Sonida Senior Living 8K/A Financial Statements and Exhibits | SNDA 22 Nov 10

Exhibit 99.1

SIGNATURE ASSISTED LIVING OF TEXAS, LLC

FINANCIAL STATEMENTS

December 31, 2009 and 2008

with

Independent Auditors’ Report

SIGNATURE ASSISTED LIVING OF TEXAS, LLC

TABLE OF CONTENTS


	Page
INDEPENDENT AUDITORS’ REPORT		1
FINANCIAL STATEMENTS:
Balance Sheets		2
Statements of Income		4
Statements of Changes in Members’ Equity		5
Statements of Cash Flow		6
Notes to Financial Statements		7

INDEPENDENT AUDITORS’ REPORT

To the Members
of Signature Assisted Living of Texas, LLC

We have audited the accompanying balance sheets of Signature Assisted Living of Texas, LLC (the “Company”) as of December 31, 2009 and 2008, and the related statements of income, changes in members’ equity, and cash flows for the years then ended. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial position of the Company as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Dallas, Texas
November 11, 2010

SIGNATURE ASSISTED LIVING OF TEXAS, LLC

BALANCE SHEETS

December 31, 2009 and 2008


	2009		2008
ASSETS
Cash and cash equivalents	$	388,585	$	298,866
Cash — restricted		605,794		593,750
Accounts receivable		134,286		31,192
Accounts receivable — related parties		3,108,130		5,303,820
Reimbursable construction costs		2,774,080		343,514
Inventory		—		4,391
Prepaid expenses		825,779		747,479

Total current assets		7,836,654		7,323,012

Property and equipment, net		339,771		397,125
Deposits		3,450		3,450

Total assets	$	8,179,875	$	7,723,587

The accompanying notes are an integral
part of these financial statements.

SIGNATURE ASSISTED LIVING OF TEXAS, LLC

BALANCE SHEETS

December 31, 2009 and 2008


	2009			2008
LIABILITIES AND MEMBERS’ EQUITY
Accounts payable	$	1,148,650		$	326,265
Accounts payable — related parties		1,760,897			4,725,791
Other payables		28,671			23,749
Accrued expenses		1,499,666			1,278,941
Deferred revenue		513,942			589,750
Capital lease obligations — current portion		136,106			100,749
Refundable deposits		54,000			55,090
Notes payable — related parties		182,088			182,088

Total current liabilities		5,324,020			7,282,423

Capital lease obligations — long term portion		202,087			238,059

Total liabilities		5,526,107			7,520,482


Members’ equity
Controlling interest
Contributions		900			900
Accumulated earnings prior to non-controlling interest		2,421,418			164,571
Non-controlling interest in subsidiary
Contributions		100			100
Distributions		(47,634	)		(10,000	)
Accumulated earnings		278,984			47,534

Total members’ equity		2,653,768			203,105

Total liabilities and members’ equity	$	8,179,875		$	7,723,587

The accompanying notes are an integral
part of these financial statements.

SIGNATURE ASSISTED LIVING OF TEXAS, LLC

STATEMENTS OF INCOME

For the Years Ended December 31, 2009 and 2008


	2009		2008
Revenues
Rental revenue from residents	$	22,054,700	$	19,739,538
Other fees from residents		494,112		—
Other income		196,173		54,466

Total revenue		22,744,985		19,794,004

Expenses
Residence operating expenses
Advertising and marketing		72,299		98,147
Food services		1,097,976		997,737
General and administrative — residences		566,826		392,829
Housekeeping and maintenance		583,336		440,522
Insurance		191,696		231,751
Miscellaneous expenses		70,819		71,672
Payroll and related expenses		7,828,085		7,102,802
Property taxes		861,037		831,141
Other taxes		261,685		129,987
Resident activities and care		141,061		136,878
Utilities		1,152,739		1,195,288

Total residence operating expenses		12,827,559		11,628,754

Building lease payments		5,626,872		5,339,239

Start up cost		14,293		34,127

Management fees — related party		1,586,769		1,381,487

Depreciation and amortization expenses		118,708		114,386

Finance and interest expenses
Finance charges		33,145		42,196
Interest expense — related party notes		61,386		22,299

Total finance and interest expenses		94,531		64,495

Total expenses		20,268,732		18,562,488

Profit from operations		2,476,253		1,231,516
Other income
Interest income		12,044		26,490

Profit before non-controlling interest		2,488,297		1,258,006
Less: net gain attributable to non-controlling interest		231,450		152,124

Net profit	$	2,256,847	$	1,105,882

The accompanying notes are an integral
part of these financial statements.

SIGNATURE ASSISTED LIVING OF TEXAS, LLC

STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

For the Years Ended December 31, 2009 and 2008


				Non-
	Controlling			Controlling
	Interest			Interest			Total Interest
Balance at December 31, 2007	$	(940,411	)	$	(104,490	)	$	(1,044,901	)
Capital distribution		—			(10,000	)		(10,000	)
Net profit		1,105,882			152,124			1,258,006

Balance at December 31, 2008		165,471			37,634			203,105
Capital distribution		—			(37,634	)		(37,634	)
Net profit		2,256,847			231,450			2,488,297

Balance at December 31, 2009	$	2,422,318		$	231,450		$	2,653,768

The accompanying notes are an integral
part of these financial statements.

SIGNATURE ASSISTED LIVING OF TEXAS, LLC
STATEMENTS OF CASH FLOW
For the Years Ended December 31, 2009 and 2008


	2009			2008
Cash flows from operating activities
Net profit	$	2,256,847		$	1,105,882
Net profit attributable to non-controlling interest		231,450			152,124
Adjustments to reconcile net profit to net cash (used) provided by operating activities
Depreciation and amortization		118,708			114,386
Loss on write off of fixed assets		45,625			—
Changes in operating assets and liabilities
(Increase) decrease in operating assets
Accounts receivable		(103,094	)		(30,691	)
Accounts receivable — related parties		2,195,690			(3,756,390	)
Other receivable		—			6,932
Reimbursable construction costs		(2,430,566	)		426,135
Inventory		4,391			(4,391	)
Prepaid expenses		(78,300	)		(337,393	)
Other assets		—			26,403
Increase (decrease) in operating liabilities
Accounts payable		822,385			(536,941	)
Accounts payable — related parties		(2,964,894	)		2,683,420
Other payables		4,922			23,749
Payroll tax payable		—			(23,716	)
Accrued expenses		220,725			363,426
Deferred revenue		(75,808	)		110,977
Refundable deposits		(1,090	)		55,090

Net cash provided by operating activities		246,991			379,002

Cash flows from investing activities
Purchase of property and equipment		(1,872	)		(41,362	)

Net cash used by investing activities		(1,872	)		(41,362	)

Cash flows from financing activities
Distribution to members		(37,634	)		(10,000	)
Principal payments on capital leases		(105,722	)		(84,364	)

Net cash used by financing activities		(143,356	)		(94,364	)

Net increase in cash		101,763			243,276
Cash, beginning of year		892,616			649,340

Cash, end of year	$	994,379		$	892,616


Supplemental information:
Interest paid	$	61,386		$	22,299

State margin taxes paid	$	154,392		$	99,741


Noncash activities:
Through the year ending December 31, 2009 and 2008, the Company acquired vehicles through financing agreements totaling $105,108 and $56,907, respectively.

The accompanying notes are an integral
part of these financial statements.

SIGNATURE ASSISTED LIVING OF TEXAS, LLC

NOTES TO FINANCIAL STATEMENTS

December 31, 2009 and 2008

1.ORGANIZATION AND ACCOUNTING PRINCIPLES

General Information and Operations

Signature Assisted Living of Texas, LLC, (the “Company”) is majority owned by Signature Assisted Living, LLC (“SAL”). Opus Won, LLC (“Opus”), a Florida limited liability company, has a 10 percent interest in eight of the ten communities owned by the Company. The communities in which Opus holds a minority interest are as follows: Spring Lake Assisted Living and Memory Care Community, Pecan Point Assisted Living and Memory Care Community, Hawkins Creek Assisted Living and Memory Care Community, Azalea Trails Assisted Living and Memory Care Community, Santa Fe Trails Assisted Living and Memory Care Community, Walnut Creek Assisted Living and Memory Care Community, Martin Crest Assisted Living and Memory Care Community, and Magnolia Assisted Living and Memory Care Community.

At December 31, 2009, the Company operates ten assisted living communities in the State of Texas and is in the process of developing and constructing two more assisted living communities in Texas. See Note 3 for additional information regarding the operations of the Company.

Basis of Accounting

The financial statements are presented using accounting principles generally accepted in the United States of America.

Cash and Cash Equivalents

Cash or cash equivalents include all highly liquid debt instruments purchased with a maturity of three months or less.

Accounts Receivable

Accounts receivable represent amounts due from tenants and other third parties originating during the normal course of business. Receivables which are 60 days past due are evaluated by management for collectability. Receivables determined to be uncollectible are written off using the direct write-off method. Currently, all amounts are considered fully collectible.

Inventory

Inventory is valued at the lower of cost or market.

Property and Equipment

The Company capitalizes all expenditures for property and equipment that exceed $1,000 and have a useful life of more than one year. Depreciation is computed over the estimated useful lives of the assets using the straight line method. Useful lives range from 5-30 years.

Deferred Revenue

Deferred revenue represents amounts prepaid as of December 31, 2009 and 2008 by tenants of the Company for rent related to 2010 and 2009, respectively.

Revenue Recognition

Revenue is recognized when earned or as rent becomes due, typically at the first of each month.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results may differ from those estimates.

Fair Value of Financial Instruments

The Company’s financial instruments, none of which are held for trading purposes, include cash, accounts receivable, accounts payable and short and long-term debt. Management estimates that the fair value of all financial instruments at December 31, 2009 and 2008 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying financial statements.

Income and Texas State Margin Taxes

Under existing provisions of the Internal Revenue Code, the income or loss of a limited liability company filing its taxes as a partnership is recognized by the individual members for income tax purposes. Accordingly, no provision for income tax has been made in the accompanying financial statements.

The Company is subject to the Texas State Margin Tax, and will file its state margin tax return as part of a consolidated group. The state margin tax is calculated based upon the consolidated groups’ taxable margin, reduced by eligible tax credits and then allocated to the consolidated entities based on an entity’s percentage of gross revenues to the gross revenues of the consolidated group.

In addition, as of January 1, 2009, the Company has adopted FASB ASC 740,Accounting for Uncertainty in Income Taxes. The Company’s management has evaluated its tax positions and has not identified any material uncertain tax positions that would not be sustained in a federal or state income tax examination. Accordingly, no provision for uncertain tax positions has been made in the accompanying financial statements.

Subsequent Events

In accordance with FASB ASC 855,Subsequent Events,management has reviewed subsequent events through November 11, 2010, the date the report was available to be issued.

Reclassifications

Certain reclassifications have been made to the 2008 financial statement presentation to correspond to the current year’s format. Total equity and net income are unchanged due to these reclassifications.

2.CASH — RESTRICTED

The Company has two certificates of deposits which are time restricted. The time restrictions expire on November 18, 2010 and October 25, 2010, respectively.


	2009		2008
Certificate of Deposit — A	$	557,648	$	546,750
Certificate of Deposit — B		48,146		47,000

	$	605,794	$	593,750

3.REIMBURSABLE CONSTRUCTION COSTS

The Company is currently developing and constructing several assisted living and memory care communities on behalf of Health Care REIT, LLC and HCRI Texas Properties, LLC (the “Landlords”). Upon completion of construction and after a certificate of occupancy is issued for a community, the Company leases the completed community under an operating lease agreement with the Landlords according to specifications as set forth in the Master Lease Agreement between the Landlords and the Company with revisions as set forth in the November 1, 2005 Amended and Restated Term Sheet for Master Lease (the “Agreement”). According to the Agreement, there is an option period in which the Company can opt to purchase the leased properties from the Landlords. The option purchase price, specified in the Agreement, is not a bargain purchase price as defined by FASB ASC 840,Leases,and therefore, the leases are presented as operating leases instead of capital leases.

Ten communities, in various Texas locations, have obtained certificates of occupancy and are operating as of December 31, 2009. The costs incurred in developing and constructing the assisted living communities, according to the Agreement, between the Landlords and the Company, were reimbursed by the Landlords to the Company with an investment amount by the Landlords of $60,700,000. As of December 31, 2009, two additional communities were under construction at McKinney, Texas and Conroe, Texas. The costs incurred in developing and constructing these assisted living and memory care communities, according to the Agreement, between the Landlords and the Company, are reimbursable by the Landlords to the Company with a maximum investment amount

$10,200,000 and $10,000,000, respectively. The investment amount will cover all approved community construction costs including acquisition costs of land and improvements, development costs, renovation costs, costs of personal property not to exceed 10 percent of the allocated investment amount, closing costs, construction costs and fees, subject to review and approval by the Landlords.

The total amount of construction costs that are reimbursable by the Landlords as of December 31, 2009 and 2008 are $2,774,080 and $343,514, respectively.

4.PROPERTY AND EQUIPMENT

Detail of property and equipment at December 31, 2009 and 2008 is:


	2009			2008
Furniture and equipment	$	—		$	60,796
Assets under capital leases		669,705			562,725

Total property and equipment		669,705			623,521
Less: accumulated depreciation		(329,934	)		(226,396	)

Total property and equipment, net	$	339,771		$	397,125

Depreciation expense totaled $118,708 and $114,386 for the years ended December 31, 2009 and 2008, respectively.

5.CAPITAL LEASES

At December 31, 2009 and 2008, net property and equipment on the balance sheets includes $669,705 for twelve 12-passenger Ford minibuses and $562,725 for ten 12-passenger Ford minibuses, respectively, that are used to transport residents of the communities. The lease agreement contains a bargain purchase option at the end of the lease term. Future minimum lease payments under capital leases are as follows:


Year ending December 31,	Principal		Interest		Total
2010	$	136,106	$	28,376	$	164,482
2011		127,988		13,839		141,827
2012		45,802		4,975		50,777
2013		28,297		1,120		29,417

Total minimum lease payments	$	338,193	$	48,310	$	386,503

6.CONCENTRATION OF CREDIT RISK

The cash balances of the Company are held in financial institutions in the North Texas area. If cash balances exceed the amounts covered by insurance provided by the Federal Deposit Insurance Corporation (FDIC), the excess balances could be at risk of loss. The total cash at risk of loss at December 31, 2009 and 2008 is $574,914 and $628,103, respectively.

7.COMMITMENT AND CONTINGENCIES

The guarantors for the communities under construction contract include the Company, each subtenant, manager, Signature Senior Living, LLC. (each an “Entity Guarantor”) and Steven Vick and Linda Martin and their respective spouses (each a “Personal Guarantor”). All guarantees are joint and several. Guaranty of all Personal Guarantors is to be as follows: i) 100 percent of the greater of the community cost or the maximum investment amount during construction (See Note 2), ii) 15 percent of the allocated investment amount for such facility after a certificate of occupancy is issued, and iii) 2.5 percent of the allocated investment amount upon the compliance of the Company for four consecutive quarters with the portfolio coverage ratio, as defined in the Agreement. There is a potential liability for up to the investment amount for each community should there be an unremedied breach of the Agreement until a certificate of occupancy is obtained. The following chart shows the level of liability to which each property is guaranteed as of December 31, 2009.


Community Name	15%	2.50%
Paris — Spring Lake		•
Sherman — Pecan Point		•
Longview — Hawkins Creek		•
Tyler — Azalea Trails		•
Cleburne — Santa Fe		•
Mansfield — Walnut Creek	•
Weatherford — Martin Crest	•
Nacogdoches — Magnolia		•
Palestine — Dogwood	•
Waxahachie — Buffalo Creek	•

8.OPERATING LEASES

The Company pays rent to the Health Care REIT, Inc. for each of its operating communities. Under the Agreement, the initial term of the lease is 15 years with two 5 year renewal options. The base rent will be calculated using the 15-year USTN plus 4 percent with a floor of 9 percent subject to changes in the CPI and based on the number of communities added during the lease term. Rent expense under the Agreement for the year ended December 31, 2009 and 2008 totals $5,626,872 and $5,339,239, respectively.

9.RELATED PARTY TRANSACTIONS

The Company is part of affiliated group of companies which exist to administrate and manage the operations of assisted living facilities. Related party transactions with these affiliated companies are as follow:

	•		Receivables from related parties total $3,108,130 and $5,303,820 at December 31, 2009 and 2008, respectively.

	•		Accounts payable to related parties total $1,760,897 and $4,725,791 at December 31, 2009 and 2008, respectively.

	•		Notes payable to related parties total $182,088 at December 31, 2009 and 2008.

	•		Management fees paid to a related party total $1,586,769 and $1,381,487 for the years ended December 31, 2009 and 2008, respectively.

	•		Interest expense paid to related parties totals $61,386 and $22,299 for the years ended December 31, 2009 and 2008, respectively.

10.SUBSEQUENT EVENTS

At September 10, 2010, the Company sold its leasing rights to 12 communities as described in Note 3 owned by Health Care REIT, LLC to Capital Senior Living Acquisition, LLC.

Sonida Senior Living (SNDA) 8-K/AFinancial Statements and Exhibits