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EX-23.2 - CONSENT - CNL LIFESTYLE PROPERTIES INCd240663dex232.htm
EX-23.1 - CONSENT - CNL LIFESTYLE PROPERTIES INCd240663dex231.htm
Index to Financial Statements

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): August 2, 2011

 

 

CNL Lifestyle Properties, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   000-51288   20-0183627

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

450 South Orange Avenue, Orlando, Florida 32801

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 407-650-1000

(Former name or former address, if changed since last report).

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4 (c) under the Exchange Act (17 CFR 240.13e-4 (c))

 

 

 


Index to Financial Statements
Item 2.01 Completion of Acquisition or Disposition of Assets.

On August 17, 2011, CNL Lifestyle Properties, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Initial 8-K”) disclosing its acquisition of six senior living facilities (the “Properties”) through a joint venture with Sunrise Senior Living Investments, Inc. (“Sunrise”). As previously reported by the Company on a Current Report on Form 8-K, on January 10, 2011, the Company acquired 29 senior living facilities through another joint venture with Sunrise. The acquisition of the Properties are considered related businesses to the previously acquired 29 facilities.

This Current Report on Form 8-K/A hereby amends the Initial 8-K to include the financial information required by Item 9.01 relating to the acquisition of the Properties.

 

Item 9.01 Financial Statements and Exhibits

 

(a) Financial Statements of Businesses Acquired

 

Sunrise Third Senior Living Holdings, LLC

  

Consolidated Financial Statements as of and for the years ended December 31, 2010 and 2009

  

Report of Independent Auditors

  

Consolidated Balance Sheets

  

Consolidated Statements of Operations

  

Consolidated Statements of Changes in Members’ Equity

  

Consolidated Statements of Cash Flows

  

Notes to Consolidated Financial Statements

  

Consolidated Financial Statements as of and for the years ended December 31, 2008 and 2007

  

Independent Auditors’ Report

  

Consolidated Balance Sheets

  

Consolidated Statements of Operations

  

Consolidated Statements of Changes in Members’ Capital

  

Consolidated Statements of Cash Flows

  

Notes to Consolidated Financial Statements

  

MetSun Two Pool One, LLC

  

Unaudited financial statements as of June 30, 2011 and December 31, 2010 and for the six months ended June 30, 2011 and 2010

  

Consolidated Balance Sheets

  

Consolidated Statements of Operations

  

Consolidated Statement of Changes in Member’s Deficit

  

Consolidated Statements of Cash Flows

  

Notes to Consolidated Financial Statements

  


Index to Financial Statements

Consolidated Financial Statements as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008

  

Report of Independent Auditors

  

Consolidated Balance Sheets

  

Consolidated Statements of Operations

  

Consolidated Statements of Changes in Member’s (Deficit) Equity

  

Consolidated Statements of Cash Flows

  

Notes to Consolidated Financial Statements

  

(b)    Pro Forma Financial Information

  

CNL Lifestyle Properties, Inc.

  

Pro Forma Condensed Consolidated Financial Information:

  

Unaudited Pro Forma Condensed Consolidated Financial Information

  

Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2011

  

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 2011

  

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2010

  

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

  

(d)    Exhibits

  

23.1    Consent of Independent Auditors

  

23.2    Consent of Independent Auditors

  


Index to Financial Statements

SIGNATURES

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 hereunto duly authorized.

 

Date: October 11, 2011       CNL LIFESTYLE PROPERTIES, INC.
      By: /s/ Joseph T. Johnson        
      Name: Joseph T. Johnson
      Title: Senior Vice President and
      Chief Financial Officer


Index to Financial Statements

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Sunrise Third Senior Living Holdings, LLC

  

Consolidated Financial Statements as of and for the years ended December 31, 2010 and 2009

  

Report of Independent Auditors

     F – 1   

Consolidated Balance Sheets

     F – 2   

Consolidated Statements of Operations

     F – 3   

Consolidated Statements of Changes in Members’ Equity

     F – 4   

Consolidated Statements of Cash Flows

     F – 5   

Notes to Consolidated Financial Statements

     F – 6   

Consolidated Financial Statements as of and for the years ended December 31, 2008 and 2007

  

Independent Auditors’ Report

     F – 13   

Consolidated Balance Sheets

     F – 14   

Consolidated Statements of Operations

     F – 15   

Consolidated Statements of Changes in Members’ Capital

     F – 16   

Consolidated Statements of Cash Flows

     F – 17   

Notes to Consolidated Financial Statements

     F – 18   

MetSun Two Pool One, LLC

  

Unaudited financial statements as of June 30, 2011 and December 31, 2010 and for the six months ended June 30, 2011 and 2010

  

Consolidated Balance Sheets

     F – 25   

Consolidated Statements of Operations

     F – 26   

Consolidated Statement of Changes in Member’s Deficit

     F – 27   

Consolidated Statements of Cash Flows

     F – 28   

Notes to Consolidated Financial Statements

     F – 29   


Index to Financial Statements

Consolidated Financial Statements as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008

  

Report of Independent Auditors

     F – 32   

Consolidated Balance Sheets

     F – 33   

Consolidated Statements of Operations

     F – 34   

Consolidated Statements of Changes in Member’s (Deficit) Equity

     F – 35   

Consolidated Statements of Cash Flows

     F – 36   

Notes to Consolidated Financial Statements

     F – 38   

CNL Lifestyle Properties, Inc.

  

Pro Forma Condensed Consolidated Financial Information:

     F – 44   

Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2011

     F – 45   

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the six months ended June  30, 2011

     F – 46   

Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December  31, 2010

     F – 47   

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

     F – 48   


Index to Financial Statements

Report of Independent Auditors

To Members of

Sunrise Third Senior Living Holdings, LLC:

We have audited the accompanying consolidated balance sheets of Sunrise Third Senior Living Holdings, LLC (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunrise Third Senior Living Holdings, LLC at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

March 21, 2011

 

F – 1


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2010 AND 2009

 

 

     2010     2009  

ASSETS

    

PROPERTY AND EQUIPMENT:

    

Land and land improvements

   $ 74,404,873      $ 74,399,836   

Building and building improvements

     338,201,898        338,303,427   

Furniture and equipment

     33,052,252        31,406,451   

Construction in progress

     352,854        425,124   
  

 

 

   

 

 

 
     446,011,877        444,534,838   

Less accumulated depreciation

     (91,480,969     (78,516,796
  

 

 

   

 

 

 

Property and equipment — net

     354,530,908        366,018,042   

CASH AND CASH EQUIVALENTS

     9,414,834        7,921,996   

RESTRICTED CASH

     3,930,662        4,601,263   

ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $1,291,682 and $1,185,674 for 2010 and 2009, respectively

     1,762,194        2,011,875   

PREPAID EXPENSES AND OTHER ASSETS

     932,572        994,354   

DEFERRED FINANCING COSTS — Net of accumulated amortization of $4,317,670 and $3,606,427 for 2010 and 2009, respectively

     1,496,764        2,208,007   
  

 

 

   

 

 

 

TOTAL

   $ 372,067,934      $ 383,755,537   
  

 

 

   

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

    

LIABILITIES:

    

Notes payable

   $ 288,809,228      $ 298,512,312   

Accounts payable and accrued expenses

     6,251,872        5,359,478   

Payable to affiliates — net

     550,029        1,423,542   

Deferred rent

     2,469,077        2,205,355   

Deferred revenue

     6,768,354        6,958,517   

Security and reservation deposits

     117,000        165,064   
  

 

 

   

 

 

 

Total liabilities

     304,965,560        314,624,268   

MEMBERS’ EQUITY

     67,102,374        69,131,269   
  

 

 

   

 

 

 

TOTAL

   $ 372,067,934      $ 383,755,537   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 2


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

 

 

     2010     2009  

OPERATING REVENUE:

    

Resident fees

   $ 138,778,238      $ 135,949,422   

Other Income

     674,985        627,049   
  

 

 

   

 

 

 

Total operating revenue

     139,453,223        136,576,471   
  

 

 

   

 

 

 

OPERATING EXPENSES:

    

Labor

     50,794,323        50,198,948   

Depreciation and amortization

     12,998,874        12,736,874   

Management fees to affiliate

     9,666,695        9,480,782   

General and administrative

     7,885,384        8,550,787   

Taxes and license fees

     5,515,524        4,943,039   

Utilities

     4,995,701        4,894,794   

Food

     4,747,207        4,854,837   

Insurance

     4,296,615        4,423,072   

Repairs and maintenance

     3,973,077        3,725,250   

Advertising and marketing

     2,322,902        1,566,766   

Ancillary expenses

     1,015,872        924,881   

Ground rent and lease expense

     646,525        676,589   

Bad debt

     613,678        668,190   
  

 

 

   

 

 

 

Total operating expenses

     109,472,377        107,644,809   
  

 

 

   

 

 

 

INCOME FROM OPERATIONS

     29,980,846        28,931,662   

OTHER EXPENSES (INCOME):

    

Amortization of financing costs

     711,243        711,242   

Interest expense

     12,055,559        12,441,569   

(Gain) loss on disposal of fixed assets

     (7,717     10,987   
  

 

 

   

 

 

 

Total other expenses

     12,759,085        13,163,798   
  

 

 

   

 

 

 

NET INCOME

   $ 17,221,761      $ 15,767,864   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 3


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

 

 

     USALF3     SSLII     Total  

MEMBERS’ EQUITY — January 1, 2009

   $ 63,667,944      $ 7,685,367      $ 71,353,311   

Distributions

     (16,190,915     (1,798,991     (17,989,906

Net income

     14,191,078        1,576,786        15,767,864   
  

 

 

   

 

 

   

 

 

 

MEMBERS’ EQUITY — December 31, 2009

     61,668,107        7,463,162        69,131,269   

Distributions

     (17,325,590     (1,925,066     (19,250,656

Net income

     15,499,585        1,722,176        17,221,761   
  

 

 

   

 

 

   

 

 

 

MEMBERS’ EQUITY — December 31, 2010

   $ 59,842,102      $ 7,260,272      $ 67,102,374   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 4


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

 

 

     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 17,221,761      $ 15,767,864   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     12,998,874        12,736,874   

Amortization of financing costs

     711,243        711,242   

Provision for bad debts

     613,678        668,190   

(Gain) loss on disposal of fixed assets

     (7,717     10,987   

Changes in operating assets and liabilities:

    

Accounts receivable

     (363,997     (218,883

Prepaid expenses and other assets

     61,782        (59,799

Accounts payable and accrued expenses

     764,787        19,834   

Payable to affiliates — net

     (873,513     911,963   

Deferred rent

     263,722        362,178   

Deferred revenue

     (190,163     (271,789

Security and reservation deposits

     (48,064     (69,000
  

 

 

   

 

 

 

Net cash provided by operating activities

     31,152,393        30,569,661   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Restricted cash

     670,601        (1,974,633

Proceeds from sale of property and equipment

     9,993        —     

Purchases of property and equipment

     (1,386,409     (2,158,090
  

 

 

   

 

 

 

Net cash used in investing activities

     (705,815     (4,132,723
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payment on notes payable

     (9,703,084     (9,333,429

Distributions

     (19,250,656     (17,989,906
  

 

 

   

 

 

 

Net cash used in financing activities

     (28,953,740     (27,323,335
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS

     1,492,838        (886,397

CASH AND CASH EQUIVALENTS — Beginning of year

     7,921,996        8,808,393   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS — End of year

   $ 9,414,834      $ 7,921,996   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION — Cash paid for interest

   $ 12,055,559      $ 12,441,569   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH FLOW
INFORMATION — Accrued capital expenditures

   $ 127,607      $ —     
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 5


Index to Financial Statements

SUNRISE THIRD SENIOR HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

 

 

1. ORGANIZATION

Sunrise Third Senior Living Holdings, LLC (“Sunrise Third”) was formed on May 5, 2003 as a limited liability company under the laws of the state of Delaware. Sunrise Third shall terminate on June 30, 2028, unless substantially all of its assets are sold or the members elect to dissolve Sunrise Third prior to this date. Sunrise Senior Living Investments, Inc. (“SSLII”), a wholly-owned subsidiary of Sunrise Senior Living, Inc. (“SSLI”), is the managing member and holds a 10% ownership interest in Sunrise Third. US Assisted Living Facilities III, Inc. (“USALF3”), a Delaware corporation, holds a 90% ownership interest in Sunrise Third.

Sunrise Third has transferred its membership interest in or sold each of the Facilities to 29 separate special purpose vehicles (“SPV”s). Each SPV is administered by Global Securitization Services, LLC (“GSS”) and owned by an affiliate of GSS. The SPVs are variable interest entities as Sunrise Third has the power to direct the activities of the SPVs that most significantly impact economic performance, however, Sunrise Third does not have an equity investment at-risk in the SPVs. Sunrise Third also has the right to receive all of the benefits from the SPVs and the obligation to absorb all of the losses of the SPVs. Therefore, Sunrise Third is considered the primary beneficiary and accordingly, consolidates the SPVs. Since Sunrise Third has the right to receive all of the benefits from the SPVs and the obligation to absorb all of the losses of the SPVs, the assets and liabilities of the SPV’s are not shown separately in the consolidated balance sheets of Sunrise Third. There has been no change in, or risks associated with Sunrise Third’s involvement with the SPVs.

The operating agreements, effective June 30, 2003, detail the commitments of the members and provide the procedures for the return of capital to the members with defined priorities. All net cash flows from operations and capital proceeds are to be distributed according to the priorities pro rata as specified in the operating agreements. Contributions are made pro rata in proportion to the relative percentage interests of the member at the time of request. Net income is allocated to the members pro rata in proportion to the relative percentage interests of the members.

 

F – 6


Index to Financial Statements

The purpose of Sunrise Third is to lease and operate the following 29 assisted living facilities (the “Facilities”) which provide assisted living services for seniors:

 

Operator Entity    Location    Date Opened

Sunrise Village House, LLC

   Montgomery Village, Maryland    May 1993

Sunrise Weston Assisted Living, LP

   Weston, Massachusetts    December 1997

Sunrise Flossmoor Assisted Living, LLC

   Flossmoor, Illinois    November 1999

Sunrise Gahanna Assisted Living, LLC

   Gahanna, Ohio    March 1998

Sunrise Third Tustin, SL, LP

   Tustin, California    September 2000

Sunrise Third Edgewater SL, LLC

   Edgewater, New Jersey    October 2000

Sunrise Third Alta Loma SL, LP

   Alta Loma, California    January 2001

Sunrise Chesterfield Assisted Living, LLC

   Chesterfield, Missouri    October 2000

Sunrise Third Claremont SL, LP

   Claremont, California    December 2000

Sunrise Third Holbrook SL, LLC

   Holbrook, New York    June 2001

Sunrise Third Crystal Lake SL, LLC

   Crystal Lake, Illinois    February 2001

Sunrise Third Gurnee SL, LLC

   Gurnee, Illinois    May 2002

Sunrise Third West Bloomfield SL, LLC

   West Bloomfield, Michigan    August 2000

Sunrise Third University Park SL, LLC

   Colorado Springs, Colorado    February 2001

East Meadow A.L., LLC

   East Meadow, New York    March 2002

Sunrise Third East Setauket SL, LLC

   East Setauket, New York    June 2002

Sunrise North Naperville Assisted Living, LLC

   Naperville, Illinois    June 2002

Sunrise Third Schaumburg SL, LLC

   Schaumburg, Illinois    September 2001

Sunrise Third Roseville SL, LLC

   Roseville, Minnesota    December 2001

Sunrise Third Lincroft SL, LLC

   Lincroft, New Jersey    December 2001

Sunrise Third Plainview SL, LLC

   Plainview, New York    January 2002

White Oak Assisted Living, LLC

   Silver Spring, Maryland    March 2002

Canoga Park Assisted Living, LLC

   West Hills, California    June 2002

Sunrise Basking Ridge Assisted Living, LLC

   Basking Ridge, New Jersey    September 2002

Sunrise Third Dix Hills SL, LLC

   Dix Hills, New York    March 2003

Sunrise Marlboro Assisted Living, LLC

   Marlboro, New Jersey    January 2002

Sunrise Belmont Assisted Living, LLC

   Belmont, California    October 2002

Sunrise Third West Babylon SL, LLC

   West Babylon, New York    January 2003

Sunrise Kennebunk ME Senior Living, LLC

   Kennebunk, Maine    December 2005

Senior living services include a residence, meals, and non-medical assistance to elderly residents for a monthly fee. The Facilities’ services are generally not covered by health insurance, and therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The accompanying consolidated financial statements include the consolidated accounts of Sunrise Third, the Facilities, and SPVs (collectively, the “Company”) after elimination of significant intercompany accounts and transactions. The Company reviewed subsequent events through March 21, 2011, the date the consolidated financial statements were issued, for inclusion in these consolidated financial statements.

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates and assumptions have been made with respect to the useful lives of assets, recoverability of investments in property and equipment, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial instruments. Actual results could differ from those estimates.

 

F – 7


Index to Financial Statements

Property and Equipment — Property and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:

 

Land improvements

     10-15 years   

Building and improvements

     30-40 years   

Furniture, fixtures, and equipment

     3-10 years   

Property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable. Impairment is recognized when the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss for such assets by comparing the fair value of the asset to its carrying amount. No impairment charges were recorded in 2010 or 2009.

Cash and Cash Equivalents — Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Throughout the year, the Company may have cash balances in excess of federally insured amounts on deposit with various financial institutions.

Restricted Cash — Restricted cash balances represent amounts set aside for debt service charges, real estate taxes, insurance and capital expenditures as required by the loan and management agreements.

Allowance for Doubtful Accounts — The Company provides an allowance for doubtful accounts on its outstanding receivables balance based on its collection history and an estimate of uncollectible accounts.

Deferred Financing Costs — Costs incurred in conjunction with obtaining permanent financing for the Company have been deferred and are amortized using the straight-line method, which approximates the effective interest method, to interest expense over the remaining term of the financing. Amortization expense for the years ended December 31, 2010 and 2009 was $711,243 and $711,242, respectively. The Company refinanced its loan in January 2011, as described in Note 8, at which time it expensed the remaining unamortized balance of deferred financing costs.

Revenue Recognition and Deferred Revenue — Operating revenue consists of resident fee revenue, including resident community fees. Generally, resident community fees approximating 30 to 60 times the daily residence fee are received from residents upon occupancy. Resident community fees are deferred and recognized as income over one year corresponding to the terms of agreements with residents. The agreements are cancelable by residents with 30 days notice. All other resident fee revenue is recognized when services are rendered. The Company bills the residents one month in advance of the services being rendered, and therefore, cash payments received for services are recorded as deferred revenue until the services are rendered and the revenue is earned.

Income Taxes —No provision has been made for federal and state income taxes, as the liability for such taxes, if any, is that of the members and not the Company. The Company is subject to franchise taxes in the states of California, Michigan, Massachusetts, and Ohio, where some of the properties are located. The Company is also subject to state income tax in the state of Michigan. These taxes are expensed as incurred and included in taxes and license fees in the accompanying consolidated financial statements.

In July 2006, the Financial Accounting Standards Board issued (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which has principally been codified in ASC 740-10-25, Income Taxes, Overall Recognition (ASC 740-10-25). ASC 740-10-25 describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities’ have full knowledge of the position and all relevant facts, but without considering time values. The Company adopted the provisions of this statement on January 1, 2009. The adoption of this statement did not have any effect on the Company’s financial position or results of operations, and the Company has no uncertain tax positions that require accrual as of December 31, 2010.

 

F – 8


Index to Financial Statements

Fair Value Measurements —The Company adopted the provisions of ASC Fair Value Measurements Topic for non-financial assets and liabilities on January 1, 2009. The Company had previously adopted the other provisions of fair value measurement for financial assets and liabilities on January 1, 2008. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC Fair Value Measurements Topic establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

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

Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3 — Unobservable inputs are used when little or no market data is available.

As of December 31, 2010 and 2009, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities were representative of their fair values because of the short-term maturity of these instruments.

 

3. TRANSACTIONS WITH AFFILIATES

The Company has entered into management agreements with Sunrise Senior Living Management, Inc. (“SSLMI”), a wholly-owned subsidiary of SSLI, to manage each of the Facilities. The agreements have terms of 25 years and expire in 2028 and 2030. The agreements provide for management fees to be paid monthly and consist of a variable fee ranging from 6.5% to 7.0% of the adjusted gross revenues of the Facilities (as defined in the agreements). Total management fees incurred were $9,666,695 and $9,480,782 in 2010 and 2009, respectively.

The agreements also provide for reimbursement to SSLMI of all direct costs of operations. Payments to SSLMI for direct operating expenses were $95,000,331 and $92,800,047 in 2010 and 2009, respectively.

The Company obtains worker’s compensation, professional and general liability, and auto coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $3,949,415 and $4,570,618 in 2010 and 2009, respectively.

The Company had net payables to SSLI of $550,029 and $1,423,542 as of December 31, 2010 and 2009, respectively. These transactions are subject to the right of offset, wherein any receivables from the affiliate can be offset by any payables to the affiliate, and therefore, the amounts have been presented as payable to affiliates — net in the accompanying consolidated financial statements. The amounts are non-interest-bearing and due on demand.

The management agreements for the Facilities require SSLMI to set aside from Facility operations a reserve to cover the cost of certain fixed asset additions, repairs, and maintenance. SSLMI is required to transfer funds of 1.25% of gross revenues per month into this reserve account as originally established by the members in the formation of the Company. There was $853,525 and $1,458,422 in this reserve, included in restricted cash in the accompanying consolidated balance sheets, as of December 31, 2010 and 2009, respectively.

 

F – 9


Index to Financial Statements
4. NOTES PAYABLE

The Company has 29 loans outstanding. Each loan is secured by the related facility and payments required on the loans are guaranteed by SSLI. The loans are subject to prepayment penalties and are cross-collateralized and cross-defaulted with one another.

Seventeen of the properties have notes payable to finance institutions, due in monthly installments, with the remaining balance of the notes maturing from January 2013 through June 2014. The notes bear interest at rates ranging from 5.31% to 6.20%, with an aggregate outstanding balance totaling $146,734,485 and $150,950,884 as of December 31, 2010 and 2009, respectively.

Twelve of the properties refinanced their debt in 2005 and each have a note payable to a finance institution, due in monthly installments, with the remaining balance of each note maturing October 1, 2012. The notes bear interest at the 30-day London Interbank Offered Rate (“LIBOR”) plus 2.33%, not to exceed 7.06%. The 30-day LIBOR rate was 0.26% and 0.23% as of December 31, 2010 and 2009, respectively. The aggregate outstanding balances were $142,074,743 and $147,561,428 as of December 31, 2010 and 2009, respectively.

Prior to June 8, 2010, the loans described above required SSLI to meet certain financial debt covenants including a minimum liquidity requirement of $25 million and a net worth requirement of $450 million. As of December 31, 2009, SSLI was not in compliance with the minimum net worth requirement. Under the terms of the debt agreements, the lender could have demanded full payment of the outstanding principal and accrued but unpaid interest at any time. On June 8, 2010, the lender waived the minimum net worth requirement related to SSLI through July 2012 at which time a net worth covenant of $50 million will be required from August 2012 to July 2013 and $75 million from August 2013 through maturity, with all other terms remaining unchanged from the original loan agreement. As of December 31, 2010, the Company was in compliance with all financial and non-financial covenants.

Principal maturities of notes payable as of December 31, 2010 are as follows:

 

2011

   $ 10,019,778   

2012

     141,143,678   

2013

     101,943,300   

2014

     35,702,472   
  

 

 

 

Total

   $ 288,809,228   
  

 

 

 

The Company has applied the provisions of ASC Fair Value Measurements when preparing fair value disclosures of its notes payable. The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. Per ASC Fair Value Measurements, the Company has applied Level 2 type inputs to determine that the estimated fair value of the Company’s notes payable was $275,770,589 and $290,031,296 as of December 31, 2010 and 2009, respectively.

As discussed in Note 8, Subsequent Events, the notes payable were prepaid on January 10, 2011 as part of USALF3’s sale of its 90% interest in the Company to CC3 Acquisition, LLC (“CC3”). The prepayment penalties, fees, and interest were paid by the buyer, CC3, at closing as part of the transaction.

 

F – 10


Index to Financial Statements
5. INCOME TAXES

In general, entities that are recognized as limited liability companies for federal income tax purposes are not subject to income tax at the entity level. A limited liability company is a flow-through entity, and therefore, the income or loss generated is recognized by the members rather than the limited liability company. However, not all states follow suit. The modified gross receipts tax assessed by Michigan is a state income tax at the Company level. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount recognized for income tax purposes. At December 31, 2010, the Company had a deferred tax asset of $7,298 and a deferred tax liability of $94,755. The deferred tax asset was fully reserved by a valuation allowance of $7,298 as the Company does not anticipate using the deferred tax asset in future years.

 

6. CONTINGENCIES

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management of the Company does not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s consolidated financial position.

 

7. COMMITMENTS

The Company has lease agreements for the land associated with the Facilities in Lincroft, New Jersey and East Meadow, New York. The Lincroft lease has a remaining term at December 31, 2010 of approximately 89 years. The base rent escalates 20% every five years. The East Meadow lease has a remaining term at December 31, 2010 of approximately 17 years with five 10-year and one 14-year extension options. The base rent escalates by amounts defined in the lease agreement on each of the three anniversaries of the lease inception: March 2006, March 2011, and March 2016. Lease expense for Lincroft and East Meadow is recognized on a straight-line basis over the non-cancelable term of each lease.

The Company has a lease agreement for the land associated with the Facility in Belmont, California. The Belmont lease has a remaining term at December 31, 2010 of approximately 38 years with two 10-year extensions. The base rent escalates every five years by the accumulated CPI increase with a maximum increase of 4% per year, and every 15 years there is a fair market value increase with a maximum increase of 15% of the prior-year rent, as defined in the agreement.

Future minimum lease payments as of December 31, 2010 are as follows:

 

2011

   $ 404,929   

2012

     406,597   

2013

     400,087   

2014

     429,164   

2015

     436,047   

Thereafter

     50,514,401   
  

 

 

 

Total

   $ 52,591,225   
  

 

 

 

Pursuant to the events described in Note 8, the Belmont lease was amended effective January 10, 2011. This amendment provided for a fair market rental value escalation as of the effective date with no change to the term of the lease.

 

F – 11


Index to Financial Statements
8. SUBSEQUENT EVENTS

Effective on January 10, 2011, USALF3 sold its 90% interest in the Company to CC3 for $261,713,605 and the affiliate of GSS, which owned the membership interests in the SPV’s discussed in Note 1, sold 100% of its interests in the Facilities to CC3 for $3,000. SSLII contributed its 10% interest in the Company with a fair value of $79,969,976 to CC3. CC3 is owned 40% by SSLII and 60% by an unrelated third party, CNL Income Partners, LP (a Delaware limited partnership) through its wholly-owned Delaware limited liability company, CNL Income Senior Holding, LLC. At closing, CC3 assumed the Company’s debt in the amount of $288,809,228 which was then repaid. Total consideration paid for the Company, including interests sold and contributed and debt prepaid at closing, was $630,495,809. The prepayment penalties, fees, and interest totaling $6,437,886 related to the prepaid debt were paid by CC3 at closing as part of the transaction.

Each party to the sale of the members’ interests was responsible for its own third party costs to complete the transaction with the exception of $23,693 of closing costs, incurred by the affiliate of GSS to transfer its membership interests in the SPV’s, that was paid by CC3. After December 31, 2010 and prior to closing, the Company made cash distributions to its members in the amount of $2,222,222. At closing, a net cash flow distribution of $1,912,707 was made by the Company to USALF3, with SSLII receiving its share of $221,844 in March 2011. In 2011, SSLII will provide a reconciliation of the results of operations and closing prorated costs to compute the final distribution to the members. The Company will either be reimbursed by the members for excess distributions or make a final distribution to the members as necessary in accordance with the reconciliation. All remaining cash and working capital of the Company, as of closing, will be retained by CC3.

In conjunction with the transaction, CC3 obtained new debt of $435,000,000. The loan is secured by the Facilities and matures in February 2014. The note bears interest at 6.76%, and interest-only payments are required monthly until maturity.

******

 

F – 12


Index to Financial Statements

INDEPENDENT AUDITORS’ REPORT

To the Members of

Sunrise Third Senior Living Holdings, LLC:

We have audited the accompanying consolidated balance sheets of Sunrise Third Senior Living Holdings, LLC (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in members’ capital, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunrise Third Senior Living Holdings, LLC as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 9 to the consolidated financial statements, the Company has restated its consolidated financial statements as of December 31, 2008 and 2007, to correct an error in the recording of capital distributions.

/s/ Baker Tilly Virchow Krause, LLP

January 10, 2011

 

F – 13


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007

 

 

     2008     2007  
     (Restated)     (Restated)  

ASSETS

    

PROPERTY AND EQUIPMENT:

    

Land and land improvements

   $ 74,375,727      $ 74,207,517   

Building and building improvements

     338,112,055        337,327,835   

Furniture and equipment

     29,886,049        27,758,823   

Construction in progress

     661,133        701,366   
  

 

 

   

 

 

 
     443,034,964        439,995,541   

Less accumulated depreciation

     (66,312,209     (52,929,294
  

 

 

   

 

 

 

Property and equipment — net

     376,722,755        387,066,247   

CASH AND CASH EQUIVALENTS

     8,808,393        14,323,759   

RESTRICTED CASH

     2,626,630        3,806,086   

ACCOUNTS RECEIVABLE — Less allowance for doubtful accounts of $1,219,454 and $1,109,165 in 2008 and 2007, respectively

     2,461,182        2,605,481   

RECEIVABLES FROM AFFILIATES — net

     —          578,758   

PREPAID EXPENSES AND OTHER CURRENT ASSETS

     819,613        786,570   

DEFERRED FINANCING COSTS — Less accumulated amortization of $2,895,185 and $2,183,943 in 2008 and 2007, respectively

     2,919,249        3,630,491   
  

 

 

   

 

 

 

TOTAL

   $ 394,357,822      $ 412,797,392   
  

 

 

   

 

 

 

LIABILITIES AND MEMBERS’ CAPITAL

    

LIABILITIES:

    

Long-term debt

   $ 307,845,741      $ 315,500,643   

Accounts payable and accrued expenses

     5,339,644        6,520,463   

Payables to affiliates — net

     511,579        —     

Deferred rent

     1,843,177        1,519,471   

Deferred revenue

     7,230,306        7,524,241   

Security and reservation deposits

     234,064        299,814   
  

 

 

   

 

 

 

Total liabilities

     323,004,511        331,364,632   

MEMBERS’ CAPITAL

     71,353,311        81,432,760   
  

 

 

   

 

 

 

TOTAL

   $ 394,357,822      $ 412,797,392   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 14


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

 

 

     2008     2007  

OPERATING REVENUE:

    

Resident fees

   $ 138,409,907      $ 132,854,527   

Other income

     766,645        809,569   
  

 

 

   

 

 

 

Total operating revenue

     139,176,552        133,664,096   
  

 

 

   

 

 

 

OPERATING EXPENSES:

    

Labor

     48,852,793        47,064,814   

Depreciation and amortization

     13,382,915        12,729,705   

Management fees

     9,626,177        10,228,704   

General and administrative

     8,972,345        8,805,348   

Taxes and license fees

     5,077,799        4,794,141   

Food

     5,053,992        4,752,359   

Utilities

     4,971,669        4,630,101   

Insurance

     4,039,980        3,743,383   

Repairs and maintenance

     3,830,674        3,827,294   

Advertising and marketing

     2,013,037        1,759,997   

Ancillary expenses

     1,013,037        921,215   

Bad debt

     759,972        288,521   

Ground rent and lease expense

     702,322        682,539   
  

 

 

   

 

 

 

Total operating expenses

     108,296,712        104,228,121   
  

 

 

   

 

 

 

INCOME FROM OPERATIONS

     30,879,840        29,435,975   
  

 

 

   

 

 

 

OTHER INCOME (EXPENSE):

    

Interest expense

     (16,925,018     (21,055,988

Interest income

     170,988        742,831   
  

 

 

   

 

 

 

Total other expense

     (16,754,030     (20,313,157
  

 

 

   

 

 

 

NET INCOME

   $ 14,125,810      $ 9,122,818   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 15


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ CAPITAL

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

 

 

MEMBERS’ CAPITAL — January 1, 2007 (As previously stated)

   $ 92,381,555   

Effect of restatement

     1,578,617   
  

 

 

 

Balance at January 1, 2007 (Restated)

     93,960,172   

Distributions (Restated)

     (21,650,230

Net income

     9,122,818   
  

 

 

 

MEMBERS’ CAPITAL — December 31, 2007 (Restated)

     81,432,760   

Distributions (Restated)

     (24,205,259

Net income

     14,125,810   
  

 

 

 

MEMBERS’ CAPITAL — December 31, 2008 (Restated)

   $ 71,353,311   
  

 

 

 

See notes to consolidated financial statements.

 

F – 16


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

 

 

     2008     2007  
     (Restated)     (Restated)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 14,125,810      $ 9,122,818   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     13,382,915        12,729,705   

Amortization of financing costs

     711,242        711,243   

Provision for bad debts

     (759,972     (288,521

Changes in assets and liabilities:

    

Accounts receivable

     904,271        810,773   

Receivable from / payable to affiliates — net

     1,090,337        (1,091,528

Prepaid expenses and other current assets

     (33,043     160,963   

Accounts payable and accrued expenses

     (1,180,819     313,037   

Deferred rent

     323,706        406,206   

Deferred revenue

     (293,935     3,229,395   

Security and reservation deposits

     (65,750     (26,355
  

 

 

   

 

 

 

Net cash provided by operating activities

     28,204,762        26,077,736   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Decrease in restricted cash

     1,179,456        112,322   

Investment in property and equipment

     (3,039,423     (1,757,773
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,859,967     (1,645,451
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payment on long-term debt

     (7,654,902     (6,129,990

Distributions

     (24,205,259     (21,650,230
  

 

 

   

 

 

 

Net cash used in financing activities

     (31,860,161     (27,780,220
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (5,515,366     (3,347,935

CASH AND CASH EQUIVALENTS — Beginning of year

     14,323,759        17,671,694   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS — End of year

   $ 8,808,393      $ 14,323,759   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW

    

INFORMATION — Cash paid for interest

   $ 16,213,776      $ 20,344,745   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 17


Index to Financial Statements

SUNRISE THIRD SENIOR LIVING HOLDINGS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

 

 

1. ORGANIZATION AND OTHER MATTERS

Sunrise Third Senior Living Holdings, LLC (the Company) was formed on May 5, 2003 as a limited liability company under the laws of the state of Delaware. The Company began operations on June 30, 2003. The Company shall terminate on June 30, 2028, unless substantially all of its assets are sold or the members elect to dissolve the Company prior to this date.

Sunrise Senior Living Investments, Inc. (SSLII) was the initial member of the Company and is the managing member. SSLII is a wholly-owned subsidiary of Sunrise Senior Living, Inc. (SSLI). In June and September 2003, the Company acquired 24 limited liability companies and four limited partnerships, each owning a separate assisted living facility, from SSLI and AL IV Investments, LLC and AL V Investments, LLC (collectively the ALs). SSLII previously owned 9 percent of the ALs. The aggregate purchase price was $405,049,639 and was allocated to property and equipment and a resident lease intangible based on fair values. Operating assets and liabilities acquired were recorded at book value, which approximates fair value.

SSLII holds a 10 percent ownership interest in the Company. US Assisted Living Facilities III, Inc. (USALF3), a Delaware corporation, holds a 90 percent ownership interest in the Company.

In December 2005, the Company acquired another existing and operating senior living facility in Kennebunk, Maine. The total purchase price was approximately $39 million and was allocated to property and equipment and resident lease intangible based on relative fair values.

The Company has transferred its membership interest in or sold each of the facilities to 29 separate special purpose vehicles (SPVs). Each SPV is administered by Global Securitization Services, LLC (GSS) and owned by an affiliate of GSS. The SPVS are variable interest entities as all significant economic activities are controlled by the Company. The Company receives all the benefits and has an obligation to absorb all of the losses of the SPVS. The SPVs have been consolidated into the Company as the Company is considered the primary beneficiary.

The operating agreements, effective June 30, 2003, detail the commitments of the members and provide the procedures for the return of capital to the members with defined priorities. All net cash flows from operations and capital proceeds are to be distributed according to the priorities pro rata as specified in the operating agreements. Contributions are made pro rata in proportion to the relative percentage interests of the member at the time of request. Net income is allocated to the members pro rata in proportion to the relative percentage interests of the members.

 

F – 18


Index to Financial Statements

The purpose of the Company is to lease and operate the following 29 assisted living facilities (the Facilities) which provide assisted living services to seniors:

 

Operator Entity    Location

Sunrise Village House, LLC

   Montgomery Village, Maryland

Sunrise Weston Assisted Living, LP

   Weston, Massachusetts

Sunrise Flossmoor Assisted Living, LLC

   Flossmoor, Illinois

Sunrise Gahanna Assisted Living, LLC

   Gahanna, Ohio

Sunrise Third Tustin, SL, LP

   Tustin, California

Sunrise Third Edgwater SL, LLC

   Edgewater, New Jersey

Sunrise Third Alta Loma SL, LP

   Alta Loma, California

Sunrise Chesterfield Assisted Living, LLC

   Chesterfield, Missouri

Sunrise Third Claremont SL, LP

   Claremont, California

Sunrise Third Holbrook SL, LLC

   Holbrook, New York

Sunrise Third Crystal Lake SL, LLC

   Crystal Lake, Illinois

Sunrise Third Gurnee SL, LLC

   Gurnee, Illinois

Sunrise Third West Bloomfield SL, LLC

   West Bloomfield, Michigan

Sunrise Third University Park SL, LLC

   Colorado Springs, Colorado

East Meadow A.L., LLC

   East Meadow, New York

Sunrise Third East Setauket SL, LLC

   East Setauket, New York

Sunrise North Naperville Assisted Living, LLC

   Naperville, Illinois

Sunrise Third Schaumburg SL, LLC

   Schaumburg, Illinois

Sunrise Third Roseville SL, LLC

   Roseville, Minnesota

Sunrise Third Lincroft SL, LLC

   Lincroft, New Jersey

Sunrise Third Plainview SL, LLC

   Plainview, New York

White Oak Assisted Living, LLC

   Silver Spring, Maryland

Canoga Park Assisted Living, LLC

   West Hills, California

Sunrise Basking Ridge Assisted Living, LLC

   Basking Ridge, New Jersey

Sunrise Third Dix Hills SL, LLC

   Dix Hills, New York

Sunrise Marlboro Assisted Living, LLC

   Marlboro, New Jersey

Sunrise Belmont Assisted Living, LLC

   Belmont, California

Sunrise Third West Babylon SL, LLC

   West Babylon, New York

Sunrise Kennebunk ME Senior Living, LLC

   Kennebunk, Maine

Assisted living services provide a residence, meals, and nonmedical assistance to elderly residents for a monthly fee. These services are generally not covered by health insurance and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Prior Year Reclassifications — Certain amounts for 2007 have been reclassified to be consistent with the 2008 presentation.

Basis of Accounting — The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the consolidated accounts of Sunrise Third Senior Holdings, LLC, its wholly-owned subsidiaries, and SPVs after elimination of significant intercompany accounts and transactions.

Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions have been made with respect to the useful lives of assets, impairment of long-lived assets, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial instruments. Actual results could differ from those estimates.

 

F – 19


Index to Financial Statements

Property and Equipment — Property and equipment are recorded at the lower of cost, or if impairment is indicated, at fair value. Maintenance and repairs are charged to expense as incurred. The Company capitalizes property taxes, insurance, and interest during construction to the extent such assets qualify for capitalization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:

 

Land improvements

     10–15 years   

Building and improvements

     30–40 years   

Furniture, fixtures, and equipment

     3–10 years   

Property and equipment are reviewed for impairment whenever events or circumstances indicate that the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss for such assets by comparing the fair value of the asset to its carrying amount. The Company determines fair values using various commonly used methods, including estimated cash flow projections discounted at appropriate rates and capitalization rates based on available market information. Management determined no impairment occurred in 2008 or 2007.

The cash flow projections noted above include many assumptions and estimates. These projections and estimates will be impacted by any number of future events including changes in the local and national economic conditions and interest rate environments, continued changes in the domestic credit markets, changes in volume and value of real estate. Due to the uncertainties in the estimation process, actual results could vary from the Company’s projections used in their analyses. The variations could be significant and have material future impact on the Company’s reported financial position and results of operations and its ability to recover the carrying value of its long-lived assets.

Cash and Cash Equivalents — Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Throughout the year, the Company may have cash balances in excess of federally insured amounts of $250,000 and $100,000 as of December 31, 2008 and 2007, respectively, on deposit with various financial institutions. Management believes the Company is not exposed to any significant credit risk on these amounts.

Restricted Cash — Restricted cash balances represent amounts set aside for debt service charges, real estate taxes, insurance and capital expenditures as required by loan and management agreements.

Allowance for Doubtful Accounts — The Company provides an allowance for doubtful accounts on its outstanding receivables balance based on its collection history and an estimate of uncollectible accounts. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

Deferred Financing Costs — Costs incurred in conjunction with obtaining permanent financing for the Company have been deferred and are amortized using the straight-line method, which approximates the effective interest method, to interest expense over the remaining term of the financing. Amortization expense for the years ended December 31, 2008 and 2007 was $711,242 and $711,243, respectively.

Revenue Recognition and Deferred Revenue — Operating revenue consists of resident fee revenue, including resident community fees. Generally, resident community fees approximating 30 to 60 times the daily residence fee are received from residents upon occupancy. Resident community fees are deferred and recognized as income over one year corresponding to the terms of agreements with residents. The agreements are cancelable by residents with 30 days notice. All other resident fee revenue is recognized when services are rendered. The Company bills the residents one month in advance of the services being rendered, and therefore, cash payments received for services are recorded as deferred revenue until the services are rendered and the revenue is earned.

 

F – 20


Index to Financial Statements

Income Taxes — No provision has been made for federal and state income taxes, as the liability for such taxes, if any, is that of the members and not the Company. The Company is subject to franchise taxes in the states of California, Michigan, Massachusetts, and Ohio, where some of the properties are located. These taxes, and for states that do not recognize pass-through entities, state income taxes, are expensed as incurred and included in taxes and license fees in the accompanying consolidated financial statements.

In July 2006, FASB issued ASC 740-10-25 Income Taxes (FASB ASC 740-10-25). FASB ASC 740-10-25 describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities have full knowledge of the position and all relevant facts, but without considering time values. The Company adopted the provisions on January 1, 2009. The adoption did not have any effect on the Company’s financial position or results of operations for the years ended December 31, 2008 and 2007.

 

3. FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted the provisions of FASB ASC 820, Fair Value Measurements and Disclosures, (FASB ASC 820). Under FASB ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, FASB ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

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

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available.

The Company has applied the provisions of FASB ASC 820 when preparing fair value disclosures of its long-term debt. The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. Per FASB ASC 820, the Company has applied Level 3 type inputs to determine that the estimated fair value of the Company’s long-term debt was $297,191,081 and $346,848,871 as of December 31, 2008 and 2007, respectively.

As of December 31, 2008, the carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other liabilities were representative of their fair values because of the short-term maturity of these instruments.

Disclosures of estimated fair value are determined by management using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, estimates presented are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

 

4. TRANSACTIONS WITH AFFILIATES

The Facilities have entered into management agreements with Sunrise Senior Living Management, Inc. (SSLMI), a wholly-owned subsidiary of SSLI, to manage each of the Facilities. The agreements have terms of 25 years and expire in 2028 and 2030. The agreements provide for management fees to be paid monthly and consist of a fixed fee ranging from $2,760 to $3,220 per Facility unit and a variable fee ranging from 6.25 percent to 7 percent of the adjusted gross revenues of the Facilities (as defined in the agreements). Total management fees incurred were $9,626,177 and $10,228,704 in 2008 and 2007, respectively.

 

F – 21


Index to Financial Statements

The agreements also provide for the reimbursement to SSLMI of all direct costs of operations. Payments to SSMMI for direct operating expenses were $91,848,000 and $76,996,000 in 2008 and 2007, respectively. The Company obtains professional and general liability coverage through Sunrise Senior Living Insurance, Inc., a multi-provider captive insurance company and a subsidiary of SSLI. Related payments totaled $2,140,853 and $3,579,403, in 2008 and 2007, respectively. Refunds of liability premiums of $824,659 and $957,300 were given in 2008 and 2007, respectively and are reported as a reduction in insurance expense in the accompanying consolidated statements of operations.

The Company had net payables to SSLI of $511,579 as of December 31, 2008, and net receivables from SSLI of $578,758 at December 31, 2007. These transactions are subject to the right of offset, wherein any receivables from the affiliate can be offset by any payables to the affiliate, and therefore, the amounts have been presented as a net receivable and payable from/to affiliates in 2008 and 2007, respectively, in the accompanying consolidated financial statements. The amounts are non-interest-bearing and due on demand.

The management agreements for the Facilities require SSLMI to set aside from facility operations a reserve account to cover the cost of certain fixed asset additions, repairs and maintenance. SSLMI is required to transfer funds of 1.25 percent of gross revenues per month into this reserve account originally established by the members in the formation of the Company. There was $724,700 and $1,210,692 in this reserve, included in restricted cash in the accompanying consolidated balance sheets, as of December 31, 2008 and 2007, respectively.

 

5. CONCENTRATIONS OF CREDIT RISK

The Company grants credit without collateral to its residents. The accounts receivables in the accompanying consolidated balance sheets are due from residents, their families, or other responsible parties.

 

6. LONG-TERM DEBT

The Company has 29 loans outstanding. Each loan is secured by the related facility and payments required on the loans are guaranteed by SSLI. The loans are subject to prepayment penalties and are cross-collateralized and cross-defaulted with one another.

Seventeen of the properties have notes payable to finance institutions, due in monthly installments, with the remaining balance of the notes maturing from July 2013 through June 2014. The notes bear interest at rates ranging from 5.31 percent to 6.20 percent, with outstanding balances totaling $154,937,169 and $158,681,486 as of December 31, 2008 and 2007, respectively.

Twelve of the properties refinanced their debt in 2005, and each have a note payable to a finance institution, due in monthly installments, with the remaining balance of each note maturing October 1, 2012. The notes bear interest at the 30-day London Interbank Offered Rate (LIBOR) plus 2.33 percent, not to exceed 7.06 percent. The outstanding balances were $152,908,572 and $156,819,157 as of December 31, 2008 and 2007, respectively. The 30-day LIBOR rate was 0.44 percent and 4.60 percent as of December 31, 2008 and 2007, respectively.

Prior to June 8, 2010, the loans described above required SSLI to meet certain financial debt covenants including a minimum liquidity requirement of $25 million and a net worth covenant of $450 million. As of December 31, 2008, SSLI was not in compliance with the net worth covenant. Under the terms of the debt agreements, the lender may have requested full payment of the principal and accrued but unpaid interest on demand. On June 8, 2010, the lender waived the minimum net worth requirement related to SSLI through July 2012 at which time the net worth covenant of $50 million is required from August 2012 to July 2013 and $75 million from August 2013 through maturity.

 

F – 22


Index to Financial Statements

Principal maturities of long-term debt as of December 31, 2008, are as follows:

 

2009

   $ 9,212,791   

2010

     9,581,317   

2011

     9,958,869   

2012

     141,456,296   

2013

     101,943,858   

Thereafter

     35,692,610   
  

 

 

 

Total

   $ 307,845,741   
  

 

 

 

 

7. CONTINGENCIES

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management and general counsel of the Company do not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s financial position.

 

8. COMMITMENTS

On June 30, 2003, the Company assumed operating lease agreements for the land associated with the Facilities in Lincroft, New Jersey and East Meadow, New York. The Lincroft lease has a remaining term at December 31, 2008 of approximately 92 years. The base rent escalates 20 percent every five years. The East Meadow lease has a remaining term at December 31, 2008 of approximately 12 years with five 10-year and one 14-year extension options. The base rent escalates by amounts defined in the lease agreement on each of the three anniversaries of the lease inception: March 2006, March 2011 and March 2016. On September 23, 2003, the Company assumed a lease agreement for the land associated with the Facility in Belmont, California. The Belmont lease has remaining terms at December 31, 2008 of approximately 41 years with two 10-year extensions. The base rent escalates every five years by the accumulated CPI increase with a maximum increase of 4 percent per year and every 15 years there is a fair market increase with a maximum increase of 15 percent of the prior-year rent, as defined in the agreement. Lease expense for the Lincroft and East Meadow is recognized on a straight-line basis over the term of the lease.

Future minimum lease payments as of December 31, 2008 are as follows:

 

2009

   $ 359,440   

2010

     364,443   

2011

     378,565   

2012

     378,565   

2013

     378,565   

Thereafter

     42,330,059   
  

 

 

 

Total

   $ 44,189,637   
  

 

 

 

 

9. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

The Company determined, in connection with the preparation of its 2009 consolidated financial statements, that its 2008 and 2007 financial statements required restatement to correct an error related to the timing of recording capital distributions. Previously the Company accrued certain distributions that were not otherwise guaranteed prior to their payment rather than when such dividends are declared. As a result of the error, the Company restated its consolidated financial statements for the years ended December 31, 2008 and 2007. The restatement resulted in no change in net income for 2008 and 2007. The effect of the restatement as of January 1, 2007 was an increase in members’ capital and a decrease in distributions payable of approximately $1,579,000.

 

F – 23


Index to Financial Statements

The effect of the restatement as of December 31, 2007 was a net increase in members’ capital of approximately $1,414,000, an increase in accounts payable and accrued expenses of $46,000 and a decrease in distributions payable of $1,460,000. The effect of the restatement as of December 31, 2008 was an increase in members’ capital of $1,919,500, an increase in accounts payable and accrued expenses of $46,000 and a decrease in distributions payable of approximately $1,965,500.

 

10. SUBSEQUENT EVENTS

In preparing these financial statements, the Company evaluated events and transactions for potential recognition or disclosure through January 10, 2011, the date the financial statements were available to be issued.

On January 10, 2011, USALF3 sold its ownership interest in the Company to a new joint venture between SSLII and CNL Income Senior Holdings, LLC (“CNL”). SSLII contributed its ownership interest in the Company to the new venture for a 40 percent ownership in the new venture. CNL owns 60 percent of the new venture.

******

 

F – 24


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2011 AND DECEMBER 31, 2010

 

 

     June 30,
2011
(unaudited)
    December 31,
2010
 

ASSETS

    

PROPERTY AND EQUIPMENT:

    

Land and land improvements

   $ 19,718,026      $ 19,718,026   

Building and building improvements

     93,787,826        93,791,466   

Furniture and equipment

     8,476,852        8,462,962   
  

 

 

   

 

 

 
     121,982,704        121,972,454   

Less accumulated depreciation

     (5,558,315     (3,440,596
  

 

 

   

 

 

 

Property and equipment — net

     116,424,389        118,531,858   

CASH AND CASH EQUIVALENTS

     4,808,071        3,273,503   

RESTRICTED CASH

     3,378,110        3,855,430   

ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $86,038 and $41,170, respectively

     410,118        383,839   

PREPAID EXPENSES AND OTHER ASSETS

     242,238        167,962   

DEFERRED FINANCING COSTS — Net of accumulated amortization of $2,410,109 and $2,209,475, respectively

     15,000        200,634   
  

 

 

   

 

 

 

TOTAL

   $ 125,277,926      $ 126,413,226   
  

 

 

   

 

 

 

LIABILITIES AND MEMBER’S DEFICIT

    

LIABILITIES:

    

Notes payable

   $ 133,249,267      $ 133,249,267   

Accounts payable and accrued expenses

     1,994,700        1,797,924   

Accrued interest

     2,192,691        530,669   

Payable to affiliates — net

     493,861        100,265   

Security and reservation deposits

     11,000        10,000   

Deferred tax liability

     220,346        220,346   

Deferred revenue

     1,386,682        1,388,765   
  

 

 

   

 

 

 

Total liabilities

     139,548,547        137,297,236   

MEMBER’S DEFICIT

     (14,270,621     (10,884,010
  

 

 

   

 

 

 

TOTAL

   $ 125,277,926      $ 126,413,226   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 25


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

 

 

     2011     2010  

OPERATING REVENUE:

    

Resident fees

   $ 16,068,391      $ 11,705,006   

Other income

     127,879        97,505   
  

 

 

   

 

 

 

Total operating revenue

     16,196,270        11,802,511   
  

 

 

   

 

 

 

OPERATING EXPENSES:

    

Labor

     7,068,145        6,086,034   

Depreciation

     2,117,719        2,608,109   

Management fees to affiliate

     1,238,440        1,021,819   

General and administrative

     970,214        972,298   

Insurance

     511,606        610,526   

Taxes and license fees

     783,138        453,870   

Utilities

     504,084        535,547   

Advertising and marketing

     319,346        546,463   

Food

     581,021        440,636   

Repairs and maintenance

     340,549        244,417   

Ancillary expenses

     141,416        115,199   

Bad debt

     54,777        27,672   
  

 

 

   

 

 

 

Total operating expenses

     14,630,455        13,662,590   
  

 

 

   

 

 

 

INCOME (LOSS) FROM OPERATIONS

     1,565,815        (1,860,079
  

 

 

   

 

 

 

OTHER INCOME (EXPENSE):

    

Amortization of financing costs

     (200,634     (389,907

Interest expense

     (4,752,702     (2,914,957

Other expense

     —          (4,100

Interest income

     910        58   
  

 

 

   

 

 

 

Total other expense

     (4,952,426     (3,308,906
  

 

 

   

 

 

 

NET LOSS

   $ (3,386,611   $ (5,168,985
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 26


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED STATEMENT OF CHANGES IN MEMBER’S DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2011 (UNAUDITED)

 

 

MEMBER’S DEFICIT — December 31, 2010

   $ (10,884,010

Net loss

     (3,386,611
  

 

 

 

MEMBER’S DEFICIT — June 30, 2011

   $ (14,270,621
  

 

 

 

See notes to consolidated financial statements.

 

F – 27


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

 

 

     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (3,386,611   $ (5,168,985

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation

     2,117,719        2,608,109   

Amortization of financing costs

     200,634        389,907   

Provision for bad debts

     54,777        27,672   

Changes in assets and liabilities:

    

Accounts receivable

     (81,056     (71,106

Prepaid expenses and other assets

     (74,277     116,328   

Accounts payable and accrued expenses

     196,777        435,647   

Accrued interest

     1,662,022        2,475   

Payable to affiliates — net

     393,596        (995,506

Security and reservation deposits

     1,000        (5,500

Deferred revenue

     (2,083     59,947   
  

 

 

   

 

 

 

Net cash provided by (used in) in operating activities

     1,082,498        (2,601,012
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Development and purchase of property and equipment

     (10,250     75,465   

Change in restricted cash

     477,320        (89,430
  

 

 

   

 

 

 

Net cash provided by (used in) in investing activities

     467,070        (13,965
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payment of financing costs

     (15,000     —     

Proceeds from notes payable

     —          2,826,004   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (15,000     2,826,004   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     1,534,568        211,027   

CASH AND CASH EQUIVALENTS — Beginning of year

     3,273,503        1,222,054   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS — End of period

   $ 4,808,071      $ 1,433,081   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW

    

INFORMATION — Cash paid for interest, net of amounts capitalized

   $ 2,702,428      $ 1,072,110   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 28


Index to Financial Statements

METSUN TWO POOL ONE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2011 AND DECEMBER 31, 2010 AND FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010 (UNAUDITED)

 

 

1. ORGANIZATION AND PRESENTATION

Our accompanying unaudited consolidated financial statements include all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the six months ended June 30, 2011 and 2010. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted. These consolidated financial statements should be read together with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2010 included in this Form 8-K/A. Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

MetSun Two Pool One, LLC (“the Company”) was formed under the laws of the State of Delaware on July 19, 2007. The Company is an entity 100% owned by Master MetSun Two, LP (“MetSun II”). MetSun II was organized to invest in entities created for the purpose of acquiring, developing, owning, managing, and disposing of up to fourteen assisted living and/or independent living facilities (the “Facilities”). MetSun II was formed among Master MetSun Two GP, LLC, a Delaware limited liability company (“Sunrise GP”), as the general partner, and Sunrise Senior Living Investments, Inc., a Virginia corporation (“Sunrise LP”), and Metropolitan Connecticut Properties Ventures, LLC, a Delaware limited liability company (“MetLife LLC”), as limited partners (collectively, the “Partners”).

Sunrise LP and Sunrise GP (collectively, “SSLII”) are wholly owned subsidiaries of Sunrise Senior Living, Inc. (“SSLI”). Sunrise LP holds a 19% partnership interest, MetLife LLC holds an 80% partnership interest, and Sunrise GP holds a 1% partnership interest in the Company.

The Company wholly owns four single-purpose limited liability companies and two single-purpose limited partnerships (collectively, the “Operator Entities”) that were organized to develop and own six assisted living Facilities to provide assisted living services for seniors:

 

Operator Entity    Location    Date Opened

MetSun Two Broomfield CO Senior Living, LLC

   Broomfield, CO    May 2009

Sunrise Johns Creek GA Senior Living, LLC

   Johns Creek, GA    March 2009

MetSun Two Bloomfield South MI Senior Living, LLC

   Bloomfield, MI    March 2009

Sunrise Wake County NC Senior Living, LLC

   Cary, NC    July 2009

MetSun Two Simi Valley CA Senior Living, LP

   Simi Valley, CA    August 2009

MetSun Two McCandless PA Senior Living, LP

   McCandless, PA    June 2009

The Operator Entities have entered into pooling arrangements in which the terms and conditions of the management agreements and development agreements are considered at a consolidated level.

MetSun II and the Operator Entities (collectively, the “Partnership”) shall terminate on July 19, 2012, unless substantially all of its assets are sold or the Partners elect to dissolve MetSun II prior to this date. If all of the Facilities have not been sold by July 19, 2012, MetSun II will automatically extend for periods of one year until all Facilities are sold.

Senior living services include a residence, meals, and nonmedical assistance to elderly residents for a monthly fee. The Facilities’ services are generally not covered by health insurance, and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

On August 2, 2011, the Company was restructured with CNL Income SL II Holding, LLC (“CNL”) acquiring a 70% interest and SSLII’s combined interest increasing to 30% the (“2011 Recapitalization”), (see Note 3).

 

F – 29


Index to Financial Statements
2. NOTES PAYABLE

In March 2008, the Company has entered into separate loan agreements for the six Facilities with Prudential Insurance Company of America (“Prudential). The loans are secured by the Facilities. The loans are interest only and bear interest at variable rates tied to the London Interbank Offered Rate (“LIBOR”) as disclosed in the table below. The loans are subject to a LIBOR floor of 2.50%.

A summary of the loan terms and balances at June 30, 2011 and December 31, 2010 are as follows:

 

Facilities    Lender     

Interest

Rate

   

Maturity

Date

    Loan
Commitment
   

Loan Balance as of

June 30, 2011 and

December 31, 2010

 

MetSun Two Broomfield CO

     Prudential         LIBOR + 2.08        April 5, 2011      $ 51,993,000      $ 49,703,737   

Sunrise Johns Creek GA

     Prudential         LIBOR + 2.08        April 5, 2011        15,987,000        14,052,998   

MetSun Two Bloomfield South MI

     Prudential         LIBOR + 2.08        April 5, 2011        18,945,000        17,708,679   

Sunrise Wake County NC

     Prudential         LIBOR + 2.08        April 5, 2011        14,698,000        14,266,853   

MetSun Two Simi Valley CA

     Prudential         LIBOR + 2.08        April 5, 2011        21,895,000        21,895,000   

MetSun Two McCandless PA

     Prudential         LIBOR + 2.08        April 5, 2011        15,622,000        15,622,000   
         

 

 

   

 

 

 
          $ 139,140,000      $ 133,249,267   
         

 

 

   

 

 

 

The Company is subject to certain debt service and other financial covenants pursuant to its loan agreements described above. Upon an event of default, the lenders have remedies ranging from a written waiver of default to acceleration of the debt obligation.

The loans are cross-collateralized and cross-defaulted. Each loan has two optional one-year extensions, with a final maturity date of March 5, 2012, if certain criteria are met. Under the loan covenants for the Prudential loans, SSLI is required to maintain certain financial conditions. As of December 31, 2009, the Company failed its requirements on the Prudential loans related to the financial condition of SSLI. On November 23, 2010, the Company amended and modified the loan agreements with Prudential which reduced the principal available under the loan, waived the SSLI financial covenants until the fiscal quarter ending September 30, 2010, and disbursed the remaining unfunded operating deficit funds into escrow. SSLII has executed operating deficit guaranty agreements and completion guaranty agreements with Prudential. The Prudential loans are also guaranteed by SSLI through recourse guaranty agreements. In the event certain conditions occur (i.e., borrower files for bankruptcy) as described in the agreements, SSLI unconditionally guarantees the payment and performance on the Prudential loans. As of June 30, 2011, the Company met its requirements related to the financial condition of SSLI. On April 7, 2011, Prudential issued notices of an event of default as the Company failed to pay the loans in full at the maturity date which was April 5, 2011 (See Note 3).

Interest expense for the six months ended June 30, 2011 and 2010, was $4,752,702 and $2,914,957, respectively.

 

3. SUBSEQUENT EVENTS

On August 2, 2011, the Company was restructured with CNL acquiring a 70% interest and SSLII’s combined interest increasing to 30%. Therefore, MetLife LLC no longer has an ownership interest in the Company. The facilities included in the Company which becomes CNLSun Partners II, LLC (“CNLSun”) are MetSun Two Broomfield CO Senior Living, LLC, Sunrise John Creek GA Senior Living, LLC, MetSun Two Bloomfield South MI Senior Living, LLC, Sunrise Wake County NC Senior Living, LLC, MetSun Two Simi Valley CA Senior Living, LP and MetSun Two McCandless PA Senior Living, LP. CNLSun owns 100% of the interest of CNLSun Two Pool One, LLC which operates the facilities. As part of the new venture agreement with CNL, from the start of year four to the end of year six, SSLI will have a buyout option to purchase CNL’s 70% interest in the venture for a 16% internal rate of return to CNL. In addition, the new venture modified the existing mortgage loan in the amount of $133,200,000 to provide for, among other things, (i) pay down of the loan by approximately $28,700,000 and (ii) an extension of the maturity date of the loan to April 2014 which may be extended by two additional years under certain conditions. In connection with the transaction, SSLI contributed $8,100,000 and CNL contributed $19,000,000 to the new venture. New management and lease agreements were executed.

The Company reviewed subsequent events through October 11, 2011, the date the financial statements were issued.

******

 

F – 30


Index to Financial Statements

METSUN TWO POOL ONE, LLC

TABLE OF CONTENTS

 

 

     Page  

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2010

  

AND 2009 AND FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008:

  

REPORT OF INDEPENDENT AUDITORS

     F –32   

Consolidated Balance Sheets

     F – 33   

Consolidated Statements of Operations

     F – 34   

Consolidated Statements of Changes in Member’s (Deficit) Equity

     F – 35   

Consolidated Statements of Cash Flows

     F – 36   

Notes to Consolidated Financial Statements

     F – 38   

 

F – 31


Index to Financial Statements

REPORT OF INDEPENDENT AUDITORS

To the Member of

MetSun Two Pool One, LLC

We have audited the accompanying consolidated balance sheets of MetSun Two Pool One, LLC (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in member’s (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MetSun Two Pool One, LLC at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010 in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

September 30, 2011

 

F – 32


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2010 AND 2009

 

 

     2010     2009  

ASSETS

    

PROPERTY AND EQUIPMENT:

    

Land and land improvements

   $ 19,718,026      $ 25,055,195   

Building and building improvements

     93,791,466        130,001,282   

Furniture and equipment

     8,462,962        8,368,298   

Construction in progress

     —          159,326   
  

 

 

   

 

 

 
     121,972,454        163,584,101   

Less accumulated depreciation

     (3,440,596     (3,025,764
  

 

 

   

 

 

 

Property and equipment — net

     118,531,858        160,558,337   

CASH AND CASH EQUIVALENTS

     3,273,503        1,222,054   

RESTRICTED CASH

     3,855,430        92,879   

ACCOUNTS RECEIVABLE — Net of allowance for doubtful accounts of $41,170 and $3,141 in 2010 and 2009, respectively

     383,839        262,502   

PREPAID EXPENSES AND OTHER ASSETS

     167,962        160,037   

DEFERRED FINANCING COSTS — Net of accumulated amortization of $2,209,475 and $1,429,660 in 2010 and 2009, respectively

     200,634        980,449   
  

 

 

   

 

 

 

TOTAL

   $ 126,413,226      $ 163,276,258   
  

 

 

   

 

 

 

LIABILITIES AND MEMBER’S (DEFICIT) EQUITY

    

LIABILITIES:

    

Notes payable

   $ 133,249,267      $ 124,761,759   

Construction costs payable

     —          20,000   

Accounts payable and accrued expenses

     1,797,924        1,165,744   

Accrued interest

     530,669        483,901   

Payable to affiliates — net

     100,265        869,717   

Security and reservation deposits

     10,000        17,500   

Deferred tax liability

     220,346        267,373   

Deferred revenue

     1,388,765        1,214,977   
  

 

 

   

 

 

 

Total liabilities

     137,297,236        128,800,971   

MEMBER’S (DEFICIT) EQUITY

     (10,884,010     34,475,287   
  

 

 

   

 

 

 

TOTAL

   $ 126,413,226      $ 163,276,258   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 33


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

 

 

     2010     2009     2008  

OPERATING REVENUE:

      

Resident fees

   $ 26,252,793      $ 8,906,410      $ —     

Other income

     204,382        68,894        —     
  

 

 

   

 

 

   

 

 

 

Total operating revenue

     26,457,175        8,975,304        —     
  

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

      

Impairment losses (Note 2)

     36,790,215        —          —     

Labor

     12,675,531        6,551,866        —     

Depreciation

     5,222,167        3,025,764        —     

Management fees to affiliate

     2,182,911        1,119,644        —     

General and administrative

     2,164,344        946,107        14,646   

Insurance

     1,166,577        687,654        —     

Taxes and license fees

     1,079,164        708,873        2,892   

Utilities

     1,055,726        550,577        —     

Advertising and marketing

     1,006,665        5,534,681        5,276,146   

Food

     962,217        353,980        —     

Repairs and maintenance

     502,802        193,627        —     

Ancillary expenses

     235,412        74,230        —     

Bad debt

     62,847        3,141        —     
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     65,106,578        19,750,144        5,293,684   
  

 

 

   

 

 

   

 

 

 

LOSS FROM OPERATIONS

     (38,649,403     (10,774,840     (5,293,684
  

 

 

   

 

 

   

 

 

 

OTHER INCOME (EXPENSE):

      

Amortization of financing costs

     (779,815     (453,217     —     

Interest expense

     (5,942,242     (3,419,143     —     

Income tax benefit (expense)

     12,163        (267,373     —     

Interest income

     —          325        129,810   
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (6,709,894     (4,139,408     129,810   
  

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (45,359,297   $ (14,914,248   $ (5,163,874
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 34


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER’S (DEFICIT) EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

 

 

MEMBER’S EQUITY — December 31, 2007

   $ 49,568,665   

Contributions

     4,984,744   

Net loss

     (5,163,874
  

 

 

 

MEMBER’S EQUITY — December 31, 2008

   $ 49,389,535   

Net loss

     (14,914,248
  

 

 

 

MEMBER’S EQUITY — December 31, 2009

   $ 34,475,287   

Net loss

     (45,359,297
  

 

 

 

MEMBER’S DEFICIT — December 31, 2010

   $ (10,884,010
  

 

 

 

See notes to consolidated financial statements.

 

F – 35


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

 

 

     2010     2009     2008  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net loss

   $ (45,359,297   $ (14,914,248   $ (5,163,874

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation

     5,222,167        3,025,764        —     

Impairment losses

     36,790,215        —          —     

Amortization of financing costs

     779,815        453,217        —     

Provision for bad debts

     62,847        3,141        —     

Deferred taxes

     (47,027     267,373        —     

Changes in assets and liabilities:

      

Accounts receivable

     (184,184     (260,534     —     

Prepaid expenses and other assets

     (7,925     (160,037     —     

Accounts payable and accrued expenses

     760,403        1,302,165        —     

Accrued interest

     46,768        211,049        272,852   

Payable to affiliates — net

     (769,452     929,462        (5,109

Security and reservation deposits

     (7,500     (20,500     38,000   

Deferred revenue

     173,788        1,124,279        90,698   
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (2,539,382     (8,038,869     (4,767,433
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Development and purchase of property and equipment

     (134,126     (47,646,396     (82,128,434

Change in restricted cash

     (3,762,551     (92,879     —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (3,896,677     (47,739,275     (82,128,434
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Payment of financing costs

     —          (1,265,014     (870,957

Repayments of notes payable

     —          (109,380     —     

Proceeds from notes payable

     8,487,508        53,395,601        68,641,058   

Contributions

     —          —          4,984,744   

Contributions released from escrow (note 2)

     —          —          2,041,840   
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     8,487,508        52,021,207        74,796,685   
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND

      

CASH EQUIVALENTS

     2,051,449        (3,756,937     (12,099,182

CASH AND CASH EQUIVALENTS — Beginning of year

     1,222,054        4,978,991        17,078,173   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS — End of year

   $ 3,273,503      $ 1,222,054      $ 4,978,991   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

F – 36


Index to Financial Statements

METSUN TWO POOL ONE, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

 

 

     2010      2009      2008  

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION — Cash paid for interest, net of amounts capitalized

   $ 1,879,390       $ 219,476       $ —     
  

 

 

    

 

 

    

 

 

 

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING INFORMATION:

        

Accrued capital expenditures and construction costs payable

   $ 8,198       $ 136,421       $ 896,022   
  

 

 

    

 

 

    

 

 

 

Construction costs due to affiliates

   $ —         $ 434,622       $ 10,872,054   
  

 

 

    

 

 

    

 

 

 

Amortization of financing fees capitalized on development properties

   $ —         $ 976,433       $ 381,699   
  

 

 

    

 

 

    

 

 

 

See notes to consolidated financial statements.

 

F – 37


Index to Financial Statements

METSUN TWO POOL ONE, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2010 AND 2009 AND FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

 

 

1. ORGANIZATION AND PRESENTATION

Organization — MetSun Two Pool One, LLC (“the Company”) was formed under the laws of the State of Delaware on July 19, 2007. The Company is an entity 100% owned by Master MetSun Two, LP (“MetSun II”). MetSun II was organized to invest in entities created for the purpose of acquiring, developing, owning, managing, and disposing of up to fourteen assisted living and/or independent living facilities (the “Facilities”). MetSun II was formed among Master MetSun Two GP, LLC, a Delaware limited liability company (“Sunrise GP”), as the general partner, and Sunrise Senior Living Investments, Inc., a Virginia corporation (“Sunrise LP”), and Metropolitan Connecticut Properties Ventures, LLC, a Delaware limited liability company (“MetLife LLC”), as limited partners (collectively, the “Partners”).

Sunrise LP and Sunrise GP (collectively, “SSLII”) are wholly owned subsidiaries of Sunrise Senior Living, Inc. (“SSLI”). Sunrise LP holds a 19% partnership interest, MetLife LLC holds an 80% partnership interest, and Sunrise GP holds a 1% partnership interest in the Company.

The Company wholly owns four single-purpose limited liability companies and two single-purpose limited partnerships (collectively, the “Operator Entities”) that were organized to develop and own six assisted living Facilities to provide assisted living services for seniors:

 

Operator Entity    Location    Date Opened

MetSun Two Broomfield CO Senior Living, LLC

   Broomfield, CO    May 2009

Sunrise Johns Creek GA Senior Living, LLC

   Johns Creek, GA    March 2009

MetSun Two Bloomfield South MI Senior Living, LLC

   Bloomfield, MI    March 2009

Sunrise Wake County NC Senior Living, LLC

   Cary, NC    July 2009

MetSun Two Simi Valley CA Senior Living, LP

   Simi Valley, CA    August 2009

MetSun Two McCandless PA Senior Living, LP

   McCandless, PA    June 2009

The Operator Entities have entered into pooling arrangements in which the terms and conditions of the management agreements and development agreements are considered at a consolidated level.

MetSun II and the Operator Entities (collectively, the “Partnership”) shall terminate on July 19, 2012, unless substantially all of its assets are sold or the Partners elect to dissolve MetSun II prior to this date. If all of the Facilities have not been sold by July 19, 2012, MetSun II will automatically extend for periods of one year until all Facilities are sold.

Senior living services include a residence, meals, and nonmedical assistance to elderly residents for a monthly fee. The Facilities’ services are generally not covered by health insurance, and, therefore, monthly fees are generally payable by the residents, their family, or another responsible party.

On August 2, 2011, the Company was restructured with CNL Income SL II Holding, LLC (“CNL”) acquiring a 70% interest and SSLII’s combined interest increasing to 30% the (“2011 Recapitalization”), (see Note 6).

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The accompanying financial statements include the consolidated accounts of the Company after elimination of significant intercompany accounts and transactions. The Company reviewed subsequent events through September 30, 2011, the date the financial statements were issued.

 

F – 38


Index to Financial Statements

Use of Estimates — The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates and assumptions have been made with respect to the useful lives of assets, recoverability of investments in property and equipment, recoverable amounts of receivables, amortization periods of deferred costs, and the fair value of financial instruments. Actual results could differ from those estimates.

Property and Equipment — Property and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. The Company capitalizes property taxes, insurance, and interest during construction to the extent such assets qualify for capitalization. Interest is capitalized during the period of construction based upon actual interest on borrowings incurred on the specific construction loans for each facility. Interest and other carrying costs are capitalized until the construction is completed and the facility is ready for its intended use. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, as follows:

 

Land improvements

     15 years   

Building and improvements

     10-40 years   

Furniture, fixtures, and equipment

     3-10 years   

Property and equipment are reviewed for impairment whenever events or circumstances indicate that the asset’s undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount using Level 3 inputs per Accounting Standards Codification (“ASC”) Fair Value Measurements Topic for non-financial assets and liabilities to determine the estimated fair value of the properties. The Company determines fair values using various methods, including estimated cash flow projections discounted at appropriate rates based on available market information. As of December 31, 2010 and 2009, the Facilities collateralized under the Prudential loans (see Note 4) were measured for impairment due to the default or anticipated defaults. Impairment charges on assets held and used were $36,790,215, $0 and $0 for the years ended December 31, 2010, 2009 and 2008, respectively.

Cash and Cash Equivalents — Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Throughout the year, the Company may have cash balances in excess of federally insured amounts on deposit with various financial institutions.

Restricted Cash — Upon commencement of operations, the Company established a capital expenditure reserve to cover the cost of replacements and repairs to the Facilities’ furniture, fixtures, and equipment. The required deposit is $300 per unit in year one, $500 per unit in year two, $1,000 per unit in year three, and $1,000 per unit as increased by the greater of 3% or the consumer price index in subsequent years. As a result of the pooling arrangements entered into by the Company, all amounts in the capital expenditure reserves for the Facilities are considered to be pooled into one account and may be used for any of the Facilities. The balances in the capital reserve were $270,957 and $92,879 as of December 31, 2010 and 2009, respectively and are included in restricted cash in the accompanying consolidated balance sheets.

In 2007, MetLife LLC deposited contributions of $2,041,840 into an escrow account managed by First American Title Company for the benefit of the Company. The funds were released by First American Title Company to the Company in 2008.

The Company amended its loan agreements related to the six loan commitments with Prudential on November 23, 2010. At the time of the amendment, all remaining undisbursed funds attributable to the operating deficit reserves were disbursed into an escrow with Prudential Asset Resources, Inc. Operating deficit guarantees by SSLI to the lenders are to cover operating shortfalls of the Company (as further described in Note 4). The general partner has the ability to request additional capital to be released from the escrow for operating shortfalls and optional shortfall funding at the discretion of Sunrise Senior Living Management, Inc. (“SSLMI”), a wholly owned subsidiary of SSLI and the manager of the Facilities (as further described in Note 4). The balance in the escrow was $3,584,473 and $0 as of December 31, 2010 and 2009, respectively.

 

F – 39


Index to Financial Statements

Allowance for Doubtful Accounts — The Company provides an allowance for doubtful accounts on its outstanding receivables balance based on its collection history and an estimate of uncollectible accounts.

Deferred Financing Costs — Costs incurred in conjunction with obtaining permanent financing for the Company have been deferred and are amortized using the straight-line method, which approximates the effective interest method, to interest expense over the remaining term of the financing. For the years ended December 31, 2010, 2009 and 2008, amortization was $779,815, $1,429,650 and $381,699 respectively, of which $0, $976,433 and $381,699, respectively, was capitalized to building with the remaining $779,815, $453,217 and $0 included in amortization of financing costs in the accompanying consolidated statements of operations, respectively.

Revenue Recognition and Deferred Revenue — Operating revenue consists of resident fee revenue, including resident community fees. Generally, resident community fees approximating 30 to 60 times the daily residence fee are received from residents upon occupancy. Resident community fees are deferred and recognized as income over one year, corresponding to the terms of agreements with residents. The agreements are cancelable by residents with 30 days’ notice. All other resident fee revenue is recognized when services are rendered. The Company bills the residents one month in advance of the services being rendered, and therefore, cash payments received for services are recorded as deferred revenue until the services are rendered and the revenue is earned.

Income Taxes — No provision has been made for federal income taxes, as the liability for such taxes, if any, is that of the Members and not the Company. The Company is subject to franchise taxes in the states of California, Georgia, Michigan, North Carolina and Pennsylvania, where some of the properties are located. These taxes are expensed as incurred and are included in taxes and license fees in the accompanying consolidated statements of operations. The Company is also subject to state income tax for Michigan.

In July 2006, the Financial Accounting Standards Board issued (“FASB”) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which has principally been codified in ASC 740-10-25, Income Taxes, Overall Recognition (ASC 740-10-25). ASC 740-10-25 describes a comprehensive model for the measurement, recognition, presentation and disclosure of uncertain tax positions in the financial statements. Under the interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the tax authorities’ have full knowledge of the position and all relevant facts, but without considering time values. The Company adopted the provisions of this statement on January 1, 2009. The adoption of this statement did not have any effect on the Company’s financial position or results of operations, and the Company has no uncertain tax position that requires accrual as of December 31, 2010 and 2009.

Fair Value Measurement — The Company adopted the provisions of ASC Fair Value Measurements Topic for non-financial assets and liabilities on January 1, 2009. The Company had previously adopted the other provisions of fair value measurement for financial assets and liabilities on January 1, 2008. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC Fair Value Measurements Topic establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels. These levels, in order of highest priority to lowest priority, are described below:

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

Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3 — Unobservable inputs are used when little or no market data is available.

As of December 31, 2010 and 2009, the carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses, and other liabilities were representative of their fair values because of the short-term maturity of these instruments.

 

F – 40


Index to Financial Statements
3. TRANSACTIONS WITH AFFILIATES

The Facilities have entered into development agreements with Sunrise Development, Inc. (“SDI”), a wholly owned subsidiary of SSLI, to provide development, design, and construction services for the Facilities. The development fee to be charged by SDI is 5% of budgeted project costs pursuant to the development agreement. Development fees incurred and capitalized into construction in progress were $0, $768,024 and $7,240,322 during 2010, 2009 and 2008, respectively.

In the event of a cost overrun at a Facility, SDI may apply any cost savings from any other Facility that has achieved cost finalization, in accordance with pooling arrangements. Upon cost finalization of all Facilities and the netting of any cost savings against cost overruns, the Members are obligated to contribute the necessary funds to cover the aggregate cost overrun, if any.

Each Operator Entity has entered into a preopening and management agreement with SSLMI for management of its Facility. The agreements provide for a preopening service fee equal to 2% of the Facility’s budgeted project cost, as defined. The preopening management fee is earned and paid ratably on a monthly basis until the day immediately prior to the Facility’s opening date. Upon the opening of each Facility, SSLMI will begin receiving a monthly management fee equal to the greater of (i) 7% of the gross revenues of the Facility or (ii) $250 multiplied by the number of units in the Facility. SSLMI is also entitled to an incentive management fee equal to 25% of the difference between adjusted net operating income, as defined, and target net income, as defined, not to exceed 0.55% of gross revenues, as defined, in any given year. No incentive management fees were incurred during 2010, 2009 and 2008. Preopening fees incurred were $0, $774,774 and $2,385,634 for 2010, 2009 and 2008, respectively and are included in advertising and marketing on the accompanying consolidated statements of operations. Management fees of $2,182,911, $1,119,644 and $0 were incurred in 2010, 2009 and 2008, respectively.

SSLMI shall have the right, but not the obligation, to lend, on a monthly basis, the amount of any operating deficit, as defined and set forth in the management agreement. The operating deficit requirement shall commence on the date on which all working capital reserves have been expended and terminates upon termination of the management contract. As of December 31, 2010 and 2009, there were no operating deficit loans made or outstanding.

The Company receives advances from affiliates that are used for development purposes. These transactions are subject to the right of offset wherein any receivables from the affiliate can be offset by any payables to the affiliates, and therefore, the amounts have been presented net as payable to affiliates-net in the accompanying consolidated financial statements. The amounts are non-interest-bearing and due on demand. Total payables outstanding were $0 and $434,622 at December 31, 2010 and 2009, respectively and are included in payable to affiliates-net on the accompanying consolidated balance sheets. Advances by SDI or SSLI to cover cash shortfalls for development, to the extent required, bear interest at the rate of 6% per annum. Total interest accrued was $0 and $12,148 as of December 31, 2010 and 2009, respectively and is included in payable to affiliates-net in the accompanying consolidated balance sheets. Payments to SSLMI for direct development costs were $739,019, $17,464,025 and $10,487,119 in 2010, 2009 and 2008, respectively.

The management agreements also provide for reimbursement to SSLMI for all direct costs of operations. These transactions are subject to the right of offset wherein any receivables from the affiliate can be offset by any payables to the affiliate, and therefore, the amounts have been presented net as payable to affiliates, net in the accompanying consolidated financial statements. The amounts are non-interest-bearing and due on demand. Payments to SSLMI for direct operating expenses were $20,788,723, $14,897,254 and $0 in 2010, 2009 and 2008, respectively. Amounts due related to these costs at December 31, 2010 and 2009 were $100,265 and $435,095, respectively and are included in payable to affiliates-net in the accompanying consolidated balance sheets.

The Company obtains property, workers compensation, professional and general liability coverage through Sunrise Senior Living Insurance, Inc., an affiliate of SSLI. Related payments totaled $924,401, $768,450 and $66,409 in 2010, 2009 and 2008, respectively. In the accompanying consolidated balance sheets, liability premiums capitalized to building were $0 in 2010 and $115,114 in 2009.

 

F – 41


Index to Financial Statements
4. NOTES PAYABLE

In March 2008, the Company has entered into separate loan agreements for the six Facilities with Prudential Insurance Company of America (“Prudential”). The loans are secured by the Facilities. The loans are interest only and bear interest at variable rates tied to the London Interbank Offered Rate (“LIBOR”) as disclosed in the table below. The LIBOR rates were 0.26%, 0.23% and 0.44% as of December 31, 2010, 2009 and 2008, respectively. The loans are subject to a LIBOR floor of 2.50%.

A summary of the loan terms and balances at December 31, 2010 and 2009 are as follows:

 

Facilities

  

Lender

    

Interest

Rate

    

Maturity

Date

    

Loan

Commitment

    

Loan Balance

as of

December 31, 2010

    

Loan Balance

as of

December 31, 2009

 
                 
                 

MetSun Two Broomfield CO

     Prudential         LIBOR + 2.08         April 5, 2011       $ 51,993,000       $ 49,703,737       $ 46,104,229   

Sunrise Johns Creek GA

     Prudential         LIBOR + 2.08         April 5, 2011         15,987,000         14,052,998         13,147,689   

MetSun Two Bloomfield South MI

     Prudential         LIBOR + 2.08         April 5, 2011         18,945,000         17,708,679         16,657,737   

Sunrise Wake County NC

     Prudential         LIBOR + 2.08         April 5, 2011         14,698,000         14,266,853         13,260,245   

MetSun Two Simi Valley CA

     Prudential         LIBOR + 2.08         April 5, 2011         21,895,000         21,895,000         20,991,713   

MetSun Two McCandless PA

     Prudential         LIBOR + 2.08         April 5, 2011         15,622,000         15,622,000         14,600,146   
           

 

 

    

 

 

    

 

 

 
            $ 139,140,000       $ 133,249,267       $ 124,761,759   
           

 

 

    

 

 

    

 

 

 

The Company is subject to certain debt service and other financial covenants pursuant to its loan agreements described above. Upon an event of default, the lenders have remedies ranging from a written waiver of default to acceleration of the debt obligation.

The loans are cross-collateralized and cross-defaulted. Each loan has two optional one-year extensions, with a final maturity date of March 5, 2012, if certain criteria are met. Under the loan covenants for the Prudential loans, SSLI is required to maintain certain financial conditions. As of December 31, 2009, the Company failed its requirements on the Prudential loans related to the financial condition of SSLI. On November 23, 2010, the Company amended and modified the loan agreements with Prudential which reduced the principal available under the loan, waived the SSLI financial covenants until the fiscal quarter ending September 30, 2010, and disbursed the remaining unfunded operating deficit funds into escrow. SSLII has executed operating deficit guaranty agreements and completion guaranty agreements with Prudential. The Prudential loans are also guaranteed by SSLI through recourse guaranty agreements. In the event certain conditions occur (i.e., borrower files for bankruptcy) as described in the agreements, SSLI unconditionally guarantees the payment and performance on the Prudential loans. As of December 31, 2010, the Company met its requirements related to the financial condition of SSLI. On April 7, 2011, Prudential issued notices of an event of default as the Company failed to pay the loans in full at the maturity date which was April 5, 2011.

On August 2, 2011, as part of the 2011 Recapitalization (Note 6), the Prudential loans were modified, extending the maturity date to April 5, 2014 with two twelve month extensions. The modification required a principal pay down of $28,700,000 funded by SSLI and CNL. The modification also releases SSLII from the operating deficit guarantees and eliminates the previous Debt Service Covenant Ratio (“DSCR”) requirements related to the financial condition of SSLI.

Interest incurred for the years ended December 31, 2010, 2009 and 2008, was $5,942,242, $5,161,606 and $1,232,021, respectively, of which $0, $1,742,463 and $1,232,021 was capitalized to building , respectively, with the remaining $5,942,242, $3,419,143 and $0 included in interest expense on the accompanying consolidated statements of operations, respectively.

The fair value of the Company’s notes payable has been estimated based on current rates offered for debt with the same remaining maturities and comparable collateralizing assets. Changes in assumptions or methodologies used to make estimates may have a material effect on the estimated fair value. Per ASC Fair Value Measurements Topic, the Company has applied Level 2 type inputs to determine that the estimated fair value of the Company’s notes payable were $133,249,264 and $121,710,248 as of December 31, 2010 and 2009, respectively based on a market interest rate of 6.76% and 6.5% at those respective dates.

 

F – 42


Index to Financial Statements
5. CONTINGENCIES

The Company is involved in claims and lawsuits incidental to the ordinary course of business. While the outcome of these claims and lawsuits cannot be predicted with certainty, management of the Company does not believe the ultimate resolution of these matters will have a material adverse effect on the Company’s consolidated financial position.

 

6. SUBSEQUENT EVENTS

On August 2, 2011, the Company was restructured with CNL acquiring a 70% interest and SSLII’s combined interest increasing to 30%. Therefore, MetLife LLC no longer has an ownership interest in the Company. The facilities included in the Company which becomes CNLSun Partners II, LLC (“CNLSun”) are MetSun Two Broomfield CO Senior Living, LLC, Sunrise John Creek GA Senior Living, LLC, MetSun Two Bloomfield South MI Senior Living, LLC, Sunrise Wake County NC Senior Living, LLC, MetSun Two Simi Valley CA Senior Living, LP and MetSun Two McCandless PA Senior Living, LP. CNLSun owns 100% of the interest of CNLSun Two Pool One, LLC which operates the facilities. As part of the new venture agreement with CNL, from the start of year four to the end of year six, SSLI will have a buyout option to purchase CNL’s 70% interest in the venture for a 16% internal rate of return to CNL. In addition, the new venture modified the existing mortgage loan in the amount of $133,200,000 to provide for, among other things, (i) pay down of the loan by approximately $28,700,000 and (ii) an extension of the maturity date of the loan to April 2014 which may be extended by two additional years under certain conditions. In connection with the transaction, SSLI contributed $8,100,000 and CNL contributed $19,000,000 to the new venture. New management and lease agreements were executed.

******

 

F – 43


Index to Financial Statements

CNL LIFESTYLE PROPERTIES, INC.

AND SUBSIDIARIES

UNAUDITED PRO FORMA

CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The Unaudited Pro Forma Condensed Consolidated Balance Sheet of CNL Lifestyle Properties Inc. (the “Company”) is presented as if the acquisition described in Note (b) had occurred on June 30, 2011.

On August 17, 2011, the Company acquired six senior living facilities (the “Properties”) through a joint venture with Sunrise Senior Living Investments, Inc (“Sunrise”). On January 10, 2011, the Company acquired 29 senior living facilities through another joint venture with Sunrise. The acquisition of the Properties are considered related businesses to the previously acquired 29 facilities. The accompanying Unaudited Pro Forma Condensed Consolidated Statements of Operations are presented for the six months ended June 30, 2011 and for the year ended December 31, 2010 (the “Pro Forma Periods”), and include certain pro forma adjustments to illustrate the estimated effect of the acquisitions as if they occurred on January 1, 2010.

This pro forma condensed consolidated financial information is presented for informational purposes only and does not purport to be indicative of the Company’s financial results or condition if the various events and transactions reflected herein had occurred on the dates or been in effect during the periods indicated. This pro forma condensed consolidated financial information should not be viewed as indicative of the Company’s financial results or conditions in the future.

 

F – 44


Index to Financial Statements

CNL LIFESTYLE PROPERTIES, INC.

AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

AS OF JUNE 30, 2011

(in thousands, except per share data)

 

     Historical (a)     Pro Forma
Adjustments
    Pro Forma  
      
ASSETS       

Real estate investment properties, net (including $212,962 related to consolidated variable interest entities)

   $ 1,983,891      $ —        $ 1,983,891   

Cash

     342,943        (18,960 ) (b)      323,983   

Mortgages and other notes receivable, net

     126,667        —          126,667   

Investments in unconsolidated entities

     271,862        18,960   (b)      290,822   

Deferred rent and lease incentives

     88,616        —          88,616   

Other assets

     59,855        —          59,855   

Intangibles, net

     25,159        —          25,159   

Restricted cash

     25,579        —          25,579   

Accounts and other receivables

     15,788        —          15,788   
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 2,940,360      $ —        $ 2,940,360   
  

 

 

   

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY       

Mortgages and other notes payable (including $61,622 non-recourse debt of consolidated variable interest entities)

   $ 435,943      $ —        $ 435,943   

Unsecured senior notes, net of discount

     397,063        —          397,063   

Other liabilities

     63,294        —          63,294   

Security deposits

     15,287        —          15,287   

Accounts payable and accrued expenses

     31,172        —          31,172   

Due to affiliates

     1,517        —          1,517   
  

 

 

   

 

 

   

 

 

 

Total Liabilities

   $ 944,276      $ —        $ 944,276   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies

      

Stockholders’ equity:

      

Preferred stock, $.01 par value per share

      

200 million shares authorized and unissued

     —          —          —     

Excess shares, $.01 par value per share

      

120 million shares authorized and unissued

     —          —          —     

Common stock, $.01 par value per share

      

One billion shares authorized at June 30, 2011 324,432 shares issued and 306,294 shares outstanding

     3,063        —          3,063   

Capital in excess of par value

     2,717,016        —          2,717,016   

Accumulated deficit

     (40,126     —          (40,126

Accumulated distributions

     (678,282     —          (678,282

Accumulated other comprehensive loss

     (5,587     —          (5,587
  

 

 

   

 

 

   

 

 

 
     1,996,084        —          1,996,084   
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,940,360      $ —        $ 2,940,360   
  

 

 

   

 

 

   

 

 

 

 

F – 45


Index to Financial Statements

CNL LIFESTYLE PROPERTIES, INC.

AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(in thousands, except per share data)

 

     Historical (1)     Pro Forma
Adjustments
    Pro  Forma
Results
 
      

Revenues:

      

Rental income from operating leases

   $ 89,679      $ —        $ 89,679   

Property operating revenues

     93,459        —          93,459   

Interest income on mortgages and other notes receivable

     6,520        —          6,520   
  

 

 

   

 

 

   

 

 

 

Total revenues

     189,658        —          189,658   
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Property operating expenses

     95,166        —          95,166   

Asset management fees to advisor

     15,311        459  (2)      15,770   

General and administrative

     7,009        —          7,009   

Ground lease and permit fees

     6,372        —          6,372   

Acquisition fees and costs

     6,911        —          6,911   

Other operating expenses

     4,639        —          4,639   

Depreciation and amortization

     60,699        —          60,699   
  

 

 

   

 

 

   

 

 

 

Total expenses

     196,107        459        196,566   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (6,449     (459     (6,908
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest and other expense

     (917     —          (917

Interest expense and loan cost amortization

     (27,292     —          (27,292

Equity in earnings (loss) of unconsolidated entities

     (1,705     497  (3)      (1,208
     —          6,265  (4)      6,265   
  

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (29,914     6,762        (23,152
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (36,363   $ 6,303      $ (30,060
  

 

 

   

 

 

   

 

 

 

Loss per share of common stock (basic and diluted)

   $ (0.12     $ (0.10
  

 

 

     

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)

     297,376          297,376   
  

 

 

     

 

 

 

 

F – 46


Index to Financial Statements

CNL LIFESTYLE PROPERTIES, INC.

AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010

(in thousands, except per share data)

 

     Historical (1)     Pro Forma
Adjustments
    Pro Forma
Results
 

Revenues:

      

Rental income from operating leases

   $ 202,029      $ —        $ 202,029   

Property operating revenues

     86,567        —          86,567   

Interest income on mortgages and other notes receivable

     15,832        —          15,832   
  

 

 

   

 

 

   

 

 

 

Total revenues

     304,428        —          304,428   
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Property operating expenses

     79,365        —          79,365   

Asset management fees to advisor

     26,808        4,697  (2)      31,505   

General and administrative

     14,242        —          14,242   

Ground lease and permit fees

     12,589        —          12,589   

Acquisition fees and costs

     14,149        —          14,149   

Other operating expenses

     2,528        —          2,528   

Bad debt expense

     2,315        —          2,315   

Loan loss provision

     4,072        —          4,072   

Loss on lease termination

     55,528        —          55,528   

Impairment provision

     26,880        —          26,880   

Depreciation and amortization

     126,223        —          126,223   
  

 

 

   

 

 

   

 

 

 

Total expenses

     364,699        4,697        369,396   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (60,271     (4,697     (64,968
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest and other income

     2,759        —          2,759   

Interest expense and loan cost amortization

     (50,616     —          (50,616

Gain on extinguishment of debt

     15,261        —          15,261   

Equity in earnings (loss) of unconsolidated entities

     10,978        (785 )(3)      10,193   
  

 

 

   

 

 

   

 

 

 

Total other expense

     (21,618     (785     (22,403
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (81,889   $ (5,482   $ (87,371
  

 

 

   

 

 

   

 

 

 

Loss per share of common stock (basic and diluted)

   $ (0.31     $ (0.33
  

 

 

     

 

 

 

Weighted average number of shares of common Stock outstanding (basic and diluted)

     263,516          263,516   
  

 

 

     

 

 

 

 

F – 47


Index to Financial Statements

CNL LIFESTYLE PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Condensed Consolidated Balance Sheet:

 

(a) Reflects the Company’s historical balance sheet as of June 30, 2011.

 

(b) On August 2, 2011, the Company acquired an ownership interest in a portfolio of six senior living facilities. The Company entered into agreements with Metropolitan Connecticut Property Ventures, LLC, an affiliate of MetLife, Inc., and Sunrise to acquire the portfolio through a new joint venture formed by the Company and Sunrise, CNLSun Partners II, LLC (“CNLSun II”), with an agreed upon value of approximately $131 million. The Company acquired seventy percent (70%) of the membership interests in CNLSun II for an equity contribution of approximately $19.0 million. Sunrise contributed $8.1 million, in cash, for a thirty percent (30%) membership interest in CNLSun II. CNLSun II paid down the portfolio’s existing financing with The Prudential Insurance Company of America by approximately $26.0 million resulting in a principal balance of approximately $104.5 million.

Unaudited Pro Forma Condensed Consolidated Statement of Operations:

 

(1) Represents the Company’s historical operating results for the respective pro forma periods being presented.

 

(2) Represents asset management fees paid to the Company’s advisor in an amount equal to 0.08334% of the real estate asset value, the outstanding principal amount of any loans and the amount invested in other permitted investments including wholly-owned properties, determined on the basis of cost, plus, in the case of properties owned by any joint venture or partnership in which the Company is a co-venture or partner, the portion of the asset of such properties paid by the Company. The pro forma adjustments include asset management fees for the transactions described in Notes (b) and (3) as if the acquisitions had occurred at January 1, 2010.

 

(3) On January 10, 2011, the Company acquired an ownership interest in 29 senior living facilities from US Assisted Living Facilities III, Inc. and Sunrise to acquire the facilities through a new joint venture formed by the Company and Sunrise, valued at $630.0 million (the “Sunrise Venture”). The Company acquired sixty percent (60%) of the membership interests in Sunrise Venture for an equity contribution of $134.3 million, including certain transactional costs. Sunrise contributed cash and its interest in the previous joint venture with Seller for a forty percent (40%) share. The Sunrise Venture obtained $435.0 million in loan proceeds from new debt financing, a portion of which was used to refinance the existing indebtedness encumbering the communities.

The Sunrise Venture and CNLSun II, as described above, are accounted for under the equity method of accounting and the Company records its equity in earnings or losses of the ventures under the hypothetical liquidation at book value (“HLBV”) method of accounting due to the ventures structure and preferences the Company receives on the distributions. Under this method, the Company recognizes income or loss in each period based on the change in liquidation proceeds the Company would received from a hypothetical liquidation of its investment in the ventures from the beginning to the end of the periods presented.

The pro forma adjustment summarized below represents the Company’s equity in earnings (loss) generated from the unconsolidated interests in Sunrise Venture and CNLSun II as described above allocated between the Company and its partners. The following estimated operating results of the properties owned by the Sunrise Venture and CNLSun II and equity in earnings (loss) of the Company are presented as if the investments had been made on January 1, 2010. These amounts were derived from the historical operating results of each of the acquisitions for the periods presented and include the impact of the following pro forma adjustments:

 

   

In connection with the formation of the ventures, new management agreements were executed. The amounts presented include the impact of the reduction in rates associated with these agreements.

 

   

The formation of the ventures resulted in a new basis of accounting for the related assets. Depreciation and amortization has been adjusted to reflect the impact of this allocation on the carrying values of land, building and equipment.

 

   

As part of their formation transactions, the ventures entered into new financing arrangements. The historical results have been adjusted to reflect the terms associated with the new financing arrangements.

 

   

The impairment provision reflected in the historical results of the CNL Sun II venture for the year ended December 31, 2010 has been eliminated as it does not have continuing impact on the operating results of the venture given the new basis of the assets established as part of the formation transactions.

 

 

F – 48


Index to Financial Statements

CNL LIFESTYLE PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

Unaudited Pro Forma Condensed Consolidated Statement of Operations (Continued):

 

    

Pro Forma Periods Ended

 
     (in Thousands)  
     June 30, 2011     December 31, 2010  
     CNLSun II     Sunrise Venture     CNLSun II  

Revenue

   $ 16,196      $ 139,453      $ 26,457   

Property operating expenses

     (12,162     (93,780     (22,009

Depreciation & amortization expenses

     (2,118     (25,706     (5,222

Interest expense

     (1,211     (26,100     (2,456 )  

Interest and other income (expense)

     5        8        (155
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 710      $ (6,125   $ (3,385
  

 

 

   

 

 

   

 

 

 

Income (loss) allocable to venture partners

   $ 213      $ (7,710   $ (1,015
  

 

 

   

 

 

   

 

 

 

Income (loss) allocable to the Company on a proforma basis

   $ 497      $ 1,585      $ (2,370
  

 

 

   

 

 

   

 

 

 

 

(4) In connection with the acquisition of the Sunrise Venture, the venture incurred one-time acquisition fees and costs of approximately $6.3 million that were included in the Company’s historical operating results for the period ended June 30, 2011. These costs were eliminated for the pro forma period ended June 30, 2011.

 

F – 49