UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2010

or

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

For the transition period from _____________ to _____________

Commission File Number: 001-32641

BROOKDALE SENIOR LIVING INC.
(Exact name of registrant as specified in its charter)

Delaware
20-3068069
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer Identification No.)

111 Westwood Place, Suite 400, Brentwood, Tennessee
37027
 
(Address of principal executive offices)
(Zip Code)
 

(615) 221-2250
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   £   No   £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer    £
Accelerated filer                    T
 
 
Non-accelerated filer      £ (Do not check if a smaller reporting company)
 
Smaller reporting company   £

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

 
 

 
 
 
As of August 3, 2010, 120,257,590 shares of the registrant’s common stock, $0.01 par value, were outstanding (excluding unvested restricted shares).
 


 
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TAB LE OF CONTENTS
BROOKDALE SENIOR LIVING INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2010

 
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3


 
PAR T I.   FINANCIAL INFORMATION

Ite m 1.   Financial Statements

BRO OKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except stock amounts)

   
June 30,
2010
   
December 31,
2009
 
Assets
 
(Unaudited)
       
Current assets
           
Cash and cash equivalents
  $ 51,345     $ 66,370  
Cash and escrow deposits — restricted
    129,827       109,977  
Accounts receivable, net
    79,824       75,816  
Deferred tax asset
    7,688       7,688  
Prepaid expenses and other current assets, net
    53,173       50,350  
Total current assets
    321,857       310,201  
Property, plant and equipment and leasehold intangibles, net
    3,794,212       3,857,774  
Cash and escrow deposits — restricted
    90,063       73,090  
Investment in unconsolidated ventures
    20,930       20,512  
Goodwill
    109,730       109,835  
Other intangible assets, net
    182,729       198,043  
Other assets, net
    78,523       76,056  
Total assets
  $ 4,598,044     $ 4,645,511  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 277,610     $ 166,185  
Trade accounts payable
    40,432       51,612  
Accrued expenses
    171,142       169,612  
Refundable entrance fees and deferred revenue
    299,961       290,673  
Tenant security deposits
    10,972       13,515  
Total current liabilities
    800,117       691,597  
Long-term debt, less current portion
    2,323,064       2,459,341  
Deferred entrance fee revenue
    73,087       69,306  
Deferred liabilities
    151,816       148,690  
Deferred tax liability
    126,547       140,313  
Other liabilities
    49,936       49,682  
Total liabilities
    3,524,567       3,558,929  
                 
Stockholders’ Equity
               
Preferred stock, $0.01 par value, 50,000,000 shares authorized at June 30, 2010 and December 31, 2009; no shares issued and outstanding
           
Common stock, $0.01 par value, 200,000,000 shares authorized at June 30, 2010 and December 31, 2009; 125,484,654 and 124,417,940 shares issued and 124,273,353 and 123,206,639 shares outstanding (including 4,017,583 and 3,915,330 unvested restricted shares), respectively
    1,243       1,232  
Additional paid-in-capital
    1,892,836       1,882,377  
Treasury stock, at cost; 1,211,301 shares at June 30, 2010 and December 31, 2009
    (29,187 )     (29,187 )
Accumulated deficit
    (790,827 )     (766,975 )
Accumulated other comprehensive loss
    (588 )     (865 )
Total stockholders’ equity
    1,073,477       1,086,582  
Total liabilities and stockholders’ equity
  $ 4,598,044     $ 4,645,511  


See accompanying notes to condensed consolidated financial statements.


 
BR OOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenue
                       
Resident fees
  $ 547,560     $ 499,459     $ 1,090,589     $ 995,688  
Management fees
    1,412       1,298       2,807       3,015  
Total revenue
    548,972       500,757       1,093,396       998,703  
                                 
Expense
                               
Facility operating expense (excluding depreciation and amortization of $52,174, $45,558, $104,207 and $91,251, respectively)
    353,051       316,586       708,375       634,698  
General and administrative expense (including non-cash stock-based compensation expense of $5,105, $6,871, $9,976 and $13,680, respectively)
    31,834       31,721       63,786       65,428  
Facility lease expense
    67,175       68,434       135,424       136,175  
Depreciation and amortization
    73,168       67,262       146,229       135,395  
Total operating expense
    525,228       484,003       1,053,814       971,696  
Income from operations
    23,744       16,754       39,582       27,007  
                                 
Interest income
    453       328       1,080       1,148  
Interest expense:
                               
Debt
    (33,903 )     (33,450 )     (67,183 )     (66,271 )
Amortization of deferred financing costs and debt discount
    (2,410 )     (3,390 )     (5,006 )     (4,932 )
Change in fair value of derivatives and amortization
    (2,207 )     7,900       (4,847 )     3,615  
Loss on extinguishment of debt, net
    (682 )     (1,740 )     (701 )     (1,740 )
Equity in earnings of unconsolidated ventures
    119       581       516       1,176  
Other non-operating (expense) income
          (8 )           4,224  
Loss before income taxes
    (14,886 )     (13,025 )     (36,559 )     (35,773 )
Benefit for income taxes
    5,329       2,495       12,707       11,607  
   Net loss
  $ (9,557 )   $ (10,530 )   $ (23,852 )   $ (24,166 )
                                 
Basic and diluted loss per share
  $ (0.08 )   $ (0.10 )   $ (0.20 )   $ (0.23 )
 
Weighted average shares used in computing basic and diluted loss per share
    119,721       106,042       119,519       103,902  
 
 
See accompanying notes to condensed consolidated financial statements.


 
BR OOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
 (Unaudited, in thousands)

 
    Common Stock                                
    Shares     Amount    
Additional
Paid-In-
Capital
   
Treasury
Stock 
   
Accumulated Deficit
   
Accumulated
Other
Comprehensive
Loss 
    Total  
Balances at January 1, 2010
    123,206     $ 1,232     $ 1,882,377     $ (29,187 )   $ (766,975 )   $ (865 )   $ 1,086,582  
Compensation expense related to restricted stock and restricted stock unit grants
                9,976                         9,976  
Net loss
                            (23,852 )           (23,852 )
Issuance of common stock under Associate Stock Purchase Plan
    31             494                         494  
Restricted stock, net
    1,036       11       (11 )                        
Reclassification of net loss on derivatives into earnings
                                  267       267  
Amortization of payments from settlement of forward interest rate swaps
                                  188       188  
Other
                                  (178 )     (178 )
Balances at June 30, 2010
    124,273     $ 1,243     $ 1,892,836     $ (29,187 )   $ (790,827 )   $ (588 )   $ 1,073,477  


See accompanying notes to condensed consolidated financial statements.


 
BR OOKDALE SENIOR LIVING INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

   
Six Months Ended
June 30,
 
   
2010
   
2009
 
Cash Flows from Operating Activities
           
Net loss
  $ (23,852 )   $ (24,166 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Loss on extinguishment of debt, net
    701       1,740  
Depreciation and amortization
    151,235       140,327  
Equity in earnings of unconsolidated ventures
    (516 )     (1,176 )
Distributions from unconsolidated ventures from cumulative share of net earnings
    375       11  
Amortization of deferred gain
    (2,172 )     (2,171 )
Amortization of entrance fees
    (11,526 )     (10,342 )
Proceeds from deferred entrance fee revenue
    17,904       10,590  
Deferred income tax benefit
    (13,943 )     (11,517 )
Change in deferred lease liability
    5,297       8,280  
Change in fair value of derivatives and amortization
    4,847       (3,615 )
Loss (gain) on sale of assets
    144       (4,352 )
Change in future service obligation
    (1,064 )      
Non-cash stock-based compensation
    9,976       13,680  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (2,706 )     (1,613 )
Prepaid expenses and other assets, net
    (1,870 )     (4,484 )
Accounts payable and accrued expenses
    (9,790 )     11,813  
Tenant refundable fees and security deposits
    (2,269 )     (12,076 )
Deferred revenue
    4,630       8,310  
Other
    (10,630 )     (6,167 )
Net cash provided by operating activities
    114,771       113,072  
                 
Cash Flows from Investing Activities
               
Decrease in lease security deposits and lease acquisition deposits, net
    801       1,480  
Increase in cash and escrow deposits — restricted
    (36,360 )     (53,867 )
Net proceeds from the sale of property, plant and equipment
          210  
Additions to property, plant and equipment and leasehold intangibles, net of related payables
    (45,510 )     (62,934 )
Acquisition of assets, net of related payables and cash received
    (21,809 )     (190 )
Payment on (issuance of) notes receivable, net
    169       (795 )
Investment in unconsolidated ventures
    (1,053 )     (1,106 )
Distributions received from unconsolidated ventures
    47       790  
Proceeds from sale of assets
    1,487        
Proceeds from sale leaseback transaction
          9,166  
Proceeds from sale of unconsolidated venture
          8,831  
Other
    (316 )      
Net cash used in investing activities
    (102,544 )     (98,415 )
                 
Cash Flows from Financing Activities
               
Proceeds from debt
    168,684       50,519  
Repayment of debt and capital lease obligation
    (192,954 )     (15,733 )
Proceeds from line of credit
    60,000       60,446  
Repayment of line of credit
    (60,000 )     (219,899 )
Payment of financing costs, net of related payables
    (6,044 )     (7,327 )
Proceeds from public equity offering, net
          163,908  
Other
    (44 )     (476 )
Refundable entrance fees:
               
      Proceeds from refundable entrance fees
    15,061       7,736  
      Refunds of entrance fees
    (11,122 )     (12,193 )
Cash portion of loss on extinguishment of debt
    (179 )      
Recouponing and payment of swap termination
    (654 )      
Net cash (used in) provided by financing activities
    (27,252 )     26,981  
   Net (decrease) increase in cash and cash equivalents
    (15,025 )     41,638  
   Cash and cash equivalents at beginning of period
    66,370       53,973  
   Cash and cash equivalents at end of period
  $ 51,345     $ 95,611  

 
See accompanying notes to condensed consolidated financial statements.


 
BR OOKDALE SENIOR LIVING INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  Description of Business

Brookdale Senior Living Inc. (“Brookdale” or the “Company”) is a leading owner and operator of senior living communities throughout the United States.  The Company provides an exceptional living experience through properties that are designed, purpose-built and operated to provide the highest quality service, care and living accommodations for residents.  The Company owns, leases and operates retirement centers, assisted living and dementia-care communities and continuing care retirement centers (“CCRCs”).

2.  Summary of Significant Accounting Policies

Basis of Presentation
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company as of June 30, 2010, and for all periods presented. The condensed consolidated financial statements are prepared on the accrual basis of accounting. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto, together with management’s discussion and analysis of financial condition and results of operations, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the Securities and Exchange Commission.

Revenue Recognition

Resident Fees

Resident fee revenue is recorded when services are rendered and consist of fees for basic housing, support services and fees associated with additional services such as personalized health and assisted living care. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly in advance. Revenue for certain skilled nursing services and ancillary charges is recognized as services are provided and is billed monthly in arrears.

Entrance Fees

Certain of the Company’s communities have residency agreements which require the resident to pay an upfront fee prior to occupying the community.  In addition, in connection with the Company’s MyChoice program, new and existing residents are allowed to pay additional entrance fee amounts in return for a reduced monthly service fee.  The non-refundable portion of the entrance fee is recorded as deferred revenue and amortized over the estimated stay of the resident based on an actuarial valuation.  The refundable portion of a resident’s entrance fee is generally refundable within a certain number of months or days following contract termination or in certain agreements, upon the resale of the resident’s unit or a comparable unit or 12 months after the resident vacates the unit.  In such instances the refundable portion of the fee is not amortized and included in refundable entrance fees and deferred revenue.

Certain contracts require the refundable portion of the entrance fee plus a percentage of the appreciation of the unit, if any, to be refunded only upon resale of a comparable unit (“contingently refundable”).  Upon resale the Company may receive reoccupancy proceeds in the form of additional contingently refundable fees, refundable fees, or non-refundable fees.  The Company estimates the amount of reoccupancy proceeds to be received from additional


 
contingently refundable fees or non-refundable fees and records such amount as deferred revenue.  The deferred revenue is amortized over the life of the community and was approximately $61.0 million and $61.8 million at June 30, 2010 and December 31, 2009, respectively.  All remaining contingently refundable fees not recorded as deferred revenue and amortized are included in refundable entrance fees and deferred revenue.

All refundable amounts due to residents at any time in the future, including those recorded as deferred revenue, are classified as current liabilities.

The non-refundable portion of entrance fees expected to be earned and recognized in revenue in one year is recorded as a current liability.  The balance of the non-refundable portion is recorded as a long-term liability.

Community Fees

Substantially all community fees received are non-refundable and are recorded initially as deferred revenue.  The deferred amounts, including both the deferred revenue and the related direct resident lease origination costs, are amortized over the estimated stay of the resident which is consistent with the implied contractual terms of the resident lease.

Management Fees

Management fee revenue is recorded as services are provided to the owners of the communities. Revenues are determined by an agreed upon percentage of gross revenues (as defined).

Fair Value of Financial Instruments

Cash and cash equivalents, cash and escrow deposits-restricted and derivative financial instruments are reflected in the accompanying condensed consolidated balance sheets at amounts considered by management to reasonably approximate fair value.  Management estimates the fair value of its long-term debt using a discounted cash flow analysis based upon the Company’s current borrowing rate for debt with similar maturities and collateral securing the indebtedness.  The Company had outstanding debt with a carrying value of $2.6 billion as of June 30, 2010 and December 31, 2009.  The fair value of debt both as of June 30, 2010 and December 31, 2009 was $2.6 billion.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (“ASC”) 820 – Fair Value Measurements (“ASC 820”), which establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.

The Company considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period statement of operations (Note 14).


 
Self-Insurance Liability Accruals

The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. Although the Company maintains general liability and professional liability insurance policies for its owned, leased and managed communities under a master insurance program, the Company’s current policy provides for deductibles for each and every claim ($250,000 effective January 1, 2009 and $150,000 effective January 1, 2010).  As a result, the Company is, in effect, self-insured for claims that are less than $150,000.  In addition, the Company maintains a self-insured workers compensation program and a self-insured employee medical program for amounts below excess loss coverage amounts, as defined. The Company reviews the adequacy of its accruals related to these liabilities on an ongoing basis, using historical claims, actuarial valuations, third party administrator estimates, consultants, advice from legal counsel and industry data, and adjusts accruals periodically. Estimated costs related to these self-insurance programs are accrued based on known claims and projected claims incurred but not yet reported. Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Treasury Stock

The Company accounts for treasury stock under the cost method and includes treasury stock as a component of stockholders’ equity.

New Accounting Pronouncements

In January 2010, the Company adopted the amendment in ASC 820, requiring new fair value disclosures on fair value measurements for all nonfinancial assets and liabilities, including separate disclosure of significant transfers into and out of Level 3 and the reasons for the transfers, the amount of transfers between Level 1 and Level 2 and the reasons for the transfers, lower level of disaggregation for fair value disclosures (by class rather than major category) and additional details on the valuation techniques and inputs used to determine Level 2 and Level 3 measurements.  Other than the required disclosures, the adoption of the guidance had no impact on the condensed consolidated financial statements.

In January 2010, the Company adopted amendments to the variable interest consolidation model in ASC 810, Consolidation .  The amendments were applied to all structures in place at the date of adoption.  Key amendment changes include:  the scope exception for qualifying special purpose entities was eliminated, consideration of kick-out and participation rights in variable interest entity determination, qualitative analysis considerations for primary beneficiary determination, changes in related party considerations, and certain disclosure changes.  The Company considered the amendments in accounting for its joint ventures and determined that the amendments had no impact on its current accounting.
 
In July 2010, the FASB issued a final accounting standards update that requires entities to provide extensive new disclosures in their financial statements about their financing receivables, including credit risk exposures and the allowance for credit losses. Adoption of this accounting standards update is required for public entities for interim or annual reporting periods ending on or after December 15, 2010. The Company is currently evaluating this accounting standards update, but does not anticipate a material change to the condensed consolidated financial statements other than additional disclosure.

Dividends

On December 30, 2008, the Company’s board of directors voted to suspend the Company’s quarterly cash dividend indefinitely.
 
Reclassifications

Certain prior period amounts have been reclassified to conform to the current financial statement presentation, with no effect on the Company’s results of operations.

3.  Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding.  Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents.  For purposes of calculating basic and diluted earnings per share, vested restricted stock awards are considered outstanding.  Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if securities or other instruments that are convertible into common stock were exercised or could result


 
in the issuance of common stock.  Potentially dilutive common stock equivalents include unvested restricted stock and restricted stock units.

During the three and six months ended June 30, 2010 and June 30, 2009, the Company reported a consolidated net loss.  As a result of the net loss, unvested restricted stock and restricted stock unit awards were antidilutive for each period and were not included in the computation of diluted weighted average shares.  The weighted average restricted stock and restricted stock unit grants excluded from the calculations of diluted net loss per share were 1.6 million and 1.3 million for the three months ended June 30, 2010 and 2009, respectively, and 1.7 million and 1.2 million for the six months ended June 30, 2010 and 2009, respectively.

4.  Acquisitions

Effective June 16, 2010, the Company acquired four independent living communities that the Company previously leased for an aggregate purchase price of $22.5 million.  In connection with entering into the agreement to acquire the communities, the remaining leases between the Company and the seller/lessor were amended to modify and clarify certain of the terms thereof, including various financial and non-financial covenants.  Transaction expenses of approximately $0.3 million were incurred and were recorded as general and administrative expense in the current year.  The results of operations of these communities, prior and subsequent to the acquisition, are reported in the Retirement Centers segment.

During the six months ended June 30, 2010, the Company purchased three home health agencies as part of its growth strategy for an aggregate purchase price of approximately $2.0 million.  The entire purchase price of the acquisitions has been ascribed to an indefinite useful life intangible asset and recorded on the condensed consolidated balance sheet under other intangible assets, net.

5.  Stock-Based Compensation

The Company recorded $5.1 million and $6.9 million of compensation expense in connection with grants of restricted stock and restricted stock units for the three months ended June 30, 2010 and 2009, respectively, and $10.0 million and $13.7 million of such expense was recorded for the six months ended June 30, 2010 and 2009, respectively.  For the six months ended June 30, 2010 and 2009, compensation expense was calculated net of forfeitures estimated from 0% to 5% and 0% to 6%, respectively, of the shares granted.

For all awards with graded vesting other than awards with performance-based vesting conditions, the Company records compensation expense for the entire award on a straight-line basis over the requisite service period.  For graded-vesting awards with performance-based vesting conditions, total compensation expense is recognized over the requisite service period for each separately vesting tranche of the award as if the award is, in substance, multiple awards once the performance target is deemed probable of achievement.  Performance goals are evaluated quarterly.  If such goals are not ultimately met or it is not probable the goals will be achieved, no compensation expense is recognized and any previously recognized compensation expense is reversed.

During 2009, the Company issued restricted stock units to its Chief Executive Officer.  Under the terms of the award agreement, upon vesting, each restricted stock unit represents the right to receive one share of the Company’s common stock.

Current year grants of restricted shares under the Company’s Omnibus Stock Incentive Plan were as follows (amounts in thousands except for value per share):

   
Shares Granted
   
Value Per Share
   
Total Value
 
Three months ended March 31, 2010
    64       $17.95 – $18.19     $ 1,151  
Three months ended June 30, 2010
    1,146       $16.85 – $21.36     $ 19,312  

The Company has an employee stock purchase plan for all eligible employees.  The plan became effective on October 1, 2008.  Under the plan, eligible employees of the Company can purchase shares of the Company’s common stock on a quarterly basis at a discounted price through accumulated payroll deductions.  Each eligible


 
employee may elect to deduct up to 15% of his or her base pay each quarter.  Subject to certain limitations specified in the plan, on the last trading date of each calendar quarter, the amount deducted from each participant’s pay over the course of the quarter will be used to purchase whole shares of the Company’s common stock at a purchase price equal to 90% of the closing market price on the New York Stock Exchange on such date.  Initially, the Company reserved 1,000,000 shares of common stock for issuance under the plan.  The employee stock purchase plan also contains an “evergreen” provision that automatically increases the number of shares reserved for issuance under the plan by 200,000 shares on the first day of each calendar year beginning January 1, 2010.  The impact on the Company’s current year condensed consolidated financial statements is not material.

6.  Goodwill and Other Intangible Assets, Net

Following is a summary of changes in the carrying amount of goodwill for the six months ended June 30, 2010 presented on an operating segment basis (dollars in thousands):
 
   
Retirement
Centers
   
Assisted
Living
   
Total
 
Balance at December 31, 2009
  $ 7,155     $ 102,680     $ 109,835  
Adjustments
          (105 )     (105 )
Balance at June 30, 2010
  $ 7,155     $ 102,575     $ 109,730  

Goodwill is tested for impairment annually with a test date of October 1 or sooner if indicators of impairment are present.  No indicators of impairment were present during the six months ended June 30, 2010.

Intangible assets with definite useful lives are amortized over their estimated lives and are tested for impairment whenever indicators of impairment arise. The following is a summary of other intangible assets at June 30, 2010 and December 31, 2009 (dollars in thousands):

   
June 30, 2010
   
December 31, 2009
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
 
Community purchase options
  $ 147,782     $ (12,018 )   $ 135,764     $ 147,682     $ (10,169 )   $ 137,513  
Management contracts and other
    158,041       (124,892 )     33,149       158,041       (109,323 )     48,718  
Home health licenses
    13,816             13,816       11,812             11,812  
Total
  $ 319,639     $ (136,910 )   $ 182,729     $ 317,535     $ (119,492 )   $ 198,043  

Amortization expense related to definite-lived intangible assets for the three months ended June 30, 2010 and 2009 was $8.7 million and $8.9 million, respectively, and $17.4 million and $17.8 million of such expense was recorded for the six months ended June 30, 2010 and 2009, respectively.  Home health licenses were determined to be indefinite-lived intangible assets and are not subject to amortization.

7.  Property, Plant and Equipment and Leasehold Intangibles, Net

Property, plant and equipment and leasehold intangibles, net, which include assets under capital leases, consist of the following (dollars in thousands):

   
June 30,
2010
   
December 31,
2009
 
Land
  $ 272,136     $ 272,737  
Buildings and improvements
    3,009,315       2,968,659  
Furniture and equipment
    357,085       334,553  
Resident and operating lease intangibles
    603,276       599,618  
Construction in progress
    15,603       17,702  
 
 
 
Assets under capital and financing leases
    605,787       606,224  
      4,863,202       4,799,493  
Accumulated depreciation and amortization
    (1,068,990 )     (941,719 )
Property, plant and equipment and leasehold intangibles, net
  $ 3,794,212     $ 3,857,774  

8.  Debt

Long-term Debt, Capital Leases and Financing Obligations

Long-term debt, capital leases and financing obligations consist of the following (dollars in thousands):

   
June 30,
 2010
   
December 31,
2009
 
 
Mortgage notes payable due 2010 through 2020; weighted average interest rate of 4.99% for the six months ended June 30, 2010 (weighted average interest rate of 4.70% in 2009)
  $ 1,401,522     $ 1,416,732  
 
$150,000 Series A notes payable, secured by five communities and by a $3.0 million letter of credit, bearing interest at LIBOR plus 0.88%, payable in monthly installments of interest only until August 2011 and payable in monthly installments of principal and interest through maturity in August 2013
    150,000       150,000  
 
Mortgages payable due 2012; weighted average interest rate of 5.64% for the six months ended June 20, 2010 (weighted average interest rate of 5.64% in 2009), payable interest only through July 2010 and payable in monthly installments of principal and interest through maturity in July 2012, secured by the underlying assets of the portfolio
    212,407       212,407  
 
Discount mortgage note payable due 2013, weighted average interest rate of 2.50% for the six months ended June 30, 2010 (weighted average interest rate of 2.45% in 2009), net of debt discount of $5.8 million as of June 30, 2010
    78,954       78,631  
 
Variable rate tax-exempt bonds credit-enhanced by Fannie Mae; weighted average interest rate of 1.75% for the six months ended June 30, 2010 (weighted average interest rate of 1.84% in 2009), due 2032, payable interest only until maturity, secured by the underlying assets of the portfolio
    100,841       100,841  
 
Capital and financing lease obligations payable through 2023; weighted average interest rate of 8.76% for the six months ended June 30, 2010 (weighted average interest rate of 8.74% in 2009)
    341,770       351,735  
 
Mortgage note, bearing interest at a variable rate of LIBOR plus 0.70%, payable interest only through maturity in August 2012.  The note is secured by 15 of the Company’s communities and an $11.5 million guaranty by the Company
    315,180       315,180  
 
Total debt
    2,600,674       2,625,526  
 
Less current portion
    (277,610 )     (166,185 )
 
Total long-term debt
  $ 2,323,064     $ 2,459,341  


 
Credit Facilities

As of January 1, 2010, the Company had an available secured line of credit of $75.0 million (including a $25.0 million letter of credit sublimit) and secured and unsecured letter of credit facilities of up to $78.5 million in the aggregate.  The line of credit bore interest at a rate of 6.0% and was scheduled to mature on August 31, 2010.  No amounts were borrowed under the secured line of credit during 2010.

2010 Credit Facility

Effective February 23, 2010, the Company terminated the $75.0 million revolving credit facility with Bank of America, N.A. and entered into a credit agreement with General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto. The new facility had an initial commitment of $100.0 million, with an option to increase the commitment to $120.0 million (which the Company exercised on May 5, 2010), and is scheduled to mature on June 30, 2013.

The revolving line of credit may be used to finance acquisitions and fund working capital and capital expenditures and for other general corporate purposes.

The new facility is secured by a first priority lien on certain of the Company’s communities.  The availability under the line may vary from time to time as it is based on borrowing base calculations related to the value and performance of the communities securing the facility.

Amounts drawn under the facility will bear interest at 90-day LIBOR plus an applicable margin, as described below.  For purposes of determining the interest rate, in no event shall LIBOR be less than 2.0%.  The applicable margin varies with the percentage of the total commitment drawn, with a 4.5% margin at 35% or lower utilization, a 5.0% margin at utilization greater than 35% but less than or equal to 50%, and a 5.5% margin at greater than 50% utilization.  The Company is also required to pay a quarterly commitment fee of 1.0% per annum on the unused portion of the facility.

As of June 30, 2010, the Company had an available secured line of credit with a $120.0 million commitment and secured and unsecured letter of credit facilities of up to $78.5 million in the aggregate.  As of June 30, 2010, there were no borrowings under the revolving loan facility and $69.2 million of letters of credit had been issued under the secured and unsecured letter of credit facilities.

Financings

On February 25, 2010, the Company obtained a $44.6 million first mortgage loan, secured by five communities that the Company acquired in November 2009.  The loan bears interest at a fixed rate of 6.33% and matures in March 2020.  In connection with the transaction, the Company repaid $13.3 million of debt that had been assumed at the time of closing of the acquisition.

Effective May 11, 2010, the Company exercised its option to extend the maturity date of $121.0 million of mortgage notes from May 11, 2010 to May 11, 2011.  No other terms of the notes were changed in connection with the extension.

On June 11, 2010, the Company obtained a $117.0 million first mortgage loan, secured by 21 communities.  The loan bears interest at a fixed rate of 5.98% and matures in July 2020.  In connection with the transaction, the Company repaid $119.0 million of existing variable rate debt.

As of June 30, 2010, the Company is in compliance with the financial covenants of its outstanding debt and lease agreements.


 
Interest Rate Swaps and Caps

In the normal course of business, a variety of financial instruments are used to manage or hedge interest rate risk.  Interest rate protection and swap agreements were entered into to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions.  Pursuant to the hedge agreements, the Company is required to secure its obligation to the counterparty if the fair value liability exceeds a specified threshold.  Cash collateral pledged to the Company’s counterparties was $17.5 million and $16.2 million as of June 30, 2010 and December 31, 2009, respectively.

All derivative instruments are recognized as either assets or liabilities in the condensed consolidated balance sheets at fair value.  The change in mark-to-market of the value of the derivative is recorded as an adjustment to income or other comprehensive loss depending on whether it has been designated and qualifies as an accounting hedge.

Derivative contracts are not entered into for trading or speculative purposes.  Furthermore, the Company has a policy of only entering into contracts with major financial institutions based upon their credit rating and other factors.  Under certain circumstances, the Company may be required to replace a counterparty in the event that the counterparty does not maintain a specified credit rating.

The following table summarizes the Company’s swap instruments at June 30, 2010 (dollars in thousands):

Current notional balance
  $ 351,840  
Highest possible notional
  $ 351,840  
Lowest interest rate
    3.24 %
Highest interest rate
    4.47 %
Average fixed rate
    3.74 %
Earliest maturity date
    2011  
Latest maturity date
    2014  
Weighted average original maturity
 
4.7 years
 
Estimated liability fair value (included in other liabilities at June 30, 2010)
  $ (20,035 )
Estimated asset fair value (included in other assets, net at June 30, 2010)
  $  

The following table summarizes the Company’s cap instruments at June 30, 2010 (dollars in thousands):

Current notional balance
  $ 925,865  
Highest possible notional
  $ 925,865  
Lowest interest rate
    4.96 %
Highest interest rate
    6.50 %
Average fixed rate
    5.82 %
Earliest maturity date
    2011  
Latest maturity date
    2012  
Weighted average original maturity
 
3.2 years
 
Estimated liability fair value (included in other liabilities at June 30, 2010)
  $  
Estimated asset fair value (included in other assets, net at June 30, 2010)
  $ 123  

The fair value of the Company’s interest rate swaps and caps decreased $2.2 million and increased $7.9 million for the three months ended June 30, 2010 and 2009, respectively, and decreased $4.8 million and increased $3.6 million for the six months ended June 30, 2010 and 2009, respectively.  This is included as a component of interest expense in the condensed consolidated statements of operations.

9.  Litigation

The Company has been and is currently involved in litigation and claims incidental to the conduct of its business which are comparable to other companies in the senior living industry. Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve. Similarly, the senior living industry is continuously subject to scrutiny by governmental regulators, which could result in litigation related to regulatory compliance matters. As a result, the Company maintains insurance policies in amounts and with coverage and
 
 
 
deductibles the Company believes are adequate, based on the nature and risks of its business, historical experience and industry standards.  Effective January 1, 2010, the Company’s current policies provide for deductibles of $150,000 for each claim.  Accordingly, the Company is, in effect, self-insured for claims that are less than $150,000.

10.  Supplemental Disclosure of Cash Flow Information

(dollars in thousands):
   
Six Months Ended June 30,
 
   
2010
   
2009
 
Supplemental Disclosure of Cash Flow Information:
           
Interest paid
  $ 67,219     $ 67,850  
Income taxes paid
  $ 1,413     $ 1,419  
Write-off of deferred costs
  $ 2,022     $ 1,740  
                 
Supplemental Schedule of Non-cash Operating, Investing and Financing Activities:
               
Capital leases:
               
Property, plant and equipment and leasehold intangibles, net
  $     $ 18,236  
Long-term debt
          (18,236 )
Net
  $     $  
Acquisition of assets, net of related payables and cash received:
               
Property, plant and equipment and leasehold intangibles, net
  $ 19,900     $  
Other intangible assets, net
    2,004       190  
Accrued expenses
    (95 )      
Net
  $ 21,809     $ 190  
Reclassification of other intangibles, net
  $     $ 146  

11.  Facility Operating Leases

A summary of facility lease expense and the impact of straight-line adjustment and amortization of deferred gains are as follows (dollars in thousands):

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Cash basis payment
  $ 66,100     $ 65,487     $ 132,299     $ 130,066  
Straight-line expense
    2,161       4,032       5,297       8,280  
Amortization of deferred gain
    (1,086 )     (1,085 )     (2,172 )     (2,171 )
Facility lease expense
  $ 67,175     $ 68,434     $ 135,424     $ 136,175  
 

 
12.  Other Comprehensive Loss, Net

The following table presents the after-tax components of the Company’s other comprehensive loss for the periods presented (dollars in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net loss
  $ (9,557 )   $ (10,530 )   $ (23,852 )   $ (24,166 )
Reclassification of net loss on derivatives out of earnings
    143       123       267       246  
Amortization of payments from settlement of forward interest rate swaps
    94       94       188       188  
Other
    (93 )     (254 )     (178 )     (169 )
Total comprehensive loss
  $ (9,413 )   $ (10,567 )   $ (23,575 )   $ (23,901 )

13.  Income Taxes

The Company’s effective tax rates for the three months ended June 30, 2010 and 2009 were 35.8% and 19.2%, respectively, and for the six months ended June 30, 2010 and 2009 were 34.8% and 32.4%, respectively. The difference in the effective rate between these periods was primarily due to the impact of the nondeductible stock-based compensation recorded under ASC 718-10 in 2009.

The Company recorded additional interest charges related to its tax contingency reserve for the six months ended June 30, 2010. Tax returns for years 2007 and 2008 are subject to future examination by tax authorities. In addition, certain tax returns are open from 2000 through 2006 to the extent of the net operating losses generated during those periods.

14.  Fair Value Measurements

The following table provides the Company’s derivative assets and liabilities carried at fair value as measured on a recurring basis as of June 30, 2010 (dollars in thousands):

   
Total Carrying
Value at
June 30, 2010
   
Quoted prices
in active
markets
(Level 1)
   
Significant
other
observable
inputs
(Level 2)
   
Significant unobservable
inputs
(Level 3)
 
Derivative assets
  $ 123     $     $ 123     $  
Derivative liabilities
    (20,035 )           (20,035 )      
    $ (19,912 )   $     $ (19,912 )   $  

The Company’s derivative assets and liabilities include interest rate swaps and caps that effectively convert a portion of the Company’s variable rate debt to fixed rate debt.   The derivative positions are valued using models developed internally by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves) and are classified within Level 2 of the valuation hierarchy.

The Company considers its own credit risk as well as the credit risk of its counterparties when evaluating the fair value of its derivatives. Any adjustments resulting from credit risk are recorded as a change in fair value of derivatives and amortization in the current period statement of operations.



 
15.  Segment Information

The Company currently has four reportable segments: retirement centers; assisted living; CCRCs; and management services.   These segments were determined based on the way that the Company’s chief operating decision makers organize the Company’s business activities for making operating decisions and assessing performance.

Retirement Centers .  Retirement center communities are primarily designed for middle to upper income senior citizens age 70 and older who desire an upscale residential environment providing the highest quality of service.  The majority of the Company’s retirement center communities consist of both independent living and assisted living units in a single community, which allows residents to “age-in-place” by providing them with a continuum of senior independent and assisted living services.

Assisted Living.   Assisted living communities offer housing and 24-hour assistance with activities of daily life to mid-acuity frail and elderly residents.  The Company’s assisted living communities include both freestanding, multi-story communities and freestanding single story communities.  The Company also operates memory care communities, which are freestanding assisted living communities specially designed for residents with Alzheimer’s disease and other dementias.

CCRCs.   CCRCs are large communities that offer a variety of living arrangements and services to accommodate all levels of physical ability and health.  Most of the Company’s CCRCs have retirement centers, assisted living and skilled nursing available on one campus, and some also include memory care and Alzheimer’s units.

Management Services.   The Company’s management services segment includes communities owned by others and operated by the Company pursuant to management agreements.  Under the management agreements for these communities, the Company receives management fees as well as reimbursed expenses, which represent the reimbursement of certain expenses it incurs on behalf of the owners.

The accounting policies of reportable segments are the same as those described in the summary of significant accounting policies.

The following table sets forth certain segment financial and operating data (dollars in thousands):




   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenue (1)
                       
Retirement Centers
  $ 132,209     $ 123,915     $ 263,792     $ 247,158  
Assisted Living
    254,748       228,819       506,244       457,894  
CCRCs
    160,603       146,725       320,553       290,636  
Management Services
    1,412       1,298       2,807       3,015  
    $ 548,972     $ 500,757     $ 1,093,396     $ 998,703  
Segment operating income (2)
                               
Retirement Centers
  $ 54,963     $ 53,916     $ 108,148     $ 106,052  
Assisted Living
    91,813       83,959       180,599       167,254  
CCRCs
    47,733       44,998       93,467       87,684  
Management Services
    988       909       1,965       2,110  
    $ 195,497     $ 183,782     $ 384,179     $ 363,100  
General and administrative (including non-cash stock-based compensation expense) (3)
  $ 31,410     $ 31,332     $ 62,944     $ 64,523  
Facility lease expense
    67,175       68,434       135,424       136,175  
Deprecation and amortization
    73,168        67,262       146,229       135,395  
Income from operations
  $ 23,744     $ 16,754     $ 39,582     $ 27,007  
                                 
                                 
                   
As of
 
                   
June 30,
2010
   
December 31,
2009
 
Total assets
                               
Retirement Centers
                  $ 1,113,900     $ 1,109,794  
Assisted Living
                    1,480,311       1,519,693  
CCRCs
                    1,656,727       1,685,832  
Corporate and Management Services
                    347,106       330,192  
Total assets
                  $ 4,598,044     $ 4,645,511  


(1)
All revenue is earned from external third parties in the United States.
(2)
Segment operating income is defined as segment revenues less segment operating expenses (excluding depreciation and amortization).
(3)
Net of general and administrative costs allocated to management services reporting segment.
 

 
Ite m 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements in this Quarterly Report on Form 10-Q and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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, statements relating to our operational initiatives and our expectations regarding their effect on our results; our expectations regarding occupancy, revenue, cash flow, expense levels, the demand for senior housing, expansion activity, acquisition opportunities and asset dispositions; our belief regarding our growth prospects; our ability to secure financing or repay, replace or extend existing debt at or prior to maturity; our ability to remain in compliance with all of our debt and lease agreements (including the financial covenants contained therein); our expectations regarding liquidity; our plans to deleverage; our expectations regarding financings and refinancings of assets (including the timing thereof); our expectations regarding the effect of pending or proposed changes in government reimbursement programs on our results; our plans to generate growth organically through occupancy improvements, increases in annual rental rates and the achievement of operating efficiencies and cost savings; our plans to expand our offering of ancillary services (therapy and home health); our plans to expand existing communities; the expected project costs for our expansion program; our plans to acquire additional communities, asset portfolios, operating companies and home health agencies; our expected levels of expenditures and reimbursements (and the timing thereof); our expectations for the performance of our entrance fee communities; our ability to anticipate, manage and address industry trends and their effect on our business; our expectations regarding the payment of dividends; and our ability to increase revenues, earnings, Adjusted EBITDA, Cash From Facility Operations, and/or Facility Operating Income (as such terms are defined herein). Words such as “anticipate(s)”, “expect(s)”, “intend(s)”, “plan(s)”, “target(s)”, “project(s)”, “predict(s)”, “believe(s)”, “may”, “will”, “would”, “could”, “should”, “seek(s)”, “estimate(s)” and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to, the risk associated with the current global economic crisis and its impact upon capital markets and liquidity; our inability to extend (or refinance) debt (including our credit and letter of credit facilities) as it matures; the risk that we may not be able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements; events which adversely affect the ability of seniors to afford our monthly resident fees or entrance fees; the conditions of housing markets in certain geographic areas; our ability to generate sufficient cash flow to cover required interest and long-term operating lease payments; the effect of our indebtedness and long-term operating leases on our liquidity; the risk of loss of property pursuant to our mortgage debt and long-term lease obligations; the possibilities that changes in the capital markets, including changes in interest rates and/or credit spreads, or other factors could make financing more expensive or unavailable to us; the risk that we may be required to post additional cash collateral in connection with our interest rate swaps; the risk that continued market deterioration could jeopardize the performance of certain of our counterparties’ obligations; changes in governmental reimbursement programs; our limited operating history on a combined basis; our ability to effectively manage our growth; our ability to maintain consistent quality control; delays in obtaining regulatory approvals; our ability to complete acquisitions and integrate them into our operations; competition for the acquisition of assets; our ability to obtain additional capital on terms acceptable to us; a decrease in the overall demand for senior housing; our vulnerability to economic downturns; acts of nature in certain geographic areas; terminations of our resident agreements and vacancies in the living spaces we lease; increased competition for skilled personnel; increased union activity; departure of our key officers; increases in market interest rates; environmental contamination at any of our facilities; failure to comply with existing environmental laws; an adverse determination or resolution of complaints filed against us; the cost and difficulty of complying with increasing and evolving regulation; and other risks detailed from time to time in our filings with the Securities and Exchange Commission, press releases and other communications, including those set forth under “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2009 and in this Quarterly Report.  Such forward-looking statements speak only as of the date of this Quarterly Report. We expressly disclaim any obligation to release publicly any updates or revisions


 
to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

Executive Overview

During the second quarter of 2010, we continued to make progress in implementing our long-term growth strategy, integrating previous acquisitions, and building a platform for future growth.  Our primary long-term growth objectives are to grow our revenues, Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income primarily through a combination of: (i) organic growth in our core business, including expense control and the realization of economies of scale; (ii) continued expansion of our ancillary services programs (including therapy and home health services); (iii) expansion of our existing communities; and (iv) acquisitions of additional operating companies and communities.

Our operating results for the three and six months ended June 30, 2010 were favorably impacted by an increase in our total revenues (primarily driven by an increase in average monthly revenue per unit, including an increase in our ancillary services revenue, the inclusion of revenue from recent acquisitions and expansions, and an increase in occupancy) and by the significant cost control measures that were implemented in recent periods.  Although we have made significant progress in many areas of our business, the difficult operating environment has continued to result in occupancy rates that are lower than historical levels and diminished growth in the rates we charge our residents.

During the six months ended June 30, 2010, we also continued our efforts to strengthen our financial position.  For example (and as discussed in more detail under “Credit Facilities - 2010 Credit Facility” below), during the first quarter of 2010, we entered into a new revolving credit facility. The new facility had an initial commitment of $100.0 million, with an option to increase the commitment to $120.0 million (which we exercised during the second quarter), and matures on June 30, 2013. The new facility replaced the $75.0 million revolving credit agreement with Bank of America, N.A. that was scheduled to expire in August 2010.  As a result of our recent operating performance and the steps we have recently taken to improve our liquidity position, we ended the quarter with $51.3 million of unrestricted cash and cash equivalents on our condensed consolidated balance sheet.

The tables below present a summary of our operating results and certain other financial metrics for the three and six months ended June 30, 2010 and 2009 and the amount and percentage of increase or decrease of each applicable item (dollars in millions).

   
Three Months Ended
June 30,
   
Increase
(Decrease)
 
   
2010
   
2009
   
Amount
   
Percent
 
Total revenues
  $ 549.0     $ 500.8     $ 48.2       9.6 %
Net loss
  $ (9.6 )   $ (10.5 )   $ (0.9 )     (8.6 %)
Adjusted EBITDA
  $ 100.3     $ 92.1     $ 8.2       8.9 %
Cash From Facility Operations
  $ 57.0     $ 52.5     $ 4.5       8.6 %
Facility Operating Income
  $ 187.7     $ 177.6     $ 10.1       5.7 %

   
Six Months Ended
June 30,
   
Increase
(Decrease)
 
   
2010
   
2009
   
Amount
   
Percent
 
Total revenues
  $ 1,093.4     $ 998.7     $ 94.7       9.5 %
Net loss
  $ (23.9 )   $ (24.2 )   $ (0.3 )     (1.2 %)
Adjusted EBITDA
  $ 196.6     $ 178.0     $ 18.6       10.4 %
Cash From Facility Operations
  $ 111.4     $ 102.7     $ 8.7       8.5 %
Facility Operating Income
  $ 369.6     $ 350.6     $ 19.0       5.4 %

Adjusted EBITDA and Facility Operating Income are non-GAAP financial measures we use in evaluating our operating performance. Cash From Facility Operations is a non-GAAP financial measure we use in evaluating our liquidity. See “Non-GAAP Financial Measures” below for an explanation of how we define each of these measures,


 
a detailed description of why we believe such measures are useful and the limitations of each measure, a reconciliation of net loss to each of Adjusted EBITDA and Facility Operating Income and a reconciliation of net cash provided by operating activities to Cash From Facility Operations.

Our revenues for the six months ended June 30, 2010 increased to $1.1 billion, an increase of $94.7 million, or 9.5%, over our revenues for the six months ended June 30, 2009.  The increase in revenues in the current year period was primarily a result of an increase in the average monthly revenue per unit compared to the prior year period, including growing revenues from our ancillary services programs, the inclusion of revenue from recent acquisitions and expansions, and an increase in occupancy.  Our weighted average occupancy rate for the six months ended June 30, 2010 and 2009 was 86.7% and 86.4%, respectively.  As described below, beginning with the first quarter of 2010, occupancy rates and average monthly revenue per unit are being reported using the average unit methodology.  Occupancy rates and average monthly revenue per unit for all prior periods have been recast to conform to the current presentation.

During the three months ended June 30, 2010, our Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income increased by 8.9%, 8.6% and 5.7%, respectively, when compared to the three months ended June 30, 2009.  During the six months ended June 30, 2010, our Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income increased by 10.4%, 8.5% and 5.4%, respectively, when compared to the six months ended June 30, 2009.
 
During the three months ended June 30, 2010, we continued to expand our ancillary services offerings.  As of June 30, 2010, we offered therapy services to almost 38,000 of our units and home health services to over 24,000 of our units.   We continue to see positive results from the maturation of previously-opened therapy and home health clinics.  We also expect to continue to expand our ancillary services programs to additional units and to open or acquire additional home health agencies.

We believe that the deteriorating housing market, credit crisis and general economic uncertainty have caused some potential customers (or their adult children) to delay or reconsider moving into our communities, resulting in a decrease in occupancy rates and occupancy levels when compared to historical levels.  We remain cautious about the economy and the adverse credit and financial markets and their effect on our customers and our business.  In addition, we continue to experience volatility in the entrance fee portion of our business.  The timing of entrance fee sales is subject to a number of different factors (including the ability of potential customers to sell their existing homes) and is also inherently subject to variability (positively or negatively) when measured over the short-term.  These factors also impact our potential independent living customers to a significant extent.  We expect occupancy and entrance fee sales to normalize over the longer term.

Consolidated Results of Operations

Three Months Ended June 30, 2010 and 2009

The following table sets forth, for the periods indicated, statements of operations items and the amount and percentage of increase or decrease of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included herein.

Beginning with the first quarter of 2010, occupancy rates and average monthly revenue per unit are reported using an average unit methodology based on a consistent treatment of units across all product lines, as compared to the  historical method where occupancy was reported based upon unit calculations that varied by product line.  Occupancy rates and average monthly revenue per unit for all prior periods have been recast to conform to the current presentation.



 
(dollars in thousands, except average monthly revenue per unit)

   
Three Months Ended
June 30,
             
   
2010
   
2009
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
                         
Statement of Operations Data:
                       
Revenue
                       
Resident fees
                       
Retirement Centers
  $ 132,209     $ 123,915     $ 8,294       6.7 %
Assisted Living
    254,748       228,819       25,929       11.3 %
CCRCs
    160,603       146,725       13,878       9.5 %
Total resident fees
    547,560       499,459       48,101       9.6 %
Management fees
    1,412       1,298       114       8.8 %
Total revenue
    548,972       500,757       48,215       9.6 %
Expense
                               
Facility operating expense
                               
Retirement Centers
    77,246       69,999       7,247       10.4 %
Assisted Living
    162,935       144,860       18,075       12.5 %
CCRCs
    112,870       101,727       11,143       11.0 %
Total facility operating expense
    353,051       316,586       36,465       11.5 %
General and administrative expense
    31,834       31,721       113       0.4 %
Facility lease expense
    67,175       68,434       (1,259 )     (1.8 %)
Depreciation and amortization
    73,168       67,262       5,906       8.8 %
Total operating expense
    525,228       484,003       41,225       8.5 %
Income from operations
    23,744       16,754       6,990       41.7 %
Interest income
    453       328       125       38.1 %
Interest expense
                               
Debt
    (33,903 )     (33,450 )     453       1.4 %
Amortization of deferred financing costs and debt discount
    (2,410 )     (3,390 )     (980 )     (28.9 %)
Change in fair value of derivatives and amortization
    (2,207 )     7,900       (10,107 )     (127.9 %)
Equity in earnings of unconsolidated ventures
    119       581       (462 )     (79.5 %)
Loss on extinguishment of debt, net
    (682 )     (1,740 )     (1,058 )     (60.8 %)
Other non-operating loss
          (8 )     (8 )     (100.0 %)
Loss before income taxes
    (14,886 )     (13,025 )     1,861       14.3 %
Benefit for income taxes
    5,329       2,495       2,834       113.6 %
Net loss
  $ (9,557 )   $ (10,530 )   $ (973 )     (9.2 %)
                                 
Selected Operating and Other Data:
                               
Total number of communities (at end of period)
    564       546       18       3.3 %
Total units operated (1)
    50,810       49,183       1,627       3.3 %
Owned/leased communities units
    47,128       44,865       2,263       5.0 %
Owned/leased communities occupancy rate (weighted average) (2)
    86.8 %     86.2 %     0.6 %     0.7 %
Average monthly revenue per unit (3)
  $ 4,415     $ 4,258     $ 157       3.7 %
 
 
 
Selected Segment Operating and Other Data:
                               
Retirement Centers
                               
Number of communities (period end)
    80       77       3       3.9 %
Total units (1)
    14,737       14,117       620       4.4 %
Occupancy rate (weighted average)
    87.1 %     86.9 %     0.2 %     0.2 %
Average monthly revenue per unit (3)
  $ 3,434     $ 3,366     $ 68       2.0 %
Assisted Living
                               
Number of communities (period end)
    429       413       16       3.9 %
Total units (1)
    21,115       20,073       1,042       5.2 %
Occupancy rate (weighted average)
    88.0 %     86.0 %     2.0 %     2.3 %
Average monthly revenue per unit (3)
  $ 4,571     $ 4,417     $ 154       3.5 %
CCRCs
                               
Number of communities (period end)
    36       35       1       2.9 %
Total units (1)
    11,276       10,675       601       5.6 %
Occupancy rate (weighted average) (2)
    84.2 %     85.7 %     (1.5 %)     (1.8 %)
Average monthly revenue per unit (3)
  $ 5,437     $ 5,153     $ 284       5.5 %
Management Services
                               
Number of communities (period end)
    19       21       (2 )     (9.5 %)
Total units (1)
    3,682       4,309       (627 )     (14.6 %)
Occupancy rate (weighted average)
    83.4 %     84.6 %     (1.2 %)     (1.4 %)
                                 
Selected Entrance Fee Data:
                               
Non-refundable entrance fees sales
  $ 8,354     $ 5,718                  
Refundable entrance fees sales
    6,619       4,098                  
Total entrance fee receipts (4)
    14,973       9,816                  
Refunds
    (5,360 )     (6,357 )                
Net entrance fees
  $ 9,613     $ 3,459                  
 
__________
 
(1)
Total units operated represent the average units operated during the period, excluding equity homes.
 
(2)
Excluding the impact of current quarter expansion openings, for the three months ended June 30, 2010, owned/leased communities occupancy rate was 87.0% and CCRCs occupancy rate was 84.9%.
 
(3)
Average monthly revenue per unit represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by average occupied units.
 
(4)
Includes $5.6 million of first generation entrance fee receipts (which represent initial entrance fees received from the sale of units at a newly opened entrance fee CCRC) during the three months ended June 30, 2010.

As of June 30, 2010, our total operations included 564 communities with a capacity of 51,858 units.

Resident Fees

The increase in resident fees occurred across all segments.  Resident fees increased over the prior-year second quarter mainly due to an increase in average monthly revenue per unit during the current period, including an increase in our ancillary services revenue as we continue to roll out therapy and home health services to many of our communities, the inclusion of revenue from recent acquisitions and expansions, and an increase in occupancy.  During the current period, revenues grew 2.9% at the 514 communities we operated during both periods with a 2.2% increase in the average monthly revenue per unit excluding amortization of entrance fees in both instances.  Occupancy increased 0.6% in these communities period over period.

Retirement Centers revenue increased $8.3 million, or 6.7%, primarily due to the inclusion of acquisitions that occurred after the prior period and an increase in average monthly revenue per unit, including an increase in our ancillary services revenue, at communities we operated during both periods, partially offset by a decrease in occupancy at those same communities period over period.
 

 
Assisted Living revenue increased $25.9 million, or 11.3%, primarily due to the inclusion of acquisitions that occurred after the prior period and increases in the average monthly revenue per unit, including an increase in our ancillary services revenue, and occupancy at the communities we operated during both periods.

CCRCs revenue increased $13.9 million, or 9.5%, primarily due to the inclusion of expansions that opened after the prior period and an increase in the average monthly revenue per unit, including an increase in our ancillary services revenue, at the communities we operated during both periods, partially offset by a decrease in occupancy at these same communities period over period.

Management Fees

Management fees remained relatively constant period over period.

Facility Operating Expense

Facility operating expense increased over the prior-year period primarily due to an increase in salaries and wages, additional current year expense incurred in connection with the continued expansion of our ancillary services programs during 2009 and 2010 and the inclusion of expenses from recent acquisitions and expansions.  These increases were partially offset by a decrease in insurance expense related to changes in estimates and significant cost control measures that were implemented in recent periods.

Retirement Centers operating expenses increased $7.2 million, or 10.4%, primarily due to the inclusion of expenses from acquisitions that occurred after the prior period and an increase in expenses incurred in connection with the continued expansion of our ancillary services programs.  Facility operating expenses were also negatively impacted by increases in lighting retrofit costs related to an initiative to use more energy efficient light bulbs in our communities, as well as increased salaries and wages due to wage rate increases and an increase in hours worked period over period.  These increases were partially offset by a decrease in insurance expense related to changes in estimates and significant cost control measures that were implemented in recent periods.

Assisted Living operating expenses increased $18.1 million, or 12.5%, primarily due to the inclusion of expenses from acquisitions that occurred after the prior period, an increase in expenses incurred in connection with the continued expansion of our ancillary services programs, as well as increased salaries and wages due to wage rate increases and an increase in hours worked period over period.  These increases were partially offset by a decrease in insurance expense related to changes in estimates and reduced workers compensation expenses.

CCRCs operating expenses increased $11.1 million, or 11.0%, primarily due to the inclusion of expenses from expansions that opened after the prior period, increased salaries and wages due to wage rate increases and an increase in hours worked period over period, and increases in lighting retrofit costs related to an initiative to use more energy efficient light bulbs in our communities.  These increases were partially offset by a decrease in insurance expense related to changes in estimates and reduced workers compensation expenses.

General and Administrative Expense

General and administrative expense increased $0.1 million, or 0.4%, primarily as a result of increases in employee benefits, travel expenses and transaction-related costs, partially offset by decreases in bonus expense and non-cash stock-based compensation expense in the current period.  General and administrative expense as a percentage of total revenue, including revenue generated by the communities we manage and excluding non-cash compensation expense, was 4.6% for both the three months ended June 30, 2010 and 2009, calculated as follows (dollars in thousands):
 
 

   
Three Months Ended June 30,
 
   
2010
   
2009
 
                         
Resident fee revenues
  $ 547,560       94.1 %   $ 499,459       92.7 %
Resident fee revenues under management
    34,282       5.9 %     39,247       7.3 %
Total
  $ 581,842       100.0 %   $ 538,706       100.0 %
General and administrative expenses (excluding non-cash compensation expense)
  $ 26,729       4.6 %   $ 24,850       4.6 %
Non-cash compensation expense
    5,105       0.9 %     6,871       1.3 %
General and administrative expenses (including non-cash compensation expense)
  $ 31,834       5.5 %   $ 31,721       5.9 %

Facility Lease Expense

Lease expense remained relatively constant period over period.

Depreciation and Amortization

Depreciation and amortization expense increased $5.9 million, or 8.8%, primarily due to the inclusion of acquisitions and expansions that occurred or opened subsequent to the prior period.

Interest Income

Interest income remained relatively constant period over period.

Interest Expense

The change in interest expense was primarily driven by additional interest expense recorded from the change in the fair value of interest rate swaps and caps due to unfavorable changes in the LIBOR yield curve.

Income Taxes

Our effective tax rates for the three months ended June 30, 2010 and 2009 were 35.8% and 19.2%, respectively. The difference in the effective rate between these periods was primarily due to the impact of the nondeductible stock-based compensation recorded under ASC 718-10 in 2009.

An additional interest charge related to our tax contingency reserve was recorded during the three months ended June 30, 2010. Tax returns for years 2007 and 2008 are subject to future examination by tax authorities. In addition, certain tax returns are open from 2000 through 2006 to the extent of the net operating losses generated during those periods.

Six Months Ended June 30, 2010 and 2009

The following table sets forth, for the periods indicated, statements of operations items and the amount and percentage of increase or decrease of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our condensed consolidated financial statements and the related notes, which are included herein.

Beginning with the first quarter of 2010, occupancy rates and average monthly revenue per unit are reported using an average unit methodology based on a consistent treatment of units across all product lines, as compared to the  historical method where occupancy was reported based upon unit calculations that varied by product line.


 
Occupancy rates and average monthly revenue per unit for all prior periods have been recast to conform to the current presentation.

(dollars in thousands, except average monthly revenue per unit)

   
Six Months Ended
June 30,
             
   
2010
   
2009
   
Increase
(Decrease)
   
% Increase
(Decrease)
 
                         
Statement of Operations Data:
                       
Revenue
                       
Resident fees
                       
Retirement Centers
  $ 263,792     $ 247,158     $ 16,634       6.7 %
Assisted Living
    506,244       457,894       48,350       10.6 %
CCRCs
    320,553       290,636       29,917       10.3 %
Total resident fees
    1,090,589       995,688       94,901       9.5 %
Management fees
    2,807       3,015       (208 )     (6.9 %)
Total revenue
    1,093,396       998,703       94,693       9.5 %
Expense
                               
Facility operating expense
                               
Retirement Centers
    155,644       141,106       14,538       10.3 %
Assisted Living
    325,645       290,640       35,005       12.0 %
CCRCs
    227,086       202,952       24,134       11.9 %
Total facility operating expense
    708,375       634,698       73,677       11.6 %
General and administrative expense
    63,786       65,428       (1,642 )     (2.5 %)
Facility lease expense
    135,424       136,175       (751 )     (0.6 %)
Depreciation and amortization
    146,229       135,395       10,834       8.0 %
Total operating expense
    1,053,814       971,696       82,118       8.5 %
Income from operations
    39,582       27,007       12,575       46.6 %
Interest income
    1,080       1,148       (68 )     (5.9 %)
Interest expense
                               
Debt
    (67,183 )     (66,271 )     912       1.4 %
Amortization of deferred financing costs and debt discount
    (5,006 )     (4,932 )     74       1.5 %
Change in fair value of derivatives and amortization
    (4,847 )     3,615       (8,462 )     (234.1 %)
Equity in earnings of unconsolidated ventures
    516       1,176       (660 )     (56.1 %)
Loss on extinguishment of debt, net
    (701 )     (1,740 )     (1,039     (59.7 %)
Other non-operating income
          4,224       (4,224 )     (100.0 %)
Loss before income taxes
    (36,559 )     (35,773 )     786       2.2 %
Benefit for income taxes
    12,707       11,607       1,100       9.5 %
Net loss
  $ (23,852 )   $ (24,166 )   $ (314 )     (1.3 %)
                                 
Selected Operating and Other Data:
                               
Total number of communities (at end of period)
    564       546       18       3.3 %
Total units operated (1)
    50,887       49,137       1,750       3.6 %
Owned/leased communities units
    47,152       44,841       2,311       5.2 %
Owned/leased communities occupancy rate (weighted average) (2)
    86.7 %     86.4 %     0.3 %     0.3 %
Average monthly revenue per unit (3)
  $ 4,401     $ 4,237     $ 164       3.9 %
 
 
 
Selected Segment Operating and Other Data:
                               
Retirement Centers
                               
Number of communities (period end)
    80       77       3       3.9 %
Total units (1)
    14,737       14,117       630       4.4 %
Occupancy rate (weighted average)
    87.1 %     87.1 %            
Average monthly revenue per unit (3)
  $ 3,427     $ 3,349     $ 78       2.3 %
Assisted Living
                               
Number of communities (period end)
    429       413       16       3.9 %
Total units (1)
    21,134       20,071       1,063       5.3 %
Occupancy rate (weighted average)
    87.8 %     86.1 %     1.7 %     2.0 %
Average monthly revenue per unit (3)
  $ 4,548     $ 4,415     $ 133       3.0 %
CCRCs
                               
Number of communities (period end)
    36       35       1       2.9 %
Total units (1)
    11,282       10,654       628       5.9 %
Occupancy rate (weighted average) (2)
    84.1 %     86.1 %     (2.0 %)     (2.3 %)
Average monthly revenue per unit (3)
  $ 5,429     $ 5,092     $ 337       6.6 %
Management Services
                               
Number of communities (period end)
    19       21       (2 )     (9.5 %)
Total units (1)
    3,735       4,296       (561 )     (13.1 %)
Occupancy rate (weighted average)
    83.4 %     83.5 %     (0.1 %)     (0.1 %)
                                 
Selected Entrance Fee Data:
                               
Non-refundable entrance fees sales
  $ 17,904     $ 10,590                  
Refundable entrance fees sales
    15,061       7,736                  
Total entrance fee receipts (4)
    32,965       18,326                  
Refunds
    (11,122 )     (12,193 )                
Net entrance fees
  $ 21,843     $ 6,133                  
 
__________
 
(1)
Total units operated represent the average units operated during the period, excluding equity homes.
 
(2)
Excluding the impact of current quarter expansion openings, for the six months ended June 30, 2010, owned/leased communities occupancy rate was 86.9% and CCRCs occupancy rate was ­­85.0%.
 
(3)
Average monthly revenue per unit represents the average of the total monthly revenues, excluding amortization of entrance fees, divided by average occupied units.
 
(4)
Includes $11.6 million of first generation entrance fee receipts (which represent initial entrance fees received from the sale of units at a newly opened entrance fee CCRC) during the six months ended June 30, 2010.

Resident Fees

The increase in resident fees occurred across all segments.  Resident fees increased over the prior-year period mainly due to an increase in average monthly revenue per unit during the current period, including an increase in our ancillary services revenue as we continue to roll out therapy and home health services to many of our communities, the inclusion of revenue from recent acquisitions and expansions, and an increase in occupancy.  During the current period, revenues grew 2.7% at the 514 communities we operated during both periods with a 2.4% increase in the average monthly revenue per unit excluding amortization of entrance fees in both instances.  Occupancy increased 0.3% in these communities period over period.

Retirement Centers revenue increased $16.6 million, or 6.7%, primarily due to the inclusion of acquisitions that occurred after the prior period and an increase in average monthly revenue per unit, including an increase in our ancillary services revenue, at communities we operated during both periods, partially offset by a decrease in occupancy at those same communities period over period.


 
Assisted Living revenue increased $48.4 million, or 10.6%, primarily due to the inclusion of acquisitions that occurred after the prior period and increases in the average monthly revenue per unit, including an increase in our ancillary services revenue, and occupancy at the communities we operated during both periods.

CCRCs revenue increased $29.9 million, or 10.3%, primarily due to the inclusion of expansions that opened after the prior period and an increase in the average monthly revenue per unit, including an increase in our ancillary services revenue, at the communities we operated during both periods, partially offset by a decrease in occupancy at these same communities period over period.

Management Fees

Management fees decreased period over period as four management agreements were terminated late in the prior year.  The decrease was partially offset by the commencement of a new management agreement in mid-2009.  Three of the terminated management agreements were attributed to us acquiring the remaining interest in the communities that we previously managed.

Facility Operating Expense

Facility operating expense increased over the prior-year period primarily due to an increase in salaries and wages, higher deferred community fee expense recognition, and additional current year expense incurred in connection with the continued expansion of our ancillary services programs during 2009 and 2010, along with the inclusion of expenses from recent acquisitions and expansions.  These increases were partially offset by a decrease in insurance expense related to changes in estimates and significant cost control measures that were implemented in recent periods.

Retirement Centers operating expenses increased $14.5 million, or 10.3%, primarily due to the inclusion of expenses from acquisitions that occurred after the prior period and an increase in expenses incurred in connection with the continued expansion of our ancillary services programs.  Facility operating expenses were also negatively impacted by increased salaries and wages due to wage rate increases and an increase in hours worked period over period, increases in lighting retrofit costs related to an initiative to use more energy efficient light bulbs in our communities, and an increase in the deferred community fee expense recognition.  These increases were partially offset by a decrease in insurance expense related to a change in estimates and reduced workers compensation expenses.

Assisted Living operating expenses increased $35.0 million, or 12.0%, primarily due to the inclusion of expenses from acquisitions that occurred after the prior period, increased salaries and wages due to wage rate increases and an increase in hours worked period over period, as well as an increase in expenses incurred in connection with the continued expansion of our ancillary services programs.  These increases were partially offset by a decrease in insurance expense related to a change in estimates and reduced workers compensation expenses.

CCRCs operating expenses increased $24.1 million, or 11.9%, primarily due to the inclusion of expenses from expansions that opened after the prior period, increased salaries and wages due to wage rate increases and an increase in hours worked period over period, as well as expenses incurred in connection with the continued expansion of our ancillary services programs.  These increases were partially offset by a decrease in insurance expense related to a change in estimates and reduced workers compensation expenses.

General and Administrative Expense

General and administrative expense decreased $1.6 million, or 2.5%, primarily as a result of decreases in bonus expense and non-cash stock-based compensation expense in the current period, partially offset by increases in employee benefits, travel expenses and transaction-related costs.  General and administrative expense as a percentage of total revenue, including revenue generated by the communities we manage and excluding non-cash compensation, integration and transaction-related costs, was 4.6% and 4.8% for the six months ended June 30, 2010 and 2009, respectively, calculated as follows (dollars in thousands):
 
 
 
   
Six Months Ended June 30,
 
   
2010
   
2009
 
                         
Resident fee revenues
  $ 1,090,589       94.1 %   $ 995,688       92.6 %
Resident fee revenues under management
    68,696       5.9 %     78,997       7.4 %
Total
  $ 1,159,285       100.0 %   $ 1,074,685       100.0 %
General and administrative expenses (excluding non-cash compensation, integration and transaction-related costs)
  $ 53,810       4.6 %   $ 51,249       4.8 %
Non-cash compensation expense
    9,976       0.9 %     13,680       1.3 %
Integration and transaction-related costs
                499        
General and administrative expenses (including non-cash compensation, integration and transaction-related costs)
  $ 63,786       5.5 %   $ 65,428       6.1 %

Facility Lease Expense

Lease expense remained relatively constant period over period.

Depreciation and Amortization

Depreciation and amortization expense increased $10.8 million, or 8.0%, primarily due to the inclusion of acquisitions and expansions that occurred or opened subsequent to the prior period.

Interest Income

Interest income remained relatively constant period over period.

Interest Expense

The change in interest expense was primarily driven by additional interest expense recorded from the change in the fair value of interest rate swaps and caps due to unfavorable changes in the LIBOR yield curve.

Income Taxes

Our effective tax rates for the six months ended June 30, 2010 and 2009 were 34.8 % and 32.4%, respectively. The difference in the effective rate between these periods was primarily due to the impact of the nondeductible stock-based compensation recorded under ASC 718-10 in 2009.

An additional interest charge related to our tax contingency reserve was recorded during the six months ended June 30, 2010. Tax returns for years 2007 and 2008 are subject to future examination by tax authorities. In addition, certain tax returns are open from 2000 through 2006 to the extent of the net operating losses generated during those periods.

Liquidity and Capital Resources

The following is a summary of cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows (dollars in thousands):
 

 
   
Six Months Ended
June 30,
 
   
2010
   
2009
 
Cash provided by operating activities
  $ 114,771     $ 113,072  
Cash used in investing activities
    (102,544 )     (98,415 )
Cash (used in) provided by financing activities
    (27,252 )     26,981  
Net (decrease) increase in cash and cash equivalents
    (15,025 )     41,638  
Cash and cash equivalents at beginning of period
    66,370       53,973  
Cash and cash equivalents at end of period
  $ 51,345     $ 95,611  

The increase in cash provided by operating activities was attributable to improved operating performance and increased proceeds from deferred entrance fee revenue related to the opening of a new entrance fee community in the third quarter of 2009, partially offset by a decrease in working capital.

The increase in cash used in investing activities was primarily attributable to cash paid for the acquisition of four previously leased communities in the current period, which was partially offset by a decrease in restricted cash funded as we posted restricted cash in the prior-year period in order to reduce our letter of credit needs in connection with the renegotiation of the line of credit and a reduction of spending on property, plant and equipment and leasehold improvements period over period.  Additionally, the prior-year period includes cash received on a sale-leaseback transaction and from the sale of a joint venture interest.

The change in cash related to financing activities period over period was primarily attributable to proceeds received from the public equity offering in the prior-year period and an increase in net repayments of debt period over period, partially offset by increased payments made on the credit facility in the prior-year period.

Our principal sources of liquidity have historically been from:

 
·
cash balances on hand;
 
·
cash flows from operations;
 
·
proceeds from our credit facilities;
 
·
proceeds from mortgage financing or refinancing of various assets;
 
·
funds generated through joint venture arrangements or sale-leaseback transactions; and
 
·
with somewhat lesser frequency, funds raised in the debt or equity markets and proceeds from the selective disposition of underperforming assets.

Over the longer-term, we expect to continue to fund our business through these principal sources of liquidity.

Our liquidity requirements have historically arisen from:

 
·
working capital;
 
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
 
·
debt service and lease payments;
 
·
acquisition consideration and transaction costs;
 
·
cash collateral required to be posted in connection with our interest rate swaps and related financial instruments;
 
·
capital expenditures and improvements, including the expansion of our current communities and the development of new communities;
 
·
dividend payments;
 
·
purchases of common stock under our previous share repurchase authorization; and
 
·
other corporate initiatives (including integration and branding).

Over the near-term, we expect that our liquidity requirements will primarily arise from:

 
·
working capital;


 
 
·
operating costs such as employee compensation and related benefits, general and administrative expense and supply costs;
 
·
debt service and lease payments;
 
·
capital expenditures and improvements, including the expansion or redevelopment of select communities;
 
·
other corporate initiatives (including information systems);
 
·
acquisition consideration and transaction costs; and
 
·
to a lesser extent, cash collateral required to be posted in connection with our interest rate swaps and related financial instruments.

We are highly leveraged and have significant debt and lease obligations.  We have two principal corporate-level indebtednesses:  our $120.0 million credit facility and separate letter of credit facilities for up to $78.5 million in the aggregate.  The remainder of our indebtedness is generally comprised of non-recourse property-level mortgage financings.

At June 30, 2010, we had $2.3 billion of debt outstanding, excluding our line of credit and capital lease obligations, at a weighted-average interest rate of 4.01%.  At June 30, 2010, we had $341.8 million of capital and financing lease obligations, $69.2 million of letters of credit had been issued under our letter of credit facilities and no borrowings were outstanding on our revolving loan facility.  Approximately $277.6 million of our debt obligations are due on or before June 30, 2011.  We also have substantial operating lease obligations and capital expenditure requirements.  For the year ending June 30, 2011, we will be required to make approximately $266.2 million of payments in connection with our existing operating leases.

We had $51.3 million of cash and cash equivalents at June 30, 2010, excluding cash and escrow deposits-restricted and lease security deposits of $236.7 million.

In 2009, we began replacing some of our outstanding letters of credit with restricted cash in order to reduce our letter of credit needs.

At June 30, 2010, we had $478.3 million of negative working capital, which includes the classification of $223.1 million of refundable entrance fees and $11.0 million in tenant deposits as current liabilities.  Based upon our historical operating experience, we anticipate that only 9.0% to 12.0% of those entrance fee liabilities will actually come due, and be required to be settled in cash, during the next 12 months. We expect that any entrance fee liabilities due within the next 12 months will be fully offset by the proceeds generated by subsequent entrance fee sales.  Entrance fee sales, net of refunds paid, provided $9.6 million and $21.8 million of cash for the three and six months ended June 30, 2010, respectively.

For the year ending December 31, 2010, we anticipate that we will make investments of approximately $75.0 million to $100.0 million for capital expenditures, comprised of approximately $25.0 million to $35.0 million of net recurring capital expenditures and approximately $50.0 million to $65.0 million of expenditures relating to other major projects (including corporate initiatives).  These major projects include unusual or non-recurring capital projects, projects which create new or enhanced economics, such as major renovations or repositioning projects at our communities (including deferred expenditures in connection with recently acquired communities), integration related expenditures (including the cost of developing information systems), and expenditures supporting the expansion of our ancillary services programs.  For the six months ended June 30, 2010, we spent approximately $14.0 million for net recurring capital expenditures, approximately $20.1 million for expenditures relating to other major projects and corporate initiatives and approximately $1.9 million (consisting of $10.0 million for capital expenditures net of $8.1 million that had been reimbursed as of June 30, 2010) in connection with our expansion and development program.  We do not anticipate material expenditures in 2010 in connection with our community expansion and development program that will not be reimbursed.

During 2010, we anticipate that our capital expenditures will be funded from cash on hand, cash flows from operations, and amounts drawn on our new credit facility.

Through 2007, we focused on growth primarily through acquisition, spending approximately $2.2 billion during 2007 and 2006 on acquiring communities and companies, excluding fees, expenses and assumption of debt. Given


 
the market environment during 2008 and the first half of 2009, we focused on integrating previous acquisitions and on the significant organic growth opportunities inherent in our growth strategy and engaged in a reduced level of acquisition activity.  We completed two separate portfolio acquisitions during the fourth quarter of 2009 and one portfolio acquisition in the second quarter of 2010.  As opportunities arise, we plan to continue to take advantage of the fragmented continuing care, independent living and assisted living sectors by selectively purchasing existing operating companies, asset portfolios, home health agencies and communities. We may also seek to acquire the fee interest in communities that we currently lease or manage.

In the normal course of business, we use a variety of financial instruments to mitigate interest rate risk.  We have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis.  Pursuant to certain of our hedge agreements, we are required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds specified thresholds.  In periods of significant volatility in the credit markets, the value of these swaps can change significantly and as a result, the amount of collateral we are required to post can change significantly.  We have taken a number of steps to reduce our collateral posting risk.  In particular, we terminated a number of interest rate swaps and purchased and assumed a number of interest rate caps, which do not require the posting of cash collateral.  Furthermore, we obtained a number of swaps that are secured by underlying mortgaged assets and, hence, do not require cash collateralization. As of June 30, 2010, we have $925.9 million in aggregate notional amount of interest rate caps, $37.6 million in aggregate notional amount of swaps secured by underlying mortgaged assets and $314.2 million in aggregate notional amount of swaps that require cash collateralization.  All of our variable rate debt, excluding our secured line of credit and capital lease obligations, is currently subject to a cap or swap agreement.

We expect to continue to assess our financing alternatives periodically and access the capital markets opportunistically.  If our existing resources are insufficient to satisfy our liquidity requirements, or if we enter into an acquisition or strategic arrangement with another company, we may need to sell additional equity or debt securities. Any such sale of additional equity securities will dilute the interests of our existing stockholders, and we cannot be certain that additional public or private financing will be available in amounts or on terms acceptable to us, if at all (particularly given current market conditions). If we are unable to obtain this additional financing, we may be required to delay, reduce the scope of, or eliminate one or more aspects of our business development activities, any of which could reduce the growth of our business.

We currently estimate that our existing cash flows from operations, together with existing working capital, amounts available under our new credit facility and, to a lesser extent, proceeds from anticipated financings and refinancings of various assets, will be sufficient to fund our liquidity needs for at least the next 12 months, assuming that the overall economy does not substantially deteriorate further.

Our actual liquidity and capital funding requirements depend on numerous factors, including our operating results, the actual level of capital expenditures, our expansion, development and acquisition activity, general economic conditions and the cost of capital.  Shortfalls in cash flows from operating results or other principal sources of liquidity may have an adverse impact on our ability to execute our business and growth strategies.  The current volatility in the credit and financial markets may also have an adverse impact on our liquidity by making it more difficult for us to obtain financing or refinancing.  As a result, this may impact our ability to grow our business, maintain capital spending levels, expand certain communities, or execute other aspects of our business strategy.  In order to continue some of these activities at historical or planned levels, we may incur additional indebtedness or lease financing to provide additional funding.  There can be no assurance that any such additional financing will be available or on terms that are acceptable to us (particularly in light of current adverse conditions in the credit market).

As of June 30, 2010, we are in compliance with the financial covenants of our outstanding debt and lease agreements.

Credit Facilities

As of January 1, 2010, we had an available secured line of credit of $75.0 million (including a $25.0 million letter of credit sublimit) and secured and unsecured letter of credit facilities of up to $78.5 million in the aggregate.  The line


 
of credit bore interest at a rate of 6.0% and was scheduled to mature on August 31, 2010.  No amounts were borrowed under the secured line of credit during 2010.

2010 Credit Facility

Effective February 23, 2010, we terminated the $75.0 million revolving credit facility with Bank of America, N.A. and entered into a credit agreement with General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto. The new facility had an initial commitment of $100.0 million, with an option to increase the commitment to $120.0 million (which we exercised on May 5, 2010), and is scheduled to mature on June 30, 2013.

The revolving line of credit may be used to finance acquisitions and fund working capital and capital expenditures and for other general corporate purposes.

The new facility is secured by a first priority lien on certain of our communities.  The availability under the line may vary from time to time as it is based on borrowing base calculations related to the value and performance of the communities securing the facility.

Amounts drawn under the facility will bear interest at 90-day LIBOR plus an applicable margin, as described below.  For purposes of determining the interest rate, in no event shall LIBOR be less than 2.0%.  The applicable margin varies with the percentage of the total commitment drawn, with a 4.5% margin at 35% or lower utilization, a 5.0% margin at utilization greater than 35% but less than or equal to 50%, and a 5.5% margin at greater than 50% utilization.  We are also required to pay a quarterly commitment fee of 1.0% per annum on the unused portion of the facility.

The credit agreement contains typical affirmative and negative covenants, including financial covenants with respect to minimum consolidated fixed charge coverage and minimum consolidated tangible net worth.  A violation of any of these covenants could result in a default under the credit agreement, which would result in termination of all commitments under the credit agreement and all amounts owing under the credit agreement and certain other loan agreements becoming immediately due and payable.

As of June 30, 2010, we had an available secured line of credit with a $120.0 million commitment and secured and unsecured letter of credit facilities of up to $78.5 million in the aggregate.  As of June 30, 2010, there were no borrowings under the revolving loan facility and $69.2 million of letters of credit had been issued under the secured and unsecured letter of credit facilities.

Contractual Commitments

Significant ongoing commitments consist primarily of leases, debt, purchase commitments and certain other long-term liabilities. For a summary and complete presentation and description of our ongoing commitments and contractual obligations, see the “Contractual Commitments” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

There have been no material changes in our contractual commitments during the six months ended June 30, 2010.

Off-Balance Sheet Arrangements

The equity method of accounting has been applied in the accompanying financial statements with respect to our investment in unconsolidated ventures that are not considered variable interest entities as we do not possess a controlling financial interest.  We do not believe these off-balance sheet arrangements have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
 

 
Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.  In this report, we define and use the non-GAAP financial measures Adjusted EBITDA, Cash From Facility Operations and Facility Operating Income, as set forth below.

Adjusted EBITDA

Definition of Adjusted EBITDA

We define Adjusted EBITDA as follows:

Net income (loss) before:

 
·
provision (benefit) for income taxes;

 
·
non-operating (income) expense items;

 
·
loss on sale of communities;
 
 
·
depreciation and amortization (including non-cash impairment charges);

 
·
straight-line rent expense (income);

 
·
amortization of deferred gain;

 
·
amortization of deferred entrance fees;

 
·
non-cash compensation expense; and
 
 
·
change in future service obligation;

and including:

 
·
entrance fee receipts and refunds (excluding first generation entrance fee receipts on a newly opened entrance fee CCRC).

Management’s Use of Adjusted EBITDA

We use Adjusted EBITDA to assess our overall financial and operating performance.  We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations.  This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

Adjusted EBITDA provides us with a measure of financial performance, independent of items that are beyond the control of management in the short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure.  This metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  Adjusted EBITDA is one of the metrics used by senior management and the board of directors to review the financial performance of the business on a monthly basis.  Adjusted EBITDA is also used by research analysts and investors to evaluate the performance of and value companies in our industry.

 
 
Limitations of Adjusted EBITDA

Adjusted EBITDA has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of earnings.  Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:
 
 
·
the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and
 
 
·
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.
 
An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position.  We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

Adjusted EBITDA is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on Adjusted EBITDA as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of Adjusted EBITDA to GAAP net income (loss), along with our consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because Adjusted EBITDA is not a measure of financial performance under GAAP and is susceptible to varying calculations, the Adjusted EBITDA measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net loss to Adjusted EBITDA for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):
 
 

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net loss
  $ (9,557 )   $ (10,530 )   $ (23,852 )   $ (24,166 )
Benefit for income taxes
    (5,329 )     (2,495 )     (12,707 )     (11,607 )
Equity in earnings of unconsolidated ventures
    (119 )     (581 )     (516 )     (1,176 )
Loss on extinguishment of debt
    682       1,740       701       1,740  
Other non-operating expense (income)
          8             (4,224 )
Interest expense:
                               
Debt
    26,335       26,068       51,969       51,795  
Capitalized lease obligation
    7,568       7,382       15,214       14,476  
Amortization of deferred financing costs
    2,410       3,390       5,006       4,932  
Change in fair value of derivatives and amortization
    2,207       (7,900 )     4,847       (3,615 )
Interest income
    (453 )     (328 )     (1,080 )     (1,148 )
Income from operations
    23,744       16,754       39,582       27,007  
Depreciation and amortization
    73,168       67,262       146,229       135,395  
Straight-line lease expense
    2,161       4,032       5,297       8,280  
Amortization of deferred gain
    (1,086 )     (1,085 )     (2,172 )     (2,171 )
Amortization of entrance fees
    (5,787 )     (5,232 )     (11,526 )     (10,342 )
Non-cash compensation expense
    5,105       6,871       9,976       13,680  
Change in future service obligation
    (1,064 )           (1,064 )      
Entrance fee receipts (1)
    14,973       9,816       32,965       18,326  
First generation entrance fees received (2)
    (5,596 )           (11,567 )      
Entrance fee disbursements
    (5,360 )     (6,357 )     (11,122 )     (12,193 )
Adjusted EBITDA
  $ 100,258     $ 92,061     $ 196,598     $ 177,982  


 
(1)
Includes the receipt of refundable and nonrefundable entrance fees.
 
(2)
First generation entrance fees received represents initial entrance fees received from the sale of units at a newly opened entrance fee CCRC where the Company is required to apply such entrance fee proceeds to satisfy debt.

Cash From Facility Operations

Definition of Cash From Facility Operations

We define Cash From Facility Operations (CFFO) as follows:

Net cash provided by (used in) operating activities adjusted for:

 
·
changes in operating assets and liabilities;

 
·
deferred interest and fees added to principal;

 
·
refundable entrance fees received;
 
 
·
first generation entrance fee receipts on a newly opened entrance fee CCRC;
 
 
·
entrance fee refunds disbursed;

 
·
lease financing debt amortization with fair market value or no purchase options;

 
·
other; and

 
·
recurring capital expenditures.



Recurring capital expenditures include expenditures capitalized in accordance with GAAP that are funded from CFFO. Amounts excluded from recurring capital expenditures consist primarily of unusual or non-recurring capital items (including integration capital expenditures), community purchases and/or major projects or renovations that are funded using financing proceeds and/or proceeds from the sale of communities that are held for sale.

Management’s Use of Cash From Facility Operations

We use CFFO to assess our overall liquidity.  This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial and liquidity goals as well as to achieve optimal financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

This metric measures our liquidity based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  CFFO is one of the metrics used by our senior management and board of directors (i) to review our ability to service our outstanding indebtedness (including our credit facilities and long-term leases), (ii) to review our ability to pay dividends to stockholders, (iii) to review our ability to make regular recurring capital expenditures to maintain and improve our communities on a period-to-period basis, (iv) for planning purposes, including preparation of our annual budget, (v) in making compensation determinations for certain of our associates (including our named executive officers) and (vi) in setting various covenants in our credit agreements.  These agreements generally require us to escrow or spend a minimum of between $250 and $450 per unit per year.  Historically, we have spent in excess of these per unit amounts; however, there is no assurance that we will have funds available to escrow or spend these per unit amounts in the future.  If we do not escrow or spend the required minimum annual amounts, we would be in default of the applicable debt or lease agreement which could trigger cross default provisions in our outstanding indebtedness and lease arrangements.

Limitations of Cash From Facility Operations

CFFO has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of cash flow from operations.  CFFO does not represent cash available for dividends or discretionary expenditures, since we may have mandatory debt service requirements or other non-discretionary expenditures not reflected in the measure.  Material limitations in making the adjustment to our cash flow from operations to calculate CFFO, and using this non-GAAP financial measure as compared to GAAP operating cash flows, include:

 
·
the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and

 
·
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.

We believe CFFO is useful to investors because it assists their ability to meaningfully evaluate (1) our ability to service our outstanding indebtedness, including our credit facilities and capital and financing leases, (2) our ability to pay dividends to stockholders and (3) our ability to make regular recurring capital expenditures to maintain and improve our communities.

CFFO is not an alternative to cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on CFFO as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of CFFO to GAAP net cash provided by (used in) operating activities, along with our consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because CFFO is not a measure of financial performance under GAAP and is susceptible to varying calculations, the CFFO measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.


 
The table below shows the reconciliation of net cash provided by operating activities to CFFO for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net cash provided by operating activities
  $ 67,642     $ 44,315     $ 114,771     $ 113,072  
Changes in operating assets and liabilities
    3,464       16,150       22,635       4,217  
Refundable entrance fees received (1)(2)
    6,619       4,098       15,061       7,736  
First generation entrance fees received (3)
    (5,596 )           (11,567 )      
Entrance fee refunds disbursed
    (5,360 )     (6,357 )     (11,122 )     (12,193 )
Recurring capital expenditures, net
    (7,570 )     (3,888 )     (14,011 )     (6,543 )
Lease financing debt amortization with fair market value or no purchase options
    (2,221 )     (1,798 )     (4,392 )     (3,578 )
Cash From Facility Operations
  $ 56,978     $ 52,520     $ 111,375     $ 102,711  


 
(1)
Entrance fee receipts include promissory notes issued to the Company by the resident in lieu of a portion of the entrance fees due.  Notes issued (net of collections) for the three months ended June 30, 2010 and 2009 were ($0.3) million and $1.7 million, respectively, and for the six months ended June 30, 2010 and 2009 were $3.4 million and $3.6 million, respectively.
 
(2)
Total entrance fee receipts for the three months ended June 30, 2010 and 2009 were $15.0 million and $9.8 million, respectively, including $8.4 million and $5.7 million, respectively, of nonrefundable entrance fee receipts included in net cash provided by operating activities.  Total entrance fee receipts for the six months ended June 30, 2010 and 2009 were $33.0 million and $18.3 million, respectively, including $17.9 million and $10.6 million, respectively, of nonrefundable entrance fee receipts included in net cash provided by operating activities.
 
(3)
First generation entrance fees received represents initial entrance fees received from the sale of units at a newly opened entrance fee CCRC where the Company is required to apply such entrance fee proceeds to satisfy debt.

Facility Operating Income

Definition of Facility Operating Income

We define Facility Operating Income as follows:

Net income (loss) before:

 
·
provision (benefit) for income taxes;

 
·
non-operating (income) expense items;

 
·
loss on sale of communities;

 
·
depreciation and amortization (including non-cash impairment charges);

 
·
facility lease expense;

 
·
general and administrative expense, including non-cash stock compensation expense;

 
·
change in future service obligation;

 
·
amortization of deferred entrance fee revenue; and


 
 
·
management fees.

Management’s Use of Facility Operating Income

We use Facility Operating Income to assess our facility operating performance.  We believe this non-GAAP measure, as we have defined it, is helpful in identifying trends in our day-to-day facility performance because the items excluded have little or no significance on our day-to-day facility operations.  This measure provides an assessment of revenue generation and expense management and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as to achieve optimal facility financial performance.  It provides an indicator for management to determine if adjustments to current spending decisions are needed.

Facility Operating Income provides us with a measure of facility financial performance, independent of items that are beyond the control of management in the short-term, such as the change in the liability for the obligation to provide future services under existing lifecare contracts, depreciation and amortization (including non-cash impairment charges), straight-line lease expense (income), taxation and interest expense associated with our capital structure.  This metric measures our facility financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization.  Facility Operating Income is one of the metrics used by our senior management and board of directors to review the financial performance of the business on a monthly basis.  Facility Operating Income is also used by research analysts and investors to evaluate the performance of and value companies in our industry by investors, lenders and lessors.  In addition, Facility Operating Income is a common measure used in the industry to value the acquisition or sales price of communities and is used as a measure of the returns expected to be generated by a community.

A number of our debt and lease agreements contain covenants measuring Facility Operating Income to gauge debt or lease coverages.  The debt or lease coverage covenants are generally calculated as facility net operating income (defined as total operating revenue less operating expenses, all as determined on an accrual basis in accordance with GAAP).  For purposes of the coverage calculation, the lender or lessor will further require a pro forma adjustment to facility operating income to include a management fee (generally 4% to 5% of operating revenue) and an annual capital reserve (generally $250 to $450 per unit).  An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position, particularly on a facility-by-facility basis.

Limitations of Facility Operating Income

Facility Operating Income has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of earnings.  Material limitations in making the adjustments to our earnings to calculate Facility Operating Income, and using this non-GAAP financial measure as compared to GAAP net income (loss), include:

 
·
interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of communities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results; and

 
·
depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our communities, which affects the services we provide to our residents and may be indicative of future needs for capital expenditures.

An investor or potential investor may find this item important in evaluating our performance, results of operations and financial position on a facility-by-facility basis.  We use non-GAAP financial measures to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.

Facility Operating Income is not an alternative to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP.  You should not rely on Facility Operating Income as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of Facility Operating Income to GAAP net income (loss), along with our consolidated financial statements included herein.  We also strongly urge you to not rely on any single financial measure to evaluate our business.  In addition, because Facility Operating Income is not a measure of financial performance under GAAP and is susceptible to


 
varying calculations, the Facility Operating Income measure, as presented in this report, may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net loss to Facility Operating Income for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
     
      2010
   
2009
   
2010
   
2009
Net loss
  $ (9,557 )   $ (10,530 )   $ (23,852 )   $ (24,166 )
Benefit for income taxes
    (5,329 )     (2,495 )     (12,707 )     (11,607 )
Equity in earnings of unconsolidated ventures
    (119 )     (581 )     (516 )     (1,176 )
Loss on extinguishment of debt
    682       1,740       701       1,740  
Other non-operating expense (income)
          8             (4,224 )
Interest expense:
                               
Debt
    26,335       26,068       51,969       51,795  
Capitalized lease obligation
    7,568       7,382       15,214       14,476  
Amortization of deferred financing costs
    2,410       3,390       5,006       4,932  
Change in fair value of derivatives and amortization
    2,207       (7,900 )     4,847       (3,615 )
Interest income
    (453 )     (328 )     (1,080 )     (1,148 )
Income from operations
    23,744       16,754       39,582       27,007  
Depreciation and amortization
    73,168       67,262       146,229       135,395  
Change in future service obligation
    (1,064 )           (1,064 )      
Facility lease expense
    67,175       68,434       135,424       136,175  
General and administrative (including non-cash
  stock compensation expense)
    31,834       31,721       63,786       65,428  
Amortization of entrance fees
    (5,787 )     (5,232 )     (11,526 )     (10,342 )
Management fees
    (1,412 )     (1,298 )     (2,807 )     (3,015 )
Facility Operating Income
  $ 187,658     $ 177,641     $ 369,624     $ 350,648  

Ite m 3.  Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risks from changes in interest rates charged on our credit facilities, other floating-rate indebtedness and lease payments subject to floating rates. The impact on earnings and the value of our long-term debt and lease payments are subject to change as a result of movements in market rates and prices. As of June 30, 2010, we had approximately $1.2 billion of long-term fixed rate debt, $1.1 billion of long-term variable rate debt and $341.8 million of capital and financing lease obligations. As of June 30, 2010, our total fixed-rate debt and variable-rate debt outstanding had a weighted-average interest rate of 4.01%.

We enter into certain interest rate swap agreements with major financial institutions to manage our risk on variable rate debt.  Additionally, during 2009, we entered into certain cap agreements to effectively manage our risk above certain interest rates.  As of June 30, 2010, all of our debt, excluding our secured line of credit and capital and financing lease obligations, carries a fixed rate of interest or has a variable rate subject to a swap or interest rate cap agreement.  A change in interest rates would have impacted our interest rate expense related to all outstanding variable rate debt, excluding our secured line of credit and capital and financing lease obligations, as follows: a one, five and ten percent increase in interest rates would have an impact of $6.7 million, $35.5 million and $41.3 million, respectively.

As noted above, we have entered into certain interest rate protection and swap agreements to effectively cap or convert floating rate debt to a fixed rate basis, as well as to hedge anticipated future financing transactions. Pursuant to certain of our hedge agreements, we are required to secure our obligation to the counterparty by posting cash or other collateral if the fair value liability exceeds a specified threshold.


 
Ite m 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer each concluded that, as of June 30, 2010, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There has not been any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PAR T II.  OTHER INFORMATION

It em 1.  Legal Proceedings

The information contained in Note 9 to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by this reference.

It em 1A.  Risk Factors

For information regarding the most significant risks facing the Company, please see the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on February 26, 2010, as well as the risks discussed below.   There have been no material changes to the risk factors contained in our Form 10-K other than as set forth below.

Recent disruptions in the financial markets could affect our ability to obtain financing or to extend or refinance debt as it matures, which could negatively impact our liquidity, financial condition and the market price of our common stock.

The United States stock and credit markets have recently experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing (including any refinancing or extension of our existing debt) on reasonable terms, which may negatively affect our business.

As of June 30, 2010, we have an available secured line of credit with a $120.0 million commitment and separate letter of credit facilities of up to $78.5 million in the aggregate.  As of June 30, 2010, we also had $277.6 million of debt that is scheduled to mature during the twelve months ending June 30, 2011.  Although these debt obligations are scheduled to mature on or prior to June 30, 2011, we have the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $125.1 million of non-recourse mortgages payable included in such debt until 2013.  If we are unable to extend (or refinance, as applicable) any of our debt or credit or letter of credit facilities prior to their scheduled maturity dates, our liquidity and financial condition could be adversely impacted. In addition, even if we are able to extend or refinance our other maturing debt or credit or letter of credit facilities, the terms of the new financing may not be as favorable to us as the terms of the existing financing.

A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to further adjust our business plan accordingly. These events also may make it more


 
difficult or costly for us to raise capital, including through the issuance of common stock. Continued disruptions in the financial markets could have an adverse effect on us and our business.  If we are not able to obtain additional financing on favorable terms, we also may have to delay or abandon some or all of our growth strategies, which could adversely affect our revenues and results of operations.

If we are not able to satisfy the conditions precedent to exercising the extension options associated with certain of our debt agreements, our liquidity and financial condition could be negatively impacted.

Our consolidated financial statements reflect approximately $277.6 million of debt obligations due on or prior to June 30, 2011.  Although these debt obligations are scheduled to mature on or prior to June 30, 2011, we have the option, subject to the satisfaction of customary conditions (such as the absence of a material adverse change), to extend the maturity of approximately $125.1 million of non-recourse mortgages payable included in such debt until 2013, as the instruments associated with these mortgages payable provide that we can extend the respective maturity dates for either one two-year period or two terms of 12 months each from the existing maturity dates.  We presently anticipate that we will exercise the extension options and will satisfy the conditions precedent for doing so with respect to each of these obligations.  If we are not able to satisfy the conditions precedent to exercising these extension options, our liquidity and financial condition could be adversely impacted.
 
We will rely on reimbursement from governmental programs for a greater portion of our revenues than in the past, and will be subject to changes in reimbursement levels, which could adversely affect our results of operations and cash flow.

We will rely on reimbursement from governmental programs for a greater portion of our revenues than before, 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. Certain per person annual limits on Medicare reimbursement for therapy services became effective in 2006, subject to certain exceptions. These exceptions are currently scheduled to expire on December 31, 2010. If these exceptions are modified or not extended beyond that date, our revenues and net operating income relating to our outpatient therapy services could be materially adversely impacted.

In addition, 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. For example, the Centers for Medicare & Medicaid Services (CMS) recently proposed changes that would reduce therapy rates for subsequent services in a single session.  We estimate that, if adopted as proposed, the reimbursement change would have a recurring negative effect on the net operating income from our outpatient therapy services program in the range of $7.0 million to $8.0 million per year.  In addition, CMS recently announced a proposed decrease in home health rates for 2011.  We estimate that, if adopted as proposed, the rate decrease would have a negative effect on the net operating income from our home health programs in the range of $5.0 million to $6.0 million per year.  Although we believe that other proposed reimbursement changes (such as the pending adoption of RUGS IV) would offset the impact of the outpatient therapy and home health changes, there can be no assurance that such changes will, in fact, be implemented as currently proposed.  Changes in the reimbursement policies of the Medicare program could have an adverse effect on our results of operations and cash flow.

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest.

As of June 30, 2010, funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) and various principals of Fortress, in the aggregate, beneficially own 33,116,326 shares, or approximately 27.5% of our outstanding common stock (excluding unvested restricted shares). In addition, two of our directors are associated with Fortress and, pursuant to our Stockholders Agreement, Fortress currently has the ability to require us to nominate three individuals designated by Fortress for election as members of our nine-member Board of Directors (subject to their election by our stockholders).  As a result, Fortress may be able to effectively control and/or substantially influence fundamental and significant corporate matters and transactions, including: the election of directors; mergers, consolidations or acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our amended and restated certificate of incorporation and our amended and restated by-laws; and the dissolution of the Company. Fortress’s interests, including its ownership of
 
 
 
the North American operations of Holiday Retirement Corp., one of our competitors, may conflict with your interests. Their effective control of the Company could delay, deter or prevent acts that may be favored by our other stockholders such as hostile takeovers, changes in control of the Company and changes in management. As a result of such actions, the market price of our common stock could decline or stockholders might not receive a premium for their shares in connection with a change of control of the Company.

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

At June 30, 2010, 120,255,770 shares of our common stock were outstanding (excluding unvested restricted shares). All of the shares of our common stock are freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act, or any shares otherwise subject to the limitations of Rule 144.

Pursuant to our Stockholders Agreement, Fortress and certain of its affiliates and permitted third-party transferees have the right, in certain circumstances, to require us to register their shares of our common stock under the Securities Act for sale into the public markets. Upon the effectiveness of such a registration statement, all shares covered by the registration statement will be freely transferable. In connection with our obligations under the Stockholders Agreement, we received a request from Fortress to file a registration statement on Form S-3 to permit the resale, from time to time, of up to 60,875,826 shares of common stock owned by certain affiliates of Fortress. The registration statement on Form S-3 was declared effective on May 22, 2009 and 18,205,000 shares owned by affiliates of Fortress were sold pursuant to the registration statement in November 2009.  An additional 10,000,000 shares owned by affiliates of Fortress were sold pursuant to the registration statement in May 2010.

In addition, as of June 30, 2010, we had registered under the Securities Act an aggregate of 12,100,000 shares for issuance under our Omnibus Stock Incentive Plan, an aggregate of 1,000,000 shares for issuance under our Associate Stock Purchase Plan and an aggregate of 100,000 shares for issuance under our Director Stock Purchase Plan.  In accordance with the terms of the Omnibus Stock Incentive Plan, the number of shares available for issuance automatically increases by 400,000 shares on January 1 of each year. Pursuant to the terms of the Associate Stock Purchase Plan, the number of shares available for purchase under the plan will automatically increase by 200,000 shares on the first day of each calendar year beginning January 1, 2010.

Subject to any restrictions imposed on the shares and options granted under our stock incentive programs, shares registered under these registration statements will be available for sale into the public markets.
 
Ite m 5.  Other Information

In recognition of the fact that certain of the Company’s executive officer employment agreements were scheduled to expire in the near future, and in an effort to rationalize and conform the Company’s employment and severance arrangements with its existing executive officers (other than the Company’s Chief Executive Officer), on August 6, 2010, the Compensation Committee of the Company’s Board of Directors adopted the Brookdale Senior Living Inc. Severance Pay Policy, Tier I (the “Policy”).  The Policy applies to each of the members of the Company’s senior management executive committee (excluding the Chief Executive Officer) and other officers of the Company who have a title of Executive Vice President or higher (collectively, the “Eligible Employees”).  Additionally, on August 6, 2010, the Committee approved letter agreements (the “Letter Agreements”) for certain Eligible Employees (the “Letter Agreement Executives”), including the Company’s principal financial officer and each of the other executive officers, except the Chief Executive Officer, for whom compensation information was provided in the proxy statement related to the Company’s 2010 annual meeting of stockholders (the “Covered NEOs”).  The Letter Agreements, which became effective as of August 6, 2010, terminated each of the Letter Agreement Executives’ existing employment agreements in consideration of the Company’s adoption of the Policy.  The Letter Agreements also provide for certain modifications to the Policy as it is applied to the Letter Agreement Executives and state that the Policy will not be amended in a manner that is disadvantageous to a Letter Agreement Executive without such executive’s prior written consent.

Pursuant to the Policy, as modified by the Letter Agreements, following a Separation from Service (as defined in the Policy) by the Company without Cause (as defined in the Policy) or by a Covered NEO with Good Reason (as
 
 
 
defined in the Policy), the Covered NEOs are entitled to: (1) 250% of the Covered NEO’s annual salary at the current rate of base salary in effect at the Separation from Service (or, if greater, before the occurrence of circumstances giving rise to Good Reason); and (2) continued health insurance benefits for 18 months (or until a breach of the Policy or the Covered NEO becomes eligible for other medical coverage, if earlier).  Pursuant to the Policy, as modified by the Letter Agreements, following a Separation from Service by the Company without Cause or by a Covered NEO with Good Reason within 12 months following a Change in Control (as defined in the Policy), the Covered NEOs are entitled to: (1) 300% of the Covered NEO’s annual salary at the current rate of base salary in effect at the Separation from Service (or, if greater, before the occurrence of circumstances giving rise to Good Reason); and (2) continued health insurance benefits for 18 months (or until a breach of the Policy or the Covered NEO becomes eligible for other medical coverage, if earlier).  If payments pursuant to the Policy and other arrangements are not deductible by the Company under Section 280G of the Internal Revenue Code such payments shall be reduced (or repaid) in order to ensure the Company’s deduction of payments in connection with a change in control.

Severance pay will be paid to the Covered NEOs in equal periodic installments on the Company’s regular payroll dates, spanning 18 months and commencing on the 60th day following the Covered NEOs Qualifying Separation from Service (as defined in the Policy and modified by the Letter Agreements) so long as such executive has signed and returned a waiver and release and the seven day revocation period for the signed release has expired.  A Covered NEO must acknowledge in such release that all restrictive covenants to which he is a party will remain in force for the period specified in such covenants and the severance pay such executive is entitled to is additional consideration for such restrictive covenants.  A breach of such covenants will result in the cessation of severance pay and benefits and may result in a Covered NEO being required to repay certain severance pay and benefits already provided as well as certain costs and expenses.

The foregoing description does not purport to be complete and is qualified in its entirety by reference to the full text of the form Letter Agreement and Policy attached hereto as Exhibit 10.2.

Ite m 6.  Exhibits

See Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated by reference as if fully set forth herein.



 
SI GNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
           
 
BROOKDALE SENIOR LIVING INC.
   
 
(Registrant)
   
           
           
 
By:
/s/ Mark W. Ohlendorf
   
 
Name:
 
Mark W. Ohlendorf
   
 
Title:
 
Co-President and Chief Financial Officer
   
     
(Principal Financial and Accounting Officer)
   
 
Date:
 
August 6, 2010
   
           




 
EXHIBIT INDEX

     
Exhibit No.
 
Description
     
3.1
 
Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed on February 26, 2010).
3.2
 
Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 19, 2010).
4.1
 
Form of Certificate for common stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 3) (No. 333-127372) filed on November 7, 2005).
4.2
 
Stockholders Agreement, dated as of November 28, 2005, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Brookdale Acquisition LLC, Fortress Investment Trust II and Health Partners (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K filed on March 31, 2006).
4.3
 
Amendment No. 1 to Stockholders Agreement, dated as of July 26, 2006, by and among Brookdale Senior Living Inc., FIT-ALT Investor LLC, Fortress Registered Investment Trust, Fortress Brookdale Investment Fund LLC, FRIT Holdings LLC, and FIT Holdings LLC (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2006).
4.4
 
Amendment Number Two to Stockholders Agreement, dated as of November 4, 2009 (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q filed on November 4, 2009).
10.1
 
First Amendment, dated as of May 5, 2010, to the Credit Agreement, dated as of February 23, 2010, among certain subsidiaries of Brookdale Senior Living Inc., General Electric Capital Corporation, as administrative agent and lender, and the other lenders from time to time parties thereto.
10.2
 
Form of Severance Letter and Brookdale Senior Living Inc. Severance Pay Policy, Tier I.
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document.*
101.SCH
 
XBRL Taxonomy Extension Schema Document.*
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.*

*           Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.


 
47
 
 
 

 
Loan No. 07-0004350

 
FIRST AMENDMENT  TO CREDIT AGREEMENT
 
AND OTHER CREDIT DOCUMENTS
 
THIS FIRST AMENDMENT TO CREDIT AGREEMENT AND OTHER CREDIT DOCUMENTS (this “ Amendment ”) is entered into as of  May 5, 2010 (the “ Effective Date ”), among GENERAL ELECTRIC CAPITAL CORPORATION , a Delaware corporation (in its individual capacity, “ GECC ” and in its capacity as agent for the Lenders, together with its successors, “ Administrative Agent” ), the financial institutions other than GECC who are or hereafter become parties to the Credit Agreement (together with GECC, individually, a “ Lender” , and collectively, the “ Lenders ”, as the context may require), THE PARTIES LISTED ON SCHEDULE 1 ATTACHED HERETO (each a “ Borrower ” and collectively, the “ Borrowers ”) and BROOKDALE SENIOR LIVING INC. , a Delaware corporation (“ Guarantor ”).
 
RECITALS :
 
A.   Borrowers (other than BKD Kansas Properties, LLC), Administrative Agent and GECC have entered into that certain Credit Agreement dated as of February 23, 2010 (the “ Credit Agreement ”), pursuant to which the Lenders agreed to make the loan described therein (the “ Loan ”) to Borrowers.  BKD Kansas Properties, LLC was joined to the Credit Agreement as a borrower thereunder pursuant to that certain Joinder Agreement, dated as of March 5, 2010, executed by Administrative Agent, GECC, BKD Kansas Properties, LLC and the other Borrowers.
 
B.   Subject to the terms and conditions set forth in the Credit Agreement, the Borrowers (acting through the Borrower Representative), have the one-time right to cause an increase in the Aggregate Committed Amount by up to Twenty Million Dollars ($20,000,000) (to an aggregate amount not more than One Hundred Twenty Million Dollars ($120,000,000)) and the Borrower Representative has exercised this right on behalf of the Borrowers.
 
C.   Guarantor is liable for the payment of certain (a) obligations under the Loan pursuant to that certain Guaranty, dated of even date with the Credit Agreement and executed by the Guarantor in favor of Administrative Agent for the benefit of the Lenders (the “ Guaranty ”) and (b) costs and expenses related to the existence of hazardous materials affecting the property securing the Loan pursuant to that certain Hazardous Materials Indemnity Agreement, dated of even date with the Credit Agreement and executed by the Guarantor in favor of Administrative Agent for the benefit of the Lenders (the “ Environmental Indemnity ”).
 
D.   Agent, Lenders and Borrowers wish to amend the Credit Agreement to reflect the increase in the Aggregate Committed Amount as described above, all as more fully set forth in this Amendment.
 
NOW, THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Agent, Lenders and Borrowers hereby agree as follows:
 
 
 

 
 
 
1.   Defined Terms .  Capitalized terms used but not otherwise defined in this Amendment shall have the meanings ascribed to them in the Credit Agreement (as modified hereby).
 
2.   Recitals .  All of the Recitals stated above are true and accurate and by this reference are incorporated into and made a part of the body of this Amendment.
 
3.   Acknowledgement of Increase in Aggregate Commitment Amount .  Borrowers, Lenders and Agent acknowledge and agree that, provided that the Borrowers deliver to Agent the payments required under Section 2.01(b)(iii) of the Credit Agreement concurrently with the execution of this Amendment, effective as of the Effective Date, the Aggregate Committed Amount is One Hundred Twenty Million Dollars ($120,000,000), and each Lender’s Committed Amount shall be as set forth on the Schedule 2.01 attached hereto, which shall replace and supersede the Schedule 2.01 attached to the Credit Agreement.
 
4.   Ratification by Borrowers .  The Borrowers hereby (a) renew, ratify and confirm the indebtedness evidenced by the Notes and the other Credit Documents, as modified hereby; (b) acknowledge that the liens and security interests created and evidenced by the Security Documents and other Credit Documents are valid, subsisting and enforceable in accordance with their terms, as modified hereby; (c) acknowledge that as of the Effective Date there are no offsets, claims or defenses to the indebtedness evidenced by the Notes and the other Credit Documents, as modified hereby; (d) acknowledge and agree that Borrowers are, and shall remain, liable for the prompt and timely payment and performance of the indebtedness evidenced by the Notes and the other Credit Documents, as modified hereby; (e) agree that the Credit Documents are and remain in full force and effect, except as expressly modified hereby; and (f) represent and warrant that, after giving effect to the terms and conditions of this Amendment, there are no uncured Events of Default under the Credit Documents and, to each Borrowers’ actual knowledge, no event, condition or state of facts exists or has occurred and remains uncured that, with the giving of notice or passage of time or both, would constitute an Event of Default under the Credit Documents.
 
5.   Ratification by Guarantor .  Guarantor joins in the execution and delivery of this Amendment to (a) evidence its consent to, and agreement with, the terms and conditions of this Amendment and the transactions contemplated hereby; (b) renew, ratify and confirm all the terms, covenants and agreements contained in the Guaranty and the Environmental Indemnity; (c) stipulate and agree that all references in the Guaranty and Environmental Indemnity to (i) the “Loan” shall refer to the Loan, as amended by this Amendment, (ii) the “Credit Agreement” shall refer to the Credit Agreement, as amended by this Amendment, (iii) the “Credit Documents” or any of them shall refer to the Credit Documents as amended by this Amendment, and (v) any other term, provision or document shall refer to such term, provision or document as amended by this Amendment; and (d) renew, ratify, represent and confirm that (i) each of the Guaranty and Environmental Indemnity is and remains the valid, subsisting and enforceable agreement of Guarantor, enforceable against Guarantor in accordance with its terms, (ii) as of the date hereof there are no offsets, claims or defenses to the Guaranty or Environmental Indemnity, by reason of this Amendment, the transactions contemplated hereby or otherwise, (iii) all representations and warranties of Guarantor in the Guaranty and Environmental Indemnity remain true and correct in all material respects as of the date hereof; (iv) Guarantor has paid and performed all covenants and
 
 
 

 
 
 
obligations required to be paid and performed by Guarantor as of the date hereof, and (v) after giving effect to the terms and conditions of this Amendment, no uncured Event of Default exists under the Credit Documents and, to Guarantor’s actual knowledge, no event, condition or state of facts exists or has occurred and remains uncured which, with the giving of notice or passage of time or both, would constitute an Event of Default.
 
6.   Modification of other Credit Documents .  All references in the other Credit Documents to the “Credit Agreement” shall mean the Credit Agreement as modified hereby.
 
7.   Continued Validity .  Except as expressly provided in this Amendment, all terms, conditions, representations, warranties, and covenants contained in the Credit Agreement and the other Credit Documents shall remain in full force and effect, and are hereby ratified, confirmed and acknowledged by the Borrowers.
 
8.   Representations and Warranties .  The Borrowers hereby represent and warrant to Administrative Agent and Lenders that (a) (after giving effect to the terms and conditions of this Amendment), no Event of Default exists, (b) all of the representations and warranties set forth in the Credit Agreement (after giving effect to the terms and conditions of this Amendment), are true and correct in all material respects on and as of the date of this Amendment as if made on or as of such date, and (c) the execution, delivery and performance of this Amendment (i) have been authorized by all requisite corporate, partnership, limited liability company and trust action and (ii) do not and will not violate or conflict with, result in a breach of or require any consent under the articles or certificate of incorporation, bylaws, partnership agreement, trust agreement or other organizational documents of Borrowers and their partners and/or members, any applicable laws or any material agreement binding on Borrowers or any of their properties.
 
9.   Fees and Expenses .  Borrowers agree to pay all reasonable fees and expenses incurred by Administrative Agent and Lenders in connection with the drafting and negotiation of this Amendment, and the transactions contemplated hereby, including, without limitation, fees and costs of third-party consultants, accountants or professionals retained by Administrative Agent and Lenders, reasonable attorneys’ fees and expenses and recording fees.
 
10.   Construction .  This Amendment and the rights and obligations of the parties hereunder shall be construed and interpreted in accordance with and governed by, the laws of the State of Illinois and any applicable laws of the United States of America.
 
11.   Binding Effect .  This Amendment shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns; provided, however, that Borrowers shall not assign or transfer its rights or obligations hereunder without the prior written consent of the Lender.
 
12.   Counterparts .  This Amendment may be executed in several counterparts, each of which shall be fully effective as an original, and all of which together shall constitute one and the same instrument.
 
13.   NO ORAL AGREEMENTS .   THIS AMENDMENT AND THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
 
 
 

 
 
 
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES .
 
[REMAINDER OF PAGE INTENTIONALLY BLANK]

 
 

 

 
ADMINISTRATIVE AGENT:
 
GENERAL ELECTRIC CAPITAL
   
CORPORATION , as Administrative Agent
     
     
   
By:
 /s/ Adam Zeiger
 
   
Name:
 Adam Zeiger
 
   
Title:
 Authorized Signatory
 




[signatures continue on the following page]
 
 
 

 
 
 
BORROWERS:
 
BLC ATRIUM-JACKSONVILLE SNF,
             
LLC , a Delaware limited liability
             
company
             
BLC WESTWOOD, LLC , a Delaware
             
limited liability company
             
BLC JACKSON OAKS, LLC , a Delaware
             
limited liability company
             
CAROLINA HOUSE OF BLUFFTON,
             
LLC , a North Carolina limited liability
             
company
             
CAROLINA HOUSE OF HILTON
             
HEAD, LLC , a North Carolina limited
             
liability company
             
ARC HDV, LLC , a Tennessee limited
             
liability company
             
FIT RAMSEY, LLC , a Delaware limited
             
liability company
             
AHC STERLING HOUSE OF
             
HARBISON, LLC , a Delaware limited
             
liability company
             
AHC PROPERTIES, INC. , a Delaware
             
corporation
             
BROOKDALE PLACE OF BATH, LLC ,
             
a Delaware limited liability company
             
BKD KANSAS PROPERTIES, LLC ,  
             
a Delaware limited liability company


   
By:
 /s/ George T. Hicks
 
   
Name:
 George T. Hicks
 
   
Title:
 Executive Vice President
 




[Signatures Continued on Following Page]
 
 
 

 

 
LENDERS:
 
GENERAL ELECTRIC CAPITAL
   
CORPORATION
     
     
   
By:
 /s/ Adam Zeiger
 
   
Name:
 Adam Zeiger
 
   
Title:
 Authorized Signatory
 



   
BANK OF AMERICA, N.A.
     
     
   
By:
 /s/ Zubin R. Shroff
 
   
Name:
 Zubin R. Shroff
 
   
Title:
 Vice President
 



   
FIFTEENTH INVESTMENT HFS LIMITED
     
     
   
By:
 /s/ Steve Ruth
 
   
Name:
 Steve Ruth
 
   
Title:
  Authorized Signatory Chief Investment Officer
 


 


Brookdale Senior Living Inc.
111 Westwood Place, Suite 400
Brentwood, Tennessee 37027

August 6, 2010

[Executive]
[Address]

Re:           Severance Pay Policy Letter Agreement for [Executive] (the “Letter Agreement”)
 
Reference is made to that certain employment agreement, dated [______] (the “Employment Agreement”), entered into between [Executive] (the “Executive”) and Brookdale Senior Living Inc., a Delaware corporation (the “Company”).  Pursuant to this Letter Agreement, the Company and the Executive hereby mutually agree to terminate the Employment Agreement in its entirety in consideration of the Company’s adoption of the Severance Pay Policy, Tier I, (the “Policy”) attached hereto as Exhibit A , pursuant to which the Executive shall be an Eligible Employee (as such term is defined therein); provided that, the Company and the Executive hereby agree that, for purposes of applying the Policy to the Executive, the term Qualifying Separation from Service will include Executive’s voluntary Separation from Service for Good Reason (even in the absence of a Change of Control) and, as a result, Subsections 4(a)(i)(1) and 4(a)(ii)(1) of the Policy will be replaced with the versions of Subsections 4(a)(i)(1) and 4(a)(ii)(1) attached hereto as Exhibit B when applying the Policy to the Executive.  For purposes of clarity and the avoidance of doubt, upon the Executive’s acceptance and delivery to the Company of this Letter Agreement, the Policy as applied to the Executive (including with the application of the Subsections on Exhibit B as described above) will not thereafter be amended in a manner that is disadvantageous to the Executive, without the Executive’s prior written consent. It is further agreed that the Policy shall supersede and replace any other Company severance plans, programs, policies, or courses of dealing covering the Executive, which exist on the date hereof, in their entirety.  Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Policy.

[By accepting the terms and conditions of this Letter Agreement, as reflected by the Executive’s signature below, the Executive hereby agrees to be bound, to the extent not already bound, by the restrictive covenants attached hereto as Exhibit C .]
 
 
 
BROOKDALE SENIOR LIVING INC.
 
 
 
 
  By:    
       
 
  Title:    
 
 

 
 Accepted and Agreed:
 
 
 
 
 
 
 Executive
 
 
 
 
  Date

 
 

 

 
EXHIBIT A

Severance Pay Policy, Tier I


[attached]
 
 
 

 
 
 
BROOKDALE SENIOR LIVING INC.
 
SEVERANCE PAY POLICY
 
TIER I
 

 

 

 

 

 

Effective August 6, 2010
 
 
 

 
 
 
TABLE OF CONTENTS
 
  Page
Section 1.
Purpose of the Policy
1
Section 2.
Eligible Employees
1
Section 3.
Definitions
1
Section 4.
Severance Pay and Severance Benefits.
5
Section 5.
Payment of Severance Pay and Severance Benefits.
7
Section 6.
Section 409A
7
Section 7.
Waiver and Release
8
Section 8.
Restrictive Covenants
8
Section 9.
Policy Administration
9
Section 10.
Claims Procedure
9
Section 11.
Equity Awards
10
Section 12.
280G
10
Section 13.
No Assignment
11
Section 14.
No Employment Rights
11
Section 15.
Policy Funding
12
Section 16.
Survival of Policy Upon a Change in Control
12
Section 17.
Applicable Law
12
Section 18.
Severability
13
Section 19.
Policy Year
13
Section 20.
Amendment/Termination of Policy
13
Section 21.
Recovery of Payments Made by Mistake
13
Section 22.
Representations Contrary to the Policy
14
Section 23.
ERISA
14
 
 
 

 
 
 
Section 24.
Cooperation
14
Section 25.
Miscellaneous Provisions
14

 
 

 

 
SEVERANCE PAY POLICY
 
TIER I
 
Effective August 6, 2010, Brookdale Senior Living Inc. (sometimes hereinafter referred to as the “Company”) established the Brookdale Senior Living Inc. Severance Pay Policy, Tier I (hereinafter the “Policy”), for the benefit of a select group of management and highly compensated employees of the Company who are eligible to participate as described herein.
 
This Policy supersedes any employment agreements, Company severance plans, programs, policies, or course of dealing covering eligible employees, both formal and informal.
 
Section 1.                   Purpose of the Policy
 
The purpose of the Policy is to ensure that all eligible employees are given assurance of a determinable amount of Severance Pay and/or Severance Benefits in the event of a Separation from Service under the conditions specified in this Policy.
 
Section 2.                   Eligible E mployees
 
The Policy is applicable to those employees of the Company and its Subsidiaries who are members of the Company’s Executive Committee (excluding the Chief Executive Officer) (the “Executive Committee Members”) and other officers of the Company who have a title of Executive Vice President or higher (the “Other Eligible Employees”).  For purposes of the Policy, all such employees shall be referred to herein as “Eligible Employees.”
 
Section 3.                   Definitions
 
(a)           “Affiliate” means an affiliate of the Company (or other referenced entity, as the case may be) as defined in Rule 12b-2 promulgated under Section 12 of the Exchange Act (the “Exchange Act”).  For purposes of determining whether an Eligible Employee has had a Separation from Service, Section 1.409A-1(h)(3) of the Treasury Regulations shall determine whether an Affiliate is a “service recipient” under Code Section 409A.
 
(b)           “Cause” shall mean and be limited to the following:
 
(i)           conviction of, guilty plea concerning or confession of any felony;
 
(ii)           any act of fraud, theft or embezzlement committed by the Eligible Employee in connection with the Company’s or its Subsidiaries’ business,
 
(iii)           any material breach of any reasonable and lawful rule or directive of the Company;
 
(iv)           the gross or willful neglect of duties or gross misconduct by the Eligible Employee; or
 

 
1

 

 
(v)           the habitual use of drugs or habitual, excessive use of alcohol to the extent that any of such uses in the Board of Director’s (the “Board’s”) good faith determination materially interferes with the performance of the Eligible Employee’s duties to the Company.
 
(c)           “Change in Control” shall be deemed to have occurred if an event set forth in any one of the following paragraphs shall have occurred:
 
(i)           any Person   is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or any of its Affiliates) representing 50% or more of the combined voting power of the Company’s then outstanding securities; or
 
(ii)           there is consummated a merger or consolidation of the Company or any direct or indirect Subsidiary of the Company with any other corporation, other than a merger or consolidation immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the Board of the entity surviving such merger or consolidation or, if the Company or the entity surviving such merger is then a subsidiary, the ultimate parent thereof; or
 
(iii)           the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than (a) a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by stockholders of the Company following the completion of such transaction in substantially the same proportions as their ownership of the Company immediately prior to such sale or (b) a sale or disposition of all or substantially all of the Company’s assets immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the entity to which such assets are sold or disposed or, if such entity is a subsidiary, the ultimate parent thereof.
 
Notwithstanding the foregoing, a “Change in Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. As used in the foregoing definition of “Change in Control”, the term “Company” shall not include any successor of the Company.
 
 
2

 

 
(d)           “Claim” shall mean any request for Severance Pay under the Policy, which Claim shall be deemed to be made on the date of an Eligible Employee’s Separation from Service.  Any claim for Severance Benefits shall be made and determined in accordance with the terms of the applicable health plan pursuant to which such benefits are provided.
 
(e)           “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.
 
(f)           “Disability” shall mean, as determined by the Board in good faith, an Eligible Employee’s inability, due to disability or incapacity, to  perform all of the Eligible Employee’s duties hereunder on a full-time basis for (i) periods aggregating one hundred eighty (180) days, whether or not continuous, in any continuous period of three hundred and sixty five (365) days or, (ii) where the Eligible Employee’s absence is adversely affecting the performance of the Company in a significant manner, periods greater than ninety (90) days and the Eligible Employee is unable to resume the Eligible Employee’s duties on a full time basis within ten (10) days of receipt of written notice of the Board’s determination under this clause (ii).
 
(g)           “Good Reason” means the occurrence, without the express prior written consent of  an Eligible Employee, of any of the following circumstances, unless such circumstances are fully corrected by the Company within thirty (30) days following written notification by the Eligible Employee (which written notice must be delivered within ninety (90) days of the occurrence of such circumstances) that the Eligible Employee intends to terminate the Eligible Employee’s employment for one of the reasons set forth below:
 
(i)           the failure by the Company to pay to the Eligible Employee any material portion of the Eligible Employee’s base salary or bonus within thirty (30) days of the date such compensation is due; or
 
(ii)           the relocation of the Eligible Employee’s principal office at the Company to a location outside a fifty (50) mile radius from the Eligible Employee’s present principal office location with Brookdale; or
 
(iii)           the Eligible Employee is assigned duties, compensation or responsibilities that are materially and significantly reduced with respect to the scope or nature of his/her duties, compensation and/or responsibilities.
 
The right to effect a Separation from Service for Good Reason must be exercised by an Eligible Employee within six (6) months following the initial existence of the condition that constitutes Good Reason, otherwise the right to a Separation from Service on the basis of that condition shall be deemed to have been waived.
 
(h)           “Notice” shall mean any notice required under the Policy; which notice shall be in writing.  Notice hereunder shall be deemed to have been given when delivered in person to the Company or an Eligible Employee; or actually received by the Company or an Eligible Employee after being transmitted by facsimile to the Company or an Eligible Employee; or, deposited in the United States mail, certified or registered, postage prepaid, return receipt requested, addressed to the
 

 
3

 
 
 
Company or an Eligible Employee at their respective last known principal business address, and thereafter actually received by the Company or an Eligible Employee.  The burden to prove timely delivery to and receipt by the other party shall be on the party giving notice.
 
(i)           “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company, its Affiliates or any of their respective subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.
 
(j)           “Policy Administrator” shall mean the Company, or the Person(s), committee or other group designated by the Company to serve as Policy Administrator.
 
(k)           “Qualifying Separation from Service” shall mean the Eligible Employee’s Separation from Service with the Company either (i) initiated by the Company without Cause or (ii) as a result of the Eligible Employee’s voluntary Separation from Service for Good Reason within twelve (12) months following a Change of Control.  A Qualifying Separation from Service shall not include a Separation from Service initiated by the Company by reason of Cause, or as a result of the Eligible Employee’s voluntary resignation, retirement, death or Disability except as provided in Section 3(k)(ii) above.
 
(l)           “Release” shall mean the Waiver and Release which an Eligible Employee is required to provide the Company in accordance with Section 7 of the Policy.
 
(m)           “Separation from Service” shall mean an Eligible Employee’s cessation of services to the Company and/or its Subsidiaries and/or its Affiliates.  For purposes of this Policy, an Eligible Employee is treated as continuing in employment with the Company while the Eligible Employee is on military leave, sick leave, or other bona fide leave of absence if the period of such leave does not exceed six (6) months, or if longer, so long as the Eligible Employee retains a right to reemployment with the Company under an applicable statute or by contract.  A leave of absence shall constitute a bona fide leave of absence only if there is a reasonable expectation an Eligible Employee will return to perform services for the Company following such leave.  If the period of leave exceeds six (6) months and an Eligible Employee does not retain a right to reemployment under an applicable statute or by contract, the Eligible Employee will be deemed to have a Separation from Service on the first date immediately following such six (6) month period.  Notwithstanding the foregoing, if (i) a leave of absence is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six (6) months and (ii) such impairment causes an Eligible Employee to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, then a twenty-nine (29) month period of absence shall be substituted for the six (6) month period described above.  For purposes of this Policy, an Eligible Employee shall be deemed to have experienced a Separation from Service on any date the Eligible Employee’s level of bona fide services performed for the Company decreases to a level equal to twenty percent (20%) or less of the average level of services rendered by the Eligible Employee during the thirty-six (36) month period ending on such date or the full period
 

 
4

 

 
of services rendered by the Eligible Employee for the Company if the Eligible Employee has been providing services to the Company for less than thirty-six (36) months as of such date.  Whether a Separation from Service has occurred will be determined in accordance with Treasury Regulation 1.409A-1(h), or any successor thereto.
 
(n)           “Severance Pay” shall mean the severance pay payable to an Eligible Employee whose employment is terminated as provided in Section 4(a) of the Policy.
 
(o)           “Severance Benefits” shall mean those benefits payable to the Executive whose employment is terminated as provided in Section 4(b) of the Policy.
 
(p)           “Subsidiary” means any corporation or other entity in a chain of corporations or other entities (beginning with the Company and ending with the Subsidiary to which the service provider provides direct services on the date of grant of the Award) in which each corporation or other entity has a "controlling interest" in another corporation or other entity in the chain.  For purposes of determining whether an Eligible Employee has had a Separation from Service, Section 1.409A-1(h)(3) of the Treasury Regulations shall determine whether a Subsidiary is a Service Recipient under Code Section 409A.
 
Section 4.                   Severance Pay and Severance Benefits.
 
(a)            Severance Pay .  In the event that (i) an Eligible Employee’s employment is terminated as a result of a Qualifying Separation from Service and (ii) the Eligible Employee timely provides the Company with an enforceable Release in accordance with Sections 5 and 7 of the Policy which is acceptable to the Company in its sole discretion, the Company shall pay to the Eligible Employee and provide the Eligible Employee the following Severance Pay and/or Severance Benefits:
 
(i)           If at the time of the Separation from Service such Eligible Employee is an Executive Committee Member (or if such employee was otherwise an Executive Committee Member before the occurrence of circumstances giving rise to Good Reason):
 
(1)           If Separation from Service by the Company without Cause:
 
(A)           Two hundred and fifty percent (250%) of annual salary at the current rate of base salary in effect at the Separation from Service (provided, however, that notwithstanding anything else contained herein the Severance Pay Period under this Section 4(a)(i)(1) shall be eighteen (18) months).
 
(2)           If Separation from Service by the Company without Cause or by an Eligible Employee with Good Reason within twelve (12) months following a Change in Control:
 
(A)           Three hundred percent (300%) of annual salary at the current rate of base salary in effect at the Separation from Service (or, if greater, before the occurrence of circumstances giving rise to Good Reason)
 
 
5

 
 

(provided, however, that notwithstanding anything else contained herein the Severance Pay Period under this Section 4(a)(i)(2) shall be eighteen (18) months).
 
(ii)           If at the time of the Separation from Service such Eligible Employee is an Other Eligible Employee (or if such employee was otherwise an Other Eligible Employee before the occurrence of circumstances giving rise to Good Reason):
 
(1)           If Separation from Service by the Company without Cause:
 
(A)           Twelve (12) months salary at the current rate of base salary in effect at the Separation from Service; and
 
(B)           Seventy-five percent (75%) of the target annual bonus for the current year.
 
(2)           If Separation from Service by the Company without Cause or by an Eligible Employee with Good Reason within twelve (12) months following a Change in Control:
 
(A)           Twelve (12) months salary at the current rate of base salary in effect at the Separation from Service (or, if greater, before the occurrence of circumstances giving rise to Good Reason); and
 
(B)           One hundred percent (100%) of the annual cash incentive target for the current year (or, if greater, one hundred percent (100%) of the target annual bonus before the occurrence of circumstances giving rise to Good Reason).
 
(b)            Severance Benefits .  In the event of a Qualifying Separation from Service, an Eligible Employee shall be eligible to elect COBRA continuation benefits pursuant to Section 4980B of the Code and Section 601, et. seq. of ERISA (“COBRA”) under the Company’s medical plan (including dependent coverage where applicable) in accordance with the terms of the applicable plan, as such plan may be amended from time to time (the “Severance Benefits”).  If the Eligible Employee elects to continue health insurance coverage through COBRA, the Company will continue to provide current coverage (minus the amount of the then-applicable employee contribution portion) during the Severance Pay Period (exclusive of any tax consequences to the recipient(s) on resulting coverage or benefits) as if the Eligible Employee were still an active employee of the Company.  The costs of the Company’s portion of any premiums due under this Section 4(b) shall be included in the Eligible Employee’s gross income to the extent the provision of such benefits would be deemed to be discriminatory under Section 105(h) of the Code.  For the avoidance of doubt, the parties mutually agree any Severance Benefits paid during the Severance Pay Period shall run concurrently with the applicable COBRA continuation period and the Eligible Employee shall be solely responsible for the full cost of any heath premiums for the continuation of COBRA coverage which may extend past the Severance Pay Period, if any.  Notwithstanding the foregoing,  the Eligible Employee’s Severance Benefits coverage shall end on the earliest of (A) the last day of the
 

 
6

 

 
Severance Pay Period (as defined below), (B) the date of any material breach of the provisions of this Policy by the Eligible Employee, or (C) the date the Eligible Employee first becomes eligible for medical coverage under another plan, program or other arrangement of any type or description, without regard to whether the Eligible Employee neglects, refuses or otherwise fails to take any action required for enrollment in such other plan, program or other arrangement.  The Eligible Employee shall provide Notice to the Company in writing within seven (7) days of becoming eligible for any such alternate coverage.
 
Section 5.                   Payment of Severance Pay and Severance Benefits.
 
Severance Pay will be paid to an Eligible Employee in equal periodic installments (with such installments spanning the number of months for which the salary component of Severance Pay is calculated in Section 4(a), provided, however, that notwithstanding anything else contained herein the Severance Pay Period under Sections 4(a)(i)(1) and 4(a)(i)(2) shall be eighteen (18) months (the “Severance Pay Period”)) on the Company’s regular payroll dates, with such payments commencing as of the Severance Commencement Date, so long as all requirements of this Section 5 and all other provisions of this Policy regarding the payment of Severance Pay are met.  Severance Benefits shall be provided in accordance with Section 4(b) of the Policy.  Notwithstanding any other provision of the Policy, any Severance Pay shall be paid or commence on the sixtieth (60 th ) day (the “Severance Commencement Date”) following the Eligible Employee’s Qualifying Separation from Service, so long as the Eligible Employee has signed and returned a Release and the seven (7) day revocation period (as described in Section 7 of the Policy) for the signed Release has expired.  If a signed Release is not returned, the Eligible Employee revokes the Release or the seven (7) day revocation period has not expired by the sixtieth (60 th ) day following the Eligible Employee’s Separation from Service, the Eligible Employee shall forfeit all Severance Pay and the right to any continued Severance Benefits (as of the date of revocation or the Severance Commencement Date, whichever is earlier).  All taxes and other deductions required by law, and any additional sums owing the Company shall be deducted from any Severance Pay and/or Severance Benefits as determined by the Policy Administrator in its sole discretion and in accordance with Section 6 of the Policy. Any benefits that accrue under this Policy, if any, are net of any such amount other than taxes and other deductions required by law.
 
Section 6.                   Section 409A
 
It is intended that (i) each payment or installment of  payments provided under this Policy is a separate “payment” for purposes of Code Section 409A and (ii) that the payments satisfy, to the greatest extent possible, the exemptions from the application of  Code Section 409A including those exceptions provided under Treasury Regulations 1.409A-1(b)(4) (regarding short-term deferrals), 1.409A-1(b)(9)(iii) (regarding the two-times, two year exception), and 1.409A-1(b)(9)(v) (regarding reimbursements and other separation pay).  Notwithstanding anything to the contrary in this Policy, if the Company determines (i) that on the date of an Eligible Employee’s Separation from Service or at such other time that the Company determines to be relevant, the Eligible Employee is a “specified employee” (as such term is defined under Treasury Regulation 1.409A-1(i)(1)) of the Company and (ii) that any payments to be provided to the Eligible Employee pursuant to this Policy are or may become subject to the additional tax under Code Section 409A(a)(1)(B) or any other taxes or

 
7

 

 
penalties imposed under Code Section 409A (“Section 409A Taxes”) if provided at the time otherwise required under this Policy, then such payments shall be delayed until the date that is six (6) months after the date of the Eligible Employee’s Separation from Service with the Company, or if earlier, the Eligible Employee’s death.  Any payments delayed pursuant to this Section 6 shall be made in a lump sum on the first day of the seventh month following the Eligible Employee’s Separation from Service or, if earlier, the Eligible Employee’s death.

Notwithstanding any other provision of this Policy to the contrary, in no event shall any payment under this Policy that constitutes “deferred compensation” for purposes of Code Section 409A and the Treasury Regulations promulgated thereunder be subject to offset (excluding any forfeiture of Severance Pay or Severance Benefits pursuant applicable sections of this Policy) by any other amount unless otherwise permitted by Code Section 409A.

Section 7.                   Waiver and Release
 
In order to receive the Severance Pay or to continue to receive the Severance Benefits available under the Policy, an Eligible Employee must execute and submit to the Policy Administrator a signed, enforceable Release reasonably satisfactory to the Company pursuant to the time periods of the applicable Release and within forty-five (45) days of receiving the Release.  In the Release, the Eligible Employee will waive all claims or causes of action arising out of or related to his/her employment and the termination of his/her employment.  Such Release shall be provided to an Eligible Employee within three (3) business days of the date of the Eligible Employee’s Qualifying Separation from Service.
 
An Eligible Employee may revoke his/her signed Release within seven (7) days of signing such Release, provided such revocation is made in accordance with the provisions for revocation set forth below.  Any such revocation must be made in writing and must be received by the Policy Administrator within such seven (7) day period. If an Eligible Employee timely revokes his/her Release he/she shall not be eligible to receive any Severance Pay or continue to receive Severance Benefits under the Policy effective on the date of such revocation.  If an Eligible Employee timely submits a signed Release and does not exercise his/her right of revocation and/or the revocation period expires prior to the Severance Commencement Date he/she shall be eligible to receive Severance Pay and continue to receive Severance Benefits under the Policy. Eligible Employees are encouraged to contact their personal attorney at their own expense to review the Release, if they so desire. An Eligible Employee’s acceptance and right to retention of Severance Pay and/or Severance Benefits are contingent upon the terms of the Policy and full compliance with the terms of the Release.
 
Section 8.                   Restrictive Covenants
 
(a)           Eligible Employees must acknowledge in the Release that the restrictive covenants contained in any equity awards issued pursuant to the Company’s Omnibus Stock Incentive Plan or any predecessor or successor plan (the “Equity Plans”) and any and all other agreements between an Eligible Employee and the Company or to which an Eligible Employee is a party, relating to non-competition (as applicable), non-solicitation of employees, clients and others, non-disparagement
 
 
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and confidentiality will remain in force for the period specified therein and the Severance Pay that the Eligible Employee may be entitled to pursuant to this Policy is additional consideration for such restrictive covenants.
 
(b)           Not by way of limitation, a breach of such restrictive covenants by an Eligible Employee shall result in (i) the immediate and permanent cessation of payment of Severance Pay and the provision of Severance Benefits to such Eligible Employee, (ii) the obligation of the Eligible Employee to repay to the Company upon written demand ninety percent (90%) of the amount, cost or value of the Severance Pay and/or Severance Benefits previously paid or provided to the Eligible Employee, and (iii) the obligation of the Eligible Employee to pay to the Company its costs and expenses in enforcing this Section (including court costs, expenses and reasonable legal fees).
 
Section 9.                   Policy Administration
 
The Policy Administrator shall have the sole, absolute and final discretionary authority to determine eligibility for Policy benefits and to construe the terms of the Policy, including the making of factual determinations.  The decisions of the Policy Administrator shall be final and conclusive with respect to all questions concerning the interpretation and administration of the Policy.  The Policy Administrator may delegate to other persons responsibilities for performing certain of the duties of the Policy Administrator under the terms of the Policy and may seek such expert advice as the Policy Administrator deems reasonably necessary with respect to the Policy.  The Policy Administrator shall be entitled to rely upon the information and advice furnished by such delegatees and experts, unless actually knowing such information and advice to be inaccurate or unlawful.
 
Section 10.                          Claims Procedure
 
(a) In General .       An Eligible Employee may file a Claim for Severance Pay benefits with the Policy Administrator. The Policy Administrator will notify the claimant of any adverse benefit determination within a reasonable period of time, but in no event later than sixty (60) days after receipt of the Claim. The sixty (60) day period may be extended by an additional sixty (60) days for matters beyond the control of the Policy Administrator as long as the claimant is notified of the reasons for such extension and the time by which a decision will be rendered prior to the expiration of the initial sixty (60) day period. An adverse benefit determination by the Policy Administrator may be appealed as provided in this Section.
 
(b) Adverse Benefit Determination .        The Policy Administrator will provide written or electronic notification of an adverse benefit determination within the timeframes set forth in Section 10(a) above.  This notification will include: (i) the specific reasons for the adverse benefit determination; (ii) reference to the specific Policy provisions on which the determination was based; (iii) a description of any additional material or information necessary for the claimant to perfect the Claim, and an explanation of why such material or information is needed; (iv) a description of the Policy’s review procedures and the time limits applicable to such procedures; (v) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claim other than documents which are attorney work product or which are subject to attorney-client privilege; and (vi) a statement of the claimant’s right to bring a civil action under Section 502(a) of ERISA.
 
 
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           (c) Appeals .       Upon receipt of notification of an adverse benefit determination, the claimant shall have sixty (60) days from such date to file an appeal with the Policy Administrator. The claimant may submit written comments, documents, records and other information relating to the Claim. The review shall take into account all comments, documents, records, and other information submitted by the claimant relating to the Claim, without regard to whether such information was submitted or considered in the initial benefit determination.  The Policy Administrator will provide written or electronic notification to the claimant of its decision on appeal within a reasonable period of time, but in no event later than sixty (60) days after receipt of the appeal.  This sixty (60) day period may be extended by an additional sixty (60) days for matters beyond the control of the Policy Administrator as long as the claimant is notified of the reasons for such extension and the time by which a decision will be rendered prior to the expiration of the initial sixty (60) day period.  The Policy Administrator’s notification of its decision on appeal shall include the following:
 
(i)           The specific reasons for the adverse appeal determination;
 
(ii)           Reference to the specific Policy provisions on which the determination was based;
 
(iii)           A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claim, other than documents which are attorney work product or which are subject to attorney-client privilege; and
 
(iv)           A statement of the claimant’s right to bring a civil action under Section 502(a) of ERISA.
 
Section 11.                                   Equity Awards
 
The terms of any grant agreements with respect to equity awards issued pursuant to the Equity Plans shall govern the treatment of such awards in the event of a Separation from Service and shall not be modified hereby.
 
Section 12.                        280G
 
(a)            Notwithstanding anything in this Policy to the contrary, in the event that any payment or benefit received or to be received by an Eligible Employee (including any payment or benefit received in connection with a “Change in Control” or the termination of  an Eligible Employee’s employment or consultancy, whether pursuant to the terms of this Policy or any other plan, arrangement or agreement) (all such payments and benefits being hereinafter referred to as the “Total Payments”) would not be deductible (in whole or part) by the Company or any of its subsidiaries or Affiliates making such payment or providing such benefit as a result of Code Section 280G, then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of Code Section 280G in such other plan, arrangement or agreement), the portion of the Total Payments that do not constitute deferred compensation within the meaning of Code Section 409A shall first be reduced (if necessary, to zero), and all other Total Payments shall thereafter be reduced (if necessary, to zero).

 
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(b)            For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which an Eligible Employee shall have waived at such time and in such manner as not to constitute a “payment” within the meaning of Code Section 280G(b) shall be taken into account; (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel (“Tax Counsel”) reasonably acceptable to an Eligible Employee and selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent auditor (the “Auditor”), does not constitute a “parachute payment” within the meaning of Code Section 280G(b)(2), including by reason of Code Section 280G(b)(4)(A); (iii) the Severance Pay payable to an Eligible Employee pursuant to Section 4(a) hereof shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii) of this paragraph) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Code Section 280G(b)(4)(B) or are otherwise not subject to disallowance as deductions by reason of Code Section 280G, in the opinion of Tax Counsel; and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of Code Sections 280G(d)(3) and (4).
 
(c)            If it is established pursuant to a final determination of a court of competent jurisdiction or an Internal Revenue Service proceeding that, notwithstanding the good faith of an Eligible Employee and the Company in applying the terms of this Section 12, the Total Payments paid to or for an Eligible Employee’s benefit are in an amount that would result in any portion of such Total Payments being subject to the excise tax imposed by Code Section 4999 (the “Excise Tax”), then, if such repayment would result in (i) no portion of the remaining Total Payments being subject to the Excise Tax and (ii) a dollar-for-dollar reduction in the Eligible Employee’s taxable income and wages for purposes of federal, state and local income and employment taxes, the Eligible Employee shall have an obligation to pay the Company upon demand an amount equal to the sum of (x) the excess of the Total Payments paid to or for the Eligible Employee’s benefit over the Total Payments that could have been paid to or for the Eligible Employee’s benefit without any portion of such Total Payments being subject to the Excise Tax; and (y) interest on the amount set forth in clause (x) of this sentence at the rate provided in Code Section 1274(b)(2)(B) from the date of the Eligible Employee’s receipt of such excess until the date of such payment.

Section 13.                        No Assignment
 
Severance Pay and Severance Benefits payable to or to be provided under the Policy shall not be subject to anticipation, alienation, pledge, sale, transfer, assignment, garnishment, attachment, execution, encumbrance, levy, lien, or charge, and any attempt to cause such Severance Pay and/or Severance Benefits to be so subjected shall not be recognized, except to the extent required by law.
 
Section 14.                        No Employment Rights
 
The Policy is not a contract for employment and shall not confer employment rights upon any person.  No person shall be entitled, by virtue of the Policy, to remain in the employ of the
 
 
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Company and nothing in the Policy shall restrict the right of the Company or its successor to terminate the employment of any Eligible Employee or other person at any time, with or without Cause.
 
Section 15.                        Policy Funding
 
The payments to an Eligible Employee hereunder shall be made from assets which shall continue, for all purposes, to be a part of the general, unrestricted assets of the Company. No person shall have nor acquire any interest in any such assets by virtue of the provisions of this Policy or any other agreement in connection with the Policy.  The Company’s obligation hereunder shall be unfunded and unsecured.  To the extent that the Eligible Employee acquires a right to receive payments from the Company under the provisions hereof, such right shall be no greater than the right of any unsecured general creditor of the Company.  No such person shall have nor require any legal or equitable right, interest or claim in or to any property or assets of the Company.
 
Nothing contained in this Policy, and no action taken pursuant to its provisions by either party hereto, shall create, nor be construed to create, a trust of any kind or a fiduciary relationship between the Company and the Participant, his beneficiary, or any other person.
 
Section 16.                        Survival of Policy Upon a Change in Control
 
The Policy shall survive a Change in Control of the Company and shall be binding upon any successor entity that is the survivor, successor, reorganized, affiliated or purchaser organization resulting from a combination, restructuring, merger, functional reorganization, sale, affiliation or other reorganization of the Company.  Upon the Change in Control of the Company, the successor entity shall assume the obligations and liabilities of the Policy.  All Eligible Employees who were employed by the Company as of a Change in Control shall continue to be eligible to receive the Severance Pay and/or Severance Benefits available under the Policy and such Severance Pay and/or Severance Benefits shall be payable by the successor entity.  Notwithstanding the foregoing provisions of this Section, following a Change in Control of the Company, nothing in the Policy shall preclude the successor entity from adopting its own new change in control severance plan for employees covering a subsequent change in control, provided, however, that any such new change in control severance plan shall not in any way change the ability of all Eligible Employees who were employed by the Company as of a Change in Control to continue to be eligible to receive the Severance Pay and/or Severance Benefits available under the Policy, except within the limitations of Section 20.
 
Section 17.                        Applicable Law
 
The Policy shall be governed and construed in accordance with ERISA and, in the event that any reference shall be made to State law, the internal laws of the State of Tennessee shall apply to the extent not preempted by ERISA. It is intended that the Policy  meet an exception from, or comply with, applicable provisions of Code Section 409A and the Treasury Regulations promulgated thereunder and, to the extent such section or regulations apply, the Policy shall be construed and administered accordingly.
 
 
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Section 18.                                  Severability
 
Any provision of this Policy which is deemed invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this paragraph be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provisions of this Policy invalid, illegal, or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable because its scope is considered excessive, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable.
 
Section 19.                        Policy Year
 
The ERISA plan year of this Policy shall be the twelve-month period commencing on January 1 of each year.
 
Section 20.                        Amendment/Termination of Policy
 
With respect to amendments to clarify existing provisions of the Policy or to conform the Policy to the requirements of law, the Company reserves the right in its sole discretion to amend the Policy to the full extent permitted by and in accordance with Code Section 409A and the Treasury Regulations promulgated thereunder at any time, retroactively or otherwise, either by written resolution of the Company’s Board or in writing signed by the Compensation Committee of the Board.  Except as otherwise provided in this Section, the Company reserves the right in its sole discretion to amend or terminate the Policy at any time either by written resolution of the Company’s Board or in writing signed by the Compensation Committee of the Board, provided, however, that (i) any such amendment or termination which would reduce or otherwise adversely affect the benefits of an Eligible Employee who has previously incurred a Qualifying Separation from Service may not take effect as to the affected Eligible Employee without the written consent of the affected Eligible Employee, and (ii) any such amendment or termination which would reduce or adversely affect the benefits which may be payable to an Eligible Employee who has not yet incurred a Qualifying Separation from Service at the time of the amendment shall be effective not sooner than thirty (30) months from the date of such written action in the event the written action occurs on or after the date of a Change in Control, and (iii) any amounts paid in connection with such termination are paid in accordance with Section 1.409A-3(j)(4)(ix) of the Treasury Regulations.  In the event of termination of the Policy, an Eligible Employee whose Severance Pay and/or Severance Benefits are in payment status when such Policy termination occurs shall continue to be paid his/her Severance Pay and/or Severance Benefits as if the Policy had not terminated.
 
Section 21.                        Recovery of Payments Made by Mistake
 
An Eligible Employee shall be required to return immediately to the Company any Severance Pay and/or Severance Benefits payment or portion thereof, made by a mistake of fact or law, to the extent permitted by Section 409A of the Code.
 
 
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Section 22.                                  Representations Contrary to the Policy
 
No employee, officer, or director of the Company has the authority to alter, vary, or modify the terms of the Policy except by means of an authorized written amendment to the Policy.  No verbal or written representations contrary to the terms of the Policy and its written amendments shall be binding upon the Policy, the Policy Administrator, or the Company, nor may any such representation be relied upon by Eligible Employee.
 
Section 23.                        ERISA
 
To the extent this Policy is governed by ERISA, this Policy shall cover certain employees of the Company who are members of a “select group” of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA.  The Company shall have the authority to take any and all actions necessary or desirable in order for the Policy to satisfy the requirements set forth in ERISA and the regulations thereunder applicable to plans maintained for employees who are members of a select group of management or highly compensated employees.
 
Section 24.                        Cooperation
 
In order to be eligible to receive Severance Pay and/or Severance Benefits under this Policy, an Eligible Employee   must fully cooperate with the Company, its attorneys, agents, representatives, and employees with respect to legal and business matters that are either known at the time of an Eligible Employee’s Separation from Service or that may later become known.  Cooperation includes but is not limited to release of documents, review of documents, and attending depositions, hearings, and trials on reasonable notice.

Section 25.                        Miscellaneous Provisions
 
All pay and other benefits (except Policy Severance Pay and Severance Benefits), payable to an Eligible Employee as of his/her date of Separation from Service with the Company according to the established policies, plans, and procedures of the Company shall be paid in accordance with the terms of those established policies, plans, and procedures. In addition, any benefit continuation or conversion rights which an eligible Employee has as of his/her date of Separation from Service with the Company according to the established policies, plans, and procedures of the Company shall be made available to him/her.
 
 

 
 
BROOKDALE SENIOR LIVING INC.
 
 
    By:  /s/ W.E. Sheriff  
       
 
  Title:  Chief Executive Officer  

 
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EXHIBIT B


Section 4(a)(i)(1) provisions to be applied to the Executive :
 
(1)           If Separation from Service by the Company without Cause or by an Eligible Employee with Good Reason:

(A)           Two hundred and fifty percent (250%) of annual salary at the current rate of base salary in effect at the Separation from Service (or, if greater, before the occurrence of circumstances giving rise to Good Reason) (provided, however, that notwithstanding anything else contained herein the Severance Pay Period under this Section 4(a)(i)(1) shall be eighteen (18) months).


Section 4(a)(ii)(1) provision to be applied to the Executive :
 
(1)           If Separation from Service by the Company without Cause or by an Eligible Employee with Good Reason:
 
(A)           Twelve (12) months salary at the current rate of base salary in effect at the Separation from Service (or, if greater, before the occurrence of circumstances giving rise to Good Reason); and
 
(B)           Seventy-five percent (75%) of the target annual bonus for the current year (or, if greater, seventy-five percent (75%) of the target annual bonus before the occurrence of circumstances giving rise to Good Reason).

 
 

 

 
EXHIBIT C

Restrictive Covenants


Noncompetition . The Executive agrees that during the period of his employment with the Company and for the one (1) year period immediately following the termination of such employment for any reason or for no reason, the Executive shall not directly or indirectly, either as a principal, agent, employee, employer, consultant, partner, shareholder of a closely held corporation or shareholder in excess of five percent of a publicly traded corporation, corporate officer or director, or in any other individual or representative capacity, engage or otherwise participate in any manner or fashion in any business that is a Competing Business in the Area. The Executive further covenants and agrees that this restrictive covenant is reasonable as to duration, terms and geographical area and that the same protects the legitimate interests of the Company and its affiliates, imposes no undue hardship on the Executive, is not injurious to the public, and that any violation of this restrictive covenant shall be specifically enforceable in any court with jurisdiction upon short notice. Solely for purposes of this  paragraph: “Area” means a 15 mile radius of any senior living facility owned, managed or operated by the Company (or its successor) at the time Executive’s employment is terminated; and “Competing Business” means the business of owning, operating or managing senior living facilities having gross annualized revenues of at least $35 million or owning, operating or managing, in the aggregate, at least 1,000 units/beds provided that at least 750 units/beds owned, operated or managed by such business are located within the Area.



EXHIBIT 31.1



CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, W.E. Sheriff, certify that:

1.  
I have reviewed this Quarterly Report on Form 10-Q of Brookdale Senior Living Inc.;
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

Date:  August 6, 2010
 
/s/ W.E. Sheriff
   
W.E. Sheriff
   
Chief Executive Officer
 


EXHIBIT 31.2



CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark W. Ohlendorf, certify that:

1.  
I have reviewed this Quarterly Report on Form 10-Q of Brookdale Senior Living Inc.;
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
(a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

Date:  August 6, 2010
 
/s/ Mark W. Ohlendorf
   
Mark W. Ohlendorf
   
Chief Financial Officer


 
EXHIBIT 32



CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Quarterly Report on Form 10-Q of Brookdale Senior Living Inc. (the “Company”) for the period ended June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), W.E. Sheriff, as Chief Executive Officer of the Company, and Mark W. Ohlendorf, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ W.E. Sheriff
 
Name:
W.E. Sheriff
 
Title:
Chief Executive Officer
 
Date:
August 6, 2010
 




/s/ Mark W. Ohlendorf
 
Name:
Mark W. Ohlendorf
 
Title:
Chief Financial Officer
 
Date:
August 6, 2010