of management, nursing and other personnel for our communities and by increased labor costs |
| We compete with other providers of senior living and health care services with respect to attracting and retaining qualified management personnel responsible for the day-to-day operations of each of our communities and skilled technical personnel responsible for providing resident care and therapy services |
| In certain markets, a shortage of nurses, therapists or trained personnel has required us to enhance our wage and benefits package in order to compete in the hiring and retention of such personnel or to hire more expensive temporary personnel |
| We are also heavily dependent on the available labor pool of semi-skilled and unskilled associates in each of the markets in which we operate |
| At times, we have experienced a competitive labor market, periodic shortages of qualified workers in certain markets, and wage rate increases for certain of our associates |
| We cannot be sure that our labor costs will not increase, or that, if they do increase, they can be matched by corresponding increases in rates charged to residents |
| If we are unable to attract and retain qualified management and staff personnel, control our labor costs, or pass on increased labor costs to residents through rate increases, our business, financial condition, and results of operations would be adversely affected |
| We may be adversely affected by rising interest rates |
| Future indebtedness, from commercial banks or otherwise, and lease obligations, including those related to communities leased from REITs (real estate investment trusts), are expected to be based on interest rates prevailing at the time such debt and lease arrangements are obtained |
| As of December 31, 2005, we had dlra239dtta1 million of fixed rate debt and dlra84dtta9 million of variable rate debt outstanding |
| Increases in prevailing interest rates would increase our interest obligations with respect to a substantial portion of our variable rate debt, and would likely increase our interest and lease payment obligations on our future indebtedness and leases |
| An increase in prevailing interest rates, if material, could have a material adverse effect on our business, financial condition, and results of operations |
| We may be unable to refinance debt obligations on acceptable terms |
| We may need to refinance certain future debt maturities as they come due |
| Our ability to refinance debt obligations may be impacted by our operational results, industry and economic conditions, capital market conditions, and other factors that may not be within our control |
| Our inability to refinance various debt maturities as they come due in future years on acceptable terms could have an adverse impact on us and our financial condition |
| 16 _________________________________________________________________ We may not be able to successfully integrate acquired communities and new managed communities into our operations, which could adversely affect our business, financial condition and results of operations |
| During the past year, we have completed several acquisitions of retirement communities and have entered into agreements to manage other communities |
| We also expect to complete acquisitions and enter into new management agreements in the future |
| Achieving the expected benefits of these acquisitions and new management agreements will depend in large part on our completion of the integration of the operations and personnel of the new communities in a timely and efficient manner |
| If we cannot overcome the challenges we face in completing the integration, our ability to effectively and profitably manage the new communities could suffer |
| Moreover, the integration process itself may be disruptive to our business, as it will divert the attention of management from its normal operational responsibilities and duties |
| We cannot offer any assurance that we will be able to successfully integrate the new communities’ operations or personnel or realize the anticipated benefits of the acquisitions and new management agreements |
| Our failure to successfully complete the integration could harm our business, financial condition and results of operations |
| If we are unable to expand our communities in accordance with our plans, our anticipated revenues and results of operations could be adversely affected |
| We are currently working on projects that will expand several of our existing senior living communities over the next several years, and develop certain new senior living communities |
| These projects are in various stages of development and are subject to a number of factors over which we have little or no control |
| Such factors include the necessity of arranging separate leases, mortgage loans or other financings to provide the capital required to complete these projects; difficulties or delays in obtaining zoning, land use, building, occupancy, licensing, certificate of need and other required governmental permits and approvals; failure to complete construction of the projects on budget and on schedule; failure of third-party contractors and subcontractors to perform under their contracts; shortages of labor or materials that could delay projects or make them more expensive; adverse weather conditions that could delay completion of projects; increased costs resulting from general economic conditions or increases in the cost of materials; and increased costs as a result of changes in laws and regulations |
| We cannot assure you that we will elect to undertake or complete all of our proposed expansion and development projects, or that we will not experience delays in completing those projects |
| In addition, we may incur substantial costs prior to achieving stabilized occupancy for each such project and cannot assure you that these costs will not be greater than we have anticipated |
| We also cannot assure you that any of our development projects will be economically successful |
| Our failure to achieve our expansion and development plans could adversely impact our growth objectives, and our anticipated revenues and results of operations |
| The senior living industry is very competitive and has been subject to periodic oversupply conditions, which could have a material adverse effect on our revenues, earnings and expansion plans |
| The senior living industry is highly competitive |
| We compete with other companies providing independent living, assisted living, skilled nursing, therapy and other similar services and care alternatives |
| We expect that there will be competition from existing competitors and new market entrants, some of whom may have substantially greater financial resources than us |
| In addition, some of our competitors operate on a not-for-profit basis or as charitable organizations and have the ability to finance capital expenditures on a tax-exempt basis or through the receipt of charitable contributions, neither of which is available to us |
| Furthermore, if the development of new senior living communities outpaces the demand for those communities in the markets in which we have senior living communities, those markets may become saturated or over-built |
| Regulation of the independent and assisted living industry, which represents a substantial portion of our senior living services, currently is not substantial and does not represent a significant barrier to entry |
| Consequently, the development of new senior living communities could outpace demand |
| Increased competition for residents could also require us to undertake unbudgeted capital improvements or to lower our rates |
| An oversupply of senior living communities in our markets or increased competition could adversely affect our business and results of operations |
| We may be adversely affected by the loss of our key officers or associates |
| We rely upon the services of our executive officers |
| The loss of our executive officers and the inability to attract and retain qualified management personnel could affect our ability to manage our business and could adversely affect our business, financial condition and results of operations |
| 17 _________________________________________________________________ We may be adversely affected by the termination of residency and care agreements with our residents |
| Our residency and care agreements with our independent living residents (other than entrance fee contracts) are generally for a term of one year (terminable by the resident upon 30 to 60 days written notice) |
| Although most residents remain for many years, we do not contract with residents for longer periods of time |
| If a large number of residents elected to terminate their resident agreements at or around the same time, our revenues and earnings could be adversely affected |
| Although most entrance fee residents remain for many years, our entrance fee agreements are also terminable upon death or with thirty days notice |
| If a large number of entrance fee agreements were terminated around at approximately the same time, triggering certain refund liabilities, and we were unable to resell the apartment units quickly or at reasonable price levels, our cash flows could be adversely affected |
| We are dependent upon attracting residents who have sufficient resources to pay for our services |
| Circumstances that adversely affect the ability of our residents to pay for our services could have a material adverse effect on us |
| Approximately 83prca of our total revenues for the years ended December 31, 2005 and 2004 were attributable to private pay sources |
| We expect to continue to rely primarily on the ability of residents to pay for our services from their personal or family financial resources and long-term care insurance |
| Future economic or investment market conditions or other circumstances that adversely affect the ability of seniors to pay for our services could have a material adverse effect on our business, financial condition, and results of operations |
| We are susceptible to risks associated with the lifecare benefits that we offer the residents of our lifecare entrance fee communities |
| We operate seven lifecare entrance fee communities that offer residents a limited lifecare benefit |
| Residents of these communities pay an upfront entrance fee upon occupancy, of which a portion is generally refundable, with an additional monthly service fee while living in the community |
| This limited lifecare benefit is typically (a) a certain number of free days in the community’s health center during the resident’s lifetime, (b) a discounted rate for such services, or (c) a combination of the two |
| The lifecare benefit varies based upon the extent to which the resident’s entrance fee is refundable |
| The pricing of entrance fees, refundability provisions, monthly service fees, and lifecare benefits are determined utilizing actuarial projections of the expected morbidity and mortality of the resident population |
| In the event the entrance fees and monthly service payments established for our communities are not sufficient to cover the cost of lifecare benefits granted to residents, the results of operations and financial condition of these communities could be adversely affected |
| Residents of these entrance fee communities are guaranteed a living unit and nursing care at the community during their lifetime, even if the resident exhausts his or her financial resources and becomes unable to satisfy his or her obligations to the community |
| In addition, in the event a resident requires nursing care and there is insufficient capacity for the resident in the nursing facility at the community where the resident lives, the community must contract with a third party to provide such care |
| Although we screen potential residents to ensure that they have adequate assets, income, and reimbursements from government programs and third parties to pay their obligations to our communities during their lifetime, we cannot assure you that such assets, income, and reimbursements will be sufficient in all cases |
| If insufficient, we have rights of set-off against the refundable portions of the residents’ deposits, and would also seek available reimbursement under Medicaid or other available programs |
| To the extent that the financial resources of some of the residents are not sufficient to pay for the cost of facilities and services provided to them, or in the event that our communities must pay third parties to provide nursing care to residents of our communities, our results of operations and financial condition would be adversely affected |
| We are susceptible to risks associated with the concentration of our facilities in certain geographic areas |
| Part of our business strategy is to own, lease or manage senior living communities in concentrated geographic service areas |
| We have a large concentration of communities in Florida, Texas, Arizona and Colorado, among other areas |
| Accordingly, our operating results may be adversely affected by various regional and local factors, including economic conditions, real estate market conditions, competitive conditions, hurricanes and other weather conditions and applicable laws and regulations |
| 18 _________________________________________________________________ We have incurred losses in recent years and have only recently been profitable |
| We experienced losses from operations during the past several years, as recently as 2004 |
| We have been profitable since the quarter ended December 31, 2004 as a result of various factors, including increased occupancy at our communities, increased revenue per unit from rate increases and additional fees and services, and reduced debt service costs |
| Our future earnings and cash flow from operations may be negatively impacted by various operating and market factors, many of which are beyond our control, and there can be no assurance that recent trends will continue |
| We are susceptible to risks associated with government regulation of the healthcare industry and the burdens of compliance with such regulations |
| Federal and state governments regulate various aspects of our business |
| The development and operation of senior living communities and the provision of health care services are subject to federal, state, and local licensure, certification, and inspection laws |
| Failure to comply with these laws and regulations could result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new patients, restrictions on operating or marketing entrance fee communities, suspension or decertification from Medicare, Medicaid, or other state or federal reimbursement programs, restrictions on our ability to acquire new communities or expand existing communities, or revocation of a community’s license |
| We cannot assure you that we will not be subject to penalties in the future, or that federal, state, or local governments will not impose restrictions on our activities that could materially adversely affect our business, financial condition, or results of operations |
| Various states, including several of the states in which we currently operate, control the supply of licensed skilled nursing beds through certificate of need (CON) or other programs |
| In those states, approval is required for the construction of certain types of new health care communities, the addition of licensed beds and some capital expenditures at those communities |
| To the extent that a CON or other similar approval is required for the acquisition or construction of new communities or the expansion of the number of licensed beds, services, or existing communities, we could be adversely affected by our failure or inability to obtain that approval, changes in the standards applicable for that approval, and possible delays and expenses associated with obtaining that approval |
| Federal and state anti-remuneration laws, such as “anti-kickback” laws, govern some financial arrangements among health care providers and others who may be in a position to refer or recommend patients to those providers |
| These laws prohibit, among other things, some direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of a particular provider of health care items or services |
| Federal anti-kickback laws have been broadly interpreted to apply to some contractual relationships between health care providers and sources of patient referral |
| Similar state laws vary, are sometimes vague, and seldom have been interpreted by courts or regulatory agencies |
| Violation of these laws can result in loss of licensure, substantial civil and criminal penalties and exclusion of health care providers or suppliers from participation in Medicare and Medicaid programs |
| There can be no assurance that those laws will be interpreted in a manner consistent with our practices |
| Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet federal requirements related to access and use by disabled persons |
| A number of additional federal, state and local laws exist that also may require modifications to existing and planned communities to create access to the properties by disabled persons |
| Although we believe that our communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by us |
| Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial |
| The Health Insurance Portability and Accountability Act of 1996, or HIPAA, among other things, established standards for the use of and access to health information |
| Known as the administrative simplification requirements, these provisions, as implemented by regulations published by the United States Department of Health and Human Services, established among other things, standards for the security and privacy of health information |
| Additionally, the rules provide for the use of uniform standard codes for electronic transactions and require the use of uniform employer identification codes |
| Penalties for violations can range from civil fines to criminal sanctions for the most serious offenses |
| Compliance with the rules was phased in through April 2005 |
| These rules are complicated, and there are still a number of unanswered questions with respect to the extent and manner in which the HIPAA rules apply to businesses such as those operated by us |
| 19 _________________________________________________________________ We are subject to risks associated with complying with Section 404 of the Sarbanes-Oxley Act of 2002 |
| We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002 |
| Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to include a report with each Annual Report on Form 10-K regarding its internal controls over financial reporting |
| We have implemented processes documenting and evaluating our system of internal controls |
| Complying with these new requirements is extremely expensive, time consuming and subject to changes in regulatory requirements |
| The existence of one or more material weaknesses, management’s conclusion that its internal controls over financial reporting are not effective, or the inability of our auditors to express an opinion or attest that our management’s report is fairly stated, could result in a loss of investor confidence in our financial reports, adversely affect our stock price and/or subject us to sanctions or investigation by regulatory authorities |